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As filed with the Securities and Exchange Commission on August 6, 1997
Registration No. 333-30231
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
(INCLUDING EXHIBITS)
SHS BANCORP, INC.
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(Exact name of registrant as specified in charter)
Pennsylvania 6035 23-2912920
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(State or other jurisdiction of (Primary SICC No.) (I.R.S. Employer
incorporation or organization) Identification No.)
112 Federal Street
Pittsburgh, Pennsylvania 15212
(412) 231-0809
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(Address and telephone number of principal executive offices)
John F. Breyer, Jr., Esquire
Aaron M. Kaslow, Esquire
BREYER & AGUGGIA
Suite 470 East
1300 I Street, N.W.
Washington, D.C. 20005
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(Name and address of agent for service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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Calculation of Registration Fee
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Title of Each Class of Securities Proposed Maximum Proposed Offering Proposed Maximum Amount of
Being Registered Amount Being Price(1) Aggregate Offering Registration Fee
Registered(1) Price(1)
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<S> <C> <C> <C> <C>
Common Stock, $0.01 Par Value 819,950 $10.00 $8,199,500 $2,485(2)
Participation interests 25,000 -- -- (3)
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee. As
described in the Prospectus, the actual number of shares to be issued
and sold are subject to adjustment based upon the estimated pro forma
market value of the registrant and market and financial conditions.
(2) Previously paid.
(3) The securities of SHS Bancorp, Inc. to be purchased by the Spring Hill
Savings Bank 401(k) Profit Sharing Plan are included in the amount shown
for Common Stock. Accordingly, pursuant to Rule 457(h) of the Securities
Act of 1933, as amended, no separate fee is required for the
participation interests. Pursuant to such rule, the amount being
registered has been calculated on the basis of the number of shares of
Common Stock that may be purchased with the current assets of such Plan.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PROSPECTUS SUPPLEMENT
SHS BANCORP, INC.
SPRING HILL SAVINGS BANK, F.S.B.
401(K) PROFIT SHARING PLAN
This Prospectus Supplement relates to the offer and sale to participants
("Participants") in the Spring Hill Savings Bank, F.S.B. 401(k) Profit Sharing
Plan ("Plan" or "401(k) Plan") of participation interests and shares of SHS
Bancorp, Inc. common stock, par value $.01 per share ("Common Stock"), as set
forth herein.
In connection with the proposed conversion of Spring Hill Savings Bank,
F.S.B. ("Savings Bank" or "Employer") from a federally chartered mutual savings
bank to a federally chartered stock savings bank, a holding company, SHS
Bancorp, Inc. ("Holding Company"), has been formed. The simultaneous conversion
of the Savings Bank to stock form, the issuance of the Savings Bank's common
stock to the Holding Company and the offer and sale of the Holding Company's
Common Stock to the public are herein referred to as the "Conversion."
Applicable provisions of the 401(k) Plan permit the investment of the Plan
assets in Common Stock of the Holding Company at the direction of a Plan
Participant. This Prospectus Supplement relates to the election of a Participant
to direct the purchase of Common Stock in connection with the Conversion.
The Prospectus dated ______, 1997 of the Holding Company ("Prospectus")
which is attached to this Prospectus Supplement includes detailed information
with respect to the Conversion, the Common Stock and the financial condition,
results of operation and business of the Savings Bank and the Holding Company.
This Prospectus Supplement, which provides detailed information with respect to
the Plan, should be read only in conjunction with the Prospectus. Terms not
otherwise defined in this Prospectus Supplement are defined in the Plan or the
Prospectus.
A Participant's eligibility to purchase Common Stock in the Conversion
through the Plan is subject to the Participant's general eligibility to purchase
shares of Common Stock in the Conversion and the maximum and minimum limitations
set forth in the Plan of Conversion. See "THE CONVERSION" and "-- Limitations on
Purchases of Shares" in the Prospectus.
For a discussion of certain factors that should be considered by each
Participant, see "RISK FACTORS" in the Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), THE OFFICE OF THRIFT SUPERVISION ("OTS"), THE
FEDERAL DEPOSIT INSURANCE CORPORATION ("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.
The date of this Prospectus Supplement is ______, 1997.
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No person has been authorized to give any information or to make any
representations other than those contained in the Prospectus or this Prospectus
Supplement in connection with the offering made hereby, and, if given or made,
such information and representations must not be relied upon as having been
authorized by the Holding Company, the Savings Bank or the Plan. This Prospectus
Supplement does not constitute an offer to sell or solicitation of an offer to
buy any securities in any jurisdiction to any person to whom it is unlawful to
make such offer or solicitation in such jurisdiction. Neither the delivery of
this Prospectus Supplement and the Prospectus nor any sale made hereunder shall
under any circumstances create any implication that there has been no change in
the affairs of the Savings Bank or the Plan since the date hereof, or that the
information herein contained or incorporated by reference is correct as of any
time subsequent to the date hereof. This Prospectus Supplement should be read
only in conjunction with the Prospectus that is attached herein and should be
retained for future reference.
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TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
The Offering
Securities Offered................................................................
Election to Purchase Common Stock in the Conversion...............................
Value of Participation Interests..................................................
Method of Directing Transfer......................................................
Time for Directing Transfer.......................................................
Irrevocability of Transfer Direction..............................................
Direction to Purchase Common Stock After the Conversion...........................
Purchase Price of Common Stock....................................................
Nature of a Participant's Interest in the Holding Company Common Stock............
Voting and Tender Rights of Common Stock..........................................
Description of the Plan................................................................
Introduction......................................................................
Eligibility and Participation.....................................................
Contributions Under the Plan......................................................
Limitations on Contributions......................................................
Investment of Contributions.......................................................
The Employer Stock Fund...........................................................
Benefits Under the Plan...........................................................
Withdrawals and Distributions from the Plan.......................................
Administration of the Plan........................................................
Reports to Plan Participants......................................................
Plan Administrator................................................................
Amendment and Termination.........................................................
Merger, Consolidation or Transfer.................................................
Federal Income Tax Consequences...................................................
Restrictions on Resale............................................................
Legal Opinions.........................................................................
Investment Form........................................................................
</TABLE>
i
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THE OFFERING
Securities Offered
The securities offered hereby are participation interests in the Plan and
up to ______ shares, at the actual purchase price of $10.00 per share, of Common
Stock which may be acquired by the Plan for the accounts of employees
participating in the Plan. The Holding Company is the issuer of the Common
Stock. Only employees and former employees of the Savings Bank and their
beneficiaries may participate in the Plan. Information with regard to the Plan
is contained in this Prospectus Supplement and information with regard to the
Conversion and the financial condition, results of operation and business of the
Savings Bank and the Holding Company is contained in the attached Prospectus.
The address of the principal executive office of the Savings Bank is 112 Federal
Street, Pittsburgh, Pennsylvania 15212. The Savings Bank's telephone number is
(412) 231-0809.
Election to Purchase Common Stock in the Conversion
In connection with the Savings Bank's Conversion, each Participant in the
401(k) Plan may direct the trustees of the Plan (collectively, the "Trustee") to
transfer up to ___% of a Participant's beneficial interest in the assets of the
Plan to a newly created Employer Stock Fund and to use such funds to purchase
Common Stock issued in connection with the Conversion. Amounts transferred may
include salary deferral, Employer matching and profit sharing contributions. The
Employer Stock Fund will consist of investments in the Common Stock made on or
after the effective date of the Conversion. Funds not transferred to the
Employer Stock Fund will be invested at the Participant's discretion in the
other investment options available under the Plan. See "DESCRIPTION OF THE
PLAN--Investment of Contributions" below. A Participant's ability to transfer
funds to the Employer Stock Fund in the Conversion is subject to the
Participant's general eligibility to purchase shares of Common Stock in the
Conversion. For general information as to the ability of the Participants to
purchase shares in the Conversion, see "THE CONVERSION -- The Subscription,
Direct Community and Syndicated Community Offerings" in the attached Prospectus.
Value of Participation Interests
The assets of the Plan are valued on an ongoing basis and each Participant
is informed of the value of his or her beneficial interest in the Plan on a
monthly basis. This value represents the market value of past contributions to
the Plan by the Savings Bank and by the Participants and earnings thereon, less
previous withdrawals, and transfers from the Savings Fund.
Method of Directing Transfer
The last page of this Prospectus Supplement is an investment form to direct
a transfer to the Employer Stock Fund ("Investment Form"). If a Participant
wishes to transfer funds to the Employer Stock Fund to purchase Common Stock
issued in connection with the Conversion, the
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Participant should indicate that decision in Part 2 of the Investment Form. If a
Participant does not wish to make such an election, he or she does not need to
take any action.
Time for Directing Transfer
The deadline for submitting a direction to transfer amounts to the Employer
Stock Fund in order to purchase Common Stock issued in connection with the
Conversion is _______, 1997. The Investment Form should be returned to
___________ at the Savings Bank no later than the close of business on such
date.
Irrevocability of Transfer Direction
A Participant's direction to transfer amounts credited to such
Participant's account in the Plan to the Employer Stock Fund in order to
purchase shares of Common Stock in connection with the Conversion shall be
irrevocable. Participants, however, will be able to direct the sale of Common
Stock, as explained below.
Direction to Purchase Common Stock After the Conversion
After the Conversion, a Participant will be able to direct that a certain
percentage of such Participant's interests in the trust assets ("Trust") be
transferred to the Employer Stock Fund and invested in Common Stock, or to the
other investment funds available under the Plan. Alternatively, a Participant
may direct that a certain percentage of such Participant's interest in the
Employer Stock Fund be transferred from the Employer Stock Fund to other
investment funds available under the Plan. Participants will be permitted to
direct that future contributions made to the Plan by or on their behalf be
invested in Common Stock. Following the initial election, the allocation of a
Participant's interest in the Employer Stock Fund may be changed by the
Participant on a monthly basis. Special restrictions may apply to transfers
directed by those Participants who are executive officers, directors and
principal stockholders of the Holding Company who are subject to the provisions
of Section 16(b) of the Securities and Exchange Act of 1934, as amended
("Exchange Act").
Purchase Price of Common Stock
The funds transferred to the Employer Stock Fund for the purchase of Common
Stock in connection with the Conversion will be used by the Trustees to purchase
shares of Common Stock. The price paid for such shares of Common Stock will be
the same price as is paid by all other persons who purchase shares of Common
Stock in the Conversion.
Nature of a Participant's Interest in the Holding Company Stock
The Holding Company Stock purchased for an account of a Participant will be
held in the name of the Trustees of the Plan in the Employer Stock Fund. Any
earnings, losses or expenses with respect to the Holding Company Stock,
including dividends and appreciation or depreciation
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in value, will be credited or debited to the account and will not be credited to
or borne by any other accounts.
Voting and Tender Rights of Common Stock
The Trustees generally will exercise voting and tender rights attributable
to all Common Stock held by the Trust as directed by Participants with an
interest in the Employer Stock Fund. With respect to each matter as to which
holders of Common Stock have the right to vote, each Participant will be
allocated a number of voting instruction rights reflecting such Participant's
proportionate interest in the Employer Stock Fund. The percentage of shares of
Common Stock held in the Employer Stock Fund that are voted in the affirmative
or negative on each matter shall be the same percentage of the total number of
voting instruction rights that are exercised in either the affirmative or
negative, respectively.
DESCRIPTION OF THE PLAN
Introduction
The Savings Bank adopted the Plan effective July 1, 1997 as an amendment
and restatement of the Savings Bank's prior retirement plan. The Plan is a cash
or deferred arrangement established in accordance with the requirement under
Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986, as
amended ("Code").
The Savings Bank intends that the Plan, in operation, will comply with the
requirements under Section 401(a) and Section 401(k) of the Code. The Savings
Bank will adopt any amendments to the Plan that may be necessary to ensure the
qualified status of the Plan under the Code and applicable Treasury Regulations.
The Savings Bank will apply a determination from the Internal Revenue Service
("IRS") that the Plan, as amended and restated, is qualified under Section
401(a) of the Code and that it satisfies the requirements for a qualified cash
or deferred arrangement under Section 401(k) of the Code.
Employee Retirement Income Security Act. The Plan is an "individual account
plan" other than a "money purchase pension plan" within the meaning of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). As such,
the Plan is subject to all of the provisions of Title I (Protection of Employee
Benefit Rights) and Title II (Amendments to the Internal Revenue Code Relating
to Retirement Plans) of ERISA, except the funding requirements contained in Part
3 of Title I of ERISA, which by their terms do not apply to an individual
account plan (other than a money purchase pension plan). The Plan is not subject
to Title IV (Plan Termination Insurance) of ERISA. Neither the funding
requirements contained in Title IV of ERISA nor the plan termination insurance
provisions contained in Title IV will be extended to Participants or
beneficiaries under the Plan.
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APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS OR HER
BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF EMPLOYMENT WITH
THE SAVINGS BANK. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON
WITHDRAWALS MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2, UNLESS A
PARTICIPANT RETIRES AS PERMITTED UNDER THIS PLAN REGARDLESS OF WHETHER SUCH A
WITHDRAWAL OCCURS DURING HIS OR HER EMPLOYMENT WITH THE SAVINGS BANK OR AFTER
TERMINATION OF EMPLOYMENT.
Reference to Full Text of Plan. The following statements are summaries of
the material provisions of the Plan. They are not complete and are qualified in
their entirety by the full text of the Plan, which is filed as an exhibit to the
registration statement filed with the SEC. Copies of the Plan are available to
all employees by filing a request with the Plan Administrator. Each employee is
urged to read carefully the full text of the Plan.
Eligibility and Participation
Any employee of the Savings Bank is eligible to participate and will become
a Participant in the Plan following completion of six months of service with the
Savings Bank within a consecutive 12 month period of employment and the
attainment of age 18. The Plan fiscal year is the calendar year ("Plan Year").
Directors who are not employees of the Savings Bank are not eligible to
participate in the Plan.
During 1996, approximately _____ employees participated in the Plan.
Contributions Under the Plan
Participant Contributions. Each Participant in the Plan is permitted to
elect to reduce such Participant's Compensation (as defined below) pursuant to a
salary reduction agreement and have that amount contributed to the Plan on such
Participant's behalf. Such amounts are credited to the Participant's deferral
contributions account. For purposes of the Plan, "Compensation" means a
Participant's total amount of earnings reportable W-2 wages for federal income
tax withholding purposes plus a Participant's elective deferrals pursuant to a
salary reduction agreement under the Plan or any elective deferrals to a Section
125 plan. Due to recent statutory changes, the annual Compensation of each
Participant taken into account under the Plan is limited to $160,000 (as
adjusted under applicable Code provisions). A Participant may elect to modify
the amount contributed to the Plan under the participant's salary reduction
agreement during the Plan Year. Deferral contributions are generally transferred
by the Savings Bank to the Trustee of the Plan on a periodic basis.
Employer Contributions. The Savings Bank currently matches employee
deferral contributions on a discretionary basis in an amount determined annually
by the Board of
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Directors. In addition, the Savings Bank may make additional discretionary
contributions in proportion to each Participant's Compensation.
Limitations on Contributions
Limitations on Annual Additions and Benefits. Pursuant to the requirements
of the Code, the Plan provides that the amount of contributions allocated to
each Participant's Account during any Plan Year may not exceed the lesser of 25%
of the Participant's "Section 415 Compensation" for the Plan Year or $30,000 (as
adjusted under applicable Code provisions). A Participant's "Section 415
Compensation" is a Participant's Compensation, excluding any amount contributed
to the Plan under a salary reduction agreement or any employer contribution to
the Plan or to any other plan or deferred compensation or any distributions from
a plan of deferred compensation. In addition, annual additions are limited to
the extent necessary to prevent the limitations for the combined plans of the
Savings Bank from being exceeded. To the extent that these limitations would be
exceeded by reason of excess annual additions to the Plan with respect to a
Participant, the excess must be reallocated to the remaining Participants who
are eligible for an allocation of Employer contributions for the Plan Year.
Limitation on 401(k) Plan Contributions. The annual amount of deferred
compensation of a Participant (when aggregated with any elective deferrals of
the Participant under any other employer plan, a simplified employee pension
plan or a tax-deferred annuity) may not exceed $9,500 (as adjusted under
applicable Code provisions). Contributions in excess of this limitation ("excess
deferrals") will be included in the Participant's gross federal income tax
purposes in the year they are made. In addition, any such excess deferral will
again be subject to federal income tax when distributed by the Plan to the
Participant, unless the excess deferral (together with any income allocable
thereto) is distributed to the Participant not later than the first April 15th
following the close of the taxable year in which the excess deferral is made.
Any income on the excess deferral that is distributed not later than such date
shall be treated, for federal income tax purposes, as earned and received by the
Participant in the taxable year in which the excess deferral is made.
Limitation on Plan Contributions for Highly Compensated Employees.
Sections 401(k) and 401(m) of the Code limit the amount of deferred compensation
contributed to the Plan in any Plan Year on behalf of Highly Compensated
Employees (defined below) in relation to the amount of deferred compensation
contributed by or on behalf of all other employees eligible to participate in
the Plan. Specifically, the actual deferral percentage for a Plan Year (i.e.,
----
the average of the ratios, calculated separately for each eligible employee in
each group, by dividing the amount of salary reduction contributions credited to
the salary reduction contribution account of such eligible employee by such
employee's compensation for the Plan Year) of the Highly Compensated Employees
may not exceed the greater of (a) 125% of the actual deferred percentage of all
other eligible employees, or (b) the lesser of (i) 200% of the actual deferred
percentage of all other eligible employees, or (ii) the actual deferral
percentage of all other eligible employees plus two percentage points. In
addition, the actual contribution percentage for a Plan Year (i.e., the average
----
of the ratios calculated separately for each eligible employee in each
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group, by dividing the amount of employer contributions credited to the Matching
contributions account of such eligible employee by each eligible employee's
compensation for the Plan Year) of the Highly Compensated Employees may not
exceed the greater of (a) 125% of the actual contribution percentage of all
other eligible employees, or (b) the lesser of (i) 200% of the actual
contributions percentage of all other eligible employees, or (ii) the actual
contribution percentage of all other eligible employees plus two percentage
points.
In general, a Highly Compensated Employee includes any employee who, during
the Plan Year or the preceding Plan Year, (1) was at any time a 5% owner (i.e.,
----
owns directly or indirectly more than 5% of the stock of the Employer, or stock
possessing more than 5% of the total combines voting power of all stock of the
Employer) or, (2) during the preceding Plan Year, received Section 415
Compensation in excess of $80,000 (as adjusted periodically under applicable
Code provisions) and, if elected by the Savings Bank, was in the top paid group
of employees for such Plan Year.
In order to prevent disqualification of the Plan, any amounts contributed
by Highly Compensated Employees that exceed the average deferral limitation in
any Plan Year ("excess contributions"), together with any income allocable
thereto, must be distributed to such Highly Compensated Employees before the
close of the following Plan Year. However, the Savings Bank will be subject to a
10% excise tax on any excess contributions unless such excess contributions,
together with any income allocable thereto, either are recharacterized or are
distributed before the close of the first 2 1/2 months following the Plan Year
to which such excess contributions relate. In addition, in order to avoid
disqualification of the Plan, any contributions by Highly Compensated Employees
that exceed the average contribution limitation in any Plan Year ("excess
aggregate contributions") together with any income allocable thereto, must be
distributed to such Highly Compensated Employees before the close of the
following Plan Year. However, the 10% excise tax will be imposed on the Savings
Bank with respect to any excess aggregate contributions, unless such amounts,
plus any income allocable thereto, are distributed within 2 1/2 months following
the close of the Plan Year in which they arose.
Top-Heavy Plan Requirements. If, for any Plan Year, the Plan is a Top-Heavy
Plan (as defined below), then (i) the Savings Bank may be required to make
certain minimum contributions to the Plan on behalf of non-key employees (as
defined below), and (ii) certain additional restrictions would apply with
respect to the combination of annual additions to the Plan and projected annual
benefits under any defined plan maintained by the Savings Bank.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any Plan
Year, if as of the last day of the preceding Plan Year, the aggregate balance of
the accounts of all Participants who are key Employees exceeds 60% of the
aggregate balance of the Accounts of the Participants. "Key Employees" generally
include any employee, who at any time during the Plan Year or any other the four
preceding Plan Years, if (1) an officer of the Savings Bank having annual
compensation in excess of $60,000 who is in administrative or policy-making
capacity, (2) one of the ten employees having annual compensation in excess of
$30,000 and owing, directly or indirectly, the largest interest in the employer,
(3) a 5% owner of the employer (i.e.,
----
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owns directly or indirectly more than 5% of the stock of the employer, or stock
possessing more than 5% of the total combined voting power of all stock of the
employer), or (4) a 1% of owner of the employer having compensation in excess of
$150,000.
Investment of Contributions
All amounts credited to Participant's Accounts under the Plan are held in
the Trust which is administered by the Trustee. The Trustees are appointed by
the Savings Bank's Board of Directors. The Plan provides that a Participant may
direct the Trustee to invest all or a portion of his or her Accounts in various
managed investment portfolios, as described below. A Participant may
periodically elect to change his or her investment directions with respect to
both past contributions and for more additions to the Participant's accounts
invested in these investment alternatives.
Under the Plan, prior to the effective date of the Conversion, the Accounts
of Participant held in the Trust will be invested by the Trustees at the
direction of the Participant in the following managed portfolios:
Investment Fund A -
Investment Fund B -
Investment Fund C -
Investment Fund D -
Investment Fund E -
Effective upon the Conversion, a Participant may invest all or a portion of
his or her Accounts in the portfolios described above and in Fund F, described
below:
Investment Fund F - The Employer Stock Fund which invests in common stock of
the Holding Company.
A Participant may elect, to have both past and future contributions and
additions to the Participant's Account invested either in the Employer Stock
Fund or in any of the other managed portfolios listed above. Any amounts
credited to a Participant's Accounts for which investment directions are not
given will be invested in Investment Fund __.
The net gain (or loss) in the Accounts from investments (including interest
payments, dividends, realized and unrealized gains and losses on securities, and
expenses paid from the Trust) are determined on a _________ basis. For purposes
of such allocation, all assets of the Trust are valued at their fair market
value.
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The Employer Stock Fund
The Employer Stock Fund will consist of investments in Common Stock made on
and after the effective date of the Conversion. In connection with the
Conversion, pursuant to the attached Investment Form, Participants will be able
to change their investments at a time other than the normal election intervals.
Any cash dividends paid on Common Stock held in the Employer Stock Fund will be
credited to a cash dividend subaccount for each Participant investing in the
Employer Stock Fund. The Trustees will, to the extent practicable, use all
amounts held by it in the Employer Stock Fund (except the amounts credited to
cash dividend subaccounts) to purchase shares of Common Stock. It is expected
that all purchases will be made at prevailing market prices. Under certain
circumstances, the Trustees may be required to limit the daily volume of shares
purchased. Pending investment in Common Stock, assets held in the Employer Stock
Fund will be placed in bank deposits and other short-term investments.
When Common Stock is purchased or sold, the cost or net proceeds are
charged or credited to the Accounts of Participants affected by the purchase or
sale. A Participant's Account will be adjusted to reflect changes in the value
of shares of Common Stock resulting from stock dividends, stock splits and
similar changes.
To the extent dividends are not paid on Common Stock held in the Employer
Stock Fund, the return on any investment in the Employer Stock Fund will consist
only of the market value appreciation of the Common Stock subsequent to its
purchase. Following the Conversion, the Board of the Holding Company may
consider a policy of paying dividends on the Common Stock, however, no decision
has been made by the Board of the Holding Company regarding the amount or timing
of dividends, if any.
As of the date of this Prospectus Supplement, none of the shares of Common
Stock have been issued or are outstanding and there is no established market for
the Common Stock. Accordingly, there is no record of the historical performance
of the Employer Stock Fund.
Investments in the Employer Stock Fund may involve certain risk factors
associated with investments in Common Stock of the Holding Company. For a
discussion of these risk factors, see "RISK FACTORS" on pages 1 through __ in
the Prospectus.
Benefits Under the Plan
Vesting. A Participant, has at all times a fully vested, nonforfeitable
interest in all of his or her deferred contributions and the earnings thereon
under the Plan. A Participant is 100% vested in his or her matching
contributions account and employer discretionary contributions after the
completion of six years of service under the Plan's vesting schedule (20% per
year beginning with the completion of two years of service).
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Withdrawals and Distributions from the Plan
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS OR HER
BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2
UNLESS A PARTICIPANT RETIRES AS PERMITTED UNDER THE PLAN REGARDLESS OF WHETHER
SUCH A WITHDRAWAL OCCURS DURING HIS OR HER EMPLOYMENT WITH THE SAVINGS BANK.
Distribution Upon Retirement, Disability or Termination of Employment.
Payment of benefits to a Participant who retires, incurs a disability, or
otherwise terminates employment generally shall be made in a lump sum cash
payment. At the request of the Participant, the distribution may include an in-
kind distribution of Common Stock of the Holding Company credited to the
Participant's Account. A Participant whose total vested account balance equals
or exceeds $3,500 at the time of termination, may elect, in lieu of a lump sum
payments, to be paid in annual installments over a period not exceeding the life
expectancy of the Participant or the joint life expectancies of the Participant
and his or her designated beneficiary. Benefits payments ordinarily shall be
made not later than 60 days following the end of the Plan Year in which occurs
later of the Participant's: (i) termination of employment; (ii) attainment of
age 65; or (iii) tenth anniversary of commencement of participation in the Plan;
but in no event later than April 1 following the calendar year in which the
Participant attains age 70 1/2 (if the Participant is retired). However, if the
vested portion of the Participant's Account balances exceeds $3,500, no
distribution shall be made from the Plan prior to the Participant's attaining
age 65 unless the Participant consents to an earlier distribution. Special rules
may apply to the distribution of Common Stock of the Holding Company to those
Participants who are executive officers, directors and principal shareholders of
the Holding Company who are subject to the provisions of Section 16(b) of the
Exchange Act.
Distribution upon Death. A Participant who dies prior to the benefit
commencement date for retirement, disability or termination of employment, and
who has a surviving spouse, shall have his or her benefits paid to the surviving
spouse in a lump sum, or if the payment of his or her benefits had commenced
before his or her death, in accordance with the distribution method in effect at
his or her death. With respect to an unmarried Participant, and in the case of a
married Participant with spousal consent to the designation of another
beneficiary, payment of benefits to the beneficiary, payments of benefits to the
beneficiary of a deceased Participant shall be made in the form of a lump sum
payment in cash or in Common Stock, or if the payment of his or her benefit had
commenced before his or her death, in accordance with the distribution method if
effect at death.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations order
(as defined in the Code), benefits payable under the Plan shall not be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind,
S-9
<PAGE>
either voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to
benefits payable under the Plan shall be void.
Administration of the Plan
Trustees. The Trustees with respect to the Plan are ____________________.
Pursuant to the terms of the Plan, the Trustees receive and hold
contributions to the Plan in trust and have exclusive authority and discretion
to manage and control the assets of the Plan pursuant to the terms of the Plan
and to manage, invest and reinvest the Trust and income therefrom. The Trustees
have the authority to invest and reinvest the Trust and may sell or otherwise
dispose of Trust investments at any time and may hold trust funds uninvested.
The Trustees have authority to invest the assets of the Trust in "any type of
property, investment or security" as defined under ERISA.
Except as otherwise provided under the Plan, the Trustees have full power
to vote any corporate securities in the Trust in person or by proxy.
Participants will direct the Trustees as to voting and tendering of all Common
Stock held in the Employer Stock Fund.
The Trustees are not compensated for their services. The expenses incurred
in the administration of the Trust are paid out of the Trust except to the
extent such expenses are paid by the Association.
The Trustees must render at least annual reports to the Association and to
the Participants in such form and containing such information that the Trustees
deems necessary.
Reports to Plan Participants
The administrator will furnish to each Participant a statement at least
____________ showing (i) the balance in the Participant's Account as of the end
of that period, (ii) the amount of contributions allocated to such Participant's
Account for that period, and (iii) the adjustments to such Participant's Account
to reflect earnings or losses (if any).
Plan Administrator
The Savings Bank currently serves as the Plan Administrator. The Plan
Administrator is responsible for the administration of the Plan, interpretation
of the provisions of the Plan, prescribing procedures for filing applications
for benefits, preparation and distribution of information explaining the Plan,
maintenance of plan records, books of account and all other data necessary for
the proper administration of the Plan, and preparation and filing of all returns
and reports relating to the Plan which are required to be filed with the U.S.
Department of Labor and the IRS, and for all disclosures required to be made to
Participants, beneficiaries and others under Sections 104 and 105 of ERISA.
S-10
<PAGE>
Amendment and Termination
The Savings Bank may terminate the Plan at any time. If the Plan is
terminated in whole or in part, then regardless of other provisions in the Plan,
each employee who ceases to be a Participant shall have a fully vested interest
in his or her Account. The Savings Bank reserves the right to make, from time to
time, any amendment or amendments to the Plan which do not cause any part of the
Trust to be used for, or diverted to, any purpose other than the exclusive
benefit of the Participants or their beneficiaries.
Merger, Consolidation or Transfer
In the event of the merger or consolidation of the Plan with another plan,
or the transfer of the Trust to another plan, the Plan requires that each
Participant (if either the Plan or the other plan then terminated) receive a
benefit immediately after the merger, consolidation or transfer which is equal
to or greater than the benefit he or she would have been entitled to receive
immediately before the merger, consolidation or transfer (if the Plan had then
terminated).
Federal Income Tax Consequences
The following is only a brief summary of certain federal income tax aspects
of the Plan which are of general application under the Code and is not intended
to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan. The
summary is necessarily general in nature and does not purport to be complete.
Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws.
PARTICIPANTS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO ANY
DISTRIBUTION FROM THE PLAN AND TRANSACTIONS INVOLVING THE PLAN.
The Plan has received a determination from the IRS that it is qualified
under Section 401(a) and 401(k) of the Code, and that the related Trust is
exempt from tax under Section 501(a) of the Code. A plan that is "qualified"
under these sections of the Code is afforded special tax treatment which include
the following: (1) the sponsoring employer is allowed an immediate tax deduction
for the amount contributed to the Plan of each year; (2) Participants pay no
current income tax on amounts contributed by the employer on their behalf; and
(3) earnings of the Plan are tax-exempt thereby permitting the tax-free
accumulation of income and gains on investments. The Plan will be administered
to comply in operation with the requirements of the Code as of the applicable
effective date of any change in the law. The Savings Bank expects to timely
adopt any amendments to the Plan that may be necessary to maintain the qualified
status of the Plan under the Code. Following such an amendment, the Plan will be
submitted to the IRS for a determination that the Plan, as amended, continues to
qualify under Sections 401(a) and
S-11
<PAGE>
501(a) of the Code and that it continues to satisfy the requirements for a
qualified cash or deferred arrangement under Section 401(k) of the Code.
Assuming that the Plan is administered in accordance with the requirements
of the Code, participation in the Plan under existing federal income tax laws
will have the following effects:
(a) Amounts contributed to a Participant's 401(k) account and the
investment earnings are actually distributed or withdrawn from the Plan.
Special tax treatment may apply to the taxable portion of any distribution that
includes Common Stock or qualified as a "Lump Sum Distribution" (as described
below).
(b) Income earned on assets held by the Trust will not be taxable to the
Trust.
Lump Sum Distribution. A distribution from the Plan to a Participant or the
beneficiary of a Participant will qualify as a "Lump Sum Distribution" if it is
made: (i) within a single taxable year of the Participant or beneficiary; (ii)
on account of the Participant's death or separation from service, or after the
Participant attains age 59 1/2; and (iii) consists of the balance to the credits
of the Participant under the Plan and all other profit sharing plans, if any,
maintained by the Savings Bank. The portion of any Lump Sum Distribution that is
required to be included in the Participant's or beneficiary's taxable income for
federal income tax purposes ("total taxable amount") consists of the entire
amount of such Lump Sum Distribution less the amount of after-tax contributions,
if any, made by the Participant to any other profit sharing plans maintained by
the Savings Bank which is included in such distribution.
Averaging Rules. The portion of the total taxable amount of a Lump Sum
Distribution ("ordinary income portion") will be taxable generally as ordinary
income for federal income tax purposes. However, for distributions occurring
prior to January 1, 2000, a Participant who has completed at least five years of
participation in the Plan before the taxable year in which the distribution is
made, or a beneficiary who receives a Lump Sum Distribution on account of the
Participant's death (regardless of the period of the Participant's participation
in the Plan or any other profit sharing plan maintained by the Employer), may
elect to have the ordinary income portion of such Lump Sum Distribution taxed
according to a special averaging rule ("five-year averaging"). The election of
the special averaging rules may apply only to one Lump Sum Distribution received
by the Participant or beneficiary, provided such amount is received on or after
the Participant turns 59 1/2 and the recipient elects to have any other Lump Sum
Distribution from a qualified plan received in the same taxable year taxed under
the special averaging rule. The special five-year averaging rule has been
repealed for distributions occurring after December 31, 1999. Under a special
grandfather rule, individuals who turned 50 by 1986 may elect to have their Lump
Sum Distribution taxed under either the five-year averaging rule (if available)
or the prior law ten-year averaging rule. Such individuals also may elect to
have that portion of the Lump Sum Distribution attributable to the Participant's
pre-1974 participation in the Plan taxed at a flat 20% rate as gain from the
sale of a capital asset.
S-12
<PAGE>
Common Stock Included in Lump Sum Distribution. If a Lump Sum Distribution
includes Common Stock, the distribution generally will be taxed in the manner
described above, except that the total taxable amount will be reduced by the
amount of any net unrealized appreciation with respect to such Common Stock,
i.e., the excess of the value of such Common Stock at the time of the
- ----
distribution over its cost to the Plan. The tax basis of such Common Stock to
the Participant or beneficiary for purposes of computing gain or loss on its
subsequent sale will be the value of the Common Stock at the time of
distribution less the amount of net unrealized appreciation. Any gain on a
subsequent sale or other taxable disposition of such Common Stock, to the extent
of the amount of net unrealized appreciation at the time of distribution, will
be considered long-term capital gain regardless of the holding period of such
Common Stock. Any gain on a subsequent sale or other taxable disposition of the
Common Stock in excess of the amount of net unrealized appreciation at the time
of distribution will be considered either short-term capital gain or long-term
capital gain depending upon the length of the holding period of the Common
Stock. The recipient of a distribution may elect to include the amount of any
net unrealized appreciation in the total taxable amount of such distribution to
the extent allowed by the regulations by the IRS.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan or
to an IRA. Pursuant to a change in the law, effective January 1, 1993, virtually
all distributions from the Plan may be rolled over to another qualified Plan or
to an individual retirement account ("IRA") without regard to whether the
distribution is a Lump Sum Distribution or Partial Distribution. Effective
January 1, 1993, Participants have the right to elect to have the Trustee
transfer all or any portion of an "eligible rollover distribution" directly to
another plan qualified under Section 401(a) of the Code or to an IRA. If the
Participant does not elect to have an "eligible rollover distribution"
transferred directly to another qualified plan of to an IRA, the distribution
will be subject to a mandatory federal withholding tax equal to 20% of the
taxable distribution. An "eligible rollover distribution" means any amount
distributed from the Plan except: (1) a distribution that is (a) one of a series
of substantially equal periodic payments made (not less frequently than
annually) over the Participant's life of the joint life of the Participant and
the Participant's designated beneficiary, or (b) for a specified period of ten
years or more; (2) any amount that is required to be distributed under the
minimum distribution rules; and (3) any other distributions excepted under
applicable federal law. The tax law change described above did not modify the
special tax treatment of Lump Sum Distributions, that are not rolled over or
transferred, i.e., forward averaging, capital gains tax treatment and the
----
nonrecognition of net unrealized appreciation, discussed earlier.
Additional Tax on Early Distributions. A Participant who receives a
distribution from the Plan prior to attaining age 59 1/2 will be subject to an
additional income tax equal to 10% of the taxable amount of the distribution.
The 10% additional income tax will not apply, however, to the extent the
distribution is rolled over into an IRA or another qualified plan or the
distribution is (i) made to a beneficiary (or to the estate of a Participant) on
or after the death of the Participant, (ii) attributable to the Participant's
being disabled within the meaning of Section 72(m)(7) of the Code, (iii) part of
a series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the Participant or the joint
lives
S-13
<PAGE>
(or joint life expectancies) of the Participant and his or her beneficiary, (iv)
made to the Participant after separation from service on account of early
retirement under the Plan after attainment of age 55, (v) made to pay medical
expenses to the extent deductible for federal income tax purposes, (vi) pursuant
to a qualified domestic relations order, or (vii) made to effect the
distribution of excess contributions or excess deferrals.
THE FOREGOING IS ONLY A BRIEF SUMMARY OF CERTAIN FEDERAL INCOME TAX ASPECTS
OF THE PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND IS NOT INTENDED
TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME TAX
CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN.
ACCORDINGLY, EACH PARTICIPANT IS URGED TO CONSULT A TAX ADVISOR CONCERNING THE
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND RECEIVING
DISTRIBUTIONS FROM THE PLAN.
Restrictions on Resale
Any person receiving shares of the Common Stock under the Plan who is an
"affiliate" of the Savings Bank or the Holding Company as the term "affiliate"
is used in Rules 144 and 405 under the Securities Act of 1933, as amended
("Securities Act") (e.g., directors, officers and substantial shareholders of
the Savings Bank) may reoffer or resell such shares only pursuant to a
registration statement filed under the Securities Act (the Holding Company and
the Savings Bank having no obligation to file such registration statement) or,
assuming the availability thereof, pursuant to Rule 144 or some other exemption
from the registration requirements of the Securities Act. Any person who may be
an "affiliate" of the Savings Bank or the Holding Company may wish to consult
with counsel before transferring any Common Stock owned by him or her. In
addition, Participants are advised to consult with counsel as to the
applicability of the reporting and short-swing profit liability rules of Section
16 of the Exchange Act which may affect the purchase and sale of the Common
Stock where acquired or sold under the Plan or otherwise.
LEGAL OPINIONS
The validity of the issuance of the Common Stock will be passed upon by
Breyer & Aguggia, Washington, D.C., which firm is acting as special counsel for
the Holding Company in connection with the Savings Bank's Conversion from a
federally chartered mutual savings bank to a federally chartered stock savings
bank and the concurrent formation of the Holding Company.
S-14
<PAGE>
Investment Form
(Employer Stock Fund)
SPRING HILL SAVINGS BANK, F.S.B.
401(K) PROFIT SHARING PLAN
Name of Participant:______________________________________
Social Security Number:___________________________________
1. Instructions. In connection with the proposed conversion of Spring
Hill Savings Bank, F.S.B. ("Savings Bank") to a stock savings bank and the
simultaneous formation of a holding company ("Conversion"), participants in the
Spring Hill Savings Bank, F.S.B. 401(k) Profit Sharing Plan ("Plan") may elect
to direct the investment of up to ___% of their ___________, 1997 account
balances into the Employer Stock Fund ("Employer Stock Fund"). Amounts
transferred at the direction of Participants into the Employer Stock Fund will
be used to purchase shares of the common stock of SHS Bancorp, Inc. ("Common
Stock"), the proposed holding company for the Savings Bank. A Participant's
eligibility to purchase shares of Common Stock is subject to the Participant's
general eligibility to purchase shares of Common Stock in the Conversion and the
maximum and minimum limitations set forth in the Plan Conversion. See the
Prospectus for additional information.
You may use this form to direct a transfer of funds credited to your
account to the Employer Stock Fund, to purchase Common Stock in the Conversion.
To direct such a transfer to the Employer Stock Fund, you should complete this
form and return it to ___________ at the Savings Bank, no later than the close
of business on ________, 1997. The Savings Bank will keep a copy of this form
and return a copy to you. (If you need assistance in completing this form,
please contact ___________.
2. Transfer Direction. I hereby direct the Plan Administrator to transfer
$__________ (in increments of $10) from my Plan account to the Employer Stock
Fund to be applied to the purchase of Common Stock in the Conversion. Please
transfer this amount from the following investments in the amounts
indicated:______________________________________________________________________
________________________________________________________________________________
3. Effectiveness of Direction. I understand that this Investment Form
shall be subject to all of the terms and conditions of the Plan and the terms
and conditions of the Conversion. I acknowledge that I have received a copy of
the Prospectus and the Prospectus Supplement.
- -------------------------------- ---------------------------------
Signature Date
* * * * *
4. Acknowledgement of Receipt. This Investment Form was received by the
Plan Administrator and will become effective on the date noted below.
- -------------------------------- ---------------------------------
Plan Administrator Date
S-15
<PAGE>
PROSPECTUS 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
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 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. 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
below. (cover continued on following page)
FOR INFORMATION ON HOW TO SUBSCRIBE FOR SHARES OF COMMON STOCK, CALL THE
STOCK INFORMATION CENTER AT ( ) .
--- --------
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.
RYAN, BECK & CO.
The date of this Prospectus is _______________ __, 1997.
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Estimated Underwriting Estimated Net
Purchase Commissions and Proceeds
Price(1) Other Fees and Expenses(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum Per Share.......... $10.00 $.78 $9.22
- --------------------------------------------------------------------------------
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."
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").
<PAGE>
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
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 12:00 Noon, Eastern Time, on
___________, 1997 ("Expiration Date"), unless extended by the Savings Bank and
the Holding Company for up to __ days to ____________, 1997. Such extension may
be granted without additional notice to subscribers. The Direct Community
Offering will also terminate at 12:00 Noon, 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 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 depositor 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 ________ __, 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 _________ __, 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 of Pennsylvania with enlarged map of Allegheny County depicting main office
and branch offices for Spring Hill Savings Bank, F.S.B., in the city of
Pittsburg, Pennsylvania.]
THE CONVERSION IS CONTINGENT UPON APPROVAL OF THE SAVINGS BANK'S PLAN OF
CONVERSION BY ITS ELIGIBLE VOTING MEMBERS, THE SALE OF AT 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 BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE BANK
INSURANCE FUND ("BIF"), THE SAVINGS ASSOCIATION INSURANCE FUND ("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 non-performing loans and real
estate owned ("REO"). REO increased from $314,000 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 non-performing 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 non-performing 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 were 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 greater of 50% 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 12:00 Noon, Eastern Time, on the Expiration Date, unless extended by
the Savings Bank and the Holding Company for up to __ 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 and certification forms. 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
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 ("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 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 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 of 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 loss 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
KEY FINANCIAL RATIOS: ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
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 sets 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
</TABLE>
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
(In Thousands)
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
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 $1.6 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 $1.3 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 collateralized mortgage obligation declined $415,000 from $2.5
million to $2.0 million. Borrowed funds in the form of FHLB advances increased
$355,000 from $9.3 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 real estate owned and other repossessed
assets declined $29,000 to $23,000 at June 30, 1997. Real estate owned and
other repossessed assets consisted of one building and one mobile home.
Total delinquent loans increased $1.1 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 to 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 totaled $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 certain loans to related borrowers, 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 totaled $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 a group of
problem loans by related borrowers, 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-off for 1997
included the settlement on certain lease pools. See "BUSINESS OF THE SAVINGS
BANK --Lending Activities -- Commercial Loans."
Non-interest Income. Noninterest 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. Deposits 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 $352,000. 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
3
<PAGE>
approximately $389,000. These provisions may have the effect of increasing 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
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 Associations -- 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 7,728
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 $ 11,201
======= ======= ======= ======= ========
</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
Associations -- Capital Requirements."
<TABLE>
<CAPTION>
PRO FORMA AT MARCH 31, 1997
---------------------------------------------
Minimum of Estimated Midpoint of Estimated
Valuation Range Valuation Range
-------------------- -----------------------
527,000 Shares 620,000 Shares
March 31, 1997 at $10.00 Per Share at $10.00 Per Share
------------------------- -------------------- -----------------------
Percent of Percent of Percent of
Total Total Total
Amount Assets (1) Amount Assets (1) Amount Assets (1)
------ ---------- ------ ----------- ------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital........... $4,459 5.38% $8,560 9.85% $8,708 10.00%
Tangible capital
requirement............... 1,242 1.50 1,304 1.50 1,306 1.50
------ ----- ------ ----- ------ -----
Excess..................... $3,217 3.88% $7,256 8.35% $7,402 8.50%
====== ===== ====== ===== ====== =====
Core capital............... $4,459 5.38% $8,560 9.85% $8,708 10.00%
Core capital requirement(2) 2,485 3.00 2,608 3.00 2,612 3.00
------ ----- ------ ----- ------ -----
Excess..................... $1,974 2.38% $5,952 6.85% $6,096 7.00%
====== ===== ====== ===== ====== =====
Risk-based capital(3)...... $4,879 12.46% $8,980 21.79% $9,128 22.11%
Risk-based
capital requirement....... 3,132 8.00 3,296 8.00 3,302 8.00
------ ----- ------ ----- ------ -----
Excess..................... $1,747 4.46% $5,684 13.79% $5,826 14.11%
====== ===== ====== ===== ====== =====
<CAPTION>
PRO FORMA AT MARCH 31, 1987
---------------------------------------------
15% above
Maximum of Estimated Maximum of Estimated
Valuation Range Valuation Range
-------------------- ----------------------
713,000 Shares 819,950 Shares
at $10.00 Per Share at $10.00 Per Share
-------------------- ----------------------
Percent Percent of
of Total Total
Amount Assets (1) Amount Assets (1)
------ ---------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Tangible capital........... $8,708 10.00% $8,708 10.00%
Tangible capital
requirement............... 1,306 1.50 1,306 1.50
------ ----- ------ -----
Excess..................... $7,402 8.50% $7,402 8.50%
====== ===== ====== =====
Core capital............... $8,708 10.00% $8,708 10.00%
Core capital requirement(2) 2,612 3.00 2,612 3.00
------ ----- ------ -----
Excess..................... $6,096 7.00% $6,096 7.00%
====== ===== ====== =====
Risk-based capital(3)...... $9,128 22.11% $9,128 22.11%
Risk-based
capital requirement....... 3,302 8.00 3,302 8.00
------ ----- ------ -----
Excess..................... $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 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 50% 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
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(In Thousands, Except Per Share Amounts)
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(10).. 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 currently 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.
(10) Annualized.
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).
17
<PAGE>
SPRING HILL SAVINGS BANK, FSB
CONSOLIDATED STATEMENTS OF OPERATIONS
The following Consolidated Statements of Operations of Spring Hill Savings
Bank, FSB 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 adjustments 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
Collateralized 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 1.4%, 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 $928,000 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 $76.8 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 obligation decreased from $6.9 million at
December 31, 1996 to $2.5 million
20
<PAGE>
at March 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 $3.0 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. Noninterest 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 noninterest 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 0.0648% 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. Federal 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.
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
22
<PAGE>
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 $2.0 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
borrowing 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 totaled $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. Noninterest 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. 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 noninterest 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.
23
<PAGE>
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. Federal income tax expense increased $120,000 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)
- --------------------------- --------- ----------- -------- --------- ---------- ---------
(Dollars in Thousands)
<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 that matured 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.
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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 Associations --
Capital Requirements." See also "HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE."
Impact of New Accounting Standards
Accounting for Stock-Based Compensation. In October 1995, the FASB issued
SFAS No. 123, "Accounting for Stock-Based Compensation," establishing financial
accounting and reporting standards for stock-based employee compensation plans.
This statement encourages all entities to adopt a new method of accounting to
measure compensation cost of all employee stock compensation plans based on the
estimated fair value of the award at the date it is granted. Companies are,
however, allowed to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting, which generally does not result
in compensation expense recognition for most plans. Companies that elect to
remain with the existing accounting 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 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
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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 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.
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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, $42.6 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.
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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, $42.6 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 United States government sponsored agencies, although
the Savings Bank has not sold any loans in recent years.
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<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.
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<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 5 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.
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<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 totaled $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.
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<PAGE>
The largest component of the Savings Bank's consumer loan portfolio
consists of mobile home loans. At March 31, 1997, mobile home loans totaled $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>
38
<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 December 31,
At March 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 real estate owned ("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.
Three Months
Ended Year Ended
March 31, December 31,
------------ --------------
1997 1996 1996 1995
---- ---- ---- ----
(Dollars in Thousands)
<TABLE>
<CAPTION>
<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, FMNA,
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 totaled $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 March 31, At December 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 March 31, At December 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 Spring Hill Funding Corporation
("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 December 31,
March 31, --------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
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
56
<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, Spring Hill Funding
Corporation, 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.
57
<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>
58
<PAGE>
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.
<TABLE>
<CAPTION>
Name Position held with Holding Company
---- ----------------------------------
<S> <C>
Thomas F. Angotti President and Chief Executive Officer
Vincent C. Ashoff Executive Vice President and Chief Financial Officer
Joanne C. Wienand Corporate Secretary
</TABLE>
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."
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
Position with Director Term
Name Age (1) Savings Bank Since Expires
- ---- ------- ------------- -------- -------
<S> <C> <C> <C> <C>
Guy Dille 67 Director, 1988 1998
Corporate Secretary
George C. Dorsch 63 Director 1980 1999
Edward W. Preskar 68 Chairman of the 1976 1999
Board
Thomas F. Angotti 49 President, Chief 1989 2000
Executive Officer
and Director
James G. Caliendo 44 Director 1993 2000
</TABLE>
59
<PAGE>
Executive Officers Who Are Not Directors
<TABLE>
<CAPTION>
Name Age (1) Position with Savings Bank
- ---- ------- --------------------------
<S> <C> <C>
Vincent C. Ashoff 37 Senior Vice President/Operations, 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. Mr. Dille currently serves as the Savings Bank's Corporate Secretary.
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.
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. Since 1995, he has 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.
60
<PAGE>
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 the
Vice President-Lending and Controller, 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 $100,000 during the year ended December 31, 1996.
<TABLE>
<CAPTION>
Annual Compensation(1)
---------------------------------------------
Name and Other Annual All Other
Position Year Salary($) 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 $75,000 and for Mr.
Ashoff will be $55,000, 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
61
<PAGE>
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 for a period of six months.
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 Securities Exchange Act of 1934, as
amended ("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.
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.
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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 6 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."
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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 Company and the Savings Bank who have been
credited with at least 1,000 hours of service during a 12-month period and who
have attained age 19 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 seven-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 five 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
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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 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 a 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
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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 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.
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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.
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 Associations --
Transactions with Affiliates." The aggregate amount of loans by the Savings Bank
to its executive officers and directors was $9,000 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 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 capitalized;" (iii)
"undercapitalized" if it has a total risk-based capital ratio that is less than
8.0%, has a Tier I
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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 (where the mortgages are secured by domestic
residential housing or manufactured housing); FHLB stock; direct or
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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 Freddie Mac or Fannie Mae. 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 nonincludable 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 Associations --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.
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 Associations -- 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.
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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 ___________, 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.
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
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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 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 savings 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
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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.
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
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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, 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 12:00 Noon,
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:
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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.
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,
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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 12:00 Noon, 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 ______ __, 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 12:00 Noon, 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 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.
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.
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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 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
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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 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
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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 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.
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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.
To purchase shares in the Subscription and Direct Community Offering, an
executed Order Form and certification 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 12:00 Noon, Eastern Time, on the Expiration
Date. Order Forms which are not received by such time or are executed
defectively or are received without full payment (or 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
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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.
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 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
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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 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.
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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.
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,
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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 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.
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<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
Senior Vice President 5,000 50,000 0.95 0.70
------ -------- ---- ----
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 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
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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 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).
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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
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.
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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.
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.
94
<PAGE>
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 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.
95
<PAGE>
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, 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.
96
<PAGE>
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 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.
97
<PAGE>
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 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."
98
<PAGE>
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.
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.
99
<PAGE>
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 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.
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<PAGE>
Index To Consolidated Financial Statements
Spring Hill Savings Bank, FSB
<TABLE>
<CAPTION>
Pages
<S> <C>
Independent Auditors' Report..................................... 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
</TABLE>
* * *
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.
101
<PAGE>
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 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.
F-6
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment Securities Including Mortgage-Backed Securities (Continued)
----------------------------------------------------------------------
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.
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.
F-7
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
------------------------------------------------------
Allowance for Loan Losses (Continued)
-------------------------------------
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>
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>
F-24
<PAGE>
17. CAPITAL REQUIREMENTS (Continued)
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.
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.
F-25
<PAGE>
18. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
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.
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.
F-26
<PAGE>
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.
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-27
<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-28
<PAGE>
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus in connection with the offering made hereby, and, if given or made,
such other information or representation must not be relied upon as having been
authorized by 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 jurisdiction in
which such offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so, or to any person to whom
it is unlawful to make such offer or solicitation in such jurisdiction. Neither
the delivery of this Prospectus nor any sale hereunder shall under any
circumstances create any implication that there has been no change in the
affairs of SHS Bancorp, Inc. or Spring Hill Savings Bank since any of the dates
as of which information is furnished herein or since the date hereof.
<TABLE>
<CAPTION>
Table of Contents Page
----------------- ----
<S> <C>
Prospectus Summary....................................................
Selected Consolidated Financial Information...........................
Recent Developments...................................................
Risk Factors..........................................................
SHS Bancorp, Inc. ....................................................
Spring Hill Savings Bank, F.S.B. .....................................
Use of Proceeds.......................................................
Dividend Policy.......................................................
Market for Common Stock...............................................
Capitalization........................................................
Historical and Pro Forma Capital Compliance...........................
Pro Forma Data........................................................
Spring Hill Savings Bank and Subsidiary...............................
Consolidated Statements of Income.....................................
Management's Discussion and Analysis of Financial.....................
Condition and Results of Operations...................................
Business of the Holding Company.......................................
Business of the Savings Bank..........................................
Management of the Holding Company.....................................
Management of the Savings Bank........................................
Regulation............................................................
Taxation..............................................................
The Conversion........................................................
Restrictions on Acquisition of the Holding Company....................
Description of Capital Stock of the Holding Company...................
Registration Requirements.............................................
Legal and Tax Opinions................................................
Experts...............................................................
Additional Information................................................
Index to Consolidated Financial Statements............................
</TABLE>
Until the later of ___________, 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 addition to
the obligation of dealers to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
SHS BANCORP, INC.
[Logo]
(Proposed Holding Company for Spring Hill Savings Bank, F.S.B.)
713,000 Shares of
Common Stock
----------------
Prospectus
----------------
Ryan, Beck & Co.
, 1997
-----------
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Officers and Directors
Article 9 of the Articles of Incorporation requires indemnification of
directors, officers and employees as follows:
Article 9. Indemnification, etc. of Officers, Directors, Employees and
Agents.
A. Personal Liability of Directors. A director of the Corporation shall
not be personally liable for monetary damages for any action taken, or any
failure to take any action, as a director except to the extent that by law a
director's liability for monetary damages may not be limited.
B. Indemnification. The Corporation shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, including actions by or in the right of
the Corporation, whether civil, criminal, administrative or investigative, by
reason of the fact that such person is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding to
the full extent permissible under Pennsylvania law.
C. Advancement of Expenses. Reasonable expenses incurred by an officer,
director, employee or agent of the Corporation in defending a civil or criminal
action, suit or proceeding described in Section B of this Article 9 may be paid
by the Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such person to
repay such amount if it shall ultimately be determined that the person is not
entitled to be indemnified by the Corporation.
D. Other Rights. The indemnification and advancement of expenses
provided by or pursuant to this Article 9 shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under any insurance or other agreement, vote of stockholders or
directors or otherwise, both as to actions in their official capacity and as to
actions in another capacity while holding an office, and shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such person.
E. Insurance. The Corporation shall have the power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of this Article 9.
F. Security, Fund; Indemnity Agreements. By action of the Board of
Directors (notwithstanding their interest in the transaction), the Corporation
may create and fund a trust fund or fund of any nature, and may enter into
agreements with its officers, directors, employees and agents for the purpose of
securing or insuring in any manner its obligation to indemnify or advance
expenses provided for in this Article 9.
G. Modification. The duties of the Corporation to indemnify and to
advance expenses to any person as provided in this Article 9 shall be in the
nature of a contract between the Corporation and each such person, and no
amendment or repeal of any provision of this Article 9, and no amendment or
termination of any trust or other fund created pursuant to Section F of this
Article 9, shall alter to the detriment of such person the right of such
II-1
<PAGE>
person to the advance of expenses or indemnification related to a claim based on
an act or failure to act which took place prior to such amendment, repeal or
termination.
H. Proceedings Initiated by Indemnified Persons. Notwithstanding any
other provision of this Article 9, the Corporation shall not indemnify a
director, officer, employee or agent for any liability incurred in an action,
suit or proceeding initiated (which shall not be deemed to include counter-
claims or affirmative defenses) or participated in as an intervenor or amicus
curiae by the person seeking indemnification unless such initiation of or
participation in the action, suit or proceeding is authorized, either before or
after its commencement, by the affirmative vote of a majority of the directors
in office.
Spring Hill Savings Bank, F.S.B.
Section 545.121 of the Regulations for Federal Savings Associations
provides that any person against whom any action is brought or threatened by
reason of the fact that such person is or was a director or officer of the
Savings Bank shall be indemnified by such Savings Bank for reasonable costs and
expenses, including reasonable attorney's fees, actually paid or incurred by
such person in connection with proceedings related to the defense or settlement
of such action; any amount of which such person becomes liable by reason of any
judgment in such action; and reasonable costs and expenses, including reasonable
attorney's fees, actually paid or incurred in any action to enforce his rights
under this section, which results in a final judgment on the merits in favor of
the director or officer, the Savings Bank may make the indemnification provided
in the preceding sentence if a majority of the directors of the Savings Bank
determine that such director or officer was acting in good faith within what he
was reasonably entitled to believe under the circumstances was the best
interests of the Savings Bank or its stockholders or members. In which event,
regulations require a 60 day notice to the OTS. Additionally, Section 545.121(d)
authorizes the obtaining of insurance to protect against such losses.
Item 25. Other Expenses of Issuance and Distribution(1)
<TABLE>
<CAPTION>
<S> <C>
Legal fees and expenses........................ $100,000
Securities marketing legal fees................ 30,000
EDGAR, copying, printing, postage and mailing.. 100,000
Appraisal and business plan preparation........ 12,500
Accounting fees................................ 45,000
Securities marketing fees and expenses (2)..... 105,000
Data processing fees and expenses.............. 10,000
SEC registration fee........................... 2,485
Blue Sky filing fees and expenses.............. 20,000
OTS filing fees................................ 8,400
Other expenses................................. 16,615
--------
Total...................................... $450,000
========
- -------------------------
</TABLE>
(1) Assumes all of the Common Stock will be sold in the Subscription and
Direct Community Offerings.
(2) Based on the sale of Common Stock at the midpoint of the Estimated
Valuation Range.
Item 26. Recent Sales of Unregistered Securities.
Not Applicable
Item 27. Exhibits.
The exhibits filed as part of this Registration Statement are as
follows:
II-2
<PAGE>
<TABLE>
<S> <C>
1.1 -- Form of proposed Agency Agreement among SHS Bancorp, Inc., Spring
Hill Savings Bank, F.S.B. and Ryan Beck
1.2 -- Engagement Letter between Spring Hill Savings Bank, F.S.B. and Ryan
Beck (a)
2 -- Plan of Conversion of Spring Hill Savings Bank, F.S.B. (attached as
an exhibit to the Proxy Statement included as Exhibit 99.5)
3.1 -- Articles of Incorporation of SHS Bancorp, Inc. (a)
3.2 -- Bylaws of SHS Bancorp, Inc. (a)
4 -- Form of Certificate for Common Stock (a)
5 -- Opinion of Breyer & Aguggia regarding legality of securities
registered (a)
8.1 -- Form of Federal Tax Opinion of Breyer & Aguggia (a)
8.2 -- State Tax Opinion of S.R. Snodgrass, A.C.
8.3 -- Opinion of Feldman Financial as to the value of subscription rights
(a)
10.1 -- Proposed Form of Employment Agreement for Senior Officers (a)
10.2 -- Proposed Form of Severance Agreement for Key Officers (a)
10.3 -- Proposed Form of Employee Severance Compensation Plan (a)
10.4 -- Proposed Form of Employee Stock Ownership Plan (a)
10.5 -- Spring Hill Savings Bank, F.S.B. 401(k) Profit Sharing Plan
21 -- Subsidiaries of SHS Bancorp, Inc. (a)
23.1 -- Consent of S.R. Snodgrass, A.C.
23.2 -- Consent of Breyer & Aguggia (contained in opinion included as
Exhibit 5)
23.3 -- Consent of Breyer & Aguggia as to its Federal Tax Opinion (a)
23.4 -- Consent of Feldman Financial Advisors, Inc. (a)
24 -- Power of Attorney (contained in signature page) (a)
27 -- Financial Data Schedule (a)
99.1 -- Order Form
99.2 -- Solicitation and Marketing Materials (a)
99.3 -- Appraisal Agreement with Feldman Financial Advisors, Inc. (a)
99.4 -- Appraisal Report of Feldman Financial Advisors, Inc.
99.5 -- Proxy Statement for Special Meeting of Members of Spring Hill
Savings Bank, F.S.B. (a)
</TABLE>
II-3
<PAGE>
- ---------------
(a) Previously filed.
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933, as amended ("Securities Act");
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934, as amended ("Exchange Act") (and, where
applicable, each filing of any employee benefit plan's annual report pursuant to
Section 15(d) of the Exchange Act) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act, and is therefore, unenforceable. In the event that a claim for
indemnification against liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the questions whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amended Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Pittsburgh,
Pennsylvania on the 6th day of August, 1997.
SHS BANCORP, INC.
By: /s/ Thomas F. Angotti
-----------------------------------------
Thomas F. Angotti
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amended Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Thomas F. Angotti Chief Executive Officer and Director August 6, 1997
- ------------------------- (Principal Executive Officer)
Thomas F. Angotti
/s/ Vincent C. Ashoff Chief Financial Officer August 6, 1997
- ------------------------- (Principal Financial
Vincent C. Ashoff and Accounting Officer)
/s/ Guy Dille* Director August 6, 1997
- -------------------------
Guy Dille
/s/ George C. Dorsch* Director August 6, 1997
- -------------------------
George C. Dorsch
/s/ Edward W. Preskar* Director August 6, 1997
- -------------------------
Edward W. Preskar
/s/ James G. Caliendo* Director August 6, 1997
- -------------------------
James G. Caliendo
</TABLE>
- -----------------
* By power of attorney dated June 27, 1997.
<PAGE>
Exhibit Index
<TABLE>
<S> <C>
1.1 -- Form of proposed Agency Agreement among SHS
Bancorp, Inc., Spring Hill Savings Bank,
F.S.B. and Ryan Beck
1.2 -- Engagement Letter between Spring Hill Savings
Bank, F.S.B. and Ryan Beck (a)
2 -- Plan of Conversion of Spring Hill Savings
Bank, F.S.B. (attached as an exhibit to the
Proxy Statement included as Exhibit 99.5)
3.1 -- Articles of Incorporation of SHS Bancorp, Inc. (a)
3.2 -- Bylaws of SHS Bancorp, Inc. (a)
4 -- Form of Certificate for Common Stock (a)
5 -- Opinion of Breyer & Aguggia regarding legality
of securities registered (a)
8.1 -- Form of Federal Tax Opinion of Breyer &
Aguggia (a)
8.2 -- State Tax Opinion of S.R. Snodgrass, A.C.
8.3 -- Opinion of Feldman Financial as to the value
of subscription rights (a)
10.1 -- Proposed Form of Employment Agreement for
Senior Officers (a)
10.2 -- Proposed Form of Severance Agreement for Key
Officers (a)
10.3 -- Proposed Form of Employee Severance
Compensation Plan (a)
10.4 -- Proposed Form of Employee Stock Ownership Plan (a)
10.5 -- Spring Hill Savings Bank, F.S.B. 401(k) Profit
Sharing Plan
21 -- Subsidiaries of SHS Bancorp, Inc. (a)
23.1 -- Consent of S.R. Snodgrass, A.C.
23.2 -- Consent of Breyer & Aguggia (contained in
opinion included as Exhibit 5)
23.3 -- Consent of Breyer & Aguggia as to its Federal
Tax Opinion (a)
23.4 -- Consent of Feldman Financial Advisors, Inc. (a)
24 -- Power of Attorney (contained in signature
page) (a)
27 -- Financial Data Schedule (a)
99.1 -- Order Form
99.2 -- Solicitation and Marketing Materials (a)
99.3 -- Appraisal Agreement with Feldman Financial
Advisors, Inc. (a)
99.4 -- Appraisal Report of Feldman Financial
Advisors, Inc.
99.5 -- Proxy Statement for Special Meeting of Members
of Spring Hill Savings Bank, F.S.B. (a)
- ---------------
</TABLE>
(a) Previously filed.
<PAGE>
Exhibit 1.1
SHS BANCORP, INC.
(a Pennsylvania corporation)
713,000 Shares (Anticipated Maximum)
Common Stock
(Par Value $0.01 Per Share)
AGENCY AGREEMENT
----------------
July ___, 1997
Ryan, Beck & Co., Inc.
80 Main Street
West Orange, New Jersey 07052
Dear Sirs:
SHS Bancorp, Inc., a Pennsylvania corporation (the "Company") and Spring
Hill Savings Bank, F.S.B., a federally chartered mutual savings bank (the
"Bank"), hereby confirm their agreement with Ryan, Beck & Co., Inc. ("Ryan,
Beck" or the "Agent" or "you"), as follows:
Introductory. The Bank is in the process of converting from a federally
------------
chartered savings bank in the mutual form to a federally chartered savings bank
in stock form in accordance with the provisions of the Home Owners' Loan Act, as
amended (the "HOLA"), and the rules and regulations of the Office of Thrift
Supervision ("OTS") which have been or which may be promulgated thereunder by
the OTS, such statute, rules and regulations being collectively referred to as
the "Conversion Regulations." An Application for Approval of Conversion has
been filed with the OTS (the "Conversion Application") and all amendments
required to the date hereof have also been filed. The Conversion Application
includes, among other things, the Bank's plan of conversion (the "Plan") and the
Bank's proxy statement for the Special Meeting of Members, to be held on
September __, 1997 ("Proxy Statement"). Prior to the date hereof, the Plan has
been approved by the Board of Directors (hereinafter referred to as "Directors")
of the Bank and by the OTS. Pursuant to the Plan, the Bank will convert from a
federally chartered mutual savings bank to a federally chartered stock savings
bank; the Company has filed an application (the "Holding Company Application")
with the OTS to become a registered savings and loan holding company under HOLA;
all the issued and outstanding stock of the Bank will be sold to the Company;
and the Company will issue and sell its Common Stock (as defined below) in a
Subscription and Community Offering and, if necessary, in a Syndicated Community
Offering (the "Syndicated Community Offering"), all of which are described below
and in the Plan. Collectively, these transactions are referred to herein as the
"Conversion."
<PAGE>
Upon consummation of the Conversion, the Company will have authorized
capital of 15,000,000 shares of capital stock, of which 10,000,000 shares shall
be common stock, $0.01 par value per share (the "Common Stock") and 5,000,000
shares shall be preferred stock of $0.01 par value. The Company, in accordance
with the Plan, is offering, in a subscription offering by way of nontransferable
subscription rights, shares of Common Stock, in order of priority, to depositors
of the Bank with account balances of $50.00 or more as of December 31, 1995
("Eligible Account Holders"), the Bank's Employee Stock Ownership Plan, a tax-
qualified employee benefit plan (the "ESOP"), depositors of the Bank with
account balances of $50.00 or more as of June 30, 1997 ("Supplemental Eligible
Account Holders"), and depositors other than Eligible Account Holders and
Supplemental Eligible Account Holders as of the Voting Record Date and borrowers
of the Bank with mortgage loans outstanding as of the Voting Record Date ("Other
Members"). Concurrently, and subject to the prior rights of holders of
subscription rights, the Company is offering the Common Stock for sale in a
community offering to the general public, with preference given to natural
persons who reside in the Pennsylvania Counties of Allegheny, Beaver, Butler,
Washington, Westmoreland and Armstrong ("Other Subscribers"). With the exception
of the ESOP, which intends to purchase up to 8% of the total number of shares of
Common Stock issued in the Conversion, no person may purchase more than $50,000
of the Common Stock offered in the Conversion; and no person, together with
associates of and persons acting in concert with such person, may purchase more
than $85,000 of the Common Stock offered in the Conversion; provided, however
that the maximum overall purchase limitation may be increased or decreased and
the amount permitted to be subscribed for may be increased or decreased in the
sole discretion of the Company. Common Stock not so subscribed for in the
Subscription and Community Offering, if any, will be offered by the Company to
certain members of the general public in the Syndicated Community Offering. It
is acknowledged that the Company in its sole discretion may accept or reject, in
whole or in part, any orders to purchase shares of the Common Stock received in
the Community Offering or in the Syndicated Community Offering.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form SB-2 (File No. 333-30231) (the
"Registration Statement") containing a Prospectus relating to the Subscription
and Community Offering for the registration of the Common Stock under the
Securities Act of 1933, as amended (the "1933 Act"), and has filed such
amendments thereto and such amended prospectuses as may have been required to
the date hereof. The Prospectus, as amended, on file with the Commission at the
time the Registration Statement becomes effective is hereinafter called the
"Prospectus", except that if the Prospectus filed by the Company pursuant to
Rule 424 (b) of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") differs from the prospectus on file at the time the
Registration Statement becomes effective, the term "Prospectus" shall refer to
the prospectus filed pursuant to Rule 424(b) from and after the time said
prospectus is filed with the Commission.
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SECTION 1. Appointment of Agent; Compensation to the Agent. Subject to the
-----------------------------------------------
terms and conditions herein set forth, the Bank and the Company hereby appoint
the Agent as its agent to consult with and advise the Bank and the Company, and
to solicit subscriptions and purchase orders for Common Stock on behalf of the
Bank and the Company, in connection with the Company's offering of Common Stock
in the Subscription and Community Offering. On the basis of the
representations, warranties and agreements herein contained, and subject to the
terms and conditions herein set forth, Ryan, Beck accepts such appointment and
agrees to consult with and advise the Bank and the Company as to the matters set
forth in Section 3 of the Engagement Letter between the Agent and the Bank dated
February 20, 1997, included as Exhibit A attached hereto, and to use its best
efforts to solicit subscriptions and purchase orders for Common Stock in
accordance with this Agreement; provided, however, that the Agent shall not be
responsible for obtaining subscriptions or purchase orders for any specific
number of shares of Common Stock, shall not be required to purchase any shares
and shall not be obligated to take any action which is inconsistent with all
applicable laws, regulations, decisions or orders.
The appointment of the Agent hereunder shall terminate upon termination of
the Subscription and Community Offering or any Syndicated Community Offering and
satisfaction of the obligations of the Bank and the Company pursuant to this
Agreement.
Subject to the prior approval of the Company and the Bank, Ryan, Beck may
also assemble and manage a selling group of broker dealers ("Selling Group")
which are members of the National Association of Securities Dealers, Inc.
("NASD") to participate in the solicitation of purchase orders for shares of
Common Stock in the Syndicated Community Offering under a selected dealers'
agreement (the "Selected Dealers' Agreement"), the form of which is set forth as
Exhibit B to this Agreement.
In addition to the reimbursement of the expenses specified in Sections 6, 7
and 8 hereof, the Agent will receive an advisory and management fee of $25,000
("Management Fee") and a marketing fee of one and one-half percent (1.50%) of
the dollar amount of the Common Stock sold in the Subscription and Community
Offerings ("Marketing Fee"). Should a selling group of NASD member firms (which
may include Ryan, Beck & Co.) under a Selected Dealers' Agreement (the "Selling
Group") be implemented, the Bank shall pay a fee to selected dealers ("Selected
Dealers' Fee") of five and one-half percent (5.5%) in the aggregate. The
Marketing Fee and the Selected Dealers' Fee are hereinafter collectively
referred to as the "Sales Compensation." No Sales Compensation shall be payable
pursuant to this section in connection with the sale of Common Stock to
officers, directors, employees (and members of the immediate family thereof),
and employee benefit plans of the Company and the Bank. It is acknowledged that
the Bank paid the Agent $12,500 of the Management Fee upon execution of the
Engagement Letter. The minimum fee (consisting of the aggregate of the
Management Fee, Marketing Fee and Selected Dealers' Fee) shall be $100,000 and
the maximum Marketing Fee payable for shares sold in the Subscription and Direct
Community Offering is 1.5% of the aggregate Purchase Price at the midpoint of
the Estimated Valuation Range. Ryan, Beck will not commence sales
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of shares of Common Stock through members of the Selling Group without prior
approval of the Bank.
If the Conversion is not consummated by March 31, 1998, due to conditions
beyond the control of the Agent, or if the Agent terminates this Agreement in
accordance with Section 10 hereof, the Agent shall receive, in addition to the
Agent's reasonable out of pocket expenses as defined in Section 6 hereof, the
Management Fee of $25,000 in consideration of its advisory and administrative
services in lieu of the Sales Compensation. If there is necessitated a
resolicitation of subscriptions and purchase orders, the Company, the Bank and
the Agent agree to negotiate in good faith an agreement to cover the Agent's
further fees and expenses in connection therewith.
The compensation specified above shall be payable (to the extent not already
paid) to the Agent on the earlier of the Closing Date (as hereinafter defined),
or a determination by the Company and the Bank to terminate or abandon the Plan.
The Bank and the Company agree to reimburse the Agent for the costs and expenses
specified in Sections 6, 7 and 8 hereof, to the extent such costs and expenses
are reasonably incurred by the Agent, promptly upon receiving a reasonable
accounting of such costs and expenses.
SECTION 2. Closing Date; Release of Funds and Delivery of Certificates. If
-----------------------------------------------------------
all conditions precedent to the consummation of the Conversion, including,
without limitation, the sale of all Common Stock required by the Plan to be
sold, are satisfied, the Company agrees to issue or have issued the Common Stock
sold in the Subscription and Community Offering and to release for delivery
certificates for Common Stock on the Closing Date (as hereinafter defined)
against payment therefor by release of funds from the special interest-bearing
account referred to in Section 5(r) hereof and by the authorized withdrawal of
funds from deposit accounts of Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members in accordance with the Plan; provided,
however, that no such funds shall be released to the Company or withdrawn until
the conditions specified in Section 9 hereof shall have been complied with to
the reasonable satisfaction of the Agent and its counsel. Such release,
withdrawal and payment shall be made at the Closing Date of the Offering, on a
business day and at a place selected by the Agent, which date and place are
acceptable to the Bank and the Company, on at least two business days prior
notice to the Bank and Company (it being understood that such business day shall
not be more than ten business days after completion of the Subscription and
Community Offering or the solicitation of purchase orders for shares under the
Selected Dealers' Agreement unless an amendment to the Registration Statement is
required or the Conversion appraisal update has not been approved by the OTS),
or such other time or place as shall be agreed upon by the Agent, the Bank and
the Company. Certificates for Common Stock shall be delivered directly to the
purchasers thereof or in accordance with their directions. The hour and date
upon which the Company shall release or deliver the Common Stock sold in the
Subscription and Community Offering, in accordance with the terms hereof, are
herein called the "Closing Date."
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<PAGE>
SECTION 3. Prospectus; Subscription and Community Offering. The Common
-----------------------------------------------
Stock is to be offered in the Subscription and Community Offering at $10.00 per
share, as set forth on the cover page of the Prospectus. The number of shares
offered may be changed by the Company after consultation with the Agent.
SECTION 4. Representations and Warranties. The Company and the Bank
------------------------------
jointly and severally represent and warrant to the Agent as follows:
(a) The Registration Statement was declared effective by the Commission
on August 12, 1997. At the time the Registration Statement, including the
Prospectus contained therein, became effective, the Registration Statement
complied in all material respects with the requirements of the 1933 Act and
the 1933 Act Regulations and the Registration Statement, any final
Prospectus, any Blue Sky Application or any Sales Document (as such terms
are defined previously herein or in Section 7 hereof) authorized by the
Company or the Bank for use in connection with the Subscription and
Community Offering (and only with respect to information provided by or
approved by the Company and the Bank) did not contain an untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and at the time
any Rule 424(b) Prospectus was filed with the Commission and at the Closing
Date referred to in Section 2, the Registration Statement, any preliminary
or final Prospectus, any Blue Sky Application or any Sales Information (as
such terms are defined previously herein or in Section 7 hereof) authorized
by the Company or the Bank for use in connection with the Subscription and
Community Offering will not contain an untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that the representations and warranties in
this Section 4(a) shall not apply to statements in or omissions from such
Registration Statement, Prospectus or Sales Information made in reliance
upon and in conformity with information furnished in writing to the Company
or the Bank by the Agent expressly regarding the Agent for use under the
captions "Market for the Common Stock" and "The Conversion-Marketing and
Underwriting Arrangements."
(b) The Bank has filed with the OTS the Conversion Application,
including the Prospectus, exhibits, and an amendment or amendments thereto,
as required, which was approved by the OTS; the Proxy Statement of the Bank,
to be dated as of August 22, 1997, has been approved by the OTS; and the
Plan has been adopted by both the Board of Directors of the Company and the
Board of Directors of the Bank.
(c) The Company has filed with the OTS the Holding Company Application,
which was approved by the OTS and, to the best knowledge of the Company and
the Bank, no order has been received by or is pending before the OTS to
prevent, suspend or revoke any approval thereof.
-6-
<PAGE>
(d) At the Closing Date, the Company and the Bank will have completed
all conditions precedent to the Conversion and the offer and sale of the
Common Stock in accordance with the Plan, the Conversion Regulations and all
other applicable material laws, regulations, decisions and orders, including
all terms, conditions, requirements and provisions precedent to the
Conversion imposed upon the Company or the Bank by the Commission and the
OTS or any other regulatory authority.
(e) No order has been issued by the Commission, the OTS, the Federal
Deposit Insurance Corporation (the "FDIC"), or any State regulatory or Blue
Sky authority preventing or suspending the use of the Prospectus and no
action by or before any such government entity to revoke any approval,
authorization or order of effectiveness related to the Conversion is, to the
best knowledge of the Bank or the Company, pending or threatened.
(f) At the date hereof, to the best knowledge of the Company and the
Bank, no person has sought to obtain review of the final action of the OTS
in approving the Plan of Conversion or Holding Company Application.
(g) At the time of the approval of the Conversion Application by the OTS
(including any amendment or supplement thereto) and at all times subsequent
thereto until the Closing Date, the Conversion Application complied in all
material respects with the Conversion Regulations. The Prospectus contained
in the Conversion Application (including any amendments or supplements
thereto) complied in all material respects with the Conversion Regulations
at the time of the approval of the Conversion Application by the OTS and the
Prospectus contained in the Conversion Application will comply in all
material respects with such rules and regulations from such time until the
Closing Date.
(h) Feldman Financial Advisors, Inc. ("Feldman Financial"), which
prepared the Conversion appraisal dated as of June 23, 1997, described in
the Prospectus, is independent with respect to the Company and the Bank
within the meaning of the Conversion Regulations, is believed by the Company
and the Bank to be experienced and expert in rendering corporate appraisals
of thrift institutions and the Bank believes that Feldman Financial has
prepared the pricing information set forth in the Prospectus in accordance
with the requirements of the Conversion Regulations.
(i) S.R. Snodgrass, A.C. ("Snodgrass"), the firm which certified the
financial statements filed as part of the Registration Statement is, with
respect to the Company and the Bank, an independent certified public
accountant as required by the 1933 Act and the 1933 Act Regulations.
(j) The financial statements included in the Registration Statement and
which are part of the Prospectus present fairly the financial condition,
results of operations, retained earnings and changes in financial position
and statement of cash flows of the
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<PAGE>
Bank, at and for the dates indicated and the periods specified and comply as
to form in all material respects with the applicable accounting requirements
of the Conversion Regulations and generally accepted accounting principles.
Said financial statements are consistent with financial statements and other
reports filed by the Bank with the OTS and the FDIC except that accounting
principles employed in such filings (not including the Registration
Statement) conform to requirements of such authorities and not necessarily
to generally accepted accounting principles. The other financial,
statistical, and pro forma information and related notes included in the
Prospectus present fairly the information shown therein on a basis
consistent with the audited financial statements of the Bank included in the
Prospectus, and as to the pro-forma adjustments, the adjustments made
therein have been properly applied on the basis described therein.
(k) Since the respective dates as of which information is given in the
Registration Statement and Prospectus, except as may otherwise be stated
therein: (i) there has not been any material adverse change in the financial
condition of the Company, the Bank or Spring Hill Funding Corporation (the
"Subsidiary") or of the Company, the Bank and the Subsidiary considered as
one enterprise, or in the results of operations or business of the Company,
the Bank or the Subsidiary whether or not arising in the ordinary course of
business, (ii) there has not been any material increase in the long-term
debt of the Bank, nor has the Bank issued any securities or incurred any
liability or obligation for borrowing other than in the ordinary course of
business, (iii) there have not been any material transactions entered into
by the Company, the Bank or the Subsidiary, except those transactions
entered into in the ordinary course of business and those specifically
contemplated by the Prospectus, including the execution of loan documents
pertaining to the ESOP, and (iv) the capitalization, liabilities, assets,
properties and business of the Company, the Bank and the Subsidiary conform
in all material respects to the descriptions thereof contained in the
Prospectus. To the best knowledge of the Company, the Bank, and the
Subsidiary, neither the Company, the Bank nor the Subsidiary has any
material liability of any kind, contingent or otherwise, except as set forth
in the Prospectus.
(l) The Bank is now a federally chartered savings bank in mutual form of
organization and upon the Conversion will become a federally chartered
savings bank in capital stock form of organization, in both instances duly
authorized to conduct its business and own its property as described in the
Registration Statement; the Company, the Bank and the Subsidiary have
obtained all material licenses, permits and other governmental
authorizations currently required for the conduct of their respective
businesses; all such licenses, permits and the governmental authorizations
are in full force and effect; and the Company, the Bank and the Subsidiary
are in all material respects complying with all laws, rules, regulations and
orders applicable to the operation of their businesses. The Bank does not
own equity securities or any equity interest in any other business
enterprise except as described in the Prospectus. Upon completion of the
sale by the Company of the shares of Common Stock
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<PAGE>
contemplated by the Prospectus, (i) the Bank will be converted pursuant to
the Plan to a federally chartered stock savings bank, (ii) all of the issued
and outstanding capital stock of the Bank will be owned by the Company, and
(iii) the Company will have no direct subsidiaries other than the Bank. The
Conversion will have been effected in all material respects in accordance
with all applicable statutes, regulations, decisions and orders; and, except
with respect to the filing of certain post-sale, post-conversion reports and
documents, all terms, conditions, requirements and provisions with respect
to the Conversion imposed by the Commission and the OTS, if any, will have
been complied with by the Company, the Bank and the Subsidiary in all
material respects or appropriate waivers will have been obtained and all
material notice and waiting periods will have been satisfied, waived or
elapsed.
(m) The deposit accounts of the Bank are insured by the Savings
Association Insurance Fund ("SAIF") as administered by the FDIC up to the
maximum amount allowed under law. Upon consummation of the Conversion, the
liquidation account for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders ("Liquidation Account") will be duly
established in accordance with the requirements of the Conversion
Regulations.
(n) Upon consummation of the Conversion, the authorized, issued and
outstanding equity capital of the Company will be as set forth in the
Registration Statement under the caption "Capitalization," and no shares of
Common Stock have been or will be issued and outstanding prior to the
Closing Date referred to in Section 2, except as to the issuance by the
Company of shares of Common Stock, if any, for the purpose of the Company's
initial capitalization and conducting organizational business, which shares
of Common Stock shall be cancelled on the Closing Date; the shares of Common
Stock issued in the Conversion will have been duly and validly authorized
for issuance and, when issued and delivered by the Company pursuant to the
Plan against payment of the consideration calculated as set forth in the
Plan and in the Prospectus, will be duly and validly issued and fully paid
and non-assessable; the issuance of the Common Stock will not violate any
preemptive rights; and the terms and provisions of the Common Stock will
conform in all material respects to the description thereof contained in the
Registration Statement and the Prospectus. To the best knowledge of the
Company and the Bank, upon the issuance of the Common Stock, good title to
the Common Stock will be transferred from the Company to the purchasers
thereof against payment therefor, subject to such claims as may be asserted
against the purchasers thereof by third-party claimants.
(o) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the Commonwealth of
Pennsylvania with corporate power and authority to own, lease and operate
its properties and to conduct its business as described in the Registration
Statement and the Prospectus, and the Company is not required to qualify as
a foreign corporation in any jurisdiction where it has not so qualified.
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<PAGE>
(p) The Subsidiary has been duly organized and is in good standing under
the laws of the Commonwealth of Pennsylvania with full corporate power and
authority to own its properties and to conduct its business, as described in
the Registration Statement and the Prospectus and all of the outstanding
stock of the Subsidiary has been duly authorized and is fully paid and non-
assessable, and such stock is owned directly or indirectly by the Bank, free
and clear of any liens or encumbrances. The Subsidiary is duly qualified to
transact business and is in good standing in each jurisdiction in which it
conducts business, except where the failure to be qualified would not have a
material adverse effect on the operations of the Company, the Bank and the
Subsidiary taken as a whole.
(q) As of the date hereof and as of the Closing Date, neither the
Company, the Bank nor the Subsidiary is in violation of its articles of
incorporation, charter or bylaws (and the Bank will not be in violation of
its charter or bylaws in capital stock form upon consummation of the
Conversion); the consummation of the Conversion, the execution, delivery and
performance of this Agreement and the consummation of the transactions
herein contemplated have been duly and validly authorized by all necessary
corporate action on the part of the Company and the Bank and this Agreement
has been validly executed and delivered by the Company and the Bank and is
the valid, legal and binding Agreement of the Company and the Bank
enforceable in accordance with its terms, except to the extent that rights
to indemnity hereunder may be limited under applicable law and subject to
bankruptcy, insolvency, reorganization or other laws relating to or
affecting the enforcement of creditors' rights generally and equitable
principles limiting the right to obtain specific enforcement or similar
equitable relief. The consummation of the transactions herein contemplated
will not (i) conflict with or constitute a breach of, or default under, the
articles of incorporation, charter or bylaws of the Company, the Bank (in
either mutual or capital stock form) or the Subsidiary, or any material
contract, lease or other instrument to which the Company, the Bank or the
Subsidiary is a party or in which the Company, the Bank or the Subsidiary
has a beneficial interest, or any applicable law, rule, regulation or order
to which the Company, the Bank or the Subsidiary is subject; (ii) violate
any authorization, approval, judgment, decree, order, statute, rule or
regulation applicable to the Company, the Bank or the Subsidiary; or (iii)
with the exception of the Liquidation Account established in the Conversion,
result in the creation of any lien, charge or encumbrance upon any property
of the Company, the Bank or the Subsidiary.
(r) The Company and the Bank have all such power, authority,
authorizations, approvals and orders as may be required to enter into this
Agreement, to carry out the provisions and conditions hereof and to issue
and sell the capital stock of the Bank and the Common Stock as provided in
the Plan and as described in the Prospectus, subject to the final approval
of the OTS and to the satisfaction of the conditions of the OTS approval of
the Conversion.
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<PAGE>
(s) The Company, the Bank and the Subsidiary have good and marketable
title to all properties and assets which are material to the business of the
Company, the Bank and the Subsidiary on a consolidated basis and to those
properties and assets described in the Registration Statement and the
Prospectus as owned by them, free and clear of all liens, except such liens
as are described in the Prospectus or are not materially significant or
important in relation to the business of the Company, the Bank and the
Subsidiary on a consolidated basis; and all of the leases and subleases
material to the business of the Company, the Bank and the Subsidiary on a
consolidated basis under which the Company, the Bank or the Subsidiary hold
properties, including those described in the Prospectus, are in full force
and effect.
(t) The Company and the Bank are not in violation of any directive from
the Commission, the OTS, the FDIC, or any other agency to make any material
change in the method of conducting their businesses so as to comply in all
material respects with all applicable statutes and regulations (including,
without limitation, regulations, decisions, directives and orders of the
Commission, the FDIC and the OTS) and there is no suit or proceeding,
charge, investigation or action before or by any court, regulatory authority
or governmental agency or body, pending or, to the knowledge of the Company
or the Bank, threatened, which might materially and adversely affect the
Conversion, the performance of this Agreement or the consummation of the
transactions contemplated in the Plan and as described in the Prospectus or
which might result in any material adverse change in the financial
condition, results of operations or business of the Company and the Bank
taken as a whole or which would materially affect their properties and
assets.
(u) As of the Closing Date, the Bank and the Company shall have
conducted the Conversion in all material respects in accordance with the
Plan, and the Conversion Regulations and in the manner described in the
Prospectus.
(v) The Bank has received an opinion of its special counsel, Breyer &
Aguggia, with respect to the federal income tax consequences of the
Conversion and an opinion of Snodgrass with respect to the Pennsylvania
income tax consequences of the Conversion. The facts and representations
upon which such opinions are based are truthful, accurate and complete, and
neither the Bank nor the Company will take any action inconsistent
therewith.
(w) No default exists, and no event has occurred which with notice or
lapse of time, or both, would constitute a default on the part of the
Company, the Bank or the Subsidiary in the due performance and observance of
any term, covenant or condition of any indenture, mortgage, deed of trust,
note, bank loan or credit agreement or any other instrument or agreement to
which the Company, the Bank or the Subsidiary is a party or by which any of
them or any of their property is bound or affected in any respect which, in
any such case, is material to the Company, the Bank and the Subsidiary; such
agreements are in full force and effect, and no other party to any
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<PAGE>
such agreements has instituted or, to the best knowledge of the Company, the
Bank, or the Subsidiary threatened any action or proceeding wherein the
Company, the Bank or the Subsidiary would or might be alleged to be in
default thereunder.
(x) Subsequent to the date the Registration Statement is declared
effective by the Commission and prior to the Closing Date, except as
otherwise may be indicated or contemplated therein, neither the Company, the
Bank nor the Subsidiary will have issued any securities or incurred any
liability or obligation, direct or contingent, for borrowed money, except
borrowings from the same or similar sources indicated in the Prospectus in
the ordinary course of its business. For purposes of this Section 4(x),
obligations for borrowed money do not include deposits.
(y) The Company, the Bank and the Subsidiary have filed all federal,
state and local tax returns required to be filed and have made timely
payments of all taxes due and payable in respect of such returns and no
deficiency has been asserted with respect thereto by any taxing authority.
(z) To the best knowledge of the Company and the Bank, none of the
Company, the Bank or employees of the Bank has made any payment of funds of
the Company or the Bank as a loan for the purchase of the Common Stock or
made any other payment of funds prohibited by law, and no funds have been
set aside to be used for any payment prohibited by law except as disclosed
in the Prospectus with respect to the ESOP.
(aa) Prior to the Conversion, the Bank was not authorized to issue
shares of capital stock; neither the Bank nor the Company has: (i) issued
any securities within the last 18 months (except for notes to evidence other
bank loans and reverse repurchase agreements); (ii) had any material
dealings within the 12 months prior to August 12, 1997 with any member of
the NASD, or any person related to or associated with such member, other
than discussions and meetings relating to the Conversion and routine
purchases and sales of U.S. government securities; (iii) entered into a
financial or management consulting agreement except as contemplated
hereunder; and (iv) engaged any intermediary between the Agent and the
Company or the Bank in connection with the offering of Common Stock, and no
person is being compensated in any manner for such service.
(bb) Neither the Company nor the Bank is required to be registered under
the Investment Company Act of 1940, as amended.
(cc) Except for information provided in writing to the Company or Bank
by the Agent for use in the Prospectus, the Company and the Bank have not
relied upon the Agent or its legal or other advisors for any legal, tax or
accounting advice in connection with the Conversion.
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<PAGE>
(dd) To the best knowledge of the Company and the Bank, each of them is
in compliance in all material respects with all laws, rules and regulations
relating to environmental protection, except where such failure would not
have a material adverse effect on the financial condition of the Company and
the Bank taken as a whole, and neither the Company nor the Bank has been
notified or is otherwise aware that either of them is potentially liable, or
is considered potentially liable, under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, or any similar
state law. No action, suits, regulatory investigations or other proceedings
are pending, or, to the best knowledge of the Company and the Bank,
threatened against the Company or the Bank relating to environmental
protection, nor does the Company or the Bank have any reason to believe any
such proceedings may be brought against either of them. To the best
knowledge of the Company and the Bank, no disposal, release or discharge of
hazardous or toxic substances, pollutants or contaminants, including
petroleum and gas products, as any of such terms may be defined under
federal, state or local law, has occurred on, in, at or about any of the
facilities or properties of the Company or the Bank.
(ee) No labor dispute with the employees of the Company or the Bank
exists or, to the knowledge of the Company or the Bank, is imminent.
(ff) All of the loans represented as assets on the most recent financial
statements or selected financial information of the Bank included in the
Prospectus meet or are exempt from all requirements of federal, state and
local law pertaining to lending, including, without limitation, truth in
lending (including the requirements of Regulations Z and 12 C.F.R. Part
226), real estate settlement procedures, consumer credit protection, equal
credit opportunity and all disclosure laws applicable to such loans, except
for violations which, if asserted, would not result in a material adverse
effect on the financial condition, results of operations or business of the
Company and the Bank taken as a whole.
Any certificate signed by an officer of the Bank or of the Company and
delivered to the Agent or its counsel that refers to this Agreement shall be
deemed to be a representation and warranty by the Bank or the Company to the
Agent as to the matters covered thereby with the same effect as if such
representation and warranty were set forth herein.
SECTION 5. Covenants of the Company and Bank. The Company and the Bank
---------------------------------
hereby jointly and severally covenant with you as follows:
(a) The Company has filed the Registration Statement with the
Commission. The Company will not, at any time before the Registration
Statement is declared effective by the Commission, file any amendment to
such Registration Statement without providing you and your counsel an
opportunity to review such amendment and to reasonably object in writing.
The Company will not, at any time after the date the
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Registration Statement is declared effective, file any amendment or
supplement to the Registration Statement without providing you and your
counsel an opportunity to review such amendment or to which amendment you or
your counsel shall reasonably object.
(b) The Company and the Bank will use their best efforts to cause the
Registration Statement to be declared effective by the Commission and the
Conversion Application to be approved by the OTS and will immediately upon
receipt of any information concerning the events listed below notify you:
(i) when the Registration Statement has become effective; (ii) of the
receipt of any comments from the Commission, the OTS, or any other
governmental entity with respect to the Conversion or the transactions
contemplated by this Agreement; (iii) of the request by the Commission, the
OTS, or any other governmental entity for any amendment or supplement to the
Registration Statement or for additional information; (iv) of the issuance
by the Commission, the OTS, or any other governmental entity of any order or
other action suspending the effectiveness of the Registration Statement or
the approval of the Conversion Application or the use of the Registration
Statement or the Prospectus or any other filing of the Company and the Bank
under the Conversion Regulations, the 1933 Act, 1933 Act Regulations or
other applicable law, or the threat of any such action; (v) the issuance by
the Commission, the OTS, or any other state authority of any stop order
suspending the effectiveness of the Registration Statement or the Conversion
Application or of the initiation or threat of initiation or threat of any
proceedings for such purposes; or (vi) of the occurrence of any event
mentioned in paragraph (g) below. The Company and the Bank will make every
reasonable effort to prevent the issuance by the Commission, the OTS, or any
other state authority of any such order and, if any such order shall at any
time be issued, to obtain the lifting thereof at the earliest possible time.
(c) The Company will provide you with notice of its intention to file
and reasonable time to review prior to filing any amendment or supplement to
the Conversion Application, the Holding Company Application or to the
Registration Statement or the Prospectus (including a prospectus filed
pursuant to Rule 424 which differs from the prospectus on file at the time
the Registration Statement and any amendments thereto become effective) and
will not file any such amendment or supplement to which you shall reasonably
object or which shall be reasonably objected to by your counsel in writing.
(d) The Company and the Bank will deliver to you and to your counsel two
conformed copies of each of the following documents, with all exhibits: the
Conversion Application and the Holding Company Application, as originally
filed and of each amendment or supplement thereto, and the Registration
Statement, as originally filed and each amendment thereto.
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(e) The Company and the Bank will deliver to you such number of copies
of the Prospectus, as amended or supplemented, as you may reasonably
request. The Company authorizes the Agent to use the Prospectus (as amended
or supplemented, if amended or supplemented) for any lawful manner in
connection with the sale of the Common Stock by the Agent.
(f) During the periods prior to the Closing Date, when the Prospectus is
required to be delivered and subsequent to the Closing Date, the Company and
the Bank will comply, at their own expense, with any and all terms,
conditions requirements and provisions with respect to the Conversion and
the transactions contemplated thereby imposed upon them by the Commission
and the OTS, by applicable state law or the Conversion Regulations, and by
the 1933 Act, the 1933 Act Regulations, the 1934 Act and the rules and
regulations of the Commission promulgated under such statutes, including,
without limitation, Regulation M under the 1934 Act, in each case as from
time to time in force, in accordance with the provisions hereof and the
Prospectus.
(g) If, at any time during the period when the Prospectus relating to
the Shares is required to be delivered, any event relating to or affecting
the Company or the Bank shall occur, as a result of which it is necessary or
appropriate, in the opinion of counsel for the Company and the Bank to amend
or supplement the Registration Statement or Prospectus in order to make the
Registration Statement or Prospectus not misleading in light of the
circumstances existing at the time it is delivered to a purchaser, the
Company and the Bank will, at their expense, forthwith prepare, file with
the Commission and furnish to you a reasonable number of copies of an
amendment or amendments of, or a supplement or supplements to, the
Registration Statement or Prospectus (in form and substance satisfactory to
you and your counsel after a reasonable time for review) which will amend or
supplement the Registration Statement or Prospectus so that as amended or
supplemented it will not contain an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in light of the circumstances existing at the time the Prospectus
is delivered to a purchaser, not misleading.
(h) The Company and the Bank will take all necessary actions, in
cooperation with you, and furnish to whomever the Agent may direct such
information as may be required to qualify or register the Common Stock and
sale by the Company under the applicable securities or Blue Sky laws of such
jurisdictions as you and the Company and the Bank and its counsel may agree
upon; provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify to do business in any
jurisdiction in which it is not so qualified. In each jurisdiction where
any of the Common Stock shall have been qualified or registered as above
provided, the Company will make and file such statements and reports as are
or may be required by the laws of such jurisdiction.
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(i) The Company will not sell or issue, contract to sell or otherwise
dispose of, for a period of 90 days after the date hereof, without your
prior written consent, any shares of Common Stock other than the Common
Stock or other than in connection with any plan or arrangement described in
the Prospectus.
(j) During the period during which the Company's Common Stock is
registered under the 1934 Act, the Company will furnish to its stockholders
as soon as practicable after the end of each fiscal year an annual report
(including a consolidated balance sheet and statements of consolidated
income, stockholders' equity or cash flow statement of the Company and its
subsidiaries as at the end of and for such year, certified by independent
public accountants in accordance with Regulation S-X under the 1933 Act).
(k) During the period of three years from the date hereof, the Company
will furnish to you: (i) as soon as available, a copy of each report of the
Company furnished generally to stockholders of the Company or furnished to
or filed with the Commission under the 1934 Act or any national securities
exchange or system on which any class of securities of the Company is listed
or quoted, (including, but not limited to, reports on Forms 10-K, 10-Q and
8-K and all proxy statements and annual reports to stockholders), a copy of
each other report of the Company mailed to its stockholders or filed with
the Commission or any national securities exchange or system on which any
class of securities of the Company is listed or quoted, each press release
and material news items and articles released by the Company or the Bank and
(ii) from time to time, such other public information concerning the Company
and the Bank as you may reasonably request.
(l) The Company and the Bank will use the net proceeds from the sale of
the Common Stock substantially in the manner set forth in the Prospectus
under the caption "Use of Proceeds."
(m) Other than as permitted by the Conversion Regulations, the 1933 Act,
the 1933 Act Regulations and the laws of any state in which the shares of
Common Stock are qualified for sale, neither the Company nor the Bank will
distribute any prospectus, offering circular or other offering material in
connection with the offer and sale of the Common Stock.
(n) The Company will make generally available to its security holders as
soon as practicable, but not later than 60 days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 of the regulations promulgated under the 1933 Act)
covering a twelve-month period beginning not later than the first day of the
Company's fiscal quarter next following the effective date (as defined in
said Rule 158) of the Registration Statement.
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(o) The Company will file with the Commission such reports on Form SR as
may be required pursuant to Rule 463 under the 1933 Act.
(p) The Company will promptly register the Common Stock under Section
12(g) of the 1934 Act.
(q) The Company will use its best efforts to obtain approval for and
maintain quotation of the Common Stock on the SmallCap Market of the Nasdaq
Stock Market effective on or prior to the Closing Date.
(r) The Bank will maintain appropriate arrangements for depositing all
funds received from persons mailing subscriptions for or orders to purchase
Common Stock in the Subscription and Community Offering on an interest
bearing basis at the rate described in the Prospectus until the Closing Date
and satisfaction of all conditions precedent to the release of the Bank's
obligation to refund payments received from persons subscribing for or
ordering Common Stock in the Subscription and Community Offering in
accordance with the Plan as described in the Prospectus or until refunds of
such funds have been made to the persons entitled thereto in accordance with
the Plan and as described in the Prospectus. The Bank will maintain such
records of all funds received to permit the funds of each subscriber to be
separately insured by the SAIF (to the maximum extent allowable) and to
enable the Bank to make appropriate refunds of such funds in the event that
such refunds are required to be made in accordance with the Plan and as
described in the Prospectus.
(s) The Company will take such actions and furnish such information as
are reasonably requested by the Agent in order for Ryan, Beck to ensure
compliance with the NASD's "Interpretation to Free Riding and Withholding."
(t) The Bank will not amend the Plan without the Agent's prior written
consent in any manner that, in the opinion of the Agent, would affect the
sale of the Shares or the terms of this Agreement, which approval shall not
be unreasonably withheld.
(u) The Company and the Bank will use all reasonable efforts to comply
with, or cause to be complied with, the conditions precedent to the several
obligations of the Agent specified in Section 9 hereof.
SECTION 6. Payment of Expenses. The Company and the Bank jointly and
-------------------
severally agree to pay all expenses incident to the performance of the
obligations of the Company and the Bank under this Agreement, including the
following: (i) the preparation, issuance and delivery of certificates for the
Common Stock to the subscribers in the Subscription and Community Offering; (ii)
the fees and disbursements of the Company's and the Bank's counsel, accountants
and other advisors; (iii) the qualification of the Common Stock under all
applicable securities or Blue Sky laws, including filing fees and the reasonable
fees and
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disbursements of counsel in connection therewith and in connection with the
preparation of a Blue Sky Survey; (iv) the printing and delivery to you in such
quantities as you shall reasonably request of copies of the Registration
Statement, the Prospectus and the Conversion Application and Holding Company
Application as originally filed and as amended or supplemented and all other
documents in connection with the Conversion and this Agreement; (v) the filing
fees incurred in connection with the review of the Registration Statement, the
Conversion Application, or any other application, form, or filing by the
Commission, the OTS and the NASD; (vi) the fees for listing the shares on the
SmallCap Market of the Nasdaq Stock Market; (vii) the fees and expenses relating
to the appraisal; (viii) the fees and expenses relating to advertising expenses,
temporary personnel expenses, conversion center expenses, investor meeting
expenses, and other miscellaneous expenses relating to the marketing by the
Agent of the Common Stock; and (ix) the cost of printing all stock certificates
and all other documents applicable to the Conversion and the fees and charges of
any transfer agent, registrar and other agent. In the event that the Agent
incurs any of the above expenses on behalf of the Company or the Bank, the
Company or the Bank, as the case may be, shall pay or reimburse the Agent for
such reasonable fees and expenses regardless of whether the Conversion is
successfully completed. The Agent will not incur any single expense exceeding
$1,000 pursuant to this paragraph without the prior authorization of the Company
or the Bank.
The Company and the Bank also shall pay or reimburse the Agent for its
legal fees not to exceed $30,000 and other out-of-pocket expenses not to exceed
$7,500. The parties hereto acknowledge that such expense limitations may also be
exceeded in the event of a material delay in the offering that requires an
update of financial information contained in the Registration Statement
(excluding any financial information contained under the caption "Recent
Developments") for a period later than March 31, 1997.
SECTION 7. Indemnification.
---------------
(a) The Bank and the Company jointly and severally agree to indemnify and
hold harmless the Agent, its officers, directors, agents, servants and employees
and each person, if any, who controls you within the meaning of Section 15 of
the 1933 Act or Section 20(a) of the 1934 Act, against any and all loss,
liability, claim, damage or expense whatsoever (including but not limited to
settlement expenses, subject to the limitation in the last sentence of paragraph
(c) below), joint or several, that the Agent or any of them may suffer or to
which the Agent or any of them may become subject under all applicable federal
and state laws or otherwise, and to promptly reimburse the Agent and any such
persons upon written demand for any expenses (including reasonable fees and
disbursements of counsel) incurred by the Agent or any of them in connection
with investigating, preparing or defending any actions, proceedings or claims
(whether commenced or threatened) to the extent such losses, claims, damages,
liabilities or actions: (i) arise out of or are based upon any untrue
statement, or alleged untrue statements, of any material fact contained in the
Conversion Application, Holding Company Application or the Registration
Statement (the "Applications"), (or any amendment or supplement thereto), the
Prospectus (or any
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<PAGE>
amendment or supplement thereto), or any Blue Sky application or other
instrument or document of the Bank or based upon written information supplied by
the Bank or their representatives (including counsel) in any state or
jurisdiction to register or qualify any or all of the shares of Common Stock
under the securities laws thereof (or any amendment or supplement thereto)
(collectively, the "Blue Sky Application"), or any application or other
document, advertisement, or communication prepared, made or executed by or on
behalf of the Bank with its consent after review ("Sales Information") or based
upon written information or statements furnished or made by or on behalf of the
Bank or the Company, whether or not filed in any jurisdiction in order to
qualify or register the shares of Common Stock under the securities law thereof;
(ii) arise out of or are based upon the omission or alleged omission to state in
any of the foregoing documents or information, a material fact required to be
stated therein or necessary to make the statements herein, in light of the
circumstances under which they were made, not misleading; or (iii) arise from
any theory of liability whatsoever relating to or arising from or based upon any
Application (or any amendment or supplement thereto), the Prospectus (or any
amendment or supplement thereto), Blue Sky Application or Sales Information or
other documentation prepared by the Bank or the Company and distributed in
connection with the Offering; except to the extent such losses, claims, damages,
liabilities or actions arise out of or are based upon any untrue material
statements or alleged untrue material statements in, or material omission or
alleged material omission from an Application (or any amendment or supplement
thereto), the Prospectus (or any amendment or supplement thereto), Blue Sky
Application, or Sales Information made in reliance upon and in conformity with
information furnished in writing to the Bank by the Agent regarding the Agent
expressly for use in the Prospectus, which the Bank and the Company acknowledge
includes only the information contained in the Prospectus under the captions
"Market for Common Stock" and "The Conversion --Marketing and Underwriting
Arrangements"; nor shall indemnification be required for material oral
misstatements to a purchaser of shares of Common Stock made by the Agent, which
are not based upon information provided by the Bank orally or in writing or
based upon information contained in the Application (or any amendment or
supplement thereto), the Prospectus (or any amendment or supplement thereto),
Blue Sky Application or any Sales Information distributed in connection with the
Conversion. In addition, neither the Company nor the Bank will be liable under
the foregoing indemnification provision to the extent that any loss, claim,
damage, liability or action is found in a final judgment by a court to have
resulted from the Agent's bad faith or negligence in performing the services to
be performed by the Agent under this Agreement. Notwithstanding the foregoing,
the indemnification provided for in this paragraph (a) shall not apply to the
Bank to the extent that such indemnification by the Bank would constitute a
covered transaction under Section 23A of the Federal Reserve Act. For purposes
of this section, the term "expense" shall include, but not be limited to,
counsel fees and costs, court costs, out-of-pocket costs and compensation for
the time spent by the Agent's directors, officers, employees and counsel
according to his or her normal hourly billing rates. The foregoing agreement to
indemnify shall be in addition to any liability the Company may otherwise have
to the Agent or the persons entitled to the benefit of these indemnification
provisions.
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(b) The Agent jointly and severally agrees to indemnify and hold harmless
the Bank, the Company, the directors, officers, agents, servants and employees
of each of them, and each person, if any, who controls the Bank or the Company
within the meaning of Section 15 of the 1933 Act or Section 20(a) of the 1934
Act against any and all loss, liability, claim, damage or expense whatsoever
(including but not limited to settlement expenses), joint or several, which
they, or any of them, may suffer or to which they, or any of them, may become
subject under all applicable federal and state laws or otherwise, and to
promptly reimburse the Bank or the Company, and any such persons upon written
demand for any expenses (including reasonable fees and disbursements of counsel)
incurred by them, or any of them, in connection with investigating, preparing or
defending any actions, proceedings or claims (whether commenced or threatened)
to the extent such losses, claims, damages, liabilities or actions: (i) arise
out of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in any Application (or any amendment or supplement
thereto) or the Prospectus (or any amendment or supplement thereto), or the
Sales Information; or (ii) arise out of or which are based upon the omission or
alleged omission to state in any of the foregoing documents a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; provided,
however, that its obligations under this Section 7(b) shall exist only if, and
only to the extent, that such untrue statement or alleged untrue statement was
made in, or such material fact or alleged material fact was omitted from an
Application (or any amendment or supplement thereto), the Prospectus (or any
amendment or supplement thereto), or the Sales Information in reliance upon and
in conformity with information furnished in writing to the Bank by the Agent or
its representatives (including counsel) expressly for use in the Prospectus,
which the Bank and the Company acknowledge includes only the information
contained in the Prospectus under the captions "Market for the Common Stock" and
"The Conversion - Marketing and Underwriting Arrangements." In addition, the
Agent will not be liable under the foregoing indemnification provision to the
extent that any loss, claim, damage, liability or action is found in a final
judgment by a court to have resulted from the Bank's bad faith or negligence.
(c) Each indemnified party shall give prompt written notice to each
indemnifying party of any action, proceeding, claim (whether commenced or
threatened), or suit instituted against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve it from any liability which it may have on account of this Section 7 and
Section 8 herein. An indemnifying party may participate at its own expense in
the defense of such action. In addition, if it so elects within a reasonable
time after receipt of such notice, an indemnifying party, jointly with any other
indemnifying parties receiving such notice, may assume the defense of such
action with counsel chosen by it and reasonably acceptable to the indemnified
parties that are defendants in such action, unless such indemnified parties
reasonably object to such assumption on the ground that there may be legal
defenses available to them that are different from or in addition to those
available to such indemnifying party. If an indemnifying party assumes the
defense of such action, the indemnifying parties shall not be liable for any
fees and expenses of
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counsel for the indemnified parties incurred thereafter in connection with such
action, proceeding or claim, other than reasonable costs of investigation. In
no event shall the indemnifying parties be liable for the fees and expenses of
more than one firm of attorneys for the indemnified parties (unless an
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
of the other indemnified parties) in connection with any one action, proceeding
or claim or separate but similar or related actions, proceedings or claims in
the same jurisdiction arising out of the same general allegations or
circumstances. The indemnifying party shall not be liable for any settlement of
such action, proceeding or suit effected without its prior written consent.
(d) The agreement contained in this Section 7 and in Section 8 hereof and
the representations and warranties of the Bank and the Company set forth in this
Agreement shall remain operative and in full force and effect regardless of:
(i) any investigation made by or on behalf of the Agent or its officers,
directors or controlling persons, agents or employees or by or on behalf of the
Bank, the Company or any officers, directors or controlling persons, agents or
employees of the Bank or the Company; (ii) delivery of and payment hereunder for
the shares of Common Stock; or (iii) any termination of this Agreement.
SECTION 8. Contribution. If the indemnification of an indemnified party
------------
provided for in Section 7 of this Agreement is for any reason held
unenforceable, the Bank or the Company and the Agent agree to contribute to the
losses, claims, damages and liabilities for which such indemnification is held
unenforceable: (i) in such proportion as is appropriate to reflect the relative
benefits to the Bank or the Company, on the one hand, and the Agent, on the
other hand, of the Conversion as contemplated (whether or not the Conversion is
consummated), or (ii) if the application provided for in clause (i) is for any
reason held unenforceable, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Bank or the Company, on the one hand, and the Agent, on the other
hand, as well as other equitable considerations. The Bank or the Company agrees
that for the purposes of this Section 8, the relative benefits of the Bank or
the Company and the Agent of the Conversion as contemplated shall be deemed to
be in the same proportion that the total net proceeds from the Conversion
received by the Bank or the Company in connection with the Conversion bear to
the total fees paid or to be paid to the Agent under this Agreement. No person
found guilty of any fraudulent misrepresentation (within the meaning of Section
11(f) of the 1933 Act) shall be entitled to contribution from any person who was
not found guilty of such fraudulent misrepresentation. For purposes of this
Section 8, each of the Agent's officers and directors and each person, if any,
who controls the Agent within the meaning of the 1933 Act and the 1934 Act shall
have the same rights to contribution as the Agent, and each person, if any, who
controls the Bank or the Company within the meaning of the 1933 Act and the 1934
Act, and each officer, director and each person, if any, who controls the Bank
or the Company, shall have the same rights to contribution as the Bank and the
Company. Any party entitled to contribution shall promptly after receipt of
notice of commencement
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of any action, suit, claim or proceeding against such party in respect to which
a claim for contribution may be made against another party, notify such other
party, but the omission to so notify such party shall not relieve the party from
whom contribution may be sought from any other obligation it may have hereunder
or otherwise than under this Section 8. The Bank, the Company and the Agent
agree that it would not be just and equitable if contribution pursuant to this
Section 8 were determined by pro rata allocation or by other method of
--- ----
allocation that does not take into account the equitable considerations referred
to above in this Section 8. It is expressly agreed that the Agent shall not be
required to contribute to the Bank or the Company for any loss, liability,
claim, damage or expense any amount that in the aggregate exceeds the amount
paid to the Agent under this Agreement.
SECTION 9. Conditions of Your Obligations. Your obligations hereunder, as
------------------------------
to the Common Stock to be delivered at the Closing Date, are subject, in your
discretion, to the condition that all representations and warranties and other
statements of the Bank and the Company herein are, at and as of the commencement
of the Subscription and Community Offering and at and as of the Closing Date,
true and correct in all material respects, the condition that the Bank and the
Company shall have performed in all material respects all of its obligations
hereunder to be performed on or before such dates, and to the following further
conditions:
(a) The Registration Statement shall have been declared effective
by the Commission not later than 5:30 p.m. on the August 12, 1997, or with
your consent at a later time and date; and at the Closing Date no stop
order suspending the effectiveness of the Registration Statement or the
consummation of the Conversion shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission or any state
authority, and no order or other action suspending the effectiveness of the
Prospectus or the consummation of the Conversion shall have been issued or
proceedings therefor initiated or threatened by the Commission, any state
authority, the OTS or the FDIC.
(b) At the Closing Date you shall have received:
(1) The favorable opinion, dated as of the Closing Date
addressed to the Agent and for its and its counsel's benefit, of
Breyer & Aguggia, special counsel for the Company and the Bank in
form and substance to the effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the Commonwealth of Pennsylvania. The Bank validly
exists as a federally chartered savings bank under the laws of
the United States of America and upon the Conversion will
become a duly organized and validly existing federally
chartered savings bank in the capital stock form of
organization.
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(ii) The Company and the Bank each has the corporate
power and authority to own, lease and operate its properties
and to conduct its business as described in the Registration
Statement and Prospectus; and the Company is duly qualified as
a foreign corporation to transact business and is in good
standing in each jurisdiction where it owns or leases any
material properties or conducts any material business.
(iii) The deposit accounts of the Bank are insured by the
SAIF up to applicable limits in accordance with applicable
regulations; and, to the best of such counsel's knowledge, no
proceeding for the termination or revocation of such insurance
is pending or threatened. The Bank is a member of the Federal
Home Loan Bank of Pittsburgh.
(iv) Upon consummation of the Conversion, the
authorized, issued and outstanding capital stock of the Company
will be within the range set forth in the Registration
Statement and the Prospectus under the caption "Capitalization"
and no shares of Common Stock have been issued prior to the
Closing Date; the shares of Common Stock to be sold in the
Subscription Offering and Community Offering have been duly and
validly authorized for issuance and, when issued and delivered
by the Company against payment therefor as set forth in the
Plan and stated on the cover page of the Prospectus, will be
duly and validly issued and fully paid and nonassessable; and
the issuance of the shares of Common Stock is not subject to
statutory preemptive rights.
(v) Upon consummation of the Conversion, all of the
issued and outstanding capital stock of the Bank will be duly
authorized and validly issued and fully paid and nonassessable,
and all such capital stock will be owned of record and, to such
counsel's knowledge, beneficially, by the Company free and
clear of any security interest, mortgage, pledge, lien,
encumbrance, claim or equity.
(vi) The Company's acquisition of the Bank has been
approved by the OTS and, to the best of such counsel's
knowledge, no action has been taken or is pending or threatened
to revoke such approval.
(vii) The Conversion Application, as amended or
supplemented, if amended or supplemented, as filed with the
OTS, complied as to form in all material respects with the
requirements of the HOLA and the Conversion Regulations. The
OTS has authorized the Conversion, subject to the satisfaction
of the conditions set forth in its
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approval and, to the best of such counsel's knowledge, no
action has been taken or is pending or threatened to revoke
such authorization.
(viii) The OTS' approval of the Plan remains in full force
and effect; the Bank has duly adopted a federal stock charter
and by-laws effective upon consummation of the Conversion; to
the best of such counsel's knowledge, the Company and the Bank
have conducted the Conversion in all material respects in
accordance with applicable requirements of the Conversion
Regulations, federal law, all other applicable regulations,
decisions and orders thereunder and the Plan, including all
material applicable terms, conditions, requirements and
conditions precedent to the Conversion imposed upon the Company
and the Bank by the Commission and the OTS; no order has been
issued by the Commission or the OTS to suspend the Subscription
and Community Offering and no action for such purpose has been
instituted or, to the best of such counsel's knowledge,
threatened by the Commission or the OTS; and, to the best of
such counsel's knowledge, no person has sought to obtain review
of the final action of the OTS in approving the Conversion
Application or the Plan.
(ix) This Agreement has been duly authorized, executed
and delivered by the Company and the Bank.
(x) The Registration Statement is effective under the
1933 Act and no stop order suspending effectiveness has been
issued under the 1933 Act and, to the best of such counsel's
knowledge, no proceedings therefor have been initiated or
threatened by the Commission or any state authority.
(xi) Subject to satisfaction of conditions of the OTS in
connection with its approval of the Conversion Application and
Holding Company Application, no further approval,
authorization, consent or other order of any federal or state
board or body is required in connection with the execution and
delivery of this Agreement, the issuance of the shares of
Common Stock and the consummation of the Conversion, except as
may be required under the securities or Blue Sky laws of
various jurisdictions as to which counsel need render no
opinion.
(xii) At the time the Registration Statement became
effective, the Registration Statement (as amended or
supplemented, if so amended or supplemented) (other than the
financial statements, stock valuation information and other
financial and statistical data included therein, as to which no
opinion need be rendered), complied as to form in all material
respects with the requirements of the 1933 Act and the
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1933 Act Regulations and (ii) the Prospectus (other than the
financial statements, stock valuation information and other
financial and statistical data included therein, as to which no
opinion need be rendered) complied as to form in all material
respects with the requirements of the Conversion Regulations
and federal law.
(xiii) The information in the Registration Statement and
Prospectus under the captions "Risk Factors - Anti-Takeover
Provisions," "Taxation," "Regulation," "Restrictions on
Acquisition of the Holding Company," "The Conversion" and
"Description of Capital Stock of the Holding Company" to the
extent that it constitutes matters of law, summaries of legal
matters, documents or proceedings, or legal conclusions, has
been reviewed by such counsel and is correct in all material
respects.
(xiv) The terms and provisions of the Common Stock of the
Company conform in all material respects to the description
thereof contained in the Prospectus, and the form of
certificate used to evidence the shares of Common Stock is in
due and proper form.
(xv) To the best of such counsel's knowledge, there are
no material contracts, indentures, mortgages, loan agreements,
notes, leases or other instruments required to be described or
referred to in the Registration Statement and Prospectus or to
be filed as exhibits thereto other than those described or
referred to therein or filed as exhibits thereto.
(xvi) To such counsel's Actual Knowledge, the Company,
the Bank and the Subsidiary have obtained all material federal
licenses, permits and other governmental authorizations
currently required under federal banking laws for the conduct
of their respective businesses as described in the Prospectus
or filed as an exhibit to the Registration Statement, and all
such licenses, permits and other governmental authorizations
are in full force and effect, and the Company, the Bank and the
Subsidiary are in all material respects complying
therewith.
(xvii) The Plan has been duly authorized by the Board of
Directors of the Company and the Board of Directors of the Bank
and, effective upon consummation of the Conversion, the Bank
will be authorized to issue capital stock.
(xviii) To such counsel's Actual Knowledge the Company is
not in violation of its articles of incorporation or bylaws or
in default in the performance or observance of any obligation,
agreement, covenant or
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condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other instrument described in the
Prospectus or filed as an Exhibit to the Registration Statement
except for such defaults or violations which would not have a
material adverse impact on the financial condition or results
of operations of the Company, the Bank and the Subsidiary taken
as a whole; the execution and delivery of this Agreement, the
incurrence of the obligations herein set forth and the
consummation of the transactions contemplated herein have been
duly authorized by all necessary corporate action on the part
of the Company and will not conflict with or constitute a
breach of, or default under, or result in the creation or
imposition of any material lien, charge or encumbrance upon any
property or assets of the Company pursuant to any material
contract, indenture, mortgage, loan agreement, note, lease or
other instrument described in the Prospectus or filed as an
exhibit to the Registration Statement, nor will such action
result in any violation of the provisions of the articles of
incorporation or bylaws of the Company.
(xix) The Bank is not in violation of its federal mutual
charter or bylaws (and the Bank will not be in violation of its
charter in stock form upon consummation of the Conversion) or
in default in the performance or observance of any obligation,
agreement, covenant or condition contained in any material
contract, indenture, mortgage, loan agreement, note, lease or
other instrument described in the Prospectus or filed as an
exhibit to the Registration Statement; the execution and
delivery of this Agreement, the incurrence of the obligations
herein set forth and the consummation of the transaction
contemplated herein, will not conflict with or constitute a
breach of, or default under, or result in the creation or
imposition of any material lien, charge or encumbrance upon any
property or assets of the Bank pursuant to any material
contract indenture, mortgage, loan agreement, note, lease or
other instrument, described in the Prospectus or filed as an
exhibit to the Registration Statement, nor will such action
result in any violation of the provisions of the charter or
bylaws of the Bank.
(xx) To the best of such counsels knowledge, the Company
and the Bank are not in violation of any directive from the OTS
or the FDIC to make any material change in the method of
conducting their business.
(xxi) Neither the Company nor the Bank is required to be
registered as an investment company under the Investment
Company Act of 1940.
(xxii) Based on the certificate of the inspector of
election, the Plan has been duly adopted by the required vote
of the members of the Bank.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction or the United States, to
the extent such counsel
-26-
<PAGE>
deems proper and specified in such opinion, upon the opinion of other counsel of
good standing (providing that such counsel states that the Agent and its counsel
are justified in relying upon such specified opinion or opinions), and (B) as to
matters of fact, to the extent such counsel deems proper, on certificates of
responsible officers of the Company and the Bank and public officials.
(2) The favorable opinion, dated as of the Closing Date and
addressed to Ryan Beck and for its benefit of __________, the Bank's
local counsel, in form and substance to the effect that
(i) The Bank has the corporate power and authority to
own, operate and lease its properties and to conduct its
business as described in the Registration Statement and
Prospectus; and the Bank is duly qualified as a foreign
corporation to transact business and is in good standing in
each jurisdiction where it owns or leases any material
properties or conducts any material business.
(ii) The Subsidiary is incorporated and validly existing
Pennsylvania corporation in good standing with full corporate
authority to own, lease and operate its properties and conduct
its business as described in the Registration Statement and
Prospectus and the activities of the Subsidiary are permitted
by the rules, regulations, resolutions and practices of the
OTS, the FDIC and any other federal or state authorities having
jurisdiction over such matters;; the Subsidiary is duly
qualified as a foreign corporation to transact business and is
in good standing in each jurisdiction in which such
qualification is required, unless the failure to be so
qualified in one or more such jurisdictions would not have a
material adverse effect on the condition, financial or
otherwise, or the business of the Company, the Bank and the
Subsidiary considered as one enterprise; and all of the
outstanding stock of the Subsidiary has been duly authorized
and validly issued, fully paid and nonassessable, and such
stock is owned directly by the Bank and is free and clear of
any liens, encumbrances, claims or other restrictions.
(iii) There are no legal or governmental proceedings
pending or, to the best of such counsel's knowledge, threatened
against the Company, the Bank or the Subsidiary which are
required to be disclosed in the Registration Statement and
Prospectus, other than those disclosed therein, and all pending
legal and governmental proceedings to which the Company, the
Bank or the Subsidiary is the subject which are not disclosed
in the Registration Statement, including ordinary routine
litigation incidental to the business, are, considered in the
aggregate, not material.
-27-
<PAGE>
(iv) The Company, the Bank and the Subsidiary have
obtained all material state and local licenses, permits and
other governmental authorizations currently required for the
conduct of their respective businesses as described in the
Registration Statement and Prospectus, and all such licenses,
permits and other governmental authorizations are in full force
and effect, and the Company, the Bank and the Subsidiary are in
all material respects complying therewith.
(v) The Subsidiary is not in violation of its articles
of incorporation or bylaws or in default in the performance or
observance of any obligation, agreement, covenant or condition
contained in any material contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which the
Subsidiary is a party as a borrower, a lessee or a guarantor,
or by which the Subsidiary or any of its property may be bound
as a borrower, a lessee or a guarantor; the execution and
delivery of this Agreement, the incurrence of the obligations
herein and therein set forth and the consummation of the
transactions contemplated herein and therein have been duly
authorized by all necessary corporate action and will not
conflict with or constitute a breach of, or default under, or
result in the creation or imposition of any material lien,
charge or encumbrance upon any property or assets of the
Subsidiary pursuant to any material contract, indenture,
mortgage, loan agreement, note, lease or other instrument to
which the Subsidiary is a party as a borrower, a lessee or a
guarantor, or by which it may be bound as a borrower, a lessee
or a guarantor, or to which any of the property or assets of
the Subsidiary is subject, nor will such action result in any
violation of the provisions of the articles of incorporation or
bylaws of the Subsidiary.
(vi) To the best of such counsel's knowledge, the
Company, the Bank and the Subsidiary have good and marketable
title to all properties and assets which are material to the
business of the Company, the Bank and the Subsidiary,
respectively, and to those properties and assets described in
the Registration Statement as owned by them, free and clear of
all liens, charges, encumbrances or restrictions, except such
as are described in the Registration Statement (including the
Liquidation Account) or are not material in relation to the
business of the Company, the Bank and the Subsidiary considered
as one enterprise.
(3) the letter of special counsel for the Company and the
Bank addressed to the Agent, dated the Closing Date, in form and
substance to the effect that:
During the preparation of the Conversion Application, the
Registration Statement and the Prospectus, such counsel participated
in conferences with management of and the independent public
accountants for the Company and
-28-
<PAGE>
the Bank. Based upon such conferences and a review of corporate
records of the Company and the Bank as such counsel conducted in
connection with the preparation of the Registration Statement,
nothing has come to their attention that would lead them to believe
that, the Registration Statement, the Prospectus, or any amendment or
supplement thereto (other than the financial statements, notes to
financial statements, financial tables and other financial and
statistical data and stock valuation information included therein, as
to which such counsel need express no view), contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made,
not misleading.
(4) The favorable opinion, dated as of the Closing Date, of Elias,
Matz, Tiernan & Herrick L.L.P., your counsel, with respect to such
matters as you may reasonably require. Such opinion may rely upon the
opinions of counsel to the Bank and the Company, and as to matters of
fact, upon certificates of officers and directors of the Company and
the Bank delivered pursuant hereto or as such counsel shall
reasonably request.
(c) At the Closing Date, you shall receive a certificate of the Chief
Executive Officer and the Chief Financial Officer of the Company and of the
Chief Executive Officer and Chief Financial Officer of the Bank, dated as of
such Closing Date, to the effect that: (i) since the respective dates as of
which information is given in the Registration Statement and the Prospectus,
there has been no material adverse change in the financial condition, results of
operations or business of the Company and the Bank considered as one enterprise,
whether or not arising in the ordinary course of business; (ii) the
representations and warranties in Section 4 of this Agreement are true and
correct with the same force and effect as though expressly made at and as of the
Closing Date; (iii) the Company and the Bank have complied with all agreements
and satisfied all conditions on their part to be performed or satisfied at or
prior to the Closing Date and will comply with all obligations to be satisfied
by them after the Conversion; (iv) no stop order suspending the effectiveness of
the Registration Statement has been initiated or threatened by the Commission or
any state authority; and (v) no order suspending the Subscription and Community
Offering, the Conversion, the acquisition of all of the shares of the Bank by
the Company or the effectiveness of the Prospectus has been issued and no
proceedings for that purpose have been initiated or threatened by the
Commission, any state authority, the FDIC or the OTS.
(d) Prior to and at the Closing Date: (i) there shall have been no
material adverse change in the financial condition, results of operations or
business of the Company or the Bank independently, or of the Company or the
Bank, considered as one enterprise, from that as of the latest dates as of which
such condition is set forth in the Prospectus, except as referred to therein;
(ii) there shall have been no material transaction entered into by the Company
and the Bank, considered as one enterprise, from the latest date as of which the
financial condition of the Company or the Bank is set forth in the Prospectus
other than
-29-
<PAGE>
transactions referred to or contemplated therein; (iii) the Company or the Bank
shall not have received from the FDIC or the OTS any direction (oral or written)
to make any material change in the method of conducting their business with
which it has not complied (which direction, if any, shall have been disclosed to
the Agent) or which materially and adversely would affect the financial
condition, results of operations or business of the Company or the Bank; (iv)
neither the Company nor the Bank shall have been in default (nor shall an event
have occurred which, with notice or lapse of time or both, would constitute a
default) under any provision of any agreement or instrument relating to any
outstanding indebtedness; (v) no action, suit or proceedings, at law or in
equity or before or by any federal or state commission, board or other
administrative agency, shall be pending or, to the knowledge of the Company or
the Bank, threatened against the Company or the Bank or affecting any of their
properties wherein an unfavorable decision, ruling or finding would materially
and adversely affect the financial condition, results of operations or business
of the Company or the Bank, taken as a whole; and (vi) the shares of Common
Stock shall have been qualified or registered for offering and sale under the
securities or blue sky laws of the jurisdictions as set forth in the Preliminary
Blue Sky Survey of the law firm of Elias, Matz, Tiernan & Herrick L.L.P.
(e) Concurrently with the execution of this Agreement, the Agent, the
Company and the Bank shall receive a letter from S.R. Snodgrass, A.C. dated the
date hereof and addressed to the Agent: (i) confirming that S.R. Snodgrass, A.C.
is a firm of independent public accountants with respect to the Company and the
Bank within the meaning of the 1933 Act and the 1933 Act Regulations and stating
in effect that in its opinion the financial statements of the Bank for the years
ended December 31, 1996 and 1995, as are included in the Prospectus and, with
respect to such audited financial statements covered by its opinion included
therein, comply as to form in all material respects with the applicable
accounting requirements of the 1933 Act, the 1934 Act and the related published
rules and regulations of the Commission thereunder and generally accepted
accounting principles; (ii) stating in effect that, on the basis of certain
agreed upon procedures (but not an examination in accordance with generally
accepted auditing standards) consisting of a reading of the latest available
unaudited interim financial statements of the Bank prepared by the Bank, a
reading of the minutes of the meetings of the Board of Directors and members of
the Bank and consultations with officers of the Bank responsible for financial
and accounting matters, nothing came to its attention which caused it to believe
that: during the period from that date of the latest audited financial
statements included in the Prospectus to a specified date not more than five
business days prior to the date hereof, there was any material increase in
borrowings by the Company or the Bank (increases in borrowings (which shall not
include deposits) will not be deemed material if such increase in total
borrowings outstanding does not exceed $1.0 million); or there was any material
decrease in surplus and reserves of the Bank at the date of such letter as
compared with amounts shown in the latest audited statement of condition
included in the Prospectus or there was any material decrease in net income or
net interest income of the Bank for the number of full months commencing
immediately after the period covered by the latest audited income statement
included in the Prospectus and ended on the latest month end
-30-
<PAGE>
prior to the date of the Prospectus or in such letter as compared to the
corresponding period in the preceding year; and (iii) stating that, in addition
to the examination referred to in its opinion included in the Prospectus and the
performance of the procedures referred to in clause (ii) of this subsection (e),
it has compared with the general accounting records of the Company and/or the
Bank, as applicable, which are subject to the internal controls of the Company's
and/or the Bank's, as applicable, accounting system and other data prepared by
the Company and/or the Bank, as applicable, directly from such accounting
records, to the extent specified in such letter, such amounts and/or percentages
set forth in the Prospectus as you may reasonably request; and they have found
such amounts and percentages to be in agreement therewith (subject to rounding).
(f) At the Closing Date, you shall receive a letter from S.R. Snodgrass,
A.C., dated the Closing Date, addressed to the Agent, confirming the statements
made by it in the letter delivered by it pursuant to subsection (e) of this
Section 9, the "specified date" referred to in clause (ii) (C) thereof to be a
date specified in such letter, which shall not be more than five business days
prior to the Closing Date.
(g) At the Closing Date, you shall have received a letter from Feldman
Financial, dated as of the Closing Date, confirming its appraisal.
(h) At the Closing Date, your counsel shall have been furnished with such
documents and opinions as they may reasonably require for the purpose of
enabling them to pass upon the sale of the shares as herein contemplated and
related proceedings or in order to evidence the accuracy or completeness of any
of the representations or warranties, or the fulfillment of any of the
conditions, herein contained; and all proceedings taken by the Company or the
Bank in connection with the Conversion and the sale of the shares of Common
Stock as herein contemplated shall be satisfactory in form and substance to you
and your counsel.
(i) The Company and the Bank shall not have sustained since the date of
the latest audited financial statements included in the Registration Statement
and Prospectus any loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Registration Statement or otherwise provided to the
Agent in writing and in any such case described above, is in your judgment
sufficiently material and adverse as to make it impracticable or inadvisable to
proceed with the Subscription and Community Offering or the delivery of the
Common Stock on the terms and in the manner contemplated in the Prospectus.
(j) Subsequent to the date hereof, there shall not have occurred any of
the following: (i) a suspension or limitation in trading in securities generally
on the New York Stock Exchange or American Stock Exchange or in the over-the-
counter market, or quotations halted generally on the Nasdaq Stock Market, or
minimum or maximum prices for trading have been fixed, or maximum ranges for
prices for securities have been required
-31-
<PAGE>
by either of such exchanges or the NASD or by order of the commission or any
other governmental authority; (ii) a general moratorium on the operation of
commercial banks, federal savings and loan associations or savings and loan
associations in Pennsylvania or a general moratorium on the withdrawal of
deposits from commercial banks, federal savings and loan associations or savings
and loan associations in Pennsylvania declared by either federal or Pennsylvania
authorities; (iii) the engagement by the United States in hostilities which have
resulted in the declaration, on or after the date hereof, of a national
emergency or war; or (iv) a material decline in the price of equity or debt
securities if the effect of such a decline, in your judgment, makes it
impracticable or inadvisable to proceed with the Subscription and Community
Offering or the delivery of the shares of Common Stock on the terms and in the
manner contemplated in the Prospectus.
If any of the conditions specified in this Section 9 shall not have been
fulfilled when and as required by this Agreement, or by March 31, 1998, this
Agreement and all of your obligations hereunder may be canceled by you by
notifying the Bank of such cancellation in writing or by telegram at any time at
or prior to the Closing Date, and any such cancellation shall be without
liability of any party to any other party except as otherwise provided in
Sections 1, 6, 7 and 8 hereof. Notwithstanding the above, if this Agreement is
canceled pursuant to this paragraph, the Bank and the Company jointly and
severally agree to reimburse you for all of your out-of-pocket expenses
reasonably incurred by you, including any legal fees to be paid to the Agent's
counsel which shall not exceed $30,000, and an advisory and administrative
services fee of $25,000 in connection with the preparation of the Registration
Statement and the Prospectus, and in contemplation of the proposed Subscription
and Community Offering.
SECTION 10. Termination.
-----------
(a) In the event the Company fails to sell all of the Common Stock within
the period specified, and in accordance with the provisions of the Plan or as
required by the Conversion Regulations, this Agreement shall terminate upon
refund by the Bank to each person who has subscribed for or ordered any of the
Common Stock the full amount which it may have received from such person,
together with interest as provided in the Prospectus, and no party to this
Agreement shall have any obligation to the other hereunder, except for payment
by the Bank and/or the Company as set forth in Sections 1, 6, 7 and 8 hereof.
(b) This Agreement may be terminated by the Agent, with respect to the
Agent's obligations hereunder, by notifying the Company at any time at or prior
to the Closing Date, if any of the conditions specified in Section 9 hereof
shall not have been fulfilled when and as required by this Agreement or if the
Conversion has not been completed by March 31, 1998.
SECTION 11. Survival. The respective indemnities, agreements,
--------
representations, warranties and other statements of the Bank, the Company and
you, as set forth in this Agreement, shall remain in full force and effect,
regardless of any investigation (or any
-32-
<PAGE>
statement as to the results thereof) made by or on behalf of you or any of your
officers or directors of any person controlling you, or the Bank or the Company,
or any officer, director or person controlling the Bank or the Company, and
shall survive termination of this Agreement and the receipt or delivery of any
payment for the shares of Common Stock.
SECTION 12. Miscellaneous. Notices hereunder, except as otherwise
-------------
provided herein, shall be given in writing or by telegraph, addressed (a) to the
Agent at 80 Main Street, West Orange, New Jersey 07052 (Attention: Ben A.
Plotkin), with copies to Elias, Matz, Tiernan and Herrick L.L.P., 734 Fifteenth
Street, N.W., Washington, D.C. 20005 (Attention: John P. Soukenik, Esq.) and (b)
to the Bank and the Company at the Bank's principal office (Attention: Thomas F.
Angotti), President and Chief Executive Officer), with a copy to Breyer &
Aguggia, 1300 I Street, N.W., Suite 470 East, Washington, D.C. 20005,
(Attention: John F. Breyer, Jr.).
This Agreement is made solely for the benefit of and will be binding upon
the parties hereto and their respective successors and the controlling persons,
directors and officers referred to in Section 7 hereof, and no other person will
have any right or obligation hereunder. The term "successors" shall not include
any purchaser of any of the shares of Common Stock.
This Agreement shall be governed by and construed in accordance with the
laws of the Commonwealth of Pennsylvania.
Time shall be of the essence of this Agreement.
This Agreement may be signed in various counterparts which together will
constitute one agreement.
-33-
<PAGE>
If the foregoing correctly sets forth the arrangement among the Company,
the Bank and the Agent, please indicate acceptance thereof in the space provided
below for that purpose, whereupon this letter and your acceptance shall
constitute a binding agreement.
<TABLE>
<CAPTION>
SHS BANCORP, INC. SPRING HILL SAVINGS BANK, F.S.B.
<S> <C>
By:
---------------------------------
By: Thomas F. Angotti
------------------------------------ President and Chief Executive
Thomas F. Angotti Officer
President and Chief Executive
Officer
Accepted as of the date first above
written.
RYAN, BECK & CO., INC.
By:
------------------------------------
Ben A. Plotkin
President and Chief Executive Officer
</TABLE>
-34-
<PAGE>
EXHIBIT 8.2
[LOGO OF SNODGRASS APPEARS HERE]
July 29, 1997
Boards of Directors
Spring Hill Savings Bank, F.S.B.
SHS Bancorp, Inc.
112 Federal Street
Pittsburgh, Pennsylvania 15212
Board Members:
You have requested our opinion regarding certain Pennsylvania tax consequences
to Spring Hill Savings Bank, F.S.B. (the "Bank") and its depositors under the
laws of the Commonwealth of Pennsylvania of the proposed conversion (the
"Conversion") under which the Bank will convert from a federally-chartered
mutual savings bank to a federally-chartered stock savings bank (the "Stock
Bank"), the formation of a parent holding company incorporated in Pennsylvania
(the "Holding Company") that will acquire 100% of the outstanding capital stock
of the Stock Bank (the "Acquisition"), and the offering of the stock of the
Holding Company to the public (the "Offering"), pursuant to a Plan of Conversion
adopted by the Board of Directors of the Bank on April 16, 1997 (the "Plan").
You have previously received an opinion of counsel regarding certain federal
income tax consequences of the Conversion, the Acquisition, and the Offering
(the "Federal Tax Opinion"). Based upon the facts stated in the Federal Tax
Opinion, including certain representations of the Bank, the Federal Tax Opinion
concludes, among other things, that the Conversion qualifies as a tax-free
reorganization under Section 368(a)(1)(F) of the Internal Revenue Code of 1986,
as amended (the "Code"), and that the Bank, the Stock Bank, and the Holding
Company and the depositors of the Bank will not recognize income, gain, or loss
for federal income tax purposes upon the implementation of the Conversion, the
Acquisition, and the Offering.
Based upon (1) the facts and circumstances attendant to the Conversion, the
Acquisition, and the Offering, including the representations of the Bank, as
described in the Federal Tax Opinion, (2) current provisions of Pennsylvania
law, as reflected in Pennsylvania statutes, administrative regulations and
rulings thereunder, and court decisions, (3) the Federal Tax Opinion, and (4)
the assumption that the Conversion, the Acquisition, and the Offering will not
result in the recognition of any gain or income on the books of the Bank, the
Stock Bank, or the Holding Company under generally accepted accounting
principles, it is our opinion that under the laws of the Commonwealth of
Pennsylvania, the implementation of the Conversion, the Acquisition and the
Offering will not cause any tax liability to be incurred (a) by the Bank or by
the Stock Bank under the Pennsylvania Mutual Thrift Institutions Tax ("MTIT"),
72 P.S. Section 8501 et scq., (b) by the depositors of the Bank under the
-------
Pennsylvania Personal Income Tax ("PIT"), 72 P.S. Section 7301 et scq., and (c)
-------
by the Holding Company under the Pennsylvania Corporate Net Income Tax ("CNIT"),
72 P.S. Section 7401 et scq.
------
<PAGE>
Boards of Directors
Spring Hill Savings Bank, F.S.B.
SHS Bancorp, Inc.
Page 2
July 29, 1997
Our opinions herein are expressly limited to those taxes specified in the
immediately preceding paragraph and specifically do not include any opinions
with respect to the consequences to depositors of the implementation of the
Conversion, the Acquisition, or the Offering under any other taxes imposed by
the Commonwealth of Pennsylvania or any other subdivision thereof, or imposed by
states other than Pennsylvania and local jurisdictions of such states. In
addition, the opinions herein specifically do not include (1) an opinion with
respect to the consequences to the Bank, the Stock Bank, and the Holding Company
of the implementation of the Conversion, the Acquisition, or the Offering under
any local taxes imposed by any political subdivision of the Commonwealth of
Pennsylvania, and under any state or local realty or other transfer tax, or (2)
an opinion with respect to tax liabilities under the MTIT, the PIT, or the CNIT
attributable to events after the Conversion, the Acquisition and the Offering or
to any assets held or acquired by the Holding Company other than stock of the
Stock Bank.
Our opinion is based on the facts and conditions as stated herein, whether
directly or by reference to the Federal Tax Opinion. If any of the facts and
conditions are not entirely complete or accurate, it is imperative that we be
informed immediately, as the inaccuracy or incompleteness could have a material
effect on our conclusions. In rendering our opinion, we are relying upon the
relevant provisions of the Code, the laws of the Commonwealth of Pennsylvania,
as amended, the regulations and rules thereunder and judicial and administrative
interpretations thereof, which are subject to change or modification by
subsequent legislative, regulatory, administrative, or judicial decisions. Any
such changes could also have an effect on the validity of our opinion. We
undertake no responsibility to update or supplement our opinion. Our opinion is
not binding on the Internal Revenue Service or the Commonwealth of Pennsylvania,
nor can any assurance be given that any of the foregoing parties will not take a
contrary position or that our opinion will he upheld if challenged by such
parties.
Finally, we hereby consent to the filing of this opinion as an exhibit to the
Application for Conversion on Form AC ("Form AC") or similar filings of the Bank
filed with the Office of Thrift Supervision, the filing of this opinion as an
exhibit to the Application H-(e)(1)-S of the Holding Company to be filed with
the Office of Thrift Supervision, and the filing of this opinion as an exhibit
to the Holding Company's Registration Statement on Form SB-2 ("Form SB-2") to be
filed with the Securities and Exchange Commission, and to reference to our firm
in the offering circular contained in the Form AC, Form SB-2 and related
documents related to this opinion.
Very truly yours,
/s/ S.R. Snodgrass, A.C.
- -------------------------
S.R. Snodgrass, A.C.
<PAGE>
EXHIBIT 10.5
Massachusetts Mutual Life Insurance Company
NON-STANDARD (S)401(k)
Internal Revenue Service Serial No. D356563a
PROTOTYPE PLAN AND TRUST AGREEMENT
The undersigned Employer hereby adopts the Massachusetts Mutual Life Insurance
Company Prototype Defined Contribution Plan and Trust Agreement, herein called
the Plan, in order to establish a (S)401(k) Plan which will provide retirement
benefits for its Employees. The (S)401(k) Plan hereby established is a Non-
Standard Plan according to Revenue Procedure 84-23 as modified by Revenue
Procedure 89-9.
Massachusetts Mutual submitted in accordance with Revenue Procedure 89-9 the
attached Adoption Agreement and related Pension Plan Document to the Internal
Revenue Service and has received an Opinion Letter approving the form of plan.
It must be understood that a determination by the Internal Revenue Service as to
the qualification under (S)401(a) of the Code of a plan established by a
particular employer can only be made upon consideration of all facts peculiar to
that employer. Consequently, the Opinion Letter which has been received, with
respect to this plan, does not automatically constitute a determination as to
its qualification when it is established by any individual employer. An
employer who adopts this plan will be considered to have a qualified plan only
if the conditions of the Opinion Letter are satisfied.
In making this form available, Massachusetts Mutual does not make any
representations, either express or implied, that its provisions will necessarily
fulfill all of the requirements of any particular employer.
ANY PENSION PLAN AND ITS RELATED DOCUMENTS INVOLVE SIGNIFICANT FINANCIAL, LEGAL
AND TAX CONSIDERATION FOR WHICH NEITHER MASSACHUSETTS MUTUAL NOR ANY OF ITS
REPRESENTATIVES CAN ASSUME RESPONSIBILITY. NO EMPLOYER SHOULD UNDERTAKE THE
ESTABLISHMENT OF A PENSION PLAN WITHOUT PRIOR CONSULTATION WITH ITS OWN ATTORNEY
AND HIS APPROVAL OF THE NECESSARY DOCUMENTS.
A NON-REFUNDABLE DOCUMENT USE AND REGISTRATION FEE IS REQUIRED
UPON ADOPTION OF THIS PLAN.
1f
<PAGE>
Massachusetts Mutual Life Insurance Company
NON-STANDARD (S)401(k)
PROTOTYPE PLAN AND TRUST AGREEMENT
(A) GENERAL PLAN AND EMPLOYER INFORMATION
-------------------------------------
(1) Plan Name SPRING HILL SAVINGS BANK, FSB
-------------------------------
401(K) PROFIT SHARING PLAN
----------------------------------------------------------------------
----------------------------------------------------------------------
(2) Trustee(s) Name(s) THOMAS F. ANGOTTI, GEORGE C. DORSCH
---------------------------------------------------
EDWARD W. PRESKAR
----------------------------------------------------------------------
----------------------------------------------------------------------
(3) Employer Organization Elect one.
(a) (X) Corporation
(b) ( ) S Corporation
(c) ( ) Sole Proprietorship
(d) ( ) Partnership
(e) ( ) Other
---------------------------------------------------
Specify
(4) Type of Funding Elect one.
(a) ( ) Solely through the purchase of individual
life insurance and/or annuity products.
(b) (X) Through other funding arrangements.
2f
<PAGE>
(B) DATES AND COMPUTATION PERIODS
-----------------------------
(1) New Plan
Effective Date of Plan: , 19
------------------------ --
Not earlier than the date of establishment of the
adopting employer.
First Plan Year end date: , 19
---------------------- --
The first Plan Year begins on the Effective
Date of the Plan.
Subsequent Plan Years: From to
------ ------------------
Must be a twelve month period.
Complete if this Adoption Agreement
constitutes an amendment and
(2) Existing Plan restatement in its entirety of a
previously established plan.
Effective Date of this amendment: JULY 1, 1997
--------------------------------------
First Plan Year end date: SEPTEMBER 30, 1997
----------------------------------------------
The first Plan Year under this amendment begins on the
Effective Date.
Subsequent Plan Year: From JANUARY 1 to DECEMBER 31
-------------------- -------------------
Must be a twelve month period.
Pre-existing plan name: SPRING HILL SAVINGS BANK, FSB
-----------------------------------------------
401(K) PROFIT SHARING PLAN
- -------------------------------------------------------------------------------
From the previous plan document.
Pre-existing plan Adoption Date: OCTOBER 1, 1987
--------------------------------------
From the previous plan document.
3f
<PAGE>
(3) Limitation Year shall mean: Elect one.
(a) ( ) the Calendar Year.
(b) (X) the 12-consecutive month period coinciding with the Plan Year.
(c) ( ) From to
--------------- --------------------------------------------
Must be a 12-consecutive month period.
Note: If the Limitation Year is not the calendar year, the Employer shall adopt
a resolution applying the elected Limitation Year to all plans maintained by the
Employer.
(4) Entry Date(s) Elect one.
(a) ( ) the first day of the Plan Year.
(b) (X) the first day of the Plan Year and six months thereafter.
(c) ( ) the first day of the Plan Year and the first day of every third
calendar month thereafter.
(d) ( ) the first day of the Plan Year and the first day of every calendar
month thereafter.
(5) Contract Date(s) Complete if insurance or annuity contracts are
issued under the Plan.
Initial Contract Date: NA , 19
------------------
The date contracts are initially issued under the Plan.
Subsequent Contract Date(s):
-----------------------------------------------
The month(s) and day any subsequent contracts are issued under the Plan.
(C) ELIGIBILITY FOR PARTICIPATION
-----------------------------
(1) Age and Service
(a) Attainment of age 18 . Not to exceed 21.
----
(b) Completion of .5 year of service. Not to exceed 1.
------
4f
<PAGE>
(2) Exclusions From Participation Elect all that apply.
(a) (X) Employees included in a unit covered by a collective bargaining
agreement between the Employer and the Employee Representatives
under which retirement benefits were the subject of good faith
bargaining. For this purpose, the term "Employee Representatives"
does not include any organization more than half of whose members
are employees who are owners, officers, or executives of the
employer.
(b) (X) Employees who are nonresident aliens and who receive no earned
income from the employer which constitutes income from sources
within the United States.
(c) ( )
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
Specify
(3) Predecessor Service Elect all that apply.
Service with a predecessor Employer, including a sole proprietor or
partnership, which did not maintain this Plan shall be considered service
with the Employer for each purpose elected below:
(a) (X) Eligibility Service
(b) (X) Vesting Credit
(c) ( ) Limitations on Allocations
(D) COMPENSATION
------------------------
(1) Compensation means all of a Participant's Elect one.
(a) (X) W-2 withholding wages (Section 3401(a) wages).
(b) ( ) W-2 withholding wages (Box 1).
(c) ( ) (S)415 safe-harbor compensation.
(2) Employer Contributions made pursuant to a salary reduction agreement
which are not includible in the gross income of the Employee under
(S)125, (S)402(a)(8), (S)402(h), (S)403(b), or (S)457 of the Code.
(a) (X) shall be included in compensation. Elect one.
(b) ( ) shall not be included in compensation.
5f
<PAGE>
(3) Compensation shall not include: Elect all that apply for
non-integrated, non-top-heavy
plans only.
(a) ( ) Bonuses
(b) ( ) Commissions
(c) ( ) Overtime
NOTE: Election of (a), (b) and/or (c) may only be made if the Compensation
percentage for Highly Compensated Employees is not greater than the Compensation
percentage for Non-highly Compensated Employees, as described in regulations
under (S)414(s) of the Code.
(4) Compensation shall be determined over the following applicable period:
(a) (X) the Plan Year.
(b) ( ) the calendar year ending with or within the Plan Year.
(c) ( ) the portion of the Plan Year during which the Employee was a
Participant in the Plan.
(E) ELECTIVE DEFERRALS, MATCHING CONTRIBUTIONS AND EMPLOYER (S)401(k)
-----------------------------------------------------------------
CONTRIBUTIONS
-------------
(1) Elective Deferrals Complete (b), (c) and (d) - complete (a) only if
desired.
(a) Maximum Deferrals
(i) ( ) % of a Participant's Compensation
--------
(ii) ( ) $ Enter a specified dollar amount.
---------
(b) Commencement of Deferrals
A Participant may elect to commence Elective Deferrals as of 1ST DAY OF
----------
PLAN YEAR AND 1ST DAY OF SEVENTH MONTH OF PLAN YEAR
---------------------------------------------------
Enter date(s) or period(s).
(c) Change in Deferrals
A Participant may modify the amount of Elective Deferrals as of 1ST DAY
-------
OF PLAN YEAR AND 1ST DAY OF SEVENTH MONTH OF PLAN YEAR
------------------------------------------------------
Enter date(s) or period(s).
(d) Deferral of Cash Bonuses
A Participant (X) may ( ) may not base Elective Deferrals on cash
bonuses that, at the Participant's election, may be contributed to the
(S)401(k) Plan or received by the Participant in cash.
NOTE: Elections in (b), (c) or (d) shall become effective as soon as
administratively feasible thereafter.
6f
<PAGE>
(2) Matching Contributions Elect if desired.
(a) Amount of Matching Contributions
The amount of such Matching or Qualified Matching Contributions made
on behalf of each Participant shall be: Elect (i), (ii),
(iii), or (iv).
(i) ( ) % of the Elective Deferrals made for each Plan Year.
------
(ii) ( ) % of the portion of the Elective Deferrals which
------
does not exceed % of the Participant's Compensation
-----
plus % of the portion of the Elective Deferral which
-----
exceeds % of the Participant's Compensation, but does
-----
not exceed % of the Participant's Compensation.
-----
(iii) ( ) % of the Elective Deferrals made for each Plan Year
-----
during a Participant's first Years of Service.
------
% of the Elective Deferrals for each Plan Year
-----
thereafter.
(iv) ( ) An amount equal to the percentage of the Elective
Deferrals made for each Plan Year. Such percentage shall
be established by resolution of the Board of Directors
prior to the start of any Plan Year. Once established,
such percentage shall remain in effect for subsequent Plan
Years unless adjusted from time to time by resolution of
the Board of Directors prior to the start of the Plan
Year.
(b) ( ) Limit on Matching Contributions
The Employer shall not match Elective Deferrals as provided
above in excess of $ or in excess of % of
----------- -----------
the Participant's Compensation. Elect only if desired.
(c) ( ) Qualified Matching Contributions
Matching Contributions shall be 100% vested, subject to the
withdrawal restrictions of Section 7.12, and designated as
Qualified Matching Contributions. Elect only if desired.
(d) ( ) Service Requirement for Matching Contributions
No Matching Contributions shall be made for a Participant who
has completed less than 2 Years of Service.
Elect only if desired, the vesting Schedule elected in
Adoption Agreement Section (M) must be 100%.
7f
<PAGE>
(3) Employer (S)401(k) Contribution Elect if desired.
(a) The Employer shall contribute the following in addition to any
contribution elected in Section (F)
(i) ( ) _________% of Compensation
Maximum Contribution : $______ Elect only if desired.
(ii) ( ) $________ per Participant
(b) The Employer (S)401(k) Contribution shall apply to all Participants
except:
Elect if desired.
(i) ( ) Highly Compensated Employees.
(ii) ( ) Highly Compensated Employees who are Shareholder
Employees.
(iii) ( ) Highly Compensated Employees with Compensation which
exceeds $__________.
(iv) ( ) Highly Compensated Employees who are officers with
Compensation which exceeds $__________.
(c) ( ) Qualified Non-elective Contributions
Employer (S)401(k) Contributions shall be 100% vested, subject
to the withdrawal restrictions of Section 7.12, and designated
as Qualified Non-elective Contributions.
Elect only if desired.
(d) ( ) Service Requirement for Employer (S)401(k) Contributions
No Employer (S)401(k) Contributions shall be made for a
Participant who has completed less than 2 Years of Service.
Elect only if desired; the Vesting Schedule elected in Adoption
Agreement Section (M) must be 100%.
8f
<PAGE>
(f) EMPLOYER CONTRIBUTION FORMULA
-----------------------------
(1) Contribution Formula Elect one.
(a) (X) A sum to be determined each Plan Year by Employer
Resolution.
(b) ( ) _______% of Net Profits in excess of $_______
Dollar Amount or N/A.
(c) ( ) _______% of the Compensation of all Participants
Not to exceed 15%.
(d) ( ) _______% of the first $________of Net Profits
plus_______% of Net Profits in excess thereof .
(e) ( ) $_________
(f) ( )
---------------------------------------------------------
---------------------------------------------------------
Enter the Employer Contribution Formula.
(g) ( ) None
(2) (X) Qualified Non-elective Contributions
Employer Contributions shall be 100% vested, subject to the
withdrawal restrictions of Section 7.12, and designated as
Qualified Non-elective Contributions.
Elect only if desired.
(3) ( ) Service Requirement for Employer Contribution
No Employer Contribution shall be made for a Participant who has
completed less than 2 Years of Service.
Elect only if desired; the Vesting Schedule elected in Adoption
Agreement Section (M) must be 100%.
9f
<PAGE>
(G) ALLOCATION OF EMPLOYER CONTRIBUTIONS
------------------------------------
(1) (X) Non-integrated Complete if a non-integrated allocation formula
is desired.
Based upon the ratio of each Participant's Compensation to the
total Compensation of all Participants.
(2) ( ) Integrated Complete if an integrated allocation formula is
desired.
Employer contributions and forfeitures, if applicable, shall be
allocated to each Participant's Account to provide the maximum
amount based on Compensation in excess of the Integration Level,
to the extent legally permitted. (Section 6.2)
Integration Level: Elect one.
(a) ( ) Taxable Wage Base
(b) ( ) $________ Not to exceed the Taxable Wage Base.
(c) ( ) _________% of the Taxable Wage Base
Not to exceed 100%.
(H) FORFEITURES OF EMPLOYER CONTRIBUTIONS
-------------------------------------
(1) Forfeitures of Employer Profit Sharing Contributions Elect one.
(a) (X) shall be allocated in the same manner as Employer
contributions.
(b) ( ) shall be used to reduce Employer contributions.
(2) Forfeitures of Employer Matching Contributions Elect one.
(a) (X) shall be allocated in the same manner as Employer
contributions.
(b) ( ) shall be allocated to Participants with Matching
Contribution Accounts on the basis of the ratio which a
Participant's Compensation bears to the total
Compensation of all Participants with Matching
Contribution Accounts.
(c) ( ) shall be used to reduce Employer contributions.
10f
<PAGE>
(I) PARTICIPANT DIRECTED INVESTMENTS Elect one.
--------------------------------
(1) (X) shall be permitted as provided in Section 2.7.
(2) ( ) shall not be permitted.
(J) CONTRIBUTIONS IN YEAR OF TERMINATION OF EMPLOYMENT
--------------------------------------------------
Except as necessary to satisfy coverage or participation requirements as
provided in Section 6.1, Participants terminating employment after
completion of 1000 Hours of Service during a Plan Year:
Elect one.
(1) ( ) shall receive an Employer Contribution for the Plan Year.
(2) (X) shall not receive an Employer Contribution for the Plan Year.
NOTE: Election of option (2) may result in prohibited discrimination in
favor of Highly Compensated Employees and may disqualify the Plan. See
Revenue Ruling 76-250.
(K) ROLLOVERS AND TRANSFERS
-----------------------
(1) Employee Rollover Contributions Elect one.
(a) (X) shall be permitted.
(b) ( ) shall not be permitted.
(2) Employee Trust to Trust transfers Elect one.
(a) (X) shall be permitted.
(b) ( ) shall not be permitted.
(3) Employee Voluntary Contributions Elect one.
(a) ( ) shall be permitted.
(b) (X) shall not be permitted.
11f
<PAGE>
(L) PARTICIPANT LOANS & HARDSHIP WITHDRAWALS Elect one.
----------------------------------------
(1) Participant Loans
(a) (X) shall be permitted as provided in Section 2.19.
(b) ( ) shall not be permitted.
(2) Hardship Withdrawals Elect one.
(a) (X) shall be permitted as provided in Section 7.13.
(b) ( ) shall not be permitted.
(M) VESTING Complete 1 and 2.
-------
(1) ERISA Vesting Schedule Elect one.
(a) ( ) 20% after 3 Years of Service
40% after 4 Years of Service
60% after 5 Years of Service
80% after 6 Years of Service
100% after 7 Years of Service
(b) ( ) ___% after 1 Year of Service
___% after 2 Years of Service
___% after 3 Years of Service
___% after 4 Tears of Service
100% after 5 Years of Service
(c) ( ) 0% after 1 Year of Service
20% after 2 Years of Service
40% after 3 Years of Service No less than 20%
60% after 4 Years of Service No less than 40%
80% after 5 Years of Service No less than 60%
100% after 6 Years of Service No less than 80%
100% after 7 Years of Service
(d) ( ) 100% Must be elected if E(2)(d), E(3)(d) and/or F(3) are
elected.
12f
<PAGE>
(2) Top-heavy Vesting Schedule Elect one.
(a) (X) 0% after 1 Year of Service
20% after 2 Years of Service No less than 20%
40% after 3 Years of Service No less than 40%
60% after 4 Years of Service No less than 60%
80% after 5 Years of Service No less than 80%
100% after 6 Years of Service
(b) ( ) ___% after 1 Year of Service
___% after 2 Years of Service
100% after 3 Years of Service
(c) ( ) 100% Must be elected if E(2)(d), E(3)(d) and/or F(3)
are elected.
(N) VESTING EXCLUSIONS Elect all that apply.
------------------
(1) (X) Years of Service before Age 18.
(2) ( ) Years of Service with an Employer during any period for which the
Employer did not maintain the Plan or a predecessor plan.
(3) ( ) Years of Service during any Year for which the Plan required an
Employee contribution and the Employee declined the make the
entire contribution to the Plan.
(O) NORMAL RETIREMENT AGE OF A PARTICIPANT Elect one.
--------------------------------------
(1) ( ) His ____ birthday.
(2) ( ) The earlier of his 65th birthday and the first day of the Plan
Year within 6 months of his 65th birthday.
(3) (X) The later of his 65th birthday (not to exceed 65th) and the 5th
anniversary of his participation. Not to exceed 5th but in no
event later than his 65th birthday Complete only if desired.
(4) ( ) the later of:
(a) the earlier of his 65th birthday and the first day of the Plan
Year within 6 months of his 65th birthday; and
(b) the ___ anniversary of his participation Not to exceed 5th.
but in no event later than his ___ birthday Complete only if
desired.
NOTE: if options (3) or (4) are elected, see Section 1.25 of the Plan for a
special transition rule.
13f
<PAGE>
(P) EARLY RETIREMENT Elect one.
----------------
(1) ( ) Permitted upon the completion of the following requirements:
Attainment of Age ___ and the completion of ___ Years of
Service
(2) (X) Not permitted
(Q) LUMP SUM DISTRIBUTION OF BENEFITS
---------------------------------
A Participant who terminates employment, requests a distribution, and
obtains spousal consent: Elect one.
(1) (X) will be permitted a lump sum distribution.
(2) ( ) will not be permitted a lump sum distribution.
NOTE: If this Adoption Agreement amends an existing Plan which allows lump
sum distributions and option (2) is elected, Participants who have accrued
benefits as of the later of the adoption or the effective date of the
amendment must be permitted at termination to withdraw benefits accrued to
such date as a lump sum.
(R) (S)415 LIMITATIONS ON MULTIPLE PLANS
------------------------------------
(1) Complete if the Employer maintains another qualified defined
contribution plan which is not a master or prototype plan, in which
any Participant in this Plan is a Participant or could become a
Participant. Elect one.
(a) (X) The provisions of Section 8.2 will apply as if the other
plan were a master or prototype plan.
(b) ( ) The plans will limit total annual additions to the
maximum permissible amount and will properly reduce any
excess amounts in the manner that precludes Employer
discretion described below:
--------------------------------------------------------------------
--------------------------------------------------------------------
--------------------------------------------------------------------
14f
<PAGE>
(2) Complete if a participant is or has ever been a Participant in a
defined benefit plan maintained by the Employer. Elect one.
(a) (X) Annual Additions to the Defined Contribution Plan(s)
shall be limited as provided in Section 8.4 if the sum of
the Participant's Defined Contribution Plan Fraction plus
his Defined Benefit Plan Fraction exceeds 1.0.
(b) ( ) The plans will limit total annual additions to the
maximum permissible amount and will properly reduce any
excess amounts in the manner that precludes Employer
discretion described below:
--------------------------------------------------------------------
--------------------------------------------------------------------
--------------------------------------------------------------------
(S) MINIMUM CONTRIBUTIONS FOR TOP-HEAVY PLANS ((S)416)
--------------------------------------------------
Complete if the Employer maintains one or more other plans that cover any
Employees covered by this plan.
(1) ( ) A Participant shall receive a minimum contribution under this
Plan equal to 5% of compensation if the Participant also
participates in a defined benefit plan.
(2) (X) A Participant shall receive a minimum contribution under this
plan equal to 3% of Compensation if the Participant also
participates in another defined contribution plan but does not
participate in any defined benefit plan.
(3) ( ) A Participant shall receive a minimum benefit or contribution
under the following plan rather than a minimum contribution
under this plan:
--------------------------------------------------------------
Enter the name of the other Plan.
NOTE: Both (1) and (2) may be elected if the Employer maintains both a defined
contribution and defined benefit plan in addition to this Plan.
15f
<PAGE>
(T) ADDITIONAL CONTRIBUTIONS FOR TOP-HEAVY PLANS ((S)416(h))
--------------------------------------------------------
If the sum of any Participant's Defined Benefit and Defined Contribution
Plan Fractions, modified as required in any year that the Plan is top-
heavy, exceeds 1.0, then the following benefits or contributions may be
provided to restore to 1.25 the dollar limit factor in the denominators of
those fractions. These amounts are in addition to the minimum benefits or
contribution provided by Plan Section 9.3 and Adoption Agreement Section
(S).
(1) (X) No additional benefits shall be provided and the dollar limit
factor shall remain at 1.0.
(2) ( ) If Section (S)(1) of this Adoption Agreement is elected, an
additional benefit equal to 1% of Compensation shall be
provided to all Participants who participate in this Plan only
and an additional benefit equal to 2 1/2% of Compensation shall
be provided to all Participants who participate in this Plan
and a defined benefit plan maintained by the Employer.
(3) ( ) If the Employer maintains a defined benefit plan in addition to
this Plan and if (S) (3) of this Adoption Agreement is elected,
an additional benefit equal to 1% of Compensation shall be
provided to each Participant who participates in this Plan
only.
NOTE: This Section (T) does not apply if the Plan is super top-heavy as defined
in Section 8.4(b) of the Plan.
16f
<PAGE>
THIS ADOPTION AGREEMENT MAY BE USED ONLY IN CONJUNCTION WITH BASIC PLAN DOCUMENT
#02. FAILURE TO PROPERLY FILL OUT THE ADOPTION AGREEMENT MAY RESULT IN
DISQUALIFICATION OF THE PLAN.
IF THE EMPLOYER FAILS TO RETAIN QUALIFICATION OF HIS PLAN, HE MAY NO LONGER
PARTICIPATE UNDER THIS PROTOTYPE PLAN.
THE ADOPTING EMPLOYER MAY NOT RELY ON AN OPINION LETTER ISSUED BY THE NATIONAL
OFFICE OF THE INTERNAL REVENUE SERVICE TO MASSACHUSETTS MUTUAL LIFE INSURANCE
COMPANY AS EVIDENCE THAT THE PLAN IS QUALIFIED UNDER SECTION 401 OF THE INTERNAL
REVENUE CODE. IN ORDER TO OBTAIN RELIANCE WITH RESPECT TO PLAN QUALIFICATION,
THE EMPLOYER MUST APPLY TO THE APPROPRIATE KEY DISTRICT OFFICE FOR A
DETERMINATION LETTER.
THE UNDERSIGNED HAS CONSULTED LEGAL AND TAX COUNSEL TO THE EXTENT CONSIDERED
NECESSARY.
Signed this __________ day of ___________________, 19___.
Witness: Employer*:
----------------------------- -----------------------------
Witness: Employer*:
----------------------------- -----------------------------
Witness: Trustee*:
----------------------------- ------------------------------
Witness: Trustee*:
----------------------------- ------------------------------
Witness: Trustee*:
----------------------------- ------------------------------
* Please type name under signature
THIS DOCUMENT IS VALID ONLY WITH ATTACHMENT OF THE PROPER INTERNAL REVENUE
SERVICE OPINION LETTER.
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY AGREES TO INFORM REGISTERED
PROTOTYPE ADOPTERS OF ANY AMENDMENTS MADE TO THE PLAN OR OF THE DISCONTINUANCE
OR ABANDONMENT OF THE PLAN. INQUIRIES BY THE ADOPTING EMPLOYER SHOULD BE
DIRECTED TO:
QUALIFIED PLANS
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
1295 STATE STREET
SPRINGFIELD, MASSACHUSETTS 01111-0001
TELEPHONE: (413) 788-8411
17f
<PAGE>
MASSACHUSETTS PROTOTYPE REGISTRATION FORM
This form must be completed for each adopter of the MassMutual Prototype Plan.
Payment of the nonrefundable document use and registration fee of $150 is
required. Notices and/or amendments will be sent to the contact chosen below.
Plan Name: SPRING HILL SAVINGS BANK, FSB 401(K) PROFIT SHARING PLAN
--------------------------------------------------------------------
Trustee or Plan Administrator Name: SPRING HILL SAVINGS BANK, FSB
-------------------------------------------
Address: 112 FEDERAL STREET
----------------------------------------------------------------------
PITTSBURGH, PA 15212
----------------------------------------------------------------------
----------------------------------------------------------------------
Agent's Name: ROBERT L. MOORE
-----------------------------------------------------------------
Agency: PITTSBURGH / 075
-----------------------------------------------------------------------
Plan PT# if available:
--------------------------------------------------------
Send Amendments to [ X ] Trustee [ ] Agent [ X ] Other (Specify)
Philip E. Miller, Sr. V.P.
----------------------------
L.R. Webber Assoc. Inc.
----------------------------
P.O. Box 593
----------------------------
Hollidaysburg, PA 16648
----------------------------
Signed: Date:
---------------------------------------- ------------------------
(trustee or plan administrator)
Send this form and your check payable to MassMutual to:
Massachusetts Mutual Life Insurance Company
Treasurer's Department - E078
1295 State Street
Springfield, MA 01111
- --------------------------------------------------------------------------------
Home Office Use Only NSK
Date Received: Check # Site License #
-------------- -------------- --------------
- --------------------------------------------------------------------------------
18f
<PAGE>
This prototype document contains model amendments described in Revenue
Procedures 93-47 and 94-13. These amendments consist of language required for
the compensation limitation of $150,000 and for a participant to waive the 30
day period prior to receiving a profit sharing plan distribution.
This document also includes plan amendments compiled from Revenue Procedures
92-41 and 93-12. These amendments affect the "FICA" definition of compensation,
liberalize 401(k) and (m) testing and add direct rollover language. The plan
amendments can be found in Articles XVIII and XIX.
Document provisions which have been altered by these amendments (See Articles I
and VII) are identified by an asterisk (*) in the left margin.
<PAGE>
MASSACHUSETTS MUTUAL LIFE
INSURANCE COMPANY
PROTOTYPE DEFINED CONTRIBUTION
PLAN AND TRUST AGREEMENT
(C) Copyright 1986, 1991, 1993 by Massachusetts Mutual Life Insurance Company.
All Rights Reserved. No reproduction of provisions in this document are
permitted without the express written consent of Massachusetts Mutual Life
Insurance Company, Springfield, Massachusetts 01111.
SP-LI-7.13
BASIC PLAN DOCUMENT #02
10/01/94
<PAGE>
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
PROTOTYPE DEFINED CONTRIBUTION PLAN AND TRUST AGREEMENT
<TABLE>
<S> <C>
ARTICLE I DEFINITIONS
ARTICLE II ADMINISTRATION
ARTICLE III ELIGIBILITY AND PARTICIPATION
ARTICLE IV RETIREMENT BENEFITS
ARTICLE V DISTRIBUTION REQUIREMENTS
ARTICLE VI CONTRIBUTIONS
ARTICLE VII ADDITIONAL RULES FOR (S)401(K) PLANS
ARTICLE VIII LIMITATIONS ON ALLOCATIONS
ARTICLE IX ADDITIONAL REQUIREMENTS FOR TOP-HEAVY PLANS
ARTICLE X JOINT AND SURVIVOR ANNUITY REQUIREMENTS
ARTICLE XI TERMINATION OF EMPLOYMENT - PARTICIPATION AND VESTING
ARTICLE XII DEATH BENEFITS
ARTICLE XIII CONTRACTS
ARTICLE XIV INSURANCE COMPANIES
ARTICLE XV RIGHT TO AMEND
ARTICLE XVI TERMINATION, MERGER, CONSOLIDATION AND ASSET TRANSFER
ARTICLE XVII MISCELLANEOUS
ARTICLE XVIII PLAN AMENDMENT I
ARTICLE XIX PLAN AMENDMENT II
ARTICLE XX PLAN AMENDMENT III
ARTICLE XXI PLAN AMENDMENT IV
</TABLE>
<PAGE>
INDEX OF PROVISIONS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Introductory Paragraphs 1
Prototype Document
Purpose of Plan and Trust
<CAPTION>
<S> <C> <C>
ARTICLE I. DEFINITIONS 1
1.1 Administrator
1.2 Adoption Agreement
1.3 Age
1.4 Beneficiary
1.5 Break in Service
1.6 Code
1.7 Compensation
1.8 Contract
1.9 Covered Compensation
1.10 Date of Employment
1.11 Determination Date
1.12 Effective Date
1.13 Employee
1.14 Employee Mandatory Contribution
1.15 Employee Voluntary Contribution
1.16 Employer
1.17 Entry Date
1.18 Highly Compensated Employee
1.19 Hour of Service
1.20 Insurer
1.21 Integration Level
1.22 Investment Fund
1.23 Joint and Survivor Annuity
1.24 Net Profits
1.25 Normal Retirement Age
1.26 Participant
1.27 Participant's Account
1.28 Plan, Trust, Plan and Trust
1.29 Plan Year
1.30 Qualified Early Retirement Age
1.31 Segregated Account
1.32 Taxable Wage Base
1.33 Trustee
1.34 Valuation Date
1.35 Year of Participation
1.36 Year of Service
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE II. ADMINISTRATION 11
2.1 Appointment of Trustee(s) and Administrator
2.2 Allocation of Responsibilities
2.3 Receipt of Contributions
2.4 Administrative Costs
2.5 Trustee's Powers and Duties
2.6 Investment of Trust Assets
2.7 Participant Directed Investment
2.8 Prudent Man Rule
2.9 Valuation of Participant's Account
2.10 Valuation of Segregated Account(s)
2.11 Employee-Provided Participant's Account
2.12 Employer-Provided Participant's Account
2.13 Account Balance
2.14 Administrator's Power and Duties
2.15 Claims for Benefits - Appeals
2.16 Participant Data
2.17 Employer Census Report
2.18 Service of Legal Process
2.19 Participant Loans
ARTICLE III. ELIGIBILITY AND PARTICIPATION 20
3.1 Eligibility
3.2 Notification of Eligible Employees
3.3 Submission of Employee Forms
3.4 Conditions of Continued Participation
3.5 Eligibility Computation Period
3.6 Breaks in Service - Return to Service
3.7 Service with Predecessor Employer
ARTICLE IV. RETIREMENT BENEFITS 22
4.1 Normal Retirement Benefits
4.2 Employment Beyond Normal Retirement
4.3 Early Retirement Benefits
4.4 Disability Benefits
4.6 Commencement of Benefits
ARTICLE V. DISTRIBUTION REQUIREMENTS 24
5.1 General
5.2 Limits on Distribution Periods
5.3 Determination of Amount to be Distributed Each Year
5.4 Annuity Distribution
5.5 Definitions
</TABLE>
ii
<PAGE>
<TABLE>
PAGE
<S> <C> <C>
5.6 Distribution Beginning Before Death
5.7 Distribution Beginning After Death
5.8 Death of Surviving Spouse
5.9 Payments to Child
5.10 Distribution Date
5.11 Transitional Rule for (S)242(b) Tefra Election
ARTICLE VI. CONTRIBUTIONS 31
6.1 Money Purchase
6.2 Profit Sharing or (S)401(k)
6.3 Employee Voluntary Contributions
6.4 Rollover Contributions
6.5 Trust to Trust Transfers
6.6 If Employer is Successor to Unincorporated Business
ARTICLE VII. ADDITIONAL RULES FOR (S)401(k) PLANS 37
7.1 Elective Deferrals
7.2 Elective Deferrals-Contribution Limitation
7.3 Elective Deferrals-Distribution of Excess
7.4 Elective Deferrals-Actual Deferral Percentage Test
7.5 Distribution of Excess Contributions
7.6 Matching Contributions
7.7 Qualified Matching Contributions
7.8 Limitations on Employee Contributions and Matching
Contributions
7.9 Distribution of Excess Aggregate Contributions
7.10 Qualified Non-elective Contributions
7.11 Nonforfeitability and Vesting
7.12 Distribution Requirements
7.13 Hardship
ARTICLE VIII. LIMITATIONS ON ALLOCATIONS 48
8.1 Single Plan
8.2 Two or More Master or Prototype Defined Contribution
Plans
8.3 Coverage under Non-Prototype Defined Contribution Plan
8.4 Coverage under Defined Benefit Plan
8.5 Definitions
ARTICLE IX. ADDITIONAL REQUIREMENTS FOR TOP-HEAVY PLANS 57
9.1 Generally
9.2 Top-Heavy Definitions
9.3 Minimum Contribution or Allocation
9.4 Minimum Vesting
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ARTICLE X. JOINT AND SURVIVOR ANNUITY REQUIREMENTS 61
10.1 General
10.2 Qualified Joint and Survivor Annuity
10.3 Qualified Preretirement Survivor Annuity
10.4 Definitions
10.5 Notice Requirements
10.6 Transitional Rules
10.7 Distributions Without Spousal Consent
ARTICLE XI. TERMINATION OF EMPLOYMENT - PARTICIPATION 66
AND VESTING
11.1 Notice of Termination
11.2 Vesting - Employee-Provided Participant's Account and
Segregated Account
11.3 Vesting - Employer-Provided Participant's Account
11.4 Vesting - Years of Service, Break in Service
11.5 Benefits of an Ineligible Participant
11.6 Distribution of Benefits
11.7 Notice to Participant
11.8 Vested Deferred Benefits
11.9 Repayment/Restoration of Forfeiture
11.10 Application of Forfeiture
ARTICLE XII. DEATH BENEFITS 70
12.1 Death Prior to Distribution or Commencement of Benefits
12.2 Beneficiary Designation
12.3 Death Prior to Date Contract is in Force
12.4 Death After Commencement of Retirement Benefits
ARTICLE XIII. CONTRACTS 71
13.1 Purchase of Contracts
13.2 Family Coverage
13.3 Transfer of Contracts Into Plan
13.4 Forms of Contracts
13.5 Trustee as Owner
13.6 Voting Rights of Variable Contracts
13.7 Dividends
13.8 Policy Loans
13.9 Contract Riders
13.10 Waiver of Premium and Accidental Death Benefit Riders
13.11 Annuity Contracts Nontransferable
13.12 Disposition of Contract
13.13 Plan Controls
13.14 Change in Amount of Insurance
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ARTICLE XIV. INSURANCE COMPANIES 75
14.1 Insurer Not a Party to This Agreement
14.2 Reliance on Action of Trustees
14.3 Trustee's Signature
14.4 Payment to Trustees or Beneficiaries
ARTICLE XV. RIGHT TO AMEND 75
15.1 Amendment by Massachusetts Mutual
15.2 Amendment of Elections By Employer
15.3 Other Amendments by Employer
15.4 Restriction on Amendment
ARTICLE XVI. TERMINATION, MERGER, CONSOLIDATION AND 77
ASSET TRANSFER
16.1 Termination of Plan
16.2 Full Vesting Upon Termination
16.3 Merger, Consolidation, or Transfer of Plan Assets
ARTICLE XVII. MISCELLANEOUS 78
17.1 If Plan Benefits Owner-employee
17.2 Inalienability of Benefits
17.3 Permanency of Plan and Trust
17.4 Counterparts
17.5 Not an Employment Contract
17.6 State Law
17.7 Word Usage
17.8 Interpretation of Plan and Trust
17.9 Missing Beneficiaries
17.10 Return of Employer Contribution
17.11 Employer Contributions Conditional Upon Qualification
17.12 Headings
ARTICLE XVIII. PLAN AMENDMENT I 81
18.1 Purpose
18.2 Compensation (W-2)
18.3 Elective Deferrals
18.4 Hardship
18.5 Elective Deferrals - Distribution of Excess
18.6 Elective Deferrals - Actual Deferral Percentage Test
18.7 Distribution of Excess Contributions
18.8 Limitations on Employee Contributions and
Matching Contributions
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18.9 Distribution of Excess Aggregate Contributions
ARTICLE XIX. PLAN AMENDMENT II 85
19.1 Purpose
19.2 Employee's Right to Elect Direct Rollover
19.3 Eligible Rollover Distribution
19.4 Eligible Rollover Plan
19.5 Distributee
ARTICLE XX. PLAN AMENDMENT III 86
20.1 Purpose
20.2 $150,000 Compensation Limit
ARTICLE XXI. PLAN AMENDMENT IV 87
21.1 Purpose
21.2 Waiver of 30 Day Notice
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MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
PROTOTYPE DEFINED CONTRIBUTION PLAN AND TRUST AGREEMENT
To Accompany Adoption Agreements With
Numbers D256562a, D256560a, D256564a, D356561a, D356559a. D356563a
PROTOTYPE DOCUMENT
Massachusetts Mutual Life Insurance Company of Springfield, Massachusetts has
prepared this Plan for the purpose of providing retirement benefits for eligible
Employees of any Employer which adopts this Plan. Any Employer may participate
in this Plan, provided that he executes an agreement, hereinafter referred to as
the Adoption Agreement, agrees to notify Massachusetts Mutual of its adoption
and remits the appropriate document use and registration fee. This document is
intended to operate as a basic plan document, as that term is defined in Revenue
Procedure 84-23. It may be used by an Employer in conjunction with an
appropriate Adoption Agreement to establish any one of the following types of
defined contribution plans: (1) Money Purchase Plan; (2) Profit Sharing Plan;
or (3) (S)401(k) plan.
PURPOSE OF PLAN AND TRUST
The Employer establishes this Plan to provide funds for its Employees'
retirement and to provide funds for their Beneficiaries in event of death. The
benefits provided in this Plan shall be paid from a Trust established by the
Employer. The Plan and the Trust forming a part hereof are established and
shall be maintained for the exclusive benefit of Employees and their
Beneficiaries. Except as provided in Article XVII of the Plan, no part of the
Trust funds shall revert to the Employer, or be diverted to purposes other than
the exclusive benefit of Employees or their Beneficiaries.
ARTICLE I
DEFINITIONS
1.1 "Administrator" means the person appointed pursuant to Section 2.1. If no
person is appointed, "Administrator" shall mean the Employer which adopts
this Plan.
1.2 "Adoption Agreement" means the agreement executed by the Employer and
Trustee named therein, a copy of which is attached and made a part hereof.
1.3 "Age" means rated Age as determined for insurance purposes, except with
respect to Section 4.5 of the Plan and Sections (O) and (P) of the
Adoption Agreement, where it shall mean chronological Age.
1.4 "Beneficiary" means a person designated by a Participant, or by the terms
of the Plan, and who is or may become entitled to a benefit thereunder.
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1.5 "Break in Service" means any 12-consecutive month period during which the
Participant is not credited with more than 500 Hours of Service with the
Employer. The applicable 12-consecutive month period for eligibility and
participation purposes can be found in Article III, and for vesting
purposes in Article XI.
1.6 "Code" means the Internal Revenue Code of 1986, as amended.
1.7 "Compensation" means the definition as elected by the Employer in Section
(D) of the Adoption Agreement. Compensation shall mean all of a
Participant's:
(1) Section 3121 wages. Wages as defined in (S)3121(a), for purposes of
calculating social security taxes, but determined without regard to
the wage base limitation in (S)3121(a)(1), the limitations on the
exclusions from wages in (S)3121(a)(5)(C) and (D) for elective
contributions and payments by reason of salary reduction agreements,
the special rules in (S)3121(v), any rules that limit covered
employment based on the type or location of an Employee's Employer,
and any rules that limit the remuneration included in wages based on
familial relationship or based on the nature or location of the
employment or the services performed (such as the exceptions to the
definition of employment in (S)3121(b)(1) through (20)).
(2) (S)3401(a) wages. Wages as defined in (S)3401(a) for the purposes of
income tax withholding at the source but determined without regard
to any rules that limit the remuneration included in wages based on
the nature or location of the employment or the services performed
(such as the exception for agricultural labor in (S)3401(a)(2)).
(3) (S)415 safe-harbor compensation, as defined in Section 8.5(b) of the
Plan.
Compensation shall include only that compensation which is actually paid
to the Participant during the applicable period. Except as provided
elsewhere in this Plan, the applicable period shall be the period elected
by the Employer in Adoption Agreement Section (D). If the Employer makes
no election, the applicable period shall be the Plan Year.
For any self-employed individual covered under the Plan, compensation will
mean earned income. Earned income means the net earnings from self-
employment in the trade or business with respect to which the Plan is
established, for which personal services of the individual are a material
income-producing factor. Net earnings will be determined without regard to
items not included in gross income and the deductions allocable to such
items. Net earnings are reduced by contributions by the Employer to a
qualified plan to the extent deductible under (S)404 of the Code. Net
earnings shall be determined with regard to the deduction allowed to the
Employer by (S)164(f) of the Code for taxable years beginning after
December 31, 1989.
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Notwithstanding the above, if elected by the Employer in Adoption
Agreement Section (D)(2), compensation shall include any amount which is
contributed by the Employer pursuant to a salary reduction agreement and
which is not includible in the gross income of the Employee under (S)125,
(S)402(a)(8), (S)402(h) or (S)403(b) of the Code.
For years beginning after December 31, 1988, the annual compensation of
each Participant taken into account under the Plan for any year shall not
exceed 5200,000, as adjusted by the Secretary at the same time and in the
same manner as under (S)415(d) of the Code, except that the dollar
increase in effect on January 1 of any calendar year is effective for
years beginning in such calendar year and the first adjustment to the
$200,000 limitation is effected on January 1, 1990. If a plan determines
compensation on a period of time that contains fewer that 12 calendar
months, then the annual compensation limit is an amount equal to the
annual compensation limit for the calendar year in which the compensation
period begins multiplied by the ratio obtained by dividing the number of
full months in the period by 12.
In determining the compensation of a Participant for purposes of this
limitation, the rules of (S)414(q)(6) of the Code shall apply, except in
applying such rules, the term "family" shall include only the spouse of
the Participant and any lineal descendants of the Participant who have not
attained age 19 before the close of the year.
If, as a result of the application of such rules the adjusted $200,000
limitation is exceeded, then (except for purposes of determining the
portion of compensation up to the integration level if this Plan provides
for permitted disparity), the limitation shall be prorated among the
affected individuals in proportion to each such individual's compensation
as determined under this section prior to the application of this
limitation.
If compensation for any prior Plan Year is taken into account in
determining an Employee's contributions or benefits for the current year,
the compensation for such prior year is subject to the applicable annual
compensation limit in effect for that prior year. For this purpose, for
years beginning before January 1, 1990, the applicable annual compensation
limit is $200,000.
1.8 "Contract" means any life insurance policy or annuity contract issued by
the Insurer on the life of a Participant for the sole purpose of supplying
life insurance to the Participant and his beneficiaries.
1.9 "Covered Compensation" shall mean the average (without indexing) of the
Taxable Wage Bases in effect for each calendar year in which the
Participant attains (or will attain) social security retirement age. No
increase in Covered Compensation shall decrease a Participant's accrued
benefit under the Plan.
In determining a Participant's Covered Compensation for a Plan Year, the
Taxable Wage Base in effect for the current Plan Year and any subsequent
Plan Year will be assumed
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to be the same as the Taxable Wage Base in effect as of the beginning of
the Plan Year for which the determination is being made.
A Participant's Covered Compensation for a Plan Year before the 35-year
period ending with the last day of the calendar year in which the
Participant attains social security retirement age is the Taxable Wage
Base in effect as of the beginning of the Plan Year. A Participant's
Covered Compensation for a Plan Year after such 35-year period is the
Participant's Covered Compensation for the Plan Year during which the
Participant attained social security retirement age.
1.10 "Date of Employment" means the date on which the Employee first performs
an Hour of Service on behalf of the Employer.
1.11 "Determination Date" means the date as of which a determination must be
made as to whether the Plan is top-heavy. For an Employer who maintains a
single plan, the Determination Date for the first Plan Year shall be the
last day of the Plan Year and for any other Plan Year. the last day of the
preceding Plan Year.
1.12 "Effective Date" means the date elected in Adoption Agreement Section
(B)(1) as the first day of the first Plan Year for which the Employer
adopts the Plan.
1.13 "Employee" means any individual employed by the Employer or any other
employer required to be aggregated under (S)414(b), (c), (m), or (o) of
the Code. Any individual deemed under (S)414(n) or (o) of the Code to be a
leased employee of any employer described in the previous sentence shall
also be considered an employee. "Employee" shall include an individual who
is a self-employed individual or an owner-employee as defined in (S)401(c)
of the Code.
The term "leased Employee" means any person (other than an employee of the
recipient) who pursuant to an agreement between the recipient and any
other person ("leasing organization") has performed services for the
recipient (or for the recipient and related persons determined in
accordance with (S)414(n)(6) of the Code) on a substantially full time
basis for a period of at least one year and such services are of a type
historically performed by employees in the business field of the recipient
Employer. Contributions or benefits provided a leased employee by the
leasing organization which are attributable to services performed for the
recipient Employer shall be treated as provided by the recipient Employer.
A leased Employee shall not be considered an Employee of the recipient if:
(a) such Employee is covered by a money purchase pension plan providing:
(1) nonintegrated employer contribution rate of at least 10
percent of compensation, (as defined in (S)415(c)(3) of the
Code, but including
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amounts contributed by the Employer pursuant to a salary
reduction agreement which are excludable from the Employee's
gross income under (S)125, (S)402(a)(8), (S)402(h) or
(S)403(b) of the Code),
(2) immediate participation, and
(3) full and immediate vesting; and
(b) leased Employees do not constitute more that 20 percent of the
recipient's nonhighly compensated workforce.
A self-employed individual means an individual who has earned income for
the taxable year from the trade or business for which the plan is
established; also an individual who would have had earned income but for
the fact that the trade or business had no Net Profits for the taxable
year.
An owner-employee means an individual who is a sole proprietor, or who is
a partner owning more than 10 percent of either the capital or profits
interest of the partnership.
1.14 "Employee Mandatory Contribution" means an Employee contribution which was
required as a condition of participation in the Plan.
1.15 "Employee Voluntary Contribution" means a nondeductible voluntary
contribution which an Employee was permitted to make or may make under a
(S)401(k) plan, in an amount (not to exceed the limits set forth in
Section 7.8) if Employee voluntary contributions are elected by the
Employer in Section (K) of the Adoption Agreement.
1.16 "Employer" means any person, Employee organization, sole proprietorship,
partnership or corporation adopting this Plan. All Employees of all
corporations which are members of a controlled group (as defined in
(S)414(b) of the Code), all Employees of all trades or businesses (whether
or not incorporated) which are under common control (as defined in
(S)414(c) of the Code) and all Employees of all members of an affiliated
service group (as defined in (S)414(m) of the Code) shall be treated as
employed by a single Employer.
1.17 "Entry Date" means the date(s) specified in Section (B) of the Adoption
Agreement on which an Employee becomes a Participant, having satisfied the
eligibility requirements of Section (C) of the Adoption Agreement.
1.18 "Highly Compensated Employee" means highly compensated active Employees
and highly compensated former Employees.
A highly compensated active Employee includes any Employee who performs
service for the Employer during the determination year and who, during the
look-back year:
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(a) received compensation from the Employer in excess of $75,000 (as
adjusted pursuant to (S)415(d) of the Code);
(b) received compensation from the Employer in excess of $50,000 (as
adjusted pursuant to (S)415(d) of the Code) and was member of the top-
paid group for such year; or
(c) was an officer of the Employer and received compensation during such
year that is greater that 50 percent of the dollar limitation in
effect under (S)415(b)(1)(A) of the Code.
The term highly compensated employee also includes:
(a) Employees who are both described in the preceding sentence if the term
"determination year" is substituted for the term "look-back year" and
the Employee is one of the 100 Employees who received the most
compensation from the Employer during the determination year; and
(b) Employees who are 5 percent owners at any time during the look-back
year or determination year.
If no officer has satisfied the compensation requirement of (c) above
during either a determination year or look-back year, the highest paid
officer for such year shall be treated as a highly compensated employee.
A highly compensated former employee includes any employee who separated
from service (or was deemed to have separated) prior to the determination
year, performs no service for the Employer during the determination year,
and was a highly compensated active Employee for either the separation year
or any determination year ending on or after the employee's 55th birthday.
If an employee is, during a determination year or look-back year, a family
member of either a 5 percent owner who is an active or former employee or a
highly compensated employee who is one of the 10 most highly compensated
employees ranked on the basis of compensation paid by the employer during
such year, then the family member and the 5 percent owner or top-ten highly
compensated employee shall be aggregated. In such case, the family member
and 5 percent owner or top-ten highly compensated employee shall be treated
as a single employee receiving compensation and plan contributions or
benefits equal to the sum of such compensation and contributions or
benefits of the family member and 5 percent owner or top-ten highly
compensated employee.
Generally, family members include the spouse, lineal ascendants and
descendants of the Employee and the spouses of such lineal ascendants or
descendants. However, for
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purposes of (S)401(a)(17) and (S)404(1) of the Code, family member excludes
lineal descendants over age 18.
For purposes of this section, the determination year shall be the Plan
Year. The look-back year shall be the twelve-month period immediately
preceding the determination year unless a calendar year calculation
election is made in accordance with the regulations under (S)414(q) of the
Code in which case the look-back year and the determination year may
coincide.
The determination of who is a highly compensated employee, including the
determinations of the number and identity of employees in the top-paid
group, the top 100 employees, the number of employees treated as officers
and the compensation that is considered, will be made by the Plan
Administrator in accordance with (S)414(q) of the Code and the regulations
thereunder.
1.19 "Hour of Service" means
(a) Each actual hour for which an Employee is paid, or entitled to
payment, for the performance of duties for the Employer. These hours
shall be credited to the Employee for the computation period in which
the duties are performed; and
(b) Each Hour for which an Employee is paid, or entitled to payment, by
the Employer on account of a period of time during which no duties are
performed (irrespective of whether the employment relationship has
terminated) due to vacation, holiday, illness, incapacity (including
disability), layoff, jury duty, military duty or leave of absence. No
more than 501 Hours of Service shall be credited under this paragraph
for any single continuous period (whether or not such period occurs in
a single computation period). Hours under this paragraph shall be
calculated and credited pursuant to (S)2530.200b-2 of the Department
of Labor Regulations which are incorporated herein by this reference;
and,
(c) Each hour for which back pay, irrespective of mitigation of damages,
is either awarded or agreed to by the Employer. The same Hours of
Service shall not be credited both under paragraph (a) or paragraph
(b), as the case may be, and under this paragraph (c). These hours
shall be credited to the Employee for the computation period or
periods to which the award or agreement pertains rather than the
computation period in which the award, agreement or payment is made.
Hours of service will be credited for employment with other members of an
affiliated service group (under (S)414(m) of the Code), a controlled group
of corporations (under (S)414(b) of the Code), or a group of trades or
businesses under common control (under (S)414(c) of the Code), of which the
adopting employer is a member and any other entity required to be
aggregated with the Employer pursuant to (S)414(o) of the Code and the
regulations thereunder.
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Hours of service will also be credited for any individual considered an
Employee for purposes of this Plan under (S)414(n) or (S)414(o) of the Code
and the regulations thereunder.
Solely for purposes of determining whether a Break in Service for
participation and vesting purposes has occurred in a computation period, an
individual who is absent from work for maternity or paternity reasons shall
receive credit for the Hours of Service which would otherwise have been
credited to such individual but for such absence, or in any case in which
such hours cannot be determined, 8 hours of service per day of such
absence. For purposes of this paragraph, an absence from work for maternity
or paternity reasons means an absence (1) by reason of the pregnancy of the
individual, (2) by reason of a birth of a child of the individual, (3) by
reason of the placement of a child with the individual in connection with
the adoption of such child by such individual, or (4) for purposes of
caring for such child for a period beginning immediately following such
birth or placement. The Hours of Service credited under this paragraph
shall be credited (1) in the computation period in which the absence begins
if the crediting is necessary to prevent a break in service in that period,
or (2) in all other cases, in the following computation period.
Hours of Service include service for a predecessor Employer as provided in
Section 3.7 and Section 11.4 of the Plan. Where the Employer does not
continue the Plan of a predecessor employer, service for such predecessor
employer shall be treated as service for the Employer if elected in
Adoption Agreement Section (C)(3).
Where an Employee leaves a non-temporary position with the Employer to
enter the United States military service, receives an honorable discharge
upon completion of military service, makes application for reemployment
within 90 days of discharge (or within 90 days after hospitalization up to
one year in length following the discharge) and is reemployed, the military
service shall be treated as service for the Employer for participation,
vesting, and benefit accrual.
1.20 "Insurer" means Massachusetts Mutual Life Insurance Company or any other
legal reserve life insurance company authorized to do business.
1.21 "Integration Level" means the amount elected in Adoption Agreement
Section (F).
1.22 "Investment Fund" means the Trust assets exclusive of any Contracts issued
on the lives of Participants and exclusive of any Segregated Accounts.
1.23 "Joint and Survivor Annuity" means an annuity for the life of the
Participant with a survivor annuity for the life of his spouse which is not
less than one-half of, nor greater than, the amount of the annuity payable
during the joint lives of the Participant and his spouse and which is the
actuarial equivalent of the Participant's Account. The percentage of the
survivor annuity shall be elected by the Participant. If no election has
been made,
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the percentage shall be 50%. Provided, however, that if the Plan is a
Standard form of plan, the percentage of the survivor annuity shall be 50%.
1.24 "Net Profits" means the net income of the Employer (or consolidated net
income of an affiliated group of Employers) for the year for Federal Income
tax purposes before deduction of any Federal or State Income taxes, as
determined by the Employer on the basis of its books of account according
to established accounting principles consistently applied to available data
and certified to by the chief accounting officer of the Employer, less all
gains from the sale or exchange of capital or depreciable property as
defined in the Code, which are to be or have been included in the
Employer's income tax return for such year. The amount of the contribution
made or to be made under this Plan for such year shall not be included
among expenses in determining "Net Profits". The statement of Net Profits,
when determined by the Employer's accountant shall be final and binding
upon all parties interested in the Plan.
1.25 "Normal Retirement Age" means the Age as elected in Section (O) of the
Adoption Agreement. If, for plan years beginning before January 1, 1988,
normal retirement age was determined with reference to the anniversary of
the participation commencement date (more than 5 but not to exceed 10
years), the anniversary date for Participants who first commenced
participation under the Plan before the first Plan Year beginning on or
after January 1, 1988, shall be the earlier of (A) the tenth anniversary of
the date the Participant commenced participation in the Plan (or such
anniversary as had been elected by the Employer, if less than 10) or (B)
the fifth anniversary of the first day of the first Plan Year beginning on
or after January 1, 1988. The participation commencement date is the first
day of the first Plan Year in which the Participant commenced participation
in the Plan.
1.26 "Participant" means any Employee who has satisfied the requirements elected
in Section (C) of the Adoption Agreement and who became a member of this
Plan on an Entry Date.
1.27 "Participant's Account" means an individual account established and
maintained for each Participant for accounting purposes by the Trustee
pursuant to Article II. Included in the amount allocated to and accounted
for in the Participant's Account shall be:
(a) the value of any Contracts on the life of the Participant;
(b) the portion of the Employer's periodic contribution not applied to the
payment of premiums of such Contracts. Income, expenses, gains and
losses shall be allocated and credited or charged to each
Participant's Account.
1.28 "Plan," "Trust," or "Plan and Trust" means any money purchase or profit
sharing plan comprised of this basic plan document and an appropriate
Adoption Agreement. The Plan may be either a Non-standard Plan or a
Standard Plan depending on which Adoption
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Agreement the Employer selects. The provisions of this Plan, Trust and
Adoption Agreement shall be applied separately to each adopting Employer.
1.29 "Plan Year" means the 12-consecutive month period designated by the
Employer in Section (B) of the Adoption Agreement.
1.30 "Qualified Early Retirement Age" means the latest of:
(a) the earliest date, under the Plan, on which the Participant may elect
(without regard to any requirement that approval of early retirement
be obtained) to receive retirement benefits (other than disability
benefits);
(b) the first day of the 120th month beginning before the Participant
reaches Normal Retirement Age; or
(c) the date on which the Participant begins participation.
1.31 "Segregated Account" means an account(s) which may be established and
maintained for each Participant in addition to the Participant's Account to
which nondeductible Employee Voluntary Contributions under Section 6.3,
rollover contributions under Section 6.4 and transferred funds under
Sections 6.S and 6.6 are separately invested. Any appreciation,
depreciation, gain, loss or expenses with respect to each account shall be
allocated to that account. A separate Segregated Account shall be
established for each purpose for each Participant.
1.32 "Taxable Wage Base" means the maximum amount of earnings which may be
considered wages under (S)3121(a)(1) of the Code.
1.33 "Trustee" means the Trustee(s) designated in the Adoption Agreement and any
duly appointed successor Trustee(s).
1.34 "Valuation Date" means the last day of the Plan Year.
1.35 "Year of Participation" means a Plan Year during which a Participant is
credited with at least 1,000 Hours of Service (501 hours for Plan Years
beginning on or after January 1, 1990 if this Plan is a standardized plan).
In the case of a partial Plan Year, "Year of Participation" shall mean such
partial Plan Year during which a Participant is credited with at least a
number of Hours of Service equal to 1,000 multiplied by a fraction, the
numerator of which is the number of days in the partial Plan Year and the
denominator of which is 365.
1.36 "Year of Service" means a 12-consecutive month period during which an
Employee is credited with at least 1000 Hours of Service. The applicable
12-consecutive month period for eligibility and participation can be found
in Article III and for vesting in Article XI.
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All Years of Service with other members of a controlled group of
corporations. trades or businesses under common control, or members of an
affiliated service group shall be credited for purposes of determining an
Employee's eligibility to participate and his nonforfeitable percentage of
his Participant's Account under the Plan. All Years of Service as a leased
Employee shall be credited to the extent required by the law.
ARTICLE II
ADMINISTRATION
2.1 APPOINTMENT OF TRUSTEE(S) AND ADMINISTRATOR. The Employer shall have
-------------------------------------------
exclusive authority to appoint the Trustee(s) and to appoint a Plan
Administrator. Such appointments shall be made and accepted by the
appointee in writing and shall be effective upon such acceptance. Each
person so appointed shall serve at the discretion of the Employer. A new
incumbent shall be appointed as soon as possible in the event that an
appointee is removed or resigns from his position. Any successor shall
signify his acceptance by filing a written acceptance with the Employer.
Neither Massachusetts Mutual nor its affiliates shall be appointed Trustee
or Administrator by the Employer. If there is more than one Trustee all
acts and decisions shall be by a vote of a majority. The signature of any
one Trustee, however, shall be sufficient evidence to any party that a
document or Contract is authorized by the Trustees in accordance with the
terms of this Plan and Trust.
2.2 ALLOCATION OF RESPONSIBILITIES. The Employer, the Trustee, and the
------------------------------
Administrator shall have only those powers and responsibilities that are
specifically given them under the Plan and Trust. If there is more than one
Trustee, the Trustee(s) may allocate any of their duties hereunder among
themselves by written appointment and signed acceptance. The Trustee and
Administrator may appoint other persons or entities to perform any of their
functions including fiduciary functions. Such appointment shall be made and
accepted by the appointee in writing and shall be effective upon such
acceptance. The Trustee, the Administrator and any such appointee may
employ advisors and other persons necessary or convenient to help them
carry out their duties including their fiduciary duties. The Trustee or
Administrator shall supervise the work and review the performance of each
such appointee. The Trustee or Administrator shall have the right to remove
any such appointee from his position. Any person, group of persons or
entity may serve in more than one fiduciary capacity.
The Employer shall have the right to direct the Trustee as to how any of
the powers set forth in Section 2.6 shall be exercised, including the right
to direct the Trustee as to the investment of Trust assets or the
appointment of an investment manager to the extent not prohibited by
(S)4975 of the Code or other laws applicable to qualified pension or profit
sharing plans and related trusts. The Employer shall not be liable for any
loss occasioned by any party he has directed the Trustee to enter into
agreement with as an investment
-11-
<PAGE>
manager if the Employer has used prudence in making the selection of such
party. The Employer shall, in directing investments, or in directing the
Trustee as to how to exercise any of the powers set forth in Section 2.6,
be bound to follow the rule of prudence set forth in Section 2.8 as fully
and to the same extent as if it were the Trustee.
In the absence of any applicable instruction, the Trustee shall invest and
reinvest Trust assets and otherwise handle and deal with these assets and
exercise the powers granted to him as provided in Section 2.6, but no
investment or reinvestment of such assets shall otherwise be restricted to
properties and securities authorized for investment by Trustees under any
present or future State law.
2.3 RECEIPT OF CONTRIBUTIONS. The Employer shall have exclusive responsibility
------------------------
to determine and make contributions required by Article VI of the Plan. The
Trustee shall be under no obligation to investigate any matters pertaining
to the amount of the contributions made by the Employer pursuant to Article
VI and shall be under no obligation to take any affirmative action to
collect from the Employer any contribution for the Plan. The Trustee may
accept any certification made to him from the Employer pertaining to any
contribution.
2.4 ADMINISTRATIVE COSTS. The Employer shall reimburse the Trustee (other than
--------------------
a corporate Trustee) and the Administrator for any reasonable costs and
expenses, including fiduciary liability insurance, incurred by them as a
result of the performance of their functions and duties. The Employer may
compensate the Trustee for his services hereunder, provided that no Trustee
who receives full-time compensation from the Employer shall receive
compensation hereunder. The Employer may indemnify and hold harmless the
Trustee, the Administrator and other persons appointed to perform their
functions from and against any loss resulting from any liability to which
they may be subjected arising out of their official capacities in the
administration of this Plan and Trust.
2.5 TRUSTEE'S POWERS AND DUTIES. The Trustee shall have the power and duty to
---------------------------
manage, control and invest the assets of the Trust in accordance with the
terms of this Trust and Plan subject to the limitations contained in
Section 2.2, 2.6, 2.7 and 2.8. The Trustee shall periodically review and,
if necessary, revise the funding policy of the Plan unless an investment
manager has been appointed pursuant to Section 2.2.
The Trustee shall act upon written instructions signed by an officer of the
Employer. The Trustees shall have the discretion to construe the terms and
provisions of this Plan. Any construction adopted by the Trustees in good
faith shall be binding upon Participants and the Plan Administrator.
2.6 INVESTMENT OF TRUST ASSETS: Subject to the provisions of Section 2.8. the
--------------------------
Trustee shall have the following powers and authority with respect to the
Trust assets:
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<PAGE>
(a) to purchase Contracts issued by the Insurer or to invest in any
investment fund. Combination Conversion Account or group annuity
contract provided by the Insurer:
(b) to invest in the shares of any regulated investment company or
companies, including but not limited to those distributed through or
by MML Investors Service, Inc.;
(c) to invest in any interest in a limited partnership program or any
other security sold, including but not limited to those sold through
or by MML Investors Service, Inc.;
(d) to invest or reinvest in any property which in his opinion is a
prudent investment for the Trust as described in Section 2.8; provided
that he may, to the extent he considers necessary or advisable, hold
any portion of the fund in bank deposits insured by the United States
Government, in cash or in such other types of investments as shall be
selected by him, without liability for interest, pending investment or
payment of expenses or benefits;
(e) to retain, manage, improve, repair, operate and control any Trust
assets;
(f) to sell, convey, transfer, exchange, partition, grant options with
respect to, lease for any term (even though such terms may extend
beyond the duration of this Trust), mortgage, pledge or otherwise deal
with or dispose of any Trust asset in such manner (including public or
private sale, where applicable), for such consideration and upon such
terms and conditions as the Trustee, in his discretion, shall
determine;
(g) to vote either in person or by general or limited proxy or to refrain
from voting any corporate stock or other securities for any purpose;
(h) to deposit any securities with or under the direction of any committee
formed to protect said securities and participate in, consent to or
carry out any reorganization, consolidation, merger, liquidation,
readjustment of the financial structure, or sale of assets of any
corporation or other organization, and to exercise conversion and
subscription rights, and hold any property received pursuant to any
such transaction as Trust assets:
(i) if a corporation, to keep any securities or other property in the name
of some other person, partnership, or corporation, as its nominee, or
in its own name without disclosure in any case of its fiduciary
capacity;
(j) to pay, compromise or abandon any claim or other matter directly or
indirectly affecting the Trust assets;
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<PAGE>
(k) if a bank is serving as Trustee hereunder, to commingle part or all of
the assets of the Trust in any group trust maintained by the bank as
Trustee, whether now existing or hereafter created, for the collective
investment of funds held under Employees' pension or profit-sharing
plans or trusts which are qualified within the meaning of and exempt
from tax under the Code, and the provisions of any such group trust
are made a part of this Plan;
(l) provided the Trustee is a named fiduciary, to enter into an agreement
with the Insurer or any bank, trust company or other fiduciary as an
investment manager (to the extent permitted by law and regulation) to
hold, manage and invest the assets of the Trust, or any part, it being
understood that the Trustee shall not be liable for any loss
occasioned by any such investment manager selected by him, provided
that the Trustee has used prudence in making the selection, and that
any such investment manager shall be obligated to follow the rule of
prudence set out in Section 2.8;
(m) to employ agents of any kind, nature and description, and delegate to
them such ministerial and limited discretionary duties as the Trustee
sees fit; and to that end, to execute such contracts, documents,
instruments or other papers as may be requested by any such agent to
whom such duties have been delegated;
(n) to execute, acknowledge, and deliver all instruments he considers
necessary or proper for any of the foregoing purposes; and
(o) to exercise any of the powers and rights of an individual owner with
respect to any property held as a Trust asset and to do all other acts
in his judgment necessary or desirable for the proper administration
of the Trust assets although the power to do such acts is not
specifically set forth herein, subject to the rules in Section 2.8.
No person dealing with the Trustee need see to the application of any money
paid or property delivered to or on the order of the Trustee or inquire
into his authority to enter into any transaction.
2.7 PARTICIPANT DIRECTED INVESTMENT. If elected in Adoption Agreement Section
-------------------------------
(1), the Trustees shall allow all Participants to direct the investment of
all or a portion of the interest in any one or more of their individual
Account Balances subject to a procedure established and applied in a
uniform and nondiscriminatory manner by the Trustee. The Trustees shall
select investment options in accordance with the Prudent Man Rule.
2.8 PRUDENT MAN RULE. In making investments hereunder, the Trustee shall
----------------
conduct himself faithfully in the interest of the Participants and shall
exercise sound discretion. He shall discharge his duties with the care,
skill, prudence and diligence under the
-14-
<PAGE>
circumstances prevailing from time to time that a prudent man acting in a
like capacity and familiar with such matters would use in the conduct of an
enterprise of a like character with like aims. He shall cause the
investments to be diversified so as to minimize the risk of large losses,
unless under the circumstances it is clearly prudent not to do so. The
incidents of ownership of all Trust investments shall be within the
jurisdiction of the United States. The Trustee shall make no investment
prohibited by Section 406 of the Employee Retirement Income Security Act of
1974 (29 U.S.C. (S)1106), unless a statutory or administrative exemption
applies.
2.9 VALUATION OF PARTICIPANT'S ACCOUNT. The Trustee shall maintain for each
----------------------------------
Participant a separate Participant's Account. As of each Valuation Date,
all Plan assets held in the Trust shall be valued by the Trustee at fair
market value. The Trustee shall also determine as of each Valuation Date
the value of each Participant's Account. The Trustee will adjust each
Participant's Account by:
(a) crediting the Participant's allocated share of the current year's
Employer contributions;
(b) charging the contributions used for the purchase of Contracts on the
life of the Participant or family members;
(c) crediting or charging investment gains or losses allocated to the
Participant from his share of the Investment Fund:
(d) crediting any proceeds from Contracts providing life insurance for
family members of the Participant; and
(e) charging any distributions made to the Participant for such Plan Year.
The gain or loss from the Investment Fund in (c) above shall be allocated
to each Participant's Account in the ratio that each Participant's Account
as of the immediately preceding Valuation Date bears to the total of all
Participant's Accounts as of such immediately preceding Valuation Date. For
purposes of determining the allocation of gain or loss from the Investment
Fund to each Participant's Account, the cash values of any Contracts and
the values of the Segregated Accounts maintained pursuant to Article VI
shall not be considered.
If a Participant resumes employment covered by the Plan after incurring
five consecutive one year Breaks in Service, an additional Participant's
Account shall be established on his behalf and all Contributions on behalf
of the Participant after the Break in Service shall be allocated to the
post-Break in Service Participant's Account. No further contributions shall
be allocated to the pre-break Participant's Account.
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<PAGE>
2.10 VALUATION OF SEGREGATED ACCOUNT(S). The Trustee shall determine at least
----------------------------------
annually the value of any Segregated Accounts established on behalf of each
Participant.
2.11 EMPLOYEE-PROVIDED PARTICIPANT'S ACCOUNT. The Participant's Account derived
---------------------------------------
from Employee Mandatory Contributions is the amount which bears the same
ratio to his Participant's Account as the sum of his Employee Mandatory
Contributions (less withdrawals) bears to the total of the sum of his
Employee Mandatory Contributions (less withdrawals), plus the sum of
Employer contributions on his behalf (less withdrawals). Contributions
include amounts contributed to Contracts. Withdrawals only include amounts
actually distributed to Employees and do not reflect the taxable cost of
any death benefits.
The Participant's Account derived from Employee Mandatory Contributions
will not be less than the lesser of the sum of Employee Contributions, or
the value of the Investment Fund and Contracts, if any, attributable to
Employee Mandatory Contributions.
2.12 EMPLOYER-PROVIDED PARTICIPANT'S ACCOUNT. The Participant's Account derived
---------------------------------------
from Employer contributions is his Participant's Account less his
Participant's Account derived from Employee Mandatory Contributions.
2.13 ACCOUNT BALANCE. The Account Balance of each Participant consists of his
---------------
Participant's Account and any Segregated Accounts. If a Participant or
Beneficiary becomes entitled to a benefit upon death, disability,
retirement, or termination of employment or participation, the value of the
Account Balance at the date of distribution shall be:
(a) the value of any Contracts at the date of distribution;
(b) the value of Segregated Account(s), if any, at the date of
distribution; and
(c) the value as of the latest Valuation Date coincident with or prior to
the date of distribution of the portion of the Participant's
Account(s) derived from the Investment Fund. The Trustees may value
the Participant's Account(s) more frequently as long as such valuation
is provided on a consistent and non-discriminatory basis.
The Participant's Account Balance shall be fully vested upon death,
disability or retirement. Upon termination of employment or participation,
the Participant shall be entitled only to the nonforfeitable portion of the
Participant's Account Balance which shall be determined in accordance with
Article XI.
2.14 ADMINISTRATOR'S POWERS AND DUTIES. The Administrator shall be responsible
---------------------------------
for the day-to-day administration of this Plan, and for the exercise of all
fiduciary responsibilities provided for in the Plan that are not assigned
to other parties pursuant to
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<PAGE>
the terms of the Plan. The Administrator's duties shall include, but not be
limited to the following:
(a) To construe and interpret the provisions of the Plan;
(b) To decide all questions of eligibility for Plan participation and for
the payment of benefits;
(c) To provide appropriate parties, including government agencies, with
such returns. reports, schedules, descriptions, and individual
statements as are required by law within the times prescribed by law;
and to furnish to the Employer, upon request, copies of any or all
such materials, and further, to make copies of such instruments,
reports, and descriptions as are required by law to be available for
examination by Participants and their Beneficiaries who are or may be
entitled to benefits under the Plan in such places and in such manner
as required by law. The Administrator may charge a reasonable fee for
copies;
(d) To furnish to each Participant and each Beneficiary receiving benefits
under the Plan a copy of a summary plan description and a summary of
any material modifications thereof at the time and in the manner
prescribed by law;
(e) To obtain from the Employer, the Employees, the Insurer and the
Trustee such information as shall be necessary for the proper
administration of the Plan;
(f) To determine the amount, manner, and time of payment of benefits
hereunder;
(g) Subject to the approval of the Employer only as to any additional
expense. to appoint and retain such agents, counsel, and accountants
as may be necessary for the purpose of properly administering the
Plan;
(h) To take all actions and to communicate to the Trustee in writing all
necessary information to carry out the terms of the Plan and Trust
Agreement:
(i) To notify the Trustee in writing of the termination of the Plan or the
complete discontinuance of Employer contributions;
(j) To direct the Trustee to distribute assets of the Trust to each
Participant and Beneficiary in accordance with the terms of this Plan;
and
(k) To do such other acts reasonably required to administer the Plan in
accordance with its provisions, or as may be provided for or required
by law.
2.15 CLAIMS FOR BENEFITS - APPEALS. Claims for benefits may be filed with the
-----------------------------
Administrator. The Administrator shall make all determinations as to the
right of any
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<PAGE>
person to a benefit under the Plan. The Administrator shall notify the
claimant of the acceptance or denial of any claim within ninety days,
unless special circumstances are deemed by the Administrator to require an
additional period of no more than ninety days. If an extension is necessary
the Administrator shall notify the claimant in writing explaining why more
time is needed and indicate a date by which the Administrator expects to
render a decision. The Administrator shall provide to any Participant or
Beneficiary whose claim for benefits under this Plan has been fully or
partially denied a written notice setting forth the specific reasons for
such denial. Such notice shall state that the Participant or Beneficiary is
entitled to request a review by the Administrator of the decision denying
the claim, the reasons for denial, the Plan provisions upon which the
denial is based, a description and reason for needing any additional
information needed to consider the claim, and an explanation of the review
procedure.
The Participant or Beneficiary or their authorized representative may,
within sixty days of the denial of the claim, request a claim review by the
Administrator, review pertinent documents relating to the denial, and
submit issues and comments in writing to the Administrator. The
Administrator must make a final decision on a claim review within sixty
days. The Administrator shall give specific reasons and references to the
Plan provision upon which his decision is based. The sixty-day review
period may be extended for another sixty days if the Administrator finds
that special circumstances require an extension of time. If, after such
review, the Administrator concludes that the denial of benefits was
erroneous or contrary to this Plan or to the law, the Administrator shall
take such action as shall be appropriate to provide such benefit.
2.16 PARTICIPANT DATA. Each Participant and each Beneficiary must furnish to
----------------
the Administrator such evidence, data or information as the Administrator
believes necessary or desirable for purposes of administering the Plan. The
payment of benefits for the benefit of each Participant under this Plan is
conditioned upon the Participant or Beneficiary providing complete and
accurate evidence, data or information when requested. The Administrator
shall advise any Participant or Beneficiary of the effect of failure to
comply with his request for information.
2.17 EMPLOYER CENSUS REPORT. The Employer shall furnish the Administrator, on
----------------------
or before each Valuation Date, all census data required to administer the
Plan.
2.18 SERVICE OF LEGAL PROCESS. The Administrator is designated as the agent
------------------------
authorized to receive service of legal process on behalf of the Plan,
unless the Employer designates some other party in writing in the summary
plan description.
2.19 PARTICIPANT LOANS. If the Employer so elects in Section (L) of the
-----------------
Adoption Agreement, and upon the prior approval of the Plan Administrator,
the Trustee may loan funds of the Plan to a Participant or to a
Participant's Beneficiary. All such loans shall be considered investments
of the Plan and may be postponed or refused if the Trustee determines that
such loan would not be in the best interests of the Plan.
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<PAGE>
If the Participant is an owner-employee, or a shareholder-employee, the
Participant shall not be entitled to a Participant loan unless such
Participant has applied for and received a Prohibited Transaction Exemption
or is entitled to rely on a Prohibited Transaction Class Exemption. A
shareholder-employee is defined as an employee or officer of an electing S
Corporation who owns (or is considered as owning within the meaning of
(S)318(a)(1) of the Code), on any day during the taxable year of such
Corporation, more than 5% of the outstanding stock of the corporation.
Loans must be made available to all Participants and their Beneficiaries on
a reasonably equivalent basis, and may not be made available to Highly
Compensated Employees (as defined in (S)414(q)) of the Code in amounts
greater than the amounts made available to other Employees. The amount of
the loan shall not be less than $500.
In addition, all loans shall comply with the following conditions:
(a) No loan may be made except upon the prior receipt by the Trustee or
Administrator of a written application therefor executed by the
Participant or the Participant's Beneficiary.
(b) The Trustee and the borrower shall determine the loan repayment
period, which, except as provided in (c) below, shall not exceed the
lesser of five years or the number of years remaining before the
Participant's Normal Retirement Age.
(c) The five-year limit on the repayment period shall not apply to any
loan used to acquire any dwelling unit which within a reasonable time
is to be used as a principal residence of the Participant.
(d) Each loan shall bear an effective annual rate of interest which shall
be established by the Trustee. The effective annual interest rate
must not be less than the rate which currently would be obtainable by
the Trustee with respect to similar loans.
(e) Repayment of each loan shall be secured by adequate collateral to be
given by the borrower prior to or at the time loan funds are
disbursed. A Participant may, with the Trustee's permission, use his
vested Account Balance as collateral. No participant loan shall
exceed 50% of the Participant's vested Account Balance. The borrower
shall execute a promissory note in the amount of each loan including
interest, payable to the Trustee which indicates the repayment
period.
The Participant's promissory note or other loan documents shall set forth a
procedure to be followed by the Trustee to foreclose on the collateral in
the event the Participant defaults on a loan repayment. This procedure
shall, at a minimum, entitle the Trustee to refuse to make any Plan benefit
payment which may be due to the Participant until scheduled loan repayments
are made or shall entitle the Trustee to offset overdue loan repayments
against the amount of benefits due.
- 19 -
<PAGE>
The Participant's promissory note or other loan documents shall also
provide adequate protection for the Trustee with respect to any security
interest the Trustee may have in the Participant's vested Account Balance
in the event that benefits become payable to a Participant before any
default in the repayment of the loan. For this purpose, the loan documents
may provide for the payment of benefits to an escrow account until the loan
has been repaid.
A Participant must obtain the consent of his spouse, if any, to use of the
Account Balance as security for the loan. Spousal consent shall be obtained
no earlier than the beginning of the 90-day period that ends on the date on
which the loan is to be so secured. The consent must be in writing, must
acknowledge the effect of the loan, and must be witnessed by a plan
representative or notary public. Such consent shall thereafter be binding
with respect to the consenting spouse or any subsequent spouse with respect
to that loan. A new consent shall be required if the Account Balance is
used for renegotiation, extension, renewal, or other revision of the loan.
If a valid spousal consent has been obtained, then, notwithstanding any
other provision of this Plan, the portion of the Participant's vested
Account Balance held by the Plan as a security interest by reason of a loan
outstanding to the Participant shall reduce the Account Balance for
purposes of determining the amount of the Account Balance payable at the
time of death or distribution, but only if the reduction is used as
repayment of the loan. If less than 100% of the Participant's vested
Account Balance (determined without regard to the preceding sentence) is
payable to the surviving spouse, then the Account Balance shall be adjusted
by first reducing the vested Account Balance by the amount of the security
used as repayment of the loan, and then determining the benefit payable to
the surviving spouse.
In the event of default, foreclosure on the note and attachment of security
will not occur until a distributable event occurs in the Plan.
ARTICLE III
ELIGIBILITY AND PARTICIPATION
3.1 ELIGIBILITY. Each Employee shall become eligible to participate in this
-----------
Plan as of the date on which he satisfies the eligibility requirements
elected in Section (C) of the Adoption Agreement.
If 1 year or more is elected in the Adoption Agreement Section (C), the
first Year of Participation of an Employee shall commence on the Entry Date
which is nearest the date he completes the eligibility requirements and is
still employed.
If less than 1 year is elected in the Adoption Agreement Section (C), the
first Year of Participation will commence on the Entry Date following
completion of the eligibility
- 20 -
<PAGE>
requirements, but no later than the Entry Date preceding or coincident with
the date 18 months after the date on which he first performs an Hour of
Service. An Employee shall not be required to complete any specified number
of hours to receive credit for such fractional year.
3.2 NOTIFICATION OF ELIGIBLE EMPLOYEES. Upon execution of the Adoption
----------------------------------
Agreement, the Administrator shall notify each eligible Employee of the
date that such Employee may become a Participant. No later than thirty (30)
days prior to each subsequent Entry Date, the Administrator shall notify
each eligible Employee of the date such Employee may become a Participant
and provide such Participant with the necessary forms.
3.3 SUBMISSION OF EMPLOYEE FORMS. In order to participate in the Plan, the
----------------------------
Employee must complete and return to the Administrator or the Trustee the
necessary forms within thirty (30) days after he receives such forms. If an
eligible Employee fails to complete and return such forms within the time
limit above, he may file the required documents with the Administrator or
Trustee not later than thirty (30) days before the subsequent Entry Date,
in which event he will become a Participant on such subsequent Entry Date.
3.4 CONDITIONS OF CONTINUED PARTICIPATION. As a condition of continued
-------------------------------------
participation under the Plan, each Participant agrees to limit his recourse
for payment of any benefits to which he is entitled to the assets of the
Plan and complete and file with the Administrator all and any necessary
forms.
3.5 ELIGIBILITY COMPUTATION PERIOD. For purposes of determining Years of
------------------------------
Service and Breaks in Service for purposes of eligibility, the initial
eligibility computation period is the 12-consecutive month period beginning
on the date the Employee first performs an Hour of Service for the Employer
(employment commencement date). The succeeding 12-consecutive month periods
commence with the first Plan Year which commences prior to the first
anniversary of the Employee's employment commencement date regardless of
whether the Employee is entitled to be credited with 1,000 Hours of service
during the initial eligibility computation period. An Employee who is
credited with 1,000 Hours of service in both the initial eligibility
computation period and the first Plan Year which commences prior to the
first anniversary of the Employee's initial eligibility computation period
will be credited with two Years of Service for purposes of eligibility to
participate.
3.6 BREAKS IN SERVICE - RETURN TO SERVICE. A former Participant shall become a
-------------------------------------
Participant immediately upon his return to the employ of the Employer if
such former Participant had a nonforfeitable right to all or a portion of
his Participant's Account derived from Employer contributions at the time
of his termination.
In the case of a Participant who does not have any nonforfeitable right to
his Participant's Account derived from Employer contributions, Years of
Service before a period of
- 21 -
<PAGE>
consecutive l-year Breaks in Service will not be taken into account in
computing eligibility service if the number of consecutive l-year Breaks in
Service in such period equals or exceeds the greater of 5 or the aggregate
number of Years of Service. Such aggregate number of Years of Service will
not include any Years of Service disregarded under the preceding sentence
by reason of prior Breaks in Service.
If a Participant's Years of Service are disregarded pursuant to the
preceding paragraph, such Participant will be treated as a new Employee for
eligibility purposes. If a Participant's Years of Service may not be
disregarded pursuant to the preceding paragraph, such Participant shall
continue to participate in the Plan, or, if terminated shall participate
immediately upon reemployment.
In the event a Participant becomes ineligible to participate because he is
no longer a member of an eligible class of Employees under Section (C) of
the Adoption Agreement, but has not incurred a Break in Service, such
Employee shall participate immediately upon his return to an eligible class
of Employees. If such Participant incurs a Break in Service, his
eligibility to participate shall be determined pursuant to the three
preceding paragraphs.
In the event an Employee who is not a member of the eligible class of
Employees becomes a member of the eligible class, such Employee shall
participate immediately if such Employee has satisfied the minimum age and
service requirements and would have previously become a Participant had he
been in the eligible class.
3.7 SERVICE WITH PREDECESSOR EMPLOYER. Where an Employer maintains the plan of
---------------------------------
a predecessor employer, service for such predecessor employer shall be
treated as service for the Employer for purposes of determining an
Employee's eligibility to participate in this Plan. Where an Employer
maintains this Plan which was not maintained by a predecessor employer,
service with a predecessor employer, including a sole proprietorship or
partnership, shall be treated as service for the Employer, only if elected
by the Employer in Section (C) of the Adoption Agreement.
ARTICLE IV
RETIREMENT BENEFITS
4.1 NORMAL RETIREMENT BENEFITS. A Participant shall have a fully vested
--------------------------
interest in his Participant's Account at Normal Retirement Age. Upon
separation from service contributions shall cease and the Trustee shall
apply the Participant's Account and any Segregated Accounts to the payment
of benefits to the Participant. The form of the distribution of benefits
shall be determined by the Participant and may be by means of any one or
more of the following subject to the Joint and Survivor Annuity
Requirements of Article X:
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<PAGE>
(a) one sum payment to the Participant; or
(b) any method of payment available under the Participant's Contracts; or
(c) transfer to the Participant of the Contracts on his life; or
(d) purchase of an annuity Contract for transfer to the Participant; or
(e) installment payments to the Participant.
The life insurance Contracts on a Participant's life will be converted to
cash or an annuity or distributed to the Participant upon commencement of
benefits.
4.2 EMPLOYMENT BEYOND NORMAL RETIREMENT. A Participant may remain in the
-----------------------------------
employ of the Employer beyond his Normal Retirement Age. In case of
continued employment after Normal Retirement Age, further contributions
shall be made on account of his continued employment.
If, however, any Participant between the age of 65 and 70 is employed in a
bona fide executive or high policy-making position during the two-year
period immediately before retirement and if such Participant is entitled to
an immediate nonforfeitable annual retirement benefit from this Plan and
all other pension, profit-sharing, savings, or deferred compensation plans
of the Employer, or any combination of such plans, which equals, in
aggregate $44,000 or more, then the Employer may provide for the retirement
of such Participant on or after Normal Retirement Age without such
Participant's consent.
Benefits may be distributed at the Participant's request, at any time on or
after Normal Retirement Age but no later than his separation from service.
Contracts will be continued, or converted to an equivalent continuing
Contract available under the rules of the Insurer, beyond Normal Retirement
Age and until separation from service or earlier distribution of benefits.
4.3 EARLY RETIREMENT BENEFITS. If early retirement is elected pursuant to
-------------------------
Section (P) of the Adoption Agreement, contributions on behalf of the
Participant will cease and the Participant shall be fully vested in the
value of his Participant's Account. Such payment of benefits shall be made
in the form elected pursuant to the terms of Section 4.1. A Participant who
meets the service requirement but separates before meeting the Age
requirement shall, upon satisfaction of the Age requirement, commence to
receive benefits unless otherwise elected.
4.4 DISABILITY BENEFITS. A Participant may retire prior to his Normal
-------------------
Retirement Age because of disability. Disability means inability to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment that can be expected to result in death or
which has lasted or can be expected to last for a
- 23 -
<PAGE>
continuous period of not less than 12 months. The permanence and degree of
such impairment shall be supported by medical evidence. Nonforfeitable
contributions will be made to the Plan on behalf of a disabled Participant
who is not a highly compensated Employee (within the meaning of Code
(S)414(q)), for the year in which disability occurs. At a Participant's
earlier retirement for such disability, contributions required with respect
to him shall cease and the Participant shall be fully vested in the value
of his Participant's Account. The Trustees shall take whatever action is
necessary with respect to the Contracts on the Participant's life and with
respect to his share of the Investment Fund so that they will be
distributed pursuant to the provisions of this Article or pursuant to any
election made hereunder.
4.5 COMMENCEMENT OF BENEFITS. Notwithstanding any other provisions to the
------------------------
contrary, unless the Participant otherwise elects, the payment of any
benefits under this Plan will begin not later than the 60th day after the
close of Plan Year in which occurs the latest of:
(a) the date on which the Participant attains the earlier of age 65 or
the Normal Retirement Age elected in Section (O) of the Adoption
Agreement;
(b) the 5th anniversary of the date on which the Participant commenced
participation in this Plan; or
(c) the termination of the Participant's service with the Employer.
Notwithstanding the foregoing, the failure of a Participant and spouse to
consent to a distribution while a benefit is immediately distributable,
shall be deemed to be an election to defer commencement of payment of any
benefit sufficient to satisfy this Section. An Account Balance is
immediately distributable if any part of the Account Balance could be
distributed to the Participant (or surviving spouse) before the Participant
attains (or would have attained if not deceased) the later of Normal
Retirement Age or age 62.
Provided, however, if the present value of the Participant's Account
Balance attributable to Employer and Employee contributions is greater than
$3500, then no distribution may occur prior to the later of age 62 or
Normal Retirement Age without the consent of the Participant (and the
consent of his spouse) unless the distribution is in the form of a
Qualified Joint and Survivor Annuity.
ARTICLE V
DISTRIBUTION REQUIREMENTS
5.1 GENERAL. Subject to Article X, Joint and Survivor Annuity requirements,
-------
the requirements of this Article shall apply to any distribution of a
Participant's interest and will take precedence over any inconsistent
provisions of this Plan. Unless otherwise
- 24 -
<PAGE>
specified, the provisions of this Article apply to calendar years
beginning after December 31, 1984.
All distributions required under this Article shall be determined and made
in accordance with the proposed Regulations under (S)401(a)(9), including
the minimum distribution incidental benefit requirement of (S)1.401(a)(9)-2
of the regulations.
The entire interest of a Participant must be distributed or begin to be
distributed no later than the Participant's required beginning date.
5.2 LIMITS ON DISTRIBUTION PERIODS. As of the first distribution calendar
------------------------------
year, distributions, if not made in a single sum, may only be made over one
of the following periods (or a combination thereof):
(a) the life of the Participant,
(b) the life of the Participant and a designated beneficiary,
(c) a period certain not extending beyond the life expectancy of the
Participant, or
(d) a period certain not extending beyond the joint and last survivor
expectancy of the Participant and a designated beneficiary.
5.3 DETERMINATION OF AMOUNT TO BE DISTRIBUTED EACH YEAR. If the Participant's
---------------------------------------------------
interest is to be distributed in other than a single sum, the following
minimum distribution rules shall apply on or after the required beginning
date:
(a) If a Participant's benefit is to be distributed over (1) a period not
extending beyond the life expectancy of the Participant or the joint
life and last survivor expectancy of the Participant and the
Participant's designated beneficiary or (2) a period not extending
beyond the life expectancy of the designated beneficiary (in the case
of after death distributions), the amount required to be distributed
for each calendar year, beginning with distributions for the first
distribution calendar year, must at least equal the quotient obtained
by dividing the Participant's benefit by the applicable life
expectancy.
(b) For calendar years beginning before January 1, 1989, if the
Participant's spouse is not the designated beneficiary, the method of
distribution selected must assure that at least 50% of the present
value of the amount available for distribution is paid within the
life expectancy of the Participant.
(c) For calendar years beginning after December 31, 1988, the amount to
be distributed each year, beginning with distributions for the first
distribution calendar year shall not be less than the quotient
obtained by dividing the Participant's
- 25 -
<PAGE>
benefit by the lesser of (1) the applicable life expectancy or (2) if
the Participant's spouse is not the designated beneficiary, the
applicable divisor determined from the table set forth in Q&A-4 of
Section 1.401(a)(9)-2 of the Income Tax Regulations. Distributions
after the death of the Participant shall be distributed using the
applicable life expectancy in (a) above as the relevant divisor
without regard to regulations Section 1.401(a)(9)-2.
(d) The minimum distribution required for the Participant's first
distribution calendar year must be made on or before the
Participant's required beginning date. The minimum distribution for
other calendar years, including the minimum distribution for the
distribution calendar year in which the Employee's required beginning
date occurs, must be made on or before December 31 of that
distribution calendar year.
5.4 ANNUITY DISTRIBUTION. If the Participant's benefit is distributed in the
form of an annuity purchased from an insurance company, distributions
thereunder shall be made in accordance with the requirements of
(S)401(a)(9) of the Code and the regulations thereunder.
5.5 DEFINITIONS.
(a) Applicable life expectancy. The life expectancy (or joint and last
survivor expectancy) calculated using the attained age of the
Participant (or designated beneficiary) as of the Participant's (or
designated beneficiary's) birthday in the applicable calendar year
reduced by one for each calendar year which has elapsed since the
date life expectancy was first calculated.
If life expectancy is being recalculated, the applicable life
expectancy shall be the life expectancy as so recalculated. The
applicable calendar year shall be the first distribution calendar
year, and if life expectancy is being recalculated such succeeding
calendar year. If annuity payments commence in accordance with 5.4
above before the required beginning date, the applicable calendar
year is the year such payments commence. If distribution is in the
form of an immediate annuity purchased after the Participant's death
with the Participant's remaining interest, the applicable calendar
year is the year of purchase.
Unless otherwise elected by the Participant (or spouse, in the case
of distributions described in Section 5.7(b)) by the time
distributions are required to begin, life expectancies shall be
recalculated annually. Such election shall be irrevocable as to the
Participant (or spouse) and shall apply to all subsequent years. The
life expectancy of a nonspouse beneficiary may not be recalculated.
(b) Designated beneficiary. The individual who is designated as the
beneficiary under the Plan in accordance with (S)401(a)(9) and the
regulations thereunder.
- 26 -
<PAGE>
(c) Distribution calendar year. A calendar year for which a minimum
distribution is required. For distributions beginning before the
Participant's death, the first distribution calendar year is the
calendar year immediately preceding the calendar year which contains
the Participant's required beginning date. For distributions
beginning after the Participant's death, the first distribution
calendar year is the calendar year in which distributions are
required to begin pursuant to Section 5.7.
(d) Life expectancy. Life expectancy and joint and last survivor
expectancy are computed by use of the expected return multiples in
Tables V and VI of Section 1.72-9 of the Income Tax Regulations.
(e) Participant's benefit.
(1) The account balance as of the last valuation date in the
calendar year immediately preceding the distribution calendar
year (valuation calendar year) increased by the amount of any
contributions or forfeitures allocated to the account balance
as of dates in the valuation calendar year after the valuation
date and decreased by distributions made in the valuation
calendar year after the valuation date.
(2) Exception for second distribution calendar year. For purposes
of paragraph (1) above, if any portion of the minimum
distribution for the first distribution calendar year is made
in the second distribution calendar year on or before the
required beginning date, the amount of the minimum distribution
made in the second distribution calendar year shall be treated
as if it had been made in the immediately preceding
distribution calendar year.
(f) Required beginning date.
(1) General rule. The required beginning date of a Participant is
the first day of April of the calendar year following the
calendar year in which the Participant attains age 70 1/2.
(2) Transitional rules. The required beginning date of a
Participant who attains age 70 1/2 before January 1, 1988,
shall be determined in accordance with (i) and (ii) below:
(i) Non-5-percent owners. The required beginning date of a
Participant who is not a 5-percent owner is the first day
of April of the calendar year following the calendar year
in which the later of retirement or attainment of age 70
1/2 occurs.
- 27 -
<PAGE>
(ii) 5-percent owners. The required beginning date of a
Participant who is a 5-percent owner during any year
beginning after December 31, 1979, is the first day of
April following the later of:
(a) the calendar year in which the Participant attains
Age 70 1/2, or,
(b) the earlier of the calendar year with or within
which ends the Plan Year in which the Participant
becomes a 5-percent owner, or the calendar year in
which the Participant retires.
The required beginning date of a Participant who is not a 5-percent owner
who attains age 70 1/2 during 1988 and who has not retired as of January 1,
1989, is April 1, 1990.
(3) 5-percent owner. A Participant is treated as a 5-percent owner
for purposes of this section if such Participant is a 5-percent
owner as defined in (S)416(i) of the Code (determined in
accordance with (S)416 but without regard to whether the Plan
is top-heavy) at any time during the Plan Year ending with or
within the calendar year in which such owner attains age 66 1/2
or any subsequent Plan Year.
(4) Once distributions have begun to a 5-percent owner under this
Section, they must continue to be distributed, even if the
Participant ceases to be a 5-percent owner in a subsequent
year.
5.6 DISTRIBUTION BEGINNING BEFORE DEATH. If a Participant dies after
-----------------------------------
distribution of his interest has begun, the remaining portion of such
interest will continue to be distributed at least as rapidly as under the
method of distribution being used prior to the Participant's death.
5.7 DISTRIBUTION BEGINNING AFTER DEATH. If a Participant dies before
----------------------------------
distribution of his interest begins, distribution of the Participant's
entire interest shall be completed by December 31 of the calendar year
containing the fifth anniversary of the Participant's death except to the
extent that an election is made to receive distributions in accordance with
(a) or (b) below:
(a) if any portion of the Participant's interest is payable to a
designated beneficiary, distributions may be made over the life or
over a period certain not greater than the life expectancy of the
designated beneficiary commencing on or before December 31 of the
calendar year immediately following the calendar year in which the
Participant died;
- 28 -
<PAGE>
(b) if the designated beneficiary is the Participant's surviving spouse,
the date distributions are required to begin in accordance with (a)
above shall not be earlier than the later of:
(1) December 31 of the calendar year immediately following the
calendar year in which the Participant died and
(2) December 31 of the calendar year in which the Participant would
have attained age 70 1/2.
If the Participant has not made an election pursuant to this Section
5.7 by the time of his death, the Participant's designated
beneficiary must elect the method of distribution no later than the
earlier of:
(1) December 31 of the calendar year in which distributions would
be required to begin under this Section, or
(2) December 31 of the calendar year which contains the fifth
anniversary of the date of death of the Participant.
If the Participant has no designated beneficiary, or if the
designated beneficiary does not elect a method of distribution,
distribution of the Participant's entire interest must be completed
by December 31 of the calendar year containing the fifth anniversary
of the Participant's death.
5.8 DEATH OF SURVIVING SPOUSE. For purposes of Section 5.7 above, if the
-------------------------
surviving spouse dies after the Participant, but before payments to such
spouse begin, the provisions of Section 5.7, with the exception of
paragraph (b) therein, shall be applied as if the surviving spouse were the
Participant.
5.9 PAYMENTS TO CHILD. For purposes of Sections 5.6 through 5.10, any amount
-----------------
paid to a child of the Participant will be treated as if it had been paid
to the surviving spouse if the amount becomes payable to the surviving
spouse when the child reaches the age of majority.
5.10 DISTRIBUTION DATE. For purposes of Sections 5.6 through 5.10, distribution
-----------------
of a Participant's interest is considered to begin on the Participant's
required beginning date (or, if Section 5.8 above is applicable, the date
distribution is required to begin to the surviving spouse pursuant to
Section 5.7 above). If distribution in the form of an annuity described in
Section 5.4 irrevocably commences to the Participant before the required
beginning date, the date distribution is considered to begin is the date
distribution actually commences.
- 29 -
<PAGE>
5.11 TRANSITIONAL RULE FOR (S)242(b) TEFRA ELECTION. Notwithstanding the other
----------------------------------------------
requirements of this Article and subject to the requirements of Article X,
Joint and Survivor Annuity Requirements, distribution on behalf of any
Employee, including a 5-percent owner, may be made in accordance with all
of the following requirements (regardless of when such distribution
commences):
(a) The distribution by the trust is one which would not have
disqualified such trust under (S)401(a)(9) of the Internal Revenue
Code as in effect prior to amendment by the Deficit Reduction Act of
1984.
(b) The distribution is in accordance with a method of distribution
designated by the Employee whose interest in the trust is being
distributed or, if the Employee is deceased, by a beneficiary of such
Employee.
(c) Such designation was in writing, was signed by the Employee or the
beneficiary and was made before January 1, 1984.
(d) The Employee had accrued a benefit under the Plan as of December 31,
1983.
(e) The method of distribution designated by the Employee or the
beneficiary specifies the time at which distributions will commence,
the period over which distributions will be made, and in the case of
any distribution upon the Employee's death, the beneficiaries of the
Employee listed in order of priority.
A distribution upon death will not be covered by this transitional rule
unless the information in the designation contains the required information
described above with respect to the distributions to be made upon the death
of the Employee.
For any distribution which commences before January 1, 1984, but continues
after December 31, 1983, the Employee, or the beneficiary, to whom such
distribution is being made, will be presumed to have designated the method
of distribution under which the distribution is being made if the method of
distribution was specified in writing and the distribution satisfies the
requirements in subsections (a) and (e) above.
If a designation is revoked, any subsequent distribution must satisfy the
requirements of (S)401(a)(9) of the Code and the regulations thereunder. If
a designation is revoked subsequent to the date distributions are required
to begin, the trust must distribute by the end of the calendar year
following the calendar year in which the revocation occurs the total amount
not yet distributed which would have been required to have been distributed
to satisfy (S)401(a)(9) of the Code and the regulations thereunder, but for
the (S)242(b)(2) election. For calendar years beginning after December 31,
1988, such distributions must meet the minimum distribution incidental
benefit requirements in (S)1.401(a)(9)-2 of the Income Tax Regulations. Any
changes in the designation will be considered to be a revocation of the
designation. However, the mere substitution or addition of another
- 30 -
<PAGE>
beneficiary (one not named in the designation) under the designation will
not be considered to be a revocation of the designation, so long as such
substitution or addition does not alter the period over which distributions
are to be made under the designation, directly or indirectly (for example,
by altering the relevant measuring life). In the case in which an amount is
transferred or rolled over from one plan to another plan, the rules in Q&A
J-2 and Q&A J-3 shall apply.
ARTICLE VI
CONTRIBUTIONS
6.1 MONEY PURCHASE.
--------------
If the Plan is a Money Purchase Pension plan, the Employer shall contribute
to this Plan for each Plan Year an amount determined in accordance with the
contribution formula elected in Section (F) of the Adoption Agreement. A
contribution by the Employer for any Plan Year shall be determined as of
the Valuation Date on behalf of each Participant who has a Year of
Participation for such Plan Year.
If this Plan is a Non-standard Plan, a Participant whose employment is
terminated before the Valuation Date, but after he has completed 1000 Hours
of Service during the Plan Year, shall share in Employer contributions for
the Plan Year in which his termination occurs unless otherwise elected by
the Employer in Section (J) of the Adoption Agreement. Notwithstanding the
Employer's election in Section (J) to the contrary, a Participant whose
employment is terminated before the Valuation Date, but after completion of
more than 500 Hours of Service shall share in Employer contributions to the
extent necessary to satisfy minimum participation rules under (S)401(a)(26)
of the Code or minimum coverage rules under (S)410(b) of the Code.
No Employer contribution may be made in any Plan Year to the extent it
would be an Excess Amount under Article VIII, LIMITATIONS ON ALLOCATIONS.
If the Plan is determined to be top-heavy for any Plan Year under Article
IX, ADDITIONAL REQUIREMENTS FOR TOP-HEAVY PLANS, Employer contributions
allocated on behalf of each Participant shall not be less than the minimum
contribution required by Section 9.3.
In the case of the restoration of any amounts forfeited upon termination of
employment under Section 11.9, the Employer shall contribute, when
necessary, an amount in addition to the formula contribution which is
sufficient when added to forfeitures to restore such amounts.
- 31 -
<PAGE>
6.2 PROFIT SHARING OR (S)401(k).
---------------------------
(a) EMPLOYER CONTRIBUTION. If the Plan is a Profit Sharing or (S)401(k)
---------------------
plan, the Employer shall contribute to this Plan for each Plan Year
an amount determined in accordance with the contribution formula
elected in Section (F) of the Adoption Agreement. A contribution by
the Employer for any Plan Year shall be determined as of the
Valuation Date on behalf of each Participant who has a Year of
Participation for such Plan Year. Such contributions shall be made
without regard to Net Profits.
If this Plan is a Non-standard Plan, a Participant whose employment
is terminated before the Valuation Date, but after he has completed
1,000 Hours of Service during the Plan Year, shall share in Employer
contributions for the Plan Year in which his termination occurs
unless otherwise elected by the Employer in Section (J) of the
Adoption Agreement. Notwithstanding the Employer's election in
Section (J) to the contrary, a Participant whose employment is
terminated before the Valuation Date, but after completion of more
than 500 Hours of Service shall share in Employer contributions to
the extent necessary to satisfy minimum participation rules under
(S)401(a)(26) of the Code or minimum coverage rules under (S)410(b)
of the Code.
No Employer contribution may be made in any Plan Year to the extent
it would be an Excess Amount under Article VIII, LIMITATIONS ON
ALLOCATIONS. If the Plan is determined to be top-heavy for any Plan
Year under Article IX, ADDITIONAL REQUIREMENTS FOR TOP-HEAVY PLANS,
Employer contributions and reallocated forfeitures allocated on
behalf of each Participant shall not be less than the minimum
contribution required by Section 9.3.
In the case of the restoration of any amounts forfeited upon
termination of employment under Section 11.9, the Employer shall
contribute when necessary an amount in addition to the formula
contribution which is sufficient when added to forfeitures to restore
such amounts. If the Employer has elected a fixed contribution
formula in Section (F) of the Adoption Agreement and if a restoration
of forfeited contributions will cause the Employer to make a
contribution in excess of the maximum amount allowed as a deduction,
the amount of Employer formula contribution shall be reduced to the
extent necessary to avoid making a nondeductible contribution.
(b) ALLOCATION OF CONTRIBUTIONS. Employer contributions shall be
---------------------------
allocated according to the procedure elected in Section (G) of the
Adoption Agreement. If the Plan is top-heavy or is integrated, the
following special allocation rules shall apply:
- 32 -
<PAGE>
(1) Non-integrated Top-heavy Non-standard Profit Sharing Plan:
---------------------------------------------------------
Step One: A minimum contribution shall be made on behalf of
--------
all Participants whether or not they have been credited with
1,000 Hours of Service for the Plan Year. The minimum
contribution on behalf of each Participant shall equal the
Participant's proportionate share of that amount of total
Employer contributions and forfeitures which does not exceed 3%
of total Participant Compensation. The allocation of this
portion of the Employer contribution and forfeitures shall be
made according to the ratio which a Participant's Compensation
bears to the total Compensation of all Participants.
Step Two: The remaining Employer contribution and forfeitures,
--------
if any, shall be allocated only among Participants who have
been credited with 1,000 Hours of Service for the Plan Year.
The allocation of any remaining Employer contribution and
forfeitures shall be made according to the ratio which a
Participant's Compensation bears to the total Compensation of
all Participants credited with 1,000 Hours of Service for the
Plan Year.
(2) Integrated Non-top-heavy Profit Sharing Plan:
--------------------------------------------
Step One: Contributions and forfeitures will be allocated to
--------
each Participant's Account in the ratio that the sum of each
Participant's total Compensation and Compensation in excess of
the integration level bears to the sum of all Participant's
total Compensation and Compensation in excess of the
integration level, but not in excess of the profit-sharing
maximum disparity rate (as shown in the Table following
Step 2).
Step Two: Any remaining Employer contributions or forfeitures
--------
will be allocated to each Participant's Account in the ratio
that each Participant's total Compensation for the Plan Year
bears to all Participants total Compensation for that year.
NON-TOP-HEAVY PROFIT SHARING MAXIMUM DISPARITY RATES
- ------------------------------------------------------------------
Integration Level Maximum Rate
----------------- ------------
The Taxable Wage Base (TWB) 5.7%
$0 - $10,000 (or 20% of TWB if greater) 5.7%
More than 80% of TWB but less than TWB 5.4%
More than $10,00 (or 20% of TWB if greater)
but not more than 80% of TWB 4.3%
- ------------------------------------------------------------------
- 33 -
<PAGE>
The integration level shall be equal to the Taxable Wage Base or
such lesser amount elected by the Employer in the Adoption
Agreement. The Taxable Wage Base is the maximum amount of earnings
which may be considered wages for a year under (S)3121 (a)(1) of
the Code in effect as of the beginning of the Plan Year.
(3) Integrated Top-Heavy Profit Sharing Plan:
----------------------------------------
Step One: Employer contributions and forfeitures will be allocated
--------
to each Participant's Account in the ratio that each Participant's
Total Compensation bears to all Participants' total Compensation,
but not in excess of 3% of each Participant's Compensation.
Step Two: Any contributions and forfeitures remaining after the
--------
allocation in Step One will be allocated to each Participant's
Account in the ratio that each Participant's Compensation for the
Plan Year in excess of the integration level bears to the excess
Compensation of all Participants, but not in excess of 3%.
Step Three: Any contributions and forfeitures remaining after the
----------
allocation in Step Two will be allocated to each Participant's
Account in the ratio that the sum of each Participant's total
Compensation and Compensation in excess of the integration level
bears to the sum of all Participants total Compensation and
Compensation in excess of the integration level, but not in excess
of the profit-sharing maximum disparity rate minus 3 (as shown in
the Table following Step 4).
Step Four: Any remaining Employer contributions or forfeitures
---------
will be allocated to each Participant's Account in the ratio that
each Participant's total Compensation for the Plan Year bears to
all Participants total Compensation for that year.
TOP-HEAVY PROFIT SHARING MAXIMUM DISPARITY RATES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Integration Level Maximum Maximum
- ----------------- ------- -------
Rate Rate-3
<S> <C> <C>
The Taxable Wage Base (TWB) 5.7% 2.7%
$0 - $10,000 (or 20% of TWB if greater) 5.7% 2.7%
More than 80% of TWB but less than TWB 5.4% 2.4%
More than $10,00 (or 20% of TWB if greater)
but not more than 80% of TWB 4.3% 1.3%
- ----------------------------------------------------------------------
</TABLE>
-34-
<PAGE>
The integration level shall be equal to the Taxable Wage Base or such
lesser amount elected by the Employer in Section (F) of the Adoption
Agreement. The Taxable Wage Base is the maximum amount of earnings which
may be considered wages for a year under (S)3121(a)(1) of the Code in
effect as of the beginning of the Plan Year.
6.3 EMPLOYEE VOLUNTARY CONTRIBUTIONS. Unless this Plan is a (S)401(k) plan,
--------------------------------
this Plan will not accept nondeductible employee contributions and matching
contributions for Plan Years beginning after the Plan Year in which this
Plan is adopted by the Employer. If permitted under the previous sentence
and elected in Section (K) of the Adoption Agreement, each Participant may
elect to make nondeductible Employee Voluntary Contributions to the Plan
for each Plan Year during which he is a Participant. Such election shall be
made by written direction to the Employer while in the employ of the
Employer. This election may be changed with respect to any future Plan Year
by filing written direction with the Employer on or before the beginning of
such year. Employee contributions for Plan Years beginning after December
31, 1986, together with any matching contributions as defined in (S)401(m)
of the Code, will be limited so as to meet the nondiscrimination test of
(S)401(m).
The total of nondeductible Employee Voluntary Contributions by a
Participant to this Plan and to all other Qualified Plans of the Employer
shall be limited as provided in Section 7.8 and Article VIII. The Employer
shall deduct such contributions from the Compensation of the Participant
and deposit them with the Trustee. The Trustee will establish a Segregated
Account for the nondeductible Employee Voluntary Contributions of each
Participant.
The Trustee, with the Participant's consent, shall invest nondeductible
Employee Voluntary Contributions separately in a Contract or in any other
investment permitted by Section 2.6. The Participant may direct the Trustee
to enter into an agreement with any insurer, bank, trust company or other
fiduciary pursuant to Section 2.6(k) to hold, manage and invest the assets
of his Segregated Account. Nondeductible Employee Voluntary Contributions
may not be invested in a Combination Conversion Account Agreement with the
Insurer.
The Participant shall have a 100% nonforfeitable interest in the value of
his nondeductible Employee Voluntary Contributions and earnings thereon at
all times. The Participant shall have the right at any time to request the
Trustee to withdraw any part of the value of any nondeductible Employee
Voluntary Contribution. Payment pursuant to any such request shall be made
in the form of a Qualified Joint and Survivor Annuity, as defined in
Section 10.4(e), unless a qualified election has been made according to
Section 10.4(d). Any partial withdrawal shall be subject to the rules of
any investment vehicle. Such value shall not subsequently be repaid to the
Plan. Neither the Participant's nondeductible Employee Voluntary
Contributions nor any withdrawals thereof shall have an effect upon the
benefits provided by Employer contributions.
-35-
<PAGE>
6.4 ROLLOVER CONTRIBUTIONS. If permitted by Section (K) of the Adoption
----------------------
Agreement, an Employee who is not excluded from participation by Section
(C)(2) of the Adoption Agreement, may contribute cash to the Plan which
qualifies as a rollover contribution within the meaning of (S)402(a)(5),
(S)403(a)(4), (S)408(d)(3) or (S)409(b)(3) of the Code, except that amounts
which represent accumulated deductible Employee contributions within the
meaning of (S)72(o)(5) of the Code may not be rolled over. The contribution
must have been distributed to the Employee from a qualified plan under
(S)401(a) of the Code or from an annuity plan under (S)403(a) of the Code.
Distributions from an Individual Retirement Account, Individual Retirement
Annuity, or Individual Retirement Bond may also be rolled over but only to
the extent such funds originated from a qualified employees trust or
annuity plan.
The Trustee shall hold the amount contributed in a Segregated Account
established by the Trustees for such purpose. The Segregated Account shall
be separately invested in a Contract (other than a Combination Conversion
Account Agreement) or in any other investment permitted by Section 2.6. The
Employee will be 100% vested in his Segregated Account attributable to
rollover contributions made to the Trust. The Segregated Account may be
distributed in accordance with the terms of this Plan with regard to
Participants' Accounts established for Employer contributions.
6.5 TRUST TO TRUST TRANSFERS. If permitted by Adoption Agreement Section (K),
------------------------
funds held under a qualified Employee plan under (S)401(a) of the Code or
an annuity plan under (S)403(a) of the Code may be transferred to this
Plan, except that amounts which represent accumulated deductible Employees
contributions within the meaning of (S)72(o)(5) of the Code may not be
transferred. The Trustee shall hold the amount transferred in a Segregated
Account established by the Trustee for such purpose. The Segregated Account
shall be separately invested in a Contract (other than a Combination
Conversion Account Agreement) or any other investment permitted by Section
2.6. The Employee will be 100% vested in his Segregated Account
attributable to transfers made to the Trust. The Segregated Account may be
distributed in accordance with the terms of this Plan with regard to
Participants' Accounts established for Employer contributions.
6.6 IF EMPLOYER IS SUCCESSOR TO UNINCORPORATED BUSINESS. If the Employer is a
---------------------------------------------------
successor to an unincorporated business, funds held under a qualified plan
under (S)401(a) of the Code or an annuity plan under (S)403(a) of the Code
of the predecessor business may be transferred to this Plan. The Trustee
shall hold the amount transferred on behalf of each Participant in a
Segregated Account established by the Trustee for such purpose. The
Segregated Account shall be separately invested in a Contract (other than a
Combination Conversion Account Agreement) or any other investment permitted
by Section 2.6. A Contract previously maintained under the Plan of the
unincorporated business may be transferred to this Plan and the premiums
may be paid out of current contributions, subject to the separate
accounting requirement set forth above. The Employee will be 100% vested in
his Segregated Account attributable to transfers made to the Trust. The
Segregated Account may be distributed in accordance
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with the terms of this Plan with regard to Participants' Accounts
established for Employer contributions.
ARTICLE VII
ADDITIONAL RULES FOR (S)401(K) PLANS
7.1 ELECTIVE DEFERRALS. Elective Deferrals shall mean contributions made to
------------------
the Plan during the Plan Year by the Employer, at the election of the
Participant, in lieu of cash compensation and shall include contributions
that are made pursuant to a salary reduction agreement. Such contributions
must be nonforfeitable when made and are distributable only as specified in
Section 7.12.
To the extent provided in Section (E) of the Adoption Agreement a
Participant may elect to have Elective Deferrals made under this Plan
pursuant to a Salary Reduction Agreement. Elective Deferrals shall include
both single-sum and continuing contributions made pursuant to a Salary
Reduction Agreement.
To the extent provided in Section (E) of the Adoption Agreement, a
Participant may also base Elective Deferrals on cash bonuses that, at the
Participant's election, may be contributed to the (S)401(k) Plan or
received by the Participant in cash.
The provisions of the (S)401(k) Plan may be made effective as of the first
day of the Plan Year in which the (S)401(k) is adopted. However, under no
circumstances may a salary reduction agreement or other deferral mechanism
be adopted retroactively.
A Participant shall designate the amount and frequency of his Elective
Deferrals in the form and manner specified by the Plan Administrator. A
Participant shall be afforded a reasonable period, at least once each
calendar year, as specified in Section (E) of the Adoption Agreement, to
elect to commence Elective Deferrals. A Participant's election to commence
Elective Deferrals shall remain in effect until modified or terminated. A
Participant shall be afforded a reasonable period at least once each
calendar year, as specified in the Adoption Agreement, to modify the amount
or frequency of his Elective Deferrals. A Participant may terminate his
election to make Elective Deferrals at any time. The Employer shall
contribute and allocate to each Participant's Elective Deferral account the
amount of a Participant's Elective Deferrals. Elective deferrals may not be
integrated with Social Security.
7.2 ELECTIVE DEFERRALS-CONTRIBUTION LIMITATION. No Participant shall be
------------------------------------------
permitted to have Elective Deferrals made under this Plan, or any other
qualified plan maintained by the Employer, during any taxable year, in
excess of the dollar limit in effect under (S)402(g) of the Code at the
beginning of such taxable year. Other dollar limitations may apply under
(S)402(g) of the Code to the extent that a Participant makes
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Elective Deferrals to arrangements other than qualified (S)401(k) plans
(See also (S)402(h)(1)(B), (S)403(b), (S)457, and (S)501(c)(18) of the
Code).
7.3 ELECTIVE DEFERRALS-DISTRIBUTION OF EXCESS. A Participant may assign to
-----------------------------------------
this Plan any Excess Elective Deferrals made during a taxable year of the
Participant by notifying the Plan Administrator on or before March 1, of
the amount of the Excess Elective Deferrals to be assigned to the Plan.
Notwithstanding any other provision of the Plan, Excess Elective Deferrals,
plus any income and minus any loss allocable thereto, shall be distributed
no later than April 15 to any Participant to whose account Excess Elective
Deferrals were assigned for the preceding year and who claims Excess
Elective Deferrals for such taxable year.
Excess Elective Deferrals shall be adjusted for income or loss up to the
date of distribution. The income or loss allocable to Excess Elective
Deferrals is the sum of: (1) income or loss allocable to the Participant's
Excess Elective Deferral account for the taxable year multiplied by a
fraction, the numerator of which is such Participant's Excess Elective
Deferrals for the year and the denominator is the Participant's Account
attributable to Elective Deferrals without regard to any income or loss
occurring during such taxable year; and (2) ten percent of the amount
determined under (1) multiplied by the number of whole calendar months
between the end of the Participant's taxable year and the date of
distribution, counting the month of distribution if distribution occurs
after the 15th of such month.
Definitions:
a. "Elective Deferrals" shall mean any Employer contributions made to the
Plan at the election of the Participant, in lieu of cash compensation,
and shall include contributions made pursuant to a salary reduction
agreement or other deferral mechanism. With respect to any taxable
year, a Participant's Elective Deferral is the sum of all Employer
contributions made on behalf of such Participant pursuant to an
election to defer under any qualified CODA as described in (S)401(k)
of the Code, any simplified employee pension cash or deferred
arrangement as described in (S)402(h)(1)(B), any eligible deferred
compensation plan under (S)457, any plan as described under
(S)501(c)(18), and any Employer contributions made on behalf of a
Participant for the purchase of an annuity contract under (S)403(b)
pursuant to a salary reduction agreement.
b. "Excess Elective Deferrals" shall mean those Elective Deferrals that
are includible in a Participant's gross income under (S)402(g) of the
Code to the extent such Participant's Elective Deferrals for a taxable
year exceed the dollar limitation under such Code section. Excess
Elective Deferrals shall be treated as annual additions under the
Plan.
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7.4 ELECTIVE DEFERRALS-ACTUAL DEFERRAL PERCENTAGE TEST. The Actual Deferral
--------------------------------------------------
Percentage (hereinafter "ADP") for Participants who are Highly Compensated
Employees for each Plan Year and the ADP for Participants who are Non-
highly Compensated Employees for the same Plan Year must satisfy one of the
following tests:
(a) The ADP for Participants who are Highly Compensated Employees for the
Plan Year shall not exceed the ADP for Participants who are Non-highly
Compensated Employees for the same Plan Year multiplied by 1.25; or
(b) The ADP for Participants who are Highly Compensated Employees for the
Plan Year shall not exceed the ADP for Participants who are Non-highly
Compensated Employees for the same Plan Year multiplied by 2.0,
provided that the ADP for Participants who are Highly Compensated
Employees does not exceed the ADP for Participants who are Non-highly
Compensated Employees by more than two (2) percentage points.
The ADP for any Participant who is a Highly Compensated Employee for the
Plan Year and who is eligible to have Elective Deferrals (and Qualified
Non-elective Contributions or Qualified Matching Contributions, or both, if
treated as Employer contributions for purposes of the ADP test) allocated
to his accounts under two or more arrangements described in (S)401(k) of
the Code, that are maintained by the Employer, shall be determined as if
such Elective Deferrals (and, if applicable, such Qualified Non-elective
Contributions or Qualified Matching Contributions, or both) were made under
a single arrangement. If a Highly Compensated Employee participates in two
or more cash or deferred arrangements that have different Plan Years, all
cash or deferred arrangements ending with or within the same calendar year
shall be treated as a single arrangement.
In the event that this Plan satisfies the requirements of (S)401(k),
(S)401(a)(4), or (S)410(b) of the Code only if aggregated with one or more
other plans, or if one or more other plans satisfy the requirements of such
sections of the Code only if aggregated with this Plan, then this section
shall be applied by determining the ADP of Employees as if all such plans
were a single plan. For Plan Years beginning after December 31, 1989, plans
may be aggregated in order to satisfy (S)401(k) of the Code only if they
have the same Plan Year.
For purposes of determining the ADP of a Participant who is a 5% owner or
one of the ten most highly paid, Highly Compensated employees, the Elective
Deferrals (and Qualified Non-elective Contributions or Qualified Matching
Contributions, or both, if treated as Employer contributions for purposes
of the ADP test) and Compensation of such Participant shall include the
Elective Deferrals (and, if applicable, Qualified Non-elective
Contributions and Qualified Matching Contributions, or both) and
Compensation for the Plan Year of Family Members, as defined in
(S)414(q)(6) of the Code. Family members with respect to such Highly
Compensated Employees, shall be disregarded as separate Employees in
determining the ADP both for Participants who are
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Non-highly Compensated Employees and for Participants who are Highly
Compensated Employees.
For purposes of determining the ADP test, Elective Deferrals, Qualified
Non-elective Contributions and Qualified Matching Contributions must be
made before the last day of the twelve-month period immediately following
the Plan Year to which contributions relate.
The Employer shall maintain records sufficient to demonstrate satisfaction
of the ADP test and the amount of Qualified Non-elective Contributions or
Qualified Matching Contributions, or both, used in such test.
The determination and treatment of the ADP Amounts of any Participant shall
satisfy such other requirements as may be prescribed by the Secretary of
the Treasury.
Definition:
"Actual Deferral Percentage" shall mean, for a specified group of
Participants for a Plan Year, the average of the ratios (calculated
separately for each Participant in such group) of (1) the amount of
Employer contributions actually paid over to the trust on behalf of such
Participant for the Plan Year to (2) the Participant's Compensation for the
entire Plan Year or the portion of the Plan Year during which the Employee
is a Participant.
Employer contributions on behalf of any Participant shall include (1) any
Employer contributions made pursuant to the Participant's Elective
Deferral, including Excess Elective Deferrals of Highly Compensated
Employees, but excluding Elective Deferrals that are taken into account in
the Contribution Percentage test (provided the ADP test is satisfied both
with and without exclusion of these Elective Deferrals); and (2) at the
election of the Employer, Qualified Non-elective Contributions and
Qualified Matching Contributions. For purposes of computing Actual Deferral
Percentages, an Employee who would be a Participant but for the failure to
make Elective Deferrals shall be treated as a Participant on whose behalf
no Elective Deferrals are made.
7.5 DISTRIBUTION OF EXCESS CONTRIBUTIONS. Notwithstanding any other provision
------------------------------------
of this Plan, Excess Contributions, plus any income and minus any loss
allocable thereto, shall be distributed no later than the last day of each
Plan Year to Participants to whose accounts such Excess Contributions were
allocated for the preceding Plan Year. If such excess amounts are
distributed more than 2 1/2 months after the last day of the Plan Year in
which such excess amounts arose, a ten (10) percent excise tax will be
imposed on the Employer maintaining the Plan with respect to such amounts.
Such distributions shall be made to Highly Compensated Employees on the
basis of the respective portions of the Excess Contributions attributable
to each of such Employees. Excess Contributions shall be allocated to
Participants who are subject to the family member aggregation rules of
(S)414(q)(6) of the Code in the manner prescribed by the regulations.
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Excess Contributions (including any amounts recharacterized) shall be
treated as annual additions under the Plan.
Excess Contributions shall be adjusted for any income or loss up to the
date of distribution. The income or loss allocable to Excess Contributions
is the sum of: (1) income or loss allocable to the Participant's Elective
Deferral account (and, if applicable, the Qualified Matching Contributions
account or both) for the Plan Year multiplied by a fraction, the numerator
of which is such Participant's Excess Contributions for the year and the
denominator is the Participant's Account Balance attributable to Elective
Deferrals (and Qualified Non-elective Contributions, or both, if any of
such Contributions are included in the ADP test) without regard to any
income or loss occurring during such Plan Year; and (2) ten percent of the
amount determined under (1) multiplied by the number of whole calendar
months between the end of the Plan Year and the date of distribution,
counting the month of distribution if distribution occurs after the 15th of
such month.
Excess Contributions shall be distributed from the Participant's Elective
Deferral account and Qualified Matching Contributions account (if
applicable) in proportion to the Participant's Elective Deferrals and
Qualified Matching Contributions (to the extent used in the ADP test) for
the Plan Year. Excess Contributions shall be distributed from the
Participant's Qualified Non-elective Contribution account only to the
extent that such Excess Contributions exceed the balance in the
Participant's Elective Deferral account and Qualified Matching Contribution
account.
A Participant may treat his Excess Contributions as an amount distributed
to the Participant and then contributed by the Participant to the Plan.
Recharacterized amounts will remain nonforfeitable and subject to the same
distribution requirements as Elective Deferrals. Amounts may not be
recharacterized by a Highly Compensated Employee to the extent that such
amount in combination with other Employee Contributions made by that
Employee would exceed any stated limit under the Plan on Employee
Contributions.
Recharacterization must occur no later than two and one-half months after
the last day of the Plan Year in which such Excess Contributions arose and
is deemed to occur no earlier than the date the last Highly Compensated
Employee is informed in writing of the amount recharacterized and the
consequences thereof. Recharacterized amounts will be taxable to the
Participant for the Participant's tax year in which the Participant would
have received them in cash.
Definition:
"Excess Contributions" shall mean, with respect to any Plan Year, the
excess of (1) the aggregate amount of Employer contributions actually taken
into account in computing the ADP of Highly Compensated Employees for such
Plan Year, over (2) the maximum amount of such contributions permitted by
the ADP test (determined by reducing
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contributions made on behalf of Highly Compensated Employees in order of
the ADP's beginning with the highest of such percentages).
7.6 MATCHING CONTRIBUTIONS. If elected by the Employer in Adoption Agreement
----------------------
Section (E), the Employer will make Matching Contributions to the Plan.
Matching Contributions shall be vested in accordance with the Plan's
general vesting schedule under Section (M) of the Adoption Agreement. In
any event, Matching Contributions shall be fully vested at Normal
Retirement Age, upon the complete or partial termination of the Plan, or
upon the complete discontinuance of Employer contributions.
7.7 QUALIFIED MATCHING CONTRIBUTIONS. If elected by the Employer in Section
--------------------------------
(E) of the Adoption Agreement, the Employer will make Qualified Matching
Contributions to the Plan. Qualified Matching Contributions shall mean
Matching Contributions that are made to the Plan which are subject to the
distribution and nonforfeitability requirements under (S)401(k) of the Code
when made.
7.8 LIMITATIONS ON EMPLOYEE CONTRIBUTIONS AND MATCHING CONTRIBUTIONS. The
----------------------------------------------------------------
Average Contribution Percentage (hereinafter "ACP") for Participants who
are Highly Compensated Employees for each Plan Year and the ACP for
Participants who are Non-highly Compensated Employees for the same Plan
Year must satisfy one of the following tests:
(a) The ACP for Participants who are Highly Compensated Employees for the
Plan Year shall not exceed the ACP for Participants who are Non-highly
Compensated Employees for the same Plan Year by 1.25; or
(b) The ACP for Participants who are Highly Compensated Employees for the
Plan Year shall not exceed the ACP for Participants who are Non-highly
Compensated Employees for the same Plan Year Multiplied by two (2),
provided that the ACP for Participants who are Highly Compensated
Employees does not exceed the ACP for Participants who are Non-highly
Compensated Employees by more than two (2) percentage points.
If one or more Highly Compensated Employees participate in both a (S)401(k)
Plan and a plan subject to the ACP test maintained by the Employer and the
sum of the ADP and ACP of those Highly Compensated Employees subject to
either or both tests exceeds the Aggregate Limit, then the ACP of those
Highly Compensated Employees who also participate in a (S)401(k) Plan will
be reduced (beginning with such Highly Compensated Employee whose ACP is
the highest) so that the limit is not exceeded. The amount by which each
Highly Compensated Employee's Contribution Percentage Amount is reduced
shall be treated as an Excess Aggregate Contribution. The ADP and ACP of
the Highly Compensated Employees are determined after any corrections
required to meet the ADP and ACP tests. Multiple use does not occur if both
the ADP and ACP of the Highly
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Compensated Employees does not exceed 1.25 multiplied by the ADP and ACP of
the Non-highly Compensated Employees.
For purposes of this Section, the Contribution Percentage for any
Participant who is a Highly Compensated Employee and who is eligible to
have Contribution Percentage Amounts allocated to his account under two or
more plans described in (S)401(a) of the Code, or arrangements described in
(S)401(k) of the Code, that are maintained by the Employer, shall be
determined as if the total of such Contribution Percentage Amounts was made
under each plan. If a Highly Compensated Employee participates in two or
more cash or deferred arrangements that have different Plan Years, all cash
or deferred arrangements ending with or within the same calendar year shall
be treated as a single arrangement.
In the event that this Plan satisfies the requirements of (S)401(m),
(S)401(a)(4), or (S)410(b) of the Code only if aggregated with one or more
other plans, or if one or more other plans satisfy the requirements of such
Sections of the Code only if aggregated with this Plan then this Section
shall be applied by determining the Contribution Percentage of employees as
if all such plans were a single plan. For Plan Years beginning after
December 31, 1989, plans may be aggregated in order to satisfy (S)401(m) of
the Code only if they have the same Plan Year.
For purposes of determining the Contribution Percentage of a Participant
who is a five percent owner or one of the ten most highly paid Highly
Compensated Employees, the Contribution Percentage Amounts and Compensation
of such Employee shall include the Contribution Percentage Amounts and
Compensation for the Plan Year of Family Members as defined in (S)414(q)(6)
of the Code. Family Members, with respect to Highly Compensated Employees,
shall be disregarded as separate Employees in determining the Contribution
Percentage both for Participants who are Non-highly Compensated Employees
and for Participants who are Highly Compensated Employees.
For purposes of determining the Contribution Percentage test, Employee
Contributions are considered to have been made in the Plan Year in which
they were contributed to the trust. Matching Contributions and Qualified
Non-elective Contributions will be considered made for a Plan Year if made
no later than the end of the twelve-month period beginning on the day after
the close of the Plan Year.
The Employer shall maintain records sufficient to demonstrate satisfaction
of the ACP test and the amount of Qualified Non-elective Contributions or
Qualified Matching Contributions, or both, used in such test.
The determination and treatment of the Contribution Percentage of any
Participant shall satisfy such other requirements as may be prescribed by
the Secretary of the Treasury.
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Forfeitures of Excess Aggregate Contributions shall be applied to reduce
Employer contributions.
Definitions:
(a) "Aggregate Limit" shall mean the sum of (i) 125 percent of the greater
of the ADP of the Non-highly Compensated Employees for the Plan Year or
the ACP of Non-highly Compensated Employees under the Plan subject to
(S)401(m) of the Code for the Plan Year beginning with or within the
Plan Year of the (S)401(k) Plan and (ii) the lesser of 200% or two plus
the lesser of such ADP or ACP. "Lesser is substituted for "greater" in
"(i)", above, and, "greater" is substituted for "lesser" after "two
plus the" in "(ii)" if it would result in a larger Aggregate Limit.
(b) "Average Contribution Percentage" shall mean the average (expressed as
a percentage) of the Contribution Percentages of the Eligible
Participants in a group.
(c) "Contribution Percentage" shall mean the ratio (expressed as a
percentage) of the Participant's Contribution Percentage Amounts to the
Participant's Compensation for the entire Plan Year or the portion of
the Plan Year during which the Employee is a Participant.
(d) "Contribution Percentage Amounts" shall mean the sum of the Employee
Contributions, Matching Contributions, and Qualified Matching
Contributions (to the extent not taken into account for purposes of the
ADP test) under the Plan on behalf of the Participant for the Plan
Year. Such Contribution Percentage Amounts shall include forfeitures of
Excess Aggregate Contributions or Matching Contributions allocated to
the Participant's account, which shall be taken into account in the
year in which such forfeiture is allocated. The Employer may include
Qualified Non-elective Contributions in the Contribution Percentage
Amounts. The amount of Qualified Non-elective Contributions that are
made under Section (F) of the Adoption Agreement and taken into account
as Contribution Percentage Amounts for purposes of calculating the
Average Contribution Percentage, subject to such other requirements as
may be prescribed by the Secretary of the Treasury, shall be such
Qualified Non-elective Contributions that are needed to meet the
Average Contribution Percentage test stated in Section 7.8.
The Employer also may use Elective Deferrals in the Contribution
Percentage Amounts so long as the ADP test is met before the Elective
Deferrals are used in the ACP test and continues to be met following
the exclusion of those Elective Deferrals that are used to meet the ACP
test. The amount of Elective Deferrals made under Section (E) of the
Adoption Agreement and taken into account as Contribution Percentage
Amounts for purposes of calculating the Average Contribution
Percentage, subject to such other requirements as may be prescribed
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by the Secretary of the Treasury, shall be such Elective Deferrals that
are needed to meet the Average Contribution Percentage test stated in
Section 7.8.
(e) "Eligible Participant" shall mean any Employee who is eligible to make
an Employee Contribution, or an Elective Deferral (if the Employer
takes such contributions into account), or to receive a Matching
Contribution (including forfeitures) or a Qualified Matching
Contribution.
(f) "Employee Contribution" shall mean any contribution made to the Plan by
or on behalf of a Participant that is included in the Participant's
gross income in the year in which made and that is maintained under a
separate account to which earnings and losses are allocated.
(g) "Matching Contribution" shall mean an Employer contribution made to
this or any other defined contribution plan, on behalf of a Participant
on account of an Employee Contribution made by such Participant, or on
account of a Participant's Elective Deferral, under a plan maintained
by the Employer.
7.9 DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS. Notwithstanding any other
----------------------------------------------
provision of this Plan, Excess Aggregate Contributions, plus any income and
minus any loss allocable thereto, shall be forfeited, if forfeitable, or if
not forfeitable, distributed no later than the last day of each Plan Year
to Participants to whose accounts such Excess Aggregate Contributions were
allocated for the preceding Plan Year. Excess Aggregate Contributions shall
be allocated to Participants who are subject to the family member
aggregation rules of (S)414(q)(6) of the Code in the manner prescribed by
the regulations. If such Excess Aggregate Contributions are distributed
more than 2 1/2 months after the last day of the Plan Year in which such
excess amounts arose, a ten (10) percent excise tax will be imposed on the
Employer maintaining the Plan with respect to those amounts. Excess
Aggregate Contributions shall be treated as annual additions under the
Plan.
Excess Aggregate Contributions shall be adjusted for any income or loss up
to the date of distribution. The income or loss allocable to Excess
Aggregate Contributions is the sum of: (1) income or loss allocable to the
Participant's Employee Contribution Account, Matching Contribution Account
(if any, and if all amounts therein are not used in the ADP test) and, if
applicable, Qualified Non-elective Contribution Account and Elective
Deferral Account for the Plan Year multiplied by a fraction, the numerator
of which is such Participant's Excess Aggregate Contributions for the year
and the denominator is the Participant's Account Balance(s) attributable to
Contribution Percentage Amounts without regard to any income or loss
occurring during such Plan Year; and (2) ten (10) percent of the amount
determined under (1) multiplied by the number of whole calendar months
between the end of the Plan Year and the date of distribution, counting the
month of distribution if distribution occurs after the 15th of such month.
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Forfeitures of Excess Aggregate Contributions shall be applied to reduce
Employer Contributions. Excess Aggregate Contributions shall be forfeited
on a pro-rata basis from the Participant's Employee Contribution Account,
Matching Contribution Account and Qualified Matching Contribution Account
(and if applicable, the Participant's Qualified Non-elective Contribution
Account or Elective Deferral Account, or both).
Definition:
"Excess Aggregate Contributions" shall mean, with respect to any Plan Year,
the excess of:
(a) The aggregate Contribution Percentage Amounts taken into account in
computing the numerator of the Contribution Percentage actually made on
behalf of Highly Compensated Employees for such Plan Year, over
(b) The maximum Contribution Percentage Amounts permitted by the ACP test
(determined by reducing contributions made on behalf of Highly
Compensated Employees in order of their Contribution Percentages
beginning with the highest of such percentages).
Such determination shall be made after first determining Excess Elective
Deferrals pursuant to Section 7.3 and then determining Excess Contributions
pursuant to Section 7.5.
7.10 QUALIFIED NON-ELECTIVE CONTRIBUTIONS. In lieu of distributing Excess
------------------------------------
Contributions as provided in Section 7.5 of the Plan, or applying Excess
Aggregate Contributions to reduce Employer contributions as provided in
Section 7.9 of the Plan, the Employer may make Qualified Non-elective
Contributions on behalf of Non-highly Compensated Employees that are
sufficient to satisfy either the Actual Deferral Percentage test or the
Average Contribution Percentage test, or both, pursuant to regulations
under the Code. Such contributions shall be allocated to Non-highly
Compensated Participants in the ratio in which each Non-highly Compensated
Participant's Compensation for the Plan Year bears to the total
Compensation of all Non-highly Compensated Participants for such Plan Year.
Definition:
"Qualified Non-elective Contributions" shall mean contributions (other than
Matching Contributions or Qualified Matching Contributions) made by the
Employer and allocated to Participants' accounts that the Participants may
not elect to receive in cash until distributed from the Plan; that are
nonforfeitable when made; and that are distributable only in accordance
with distribution provisions that are applicable to Elective Deferrals and
Qualified Matching Contributions.
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7.11 NONFORFEITABILITY AND VESTING. The Participant's Account Balance derived
-----------------------------
from Elective Deferrals, Qualified Non-elective Contributions, Employee
Contributions, and Qualified Matching Contributions is nonforfeitable.
Separate accounts for Elective Deferrals, Qualified Non-elective
Contributions, Employee Contributions, Matching Contributions and Qualified
Matching Contributions will be maintained for each Participant. Each
account will be credited with the applicable contributions and earnings
thereon.
7.12 DISTRIBUTION REQUIREMENTS. Elective Deferrals, Qualified Non-elective
-------------------------
Contributions, and Qualified Matching Contributions, and income allocable
to each, are not distributable to a Participant or his beneficiary or
beneficiaries, in accordance with such Participant's or beneficiary or
beneficiaries election, earlier than upon separation from service, death,
disability, or one of the following events:
(a) Termination of the Plan without the establishment of another defined
contribution plan;
(b) The disposition by a corporation to an unrelated corporation of
substantially all of the assets (within the meaning of (S)409(d)(2) of
the Code) used by such corporation in a trade or business of such
corporation, if such corporation continues to maintain this Plan after
the disposition, but only with respect to Employees who continue
employment with the corporation acquiring such assets;
(c) The disposition by a corporation to an unrelated entity of such
corporation's interest in a subsidiary (within the meaning of
(S)409(d)(3) of the Code), if such corporation continues to maintain
this Plan, but only with respect to Employees who continue employment
with such subsidiary;
(d) The attainment of age 59 1/2 in the case of a profit-sharing plan; or
(e) The hardship of the Participant as described in Section 7.13 if
permitted by the Employer in Adoption Agreement Section (L).
All distributions that may be pursuant to one or more of the foregoing
distributable events are subject to the spousal and participant consent
requirements contained in (S)401(a)(11) and (S)417 of the Code.
7.13 HARDSHIP. Distribution of Elective Deferrals (and earnings thereon accrued
--------
as of December 31, 1988) may be made to a Participant in the event of
hardship. For the purposes of this section, hardship is defined as an
immediate and heavy financial need of the Employee where such Employee
lacks other available resources. Hardship distributions are subject to the
spousal consent requirements contained in (S)401(a)(11) and (S)417 of the
Code.
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Special Rules:
(a) The following are the only financial needs considered immediate and
heavy: deductible medical expenses (within the meaning of (S)213(d) of
the Code) of the Employee, the Employee's spouse, children, or
dependents; the purchase (excluding mortgage payments) of a principal
residence for the Employee; payment of tuition for the next quarter or
semester of post-secondary education for the Employee, the Employee's
spouse, children, or dependents; or the need to prevent the eviction
of the Employee from, or a foreclosure on the mortgage of, the
Employee's principal residence.
(b) A distribution will be considered as necessary to satisfy an immediate
and heavy financial need of the Employee only if:
(1) The Employee has obtained all distributions, other than hardship
distributions, and all nontaxable loans under all plans
maintained by the Employer;
(2) All plans maintained by the Employer provide that the Employee's
Elective Deferrals (and Employee Contributions) will be
suspended for twelve months after the receipt of the hardship
distribution;
(3) The distribution is not in excess of the amount of an immediate
and heavy financial need; and
(4) All plans maintained by the Employer provide that the Employee
may not make Elective Deferrals for the Employee's taxable year
immediately following the taxable year of the hardship
distribution in excess of the applicable limit under (S)402(g)
of the Code for such taxable year less the amount of such
Employee's Elective Deferrals for the taxable year of the
hardship distribution.
ARTICLE VIII
LIMITATIONS ON ALLOCATIONS
8.1 SINGLE PLAN.
-----------
(a) If the Participant does not participate in another qualified plan
maintained by the adopting Employer and has never participated in a
qualified defined benefit plan or a welfare benefit fund, as defined
in (S)419(e) of the Code maintained by the adopting Employer, or an
individual medical account, as defined in (S)415(1)(2) of the Code,
maintained by the Employer, which provides an Annual Addition, as
defined in Section 8.5, the amount of Annual Additions which may be
credited to
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the Participant's Account for any Limitation Year will not exceed the
lesser of the Maximum Permissible Amount or any other limitation
contained in this Plan. If the Employer contribution that would
otherwise be contributed or allocated to the Participant's Account
would cause the Annual Additions for the Limitation Year to exceed the
Maximum Permissible Amount, the amount contributed or allocated will
be reduced so that the Annual Additions for the Limitation Year will
equal the Maximum Permissible Amount.
(b) Prior to determining the Participant's actual Compensation for the
Limitation Year, the Employer may determine the Maximum Permissible
Amount for a Participant on the basis of a reasonable estimation of
the Participant's Compensation for the Limitation Year, uniformly
determined for all Participants similarly situated.
(c) As soon as administratively feasible after the end of the Limitation
Year, the Maximum Permissible Amount for the Limitation Year will be
determined on the basis of the Participant's actual Compensation for
the Limitation Year.
(d) If, pursuant to Section 8.1(c) or as a result of the allocation of
forfeitures, there is an Excess Amount, the excess will be disposed of
as follows:
(i) Any nondeductible Employee Voluntary Contributions, to the
extent they would reduce the Excess Amount, will be returned to
the Participant;
(ii) If after the application of paragraph (i) an Excess Amount still
exists, and the Participant is covered by the Plan at the end of
the Limitation Year, the Excess Amount in the Participant's
Account wild be used to reduce Employer contributions (including
any allocation of forfeitures) for such Participant in the next
Limitation Year, and each succeeding Limitation Year if
necessary;
(iii) If after the application of paragraph (i) an Excess Amount still
exists, and the Participant is not covered by the Plan at the
end of the Limitation Year, the Excess Amount will be held
unallocated in a suspense account. The suspense account will be
applied to reduce future Employer contributions for all
remaining Participants in the next Limitation Year, and each
succeeding Limitation Year if necessary;
(iv) If a suspense account is in existence at any time during a
Limitation Year pursuant to this section, it will not
participate in the allocation of the trust's investment gains
and losses. If a suspense account is in existence at any time
during a particular Limitation Year, all amounts in the suspense
account must be allocated and reallocated to Participants'
Accounts before any Employer or Employee Contributions may be
made
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to the Plan for that Limitation Year. Excess Amounts may
not be distributed to Participants or former Participants.
8.2 TWO OR MORE MASTER OR PROTOTYPE DEFINED CONTRIBUTION PLANS.
----------------------------------------------------------
(a) This section applies if, in addition to this Plan, the Participant is
covered under another qualified master or prototype defined
contribution plan maintained by the Employer, a welfare benefit fund
as defined by (S)419(e) of the Code maintained by the Employer, or an
individual medical account, as defined in (S)415(1)(2) of the Code,
maintained by the Employer, which provides an Annual Addition, as
defined in Section 8.5, during any Limitation Year and if the
Participant has never participated in a qualified defined benefit plan
maintained by the adopting Employer. The Annual Additions which may be
credited to a Participant's Account under this Plan for any such
Limitation Year will not exceed the Maximum Permissible Amount reduced
by the Annual Additions credited to a Participant's Account under the
other plans and welfare benefit funds for the same Limitation Year. If
the Annual Additions with respect to the Participant under other
defined contribution plans and welfare benefit funds maintained by the
Employer are less than the Maximum Permissible Amount and the Employer
contribution that would otherwise be contributed or allocated to the
Participant's Account under this Plan would cause the Annual Additions
for the Limitation Year to exceed this limitation, the amount
contributed or allocated will be reduced so that the Annual Additions
under all such plans and funds for the Limitation Year will equal the
Maximum Permissible Amount. If the Annual Additions with respect to
the Participant under such other defined contribution plans and
welfare benefit funds in the aggregate are equal to or greater than
the Maximum Permissible Amount, no amount will be contributed or
allocated to the Participant's Account under this Plan for the
Limitation Year.
(b) Prior to determining the Participant's actual Compensation for the
Limitation Year, the Employer may determine the Maximum Permissible
Amount for a Participant in the manner described in Section 8.1(b).
(c) As soon as is administratively feasible after the end of the
Limitation Year, the Maximum Permissible Amount for the Limitation
Year will be determined on the basis of the Participant's actual
Compensation for the Limitation Year.
(d) If, pursuant to Section 8.2(c) or as a result of the allocation of
forfeitures, a Participant's Annual Additions under this Plan and such
other plans would result in an Excess Amount for a Limitation Year,
the Excess Amount will be deemed to consist of the Annual Additions
last allocated, except that Annual Additions attributable to a welfare
benefit fund or individual medical account will be deemed to have been
allocated first regardless of the actual allocation date.
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(e) If an Excess Amount was allocated to a Participant on an allocation
date of this Plan which coincides with an allocation date of another
plan, the excess amount attributed to this Plan will be the product
of,
(i) the total Excess Amount allocated as of such date, times
(ii) the ratio of (1) the Annual Additions allocated to the
Participant for the Limitation Year as of such date under this
Plan to (2) the total Annual Additions allocated to the
Participant for the Limitation Year as of such date under this
and all the other qualified master or prototype defined
contribution plans.
(f) Any Excess Amount attributed to this Plan will be disposed in the
manner described in Section 8.1(d).
8.3 COVERAGE UNDER NON-PROTOTYPE DEFINED CONTRIBUTION PLAN.
------------------------------------------------------
If the Participant is covered under another qualified defined contribution
plan maintained by the Employer which is not a master or prototype plan,
Annual Additions which may be credited to the Participant's Account under
this Plan for any Limitation Year, will be limited in accordance with
Section 8.2 as though the other plan were a master or prototype plan unless
the Employer provides other limitations in Section (R) of the Adoption
Agreement.
8.4 COVERAGE UNDER DEFINED BENEFIT PLAN.
-----------------------------------
(a) Non Top-Heavy Group
-------------------
If the Employer maintains, or at any time maintained, a qualified
defined benefit plan (other than a paired plan) covering any
Participant in this Plan, the sum of the Participant's Defined Benefit
Plan Fraction and Defined Contribution Plan Fraction shall not exceed
1.0 in any Limitation Year. The Annual Additions to the Defined
Contribution Plan(s) which may be credited to the Participant's
Account for any Limitation Year shall be limited notwithstanding any
formula or provision, to such amount as will reduce such sum to 1.0 by
first limiting or eliminating any voluntary contributions, and second
by reducing the contribution formula, unless the Employer provides
other limitations in Section (R) of the Adoption Agreement.
(b) Super Top-Heavy Group
---------------------
If the Employer maintains, or at any time maintained, a qualified
defined benefit plan covering any Participant in this Plan and the
plans are paired plans or part of a super top-heavy group during any
Limitation Year, then the sum of the
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Participant's Defined Benefit Plan Fraction and Defined Contribution
Plan fraction, modified as hereinafter provided, shall not exceed 1.0
for that Limitation Year.
The term "super top-heavy group" means an aggregation group with
respect to which the present value of the cumulative accrued benefits
for Key Employees under all defined benefit plans included in such
group and the aggregate of the accounts of Key Employees under all
defined contribution plans included in such group exceeds ninety (90)
percent of a similar sum determined for all Participants. The Defined
Benefit Plan Fraction and the Defined Contribution Plan Fraction of
any Participant subject to this Subsection shall be modified by
substituting "100 percent" for "125 percent" in the denominators of
both such fractions. The Annual Additions which may be credited to the
Participant's Account under this Plan for any Limitation Year will be
limited in accordance with Section (R) of the Adoption Agreement.
(c) Top-Heavy Group
---------------
If the Employer maintains, or at any time maintained, a qualified
defined benefit plan covering any Participant in this Plan and the
Plans are paired plans or part of a top-heavy group which is not super
top-heavy during any Limitation Year, then the sum of the
Participant's Defined Benefit Plan Fraction and Defined Contribution
Plan Fraction, modified as hereinafter provided, shall not exceed 1.0
for that Limitation Year.
The Defined Benefit Plan Fraction and Defined Contribution Fraction of
any Participant subject to this Subsection (c) shall be modified by
substituting "100 percent" for "125 percent" in the denominators of
both fractions, unless the Employer elects in Section (T) of the
Adoption Agreement to provide certain additional minimum benefits. If
the Employer elects to provide such additional minimum benefits, then
no modification shall be made to either the Defined Benefit Plan or
the Defined Contribution Plan Fraction. The Annual Additions which may
be credited to the Participant's Account under this Plan for any
Limitation Year will be limited in accordance with Section (R) of the
Adoption Agreement.
(d) Paired Plans
------------
When paired plans are top-heavy but are not super top-heavy, the
Employer will provide a minimum nonintegrated contribution of 4% of
total compensation for each Employee who participates in this Plan but
does not participate in the paired defined benefit plan. If such an
Employee also participates in a paired defined contribution plan, the
minimum shall be provided as elected in Section (S) of the Adoption
Agreement substituting 4% wherever 3% appears.
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When the paired plans are super top-heavy, the Employer shall provide
a minimum nonintegrated contribution of 3% of total compensation for
each Employee who participates in this Plan but does not participate
in the paired defined benefit plan. If such an Employee also
participates in a paired defined contribution plan, the minimum shall
be provided as elected in Section (S) of the Adoption Agreement.
8.5 DEFINITIONS.
-----------
(a) Annual Additions: The sum of the following amounts credited to a
Participant's Account for the Limitation Year:
(i) Employer contributions;
(ii) forfeitures; and
(iii) Employee contributions.
For this purpose, any Excess Amount applied under Sections 8.1(d) or 8.2(f)
in the Limitation Year to reduce Employer contributions will be considered
Annual Additions for such Limitation Year.
Amounts allocated, after March 31, 1984, to an individual medical account,
as defined in (S)415(1)(2) of the Code, which is part of a pension or
annuity plan maintained by the Employer, are treated as Annual Additions to
a defined contribution plan.
Also, amounts derived from contributions paid or accrued after December 31,
1985, in taxable years ending after such date, which are attributable to
post-retirement medical benefits allocated to the separate account of a key
employee, as defined in (S)419A(d)(3) of the Code, under a welfare benefit
fund, as defined in (S)419(e) of the Code, maintained by the Employer, are
treated as Annual Additions to a defined contribution plan.
(b) Compensation: A Participant's (S)415 safe-harbor compensation. This
includes wages, salaries, and fees for professional services and other
amounts received (without regard to whether or not an amount is paid
in cash) for personal services actually rendered in the course of
employment with the Employer maintaining the Plan to the extent that
the amounts are includible in gross income (including, but not limited
to, commissions paid salesmen, compensation for services on the basis
of a percentage of profits, commissions on insurance premiums, tips
and bonuses, fringe benefits, reimbursements, and expense allowances),
and excluding the following:
(i) Employer contributions to a plan of deferred compensation which
are not includible in the Employee's gross income for the
taxable year in which
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contributed, or Employer contributions under a simplified
employee pension plan to the extent such contributions are
deductible by the Employee, or any distributions from a plan of
deferred compensation;
(ii) Amounts realized from the exercise of a non-qualified stock
option, or when restricted stock (or property) held by the
Employee either becomes freely transferable or is no longer
subject to a substantial risk of forfeiture;
(iii) Amounts realized from the sale, exchange or other disposition of
stock acquired under a qualified stock option; and
(iv) Other amounts which received special tax benefits, or
contributions made by the Employer (whether or not under a
salary reduction agreement) towards the purchase of an annuity
described in (S)403(b) of the Code (whether or not the amounts
are actually excludable from the gross income of the Employee).
For any self-employed individual compensation will mean earned income. For
limitation years beginning after December 31, 1991, for purposes of
applying the limitations of this article, Compensation for a Limitation
Year is the Compensation actually paid or includible in gross income during
such Limitation Year. Notwithstanding the preceding sentence, compensation
for a Participant in a defined contribution plan who is permanently and
totally disabled (as defined in (S)22(e)(3) of the Code) is the
Compensation such Participant would have received for the Limitation Year
if the Participant had been paid at the rate of Compensation paid
immediately before becoming permanently and totally disabled; such imputed
Compensation for the disabled Participant may be taken into account only if
the Participant is not a Highly Compensated Employee (as defined in
(S)414(q) of the Code) and contributions made on behalf of such Participant
are nonforfeitable when made.
(c) Defined Benefit Fraction: A fraction, the numerator of which is the
sum of the Participant's Projected Annual Benefits under all the
defined benefit plans (whether or not terminated) maintained by the
Employer, and the denominator of which is the lesser of 125 percent of
the dollar limitation determined for the Limitation Year under
(S)415(b) and (d) of the Code or 140 percent of the Highest Average
Compensation, including any adjustments under (S)415(b) of the Code.
Notwithstanding the above, if the Participant was a Participant as of
the first day of the first Limitation Year beginning after
December 31, 1986, in one or more defined benefit plans maintained by
the Employer which were in existence on May 6, 1986, the denominator
of this fraction will not be less than 125 percent of the sum of the
annual benefits under such plans which the Participant had accrued as
of the close of the last Limitation Year beginning before January 1,
1987, disregarding any changes in the terms and conditions of the Plan
after May 5,
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1986. The preceding sentence applies only if the defined benefit plans
individually and in the aggregate satisfied the requirements of (S)415
for all Limitation Years before January 1, 1987.
(d) Defined contribution dollar limitation: $30,000 or, if greater, one-
fourth of the defined benefit dollar limitation set forth in
(S)415(b)(1) of the Code as in effect for the Limitation Year.
(e) Defined Contribution Fraction: A fraction, the numerator of which is
the sum of the Annual Additions to the Participant's Account under all
the defined contribution plans (whether or not terminated) maintained
by the Employer for the current and all prior Limitation Years
(including the Annual Additions attributable to the Participant's
nondeductible Employee contributions to all defined benefit plans,
whether or not terminated, maintained by the Employer, and the Annual
Additions attributable to all welfare benefit funds, as defined in
(S)419(e) of the Code, and individual medical accounts, as defined in
(S)415(1)(2) of the Code, maintained by the Employer), and the
denominator of which is the sum of the maximum aggregate amounts for
the current and all prior Limitation Years of service with the
Employer (regardless of whether a defined contribution plan was
maintained by the Employer). The maximum aggregate amount in any
Limitation Year is the lesser of 125 percent of the dollar limitation
determined under (S)415(b) and (d) of the Code in effect under
(S)415(c)(1)(A) of the Code or 35 percent of the Participant's
Compensation for such year.
If the Employee was a Participant as of the end of the first day of
the first Limitation Year beginning after December 31, 1986, in one or
more defined contribution plans maintained by the Employer which were
in existence on May 6, 1986, the numerator of this fraction will be
adjusted if the sum of this fraction and the defined benefit fraction
would otherwise exceed 1.0 under the terms of this plan. Under the
adjustment, an amount equal to the product of (1) the excess of the
sum of the fractions over 1.0 times (2) the denominator of this
fraction, will be permanently subtracted from the numerator of this
fraction. The adjustment is calculated using the fractions as they
would be computed as of the end of the last Limitation Year beginning
before January 1, 1987, and disregarding any changes in the terms and
conditions of the Plan made after May 6, 1986, but using the (S)415
limitation applicable to the first Limitation Year beginning on or
after January 1, 1987. The Annual Addition for any Limitation Year
beginning before January 1, 1987 shall not be recomputed to treat all
Employee Contributions as Annual Additions.
(f) Employer: For purposes of this article, Employer shall mean the
Employer that adopts this Plan, and all members of a controlled group
of corporations (as defined in (S)414(b) of the Code as modified by
(S)415(h)), all commonly controlled trades or businesses (as defined
in (S)414(c) as modified by (S)415(h)) or affiliated service
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groups (as defined in (S)414(m)) of which the adopting Employer is a
part, and any other entity required to be aggregated with the Employer
pursuant to regulations under (S)414(o) of the Code.
(g) Excess Amount: The excess of the Participant's Annual Additions for
the Limitation Year over the Maximum Permissible Amount.
(h) Highest Average Compensation: The average Compensation for the three
consecutive years of service with the Employer that produces the
highest average. A Year of Service with the Employer is the 12-
consecutive month period defined in Section (B) of the Adoption
Agreement.
(i) Limitation Year: A calendar year, or the 12-consecutive month period
elected by the Employer in Section (B)(3) of the Adoption Agreement.
All qualified plans maintained by the Employer must use the same
Limitation Year. If the Limitation Year is amended to a different 12-
consecutive month period, the new Limitation Year must begin on a date
within the Limitation Year in which the amendment is made.
(j) Master or prototype plan: A plan the form of which is the subject of a
favorable opinion letter from the Internal Revenue Service.
(k) Maximum Permissible Amount: The maximum annual addition that may be
contributed or allocated to a Participant's Account under the Plan for
any Limitation Year shall not exceed the lesser of:
(i) the defined contribution dollar limit, or
(ii) 25% of the Participant's Compensation for the Limitation Year.
The compensation limitation referred to in (ii) shall not apply to any
contribution for medical benefits (within the meaning of (S)401(h) or
(S)419A(f)(2) of the Code) which is otherwise treated as an Annual
Addition under (S)415(1)(1) or (S)419A(d)(2). If a short Limitation
Year is created because of an amendment changing the Limitation Year
to a different 12-consecutive month period, the Maximum Permissible
Amount will not exceed the defined contribution dollar limitation
multiplied by the following fraction:
Number of months in the short Limitation Year
---------------------------------------------
12
(l) Projected Annual Benefit: The annual retirement benefit (adjusted to
an actuarially equivalent straight life annuity if such benefit is
expressed in a form
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other than a straight life annuity or qualified joint and survivor
annuity) to which the Participant would be entitled under the terms of
the plan assuming:
(i) the Participant will continue employment until Normal Retirement
Age under the Plan (or current age, if later), and
(ii) the Participant's Compensation for the current Limitation Year
and all other relevant factors used to determine benefits under
the Plan will remain constant for all future Limitation Years.
ARTICLE IX
ADDITIONAL REQUIREMENTS FOR TOP-HEAVY PLANS
9.1 GENERALLY.
---------
If the Plan is or becomes top-heavy in any Plan Year beginning after
December 31, 1983, the provisions of Section(s) 9.1 through 9.4 will
supersede any conflicting provision in the Plan or Adoption Agreement.
9.2 TOP-HEAVY DEFINITIONS.
---------------------
(a) Key Employee: Any Employee or former Employee (and the Beneficiaries
of such Employee) who at any time during the determination period was
an officer of the Employer if such individual's annual Compensation
exceeds 50 percent of the dollar limitation under (S)415(b)(1)(A) of
the Code, an owner (or considered an owner under (S)318 of the Code)
of one of the ten largest interests in the Employer if such
individual's compensation exceeds the dollar limitation under
(S)415(c)(1)(A) of the Code, a 5-percent owner of the Employer, or a
l-percent owner of the Employer who has an annual Compensation of more
than $150,000. Annual Compensation means Compensation as defined in
(S)415(c)(3) of the Code, but including amounts contributed by the
Employer pursuant to a salary reduction agreement which are excludable
from the Employee's gross income under (S)125, (S)402(a)(8), (S)402(h)
or (S)403(b) of the Code. The determination period is the Plan Year
containing the Determination Date and the four preceding Plan Years.
The determination of who is a Key Employee will be made in accordance
with (S)416(i)(1) of the Code and the regulations thereunder.
(b) Top-heavy plan: For any Plan Year beginning after December 31, 1983,
this Plan is top-heavy if any of the following conditions exists:
(i) If the Top-heavy Ratio for this Plan exceeds 60 percent and this
Plan is not part of any Required Aggregation Group or Permissive
Aggregation Group of plans.
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(ii) If this Plan is a part of a Required Aggregation Group of plans
but not part of a Permissive Aggregation Group and the Top-heavy
Ratio for the group of plans exceeds 60 percent.
(iii) If this Plan is a part of a Required Aggregation Group and part
of a Permissive Aggregation Group of plans and the Top-heavy
Ratio for the Permissive Aggregation Group exceeds 60 percent.
(c) Top-heavy Ratio:
(i) If the Employer maintains one or more defined contribution plans
(including any Simplified Employee Pension Plan) and the
Employer has not maintained any defined benefit plan which
during the 5-year period ending on the Determination Date(s) has
or has had accrued benefits, the Top-heavy Ratio for this Plan
alone or for the required or Permissive Aggregation Group as
appropriate is a fraction, the numerator of which is the sum of
the Account Balances of all Key Employees as of the
Determination Date(s) (including any part of any Account Balance
distributed in the 5-year period ending on the Determination
Date(s)), and the denominator of which is the sum of all Account
Balances (including any part of any Account Balance distributed
in the 5-year period ending on the Determination Date(s)), both
computed in accordance with (S)416 of the Code and the
regulations thereunder. Both the numerator and denominator of
the Top-heavy Ratio are increased to reflect any contribution
not actually made as of the Determination Date, but which is
required to be taken into account on that date under (S)416 of
the Code and the regulations thereunder.
(ii) If the Employer maintains one or more defined contribution plans
(including any Simplified Employee Pension Plan) and the
Employer maintains or has maintained one or more defined benefit
plans which during the 5-year period ending on the Determination
Date(s) has or has had any accrued benefits, the Top-heavy Ratio
for any required or Permissive Aggregation Group as appropriate
is a fraction, the numerator of which is the sum of Account
Balances under the aggregated defined contribution plan or plans
for all Key Employees, determined in accordance with (i) above,
and the Present Value of accrued benefits under the aggregated
defined benefit plan or plans for all Key Employees as of the
Determination Date(s), and the denominator of which is the sum
of the Account Balances under the aggregated defined
contribution plan or plans for all Participants, determined in
accordance with (i) above, and the Present Value of accrued
benefits under the defined benefit plan or plans for all
Participants as of the Determination Date(s), all determined in
accordance with (S)416 of the Code and the regulations
thereunder. The
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accrued benefits under a defined benefit plan in both the
numerator and denominator of the Top-heavy Ratio are increased
for any distribution of an accrued benefit made in the five-year
period ending on the Determination Date.
(iii) For purposes of (i) and (ii) above the value of Account Balances
and the Present Value of accrued benefits will be determined as
of the most recent Valuation Date that falls within or ends with
the 12-month period ending on the Determination Date, except as
provided in (S)416 of the Code and the regulations thereunder
for the first and second plan years of a defined benefit plan.
The Account Balances and accrued benefits of a Participant (1)
who is not a Key Employee but who was a Key Employee in a prior
year, or (2) who has not been credited with at least one Hour of
Service with any Employer maintaining the Plan at any time
during the 5-year period ending on the Determination Date will
be disregarded. The calculation of the Top-heavy Ratio, and the
extent to which distributions, rollovers, and transfers are
taken into account will be made in accordance with (S)416 of the
Code and the regulations thereunder. Deductible employee
contributions will not be taken into account for purposes of
computing the Top-heavy Ratio. When aggregating plans the value
of Account Balances and accrued benefits will be calculated with
reference to the Determination Dates that fall within the same
calendar year.
(iv) Solely for purposes of determining the Top-heavy Ratio, the
accrued benefit in a defined benefit plan of an Employee other
than a Key Employee shall be determined under (a) the method, if
any, that uniformly applies for accrual purposes under all
defined benefit plans maintained by the Employer, or (b) if
there is no such method, as if such benefit accrued not more
rapidly than the slowest accrual rate permitted under the
fractional rule of (S)411(b)(1)(C) of the Code.
(d) Permissive Aggregation Group: The Required Aggregation Group of plans
plus any other plan or plans of the Employer which, when considered as
a group with the Required Aggregation Group, would continue to satisfy
the requirements of (S)401(a)(4) and (S)410 of the Code.
(e) Required Aggregation Group: (i) Each qualified plan of the Employer in
which at least one Key Employee participates, or participated at
anytime during the determination period regardless of whether the plan
has terminated and (ii) any other qualified plan of the Employer which
enables a plan described in (i) to meet the requirements of
(S)401(a)(4) or (S)410 of the Code.
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(f) Present Value: Actuarial assumptions used to determine present value
shall be based on the interest and mortality rates elected in the
defined benefit plan which is part of the aggregation group.
9.3 MINIMUM CONTRIBUTION OR ALLOCATION.
----------------------------------
Except as otherwise provided in (b) and (c) below, the Employer
contributions and forfeitures allocated on behalf of any Participant shall
not be less than the lesser of three percent of such Participant's
Compensation or in the case where the Employer has no defined benefit plan
which designates this plan to satisfy (S)401 of the Code, the largest
percentage of Employer contributions and forfeitures, as a percentage of
the first $200,000 of the Key Employee's Compensation, allocated on behalf
of any Key Employee for that year. The minimum allocation is determined
without regard to any Social Security contribution. This minimum allocation
shall be made even though, under other plan provisions, the Participant
would not otherwise be entitled to receive an allocation, or would have
received a lesser allocation for the year because of (i) the Participant's
failure to complete 1,000 Hours of Service, or (ii) the Participant's
failure to make elective contributions to the plan, or (iii) Compensation
less than a stated amount.
(a) For purposes of computing the minimum allocation, Compensation shall
mean Compensation as defined in Section 1.7 of the Plan.
(b) The minimum allocation shall not apply to any Participant who was not
employed by the Employer on the last day of the Plan Year.
(c) The minimum allocation shall not apply to any Participant to the
extent the Participant is covered under any other plan or plans of the
Employer and the Employer has provided in Section (S) of the Adoption
Agreement that the minimum allocation or benefit requirement
applicable to top-heavy plans with respect to such Participant will be
met in the other plan or plans.
(d) Neither Elective Deferrals nor Matching Contributions may be taken
into account for the purpose of satisfying the minimum top-heavy
contribution requirements.
The minimum allocation required (to the extent required to be
nonforfeitable under (S)416(b)) may not be forfeited under (S)411(a)(3)(B)
or (S)411(a)(3)(D).
9.4 MINIMUM VESTING.
---------------
During and subsequent to the first Plan Year in which this Plan is top-
heavy, one of the minimum vesting schedules as elected by the Employer in
Section (M) of the Adoption Agreement will automatically apply to the Plan.
The minimum vesting schedule applies to all benefits within the meaning of
(S)411(a)(7) of the Code except those attributable to
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employee contributions, including benefits accrued before the effective
date of (S)416 and benefits accrued before the Plan became top-heavy.
In the event the Plan's status as top-heavy changes for any Plan Year, the
top-heavy vesting schedule in effect shall remain in effect. This section
does not apply to the Account Balances of any employee who does not have an
Hour of Service after the Plan has initially become top-heavy and such
Employee's Account Balance attributable to Employer contributions and
forfeitures will be determined without regard to this section.
ARTICLE X
JOINT AND SURVIVOR ANNUITY REQUIREMENTS
10.1 GENERAL. The provisions of this article shall take precedence over any
-------
conflicting provision in this Plan.
The provisions of this Article shall apply to any Participant who is
credited with at least one Hour of Service with the Employer on or after
August 23, 1984, and such other Participants as provided in Section 10.6.
10.2 QUALIFIED JOINT AND SURVIVOR ANNUITY. Unless an optional form of benefit
------------------------------------
is selected pursuant to a qualified election within the 90-day period
ending on the annuity starting date, a married Participant's vested Account
Balance will be paid in the form of a Qualified Joint and Survivor Annuity
and an unmarried Participant's vested Account Balance will be paid in the
form of a life annuity. The Participant may elect to have such annuity
distributed upon attainment of the earliest retirement age under the Plan.
10.3 QUALIFIED PRERETIREMENT SURVIVOR ANNUITY.
----------------------------------------
Unless an optional form of benefit is selected within the election period
pursuant to a qualified election, if a Participant dies before the annuity
starting date and is survived by a spouse, the Participant's spouse shall
receive an annuity for the life of the surviving spouse, the actuarial
equivalent of which is not less than 50 percent of the sum of the
Participant's Account and any Segregated Accounts established for the
Participant as of the date of the Participant's death. The surviving spouse
may elect to have such annuity distributed within a reasonable period after
the Participant's death.
10.4 DEFINITIONS.
-----------
(a) Election period: The period which begins on the first day of the Plan
Year in which the Participant attains age 35 and ends on the date of
the Participant's death. If a Participant separates from service prior
to the first day of the Plan Year in which age 35 is attained, with
respect to the Account Balance as of the date of separation, the
election period shall begin on the date of separation.
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(b) Pre-age 35 waiver: A Participant who will not yet attain age 35 as
of the end of any current Plan Year may make a special qualified
election to waive the Qualified Preretirement Survivor Annuity for
the period beginning on the date of such election and ending on the
first day of the Plan Year in which the Participant will attain age
35. Such election shall not be valid unless the Participant receives
a written explanation of the Qualified Preretirement Survivor Annuity
in such terms as are comparable to the explanation required under
Section 10.5(a). Qualified Preretirement Survivor Annuity coverage
will be automatically reinstated as of the first day of the Plan Year
in which the Participant attains age 35. Any new waiver on or after
such date shall be subject to the full requirements of this Article.
(c) Earliest retirement age: The earliest date on which, under the Plan,
the Participant could elect to receive retirement benefits.
(d) Qualified election: A waiver of a Qualified Joint and Survivor
Annuity or a Qualified Preretirement Survivor Annuity. Any waiver of
a Qualified Joint and Survivor Annuity or a Qualified Preretirement
Survivor Annuity shall not be effective unless: (a) the Participant's
spouse consents in writing to the election; (b) the election
designates a specific beneficiary, including any class of
beneficiaries or any contingent beneficiaries, which may not be
changed without spousal consent (or the spouse expressly permits
designations by the Participant without any further spousal consent);
(c) the spouse's consent acknowledges the effect of the election; and
(d) the spouse's consent is witnessed by a Plan representative or
notary public. Additionally, a Participant's waiver of the Qualified
Joint and Survivor Annuity shall not be effective unless the election
designates a form of benefit payment which may not be changed without
spousal consent (or the spouse expressly permits designations by the
Participant without any further spousal consent). If it is
established to the satisfaction of a Plan representative that there
is no spouse or that the spouse cannot be located, a waiver will be
deemed a qualified election.
Any consent by a spouse obtained under this provision (or
establishment that the consent of a spouse may not be obtained) shall
be effective only with respect to such spouse. A consent that permits
designations by the Participant without any requirement of further
consent by such spouse must acknowledge that the spouse has the right
to limit consent to a specific beneficiary, and a specific form of
benefit where applicable, and that the spouse voluntarily elects to
relinquish either or both of such rights. A revocation of a prior
waiver may be made by a Participant without the consent of the spouse
at any time before the commencement of benefits. The number of
revocations shall not be limited. No consent obtained under this
provision shall be valid unless the Participant has received notice
as provided in Section 10.5(a) below.
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<PAGE>
(e) Qualified Joint and Survivor Annuity: An immediate annuity for the
life of the Participant with a survivor annuity for the life of the
spouse which is not less than 50 percent and not more than 100
percent of the amount of the annuity which is payable during the
joint lives of the Participant and the spouse and which is the amount
of benefit which can be purchased with the Participant's vested
Account Balance. The percentage of the survivor annuity shall be 50%.
(f) Spouse (surviving spouse): The spouse or surviving spouse of the
Participant, provided that a former spouse will be treated as the
spouse or surviving spouse to the extent provided under a qualified
domestic relations order as described in (S)414(p) of the Code.
(g) Annuity starting date: The first day of the first Plan Year for
which an amount is paid as an annuity or any other form.
(h) Vested Account Balance: The aggregate value of the Participant's
vested Account Balances derived from Employer and Employee
contributions (including rollovers), whether vested before or upon
death, including the proceeds of insurance contracts, if any, on the
Participant's life. The provisions of this Article shall apply to a
Participant who is vested in amounts attributable to Employer
contributions. Employee contributions (or both) at the time of death
or distribution.
10.5 NOTICE REQUIREMENTS.
-------------------
(a) In the case of a Qualified Joint and Survivor Annuity, the
Administrator shall, no less than 30 days and no more than 90 days
prior to the annuity starting date, provide each Participant a
written explanation of: (i) the terms and conditions of a Qualified
Joint and Survivor Annuity; (ii) the Participant's right to make and
the effect of an election to waive the Qualified Joint and Survivor
annuity form of benefit; (iii) the rights of a Participant's spouse;
and (iv) the right to make, and the effect of, a revocation of a
previous election to waive the Qualified Joint and Survivor Annuity.
(b) In the case of a Qualified Preretirement Survivor Annuity as
described in Section 10.3 of this Article, the Administrator shall
provide each Participant within the applicable period for such
Participant a written explanation of the Qualified Preretirement
Survivor Annuity in such terms and in such manner as would be
comparable to the explanation provided for meeting the requirements
of section 10.5(a) applicable to a Qualified Joint and Survivor
Annuity.
The applicable period for a Participant is whichever of the following
periods ends last: (i) the period beginning with the first day of
the Plan Year in which the Participant attains age 32 and ending with
the close of the Plan Year preceding the
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Plan Year in which the Participant attains age 35; (ii) a reasonable
period ending after the individual becomes a Participant; and (iii) a
reasonable period ending after this Article first applies to the
Participant. Notwithstanding the foregoing, notice must be provided
within a reasonable period ending after separation from service in
the case of a Participant who separates from service before attaining
age 35.
For purposes of applying the preceding paragraph, a reasonable period
ending after the enumerated events described in (ii) and (iii) is the
end of the two-year period beginning one year prior to the date the
applicable event occurs, and ending one year after that date. In the
case of a Participant who separates from service before the Plan Year
in which age 35 is attained, notice shall be provided within the two-
year period beginning one year prior to separation and ending one
year after separation. If such a Participant thereafter returns to
employment with the Employer, the applicable period for such
Participant shall be redetermined.
10.6 TRANSITIONAL RULES.
------------------
(a) Any living Participant not receiving benefits on August 23, 1984, who
would otherwise not receive the benefits prescribed by the previous
Sections of this Article must be given the opportunity to elect to
have the prior Sections of this Article apply if such Participant is
credited with at least one Hour of Service under this Plan or a
predecessor plan in a Plan Year beginning on or before January 1,
1976, and such Participant had at least 10 years of vesting service
when he separated from service.
(b) Any living Participant not receiving benefits on August 23, 1984, who
was credited with at least one Hour of Service under this Plan or a
predecessor Plan on or after September 2, 1974, and who is not
otherwise credited with any service in a Plan Year beginning on or
after January 1, 1976, must be given the opportunity to have his
benefits paid in accordance with Section 10.6(d) of this Article.
(c) The respective opportunities to elect (as described in Sections
10.6(a) and (b) above) must be afforded to the appropriate
Participants during the period commencing on August 23, 1984, and
ending on the date benefits would otherwise commence to said
Participants.
(d) Any Participant who has elected pursuant to Section 10.6(b) of this
Article and any Participant who does not elect under Section 10.6(a)
or who meets the requirements of Section 10.6(a) except that such
Participant does not have at least 10 years of vesting service when
he separates from service, shall have his benefits distributed in
accordance with all of the following requirements if benefits would
have been payable in the form of a life annuity:
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(i) Automatic joint and survivor annuity. If benefits in the form
of a life annuity become payable to a married Participant who:
(1) begins to receive payments under the Plan on or after
Normal Retirement Age; or
(2) dies on or after Normal Retirement Age while still
working for the Employer; or
(3) begins to receive payments on or after the Qualified
Early Retirement Age; or
(4) separates from service on or after attaining Normal
Retirement Age (or the Qualified Early Retirement Age)
and after satisfying the eligibility requirements for the
payment of benefits under the Plan and thereafter dies
before beginning to receive such benefits;
then such benefits will be received under this Plan in the
form of a Qualified Joint and Survivor Annuity, unless the
Participant has elected otherwise during the election period.
The election period must begin at least 6 months before the
Participant attains Qualified Early Retirement Age and end not
more than 90 days before the commencement of benefits. Any
election hereunder will be in writing and may be changed by
the Participant at any time.
(ii) Election of early survivor annuity. A Participant who is
employed after attaining the Qualified Early Retirement Age
will be given the opportunity to elect, during the election
period, to have a survivor annuity payable on death. If the
Participant elects the survivor annuity, payments under such
annuity must not be less than the payments which would have
been made to the spouse under the Qualified Joint and Survivor
Annuity if the Participant had retired on the day before his
death. Any election under this provision will be in writing
and may be changed by the Participant at any time. The
election period begins on the later of (1) the 90th day before
the Participant attains the Qualified Early Retirement age, or
(2) the date on which participation begins, and ends on the
date the Participant terminates employment.
(iii) For purposes of this Section 10.6, Qualified Early Retirement
Age is the latest of (a) the earliest date, under the Plan, on
which the Participant may elect to receive retirement
benefits, (b) the first day of the 120th month beginning
before the Participant reaches Normal Retirement Age, or (c)
the date the Participant begins participation. Qualified Joint
and Survivor
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<PAGE>
Annuity is an annuity for the life of the Participant with a
survivor annuity for the life of the spouse as described in
Section 10.4(e).
10.7 DISTRIBUTIONS WITHOUT SPOUSAL CONSENT. Only the Participant need consent
-------------------------------------
to the commencement of a distribution in the form of a Qualified Joint and
Survivor Annuity. Neither the consent of the Participant nor the
Participant's Spouse shall be required to the extent that a distribution is
$3500 or less; required to satisfy (S)401(a)(9); or required to satisfy
(S)415 of the Code.
ARTICLE XI
TERMINATION OF EMPLOYMENT -- PARTICIPATION AND VESTING
11.1 NOTICE OF TERMINATION. If the employment of any Participant terminates for
---------------------
reasons other than death, retirement or disability, the Employer shall
immediately give written notice to the Administrator of the date of
termination of the employment of such Participant. Upon receipt of such
notice, the Administrator shall determine the Participant's vested
interest.
11.2 VESTING - EMPLOYEE-PROVIDED PARTICIPANT'S ACCOUNT AND SEGREGATED ACCOUNT.
------------------------------------------------------------------------
The Participant's Account derived from Employee Mandatory Contributions
shall be fully vested at all times. Any Segregated Account established on
behalf of an Employee for nondeductible Employee Voluntary Contributions,
rollover contributions or funds transferred from another qualified plan
shall be fully vested at all times.
11.3 VESTING - EMPLOYER-PROVIDED PARTICIPANT'S ACCOUNT. Upon termination of
-------------------------------------------------
employment for reasons other than death, retirement or disability, a
Participant shall be vested in a percentage of his Participant's Account
derived from Employer contributions on his behalf in accordance with the
schedule designated in Section (M) of the Adoption Agreement.
11.4 VESTING - YEARS OF SERVICE, BREAK IN SERVICE. For the purpose of
--------------------------------------------
determining Years of Service and Breaks in Service to compute an Employee's
nonforfeitable right with respect to his Participant's Account derived from
Employer contributions, the 12-month period shall be the Plan Year.
A former Participant who had a nonforfeitable right to all or a portion of
his Participant's Account derived from Employer contributions at the time
of his termination shall receive credit for all Years of Service prior to
his Break in Service upon completing a Year of Service after his return to
the employ of the Employer.
A former Participant who did not have a nonforfeitable right to any portion
of his Participant's Account derived from Employer contributions at the
time of his termination
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<PAGE>
shall receive credit for all Years of Service prior to his Break in Service
if (1) he completes a Year of Service after his return to the employ of the
Employer, and (2) the number of consecutive one-year Breaks in Service is
less than the greater of 5 or the aggregate number of Years of Service
before such break.
In the case of any Participant who has five consecutive one-year Breaks in
Service, Years of Service after such Break shall not be taken into account
for purposes of determining the vested interest in the Participant's
Account derived from contributions made prior to the Break in Service, but
both pre-break and post-break service will count for the purpose of vesting
the Employer-derived account balance that accrues after such breaks. Both
accounts will share in the earnings and losses of the fund. In the case of
a Participant who does not have 5 consecutive 1-year Breaks in Service,
both the pre-break and post-break service will count in vesting both the
pre-break and post-break employer-derived account balance.
Years of Service shall not include Years of Service excluded under Section
(N) of the Adoption Agreement. Years of Service shall include service with
a predecessor Employer who did maintain this Plan and, if elected by the
Employer in Section (C)(3) of the Adoption Agreement, with a predecessor
Employer who did not maintain this Plan.
11.5 BENEFITS OF AN INELIGIBLE PARTICIPANT. If the Participant ceases to be a
-------------------------------------
member of an eligible class of Employees under Section (C)(2) of the
Adoption Agreement but continues as an Employee, he shall become an
ineligible Participant and no further Employer contributions shall be
allocated on his behalf. His Participant's Account shall be distributed to
him upon his retirement, disability, death or termination of employment or
termination of the Plan. Contracts on his life will be placed under a
reduced paid-up nonforfeiture option or surrendered and the proceeds will
be placed in his Participant's Account. His Participant's Account shall
continue to share in investment gains or losses until such time as the
Participant's Account is distributed to him.
For purposes of determining the vesting percentage applied to the Employer-
provided Participant's Account of an ineligible Participant, Years of
Service shall be credited for Years for which an Employee is not a member
of an eligible class of Employees under Section (C)(2) of the Adoption
Agreement.
11.6 DISTRIBUTION OF BENEFITS. If a Participant terminates employment and the
------------------------
value of the vested Participant's Account derived from Employer and
Employee contributions is $3,500 or less, the Trustee shall distribute the
Participant's entire vested percentage of his Participant's Account no
later than 60 days after the end of the Plan Year in which a Break in
Service occurs.
If a Participant terminates employment and the value of the vested
Participant's Account derived from Employer and Employee contributions
exceeds (or at the time of any prior distribution exceeded) $3500, the
Trustee shall distribute the Participant's entire vested
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<PAGE>
percentage of his Participant's Account no later than 60 days after the
Plan Year in which the Participant dies, is disabled, attains Early
Retirement Age (if elected in Section (P) of the Adoption Agreement) or
Normal Retirement Age.
If elected in Section (Q) of the Adoption Agreement, a Participant who
terminates employment and obtains proper spousal consent, as provided in
Article X, may request and receive an immediate distribution in a form
permitted by Section 4.1 within 60 days after the end of the Plan Year in
which a Break in Service occurs. If the Participant and/or spouse does not
elect to have the vested Participant's Account distributed to him, or the
option is not available to the Participant, the Trustee shall continue to
hold the Participant's Account in Trust until the earlier of Normal
Retirement Age. Early Retirement Age (if elected in Section (P) of the
Adoption Agreement), death or disability.
When a Participant's Account is distributed the Trustee shall also
distribute any vested benefits held in a Segregated Account on behalf of
the Participant to him in a form permitted by Section 4.1 as determined by
the Participant. Such distribution shall be subject to the Joint and
Survivor Annuity rules of Article X.
11.7 NOTICE TO PARTICIPANT. The consent of the Participant and the
---------------------
Participant's spouse shall be obtained in writing within the 90-day period
ending on the annuity starting date. The annuity starting date is the first
day of the first period for which an amount is paid as an annuity or in any
other form. The Plan Administrator shall notify the Participant and the
Participant's spouse of the right to defer any distribution to Normal
Retirement Age (or age 62 if later). Such notification shall include a
general description of the material features, and an explanation of the
relative values of, the optional forms of benefit available under the Plan
in a manner that would satisfy the notice requirements of (S)417(a)(3) of
the Code, and shall be provided no less than 30 days and no more than 90
days prior to the annuity starting date.
11.8 VESTED DEFERRED BENEFITS. A Participant who terminates employment with the
------------------------
Employer shall forfeit amounts in excess of the vested portion of the
Participant's Account. The forfeiture shall be applied no later than the
close of the Plan Year in which the Participant has five consecutive one-
year Breaks in Service. The forfeiture shall be applied pursuant to Section
11.10.
11.9 REPAYMENT/RESTORATION OF FORFEITURE. A Participant who terminates
-----------------------------------
employment with the Employer and receives a distribution of the vested
percentage of his Participant's Account which is less than 100 percent in
accordance with Article XI shall forfeit amounts which are in excess of his
vested interest as of the date of distribution. For purposes of this
Section, if the value of a Participant's Account is zero, the Participant
shall be deemed to have received a distribution of such vested Account.
If a Participant terminates service, and receives the value of the
Participant's vested Account, the nonvested portion will be treated as a
forfeiture. If the Participant elects to
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<PAGE>
have distributed less than the entire vested portion of the Account
derived from Employer contributions, the part of the nonvested portion
that will be treated as a forfeiture is the total nonvested portion
multiplied by a fraction, the numerator of which is the amount of the
distribution attributable to Employer contributions and the denominator of
which is the total value of the vested Employer derived Account.
If the Participant returns to covered employment with the Employer, any
amounts so forfeited shall be restored to the Participant's Account by the
end of the Plan Year following the Plan Year after repayment by the
Participant of the distribution.
If an Employee is deemed to receive a distribution pursuant to this
section and the Employee resumes employment covered under the Plan before
the date before the Participant incurs five consecutive one year breaks in
service, upon the reemployment of such Employee, the Employer derived
account balance of the Employee will be restored to the amount on the date
of such deemed distribution.
Permissible sources for restoration of the Participant's Account are
current forfeitures and, if necessary, an Employer contribution sufficient
when added to the forfeitures to restore such amounts.
A returning Participant may repay the full amount previously distributed.
The Participant's Account once repaid and restored shall equal both the
amount distributed and the amount forfeited, unadjusted for any subsequent
gains and losses. However, no repayment shall be accepted after the
earliest of:
(a) the date which is five years after resumption of employment; or
(b) the close of the Plan Year in which the Participant has five
consecutive one-year Breaks in Service.
11.10 APPLICATION OF FORFEITURES. Forfeitures arising due to termination of
--------------------------
employment shall be determined solely by reference to the vesting
schedules elected in Section (M) of the Adoption Agreement. The
Participant shall not forfeit any Plan benefits for cause. As of each
Valuation Date, the Trustee shall allocate forfeitures to the
Participant's Account of each Participant whose benefit is entitled to be
restored under Section 11.9 of the Plan. The then remaining forfeitures
shall be used to reduce the Employer's next contribution or be allocated
to the remaining Participants as elected in Adoption Agreement Section
(H).
If so elected, the Trustee shall allocate the remaining forfeitures to the
Participant's Account of each Participant who has a Year of Participation
for such Plan Year. However, if this Plan is a Non-standard Plan, a
Participant whose employment is terminated before the Valuation Date, but
after he has completed 1,000 Hours of Service shall share in forfeitures
for the Plan Year in which his termination occurs unless
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<PAGE>
otherwise elected by the Employer in Section (J) of the Adoption Agreement.
The allocation for any Participant shall not be made in any Plan Year to
the extent that it would be an Excess Amount under Article VIII,
LIMITATIONS ON ALLOCATION. Notwithstanding the Employer's election in
Section (J) to the contrary, a Participant whose employment is terminated
before the Valuation Date, but after completion of more than 500 Hours of
Service shall share in forfeitures to the extent necessary to satisfy
minimum participation rules under (S)401(a)(26) of the Code or minimum
coverage rules under (S)410(b) of the Code.
Forfeitures resulting from contributions of an adopting Employer cannot be
reallocated for the benefit of another adopting Employer.
ARTICLE XII
DEATH BENEFITS
12.1 DEATH PRIOR TO DISTRIBUTION OR COMMENCEMENT OF BENEFITS. In the event of
-------------------------------------------------------
the death of a Participant prior to the distribution or commencement of
benefits, the amount of death benefit payable shall equal the amount
provided by any Contracts on his life, and the value of his Account Balance
as provided in Section 2.13.
If a Participant dies and is survived by a spouse and if no election has
been made under Section 10.4, the Trustee shall purchase from the death
benefit available at the Participant's death a preretirement survivor
annuity for the surviving spouse as provided in Section 10.3. If the value
of the death benefit is more than $3500, no distribution shall commence
under such preretirement survivor annuity before the later of the time the
Participant would have attained age 62 or Normal Retirement Age. Provided,
however, that the Participant's surviving spouse may elect to have such
annuity distributed within a reasonable period after the Participant's
death or to receive death benefits in a form other than a qualified
preretirement survivor annuity. The remainder of the death benefit shall be
paid to the Beneficiary of the Participant according to Section 12.2.
If a Participant dies and is not survived by a spouse, or if an election
has been made under Section 10.4, then the benefits payable under this
Section shall be paid to the Beneficiary designated by the Participant
according to Section 12.2.
12.2 BENEFICIARY DESIGNATION. Only the Trustee shall be named as the
-----------------------
Beneficiary to receive the proceeds of any Contract payable by reason of
the Participant's death. However, the Trustee shall be required to pay over
all proceeds of the Contract(s) in accordance with the distribution
provisions of this Plan. Under no circumstances shall the Trustee retain
any part of the proceeds. Each Participant shall have the right, at any
time, to select the Beneficiary or Beneficiaries to receive any death
benefit payable under this Article. Provided, however, that such death
benefits may be paid to a non-spouse Beneficiary only if the Participant
has made a qualified election with spousal consent
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<PAGE>
under Section 10.4, the Participant dies without a spouse surviving, or the
amount of the death benefit is more than sufficient to pay the
preretirement survivor annuity required by Section 10.3. If the death
benefits are more than sufficient to provide a Survivor Annuity, the excess
will be applied to increase the Survivor Annuity unless the Participant has
otherwise elected. The Participant may change each designation, from time
to time, by delivering written notice thereof to the Trustee upon such form
or forms as may be provided by the Trustee.
If there is no surviving spouse as defined in Section 10.4 and no
beneficiary designated, the Trustee shall pay in equal shares the proceeds
of any Contract or benefit payable by reason of the Participant's death to
the then living children of the Participant; if none, to either the father
or mother of such Participant, or to both equally if both are living; if
neither parent is living, to the executor or administrator of the estate of
the Participant.
12.3 DEATH PRIOR TO DATE CONTRACT IS IN FORCE. Notwithstanding any other
----------------------------------------
provision to the contrary, in the event that a Participant shall die prior
to a Contract on his life becoming effective (to which the Participant was
entitled), the death benefit in lieu of such Contract shall be the
standard-rated premium which the Trustee would have paid for such Contract.
Such death benefit shall be paid as provided in Section 12.1.
12.4 DEATH AFTER COMMENCEMENT OF RETIREMENT BENEFITS. If the distribution of a
-----------------------------------------------
Participant's benefits has commenced under Section 4.1, any benefit will be
payable in accordance with the Participant's election of benefits.
ARTICLE XIII
CONTRACTS
13.1 PURCHASE OF CONTRACTS. The Trustee may, subject to the rules of the
---------------------
Insurer, apply any portion of the required contributions made by or for a
Participant to the purchase of one or more Contracts on the life of such
Participant. In addition, if permitted by any Contract purchased, the
Trustee may at the Participant's retirement, pay to the Insurer additional
amounts from the Participant's Account for the purpose of converting the
Contract to provide a retirement income. The Contracts shall be issued to
the Trustee as owner. Such Contracts shall be dated as of the Contract Date
elected in Section (B) of the Adoption Agreement.
The Administrator may establish in a uniform and nondiscriminatory manner
written eligibility requirements for the purchase of Contracts. In
addition, the Trustee shall not be required to purchase a Contract if the
size of the Contract requested by the Participant is less than the minimum
size offered by the Insurer.
13.2 FAMILY COVERAGE. If this Plan is a profit-sharing plan or (S)401(k)
---------------
plan, the Trustees may, subject to the rules of the Insurer, apply any
portion of the required contributions
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<PAGE>
made by or for a Participant to the purchase of one or more Contracts on
the life, or lives, of the Participant's family members. Any such purchase,
when combined with the purchase of life insurance for a Participant, shall
be subject to the incidental limits set forth in Section 13.4. Any proceeds
from policies providing life insurance for family members shall be credited
to the Participant's Account and shall be distributable in accordance with
the terms of this Plan.
13.3 TRANSFER OF CONTRACTS INTO PLAN. The sale of an existing insurance
-------------------------------
contract or annuity contract by a Participant or the Employer to this Plan
is permitted if the following conditions are met:
(a) The Plan must pay no more than the lesser of the cash surrender value
of the contract or the value of the Participant's Account Balance;
(b) The sale must not involve a contract subject to a mortgage or similar
lien which the Plan assumes;
(c) The sale must not otherwise contravene any provisions of this Plan;
and
(d) The sale must not discriminate in favor of a prohibited group of
Employees.
Notwithstanding the above, the sale by a Participant who is an owner-
employee as defined in Section 1.13 or a shareholder-employee of an S-
Corporation shall be permitted only to the extent permitted by law.
13.4 FORMS OF CONTRACTS. The forms of Contracts available are:
------------------
(a) An ordinary life insurance Contract; provided that at all times the
contribution applied to the premium of such Contracts shall always be
less than 50% of the total of all Plan contributions for each
Participant.
(b) An annuity Contract with benefits payable in a fixed or variable
dollar amount.
(c) A term, universal life or variable life insurance Contract provided
that at all times the contribution applied to the premium of such
Contracts shall never be more than 25% of the total of all Plan
contributions for each Participant.
In the event that both ordinary and term Contracts are purchased on
the life of the same Participant, the sum of 50% of the premiums paid
for ordinary Contracts and 100% of the premiums paid for all other
life insurance Contracts shall not exceed 25% of the total of all
Plan contributions for each Participant.
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<PAGE>
(d) Any other form of life insurance contract or annuity contract which
the Insurer may now or hereafter offer, provided however that such
contracts may provide for no more than incidental death benefits.
Subject to the Joint and Survivor Annuity Requirements of Article X,
any contract or contracts on a Participant's life will be converted
to cash, or an annuity, or distributed to the Participant upon
commencement of benefits.
13.5 TRUSTEE AS OWNER. Each Contract shall designate the Trustee as sole owner,
----------------
with the right reserved to said Trustee to exercise any right or option
contained therein. All such Contracts shall be held by the Trustee. The
Trustee shall have the power and right to take such actions with respect to
such Contracts as shall be in accordance with this Plan for the purpose of
providing benefits to Participants.
13.6 VOTING RIGHTS OF VARIABLE CONTRACTS. The Trustee shall solicit and act in
-----------------------------------
accordance with the instructions of the Participant with regard to any
voting rights which pertain to a Contract for variable accumulation of
benefits. During the accumulation period, each Participant will have the
right to instruct the Trustee with respect to the votes attributable to any
vested interest he has in the Contract. All other votes entitled to be cast
during the accumulation period may be cast by the Trustee in his sole
discretion.
During the payment period, every Participant will have the right to
instruct the Trustee with respect to all votes attributable to the amount
of assets established in the appropriate Separate Account to meet
obligations related to such Participant. The Insurer will provide all
notices and proxy materials to the Trustee for distribution to the
Participants. The Trustee may cast all votes for which instructions were
not received in accordance with the Trustee's sole discretion.
13.7 DIVIDENDS. Dividends may be applied in any manner permitted by a
---------
Contract; provided, however, that any dividends or credits will be
allocated to the Participant's Account derived from Employer contributions
for whose benefit the contract is held. If at any time the Trustee shall
decide that the premium on a Contract is not to be paid in cash from the
Participant's Account, the Trustee, in his sole discretion, shall decide
whether the premium is to be paid by automatic policy loan (if the Contract
contains such a provision) or a policy loan or by the use of dividend or
dividend accumulations, if any; whether the Contract is to be continued as
a paid-up policy; or whether some other action is to be taken under the
Contract.
13.8 POLICY LOANS. No policy loans shall be permitted except to pay premiums
------------
on life insurance policies in the event the Employer fails to make a
contribution in time to pay a premium due on any Contract, unless the
Trustee has applied for and received a Prohibited Transaction Exemption
from the Department of Labor and forwarded a copy of such to the Insurer.
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<PAGE>
13.9 CONTRACT RIDERS. A Participant may request the Trustee to apply for the
---------------
attachment of such agreements to his Contract as may be available under
the rules of the Insurer. The Participant shall pay the entire cost of
such agreements, and any benefits resulting therefrom shall inure solely
to the Participant or his Beneficiary.
13.10 WAIVER OF PREMIUM AND ACCIDENTAL DEATH BENEFIT RIDERS. At the direction
-----------------------------------------------------
of the Employer, the Trustee may apply for either a Waiver of Premium
Rider or an Accidental Death Benefit Rider, or both, for all Participants
who qualify under the Insurer's rules. The cost of such Agreement shall be
paid from the appropriate Participants' Accounts.
13.11 ANNUITY CONTRACTS NONTRANSFERABLE. Any annuity Contract transferred or
---------------------------------
purchased under Article XI and distributed to a Participant shall be
endorsed "non-transferable" so that the Contract may not be sold,
assigned, discounted or pledged as collateral for a loan or as security
for the performance of an obligation or for any other purposes to any
other person except the Insurer or as provided in Section 17.2. The terms
of any annuity Contract purchased and distributed by the Plan to a
Participant or spouse shall comply with the requirements of this Plan.
13.12 DISPOSITION OF CONTRACT. In the event a terminated Participant is
-----------------------
entitled to the full value of Contracts on his (or a family member's)
life, the Participant may request the Administrator to have the Trustee
transfer and distribute the Contract to him. The Contracts may be
distributed in any form permitted by Section 4.1. In the event a
terminating Participant is not entitled to the full value of the Contract,
the Administrator at the direction of the Participant may have the
Trustees:
(a) Surrender the Contract and pay the Participant's portion to him;
(b) Obtain a policy loan equal to the nonvested portion of its value and
distribute the Contract to him; or
(c) To the extent permitted by a Prohibited Transaction Exemption, sell
the Contract to the Participant for an amount equal to its cash
surrender value. If the Participant declines to purchase the
Contract, the Contract may also be sold to:
(1) a relative of the Participant,
(2) his Employer, or
(3) another employee benefit plan in which he is a Participant.
13.13 PLAN CONTROLS. In the event of any conflict between the provisions of
-------------
this Plan and the terms of any policy or Contract issued thereunder, the
provisions of the Plan shall control.
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<PAGE>
13.14 CHANGE IN AMOUNT OF INSURANCE. When an increase or decrease in the amount
-----------------------------
of insurance is required because of a change in the amount of
contributions allocated to the Participant or because the aggregate life
insurance premiums would exceed the limits in Section 13.4, the Trustee
shall advise the Insurer to adjust the amount of the Participant's
Contracts.
ARTICLE XIV
INSURANCE COMPANIES
14.1 INSURER NOT A PARTY TO THIS AGREEMENT. The Insurer issuing Contracts upon
-------------------------------------
the application of the Trustees shall neither be deemed to be a party to
this Agreement nor be responsible for its validity.
14.2 RELIANCE ON ACTION OF TRUSTEES. The Insurer shall not be required to look
------------------------------
into the terms of this Agreement and shall not be responsible to see that
any action of the Trustees or the Plan Administrator has been performed or
is authorized by its terms.
14.3 TRUSTEE'S SIGNATURE. For the purpose of making application to the Insurer
-------------------
and in the exercise of any right or option contained in any Contract, the
Insurer may rely upon the signature of any Trustee and shall be held
harmless and completely discharged in acting at the direction and
authorization of such individual.
14.4 PAYMENT TO TRUSTEES OR BENEFICIARIES. The Insurer shall be discharged
------------------------------------
from all liability for any amount paid to the Trustees or to a Beneficiary
in accordance with the terms of its Contracts or paid in accordance with
the direction of the Trustees and the Insurer shall not be obliged to see
to the distribution or funkier application of any monies so paid by it.
ARTICLE XV
RIGHT TO AMEND
15.1 AMENDMENT BY MASSACHUSETTS MUTUAL. The Employer hereby delegates to
---------------------------------
Massachusetts Mutual Life Insurance Company the right to amend this Plan
and its Adoption Agreement, and the Employer, Trustee and Administrator
shall be deemed to have consented to such amendment. Such delegation shall
be limited to the right to amend and shall not be construed to make
Massachusetts Mutual a party to this Plan or the Adoption Agreement. The
delegation shall be subject to the provisions of Article XIV.
Massachusetts Mutual Life Insurance Company shall, after amendment,
contact each Employer of record who has previously adopted this Prototype
Plan and give such Employer the opportunity to continue under the amended
Prototype Plan.
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<PAGE>
Massachusetts Mutual Life Insurance Company, as a Mass Submitter, shall be
recognized as the agent of any sponsoring organization in seeking an
Opinion Letter for this Plan from the Internal Revenue Service. If the
sponsoring organization does not adopt the amendments made by the
Massachusetts Mutual Life Insurance Company as a Mass Submitter, it will
no longer be identical to or a minor modifier of the Mass Submitter Plan.
15.2 AMENDMENT OF ELECTIONS BY EMPLOYER. Subject to Section 15.4, the Employer
----------------------------------
may: (1) change the choice of options in the Adoption Agreement, (2) add
overriding language in the Adoption Agreement when such language is
necessary to satisfy (S)415 or (S)416 of the Code because of the required
aggregation of multiple plans, and (3) add certain model amendments
published by the Internal Revenue Service which specifically provide that
their adoption will not cause the plan to be treated as individually
designed. An Employer that amends the plan for any other reason including
a waiver of the minimum funding requirement under (S)412(d) of the Code,
will no longer participate in this Prototype Plan and will be considered
to have an individually designed plan.
15.3 OTHER AMENDMENTS BY EMPLOYER. Subject to Section 15.4. the Employer shall
----------------------------
have the right to amend any nonelective provision of this Plan without the
consent of any party. Any such amendment shall only apply to the Employer
and its Employees and shall not apply to the Massachusetts Mutual Life
Insurance Company Prototype Plan as it applies to other adopting
Employers. If the Employer amends this Plan other than as provided in
Section 15.2, or except to the extent necessary to satisfy (S)415 or
(S)416 of the Code because of required aggregation of multiple plans the
amended Plan shall cease to be a Prototype Plan and instead shall be
deemed an individually designed Plan not covered by Internal Revenue
Service Opinion Letters or rulings issued to Massachusetts Mutual Life
Insurance Company. The Employer shall notify Massachusetts Mutual Life
Insurance Company of any such amendment.
15.4 RESTRICTION ON AMENDMENT. No amendment:
------------------------
(a) shall increase the duties of the Administrator or Trustee without
their written consent;
(b) to the vesting schedules under Section (M) of the Adoption Agreement
shall deprive a Participant of his nonforfeitable rights to benefits
accrued to the date of the amendment. Further, if the vesting schedule
of the Plan is amended, or the Plan is amended in any way that
directly or indirectly affects the computation of a Participant's
nonforfeitable percentage, or if the Plan is deemed amended by an
automatic change to or from a top-heavy vesting schedule, each
Participant with at least 3 Years of Service with the Employer may
elect, within a reasonable period after the adoption of the amendment
or change, to have his nonforfeitable percentage computed under the
Plan without regard to such amendment or change. For Participants who
do not have at least 1 hour of Service in any Plan Year
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<PAGE>
beginning after December 31, 1988, the preceding sentence shall be
applied by substituting "5 Years of Service" for "3 Years of Service"
where such language appears. The period during which the election may
be made shall commence with the date the amendment is adopted and
shall end on the later of:
(1) 60 days after the amendment is adopted;
(2) 60 days after the amendment becomes effective; or
(3) 60 days after the Participant is issued written notice of the
amendment by the Employer or Administrator;
(c) shall decrease the Participant's Account of any Participant other than
an amendment described in (S)412(c)(8) of the Code. For purposes of
this paragraph, a plan amendment which has the effect of decreasing a
Participant's Account Balance or eliminating an optional form of
benefit, with respect to benefits attributable to service before the
amendment shall be treated as reducing an accrued benefit.
Furthermore, if the vesting schedule of the Plan is amended, in the
case of an Employee who is a Participant as of the later of the date
such amendment is adopted or becomes effective, the nonforfeitable
percentage (determined as of such date) of such Employee's right to
his employer-derived Account Balance will not be less than his
percentage computed under the Plan without regard to such amendment;
(d) shall change the funding method unless the new funding method has been
approved by the Internal Revenue Service;
(e) shall change the Plan Year unless the new Plan Year has been approved
by the Internal Revenue Service or is permitted by IRS Revenue
Procedure 87-27;
(f) shall eliminate or reduce an early retirement benefit or subsidy that
continues after retirement;
(g) shall eliminate an optional form of benefit.
ARTICLE XVI
TERMINATION, MERGER, CONSOLIDATION, AND ASSET TRANSFER
16.1 TERMINATION OF PLAN. The Employer expressly reserves the right to
-------------------
terminate this Plan and Trust Agreement in whole or in part at any time.
The Plan shall terminate upon the first of the following events:
(i) the Employer terminates the Plan;
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<PAGE>
(ii) the Employer is judicially determined bankrupt or insolvent; or
(iii) the Employer ceases to exist by merger, liquidation, or otherwise,
or in the event of a sale by the Employer of all or substantially
all of its assets, unless the Employer's liability under the Plan
shall be assumed by any successor to the business of the Employer,
in which event the successor shall substitute itself for the
Employer by amendment of the Adoption Agreement.
The Employer shall give notice of termination of this Plan to the
Administrator, Trustee and Insurer.
16.2 FULL VESTING UPON TERMINATION. If this Plan is terminated, or partially
-----------------------------
terminated, or upon a complete discontinuance of contributions, the
account balance of each affected Participant shall be fully nonforfeitable
and the assets of the Plan shall be distributed to Participants, subject
to the Joint and Survivor Annuity requirements of Article X. The form of
the distribution shall be determined by the Participant and may be by
means of any one or more of the forms provided in Section 4.1 subject to
the Joint and Survivor Annuity requirements of Article X.
16.3 MERGER, CONSOLIDATION, OR TRANSFER OF PLAN ASSETS. No merger or
-------------------------------------------------
consolidation of this Plan with any other Plan or transfer of assets or
liabilities to any other plan shall become effective until at least 30
days after the Employer or Administrator has filed with the Secretary of
the Treasury such statement as shall be required by law.
In the case of any such merger, consolidation or transfer, each
Participant in this Plan would (if such other Plan then terminated)
receive a benefit immediately after the merger, consolidation or transfer
which is equal to or greater than the benefit he would have been entitled
to receive immediately before the merger, consolidation or transfer (if
this Plan had then terminated).
ARTICLE XVII
MISCELLANEOUS
17.1 IF PLAN BENEFITS OWNER-EMPLOYEE. If this Plan provides contributions or
-------------------------------
benefits for one or more Owner-Employees who control both the business
with respect to which this Plan is established, and one or more other
trades or businesses, the Plan and the plan established with respect to
such other trades or businesses must, when looked at as a single plan,
satisfy (S)401(a) and (d) of the Code with respect to the Employees of
this and all other trades or businesses.
If this Plan provides contributions or benefits for one or more Owner-
Employees who control one or more other trades or businesses, the
Employees of each such other trade
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<PAGE>
or business must be included in a plan which satisfies (S)401(a) and (d)
of the Code and which provides contributions and benefits not less
favorable than provided for such owner-employees under this Plan.
If an individual is covered as an Owner-Employee under the plans of two or
more trades or businesses which he does not control, and such individual
controls a trade or business, then the contributions or benefits of the
Employees under the plan of the trade or business which he does control
must be as favorable as those provided for him under the most favorable
plan of the trade or business which he does not control.
For purposes of the preceding paragraphs, an Owner-Employee or two or more
Owner-Employees, shall be considered to control a trade or business if
such Owner-Employee, or such two or more Owner-Employees together:
(1) own the entire interest in an unincorporated trade or business, or
(2) in the case of a partnership, own more than 50 percent of either the
capital interest or the profits interest in such partnership.
For purposes of the preceding sentence, an Owner-Employee, or two or more
Owner-Employees, shall be treated as owning any interest in a partnership
which is owned, directly or indirectly, by a partnership which such Owner-
Employee, or such two or more Owner-Employees, are considered to control
within the meaning of the preceding sentence.
17.2 INALIENABILITY OF BENEFITS. No benefit or interest available hereunder
--------------------------
will be subject to assignment or alienation, either voluntarily or
involuntarily. The preceding sentence shall also apply to the creation,
assignment, or recognition of a right to any benefit payable with respect
to a Participant pursuant to a domestic relations order, unless such order
is determined to be a qualified domestic relations order, as defined in
(S)414(p) of the Code.
A domestic relations order entered before January 1, 1985, will be treated
as a qualified domestic relations order if payment of benefits pursuant to
the order has commenced as of such date, and may be treated as a qualified
domestic relations order if payment of benefits has not commenced as of
such date, even though the order does not satisfy the requirements of
(S)414(p) of the Code.
17.3 PERMANENCY OF PLAN AND TRUST. Subject to an earlier termination under
----------------------------
Article XVI, the Plan and Trust Agreement created hereby shall be for an
indefinite term, but the term shall be the maximum period permitted by law
in the event that the law requires a limitation for the period of
existence.
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<PAGE>
17.4 COUNTERPARTS. This Plan and Trust Agreement may be executed in any number
------------
of counterparts, each of which shall be deemed an original without
reference to the others.
17.5 NOT AN EMPLOYMENT CONTRACT. No Employee of the Employer nor anyone else
--------------------------
shall have any rights against the Employer or Trustee as a result of this
Plan and Trust Agreement, except those expressly granted hereunder.
Nothing herein shall be construed to give any Participant the right to
remain in the employ of the Employer.
17.6 STATE LAW. This Plan and Trust Agreement are to be regulated and
---------
construed in accordance with the laws of the State in which the Employer
maintains its principal office, except to the extent such laws are
preempted by Federal law.
17.7 WORD USAGE. Words herein are used irrespective of number or gender unless
----------
the context clearly requires otherwise.
17.8 INTERPRETATION OF PLAN AND TRUST. The intention of the Employer is that
--------------------------------
the Plan and Trust shall comply with the provisions of (S)401 and (S)501
of the Code and the requirements of the Employee Retirement Income
Security Act, and the corresponding provisions of any subsequent laws. The
provisions of the Plan and Trust Agreement shall be construed to
effectuate such intention.
In the event any provision or provisions shall be determined to be illegal
or invalid for any reason, the illegal or invalid provision shall not
affect the remaining parts of the Plan and Trust Agreement, and the
Employer, Trustee or Administrator may perform such alternative acts which
most clearly carry out the intent and purpose of this Plan.
17.9 MISSING BENEFICIARIES. In the event a person entitled to a benefit is
---------------------
unable to be found after a diligent one-year search by the Administrator,
the benefit payable to that person shall be forfeited and applied to
reduce the Employer's contributions under the Plan provided, however, that
the Administrator shall reinstate the benefit in the event the person
entitled thereto is found or makes a claim.
17.10 RETURN OF EMPLOYER CONTRIBUTION. Prior to the satisfaction of all Plan
-------------------------------
liabilities, all Employer contributions shall be irrevocable. However, all
contributions made by the Employer because of a mistake of fact shall be
returned to such Employer within one year of such contribution.
In the event the deduction of a contribution made by the Employer is
disallowed under (S)404 of the Code, such contribution (to the extent
disallowed) must be returned to the Employer within one year of the
disallowance of the deduction.
In the event that the Commissioner of Internal Revenue determines that the
Plan is not initially qualified under the Internal Revenue Code, any
contribution made incident to that initial qualification by the Employer
must be returned to the Employer within one year
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<PAGE>
after the date the initial qualification is denied, but only if the
application for the qualification is made by the time prescribed by law
for filing the Employer's return for the taxable year in which the Plan is
adopted, or such later date as the Secretary of the Treasury may
prescribe.
17.11 EMPLOYER CONTRIBUTIONS CONDITIONAL UPON QUALIFICATION. The adoption of
-----------------------------------------------------
the Plan and contributions thereto are subject to the condition that the
Internal Revenue Service shall determine that initially the Plan, as it
relates to the undersigned Employer, meets the requirements of the Federal
Internal Revenue Code and Regulations issued thereunder. Until the
Employer has received a favorable determination letter from the Internal
Revenue Service, no Participant shall have any vested interest in any
equity created by contributions made by the Employer, except that in the
event of the death of a Participant the death proceeds under any Contract
issued on his life shall be payable forthwith.
As soon as reasonably possible after the execution of this Adoption
Agreement, the Employer shall submit to the Internal Revenue Service the
documents required to obtain a determination as to the qualified status of
this Plan, as it relates to the Employer. Upon request, the Employer shall
submit evidence thereof to the Insurer.
If it is determined that the Plan is not so qualified or if the Plan fails
to retain qualified status, the Employer shall furnish the Trustee and the
Insurer with evidence of such determination. The Employer may no longer
participate under this Prototype Plan and the Plan will be considered an
individually designed plan. Thereupon the Plan shall terminate.
17.12 HEADINGS. The headings of the Articles and Sections of this Plan and
--------
Trust Agreement are for convenience or reference only and shall have no
substantive effect on the provisions of this Plan and Trust Agreement.
ARTICLE XVIII
PLAN AMENDMENT I
FOR
DEFINED CONTRIBUTION PLANS
18.1 PURPOSE. The purpose of this amendment is to add provisions contained in
-------
Revenue Procedure 92-41 which liberalize rules provided in the final
regulations package under sections 401(k) and (m) of the Code and add a
new definition of compensation under section 414(s) of the Code.
18.2 COMPENSATION (W-2). Section 1.7(1) of the Plan shall be deleted. Section
------------------
1.7(2) of the Plan shall be renumbered as 1.7(1). New paragraph 1.7(2)
shall read as follows:
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Compensation is defined as wages within the meaning of section 3401(a)
of the Code and all other payments of compensation to the Employee by
the Employer (in the course of the Employer's trade or business) for
which the Employer is required to furnish the Employee a written
statement under sections 6041(d), 6051(a)(3) and 6052 of the Code,
determined without regard to any rules under section 3401(a) that limit
the remuneration included in wages based on the nature or location of
the employment or the services performed.
18.3 ELECTIVE DEFERRALS. Add the following sentence after the second paragraph
------------------
of section 7.1:
Elective Deferrals shall not include any deferrals properly distributed
as excess annual additions.
18.4 HARDSHIP. Section 7.13(a) shall be replaced by the following:
--------
The following are the only financial needs considered immediate and
heavy: expenses incurred or necessary for medical care, described in
section 213(d) of the Code, of the Employee, the Employee's spouse or
dependents; the purchase (excluding mortgage payments) of a principal
residence for the Employee; payment of tuition and related educational
fees for the next twelve months of post-secondary education for the
Employee, the Employee's spouse, children or dependents; or the need to
prevent the eviction of the Employee from, or a foreclosure on the
mortgage of, the Employee's principal residence.
Section 7.13(b)(3) shall be replaced by the following:
The distribution is not in excess of the amount of an immediate and
heavy financial need (including amounts necessary to pay any federal,
state or local income taxes or penalties reasonably anticipated to
result from the distribution); and
18.5 ELECTIVE DEFERRALS-DISTRIBUTION OF EXCESS. Add the following sentence to
-----------------------------------------
the first paragraph of section 7.3 after the first sentence:
A Participant is deemed to notify the plan administrator of any Excess
Elective Deferrals that arise by taking into account only those
Elective Deferrals made to this plan and any other plans of this
Employer.
Replace the last sentence of section 7.3b to read:
Excess Elective Deferrals shall be treated as annual additions under
the plan, unless such amounts are distributed no later than the first
April 15 following the close of the Participant's taxable year.
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18.6 ELECTIVE DEFERRALS-ACTUAL DEFERRAL PERCENTAGE TEST. Add the following
--------------------------------------------------
sentence to the first paragraph after section 7.4(b):
Notwithstanding the foregoing, certain plans shall be treated as
separate if mandatorily disaggregated under regulations under section
401(k) of the Code.
Replace the last paragraph of section 7.4 (definition of Actual Deferral
Percentage) with the following:
Employer contributions on behalf of any Participant shall include: (1)
any Elective Deferrals made pursuant to the Participant's deferral
election (including Excess Elective Deferrals of Highly Compensated
Employees), but excluding (a) Excess Elective Deferrals of Non-highly
Compensated Employees that arise solely from Elective Deferrals made
under the plan or plans of this Employer and (b) Elective Deferrals
that are taken into account in the Contribution Percentage Test
(provided the ADP test is satisfied both with and without exclusion of
these Elective Deferrals); and (2) at the election of the Employer,
Qualified Non-elective Contributions and Qualified Matching
Contributions. For purposes of computing Actual Deferral Percentages,
an Employee who would be a Participant but for the failure to make
Elective Deferrals shall be treated as a Participant on whose behalf no
Elective Deferrals are made.
18.7 DISTRIBUTION OF EXCESS CONTRIBUTIONS. Replace the last sentence of the
------------------------------------
first paragraph of section 7.5 with the following:
Excess Contributions of Participants who are subject to the family
member aggregation rules shall be allocated among the family members in
proportion to the Elective Deferrals (and amounts treated as Elective
Deferrals) of each family member that is combined to determine the
combined ADP.
Modify the third paragraph as follows:
In line three, delete "sum of: (1)".
In line ten, delete the remainder of such paragraph that follows "such
Plan Year". Place a period after "such Plan Year".
18.8 LIMITATIONS ON EMPLOYEE CONTRIBUTIONS AND MATCHING CONTRIBUTIONS. Add the
----------------------------------------------------------------
following sentence to the end of the second paragraph after section
7.8(b):
Notwithstanding the foregoing, certain plans shall be treated as
separate if mandatorily disaggregated under regulations under section
401(m) of the Code.
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Replace the first paragraph of section 7.8 d. (definition of Contribution
Percentage Amounts) with the following:
"Contribution Percentage Amounts" shall mean the sum of the Employee
Contributions, Matching Contributions and Qualified Matching
Contributions (to the extent not taken into account for purposes of the
ADP test) made under the plan on behalf of the Participant for the Plan
Year. Such Contribution Percentage Amounts shall not include Matching
Contributions that are forfeited either to correct Excess Aggregate
Contributions or because the contributions to which they relate are
Excess Deferrals, Excess Contributions, or Excess Aggregate
Contributions. If so elected in the Adoption Agreement the Employer may
include Qualified Non-elective Contributions in the Contribution
Percentage Amounts.
The Employer also may elect to use Elective Deferrals in the
Contribution Percentage Amounts so long as the ADP test is met before
the Elective Deferrals are used in the ACP test and continues to be met
following the exclusion of those Elective Deferrals that are used to
meet the ACP test.
18.9 DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS. Replace the first
----------------------------------------------
paragraph of section 7.9 with the following:
Notwithstanding any other provision of this plan, Excess Aggregate
Contributions, plus any income and minus any loss allocable thereto,
shall be forfeited, if forfeitable, or if not forfeitable, distributed
no later than the last day of each Plan Year to Participants to whose
accounts such Excess Aggregate Contributions were allocated for the
preceding Plan Year. Excess Aggregate Contributions of Participants who
are subject to the family member aggregation rules shall be allocated
among the family in proportion to the Employee and Matching
Contributions (or amounts treated as Matching Contributions) of each
family member that is combined to determine the combined ACP. If such
Excess Aggregate Contributions are distributed more than 2 1/2 months
after the last day of the Plan Year in which such excess amounts arose,
a ten (10) percent excise tax will be imposed on the Employer
maintaining the Plan with respect to those amounts. Excess Aggregate
Contributions shall be treated as annual additions under the Plan.
Modify the second paragraph as follows:
In line three, delete "sum of: (1)"
In line eleven, delete the remainder of such paragraph that follows
"such Plan Year". Place a period after "such Plan Year".
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18.10 SECTION (D)(l) OF ADOPTION AGREEMENTS. Replace section (D)(l)(b)
-------------------------------------
(Compensation election) of the Adoption Agreements to the following:
W-2 withholding wages (Box 10)
ARTICLE XIX
PLAN AMENDMENT II
FOR
DEFINED CONTRIBUTION PLANS
19.1 PURPOSE. The purpose of this amendment is to add provisions contained in
-------
Revenue Procedure 93-12 which require that a Distributee has the right to
a Direct Rollover of an Eligible Rollover Distribution.
This Article shall apply to distributions made on or after January 1,
1993. Notwithstanding any provision of the Plan to the contrary that would
otherwise limit a Distributee's election under this Article, a Distributee
may elect, at the time and in the manner prescribed by the plan
administrator, to have any portion of an Eligible Rollover Distribution
paid directly to an Eligible Retirement Plan specified by the Distributee
in a Direct Rollover.
19.2 DIRECT ROLLOVER. A Direct Rollover is a payment by the Plan to the
---------------
Eligible Retirement Plan specified by the Distributee.
19.3 DISTRIBUTEE. A Distributee includes an Employee or former Employee. In
-----------
addition, the Employee's or former Employee's surviving spouse and the
Employee's or former Employee's spouse or former spouse who is the
alternate payee under a qualified domestic relations order, as defined in
section 414(p) of the Code, are Distributees with regard to the interest
of the spouse or former spouse.
19.4 ELIGIBLE RETIREMENT PLAN. An Eligible Retirement Plan is an individual
------------------------
retirement account described in section 408(a) of the Code, an individual
retirement annuity described in section 408(b) of the Code, an annuity
plan described in section 403(a) of the Code, or a qualified trust
described in section 401(a) of the Code, that accepts the Distributee's
Eligible Rollover Distribution. However, in the case of an Eligible
Rollover Distribution to the surviving spouse, an Eligible Retirement Plan
is an individual retirement account or individual retirement annuity.
19.5 ELIGIBLE ROLLOVER DISTRIBUTION. An Eligible Rollover Distribution is any
------------------------------
distribution of all or any portion of the balance to the credit of the
Distributee, except that an Eligible Rollover Distribution does not
include: any distribution that is one of substantially equal periodic
payments (not less frequently than annually) made for the life (or life
expectancy) of the Distributee or the joint lives (or joint life
expectancies) of the
-85-
<PAGE>
Distributee and the Distributee's designated beneficiary, or for a
specified period of ten years or more; any distribution to the extent such
distribution is required under section 401(a)(9) of the Code; and the
portion of any distribution that is not includible in gross income
(determined without regard to the exclusion for net unrealized
appreciation with respect to employer securities).
ARTICLE XX
PLAN AMENDMENT III
FOR
DEFINED CONTRIBUTION PLANS
20.1 PURPOSE. The purpose of this amendment is to add language provided in IRS
-------
Revenue Procedure 94-13 reducing the qualified plan compensation limit for
each Employee to $150,000 (as indexed for cost of living adjustments).
This amendment is effective for Plan Years beginning on or after January
1, 1994.
20.2 $150,000 COMPENSATION LIMIT. The following paragraphs shall be added to
---------------------------
section 1.7:
In addition to other applicable limitations set forth in the Plan, and
notwithstanding any other provision of the Plan to the contrary, for Plan
Years beginning on or after January 1, 1994, the annual compensation of
each Employee taken into account under the Plan shall not exceed the OBRA
'93 annual compensation limit. The OBRA '93 annual compensation limit is
$150,000, as adjusted by the Commissioner for increases in the cost of
living in accordance with section 401(a)-(17)(B) of the Internal Revenue
Code. The cost-of-living adjustment in effect for a calendar year applies
to any period, not exceeding 12 months, over which compensation is
determined (determination period) beginning in such calendar year. If a
determination period consists of fewer than 12 months, the OBRA '93 annual
compensation limit will be multiplied by a fraction, the numerator of
which is the number of months in the determination period, and the
denominator of which is 12.
For Plan Years beginning on or after January 1, 1994, any reference in
this Plan to the limitation under section 401(a)(17) of the Code shall
mean the OBRA '93 annual compensation limit set forth in this provision.
If compensation for any prior determination period is taken into account
in determining an Employee's benefits accruing in the current Plan Year,
the compensation for that prior determination period is subject to the
OBRA '93 annual compensation limit in effect for that prior determination
period. For this purpose, for determination periods beginning before the
first day of the first Plan Year beginning on or after January 1, 1994,
the OBRA '93 annual compensation limit is $150,000.
-86-
<PAGE>
ARTICLE XXI
PLAN AMENDMENT IV
FOR
DEFINED CONTRIBUTION PLANS
21.1 PURPOSE. The purpose of this amendment is to add language provided in
-------
Revenue Procedure 93-47 to permit a Participant to waive the 30 day period
with respect to a distribution from a profit sharing plan. This amendment
is effective on January 1, 1994.
21.2 WAIVER OF 30 DAY NOTICE. The following wording is added to Section (a) of
-----------------------
Article 10.5:
If a distribution is one to which sections 401(a)(11) and 417 of the
Internal Revenue Code do not apply, such distribution may commence less
than 30 days after the notice required under section 1.411(a)-11(c) of the
Income Tax Regulations is given, provided that:
(1) the plan administrator clearly informs the Participant that the
Participant has a right to a period of at least 30 days after
receiving the notice to consider the decision of whether or not to
elect a distribution (and, if applicable, a particular distribution
option), and
(2) the Participant, after receiving the notice, affirmatively elects a
distribution.
-87-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form SB-2 of our report dated March 21, except for the
second paragraph of Note 19, as to which date is April 16, 1997, relating to the
consolidated financial statements of Spring Hill Savings Bank, FSB and
Subsidiary, which appears in such Prospectus. We also consent to the reference
to us under the headings "Experts," "Legal and Tax Opinions" and "Tax Effects"
in such Prospectus.
/s/ S.R. Snodgrass, A.C.
Wexford, Pennsylvania
August 5, 1997
<PAGE>
Exhibit 99.1
[HOLDING COMPANY]
[LOGO]
STOCK ORDER FORM
Please read and complete this Stock Order Form. Instructions are included on
the reverse side of this form.
- -------------------------------------------------------------------------------
DEADLINE AND DELIVERY __:__ __.m., Eastern Time, on _____, 1997
Please mail the Stock Order Form in the enclosed envelope to the address listed
below or hand-deliver to any Spring Hill office. [Holding Company] is not
required to accept copies of Stock Order Forms.
- -------------------------------------------------------------------------------
NUMBER OF SHARES
- -------------------------------------------------------------------------------
(1) Number of Shares Price per Share Total Amount Due
__________ x $10.00 = $_________
(Minimum __)
- -------------------------------------------------------------------------------
OFFICE USE ONLY
- -------------------------------------------------------------------------------
________________ ______________ ____________
Date Rec'd Batch # Order #
- -------------------------------------------------------------------------------
METHOD OF PAYMENT
- -------------------------------------------------------------------------------
(2) ___ Enclosed is a check or money order payable to [Holding Company] for
$__________.
(3) ___ I authorize Spring Hill Savings Bank ("Spring Hill") to make the
withdrawal(s) from the account(s) listed below, and understand that the amounts
will not be available for withdrawal once this Stock Order Form is submitted:
Account Number(s) Amount(s)
- ----------------- ---------
____________________ __________________
____________________ __________________
____________________ __________________
____________________ __________________
Total Withdrawal $
==================
There is no early withdrawal penalty for the purchase of stock.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PURCHASER INFORMATION
(4) Check one of the following boxes.
(a) __ Check here if you are a director, officer or employee of Spring Hill,
or a member of their immediate family.
(b) __ Check here if you were a depositor of Spring Hill on December 31,
1995. List account(s) you had at this date below.
(c) __ Check here if you were a depositor on June 30, 1997. List
account(s) below.
(d) __ Check here if you were not a depositor at December 31, 1995 or
June 30, 1997, but you were a depositor on ______, 1997. List
account(s) below.
(e) __ Check here if you have never been a Spring Hill depositor.
-----
List account(s) below.
Account Title (Name(s) on Account) Account Number
___________________________________ ___________
___________________________________ ___________
___________________________________ ___________
If additional space is needed, please use the back of this Stock Order Form.
- -------------------------------------------------------------------------------
STOCK REGISTRATION (Please Print Clearly)
- -------------------------------------------------------------------------------
(5)
______________________________________________________
(First Name) (M.I.) (Last Name)
______________________________________________________
(First Name) (M.I.) (Last Name)
______________________________________________________
(Street Address)
______________________________________________________
(City) (State) (County) (Zip)
(6)
______________________________________________________
Social Security #/Tax ID# (certificate will show this number)
______________________________________________________
Social Security #/Tax ID#
(7)
______________________________________________________
(Daytime Phone Number)
______________________________________________________
(Evening Phone Number)
(8) Form of Stock Ownership (check one)
__ Individual
__ Individual Retirement Account (IRA)
__ Joint Tenants
__ Tenants in Common
__ Corporation
__ Uniform Transfer to Minors
__ 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 _____, 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
[Holding Company], this order may not be modified or withdrawn without the
-------
consent of [Holding Company]. 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 [Holding Company] 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.
________________________________________________
Signature Title (if applicable) Date
________________________________________________
Signature(if required) Date
THIS ORDER NOT VALID UNLESS SIGNED
- ----------------------------------
Stock Information Center: Spring Hill Savings Bank
112 Federal Street
Pittsburgh, PA 15212
QUESTIONS? Please call (800) ___-____ or (412) ___-____
9:00 am to 4:00 pm, Monday-Friday
- -------------------------------------------------------------------------------
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.
<PAGE>
[HOLDING COMPANY]
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 Offering is
$50,000. The maximum that an individual may order in the 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 the greater of $85,000 or 1% of the stock sold. See the Prospectus
section entitled "The Conversion", pp ___, for a more detailed description of
purchase priorities in the Subscription Offering and Community Offering.
[Holding Company] 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 [Holding Company]. 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 and Reorganization - The 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 ______, 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. See the Prospectus
section entitled "The Conversion", pp ____, for a complete description of
purchase priorities and procedures for allocation of available shares in the
event the Offering is oversubscribed. 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 [Holding Company] 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
TRANSFER TO the Uniform Transfers to Minors laws of the individual states.
MINORS: There 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>
Exhibit 99.4
[LETTERHEAD OF FELDMAN FINANCIAL ADVISORS, INC. APPEARS HERE]
======================================================================
Spring Hill Savings Bank, F.S.B.
Pittsburgh, Pennsylvania
Conversion Valuation Appraisal Report
Valued as of June 23, 1997
Prepared By
Feldman Financial Advisors, Inc.
Washington, D.C.
======================================================================
<PAGE>
[LETTERHEAD OF FELDMAN FINANCIAL ADVISORS, INC. APPEARS HERE]
June 23, 1997
Board of Directors
Spring Hill Savings Bank, F.S.B.
112 Federal Street
Pittsburgh, Pennsylvania 15212
Gentlemen:
At your request, we have completed and provide an independent appraisal of
the estimated pro forma market value of Spring Hill Savings Bank, F.S.B.
("Spring Hill" or the "Bank") in connection with the simultaneous conversion of
the Bank from the mutual to stock form of organization, the issuance of the
Bank's capital stock to SHS Bancorp, Inc. (the "Holding Company"), and the
offering of shares of common stock of the Holding Company (collectively referred
to herein as the "Conversion"). This appraisal report is furnished pursuant to
the Bank's regulatory filing of the Application for Approval of Conversion
("Form AC") with the Office of Thrift Supervision ("OTS").
The valuation is prepared utilizing the guidelines for the valuation of
mutual to stock conversions issued by the OTS. These guidelines require, among
other things, that the appraiser consider the impact of the Conversion on the
financial condition of the Bank, the trading valuation characteristics of
comparable institutions, recent conversion offerings, acquisitions in the Bank's
market area, and the likely trading price of the newly issued stock.
Feldman Financial Advisors, Inc. ("Feldman Financial") is a financial
consulting and economic research firm that specializes in financial valuations
and analyses of business enterprises and securities in the thrift, banking, and
mortgage industries. The background of Feldman Financial is presented in
Exhibit I.
In preparing our appraisal, we conducted an analysis of the Bank that
included discussions with the Bank's management, the Bank's independent
auditors, S.R. Snodgrass, A.C., the Bank's legal counsel, Breyer & Aguggia, and
the Bank's offering manager, Ryan, Beck & Co. In addition, where appropriate,
we considered information based on other available published sources that we
believe are reliable; however, we cannot guarantee the accuracy and completeness
of such information.
We also reviewed, among other factors, the economy in the Bank's primary
market area and compared the Bank's financial condition and operating
performance with that of selected publicly traded thrift institutions. We
reviewed conditions in the securities markets in general and in the market for
thrift institution common stocks in particular.
<PAGE>
Feldman Financial Advisors, Inc.
Board of Directors
Spring Hill Savings Bank, F.S.B.
June 23, 1997
Page Two
Our appraisal is based on the Bank's representation that the information
contained in the Form AC and additional evidence furnished to us by the Bank and
its independent auditors are truthful, accurate, and complete. We did not
independently verify the financial statements and other information provided by
the Bank and its independent auditors, nor did we independently value the assets
or liabilities of the Bank. The valuation considers the Bank only as a going
concern and should not be considered as an indication of the liquidation value
of the Bank.
It is our opinion that, as of June 23, 1997, the aggregate estimated pro
forma market value of the Bank was within the valuation range of $5,270,000 to
$7,130,000 with a midpoint of $6,200,000. The valuation range was based upon a
15 percent decrease from the midpoint to determine the minimum and a 15 percent
increase to establish the maximum. Assuming an additional 15 percent increase
above the maximum valuation would result in an adjusted maximum of $8,199,500.
Our valuation is not intended, and must not be construed, to be a
recommendation of any kind as to the advisability of purchasing shares of common
stock in the Conversion. Moreover, because the valuation is necessarily based
upon estimates and projections of a number of matters, all of which are subject
to change from time to time, no assurance can be given that persons who purchase
shares of stock in the Conversion will thereafter be able to sell such shares at
prices related to the foregoing estimate of the Bank's pro forma market value.
Feldman Financial is not a seller of securities within the meaning of any
federal or state securities laws and any report prepared by Feldman Financial
shall not be used as an offer or solicitation with respect to the purchase or
sale of any securities.
The valuation reported herein will be updated as appropriate. These
updates will consider, among other factors, any developments or changes in the
Bank's operating performance, financial condition, or management policies, and
current conditions in the securities markets for thrift institution common
stocks. Should any such new developments or changes be material, in our
opinion, to the Conversion valuation of the Bank, appropriate adjustments to the
estimated pro forma market value will be made. The reasons for any such
adjustments will be explained in detail at that time.
Respectfully,
Feldman Financial Advisors, Inc.
By: /s/ Trent R. Feldman
---------------------
Trent R. Feldman
President
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
TAB PAGE
- --- ----
<S> <C> <C>
INTRODUCTION....................................................... 1
I. Chapter One - BUSINESS OF SPRING HILL SAVINGS BANK, F.S.B.
General............................................................ 4
Financial Condition................................................ 8
Income and Expense Trends.......................................... 16
Asset and Liability Management..................................... 22
Asset Quality...................................................... 25
Properties......................................................... 28
Market Area........................................................ 29
Summary............................................................ 33
II. Chapter Two - COMPARISONS WITH PUBLICLY HELD THRIFTS
General............................................................ 34
Selection Criteria................................................. 35
Recent Financial Comparisons....................................... 38
III. Chapter Three - MARKET VALUE ADJUSTMENTS
Earnings Prospects................................................. 50
Market Area........................................................ 51
Management......................................................... 51
Dividend Policy.................................................... 52
Liquidity of the Issue............................................. 52
Subscription Interest.............................................. 53
Stock Market Conditions............................................ 54
Recent Acquisition Activity........................................ 58
New Issue Discount................................................. 60
Adjustments Conclusion............................................. 62
Valuation Approach................................................. 63
Valuation Conclusion............................................... 65
IV. Appendix - EXHIBITS
I Background of Feldman Financial Advisors, Inc................ I-1
II-1 Statement of Financial Condition............................. II-1
II-2 Statement of Income.......................................... II-2
II-3 Loan Portfolio Composition................................... II-3
II-4 Net Lending Activity......................................... II-4
II-5 Investment Securities Portfolio.............................. II-5
II-6 Deposit Account Distribution................................. II-6
II-7 Borrowing Activity........................................... II-7
III Financial and Market Data for All Public Thrifts............. III-1
IV-1 Pro Forma Conversion Assumptions............................. IV-1
IV-2 Pro Forma Valuation Range.................................... IV-2
IV-3 Pro Forma Conversion Analysis................................ IV-3
IV-4 Comparative Valuation Ratios................................. IV-4
</TABLE>
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
LIST OF TABLES
<TABLE>
<CAPTION>
TAB PAGE
- --- ----
<S> <C> <C>
I. Chapter One - BUSINESS OF SPRING HILL SAVINGS BANK, F.S.B.
Table 1 - Selected Financial Condition Data........................ 8
Table 2 - Relative Balance Sheet Concentrations.................... 9
Table 3 - Income Statement Summary................................. 17
Table 4 - Income Statement Ratios.................................. 18
Table 5 - Yield and Cost Summary................................... 21
Table 6 - Change in Net Portfolio Value............................ 24
Table 7 - Nonperforming Asset Summary.............................. 26
Table 8 - Allowance for Loan Losses Summary........................ 27
Table 9 - Key Economic Indicators.................................. 31
Table 10 - Deposit Trends for Pittsburgh, Allegheny Co. &
Pittsburgh MSA........................................... 32
Table 11 - Deposit Market Share for Pittsburgh...................... 32
II. Chapter Two - COMPARISONS WITH PUBLICLY HELD THRIFTS
Table 12 - Comparative Group Operating Summary....................... 37
Table 13 - Key Financial Comparisons................................. 40
Table 14 - General Financial Performance Rations..................... 44
Table 15 - Income and Expense Analysis............................... 45
Table 16 - Yield-Cost Structure and Growth Rates..................... 46
Table 17 - Balance Sheet Composition................................. 47
Table 18 - Regulatory Capital and Credit Risk Ratios................. 48
III. Chapter Three - MARKET VALUE ADJUSTMENTS
Table 19 - Comparative Stock Market Performance...................... 55
Table 20 - Selected Interest Rate Benchmarks......................... 57
Table 21 - Acquisition Summary of Pennsylvania Financial
Institutions.............................................. 59
Table 22 - Recent Summary of Standard Thrift Conversions............. 61
Table 23 - Comparative Valuation Analysis............................ 64
Table 24 - Comparative Discount and Premium Analysis................. 66
</TABLE>
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
INTRODUCTION
As requested, Feldman Financial Advisors, Inc. ("Feldman Financial") has
prepared an independent appraisal of the estimated pro forma market value of
Spring Hill Savings Bank, F.S.B. ("Spring Hill" or the "Bank") in connection
with the simultaneous conversion of the Bank from the mutual to stock form of
organization, the issuance of the Bank's capital stock to SHS Bancorp, Inc. (the
"Holding Company"), and the offering of shares of common stock of the Holding
Company (collectively referred to herein as the "Conversion"). This appraisal
report is furnished pursuant to the Bank's regulatory filing of the Application
for Approval of Conversion ("Form AC") with the Office of Thrift Supervision
("OTS").
In the course of preparing this appraisal report, we reviewed and discussed
with the Bank's management, and with the Bank's independent auditors, S.R.
Snodgrass, A.C., the audited financial statements of the Bank's operations for
the years ended December 31, 1995 and 1996 and unaudited financial statements
for the three months ended March 31, 1997. We also discussed matters related to
the Conversion with the Bank's legal counsel, Breyer & Aguggia, and with the
Bank's offering manager, Ryan, Beck & Co. We also reviewed and discussed with
management other financial matters of the Bank.
Where appropriate, we considered information based upon other available
public sources, which we believe to be reliable; however, we cannot guarantee
the accuracy or completeness of such information. We visited the Bank's primary
market area and examined the prevailing economic conditions. We also examined
the competitive environment within which the Bank operates and assessed the
Bank's relative strengths and weaknesses.
- 1 -
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
We examined and compared the Bank's financial performance with selected
segments of the thrift industry and selected publicly traded savings
institutions. We reviewed conditions in the securities markets in general and
the market for thrift institution common stocks in particular. We included in
our analysis an examination of the potential effects of the Conversion on the
Bank's operating characteristics and financial performance as they relate to the
estimated pro forma market value of the Bank.
In preparing our valuation, we have relied upon and assumed the accuracy
and completeness of financial and statistical information provided by the Bank
and its independent auditors. We did not independently verify the financial
statements and other information provided by the Bank and its independent
auditors, nor did we independently value the assets or liabilities of the Bank.
The valuation considers the Bank only as a going concern and should not be
considered as an indication of the liquidation value of the Bank.
Our valuation is not intended, and must not be construed, to be a
recommendation of any kind as to the advisability of purchasing shares of common
stock in the Conversion. Moreover, because such valuation is necessarily based
on estimates and projections of a number of matters, all of which are subject to
change from time to time, no assurance can be given that persons who purchase
shares of common stock in the Conversion will thereafter be able to sell such
shares at prices related to the foregoing valuation of the pro forma market
value thereof. Feldman Financial is not a seller of securities within the
meaning of any federal and state securities laws and any report prepared by
Feldman Financial shall not be used as an offer or solicitation with respect to
the purchase or sale of any securities.
- 2 -
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Feldman Financial Advisors, Inc.
- --------------------------------
The valuation reported herein will be updated as appropriate. These
updates will consider, among other factors, any developments or changes in the
Bank's financial performance or management policies, and current conditions in
the securities market for thrift institution common stocks. Should any such
developments or changes be material, in our opinion, to the Conversion valuation
of the Bank, appropriate adjustments to the estimated pro forma market value
will be made. The reasons for any such adjustments will be explained in detail
at that time.
- 3 -
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Feldman Financial Advisors, Inc.
- --------------------------------
I. BUSINESS OF SPRING HILL SAVINGS BANK, F.S.B.
General
The Bank, founded in 1893, is a federally chartered mutual savings bank
located in Pittsburgh, Pennsylvania. Spring Hill changed charters from a
Pennsylvania mutual savings and loan association to its current form in 1991.
The Bank is subject to regulation by the Office of Thrift Supervision ("OTS"),
its primary federal regulator, and the Federal Deposit Insurance Corporation
("FDIC"), the insurer of its deposits through the Savings Association Insurance
Fund ("SAIF"). The Bank is a member of the Federal Home Loan Bank ("FHLB") of
Pittsburgh. As of March 31, 1997, Spring Hill had total assets of $82.8
million, total deposits of $64.8 million, and total equity of $4.4 million or
5.37% of total assets. The Bank exceeded all regulatory capital requirements as
of March 31, 1997 with both tangible and core capital ratios at 5.38% and a
risk-based capital ratio of 12.46%.
Spring Hill operates three full-service offices in Pittsburgh and considers
Allegheny County as its market area. The Bank is a community-oriented financial
institution engaged primarily in the business of attracting deposits from the
general public and using those deposits along with other funds to originate
residential mortgage loans in its primary market area, including in recent years
a particular emphasis on loans secured by investor owned one- to four-family
properties. To a lesser extent, the Bank also originates multi-family,
construction, commercial real estate, and consumer loans. The Bank generally
retains for its portfolio all of the loans that it originates. To complement
its loan portfolio and to assist in achieving asset/liability management
objectives, the Bank manages a portfolio of investment and mortgage-backed
securities.
- 4 -
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Feldman Financial Advisors, Inc.
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Beginning in late 1988 and continuing through 1990, the Bank experienced a
sharp increase in the level of nonperforming assets. The asset quality problems
required extensive staff attention, resulted in increased costs, and contributed
to net operating losses in 1989 through 1992. The Bank's capital levels were
significantly affected by the establishment of reserves and the drag on
profitability stemming from nonperforming and underperforming assets.
As a result of accumulating a large portfolio of fixed-rate mortgage loans
whose interest rates were less than prevailing market rates, the Bank in 1987
had established a subsidiary, Spring Hill Funding Corporation ("SHFC"), to issue
a collateralized mortgage obligation ("CMO"). The Bank's operating results have
also 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 required SHFC to recognize the original issue
discount and prepaid expenses faster than originally anticipated and resulted in
significant losses to the Bank.
As a result of the Bank's poor asset quality, marginal capital level, and
lack of profitability, Spring Hill entered into a Supervisory Agreement with the
OTS in March 1991. The Supervisory Agreement required the Bank, among other
things, to limit growth of the Bank and to develop a strategic plan and
procedures to resolve problem assets and improve its capital position. In the
aftermath of remedial actions undertaken by the Bank in the ensuing years, which
resulted in improved capital levels and a return to profitability, the OTS
released
- 5 -
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Feldman Financial Advisors, Inc.
- --------------------------------
Spring Hill from the Supervisory Agreement in May 1995, at which time the Bank
was no longer subject to growth restrictions.
Although the Bank has improved its asset quality and financial performance,
its regulatory capital levels, while above the minimum requirements, remain low
relative to its peers. Without increased capital, the Bank's ability to grow is
limited. Spring Hill's asset size shrank from $108.1 million at year-end 1992
to $83.9 million at year-end 1994, and has since hovered around this level. In
recent years, the Bank has considered a variety of means of increasing capital,
including growth through retained earnings, a merger-conversion, a merger with
another mutual savings institution, and a mutual-to-stock conversion. Having
evaluated its strategic options, the Bank has determined to pursue the
Conversion in order to raise additional capital.
The Bank believes the Conversion will facilitate its ability to meet its
strategic goals and objectives. The Board of Directors and management of the
Bank believe that the principal benefits of the Conversion include the
following:
. Increased capital will support the Bank's ability to increase its asset
size through expanded operations, including increased lending activities
and potential acquisition of deposits.
. Additional capital will provide increased flexibility regarding
asset/liability management, including improving the net interest-earning
asset position of the Bank and enhancing interest rate risk management
capabilities.
. Enables the Bank to better enhance its customer service through a
greater capacity to improve product offering.
. Places the Bank on more competitive ground relative to other thrifts and
banks in its local market area.
. Provides access to capital markets for future capital needs, in
particular, for the sale of stock on an incremental basis as market
conditions permit.
- 6 -
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Feldman Financial Advisors, Inc.
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. Makes available to its employees and future employees forms of incentive
compensation provided by many of the Bank's immediate competitors.
. Affords the Bank's depositors and others the opportunity to become
stockholders and thereby participate more directly in the future
performance of the Holding Company and the Bank.
. Broadens the field of potential candidates for future business
combinations.
The remainder of Chapter I examines in more detail the trends addressed in
this section, including the impact of changes in Spring Hill's economic and
competitive environment, and recent management initiatives. The discussion is
supplemented by the exhibits in the Appendix. Exhibit II-1 summarizes the
Bank's statements of financial condition at fiscal year-ends December 31, 1995
and 1996 and as of March 31, 1997. Exhibit II-2 presents the Bank's statements
of income for the fiscal years ended December 31, 1995 and 1996, and for the
three months ended March 31, 1997.
-7-
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Financial Condition
Table 1 presents selected data concerning Spring Hill's financial position
as of year-end periods December 31, 1992 through 1996 and as of March 31, 1997.
Table 2 displays relative balance sheet concentrations for the Bank over the
same period.
Table 1
Selected Financial Condition Data
As of December 31, 1992 to 1996 and March 31, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
======================================================================================================================
December 31,
March 31 -------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
Investments 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
CMO 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
Equity 4,449 4,840 4,441 4,212 4,226 4,225
======================================================================================================================
</TABLE>
Asset Composition
- -----------------
Spring Hill's asset growth was relatively flat over the past three years.
During the early 1990's the Bank's growth was limited by provisions of the
Supervisory Agreement and the Bank's emphasis on improving its capital ratios.
The balance sheet contraction was accomplished through asset repayments,
prepayments, and sales, which funded the run-off of wholesale and brokered
deposits and the repayment of borrowings. The Bank's equity to assets ratio
increased from 3.91% at December 31, 1992 to 5.92% at December 31, 1996. Spring
Hill's equity ratio fell to 5.37% at March 31, 1997 due to a net loss during the
first quarter related to the repurchase of certain CMO bonds.
-8-
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Feldman Financial Advisors, Inc.
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Table 2
Relative Balance Sheet Concentrations
As of December 31, 1992 to 1996 and March 31, 1997
(Percent of Total Assets)
<TABLE>
<CAPTION>
======================================================================================================================
December 31,
March 31 ---------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
- ------
Cash and investments 6.1 5.9 6.1 4.5 12.1 13.0
Mortgage-backed secs. 23.8 23.9 26.1 26.7 31.0 32.0
Loans receivable, net 66.7 67.1 64.3 65.4 54.0 51.1
Other assets 3.4 3.1 3.5 3.5 2.9 3.9
----- ----- ----- ----- ----- -----
Total assets 100.0 100.0 100.0 100.0 100.0 100.0
===== ===== ===== ===== ===== =====
Liabilities and Equity
- ----------------------
Deposits 78.2 77.6 79.8 72.5 74.2 71.9
CMO 3.0 8.4 10.1 11.4 15.3 17.0
Borrowed funds 11.2 4.6 2.2 8.7 2.7 4.2
Other liabilities 2.2 3.6 2.5 2.4 3.2 3.0
Equity 5.4 5.8 5.4 5.0 4.6 3.9
----- ----- ----- ----- ----- -----
Total liabs. and equity 100.0 100.0 100.0 100.0 100.0 100.0
===== ===== ===== ===== ===== =====
======================================================================================================================
</TABLE>
The Bank's concentration of assets invested in loans has increased over the
past five years, while the level of mortgage-backed and investment securities
has declined. At March 31, 1997, the Bank's total net loans were 66.7% of
assets, or $55.3 million. Exhibit II-3 presents the composition of the Bank's
loan portfolio. Approximately 76.2% of the portfolio consisted of loans secured
by one- to four-family residential real estate. Substantially all of the
residential loans are secured by property located in the Bank's primary market
area. Spring Hill generally retains for its portfolio all of the loans that it
originates.
The Bank's primary loan product is owner-occupied, fixed-rate mortgage
loans. The Bank's fixed-rate loans generally have maturities ranging from 10 to
20 years. In 1994, the Bank began originating 10-year and 15-year balloon loans
with a 30-year amortization
-9-
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Feldman Financial Advisors, Inc.
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schedule. These loans currently account for a majority of the Bank's residential
loan origination volume. The Bank generally originates all fixed-rate loans
under terms, conditions, and documentation that would permit them to be sold in
the secondary mortgage market to government sponsored agencies, although the
Bank has not sold any such loans in recent years. The Bank does not currently
offer adjustable-rate mortgage loans secured by owner-occupied real estate.
Spring Hill provides mortgage loans for non-owner-occupied one- to four-
family residences on both a fixed-rate and adjustable-rate basis. At March 31,
1997, $8.5 million or 19.9% of the Bank's one- to four-family residential
mortgage loans were secured by non-owner-occupied property. The 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 rates that adjust annually based
on the prime rate. At March 31, 1997, the Bank's portfolio of non-owner-
occupied one- to four-family loans included 79.9% with fixed-rate terms and
20.1% with adjustable-rate terms.
Spring Hill is also actively involved in originating loans secured by
multi-family real estate. At March 31, 1997, $5.8 million or 10.3% of the
Bank's total loan portfolio consisted of such loans. All of these loans are
secured by property located in the Bank's market area and generally consist of 5
to 30 dwelling units. At March 31, 1997, the Bank had 35 multi-family real
estate loans, the largest of which was $559,000 and was performing in accordance
with its original terms.
The Bank originates residential construction loans primarily to local
contractors with whom it has an established relationship. To a significantly
lesser extent, the Bank originates construction loans to individuals who have a
contract for the construction of their personal
-10-
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Feldman Financial Advisors, Inc.
- --------------------------------
residence. At March 31, 1997, construction loans totaled $1.7 million of 3.0% of
total loans. All of the Bank's construction loans are secured by property
located in the Bank's primary market area.
Spring Hill invests a portion of its loan portfolio in commercial real
estate loans, which totaled $2.9 million or 5.2% of total loans as of March 31,
1997. The Bank does not actively solicit commercial real estate loans and
generally offers such loans to accommodate its current and past customers. The
Bank's commercial real estate loan portfolio includes loans secured by office
buildings, warehouses, undeveloped land, and mixed-use buildings comprised of
offices and apartments. At March 31, 1997, the Bank had 24 commercial real
estate loans, the largest of which was $633,000 and was performing in accordance
with its original terms.
The Bank's consumer lending activities are focused on partially secured and
unsecured personal loans, vehicle loans, and loans secured by savings deposits.
In 1996, as part of its strategy to provide a fuller range of services to its
retail customers, the Bank expanded its offering of consumer loans. Consumer
loans are generally made to existing customers as the Bank advertises these
loans only on a limited basis. At March 31, 1997, the Bank's consumer loans
totaled $2.9 million or 5.1% of the Bank's total loan portfolio. The largest
component of this portfolio, amounting to $2.3 million, consisted of mobile home
loans. From 1987 through 1992, Spring Hill originated mobile home loans through
a broker located in Ohio. Since 1992, the Bank has not originated any mobile
home loans other than loans to facilitate the sale of repossessed mobile homes.
The Bank increased total loan originations from $6.6 million in 1995 to
$11.7 million in 1996, as shown in Exhibit II-4. The expanded loan activity was
fueled by residential mortgage volume. For the three months ended March 31,
1997, total loan originations
-11-
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- --------------------------------
amounted to $2.9 million versus $1.4 million for the corresponding quarter one
year ago. The increased lending volume in 1996 was due to additional referrals
from local business and industry contacts coupled with more competitive interest
rates. In recent years, the Bank has not been an active purchaser or seller of
loans. The 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 Bank was
servicing $472,000 of loans for others.
The Bank is required under federal regulations to maintain a minimum amount
of liquid assets. At March 31, 1997, the Bank's regulatory liquidity ratio of
10.9% exceeded the 5.0% threshold required by OTS regulations. The Bank
generally uses investment and mortgage-backed securities to provide liquidity
for funding loan originations or deposit withdrawals and to improve the match
between the maturities and repricing of its interest-rate sensitive assets and
liabilities. As shown in Exhibit II-5 at March 31, 1997, the Bank's portfolio
of investment and mortgage-backed securities amounted to $21.7 million, of which
$3.1 million or 14.5% was classified as available for sale.
The Bank's investment securities portfolio primarily consisted of $1.5
million in U.S. Government and agency obligations. Mortgage-backed securities
represented a significant holding in the amount of $19.7 million, or 23.8% of
total assets. The Bank purchases mortgage-backed securities in order to: (i)
generate positive interest rate spread on large principal balances with minimal
administrative expense; (ii) lower the credit risk of the Bank as a result of
the federal agency guarantees; (iii) increase the Bank's liquidity; and (iv)
control interest rate risk. The Bank invests in both adjustable-rate and fixed-
rate mortgage-backed securities with maturities up to 15 years and primarily
issued through FNMA, FHLMC, and GNMA. The Bank also invest in CMOs, which
amounted to $6.2 million at March 31, 1997.
-12-
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Consistent with the policies of the OTS, current investment practices of the
Bank prohibit the purchase of high-risk CMOs. The privately issued CMOs held by
the Bank carry the highest credit rating offered by either Moody's or Standard &
Poor's.
Liability Composition
- ---------------------
Deposits and loan repayments are the major sources of the Bank's funds for
lending and other investment purposes. Exhibit II-6 presents a summary of the
Bank's deposit base at March 31, 1997. Total deposits declined from $77.7
million at year-end 1992 to $60.8 million at year-end 1994, and then reversed
direction by increasing to $64.8 million at March 31, 1997. The Bank attracts
deposits within its primary market area through the offering of a broad
selection of accounts. Interest rates on accounts are set weekly at the
direction of senior management and are determined based upon the Bank's
liquidity requirements, deposit rates offered by competitors, alternative
funding sources, the Bank's growth and deposit mix goals, and applicable
regulatory restrictions and requirements. While Spring Hill has not been a top
rate-payer in its market area, the Bank prices its deposits accounts
competitively with local institutions. Currently, the Bank does not accept
brokered deposits, nor has it aggressively sought jumbo certificates of deposit.
Jumbo certificates (in amounts of $95,000 or more) amounted to $6.4 million or
9.9% of total deposits. As shown in Exhibit II-6, total certificate accounts
composed 66.7% or $43.2 million of the overall deposit base, followed by savings
accounts at 19.6%, money market deposit accounts at 9.1%, and checking accounts
at 4.7%. Over the past two years, longer-term certificate accounts have
experienced the largest growth among the Bank's various deposit instruments.
-13-
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Spring Hill periodically utilizes advances from the FHLB of Pittsburgh to
supplement its supply of funds, to meet deposit withdrawal requirements, and to
facilitate asset/liability management objectives. FHLB advances outstanding
increased from $1.8 million at December 31, 1995 to $9.3 million at March 31,
1997, in order to offset the paydown of the CMO from $8.3 million to $2.5
million over the same time period. As previously noted, 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 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 similarly reduced in advance of the original repayment schedule. In
1993, the class A bonds of the CMO were paid off. During March 1997, the class
C bonds of the CMO with a par balance 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. The CMO carried a weighted average cost of 11.83%
and 12.31% in 1995 and 1996, respectively, and 11.71% for the March 1997
quarter. In attempting to unwind SHFC, the Bank has sought to replace the CMO
with lower costing FHLB advances that will improve the Bank's net interest
spread.
-14-
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Equity Capital
- --------------
Since the early 1990s, the Bank has controlled its asset growth in order to
maintain compliance with regulatory capital requirements. As of March 31, 1997,
Spring Hill was in compliance with all regulatory capital requirements with
tangible, core, and risk-based capital ratios of 5.38%, 5.38%, and 12.46%,
respectively, and thereby qualifying the Bank for "well capitalized" designation
under regulatory guidelines. The Bank's total equity of $4.4 million included
retained earnings of $4.5 million with contra-adjustments of $10,000 for net
unrealized loss on securities and $43,000 related to pension plan obligations.
-15-
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Income and Expense Trends
Table 3 displays the main components of the Bank's earnings performance
from 1993 to 1996 and the first quarter of 1997. Table 4 displays the
components of income and expense as a percent of average assets. Table 5
displays weighted average yields and costs for the same periods. The Bank's
profitability improved steadily from break-even results in 1993 to a 0.49%
return on average assets in 1996. An extraordinary charge produced a net loss
for the March 1997 quarter. The Bank's core earnings improvements were driven
by a steady increase in its net interest margin and controlled operating
expenses
Operating Results for Quarter Ended March 31, 1997
- --------------------------------------------------
The Bank incurred a net loss of $387,000 for the quarter ended March 31,
1997, compared to net income of $60,000 for the same period in 1996. The loss
sustained in 1997 was the result of the Bank repurchasing the class C bond of
the CMO issued by its subsidiary. As a result of the transaction, the Bank
recorded an extraordinary loss on the extinguishment of the class C bond
amounting to $563,000 (net of related income tax benefit of $400,000). Income
for the March 1997 quarter also reflected a gain of $121,000 from the redemption
of a CMO residual held as an investment by the Bank. Without the repurchase of
the CMO obligation and the gain on the sale of CMO residual, the Bank would have
had net income of approximately $91,000 for the March 1997 quarter.
The Bank's net interest spread improved from 2.40% in the March 1996
quarter to 2.64% in the March 1997 quarter. In an effort to improve
profitability, the Bank has been restructuring its asset mix by reinvesting
maturing investments and principal repayments on mortgage-backed securities in
higher yielding loans. In addition, the replacement of CMO
-16-
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Table 3
Income Statement Summary
Year Ended December 31, 1993 to 1996
And the Three Months Ended March 31, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Mos. Year Ended
Ended December 31,
March 31, ---------------------------------------
1997 1996 1995 1994 1993
--------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income $1,597 $6,314 $6,503 $6,386 $6,777
Interest expense 1,018 4,155 4,460 4,663 5,424
------ ------ ------ ------ ------
Net interest income 578 2,159 2,043 1,723 1,352
Provision for loan losses 28 239 64 61 0
------ ------ ------ ------ ------
Net interest income after prov. 550 1,919 1,979 1,662 1,352
Noninterest operating income 32 122 131 216 375
Net securities gains (losses) 117 902 (8) (14) 224
------ ------ ------ ------ ------
Total noninterest income 148 1,024 123 202 598
General and admin. expense 414 1,905 1,760 1,718 2,052
Special SAIF assessment 0 414 0 0 0
------ ------ ------ ------ ------
Total noninterest expense 414 2,319 1,760 1,718 2,052
Income before taxes 284 624 343 146 (101)
Income tax expense 109 231 112 46 (39)
------ ------ ------ ------ ------
Income before extra. item 175 393 231 100 (62)
Extraordinary item (563) 0 0 0 62
------ ------ ------ ------ ------
Net income (loss) $ (387) $ 393 $ 231 $ 100 $ 0
====== ====== ====== ====== ======
</TABLE>
-17-
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Table 4
Income Statement Ratios
Year Ended December 31,1993 to 1996
And the Three Months Ended March 31, 1997
(As a Percent of Average Assets)
<TABLE>
<CAPTION>
Three Mos. Year Ended
Ended December 31,
March 31, ---------------------------------------
1997 1996 1995 1994 1993
--------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income 7.75 7.80 7.75 7.47 6.80
Interest expense 4.94 5.13 5.32 5.46 5.45
----- ----- ----- ----- -----
Net interest income 2.81 2.67 2.44 2.02 1.36
Provision for loan losses 0.14 0.30 0.08 0.07 0.00
----- ----- ----- ----- -----
Net interest income after prov. 2.67 2.37 2.36 1.94 1.36
Noninterest operating income 0.15 0.15 0.16 0.25 0.38
Net securities gains (losses) 0.57 1.11 (0.01) (0.02) 0.22
----- ----- ----- ----- -----
Total noninterest income 0.72 1.26 0.15 0.24 0.60
General and admin. expense 2.01 2.35 2.10 2.01 2.06
Special SAIF assessment 0.00 0.51 0.00 0.00 0.00
----- ----- ----- ----- -----
Total noninterest expense 2.01 2.86 2.10 2.01 2.06
Income before taxes 1.38 0.77 0.41 0.17 (0.10)
Income tax expense 0.53 0.29 0.13 0.05 (0.04)
----- ----- ----- ----- -----
Income before extra. item 0.85 0.49 0.28 0.12 (0.06)
Extraordinary item (2.73) 0.00 0.00 0.00 0.06
----- ----- ----- ----- -----
Net income (loss) (1.88) 0.49 0.28 0.12 0.00
===== ===== ===== ===== =====
</TABLE>
-18-
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Feldman Financial Advisors, Inc.
- --------------------------------
borrowings by lower costing FHLB advances has helped to reduce the Bank's
overall cost of funds. The Bank's operating expense ratio fell to 2.01% of
average assets for the March 1997 quarter, as compared to 2.06% for the March
1996 quarter. Federal deposit insurance premiums declined by $33,000 in the
1997 period as a result of the decrease in the Bank's assessment rate from 0.23%
of deposits to approximately 0.06%.
Operating Results for Fiscal 1996 versus 1995
- ---------------------------------------------
The Bank recorded net income of $393,000 in 1996 versus earnings of
$231,000 in 1995. The Bank's return on average assets ("ROAA") improved from
0.28% to 0.49%, and its return on average equity ("ROAE") increased from 5.31%
to 8.54%. The increase in earnings for 1996 was the result of higher levels of
net interest income and net securities gains, partly offset by increased
provisions for loan losses and the one-time special SAIF assessment.
During 1996, the Bank's weighted average yield on interest-earning assets
was unchanged from the previous year at 7.99%; however, its weighted average
cost on interest-bearing liabilities declined by 17 basis points from 5.67% to
5.50%. The lower cost of funds primarily reflected a reduction in the average
balance of borrowed debt outstanding. Also in 1996, a significant volume of the
Bank's three-year and five-year certificates of deposit matured and repriced at
prevailing market rates, which were below the rates paid on the maturing
deposits. As a result of these occurrences, the Bank's net interest spread
increased from 2.32% in 1995 to 2.49% in 1996.
The Bank increased its provision for loan losses to $239,000 in 1996,
reflecting management's decision to increase the loan loss allowance after
observing higher charge-offs
-19-
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Feldman Financial Advisors, Inc.
- --------------------------------
in 1996 and completing an overall assessment of the loan portfolio. The
allowance for loan losses was increased from 0.52% of total loans at year-end
1995 to 0.75% at year-end 1996.
Non-interest income increased by $901,000 in 1996 as a result of $902,000
in gains associated with the sale and redemption of CMO residuals owned by the
Bank. The gains were partially offset by a $560,000 increase in non-interest
expense. Federal deposit insurance premiums increased by $405,000 due to the
special SAIF assessment of $414,000 which was recognized in the third quarter of
1996. Occupancy and equipment expense increased by $51,000 as a result of costs
related to renovations and improvements at office facilities and equipment
upgrades. Salaries and benefits increased by $125,000, primarily as a result of
larger bonus payments, a general profit sharing contribution, and normal salary
adjustments.
-20-
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Feldman Financial Advisors, Inc.
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Table 5
Yield and Cost Summary
For the Years Ended December 31, 1995 and 1996 and
As of and for the Three Months Ended March 31, 1997
<TABLE>
<CAPTION>
Three Mos. Year Ended
As of Ended December 31,
March 31, March 31, ------------------
1997 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted Average Yields
- -----------------------
Loans receivable 8.55% 8.53% 8.51% 8.50%
Investment securities 6.69 6.67 6.16 5.87
Mortgage-backed securities 7.15 6.89 7.11 7.24
Other interest-earning assets 5.63 5.31 5.98 6.26
Total interest-earning assets 8.05 7.93 7.99 7.99
Weighted Average Costs
- ----------------------
NOW and money market accounts 2.94 2.72 2.72 2.64
Savings accounts 3.14 3.07 3.12 3.10
Certificates of deposit 5.63 5.54 5.60 5.74
Collateralized mortgage
obligation 11.60 11.71 12.31 11.83
Borrowed funds 6.47 6.44 6.50 7.03
Total interest-bearing
liabilities 5.20 5.29 5.50 5.67
Net interest spread 2.85 2.64 2.49 2.32
Net interest margin -- 2.87 2.73 2.51
</TABLE>
-21-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Asset and Liability Management
The Bank's principal financial objective is to achieve long-term
profitability while reducing its exposure to fluctuating interest rates. The
Bank has sought to reduce its earnings vulnerability to changes in market
interest rates by managing the mismatch between asset and liability maturities
and interest rates. The principal elements of the Bank's interest rate risk
management are to evaluate the interest rate risk included in certain balance
sheet accounts, to determine the level of risk appropriate given the Bank's
business strategy, operating environment, performance objectives, and capital
and liquidity requirements, and manage the risk consistent with the Board of
Directors' approved guidelines. The Bank's management meets at least quarterly
to review the Bank's asset/liability policies and interest rate risk position.
In recent years, the 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 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.
The OTS provides a net market value methodology to measure the interest
rate risk exposure of thrifts. This exposure is a measure of the potential
decline in the net portfolio value ("NPV") of the institution based upon upward
or downward movement in interest rates.
-22-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
NPV is computed as the present value of the expected net cash flows from an
institution's assets and liabilities. Under proposed OTS regulations, an
institution's "normal" level of interest rate risk in the event of a 200 basis
point movement in interest rates is a decrease in the institution's NPV in an
amount not exceeding 2.00% of the portfolio value of total assets.
Utilizing this concept of interest rate risk measurement, Table 6
illustrates the change in the Bank's NPV as of March 31, 1997 based on
instantaneous and permanent changes in interest rate levels. An increase in
rates of 200 basis points would lower the Bank's NPV by $2.0 million or 2.36%
relative to the total portfolio value of assets, while a decrease of 200 basis
points would increase the Bank's NPV by $303,000 or 0.4% relative to total
portfolio value of assets. Based on these evaluations, the Bank's interest rate
risk exposure is greater than the amount treated as "normal" under the proposed
OTS regulations.
-23-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Table 6
Changes in Net Portfolio Value
As of March 31, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Net Portfolio Value as %
Net Portfolio Value of Portfolio Value of Assets
Basis Point (b.p.) ----------------------------------- ----------------------------
Change in Rates $ Amount $ Change(1) % Change NPV Ratio(2) Change (3)
- ------------------ -------- ----------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C>
400 $2,524 $(4,267) (63)% 3.28% (477) b.p.
300 3,645 (3,146) (46) 4.62 (342) b.p.
200 4,798 (1,993) (29) 5.94 (211) b.p.
100 5,884 (907) (13) 7.12 (93) b.p.
0 6,791 -- -- 8.05 --
(100) 7,279 488 7 8.49 44 b.p.
(200) 7,094 303 4 8.21 16 b.p.
(300) 6,733 (58) (1) 7.74 (31) b.p.
(400) 6,601 (190) (3) 7.52 (53) b.p.
- ------------------------------------------------------------------------------------------
</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.
(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.
-24-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Asset Quality
Table 7 summarizes the Bank's nonperforming assets as of December 31, 1995
and 1996, and March 31, 1997. The Bank's ratio of delinquent loans to total net
loans measured 2.03% at March 31, 1997. The ratio of nonperforming assets to
total assets was 1.42% at March 31, 1997, representing a marked improvement from
the ratio of 3.12% at year-end 1992. The Bank's $1.2 million of nonperforming
assets at March 31, 1997 consisted of $1.1 million of nonaccrual loans and
$52,000 of real estate owned and other repossessed assets (which comprised one
building and five mobile homes).
Assets classified as substandard for regulatory purposes totaled $1.5
million and primarily consisted of $366,000 of ten one- to four-family mortgage
loans, two loans to related borrowers totaling $403,000 that are secured by a
small office building, one of the borrower's personal residence and a parcel of
vacant land, and two loans to one borrower totaling $283,000 that are secured by
a small office building and the borrower's personal residence.
Table 8 shows the Bank's allowance for loan losses, which as of March 31,
1997 totaled $420,000 or 0.75% of total gross loans and 37.4% of total
nonperforming loans. Between year-ends 1995 and 1996, the Bank's loan loss
allowance was increased by $139,000 to reflect continued loan portfolio growth
and a more stringent risk assessment process. Net charge-offs amounted to
$56,000 and $100,000 in 1995 and 1996, respectively, and $23,000 for the quarter
ended March 31, 1997. Approximately $69,000 of the charge-offs in 1996 was
related to the mobile home loan portfolio. Net charge-offs to average loans
outstanding increased from 0.10% in 1995 to 0.19% in 1996, before declining
moderately to 0.04% for the first quarter of 1997.
-25-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Table 7
Nonperforming Asset Summary
As of December 31, 1995 and 1996 and March 31, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
March 31, ------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Nonaccrual loans:
One- to four-family mortgage $462 $432 $156
Multi-family mortgage 134 149 20
Commercial real estate mortgage 403 407 425
Mobile home loans 21 33 15
Other consumer 2 3 8
Commercial loans 86 86 26
----- ----- ---
1,108 1,110 650
Accruing loans which are contractually past
due 90 days or more:
One- to four-family mortgage 15 -- 80
Mobile home loans -- -- 22
---- ----- ---
15 -- 102
Total 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>
-26-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Table 8
Allowance for Loan Losses Summary
As of December 31, 1995 and 1996 and March 31, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
March 31, -----------------
1997 1996 1995
--------- ---- ----
<S> <C> <C> <C>
Allowance at beginning of period $415 $276 $268
Provision for loan losses 28 239 64
Recoveries:
One- to four-family mortgage 1 4 1
Consumer loans 3 5 8
Commercial loans 1 2 1
---- ----- ----
5 11 10
Charge-offs:
One- to four-family mortgage (22) (24) (40)
Mobile home loans (3) (69) --
Other consumer (3) (12) (11)
Commercial loans -- (6) (15)
---- ----- ----
(28) (111) (66)
Net charge-offs (23) (100) (56)
---- ----- ----
Balance at end of period $420 $415 $276
=== === ===
Allowance for loan losses as a
percent of total loans 0.75% 0.75% 0.52%
Net charge-offs to avg. loans
outstanding 0.04% 0.19% 0.10%
</TABLE>
-27-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Properties
The Bank operates three full-service facilities in Pittsburgh,
Pennsylvania. The Bank owns its Spring Hill and Beechview offices and leases
its North Shore office. The lease expires in December 1999 with an early
termination clause. The 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 Bank's furniture, fixtures and equipment was $776,000 or 0.9%
of total assets.
-28-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Market Area
The Bank is headquartered in Pittsburgh, Pennsylvania and operates three
full-service offices in the city of Pittsburgh. Most of the Bank's depositors
reside in the communities surrounding the Bank's offices and most of the 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 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 local economy will continue to
improve.
Table 9 displays selected demographic data for the United States, the state
of Pennsylvania, the Pittsburgh metropolitan statistical area ("MSA"), and
Allegheny County. Population growth in Pennsylvania, the Pittsburgh MSA, and
Allegheny County is projected to lag population growth for the country. While
population growth is expected to trail national trends, local income growth in
the MSA and the county is projected to outpace the U.S. and state growth levels.
-29-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Table 10 summarizes deposit market trends for the city of Pittsburgh,
Allegheny County, and the Pittsburgh MSA. Overall deposit growth rates ranged
from 4.1% in the Pittsburgh MSA during the 1994-1996 period to 5.7% in the city
of Pittsburgh. Due to the credit-related problems of the late 1980s and early
1990s, the Bank has concentrated on improving asset quality and developing a
strong capital base, rather than increasing its asset size or market share. As
a result, the Bank's recent deposit growth has not kept pace with local market
trends. Table 11 shows recent deposit trends for the five largest banks and
thrifts in the city of Pittsburgh. The Bank ranked 20/th/ out of 33 depository
institutions with offices in Pittsburgh and its market share has been relatively
constant at 0.3%.
-30-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Table 9
Key Economic Indicators
United States, Pennsylvania, Pittsburgh MSA, and Allegheny County
<TABLE>
<CAPTION>
========================================================================================================================
United Pittsburgh Allegheny
Key Economic Indicators States Pennsylvania MSA County
- ------------------------------------------------------------------------------------------------------------------------
Population
----------
<S> <C> <C> <C> <C>
Total Population - 1996 264,992,224 12,103,263 2,401,614 1,311,951
5-year projection percent change 4.9% 1.1% -0.1% -1.8%
1990 - 1996 percent change 6.6% 1.9% 0.3% -1.8%
Households
----------
Total Households - 1996 98,935,240 4,645,543 970,471 542,695
5-year projection percent change 5.4% 1.8% 0.9% -0.8%
1990 - 1996 percent change 7.6% 3.3% 2.5% 0.3%
Per Capita Income
-----------------
Per Capita Income - 1996 $18,415 $18,368 $19,058 $21,029
5-year projection percent change 21.7% 23.7% 29.8% 30.1%
1990 - 1996 percent change 27.9% 30.6% 38.1% 39.0%
Average Household Income
------------------------
Average Household Income - 1996 $48,762 $47,216 $46,548 $50,338
5-year projection percent change 20.7% 22.1% 26.2% 28.1%
1990 - 1996 percent change 26.7% 28.5% 34.6% 35.9%
Median Household Income
-----------------------
Median Household Income - 1996 $36,625 $36,008 $34,534 $36,640
5-year projection percent change 15.4% 17.2% 21.9% 22.9%
1990 - 1996 percent change 21.7% 23.6% 29.3% 29.9%
Household Income Distribution - 1996
------------------------------------
$ 0 - 24 K 34.0% 34.4% 36.7% 34.8%
$25 - 49K 31.5% 32.5% 31.2% 30.5%
$50K + 34.5% 33.1% 32.1% 34.8%
Household Income Distribution - proj. 2001
------------------------------------------
$ 0 - 24 K 29.1% 28.8% 29.6% 28.1%
$25 - 49K 28.6% 29.3% 27.8% 26.7%
$50K + 42.3% 41.9% 42.6% 45.2%
========================================================================================================================
</TABLE>
Note: Pittsburgh MSA includes all or part of the following counties: Allegheny,
Beaver, Butler, Fayette, Washington, and Westmoreland.
Source: SNL Securities
-31-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Table 10
Deposit Trends for Pittsburgh, Allegheny County and Pittsburgh MSA
For All Banks, Thrifts, and Credit Unions
Deposit Data as of June 30th Date
(Dollars in Thousands)
<TABLE>
<CAPTION>
====================================================================================================================================
1996 1994-96
No. of 1996 1995 1994 Growth
Area Offices Deposits Deposits Deposits Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Pittsburgh 385 $23,408,884 $20,296,990 $20,951,624 5.7%
Allegheny County 654 $31,946,972 $28,540,264 $29,008,538 4.9%
Pittsburgh MSA 1,185 $44,753,235 $41,098,152 $41,323,918 4.1%
====================================================================================================================================
</TABLE>
Table 11
Deposit Market Share for Pittsburgh
For All Banks and Thrifts
June 30, 1994 to June 30, 1996
<TABLE>
<CAPTION>
====================================================================================================================================
1996 1995 1994
1996 -------------------- --------------------- --------------------- 1994-96
No. of Deposits % of Deposits % of Deposits % of Growth
Institution Offices Type ($000s) Total ($000s) Total ($000s) Total Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mellon Bank 49 B $9,234,058 40.7% $5,653,975 28.8% $5,734,949 28.3% 26.9%
PNC Bank 68 B 6,751,372 29.7% 7,254,078 37.0% 7,794,291 38.5% -6.9%
National City Bank 66 B 2,896,611 12.8% 2,999,925 15.3% 3,086,550 15.2% -3.1%
Dollar Bank, FSB 14 T 1,064,317 4.7% 1,029,190 5.2% 1,002,458 4.9% 3.0%
Parkvale Savings 14 T 477,386 2.1% 471,909 2.4% 459,815 2.3% 1.9%
- ------------------------------------------------------------------------------------------------------------------------------------
Spring Hill Savings 3 T 64,405 0.3% 65,294 0.3% 62,647 0.3% 1.4%
- ------------------------------------------------------------------------------------------------------------------------------------
All Others 82 NA 2,227,723 9.8% 2,144,580 10.9% 2,114,810 10.4% 2.6%
-- --------- --- --------- ---- --------- ---- ---
Total in City 296 $22,715,872 100.0% $19,618,951 100.0% $20,255,520 100.0% 5.9%
====================================================================================================================================
</TABLE>
Source: SNL Securities
-32-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Summary
The Bank has benefited significantly from the general decline and recent
stability of interest rates. The Bank's net interest margin has improved
consistently over the past five years, which has resulted in steadily higher
earnings. While representing an irregular source of revenue, securities gains
have also contributed to the Bank's earnings. The trend of improved earnings
was interrupted in 1996 by higher operating expenses related to the special SAIF
assessment and in early 1997 by an extraordinary charge recorded upon the
extinguishment of certain CMO bonds. Future improvements in the Bank's net
interest margin are likely to be driven by the Bank's emphasis on its higher
yielding loan volume and replacement of higher costing CMO borrowings with lower
costing liabilities.
While the Bank has realized substantial improvement in its core earnings
production, the Bank's profitability remains below its peer averages. The
Bank's profitability in past years was hampered by its relatively low capital
ratio, reliance on high-cost borrowings, and concentration of troubled assets.
Various actions undertaken by the Bank have dramatically improved the Bank's
asset quality and enhanced its net interest margin potential. In addition, the
infusion of additional capital from the Conversion should raise its capital
ratio to a level comparable to its peers. The additional capital should also
provide interest-free funds to facilitate asset/liability management objectives
and help insulate the Bank's earnings potential from its interest rate risk
exposure.
-33-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
II. COMPARISONS WITH PUBLICLY HELD THRIFTS
General
The comparative market approach provides a sound basis for determining
estimates of going-concern valuations where a regular and active market exists
for the stocks of peer institutions. The comparative market approach was
utilized in valuing the to-be-issued common stock of Spring Hill because: (i)
reliable market and financial data are readily available for comparable
institutions; (ii) the comparative market method is required by the applicable
regulatory guidelines; and (iii) other alternative valuation methods (such as
income capitalization, liquidation analysis, or discounted cash flow) are
unlikely to produce a valuation relevant to the future trading patterns of the
issued stock. The generally employed valuation method in initial public
offerings, where possible, is the comparative market approach which can be
relied upon to determine pro forma market value in a thrift stock conversion.
The comparative market approach derives a value from the trading patterns
of selected peer institutions which due to certain factors, such as financial
performance and operating strategies, enable the appraiser to estimate the
potential value of the subject institution in a stock conversion offering. The
pricing and trading history of recent initial public offerings of thrifts are
also examined to provide evidence of the "new issue discount" which must be
considered. In Chapter II, our valuation analysis focuses on the selection and
comparison of Spring Hill with a comparable group of publicly held thrift
institutions (the "comparative group"). Chapter III will detail the new issue
discount that we believe is appropriate to Spring Hill's stock offering.
-34-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Selection Criteria
Selected market price and financial performance data for thrifts listed on
the New York and American Stock Exchanges and those thrifts traded on the over-
the-counter markets listed on the National Association of Securities Dealers
Automated Quotation System ("Nasdaq") are shown in Exhibit III. Several
criteria, discussed below, were used to select the individual members of the
comparative group from the overall universe of publicly held thrifts.
. Operating characteristics - An institution's operating characteristics
-------------------------
are the most important factors because they affect investors' expected
rates of return on a company's stock under various business/economic
scenarios, and they influence the market's general perception of the
quality and attractiveness of a given company. Operating
characteristics, which may vary in importance during the business cycle,
include financial variables such as profitability, balance sheet growth,
capitalization, asset quality, and other factors such as lines of
business and management strategies.
. Degree of marketability and liquidity - Marketability of a stock
-------------------------------------
reflects the relative ease and promptness with which a security may be
sold when desired, at a representative current price, without material
concession in price merely because of the necessity of sale.
Marketability also connotes the existence of buying interest as well as
selling interest and is usually indicated by trading volumes and the
spread between the bid and asked price for a security. Liquidity of the
stock issue refers to the organized market exchange process whereby the
security can be converted into cash. We attempted to limit our selection
to companies that have access to a regular trading market. We eliminated
from the comparative group companies with market prices that were
materially influenced by publicly announced or widely rumored
acquisitions. However, the expectation of continued industry
consolidation is currently embedded in thrift equity valuations.
. Geographic Location - The region of the country where a company operates
-------------------
is also of importance in selecting the comparative group. The operating
environment for savings institutions varies from region to region with
respect to business and economic environments, real estate market
conditions, speculative takeover activity, and investment climates.
Economic and investor climates can also vary greatly within a region,
particularly due to takeover activity.
-35-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Spring Hill's operations generally fit the traditional profile of a small
thrift institution. Its concentration of lending in the investor owned
residential property sector and prior level of CMO borrowings are two factors
which slightly differentiate the Bank from the conventional savings institution.
In determining the comparative group composition, we focused on the Bank's
mediocre profitability and comparatively low capital level. The Bank is further
characterized by significantly improved levels of core profitability and asset
quality.
Specifically, we initiated a search for thrifts in the Mid-Atlantic region
and neighboring states with total assets of between approximately $50 million
and $150 million, reporting a core return on average assets below 0.90%, an
equity-to-assets ratio below 16.00%, and some evidence of diverse lending
activity. In order to include a relevant number of thrifts from which to
evaluate as peer candidates, we expanded the size criterion to $250 million.
A general overview of the thirteen members selected for the comparative
group is presented in Table 12. Two of the companies are based in Pennsylvania.
Several local public thrifts were excluded from comparative group consideration
because of their exceptionally stronger capital and profitability ratios. Five
of the comparative group companies are based in Ohio, four are headquartered in
New York, and one each is located in Maryland and West Virginia. The asset size
of the comparative group ranges from $66 million to $241 million. Overall,
these companies exhibited lower ratios of capital, net interest margins, and
core earnings profitability than the average public thrift with assets under
$250 million. While some differences inevitably exist between the Bank and the
individual companies, we believe that the chosen comparative group on the whole
provides a meaningful basis of comparison for valuation purposes.
-36-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Table 12
Comparative Group Operating Summary
As of the Latest Period Ended March 31, 1997
<TABLE>
<CAPTION>
Total Equity/
No. of Conv. Assets Assets
Company City State Offices Date ($mil.) (%)
------- ---- ----- ------- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Spring Hill Savings Bank, FSB Pittsburgh PA 3 -- 82,809 5.37
Comparative Group
- -----------------
Advance Financial Bancorp Wellsburg WV 2 01/02/97 103,578 15.45
Albion Banc Corp. Albion NY 2 07/26/93 66,316 8.90
ASB Financial Corp. Portsmouth OH 1 05/11/95 109,414 15.74
Elmira Savings Bank Elmira NY 6 03/01/85 222,618 6.30
First Franklin Corporation Cincinnati OH 7 01/26/88 226,235 8.82
Harbor Federal Bancorp Inc. Baltimore MD 9 08/12/94 219,462 12.86
Harvest Home Financial Corp. Cheviot OH 3 10/10/94 83,103 12.50
Milton Federal Financial Corp. West Milton OH 2 10/07/94 178,757 14.74
Pittsburgh Home Financial Corp. Pittsburgh PA 7 04/01/96 236,998 11.47
Potters Financial Corp. East Liverpool OH 4 12/31/93 116,921 8.90
Prestige Bancorp Inc. Pleasant Hills PA 3 06/27/96 126,833 11.69
SFS Bancorp Inc. Schenectady NY 3 06/30/95 168,841 12.99
Skaneateles Bancorp Inc. Skaneateles NY 8 06/02/86 241,425 6.87
</TABLE>
-37-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Recent Financial Comparisons
Table 13 summarizes certain key financial comparisons between Spring Hill
and the comparative group. Tables 14 through 18 contain the detailed financial
comparisons of Spring Hill with the individual comparative group companies based
on measures of profitability, income and expense components, yield-cost
structure, capital levels, balance sheet composition, growth rates, and credit
risk. Comparative financial data utilized were for the twelve months ended
March 31, 1997, except loan portfolio composition data were as of December 31,
1996 (the latest regulatory data available). Financial data for the Bank were
as of the twelve months ended March 31, 1997 on a pre-conversion basis.
Spring Hill's return on average assets was negative 0.07%, reflecting the
combined effects of the special SAIF assessment and the extraordinary charge for
the CMO repurchase. (Since the special SAIF assessment affected the reported
profitability of most thrifts, we have focused primarily on core earnings for
the recent operating period.) The Bank's core earnings, which excludes the
impact of these and other nonrecurring items, measured 0.15% as compared to the
comparative group's average of 0.63%. In comparison to the peer group, the
Bank's core profitability was restrained by a lower net interest margin and
higher level of loan provisions.
The Bank's net interest income of 2.73% relative to average assets was
below the comparative group's average of 3.24%. Spring Hill's net interest
spread of 254 basis points was also lower than the group's average of 279 basis
points. The Bank's 7.96% earning asset yield, reflective of its increasingly
diverse loan mix, exceeded the group's 7.54% average yield. However, the Bank's
5.42% cost of funds surpassed the group's 4.75% average which
-38-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
reflected the Bank's greater reliance on borrowings, particularly the higher
costing CMO. As previously discussed, the Bank's net interest spread is expected
to benefit in the future from the paydown of the CMO and funding substitution
with lower costing liabilities.
The Bank's net interest-earning asset balance averaged 4.47% of assets over
the observed period, well below the group's average of 11.22%. This disparity
reflected the Bank's lower capital level. The Bank's 5.37% equity-to-assets
ratio trailed the group's average equity ratio of 11.32%.
Spring Hill's noninterest operating income totaled 0.15% in relation to
average assets, trailing the comparative group's average of 0.28%. The Bank has
not developed a broad offering of fee-producing products and services beyond its
traditional thrift operations. The Bank's production of nonrecurring gains was
substantial during this period as evidenced by the 1.29% level of income, as
compared to the peer group average of 0.03%.
As discussed in Chapter I, the Bank increased its provision for loan losses
in 1996 to reflect the recent loan portfolio growth, charge-off experience, and
modified risk assessment procedures. The Bank's loan loss provision amounted to
0.29% of average assets, ahead of the comparative group's average provision
level of 0.07% relative to average assets.
The Bank's operating expenses have been targeted by management as a
critical linchpin to improved profitability. The Bank's 2.20% ratio of general
and administrative expenses to average assets compared favorably to the peer
group average of 2.52%. The Bank's level of real estate related costs was
higher than the comparative group average, reflecting the Bank's continued
resolution of problem assets. The Bank's nonrecurring expense (special SAIF
assessment) measured 0.51% of average assets during the observed period, and was
comparable to those group members with a similar nonrecurring charge.
-39-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Table 13
Key Financial Comparisons
Spring Hill and the Comparative Group
As of the Twelve Months Ended March 31, 1997
<TABLE>
<CAPTION>
Comp.
Spring Group
Hill Average
------- --------
<S> <C> <C>
Profitability
- -------------
LTM Return on Average Assets (0.07)% 0.38 %
Core Return on Average Assets 0.15 0.63
LTM Return on Average Equity (1.17) 3.44
Core Return on Average Equity 2.64 5.56
Income and Expense (% of avg. assets)
- ------------------
Total Interest Income 7.78 7.30
Total Interest Expense 5.05 4.06
Net Interest Income 2.73 3.24
Provision for Loan Losses 0.29 0.07
Other Operating Income 0.15 0.28
Net Gains & Nonrecurring Income 1.29 0.03
General & Administrative Expense 2.20 2.52
Real Estate Expense (Income) 0.14 (0.01)
Nonrecurring Expense 0.51 0.42
Yield-Cost Data
- ---------------
Yield on Earning Assets 7.96 7.54
Cost of Funds 5.42 4.75
------ ------
Net Interest Spread 2.54 2.79
Asset Utilization (% of avg. assets)
- -----------------
Avg. Interest-earning Assets 97.71 96.90
Avg. Interest-bearing Liabilities 93.24 85.68
------ ------
Net Interest-earning Assets 4.47 11.22
</TABLE>
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Feldman Financial Advisors, Inc.
- --------------------------------
Table 13 (continued)
Key Financial Comparisons
Spring Hill and the Comparative Group
As of the Twelve Months Ended March 31, 1997
<TABLE>
<CAPTION>
Comp.
Spring Group
Hill Average
------ -------
<S> <C> <C>
Balance Sheet Composition (% of assets)
- -------------------------
Cash and Securities 30.56 % 28.38 %
Loans Receivable, net 66.74 68.45
Real Estate 0.02 0.15
Intangible Assets 0.00 0.05
Other Assets 2.68 2.98
Total Deposits 78.22 78.14
Borrowed Funds 14.14 9.40
Other Liabilities 2.27 1.13
Total Equity 5.37 11.32
Loan Portfolio (% of total loans)
- --------------
Residential Mortgage Loans 76.16 77.43
Other Real Estate Mortgage Loans 18.57 12.75
Nonmortgage Loans 5.17 9.82
Growth Rates
- ------------
Total Assets (0.34) 10.55
Total Loans 5.85 17.18
Total Deposits (0.46) 4.79
Credit Risk Ratios
- ------------------
Nonperforming Loans / Total Loans 2.03 0.85
Nonperforming Assets / Total Assets 1.42 0.77
Reserves / Nonperforming Loans 37.40 106.04
Reserves / Total Loans 0.75 0.81
</TABLE>
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Feldman Financial Advisors, Inc.
- --------------------------------
The Bank's balance sheet composition reflected the impact of its controlled
growth posture over recent years. The Bank's holdings of cash and securities
amounted to 30.6% of total assets, while loans accounted for 66.7%. Many of the
comparative group companies have also accumulated large investment
concentrations as a result of stock conversion proceeds and the accompanying
challenge of deploying these funds into higher yielding loans in a prudent
fashion. On average, the comparative group exhibited a 28.4% level of cash and
securities and a 68.5% concentration of loans. Spring Hill and the comparative
group companies held modest levels of non-earning assets.
Spring Hill's high deposit concentration at 78.2% of assets was virtually
identical to the comparative group's average of 78.1%. However, due to its
lower capital position, the Bank relied on a larger borrowings position to fund
its asset base. The Bank's level of borrowings outstanding at 14.1% of assets
was higher than the group's average of 9.4%. The Bank's equity level at 5.4% of
assets was lower than all of the peer group companies. However, with the
infusion of capital from the stock offering, the Bank's post-conversion equity
level should rival that of most comparative group companies such as Pittsburgh
Home Financial Corp. (11.47%), Prestige Bancorp Inc. (11.69%), Harvest Home
Financial Corp. (12.50%), and Harbor Federal Bancorp Inc. (12.86%).
The Bank's level of nonperforming assets measured 1.42% of total assets, as
compared to the peer group average of 0.77%. Several of the comparative group
companies exhibited nonperforming asset ratios higher than the Bank. In
relation to total loans, the Bank's reserve ratio at 0.75% approached the
comparative group's average of 0.81%.
In summary, the Bank's core earnings performance trailed that of the
comparative group due to its capital disadvantage and the increased provisioning
for loan losses. This
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Feldman Financial Advisors, Inc.
- --------------------------------
disparity should narrow somewhat with the infusion of capital and strengthening
of the Bank's net interest margin in the current interest rate environment.
Future earnings improvements also will be predicated on controlling operating
and credit related costs as the Bank continues to expand its lending activities.
-43-
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Feldman Financial Advisors, Inc.
- --------------------------------
<TABLE>
<CAPTION>
===================================================================================================================================
Table 14
General Financial Performance Ratios
As of or for the Latest Twelve Months Ended March 31, 1997
===================================================================================================================================
Total Tang. Total Net
Total Total Equity/ Equity/ NPAs/ Interest LTM LTM Core Core
Assets Deposits Assets Assets Assets Margin ROAA ROAE ROAA ROAE
($mil.) ($mil.) (%) (%) (%) (%) (%) (%) (%) (%)
-------- --------- --------- --------- -------- ---------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Spring Hill Savings Bank, FSB 82,809 64,776 5.37 5.37 1.37 2.79 (0.07) (1.17) 0.15 2.64
Comparative Group Average 161,577 127,380 11.33 11.28 0.77 3.35 0.38 3.44 0.63 5.56
Advance Financial Bancorp 103,578 79,308 15.45 15.45 0.37 3.50 0.37 3.65 0.66 6.49
Albion Banc Corp. 66,316 50,306 8.90 8.90 NA 3.68 0.09 0.93 0.38 3.90
ASB Financial Corp. 109,414 87,324 15.74 15.74 1.58 3.46 0.60 3.01 0.86 4.31
Elmira Savings Bank 222,618 204,348 6.30 6.05 0.83 3.74 0.29 4.50 0.28 4.32
First Franklin Corporation 226,235 198,819 8.82 8.76 0.62 2.81 0.14 1.57 0.61 6.64
Harbor Federal Bancorp Inc. 219,462 171,467 12.86 12.86 0.13 2.91 0.43 3.22 0.68 5.10
Harvest Home Financial Corp. 83,103 57,563 12.50 12.50 0.15 2.96 0.27 1.89 0.55 3.91
Milton Federal Financial Corp. 178,757 135,840 14.74 14.74 0.32 3.30 0.53 3.04 0.72 4.14
Pittsburgh Home Financial Corp. 236,998 137,700 11.47 11.35 1.74 3.31 0.58 4.34 0.81 6.11
Potters Financial Corp. 116,921 97,970 8.90 8.90 0.83 3.27 0.31 3.47 0.68 7.54
Prestige Bancorp Inc. 126,833 87,276 11.69 11.69 0.32 3.24 0.27 2.09 0.57 4.43
SFS Bancorp Inc. 168,841 144,374 12.99 12.99 0.69 3.51 0.46 3.53 0.82 6.26
Skaneateles Bancorp Inc. 241,425 203,650 6.87 6.65 1.65 3.83 0.64 9.45 0.62 9.13
</TABLE>
Source: Spring Hill; SNL Securities; Feldman Financial
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Feldman Financial Advisors, Inc.
- --------------------------------
<TABLE>
<CAPTION>
====================================================================================================================================
Table 15
Income and Expense Analysis
For the Latest Twelve Months Ended March 31, 1997
===================================================================================================================================
As a Percent of Average Assets
-------------------------------------------------------------------------------------------------------
Net Other Gains & Loan Gen. & Real Pretax
Interest Interest Interest Oper. Non-rec. Loss Admin. Estate Non-rec. Core
Income Expense Income Income Income Prov. Expense Expense Expense Earnings
------ ------- ------ ------ ------ ----- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Spring Hill Savings Bank,
FSB 7.78 5.05 2.73 0.15 1.29 0.29 2.20 0.14 0.51 0.25
Comparative Group Average 7.30 4.06 3.24 0.28 0.03 0.07 2.52 (0.01) 0.42 0.94
Advance Financial Bancorp 7.54 4.13 3.40 0.33 0.05 0.17 2.47 0.00 0.49 1.08
Albion Banc Corp. 7.52 4.02 3.50 0.41 0.01 0.23 3.22 (0.06) 0.45 0.52
ASB Financial Corp. 7.46 4.08 3.39 0.20 0.09 0.02 2.28 (0.02) 0.49 1.31
Elmira Savings Bank 7.61 4.02 3.59 0.73 0.02 0.17 3.63 0.02 0.00 0.48
First Franklin Corporation 7.22 4.48 2.74 0.17 0.06 0.04 1.91 0.00 0.78 0.93
Harbor Federal Bancorp Inc. 7.31 4.46 2.85 0.11 0.00 0.02 1.87 0.00 0.38 1.08
Harvest Home Financial
Corp. 7.04 4.15 2.90 0.08 0.03 0.01 2.16 0.00 0.46 0.81
Milton Federal Financial
Corp. 7.34 4.13 3.21 0.13 0.11 0.09 2.16 0.00 0.41 1.10
Pittsburgh Home Financial
Corp. 7.41 4.19 3.21 0.19 0.00 0.16 1.99 0.00 0.36 1.24
Potters Financial Corp. 7.02 3.85 3.17 0.26 0.00 (0.27) 2.64 (0.06) 0.57 1.12
Prestige Bancorp Inc. 6.77 3.62 3.15 0.28 0.00 0.05 2.50 0.00 0.46 0.88
SFS Bancorp Inc. 7.16 3.73 3.43 0.22 0.01 0.07 2.63 (0.01) 0.56 0.95
Skaneateles Bancorp Inc. 7.56 3.94 3.62 0.51 0.03 0.11 3.28 0.00 0.00 0.73
</TABLE>
Source: Spring Hill; SNL Securities; Feldman Financial
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Feldman Financial Advisors, Inc.
- --------------------------------
<TABLE>
<CAPTION>
====================================================================================================================================
Table 16
Yield-Cost Structure and Growth Rates
For the Latest Twelve Months Ended March 31, 1997
===================================================================================================================================
Avg. Avg. Net
Earn./ Costing Earn./ Yield on Cost Net Asset Loan Deposit
Assets/ Funds/ Assets/ Earn. of Interest Growth Growth Growth
Assets/ Assets Assets/ Assets Funds Spread Rate Rate Rate
------- ------- ------- -------- ----- -------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Spring Hill Savings Bank, FSB 97.71 93.24 4.47 7.96 5.42 2.54 (0.34) 5.85 (0.46)
Comparative Group Average 96.90 85.68 11.22 7.54 4.75 2.79 10.55 17.18 4.79
Advance Financial Bancorp 97.28 89.18 8.10 7.75 4.63 3.12 14.49 10.20 (1.39)
Albion Banc Corp. 94.97 87.16 7.81 7.92 4.61 3.31 16.98 6.02 8.24
ASB Financial Corp. 97.91 78.26 19.65 7.62 5.21 2.41 (2.06) 5.91 5.56
Elmira Savings Bank 95.82 87.00 8.82 7.94 4.62 3.32 (0.18) 9.02 (1.12)
First Franklin Corporation 97.30 89.92 7.38 7.42 4.99 2.43 4.68 7.34 6.20
Harbor Federal Bancorp Inc. 97.93 85.52 12.42 7.47 5.21 2.26 11.54 23.65 6.08
Harvest Home Financial Corp. 97.97 85.18 12.79 7.19 4.87 2.32 13.83 9.86 (3.43)
Milton Federal Financial Corp. 97.27 81.84 15.42 7.55 5.05 2.50 4.11 7.59 8.37
Pittsburgh Home Financial Corp. 97.14 81.66 15.48 7.63 5.14 2.49 21.44 42.64 13.86
Potters Financial Corp. 96.89 90.07 6.82 7.25 4.28 2.97 2.69 33.96 (2.26)
Prestige Bancorp Inc. 97.10 86.19 10.91 6.97 4.20 2.77 35.34 32.22 6.64
SFS Bancorp Inc. 97.72 85.66 12.06 7.33 4.36 2.97 1.98 13.96 3.29
Skaneateles Bancorp Inc. 94.43 86.17 8.26 8.01 4.58 3.43 12.30 21.01 12.19
</TABLE>
Source: Spring Hill; SNL Securities; Feldman Financial
-46-
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Feldman Financial Advisors, Inc.
- --------------------------------
<TABLE>
<CAPTION>
====================================================================================================================================
Table 17
Balance Sheet Composition
As of the Latest Twelve Months Ended March 31, 1997
===================================================================================================================================
As a Percent of Total Assets
-------------------------------------------------------------------------------------------------------
Cash & Net Real Intang. Other Total Borrowed Other Total Total
Securities Loans Estate Assets Assets Deposits Funds Liabs. Liabs. Equity
---------- ----- ------ ------ ------ -------- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Spring Hill Savings Bank,
FSB 30.56 66.74 0.02 0.00 2.68 78.22 14.14 2.27 94.63 5.37
Comparative Group Average 28.38 68.45 0.15 0.05 2.98 78.14 9.40 1.13 88.68 11.32
Advance Financial Bancorp 15.23 82.04 0.00 0.00 2.73 76.57 7.49 0.50 84.55 15.45
Albion Banc Corp. 23.19 71.01 0.16 0.00 5.65 75.86 13.98 1.26 91.10 8.90
ASB Financial Corp. 31.83 64.77 0.61 0.00 2.79 79.81 2.19 2.27 84.26 15.74
Elmira Savings Bank 18.57 78.07 0.37 0.27 2.72 91.79 1.18 0.72 93.70 6.30
First Franklin Corporation 30.66 67.56 0.06 0.06 1.66 87.88 2.80 0.50 91.18 8.82
Harbor Federal Bancorp Inc. 31.33 64.17 0.21 0.00 4.28 78.13 7.52 1.49 87.14 12.86
Harvest Home Financial
Corp. 45.09 52.84 0.00 0.00 2.08 69.27 17.69 0.55 87.50 12.50
Milton Federal Financial
Corp. 33.26 63.87 0.00 0.00 2.87 75.99 8.77 0.50 85.26 14.74
Pittsburgh Home Financial
Corp. 30.46 67.23 0.12 0.13 2.05 58.10 28.69 1.74 88.53 11.47
Potters Financial Corp. 39.19 57.81 0.00 0.00 3.00 83.79 6.43 0.87 91.10 8.90
Prestige Bancorp Inc. 31.98 65.10 0.01 0.00 2.91 68.81 17.98 1.53 88.31 11.69
SFS Bancorp Inc. 27.27 70.20 0.05 0.00 2.48 85.51 0.00 1.50 87.01 12.99
Skaneateles Bancorp Inc. 10.91 85.12 0.30 0.23 3.45 84.35 7.52 1.26 93.13 6.87
</TABLE>
Source: Spring Hill; SNL Securities; Feldman Financial
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- --------------------------------
================================================================================
Table 18
Regulatory Capital and Credit Risk Ratios
As of or for the Latest Twelve Months Ended March 31, 1997
================================================================================
<TABLE>
<CAPTION>
Tang. Core Risk- Total Resid. Other Nonmtg.
Capital Capital based NPLs/ NPAs/ Resrvs./ Resrvs./ Mtgs./ Mtgs./ Loans/
Ratio Ratio Capital Loans Assets NPLs Loans Loans Loans Loans
------- ------- ------- ----- ------ -------- -------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Spring Hill Savings Bank, FSB 5.38 5.38 12.46 2.03 1.42 37.40 0.75 76.16 18.57 5.17
Comparative Group Average 10.76 11.28 20.33 0.85 0.77 106.04 0.81 77.43 12.75 9.82
Advance Financial Bancorp 15.44 15.44 26.03 0.45 0.37 89.84 0.40 67.16 16.23 16.62
Albion Banc Corp. NA NA NA 0.63 NA 104.30 0.65 80.16 8.16 11.67
ASB Financial Corp. 12.15 12.15 27.02 1.45 1.58 84.76 1.23 67.40 19.43 13.17
Elmira Savings Bank 6.11 6.11 9.97 0.60 0.83 134.29 0.80 40.50 12.53 46.97
First Franklin Corporation 6.38 6.38 14.72 0.65 0.62 95.70 0.62 78.00 19.22 2.78
Harbor Federal Bancorp Inc. 11.09 11.09 27.25 0.20 0.13 131.49 0.26 79.07 17.76 3.17
Harvest Home Financial Corp. NA NA NA 0.29 0.15 90.48 0.26 88.60 11.30 0.10
Milton Federal Financial Corp. 12.20 12.20 26.30 0.27 0.32 172.55 0.46 84.68 13.49 1.83
Pittsburgh Home Financial Corp. NA 20.63 9.39 2.38 1.74 32.78 0.78 87.39 10.32 2.29
Potters Financial Corp. 8.53 8.53 19.60 1.40 0.83 231.18 3.23 76.52 15.20 8.27
Prestige Bancorp Inc. 11.97 11.97 26.81 0.48 0.32 80.50 0.39 91.25 1.73 7.03
SFS Bancorp Inc. 12.98 12.98 25.17 0.88 0.69 64.32 0.57 94.88 4.61 0.50
Skaneateles Bancorp Inc. NA 6.60 11.32 1.42 1.65 66.38 0.94 71.00 15.76 13.23
</TABLE>
Source: Spring Hill; SNL Securities; Feldman Financial
-48-
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Feldman Financial Advisors, Inc.
- --------------------------------
III. MARKET VALUE ADJUSTMENTS
This concluding chapter of the appraisal identifies certain additional
adjustments to Spring Hill's estimated pro forma market value relative to the
comparative group selected in Chapter II. Adjustments are also necessary to
reflect the equity market's likely reception of a new thrift stock offering
under current conditions. The adjustments discussed in this chapter are made
from the viewpoints of potential investors, which include depositors holding
subscription rights and unrelated parties who may purchase stock in the
community offering. It is assumed that these potential investors are aware of
all relevant and necessary facts as they pertain to the value of the Bank
relative to other publicly held thrift institutions and relative to alternative
investments.
The market value adjustments are based on certain financial and other
criteria, which include, among other factors:
(1) Earnings Prospects
(2) Market Area
(3) Management
(4) Dividend Policy
(5) Liquidity
(6) Subscription Interest
(7) Stock Market Conditions
(8) New Issue Discount
The final section of this chapter identifies Spring Hill's estimated pro
forma market value and compares the resulting company with members of the
comparative group and selected public thrift aggregate with respect to market
valuation ratios.
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Feldman Financial Advisors, Inc.
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Earnings Prospects
- ------------------
Earnings prospects are dependent upon the sensitivity of asset yields and
liability costs to changes in market interest rates, the credit quality of
assets, the stability of non-interest components of income and expense, and the
ability to leverage the balance sheet. Each of the foregoing is an important
factor to investors in assessing earnings prospects. The Bank's core earnings
profitability in recent years was fueled by an improving net interest margin
owing to lower interest rates, increased loan production, and reduced
utilization of borrowings. While economic conditions in the Bank's market area
are anticipated to remain stable, an unexpected business downturn or dramatic
interest rate increases could suppress the Bank's ability to grow, disrupt asset
quality, and strain core earnings.
As the Bank seeks to generate loan growth to spur earnings momentum,
operating expenses and funding requirements become pivotal factors. The Bank's
operating expense ratio was below the comparative group's average but is likely
to increase after the Conversion with the addition of costs associated with
being a public company and with compensation-related stock benefit plans. The
Bank's funding requirements face pressure in the form of continued intense
competition for retail deposits from other financial institutions and
alternative investments.
Overall, the Bank's recent trailing twelve-months core return on average
assets of 0.15% was well below the comparative group average of 0.63%. The
Bank's annualized core return of 0.50% for the first quarter of 1997 reflected a
more normalized level of loan loss provisions. While the Bank's net interest
spread should show future improvement in the current interest rate environment,
the Bank's earnings stream is vulnerable to rising interest rates because of its
emphasis on fixed-rate residential lending. In addition, the concentration
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Feldman Financial Advisors, Inc.
- --------------------------------
of investor owned residential and nonresidential mortgage lending may give rise
to continued credit related costs in the form of reserves and/or charge-offs.
The infusion of capital proceeds should assist the Bank in further implementing
its operating goals and stabilize its earnings stream, which has been erratic in
recent periods due to various nonrecurring items and extraordinary charges. As
the Bank attempts to turn the corner with respect to its past problems,
investors will be closely watching the Bank's core earnings results for signs of
improvement. Generally, the comparative group companies have reported moderate
earnings, but show a more sustained record of core profitability. Based on these
considerations, we believe a slight valuation discount to the Bank's pro forma
value is warranted.
Market Area
- -----------
The members of the comparative group were selected from the Mid-Atlantic
region and neighboring states. The thirteen companies collectively have
operations in Pennsylvania, Ohio, New York, Maryland, and West Virginia. Most
of the comparative group companies are based in regional centers such as
Pittsburgh, Baltimore, and Cincinnati. We do not believe that, on the whole,
the market area conditions of the comparative group are conspicuously different
from those facing the Bank. Accordingly, we believe that no adjustment is
warranted for market area considerations.
Management
- ----------
Management's principal challenge is to generate profitable results, monitor
credit risks, and control operating costs while the Bank competes in an
increasingly competitive financial services environment. Spring Hill's
management has demonstrated its effectiveness in steering the Bank through
difficult operating periods, and can now turn its full attention to enhancing
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Feldman Financial Advisors, Inc.
- --------------------------------
the Bank's competitive position and financial performance. Accordingly, we
assume that the Bank has sufficient managerial resources in place to implement
its operating goals and objectives. Therefore, we believe that no additional
adjustment is warranted for this factor.
Dividend Policy
- ---------------
The Board of Directors has not formulated a dividend policy, but intends to
develop a policy of paying cash dividends in the future. Declarations and
payments of dividends will depend upon a number of factors, including the amount
of the net proceeds retained by the Holding Company, capital requirements,
regulatory limitations, and operating results. All members of the comparative
group currently pay dividends. It is reasonable to believe that investors will
anticipate a regular stream of dividend payments following the Conversion given
the expected capitalization and profitability of the consolidated Holding
Company. As a result, we do not believe an adjustment is warranted for
dividends.
Liquidity of the Issue
- ----------------------
Following the completion of the Conversion, the Holding Company anticipates
that its common stock will be listed on the Nasdaq SmallCap Market. The Bank's
subscription marketing agent intends to make a post-conversion market in the
common stock 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. However, there is no assurance that there will be two or more
market markers. Furthermore, due to the relatively small market capitalization,
it is questionable whether an active and liquid trading market will develop or
be maintained. The liquidity of thrift stocks, as with all securities, has a
significant impact on their market valuation. All of the comparative group
companies are listed on Nasdaq. While many small-
-52-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
cap thrift and bank stocks have moved from pure pink sheet status to the OTC
electronic bulletin board in pursuit of increased liquidity, discounts to
exchange-listed stocks are still apparent as well as volatile bid-ask spreads.
Given the active trading volumes exhibited by a majority of the comparative
group members, we believe the Bank's estimated pro forma value should be
discounted marginally to reflect the possible lack of stock liquidity following
the Conversion.
Subscription Interest
- ---------------------
In recent years, initial public offerings of thrift stocks have attracted a
great deal of investor interest. During 1996, increased pro forma valuations
and more restrained aftermarket performance did little to deter investors from
actively participating in thrift stock conversions. Almost two-thirds of the
conversions in 1996 were oversubscribed by depositors alone with no shares
remaining for community offerings. Contributing to this huge demand is the
growing scarcity factor of mutual candidates for thrift stock conversions. The
annual number of conversion offerings and aggregate amount of gross proceeds
have both declined over past years.
The visibility of thrift conversions moved to the forefront once again in
late 1996 and early 1997 with the conversion of Roslyn Savings Bank, which
received orders totaling approximately $1.7 billion for an offering that was
ultimately closed at $424 million. Notwithstanding the demand for thrift stocks
in initial offerings, a strong subscription does not always indicate that the
valuation range should be increased or the offering should be priced in the
upper end of the valuation range. Many conversion investors do not routinely
purchase in the aftermarket, particularly at higher stock prices or involving
stock issues with limited
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Feldman Financial Advisors, Inc.
- --------------------------------
liquidity. As such, absent actual results of the Bank's subscription offering,
we do not believe any adjustment is warranted at this time.
Stock Market Conditions
- -----------------------
Table 19 graphically displays the performance of the SNL Thrift Index of
all publicly traded thrifts as compared to the Standard & Poor's 500-Stock Index
("S&P 500") over the past two and one-half years. The SNL Thrift Index
substantially outperformed the S&P 500 during this period, advancing by 53.4%
since year-end 1995 through month-end May 1997 as compared to the broader market
index up 37.7%. The index of smaller public thrifts (less than $250 million in
assets) markedly trailed the overall thrift performance, increasing by only
20.5%. The stock market performance of smaller public thrifts did not enjoy the
beneficial impact of greater liquidity or the visible attractiveness of
acquisition speculation favoring their larger counterparts.
Table 20 graphically depicts selected interest rates over the past two and
one-half years. General market interest rates declined throughout 1995 and
propelled the stock market to new heights. Interest rates turned upward during
the first half of 1996, responding to concerns about inflationary pressures.
Thrift stocks, which had significantly outperformed the overall market in 1995,
trailed the broader market through mid-year of 1996. However, as interest rates
declined modestly and stabilized during the second half of 1996, thrift stocks
regained momentum and were sparked additionally by another wave of mergers and
acquisitions. Resolution of the SAIF recapitalization appeared to break a
logjam that resulted in the announcements of a number of acquisitions of
relatively large thrifts.
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Feldman Financial Advisors, Inc.
- --------------------------------
Table 19
Comparative Stock Market Performance
Month-end Index Data, Year-end 1995 = 100
[LINE GRAPH APPEARS HERE]
-55-
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Feldman Financial Advisors, Inc.
- --------------------------------
Speculation about higher rates and the sustainability of thrift stock valuations
stalled the rally in late 1996. The market sell-off was prompted in part as
reaction to suggestions from the Federal Reserve Chairman that the stock market
was overheated and that the central bank might raise rates to head off
inflation. However, a flurry of merger activity in early 1997 pumped further
speculative fervor into thrift stocks.
This latest round of merger activity included the nation's three largest
thrifts involved in an unsolicited takeover battle and pushed the SNL Thrift
Index upward to new highs. The market found new momentum again in the late
spring as inflationary concerns waned. Notwithstanding the spillover effect of
merger activity, many stock analysts believe that the financial sector is headed
for more sluggishness as valuation multiples continue to enter ground-breaking
territory, but operating fundamentals remain strong enough to avert a major
correction independent of the overall market.
-56-
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Feldman Financial Advisors, Inc.
- --------------------------------
Table 20
Selected Interest Rate Benchmarks
Month-end Indicators
[LINE GRAPH APPEARS HERE]
-57-
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Feldman Financial Advisors, Inc.
- --------------------------------
Recent Acquisition Activity
- ---------------------------
Acquisition speculation is one factor impacting the prices of newly
converted thrifts in the aftermarket. Table 21 summarizes recent acquisition
activity involving thrifts and banks based in Pennsylvania. Overall acquisition
premiums for Pennsylvania institutions have been similar to the ratios reported
nationwide. During 1996 and 1997 year-to-date, there were 12 acquisitions
involving Pennsylvania banks and thrifts. The most prominent acquisition was
the purchase of Dauphin Deposit Corp., a $6.0 billion-asset commercial bank, by
Allied Irish Banks.
The state's financial institution marketplace comprises a large number of
middle-tier banks and thrifts. Larger institutions, such as Meridian Bancorp
and Integra Financial, were absorbed in recent years by the state's market
leaders, including PNC Bank Corp., Mellon Bank Corp., CoreStates Financial
Corp., and National City Corp. Thrift acquisition activity in Pennsylvania has
been restrained by the limited volume of available product of significant size
to attract acquisition interest. Several of the state's larger thrifts are
currently (or were until recently) organized as mutual holding companies. The
Bank aims to maintain a strong community-based focus and has indicated no desire
to seek a sale of the institution in the near future. Therefore, given these
considerations, we do not believe acquisition premiums are a significant factor
to consider in determining the Bank's estimated pro forma market value.
-58-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Table 21
Acquisition Summary of Pennsylvania Financial Institutions
Transactions Announced in 1996 and 1997 Year-to-date
<TABLE>
<CAPTION>
Seller's Prior Financial Data
----------------------------------
Total TanEq./ YTD YTD
B/T B/T Assets Assets ROAA ROAE Date Status
Buyer St. (1) Seller (1) ($M) (%) (%) (%) Anncd. (2)
----- --- --- ------ --- ----- ----- ----- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Overall Average (12 transactions) 697 11.53 0.77 5.29 -- --
Thrift Seller Average (3 transactions) 50 18.34 0.19 (8.84) -- --
Bank Seller Average (9 transactions) 913 9.26 0.96 10.00 -- --
Northwest Savings PA T Corry Savings Bank B 29 10.01 0.24 2.42 06/19/97 P
Susquehanna Bcshrs. PA B Founders' Bank B 96 7.82 0.66 7.96 02/11/97 P
ML Bancorp PA T Penncore Fin'l Srvcs. B 139 6.36 0.48 7.47 02/04/97 P
Allied Irish Banks FO B Dauphin Deposit Corp B 5,971 8.98 1.25 12.89 01/21/97 P
Keystone Financial PA B Financial Trust Corp. B 1,227 11.35 1.73 14.20 12/20/96 C
St Edmond's FSB PA T Keystone S&L Assn. T 14 4.32 (1.98) (36.75) 12/11/96 C
S&T Bancorp PA B Peoples Bnk of Unity B 292 16.35 1.92 11.42 11/26/96 C
Sun Bancorp, Inc. PA B Bucktail B&TC B 119 7.29 0.78 10.88 11/06/96 P
PennFirst Bancorp PA T Troy Hill Bancorp T 80 22.20 1.34 5.98 09/16/96 C
JeffBanks, Inc. PA B United Valley Bncrp. B 127 9.55 0.75 8.07 09/05/96 C
Northwest Savings PA T Bridgeville SB T 56 28.51 1.21 4.24 06/27/96 C
Prime Bancorp, Inc. PA T First Sterling Bncrp. B 212 5.65 0.84 14.72 06/12/96 C
</TABLE>
<TABLE>
<CAPTION>
Offer Value to
--------------------------------
Offer Book Tang. LTM Total
B/T B/T Value Value Book EPS Assets
Buyer St. (1) Seller (1) ($M) (%) (%) (x) (%)
----- --- --- ------ --- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Overall Average (12 transactions) 197 191.7 193.9 21.65 22.05
Thrift Seller Average (3 transactions) 21 120.4 120.4 23.22 30.90
Bank Seller Average (9 transactions) 241 209.6 212.3 21.25 19.84
Northwest Savings PA T Corry Savings Bank B NA NA NA NA NA
Susquehanna Bcshrs. PA B Founders' Bank B 15 200.4 200.4 24.47 15.68
ML Bancorp PA T Penncore Fin'l Srvcs. B 15 170.2 170.2 22.64 10.83
Allied Irish Banks FO B Dauphin Deposit Corp B 1,357 239.4 246.1 19.37 22.72
Keystone Financial PA B Financial Trust Corp. B 376 256.0 271.0 19.11 30.63
St Edmond's FSB PA T Keystone S&L Assn. T NA NA NA NA NA
S&T Bancorp PA B Peoples Bnk of Unity B 95 198.8 198.8 17.71 32.50
Sun Bancorp, Inc. PA B Bucktail B&TC B 18 200.9 200.9 22.01 14.65
PennFirst Bancorp PA T Troy Hill Bancorp T 23 126.4 126.4 19.77 28.95
JeffBanks, Inc. PA B United Valley Bncrp. B 23 188.4 188.4 26.75 17.99
Northwest Savings PA T Bridgeville SB T 18 114.5 114.5 26.67 32.85
Prime Bancorp, Inc. PA T First Sterling Bncrp. B 29 222.5 222.5 17.95 13.69
- ---------------------------------------------------------------------------------------------------------
(1) B=bank; T=thrift.
(2) P=pending; C=completed.
</TABLE>
-59-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
New Issue Discount
- ------------------
A "new issue" discount that reflects investor concerns and investment risks
inherent in all initial stock offerings is a factor to be considered in
valuations of initial thrift stock offerings. The magnitude of the new issue
discount typically expands during periods of declining thrift stock prices as
investors require larger inducements, and narrows during strong market
conditions.
The thrift conversion market continues to respond to the aftermarket
performance of recent offerings. Table 22 presents a summary of publicly traded
thrifts that have completed standard conversions since July 1, 1996. The
aftermarket performance of thrift conversions was more subdued through the first
half of 1996, similar to the thrift stock market overall. As the thrift market
regained momentum during the second half of 1996 and first half of 1997,
aftermarket performance improved even as pro forma valuations were increased.
Recently, the thrift conversion market has proven to be resilient with the
typical offering selling out in the subscription phase and being priced at or
near the adjusted maximum of the valuation range. With valuations increasing to
reflect the strength of recent offerings, it is uncertain when the market will
reach its tolerance for higher valuations accompanied by the prospect of
companies generating lackluster returns on equity. The average price-to-book
ratio for the ten publicly traded conversions completed thus far in 1997 was
71.2%.
In the aftermarket, full conversions have been trading upward to and above
90%. To price a new offering at 90% of pro forma book value, because of the
mathematics of the calculation, would require very large increases in valuations
and produce very marginal returns on equity. This would likely produce price
declines in the aftermarket. Accordingly,
-60-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Table 22
Recent Summary of Standard Thrift Conversions
Offerings by Publicly Traded Companies Since July 1, 1996
<TABLE>
<CAPTION>
Pre-Conversion Data
---------------------------------
Initial Gross Total TanEq./ YTD
Conv. Price Offering Assets Assets ROA
Company State Date ($) ($M) ($M) (%) (%)
- --------------------------- ----- -------- -------- --------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Average -- -- -- 39.3 198 11.56 0.55
HCB Bancshares Inc. MT 05/07/97 10.00 26.5 171 8.31 0.16
Peoples-Sidney Financial
Corp. AR 04/28/97 10.00 17.9 87 10.60 NA
NewSouth Bancorp, Inc. OH 04/08/97 15.00 43.6 194 9.45 0.44
Hemlock Federal Fin. Corp. NC 04/02/97 10.00 20.8 147 7.81 0.10
GS Financial Corp. IL 04/01/97 10.00 34.4 87 27.53 0.57
Market Financial
Corporation LA 03/27/97 10.00 13.4 46 16.50 0.50
Empire Federal Bancorp,
Inc. OH 01/27/97 10.00 25.9 87 18.29 0.72
FirstFed America Bancorp,
Inc. MA 01/15/97 10.00 87.1 724 6.41 0.76
Roslyn Bancorp, Inc. NY 01/13/97 10.00 423.7 1,597 14.18 1.21
Advance Financial Bancorp WV 01/02/97 10.00 10.8 92 6.75 0.48
Home City Financial Corp. OH 12/30/96 10.00 9.5 56 9.46 0.98
Century Bancorp, Inc. NC 12/23/96 50.00 20.4 81 13.83 0.86
Southern Community Bancshs. AL 12/23/96 10.00 11.4 64 9.09 0.90
Big Foot Financial Corp. IL 12/20/96 10.00 25.1 195 6.98 0.11
River Valley Bancorp IN 12/20/96 10.00 11.9 87 7.59 0.30
PS Financial, Inc. IL 11/27/96 10.00 21.8 54 21.91 2.06
Carolina Fincorp, Inc. NC 11/25/96 10.00 18.5 94 9.18 0.64
Delphos Citizens Bancorp,
Inc. OH 11/21/96 10.00 20.4 88 12.27 1.10
Fulton Bancorp, Inc. MO 10/18/96 10.00 17.2 85 10.66 0.75
Chester Bancorp, Inc. IL 10/08/96 10.00 21.8 135 8.69 0.73
South Street Financial
Corp. NC 10/03/96 10.00 45.0 167 12.41 0.36
AFSALA Bancorp, Inc. NY 10/01/96 10.00 14.5 133 6.16 0.49
CBES Bancorp, Inc. MO 09/30/96 10.00 10.3 86 9.15 0.58
Westwood Homestead Fin.
Corp. OH 09/30/96 10.00 28.4 97 14.68 (0.21)
Home Bancorp of Elgin, Inc. IL 09/27/96 10.00 70.1 305 12.05 0.78
Peoples Financial Corp. OH 09/13/96 10.00 14.9 78 12.87 0.29
Park Bancorp, Inc. IL 08/12/96 10.00 27.0 159 11.03 0.11
Acadiana Bancshares, Inc. LA 07/16/96 12.00 32.8 225 7.86 (0.43)
Pennwood Bancorp, Inc. PA 07/15/96 10.00 6.1 42 9.77 0.81
Mitchell Bancorp, Inc. NC 07/12/96 10.00 9.8 28 21.45 (0.40)
Ocean Financial Corp. NJ 07/03/96 20.00 167.8 1,036 8.91 0.80
Home Financial Bancorp IN 07/02/96 10.00 5.1 33 9.85 0.92
Eagle BancGroup, Inc. IL 07/01/96 10.00 13.0 151 7.63 (0.05)
First Lancaster Bancshares KY 07/01/96 10.00 9.6 35 13.69 0.80
<CAPTION>
Pro Forma Ratios Aftermarket
-------------------------------------- -------------------------
Price/ Price/ Price/ Price/ 1-Day 1-Mo.
Book TanBk. EPS Assets Chg. Chg.
Company (%) (%) (%) (%) (%) (%)
- --------------------------- -------- -------- -------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Average 70.9 70.9 19.8 16.7 22.3 28.0
HCB Bancshares Inc. 72.0 72.0 29.0 13.4 26.3 28.8
Peoples-Sidney Financial Corp. 71.2 71.2 11.5 17.0 25.6 32.5
NewSouth Bancorp, Inc. 78.7 78.7 22.1 18.4 35.0 59.2
Hemlock Federal Fin. Corp. 71.6 71.6 37.5 12.4 28.8 30.0
GS Financial Corp. 63.8 63.8 38.7 28.4 33.8 40.0
Market Financial Corporation 71.1 71.1 26.2 22.7 29.4 26.3
Empire Federal Bancorp, Inc. 68.1 68.1 21.5 23.0 32.5 37.5
FirstFed America Bancorp, Inc. 72.0 72.0 13.6 10.7 36.3 48.8
Roslyn Bancorp, Inc. 72.0 72.0 9.3 21.0 50.0 60.0
Advance Financial Bancorp 71.1 71.1 16.8 10.6 28.8 40.0
Home City Financial Corp. 71.2 71.2 13.7 14.6 NA 35.0
Century Bancorp, Inc. 72.1 72.1 18.9 20.0 25.3 30.3
Southern Community Bancshs. 74.4 74.4 14.5 15.0 30.0 35.0
Big Foot Financial Corp. 72.7 72.7 33.1 11.4 23.1 38.8
River Valley Bancorp 73.0 73.0 15.2 12.1 36.9 50.0
PS Financial, Inc. 71.9 71.9 17.2 29.0 16.4 25.0
Carolina Fincorp, Inc. 77.0 77.0 17.2 16.4 30.0 36.3
Delphos Citizens Bancorp, Inc. 72.2 72.2 14.6 18.8 21.3 20.6
Fulton Bancorp, Inc. 72.5 72.5 14.6 16.7 25.0 47.5
Chester Bancorp, Inc. 72.1 72.1 18.8 13.9 29.4 26.3
South Street Financial Corp. 76.3 76.3 26.1 21.2 NA 23.8
AFSALA Bancorp, Inc. 71.7 71.7 13.7 9.9 13.8 15.6
CBES Bancorp, Inc. 61.1 61.1 13.2 10.6 26.3 32.5
Westwood Homestead Fin. Corp. 73.8 73.8 NA 22.7 7.5 5.0
Home Bancorp of Elgin, Inc. 72.6 72.6 24.9 18.7 18.1 26.3
Peoples Financial Corp. 64.3 64.3 28.6 16.0 8.8 27.5
Park Bancorp, Inc. 66.7 66.7 26.2 14.5 2.5 5.0
Acadiana Bancshares, Inc. 71.9 71.9 NA 12.7 0.0 3.1
Pennwood Bancorp, Inc. 67.5 67.5 14.5 12.8 (5.0) (3.8)
Mitchell Bancorp, Inc. 70.0 70.0 NA 25.8 NA 10.0
Ocean Financial Corp. 71.2 71.2 13.4 13.9 6.3 5.0
Home Financial Bancorp 68.0 68.0 11.4 13.1 2.5 5.0
Eagle BancGroup, Inc. 58.4 58.4 NM 7.9 12.5 11.3
First Lancaster Bancshares 74.7 74.7 18.5 21.3 35.0 37.5
</TABLE>
-61-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
thrift conversions continue to be priced at discounts to publicly traded
companies. This is due to the relatively high equity ratios, low returns on
equity, and the uncertainty regarding the ability of an institution to leverage
the balance sheet.
Investors are aware that at pro forma price/book ratios approaching the
current trading range of a majority of public thrifts, price/earnings ratios of
converting thrifts would be excessive, returns on equity very low, and capital
levels dramatically high. Based upon the price/book ratio measure, standard
thrift conversions are being discounted by 30% to 40% relative to the overall
market.
Adjustments Conclusion
- ----------------------
The Bank's pro forma valuation should be discounted relative to the
comparative group because of unproven earnings prospects, the possible lack of
liquidity, and the new issue discount. Individual discounts and premiums are
not necessarily additive and may, to some extent, offset or overlay each other.
Currently, conversions are often priced at substantial discounts to peer
institutions relative to price/book ratios, but at lesser discounts to the
comparable institutions' price/earnings ratios. It is the role of the appraiser
to balance the relative dynamics of price/book and price/earnings discounts and
premiums. We believe that relative to the comparative group, the Bank's pro
forma valuation measures should be discounted.
-62-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Valuation Approach
- ------------------
Table 23 displays the market price and valuation data of the comparative
group as of June 23, 1997. Table 24 compares the Bank's valuation ratios with
the comparative group average, all public thrift aggregate, and all Pennsylvania
public thrift aggregate. Exhibit IV displays the pro forma conversion
calculations utilized in analyzing the Bank's valuation ratios.
Investors continue to make decisions to purchase thrift conversion stocks
and more seasoned thrift issues based upon consideration of core earnings
profitability and price/book comparisons. Utilizing a discount of approximately
37% to the corresponding comparative group average, the Bank's resulting pro
forma price/book ratio at the midpoint is 65.6%, reflecting a maximum price/book
valuation of 69.5% at the high end of the range and an adjusted maximum of
73.2%. As shown on Table 24, the Bank's pro forma price/book ratio of 72.8% at
the adjusted maximum represents a 30% discount to the comparative group's
average. The Bank's pro forma price/book ratios reflect greater discounts to
the all public and Pennsylvania thrift aggregates.
The price/earnings ratio is also important and was examined in deriving our
estimate of pro forma market value. Given the variability in earnings,
investors often encounter some difficulty in evaluating thrift offerings based
upon price/earnings multiples. Recently, the special SAIF assessment depressed
the earnings of most thrifts. Therefore, we have evaluated core earnings for
both the last twelve months ("LTM") and recent quarter, which attempts to
exclude extraordinary items.
Based on the Bank's LTM core earnings and the net conversion-related
returns and adjustments, the Bank is valued at a midpoint price/earnings ratio
of 23.1x. This pro forma
-63-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
<TABLE>
<CAPTION>
Table 23
Comparative Valuation Analysis
Spring Hill and the Comparative Group
Market Price Data as of June 23, 1997
-----------------------------------------------------------------------------------------------------------------------------
Current Total Price/ Price/ Price/ Price/ Price/ Tang. Current
Stock Market LTM Core Qtr. Core Book Tang. Total Equity/ Dividend
Price Value EPS(1) EPS(1) Value Book Assets Assets Yield
Company ($) ($M) (x) (x) (%) (%) (%) (%) (%)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Spring Hill Savings Bank
Pro Forma Minimum 10.00 5.27 21.4 9.5 61.0 61.0 6.06 9.93 0.00
Pro Forma Midpoint 10.00 6.20 23.1 10.7 65.6 65.6 7.06 10.77 0.00
Pro Forma Maximum 10.00 7.13 24.6 11.9 69.5 69.5 8.05 11.58 0.00
Pro Forma Adj. Maximum 10.00 8.20 25.9 13.1 73.2 73.2 9.16 12.51 0.00
Comparative Group Average -- 18.95 19.3 16.4 104.2 104.9 12.02 11.28 2.30
All Public Thrift Average -- 171.21 16.0 15.8 135.3 141.3 15.92 12.33 1.72
Pennsylvania Thrift Average -- 120.52 15.2 15.6 138.1 146.3 12.78 9.43 1.89
Comparative Group
- -----------------
Advance Financial Bancorp 14.25 15.45 NA NA 96.6 96.6 14.92 15.45 2.25
Albion Banc Corp. 22.00 5.79 23.4 12.2 93.1 93.1 8.30 8.90 1.41
ASB Financial Corp. 12.13 20.87 20.6 21.7 114.2 114.2 19.08 15.74 3.30
Elmira Savings Bank 20.00 14.13 23.3 21.7 99.0 103.4 6.35 6.05 3.20
First Franklin Corporation 19.75 23.27 17.8 17.6 116.7 117.5 10.29 8.76 1.62
Harbor Federal Bancorp Inc. 18.50 32.46 21.8 19.3 115.0 115.0 14.79 12.86 2.16
Harvest Home Financial Corp. 10.50 9.61 21.0 14.6 94.5 94.5 11.81 12.50 3.81
Milton Federal Financial Corp. 13.75 32.00 24.1 26.4 112.5 112.5 17.90 14.74 4.36
Pittsburgh Home Financial Corp 15.00 29.54 NA 16.3 109.4 110.7 12.55 11.35 1.60
Potters Financial Corp. 22.00 10.71 13.9 6.3 102.9 102.9 9.16 8.90 1.64
Prestige Bancorp Inc. 15.63 14.29 NA 17.0 97.0 97.0 11.33 11.69 0.77
SFS Bancorp Inc. 16.50 20.39 14.9 21.7 95.6 95.6 12.42 12.99 1.70
Skaneateles Bancorp Inc. 18.75 17.85 12.3 12.0 107.7 111.3 7.39 6.65 2.13
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Price/earnings ratios greater than 25 are excluded from averages.
-64-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
ratio represents a 20% premium to the comparative group average of 19.3x.
However, because of the Bank's very low historical LTM core earnings base of
$124,000 (representing a 0.15% ROAA), the Bank's resulting price/earnings ratio
is distorted upward. Applying the recent quarter annualized core earnings base
of $413,000 (denoting a 0.50% ROAA), the price/earnings ratio at the midpoint is
10.7x and increases to 11.9x and 13.1x at the maximum valuation and adjusted
maximum, respectively. At the upper ends of the Bank's pro forma valuation
range, the magnitude of the discounts ranges from 20% to 27% with respect to the
comparative group's average price/core earnings ratio for the recent quarter.
In contrast to the aggregates, the Bank's lower price/assets ratio was
largely related to its lower capital level. Based on the midpoint offering, the
Holding Company's pro forma equity/assets ratio is projected at 10.51% and
increases to 11.30% at the maximum offering and 12.19% at the adjusted maximum.
Valuation Conclusion
- --------------------
It is our opinion that, as of June 23, 1997, the aggregate estimated pro
forma market value of the Bank was within the valuation range of $5,270,000 to
$7,130,000 with a midpoint of $6,200,000. The valuation range was based upon a
15 percent decrease from the midpoint to determine the minimum and a 15 percent
increase to establish the maximum. Assuming an additional 15 percent increase
above the maximum valuation would result in an adjusted maximum of $8,199,500.
Exhibit IV displays the conversion calculations and assumptions utilized in
determining the Bank's estimated pro forma market value.
-65-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Table 24
Comparative Discount and Premium Analysis
Market Price Data as of June 23, 1997
<TABLE>
<CAPTION>
Relative Premiums (Discounts)
Spring -------------------------------------------------------------
Hill Comp. All All
Valuation Savings Group Public Pennsylvania
Ratio Symbol Bank Average Thrifts(1) Thrifts(2)
--------- ------ ------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------
Price/LTM Core EPS(3) P/E 19.3 16.0 15.2
-------- -------------------------------------------------------------
Minimum (x) 21.4 11% 34% 41%
Midpoint 23.1 20% 44% 52%
Maximum 24.6 27% 54% 62%
Adj. Maximum 25.9 34% 62% 70%
--------
-------------------------------------------------------------
Price/Qtr. Core EPS(3) P/E 16.4 15.8 15.6
-------- -------------------------------------------------------------
Minimum (x) 9.5 -42% -40% -39%
Midpoint 10.7 -35% -32% -31%
Maximum 11.9 -27% -25% -24%
Adj. Maximum 13.1 -20% -17% -16%
--------
-------------------------------------------------------------
Price/Book Value P/B 104.2 135.3 138.1
-------- -------------------------------------------------------------
Minimum (%) 61.0 -41% -55% -56%
Midpoint 65.6 -37% -52% -52%
Maximum 69.5 -33% -49% -50%
Adj. Maximum 73.2 -30% -46% -47%
--------
-------------------------------------------------------------
Price/Tangible Book P/B 104.9 141.3 146.3
-------- -------------------------------------------------------------
Minimum (%) 61.0 -42% -57% -58%
Midpoint 65.6 -37% -54% -55%
Maximum 69.5 -34% -51% -52%
Adj. Maximum 73.2 -30% -48% -50%
--------
-------------------------------------------------------------
Price/Total Assets P/A 12.02 15.92 12.78
-------- -------------------------------------------------------------
Minimum (%) 6.06 -50% -62% -53%
Midpoint 7.06 -41% -56% -45%
Maximum 8.05 -33% -49% -37%
Adj. Maximum 9.16 -24% -42% -28%
--------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 362 publicly traded thrifts nationwide.
(2) Includes 21 publicly traded thrifts based in Pennsylvania.
(3) Price/earnings ratio averages exclude values greater than 25.
-66-
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit I
Background of Feldman Financial Advisors, Inc.
Overview of Firm
- ----------------
Feldman Financial Advisors provides consulting services to financial
institutions and mortgage companies in the areas of corporate valuations,
mergers and acquisitions, strategic planning, branch sales and purchases,
developing and implementing regulatory business and capital plans, enhancing
franchise value, portfolio analysis and restructuring, advising on retail branch
strategies, evaluating bank management, regulatory analysis, and expert witness
testimony and analysis.
Feldman Financial Advisors was incorporated in February 1996 by a group of
consultants who were previously associated with Kaplan Associates. Each of the
principals at Feldman Financial Advisors has more than 10 years experience in
consulting and all were officers of their former employer. Our principals
collectively have worked with more than 1,000 banks, thrifts and mortgage
companies nationwide. The firm's offices are located in downtown Washington,
D.C.
Background of Principals
- ------------------------
Trent Feldman is the President of the firm. Trent is a nationally recognized
expert in valuing financial institutions, providing strategic advice to
financial institutions, and advising on mergers and acquisitions for banks and
thrifts of all sizes. Trent was with Kaplan Associates for 14 years and was one
of three founding principals at that firm. Trent also has worked in the
Chairman's Office of the Federal Home Loan Bank Board, the Federal Savings and
Loan Insurance Corporation, and with the California state legislature. Trent
holds Bachelors and Masters degrees from the University of California at Los
Angeles.
Peter Williams specializes in merger and acquisition analysis, corporate
valuations, strategic business plans and retail branch analysis. Peter was with
Kaplan Associates for 13 years. Peter also served as a Corporate Planning
Analyst with the Wilmington Trust Company in Delaware. Peter holds a BA in
Economics from Yale University and an MBA in Finance from George Washington
University.
Michael Green is an expert in mergers and acquisition analysis, financial
institution valuations, and business plans. During Mike's 10 years at Kaplan
Associates, his experience also included mark-to-market analysis, goodwill
valuations and core deposit studies. Mike holds a BS in Finance and Economics
from Rutgers College.
Linda Farrell is nationally known for her expertise in branch purchases and
sales, and she specializes in small bank mergers and acquisitions, retail
banking analysis, business plans and management reviews. Linda was with Kaplan
Associates for 12 years. Linda also was a Senior Vice President of Retail
Banking at Western Savings in Salt Lake City and a consultant with both Arthur
Young & Company and Richard T. Pratt Associates. Linda holds a BA in English
from Oklahoma State University and an MBA from the University of Utah.
I-1
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit II-1
Statement of Financial Condition
As of December 31, 1995 and 1996 and March 31, 1997
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
ASSETS
- ------
Cash and due from banks $ 632,410 $ 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 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 17,362,329 17,126,963 18,992,674
Loans receivable 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/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
---------- ---------- ----------
RETAINED EARNINGS
Retained earnings 4,502,097 4,889,486 4,496,742
Net unrealized loss on securities (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>
II-1
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit II-2
Statement of Income
For the Year Ended December 31, 1994 to 1996
And the Three Months Ended March 31, 1996 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
-------------------- ---------------------------
1997 1996 1996 1995 1994
-------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
Interest income $1,597 $1,617 $6,314 $6,503 $6,386
Interest expense 1,018 1,088 4,155 4,460 4,663
------ ------ ------ ------ ------
Net interest income 578 529 2,159 2,043 1,723
Provision for loan losses 28 30 239 64 61
------ ------ ------ ------ ------
Net interest income
after prov. 550 499 1,919 1,979 1,662
Noninterest operating
income 32 29 122 131 216
Net securities gains
(losses) 117 0 902 (8) (14)
------ ------ ------ ------ ------
Total noninterest income 148 29 1,024 123 202
General and admin. expense 414 425 1,905 1,760 1,718
Special SAIF assessment 0 0 414 0 0
------ ------ ------ ------ ------
Total noninterest
expense 414 425 2,319 1,760 1,718
Income before taxes 284 103 624 343 146
Income tax expense 109 43 231 112 46
------ ------ ------ ------ ------
Income before extra. item 175 60 393 231 100
Extraordinary item (563) 0 0 0 0
------ ------ ------ ------ ------
Net income (loss) $ (387) $ 60 $ 393 $ 231 $ 100
====== ====== ====== ====== ======
</TABLE>
II-2
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit II-3
Loan Portfolio Composition
As of December 31, 1995 and 1996 and March 31, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
At March 31, At December 31,
-------------------- --------------------------------------
1997 1996 1995
-------------------- --------------------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<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 3.11 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 94.33 49,430 93.45
Consumer loans:
Mobile homes 2,297 4.10 2,454 4.41 3,161 5.98
Other 568 1.01 611 1.10 167 0.32
------- ------ ------- ------ ------- ------
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%.
II-3
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit II-4
Net Lending Activity
For the Year Ended December 31, 1995 and 1996
and Three Months Ended March 31, 1996 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months
Ended Year Ended
March 31, December 31,
------------------ -----------------
1997 1996 1996 1995
---- ---- ---- ----
<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 prepayments 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>
II-4
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit II-5
Investment Securities Portfolio
As of December 31, 1995 and 1996
and March 31, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
At March 31, At December 31,
----------------------- -------------------------------------------
1997 1996 1995
----------------------- --------------------- --------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio Value Portfolio
-------- ----------- -------- ----------- -------- -----------
<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 16.16 328 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 53.64 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 4.73
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>
II-5
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit II-6
Deposit Account Distribution
As of December 31, 1995 and 1996
and March 31, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
At March 31, At December 31,
---------------------- ------------------------------------------
1997 1996 1995
---------------------- -------------------- --------------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
------- ----------- ------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing checking $ 405 0.63% $ 312 0.49% $ 233 0.36%
Interest-bearing demand 8,516 13.15 8,639 13.44 7,749 11.89
Savings accounts 12,673 19.56 12,834 19.96 13,398 20.56
Fixed-rate certificates which
mature:
Within 1 year 26,177 40.41 27,315 42.48 32,739 50.24
After 1 year, but within 2 years 6,828 10.54 5,340 8.31 5,643 8.66
After 2 years, but within 5 years 10,165 15.69 9,852 15.32 5,374 8.25
Certificates maturing thereafter 12 0.02 2 0.00 24 0.04
------- ------ ------- ------ ------- ------
Total $64,776 100.00% $64,294 100.00% $65,160 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
II-6
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit II-7
Borrowing Activity
Year Ended December 31, 1995 and 1996
and Three Months Ended March 31, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months
Ended Year Ended
March 31, December 31,
----------- ---------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Maximum amount of borrowings
outstanding at any month end
during the period:
FHLB advances $9,254 $6,378 $5,800
Collateralized mortgage obligation 6,836 8,156 9,460
Average amount of borrowings
outstanding during the period:
FHLB advances 5,221 2,629 3,975
Collateralized mortgage obligation 5,875 7,565 8,968
Approximate weighted average
interest rate during the period:
FHLB advances 6.44% 6.50% 7.04%
Collateralized mortgage obligation 11.71% 12.31% 11.83%
</TABLE>
II-7
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit III
Financial and Market Data for All Public Thrifts
<TABLE>
<CAPTION>
Tang. LTM LTM Total Current
Total Equity/ Core Core Market Price
Assets Assets ROAA ROAE Value 6/23/97
Company Ticker Exch. State ($M) (%) (%) (%) ($M) ($)
------- ------ ----- ----- ---- --- --- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
All Public Thrift Avg. -- -- -- 1,298 12.33 0.81 7.96 171.2 NA
All Public Thrifts (excluding
MHCs and acquisition targets
- ---------------------------
Abington Bancorp Inc. ABBK OTC MA 492 6.20 0.67 10.06 47.6 25.13
Acadiana Bancshares Inc. ANA AMSE LA 262 17.43 0.84 5.61 52.9 19.38
Access Anytime Bancorp, Inc. AABC OTC NM 106 6.80 (0.23) (4.64) 6.9 5.75
Advance Financial Bancorp AFBC OTC WV 104 15.45 0.66 6.49 15.5 14.25
Advantage Bancorp Inc. AADV OTC WI 1,021 8.24 0.86 9.33 126.0 39.00
Affiliated Community Bancorp AFCB OTC MA 1,055 9.71 1.07 10.83 155.2 24.00
AFSALA Bancorp Inc. AFED OTC NY 152 13.82 NA NA 21.5 14.75
Ahmanson & Company (HF) AHM NYSE CA 48,697 4.34 0.65 12.37 4,539.4 45.13
ALBANK Financial Corp. ALBK OTC NY 3,496 8.08 1.01 10.83 487.5 38.13
Albion Banc Corp. ALBC OTC NY 66 8.90 0.38 3.90 5.8 22.00
Alliance Bancorp Inc. ABCL OTC IL 1,313 9.20 0.74 8.51 160.5 30.13
AMB Financial Corp. AMFC OTC IN 94 16.30 0.88 4.67 13.5 14.00
Ambanc Holding Co. Inc. AHCI OTC NY 478 12.72 (0.61) (4.18) 69.7 15.88
Ameriana Bancorp ASBI OTC IN 402 10.84 0.84 7.59 50.6 15.63
American Bank of Connecticut BKC AMSE CT 589 7.65 1.11 12.89 81.1 35.25
AmTrust Capital Corp. ATSB OTC IN 71 10.07 0.19 1.91 6.7 12.63
Anchor BanCorp Wisconsin ABCW OTC WI 1,885 6.14 0.98 15.31 222.2 48.50
Andover Bancorp Inc. ANDB OTC MA 1,210 8.07 1.12 14.3 151.2 29.38
ASB Financial Corp. ASBP OTC OH 109 15.74 0.86 4.31 20.9 12.13
Astoria Financial Corp. ASFC OTC NY 7,689 6.41 0.77 9.62 969.2 45.63
Avondale Financial Corp. AVND OTC IL 635 8.26 (1.34) (13.28) 49.4 14.00
Bancorp Connecticut Inc. BKCT OTC CT 414 10.40 1.21 11.53 62.6 24.50
Bank Plus Corp. BPLS OTC CA 3,295 4.91 (0.04) (0.86) 184.8 10.13
Bank United Corp. BNKU OTC TX 11,003 5.06 1.14 19.19 1,176.9 37.25
Bank West Financial Corp. BWFC OTC MI 147 15.31 0.62 3.53 25.0 14.00
BankAtlantic Bancorp Inc. BANC OTC FL 2,773 4.53 0.71 11.07 342.1 14.50
BankUnited Financial Corp. BKUNA OTC FL 1,453 5.98 0.62 7.72 80.3 9.38
Bay View Capital Corp. BVCC OTC CA 3,045 6.02 0.63 10.22 320.2 24.69
Bedford Bancshares Inc. BFSB OTC VA 132 14.32 1.33 9.05 24.0 21.00
Big Foot Financial Corp. BFFC OTC IL 212 16.98 NA NA 40.2 16.00
BostonFed Bancorp Inc. BFD AMSE MA 941 8.62 0.65 5.81 104.3 17.50
<CAPTION>
Price/ Price/ Price/ Price/ Price/ Current
LTM Core Book Tang. Total Div.
EPS(1) EPS(1) Value Book Assets Yeild
Company Ticker Exch. State (x) (x) (%) (%) (%) (%)
------- ------ ----- ----- ----- ----- ----- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
All Public Thrift Avg. -- -- -- 17.9 16.0 135.3 141.3 15.92 1.72
All Public Thrifts (excluding
MHCs and acquisition targets
- ---------------------------
Abington Bancorp Inc. ABBK OTC MA 13.3 15.2 140.7 157.1 9.67 1.59
Acadiana Bancshares Inc. ANA AMSE LA NA N/A 116.0 116.0 20.22 1.86
Access Anytime Bancorp, Inc. AABC OTC NM NM NM 90.7 90.7 6.17 0.00
Advance Financial Bancorp AFBC OTC WV NA NA 96.6 96.6 14.92 2.25
Advantage Bancorp Inc. AADV OTC WI 38.6 16.1 139.6 150.8 12.34 1.03
Affiliated Community Bancorp AFCB OTC MA 16.7 14.6 147.9 148.8 14.69 2.00
AFSALA Bancorp Inc. AFED OTC NY NA NA 94.2 94.4 14.09 1.09
Ahmanson & Company (HF) AHM NYSE CA 35.8 17.8 236.9 280.6 9.32 1.95
ALBANK Financial Corp. ALBK OTC NY 19.4 15.5 151.9 175.1 13.98 1.57
Albion Banc Corp. ALBC OTC NY 100.0 23.4 93.1 93.1 8.30 1.41
Alliance Bancorp Inc. ABCL OTC IL 30.1 17.5 131.4 133.1 12.24 2.16
AMB Financial Corp. AMFC OTC IN NA NA 98.0 98.0 15.97 1.71
Ambanc Holding Co. Inc. AHCI OTC NY NM NM 114.6 114.6 14.58 0.00
Ameriana Bancorp ASBI OTC IN 21.7 15.3 116.8 116.9 12.67 3.84
American Bank of Connecticut BKC AMSE CT 11.9 13.7 172.9 180.9 13.79 4.09
AmTrust Capital Corp. ATSB OTC IN 28.7 46.8 92.0 93.0 9.36 1.58
Anchor BanCorp Wisconsin ABCW OTC WI 17.2 13.3 188.5 192.3 11.79 1.16
Andover Bancorp Inc. ANDB OTC MA 11.6 11.3 154.9 154.9 12.50 2.32
ASB Financial Corp. ASBP OTC OH 29.6 20.6 114.2 114.2 19.08 3.30
Astoria Financial Corp. ASFC OTC NY 26.2 17.0 165.9 199.3 12.60 1.32
Avondale Financial Corp. AVND OTC IL NM NM 94.1 94.1 7.77 0.00
Bancorp Connecticut Inc. BKCT OTC CT 13.3 13.9 145.8 145.8 15.16 3.59
Bank Plus Corp. BPLS OTC CA NM NM 114.0 114.3 5.61 0.00
Bank United Corp. BNKU OTC TX NA NA 206.8 211.5 10.70 1.50
Bank West Financial Corp. BWFC OTC MI 24.1 27.5 110.9 110.9 16.98 2.00
BankAtlantic Bancorp Inc. BANC OTC FL 15.1 18.6 176.2 216.4 9.70 0.80
BankUnited Financial Corp. BKUNA OTC FL 40.8 17.7 127.9 159.2 5.71 0.00
Bay View Capital Corp. BVCC OTC CA 27.4 16.7 166.6 175.2 10.52 1.30
Bedford Bancshares Inc. BFSB OTC VA 17.4 13.5 120.5 120.5 18.24 2.67
Big Foot Financial Corp. BFFC OTC IL NA NA 111.5 111.5 18.94 0.00
BostonFed Bancorp Inc. BFD AMSE MA 27.3 20.1 116.5 120.7 11.09 1.60
</TABLE>
III-1
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
<TABLE>
<CAPTION>
Exhibit III (continued)
Financial and Market Data for All Public Thrifts
Tang. LTM LTM Total Current
Total Equity/ Core Core Market Price
Assets Assets ROAA ROAE Value 6/23/97
Company Ticker Exch. State ($M) (%) (%) (%) ($M) ($)
------- ------ ----- ----- ------ ------ ----- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Branford Savings Bank BSBC OTC CT 177 9.52 1.11 12.32 31.2 4.75
Broadway Financial Corp. BYFC OTC CA 119 11.50 0.16 1.32 9.6 10.75
Calumet Bancorp Inc. CBCI OTC IL 495 15.94 1.35 8.36 80.9 38.25
Camco Financial Corp. CAFI OTC OH 472 8.99 0.86 9.55 57.4 18.75
Cameron Financial Corp CMRN OTC MO 198 22.96 1.38 5.52 44.7 16.88
Capital Savings Bancorp Inc. CAPS OTC MO 238 8.66 0.92 10.27 30.7 16.25
Carolina Fincorp Inc. CFNC OTC NC 109 23.70 NA NA 27.5 14.88
Carver Bancorp Inc. CNY AMSE NY 424 7.75 (0.03) (0.30) 27.5 11.88
Cascade Financial Corp. CASB OTC WA 352 6.17 0.58 9.43 38.0 18.50
Catskill Financial Corp. CATB OTC NY 274 26.98 1.32 4.90 78.6 15.50
CBES Bancorp Inc. CBES OTC MO 95 18.39 0.96 6.41 16.9 16.50
CCF Holding Company CCFH OTC GA 87 14.31 0.42 2.37 13.2 16.00
CENFED Financial Corp. CENF OTC CA 2,263 5.10 0.71 14.04 184.3 32.00
CENIT Bancorp Inc. CNIT OTC VA 707 6.53 0.70 9.75 74.3 45.25
Central Co-operative Bank CEBK OTC MA 324 9.22 0.66 6.66 35.4 18.00
Century Bancorp Inc. CENB OTC NC 100 29.94 NA NA 28.6 70.25
CFSB Bancorp Inc. CFSB OTC MI 834 7.63 1.00 12.72 119.5 23.25
CFX Corp. CFX AMSE NH 1,744 7.19 1.00 11.48 234.9 18.00
Charter Financial Inc. CBSB OTC IL 395 12.62 1.21 7.51 72.3 17.13
Charter One Financial COFI OTC OH 14,040 6.33 1.23 18.12 2,305.4 49.75
Chester Valley Bancorp Inc. CVAL OTC PA 305 8.56 0.92 10.26 44.7 21.75
CitFed Bancorp Inc. CTZN OTC OH 2,937 5.68 0.79 12.14 326.2 37.88
Citizens First Financial Corp. CBK AMSE IL 272 14.64 0.57 3.92 44.8 16.00
CKF Bancorp Inc. CKFB OTC KY 60 23.68 1.29 5.05 17.9 19.25
Classic Bancshares Inc. CLAS OTC KY 128 12.84 0.71 3.40 18.9 14.25
CNS Bancorp Inc. CNSB OTC MO 98 24.81 0.78 3.35 28.1 17.00
Coast Savings Financial CSA NYSE CA 8,797 4.89 0.50 9.99 832.0 44.75
Coastal Bancorp Inc. CBSA OTC TX 2,853 2.91 0.41 12.27 145.3 29.25
Coastal Financial Corp. CFCP OTC SC 485 6.09 0.99 16.15 106.6 23.00
Commercial Federal Corp. CFB NYSE NE 6,902 5.30 0.91 15.29 799.4 37.13
Commonwealth Bancorp Inc. CMSB OTC PA 2,236 7.51 0.71 6.77 279.9 16.38
Community Federal Bancorp CFTP OTC MS 206 33.52 1.70 5.11 73.3 17.13
Community Financial Corp. CFFC OTC VA 167 13.78 1.31 9.44 28.3 22.25
Community Investors Bancorp CIBI OTC OH 97 11.52 0.99 8.18 12.5 13.13
<CAPTION>
Price/ Price/ Price/ Price/ Price/ Current
LTM Core Book Tang. Total Div.
EPS(1) EPS(1) Value Book Assets Yield
Company Ticker Exch. State (x) (x) (%) (%) (%) (%)
------- ------ ----- ----- ------ ------ ----- ----- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Branford Savings Bank BSBC OTC CT 16.4 16.4 184.1 184.1 17.56 1.68
Broadway Financial Corp. BYFC OTC CA NM 51.2 75.3 75.3 8.08 1.86
Calumet Bancorp Inc. CBCI OTC IL 17.6 14.5 108.6 108.6 17.31 0.00
Camco Financial Corp. CAFI OTC OH 17.2 13.2 125.3 136.3 12.15 2.77
Cameron Financial Corp CMRN OTC MO 21.1 16.9 99.7 99.7 22.89 1.66
Capital Savings Bancorp Inc. CAPS OTC MO 21.4 14.6 149.2 149.2 12.92 1.48
Carolina Fincorp Inc. CFNC OTC NC NA NA 106.9 106.9 25.34 1.35
Carver Bancorp Inc. CNY AMSE NY NM NM 80.5 84.0 6.49 1.68
Cascade Financial Corp. CASB OTC WA 28.0 21.0 174.7 174.7 10.79 0.00
Catskill Financial Corp. CATB OTC NY NA NA 105.4 105.4 28.44 1.81
CBES Bancorp Inc. CBES OTC MO NA NA 96.6 96.6 17.76 2.42
CCF Holding Company CCFH OTC GA 72.7 48.5 111.3 111.3 15.92 3.13
CENFED Financial Corp. CENF OTC CA 17.6 12.0 159.6 159.9 8.14 1.02
CENIT Bancorp Inc. CNIT OTC VA 22.2 16.1 148.0 161.8 10.50 2.21
Central Co-operative Bank CEBK OTC MA 18.6 16.5 106.3 119.8 10.91 1.78
Century Bancorp Inc. CENB OTC NC NA NA 95.6 95.6 28.63 2.85
CFSB Bancorp Inc. CFSB OTC MI 21.1 16.0 188.7 188.7 14.40 2.58
CFX Corp. CFX AMSE NH 16.4 13.3 175.6 188.5 13.47 4.89
Charter Financial Inc. CBSB OTC IL 21.1 16.6 129.5 147.6 18.31 1.87
Charter One Financial COFI OTC OH 17.8 13.9 242.3 260.5 16.42 2.01
Chester Valley Bancorp Inc. CVAL OTC PA 25.3 17.1 171.0 171.0 14.64 2.02
CitFed Bancorp Inc. CTZN OTC OH 22.3 15.5 175.4 197.0 11.11 0.85
Citizens First Financial Corp. CBK AMSE IL NA NA 100.6 100.6 16.49 0.00
CKF Bancorp Inc. CKFB OTC KY 22.1 22.4 116.0 116.0 29.65 2.29
Classic Bancshares Inc. CLAS OTC KY 44.5 26.9 98.4 117.1 14.68 1.97
CNS Bancorp Inc. CNSB OTC MO NA NA 115.4 115.4 28.65 1.18
Coast Savings Financial CSA NYSE CA 66.8 20.1 190.8 193.5 9.46 0.00
Coastal Bancorp Inc. CBSA OTC TX 20.0 12.8 151.2 179.0 5.09 1.64
Coastal Financial Corp. CFCP OTC SC 26.7 25.0 361.1 361.1 22.01 1.44
Commercial Federal Corp. CFB NYSE NE 19.2 13.6 195.5 219.7 11.58 0.75
Commonwealth Bancorp Inc. CMSB OTC PA NA NA 131.0 170.6 12.53 1.71
Community Federal Bancorp CFTP OTC MS 26.0 21.7 106.2 106.2 35.59 1.75
Community Financial Corp. CFFC OTC VA 16.9 13.2 123.3 123.3 16.99 2.52
Community Investors Bancorp CIBI OTC OH 19.6 13.3 111.0 111.0 12.79 2.03
</TABLE>
III-2
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit III (continued)
Financial and Market Data for All Public Thrifts
<TABLE>
<CAPTION>
Tang. LTM LTM Total Current
Total Equity/ Core Core Market Price
Assets Assets ROAA ROAE Value 6/23/97
Company Ticker Exch. State ($M) (%) (%) (%) ($M) ($)
------- ------ ----- ----- ---- --- --- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cooperative Bankshares Inc. COOP OTC NC 348 7.49 0.12 1.38 31.7 21.25
CoVest Bancshares Inc. COVB OTC IL 553 8.55 0.43 4.83 57.3 19.00
Crazy Woman Creek Bancorp CRZY OTC WY 52 27.84 1.25 4.20 13.6 13.50
CSB Financial Group Inc. CSBF OTC IL 48 23.98 0.65 2.39 11.8 12.50
D & N Financial Corp. DNFC OTC MI 1,528 5.75 0.91 15.75 155.9 18.75
Damen Financial Corp. DFIN OTC IL 227 20.16 0.89 3.85 45.5 14.00
Delphos Citizens Bancorp Inc. DCBI OTC OH 107 28.35 NA NA 29.3 14.38
Dime Bancorp Inc. DME NYSE NY 18,465 5.66 0.72 13.84 1,881.5 17.88
Dime Community Bancorp Inc. DIME OTC NY 1,237 13.53 1.13 6.79 256.0 19.50
Dime Financial Corp. DIBK OTC CT 814 7.56 1.88 22.83 123.3 24.00
Downey Financial Corp. DSL NYSE CA 5,484 7.20 0.76 9.62 611.5 22.88
Eagle BancGroup Inc. EGLB OTC IL 171 12.10 0.12 0.95 19.8 15.63
Eagle Bancshares EBSI OTC GA 666 8.71 0.80 8.97 79.7 17.50
Eagle Financial Corp. EGFC OTC CT 1,512 5.28 0.79 10.87 138.5 30.38
East Texas Financial Services ETFS OTC TX 112 19.03 0.64 3.42 18.8 18.38
Elmira Savings Bank (The) ESBK OTC NY 223 6.05 0.28 4.32 14.1 20.00
Emerald Financial Corp. EMLD OTC OH 589 7.39 0.89 11.25 68.3 13.50
Emerald Isle Bancorp Inc. EIRE OTC MA 412 6.96 0.85 12.61 42.8 19.13
Empire Federal Bancorp Inc. EFBC OTC MT 108 36.85 NA NA 35.6 13.75
Enterprise Federal Bancorp EFBI OTC OH 257 12.32 0.79 5.69 37.0 18.38
Equitable Federal Savings Bank EQSB OTC MD 296 5.07 0.76 14.87 23.2 38.50
Essex Bancorp Inc. ESX AMSE VA 180 8.30 (1.76) (31.06) 1.1 1.00
Falmouth Co-Operative Bank FCB AMSE MA 90 24.45 0.82 3.32 23.6 16.25
Fed One Bancorp FOBC OTC WV 346 11.12 0.98 8.25 47.9 20.25
FFBS Bancorp Inc. FFBS OTC MS 129 19.42 1.49 7.62 35.8 23.00
FFD Financial Corp. FFDF OTC OH 85 24.74 1.06 4.46 19.8 13.63
FFLC Bancorp Inc. FFLC OTC FL 359 14.47 1.01 6.25 63.1 27.00
FFVA Financial Corp. FFFC OTC VA 550 12.73 1.33 9.00 123.2 27.25
FFW Corp. FFWC OTC IN 158 10.01 1.10 10.78 18.1 26.00
FFY Financial Corp. FFYF OTC OH 599 14.10 1.26 7.53 110.3 26.38
Fidelity Bancorp Inc. FBCI OTC IL 486 10.17 0.75 6.93 52.0 18.63
Fidelity Bancorp Inc. FSBI OTC PA 328 6.96 0.84 12.04 30.9 20.00
Fidelity Federal Bancorp FFED OTC IN 250 5.14 0.29 5.39 23.6 9.50
Fidelity Financial of Ohio FFOH OTC OH 513 11.71 0.96 6.07 81.8 14.63
<CAPTION>
Price/ Price/ Price/ Price/ Price/ Current
LTM Core Book Tang. Total Div.
EPS(1) EPS(1) Value Book Assets Yield
Company Ticker Exch. State (x) (x) (%) (%) (%) (%)
------- ------ ----- ----- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cooperative Bankshares Inc. COOP OTC NC NM 106.3 121.5 121.5 9.10 0.00
CoVest Bancshares Inc. COVB OTC IL 63.3 26.0 116.1 121.9 10.38 2.11
Crazy Woman Creek Bancorp CRZY OTC WY 26.0 20.8 93.6 93.6 26.07 2.96
CSB Financial Group Inc. CSBF OTC IL 56.8 39.1 97.8 103.7 24.53 0.00
D & N Financial Corp. DNFC OTC MI 17.9 12.3 177.6 179.6 10.20 0.00
Damen Financial Corp. DFIN OTC IL 29.8 23.0 99.2 99.2 19.99 1.71
Delphos Citizens Bancorp Inc. DCBI OTC OH NA NA 96.5 96.5 27.37 0.00
Dime Bancorp Inc. DME NYSE NY 17.4 13.5 178.6 180.2 10.19 0.00
Dime Community Bancorp Inc. DIME OTC NY NA NA 134.2 156.4 20.69 0.92
Dime Financial Corp. DIBK OTC CT 9.3 9.2 193.4 200.7 15.13 1.67
Downey Financial Corp. DSL NYSE CA 27.6 16.2 152.7 155.0 11.15 1.40
Eagle BancGroup Inc. EGLB OTC IL NA NA 96.0 96.0 11.62 0.00
Eagle Bancshares EBSI OTC GA 20.4 15.2 137.4 137.4 11.96 3.43
Eagle Financial Corp. EGFC OTC CT 17.1 12.9 132.6 176.1 9.15 3.03
East Texas Financial Services ETFS OTC TX 47.1 26.3 93.3 93.3 17.76 1.09
Elmira Savings Bank (The) ESBK OTC NY 22.5 23.3 99.0 103.4 6.35 3.20
Emerald Financial Corp. EMLD OTC OH 17.8 14.1 154.6 157.3 11.61 1.78
Emerald Isle Bancorp Inc. EIRE OTC MA 13.4 12.7 149.1 149.1 10.37 1.46
Empire Federal Bancorp Inc. EFBC OTC MT NA NA 89.6 89.6 33.02 2.18
Enterprise Federal Bancorp EFBI OTC OH 21.6 19.1 116.7 116.9 14.39 5.44
Equitable Federal Savings Bank EQSB OTC MD 18.5 11.6 154.6 154.6 7.83 0.00
Essex Bancorp Inc. ESX AMSE VA NM NM NM NM 0.59 0.00
Falmouth Co-Operative Bank FCB AMSE MA 31.3 31.9 107.1 107.1 26.19 1.23
Fed One Bancorp FOBC OTC WV 21.8 14.9 118.6 124.5 14.29 2.86
FFBS Bancorp Inc. FFBS OTC MS 23.7 18.7 135.2 135.2 27.84 2.17
FFD Financial Corp. FFDF OTC OH NA NA 93.9 93.9 23.24 2.20
FFLC Bancorp Inc. FFLC OTC FL 28.7 19.7 121.8 121.8 17.64 1.78
FFVA Financial Corp. FFFC OTC VA 23.5 19.3 160.4 164.1 22.41 1.76
FFW Corp. FFWC OTC IN 13.3 10.9 114.3 114.3 11.44 2.77
FFY Financial Corp. FFYF OTC OH 22.9 16.6 135.3 135.3 19.07 2.65
Fidelity Bancorp Inc. FBCI OTC IL 21.4 15.3 105.0 105.3 10.70 1.72
Fidelity Bancorp Inc. FSBI OTC PA 19.1 12.1 135.0 135.0 9.40 1.80
Fidelity Federal Bancorp FFED OTC IN 63.3 35.2 183.8 183.8 9.45 4.21
Fidelity Financial of Ohio FFOH OTC OH 32.5 19.5 121.6 138.4 15.95 1.92
</TABLE>
III-3
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit III (continued)
Financial and Market Data for All Public Thrifts
<TABLE>
<CAPTION>
Tang. LTM LTM Total Current
Total Equity/ Core Core Market Price
Assets Assets ROAA ROAE Value 6/23/97
Company Ticker Exch. State ($M) (%) (%) (%) ($M) ($)
------- ------ ----- ----- ---- --- --- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Financial Bancp Inc. FIBC OTC NY 269 9.68 0.95 9.46 30.5 17.75
First Bancp FBCV OTC IN 273 7.80 0.04 0.47 21.4 30.63
First Bancshares Inc. FBSI OTC MO 160 14.33 1.12 7.33 22.7 19.88
First Bell Bancp Inc. FBBC OTC PA 709 10.20 1.40 8.44 109.7 16.13
First Bergen Bancp FBER OTC NJ 252 16.44 0.75 4.45 45.2 15.00
First Citizens Corp. FSTC OTC GA 257 7.52 2.03 19.20 40.0 24.75
First Coastal Corp. FCME OTC ME 151 8.88 4.17 67.90 12.9 9.50
First Colorado Bancp Inc. FFBA OTC CO 1,510 12.57 1.24 8.26 308.5 18.63
First Defiance Financial FDEF OTC OH 546 21.42 1.07 4.61 134.3 14.25
First Essex Bancp Inc. FESX OTC MA 1,147 6.36 0.91 12.11 123.5 16.50
First Federal Bancp Inc. FFBZ OTC OH 192 7.65 1.00 13.08 28.7 18.25
First Federal Bancporation BDJI OTC MN 108 11.17 0.65 5.35 13.1 18.75
First Federal Bancshares of AR FFBH OTC AR 520 15.82 1.13 7.39 95.5 19.50
First Federal Capital Corp. FTFC OTC WI 1,530 5.98 0.86 13.11 199.6 21.88
First Federal Financial Corp. FFKY OTC KY 372 12.88 1.49 10.72 77.0 18.50
First Federal of East Hartford FFES OTC CT 975 6.25 0.69 11.18 77.1 29.00
First Financial Bancp Inc. FFBI OTC IL 93 7.80 0.45 5.63 7.8 18.75
First Financial Holdings Inc. FFCH OTC SC 1,602 6.15 0.83 13.37 189.9 30.00
First Franklin Corp. FFHS OTC OH 226 8.76 0.61 6.64 23.3 19.75
First FS&LA-San Bernardino FSSB OTC CA 104 4.18 (1.18) (24.76) 3.1 9.50
First Georgia Holding Inc. FGHC OTC GA 147 7.80 0.77 9.28 22.1 7.25
First Home Bancp Inc. FSPG OTC NJ 508 6.48 0.99 15.16 52.5 19.38
First Independence Corp. FFSL OTC KS 109 10.50 0.76 6.54 11.4 11.50
First Indiana Corp. FISB OTC IN 1,481 9.47 1.03 11.07 219.3 20.88
First Keystone Financial FKFS OTC PA 315 7.07 0.77 10.01 28.2 23.00
First Lancaster Bancshares FLKY OTC KY 40 34.24 1.41 4.31 14.9 15.50
First Liberty Financial Corp. FLFC OTC GA 1,248 6.62 0.91 12.24 171.9 22.25
First Midwest Financial Inc. CASH OTC IA 370 10.40 0.97 8.40 43.1 15.25
First Mutual Bancp Inc. FMBD OTC IL 425 10.65 0.37 1.94 54.4 15.50
First Mutual Savings Bank FMSB OTC WA 426 6.68 0.98 14.75 48.6 18.00
First Northern Capital Corp. FNGB OTC WI 618 11.51 0.88 7.48 93.9 21.25
First Palm Beach Bancp Inc. FFPB OTC FL 1,558 6.60 0.05 0.66 150.3 30.00
First Republic Bancp FRC NYSE CA 2,183 7.41 0.58 9.96 218.6 21.88
First Savings Bancp Inc. SOPN OTC NC 271 24.61 1.68 6.59 84.1 22.75
<CAPTION>
Price/ Price/ Price/ Price/ Price/ Current
LTM Core Book Tang. Total Div.
EPS(1) EPS(1) Value Book Assets Yield
Company Ticker Exch. State (x) (x) (%) (%) (%) (%)
------- ------ ----- ----- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Financial Bancp Inc. FIBC OTC NY 22.2 12.2 118.4 119.1 11.52 2.25
First Bancp FBCV OTC IN 33.7 204.2 98.2 100.4 7.82 1.31
First Bancshares Inc. FBSI OTC MO 16.8 13.5 100.4 100.5 14.41 1.01
First Bell Bancp Inc. FBBC OTC PA 16.0 13.7 151.7 151.7 15.47 2.48
First Bergen Bancp FBER OTC NJ NA NA 109.0 109.0 17.93 0.80
First Citizens Corp. FSTC OTC GA 9.7 9.8 163.0 207.3 15.28 1.78
First Coastal Corp. FCME OTC ME 1.8 2.0 96.1 96.1 8.53 0.00
First Colorado Bancp Inc. FFBA OTC CO 23.6 17.4 160.6 162.8 20.43 2.36
First Defiance Financial FDEF OTC OH 33.1 25.5 114.8 114.8 24.59 2.25
First Essex Bancp Inc. FESX OTC MA 11.2 12.8 147.3 171.0 10.77 2.91
First Federal Bancp Inc. FFBZ OTC OH 23.1 17.1 217.8 218.0 14.96 1.32
First Federal Bancporation BDJI OTC MN 36.1 18.2 109.1 109.1 12.19 0.00
First Federal Bancshares of AR FFBH OTC AR NA NA 116.1 116.1 18.37 1.03
First Federal Capital Corp. FTFC OTC WI 20.4 14.8 205.4 219.2 13.06 2.19
First Federal Financial Corp. FFKY OTC KY 17.3 14.5 152.1 162.0 20.70 2.81
First Federal of East Hartford FFES OTC CT 19.0 11.9 126.1 126.1 7.88 2.07
First Financial Bancp Inc. FFBI OTC IL NM 19.3 107.1 107.1 8.36 0.00
First Financial Holdings Inc. FFCH OTC SC 22.4 14.9 192.7 192.7 11.85 2.40
First Franklin Corp. FFHS OTC OH 76.0 17.8 116.7 117.5 10.29 1.62
First FS&LA-San Bernardino FSSB OTC CA NM NM 69.4 72.1 3.01 0.00
First Georgia Holding Inc. FGHC OTC GA 25.0 20.1 177.7 194.9 15.04 0.74
First Home Bancp Inc. FSPG OTC NJ 12.0 10.9 156.8 159.6 10.33 2.07
First Independence Corp. FFSL OTC KS 24.0 15.5 100.8 100.8 10.58 2.17
First Indiana Corp. FISB OTC IN 17.0 NA 154.5 156.5 14.81 2.30
First Keystone Financial FKFS OTC PA 17.3 11.7 126.9 126.9 8.98 0.87
First Lancaster Bancshares FLKY OTC KY NA NA 107.3 107.3 36.74 0.00
First Liberty Financial Corp. FLFC OTC GA 17.8 15.5 187.5 209.5 13.77 1.80
First Midwest Financial Inc. CASH OTC IA 15.9 10.9 100.5 113.6 11.65 2.36
First Mutual Bancp Inc. FMBD OTC IL 119.2 50.0 93.4 121.4 13.66 2.07
First Mutual Savings Bank FMSB OTC WA 12.6 13.1 170.6 170.6 11.40 1.11
First Northern Capital Corp. FNGB OTC WI 27.2 18.2 132.1 132.1 15.20 3.01
First Palm Beach Bancp Inc. FFPB OTC FL NM 200.0 142.6 146.3 9.64 2.00
First Republic Bancp FRC NYSE CA 15.2 17.1 135.1 135.2 10.01 0.00
First Savings Bancp Inc. SOPN OTC NC 24.5 20.1 126.1 126.1 31.02 3.52
</TABLE>
III-4
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit III (continued)
Financial and Market Data for All Public Thrifts
<TABLE>
<CAPTION>
Tang. LTM LTM Total Current
Total Equity/ Core Core Market Price
Assets Assets ROAA ROAE Value 6/23/97
Company Ticker Exch. State ($M) (%) (%) (%) ($M) ($)
------- ------ ----- ----- ------ ----- ----- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First SB of Washington Bancorp FWWB OTC WA 1,008 13.73 1.17 7.04 224.8 21.38
First Shenango Bancorp Inc. SHEN OTC PA 401 10.70 1.12 9.37 52.6 25.50
First Southeast Financial Corp FSFC OTC SC 335 10.23 0.90 7.30 43.3 9.88
FirstFed America Bancorp Inc. FAB AMSE MA 980 12.47 0.43 4.38 149.1 17.13
FirstFed Bancorp Incorporated FFDB OTC AL 176 9.17 0.93 9.10 22.1 18.00
FirstFed Financial Corp. FED NYSE CA 4,130 4.67 0.48 10.34 322.1 30.50
FirstFederal Financial Svcs FFSW OTC OH 1,088 7.21 0.84 10.76 187.0 40.75
FLAG Financial Corp. FLAG OTC GA 222 9.40 0.14 1.51 29.0 14.25
Flagstar Bancorp Inc. FLGS OTC MI 1,519 NA NA NA 213.6 15.63
Flushing Financial Corp. FFIC OTC NY 811 16.02 0.86 4.92 160.7 19.88
FMS Financial Corp. FMCO OTC NJ 554 6.17 0.98 14.96 60.9 25.50
Fort Bend Holding Corp. FBHC OTC TX 295 5.81 0.51 7.64 24.1 29.25
Fort Thomas Financial Corp. FTSB OTC KY 95 16.09 0.77 3.83 15.2 10.75
Frankfort First Bancorp Inc. FKKY OTC KY 128 26.19 0.92 3.34 41.0 12.13
FSF Financial Corp. FFHH OTC MN 367 11.77 0.82 6.13 52.4 17.13
Fulton Bancorp Inc. FTNB OTC MO 99 25.01 NA NA 34.2 19.88
GA Financial Inc. GAF AMSE PA 670 17.11 1.19 5.64 151.7 19.00
GFS Bancorp Inc. GFSB OTC IA 88 11.57 1.20 10.24 13.8 14.00
GFSB Bancorp Inc. GUPB OTC NM 87 16.30 0.93 4.89 15.3 19.00
Glacier Bancorp Inc. GBCI OTC MT 552 9.32 1.56 16.51 129.2 19.00
Glendale Federal Bank FSB GLN NYSE CA 15,394 6.04 0.62 9.70 1,263.9 25.13
Glenway Financial Corp. GFCO OTC OH 281 9.42 0.68 7.14 29.5 25.75
Golden West Financial GDW NYSE CA 38,530 6.26 1.24 19.61 4,041.1 70.63
Great American Bancorp GTPS OTC IL 138 21.15 0.61 2.42 28.4 16.13
Great Financial Corp. GTFN OTC KY 3,002 8.93 0.71 7.13 483.4 34.81
Great Southern Bancorp Inc. GSBC OTC MO 679 8.97 1.54 15.89 137.2 16.88
Green Street Financial Corp. GSFC OTC NC 174 36.08 1.69 5.18 75.2 17.50
GreenPoint Financial Corp. GPT NYSE NY 13,261 6.49 0.96 8.96 3,082.9 65.75
GS Financial Corp. GSLA OTC LA 135 18.28 NA NA 52.9 15.38
Hallmark Capital Corp. HALL OTC WI 409 6.99 0.59 8.28 32.5 22.50
Harbor Federal Bancorp Inc. HRBF OTC MD 219 12.86 0.68 5.10 32.5 18.50
Hardin Bancorp Inc. HFSA OTC MO 103 12.78 0.81 5.14 12.6 14.63
Harleysville Savings Bank HARL OTC PA 333 6.36 0.98 15.27 36.3 22.00
Harrington Financial Group HFGI OTC IN 515 4.78 0.48 10.32 39.9 12.25
<CAPTION>
Price/ Price/ Price/ Price/ Price/ Current
LTM Core Book Tang. Total Div.
EPS(1) EPS(1) Value Book Assets Yield
Company Ticket Exch. State (x) (x) (%) (%) (%) (%)
------- ------ ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First SB of Washington Bancorp FWWB OTC WA 22.5 20.2 140.2 152.4 22.31 1.31
First Shenango Bancorp Inc. SHEN OTC PA 17.4 NA 122.7 122.7 13.12 2.35
First Southeast Financial Corp FSFC OTC SC NM 13.9 126.6 126.6 12.95 2.43
FirstFed America Bancorp Inc. FAB AMSE MA NA NA 122.1 122.1 15.22 0.00
FirstFed Bancorp Incorporated FFDB OTC AL 23.7 14.2 125.6 137.5 12.50 2.78
FirstFed Financial Corp. FED NYSE CA 32.8 16.5 165.0 167.2 7.80 0.00
FirstFederal Financial Svcs FFSW OTC OH 26.1 27.9 317.9 376.3 17.18 1.08
FLAG Financial Corp. FLAG OTC GA NM 95.0 139.0 139.0 13.07 2.39
Flagstar Bancorp Inc. FLGS OTC MI NA NA NA NA NA 0.00
Flushing Financial Corp. FFIC OTC NY 22.8 24.0 123.8 123.8 19.82 1.21
FMS Financial Corp. FMCO OTC NJ 18.8 12.4 174.8 178.5 10.99 0.78
Fort Bend Holding Corp. FBHC OTC TX 32.1 18.1 130.5 140.8 8.15 0.96
Fort Thomas Financial Corp. FTSB OTC KY 37.1 22.9 105.5 105.5 16.97 2.33
Frankfort First Bancorp Inc. FKKY OTC KY 46.6 32.8 122.1 122.1 31.98 2.97
FSF Financial Corp. FFHH OTC MN 23.5 18.6 107.9 107.9 14.43 2.92
Fulton Bancorp Inc. FTNB OTC MO NA NA 137.4 137.4 34.36 1.01
GA Financial Inc. GAF AMSE PA 23.8 21.6 127.2 128.6 23.83 2.11
GFS Bancorp Inc. GFSB OTC IA 16.7 13.5 135.5 135.5 15.69 1.43
GFSB Bancorp Inc. GUPB OTC NM 28.4 22.6 112.6 112.6 18.35 2.11
Glacier Bancorp Inc. GBCI OTC MT 17.4 15.6 244.5 251.7 23.38 2.25
Glendale Federal Bank FSB GLN NYSE CA 73.9 18.9 164.1 176.4 8.21 0.00
Glenway Financial Corp. GFCO OTC OH 27.4 15.3 111.7 113.4 10.49 2.64
Golden West Financial GDW NYSE CA 11.0 9.1 167.4 167.4 10.49 0.62
Great American Bancorp GTPS OTC IL 100.8 42.4 87.8 87.8 20.58 2.48
Great Financial Corp. GTFN OTC KY 24.0 24.5 175.6 183.5 16.32 1.72
Great Southern Bancorp Inc. GSBC OTC MO 16.1 14.2 229.6 229.6 20.59 2.37
Green Street Financial Corp. GSFC OTC NC NA NA 119.5 119.5 43.14 2.29
GreenPoint Financial Corp. GPT NYSE NY 19.5 21.7 190.2 331.9 23.25 1.52
GS Financial Corp. GSLA OTC LA NA NA NA NA NA 0.00
Hallmark Capital Corp. HALL OTC WI 18.6 14.2 113.5 113.5 7.93 0.00
Harbor Federal Bancorp Inc. HRBF OTC MD 34.3 21.8 115.0 115.0 14.79 2.16
Hardin Bancorp Inc. HFSA OTC MO 28.7 17.6 95.2 95.2 12.16 3.28
Harleysville Savings Bank HARL OTC PA 17.2 12.1 171.6 171.6 10.92 1.82
Harrington Financial Group HFGI OTC IN 24.0 16.3 161.8 161.8 7.74 0.98
</TABLE>
III-5
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit III (continued)
Financial and Market Data for All Public Thrifts
<TABLE>
<CAPTION>
Tang. LTM LTM Total Current
Total Equity/ Core Core Market Price
Assets Assets ROAA ROAE Value 6/23/97
Company Ticker Exch. State ($M) (%) (%) (%) ($M) ($)
------- ------ ---- ----- ------ ----- ----- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Harrodsburg First Fin Bancorp HFFB OTC KY 108 26.36 1.35 4.90 30.4 15.00
Harvest Home Financial Corp. HHFC OTC OH 83 12.50 0.55 3.91 9.6 10.50
Haven Bancorp Inc. HAVN OTC NY 1,728 5.77 0.90 14.67 158.1 36.50
Hawthorne Financial Corp. HTHR OTC CA 838 5.27 0.54 10.05 29.9 11.38
Haywood Bancshares Inc. HBS AMSE NC 146 13.68 1.12 7.43 21.2 16.94
HCB Bancshares Inc. HCBB OTC AR 180 7.01 NA NA 34.1 12.88
Hemlock Federal Financial Corp. HMLK OTC IL 164 18.28 NA NA 27.5 13.25
HF Bancorp Inc. HEMT OTC CA 984 6.82 0.16 1.87 88.7 14.13
HF Financial Corp. HFFC OTC SD 561 9.17 0.81 8.80 61.3 20.50
HFNC Financial Corp. HFNC OTC NC 843 18.83 1.38 4.71 279.4 16.25
Highland Federal Bank FSB HBNK OTC CA 480 7.46 0.5 6.7 54.2 23.75
Hingham Instit. for Savings HIFS OTC MA 206 9.55 1.17 11.92 26.4 20.25
HMN Financial Inc. HMNF OTC MN 553 14.24 0.91 5.93 99.5 23.63
Home Bancorp HBFW OTC IN 328 13.95 0.89 6.04 54.1 20.63
Home Bancorp of Elgin Inc. HBEI OTC IL 359 28.11 0.81 3.67 113.9 16.25
Home Building Bancorp HBBI OTC IN 47 12.07 0.50 3.77 6.5 21.00
Home City Financial Corp. HCFC OTC OH 68 20.61 NA NA 13.6 14.25
Home Federal Bancorp HOMF OTC IN 664 8.20 1.18 14.20 94.1 27.75
Home Financial Bancorp HWEN OTC IN 39 18.63 0.81 5.11 7.7 15.75
Home Port Bancorp Inc. HPBC OTC MA 189 10.82 1.70 15.83 37.3 20.25
HomeCorp Inc. HMCI OTC IL 336 6.30 0.38 6.13 24.1 14.25
Horizon Financial Corp. HRZB OTC WA 515 15.23 1.52 9.68 117.9 15.94
Horizon Financial Svcs Corp. HZFS OTC IA 78 10.50 0.60 5.41 8.2 19.25
IBS Financial Corp. IBSF OTC NJ 740 17.03 0.87 4.48 174.8 15.88
Independence Federal Savings IFSB OTC DC 263 5.76 0.33 4.92 11.5 9.00
Indiana Community Bank SB INCB OTC IN 91 12.39 0.50 3.92 13.8 15.00
Industrial Bancorp INBI OTC OH 334 18.49 1.27 6.69 74.4 13.75
InterWest Bancorp Inc. IWBK OTC WA 1,772 6.56 1.11 16.43 296.7 37.00
Ipswich Savings Bank IPSW OTC MA 166 6.16 0.93 15.41 19.3 16.25
ISB Financial Corp. ISBF OTC LA 939 10.53 0.92 6.15 164.8 23.88
ITLA Capital Corp. ITLA OTC CA 810 11.33 1.45 12.48 121.4 15.50
Jacksonville Bancorp Inc. JXVL OTC TX 218 15.63 1.20 7.41 36.9 14.50
Jefferson Savings Bancorp JSBA OTC MO 1,297 6.37 0.70 9.29 152.2 30.63
Joachim Bancorp Inc. JOAC OTC MO 36 28.98 0.78 2.68 11.0 14.50
<CAPTION>
Price/ Price/ Price/ Price/ Price/ Current
LTM Core Book Tang. Total Div.
EPS(1) EPS(1) Value Book Assets Yield
Company Ticker Exch. State (x) (x) (%) (%) (%) (%)
------- ------ ---- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Harrodsburg First Fin Bancorp HFFB OTC KY 25.9 20.3 98.2 98.2 28.07 2.67
Harvest Home Financial Corp. HHFC OTC OH 45.7 21.0 94.5 94.5 11.81 3.81
Haven Bancorp Inc. HAVN OTC NY 16.5 11.1 157.8 158.4 9.15 1.64
Hawthorne Financial Corp. HTHR OTC CA 36.7 30.7 92.0 92.0 3.57 0.00
Haywood Bancshares Inc. HBS AMSE NC 19.9 14.0 102.5 106.5 14.49 3.31
HCB Bancshares Inc. HCBB OTC AR NA NA NA NA NA 0.00
Hemlock Federal Financial Corp. HMLK OTC IL NA NA NA NA NA 0.00
HF Bancorp Inc. HEMT OTC CA NM 52.3 109.8 134.1 9.01 0.00
HF Financial Corp. HFFC OTC SD 19.2 14.0 124.2 124.5 10.95 1.76
HFNC Financial Corp. HFNC OTC NC 30.1 22.6 176.1 176.1 33.14 1.72
Highland Federal Bank FSB HBNK OTC CA 41.7 23.8 151.3 151.3 11.29 0.00
Hingham Instit. for Savings HIFS OTC MA 11.7 11.7 134.2 134.2 12.81 1.98
HMN Financial Inc. HMNF OTC MN 23.6 20.2 126.3 126.3 17.98 0.00
Home Bancorp HBFW OTC IN 29.1 18.4 118.3 118.3 16.51 0.97
Home Bancorp of Elgin Inc. HBEI OTC IL NA NA 112.9 112.9 31.76 2.46
Home Building Bancorp HBBI OTC IN 67.7 28.0 105.6 105.6 13.98 1.43
Home City Financial Corp. HCFC OTC OH NA NA 88.8 88.8 19.89 2.25
Home Federal Bancorp HOMF OTC IN 14.7 12.7 167.8 173.4 14.17 1.80
Home Financial Bancorp HWEN OTC IN NA NA 104.2 104.2 19.40 1.27
Home Port Bancorp Inc. HPBC OTC MA 12.0 12.1 182.3 182.3 19.71 3.95
HomeCorp Inc. HMCI OTC IL 71.3 20.1 113.8 113.8 7.17 0.00
Horizon Financial Corp. HRZB OTC WA 15.3 15.6 150.2 150.2 22.88 2.18
Horizon Financial Svcs Corp. HZFS OTC IA 25.0 18.2 99.6 99.6 10.45 1.66
IBS Financial Corp. IBSF OTC NJ 45.4 26.5 138.7 138.7 23.62 2.02
Independence Federal Savings IFSB OTC DC 31.0 13.9 67.2 76.7 4.38 2.44
Indiana Community Bank SB INCB OTC IN 100.0 31.3 122.3 122.3 15.14 2.40
Industrial Bancorp INBI OTC OH 30.6 17.4 120.5 120.5 22.28 3.49
InterWest Bancorp Inc. IWBK OTC WA 20.9 16.1 249.8 255.7 16.75 1.62
Ipswich Savings Bank IPSW OTC MA 11.1 14.1 189.2 189.2 11.66 1.48
ISB Financial Corp. ISBF OTC LA 29.1 21.5 136.8 161.3 17.80 1.68
ITLA Capital Corp. ITLA OTC CA 11.4 11.4 131.7 132.3 14.97 0.00
Jacksonville Bancorp Inc. JXVL OTC TX NA NA 109.3 109.3 17.08 3.45
Jefferson Savings Bancorp JSBA OTC MO 38.8 15.6 131.9 173.1 11.74 1.31
Joachim Bancorp Inc. JOAC OTC MO 58.0 37.2 106.7 106.7 30.92 3.45
</TABLE>
III-6
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit III (continued)
Financial and Market Data for All Public Thrifts
<TABLE>
<CAPTION>
Tang. LTM LTM Total Current
Total Equity/ Core Core Market Price
Assets Assets ROAA ROAE Value 6/23/97
Company Ticker Exch. State ($M) (%) (%) (%) ($M) ($)
------- ------ ----- ----- ------ ----- ----- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
JSB Financial Inc. JSBF OTC NY 1,531 22.17 1.68 7.73 430.5 43.75
Kankakee Bancorp Inc. KNK AMSE IL 342 10.06 0.77 7.65 41.9 29.50
Kentucky First Bancorp Inc. KYF AMSE KY 89 16.11 1.07 5.23 14.2 10.75
Klamath First Bancorp KFBI OTC OR 684 20.44 1.29 5.42 184.3 18.50
KS Bancorp Inc. KSAV OTC NC 101 13.82 1.21 8.44 16.9 25.50
KSB Bancorp Inc. KSBK OTC ME 140 6.77 1.09 15.50 16.8 40.50
Lakeview Financial LVSB OTC NJ 482 7.76 0.95 9.52 77.1 33.50
Landmark Bancshares Inc. LARK OTC KS 224 14.63 1.04 6.69 35.7 19.75
Laurel Capital Group Inc. LARL OTC PA 209 10.42 1.43 13.48 30.5 21.13
Lawrence Savings Bank LSBX OTC MA 342 8.78 1.66 20.48 45.2 10.63
Lexington B&L Financial Corp. LXMO OTC MO 60 27.62 1.18 3.91 16.5 15.19
Life Bancorp Inc. LIFB OTC VA 1,408 10.49 0.86 7.73 236.3 24.00
Little Falls Bancorp Inc. LFBI OTC NJ 303 12.03 0.49 3.43 37.8 13.75
Logansport Financial Corp. LOGN OTC IN 79 19.65 1.51 6.80 17.6 14.00
London Financial Corp. LONF OTC OH 38 19.87 1.08 5.10 7.7 15.00
Long Island Bancorp Inc. LISB OTC NY 5,814 8.93 0.73 7.57 846.5 34.94
LSB Financial Corp. LSBI OTC IN 188 9.08 0.42 4.44 19.4 20.50
MAF Bancorp Inc. MAFB OTC IL 3,236 6.92 1.08 14.28 430.2 41.25
Marion Capital Holdings MARN OTC IN 174 23.05 1.59 6.87 41.4 22.63
Market Financial Corp. MRKF OTC OH 56 34.60 NA NA 17.4 13.00
Marshalltown Financial Corp. MFCX OTC IA 127 15.61 0.63 4.04 21.4 15.13
Maryland Federal Bancorp MFSL OTC MD 1,157 8.29 0.89 10.76 142.0 44.25
MASSBANK Corp. MASB OTC MA 901 9.98 1.02 10.08 126.3 47.00
Mayflower Co-operative Bank MFLR OTC MA 125 9.28 0.93 9.66 15.3 17.13
MBLA Financial Corp. MBLF OTC MO 210 13.50 0.85 6.32 31.6 24.00
Mechanics Savings Bank MECH OTC CT 789 9.73 0.27 3.12 100.5 19.00
Medford Savings Bank MDBK OTC MA 1,054 8.20 1.01 11.38 132.8 29.25
Meritrust Federal SB MERI OTC LA 229 7.90 0.97 12.70 29.4 38.00
Metropolitan Financial Corp. METF OTC OH 807 3.43 NA NA 57.3 16.25
MetroWest Bank MWBX OTC MA 555 7.33 1.37 17.58 78.4 5.63
MFB Corp. MFBC OTC IN 234 14.51 0.85 5.10 33.0 19.00
Mid-Coast Bancorp Inc. MCBN OTC ME 58 8.60 0.64 7.05 4.5 19.50
Mid-Iowa Financial Corp. MIFC OTC IA 124 9.08 1.19 12.89 14.7 8.75
Mid Continent Bancshares Inc. MCBS OTC KS 371 10.04 1.17 10.54 53.9 27.50
<CAPTION>
Price/ Price/ Price/ Price/ Price/ Current
LTM Core Book Tang. Total Div.
EPS(1) EPS(1) Value Book Assets Yield
Company Ticket Exch. State (x) (x) (%) (%) (%) (%)
------- ------ ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
JSB Financial Inc. JSBF OTC NY 16.8 17.7 126.7 126.7 28.09 3.20
Kankakee Bancorp Inc. KNK AMSE IL 20.6 15.7 114.6 122.4 12.24 1.63
Kentucky First Bancorp Inc. KYF AMSE KY 19.9 15.6 99.0 99.0 15.95 4.65
Klamath First Bancorp KFBI OTC OR 31.9 21.8 120.2 120.2 26.95 1.62
KS Bancorp Inc. KSAV OTC NC 19.9 14.3 121.4 121.5 16.79 2.35
KSB Bancorp Inc. KSBK OTC ME 12.3 10.9 166.6 177.1 11.94 0.59
Lakeview Financial LVSB OTC NJ 13.4 19.1 168.3 210.4 16.01 0.75
Landmark Bancshares Inc. LARK OTC KS 20.6 16.2 109.1 109.1 15.96 2.03
Laurel Capital Group Inc. LARL OTC PA 14.7 11.7 145.6 145.6 15.17 2.08
Lawrence Savings Bank LSBX OTC MA 8.3 8.3 150.5 150.5 13.22 0.00
Lexington B&L Financial Corp. LXMO OTC MO NA NA 100.1 100.1 27.65 1.98
Life Bancorp Inc. LIFB OTC VA 24.0 18.9 155.6 160.5 16.79 2.00
Little Falls Bancorp Inc. LFBI OTC NJ 49.1 25.9 96.2 104.6 12.44 0.87
Logansport Financial Corp. LOGN OTC IN 20.0 15.6 112.8 112.8 22.18 2.86
London Financial Corp. LONF OTC OH NA NA 102.5 102.5 20.37 1.60
Long Island Bancorp Inc. LISB OTC NY 25.0 21.1 161.6 163.2 14.56 1.72
LSB Financial Corp. LSBI OTC IN 20.1 23.6 105.6 105.6 10.31 1.58
MAF Bancorp Inc. MAFB OTC IL 17.6 13.1 168.6 194.2 13.29 1.02
Marion Capital Holdings MARN OTC IN 18.4 15.2 102.9 102.9 23.72 3.89
Market Financial Corp. MRKF OTC OH NA NA 89.1 89.1 30.82 0.00
Marshalltown Financial Corp. MFCX OTC IA 52.2 27.5 107.6 107.6 16.80 0.00
Maryland Federal Bancorp MFSL OTC MD 20.5 14.0 146.4 148.3 12.27 1.81
MASSBANK Corp. MASB OTC MA 13.3 14.3 140.3 140.3 14.01 2.30
Mayflower Co-operative Bank MFLR OTC MA 12.9 13.9 129.6 131.9 12.23 3.50
MBLA Financial Corp. MBLF OTC MO 24.5 18.8 111.6 111.6 15.06 1.67
Mechanics Savings Bank MECH OTC CT NA NA 131.0 131.0 12.75 0.00
Medford Savings Bank MDBK OTC MA 13.1 13.5 143.2 154.7 12.60 2.46
Meritrust Federal SB MERI OTC LA 22.4 13.9 162.8 162.8 12.87 1.84
Metropolitan Financial Corp. METF OTC OH NA NA 186.1 207.5 7.10 0.00
MetroWest Bank MWBX OTC MA 11.5 11.5 192.6 192.6 14.13 2.13
MFB Corp. MFBC OTC IN 27.9 19.0 97.0 97.0 14.07 1.68
Mid-Coast Bancorp Inc. MCBN OTC ME 21.0 13.0 90.2 90.2 7.76 2.67
Mid-Iowa Financial Corp. MIFC OTC IA 14.1 NA 130.4 130.6 11.87 0.91
Mid Continent Bancshares Inc. MCBS OTC KS 15.7 13.8 141.3 141.3 14.51 1.46
</TABLE>
III-7
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit III (continued)
Financial and Market Data for All Public Thrifts
<TABLE>
<CAPTION>
Tang. LTM LTM Total Current
Total Equity/ Core Core Market Price
Assets Assets ROAA ROAE Value 6/23/97
Company Ticker Exch. State ($M) (%) (%) (%) ($M) ($)
- ------- ------ ----- ----- ------ ------- ---- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Midwest Bancshares Inc. MWBI OTC IA 139 6.94 0.74 10.69 11.0 31.50
Midwest Federal Financial MWFD OTC WI 201 8.30 1.09 12.42 32.1 19.75
Milton Federal Financial Corp. MFFC OTC OH 179 14.74 0.72 4.14 32.0 13.75
Mississippi View Holding Co. MIVI OTC MN 70 18.26 1.01 5.54 12.0 14.63
Mitchell Bancorp Inc. MBSP OTC NC 34 43.32 NA NA 16.0 16.50
ML Bancorp Inc. MLBC OTC PA 1,960 NA 0.65 8.57 196.6 18.88
Monterey Bay Bancorp Inc. MBBC OTC CA 422 9.94 0.52 4.02 54.8 16.88
MSB Bancorp Inc. MBB AMSE NY 811 4.69 0.48 5.76 55.3 19.50
MSB Financial Inc. MSBF OTC MI 76 16.61 1.49 7.55 14.5 23.00
Mutual Savings Bank FSB MSBK OTC MI 663 6.01 0.01 0.18 40.1 9.38
New Hampshire Thrift Bncshrs NHTB OTC NH 313 6.41 0.51 6.82 31.1 15.25
New York Bancorp Inc. NYB NYSE NY 3,175 5.06 1.36 25.36 557.3 34.38
NewMil Bancorp Inc. NMSB OTC CT 317 9.97 0.80 7.51 37.9 9.75
NewSouth Bancorp, Inc. NSBC OTC NC 255 7.52 NA NA 70.9 24.38
North American Savings Bank NASB OTC MO 689 7.73 1.18 16.39 99.2 44.00
North Bancshares Inc. NBSI OTC IL 120 14.61 0.64 4.18 19.9 19.25
North Central Bancshares Inc. FFFD OTC IA 203 24.59 1.97 7.28 51.3 15.44
Northeast Bancorp NBN AMSE ME 248 6.88 0.50 6.24 18.5 14.50
Northeast Indiana Bancorp NEIB OTC IN 173 15.16 1.22 7.06 27.8 15.75
Northwest Equity Corp. NWEQ OTC WI 95 11.42 0.99 7.91 12.4 14.75
Norwalk Savings Society NSSY OTC CT 617 7.79 0.31 4.02 68.1 28.31
Norwich Financial Corp. NSSB OTC CT 701 9.97 0.98 9.14 120.2 22.25
NS&L Bancorp Inc. NSLB OTC MO 58 19.92 0.74 3.45 11.7 16.50
Nutmeg Federal S&LA NTMG OTC CT 94 6.17 0.38 6.31 5.8 8.00
Ocean Financial Corp. OCFC OTC NJ 1,388 17.82 0.94 5.61 296.2 33.00
Ocwen Financial Corp. OCWN OTC FL 2,649 8.50 NA NA 783.9 29.25
OHSL Financial Corp. OHSL OTC OH 230 11.04 0.86 7.28 30.5 25.25
Ottawa Financial Corp. OFCP OTC MI 859 7.20 0.73 7.63 109.8 22.31
Pacific Crest Capital PCCI OTC CA 343 7.22 0.90 11.08 38.6 13.13
PacificAmerica Money Center PAMM OTC CA 112 22.43 6.32 36.89 56.6 30.00
Palfed, Inc. PALM OTC SC 656 8.11 0.56 6.94 86.4 16.38
Pamrapo Bancorp Inc. PBCI OTC NJ 367 12.71 1.19 7.86 59.0 20.75
Park Bancorp Inc. PFED OTC IL 178 21.69 1.06 5.51 35.3 14.50
Parkvale Financial Corp. PVSA OTC PA 973 7.42 1.06 14.68 116.7 28.75
<CAPTION>
Price/ Price/ Price/ Price/ Price/ Current
LTM Core Book Tang. Total Div.
EPS(1) EPS(1) Value Book Assets Yield
Company Ticker Exch. State (x) (x) (%) (%) (%) (%)
- ------- ------ ----- ----- ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Midwest Bancshares Inc. MWBI OTC IA 18.3 11.5 113.8 113.8 7.89 1.91
Midwest Federal Financial MWFD OTC WI 16.6 16.5 185.3 192.9 15.96 1.72
Milton Federal Financial Corp. MFFC OTC OH 32.0 24.1 112.5 112.5 17.90 4.36
Mississippi View Holding Co. MIVI OTC MN 25.2 17.2 94.1 94.1 17.17 1.09
Mitchell Bancorp Inc. MBSP OTC NC NA NA 108.8 108.8 47.12 0.00
ML Bancorp Inc. MLBC OTC PA 15.5 17.6 144.9 NA 10.03 2.12
Monterey Bay Bancorp Inc. MBBC OTC CA 52.7 29.1 112.4 122.6 12.96 0.59
MSB Bancorp Inc. MBB AMSE NY 59.1 19.3 98.9 230.2 6.82 3.08
MSB Financial Inc. MSBF OTC MI 18.4 14.6 115.4 115.4 19.16 2.44
Mutual Savings Bank FSB MSBK OTC MI 58.6 NM 100.7 100.7 6.05 0.00
New Hampshire Thrift Bncshrs NHTB OTC NH 33.2 21.5 133.1 157.1 9.94 3.28
New York Bancorp Inc. NYB NYSE NY 15.3 14.9 350.4 350.4 17.73 1.75
NewMil Bancorp Inc. NMSB OTC CT 16.5 17.1 119.9 119.9 11.96 2.46
NewSouth Bancorp, Inc. NSBC OTC NC NA NA NA NA NA 1.64
North American Savings Bank NASB OTC MO 11.5 11.7 180.7 186.8 14.41 1.82
North Bancshares Inc. NBSI OTC IL 37.8 27.5 113.6 113.6 16.60 2.49
North Central Bancshares Inc. FFFD OTC IA 16.6 14.4 105.8 105.8 26.02 1.62
Northeast Bancorp NBN AMSE ME 20.1 22.0 107.5 124.4 7.47 2.21
Northeast Indiana Bancorp NEIB OTC IN 17.1 14.6 105.9 105.9 16.06 2.03
Northwest Equity Corp. NWEQ OTC WI 17.6 13.9 104.0 104.0 13.01 3.25
Norwalk Savings Society NSSY OTC CT 11.6 42.9 136.8 141.9 11.02 1.41
Norwich Financial Corp. NSSB OTC CT 17.1 18.2 155.9 173.8 17.13 2.52
NS&L Bancorp Inc. NSLB OTC MO 37.5 28.5 100.9 100.9 20.10 3.03
Nutmeg Federal S&LA NTMG OTC CT 32.0 23.5 108.8 108.8 6.20 0.00
Ocean Financial Corp. OCFC OTC NJ NA NA 120.9 120.9 21.54 2.42
Ocwen Financial Corp. OCWN OTC FL NA NA 348.2 348.2 29.59 0.00
OHSL Financial Corp. OHSL OTC OH 24.5 17.2 120.2 120.2 13.27 3.49
Ottawa Financial Corp. OFCP OTC MI 31.9 18.9 148.1 185.0 13.09 1.79
Pacific Crest Capital PCCI OTC CA 12.7 15.1 155.7 155.7 11.25 0.00
PacificAmerica Money Center PAMM OTC CA NA NA 224.7 224.7 50.42 0.00
Palfed, Inc. PALM OTC SC NM 23.4 162.6 162.6 13.18 0.73
Pamrapo Bancorp Inc. PBCI OTC NJ 21.4 15.5 126.3 127.4 16.17 4.82
Park Bancorp Inc. PFED OTC IL NA NA 91.4 91.4 19.81 0.00
Parkvale Financial Corp. PVSA OTC PA 18.1 12.1 160.5 161.9 12.00 1.81
</TABLE>
III-8
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit III (continued)
Financial and Market Data for All Public Thrifts
<TABLE>
<CAPTION>
Tang. LTM LTM Total Current
Total Equity/ Core Core Market Price
Assets Assets ROAA ROAE Value 6/23/97
Company Ticker Exch. State ($M) (%) (%) (%) ($M) ($)
- ------- ------ ----- ----- ------ ------- ---- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Patriot Bank Corp. PBIX OTC PA 594 8.09 0.63 5.80 70.3 16.63
Peekskill Financial Corp. PEEK OTC NY 183 25.58 1.38 4.78 48.9 15.25
PennFed Financial Services Inc PFSB OTC NJ 1,252 6.29 0.84 10.45 132.6 27.50
PennFirst Bancorp Inc. PWBC OTC PA 706 6.49 0.64 8.73 60.6 15.50
Pennwood Bancorp Inc. PWBK OTC PA 48 19.47 0.96 5.53 9.3 15.25
Peoples-Sidney Financial Corp. PSFC OTC OH 94 10.15 NA NA 24.1 13.50
Peoples Bancorp PFDC OTC IN 283 15.18 1.45 9.42 51.9 22.75
People's Bancshares Inc. PBKB OTC MA 549 5.39 0.51 8.94 54.3 15.13
Peoples Financial Corp. PFFC OTC OH 90 26.90 0.80 3.64 22.7 15.25
Peoples Heritage Finl Group PHBK OTC ME 5,458 7.02 1.29 15.75 986.7 35.38
Permanent Bancorp Inc. PERM OTC IN 413 9.61 0.51 5.11 52.1 25.00
Perpetual Midwest Financial PMFI OTC IA 398 8.49 0.26 2.90 36.2 19.00
Perry County Financial Corp. PCBC OTC MO 80 18.32 1.03 5.45 16.0 19.75
PFF Bancorp Inc. PFFB OTC CA 2,536 10.37 0.45 3.68 320.4 17.00
Piedmont Bancorp Inc. PDB AMSE NC 119 16.96 0.76 3.20 28.5 10.38
Pittsburgh Home Financial Corp. PHFC OTC PA 237 11.35 0.81 6.11 29.5 15.00
Potters Financial Corp. PTRS OTC OH 117 8.90 0.68 7.54 10.7 22.00
Poughkeepsie Financial Corp. PKPS OTC NY 861 8.42 0.47 5.62 87.4 6.94
Prestige Bancorp Inc. PRBC OTC PA 127 11.69 0.57 4.43 14.3 15.63
Progress Financial Corp. PFNC OTC PA 400 4.59 0.55 10.45 36.7 9.63
Progressive Bank Inc. PSBK OTC NY 878 7.47 1.07 13.23 118.1 30.88
Provident Financial Holdings PROV OTC CA 609 14.22 0.12 0.87 86.3 17.00
PS Financial Inc. PSFI OTC IL 75 43.23 NA NA 32.2 14.75
Pulse Bancorp PULS OTC NJ 516 7.80 1.07 12.54 62.1 20.25
PVF Capital Corp. PVFC OTC OH 356 7.02 1.38 20.48 44.4 19.13
QCF Bancorp Inc. QCFB OTC MN 150 18.09 1.66 8.76 29.2 20.50
Quaker City Bancorp Inc. QCBC OTC CA 781 8.90 0.57 6.21 81.3 17.13
Queens County Bancorp Inc. QCSB OTC NY 1,373 14.98 1.72 11.02 490.0 44.00
Raritan Bancorp Inc. RARB OTC NJ 375 7.55 1.02 13.32 47.7 30.00
RedFed Bancorp Inc. REDF OTC CA 909 8.17 0.47 6.40 111.9 15.63
Reliance Bancorp Inc. RELY OTC NY 1,927 5.77 0.84 10.00 232.2 26.50
Reliance Bancshares Inc. RELI OTC WI 47 NA 1.88 3.30 20.2 8.00
River Valley Bancorp RIVR OTC IN 138 12.19 NA NA 17.6 14.75
Roslyn Bancorp Inc. RSLN OTC NY 2,849 21.48 NA NA 913.8 20.94
S. Carolina Community Bancshrs. SCCB OTC SC 46 25.96 1.10 4.03 13.2 18.75
<CAPTION>
Price/ Price/ Price/ Price/ Price/ Current
LTM Core Book Tang. Total Div.
EPS(1) EPS(1) Value Book Assets Yield
Company Ticker Exch. State (x) (x) (%) (%) (%) (%)
- ------- ------ ----- ----- ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Patriot Bank Corp. PBIX OTC PA 32.0 21.0 130.9 130.9 11.94 2.11
Peekskill Financial Corp. PEEK OTC NY 26.8 20.6 104.6 104.6 26.75 2.36
PennFed Financial Services Inc PFSB OTC NJ 20.2 13.4 129.7 157.2 10.59 1.02
PennFirst Bancorp Inc. PWBC OTC PA 20.7 14.0 121.4 133.1 8.58 2.32
Pennwood Bancorp Inc. PWBK OTC PA NA NA 99.7 99.7 19.41 2.10
Peoples-Sidney Financial Corp. PSFC OTC OH NA NA NA NA NA 0.00
Peoples Bancorp PFDC OTC IN 17.0 12.5 120.6 120.6 18.31 2.64
People's Bancshares Inc. PBKB OTC MA 12.6 19.9 176.5 184.2 9.90 2.91
Peoples Financial Corp. PFFC OTC OH NA NA 94.3 94.3 25.35 3.28
Peoples Heritage Finl Group PHBK OTC ME 16.2 15.1 224.5 266.0 18.42 2.04
Permanent Bancorp Inc. PERM OTC IN 56.8 26.0 129.9 131.2 12.61 1.20
Perpetual Midwest Financial PMFI OTC IA 126.7 37.3 107.3 107.3 9.11 1.58
Perry County Financial Corp. PCBC OTC MO 24.7 15.2 109.4 109.4 20.03 2.03
PFF Bancorp Inc. PFFB OTC CA 113.3 29.8 120.7 122.0 12.63 0.00
Piedmont Bancorp Inc. PDB AMSE NC NM 26.6 141.9 141.9 24.08 3.86
Pittsburgh Home Financial Corp. PHFC OTC PA NA NA 109.4 110.7 12.55 1.60
Potters Financial Corp. PTRS OTC OH 30.1 13.9 102.9 102.9 9.16 1.64
Poughkeepsie Financial Corp. PKPS OTC NY 53.4 NA 120.5 120.5 10.15 1.44
Prestige Bancorp Inc. PRBC OTC PA NA NA 97.0 97.0 11.33 0.77
Progress Financial Corp. PFNC OTC PA 23.5 17.8 174.4 198.9 9.17 0.83
Progressive Bank Inc. PSBK OTC NY 12.6 12.6 161.1 181.8 13.46 2.20
Provident Financial Holdings PROV OTC CA NA NA 99.7 99.7 14.17 0.00
PS Financial Inc. PSFI OTC IL NA NA 99.1 99.1 42.85 2.17
Pulse Bancorp PULS OTC NJ 19.1 12.5 154.1 154.1 12.01 3.46
PVF Capital Corp. PVFC OTC OH 13.3 7.7 177.6 177.6 12.47 0.00
QCF Bancorp Inc. QCFB OTC MN 14.0 11.5 108.0 108.0 19.54 0.00
Quaker City Bancorp Inc. QCBC OTC CA 35.0 18.8 117.6 117.8 10.48 0.00
Queens County Bancorp Inc. QCSB OTC NY 21.2 21.5 207.4 207.4 35.68 1.82
Raritan Bancorp Inc. RARB OTC NJ 14.7 13.6 159.6 162.5 12.25 2.40
RedFed Bancorp Inc. REDF OTC CA 173.6 26.0 150.7 150.8 12.32 0.00
Reliance Bancorp Inc. RELY OTC NY 23.5 15.1 150.9 215.3 12.13 2.42
Reliance Bancshares Inc. RELI OTC WI NA NA 90.0 NA 43.20 0.00
River Valley Bancorp RIVR OTC IN NA NA 102.6 104.2 12.69 0.00
Roslyn Bancorp Inc. RSLN OTC NY NA NA 148.7 149.5 32.07 0.96
S. Carolina Community Bancshrs. SCCB OTC SC 34.7 26.8 109.6 109.6 28.45 3.20
</TABLE>
III-9
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit III (continued)
Financial and Market Data for All Public Thrifts
<TABLE>
<CAPTION>
Tang. LTM LTM Total Current
Total Equity/ Core Core Market Price
Assets Assets ROAA ROAE Value 6/23/97
Company Ticker Exch. State ($M) (%) (%) (%) ($M) ($)
- ------- ------ ----- ----- ------ ------- ---- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sandwich Co-operative Bank SWCB OTC MA 475 7.89 0.96 11.82 58.1 30.50
Scotland Bancorp Inc SSB AMSE NC 69 36.69 1.77 4.89 29.9 16.25
Security First Corp. SFSL OTC OH 635 9.22 1.35 13.81 112.6 22.50
Security First Network Bank SFNB OTC GA 80 42.09 (28.20) (69.94) 49.5 5.88
SFS Bancorp Inc. SFED OTC NY 169 12.99 0.82 6.26 20.4 16.50
SGV Bancorp Inc. SGVB OTC CA 400 7.15 0.37 4.26 32.2 13.75
Sho-Me Financial Corp. SMFC OTC MO 304 9.54 1.08 10.28 59.6 39.75
SIS Bancorp Inc. SISB OTC MA 1,404 7.22 1.45 19.94 165.7 29.50
Skaneateles Bancorp Inc. SKAN OTC NY 241 6.65 0.62 9.13 17.9 18.75
Sobieski Bancorp Inc. SOBI OTC IN 79 15.40 0.57 3.28 11.2 14.75
Somerset Savings Bank SOSA OTC MA 522 5.91 0.59 10.32 44.8 2.69
South Street Financial Corp. SSFC OTC NC 239 25.45 1.03 5.90 72.5 16.13
Southern Banc Company Inc. SRN AMSE AL 105 16.75 0.50 2.78 18.3 14.88
Southern Community Bancshares SCBS OTC AL 70 21.97 0.80 5.57 16.2 14.25
Southern Missouri Bancorp Inc. SMBC OTC MO 166 15.67 1.01 6.29 28.9 17.63
SouthFirst Bancshares Inc. SZB AMSE AL 93 13.98 0.16 1.13 13.0 15.38
Southwest Bancshares SWBI OTC IL 372 10.79 1.04 9.52 54.1 20.50
Sovereign Bancorp Inc. SVRN OTC PA 10,287 3.95 0.74 14.59 973.3 13.94
St. Francis Capital Corp. STFR OTC WI 1,579 7.19 0.70 7.59 179.1 33.25
St. Paul Bancorp Inc. SPBC OTC IL 4,485 8.71 1.00 11.18 768.0 33.63
StateFed Financial Corp. SFFC OTC IA 85 17.60 1.29 6.99 15.0 19.13
Statewide Financial Corp. SFIN OTC NJ 677 9.29 0.87 8.80 82.6 17.38
Sterling Financial Corp. STSA OTC WA 1,557 5.00 0.43 7.62 101.9 18.38
Stone Street Bancorp Inc. SSM AMSE NC 105 35.84 1.97 5.55 49.3 27.00
SuburbFed Financial Corp. SFSB OTC IL 408 6.54 0.54 8.08 30.9 24.50
Tappan Zee Financial Inc. TPNZ OTC NY 122 17.42 1.01 5.46 25.3 16.50
Teche Holding Co. TSH AMSE LA 394 13.31 1.00 6.93 64.9 18.88
Texarkana First Financial Corp FTF AMSE AR 168 16.03 1.71 9.71 33.1 18.13
TF Financial Corp. THRD OTC PA 644 9.58 0.75 6.23 76.1 18.63
Three Rivers Financial Corp. THR AMSE MI 91 13.71 0.83 5.71 13.1 15.88
Tolland Bank TBK AMSE CT 237 6.54 0.75 11.53 23.0 19.63
TR Financial Corp. ROSE OTC NY 3,404 6.16 0.86 13.75 411.7 23.50
Tri-County Bancorp Inc. TRIC OTC WY 86 15.31 0.99 6.66 12.9 21.25
Twin City Bancorp TWIN OTC TN 104 12.92 0.79 6.08 16.2 19.00
United Federal Savings Bank UFRM OTC NC 270 7.60 0.47 6.03 36.0 11.75
<CAPTION>
Price/ Price/ Price/ Price/ Price/ Current
LTM Core Book Tang. Total Div.
EPS(1) EPS(1) Value Book Assets Yield
Company Ticker Exch. State (x) (x) (%) (%) (%) (%)
- ------- ------ ----- ----- ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sandwich Co-operative Bank SWCB OTC MA 14.0 13.7 148.4 155.7 12.23 3.93
Scotland Bancorp Inc SSB AMSE NC NA NA 118.3 118.3 43.38 1.85
Security First Corp. SFSL OTC OH 19.2 15.3 189.4 192.8 17.73 2.13
Security First Network Bank SFNB OTC GA NM NM 155.0 157.5 62.24 0.00
SFS Bancorp Inc. SFED OTC NY 25.8 14.9 95.6 95.6 12.42 1.70
SGV Bancorp Inc. SGVB OTC CA 59.8 23.3 110.8 112.8 8.06 0.00
Sho-Me Financial Corp. SMFC OTC MO 24.0 20.4 189.4 189.4 19.83 0.00
SIS Bancorp Inc. SISB OTC MA 8.8 8.9 161.8 161.8 11.90 1.63
Skaneateles Bancorp Inc. SKAN OTC NY 11.9 12.3 107.7 111.3 7.39 2.13
Sobieski Bancorp Inc. SOBI OTC IN 50.9 25.9 84.2 84.2 14.17 1.90
Somerset Savings Bank SOSA OTC MA 14.2 14.2 145.3 145.3 8.57 0.00
South Street Financial Corp. SSFC OTC NC NA NA 110.1 110.1 30.36 2.48
Southern Banc Company Inc. SRN AMSE AL 64.7 27.6 103.2 104.2 17.43 2.35
Southern Community Bancshares SCBS OTC AL NA NA 105.2 105.2 23.12 2.11
Southern Missouri Bancorp Inc. SMBC OTC MO 24.5 17.3 111.2 111.2 17.42 2.84
SouthFirst Bancshares Inc. SZB AMSE AL NM 90.4 97.2 97.2 13.59 3.25
Southwest Bancshares SWBI OTC IL 20.9 15.1 135.0 135.0 14.56 3.71
Sovereign Bancorp Inc. SVRN OTC PA 22.9 NA 211.2 288.0 9.46 0.57
St. Francis Capital Corp. STFR OTC WI 21.9 18.6 139.2 158.2 11.34 1.44
St. Paul Bancorp Inc. SPBC OTC IL 27.3 18.3 196.0 196.5 17.12 1.43
StateFed Financial Corp. SFFC OTC IA 17.7 14.2 100.7 100.7 17.72 2.09
Statewide Financial Corp. SFIN OTC NJ 23.5 13.6 131.5 131.8 12.24 2.30
Sterling Financial Corp. STSA OTC WA 131.3 22.7 167.4 197.4 6.54 0.00
Stone Street Bancorp Inc. SSM AMSE NC NA NA 130.3 130.3 46.71 1.67
SuburbFed Financial Corp. SFSB OTC IL 25.3 15.5 115.4 115.9 7.58 1.31
Tappan Zee Financial Inc. TPNZ OTC NY 28.0 20.1 119.2 119.2 20.78 1.21
Teche Holding Co. TSH AMSE LA 23.0 16.6 123.9 123.9 16.49 2.65
Texarkana First Financial Corp FTF AMSE AR 13.7 11.2 123.3 123.3 19.76 2.48
TF Financial Corp. THRD OTC PA 23.6 16.9 100.6 115.5 11.81 2.15
Three Rivers Financial Corp. THR AMSE MI 25.2 17.1 104.2 104.7 14.34 2.27
Tolland Bank TBK AMSE CT 15.1 14.1 144.0 148.6 9.70 1.02
TR Financial Corp. ROSE OTC NY 13.4 15.2 184.0 184.0 12.17 2.21
Tri-County Bancorp Inc. TRIC OTC WY 21.0 16.6 98.2 98.2 15.05 2.82
Twin City Bancorp TWIN OTC TN 26.8 19.0 120.1 120.1 15.52 3.37
United Federal Savings Bank UFRM OTC NC 65.3 29.4 175.4 175.4 13.34 2.04
</TABLE>
III-10
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit III (continued)
Financial and Market Data for All Public Thrifts
<TABLE>
<CAPTION>
Tang. LTM LTM Total Current
Total Equity/ Core Core Market Price
Assets Assets ROAA ROAE Value 6/23/97
Company Ticker Exch. State ($M) (%) (%) (%) ($M) ($)
------- ------ ----- ----- ------ ------- ----- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United Financial Corp. UBMT OTC MT 108 22.65 1.34 5.74 24.5 20.00
Virginia Beach Fed.
Financial VABF OTC VA 607 6.78 0.40 5.94 63.9 12.84
Warren Bancorp Inc. WRNB OTC MA 361 10.10 1.74 18.61 67.4 18.00
Washington Federal Inc. WFSL OTC WA 5,789 10.53 1.83 15.76 1,257.6 26.50
Washington Mutual Inc. WAMU OTC WA 46,051 5.00 0.69 11.46 7,139.2 60.38
Washington Savings Bank,
FSB WSB AMSE MD 257 8.32 0.74 8.91 21.4 5.06
Wayne Bancorp Inc. WYNE OTC NJ 245 14.56 0.87 5.53 42.1 19.50
Webster Financial Corp. WBST OTC CT 5,584 4.31 0.70 12.75 519.7 43.38
Wells Financial Corp. WEFC OTC MN 202 14.23 1.01 7.11 28.1 14.25
Westco Bancorp WCBI OTC IL 310 15.57 1.40 9.01 61.9 24.25
Westcorp WES NYSE CA 3,406 9.37 0.21 2.09 468.3 18.00
WesterFed Financial Corp. WSTR OTC MT 932 8.88 0.84 6.16 114.5 20.63
Western Ohio Financial
Corp. WOFC OTC OH 400 12.74 0.43 3.23 49.3 21.25
Westwood Financial Corp. WWFC OTC NJ 108 8.25 0.82 8.68 13.9 21.50
Westwood Homestead Fin. Corp. WEHO OTC OH 130 30.95 0.83 3.39 38.4 13.50
WHG Bancshares Corp. WHGB OTC MD 98 21.89 0.89 3.83 21.6 14.75
Wilshire Financial Services WFSG OTC OR 1,098 5.85 NA NA 119.2 15.75
Winton Financial Corp. WFCO OTC OH 307 7.00 0.88 12.04 26.1 13.13
Wood Bancorp Inc. FFWD OTC OH 163 12.70 1.23 9.24 25.2 16.88
WSFS Financial Corp. WSFS OTC DE 1,478 5.08 1.33 22.77 169.2 13.50
WVS Financial Corp. WVFC OTC PA 280 12.72 1.32 10.14 45.3 25.94
Yonkers Financial Corp. YFCB OTC NY 284 15.29 1.13 6.22 49.3 15.50
York Financial Corp. YFED OTC PA 1,157 8.43 0.76 9.30 137.7 19.75
<CAPTION>
Price/ Price/ Price/ Price/ Price/ Current
LTM Core Book Tang. Total Div.
EPS(1) EPS(1) Value Book Asets Yield
Company Ticker Exch. State (x) (x) (%) (%) (%) (%)
------- ------ ----- ----- ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United Financial Corp. UBMT OTC MT 21.1 17.2 100.3 100.3 22.71 4.80
Virginia Beach Fed.
Financial VABF OTC VA 67.6 25.7 154.9 154.9 10.51 1.56
Warren Bancorp Inc. WRNB OTC MA 9.5 11.5 182.2 182.2 18.39 2.89
Washington Federal Inc. WFSL OTC WA 14.0 12.6 187.9 208.7 21.72 3.47
Washington Mutual Inc. WAMU OTC WA 62.9 25.2 309.1 327.8 15.50 1.72
Washington Savings Bank,
FSB WSB AMSE MD 17.5 12.1 100.1 100.1 8.33 1.98
Wayne Bancorp Inc. WYNE OTC NJ NA NA 117.7 117.7 17.13 1.03
Webster Financial Corp. WBST OTC CT 24.2 14.3 182.9 217.3 9.29 1.84
Wells Financial Corp. WEFC OTC MN 21.9 14.0 100.4 100.4 14.29 0.00
Westco Bancorp WCBI OTC IL 20.0 15.5 128.4 128.4 19.99 2.47
Westcorp WES NYSE CA 15.8 72.0 146.5 146.8 13.75 2.22
WesterFed Financial Corp. WSTR OTC MT 25.5 18.4 111.9 141.6 12.28 2.04
Western Ohio Financial
Corp. WOFC OTC OH 44.3 31.3 91.6 97.1 12.28 4.71
Westwood Financial Corp. WWFC OTC NJ NA NA 139.4 157.3 12.85 0.93
Westwood Homestead Fin. Corp. WEHO OTC OH NA NA 95.4 95.4 29.54 2.07
WHG Bancshares Corp. WHGB OTC MD NA NA 105.4 105.4 23.06 1.36
Wilshire Financial Services WFSG OTC OR NA NA 185.7 185.7 10.86 0.00
Winton Financial Corp. WFCO OTC OH 12.5 10.8 118.7 121.4 8.49 3.51
Wood Bancorp Inc. FFWD OTC OH 17.1 13.3 121.3 121.3 15.41 2.37
WSFS Financial Corp. WSFS OTC DE 10.5 10.4 223.1 225.4 11.44 0.00
WVS Financial Corp. WVFC OTC PA 15.9 12.9 126.5 126.5 16.10 3.08
Yonkers Financial Corp. YFCB OTC NY NA NA 113.3 113.3 17.33 1.29
York Financial Corp. YFED OTC PA 20.6 16.3 141.2 141.2 11.90 3.04
</TABLE>
(1) Price/earnings ratio averages exclude values greater than 25.0.
III-11
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit III (continued)
Financial and Market Data for All Public Thrifts
<TABLE>
<CAPTION>
Tang. LTM LTM Total Current
Total Equity/ Core Core Market Price
Assets Assets ROAA ROAE Value 6/23/97
Company Ticker Exch. State ($M) (%) (%) (%) ($M) ($)
------- ------ ----- ----- ------ ------- ----- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Acq. Target Thrift Avg. -- -- -- 3,007 10.36 1.00 10.99 504.4 NA
Current Acquisition Targets
- ---------------------------
America First Financial Fund AFFFZ OTC CA 2,183 8.17 1.73 23.50 232.9 38.75
American Federal Bank FSB AMFB OTC SC 1,307 8.43 1.36 16.35 350.9 31.75
American National Bancorp ANBK OTC MD 505 8.97 0.65 6.68 69.8 19.31
Bankers Corp. BKCO OTC NJ 2,542 7.67 1.17 14.32 319.1 25.75
CB Bancorp Inc. CBCO OTC IN 227 9.18 1.28 13.32 39.5 34.00
Community Bankshares Inc. CBNH OTC NH 581 7.13 0.76 10.50 94.9 38.50
California Financial Holding CFHC OTC CA 1,315 6.93 0.81 12.17 141.2 29.63
Collective Bancorp Inc. COFD OTC NJ 5,518 6.37 1.14 16.30 927.8 45.38
CitiSave Financial Corp CZF AMSE LA 75 16.62 0.77 4.51 19.5 20.25
Eastern Bancorp EBCP OTC NH 866 7.23 0.59 7.69 101.1 27.25
FCB Financial Corp. FCBF OTC WI 269 17.51 1.09 6.09 62.2 25.25
First Citizens Financial Corp. FCIT OTC MD 694 6.11 0.77 12.93 87.6 29.75
F.F.O. Financial Group Inc. FFFG OTC FL 320 6.49 0.99 15.45 41.7 4.94
First Financial Corp. FFHC OTC WI 5,809 6.79 1.26 17.30 1,040.4 28.75
Glendale Co-Operative Bank GLBK OTC MA 37 16.38 0.72 4.49 6.7 27.00
Greater New York Savings Bank GRTR OTC NY 2,571 8.28 0.68 8.49 288.9 21.13
Gateway Bancorp Inc. GWBC OTC KY 66 26.09 1.14 4.50 19.0 17.63
Great Western Financial GWF NYSE CA 42,878 5.42 0.69 11.07 7,412.6 53.75
Haverfield Corp. HVFD OTC OH 342 8.39 0.91 10.69 49.1 25.75
Indiana Federal Corp. IFSL OTC IN 819 8.30 0.95 10.55 135.3 28.25
Magna Bancorp Inc. MGNL OTC MS 1,383 9.28 1.65 16.89 359.3 26.13
People's Savings Financial Cp. PBNB OTC CT 479 9.05 0.88 8.77 69.6 36.50
Primary Bank PETE OTC NH 436 6.61 0.82 12.85 50.9 24.38
Portsmouth Bank Shares POBS OTC NH 263 25.13 1.97 8.10 98.4 16.75
RCSB Financial Inc. RCSB OTC NY 4,032 7.66 0.96 11.64 651.9 44.00
Roosevelt Financial Group RFED OTC MO 7,508 NA 0.90 15.56 1,022.8 24.00
Suburban Bancorporation Inc. SBCN OTC OH 222 11.67 0.72 5.94 28.8 19.50
Security Capital Corp. SECP OTC WI 3,647 15.85 1.38 8.56 873.1 94.88
Standard Financial Inc. STND OTC IL 2,489 10.89 0.70 6.15 403.1 24.88
Virginia First Financial Corp. VFFC OTC VA 817 7.80 0.68 8.41 134.3 23.13
<CAPTION>
Price/ Price/ Price/ Price/ Price/ Current
LTM Core Book Tang. Total Div.
EPS(1) EPS(1) Value Book Asets Yield
Company Ticker Exch. State (x) (x) (%) (%) (%) (%)
------- ------ ----- ----- ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Acq. Target Thrift Avg. -- -- -- 18.1 17.3 185.0 188.3 17.49 1.74
Current Acquisition Targets
- ---------------------------
America First Financial Fund AFFFZ OTC CA 8.6 7.3 136.3 138.2 10.67 4.13
American Federal Bank FSB AMFB OTC SC 24.1 19.4 298.4 320.1 26.81 1.51
American National Bancorp ANBK OTC MD 50.8 22.2 147.7 147.7 13.81 0.62
Bankers Corp. BKCO OTC NJ 12.9 12.1 161.1 163.8 12.54 2.49
CB Bancorp Inc. CBCO OTC IN 18.4 16.3 189.5 189.5 17.39 0.00
Community Bankshares Inc. CBNH OTC NH 18.7 23.1 229.2 229.2 16.35 1.66
California Financial Holding CFHC OTC CA 20.4 13.2 154.1 154.8 10.74 1.49
Collective Bancorp Inc. COFD OTC NJ 18.5 15.3 240.2 265.5 16.81 2.20
CitiSave Financial Corp CZF AMSE LA 50.6 33.8 156.4 156.4 26.00 1.98
Eastern Bancorp EBCP OTC NH 33.2 21.6 152.6 160.8 11.58 2.35
FCB Financial Corp. FCBF OTC WI 25.8 21.4 132.1 132.1 23.13 2.85
First Citizens Financial Corp. FCIT OTC MD 27.3 18.3 206.7 206.7 12.62 0.00
F.F.O. Financial Group Inc. FFFG OTC FL 19.8 14.5 200.7 200.7 13.01 0.00
First Financial Corp. FFHC OTC WI 20.8 15.2 258.1 266.0 18.02 2.09
Glendale Co-Operative Bank GLBK OTC MA 24.6 25.2 110.4 110.4 18.08 0.00
Greater New York Savings Bank GRTR OTC NY 26.1 30.2 184.0 184.0 11.24 0.95
Gateway Bancorp Inc. GWBC OTC KY 33.9 NA 110.4 110.4 28.81 2.27
Great Western Financial GWF NYSE CA 81.4 28.0 306.3 345.9 17.28 1.86
Haverfield Corp. HVFD OTC OH 29.3 15.9 171.2 171.2 14.37 2.18
Indiana Federal Corp. IFSL OTC IN 25.9 18.2 188.0 200.1 16.51 2.55
Magna Bancorp Inc. MGNL OTC MS 19.8 16.8 271.9 280.9 25.98 2.30
People's Savings Financial Cp. PBNB OTC CT 17.1 18.0 151.2 161.4 14.53 2.52
Primary Bank PETE OTC NH 14.9 15.3 176.4 176.8 11.68 0.00
Portsmouth Bank Shares POBS OTC NH 16.6 19.0 148.9 148.9 37.41 3.58
RCSB Financial Inc. RCSB OTC NY 17.7 18.3 206.0 211.3 16.17 1.36
Roosevelt Financial Group RFED OTC MO 218.2 14.4 242.2 NA 13.62 2.83
Suburban Bancorporation Inc. SBCN OTC OH 26.7 18.4 108.2 108.2 12.96 3.08
Security Capital Corp. SECP OTC WI 21.8 18.3 160.3 160.3 23.94 1.27
Standard Financial Inc. STND OTC IL 35.5 23.0 148.6 148.8 16.20 1.61
Virginia First Financial Corp. VFFC OTC VA 12.9 26.9 203.7 211.0 16.42 0.43
</TABLE>
(1) Price/earnings ratio averages exclude values greater than 25.0.
III-12
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit IV-1
Pro Forma Conversion Assumptions
1. The total amount of the net conversion proceeds was fully invested at the
beginning of the applicable period
2. The net conversion proceeds are invested to yield a return of 6.02%, which
represents the one-year U.S. Treasury bill yield as of March 31, 1997. The
combined federal and state income tax rate was assumed to be 38.4%,
resulting in an after-tax yield of 3.71%.
3. It is assumed that 8.0% of the shares offered in the Conversion will be
purchased by the Bank's Employee Stock Ownership Plan ("ESOP"). The funds
used to acquire such shares will be borrowed by the ESOP from the net
proceeds retained by the Holding Company. Pro forma adjustments have been
made to earnings and equity to reflect the impact of the ESOP. The annual
ESOP expense is estimated based on a 10-year debt amortization period. No
reinvestment is assumed on proceeds used to fund the ESOP.
4. It is assumed that 4.0% of the shares offered in the Conversion will be
purchased in the open market by the Bank's Management Recognition Plan and
Trust ("MRP"). The MRP is subject to stockholder approval and is expected
to be adopted following the consummation of the Conversion. Pro forma
adjustments have been made to earnings and equity to reflect the impact of
the MRP. The annual MRP expense is estimated based on a 5-year vesting
period. No reinvestment is assumed on proceeds used to fund the MRP.
5. Conversion expenses are estimated at $450,000 at the midpoint valuation and
range from $445,000 at the minimum offering to $463,000 at the maximum
offering. Actual expenses may vary from this estimate and will depend,
among other factors, on the payment of marketing fees related to the
percentages and total number of shares sold in different phases of the
offering.
6. The number of shares outstanding for purposes of calculating earnings per
share is adjusted to reflect the shares assumed to held by the ESOP not
committed to be released within the first year following the Conversion.
7. No effect has been given to withdrawals from deposit accounts for the
purpose of purchasing common stock in the Conversion.
IV-1
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit IV-2
Pro Forma Valuation Range
Spring Hill Savings Bank, F.S.B.
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Adjusted
Minimum Midpoint Maximum Maximum
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares offered 527,000 620,000 713,000 819,950
Offering price $10.00 $10.00 $10.00 $10.00
- -------------------------------------------------------------------------------------------------------------------
Gross proceeds $5,270 $6,200 $7,130 $8,200
Less: estimated expenses (445) (450) (463) (463)
--- --- --- ---
Net offering proceeds $4,825 $5,750 $6,667 $7,737
- -------------------------------------------------------------------------------------------------------------------
Core Income:
LTM ended March 31, 1997 $124 $124 $124 $124
Pro forma income on net proceeds 156 186 216 251
Pro forma ESOP adjustment (26) (31) (35) (40)
Pro forma MRP adjustment (26) (31) (35) (40)
-- -- -- --
Pro forma net income $228 $249 $269 $294
---- ---- ---- ----
Pro forma net income per share $0.47 $0.43 $0.41 $0.39
- -------------------------------------------------------------------------------------------------------------------
Core Income:
Qtr. ended March 31, 1997 $413 $413 $413 $413
Pro forma income on net proceeds 156 186 216 251
Pro forma ESOP adjustment (26) (31) (35) (40)
Pro forma MRP adjustment (26) (31) (35) (40)
-- -- -- --
Pro forma core income $517 $538 $558 $583
---- ---- ---- ----
Pro forma core income per share $1.06 $0.94 $0.84 $0.77
- -------------------------------------------------------------------------------------------------------------------
Total Equity at March 31, 1997 $4,449 $4,449 $4,449 $4,449
Net proceeds 4,825 5,750 6,667 7,737
Less: ESOP purchase (422) (496) (570) (656)
Less: MRP purchase (211) (248) (285) (328)
--- --- --- ---
Pro forma total equity $8,642 $9,455 $10,260 $11,202
------ ------- ------- -------
Pro forma book value $16.40 $15.25 $14.39 $13.66
- -------------------------------------------------------------------------------------------------------------------
Tangible Equity at March 31, 1997 $4,449 $4,449 $4,449 $4,449
Net proceeds 4,825 5,750 6,667 7,737
Less: ESOP purchase (422) (496) (570) (656)
Less: MRP purchase (211) (248) (285) (328)
--- --- --- ---
Pro forma tangible equity $8,642 $9,455 $10,260 $11,202
------ ------- ------- -------
Pro forma tangible book value $16.40 $15.25 $14.39 $13.66
- -------------------------------------------------------------------------------------------------------------------
Total Assets at March 31, 1997 $82,809 $82,809 $82,809 $82,809
Net proceeds 4,825 5,750 6,667 7,737
Less: ESOP purchase (422) (496) (570) (656)
Less: MRP purchase (211) (248) (285) (328)
--- --- --- ---
Pro forma total assets $87,002 $87,815 $88,620 $89,562
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
IV-2
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit IV-3
Pro Forma Conversion Analysis at Midpoint Valuation
Spring Hill Savings Bank, F.S.B.
Financial Data as of March 31, 1997
<TABLE>
<CAPTION>
Valuation Parameters Symbol Data
- -------------------- ------ --------
<S> <C> <C> <C>
Core income -- LTM Y $ 124,000
Core income -- qtr. annlzd. Y 413,000
Net worth B 4,449,000
Tangible net worth B 4,449,000
Total assets A 82,809,000
Expenses in conversion X 450,000
Other proceeds not reinvested O 744,000
ESOP purchase E 8.0% 496,000
ESOP expense (pre-tax) F 10.0% 49,600
MRP purchase M 4.0% 248,000
MRP expense (pre-tax) N 20.0% 49,600
Re-investment rate (after-tax) R 3.71%
Tax rate T 38.40%
Shares for EPS S 92.80%
<CAPTION>
Pro Forma Ratios at Midpoint Valuation
- --------------------------------------
<S> <C> <C>
Price / earnings P/E 23.14
Price / core earnings P/E 10.69
Price / book value P/B 65.57%
Price / tangible book P/B 65.57%
Price / assets P/A 7.06%
<CAPTION>
Pro Forma Calculation at Midpoint Valuation Based on
- ------------------------------------------- --------
<S> <C>
V = (P/E / S)*((Y-R*(O+X)-(F+N)*(1-T))) = $6,190,797 [LTM core earnings]
-----------------------------------
1 - (P/E / S) * R
V = (P/E / S)*((Y-R*(O+X)-(F+N)*(1-T))) = $6,187,784 [Qtr. core earnings]
-----------------------------------
1 - (P/E / S) * R
V = P/B * (B - X - E - M) = $6,198,965 [Book value]
---------------------
1 - P/B
V = P/B * (B - X - E - M) = $6,198,965 [Tangible book]
---------------------
1 - P/B
V = P/A * (B - X - E - M) = $6,199,719 [Total assets]
---------------------
1 - P/A
<CAPTION>
Pro Forma Valuation Range Shares Price
- ------------------------- ------ -----
<S> <C> <C>
Minimum = $6,200,000 x 0.85 = $5,270,000 527,000 $10.00
Midpoint = $6,200,000 x 1.00 = $6,200,000 620,000 $10.00
Maximum = $6,200,000 x 1.15 = $7,130,000 713,000 $10.00
Adj. Max. = $7,130,000 x 1.15 = $8,199,500 819,950 $10.00
</TABLE>
IV-3
<PAGE>
Feldman Financial Advisors, Inc.
- --------------------------------
Exhibit IV-4
Comparative Valuation Ratios
Market Price Data as of June 23, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nationwide Pennsylvania
Spring Comparative Public Thrift Public Thrift
Hill Group Aggregate(1) Aggregate(2)
Valuation Savings ----------------- ----------------- -----------------
Ratio Symbol Bank Mean Median Mean Median Mean Median
--------- ------ ------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Price/LTM EPS (3) P/E
-------------
Adj. Maximum (x) 25.9 19.3 20.8 16.0 15.5 15.2 14.0
Maximum 24.6
Midpoint 23.1
Minimum 21.4
-------------
Price/Core EPS (3) P/E
-------------
Adj. Maximum (x) 13.1 16.4 17.3 15.8 15.1 15.6 14.4
Maximum 11.9
Midpoint 10.7
Minimum 9.5
-------------
Price/Book Value P/B
-------------
Adj. Maximum (%) 73.2 104.2 102.9 135.3 123.3 138.1 131.0
Maximum 69.5
Midpoint 65.6
Minimum 61.0
-------------
Price/Tangible Book P/B
-------------
Adj. Maximum (%) 73.2 104.9 103.4 141.3 126.1 146.3 134.0
Maximum 69.5
Midpoint 65.6
Minimum 61.0
-------------
Price/Total Assets P/A
-------------
Adj. Maximum (%) 9.16 12.02 11.81 15.92 14.08 12.78 11.94
Maximum 8.05
Midpoint 7.06
Minimum 6.06
-------------
</TABLE>
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(1) Includes 362 publicly traded thrifts nationwide.
(2) Includes 21 publicly traded thrifts based in Pennsylvania.
(3) Price/earnings ratio averages exclude values greater than 25.
IV-4
