<PAGE>
As filed with the Securities and Exchange Commission on May 7, 1998
Registration No. 333-37511
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
Amendment No. 3
to
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(INCLUDING EXHIBITS)
---------------------
PSB BANCORP, INC.
(Exact name of registrant in its charter)
Pennsylvania 6035 23-2930740
(State or other jurisdiction of (Primary SIC No.) (I.R.S. Employer
incorporation or organization) Identification No.)
Eleven Penn Center, Suite 2601
1835 Market Street
Philadelphia, PA 19103
(215) 979-7900
(Address and telephone number of principal
executive offices and place of business)
---------------------
Anthony DiSandro
President and Chief Operating Officer
Eleven Penn Center, Suite 2601
1835 Market Street
Philadelphia, PA 19103
(215) 979-7900
(Name, address and telephone number of agent for service)
---------------------
Copies of all communications to:
Jeffrey P. Waldron, Esquire John F. Breyer, Jr., Esquire
Stevens & Lee Aaron M. Kaslow, Esquire
One Glenhardie Corporate Center Breyer & Aguggia
1275 Drummers Lane 1300 I Street, N.W.
P.O. Box 236 Suite 470 East
Wayne, PA 19087 Washington, DC 20005
(610) 964-1480 (202) 737-7900
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 426(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
---------------------
The registrant hereby amends this Registration Statement on such date 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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<PAGE>
<TABLE>
<CAPTION>
Calculation of Registration Fee
====================================================================================================
Title
of Each Proposed Proposed
Class of Maximum Maximum Amount
Securities Amount Proposed Aggregate of
Being Being Offering Offering Registration
Registered Registered Price Price Fee
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no Par
Value ................. 1,851,500(1) $ 10.00(1) $18,515,000(1) $ 5,610.61
- ---------------------------------------------------------------------------------------------------
Common Stock, no Par
Value ................. 1,713,198(2) $ 25.75(2) $14,919,292(2) $ 4,521.00
- ---------------------------------------------------------------------------------------------------
Total .................. 3,564,698 -- 33,434,292 $ 10,131.61
- ---------------------------------------------------------------------------------------------------
Participation interests 143,037 -- -- (3)
====================================================================================================
</TABLE>
(1) As to the shares of Common Stock to be issued in the Conversion Offerings,
the Purchase Price has been estimated solely for purposes of calculating
the registration fee pursuant to Rule 457(a) of the Securities Act of 1933
(the "1933 Act"). The actual number of shares to be issued and sold is
subject to adjustment based upon the estimated pro forma market value of
the registrant and market and financial conditions.
(2) The offering price of shares of Common Stock issued to security holders in
exchange for shares of Savings Bank Common Stock for purposes of the
filing fee shall be calculated pursuant to Rule 457(f)(1) and Rule 457(c)
of the 1933 Act based on the average of the bid and asked price of Savings
Bank Common Stock on October 6, 1997 multiplied by the number of shares of
Savings Bank Common Stock to be received by the registrant.
(3) The securities of PSB Bancorp, Inc. to be purchased by Pennsylvania Savings
Bank 401(k) Plan are included in the amount shown for Common Stock.
Accordingly, pursuant to Rule 457(h) of the Act, 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.
<PAGE>
PROSPECTUS SUPPLEMENT
PSB BANCORP, INC.
PENNSYLVANIA SAVINGS BANK
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
This Prospectus Supplement relates to the offer and sale to participants
("Participants") in the Pennsylvania Savings Bank Employees' Savings and Profit
Sharing Plan (the "Plan" or the "401(k) Plan") of participation interests and
shares of PSB Bancorp, Inc. common stock, without par value (the "Common
Stock"), as set forth herein.
In connection with the proposed reorganization of Pennsylvania Savings
Bank (the "Savings Bank" or the "Employer") from the mutual holding company
form of organization to a wholly-owned subsidiary of a stock savings and loan
holding company, PSB Bancorp, Inc. (the "Holding Company") has been formed. The
reorganization of the Savings Bank as a wholly-owned subsidiary of the Holding
Company, the exchange of shares of Savings Bank common stock ("Savings Bank
Common Stock") by public stockholders of the Savings Bank (the "Public
Stockholders") for Common Stock and the sale of Common Stock to the public (the
"Conversion Offerings") are herein referred to as the "Conversion and
Reorganization." Applicable provisions of the 401(k) Plan permit the investment
of the Plan assets in Common Stock 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 and Reorganization.
The Prospectus dated May , 1998 of the Holding Company ("Prospectus")
which is attached to this Prospectus Supplement includes detailed information
with respect to the Conversion and Reorganization, the Conversion Offerings,
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 and
Reorganization through the Plan is subject to the Participant's general
eligibility to purchase shares of Common Stock in the Conversion Offerings and
the maximum and minimum limitations set forth in the Plan of Conversion. See
"THE CONVERSION AND REORGANIZATION" 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 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. THESE SECURITIES ARE
NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY DEPOSITORY INSTITUTION.
THESE SECURITIES ARE NOT INSURED BY THE FDIC, THE FEDERAL RESERVE BOARD, OR ANY
OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus Supplement is May 7, 1998.
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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
The Offering
Securities Offered .................................................... S-1
Election to Purchase Common Stock in the Conversion ................... S-1
Value of Participation Interests ...................................... S-1
Method of Directing Transfer .......................................... S-1
Time for Directing Transfer ........................................... S-1
Irrevocability of Transfer Direction .................................. S-1
Treatment of Savings Bank Common Stock Held in the Plan ............... S-2
Direction to Purchase Common Stock After the Conversion ............... S-2
Purchase Price of Common Stock ........................................ S-2
Nature of a Participant's Interest in the Holding Company Common Stock S-2
Voting and Tender Rights of Common Stock .............................. S-2
Description of the Plan
Introduction .......................................................... S-3
Eligibility and Participation ......................................... S-3
Contributions Under the Plan .......................................... S-3
Limitations on Contributions .......................................... S-4
Investment of Contributions ........................................... S-5
The Employer Stock Fund ............................................... S-5
Benefits Under the Plan ............................................... S-6
Withdrawals and Distributions from the Plan ........................... S-6
Administration of the Plan ............................................ S-7
Reports to Plan Participants .......................................... S-7
Plan Administrator .................................................... S-7
Amendment and Termination ............................................. S-7
Merger, Consolidation or Transfer ..................................... S-8
Federal Income Tax Consequences ....................................... S-8
Restrictions on Resale ................................................ S-10
Legal Opinions ........................................................... S-10
Investment Form .......................................................... S-11
</TABLE>
S-i
<PAGE>
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 Reorganization 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 Eleven Penn Center, Suite 2601, 1835 Market Street,
Philadelphia, Pennsylvania 19103. The Savings Bank's telephone number is (215)
979-7900.
Election to Purchase Common Stock in the Conversion and Reorganization
In connection with the Savings Bank's Conversion and Reorganization, each
Participant in the 401(k) Plan may direct the trustees of the Plan
(collectively, the "Trustee") to transfer up to 100% of a Participant's
beneficial interest in the assets of the Plan to the Employer Stock Fund and to
use such funds to purchase Common Stock issued in connection with the
Conversion and Reorganization. Amounts transferred may include salary deferral,
Employer matching and profit sharing contributions. The Employer Stock Fund
consists of investments in the Common Stock. 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 Offerings is subject to the
Participant's general eligibility to purchase shares of Common Stock in the
Conversion Offerings. For general information as to the ability of the
Participants to purchase shares in the Conversion Offerings, see "THE
CONVERSION AND REORGANIZATION -- 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
semi-annual 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 Offerings, the
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 Offerings is __________, 1998. 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 Offerings
shall be irrevocable. Participants, however, will be able to direct the sale of
Common Stock, as explained below.
S-1
<PAGE>
Treatment of Savings Bank Common Stock Held in the Plan
Shares of Savings Bank Common Stock held in the Employer Stock Fund prior
to the consummation of the Conversion and Reorganization will be treated in the
same manner as shares held by other Public Stockholders. Such shares will be
exchanged for shares of Common Stock pursuant to the Exchange Ratio.
Application of the Exchange Ratio will result in the holders of the outstanding
Savings Bank Common Stock owning, in the aggregate, approximately the same
percentage of the Common Stock to be outstanding upon the completion of the
Conversion and Reorganization as the percentage of Savings Bank Common Stock
owned by them, in the aggregate, immediately prior to the consummation of the
Conversion. For additional information regarding the treatment of Savings Bank
Common Stock, see "THE CONVERSION AND REORGANIZATION" in the Prospectus.
Direction to Purchase Common Stock After the Conversion and Reorganization
After the Conversion and Reorganization, a Participant will be able to
direct that a certain percentage of such Participant's interests in the trust
assets (the "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 quarterly 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 (the "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 Trustee 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 Offerings.
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 Employer Stock Fund. Any earnings, losses or expenses with
respect to the Common Stock, including dividends and appreciation or
depreciation 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 Trustee 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.
S-2
<PAGE>
DESCRIPTION OF THE PLAN
Introduction
The Savings Bank adopted the Plan effective 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 has received a determination from the Internal
Revenue Service ("IRS") that the Plan 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 11 (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.
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 two years of service
with the Savings Bank and the attainment of age 21. 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 1997, approximately 19 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 (limited to 15 percent of
Compensation) 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
S-3
<PAGE>
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 [50%] of a
Participant's monthly deferral contributions to a maximum of [3%] of
Compensation. In addition, the Savings Bank may make 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 periodically 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 $10,000 (as adjusted
periodically 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 March 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) 100% 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 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.
S-4
<PAGE>
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., 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 Trustee is 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, made available by the Trustee from time to time.
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. A Participant
may also invest all or a portion of his or her Accounts in these investment
vehicles and in a 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 by the Trustee.
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 quarterly
basis. For purposes of such allocation, all assets of the Trust are valued at
their fair market value.
The Employer Stock Fund
The Employer Stock Fund consists of investments in Common Stock. In
connection with the Conversion Offerings, 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. To the extent
practicable, all amounts held in the Employer Stock Fund (except the amounts
credited to
S-5
<PAGE>
cash dividend subaccounts) will be used to purchase shares of Common Stock. It
is expected that all purchases will be made at prevailing market prices.
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.
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 ___ 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 three years of service under the Plan's vesting schedule, or upon
normal retirement (as defined herein), disability or death of a Participant.
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 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.
S-6
<PAGE>
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,
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
Trustee. The Trustees with respect to Plan assets, including the Employer
Stock Fund, are currently Vincent J. Fumo and Anthony DiSandro. The Savings
Bank also serves as custodian of the Plan's assets. Except as otherwise
indicated by the context, references in this Prospectus Supplement to the
Trustee refer to Messrs. Fumo and DiSandro.
Pursuant to the terms of the Plan, the Trustee receives and holds
contributions to the Plan in trust and has 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 Trustee
has 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 Trustee has authority to invest the assets of the Trust in "any type of
property, investment or security" as defined under ERISA.
The Trustee has full power to vote any corporate securities in the Trust
in person or by proxy; provided, however, that the Participants will direct the
Trustee as to voting and tendering of all Common Stock held in the Employer
Stock Fund.
The Trustee is entitled to reasonable compensation for its services and is
also entitled to reimbursement for expenses properly and actually incurred in
the administration of the Trust. The expenses of the Trustee and the
compensation of the persons so employed is paid out of the Trust except to the
extent such expenses and compensation are paid by the Savings Bank.
The Trustee must render at least annual reports to the Savings Bank and to
the Participants in such form and containing information that the Trustee deems
necessary.
Reports to Plan Participants
The administrator will furnish to each Participant a statement at least
semiannually 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
A committee consisting of the Savings Bank's Chairman and Chief Executive
Officer, President, and Vice-President and Treasurer will administer the Plan
(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.
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
S-7
<PAGE>
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 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.
S-8
<PAGE>
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.
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 (or joint life expectancies) of the Participant
and his or her beneficiary, (iv) made to the Participant after separation from
service on
S-9
<PAGE>
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
Stevens & Lee, Wayne, Pennsylvania, which firm is acting as special counsel for
the Holding Company in connection with the Savings Bank's Conversion and
Reorganization from the mutual holding company of organization to a
wholly-owned subsidiary by the Holding Company.
S-10
<PAGE>
Investment Form
(Employer Stock Fund)
PENNSYLVANIA SAVINGS BANK
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
Name of Participant:___________________________________
Social Security Number:________________________________
1. Instructions. In connection with the proposed reorganization of
Pennsylvania Savings Bank (the "Savings Bank") from the mutual holding form of
organization to a wholly-owned subsidiary of a savings and loan holding company
(the "Conversion and Reorganization"), participants in the Pennsylvania Savings
Bank Employees' Savings and 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 PSB 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 Offerings and the maximum and minimum
limitations set forth in the Plan of 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
Offerings. 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 __________, 1998. 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 Offerings.
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 and Reorganization. I acknowledge that I have
received a copy of the Prospectus and the Prospectus Supplement.
_____________________________________ ________________________________________
Signature Date
* * * * *
4. Acknowledgment of Receipt. This Investment Form was received by the
Plan Administrator and will become effective on the date noted below.
_____________________________________ ________________________________________
Plan Administrator Date
S-11
<PAGE>
PROSPECTUS
PSB BANCORP, INC.
(Proposed Holding Company for Pennsylvania Savings Bank)
Up to 3,099,728 Shares of Common Stock
$10.00 Purchase Price Per Share
PSB Bancorp, Inc. (the "Holding Company"), a Pennsylvania corporation, is
offering up to 3,099,728 shares (subject to adjustment to 3,564,698 shares, see
footnote 4 below) of its common stock, no par value per share (the "Common
Stock"), in connection with (i) the Exchange Offering, described below, to
effect the reorganization of Pennsylvania Savings Bank (the "Savings Bank") as
a wholly-owned subsidiary of the Holding Company and (ii) the Conversion
Offerings, described below, to effect the conversion of PSB Mutual Holding
Company (the "MHC") from a mutual holding company to a stock holding company.
The Holding Company, Savings Bank and MHC are collectively referred to herein
as the "Primary Parties." The transactions contemplated by the Exchange
Offering and the Conversion Offerings, which are collectively referred to
herein as the "Conversion and Reorganization," are undertaken pursuant to a
Plan of Conversion from Mutual Holding Company to Stock Holding Company and
Agreement and Plan of Reorganization (the "Plan of Conversion") adopted by the
Boards of Directors or Trustees of the Primary Parties.
The Exchange Offering. Pursuant to the Plan of Conversion, each share of
common stock, par value $1.00 per share, of the Savings Bank (the "Savings Bank
Common Stock") held by the MHC (615,250 shares, or 51.5% of the outstanding
shares, as of the date of this Prospectus) will be canceled and each share of
Savings Bank Common Stock held by the Savings Bank's public shareholders (the
"Public Savings Bank Shares" and "Public Shareholders," respectively) (579,390
shares, or 48.5% of the outstanding shares, as of the date of this Prospectus)
will be exchanged for shares of Common Stock (the "Exchange Shares") pursuant
to a ratio (the "Exchange Ratio") that will result in the Public Shareholders'
aggregate ownership of approximately 48.06% of the outstanding shares of Common
Stock determined without regard to (i) payment of cash in lieu of issuing
fractional Exchange Shares and (ii) Conversion Shares (as defined below) that
may be purchased by the Public Shareholders and by the Savings Bank's employee
stock ownership plan, a tax-qualified employee benefit plan (the "ESOP"), in
the Conversion Offerings or thereafter. The final Exchange Ratio will be based
on the Public Shareholders' ownership interest in the Savings Bank and not on
the market value of the Public Savings Bank Shares. See "THE CONVERSION AND
REORGANIZATION -- Independent Valuation."
(continued on next page)
--------------
FOR INFORMATION ON HOW TO SUBSCRIBE FOR SHARES OF COMMON STOCK,
CALL THE STOCK INFORMATION CENTER AT (215) 979-7904.
--------------
FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED BY
EACH PROSPECTIVE INVESTOR, SEE "RISK FACTORS" ON PAGE 17
--------------
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 FDIC OR ANY OTHER FEDERAL AGENCY OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE SEC, THE FDIC OR ANY OTHER AGENCY OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. THESE SECURITIES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
BY, ANY DEPOSITORY INSTITUTION. THESE SECURITIES ARE NOT INSURED BY THE FDIC,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
Estimated
Underwriting
Commissions
and Other
Fees and Estimated
Purchase Price(1) Expenses(2) Net Proceeds(3)
<S> <C> <C> <C>
Minimum Price Per Share ......................... $ 10.00 $ 0.40 $ 9.60
Midpoint Price Per Share ........................ 10.00 0.34 9.66
Maximum Price Per Share ......................... 10.00 0.30 9.70
Maximum Price Per Share, as adjusted(4) ......... 10.00 0.26 9.74
Minimum Total(5) ................................ $11,900,000 $475,000 $11,425,000
Midpoint Total(6) ............................... 14,000,000 475,000 13,525,000
Maximum Total(7) ................................ 16,100,000 475,000 15,625,000
Maximum Total, as adjusted(4)(8) ................ 18,515,000 475,000 18,040,000
</TABLE>
- --------------------------------------------------------------------------------
(1) Determined by the Board of Directors of the Holding Company based upon an
independent appraisal prepared by RP Financial, LC., Arlington, Virginia
("RP Financial"). See "THE CONVERSION AND REORGANIZATION -- Stock Pricing,
Exchange Ratio and Number of Shares to be Issued."
(2) Includes estimated expenses to the Holding Company and the Savings Bank
arising from the Conversion and Reorganization, including fees to be paid
to Charles Webb & Company ("Webb") in connection with the Conversion
Offerings. Webb's fee consists of a $25,000 management fee and a success
fee of 1.5% of the aggregate Purchase Price of Conversion Shares sold in
the Subscription Offering and Community Offering (subject to certain
excluded Common Stock purchases). The success fee is not to exceed
$100,000 and the management fee shall be applied against the success fee,
which may be deemed to be an underwriting fee. Webb may be deemed to be an
underwriter. Expenses, other than fees to be paid to Webb, are estimated
to total approximately $375,000 at each of the minimum, midpoint, maximum
and 15% above the Estimated Valuation Range. Actual expenses may be more
or less than estimated amounts. The Holding Company and the Savings Bank
have agreed to indemnify Webb against certain liabilities, including
liabilities that might arise under the Securities Act of 1933, as amended
("Securities Act"). See "USE OF PROCEEDS" and "THE CONVERSION AND
REORGANIZATION -- Plan of Distribution for the Subscription, Direct
Community and Syndicated Community Offerings."
(3) Actual net proceeds can vary substantially from the estimated amounts
depending upon actual expenses and the number of shares sold in the
Conversion Offerings. See "USE OF PROCEEDS" and "PRO FORMA DATA."
(4) Gives effect to an increase in the number of shares that could be sold in
the Conversion Offerings resulting from an increase in the pro forma
market value of the MHC and the Savings Bank, as converted, up to 15%
above the maximum of the Estimated Valuation Range, without the
resolicitation of subscribers or any right of cancellation. The issuance
of such additional shares will be conditioned on a determination by RP
Financial that such issuance is compatible with its determination of the
estimated pro forma market value of the MHC and the Savings Bank, as
converted. See "THE CONVERSION AND REORGANIZATION -- Stock Pricing,
Exchange Ratio and Number of Shares to be Issued."
(5) Assumes the issuance of 1,190,000 Conversion Shares at $10.00 per share.
(6) Assumes the issuance of 1,400,000 Conversion Shares at $10.00 per share.
(7) Assumes the issuance of 1,610,000 Conversion Shares at $10.00 per share.
(8) Assumes the issuance of 1,851,000 Conversion Shares at $10.00 per share.
--------------
Charles Webb & Company
a Division of Keefe, Bruyette & Woods, Inc.
--------------
The date of this Prospectus is May , 1998.
<PAGE>
(continued from prior page)
The Conversion Offerings. Pursuant to the Plan of Conversion,
nontransferable rights to subscribe (the "Subscription Rights") for up to
1,610,000 shares (which may be increased to 1,851,500 shares under
circumstances described in footnote 4 of the table appearing on the cover page
of this Prospectus) of Common Stock (the "Conversion Shares") have been
granted, in order of priority, to (i) depositors with $50.00 or more on deposit
at the Savings Bank as of June 30, 1996 (the "Eligible Account Holders"), (ii)
the ESOP, and (iii) depositors with $50.00 or more on deposit at the Savings
Bank as of December 31, 1997 (the "Supplemental Eligible Account Holders"),
subject to the priorities and purchase limitations set forth in the Plan of
Conversion (the "Subscription Offering"). Subscription Rights are
nontransferable. Persons selling or otherwise transferring their Subscription
Rights or subscribing for Common Stock on behalf of another person will be
subject to forfeiture of such Subscription Rights and possible further
sanctions and penalties imposed by agencies of the U.S. Government and the
Commonwealth of Pennsylvania. Concurrently, but subject to the prior rights of
Subscription Rights holders, the Holding Company is offering the Conversion
Shares for sale to members of the general public through a direct community
offering (the "Direct Community Offering") with preference given first to
Public Shareholders who are not Eligible Account Holders (or Supplemental
Eligible Account Holders) and then to natural persons and trusts of natural
persons who are permanent residents of Philadelphia and Montgomery Counties of
the Commonwealth of Pennsylvania (the "Local Community"). It is anticipated
that any Conversion Shares not subscribed for in the Subscription Offering or
purchased in the Direct Community Offering will be offered to eligible members
of the general public on a best efforts basis by Webb in a syndicated community
offering (the "Syndicated Community Offering"). The Subscription Offering, the
Direct Community Offering and the Syndicated Community Offering are referred to
collectively as the "Conversion Offerings." The Primary Parties reserve the
right, in their absolute discretion, to accept or reject, in whole or in part,
any or all orders in the Direct Community Offering or the Syndicated Community
Offering either at the time of receipt of an order or as soon as practicable
following the termination of the Conversion Offerings. If an order is rejected
in part, the purchaser does not have the right to cancel the remainder of the
order.
The Subscription Offering will expire at _______, Eastern Time, on
____________________, 1998 unless extended by the Primary Parties for up to
_____ days to ______________, 1998 (the "Expiration Date"). Such extension may
be granted without additional notice to subscribers. The Direct Community
Offering is also expected to terminate on the Expiration Date or at a date
thereafter, however, in no event later than _________________, 1998. The
Holding Company must receive at an office of the Savings Bank by the Expiration
Date the accompanying original Stock Order Form and a fully executed
Certification Form (collectively, the "Stock Order Form") (facsimile copies and
photocopies will not be accepted), along with full payment (or appropriate
instructions authorizing a withdrawal from a deposit account at the Savings
Bank) of $10.00 per share (the "Purchase Price") for all Conversion Shares
subscribed for or ordered. Payment by wire transfer will not be accepted. Funds
so received will be placed in segregated accounts 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 and Reorganization is
consummated or terminated. Payments authorized by withdrawals from deposit
accounts will continue to earn interest at their contractual rate until the
Conversion and Reorganization is consummated or terminated although such funds
will be unavailable for withdrawal until the Conversion and Reorganization is
consummated or terminated. Orders submitted are irrevocable until the
consummation or termination of the Conversion and Reorganization. If the
Conversion and Reorganization is not consummated within 45 days after the last
day of the Subscription and the Direct Community Offering (which date will be
no later than _________________, 1998) and the Pennsylvania Department of
Banking (the "PDOB") and FDIC consents to an extension of time to consummate
the Conversion and Reorganization, subscribers will be notified in writing of
the time period within which the subscriber must notify the Primary Parties of
his or her intention to increase, decrease or rescind his or her subscription.
If an affirmative response to any such resolicitation is not received by the
Primary Parties from subscribers, such orders will be rescinded and all funds
will be returned promptly with interest. If such period is not extended or, in
any event, if the Conversion and Reorganization is not consummated by
______________, 1998, all subscription funds will be promptly returned,
together with accrued interest and all withdrawal authorizations terminated.
Such extensions may not go beyond ____________________________, 2000.
The Primary Parties have engaged Webb as their financial advisor and to
assist the Holding Company in the sale of the Conversion Shares in the
Conversion Offerings. Webb is a division of Keefe, Bruyette & Woods, Inc.
("KB&W"), a registered broker-dealer and member of the National Association of
Securities Dealers, Inc. ("NASD"). Neither KB&W nor any other registered
broker-dealer is obligated to take or purchase any Conversion Shares in the
Conversion Offerings. See "THE CONVERSION AND REORGANIZATION -- Plan of
Distribution for the Subscription, Direct Community and Syndicated Community
Offerings."
Independent Valuation. Pennsylvania law and FDIC regulations require that
the offering of Conversion Shares in the Conversion Offerings be based on an
independent valuation of the pro forma market value of the Savings Bank and the
MHC, as converted. RP Financial, LC ("RP Financial") has prepared an
independent appraisal that states that the estimated pro forma market
2
<PAGE>
value of the Conversion Shares and Exchange Shares was $26,954,178 as of
February 13, 1998 (the "Appraisal"). The Appraisal was multiplied by 51.94%,
which represents the MHC's 51.5% interest in the Savings Bank adjusted for
assets held by the MHC, to determine a midpoint of the offering range
($14,000,000), and the minimum and maximum of the range were set at 15% below
and above the midpoint, respectively, resulting in a range of $11,900,000 to
$16,100,000 (the "Estimated Valuation Range").
The Board of Directors of the Holding Company determined that the
Conversion Shares would be sold at $10.00 per share (the "Purchase Price"),
resulting in a range of 1,190,000 to 1,610,000 Conversion Shares being offered.
Upon consummation of the Conversion and Reorganization, the Conversion Shares
and the Exchange Shares will represent approximately 51.94% and 48.06%,
respectively, of the Holding Company's total outstanding shares. Based upon the
Estimated Valuation Range, the Exchange Ratio is expected to range from 1.9005
to 2.5712 resulting in a range of 1,101,131 Exchange Shares to 1,489,728
Exchange Shares to be issued in the Conversion and Reorganization. The
3,099,728 Common Shares offered hereby include up to 1,610,000 Conversion
Shares (subject to adjustment up to 1,851,000 Conversion Shares as described
herein) and up to 1,489,728 Exchange Shares (subject to adjustment up to
1,713,198 shares as described herein). The Estimated Valuation Range may be
increased or decreased to reflect changes in market and economic conditions
prior to completion of the Conversion and Reorganization, and under certain
circumstances specified herein subscribers will be resolicited and given the
right to modify or cancel their orders. See "The CONVERSION AND REORGANIZATION
- -- Stock Pricing, Exchange Ratio and Number of Shares to be Issued."
Purchase Limitations on Conversion Shares. Except for the ESOP, which is
expected to subscribe for 8% of the Conversion Shares issued in the Conversion
Offerings, the Plan of Conversion provides for the following purchase
limitations: (i) the maximum number of Conversion Shares that may be subscribed
for or purchased in all categories in the Conversion Offerings by any person,
when combined with any Exchange Shares received, shall not exceed 1% of the
Conversion Shares issued in the Conversion Offerings, and (ii) the maximum
number of Conversion Shares that may be subscribed for or purchased in all
categories in the Conversion Offerings by any person, together with all
associates or any group of persons acting in concert, when combined with any
Exchange Shares received, shall not exceed 2% of the Conversion Shares issued
in the Conversion Offerings. The minimum order is 25 Conversion Shares. See
"THE CONVERSION AND REORGANIZATION -- The Subscription, Direct Community and
Syndicated Community Offerings," "-- Procedure for Purchasing Conversion Shares
in the Subscription and Direct Community Offerings" and "-- Limitations on
Purchase of Conversion Shares."
Market for the Common Stock. The Holding Company has received [conditional
approval] to list the Common Stock on the Nasdaq National Market under the
symbol "PSBI." Prior to the Conversion and Reorganization, the Public Savings
Bank Shares have been traded on the OTC Bulletin Board under the same trading
symbol. There can be no assurance that an active and liquid trading market for
the Common Stock will develop or, if developed, will be maintained. See "RISK
FACTORS -- Absence of Prior Market for the Common Stock" and "MARKET FOR COMMON
STOCK."
3
<PAGE>
PENNSYLVANIA SAVINGS BANK
PHILADELPHIA, PENNSYLVANIA
[Map to be filed by amendment]
THE CONVERSION AND REORGANIZATION IS CONTINGENT UPON APPROVAL OF THE PLAN OF
CONVERSION BY AT LEAST A MAJORITY OF THE TOTAL NUMBER OF VOTES ELIGIBLE TO BE
CAST BY THE MHC'S MEMBERS (THE "MEMBERS") AS OF ____________, 1998 (THE "VOTING
RECORD DATE"), BY THE HOLDERS OF A MAJORITY OF THE PUBLIC SAVINGS BANK SHARES
AS OF THE VOTING RECORD DATE AND BY HOLDERS OF TWO-THIRDS OF THE SAVINGS BANK
COMMON STOCK (INCLUDING THE MHC) CAST BY HOLDERS OF SAVINGS BANK COMMON STOCK
AT THE MEETING OF SHAREHOLDERS, THE SALE OF AT LEAST 1,190,000 CONVERSION
SHARES PURSUANT TO THE PLAN OF CONVERSION, AND THE RECEIPT OF ALL APPLICABLE
REGULATORY APPROVALS.
4
<PAGE>
CAPSULE SUMMARY
PSB Bancorp, Inc......... The Holding Company was organized on October 3,
1997 under Pennsylvania law at the direction of the
Savings Bank. The Holding Company has been formed to
acquire the Savings Bank as a wholly-owned
subsidiary upon consummation of the Conversion and
Reorganization. The Holding Company has engaged
only in organizational activities to date.
PSB Mutual Holding
Company................. The MHC is the Pennsylvania-chartered mutual
holding company for the Savings Bank formed in
October 1995 to act as the mutual holding company
for the Savings Bank (the "MHC Reorganization"). As
part of the Conversion and Reorganization, the MHC
will convert to a Pennsylvania-chartered interim
stock savings bank and simultaneously merge with and
into the Savings Bank, with the Savings Bank as the
surviving entity.
Pennsylvania Savings
Bank ................... The Savings Bank is a Pennsylvania-chartered
savings bank, headquartered in Philadelphia,
Pennsylvania.
The Conversion and
Reorganization.......... Under the Plan of Conversion, (i) the MHC will
convert to an interim state stock savings bank
("Interim A") and simultaneously merge with and into
the Savings Bank, pursuant to which the MHC will
cease to exist and the outstanding shares of Savings
Bank Common Stock held by the MHC will be canceled,
and (ii) an interim state stock savings bank
("Interim B") will be formed as a wholly-owned
subsidiary of the Holding Company and will merge
with and into the Savings Bank, resulting in the
Savings Bank becoming a wholly-owned subsidiary of
the Holding Company, and the outstanding Public
Savings Bank Shares will be converted into the
Exchange Shares at the rate specified by Exchange
Ratio. The Exchange Ratio will result in the holders
of the outstanding Public Savings Bank Shares
owning, in the aggregate, approximately 48.06% of
the Common Stock to be outstanding upon the
completion of the Conversion and Reorganization,
determined without regard to any (i) payment of cash
in lieu of issuing fractional Exchange Shares and
(ii) Conversion Shares that may be purchased by
Public Shareholders (including the ESOP) in the
Conversion Offerings.
The Subscription, Direct
Community and Syndicated
Community Offerings ... The Holding Company is offering up to 1,610,000
Conversion Shares in the Subscription, Direct
Community and Syndicated Community Offerings.
Conversion Shares are first being offered in the
Subscription Offering through the exercise of
Subscription Rights issued, in order of priority, to
(i) Eligible Account Holders; (ii) the ESOP; and
(iii) Supplemental Eligible Account Holders. Subject
to the prior rights of Subscription Rights holders,
Conversion Shares not subscribed for in the
Subscription Offering are being offered in the
Direct Community Offering to members of the general
public with preference given first to Public
Shareholders (who are not Eligible Account Holders
or Supplemental Eligible Account Holders)
5
<PAGE>
and then to natural persons and trusts of natural
persons who are permanent residents of the Local
Community. It is anticipated that shares not
subscribed for in the Subscription Offering and
Direct Community Offering may be offered to the
general public in the Syndicated Community
Offering.
Potential Benefits of
Conversion and
Reorganization to
Management.............. The Board of Directors of the Holding Company, the
Board of Trustees of the Savings Bank, and executive
officers and employees of the Holding Company and
the Savings Bank will receive certain additional
benefits as a result of the Conversion and
Reorganization. See "MANAGEMENT -- Compensation of
Officers, Directors and Trustees Through Benefit
Plans."
Purchase Limitations..... Except for the ESOP, (i) the maximum number of
Conversion Shares that may be subscribed for or
purchased in all categories in the Conversion
Offerings by any person, when combined with any
Exchange Shares received, shall not exceed 1% of the
Conversion Shares issued in the Conversion
Offerings, and (ii) the maximum number of Conversion
Shares that may be subscribed for or purchased in
all categories in the Conversion Offerings by any
person, together with all associates or any group of
persons acting in concert, when combined with any
Exchange Shares received, shall not exceed 2% of the
Conversion Shares issued in the Conversion
Offerings. The minimum order is 25 Conversion
Shares.
Stock Pricing and Number
of Shares to be Issued
in the Conversion and
Reorganization.......... Pennsylvania law and FDIC regulations require that
the aggregate purchase price of the Conversion
Shares be based upon an independent valuation of the
pro forma market value of the MHC and the Savings
Bank, which was estimated by RP Financial to be
$26,954,178 as of February 13, 1998 (the
"Appraisal"). The Appraisal was multiplied by 51.94%
which represents the MHC's 51.5% interest in the
Savings Bank adjusted for assets held by the MHC to
determine the midpoint of the valuation range or
$14,000,000. This was multiplied by 15% to determine
the Estimated Valuation Range which ranges from
$11.90 million to $16.10 million, or from 1,190,000
Conversion Shares to 1,610,000 Conversion Shares
based on the Purchase Price as determined by the
Primary Parties. The maximum of the Estimated
Valuation Range may be increased by up to 15% and
the number of Conversion Shares may be increased to
1,851,500 shares.
Based on the 579,390 Public Savings Bank Shares
outstanding at the date of this Prospectus, and
assuming a minimum of 1,190,000 and a maximum of
1,610,000 Conversion Shares are issued in the
Conversion Offerings, the Exchange Ratio is
expected to range from approximately 1.9005
Exchange Shares to 2.5712 Exchange Shares for each
Public Savings Bank Share issued and outstanding
immediately prior to the consummation of the
Conversion and Reorganization.
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<PAGE>
Use of Proceeds.......... The net proceeds from the sale of the Conversion
Shares are estimated to range from $11.42 million to
$15.63 million, or $18.04 million if the Estimated
Valuation Range is increased by 15%. The Holding
Company has received conditional approval from the
FDIC, the PDOB and the Board of Governors of the
Federal Reserve System (the "Federal Reserve") to
purchase all of the capital stock of the Savings
Bank to be issued in the Conversion and
Reorganization in exchange for 50% of the net
proceeds of the Conversion Offerings. This will
result in the Holding Company retaining, for general
corporate purposes, approximately $5.71 million to
$7.82 million of the net proceeds, or up to $9.02
million if the Estimated Valuation Range is
increased by 15%. See "PRO FORMA DATA" and "USE OF
PROCEEDS."
Market for Common Stock... The Holding Company has received conditional
approval to have the Common Stock listed on the
Nasdaq National Market under the symbol "PSBI" (the
current symbol for the Public Savings Bank Shares,
which are traded on the OTC Bulletin Board). See
"RISK FACTORS -- Absence of Prior Market for the
Common Stock" and "MARKET FOR COMMON STOCK."
Dividend Policy.......... Following consummation of the Conversion and
Reorganization, the Holding Company's Board of
Directors will consider adopting a policy of paying
regular cash dividends on the Common Stock. There
can be no assurance that any dividends will be paid
on the Common Stock or that if paid, such dividends
will not be reduced or eliminated in future periods.
See "DIVIDEND POLICY."
Officers', Directors' and
Trustees' Common Stock
Purchases and
Beneficial Ownership ... In addition to an aggregate of 608,545 Exchange
Shares to be received by officers and trustees of
the Savings Bank in the Exchange Offering based on
an Exchange Ratio of 2.2358, officers and trustees
are expected to subscribe for an aggregate of
approximately 43,646 Conversion Shares, or 3.34% of
the Conversion Shares based on the midpoint of the
Estimated Valuation Range, respectively. See "COMMON
STOCK TO BE PURCHASED OR RECEIVED BY MANAGEMENT."
Risk Factors............. See "RISK FACTORS" for a discussion of certain
risks related to the Conversion Offerings that
should be considered by all prospective investors.
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<PAGE>
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR ACCOUNTS AND WILL NOT BE
INSURED OR GUARANTEED BY THE FDIC, THE BIF, THE SAIF OR ANY OTHER GOVERNMENT
AGENCY.
PROSPECTUS SUMMARY
The information set forth below should be read in conjunction with and is
qualified in its entirety by the more detailed information and Consolidated
Financial Statements (including the Notes thereto) presented elsewhere in this
Prospectus. The purchase of Common Stock is subject to certain risks. See "RISK
FACTORS.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "RISK FACTORS" and elsewhere in this
Prospectus.
PSB Bancorp, Inc.
The Holding Company was organized on October 3, 1997 under Pennsylvania
law at the direction of the Savings Bank. The Holding Company has been formed
to acquire the Savings Bank as a wholly-owned subsidiary upon consummation of
the Conversion and Reorganization. The Holding Company has engaged only in
organizational activities to date. The Holding Company has received conditional
approval from the Federal Reserve to become a bank holding company through the
acquisition of 100% of the capital stock of the Savings Bank. Immediately
following the Conversion and Reorganization, the only significant assets of the
Holding Company will be the outstanding capital stock of the Savings Bank, 50%
of the net proceeds of the Conversion Offerings (see "PRO FORMA DATA") and a
note receivable from the ESOP evidencing a loan to enable the ESOP to purchase
8% of the Conversion Shares issued in the Conversion and Reorganization. Funds
retained by the Holding Company will be used for general business activities.
See "USE OF PROCEEDS." Upon consummation of the Conversion and Reorganization,
the Holding Company will be classified as a bank holding company subject to
Federal Reserve regulation. See "REGULATION -- Bank Holding Company
Regulations." The main office of the Holding Company is located at Eleven Penn
Center, Suite 2601, 1835 Market Street, Philadelphia, Pennsylvania 19103 and
its telephone number is (215) 979-7900.
PSB Mutual Holding Company
The MHC is the Pennsylvania-chartered mutual holding company for the
Savings Bank. The MHC was formed in October 1995 to act as the holding company
for the Savings Bank, a Pennsylvania-chartered capital stock savings bank. The
members of the MHC consist of depositors of the Savings Bank. Currently, the
MHC's sole business activity is holding 615,250 shares of Savings Bank Common
Stock, which represents 51.5% of the outstanding shares as of the date of this
Prospectus. As part of the Conversion and Reorganization, the MHC will convert
to a Pennsylvania-chartered interim stock savings bank and simultaneously merge
with and into the Savings Bank, with the Savings Bank as the surviving entity.
The MHC's main office is located at Eleven Penn Center, Suite 2601, 1835 Market
Street, Philadelphia, Pennsylvania 19103 and its telephone number is (215)
979-7900.
Pennsylvania Savings Bank
The Savings Bank is a Pennsylvania-chartered savings bank, headquartered
in Philadelphia, Pennsylvania. The Savings Bank's deposits are insured by the
FDIC up to applicable legal limits under the BIF, however, it also pays SAIF
insurance premiums with respect to the deposits that it assumed in the MHC
Reorganization. The Savings Bank is regulated by the PDOB and the FDIC. At
December 31, 1997, the Savings Bank had total assets of $129.34 million, total
deposits of $108.73 million, and total shareholders' equity of $15.0 million,
on a consolidated basis. The Savings Bank maintains six full-service offices in
Montgomery and Philadelphia Counties, Pennsylvania. Five full-service offices
are located in South Philadelphia and the Savings Bank's main office is located
at Eleven Penn Center, Suite 2601, 1835 Market Street, Philadelphia,
Pennsylvania 19103 and its telephone number is (215) 979-7900. The Savings Bank
also has an office in Glenside, Montgomery County, Pennsylvania.
8
<PAGE>
The Savings Bank's predecessor, Pennsylvania Savings Association,
converted from a state-chartered mutual savings association to a
state-chartered mutual savings bank in 1990. Effective on October 20, 1995,
this state-chartered mutual savings bank reorganized into a mutual savings bank
holding company and transferred substantially all of its assets and liabilities
to the Savings Bank, a newly-formed stock savings bank (referred to herein as
the "MHC Reorganization.") The Savings Bank is now majority-owned by the MHC.
References in this Prospectus to the Savings Bank include the Savings Bank's
predecessors as the context requires.
On October 20, 1995, when the MHC Reorganization was consummated, the
Savings Bank completed its initial stock offering by issuing 1,173,250 shares
of Savings Bank Common Stock, of which 558,000 shares were purchased by the
Public Shareholders and 615,250 shares were issued to the MHC. Awards under the
Savings Bank 1995 Management Recognition Plan subsequent to the initial public
offering have increased the total shares issued and outstanding to 1,194,640 as
of the date of this Prospectus, of which 579,390 shares are held by the Public
Shareholders and 615,250 shares are held by the MHC.
The Savings Bank's strategy is to maximize profitability by providing
quality deposit and loan products in an efficient manner as a well-capitalized
and independent savings bank. Generally, the Savings Bank has sought to
implement this strategy by emphasizing retail deposits as its primary source of
funds and maintaining a substantial part of its assets in locally originated
residential first mortgage loans, commercial real estate loans, commercial
business loans, construction loans and consumer loans, mortgage-backed
securities and other liquid investment securities.
The Savings Bank started an expansion of its branch network by opening a
branch in Center City Philadelphia on June 14, 1996. The Savings Bank plans
further expansion of its branch network in areas contiguous to its current
market and then into the suburbs of Philadelphia by opening branch offices or
acquiring the branches of other institutions.
As part of this strategy, the Savings Bank continues to expand the
operations of TransNational Mortgage Corp. ("TNMC"), its mortgage banking
subsidiary. TNMC currently maintains a staff of six commissioned sales people
to solicit mortgage loans throughout the Philadelphia metropolitan area and
surrounding counties of Pennsylvania, New Jersey and Delaware. In addition,
TNMC is processing and servicing loans for other mortgage companies and
originating mortgages for sale in the secondary market. See "SUBSIDIARIES."
The Savings Bank also plans to increase loan origination through its
existing office network and is expanding other loan products such as commercial
real estate loans, commercial business loans, construction loans and consumer
loans. For the year ended December 31, 1997 loan originations other than
residential first mortgage loans totalled $26.75 million, or 72.42% of
originations during the period.
The Conversion and Reorganization
Purposes of the Conversion and Reorganization. The Boards of Directors of
the Primary Parties believe that the Conversion and Reorganization is in the
best interests of the MHC and its members, the Savings Bank and its
shareholders, and the communities served by the MHC and the Savings Bank. In
their decision to pursue the Conversion and Reorganization, the Boards of
Directors of the Primary Parties' considered the various advantages of the
stock holding company form of organization, including: (i) the Holding
Company's ability to repurchase Common Stock without adverse tax consequences,
unlike the Savings Bank; (ii) the Holding Company's greater flexibility under
current law and regulations relative to the MHC to acquire other financial
institutions and diversify its operations; (iii) the larger capital base of the
Holding Company relative to the Savings Bank that will result from the
Conversion Offerings; and (iv) the potential increased liquidity in the Common
Stock relative to the Public Savings Bank Shares because of the larger number
of shares of Common Stock to be outstanding upon consummation of the Conversion
and Reorganization. Currently, the Boards of Directors of the Primary Parties
have no specific plans, arrangements or understandings, written or oral,
regarding any stock repurchases or acquisitions. See "THE CONVERSION AND
REORGANIZATION -- Purposes of Conversion and Reorganization."
9
<PAGE>
Description of the Conversion and Reorganization. The Boards of Trustees
of the Savings Bank and the MHC adopted, on July 17, 1997 and amended on
September 25, 1997 and the Board of Directors of the Holding Company adopted,
on _______________, 1998 the Plan of Conversion which describes and controls
the Conversion and Reorganization. Under the Plan of Conversion, (i) the MHC
will convert to an interim Pennsylvania stock savings bank ("Interim A") and
simultaneously merge with and into the Savings Bank, pursuant to which the MHC
will cease to exist and the outstanding shares of Savings Bank Common Stock
held by the MHC (615,250 shares, or 51.5% of the outstanding Savings Bank
Common Stock as of the date of this Prospectus) will be canceled, and (ii) an
interim Pennsylvania stock savings bank ("Interim B") will be formed as a
wholly-owned subsidiary of the Holding Company and will merge with and into the
Savings Bank, resulting in the Savings Bank becoming a wholly-owned subsidiary
of the Holding Company and the outstanding Public Savings Bank Shares (579,390
shares or 48.5% of the outstanding Savings Bank Common Stock as of the date of
this Prospectus) will be converted into the Exchange Shares at the rate
specified by the Exchange Ratio. The Exchange Ratio will result in the holders
of the outstanding Public Savings Bank Shares owning, in the aggregate,
approximately 48.06% of the Common Stock, determined without regard to any (i)
payment of cash in lieu of issuing fractional Exchange Shares and (ii)
Conversion Shares that may be purchased by Public Shareholders (including the
ESOP) in the Conversion Offerings. In accordance with FDIC policy, the Public
Shareholders will receive only 48.06% of the Common Stock, which is slightly
less than their 48.5% ownership in the Savings Bank, to reflect the
contribution to the Holding Company on a consolidated basis, of the assets of
the MHC.
The following diagram outlines the current organizational structure of the
Primary Parties and their ownership interests:
Public
MHC Shareholders
51.5% 48.5%
Savings Bank
100%
Holding Company
100%
Interim B
(in formation)
The following diagram reflects the post-Conversion and Reorganization
organizational structure of the Holding Company and the Savings Bank and their
ownership interests. The ownership interests presented assumes no fractional
Exchange Shares are issued, and does not give effect to purchases of any
Conversion Shares by the Public Shareholders (including the ESOP) or the
exercise of outstanding stock options. The Exchange Ratio is subject to
adjustment if the updated Appraisal delivered prior to closing is adjusted.
Purchasers of Former Public
Conversion Shares Shareholders
51.94% 48.06%
Holding Company
100%
Savings Bank
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<PAGE>
Required Approvals. The PDOB and the Federal Reserve have approved, the
Plan of Conversion subject to (i) the approval of the holders of at least a
majority of the total number of votes eligible to be cast by the members of the
MHC as of the close of business on the Voting Record Date at a special meeting
of members called for the purpose of considering the Plan of Conversion (the
"Members' Meeting"), (ii) the approval of the holders of at least two-thirds of
the shares of Savings Bank Common Stock (including those shares held by the
MHC) voted by holders of Savings Bank Common Stock at a meeting of shareholders
called for the purpose of considering the Plan of Conversion (the
"Shareholders' Meeting"), and (iii) the approval of the holders of at least a
majority of votes cast by the Public Savings Bank Shares as of the close of
business on the Voting Record Date present in person or by proxy at the
Shareholders' Meeting. The MHC intends to vote its shares of Savings Bank
Common Stock, in favor of the Plan of Conversion at the Shareholders' Meeting.
In addition, as of December 31, 1997, directors and executive officers of the
Primary Parties as a group (13 persons) owned of record 236,323, or 19.78%, of
the outstanding shares of Savings Bank Common Stock, which they intend to vote
in favor of the Plan of Conversion at the Shareholders' Meeting. Shareholders
of the Savings Bank are entitled to dissent with respect to the Plan of
Conversion and to obtain payment of the "fair value" of their Savings Bank
Common Stock if the Plan of Conversion is consummated. See the "Dissenters'
Rights" in the Savings Bank's Proxy Statement.
The Conversion Offerings
The Conversion Offerings are being undertaken pursuant to the Plan of
Conversion. The Holding Company is offering up to 1,610,000 Conversion Shares
in the Conversion Offerings. Conversion Shares are first being offered in the
Subscription Offering through the exercise of Subscription Rights issued, in
order of priority, to (i) Eligible Account Holders; (ii) the ESOP; and (iii)
Supplemental Eligible Account Holders. The Subscription Offering will expire on
the Expiration Date, unless extended by the Board of Directors of the Holding
Company.
Subject to the prior rights of Subscription Rights holders, Conversion
Shares not subscribed for in the Subscription Offering are being offered in the
Direct Community Offering to members of the general public with preference
given first to Public Shareholders (who are not Eligible Account Holders or
Supplemental Eligible Account Holders) and then to natural persons and trusts
of natural persons who are permanent residents of the Local Community. It is
anticipated that shares not subscribed for in the Subscription Offering and
Direct Community Offering may be offered to the general public in the
Syndicated Community Offering. The Primary Parties reserve the absolute right
to reject or accept any orders in the Direct Community Offering or the
Syndicated Community Offering (if any), in whole or in part, either at the time
of receipt of an order or as soon as practicable following the Expiration Date.
The closing with respect to all shares sold in the Conversion Offerings will
occur simultaneously, and all Conversion Shares will be sold at the Purchase
Price.
The Primary Parties have retained Webb as their financial advisor in
connection with the Conversion Offerings and to assist in soliciting
subscriptions in the Conversion Offerings on a best efforts basis. See "The
CONVERSION AND REORGANIZATION -- The Subscription, Direct Community and
Syndicated Offerings."
Potential Benefits of Conversion and Reorganization to Management
1998 Stock Option Plan. The Board of Directors of the Holding Company
intends to implement the 1998 PSB Bancorp, Inc. Stock Option Plan (the "1998
Stock Option Plan"), contingent upon receipt of shareholder approval at a
meeting of the Holding Company's shareholders to be held no earlier than six
months following the Conversion and Reorganization. Assuming 1,610,000
Conversion Shares are issued in the Conversion and Reorganization and receipt
of the required approvals, the Holding Company may grant options to purchase
161,000 shares of the Common Stock to executive officers and directors as a
group (13 persons) under the 1998 Option Plan during the life of the 1998 Stock
Option Plan. The exercise price of the options, which would be granted at no
cost to the recipient thereof, would be the fair market value of the Common
Stock subject to the option on the date the option is granted.
1998 PSB Bancorp, Inc. Management Recognition Plan. The Board of Directors
of the Holding Company intends to implement the 1998 PSB Bancorp, Inc.
Management Recognition Plan (the "1998 MRP") contingent upon the receipt of
shareholder approval at a meeting of the Holding Company's shareholders to be
held no earlier than six months following the Conversion and Reorganization.
Subject to such approval, the 1998 MRP will purchase an amount of shares after
the Conversion and Reorganization equal to up to 4% of the shares
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<PAGE>
issued in the Conversion and Reorganization (64,400 shares at the maximum of
the Estimated Valuation Range), which are expected to be issued to executive
officers and directors of the Holding Company and its subsidiaries in the year
following the Conversion and Reorganization. Under the 1998 MRP, the shares
issued to directors and employees could be newly-issued shares or shares
purchased in the open market. No shares will be awarded under the 1998 MRP
prior to receipt of shareholder approval. Awards under the 1998 MRP would be
granted at no cost to the recipient thereof.
Prospectus Delivery and Procedure for Purchasing Conversion Shares
To ensure that each prospective purchaser receives a Prospectus at least
48 hours prior to the Expiration Date as required by Rule 15c2-8 under the
Securities Exchange Act of 1934, as amended ("Exchange Act"), no Prospectus
will be mailed later than five days or hand delivered later than two days prior
to the Expiration Date. Execution of the Stock Order Form will confirm receipt
or delivery of a Prospectus as required by Rule 15c2-8. Stock Order Forms will
be distributed only with a Prospectus.
To ensure that Eligible Account Holders and Supplemental Eligible Account
Holders are properly identified, such parties must list all deposit accounts on
the Stock Order Form giving all names on each deposit account and the account
balance at the applicable eligibility date.
Full payment by check, cash (only if delivered in person at an office of
the Savings Bank), money order, bank draft or withdrawal authorization must
accompany an original Stock Order Form (facsimile copies and photocopies will
not be accepted) and a fully executed separate Certification Form. Payment by
wire transfer will not be accepted. Orders cannot and will not be accepted
without execution of the Certification Form appearing on the reverse side of
the Stock Order Form. See "THE CONVERSION AND REORGANIZATION -- Procedure for
Purchasing Conversion Shares in the Subscription and Direct Community
Offering."
Purchase Limitations
Except for the ESOP, which is expected to subscribe for 8% of the
Conversion Shares issued in the Conversion and Reorganization, the Plan of
Conversion provides for the following purchase limitations: (i) the maximum
number of Conversion Shares that may be subscribed for or purchased in all
categories in the Conversion Offerings by any person, when combined with any
Exchange Shares received, shall not exceed 1% of the Conversion Shares issued
in the Conversion Offerings, and (ii) the maximum number of Conversion Shares
that may be subscribed for or purchased in all categories in the Conversion
Offerings by any person, together with all associates or any group of persons
acting in concert, when combined with any Exchange Shares received, shall not
exceed 2% of the Conversion Shares issued in the Conversion Offerings. The
minimum order is 25 Conversion Shares. At any time during the Conversion
Offerings, and without further approval by the MHC Members or the Public
Shareholders, the Primary Parties, in their sole discretion, may increase any
of the purchase limitations to up to 5% of the Conversion Shares issued in the
Conversion and Reorganization. Under certain circumstances, subscribers may be
resolicited in the event of such an increase and given the opportunity to
increase, decrease or rescind their orders. If there is an oversubscription in
the Conversion Offerings, Conversion Shares will be allocated as set forth in
the Plan of Conversion. See "THE CONVERSION AND REORGANIZATION -- The
Subscription, Direct Community and Syndicated Community Offerings," "--
Procedure for Purchasing Conversion Shares in the Subscription and Direct
Community Offerings" and "-- Limitations on Purchases of Conversion Shares."
Because the purchase limitations set forth in the Plan of Conversion take into
account the Exchange Shares to be issued to the Public Shareholders for their
Public Savings Bank Shares, certain Public Shareholders, including members of
management of the Savings Bank, may be limited or have no ability to purchase
Conversion Shares in the Conversion Offerings. See "COMMON STOCK TO BE
PURCHASED OR RECEIVED BY MANAGEMENT."
Stock Pricing and Number of Shares to be Issued in the Conversion and
Reorganization
Pennsylvania law and FDIC regulations require the aggregate purchase price
of the Conversion Shares be consistent with the appraisal of the estimated pro
forma market value of the MHC and the Savings Bank, which was converted by
multiplying the Appraisal by the MHC's percentage interest in the Savings Bank
(51.5%); this
12
<PAGE>
calculation ensures that the Public Shareholders will continue to hold
approximately the same aggregate percentage ownership interest in the Holding
Company as they held in the Savings Bank before the Conversion and
Reorganization (before giving effect to the payment of cash in lieu of issuing
fractional Exchange Shares and any Conversion Shares purchased by the Public
Shareholders or the ESOP in the Conversion Offerings or thereafter). The
resulting figure represents the midpoint of the Estimated Valuation Range. This
amount is $14.00 million, or 1,400,000 Conversion Shares based on the Purchase
Price. Therefore, RP Financial estimated the pro forma market value range from
$11.9 million to $16.10 million as of December 31, 1997, and upon the Board of
Directors and Boards of Trustees of the Primary Parties choosing a purchase
price of $10.00 the number of Conversion Shares issued shall range from
1,190,000 Conversion Shares to 1,610,000 Conversion Shares based on the
Purchase Price.
The full text of the independent appraisal describes the procedures
followed, the assumptions made, limitations on the review undertaken and
matters considered, which included but did not depend on the trading market for
the Savings Bank Common Stock. See "MARKET FOR COMMON STOCK". The appraisal
will be updated or confirmed at the completion of the Conversion Offerings. The
maximum of the Estimated Valuation Range may be increased by up to 15% and the
number of Conversion Shares may be increased to 1,851,500 shares due to
material changes in the financial condition or results of operations of the
Savings Bank or changes in market conditions or general financial, economic or
regulatory 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 Conversion Shares are less than
the minimum or more than 15% above the maximum of the current Estimated
Valuation Range. All Conversion Shares will be sold at the Purchase Price,
which was established by the Board of Directors of the Holding Company. Any
increase or decrease in the number of Conversion Shares will result in a
corresponding change in the number of Exchange Shares, so that upon
consummation of the Conversion and Reorganization, the Conversion Shares and
the Exchange Shares will represent approximately 51.94% and 48.06%,
respectively, of the total outstanding shares of Common Stock. Nevertheless,
Exchange Shares may represent a lesser percentage of the total outstanding
shares of Common Stock if there are insufficient shares for the ESOP to
purchase 8.0% of the Conversion Shares issued in the Conversion and
Reorganization, and the Holding Company issues authorized but unissued shares
to the ESOP to satisfy its order. See "PRO FORMA DATA," "RISK FACTORS --
Possible Dilutive Effect of Benefit Programs" and "THE CONVERSION AND
REORGANIZATION -- Stock Pricing, Exchange Ratio and Number of Shares to be
Issued." 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 Conversion Offerings nor can assurance be given that purchasers of the
Common Stock in the Conversion Offerings will be able to sell such shares after
consummation of the Conversion and Reorganization at a price that is equal to
or above the Purchase Price. Furthermore, the pro forma shareholders' 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 shareholders
in the event of liquidation. A complete copy of the appraisal is available upon
request. See "ADDITIONAL INFORMATION."
Based on the 579,390 Public Savings Bank Shares outstanding at the date of
this Prospectus, and assuming a minimum of 1,190,000 and a maximum of 1,610,000
Conversion Shares are issued in the Conversion Offerings, the Exchange Ratio is
expected to range from approximately 1.9005 Exchange Shares to 2.5712 Exchange
Shares for each Public Savings Bank Share issued and outstanding immediately
prior to the consummation of the Conversion and Reorganization. The Exchange
Ratio will be affected if any stock options to purchase shares of Savings Bank
Common Stock are exercised after the date of this Prospectus and before the
consummation of the Conversion and Reorganization. If any stock options are
outstanding immediately before the consummation of the Conversion and
Reorganization, they will be converted into options to purchase shares of
Common Stock, with the number of shares subject to the option and the exercise
price per share to be adjusted based upon the Exchange Ratio so that the
aggregate exercise price remains unchanged. The duration of the options also
will be unchanged. As of the date of this Prospectus, there were outstanding
options to purchase 36,859 shares of Savings Bank Common Stock at a
weighted-average exercise price of $12.12 per share. The Savings Bank has no
plans to grant additional stock options before the consummation of the
Conversion and Reorganization.
13
<PAGE>
The following table sets forth, based upon the minimum, midpoint, maximum
and 15% above the maximum of the Valuation Price Range, the following: (i) the
total number of Conversion Shares and Exchange Shares to be issued in the
Conversion, (ii) the percentage of the total Common Stock represented by the
Conversion Shares and the Exchange Shares, and (iii) the Exchange Ratio. The
table assumes that there is no cash paid in lieu of issuing fractional Exchange
Shares.
<TABLE>
<CAPTION>
Shares
Conversion Shares Exchange Stock to of Common
to Be Issued Be Issued Stock to
------------------------- ------------------------- be Out- Exchange
Amount Percent Amount Percent standing Ratio
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Minimum .......... 1,190,000 51.94% 1,101,131 48.06% 2,291,131 1.9005
Midpoint ......... 1,400,000 51.94% 1,295,417 48.06% 2,695,417 2.2358
Maximum .......... 1,610,000 51.94% 1,489,728 48.06% 3,099,728 2.5712
15% above
Maximum ......... 1,851,500 51.94% 1,713,198 48.06% 3,564,698 2.9569
</TABLE>
Use of Proceeds
The net proceeds from the sale of the Conversion Shares are estimated to
range from $11.43 million to $15.63 million, or $18.04 million if the Estimated
Valuation Range is increased by 15%. The Holding Company has received PDOB
approval to purchase all of the capital stock of the Savings Bank to be issued
in the Conversion and Reorganization in exchange for 50% of the net proceeds of
the Conversion Offerings. This will result in the Holding Company retaining
approximately $5.72 million to $7.82 million of the net proceeds, or up to
$9.02 million if the Estimated Valuation Range is increased by 15%. See "PRO
FORMA DATA."
Receipt of 50% 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, initially,
lending and investment in short-term U.S. Government and agency obligations.
A portion of the net proceeds retained by the Holding Company will be used
for a loan by the Holding Company to the ESOP to enable it to refinance its
existing third party loan used to purchase shares of Savings Bank Common Stock
in the MHC Reorganization $295,000 (outstanding balance at December 31, 1997)
and to purchase 8% of the shares of Conversion Shares issued in the Conversion
and Reorganization ($1.29 million at the maximum of the Estimated Valuation
Range). Such loan 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 primarily in short-term U.S. Government and agency obligations
or in a deposit account at the Savings Bank or another financial institution.
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 shareholders of the
Holding Company and for future repurchases of Common Stock (including possible
repurchases to fund the 1998 MRP or to provide shares to be issued upon
exercise of stock options) to the extent permitted under Pennsylvania and
federal law. The Holding Company will consider exploring opportunities to use
such funds to expand operations through acquiring or establishing additional
branch offices or acquiring other financial institutions. Currently, there are
no specific plans, arrangements, agreements or understandings, written or oral,
regarding any diversification activities. See "Use of Proceeds."
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 National Market under the symbol "PSBI" (the current symbol for the
Public Savings Bank Shares, which are traded on the OTC Bulletin Board). The
Nasdaq National Market requires the Company to have three market makers for the
Common Stock. The Company expects that KB&W and at least two other
broker-dealers will be market makers for the Common Stock following
consummation of the Conversion and Reorganization. No assurance can be given
that an active and liquid trading market for the Common
14
<PAGE>
Stock will develop or, if developed that it will continue. Further, no
assurance can be given that purchasers will be able to sell their shares at or
above the Purchase Price after the Conversion and Reorganization. See "RISK
FACTORS -- Absence of Prior Market for the Common Stock" and "MARKET FOR COMMON
STOCK."
Dividend Policy
The Savings Bank is not currently paying dividends. Following consummation
of the Conversion and Reorganization, the Holding Company's Board of Directors
will consider adopting a policy of paying regular cash dividends on the Common
Stock. Declarations of dividends (regular and special) by the Holding Company's
Board of Directors will depend upon a number of factors, including the amount
of the net proceeds from the Conversion Offerings retained by the Holding
Company, investment opportunities available to the Holding Company or the
Savings Bank, capital requirements, regulatory limitations, the Holding
Company's and the Savings Bank's financial condition and results of operations,
tax considerations, capital requirements, industry standards, economic
conditions, and other factors, including the regulatory restrictions that
affect the payment of dividends by the Savings Bank to the Holding Company.
Consequently, there can be no assurance that any dividends will be paid on the
Common Stock or that if paid, such dividends will not be reduced or eliminated
in future periods. See "DIVIDEND POLICY."
Officers' and Directors' Common Stock Purchases and Beneficial Ownership
At December 31, 1997, officers and trustees of the Savings Bank (thirteen
persons) beneficially owned 272,182 shares of Savings Bank Common Stock. See
"MANAGEMENT OF THE SAVINGS BANK -- Beneficial Owners of Savings Bank Common
Stock." In addition to an aggregate of 608,545 Exchange Shares to be received
by officers and trustees of the Savings Bank in the Exchange Offering based on
an Exchange Ratio of 2.2358, officers and trustees are expected to subscribe
for an aggregate of approximately 46,827 Conversion Shares, or 3.34% of the
Conversion Shares based on the midpoint of the Estimated Valuation Range. See
"COMMON STOCK TO BE PURCHASED OR RECEIVED BY MANAGEMENT" and "RISK FACTORS --
Antitakeover Considerations -- Voting Control by Insiders."
Risk Factors
See "RISK FACTORS" for a discussion of certain risks related to the
Conversion and Reorganization that should be considered by all prospective
investors.
15
<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 subsidiaries 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. After the end of the Savings
Bank's fiscal year ended September 30, 1995, the Savings Bank elected to change
its fiscal year end to December 31.
<TABLE>
<CAPTION>
At or for the
years ended
December 31,
----------------------------
1997 1996
------------- -------------
(Dollars in thousands except
per share data)
<S> <C> <C>
Balance Sheet Data:
Total assets ............................................. $ 129,338 $ 118,435
Cash and cash equivalents ................................ 27,888 31,622
Loans receivable, net .................................... 61,915 52,586
Loans held for sale ...................................... 6,575 4,598
Investment securities .................................... 22,621 18,973
Mortgage-backed securities ............................... 5,002 5,942
Deposits ................................................. 108,734 100,574
Retained earnings and shareholders'
equity (1) .............................................. 14,998 14,169
Book value per share ..................................... 12.55 11.94
Summary Statement of Operations:
Interest income .......................................... 8,740 8,039
Interest expense ......................................... 4,564 4,118
--------- ---------
Net interest income ..................................... 4,176 3,921
Provision for loan losses ................................ 60 133
--------- ---------
Net interest income after provision for loan losses ..... 4,116 3,788
--------- ---------
Noninterest income ..................................... 1,071 915
Noninterest expense .................................... 4,134 4,363
Income before income taxes ............................... 1,053 340
Income tax provision ..................................... 345 201
Cumulative effect of prior years of a change in
accounting principle .................................... -- --
--------- ---------
Net income (2) ........................................... $ 708 $ 139
========= =========
Earnings per share -- basic (3) .......................... $ 0.61 $ 0.12
========= =========
Earnings per share -- diluted ............................ $ 0.60 $ 0.12
========= =========
Performance Data:
Return on average assets ................................. 0.57% 0.12%
Return on average equity ................................. 4.83% 0.98%
Dividend payout ratio .................................... -- 31.25%
Equity to assets ......................................... 11.88% 12.29%
Interest rate spread ..................................... 2.92% 2.95%
Asset Quality Ratios:
Nonperforming loans to total loans ....................... 3.34% 5.21%
Nonperforming assets to total assets ..................... 1.97% 2.74%
Allowance for loan losses to total loans ................. 0.38% 0.39%
Allowance for loan losses to nonperforming loans ......... 11.37% 7.45%
Allowance for loan losses to nonperforming assets ........ 9.33% 6.38%
Net charge-offs as a percentage of total loans ........... 0.05% 0.25%
Loans past due 90 days or more as to interest or
principal and accruing interest ......................... $ 200 $ 2,009
Nonaccrual loans ......................................... 1,894 770
Total nonperforming loans ................................ 2,094 2,779
Real estate owned (REO) .................................. 457 465
Total nonperforming assets ............................... 2,551 3,244
<PAGE>
<CAPTION>
At or for the
three months
ended At or for the years ended
December 31, September 30,
-------------- -----------------------------------------
1995 1995 1994 1993
-------------- ------------- ------------ ------------
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Total assets ............................................. $114,184 $ 113,232 $ 99,696 $ 96,261
Cash and cash equivalents ................................ 34,468 29,777 21,371 30,680
Loans receivable, net .................................... 51,809 51,212 50,285 51,272
Loans held for sale ...................................... 2,509 1,041 185 1,544
Investment securities .................................... 14,844 22,064 16,362 3,209
Mortgage-backed securities ............................... 6,869 5,578 7,382 6,289
Deposits ................................................. 96,476 94,588 89,429 85,804
Retained earnings and shareholders'
equity (1) .............................................. 13,814 9,491 8,339 8,304
Book value per share ..................................... -- -- -- --
Summary Statement of Operations:
Interest income .......................................... 2,051 7,270 6,714 6,543
Interest expense ......................................... 4,066 3,443 3,045 3,160
-------- --------- -------- --------
Net interest income ..................................... 985 3,827 3,669 3,383
Provision for loan losses ................................ 77 27 21 --
-------- --------- -------- --------
Net interest income after provision for loan losses ..... 908 3,800 3,648 3,383
-------- --------- -------- --------
Noninterest income ..................................... 411 876 674 1,018
Noninterest expense .................................... 1,470 3,584 3,211 2,899
Income before income taxes ............................... (152) 1,092 1,111 1,502
Income tax provision ..................................... 40 433 470 610
Cumulative effect of prior years of a change in
accounting principle .................................... -- -- -- 36
-------- --------- -------- --------
Net income (2) ........................................... $ (112) $ 659 $ 641 $ 928
======== ========= ======== ========
Earnings per share -- basic (3) .......................... $ (0.10) $ -- $ -- $ --
======== ========= ======== ========
Earnings per share -- diluted ............................ $ (0.10) $ -- $ -- $ --
======== ========= ======== ========
Performance Data:
Return on average assets ................................. ( 0.11%) 0.60% 0.63% 1.08%
Return on average equity ................................. ( 1.00%) 6.94% 7.24% 11.42%
Dividend payout ratio .................................... -- -- -- --
Equity to assets ......................................... 10.66% 8.65% 8.74% 8.45%
Interest rate spread ..................................... 3.12% 3.32% 3.61% 3.55%
Asset Quality Ratios:
Nonperforming loans to total loans ....................... 4.29% 4.50% 4.21% 2.94%
Nonperforming assets to total assets ..................... 2.43% 2.49% 2.49% 2.07%
Allowance for loan losses to total loans ................. 0.39% 0.40% 0.41% 0.36%
Allowance for loan losses to nonperforming loans ......... 9.19% 8.91% 9.65% 12.38%
Allowance for loan losses to nonperforming assets ........ 7.45% 7.38% 8.37% 9.36%
Net charge-offs as a percentage of total loans ........... 0.20% 0.05% -- --
Loans past due 90 days or more as to interest or
principal and accruing interest ......................... $1,645 $ 1,565 $ 1,417 $ 1,167
Nonaccrual loans ......................................... 607 770 738 344
Total nonperforming loans ................................ 2,252 2,335 2,155 1,511
Real estate owned (REO) .................................. 528 482 330 486
Total nonperforming assets ............................... 2,780 2,817 2,485 1,997
</TABLE>
- ------------
(1) Includes only retained earnings prior to the MHC Reorganization completed
on October 20, 1995.
(2) The Savings Bank was assessed a one-time fee of $567,000 in 1996 to
recapitalize the SAIF.
(3) Represents earnings per share for the Savings Bank.
(4) Ratios annualized.
16
<PAGE>
RISK FACTORS
Before investing in shares of the Common Stock offered hereby, prospective
investors should carefully consider the Risk Factors presented below, in
addition to matters discussed elsewhere in this Prospectus.
Cost of Expansion
The Savings Bank's business strategy is to maintain its core customer base
in South Philadelphia and to expand its market to include other segments of the
metropolitan Philadelphia market. As a component of the Savings Bank's regional
expansion strategy, the Savings Bank intends to continue its expansion of and
develop nonresidential real estate lending, commercial lending, and mortgage
banking operations throughout the metropolitan Philadelphia area and the
adjacent counties in Pennsylvania, New Jersey and Delaware.
The Savings Bank's expansion strategy, including expansion of its mortgage
banking activities, has materially increased operating expenses associated with
leasing additional office space, related equipment expense and salary and
benefit expenses for additional personnel, and operating expenses are expected
to continue to increase as the Savings Bank continues to expand. Increased
revenues from the expansion of the Savings Bank's territory and services has
and will continue to lag behind the expenses incurred by implementing the
expansion strategy for the foreseeable future. Purchasers should be aware that
this expansion strategy will adversely affect the Savings Bank's earnings and
earnings per share. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Business Strategy."
Risks of Low Return on Equity After Conversion and Reorganization
Return on equity (net income for a given period divided by average equity
during that period) is a ratio used by many investors to compare the
performance of a particular financial institution to its peers. The Savings
Bank's return on equity for the year ended December 31, 1997 was 4.83% and for
year ended December 31, 1996 it was .98% and the Holding Company's
post-Conversion and Reorganization return on equity will be less than the
average return on equity for publicly traded thrift institutions and their
holding companies. In order for the Holding Company to achieve a return on
equity comparable to the return on equity of other publicly traded companies,
the Savings Bank will have to materially increase net income or reduce
shareholders' equity, or both, commensurate with the increase in equity
resulting from the Conversion and Reorganization. Reductions in equity could be
achieved by, among other things, the payment of regular or special cash
dividends (although no assurances can be given as to their payment or, if paid,
their amount and frequency), the repurchase of shares of Common Stock subject
to applicable regulatory restrictions, or the acquisition of branch offices,
other financial institutions or related businesses (neither the Holding Company
nor the Savings Bank has any present plans, arrangements, or understandings,
written or oral, regarding any repurchase or acquisitions). See "DIVIDEND
POLICY" and "USE OF PROCEEDS." Achievement of increased net income levels will
depend on several important factors outside management's control, such as
general economic conditions, including the level of market interest rates,
competition and related factors, among others. In addition, the expenses
associated with the ESOP and the 1998 MRP (see "-- New Expenses Associated with
ESOP and 1998 MRP"), along with other post-Conversion and Reorganization
expenses are expected to contribute initially to reduced earnings levels.
Subject to market conditions, initially the Savings Bank intends to deploy the
net proceeds of the Conversion Offerings to support its lending activities to
increase earnings per share and book value per share, with the goal of
achieving a return on equity comparable to the average for publicly traded
thrift institutions and their holding companies. This goal will likely take a
number of years to achieve and no assurances can be given that this goal can be
attained. Consequently, for the foreseeable future, investors should not expect
a return on equity that will meet or exceed the average return on equity for
publicly traded thrift institutions.
Risks of Commercial and Nonresidential Lending
There are risks attendant to adding nonresidential real estate lending and
commercial lending to the business of the Savings Bank. Commercial loans are
generally more interest rate sensitive and carry higher yields than do
residential loans, and are generally believed to carry a higher level of credit
risk than do residential loans. In addition, nonresidential loans are generally
more expensive to administer than are residential loans. As
17
<PAGE>
of December 31, 1997, commercial and nonresidential loans and residential
one-to-four family loans comprised 21.24% and 71.59% of the Savings Bank's loan
portfolio. In addition, $2.82 million and $28.32 million of commercial and
nonresidential and one-to-four-family loans were originated for the year ended
December 31, 1997.
The nonresidential real estate lending that the Savings Bank engages in
typically involves larger loans to a single obligor and is generally viewed as
exposing the lender to a greater risk of loss than residential one-to-four
family lending. Nonresidential real estate property values are also generally
subject to greater volatility than residential property values. The liquidation
values of commercial properties may be adversely affected by risks generally
incident to interests in real property, including changes or continued weakness
in general or local economic conditions and/or specific industry segments;
declines in real estate values; declines in rental, room or occupancy rates;
increases in interest rates, real estate and personal property tax rates and
other operating expenses (including energy costs); the availability of
refinancing; changes in governmental rules, regulations and fiscal policies,
including rent control ordinances, environmental legislation and taxation; and
other factors beyond the control of the borrower or the lender. It should also
be noted that the resale market for nonresidential real estate loans is less
liquid than the well established secondary market for residential real estate
loans, which could result in the Savings Bank recognizing losses upon any such
sales. For a more detailed discussion of the specific characteristics of the
Savings Bank's real estate loan portfolio, see "BUSINESS -- Business of the
Savings Bank -- Lending Activities."
Anticipated Increase in Provision for Loan Losses
Historically, the Savings Bank's loan portfolio has consisted mainly of
residential real estate loans and the amount of the allowance for loan losses
has been established based upon the Savings Bank's assessment of the risks
inherent in this residential loan portfolio. Because the Savings Bank is
expanding its origination of commercial, commercial real estate and consumer
loans, which entail greater risk than residential lending, the Savings Bank
anticipates that it will increase its provision for loan losses in future
periods. In addition, the provision for loan losses may increase in 1998 and
1999 if management determines that losses inherent in the existing portfolio of
nonaccrual loans exceeds anticipated recoveries.
Risks of Mortgage Banking
Through its subsidiary, TNMC, the Savings Bank has conducted a mortgage
banking operation since 1989. Mortgage banking consists primarily of the
origination, purchase, sale and servicing of first mortgage loans secured by
one- to four-family homes. Such loans are sold either as individual loans, as
mortgage-backed securities, or as participation certificates issued or
guaranteed by FNMA or FHLMC.
Because mortgage originations fluctuate significantly with the level of
interest rates and other economic conditions, mortgage banking revenues are
very cyclical. The profitability of mortgage banking operations depends
primarily on managing the volume of loan originations and sales and the
expenses associated with loan originations so that gains on the sale of loans
together with fee income exceeds the costs of this activity. Changes in the
level of interest rates and the condition of the local and national economies
affect the amount of loans originated by the Savings Bank and demanded by
investors to whom the loans are sold. Generally, the Savings Bank's loan
origination and sale activity and, therefore, its results of operations, may be
adversely affected by an increasing interest rate environment to the extent
such environment results in decreased loan demand by borrowers and/or
investors. Accordingly, the volume of loan originations and the profitability
of this activity can vary significantly from period to period. In addition, the
Savings Bank's results of operations are affected by the amount of non-interest
expenses associated with mortgage-banking activities, such as compensation and
benefits, occupancy and equipment expenses, and other operating costs. During
periods of reduced loan demand, the Savings Bank's results of operations may be
adversely affected to the extent that it is unable to reduce expenses
commensurate with the decline in loan originations. To the extent TNMC revenues
and profits become a significant component of the Savings Bank's consolidated
revenues and net income, which is currently planned, an investor should be
aware that earnings of the Savings Bank could fluctuate materially.
18
<PAGE>
Dependence Upon Key Personnel
The success of the Savings Bank and the Holding Company will depend
heavily on the expertise and guidance of Vincent J. Fumo, Chief Executive
Officer and Chairman of the Board of the Holding Company and the Savings Bank,
and Anthony DiSandro, the President and Chief Operating Officer of the Holding
Company and the Savings Bank, as well as certain other senior executive
officers. The loss of the services of any of these key individuals would have a
material adverse effect on the Savings Bank and the Holding Company. Neither
the Savings Bank nor the Holding Company maintains key-man life insurance with
respect to any of these individuals. See "MANAGEMENT."
Increased Expenses Associated With ESOP and 1998 MRP
The Savings Bank will recognize material employee compensation and benefit
expenses assuming the ESOP and the 1998 MRP are implemented. The amount of
these new expenses cannot be predicted because applicable accounting practices
require that they be based on the fair market value of the shares of Common
Stock when the expenses are recognized. Such expenses are recognized when
shares are committed to be released in the case of the ESOP and over the
vesting period of awards made to recipients in the case of the 1998 MRP. These
expenses have been reflected in the pro forma financial information under "PRO
FORMA DATA" assuming the Purchase Price as fair market value. Actual expenses,
however, will be based on the fair market value of the Common Stock at the time
of recognition, which may be higher or lower than the Purchase Price. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Impact of Accounting Pronouncements and Regulatory Policies --
Accounting for Employee Stock Ownership Plans," "- Accounting for Stock-Based
Compensation," "MANAGEMENT -- Management of the Savings Bank -- Benefits --
Employee Stock Ownership Plan" and "-- Benefits -- Management Recognition
Plan."
Potential Benefits to Management
At a meeting of shareholders to be held no earlier than six months
following the consummation of the Conversion and Reorganization, the Holding
Company expects to seek approval of the 1998 MRP and the 1998 Stock Option
Plan. The Holding Company expects to acquire Common Stock on behalf of the 1998
MRP in an amount equal to 4% of the Common Stock issued in the Conversion and
Reorganization, or 47,600 and 64,400 Conversion 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. In addition, the Holding Company intends to reserve for
future issuance pursuant to the 1998 Stock Option Plan a number of authorized
shares of Common Stock equal to 10% of the Conversion Shares issued in the
Conversion and Reorganization (119,000 and 161,000 Conversion Shares at the
minimum and the maximum of the Estimated Valuation Range, respectively).
Voting Control by Insiders. In addition to an aggregate of 608,545
Exchange Shares to be received by trustees or directors, as the case may be,
and officers of the Savings Bank and the Holding Company in the Exchange
Offering based on an Exchange Ratio of 2.2358, directors and officers expect to
subscribe for 46,827 Conversion Shares. Directors and officers are also
expected to control indirectly the voting of approximately 8% of the shares of
Common Stock issued in the Conversion and Reorganization to 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. Mr. Fumo and Mr. DiSandro serve as the ESOP trustees.
19
<PAGE>
Assuming (i) the receipt of Exchange Shares and the purchase of Conversion
Shares by the directors and officers described above, (ii) the implementation
of the 1998 MRP and the 1998 Stock Option Plan, (iii) the open market purchase
of shares on behalf of the 1998 MRP, (iv) the purchase by the ESOP of 8% of the
Conversion Shares sold in the Conversion Offerings, and (v) the grant of stock
options equal to 10% of the number of shares of Conversion Shares issued in the
Conversion and Reorganization, directors, officers and employees of the Holding
Company and the Savings Bank would have voting control, on a fully diluted
basis, of 36.05% and 35.51% of the Common Stock, based on the issuance of the
minimum and maximum of the Estimated Valuation Range, respectively.
Management's potential voting control might preclude or make more difficult
takeover attempts that certain shareholders may deem to be in their best
interest and might tend to perpetuate existing management.
As a result of the purchases by management and the number of Exchange
Shares to be received by management, management could acquire a substantial
interest in the Company and, if each member of management were to act
consistently with each other, could have significant influence over the outcome
of the election of directors and any other shareholder vote, especially a vote
on matters requiring the approval of 80% of the outstanding Common Stock, such
as certain business combinations. Management might thus have the power to
authorize actions that may be viewed as contrary to the best interests of
non-affiliated holders of Common Stock and might have substantial power to
block actions that such holders may deem to be in their best interests. See
"Pro Forma Data," "Management -- Certain Benefit Plans and Agreements," "The
Conversion -- Proposed Management Purchases," and "Certain Restrictions on
Acquisition of the Company."
Provisions of Employment and Severance Agreements and Severance Plan. The
employment agreements of Vincent J. Fumo and Anthony DiSandro provide for cash
severance payments and/or the continuation of health, life and disability
benefits in the event of their termination of employment following a change in
control of the Holding Company or the Savings Bank. Assuming a change of
control occurred as of December 31, 1997, the aggregate value of the severance
benefits available to these executive officers under the agreements would have
been approximately $4.6 million excluding the value of health insurance, life
insurance and disability benefits. These agreements and plans may have the
effect of increasing the costs of acquiring the Holding Company, thereby
discouraging future attempts to take over the Holding Company or the Savings
Bank. See "MANAGEMENT -- Management of the Savings Bank -- Benefits,"
"RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY" and "DESCRIPTION OF
CAPITAL STOCK OF THE HOLDING COMPANY."
Possible Dilutive Effect of Benefit Programs
The 1998 MRP intends to acquire an amount of Common Stock equal to 4% of
the Conversion Shares issued in the Conversion and Reorganization. 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. If the 1998 MRP acquires
authorized but unissued shares of Common Stock from the Holding Company, the
voting interests of existing shareholders will be diluted and net income per
share and shareholders' equity per share will be decreased. See "PRO FORMA
DATA" and "MANAGEMENT -- Management of the Savings Bank -- Benefits -
Management Recognition Plan." The 1998 MRP is subject to approval by the
Holding Company's shareholders.
The 1998 Stock Option Plan will provide for options to acquire up to a
number of shares of Common Stock of the Holding Company equal to 10% of the
Conversion Shares issued in the Conversion and Reorganization. Upon exercise of
the options, Shares may be issued from authorized but unissued shares which
would result in the dilution of the voting interests of existing shareholders
and may decrease net income per share and shareholders' equity per share. See
"MANAGEMENT -- Management of the Savings Bank -- Benefits -- 1998 Stock Option
Plan." The 1998 Stock Option Plan is subject to approval by the Holding
Company's shareholders.
The Savings Bank maintains a 1995 Stock Option Plan that was implemented
in connection with the MHC Reorganization. As of the date of this Prospectus,
no shares of Savings Bank Common Stock remain reserved for issuance under the
1995 Stock Option Plan and options for 35,859 shares have been granted to
optionees but remain unexercised. Upon consummation of the Conversion and
Reorganization, the 1995 Stock Option Plan will be assumed by the Holding
Company and shares of Common Stock will be issued in lieu of shares of Savings
Bank Common Stock pursuant to the terms of the 1995 Stock Option Plan.
20
<PAGE>
The Board of Directors expects it will award over time MRP shares and
grant options to officers, directors and employees of the Holding Company and
the Savings Bank. At an assumed price of $10.00 the MRP shares have a value of
$442,000 and $598,000 at the minimum and the maximum of the Estimated Valuation
Range, respectively. The Options will have value only if the market price
increases above the exercise price of the option, which will be the market
value of the Common Stock on the date the option is granted.
Certain Anti-takeover Provisions
The Holding Company's Articles of Incorporation and Bylaws contain certain
provisions that may have the effect of discouraging a non-negotiated tender or
exchange offer for the Common Stock, a proxy contest for control of the Holding
Company, the assumption of control of the Holding Company by a holder of a
large block of Common Stock or the removal of the Holding Company's management,
all of which certain shareholders might deem to be in their best interests.
These provisions include, among other things (i) the classification of the
terms of the members of the Board of Directors, (ii) supermajority provisions
for the approval of certain business combinations and amendments of the
Articles of Incorporation or Bylaws of the Holding Company, and (iii)
elimination of cumulative voting in the election of directors. The provisions
in the Holding Company's Articles of Incorporation requiring a supermajority
vote for the approval of certain business combinations provide that the
supermajority voting requirements and voting restrictions do not apply to
business combinations meeting the Holding Company's Board of Director approval
requirements. The Holding Company's Articles of Incorporation also authorize
the issuance of 5,000,000 shares of preferred stock as well as 15,000,000
shares of Common Stock. These shares could be issued without shareholder
approval on terms or in circumstances that could deter a future takeover
attempt.
Interest Rate Risk
Like all financial institutions, the Savings Bank's financial condition
and results of operations are influenced significantly by general economic
conditions, the related monetary and fiscal policies of the federal government
and government regulations. Deposit flows and the cost of funds are influenced
by interest rates of competing investments and general market interest rates.
Lending activities are affected by the demand for mortgage financing and for
consumer and other types of loans, which in turn is affected by the interest
rates at which such financing may be offered and by other factors affecting the
supply of housing and the availability of funds. The Savings Bank's
profitability, like that of most financial institutions, depends largely on its
net interest income, which is the difference between the interest income
received from its interest-earning assets and the interest expense incurred
from interest-bearing liabilities. The Savings Bank's results of operations
would be adversely affected by a material prolonged increase in market interest
rates. Changes in the level of interest rates also affect the volume of loans
originated or purchased by the Savings Bank and, thus, the amount of loan and
commitment fees, as well as 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 that, because
of the absence of federal insurance premiums and reserve requirements,
generally pay higher rates of return than savings institutions.
Competition
The Savings Bank has faced, and will continue to face, strong competition
both in making loans and attracting deposits. The Savings Bank's primary market
has a high concentration of financial institutions, many
21
<PAGE>
of which are affiliated with large bank holding companies that have greater
financial resources than the Savings Bank and all of which compete with the
Savings Bank in varying degrees. Competition for loans principally comes from
commercial banks, thrift institutions, credit unions and mortgage banking
companies. Historically, commercial banks, thrift institutions and credit
unions have been the Savings Bank's most direct competition for deposits. The
Savings Bank also competes with short-term money market mutual funds and with
other financial institutions, such as brokerage firms and insurance companies,
for deposits. In competing for loans, the Savings Bank may be forced to offer
lower loan interest rates periodically. Conversely, in competing for deposits,
the Savings Bank may be forced to offer higher deposit interest rates
periodically. Either case or both cases could adversely affect net interest
income. See "BUSINESS OF THE SAVINGS BANK -- Competition."
Absence of Prior Market for the Common Stock
The Holding Company has never issued capital stock and, consequently,
there is no existing market for the Common Stock. Prior to the Conversion and
Reorganization, the Public Savings Bank Shares have been traded on the OTC
Bulletin Board under the symbol "PSBI." Although the Holding Company has
received conditional approval to list the Common Stock on the Nasdaq Stock
Market also under the symbol "PSBI," there can be no assurance that an active
and liquid market for the Common Stock will develop or, if 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 Increase in Estimated Valuation Range and Number of shares Issued
The Estimated Valuation Range may be increased up to 15% to reflect
material changes in the financial condition or results of operations of the
Savings Bank, market conditions or general financial, economic or regulatory
conditions following the commencement of the Conversion Offerings. If the
Estimated Valuation Range is increased, it is expected that the Holding Company
would increase the Estimated Price Range so that up to 1,851,500 Conversion
Shares at the Purchase Price would be issued for an aggregate price of up to
$18,515,000. This increase in the number of shares would decrease a
subscriber's pro forma net income per share and shareholders' equity per share,
increase the Holding Company's pro forma consolidated shareholders' equity and
net earnings, and increase the Purchase Price as a percentage of pro forma
shareholders' equity per share and net income per share. See "PRO FORMA DATA."
Possible Adverse Income Tax Consequences of the Distribution of Subscription
Rights
If the Subscription Rights granted to Eligible Account Holders and
Supplemental Eligible Account Holders of the Savings Bank are deemed to have an
ascertainable value, receipt of such rights may be a taxable event to those
Eligible Account Holders or Supplemental Eligible Account Holders who receive
and/or exercise the Subscription Rights. 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 RP Financial that
such rights have no value; however, RP Financial's conclusion is not binding on
the Internal Revenue Service ("IRS"). See "THE CONVERSION AND REORGANIZATION --
Effects of Conversion and Reorganization on Depositors and Borrowers of the
Savings Bank -- Tax Effects."
Risk of Delayed Offering
The Company and the Savings Bank expect to complete the Conversion and
Reorganization within the time periods indicated in this Prospectus.
Specifically, the Subscription Offering will expire no more than thirty-five
days after the date of mailing. Nevertheless, it is possible, although not
anticipated, that adverse market, economic or regulatory conditions, or other
factors would significantly delay the completion of the Conversion and result
in increased costs or in changes in the Appraisal.
22
<PAGE>
PSB BANCORP, INC.
The Holding Company was organized on October 3, 1997 under the PBCL at the
direction of the Savings Bank. The Holding Company has been formed to become
the holding company for the Savings Bank upon consummation of the Conversion
and Reorganization. The Holding Company has received conditional approval from
the Federal Reserve to become a bank holding company and acquire 100% of the
capital stock of the Savings Bank. Prior to the Conversion and Reorganization,
the Holding Company will not engage in any material operations. After the
Conversion and Reorganization, the Holding Company will be subject to
regulation by the Federal Reserve, and its principal business will be the
ownership of the Savings Bank. Immediately following the Conversion and
Reorganization, the only significant assets of the Holding Company will be the
capital stock of the Savings Bank, 50% of the net proceeds of the Conversion
Offerings and a note receivable from the ESOP evidencing a loan to enable the
ESOP to purchase 8% of the Common Stock issued in the Conversion and
Reorganization. See "PRO FORMA DATA" and "BUSINESS -- Business of the Holding
Company."
The holding company structure will permit the Holding Company to expand
the financial services currently offered through the Savings Bank. Management
believes that the holding company structure and retention of a portion of the
proceeds of the Conversion Offerings will facilitate the expansion and
diversification of its operations. The holding company structure will also
enable the Holding Company to repurchase its stock without adverse tax
consequences, subject to applicable regulatory restrictions, including waiting
periods. There are no present plans, arrangements, agreements, or
understandings, written or oral, regarding any such activities or repurchases.
See "REGULATION -- Regulation of the Holding Company."
PENNSYLVANIA SAVINGS BANK
The Savings Bank is a Pennsylvania-chartered savings bank, founded in 1923
and headquartered in Philadelphia, Pennsylvania. The Savings Bank's deposits
are insured by the FDIC up to applicable legal limits under the BIF. The
Savings Bank has been a member of the FHLB system since 1937. The Savings Bank
is regulated by the PDOB and the FDIC. At December 31, 1997, the Savings Bank
had total assets of $129.34 million, total deposit accounts of $108.73 million,
and total shareholders' equity of $15.00 million, on a consolidated basis.
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock offered hereby are
estimated to range from $11.43 million to $15,63 million, or up to $18.04
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 conditional Federal Reserve approval to purchase all of the
capital stock of the Savings Bank to be issued in the Conversion and
Reorganization in exchange for 50% of the net proceeds of the Conversion
Offerings. This will result in the Holding Company retaining approximately
$5.72 million to $7.82 million of net proceeds, or up to $9.02 million if the
Estimated Valuation Range is increased by 15%. See "PRO FORMA DATA."
Receipt of 50% of the net proceeds of the sale of the Conversion Shares
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, initially,
lending and investment in short-term U.S. Government and agency obligations.
In connection with the Conversion and Reorganization, the Holding Company
intends to loan the ESOP the amount necessary to refinance the ESOP's existing
third party loan used to purchase shares of Savings Bank Common Stock in the
MHC Reorganization ($295,000 outstanding balance at December 31, 1997) and to
purchase 8% of the shares of Common Stock sold in the Conversion Offerings
($6.05 million at the maximum of the Estimated Valuation Range). The Holding
Company's loan to fund the ESOP's purchase of shares of Common Stock in the
Conversion Offerings may range from $925,000 to $1.28 million based on the sale
of 95,200 Conversion Shares to the ESOP (at the minimum of the Estimated
Valuation Range) and 128,800 Conversion Shares (at the maximum of the Estimated
Valuation Range), respectively, at the Purchase Price. If 15% above the maximum
of the Estimated Valuation Range, or 1,851,500 Conversion Shares, are sold in
the Conversion and Reorganization, the Holding Company's loan to the ESOP would
be approximately $1.48 million (based on the sale of 148,120 Conversion Shares
to the ESOP). The principal amount of the ESOP loan will be larger if
23
<PAGE>
the ESOP is unable to purchase shares in the Conversion and Reorganization and
instead purchases shares in the open market at prices above the Purchase Price.
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 and Reorganization. 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 net proceeds retained by the Holding Company initially will be
invested primarily in short-term U.S. Government and agency obligations or in a
deposit account either at the Savings Bank or another financial institution.
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 shareholders of the
Holding Company and for future repurchases of Common Stock to the extent
permitted under Pennsylvania law and federal regulations. The Holding Company
will consider exploring opportunities to use such funds to expand operations
through acquiring or establishing additional branch offices or acquiring other
financial institutions. Currently, there are no specific plans, arrangements,
agreements or understandings, written or oral, regarding any diversification
activities.
Following consummation of the Conversion and Reorganization, the Holding
Company's Board of Directors will have the authority to adopt plans for
repurchases of Common Stock, subject to statutory and regulatory requirements.
Facts and circumstances upon which the Holding Company's Board of Directors may
determine to repurchase stock in the future would include but are not limited
to: (i) market and economic factors such as the price at which the Common Stock
is trading in the market, the volume of trading, the attractiveness of other
investment alternatives, 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
shareholders by not issuing 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 shareholders. Any stock repurchases will be subject to
a determination by the Holding Company's Board of Directors that both the
Holding Company and the Savings Bank will be capitalized in excess of all
applicable regulatory requirements and tax and other regulatory considerations.
For a discussion of the regulatory limitations applicable to stock repurchases
and current Federal Reserve and FDIC policy with respect thereto, see "THE
CONVERSION AND REORGANIZATION -- Restrictions on Repurchase of Stock."
DIVIDEND POLICY
General
The Savings Bank currently does not pay dividends. Upon completion of the
Conversion and Reorganization, the Holding Company's Board of Directors will
have the authority to declare dividends on the Common Stock, subject to
statutory and regulatory requirements. Following consummation of the Conversion
and Reorganization, the Board of Directors of the Holding Company will consider
adopting a policy of paying regular cash dividends on the Common Stock. In
addition, the Board of Directors may determine to pay periodic special cash
dividends in addition to, or in lieu of, regular cash dividends. Declarations
or payments of any dividends (regular and special) will be subject to
determination by the Board of Directors, which will take into account the
amount of the net proceeds retained by the Holding Company, the Holding
Company's and the Savings Bank's financial condition and results of operations,
investment opportunities available to the Holding Company or the Savings Bank,
tax considerations, capital requirements, industry standards, economic
conditions and other factors, including the regulatory restrictions that affect
the payment of dividends by the Savings Bank to the Holding Company. The
primary source of dividends payable to the Holding Company will be dividends
from the Savings Bank. The Savings Bank may pay dividends only out of retained
earnings. As of December 31, 1997, the Savings Bank's retained earnings on a
pro forma basis were $793,000. See "Capitalization." See "REGULATION --
Regulation of the Holding Company -- Restrictions on Dividends." No assurances
can be given that any dividends, either regular or special, will be declared
or, if declared, what the amount of dividends will be or whether such
dividends, if commenced, will continue.
24
<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
National Market under the symbol "PSBI," there can be no assurance that the
Holding Company will meet Nasdaq National Market listing requirements, which
include a minimum market capitalization, at least three market makers and a
minimum number of record holders. KB&W has agreed to make a market for the
Common Stock following consummation of the Conversion and Reorganization,
although it is under no obligation to do so, and will assist the Holding
Company in seeking to encourage at least two additional market makers 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. The Holding Company
anticipates that prior to the completion of the Conversion and Reorganization
it will be able to obtain the commitment from at least two additional
broker-dealers to act as 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.
Since the MHC Reorganization the Public Savings Bank Shares have been
traded on the OTC Bulletin Board under the symbol "PSBI." The following table
sets forth the high and low trading prices, as reported by the OTC Bulletin
Board, and cash dividends paid for each quarter during the 1996 and 1997 fiscal
years. However, there is no relation between the Purchase Price of the Common
Stock and the trading prices of the Savings Bank Shares.
<TABLE>
<CAPTION>
Cash
Dividend
Year Ended December 31, 1996 High Low Declared
- ---------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Quarter ended March 31, 1996 .................................. $ 12.38 $ 11.50 $ 0
Quarter ended June 30, 1996 ................................... 11.63 11.00 0.0375
Quarter ended September 30, 1996 .............................. 11.75 10.50 0
Quarter ended December 31, 1996 ............................... 13.75 13.00 0
Year Ended December 31, 1997
Quarter ended March 31, 1997 .................................. $ 15.00 $ 14.00 $ 0
Quarter ended June 30, 1997 ................................... 15.00 13.00 0
Quarter ended September 30, 1997 .............................. 25.00 14.50 0
Quarter ended December 31, 1997 ............................... 29.00 24.00 0
January 1, 1998 to Present
Quarter ended March 31, 1998 (through March 31, 1998) ......... 29.00 25.88 $ 0
</TABLE>
25
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the Savings
Bank at December 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 at the
minimum, midpoint, maximum and maximum, as adjusted, of the Estimated Valuation
Range. The shares that would be issued at the maximum, as adjusted, of the
Estimated Valuation Range would be subject to receipt of PDOB and FDIC approval
of an updated appraisal confirming such valuation. A change in the number of
shares to be issued in the Conversion and Reorganization would materially
affect pro forma consolidated capitalization.
<TABLE>
<CAPTION>
Capitalization
of Savings Bank
at
December 31, 1997
-------------------
(In thousands)
<S> <C>
Deposits(3) ...................................... $108,734
Borrowings ....................................... 3,136
--------
Total deposits and borrowed funds ................ $111,870
========
Shareholders' equity:
Savings Bank Common Stock:
10,000,000 shares, $1.00 par value per
share authorized; 1,194,640 issued and
outstanding .................................. $ 1,194
Holding Company Common Stock:
15,000,000 shares, no par value per share,
authorized; specified number of shares
assumed to be issued and outstanding ......... 0
Additional paid-in capital ...................... 13,563
Retained earnings(4) ............................ 546
Unrealized loss on securities available- for-
sale, net of tax .............................. (10)
Less:
Holding Company Common Stock
acquired by ESOP(5) .......................... (295)
Holding Company Common Stock to be
acquired by 1998 MRP(6) ...................... 0
--------
Total shareholders' equity ....................... $ 14,998
========
<PAGE>
<CAPTION>
Holding Company Pro Forma Consolidated Capitalization
Based Upon the Sale of
-------------------------------------------------------------
1,190,000 1,400,000 1,610,000 1,851,500
shares at shares at shares at shares at
$10.00 $10.00 $10.00 $10.00
Per Share(1) Per Share(1) Per Share(1) Per Share(2)
-------------- -------------- -------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Deposits(3) ...................................... $108,734 $108,734 $108,734 $108,734
Borrowings ....................................... 3,136 3,136 3,136 3,136
-------- -------- -------- --------
Total deposits and borrowed funds ................ $111,870 $111,870 $111,870 $111,870
======== ======== ======== ========
Shareholders' equity:
Savings Bank Common Stock:
10,000,000 shares, $1.00 par value per
share authorized; 1,194,640 issued and
outstanding .................................. $ 0 $ 0 $ 0 $ 0
Holding Company Common Stock:
15,000,000 shares, no par value per share,
authorized; specified number of shares
assumed to be issued and outstanding ......... 0 0 0 0
Additional paid-in capital ...................... 26,183 28,283 30,383 32,798
Retained earnings(4) ............................ 793 793 793 793
Unrealized loss on securities available- for-
sale, net of tax .............................. (10) (10) (10) (10)
Less:
Holding Company Common Stock
acquired by ESOP(5) .......................... (1,247) (1,415) (1,583) (1,776)
Holding Company Common Stock to be
acquired by 1998 MRP(6) ...................... (476) (560) (644) (741)
-------- -------- -------- --------
Total shareholders' equity ....................... $ 25,243 $ 27,091 $ 28,939 $ 31,064
======== ======== ======== ========
</TABLE>
- ------------
(1) Does not reflect the possible increase in the Estimated Valuation Range or
the issuance of additional shares under the 1998 Stock Option Plan.
(2) Represents the pro forma capitalization of the Holding Company if the
aggregate number of Conversion Shares issued in the Conversion and
Reorganization is 15% above the maximum of the Estimated Valuation Range.
See "PRO FORMA DATA."
(3) Withdrawals from deposit accounts for the purchase of Conversion Shares are
not reflected. Such withdrawals will reduce pro forma deposits.
(4) Pro forma retained earnings include $247,000 of cash or cash equivalent
assets of the MHC. The other asset of the MHC, investment in subsidiary,
is eliminated upon consolidation. The MHC has no material liabilities. No
consideration will be paid by the Holding Company or the Savings Bank in
connection with the merger of the MHC and the Savings Bank. 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 that will be established for
26
<PAGE>
the benefit of Eligible Account Holders and Supplemental Eligible Account
Holders at the consummation of the Conversion and Reorganization. See "THE
CONVERSION AND REORGANIZATION -- Effects of Conversion and Reorganization
on Depositors and Borrowers of the Savings Bank -- Liquidation Account."
(5) Assumes that 8% of the Conversion Shares sold in the Conversion and
Reorganization will be acquired by the ESOP with funds borrowed from the
Holding Company. Under generally accepted accounting principles ("GAAP"),
the amount of Conversion Shares to be purchased by the ESOP represents
unearned compensation and is, accordingly, reflected as a reduction of
capital. As shares are released to ESOP participant accounts, a
corresponding reduction in the charge against capital will occur. Because
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
-- Management of the Savings Bank -- Benefits -- Employee Stock Ownership
Plan."
(6) Assumes the purchase in the open market at the Purchase Price, pursuant to
the proposed 1998 MRP, of a number of shares equal to 4% of the shares of
Conversion Shares issued in the Conversion and Reorganization at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range. The issuance of such additional Conversion Shares to the
1998 MRP from authorized but unissued shares of Common Stock would dilute
the ownership interest of shareholders by 2.04%. The shares are reflected
as a reduction of shareholders' equity. See "RISK FACTORS -- Possible
Dilutive Effect of Benefit Programs," "PRO FORMA DATA" and "MANAGEMENT --
Management of the Savings Bank -- Benefits -- Management Recognition
Plan." The 1998 MRP is subject to shareholder approval, which is expected
to be sought at a meeting to be held no earlier than six months following
consummation of the Conversion and Reorganization.
27
<PAGE>
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
The following table presents the Savings Bank's historical and pro forma
capital position relative to its capital requirements at December 31, 1997. The
amount of capital infused into the Savings Bank for purposes of the following
table is 50% of the net proceeds of the Conversion Offerings. For purpose 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 1998 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 FDIC capital regulations as discussed under
"REGULATION -- Regulation of the Savings Bank -- Capital Requirements."
<TABLE>
<CAPTION>
Historical as of
December 31, 1997
-----------------------
Percent
of
Adjusted
Total
Amount Assets(1)
---------- -----------
<S> <C> <C>
GAAP Capital ....................... $14,998 13.35%
Leverage capital(2) ................ $15,001 13.36%
Leverage capital requirement(2)..... 6,739 6.00%
------- -----
Excess ............................. $ 8,262 7.36%
======= =====
Tier 1 risk-based capital(3) ....... $15,001 24.67%
Tier 1 capital requirement ......... 2,432 4.00%
------- -----
Excess ............................. $12,569 20.67%
======= =====
Total risk-based capital(4) ........ $15,239 25.06%
Total risk-based capital
requirement ....................... 4,865 8.00%
------- -----
Excess ............................. $10,374 17.06%
======= =====
<PAGE>
<CAPTION>
PRO FORMA AT DECEMBER 31, 1997
-------------------------------------------------------------------------------------
15% Above
Minimum of Midpoint of Maximum of Maximum of
Estimated Estimated Estimated Estimated
Valuation
Valuation Range Valuation Range Valuation Range Range
----------------------- ----------------------- ----------------------- -------------------
1,900,000 shares 1,400,000 shares 1,610,000 shares 1,851,500 shares
at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share
----------------------- ----------------------- ----------------------- ------------------
(Dollars in thousands)
Percent Percent Percent Percent
of of of of
Adjusted Adjusted Adjusted Adjusted
Total Total Total Total
Amount Assets(1) Amount Assets(1) Amount Assets(1) Amount Assets(1)
---------- ----------- ---------- ----------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital ....................... $19,530 16.58% $20,328 17.12% $21,126 17.64% $22,043 18.24%
Leverage capital(2) ................ $19,533 16.58% $20,331 17.12% $21,129 17.65% $22,046 18.24%
Leverage capital requirement(2)..... 7,068 6.00% 7,126 6.00% 7,184 6.00% 7,250 6.00%
------- ----- ------- ----- ------- ----- ------- -----
Excess ............................. $12,465 10.58% $13,205 11.12% $13,945 11.65% $14,796 12.24%
======= ===== ======= ===== ======= ===== ======= =====
Tier 1 risk-based capital(3) ....... $19,533 33.70% $20,331 32.64% $21,129 33.92% $22,046 35.26%
Tier 1 capital requirement ......... 2,476 4.00% 2,484 4.00% 2,492 4.00% 2,501 4.00%
------- ----- ------- ----- ------- ----- ------- -----
Excess ............................. $17,056 27.55% $17,847 28.64% $18,637 29.92% $19,545 31.26%
======= ===== ======= ===== ======= ===== ======= =====
Total risk-based capital(4) ........ $19,770 31.93% $20,568 33.02% $21,366 34.30% $22,283 34.84%
Total risk-based capital
requirement ....................... 4,953 8.00% 4,968 8.00% 4,984 8.00% 5,001 8.00%
------- ----- ------- ----- ------- ----- ------- -----
Excess ............................. $14,817 23.93% $15,600 25.02% $16,382 26.30% $17,282 26.84%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- ------------
(1) Based upon historical total adjusted assets of the Savings Bank of $112.31
million at December 31, 1997, and $117.80 million, $118.76 million,
$119.73 million and $120.84 million at the minimum, midpoint, maximum, and
maximum, as adjusted, of the Estimated Valuation Range, respectively, for
purposes of the leverage capital requirement; and, for purposes of the
risk-based capital requirements, based upon historical risk-weighted
assets of $60.81 million at December 31, 1997 and $61.91 million, $62.10
million, $62.30 million and of $62.52 million at the minimum, midpoint,
maximum, and maximum, as adjusted, of the Estimated Valuation Range,
respectively.
(2) Percentage represents leverage capital divided by total adjusted assets.
(3) Percentage represents tier 1 capital divided by total risk-weighted assets.
Assumes net proceeds are invested in assets that carry a 20%
risk-weighting.
(4) Percentage represents total capital divided by total risk-weighted assets.
Assumes net proceeds are invested in assets that carry a 20%
risk-weighting.
28
<PAGE>
PRO FORMA DATA
Under the Plan of Conversion, the Conversion Shares must be sold at an
aggregate price equal to the estimated pro forma market value of the MHC and
the Savings Bank as converted determined by an independent valuation and
converted by multiplying the Appraisal by the MHC's percentage interest in the
Savings Bank (51.5%). Based upon this calculation, the Estimated Valuation
Range as of December 31, 1997 is from a minimum of $11.90 million to a maximum
of $16.10 million with a midpoint of $14.0 million or, at a price per share of
$10.00, a minimum number of shares of 1,190,000, a maximum number of shares of
1,610,000 and a midpoint number of shares of 1,400,000. The actual net proceeds
from the sale of the Conversion Shares cannot be determined until the
Conversion and Reorganization is completed. However, net proceeds set forth in
the following table are based upon the following assumptions: (i) Webb will
receive a fee not to exceed $100,000 which consists of a $25,000 management fee
and a success fee of 1.5% of the aggregate Purchase Price of the Conversion
Shares sold in the Subscription and Direct Community Offerings (see "THE
CONVERSION AND REORGANIZATION -- Plan of Distribution for the Subscription, the
Direct Community and the Syndicated Community Offerings); (ii) all of the
Conversion Shares will be sold in the Subscription and Direct Community
Offerings; and (iii) Conversion and Reorganization expenses, including the fees
paid to Webb, will total approximately $475,000 at each of the minimum,
midpoint, maximum and 15% above the Estimated Valuation Range. Actual expenses
may vary from this estimate, and the fees paid will depend upon the percentages
and total number of shares sold in the Subscription, Direct Community and
Syndicated Community Offerings and other factors.
The pro forma consolidated net income of the Savings Bank for the year
ended December 31, 1997 has been calculated as if the Conversion and
Reorganization had been consummated at the beginning of the period and the
estimated net proceeds received by the Holding Company and the Savings Bank had
been invested at 6.03%, at the beginning of the period, which represents the
arithmetic average of the Savings Bank's yield on interest-earning assets and
the rate paid on interest-bearing deposits for the year ended December 31,
1997. As discussed under "USE OF PROCEEDS," the Holding Company expects to
retain 50% of the net proceeds of the Conversion Offerings from which it will
fund the ESOP loan. A pro forma after-tax return of 3.98% is used for both the
Holding Company and the Savings Bank for the period, after giving effect to an
incremental combined federal and state income tax rate of 34.0%. 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 December 31,
1997, as applicable, but without any adjustment of per share historical or pro
forma shareholders' equity to reflect the earnings on the estimated net
proceeds.
The following tables summarize the historical net income and retained
earnings of the Savings Bank and the pro forma consolidated net income and
shareholders' equity of the Holding Company for the periods and at the date
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. No effect has been given to: (i) the shares to be reserved for
issuance under the 1998 Stock Option Plan, which is expected to be voted upon
by shareholders at a meeting to be held no earlier than six months following
consummation of the Conversion and Reorganization; (ii) withdrawals from
deposit accounts for the purpose of purchasing Conversion Shares in the
Conversion Offerings; (iii) the issuance of shares from authorized but unissued
shares to the 1998 MRP, which is expected to be voted upon by shareholders at a
meeting to be held no earlier than six months following consummation of the
Conversion and Reorganization; 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 -- 1998 Stock
Option Plan" and "THE CONVERSION AND REORGANIZATION -- Stock Pricing, Exchange
Ratio and Number of Shares Issued." Conversion Shares 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
such purchases.
The following pro forma information may not be representative of the
financial effects of the Conversion and Reorganization at the date on which the
Conversion and Reorganization actually occurs and
29
<PAGE>
should not be taken as indicative of future results of operations.
Shareholders' equity represents the difference between the stated amounts of
consolidated assets and liabilities of the Holding Company computed according
to GAAP. Shareholders' equity has not been increased or decreased to reflect
the difference between the carrying value of loans and other assets and market
value. Shareholders' equity is not intended to represent fair market value nor
does it represent amounts that would be available for distribution to
shareholders in the event of liquidation.
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1997
-------------------------------------------------------------
15% Above
Minimum of Midpoint of Maximum of Maximum of
Estimated Estimated Estimated Estimated
Valuation Valuation Valuation Valuation
Range Range Range Range
------------- ------------- ------------- -------------
1,190,000 1,400,000 1,610,000 1,851,500
shares shares shares shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share(1)
------------- ------------- ------------- -------------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds .............................. $ 11,900 $ 14,000 $ 16,100 $ 18,515
Less: estimated expenses .................... 475 475 475 475
----------- ----------- ----------- -----------
Estimated net proceeds ...................... 11,425 13,525 15,625 18,040
Less: Common Stock acquired by ESOP ......... (952) (1,120) (1,288) (1,481)
Less: Common Stock to be acquired by 1998
MRP ........................................ (476) (560) (644) (741)
----------- ----------- ----------- -----------
Net investable proceeds .................. $ 9,997 $ 11,845 $ 13,693 $ 15,818
=========== =========== =========== ===========
Consolidated net income:
Historical ................................. $ 708 $ 708 $ 708 $ 708
Pro forma income on net proceeds(2) ........ 398 471 545 630
Pro forma ESOP adjustments(3) .............. (63) (74) (85) (98)
Pro forma 1998 MRP adjustments(4) .......... (63) (74) (85) (98)
----------- ----------- ----------- -----------
Pro forma net income ..................... $ 980 $ 1,031 $ 1,083 $ 1,142
=========== =========== =========== ===========
Consolidated net income per share(5)(6):
Historical ................................. $ 0.33 $ 0.28 $ 0.24 $ 0.21
Pro forma income on net proceeds ........... 0.19 0.18 0.19 0.18
Pro forma ESOP adjustments(3) .............. (0.03) (0.03) (0.03) (0.03)
Pro forma 1998 MRP adjustments(4) .......... (0.03) (0.03) (0.03) (0.03)
----------- ----------- ----------- -----------
Pro forma net income per share ........... $ 0.46 $ 0.40 $ 0.37 $ 0.33
=========== =========== =========== ===========
Offering price as a multiple of pro forma net
earnings per share ......................... 22.22 25.00 27.03 30.30
Number of shares used in earnings per share
calculations ............................... 2,149,320 2,528,583 2,907,868 3,344,058
Shareholders' equity:
Historical(7) .............................. $ 15,245 $ 15,245 $ 15,245 $ 15,245
Estimated net proceeds ..................... 11,425 13,525 15,625 18,040
Less: Common Stock acquired by ESOP ........ (952) (1,120) (1,288) (1,481)
Less: Common Stock to be acquired by 1998
MRP(4) ................................... (476) (560) (644) (741)
----------- ----------- ----------- -----------
Pro forma shareholders' equity(8) ........ $ 25,242 $ 27,090 $ 28,938 $ 31,064
=========== =========== =========== ===========
Consolidated shareholders' equity per
share(6)(9):
Historical(6) .............................. $ 6.65 $ 5.66 $ 4.92 $ 4.28
Estimated net proceeds ..................... 5.00 5.02 5.04 5.06
Less: Common Stock acquired by ESOP ........ (0.42) (0.42) (0.42) (0.42)
Less: Common Stock to be acquired by 1998
MRP(4) ................................... (0.21) (0.21) (0.21) (0.21)
----------- ----------- ----------- -----------
Pro forma shareholders' equity(10) ....... $ 11.02 $ 10.05 $ 9.33 $ 8.71
=========== =========== =========== ===========
Purchase Price as a percentage of pro forma
shareholders' equity per share ............. 90.74% 99.50% 107.18% 114.81%
</TABLE>
30
<PAGE>
- ------------
(1) Gives effect to the sale of an additional 241,500 Conversion Shares in the
Conversion and Reorganization, which may be issued to cover an increase in
the pro forma market value of the MHC 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 by RP Financial that such issuance is compatible with its
determination of the estimated pro forma market value of the MHC and the
Savings Bank, as converted. See "THE CONVERSION AND REORGANIZATION --
Stock Pricing, Exchange Ratio and Number of Shares to be Issued."
(2) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Conversion Shares. Because funds on deposit at the
Savings Bank may be withdrawn to purchase shares of Common Stock (which
will reduce deposits by the amount of such purchases), the net amount of
funds available to the Savings Bank for investment following receipt of
the net proceeds of the Conversion Offerings will be reduced by the amount
of such withdrawals.
(3) It is assumed that 8% of the Conversion Shares issued in the Conversion and
Reorganization 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 and Reorganization) from the net proceeds from the
Conversion 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 at least equal to the principal and
interest requirement of the debt. As the debt is repaid, shareholders'
equity will be increased. The Savings Bank's payment of the ESOP debt is
based upon equal installments of principal over a 10-year period, assuming
a combined federal and state income tax rate of 34.0%. 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, which requires 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 Purchase Price. See
"MANAGEMENT -- Management of the Savings Bank -- Benefits -- Employee
Stock Ownership Plan."
(4) In calculating the pro forma effect of the 1998 MRP, it is assumed that the
required shareholder approval has been received, that the shares were
acquired by the 1998 MRP at the beginning of the periods presented in open
market purchases at the Purchase Price, that the amount contributed was
amortized during such periods at the rate of 20% per annum, that for
purposes of this table, compensation expense is recognized on a
straight-line basis over each vesting period, and that the combined
federal and state income tax rate is 34.0%. The issuance of authorized but
unissued shares of Common Stock instead of open market purchases would
dilute the voting interests of existing shareholders by approximately
2.04% and pro forma net income per share would be $.45, $.41, $.37 and
$.34 at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range for the year ended December 31, 1997,
respectively. Pro forma shareholders' equity per share would be $11.00,
$10.05, $9.35 and $8.74 at the minimum, midpoint, maximum and 15% above
the maximum of the Estimated Valuation Range at December 31, 1997,
respectively. In the event the fair market value per share is greater than
$10.00 per share on the date shares are awarded under the 1998 MRP, total
1998 MRP expense would increase. SEE "RISK FACTORS -- Expenses Associated
with ESOP and 1998 MRP." No effect has been given to the shares reserved
for issuance under the proposed 1998 Stock Option Plan. If shareholders
approve the 1998 Stock Option Plan following the Conversion and
Reorganization, the Holding Company will have reserved for issuance under
the 1998 Stock Option Plan authorized but unissued shares of Common Stock
representing an amount of shares equal to 10% of the Conversion Shares
sold in the Conversion Offerings. If all of the options were exercised,
and shares were issued from authorized but unissued shares, the voting and
ownership interests of existing shareholders would be diluted by
approximately 4.94%. Assuming shareholder approval of the 1998 Stock
Option Plan and that all options were exercised at the end of the year
ended December 31, 1997 at an exercise price of $10.00 per share, pro
forma net earnings per share would be $.46, $.42, $.38 and $.35,
respectively, for the year ended December 31, 1997, and pro forma
shareholders' equity per share would be $10.97,
31
<PAGE>
$10.05, $9.37 and $8.78, respectively, at December 31, 1997 at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range. See "MANAGEMENT -- Management of the Savings Bank -- Benefits --
1997 Stock Option Plan" and "-- Benefits -- Management Recognition Plan"
and "RISK FACTORS -- Possible Dilutive Effect of Benefit Programs."
(5) Per share amounts are based upon shares outstanding of 2,149,320,
2,528,583, 2,907,868 and 3,344,058 for the year ended December 31, 1997,
at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range, respectively. Such amounts include the
Conversion Shares sold in the Conversion and Reorganization, less the
number of shares assumed to be held by the ESOP not committed to be
released within the first year following the Conversion and
Reorganization.
(6) Historical per share amounts have been computed as if the Conversion Shares
expected to be issued in the Conversion and Reorganization had been
outstanding at the beginning of the period or on the dates 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 and Reorganization, the additional ESOP
expense or the proposed 1998 MRP expense, as described above.
(7) Historical book value includes $247,000 of assets held by the MHC, that
will be consolidated with the Savings Bank's book value upon consummation
of the Conversion and Reorganization.
(8) "Shareholders equity" represents the difference between the stated amounts
of the Savings Bank's assets and liabilities. The amounts shown do not
reflect the liquidation account that will be established for the benefit
of Eligible Account Holders and Supplemental Eligible Account Holders in
the Conversion and Reorganization, or the federal income tax consequences
of the restoration to income of the Savings Bank's special bad debt
reserves for income tax purposes that would be required in the unlikely
event of liquidation. See "THE CONVERSION AND REORGANIZATION -- Effects of
Conversion and Reorganization to Stock Form on Depositors and Borrowers of
the Savings Bank" and "FEDERAL TAXATION." The amounts shown for book value
do not represent fair market values or amounts distributable to
shareholders in the unlikely event of liquidation.
(9) Per share amounts are based upon shares outstanding of 2,291,131,
2,695,400, 3,099,728 and 3,564,698 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range, respectively.
(10) Shareholders equity per share does not give effect to outstanding options
or MRP awards that may be granted in the future. Amounts are not intended
to represent possible future price appreciation or depreciation of the
Common Stock.
32
<PAGE>
COMMON STOCK TO BE PURCHASED
OR RECEIVED BY MANAGEMENT
The following table sets forth, for each director and executive officer
and for all of the directors and executive officers as a group, (i) Exchange
Shares to be held upon consummation of the Conversion and Reorganization, based
upon their beneficial ownership of Savings Bank Common Stock as of December 31,
1997, (ii) proposed purchases of Conversion Shares, assuming shares available
to satisfy their subscriptions, and (iii) total shares of Common Stock to be
held upon consummation of the Conversion and Reorganization, in each case
assuming that 1,400,000 Conversion Shares are sold at the midpoint of the
Estimated Valuation Range. No individual has entered into a binding agreement
with respect to such intended purchases, and, therefore, actual purchases could
be more or less than indicated below. Directors and executive officers and
their associates may not purchase in excess of 33% of the shares sold in the
Conversion and Reorganization. Directors, officers and employees will pay the
Purchase Price for each share for which they subscribe.
<TABLE>
<CAPTION>
Number of
Exchange Proposed Purchase of Total Common Stock
Conversion Shares to be Held
Shares to ------------------------ ----------------------------
be Held Number Number Percentage
(1)(2) Amount of shares of shares(2) of Total
----------- ---------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Vincent J. Fumo (3)(4)(5) .......... 227,249 $ 0 0 227,249 8.43%
Chief Executive Officer
and Chairman of the Board
Anthony DiSandro (3)(5) ............ 102,646 0 0 102,646 3.81
President and Director
Sylvia M. DiBona (5) ............... 51,982 0 0 51,982 1.92
Director
P. Charles DeRita .................. 11,179 $ 28,210 2,821 14,000 0.52
Director
James W. Eastwood .................. 13,862 $ 138 138 14,000 0.52
Director
James F. Kenney .................... 224 $ 33,000 3,300 3,524 0.13
Director
Roseanne Pauciello ................. 5,590 $ 38,500 3,850 9,440 0.35
Director and Secretary
Thomas J. Finley ................... 0 $140,000 14,000 14,000 0.52
Director
S. Michael Palermo ................. 0 $140,000 14,000 14,000 0.52
Director
Jane Scaccetti Fumo (4)(5) ......... 227,249 0 0 227,249 8.43
Director
Alfonso Tumini ..................... 0 $ 45,370 4,537 4,537 0.17
Director
Leonard A. Green ................... 224 $ 10,000 1,000 1,224 0.05
Director
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Number of
Exchange Proposed Purchase of Total Common Stock
Conversion Shares to be Held
Shares to ------------------------- ----------------------------
be Held Number Number Percentage
(1)(2) Amount of shares of shares(2) of Total
----------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Gary Polimeno (5) ................... 19,769 $ 0 0 19,769 0.73%
Vice President
All directors and executive officers. 432,725 $435,480 43,548 471,734 17.5
as a group (13 persons)
</TABLE>
- ------------
(1) Excludes shares that may be received upon the exercise of outstanding stock
options granted under the 1995 Stock Option Plan. Based upon the Exchange
Ratio of 2.2358 Exchange Shares for each Public Savings Bank Share at the
midpoint of the Estimated Valuation Range, the persons named in the table
would have options to purchase Common Stock as follows: Mr. Fumo, 37,099
shares; Mr. DiSandro, 37,099 shares; and Mr. Polimeno, 5,976 shares.
(2) Excludes stock options that may be granted under the 1998 Stock Option Plan
and awards that may be granted under 1998 MRP if such plans are approved
by shareholders at an annual or special meeting held at least six months
following the Conversion and Reorganization. See "MANAGEMENT OF THE
SAVINGS BANK -- Benefits."
(3) Excludes Exchange Shares held by the ESOP as to which Messrs. Fumo and
DiSandro exercise voting control.
(4) Vincent Fumo and Jane Scaccetti Fumo are husband and wife. Amount includes,
based upon an Exchange Ratio of 2.2358 Exchange Shares for each Public
Savings Bank Share at the midpoint of the Estimated Valuation Range,
40,244 shares held through the 401(k) Plan, 16,109 shares held through the
Profit Sharing Plan, 94,004 shares held in IRA accounts, 22,718 shares
held by the 1995 MRP which have been awarded to Mr. Fumo, 447 shares held
by Mrs. Fumo and 671 shares held on behalf of the daughter of Vincent and
Jane Scaccetti Fumo.
(5) These individuals already own the maximum amount of Common Stock that can
be acquired in the Conversion Offerings and therefore they are not
permitted to purchase additional shares in the Conversion and
Reorganization.
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Business Strategy of the Savings Bank
The Savings Bank's strategy is to maximize profitability by providing
quality deposit and loan products in an efficient manner as a well-capitalized
and independent savings bank. Generally, the Savings Bank seeks to implement
this strategy by emphasizing retail deposits as its primary source of funds and
by maintaining a substantial part of its assets in locally-originated
residential first mortgage loans, commercial real estate loans, commercial
business loans, construction loans and consumer loans, mortgage-backed
securities and other liquid investment securities. The Savings Bank started an
expansion of its branch network by opening a branch in Center City Philadelphia
on June 14, 1996. The Savings Bank plans further expansion of its branch
network in areas contiguous to its current market and then into the suburbs of
Philadelphia by opening branch offices or acquiring the branches of other
institutions. The Savings Bank is also expanding the operations of TNMC, its
mortgage banking subsidiary, in an effort to increase its fee income. Retail
mortgage origination is being expanded by maintaining a staff of six
commissioned sales people to solicit mortgage loans throughout the Philadelphia
metropolitan area and surrounding counties in Pennsylvania, New Jersey and
Delaware; wholesale mortgage origination is being expanded by originating,
processing and servicing loans for other mortgage companies. See
"SUBSIDIARIES." The Savings Bank is increasing loan originations through its
existing office network and is increasing origination of other loan products
separate from TNMC such as commercial real estate loans, commercial business
loans, construction loans and consumer loans. During the year ended December
31, 1997, loan originations other than residential mortgage loans totalled
$26.75 million or 72.42% of originations during the period. This increased
origination of loans other than residential mortgage loans reflects
management's effort to diversify the Savings Bank's loan portfolio, achieve a
higher net interest margin through the origination of higher yielding assets.
The Savings Bank expects this diversification trend to continue.
The Savings Bank's business strategy incorporates the following elements:
(1) increasing assets by expanding its retail branch network to include other
contiguous segments of the metropolitan Philadelphia market; (2) increasing fee
income by expanding its mortgage banking operations through the metropolitan
Philadelphia area and the adjacent counties of Pennsylvania, New Jersey and
Delaware, and (3) increasing net interest income and reducing interest rate
risk by emphasizing the origination for portfolio of commercial real estate,
construction, commercial business and consumer loans, which generally bear
higher interest rates and have shorter terms than residential mortgage loans.
The Savings Bank's expansion strategy has resulted in materially increased
operating expenses associated with the lease of the Center City Philadelphia
office space, related equipment expense and salary and benefit expenses for
personnel expansion. Also as expected, the generation of increased revenues
from the new branch and the mortgage banking operation has lagged recognition
of these additional expenses.
In February 1996, the Board of Trustees of Pennsylvania Savings Bank
elected to change the Savings Bank's fiscal year end from September 30th to
December 31st. The Savings Bank filed a transition report pursuant to Section
13 of the Securities Exchange Act of 1934 for the transition period from
October 1, 1995 to December 31, 1995. Due to this change, a portion of the
following discussion compares the Savings Bank's results of operations for its
fiscal year ended December 31, 1996 to its fiscal year ended September 30,
1995. Management of the Savings Bank does not believe that this timing
difference is material to an understanding of the Savings Bank's comparative
results of operations.
Financial Condition -- December 31, 1997 Compared to December 31, 1996
The Savings Bank's total assets increased $10.91 million or 9.21% to
$129.34 million at December 31, 1997 from $118.43 million at December 31, 1996.
The increase in assets was primarily the result of higher levels of office
properties and equipment, net loans, loans held for sale and investments which
were partially offset by a decrease in cash and cash equivalents.
Net loans increased by $9.33 million to $61.92 million at December 31,
1997 from $52.59 million at December 31, 1996. The increase of 17.74% was the
result of modest demand for new mortgage loan origination in the Savings Bank's
market area. Net loans also increased due to the Savings Bank increasing loan
origination of other loan products such as commercial real estate, commercial
business loans, construction loans and consumer loans.
35
<PAGE>
Total investment securities (including mortage-backed securities)
increased $2.70 million, or 10.83%, to $27.62 million at December 31, 1997 from
$24.92 million at December 31, 1996. The increase occurred because the Savings
Bank transferred cash and cash equivalents and new deposit funds into higher
yielding, one to five year maturity investment securities during the year ended
December 31, 1997.
Cash and cash equivalents, including interest-bearing deposits with banks,
decreased $3.73 million to $27.89 million at December 31, 1997 from $31.62
million at December 31, 1996. This decrease was the result of cash used for the
purchase of investments, capital expenditures and disbursements of loan
proceeds net of cash provided from new deposits, maturities of investments and
loan payments.
Total liabilities increased to $114.34 million at December 31, 1997 from
$104.27 million at December 31, 1996. This $10.07 million, or 9.66% increase
reflected an increase in the Savings Bank's primary source of funds, saving
deposits, which aggregated $108.73 million at December 31, 1997, an increase of
$8.16 million, or 8.11% from $100.57 million at December 31, 1996.
Shareholder's equity increased by $830,000, or 5.86%, from $14.17 million
at December 31, 1996 to $15.00 million at December 31, 1997. This increase
reflects the Savings Bank's earnings for the year ended December 31, 1997 and a
decrease of $60,000 in unrealized losses (net of taxes) on investment and
mortgage-backed securities held in the Savings Bank's available for sale
portfolio as well as the payment of $60,000 on the Savings Bank's ESOP loan.
36
<PAGE>
Results of Operations for the Years Ended December 31, 1997 and December 31,
1996
General. The Savings Bank's net income is primarily dependent on its net
interest income, which is the difference between interest income earned on its
interest-earning assets (such as investments and mortgage-backed securities,
other investment securities and loans), and its cost of funds (consisting of
interest paid on deposits). The Savings Bank's net income also is affected by
its provision for loan losses, as well as by the amount of noninterest income,
including income from fees and services charges, net gains and losses on sales
of mortgage-backed securities and other investments, and noninterest expense
such as employee compensation and benefits, deposit insurance premiums,
occupancy and equipment costs, and income taxes. Earnings of the Savings Bank
also are affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities, which events are beyond the control of the Savings
Bank. In particular, the general level of market interest rates tends to be
highly cyclical. In periods of high interest rates, earnings of the Savings
Bank are likely to be depressed, which in turn would be likely to have a
detrimental effect on the market value of any investment in the Holding
Company's Common Stock.
Average Balance Sheet. The following table provides an analysis on a
monthly basis of net interest income, setting forth for the periods (i) average
assets, liabilities and shareholders' equity, (ii) interest income earned on
interest-earning assets and interest expense paid on interest-bearing
liabilities, (iii) average yields earned on interest-earning assets and average
rates paid on interest-bearing liabilities, and (iv) the Savings Bank's net
interest margin (net interest income as a percentage of average total
interest-earning assets).
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1997 1996
----------------------------------- -----------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------- ---------- ---------- ----------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Interest-earning deposits(1) ................... $ 25,648 $1,210 4.72% $ 27,803 $1,207 4.34%
Investment securities .......................... 23,182 1,616 6.97 18,880 1,183 6.27
Mortgage-backed securities ..................... 5,696 374 6.57 6,494 431 6.64
Net loans(2) ................................... 62,213 5,540 8.90 56,048 5,218 9.31
-------- ------ ----- -------- ------ -----
Total interest-earning assets ................. 116,739 8,740 7.49 109,225 8,039 7.36
-------- ------ ----- -------- ------ -----
Noninterest-earning assets ...................... 6,565 6,777
-------- --------
Total assets .................................. $123,304 $116,002
======== ========
LIABILITIES
Interest-bearing liabilities:
Savings deposits ............................... $ 40,061 1,137 2.84% $ 40,677 1,122 2.76%
Certificates ................................... 59,178 3,397 5.74 52,253 2,960 5.66
-------- ------ ----- -------- ------ -----
Total deposits ................................ 99,239 4,534 4.57 92,930 4,082 4.39
Borrowed money ................................ 323 31 9.60 387 36 9.30
-------- ------ ----- -------- ------ -----
Total interest-bearing liabilities ............ 99,562 4,565 4.59% 93,317 4,118 4.41%
-------- ------ ----- -------- ------ -----
Noninterest-bearing liabilities ................. 9,096 8,431
-------- --------
Total liabilities ............................. 108,658 101,748
Retained earnings or shareholders' equity ....... 14,646 14,254
-------- --------
Total liabilities and retained
earnings or shareholders' equity .............. $123,304 $116,002
======== ========
Net interest income ............................. $4,175 $3,921
====== ======
Interest rate spread(3) ......................... 2.90% 2.95%
Net yield on interest-earning assets(4) ......... 3.58% 3.59%
Ratio of interest-earning assets to interest-
bearing liabilities ............................ 1.17x 1.17x
<PAGE>
<CAPTION>
Year Ended September 30,
-----------------------------------
1995
-----------------------------------
Average Yield/
Balance Interest Rate
----------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
ASSETS
Interest-earning assets:
Interest-earning deposits(1) ................... $ 24,782 $ 817 3.30%
Investment securities .......................... 21,063 1,135 5.39
Mortgage-backed securities ..................... 6,884 493 7.16
Net loans(2) ................................... 51,259 4,825 9.41
-------- ------ -----
Total interest-earning assets ................. 103,988 7,270 6.99%
-------- ------ -----
Noninterest-earning assets ...................... 5,756
--------
Total assets .................................. $109,744
========
LIABILITIES
Interest-bearing liabilities:
Savings deposits ............................... $ 44,277 1,200 2.71%
Certificates ................................... 49,416 2,237 4.53
-------- ------ -----
Total deposits ................................ 93,693 3,437 3.67
Borrowed money ................................ -- 6 --
-------- ------ -----
Total interest-bearing liabilities ............ 93,693 3,443 3.67%
-------- ------ -----
Noninterest-bearing liabilities ................. 6,560
--------
Total liabilities ............................. 100,253
Retained earnings or shareholders' equity ....... 9,491
--------
Total liabilities and retained
earnings or shareholders' equity .............. $109,744
========
Net interest income ............................. $3,827
======
Interest rate spread(3) ......................... 3.32%
Net yield on interest-earning assets(4) ......... 3.68%
Ratio of interest-earning assets to interest-
bearing liabilities ............................ 1.11x
</TABLE>
- ------------
(1) Includes interest-earning deposits with the Federal Home Loan Bank of
Pittsburgh.
(2) Includes nonaccrual loans.
(3) Represents the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities.
(4) Represents net interest earnings divided by average interest-earning
assets.
37
<PAGE>
Rate/Volume Analysis. Net interest income is affected by changes in the
mix of the volume and sales of interest-earning assets and interest-earning
liabilities. The following table represents the extent to which changes in
interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities have affected the Savings Bank's interest income
and interest expense during the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31, and
Year Ended December 31, September 30,
------------------------------------- ----------------------------------
1997 vs. 1996 1996 vs. 1995
Increase/(Decrease) Increase/(Decrease)
------------------------------------- ----------------------------------
Volume Rate Total Volume Rate Total
---------- ----------- ---------- -------- ------------ --------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investments(1) .......................... $198 $ 238 $436 $ (6) $444 $ 438
Mortgage-backed securities .............. (52) (5) (57) (26) (36) (62)
Loans(2) ................................ 549 (227) 322 446 (53) 393
----- ------- ----- ----- ---- -----
Total interest-earning assets ......... 695 6 701 414 355 769
Interest-bearing liabilities:
Deposits ................................ 380 72 452 61 584 645
Borrowed Money .......................... (6) 1 (5) 36 (6) 30
Total interest-bearing
liabilities. .......................... 374 73 447 97 578 675
------ ------- ------ ----- ------ -----
Net change in net interest income . $321 $ (67) $254 $ 317 ($223) $ 94
====== ======= ====== ===== ====== =====
</TABLE>
- ------------
(1) Includes interest-earning deposits and investment securities.
(2) Includes non-accrual loans and loans held for sale.
Net Income. The Savings Bank's net income totaled $708,000 and $139,000
for the year ended December 31, 1997 and December 31, 1996, respectively. This
increase in net income was the result of an one basis point increase in the
Savings Bank's net yield on interest earning assets principally caused by an
increase of $6.17 million in average loans and a $4.30 million increase in
investment securities and a decrease in noninterest expense associated with the
FDIC's one-time special assessment in the year ended December 31, 1996. Without
the SAIF special assessment, net income for 1996 would have been $513,000.
Earnings per share for 1997 and 1996, were $.61 and $.12, respectively.
Interest Income. Total interest income increased by $700,000, or 8.71%, to
$8.74 million for the year ended December 31, 1997, from $8.04 million for the
year ended December 31, 1996. This reflected a $7.51 million, or 6.88%,
increase in average interest-earning assets, and a 13 basis point increase in
average yield on interest-earning assets. The increase in average
interest-earning assets was comprised of a $3.50 million increase in average
investment and mortgage-backed securities and a $6.17 million increase in
average net loans. The increase in interest-earning assets generally reflected
management's strategy of pursuing moderate growth while maintaining adequate
margins over minimum required capital levels.
Interest Expense. Total interest expense increased to $4.56 million for
the year ended December 31, 1997, from $4.12 million for the year ended
December 31, 1996, representing an increase of $440,000 or 10.68%. Higher
interest expense resulted from a $6.25 million increase in average-interest
bearing liabilities and an 18 basis point incerase in the average yield on
interest-bearing liabilities. This increase in interest-bearing liabilities was
comprised of a $6.93 million increase in higher yielding average certificates
of deposit that was only partially offset by a $616,000 decrease in average
savings deposits. Despite the small decline in savings account deposits, the
Savings Bank attracts a significant portion of its deposits from its passbook
product. Management's experience is that its customer base still finds the
traditional passbook savings account attractive even though higher yields may
be available from alternative deposit products. Accordingly, the Savings Bank
prices its passbook product above its large commercial bank competitors. As a
result, the Savings Bank has been able to fund operations with a significant
percentage of passbook savings accounts and thereby achieve a comparatively low
cost of funds.
38
<PAGE>
Provision for Loan Losses. The Savings Bank makes a provision to its
allowance for loan losses to protect the Savings Bank against possible but not
yet identified losses inherent in the Savings Bank's loan portfolio. This
provision is recognized for financial reporting purposes as a reduction of
income. In making such provision, management of the Savings Bank considers,
among other factors, the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans and current economic
conditions that may affect the borrower's ability to pay. Effective January 1,
1997, interest is discontinued on all loans that are contractually past due 3
months. Prior to January 1, 1997, interest was discontinued on residential
loans that were contractually past due 12 months, unless the value of the
mortgaged property well exceeded the loan balance in which case interest
continued to accrue until the loan balance plus accrued interest equalled the
fair market value of the property securing the loan. Interest was discontinued
on commercial, consumer and unsecured loans that were contractually past due 3
months. During the years ended December 31, 1997 and 1996, the Savings Bank had
charge-offs against the allowance for loan losses of $29,000 and $133,000,
respectively, reflecting write-offs on several different loans in both periods.
During such periods, the Savings Bank provided $60,000 and $133,000,
respectively, for loan losses in order to protect against future losses. The
provision for loan losses was higher in both 1997 and 1996 compared to prior
periods. This occurred during these years, in part, because of deterioration in
certain specific credits in 1996 and because of the planning and implementation
of the loan diversification strategy. Management expects the provision for loan
losses to increase in future periods as the Savings Bank achieves its
diversification strategy. In addition, the provision for loan losses may
increase in 1998 and 1999 if management determines that losses inherent in the
existing portfolio of nonaccrual loans exceeds anticipated recoveries.
Net Interest Income After Provision for Loan Losses. Net interest income
after the provision for loan losses for the year ended December 31, 1997,
increased to $4.12 million from $3.79 million for the year ended December 31,
1996, an increase of $330,000, or 8.71%.
Noninterest Income. Noninterest income consists of gain on sale of loans,
loan fees, service charges, rental income, net gains and losses on sales of
investment and mortgage-backed securities and other income. Noninterest income
increased by $60,000, or 5.94%, to $1.07 million for the year ended December
31, 1997 from $1.01 million for the year ended December 31, 1996. The principal
reasons for the increase in noninterest income was a $220,000 increase in gain
on sale of loans to $556,000 in 1997 from $336,000 in 1996 and a $54,000
increase in loan fees to $81,000 in 1997 from $27,000 in 1996 due to higher
loan origination volume which was offset by a $23,000 decrease in service
charges attributable to a major customer of the bank discontinuing services
where its daily excess cash was sent to the Savings Bank and the customer was
charged a fee per $1,000. This service began in the last calendar quarter of
1995 and was discontinued in the third quarter of 1996; therefore there were no
fees charged for the year ended December 31, 1997. Other income decreased
$90,000 from $137,000 for the year ended December 31, 1996 to $47,000 for the
year ended December 31, 1997.
Noninterest Expense. Noninterest expense principally consists of
employees' compensation and benefits, deposit insurance premiums and premises
and occupancy costs. Noninterest expense decreased by $230,000, or 5.28%, to
$4.13 million for the year ended December 31, 1997, from $4.36 million for the
year ended December 31, 1996. The principal reasons for the decrease was a
$671,000 decrease in federal insurance premiums due to the FDIC's one-time
assessment to recapitalize the Savings Association Insurance Fund in the year
ended December 31, 1996 and a $135,000 decrease in expenses of real estate
owned due to a write down of real estate owned for the year ended December 31,
1996. This decrease was offset by an increase of $228,000 in premises and
occupancy costs and a $344,000 increase in compensation and employee benefits
due to the establishment of the new Center City branch, the relocation of the
executive offices to Center City and related increased staffing requirements.
Income Taxes. Income tax provisions for the year ended December 31, 1997
and 1996 of $345,000 and $201,000, respectively, generally reflect the Savings
Bank's pre-tax income at rates then in effect, except that a $37,000 and
$59,000 deferred tax expense as a result of timing differences in the
recognition of revenue and expenses for tax and financial statement purposes
were realized in the December 31, 1997 and 1996 period, respectively.
39
<PAGE>
Results of Operations for the Years Ended December 31, 1996 and September 30,
1995
Net Income
The Savings Bank's net income totalled $139,000 and $659,000 for the years
ended December 31, 1996 and September 30, 1995, respectively. The decrease in
net income was the result of substantially higher non-interest expense
associated with the federal deposit insurance assessment to recapitalize the
SAIF, the Savings Bank's Center City branch expansion, the move of the
executive offices from South Philadelphia to Center City, Philadelphia and the
expansion of the mortgage banking operations and was partially offset by higher
net interest income and noninterest income.
Interest Income. Total interest income increased by $770,000, or 10.59%,
to $8.04 million for the year ended December 31, 1996, from $7.27 million for
the year ended September 30, 1995. This reflected a $5.24 million, or 5.04%,
increase in average interest-earning assets and a 37 basis point increase in
average yield on interest-earning assets. The increase in average
interest-earning assets was comprised of a $3.02 million increase in average
interest-earning deposits and a $4.79 million increase in average net loans.
The increase in net loans resulted from modest loan demand in the Savings
Bank's market area. The increase in interest-earning assets generally reflected
management's strategy of pursuing moderate growth while maintaining adequate
margins over minimum required capital levels.
Interest Expense. Total interest expense increased to $4.12 million for
the year ended December 31, 1996, from $3.44 million for the year ended
September 30, 1995, representing an increase of $680,000, or 19.77%. Higher
interest expense resulted from a $376,000 decrease in average-interest bearing
liabilities but a shift in deposit composition including a $2.84 million
increase in average certificates of deposit and a $3.60 million decrease in
average savings deposits. Customers indicated a preference for certificates of
deposit, which had an average yield increase of 113 basis points, over savings
accounts, which had an average yield increase of only 5 basis points. As a
result, the yield on all interest-bearing liabilities increased 74 basis
points. In 1996 as market interest rates rose and alternative deposit products
began to pay higher yields, the historical relative price inelasticity of the
Savings Bank's passbook accounts diminished. Accordingly, the Savings Bank was
forced to increase rates on passbook accounts which resulted in compression of
its interest rate spread from 3.32% for the year ended September 30, 1995 to
2.95% for the year ended December 31, 1996.
Provision for Loan Losses. For the years ended December 31, 1996 and
September 30, 1995, the Savings Bank had charge-offs against the allowance for
loan losses of $133,000 and $27,000, reflecting write-offs on several different
loans. During such period, the Savings Bank provided $133,000 and $27,000,
respectively, for loan losses in order to protect against future losses. The
significant increase in the provision for loan losses for the year ended
December 31, 1996 from the prior period was caused primarily by a decision on
the part of management to increase the allowance for loan losses in
anticipation of the implementation of the loan diversification strategy of the
Savings Bank.
Net Interest Income After Provision for Loan Losses. Net interest income
after the provision for possible loan losses for the year ended December 31,
1996, decreased to $3.79 million from $3.80 million for the year ended
September 30, 1995, a decrease of $10,000 or .26%.
Noninterest Income. Noninterest income increased by $38,000, or 4.33%, to
$915,000 for the year ended December 31, 1996 from $877,000 for the year ended
September 30, 1995. The principal reasons for the increase in noninterest
income were a $16,000 increase in rental income, a $150,000 increase in gain on
sale of loans due to higher volume orgination volume, and a $300,000 increase
in service charges attributable to a major customer of the Savings Bank
requiring additional services where its daily excess cash is sent to the
Savings Bank and the customer is charged a fee per $1,000. This service began
in the last calendar quarter of 1995; therefore there were no fees charged
prior to September 30, 1995. The increase in noninterest income was offset by a
decrease in other income of $245,000 and a decrease of $182,000 in loan fees.
Noninterest Expense. Noninterest expense principally consists of
employees' compensation and benefits, deposit insurance premiums and occupancy
and equipment costs. Noninterest expense increased by $820,000, or 22.90%, to
$4.40 million for the year ended December 31, 1996, from $3.58 million for the
year ended September 30, 1995. The principal reasons for the increase were a
$534,000 increase in federal insurance premiums due
40
<PAGE>
to the FDIC's one-time assessment to recapitalize the SAIF, a $128,000 increase
in premises and occupancy costs due to the opening of the new Center City
Branch and relocation of the executive offices in June 1996 and a $107,000
increase in expenses of real estate owned and a $71,000 increase in noninterest
expense.
Income Taxes. Income tax provisions for the years ended December 31, 1996
and September 30, 1995 of $201,000 and $433,000, respectively, generally
reflect the Savings Bank's pre-tax income at rates then in effect, except that
a $59,000 and $33,000 deferred tax expense as a result of timing differences in
the recognition of revenue and expenses for tax and financial statement
purposes were realized in the December 31, 1996 and September 30, 1995 period,
respectively.
Liquidity and Capital Resources
The Savings Bank is required to maintain a sufficient level of liquid
assets, as determined by management and defined and reviewed for adequacy by
the FDIC during its regular examinations. The FDIC, however, does not prescribe
by regulation a minimum amount or percentage of liquid assets. The FDIC allows
any marketable security, whose sale would not impair the capital adequacy of
the Savings Bank, to be eligible for liquidity. The Savings Bank's liquidity is
quantified through the use of a standard liquidity ratio of liquid assets (cash
and cash equivalents, investment securities available-for-sale, mortgage-backed
securities available-for-sale and Federal Home Loan Bank stock) to short-term
borrowings plus deposits. Using this formula, the Savings Bank's liquidity
ratio was 42.11% as of December 31, 1997. The Savings Bank adjusts its
liquidity levels in order to meet funding needs of deposit outflows and loan
commitments. The Savings Bank also adjusts liquidity as appropriate to meet its
asset/liability management objectives.
The Savings Bank's primary source of funds are deposits, the amortization
and prepayment of loans and mortgage-backed securities, maturities of
investments securities, the sale of mortgage loans as part of TNMC's mortgage
banking business and earnings provided from operations. While scheduled
principal repayments on loans and mortgage-backed securities are a relatively
predictable source of funds, deposit flows and loan prepayments are greatly
influenced by general interest rate levels, economic conditions and
competition. The Savings Bank manages the pricing of its deposits to maintain a
desired deposit balance. In addition, the Savings Bank invests excess funds in
short-term, interest-earning assets and other assets that provide liquidity to
meet lending requirements and interest rate risk management objectives.
Short-term, interest-earning deposits with the FHLB of Pittsburgh amounted to
$26.70 million at December 31, 1997. For additional information about cash
flows from the Savings Bank's operating, financing and investment activities,
see "CONSOLIDATED FINANCIAL STATEMENTS."
A major portion of the Savings Bank's liquidity consists of cash and cash
equivalents, which are a product of its operating investment and financing
activities. The primary sources of cash were net income, principal repayments
on loans and mortgage-backed securities and increases in deposit accounts. At
December 31, 1997, the Savings Bank had unfunded loan commitments of $2.99 and
certificates of deposit due to mature within one year of $45.64 million. The
Savings Bank believes its has sufficient liquidity to meet these obligations.
Asset/Liability Management and Interest Rate Sensitivity Analysis
Interest rate risk may be analyzed by examining the extent to which an
institution's assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or re-price within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or re-pricing within a specific time period
and the amount of interest-bearing liabilities maturing or re-pricing within
that time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to adversely affect
net interest income while a positive gap would tend to positively affect net
interest income. Conversely, during a period of falling interest rates, a
negative gap would tend to positively affect net interest income while a
positive gap would tend to adversely affect net interest income.
41
<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1997, that are
expected to re-price or mature, based upon certain assumptions, in each of the
future time periods shown. Except as stated below, the amounts of assets and
liabilities shown that re-price or mature during a particular period were
determined in accordance with the earlier of the term of re-pricing or the
contractual term of the asset or liability. Management believes that these
assumptions approximate the standards used in the savings industry and
considers them appropriate and reasonable.
<TABLE>
<CAPTION>
More than More Than
One Year Two Years
Within One To Two To Three
Year Years Years
------------ ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans (1)(2) Mortgage loans:
Residential ..................... $ 3,568 $ 125 $ 570
Commercial. ..................... 1,627 566 1,073
Land and construction
loans .......................... 2,597
Consumer loans. ................. 357 117 165
Other loans ..................... 2,157
------- -------- ---------
Total loans .................... 10,306 808 1,808
------- -------- ---------
Mortgage-backed
securities(3) .................. 625 535 461
Mortgage loans held for
sale. .......................... 6,575
Investment securities(4). ....... 18,234 2,020 --
Other interest-earning
assets. ........................ 23,778
------- -------- ---------
Total interest-earning
assets ....................... $ 59,518 $ 3,363 $ 2,269
======== ======== =========
Interest-bearing liabilities:
Transaction accounts. ............. $ 5,374
Money market accounts ............. 7,201
Other savings accounts. ............ 1,188
Passbook accounts(5). ............. 3,922 3,334 2,834
Certificate of deposit over
100,000. ........................ 8,904 1,284 100
Certificate of deposit under
100,000. ........................ 36,738 12,884 1,472
Repurchase agreement. ............. 1,724 945 173
-------- -------- ---------
Total interest-bearing
liabilities .................... $ 65,051 $ 18,447 $ 4,579
======== ======== =========
Interest-bearing assets net of
interest-bearing liabilities. ..... (5,533) (15,084) (2,310)
Cumulative excess (deficiency)
interest-bearing assets over
interest-bearing liabilities. ..... (5,533) (20,617) (22,927)
Cumulative excess (deficiency)
of interest-earning assets
over interest-bearing liabili-
ties as a percentage of total
assets ............................ (4.28%) (15.94%) (17.73%)
<PAGE>
<CAPTION>
More Than More Than
Three Five Years
Years To To Ten More Than
Five Years Years Ten Years Total
------------ ------------- ------------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans (1)(2) Mortgage loans:
Residential ..................... $ 2,147 $ 4,059 $ 34,471 $ 44,940
Commercial. ..................... 6,184 1,162 1,510 12,122
Land and construction
loans .......................... 2,597
Consumer loans. ................. 264 49 -- 952
Other loans ..................... 2,157
--------- -------- --------- ---------
Total loans .................... 8,595 5,270 35,981 62,768
--------- -------- --------- --------
Mortgage-backed
securities(3) .................. 927 2,453 -- 5,001
Mortgage loans held for
sale. .......................... 6,575
Investment securities(4). ....... -- -- -- 20,254
Other interest-earning
assets. ........................ 23,778
--------- -------- --------- --------
Total interest-earning
assets ....................... $ 9,522 $ 7,723 $ 35,981 $118,376
========= ======== ========= ========
Interest-bearing liabilities:
Transaction accounts. ............. $ 5,374
Money market accounts ............. 7,201
Other savings accounts. ............ 1,188
Passbook accounts(5). ............. 4,817 11,240 -- 26,147
Certificate of deposit over
100,000. ........................ 503 -- -- 10,791
Certificate of deposit under
100,000. ........................ 1,205 405 -- 52,704
Repurchase agreement. ............. -- -- -- 2,842
--------- -------- --------- --------
Total interest-bearing
liabilities .................... $ 6,525 $ 11,645 $ -- $106,247
========= ======== ========= ========
Interest-bearing assets net of
interest-bearing liabilities. ..... 2,997 (3,922) 35,981 12,129
Cumulative excess (deficiency)
interest-bearing assets over
interest-bearing liabilities. ..... (19,930) (23,852) 12,129
Cumulative excess (deficiency)
of interest-earning assets
over interest-bearing liabili-
ties as a percentage of total
assets ............................ (15.41%) (18.44%) 9.38%
</TABLE>
- ------------
(1) Net of deferred loan fees and the allowance for loan losses.
(2) Adjustable-rate loans are included in the period in which interest rates
are next scheduled to adjust rather than in the period in which they are
contractually due to mature. Fixed-rate loans are included in the period
in which they are contractually due to mature.
(3) Reflects the repricing of the underlying loans and/or the expected average
life of the mortgage-backed security.
(4) Reflects repricing or contractual maturity.
(5) For passbook accounts, which totalled $26.15 million, or 24.05% of total
deposits at December 31, 1997, assumes an annual decay rate of 15% through
the fifth year, based upon historical trends.
42
<PAGE>
Significant shortcomings are inherent in the analysis presented by the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to re-pricing, they may react in different
degrees to changes in market interest rates. Also, interest rates on certain
types of assets and liabilities may fluctuate in advance of or lag behind
changes in market interest rates. Additionally, certain assets, such as some
adjustable rate loans, have features that restrict changes in interest rates on
a short term basis and over the life of the asset. Moreover, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in calculating the table.
The Savings Bank's portfolio of adjustable rate loans constituted only
11.92% of the total loan portfolio at December 31, 1997. Accordingly, the
Savings Bank's policy in recent years has been to reduce its exposure to
interest rate risk by maintaining high asset liquidity through the purchase of
short-term or adjustable-rate investment securities and mortgage-backed
securities. See "RISK FACTORS -- Interest Rate Risk." Although this requires
the Savings Bank to accept lower yields on these assets, it permits the Savings
Bank to frequently reinvest proceeds of repayments and maturing securities to
take advantage of changing interest rates. As part of its strategy to expand
commercial, commercial real estate and consumer lending, the Savings Bank has
also experienced growth in short-term loans that re-price more frequently and
therefore more closely match the market interest rates.
Of the Savings Bank's $108.73 million in deposits at December 31, 1997,
$45.43 million consisted of deposit accounts that are immediately withdrawable.
The Savings Bank nevertheless believes that, based upon historical experience,
a substantial portion of these deposits represent inelastic deposits and are
not likely to be withdrawn because of changes in interest rates, nor are they
likely to re-price as rapidly as changes in market interest rates. Therefore,
although the foregoing table indicates that interest-earning liabilities
significantly exceed interest-earning assets for maturity or repricing periods
of two years or less, the Savings Bank believes that because of its stable core
deposit base and its relatively high balance of cash and short term investments
that the Savings Bank is not exposed to material interest rate risk.
Impact of Accounting Pronouncements and Regulatory Policies
Accounting for Employee Stock Ownership Plans. In November 1993 the
American Institute of Certified Public Accountants issued SOP 93-6, which
requires an employer to record compensation expense in an amount equal to the
fair value of shares committed to be released to employees from an employee
stock ownership plan and to exclude unallocated shares from earnings per share
computations. The effect of SOP 93-6 on net income and book value 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. See "PRO FORMA
DATA."
Accounting for Stock-Based Compensation. In October 1995, FASB issued SFAS
No. 123. This statement encourages all entities to adopt a fair value-based
method of accounting for employee stock compensation plans, whereby
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value-based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," whereby compensation cost is the excess, if any, of the
quoted market price of the stock at the grant date (or other measurement date)
over the amount an employee must pay to acquire the stock. Entities electing to
remain with the accounting in APB Opinion No. 25 must make pro forma
disclosures of net income and earnings per share, as if the fair value-based
method of accounting had been applied.
Generally, stock options issued under the 1995 Stock Option Plan have no
intrinsic value at the grant date, and under APB Opinion No. 25, no
compensation cost is recognized for them. The accounting requirements of this
statement are generally effective for transactions entered into in fiscal years
that begin after December 15, 1995. The disclosure requirements of this
statement are generally effective for financial statements for fiscal years
beginning after December 15, 1995. The Savings Bank has continued accounting
for stock options under APB Opinion No. 25 and has made the pro forma
disclosures prescribed by this Statement. See "PRO FORMA DATA."
43
<PAGE>
Earnings Per Share. SFAS No. 128, "Earnings Per Share," issued in February
1997, establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly-held common stock or potential
common stock. It replaces the presentation of primary EPS with a presentation
of basic EPS and requires the dual presentation of basic and diluted EPS on the
face of the income statement. SFAS No. 128 is effective for the financial
statements for the periods ending after December 15, 1997. SFAS No. 128
requires restatement of all prior period EPS data presented. The impact of its
adoption has not been material to the Savings Bank.
Disclosure of Information About Capital Structure. SFAS No. 129,
"Disclosure of Information About Capital Structure," establishes standards for
disclosing information about an entity's capital structure and applies to all
entities. SFAS No. 129 continues the previous requirements to disclose certain
information about an entity's capital structure found in APB Opinions No. 10,
"Omnibus Opinion - 1966," and No. 15, "Earnings Per Share," and SFAS No. 47,
"Disclosure of Long-Term Obligations," for entities that were subject to those
standards. SFAS No. 129 is effective for financial statements for periods
ending after December 15, 1997. SFAS No. 129 contains no change in disclosure
requirements for entities that were previously subject to the requirements of
APB Opinions Nos. 10 and 15 and SFAS No. 47. The adoption of the provisions of
SFAS No. 129 is not expected to have a material impact on the Savings Bank.
Disclosure About 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 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.
Disclosure Regarding Year 2000 Compliance
The Holding Company and the Savings Bank are taking measures to address
the impact of the "Year 2000" issue on its information systems. The Year 2000
issue, which is common to most businesses, concerns the inability of certain
information systems, primarily certain computer software programs, to properly
recognize and process date sensitive information beyond the year 1999. The
Holding Company and the Savings Bank outsource all data processing applications
to Intrieve, Incorporated ("Intrieve"). Under the agreement with Intrieve,
Intrieve is obligated to incur all software related costs to make its system
Year 2000 compliant. Intrieve has prepared a detailed schedule of functions to
be performed in its compliance project. The expected completion of the project
is scheduled for December 1998. The Holding Company and the Savings Bank are
obligated to incur only the hardware cost associated with implementing the
changes required by Intrieve, however the hardware costs are not expected to be
material. Other computer programs utilized by the Company and the Savings Bank,
such as accounting packages and investment packages, are either Year 2000
compliant or will be Year 2000 compliant in the near future at no significant
cost to the Holding Company and the Savings Bank.
44
<PAGE>
BUSINESS
Business of the Holding Company
General. The Holding Company was organized as a Pennsylvania business
corporation at the direction of the Savings Bank on October 3, 1997 for the
purpose of becoming a holding company for the Savings Bank upon completion of
the Conversion and Reorganization. As a result of the Conversion and
Reorganization, the Savings Bank will be a wholly-owned subsidiary of the
Holding Company and all of the issued and outstanding capital stock of the
Savings Bank will be owned by the Holding Company.
Business. Prior to the Conversion and Reorganization, the Holding Company
has not and will not engage in any significant activities other than that of an
organizational nature. Upon completion of the Conversion and Reorganization,
the Holding Company's primary business activity will be the ownership of the
outstanding capital stock of the Savings Bank. 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.
Because the Holding Company will hold only the outstanding capital stock
of the Savings Bank upon consummation of the Conversion and Reorganization, the
competitive conditions applicable to the Holding Company will be the same as
those confronting the Savings Bank. See "BUSINESS -- Business of the Savings
Bank -- Competition."
Business of the Savings Bank
General. The Savings Bank is a Pennsylvania-chartered stock savings bank
headquartered in Philadelphia, Pennsylvania. The Savings Bank is a
community-oriented institution offering traditional deposit and loan products.
The Savings Bank operates five full-service offices in Philadelphia,
Pennsylvania and one full-service office in Glenside, Montgomery County,
Pennsylvania.
In February 1996, the Board of Trustees of Pennsylvania Savings Bank
elected to change the Savings Bank's fiscal year end from September 30th to
December 31st. The Savings Bank filed a Transition Report pursuant to Section
13 of the Securities Exchange Act of 1934 for the transition period from
October 1, 1995 to December 31, 1995.
At December 31, 1997, the Savings Bank had total assets of $129.34
million, total deposits of $108.73 million and shareholders' equity of $15.00
million.
The Savings Bank is primarily engaged in the business of attracting
deposits from the general public in the Savings Bank's market area and
investing such deposits in loans secured by one- to four-family residential
real estate, commercial real estate loans, commercial business loans,
construction loans and investment and mortgage-backed securities. The Savings
Bank's deposits are insured by the SAIF of the FDIC to the extent that such
deposits were assumed from the mutual savings bank in the MHC Reorganization.
Deposits accepted by the Savings Bank after the MHC Reorganization are insured
by the FDIC's BIF, up to applicable limits.
Lending Activities
General. The Savings Bank historically focused its lending activities
primarily on the origination of loans secured by first mortgages on
owner-occupied, one-to four-family residences for retention in the Savings
Bank's portfolio. The Savings Bank has expanded origination of one-to
four-family residential mortgage loans for resale in the secondary market
through expansion of its mortgage banking operations. As part of a strategy to
diversify its loan portfolio, achieve a higher net interest margin and reduce
interest rate risk, the Savings Bank has increased its origination of
construction loans, commercial real estate loans, commercial business loans,
and
45
<PAGE>
multifamily real estate loans which together totalled 26.50% of the Savings
Bank's total loans at December 31, 1997. To a lesser extent, the Savings Bank
and its subsidiaries also originate consumer loans, including home equity,
second mortgage, and other consumer loans. The Savings Bank expects this
diversification trend to continue.
One- to-four-family residential mortgage loans originated for resale in
the secondary market are underwritten according to standards that conform to
FNMA and/or FHLMC guidelines. One- to-four-family residential mortgage loans
originated and held in portfolio are generally underwritten to conform to
secondary market standards but from time to time the Savings Bank originates
non-conforming loans if, in the Savings Bank's judgment, the borrower does not
present an unreasonable risk of default. The Savings Bank and TNMC, its
mortgage banking subsidiary, have sold residential mortgage loans in the
secondary market. The Savings Bank has begun to expand its mortgage banking
capabilities through TNMC and anticipates that its origination of loans for
sale in the secondary market in Southeastern Pennsylvania, Southern New Jersey
and Northern Delaware will increase significantly.
Analysis of Loan Portfolio. Set forth below is selected data relating to
the composition of the Savings Bank's loan portfolio by type of loan as of the
dates indicated, including data regarding the portion of the Savings Bank's
loans that bear fixed and adjustable interest rates, respectively. TNMC has
originated and sold mortgage loans to third party investors within the Savings
Bank's financial reporting periods. Such mortgage loans are not reflected in
the financial tables and financial statements pertaining to a particular period
to the extent that such loans were sold prior to any period end.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------
1997 1996
----------------------- -----------------------
Amount Percent Amount Percent
---------- ----------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real Estate Loans:
One-to-four-family ................ $44,940 71.59% $45,018 84.47%
Construction loans ................ 2,597 4.14 661 1.24
Five or more family residence ..... 702 1.12 654 1.23
Nonresidential .................... 11,421 18.20 5,575 10.46
Commercial loans ................... 1,908 3.04 369 0.69
Consumer loans(1) .................. 1,201 1.91 1,016 1.91
------- ------ ------- ------
Total loans(2) ................... $62,769 100.00% $53,293 100.00%
======= ====== ======= ======
Less:
Unearned fees and discounts ....... $ 478 $ 495
Undisbursed loan proceeds ......... 138 5
Allowance for loan losses ......... 238 207
------- -------
Net Loans ......................... $61,915 $52,586
======= =======
Total loans with:
Fixed rates ....................... $55,289 88.08% $48,701 91.38%
Adjustable rate ................... 7,480 11.92 4,592 8.62
------- ------ ------- ------
Total loans(2) ................... $62,769 100.00% $53,293 100.00%
======= ====== ======= ======
<PAGE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------
1995 1994 1993
----------------------- ----------------------- -----------------------
Amount Percent Amount Percent Amount Percent
---------- ----------- ---------- ----------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One-to-four-family ................ $43,033 82.93% $43,105 84.28% $44,258 85.99%
Construction loans ................ 829 1.60 339 0.66 651 1.26
Five or more family residence ..... 508 0.98 405 0.79 412 0.80
Nonresidential .................... 5,940 11.45 5,819 11.38 5,192 10.09
Commercial loans ................... 602 1.16 780 1.53 236 0.46
Consumer loans(1) .................. 977 1.88 696 1.36 720 1.40
------- ------ ------- -------- ------- ------
Total loans(2) ................... $51,889 100.00% $51,144 $ 100.00% $51,469 100.00%
======= ====== ======= ========= ======= ======
Less:
Unearned fees and discounts ....... $ 464 $ -- $ --
Undisbursed loan proceeds ......... 5 24 10
Allowance for loan losses ......... 208 208 187
------- ------- -------
Net Loans ......................... $51,212 $50,912 $51,272
======= ======= =======
Total loans with:
Fixed rates ....................... $47,632 91.80% $46,740 91.39% $47,129 91.57%
Adjustable rate ................... 4,257 8.20 4,404 8.61 4,340 8.43
------- ------ ------- --------- ------- ------
Total loans(2) ................... $51,889 100.00% $51,144 100.00% $51,469 100.00%
======= ====== ======= ========= ======= ======
</TABLE>
- ------------
(1) Consists of both secured and unsecured personal loans.
(2) Does not include loans originated and held for sale by TNMC, the Savings
Bank's subsidiary, which amounted to $6.6 million and $4.6 million, at
December 31, 1997 and 1996, respectively and $1.04 million, $185,000 and
$1.5 million at September 30, 1995, 1994 and 1993, respectively.
One-to Four-Family Residential Real Estate Loans. The primary lending
activity of the Savings Bank historically consisted of the origination for
retention in the Savings Bank's portfolio of owner-occupied one-to four-family
residential mortgage loans secured by properties located in the Savings Bank's
market area. In 1997,
46
<PAGE>
consistent with the Savings Bank's strategy regarding diversification of its
loan portfolio, origination of loans other than residential mortgages loans
totalled $26.75 million, or 72.42%, of originations in 1997. However, at
December 31, 1997, $44.94 million, or 71.59%, of the Savings Bank's total loan
portfolio still consisted of one-to four-family residential mortgage loans.
The Savings Bank currently offers one- to four-family residential mortgage
loans with terms typically ranging from 10 to 30 years, with either adjustable
or fixed interest rates. Originations of fixed-rate mortgage loans versus
adjustable-rate mortgage loans are affected by such things as interest rate
risk policies, customer preferences and competition. In the Savings Bank's
market area borrowers strongly prefer fixed-rate mortgage loans as opposed to
adjustable-rate mortgage loans.
The Savings Bank's fixed-rate loans are generally originated and
underwritten according to standards that permit sale in the secondary mortgage
market. Secondary mortgage market loans typically conform to FNMA and/or FHLMC
guidelines. The Savings Bank has, from time to time, originated loans that do
not conform to such secondary market standards. Such nonconforming loans
include loans exceeding the maximum loan amounts acceptable to FNMA and FHLMC
and loans as to which the Savings Bank's underwriting indicates that the
particular borrower does not present an unreasonable risk of default in view of
underwriting criteria that differ from secondary mortgage market standards.
Whether the Savings Bank can or will sell fixed-rate loans in the secondary
market, however, depends on a number of factors including the yield and the
term of the loan, market conditions, and the Savings Bank's current interest
rate risk position. The Savings Bank has primarily been a portfolio lender, and
at any one time the Savings Bank holds only a nominal amount of loans for
immediate sale.
The Savings Bank's one-to four-family mortgage loans are amortized on a
monthly basis with principal and interest due each month. One- to four-family
residential real estate loans often remain outstanding for significantly
shorter periods than their contractual terms because borrowers may refinance or
prepay loans at their option.
The Savings Bank currently offers adjustable-rate mortgage loans with
initial interest rate adjustment periods of one and three years, based on
changes in a designated market index. After the initial interest rate
adjustment, each adjustable-rate mortgage loan adjusts either annually or every
third year within a periodic interest rate adjustment limit of 200 basis points
and within a maximum interest rate adjustment limit of 600 basis points above
the initial rate. Adjustable-rate mortgage loans are currently priced at a
fixed margin above the weekly average yield on United States Treasury
securities adjusted to a constant term to maturity of one year (or three years
in the case of loans with three year interest rate adjustment periods), as
published by the Federal Reserve. The Savings Bank originates adjustable-rate
mortgage loans with initially discounted rates, which vary depending upon
market conditions and whether the initial rate adjustment period is one or
three years. Adjustable-rate loans represented 11.92% of the Savings Bank's
total loan portfolio at December 31, 1997 due to the difficulty of originating
adjustable-rate mortgage loans in the Savings Bank's primary market.
Traditionally, the Savings Bank's older, low to moderate income residential
customer base has not been receptive to adjustable rate mortgage loans and this
tendency was exacerbated in recent years because of the comparatively low
interest rate environment for fixed rate mortgate loans.
The Savings Bank's one- to four-family residential first mortgage loans
customarily include due-on-sale clauses, which are provisions giving the
Savings Bank the right to declare a loan immediately due and payable in the
event, among other things, that the Borrower sells or otherwise disposes of the
underlying real property serving as security for the loan. Due-on-sale clauses
are an important means of adjusting the rates on the Savings Bank's fixed-rate
mortgage loan portfolio, and the Savings Bank has usually exercised its rights
under these clauses.
Regulations limit the amount that a savings bank may lend relative to the
appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. Appraisals are performed by
appraisers approved by the Savings Bank's Board of Trustees. Such regulations
permit a maximum loan-to-value ratio of 95% for residential property and 80%
for all other real estate loans. The Savings Bank's lending policies limit the
maximum loan-to-value ratio on both fixed-rate and adjustable-rate mortgage
loans without private mortgage insurance to 80% of the lesser of the appraised
value or the purchase price of the real estate that serves
47
<PAGE>
as collateral for the loan. For one- to four-family real estate loans with
loan-to-value ratios in excess of 80%, the Savings Bank requires the borrower
to obtain private mortgage insurance. The Savings Bank requires fire and
casualty insurance, as well as title insurance on all properties securing real
estate loans made by the Savings Bank.
Construction Loans. The Savings Bank's loan portfolio included $2.60
million of construction loans at December 31, 1997, which amounted to 4.14% of
the Savings Bank's total loan portfolio. The Savings Bank offers fixed and
adjustable rate residential construction loans primarily for the construction
of owner-occupied one-to four-family residences in the Savings Bank's market
area to builders or to owners who have a contract for construction. The Savings
Bank generally does not make a construction loan to a builder unless the
housing unit is under an agreement of sale. Construction loans to owners are
generally structured to become permanent loans, and are originated with terms
up to 30 years with an allowance of up to one year for construction. The
Savings Bank's largest construction loan at December 31, 1997 had a principal
balance of approximately $989,000. Construction loans at December 31, 1997 were
located in Philadelphia County, Montgomery County and Bucks County,
Pennsylvania.
Construction lending generally involves a greater degree of credit risk
than other one- to four-family residential mortgage lending. The repayment of
the construction loan is often dependent upon the successful completion of the
construction project. Construction delays or the inability of the borrower to
sell the property once construction is completed may impair the borrower's
ability to repay the loan.
Five or More Family Residential Real Estate Loans. Loans secured by five
or more family residential real estate constituted approximately $702,000, or
1.12%, of the Savings Bank's total loan portfolio at December 31, 1997. The
Savings Bank's five or more family residential real estate loans are secured by
residence buildings with over 4 family units, which are generally rental
properties. At December 31, 1997, all of the Savings Bank's five or more family
residential real estate loans were secured by properties located within the
Savings Bank's market area. The Savings Bank's largest five or more family
residential real estate loan at December 31, 1997, had a principal balance of
approximately $196,000.
Five or more family residential real estate loans are offered with both
adjustable interest rates and fixed interest rates. The terms of each five or
more family residential real estate loan are negotiated on a case-by-case
basis. The Savings Bank generally makes five or more family residential real
estate loans up to 80% of the lesser of property cost or the appraised value of
the mortgaged property. Loans secured by five or more family residential real
estate generally involve a greater degree of credit risk than one-to
four-family residential mortgage loans. This increased credit risk is a result
of several factors, including the concentration of larger balances in a limited
number of loans and borrowers, the effects of general economic conditions on
income producing properties, and the increased difficulty of evaluating and
monitoring these types of loans. Furthermore, the repayment of loans secured by
five or more family residential real estate is typically dependent upon the
successful operation of related real estate property. If the cash flow from the
project is reduced, the borrower's ability to repay the loan may be impaired.
Nonresidential Real Estate Loans. Loans secured by nonresidential real
estate constituted approximately $11.42 million, or 18.20%, of the Savings
Bank's total loan portfolio at December 31, 1997. The Savings Bank's
nonresidential real estate loans are secured by nonresidential properties such
as retail establishments, office buildings, and industrial buildings. The
Savings Bank also originates nonresidential real estate loans through its
subsidiary, PSA Financial Corp. See "SUBSIDIARIES." A significant portion of
the Savings Bank's nonresidential real estate loans are secured by properties
located within the Savings Bank's market area. The Savings Bank's largest
nonresidential real estate loan, which is secured by a business property in the
Savings Bank's market area, had a principal balance of approximately $1.16
million at December 31, 1997, and was performing in accordance with its terms.
Nonresidential real estate loans are offered with both adjustable interest
rates and fixed interest rates. The terms of each nonresidential real estate
loan are negotiated on a case-by-case basis. The Savings Bank generally makes
nonresidential real estate loans up to 75% of the lesser of property cost or
the appraised value of the mortgaged property. As in the case of five or more
family loans, nonresidential real estate loans generally involve a greater
degree of credit risk than one-to four-family residential mortgage loans and
carry larger loan balances.
48
<PAGE>
This increased credit risk results from the concentration of principal in a
more limited number of loans and borrowers, the effects of general economic
conditions on income producing properties, and the increased difficulty of
evaluating and monitoring nonresidential loans. The repayment of loans secured
by nonresidential real estate is typically dependent upon the success of the
related business operation. If the cash flow from the business is impaired, the
borrower's ability to repay the loan may also be impaired.
Commercial Loans. The Savings Bank currently offers commercial loans to
finance various activities in the Philadelphia metropolitan area, some of which
are secured in part by additional real estate collateral, such as business
property and/or personal residences. The Savings Bank originates commercial
loans through its subsidiary, PSA Financial Corp. See "SUBSIDIARIES." At
December 31, 1997, commercial loans totalled approximately $1.91 million or
3.04% of the total loan portfolio. Commercial loans are offered with either
adjustable or fixed interest rates. Adjustable rates are tied to the Savings
Bank's prime rate plus a margin.
Underwriting standards employed by the Savings Bank for commercial loans
include a determination of the applicant's ability to met existing obligations
and payments on the proposed loan from normal cash flows generated by the
applicant's business. The financial strength of each applicant also is assessed
through a review of financial statements provided by the applicant. Commercial
loans generally bear higher interest rates than residential loans, but they
also may involve a higher risk of default since their repayment is generally
dependent on the successful operation of the borrower's business. The Savings
Bank generally obtains personal guarantees from the borrower or a third party
as a condition to originating its commercial loans.
Consumer Loans. As of December 31, 1997, consumer loans totalled $1.20
million, or 1.91%, of the Savings Bank's total loan portfolio. The principal
types of consumer loans offered by the Savings Bank are home equity loans and
lines of credit, unsecured personal loans, and loans secured by deposit
accounts. The Savings Bank's subsidiary, PSA Consumer Discount Company, offers
secured and unsecured personal loans. See "SUBSIDIARIES." Consumer loans are
offered with maturities generally of less than ten years. The Savings Bank's
home equity loans and lines of credit are secured by the borrower's principal
residence with a maximum loan-to-value ratio, including the principal balances
of both the first and second mortgage loans, of 80% in the case of home equity
loans and 70% in the case of lines of credit. Such loans are offered on both a
fixed-rate and an adjustable-rate basis with terms of up to fifteen years.
The underwriting standards employed by the Savings Bank for consumer loans
include a determination of the applicant's credit history and an assessment of
ability to meet existing obligations and payments on the proposed loan. The
stability of the applicant's monthly income may be determined by verification
of gross monthly income from primary employment, and additionally from any
verifiable secondary income. Creditworthiness of the applicant is of primary
consideration; however, the underwriting process also includes a comparison of
the value of the collateral in relation to the proposed loan amount, and in the
case of home equity loans or lines of credit, the Savings Bank either obtains
title insurance or obtains a title search report, depending on the particular
loan.
Consumer loans entail greater credit risk than do residential first
mortgage loans, particularly in the case of consumer loan that are unsecured or
secured by assets that depreciate rapidly. In such cases, repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment for the outstanding loan and the remaining deficiency often does not
warrant further substantial collection efforts against the borrower. See "--
Delinquencies and Classified Assets -- Nonperforming Assets," "-- Loans Past
Due and Nonperforming Assets," and "-- Classification of Assets" for
information regarding the Savings Bank's loan loss experience and reserve
policy.
Mortgage Banking Operations
Through its subsidiary, TNMC, the Savings Bank has conducted a mortgage
banking operation since 1989. Mortgage banking consists primarily of the
origination, purchase, sale and servicing of first mortgage loans secured by
one-to-four family homes. Such loans are sold either as individual loans, as
mortgage-backed secur-ities, or as participation certificates issued or
guaranteed by FNMA or FHLMC. Loans may be sold either on a servicing retained
or servicing released basis.
49
<PAGE>
As of December 31, 1997, the Savings Bank's equity investment in TNMC
totaled ($60,000). For the year ended December 31, 1997, TNMC's loan
originations totaled $18.13 million and net loss totaled ($37,000). For the
year ended December 31, 1996, TNMC sold 81.79% of the loans originated in that
year and at December 31, 1997 TNMC had sold 89.10% of the loans originated in
that year.
The Savings Bank plans to expand into the Philadelphia metropolitan
market, including counties of New Jersey and Delaware, because management
believes this market is more accustomed to obtaining mortgages from mortgage
brokers as well as directly from banks and thrifts. The Savings Bank has
implemented a strategy in this area to expand TNMC's operations in order to
increase the origination of loans for sale in the secondary market and for its
own portfolio and the expansion of its servicing portfolio.
The Savings Bank expects that it will serve as the principal funding
source for TNMC pursuant to a credit arrangement between the parties. TNMC
originates loans in accordance with FNMA and FHLMC underwriting criteria or the
criteria of private investors.
In the past, TNMC has sold loans on a servicing released basis, but, as
origination volume increases, the Savings Bank is establishing loan servicing
capabilities and TNMC expects to sell servicing to the Savings Bank. Loan
servicing income provides a predictable source of fee income and servicing
values are generally countercyclical to the origination side of the mortgage
banking business. At December 31, 1997, the Savings Bank was not servicing any
loans for others.
Because mortgage originations fluctuate significantly with economic
conditions, mortgage banking revenues are very cyclical. To the extent TNMC
revenues and profits become, as expected, a significant component of the
Savings Bank's consolidated revenues and net income, earnings of the Savings
Bank could fluctuate materially.
Loan Maturity and Re-pricing Schedule. The following table set forth the
maturity or period of re-pricing of the Savings Bank's loan portfolio at
December 31, 1997. Demand loans and loans having no stated schedule of
repayments and no stated maturity are reported as due in one year or less.
Adjustable and floating-rate loans are included in the period in which interest
rates are next scheduled to adjust rather than the period in which they
contractually mature, and fixed-rate loans are included in the period in which
the final contractual repayment is due.
<TABLE>
<CAPTION>
Amounts at December 31, 1997
------------------------------------------------------------------
Multi- Consumer
One to Family and and
Four Nonresidential Construc- Commercial Total
Family Real Estate tion Business Loans
---------- ---------------- ----------- ------------ ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Amounts due:
Non-accrual ....................... $ 1,497 $ 397 $ -- $ -- $ 1,894
Within one year ................... 2,071 1,230 2,597 2,514 8,412
------- ------- ------ ------ -------
After one year:
1 to 3 years ...................... 695 1,640 -- 282 2,617
3 to 5 years ...................... 2,147 6,184 -- 264 8,595
5 to 10 years ..................... 4,059 1,162 -- 49 5,270
Over 10 years ..................... 34,471 1,510 -- -- 35,981
------- ------- ------ ------ -------
Total due after one year ......... 41,372 10,496 -- 595 52,463
------- ------- ------ ------ -------
Total amounts due ................ $44,940 $12,123 $2,597 $3,109 $62,769
======= ======= ====== ====== =======
</TABLE>
50
<PAGE>
Loan Origination, Purchase and Sale Schedule. The following table shows
total loans originated, purchased, sold and repaid during the periods indicated
for the Savings Bank and its subsidiaries.
<TABLE>
<CAPTION>
For the year ended For the year ended
December 31, September 30,
------------------------- ----------------------------------------
1997 1996 1995 1994 1993
------------ ---------- ---------- ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans receivable, net and loans held for
sale at beginning of period ................ $ 57,183 $ 54,790 $ 51,097 $ 52,816 $ 48,863
--------- -------- -------- --------- ---------
Originations:
One-to-four family residential real estate. 28,318 20,038 4,447 14,041 24,820
Other real estate ........................... 5,377 24 4,214 0 70
Consumer and commercial
business loans ............................. 3,248 1,033 961 398 292
--------- -------- -------- --------- ---------
Total loan originations ..................... 36,943 21,095 9,622 14,439 25,182
--------- -------- -------- --------- ---------
Loans purchased ............................. 0 0 0 0 0
--------- -------- -------- --------- ---------
Transfer to REO ............................. -- -- -- -- (463)
Principal repayments ........................ (9,648) (9,378) (2,451) (4,595) (16,454)
Sales of loans .............................. (16,152) (9,293) (5,996) (11,598) (4,319)
--------- -------- -------- --------- ---------
Increase (decrease) in loans in process ..... 133 (31) (19) 14 7
--------- -------- -------- --------- ---------
Increase (decrease) in allowance for loan
losses ..................................... 31 0 0 21 0
--------- -------- -------- --------- ---------
Net increase (decrease) in loans ............ 11,307 2,393 1,156 (1,719) 3,953
Loans receivable, net and loans held for
sale at end of period ...................... $ 68,490 $ 57,183 $ 52,253 $ 51,097 $ 52,816
========= ======== ======== ========= =========
</TABLE>
51
<PAGE>
Loans-to-One Borrower. Savings banks are subject to the same loans-to-one
borrower limits as those applicable to national banks, which under current
regulations restrict loans to one borrower to an amount equal to 15% of
unimpaired capital and unimpaired surplus on an unsecured basis, and an
additional amount equal to 10% of unimpaired capital and unimpaired surplus if
the loan is secured by readily marketable collateral (generally, financial
instruments and bullion, but not real estate). As of December 31, 1997, the
Savings Bank's largest loan to one borrower consisted of six loans to one
borrower. Of the six loans, three loans were commercial loans which had an
aggregate outstanding balance of $489,000, one loan was a consumer loan with an
outstanding balance of $26,000 and two loans were construction loans with an
aggregate outstanding balance of $1.56 million at December 31, 1997 and each of
these loans is performing according to its terms.
Delinquencies and Classified Assets
Collection Procedures. The Savings Bank's collection procedures provide
that when a mortgage loan is unpaid within its grace period (either ten or
fifteen days depending on the loan), a late notice will be sent to the borrower
requesting payment. If delinquency continues for approximately fifteen days,
then a second notice may be sent and contact efforts are attempted to
strengthen the collection process and obtain reasons for the delinquency. Plans
to arrange a repayment plan may be made. If a loan becomes two months
delinquent, the property is inspected in anticipation of foreclosure, a
collection letter is sent, personal contact may be attempted,
and the loan becomes subject to possible legal action if suitable arrangements
to repay have not been made. In addition, the borrower is given information
regarding consumer counseling services, to the extent required by regulations
of the PDOB, or the Pennsylvania Department of Housing and Urban Development.
When a loan continues in a delinquent status for 60 to 90 days and a repayment
schedule has not been made or kept by the borrower, generally a notice of
intent to foreclose is sent to the borrower, giving 30 days to cure the
delinquency. If the default is not cured, foreclosure proceedings are
initiated.
Nonperforming Assets. All loans, including residential mortgage loans, are
placed on nonaccrual status when past due 90 days or more unless the loan is in
the process of collection and the value of the collateral well exceeds the loan
balance. Prior to 1997, residential mortgage loans were not placed on
nonaccrual status unless the loan was delinquent for 12 months and the value of
the mortgaged property did not exceed the loan balance. Consumer and unsecured
loans are placed on nonaccrual upon becoming three months delinquent. Although
the Savings Bank viewed its nonaccrual policy as justified based on historical
experience, in 1997 it adopted a more conserative nonaccrual policy that it
believes is more consistent with peer bank practice. No adjustment is made for
interest accrued and unpaid at the time a loan is placed on nonaccrual status.
Interest is discontinued and income is subsequently recognized only to the
extent that cash payments are received, or until in management's judgment, the
borrower's ability to make periodic interest and principal payments is back to
normal, in which case the loan is returned to accrual status.
Real estate acquired by the Savings Bank as a result of foreclosure or by
deed in lieu of foreclosure is classified as REO until such time as it is sold.
When real estate is acquired through foreclosure, by deed in lieu of
foreclosure, it is recorded at its fair value, less estimated costs of
disposal. If the value of the property is less than the loan, less any related
specific loan loss provisions, the difference is charged against the allowance
for loan losses. Any subsequent write-down of REO is charged against earnings.
At December 31, 1997, the Savings Bank had approximately $457,000 of property
acquired as a result of foreclosure.
At December 31, 1997, the Savings Bank had nonperforming loans of $2.09
million, and a ratio of nonperforming loans to total loans of 3.34%. Of the
total nonperforming loans, $1.7 million are single-family residential mortgage
loans. At December 31, 1997, the Savings Bank had nonperforming assets of $2.55
million and a ratio of nonperforming assets to total assets of 1.97%. From 1994
to 1996 the Savings Bank's ratio of nonperforming loans to total loans exceeded
4%. This was due in large part to ineffective implementation of the Savings
Bank's stated collection practices by Savings Bank personnel and outside
counsel. New collection personnel were hired in 1997, resulting in the decline
in the ratios of nonperforming loans to total loans and nonperforming assets to
total assets.
52
<PAGE>
Loans Past Due and Nonperforming Assets. The following table sets forth
information regarding the Savings Bank's loans 90 days or more past due, loans
90 days or more past due and accruing interest, and real estate acquired or
deemed acquired by foreclosure at the dates indicated. For all the dates
indicated, the Savings Bank did not have any material restructured loans within
the meaning of SFAS No. 15.
<TABLE>
<CAPTION>
At December 31, At September 30,
------------------------- ---------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans past due 90 days or more as to interest or principal
and accruing interest ................................... $ 200 $ 2,009 $ 1,565 $ 1,417 $ 1,167
Nonaccrual loans(1) ...................................... 1,894 770 770 738 344
Total nonperforming loans ................................ 2,094 2,779 2,335 2,155 1,511
Real estate owned (REO) .................................. 457 465 482 330 486
------- ------- ------- ------- -------
Total nonperforming assets ............................... $ 2,551 $ 3,244 $ 2,817 $ 2,486 $ 1,997
======= ======= ======= ======= =======
Nonperforming loans to total loans ....................... 3.34% 5.21% 4.41% 4.20% 2.85%
Nonperforming assets to total assets ..................... 1.97 2.74 2.47 2.49 2.07
Allowance for loan losses to total loans ................. 0.38 0.39 0.39 0.41 0.35
Allowance for loan losses to
nonperforming loans ..................................... 11.37 7.45 8.91 9.65 12.38
Allowance for loan losses to
nonperforming assets .................................... 9.33 6.38 7.38 8.37 9.36
Net charge-offs as a percentage of total loans ........... 0.05 0.25 0.05 -- --
</TABLE>
(1) The Savings Bank classifies as nonaccrual all loans three months or more
delinquent. Prior to 1997, residential mortgage loans were classified as
nonaccrual when the loan was delinquent 12 months and the value of the
mortgaged property did not well exceed the loan balance.
For the years ended December 31, 1997 and 1996 and September 30, 1995,
gross interest income of approximately $353,000, $175,000, and $157,000,
respectively, would have been recorded on loans accounted for on a nonaccrual
basis if the loans had been current throughout the related periods. No interest
income on nonaccrual loans was included in income during such periods.
In May 1993, the FASB issued SFAS No. 114 "Accounting by Creditors for
Impairment of a Loan." SFAS No. 114 requires that certain impaired loans be
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. In October 1994, the FASB issued SFAS No. 118 "Accounting
by Creditors for Impairment of a Loan--Income Recognition and Disclosure," that
amends SFAS No. 114 and eliminates its provision regarding how a creditor
should report income on an impaired loan. Originally, SFAS No. 114 would have
required creditors to apply one of two allowable methods. As a result of the
amendment, creditors may now continue to use existing methods for recognizing
income on impaired loans, including methods that are required by certain
industry regulators. SFAS No. 114 and SFAS No. 118 were adopted by Savings Bank
beginning January 1, 1996. At December 31, 1997, the Savings Bank's impaired
loans consisted of two commercial real estate loans with a total balance of
$321,052 for which specific allowances of $16,048 has been established. At
December 31, 1996, the Savings Bank's impaired loans consisted of smaller
balance residential mortgage loans.
Classification of Assets. The Savings Bank's policies, consistent with
regulatory guidelines, provide for the classification of loans and other assets
such as debt and equity securities, considered to be of lesser quality as
"substandard," "doubtful," or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or by the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the savings institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis
of currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets that do not
53
<PAGE>
expose the savings institution to risk sufficient to warrant classification in
one of the aforementioned categories, but which possess some weaknesses, are
required to be designated "special mention" by management. At December 31,
1997, the Savings Bank had $1.4 million of substandard loans and $989,000 of
"special mention" loans.
When a savings bank classifies problem assets as either substandard or
doubtful, it is required to establish general valuation allowances or "loss
reserves" in an amount deemed prudent by management. General allowances
represent loss allowances that have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When a savings bank
classifies problem assets as "loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the assets so
classified, or to charge off such amount. A savings bank's determination as to
the classification of its assets and the amount of its valuation allowance is
subject to review by its regulatory agencies, which can order the establishment
of additional general or specific loss allowances. The Savings Bank regularly
reviews its asset portfolio to determine whether any assets require
classification in accordance with applicable regulations.
At December 31, 1997, the Savings Bank had no foreign loans and no loan
concentrations exceeding 10% of total loans in the table "Analysis of Loan
Portfolio." Loan concentrations are considered to exist when there are amounts
loaned to a multiple number of borrowers engaged in similar activities that
would cause them to be similarly impacted by economic or other conditions.
Potential problem loans consist of loans that are included in performing
loans, but for which potential credit problems of the borrowers have caused
management to have serious doubts as to the ability of such borrowers to
continue to comply with present repayment terms. At December 31, 1997, loans
past due between 30 and 89 days that are not included in the preceding table
totalled $232,000.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
known and inherent risks in its loan portfolio and current economic conditions.
Accordingly, the Savings Bank consistently applies a methodology to determine
both the adequacy of the allowance for loan losses and the necessary provision
for loan losses to be charged against earnings. This methodology includes:
-- a detailed review of all classified assets to determine if any specific
reserve allocations (which includes impaired loans) are required on an
individual loan basis.
-- the application of reserve allocations to all criticized and classified
assets, based upon allocation percentages, with an "olem" (other loans
especially mentioned), substandard or doubtful rating.
-- the application of reserve allocations to installment and mortgage loans
based upon historical charge-off experience for those loan types. the
application of reserve allocations to all performing loans based upon
historical actual losses incurred from all loan review categories.
The Savings Bank provided $60,000, $132,000 and $27,000 to its allowance
for loan losses for the years ended December 31, 1997 and 1996 and September
30, 1995, respectively. At December 31, 1997, the total allowance for loan
losses was $238,000, which amounted to 9.33% of nonperforming assets. The
Savings Bank will continue to monitor and modify the level of its allowance for
loan losses in order to maintain it at a level that management considers
adequate to provide for potential loan losses. As the Savings Bank continues to
diversify its loan portfolio into commercial, commercial real estate and
construction lending, the Savings Bank expects to increase its provisions for
loan losses in future periods in order to increase the allowance for loan
losses. For the years ended December 31, 1997 and 1996 and September 30, 1995,
respectively, the Savings Bank had $29,000, $133,000 and $27,000 in charge-offs
against this allowance.
54
<PAGE>
Analysis of the Allowance For Loan Losses. The following table sets forth
the analysis of the allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Years Ended Years Ended
December 31, September 30,
----------------------- ------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance, beginning of period ................ $ 207 $ 208 $ 208 $ 187 $ 187
Charge-offs:
Real Estate: One-to-four-family .............. 28 125 27 -- --
Consumer ..................................... -- 8 -- -- --
------- ------- ------- ------- -------
Total charge-offs ............................. 28 133 27 -- --
------- ------- ------- ------- -------
Total recoveries .............................. -- -- -- -- --
------- ------- ------- ------- -------
Net charge-offs (recoveries) ................. 29 133 27 -- --
Provision charged to operations ............... 60 132 27 21 --
------- ------- ------- ------- -------
Allowance, end of period ...................... $ 238 $ 207 $ 208 $ 208 $ 187
======= ======= ======= ======= =======
Charge-offs (recoveries) to average loans ..... 0.05% 0.25% 0.05% -- --
Allowance for loan losses as a percentage
of period-end loans .......................... 0.38% 0.38% 0.39% 0.41% 0.35%
</TABLE>
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of allowance for loan losses by loan category for the periods
indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------
1997 1996
---------------------- ----------------------
Amount Percent Amount Percent
-------- ----------- -------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Residential including multifamily real
estate .............................. $166 72.71% $150 85.70%
Commercial real estate and
commercial business ................. 67 25.38 44 12.39
Consumer ............................. 5 1.91 13 1.91
Unallocated .......................... -- --
---- ------
Total ............................. $238 100.00% $207 100.00%
==== ====== ==== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------
1995 1994 1993
---------------------- ---------------------- ----------------------
Amount Percent Amount Percent Amount Percent
-------- ----------- -------- ----------- -------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential including multifamily real
estate .............................. $150 83.91% $149 85.07% $ 97 86.79%
Commercial real estate and
commercial business ................. 39 14.21 46 13.57 56 11.81
Consumer ............................. 16 1.88 3 1.36 5 1.40
Unallocated .......................... 3 -- 9 -- 29 --
---- ------ ---- ------ ---- ------
Total ............................. $208 100.00% $207 100.00% $187 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
- ------------
(1) Represents percentage in each category to total loans.
Investment Activities
The Savings Bank's investment portfolio is comprised of mortgage-backed
securities, investment securities, and cash and cash equivalents. The carrying
value of the Savings Bank's investment securities and mortgage-backed
securities portfolio totalled $27.62 million at December 31, 1997 compared to
$24.92 million at December 31, 1996. The Savings Bank's cash and cash
equivalents, consisting of cash and due from banks, and interest-earning
deposits with other financial institutions, totalled $27.89 million at December
31, 1997 compared to $31.62 million at December 31, 1996, a decrease of $3.73
million or 11.80%. The majority of the Savings Bank's mortgage-backed
securities are issued or guaranteed by the United States Government or agencies
thereof. At December 31, 1997, mortgage-backed securities totalled $5.00
million. The majority of this amount represents securities that were issued or
guaranteed by either FNMA, FHLMC or the Government National Mortgage
Association ("GNMA"). The Savings Bank historically maintains high levels of
interest-earning deposits as part of its strategy for meeting liquidity
requirements and improving interest sensitivity.
55
<PAGE>
The Savings Bank is required under federal regulations to maintain a
minimum amount of liquid assets that may be invested in specified short term
securities and certain other investments. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and
Capital Resources." The Savings Bank generally has maintained a portfolio of
liquid assets that exceeds regulatory requirements. Liquidity 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, 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.
Pursuant to SFAS No. 115, which the Savings Bank adopted in 1994, the
Savings Bank classifies its investment securities and mortgage-backed
securities as either held-to-maturity, available for sale or trading. Available
for sale and trading securities are carried at market value, while
held-to-maturity securities are carried at amortized cost. At December 31,
1997, $10.29 million of the Savings Bank's investment securities and mortgaged-
backed securities were classified held-to-maturity and $17.33 million of the
Savings Bank's investment securities and mortgage-backed securities were
classified available for sale. The Savings Bank did not carry any trading
securities at December 31, 1997.
The Savings Bank's Board of Trustees has also adopted an investment policy
which identifies acceptable types of investments for the Savings Bank and
establishes criteria to guide management in classifying investments as
prescribed by SFAS No. 115. The policy also authorizes the Savings Bank's
investment officer to make single investments of up to $1 million. Under the
investment policy the Savings Bank may invest in certain AAA rated derivative
securities. As of December 31, 1997, the Savings Bank had no collateralized
mortgage obligations. The Savings Bank may not invest in high-risk
collateralized mortgage obligations ("CMOs") and the Savings Bank's investment
officer must periodically analyze the risk of any CMO held by the Savings Bank
to determine that such securities are not within the high-risk category.
Carrying and Market Value of Investment and Mortgage-Backed
Securities. The following table sets forth certain information regarding the
carrying and market values of the Savings Bank's investment securities and
mortgage-backed securities in the Savings Bank's held-to-maturity portfolio for
the periods indicated.
<TABLE>
<CAPTION>
Held to Maturity
At December 31,
--------------------------------------------
1997
--------------------------------------------
Gross Gross
Amor- Unreal- Unreal-
tized ized ized Fair
Cost Gains Losses Value
--------- --------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Investment Securities:
Debt:
FHLB ............................................. $ 7,219 $ 8 $-- $ 7,227
FNMA ............................................. 1,000 8 -- 1,008
FHLMC ............................................ -- -- -- --
------- ---- --- -------
Total debt securities held to maturity ......... 8,219 16 -- 8,235
Mortgage-backed securities:
GNMA ............................................. 1,980 105 -- 2,085
CMO .............................................. -- -- -- --
FHLMC ............................................ 88 9 97
------- ---- --- -------
Total mortgage-backed securities held to
maturity .................................... 2,068 114 -- 2,182
------- ---- --- -------
Total securities held to maturity ............. $10,287 $130 $-- $10,417
======= ==== === =======
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
Held to Maturity
At December 31,
----------------------------------------------
1996
----------------------------------------------
Gross Gross
Unreal- Unreal-
Amortized ized ized Fair
Cost Gains Losses Value
----------- --------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Investment Securities:
Debt:
FHLB Notes ........................................... $ 8,000 $ -- $32 $ 7,968
FNMA ................................................. 3,000 3 -- 3,003
FHLMC ................................................ 1,000 -- -- 1,000
Federal Farm Credit .................................. 657 -- -- 657
------- ---- --- -------
Total debt securities held to maturity ............... 12,657 3 32 12,628
Mortgage-backed securities:
GNMA ................................................. 2,355 90 -- 2,445
CMO .................................................. 227 -- 2 225
FHLMC ................................................ 166 16 -- 182
------- ---- --- -------
Total mortgage-backed securities held to maturity..... 2,748 106 2 2,852
------- ---- --- -------
Total securities held to maturity. ................... $15,405 $109 $34 $15,480
======= ==== === =======
</TABLE>
The following table presents the estimated fair value of investment
securities and mortgage-backed securities available for sale and the net
unrealized gain or loss at the periods indicated:
<TABLE>
<CAPTION>
Available for Sale at
December 31,
-----------------------------------------------------
1997
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ---------
(In thousands)
<S> <C> <C> <C> <C>
Investment Securities:
Equity:
Investment in mutual funds ................... .... $ 2,354 $12 $ -- $ 2,366
------- --- ---- -------
Debt:
FHLB Notes ....................................... 7,995 23 -- 8,018
Federal Farm Credit .............................. 2,000 12 2,012
FNMA ............................................. 998 13 1,011
SLMA ............................................. 1,000 -- 6 994
------- --- ---- -------
Total debt securities available for sale ......... 11,993 48 6 12,035
Mortgage-backed Securities
FNMA ............................................. 2,227 -- 65 2,162
FHLMC ............................................ 778 -- 6 772
------- --- ---- -------
Total mortgage-backed securities available for
sale ............................................ 3,005 -- 71 2,934
------- --- ---- -------
Total available-for-sale securities .............. $17,352 $60 $ 77 $17,335
======= === ==== =======
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Available for Sale
December 31, 1996
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ---------
(In thousands)
<S> <C> <C> <C> <C>
Investment Securities:
Equity:
Investment in mutual funds ................... ...... $2,305 $ 47 $ -- $2,352
------ ---- ---- ------
Debt:
FNMA Notes ......................................... 3,000 -- 15 2,985
SLMA ............................................... 1,000 -- 21 979
------ ---- ---- ------
Total debt securities available for sale ... ...... 4,000 -- 36 3,964
------ ---- ---- ------
Mortgage-backed Securities:
FNMA ............................................... 2,530 -- 110 2,420
FHLMC .............................................. 792 -- 18 774
------ ---- ---- ------
Total mortgage-backed securities available for
sale .............................................. 3,322 -- 128 3,194
------ ---- ---- ------
Total available-for-sale securities ................ $9,627 $ 47 $164 $9,510
====== ==== ==== ======
</TABLE>
Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, carrying values, and weighted average yields for the
Savings Bank's investment securities and mortgage-backed securities portfolios
classified as being held to maturity and available for sale at December 31,
1997. Adjustable-rate, mortgage-backed securities are included in the period in
which interest rates are next scheduled to adjust.
<TABLE>
<CAPTION>
At December 31, 1997
--------------------------------------------
In one year After one year
or less to five years
--------------------- ---------------------
(Dollars in thousands)
Carrying Average Carrying Average
Value Yield Value Yield
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Held to maturity:
Investment securities ......... $ 8,219 7.13% $ -- --
Mortgage-backed
securities ................... -- -- --
------- ----- ------ -----
Total held to maturity ....... $ 8,219 7.13% $ -- --
======= ===== ====== ==
Available for sale:
Investment securities ......... $ 9,995 6.94% $1,998 7.22%
Mortgage-backed
securities ................... 778 5.00% 2,227 5.50%
------- ----- ------ -----
Total available for sale ..... $10,773 11.94% $4,225 12.72%
======= ===== ====== =====
<PAGE>
<CAPTION>
At December 31, 1997
--------------------------------------------------------------------
After five years
to ten years Over ten years
--------------------- ----------------------
(Dollars in thousands)
No stated
Carrying Average Carrying Average Maturity
Value Yield Value Yield or Rate Total
---------- --------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Held to maturity:
Investment securities ......... $ -- -- $ -- -- $ -- $ 8,219
Mortgage-backed
securities ................... -- -- 2,068 8.35% -- 2,068
---- -- ------ ---- ------ -------
Total held to maturity ....... $ -- -- $2,068 8.35% $ -- $10,287
==== == ====== ==== ====== =======
Available for sale:
Investment securities ......... $ -- -- $ -- -- $2,354 $14,347
Mortgage-backed
securities ................... -- -- -- -- -- 3,005
---- -- ------ ---- ------ -------
Total available for sale ..... $ -- -- -- $ -- $2,354 $17,352
==== == ====== ======== ====== =======
</TABLE>
Sources of Funds
General. Deposits are the major source of the Savings Bank's funds for
lending and other investment purposes. In addition to deposits, the Savings
Bank derives funds from the amortization and prepayment of loans and
mortgage-backed securities, the maturity of investment securities, operations
and, if needed, advances from the FHLB. Scheduled loan principal repayments are
a relatively stable source of funds, while deposit inflows and outflows and
loan prepayments are influenced significantly by general interest rates and
market conditions. Borrowings may be used on a short-term basis to compensate
for reductions in the availability of funds from other sources or on a longer
term basis for general business purposes.
Deposits. Consumer and commercial deposits are attracted principally from
within the Savings Bank's market area through the offering of a broad selection
of deposit instruments including checking accounts, passbook savings accounts,
statement savings accounts, money market deposit accounts, term certificate
accounts and
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<PAGE>
individual retirement accounts. Deposit account terms vary according to the
minimum balance required, the period of time during which the funds must remain
on deposit, and the interest rate, among other factors. The Savings Bank
regularly evaluates its internal cost of funds, surveys rates offered by
competing institutions, reviews the Savings Bank's cash flow requirements for
lending and liquidity, and executes rate changes when deemed appropriate. The
Savings Bank does not obtain deposits through brokers, nor does it solicit
funds outside its market area.
The Savings Bank's deposit pricing strategy seeks to retain passbook
savings deposit accounts as an important funding source. Management's
experience is that its customer base finds the traditional passbook savings
account attractive even though higher yields may be available from alternative
deposit products. Accordingly, the Savings Bank typically prices its passbook
product above its large commercial bank competitors whose pricing strategy is
designed for a larger and more diverse market.
The following table sets forth the savings account activities for the
Savings Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December
31, Year Ended September 30,
-------------------- -------------------------------
1997 1996 1995 1994 1993
--------- -------- --------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Increase before interest
credited .................... $4,249 $ 527 $3,187 $ 587 $ 794
Interest credited ............ 3,911 3,571 3,437 3,038 3,152
------ ------ ------ ------ ------
Net deposit increase ......... $8,160 $4,098 $6,624 $3,625 $3,946
====== ====== ====== ====== ======
</TABLE>
59
<PAGE>
The following tables set forth the composition of savings deposits in the
various types of savings accounts offered by the Savings Bank between the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------
1997
------------------------------------
Weighted
Average
% of Nominal
Balance Deposits Rate
----------- ---------- ---------
<S> <C> <C> <C>
Savings deposit accounts ................. $ 29,694 27.31% 2.50%
NOW accounts ............................. 8,535 7.85 0.90
Money market accounts .................... 7,201 6.62 3.57
Retail certificates of deposit ........... 57,536 52.91 5.57
Jumbo certificates of deposit(1) ......... 5,768 5.31 5.81%
-------- ------
Total deposits .......................... $108,734 100.00%
======== ======
</TABLE>
<TABLE>
<CAPTION>
At December 31, At September 30,
------------------------------------- ----------------------------------
1996 1995
------------------------------------- ----------------------------------
Weighted Weighted
Average Average
% of Nominal % of Nominal
Balance Deposits Rate Balance Deposits Rate
----------- ---------- ---------- --------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Savings deposit accounts ................. $ 28,992 28.83% 2.49% $33,263 34.63% 3.00%
NOW accounts ............................. 9,105 9.05 1.09 3,845 4.00 1.04
Money market accounts .................... 6,266 6.23 3.63 4,884 5.08 3.61
Retail certificates of deposit ........... 50,175 49.89 5.41 49,243 51.27 5.55
Jumbo certificates of deposit(1) ......... 6,036 6.00 5.72% 4,818 5.02 5.62%
-------- ------ ------- ------
Total deposits .......................... $100,574 100.00% $96,053 100.00%
======== ====== ======= ======
</TABLE>
- ------------
(1) Includes only certificates of deposit of $100,000 or more bearing
negotiated rates.
Time Deposit Maturities. The following table sets forth the amount and
maturities of time deposits at December 31, 1997.
<TABLE>
<CAPTION>
Period to Maturity from
-------------------------------------------------------
December 31, 1997
-------------------------------------------------------
Within One One to
Year Three Years Thereafter Total
------------ ------------- ------------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Less than 4.00% .......... $ 327 $ 27 $ 254 $ 608
4.001% - 6.000% .......... 42,248 14,044 1,433 57,725
6.001% - 8.000% .......... 2,569 1,655 681 4,905
8.001% - 10.000% ......... 24 42 -- 66
over 10.000% ............. -- -- -- --
------- ------- ------ -------
Total ................... $45,168 $15,768 $2,368 $63,304
======= ======= ====== =======
</TABLE>
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<PAGE>
Large Certificates of Deposit Maturities. The following table indicates
the amount of the Savings Bank's certificates of deposit of $100,000 or more by
time remaining until maturity at December 31, 1997.
Certificates
Maturity Period of Deposit
--------------- ----------
(In thousands)
One year or less ............................ $ 8,904
Over one year though two years .............. 1,284
Over two years through three years .......... 100
Over three years through five years ......... 503
Over five years through ten years ........... --
Over ten years .............................. --
-------
$10,791
=======
Borrowings
Savings deposits are the primary source of funds for the Savings Bank's
lending and investment activities and for its general business purposes. If the
need arises, the Savings Bank may rely upon advances from the FHLB to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. At December 31, 1997, the Savings Bank had no FHLB advances
outstanding.
Market Area and Competition
The Savings Bank's market area includes the Philadelphia and metropolitan
area and all counties contiguous thereto as well as counties of New Jersey and
Delaware. This area has a large concentration of financial institutions, many
of which are significantly larger and have greater financial resources than the
Savings Bank, and all of which are competitors of the Savings Bank to varying
degrees. As a result, the Savings Bank encounters strong competition both in
attracting deposits and in originating real estate and other loans. Its most
direct competition for deposits has come historically from commercial banks,
brokerage houses, other savings associations and credit unions in its market
area, and the Savings Bank expects continued strong competition from such
financial institutions in the foreseeable future. The Savings Bank's market
area includes branches of several commercial banks that are substantially
larger than the Savings Bank. The Savings Bank competes for savings deposits by
offering depositors a high level of personal service.
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies and other savings institutions.
This competition for loans has increased substantially in recent years as a
result of the large number of institutions competing in the Savings Bank's
market area, as well as the increased efforts by commercial banks to expand
mortgage loan originations.
The Savings Bank competes for loans primarily through the interest rates
and loan fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers and builders. Factors that affect competition
include general and local economic conditions, interest rate levels and
volatility of the mortgage markets.
Subsidiaries
The Savings Bank owns three direct subsidiaries and one indirect
subsidiary. See "Business of the Savings Bank -- Mortgage Banking Activities."
TNMC is engaged in a mortgage banking business. See "Business of the Savings
Bank -- Mortgage Banking Operations" and "RISK FACTORS -- Interest Rate Risk."
PSA Service Corp. conducts real estate appraisals, processes credit
applications and provides other services in connection with the origination of
loans. PSA Financial Corp. primarily originates business loans and commercial
real estate loans. Its subsidiary, PSA Consumer Discount Company, primarily
originates consumer loans.
Personnel
As of December 31, 1997, the Savings Bank had 47 full-time and no
part-time employees. None of the Savings Bank's employees are represented by a
collective bargaining group. The Savings Bank believes its relationship with
its employees to be good.
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<PAGE>
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. 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
As of December 31, 1997, the Savings Bank conducted operations through an
executive/administrative office, six full-service offices and a branch
administrative office. The Savings Bank owns five of the six full-service
offices and the branch administrative office. The Savings Bank is leasing its
Center City Philadelphia full-service office and executive office for a term of
eleven years.
Environmental Matters
Environmental hazards have become a source of substantial risk and
potential liability in the loan portfolios of financial institutions. If a
property securing one or more of an institutions loans is environmentally
contaminated, the institution may be adversely affected in several different
ways. The value of the collateral could be impaired, environmental clean-up
costs may impair the borrower's repayment ability, liens held by the
institution against the contaminated property may be subordinated to state
and/or federal liens securing clean-up costs, and the institution against the
contaminated property may be subordinated to state and/or federal liens
securing clean-up costs if it has foreclosed on the property or if it is deemed
to have become involved in management of the borrower. To minimize these risks,
the Savings Bank may require an environmental examination of the property of
any borrower or prospective borrower if consideration of the potential loss to
the Savings Bank in relation to the burdens to the borrower. The costs of such
examinations and reports are generally the responsibility of the borrower.
These costs may be substantial and may deter a prospective borrower from
entering into a loan transaction with the Savings Bank. The Savings Bank is not
aware of any borrower who is currently subject to any environmental
investigation or clean-up proceeding which is likely to have a material adverse
impact on the financial condition or results of operations of the Savings Bank.
REGULATION
General
The Savings Bank is a Pennsylvania-chartered stock savings bank and its
deposit accounts are insured up to applicable limits by the FDIC under the SAIF
(to the extent such deposits were assumed from the Savings Bank's mutual
savings bank predecessor) or the BIF (in the case of other insured deposits).
The Savings Bank is subject to extensive regulation by the PDOB, as its
chartering agency, and by the FDIC, as its primary federal regulator and
deposit insurer. The Savings Bank must file reports with the PDOB and the FDIC
concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to engaging in certain activities and transactions
including, but not limited to, mergers and acquisitions. The PDOB and the FDIC
periodically examine the Savings Bank to assess its compliance with various
regulatory requirements. State and federal regulation and supervision create a
framework within which the Savings Bank must operate and are intended primarily
for the protection of the FDIC insurance funds and depositors rather than
shareholders.
The MHC, as a mutual holding company, is also required to file certain
reports with the FRB and to comply with other rules and regulations of the FRB.
Regulatory authorities possess extensive discretion in connection with their
supervisory and enforcement activities and in connection with their examination
policies, including policies regarding the classification of assets and the
adequacy of loan loss reserves. Any change in regulatory policy by the PDOB,
the FRB, or the FDIC could have a material adverse impact on the MHC, the
Savings Bank and their operations. Certain of the regulatory requirements
applicable to the Savings Bank and to the MHC are referred to below or
elsewhere herein.
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<PAGE>
Regulation of the Holding Company
General. The MHC is, and the Holding Company will be, a bank holding
company subject to supervision and regulation by the Federal Reserve under the
Bank Holding Company Act of 1956, as amended. As a bank holding company, the
Holding Company's activities and those of its subsidiary are limited to the
business of banking and activities closely related or incidental to banking,
and the Holding Company may not directly or indirectly acquire the ownership or
control or more than 5% of any class of voting shares or substantially all of
the assets of any company, including a bank, without the prior approval of the
Federal Reserve.
The Savings Bank is subject to supervision and examination by applicable
federal and state banking agencies. The Savings Bank is also a
Pennsylvania-chartered bank subject to supervision and regulation by the PDOB.
In addition, because the deposits of the Savings Bank are insured by the FDIC,
the Savings Bank is subject to regulation by the FDIC. The Savings Bank is also
subject to requirements and restrictions under federal and state law, including
requirements to maintain reserves against deposits, restrictions on the types
and amounts of loans that may be granted and the interest that may be charged
thereon and imitations on the types of investments that may be made and the
types of services that may be offered. Various consumer laws and regulations
also affect the operations of the Savings Bank. In addition to the impact of
regulation, commercial banks are affected significantly by the actions of the
Federal Reserve in attempting to control the money supply and credit
availability in order to influence the economy.
Holding Company Structure. The Savings Bank is subject to restrictions
under federal law which limit its ability to transfer funds to the Holding
Company, whether in the form of loans, other extensions of credit, investments
or asset purchases. Such transfers by the Savings Bank to the Holding Company
are generally limited in amount to 10% of the Savings Bank's capital and
surplus. Furthermore, such loans and extensions of credit are required to be
secured in specific amounts, and all transactions are required to be on an
arm's length basis. The Savings Bank has never made any loan or extension of
credit to the Holding Company nor has it purchased any assets from the Holding
Company.
Under Federal Reserve policy, a bank holding company is expected to act as
a source of financial strength to the Savings Bank and to commit resources to
support the Savings Bank, i.e., to downstream funds to the Savings Bank. This
support may be required at times when, absent such policy, the bank holding
company might not otherwise provide such support. Any capital loans by a bank
holding company to the Savings Bank are subordinate in right of payment to
deposits and to certain other indebtedness of the Savings Bank. In the event of
a bank holding company's bankruptcy, any commitment by the bank holding company
to a federal bank regulatory agency to maintain the capital of the Savings Bank
will be assumed by the bankruptcy trustee and entitled to a priority of
payment.
Regulation of the Savings Bank
Pennsylvania Savings Bank Law. The Savings Bank is incorporated under the
Pennsylvania Banking Code of 1965, as amended (the "Banking Code"). The Banking
Code contains detailed provisions governing the Bank's organization, the
location of its offices, the rights and responsibilities of its trustees,
officers, employees, depositors and shareholders, and its savings, investment
and other operations. The Banking Code delegates extensive rulemaking power and
administrative discretion to the PDOB.
The PDOB generally examines each savings bank not less frequently than
once every two years. Although the PDOB may accept the examinations and reports
of the FDIC in lieu of the PDOB's examination, the current practice is for the
PDOB to conduct individual examinations. The PDOB may order any savings bank to
discontinue any violation of law or unsafe or unsound business practice and may
direct any trustee, officer, employee or attorney of a savings bank engaged in
an objectionable activity, after the PDOB has ordered the activity to be
terminated, to show cause at a hearing before the PDOB why such person should
not be removed.
Interstate Acquisitions. The Commonwealth of Pennsylvania has enacted
legislation regarding the acquisition of commercial banks, bank holding
companies, savings banks and savings and loan associations located
63
<PAGE>
in Pennsylvania by institutions located outside of Pennsylvania. The statute
dealing with savings institutions authorizes (i) a savings bank, savings and
loan association or holding company thereof located in another state (a
"foreign institution") to acquire the voting stock of, merge or consolidate
with, or purchase assets and assume liabilities of, a Pennsylvania-chartered
savings bank and (ii) the establishment of branches in Pennsylvania by foreign
institutions, in each case subject to certain conditions including (A)
reciprocal legislation in the state in which the foreign institution seeking
entry into Pennsylvania is located permitting comparable entry by Pennsylvania
savings institutions and (B) approval by the PDOB. Pennsylvania law also
provides for nationwide branching by Pennsylvania-chartered savings banks and
savings and loan associations, subject to the PDOB's approval and certain other
conditions.
On September 29, 1994, the United States Congress enacted the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate
Banking Law"), which amended various federal banking laws to provide for
nationwide interstate banking, interstate bank mergers and interstate
branching. The Interstate Banking Law currently allows the acquisition by a
bank holding company of a bank located in another state, interstate bank
mergers and branch purchase and assumption transactions. Only a few states have
"opted-out" of the merger and purchase and assumption provisions by enacting
laws that specifically prohibit such interstate transactions.
Pursuant to the Interstate Banking Law, states may also enact legislation
to allow for de novo interstate branching by out of state banks.
Capital Maintenance. FDIC regulations require FDIC-insured state-chartered
savings banks, such as the Savings Bank, to maintain minimum levels of capital.
The regulations establish a minimum leverage capital requirement of not less
than 3% Tier 1 capital to total assets for institutions in the strongest
financial and managerial condition, with a CAMEL rating of "1" (the highest
rating of the FDIC for banks). For all other banks, the minimum leverage ratio
is at least 4% to 5%. Tier I capital consists principally of common
shareholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, and minority interests in consolidated
subsidiaries, minus all intangible assets other than certain supervisory
goodwill, purchased mortgage servicing rights and purchased credit card
relationships.
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings banks requires the
maintenance of total capital (which is defined as Tier 1 capital plus
supplementary (Tier 2) capital) to risk- weighted assets of 8%. In determining
the amount of risk- weighted assets, all assets, plus certain off balance sheet
assets, are multiplied by a risk weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item.
Tier 2 capital includes certain perpetual preferred stock, hybrid capital
instruments, including certain mandatory convertible securities, certain
subordinated debt and intermediate preferred stock and a limited amount of the
general allowance for loan and lease losses. The amount of the allowance for
loan and lease losses includable in Tier 2 capital is limited to a maximum of
1.25% of risk-weighted assets and 100% of Tier 1 capital. Overall, the amount
of capital counted toward Tier 2 capital cannot exceed 100% of Tier 1 capital.
At December 31, 1997, the Savings Bank met its capital requirements.
FDICIA requires the Federal banking agencies to revise their risk-based
capital guidelines to, among other things, take adequate account of interest
rate risk, concentration of credit risk, and risks of nontraditional
activities. The agencies have adopted a specific rule applicable to
institutions whose investment portfolio trading activity exceeds 10% of total
assets or $1 billion. The Savings Bank is not subject to this rule. The
agencies have stated that they will also consider the effects of market and
credit risk and nontraditional activities on a case-by-case basis, and could
impose higher capital requirements on any institution.
Virtually identical capital requirements are imposed on the Holding
Company and enforced by the FRB. The Savings Bank is also subject to PDOB
capital guidelines. Although not adopted in regulation form, the PDOB utilizes
capital standards requiring a minimum of 6% leverage capital and 10% risk-based
capital. The components of leverage and risk-based capital are substantially
the same as those defined by the FDIC.
Insurance of Deposit Accounts. The FDIC has implemented a risk-related
premium schedule for all insured depository institutions that results in the
assessment of premiums based on capital and supervisory measures. Under the
risk-related premium schedule, the FDIC assigns, on a semiannual basis, each
institution to one
64
<PAGE>
of three capital groups (well-capitalized, adequately capitalized or
undercapitalized) and further assigns such institution to one of three
subgroups within a capital group. The institution's subgroup assignment is
based upon the FDIC's judgment of the institution's strength in light of
supervisory evaluations, including examination reports, statistical analyses
and other information relevant to measuring the risk posed by the institution.
Only institutions with a total capital to risk-adjusted assets ratio of 10.00%
or greater, a Tier 1 capital to risk-based assets ratio of 6% or greater, and a
Tier 1 leverage ratio of 5.0% or greater, are assigned to the well-capitalized
group. As of December 31, 1996, the Savings Bank was well capitalized for
purposes of calculating insurance assessments.
On September 30, 1996, the President signed into law the Omnibus
Appropriations' Act that included legislation to capitalize the Savings
Association Insurance Fund with a one-time special assessment. The special
assessment was paid on the amount of SAIF-assessable deposits held by the
institution as of March 31, 1995 and the amount of any SAIF assessable deposits
acquired by the institution after that date. The Savings Bank recognized an
expense of $567,000 in the third quarter of 1996. Since the SAIF was deemed
recapitalized as of October 1, 1996, the FDIC also set a new premium range for
the fourth quarter of 1996. Consequently, the Savings Bank received a refund of
$58,000 for the fourth quarter of 1996. The FDIC approved a final rule
establishing a new range of premiums for SAIF and BIF insured deposits
effective January 1, 1997. The FDIC calculated deposit insurance assessments at
the rate of $0.00 for every $100 of deposits for banks in the lowest risk-based
premium category and $0.27 for every $100 of insured deposits for banks in the
highest risk-based category. The Savings Bank is presently in the lowest
premium category.
While the Savings Bank presently pays no premium for deposit insurance, it
is subject to assessments to pay the interest on Financing Corporation ("FICO")
bonds. FICO was created by Congress in 1989 to issue bonds to finance the
resolution of failed thrift institutions. Prior to 1997, only thrift
institutions were subject to assessments to raise funds to pay the FICO bonds.
The Omnibus Budget Act also provided that the BIF deposits would be subject to
1/5 of the assessment to which SAIF deposits are subject for FICO bond payments
through 1999. Beginning in 2000, BIF and SAIF deposits will be subject to the
same assessment for FICO bonds. The FICO assessment for the Savings Bank for
1997 is $.013 for each $100 of BIF deposits and $.0648 for each $100 of SAIF
deposits.
The Savings Bank was chartered as a BIF-insured institution; however, it
will continue to pay premiums to the SAIF at SAIF rates with respect to the
deposits that it assumed in the MHC Reorganization. Therefore, substantially
all of the Savings Bank's deposits are assessed at SAIF rates.
Restrictions on Dividends. Dividend payments by the Savings Bank are
subject to the Banking Code. Under the Banking Code, no dividends may be paid
except from "accumulated net earnings" (generally, undivided profits). Under
the FDI Act, no dividends may be paid by an insured bank if the bank is in
arrears in the payment of any insurance assessment due to the FDIC.
State and federal regulatory authorities have adopted standards for the
maintenance of adequate levels of capital by banks. Adherence to such standards
further limits the ability of the Savings Bank to pay dividends.
Restrictions on Investment Authority of State-Chartered Banks. Section 24
of the FDI Act, and the FDIC regulations promulgated thereunder, generally
limit the activities and equity investments of FDIC insured savings banks and
their subsidiaries to those permissible for national banks and their
subsidiaries, unless such activities and investments are specifically exempted
or consented to by the FDIC. FDIC regulations governing the equity investments
of FDIC insured savings banks generally prohibit equity investments by such
banks and required the divestiture of such investments by December 19, 1996,
unless certain conditions are met. The Savings Bank has no impermissible
investments and does not conduct impermissible activities. Savings banks not
engaging in such activities but that desire to engage in other impermissible
activates may apply for approval from the FDIC to do so.
Transactions with Affiliates. Extensions of credit by the Savings Bank to
executive officers, trustees, and principal shareholders and related interests
of such persons are subject to Sections 22(g) and 22(h) of the FRA and the
Federal Reserve's Regulation O. These rules limit the aggregate amount of loans
to any such individual and their related interests, and require that all such
loans be pre-approved by the full Board of the Holding Company voting without
such person being present. These rules also provide that no institution shall
make any
65
<PAGE>
loan or extension of credit in any manner to any of such persons, unless such
loan or extension of credit is made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons, does not involve more than the normal risk of
repayment or present other unfavorable features, and the institution follows
underwriting procedures that are not less stringent than those applicable to
comparable transactions by the institution with persons who are not executive
officers, trustees, principal shareholders, or employees of the institution.
Loans can be made to employees, including executives and trustees, on more
favorable terms than to the general public, if all employees are eligible for
such preferential terms. Regulation O also sets forth additional limitations on
extensions of credit by an institution to its executive officers. Management
believes that the Savings Bank is in compliance with Sections 22(g) and 22(h)
of the FRA and the Federal Reserve's Regulation O.
Federal Reserve System. Under Federal Reserve regulations, the Savings
Bank is required to maintain noninterest-earning reserves against its
transaction accounts (primarily NOW and regular checking accounts). The Federal
Reserve regulations generally require that reserves of 3% must be maintained
against net transaction accounts of $47.8 million or less (subject to
adjustment by the Federal Reserve) and $1.43 million plus 10% of net
transaction accounts in excess of $47.8 million. The Savings Bank is in
compliance with the foregoing requirements. Because required reserves must be
maintained in the form of either vault cash, a noninterest-bearing account at a
Federal Reserve Bank or a pass-through account as defined by the Federal
Reserve, the effect of this reserve requirement is to reduce the Savings Bank's
interest-earning assets.
Federal Home Loan Bank System. As a condition of approval to the Savings
Bank's conversion from a state-chartered savings association to a
state-chartered savings bank in 1990, the Savings Bank is required to retain
its membership in the FHLB System, which consists of 12 regional FHLBs. The
FHLB provides a central credit facility primarily for member institutions. The
Savings Bank, as a member of the FHLB of Pittsburgh, is required to acquire and
hold shares of capital stock in that FHLB in an amount at least equal to 1% of
the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB of Pittsburgh, whichever is greater. The Savings
Bank is in compliance with this requirement, with an investment in FHLB of
Pittsburgh stock at December 31, 1997 of $559,900. FHLB advances must be
secured by specified types of collateral and may only be obtained for the
purpose of providing funds for residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest
on advances to their members. If dividends were reduced, or interest on future
FHLB advances increased, the Savings Bank's net interest income would likely
also be reduced.
FEDERAL TAXATION
General. Upon consummation of the Conversion and Reorganization, 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, the
Savings Bank generally recognized a bad debt deduction equal to 8% of taxable
income.
66
<PAGE>
The provisions repealing the current thrift bad debt rules were passed by
Congress as part of "The Small Business Job Protection Act of 1996, as amended
by the Taxpayer Relief Act of 1997 (for qualifying thrifts which are S
corporations)." 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). The Savings
Bank has previously recorded a deferred tax liability equal to the bad debt
recapture and as such the new rules will have no effect on 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 or, if the Savings Bank is a "large" association (assets in
excess of $500 million) on the basis of net charge-offs during the taxable
year. The new rules allow an institution to suspend bad debt reserve recapture
for the 1996 and 1997 tax years if the institution's lending activity for those
years is equal to or greater than the institutions average mortgage lending
activity for the six taxable years preceding 1996 adjusted for inflation. For
this purpose, only home purchase or home improvement loans are included and the
institution can elect to have the tax years with the highest and lowest lending
activity removed from the average calculation. If an institution is permitted
to postpone the reserve recapture, it must begin its six year recapture no
later than the 1998 tax year. 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 provisions 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 lesser 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 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 the
alternative minimum taxable income ("AMTI") of certain corporations 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 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 OMIT
(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 environment tax of 0.12% 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 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 which elect to file a consolidated return. 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 assuming the applicable holding period has been satisfied.
67
<PAGE>
MANAGEMENT
Management of the Holding Company
Directors will be elected by the shareholders of the Holding Company for
staggered three-year terms, or until their successors are elected and
qualified, at the first annual meeting of shareholders following the
consummation of the Conversion and Reorganization. The Holding Company's Board
of Directors consists of six persons divided into three classes, each of which
contains one third of the Board. One class, consisting of Mr. DiSandro and Ms.
Pauciello has a term of office expiring at the first annual meeting of
shareholders after their election; a second class, consisting of Mrs. Fumo and
Ms. Pauciello, has a term of office expiring at the second annual meeting of
shareholders after her election; and a third class, consisting of Mr. Fumo and
Mr. Finley, has a term of office expiring at the third annual meeting of
shareholders after his election.
The executive officers of the Holding Company will be elected annually by
the Board of Directors and hold office until their respective successors have
been elected and qualified or until death, resignation or removal by the Board
of Directors. The executive officers of the Holding Company are:
<TABLE>
<CAPTION>
Name Position
---- --------
<S> <C>
Vincent J. Fumo ............. Chairman of the Board and Chief Executive Officer
Anthony DiSandro ............ President and Director
Gary Polimeno ............... Treasurer and Vice President
Roseanne Pauciello .......... Corporate Secretary and Director
</TABLE>
Since the formation of the Holding Company, none of the executive
officers, directors or other personnel has received remuneration from the
Holding Company. For information concerning the principal occupations,
employment and compensation of the directors and executive officers of the
Holding Company during the past five years, see "MANAGEMENT OF THE SAVINGS BANK
- -- Biographical Information."
Management of the Savings Bank
Directors and Executive Officers. The Savings Bank's Bylaws require that
the Board of Trustees of the Savings Bank consist of between seven and twenty
members, and that the Board of Trustees shall set the exact number from time to
time. The Savings Bank's Board of Trustees has fixed the number of trustees at
twelve members. Such Bylaws establish three classes of Trustees of equal size.
Trustees are elected for three year terms, with one class to be elected each
year.
The following table sets forth information, as of December 31, 1997, with
respect to the trustees and executive officers of the Savings Bank.
Class I Trustee (Term expiring 2000)
<TABLE>
<CAPTION>
Year
First
Elected Principal Occupation
Name/Position Age Trustee(1) During Past Five Years
- ------------- --- ---------- ----------------------
<S> <C> <C> <C>
Class I Trustees:
Sylvia M. DiBona, Trustee .......... 43 1997 Chairman and Chief Executive Officer of the
William Penn Agency
(insurance agency)
James W. Eastwood, Trustee ......... 52 1995 President of Granary Associates, Inc. (hospital
development and consulting firm)
P. Charles DeRita, Trustee ......... 86 1995 Vice President and Manager of Hallmark
Abstract Co.
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
Year
First
Elected Principal Occupation
Name/Position Age Trustee(1) During Past Five Years
- ------------- --- ----------- ----------------------
<S> <C> <C> <C>
Vincent J. Fumo, Chairman and Chief
Executive Officer(2) ...................... 54 1995 Chairman and Chief Executive Officer of
Pennsylvania Savings Bank and Pennsylvania State
Senator
Class II Trustees (Term expiring 1998):
James F. Kenney, Trustee ................... 39 1995 City of Philadelphia Councilman since 1992
Roseanne Pauciello, Trustee and
Corporate Secretary ....................... 53 1995 Corporate Secretary of Pennsylvania Savings
Bank; School District of Philadelphia Home
and School Visitor
Thomas J. Finley, Jr., Trustee ............. 76 1995 Retired
S. Michael Palermo, ........................ 56 1995 Assistant Executive Trustee of Pennsylvania
Turnpike Commission
Class III Trustees (Term expiring 1999):
Jane Scaccetti Fumo, Trustee(2)(3) ......... 42 1995 Certified Public Accountant, Drucker &
Scaccetti, P.C.
Alfonso Tumini, Trustee .................... 47 1995 Attorney
Leonard A. Green, Trustee .................. 78 1995 Attorney
Anthony DiSandro, Trustee, President
and Chief Operating Officer ............... 50 1995 President and Chief Operating Officer of
Pennsylvania Savings Bank
</TABLE>
- ------------
(1) Period indicated excludes service as a trustee of the Savings Bank's
predecessors; each Trustee was selected as an initial trustee of the
Savings Bank in connection with its incorporation on October 20, 1995.
(2) Vincent J. Fumo and Jane Scaccetti Fumo are husband and wife.
(3) Jane Scaccetti Fumo also serves as a director of Nutrition Management
Corp., which has a class of securities registered or subject to the
Securities Exchange Act of 1934, as amended ("Exchange Act").
Executive Officers Who Are Not Trustees
<TABLE>
<CAPTION>
Principal Occupation
Name/Position Age During Past Five Years
- ------------- --- ----------------------
<S> <C> <C>
Gary Polimeno, Vice President and
Treasurer ..................... 45 Vice President of Pennsylvania
Savings Bank. Treasurer of Pennsylvania
Savings Bank since 1994.
</TABLE>
Stock Ownership of Management as of December 31, 1997
Amount and Percent of
Nature of Outstanding
Name of Beneficial Shares of
Beneficial Owner Ownership Common Stock
---------------- --------- ------------
P. Charles DeRita ............. 5,000 0.42%
Sylvia M. DiBona .............. 23,250 1.95%
Anthony DiSandro .............. 104,783(1) 8.77%
James W. Eastwood ............. 6,200 0.52%
Thomas J. Finley, Jr. ......... 0 0%
69
<PAGE>
<TABLE>
<CAPTION>
Amount and Percent of
Nature of Outstanding
Name of Beneficial Shares of
Beneficial Owner Ownership Common Stock
---------------- --------- ------------
<S> <C> <C>
Jane Scaccetti Fumo .................... 160,514(2) 13.25%
Vincent J. Fumo ........................ 160,514(2) 13.25%
Leonard A. Green ....................... 100 (3)
James F. Kenney ........................ 100 (3)
S. Michael Palermo ..................... 0 0%
Gary Polimeno .......................... 11,515(4) 0.96%
Roseanne Pauciello ..................... 2,500 0.21%
Alfonso Tumini ......................... 0 0%
All executive officers and trustees as a
group (13 persons) ................... 272,182 22.21%
</TABLE>
- ------------
(1) Amount includes 19,636 shares held indirectly through the 401(k) Plan,
10,000 shares held through the Profit Sharing Plan, 10,160 shares held by
the 1995 MRP that have been awarded to Mr. DiSandro, 6,114 shares held by
Mr. DiSandro directly and 16,593 shares subject to immediately exercisable
options. Also includes 42,280 shares held by the ESOP of which Mr.
DiSandro is a trustee.
(2) Vincent Fumo and Jane Scaccetti Fumo are husband and wife. Amount includes
18,000 shares held through the 401(k) Plan, 7,205 shares held through the
Profit Sharing Plan, 42,045 held in IRA accounts, 10,161 shares held by
the 1995 MRP that have been awarded to Mr. Fumo, 200 shares held by Jane
Scaccetti Fumo, 300 shares held on behalf of the daughter of Vincent and
Jane Scaccetti Fumo and 16,593 shares subject to immediately exercisable
options. Also includes 42,280 shares held by the ESOP of which Mr. Fumo is
a trustee.
(3) Represents less than 1/2 of one percent of total shares outstanding.
(4) Includes 7,773 shares held indirectly through the 401(k) Plan, 1,069 shares
by the 1995 MRP, and 2,673 shares subject to immediately exercisable
options.
Meetings and Committees of the Board of Trustees
The business of the Savings Bank is conducted at regular and special
meetings of the full Board of Trustees and its standing committees. The
standing committees consist of the Executive, Asset/Liability Management,
Budget, Compensation, Loan, Investment, Strategic Planning, Audit and
Nominating Committees. During 1997, the Board of Trustees met at twelve regular
meetings. No member of the Board or any committee thereof attended less than
75% of said meetings.
The Executive Committee of the Board of Trustees consists of Trustee
DiSandro, who serves as Chairman, and Trustees Pauciello and Palermo. The
Executive Committee meets immediately prior to meetings of the full Board. All
significant actions of the Executive Committee are reviewed by the entire
Board; however, the Executive Committee has decision-making authority as
assigned by the Board, such as loan approval authority up to $350,000. The
Executive Committee met twelve times during 1997.
The Asset/Liability Committee consists of Vincent J. Fumo, who serves as
Chairman, Trustees DiSandro, Eastwood, Jane Scaccetti Fumo and Gary Polimeno,
the Savings Bank's Treasurer. This committee meets to review the maturity and
repricing of the Savings Bank's assets and liabilities in an effort to manage
the Savings Bank's interest rate risk in accordance with the Savings Bank's
interest rate risk policy and otherwise reviews the Bank's strategies for
interest rate risk management. This committee met four times during 1997.
The Audit Committee of the Savings Bank consists of Trustee James W.
Eastwood, who serves as Chairman, and Trustees Kenney and DiBona. The Audit
Committee reviews the Savings Bank's general financial condition and the
results of the annual audit. The Audit Committee is authorized to retain the
services of outside independent auditors of the Savings Bank. The Audit
Committee met twelve times in 1997.
70
<PAGE>
The Nominating Committee consists of Trustee Vincent J. Fumo, who serves
as Chairman, and Trustees Anthony DiSandro, Roseanne Pauciello and Jane
Scaccetti Fumo. The Nominating Committee, which met once in 1997, is
responsible for selecting and submitting nominees for trustees to the Board at
its meeting for the purpose of appointing trustees. Shareholder nominations for
trustee must be made in accordance with the Savings Bank's Bylaws.
The Budget Committee of the Savings Bank consists of Trustee Tumini, who
serves as Chairman, and Trustees Kenney and Jane Scaccetti Fumo. The Budget
Committee participates in the formulation of the Savings Bank's budget and
supervises the Savings Bank's adherence to its budget. The Budget Committee met
twelve times in 1997.
The Savings Bank's Strategic Planning Committee consists of Trustee Jane
Scaccetti Fumo, who serves as Chairperson, and Trustees DiBona, Green and
Pauciello. The Savings Bank's Strategic Planning Committee conducts analyses of
the Savings Bank's status and performance to produce recommendations to the
Board for strategies for growth and profitability. The Strategic Planning
Committee met three times in 1997.
The Savings Bank's Loan Committee consists of Trustee DiSandro, who serves
as Chairman, together with officers Gary Polimeno and Renee D'Orazio. The Loan
Committee approves loans of up to $200,000. It submits larger loans to the
Executive Committee or the Board of Trustees for approval. The Loan Committee
met at least once each month in 1997.
Trustee Eastwood serves as Chairman of the Savings Bank's Compensation
Committee, which is responsible for establishing and monitoring compensation
levels in view of management's performance and coordinating and instituting
special compensation plans. Trustees DeRita and Pauciello also serve on the
Compensation Committee, which met four times in 1997.
The Savings Bank's investment portfolio is managed by the Investment
Committee. The Investment Committee makes and monitors investments in
accordance with the Savings Bank's Investment Policy. Trustee Vincent J. Fumo
serves as Investment Committee Chairman, and Trustee DiSandro and officer Gary
Polimeno are members. The committee met four times in 1997.
Trustee Compensation
For the year ended December 31, 1997, trustees were paid $700 per Board
meeting attended. In addition, trustees were paid $350 per committee meeting
attended. Directors of the Savings Bank's subsidiaries and affiliates, PSA
Financial Corp., PSA Service Corp., PSA Consumer Discount Company,
Transnational Mortgage Corp. and PSB Mutual Holding Company, were paid $250,
$150, $150, $250 and $200, respectively, per board meeting attended.
71
<PAGE>
Executive Compensation
The following table sets forth, for the years ended December 31, 1997,
December 31, 1996 and September 30, 1995 certain information as to the total
remuneration paid by the Savings Bank to executive officers who received salary
and bonuses in excess of $100,000 during such fiscal year.
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards
----------------------------------- --------------------------------------
Other All
Annual Other
Compen- Restricted Securities Compen-
Fiscal sation Stock Underlying sation
Name and Principal Position Year Salary(1) Bonuses (2) Awards(3) Options (4)(5)
- --------------------------- ---- ---------- ------- --- --------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Vincent J. Fumo 1997 $139,987 $117,500 $60,671 $23,800
Chairman and Chief Executive 1996 $130,478 $117,500 $19,174 $120,713 16,593 $40,758
Officer 1995 $142,170 $108,500 $25,414 $44,171
Anthony DiSandro 1997 $147,456 $125,000 $56,540 $27,650
President and Chief Operating 1996 $145,782 $125,000 $18,263 $120,701 16,593 $47,250
Officer 1995 $158,935 $113,500 $16,788 $49,143
Gary Polimeno 1997 $ 87,282 $ 35,000 $ 2,966 $ 8,400
Vice President and Treasurer 1996 $ 87,282 $ 45,000 $ -- $ 12,700 2,673 $17,660
1995 $ 95,874 $ 45,000 $ -- $27,199
</TABLE>
- ------------
(1) Includes the portion of salary deferred by the executive pursuant to the
401(k) Plan.
(2) Consists of lease payments paid by the Savings Bank with respect to vehicle
provided by the Savings Bank for the executive's use and compensation
income related to restricted Stock awards. For the year ended December 31,
1997, Mr. Fumo, Mr. DiSandro and Mr. Polimeno recognized compensation
expense of $40,004, $40,004 and $2,996 for those shares which were vested
as of December 31, 1997.
(3) Mr. Fumo, Mr. DiSandro and Mr. Polimeno each hold 10,161 shares of
restricted stock, 10,160 shares of restricted stock and 1,069 shares of
restricted stock, respectively, which, as of December 31, 1997, had a fair
market value of $294,669, $294,640 and $31,001, respectively. Of such
shares, 5,347, 5,347 and 1,069 shares of each of Messrs. Fumo, DiSandro
and Polimeno were awarded at April 30, 1996 and vest at a rate of 20% per
year over a five (5) year period and 4,814 and 4,813 shares of each of
Messrs. Fumo and DiSandro were granted on December 31, 1996 and vest at a
rate of 20% per year over a five (5) year period.
<PAGE>
(4) Includes trustees fees of $15,400 and $19,250 paid to Mr. Fumo and Mr.
DiSandro, respectively, for the year ended December 31, 1997, and
directors fees paid by the Savings Bank's subsidiaries to Mr. Fumo, Mr.
DiSandro and Mr. Polimeno of $8,400, $8,400 and $8,400, respectively, for
the year ended December 31, 1997. Includes trustees fees of $12,200 and
$17,100 paid to Mr. Fumo and Mr. DiSandro, respectively, for the year
ended December 31, 1996, and directors fees paid by the Bank's
subsidiaries to Mr. Fumo, Mr. DiSandro and Mr. Polimeno of $11,200,
$11,200 and $8,400, respectively, for the year ended December 31, 1996.
Includes trustee fees of $7,200 and $11,400 paid to Mr. Fumo and Mr.
DiSandro, respectively, in fiscal year 1995, and trustee fees paid by the
Bank's subsidiaries and affiliates to Mr. Fumo, Mr. DiSandro and Mr.
Polimeno of $8,400 each in fiscal year 1995.
(5) Includes contributions of $17,358, $18,950 and $9,260 made by the Savings
Bank to the accounts of Mr. Fumo, Mr. DiSandro and Mr. Polimeno,
respectively, pursuant to the Profit Sharing Plan for the year ended
December 31, 1996 and contributions of $25,713, $28,028 and $15,131 to the
accounts of Mr. Fumo, Mr. DiSandro and Mr. Polimeno, respectively, for
fiscal year 1995. Also includes $2,858, $1,315 and $3,668 in contributions
to the accounts of Mr. Fumo, Mr. DiSandro and Mr. Polimeno, respectively,
pursuant to the 401(k) Plan for the year ended December 31, 1995. During
the year ended December 31, 1996, the Savings Bank made no profit sharing
or matching contributions to the accounts of Mr. Fumo, Mr. DiSandro, and
Mr. Polimeno, respectively. For the year ended December 31, 1997, no
contributions were made to either the Profit Sharing or the 401K Plan.
Employment Agreements. In connection with the MHC Reorganization, the
Savings Bank entered into employment agreements (the "Employment Agreements")
with Vincent J. Fumo, Chairman and Chief Executive Officer and Anthony
DiSandro, President and Chief Operating Officer. Under the terms of his
Employment
72
<PAGE>
Agreement, Mr. Fumo serves as Chairman and Chief Executive Officer of the MHC
and the Savings Bank at a base salary of $130,500. Under the terms of his
Employment Agreement, Mr. DiSandro serves as President and Chief Operating
Officer of the MHC and the Savings Bank at a base salary of $145,800. Each
Employment Agreement provides for an initial term of three years, which will
thereafter be automatically renewed for an additional three years on each
anniversary date unless terminated pursuant to its terms by the respective
parties.
Each Employment Agreement provides for the payment of certain severance
benefits in the event of the executive's resignation for specified reasons or
as a result of his termination by the MHC or the Savings Bank without "Cause"
(as defined in each Employment Agreement). The executive would be entitled to
severance payments if: (1) he terminates employment during the term of such
agreement following any breach of the Employment Agreement by the Savings Bank
or MHC, loss of title, office or significant authority, reduction in annual
compensation or benefits, or relocation of the executive's principal place of
employment by more than 30 miles, or (2) if the Savings Bank or the MHC
terminates his employment, other than for Cause.
If either executive becomes entitled to receive severance payments under
his Employment Agreement, he would receive, over a period of 36 months, a cash
payment equal to three times his average annual compensation during the
five-year period preceding termination of employment. Payments would be made in
equal monthly installments. In addition to the severance payments, the
executive would be entitled to continue to receive life, medical, dental and
other insurance coverages (or a dollar amount equal to the cost of obtaining
each such coverage) for a period of up to 36 months from the date of
termination. Payments under the Employment Agreements are limited, however, to
the extent (i) that they will constitute excess parachute payments under
Section 280G of the Internal Revenue Code of 1986, as amended ("Code"), or (ii)
not permitted under the Federal Deposit Insurance Act.
Significant Owners of Savings Bank Common Stock
The following table sets forth, as of December 31, 1997, certain
information as to the beneficial ownership of Savings Bank Common Stock by
persons known by the Savings Bank who beneficially own more than 5% of the
outstanding shares of the Savings Bank Common Stock (the "Significant Owners").
For purposes of this table, an individual is considered to beneficially own
shares of Savings Bank Common Stock if he or she has or shares voting power
(which includes the power to vote or direct the voting of the shares) or
investment power (which includes the power to dispose of or direct the
disposition of the shares). Unless otherwise indicated, all shares are owned
directly by the Significant Owners through a trust, corporation or association,
or by the Significant Owners or their spouses as custodians or trustee for the
shares of minor children. The Significant Owners effectively exercise sole
voting and investment power over such shares. Shares that are subject to
options that are exercisable within 60 days of December 31, 1997 are deemed to
be beneficially owned. For information regarding proposed purchases of
Conversion Shares by the Significant Owners and their anticipated ownership of
Common Stock upon consummation of the Conversion and Reorganization, see
"COMMON STOCK TO BE PURCHASED OR RECEIVED BY MANAGEMENT."
<TABLE>
<CAPTION>
Amount and Percent of
Nature of Outstanding
Name and Address of Beneficial Shares of
Title of Class Beneficial Ownership Ownership Common Stock
-------------- ---------------------- --------- ------------
<S> <C> <C> <C>
Common Stock PSB Mutual Holding Company 615,250 51.50%
par value Eleven Penn Center, Suite 2601
$1.00 per 1835 Market Street
Philadelphia, Pennsylvania 19103
Vincent J. Fumo and 160,514 13.44%
Jane Scaccetti Fumo
1818 South 13th Street
Philadelphia, Pennsylvania 19148(1)
Anthony DiSandro 104,783 8.77%
1071 Welsh Road
Philadelphia, Pennsylvania 19115(2)
MHC and all officers 880,547 73.71%
and trustees of
the MHC(3)
</TABLE>
73
<PAGE>
- ------------
(1) Vincent Fumo and Jane Scaccetti Fumo are husband and wife. Amount includes
18,000 shares held through the Savings Bank's Cash or Deferred Profit
Sharing Plan (the "401(k) Plan"), 7,205 shares held through the Savings
Bank's Profit Sharing Plan (the "Profit Sharing Plan"), 42,045 held in IRA
accounts, 10,161 shares held by the Pennsylvania Savings Bank Management
Recognition Plan (the "MRP") that 105 have been awarded to Mr. Fumo, 200
shares held by Jane Scaccetti Fumo, 300 shares held on behalf of the
daughter of Vincent and Jane Scaccetti Fumo and 16,593 shares subject to
immediately exercisable options. Also includes 42,280 shares held by the
Pennsylvania Savings Bank Employee Stock Ownership Plan (the "ESOP") of
which Mr. Fumo is a trustee.
(2) Amount includes 19,636 shares held indirectly through the 401(k) Plan,
10,000 shares held through the Profit Sharing Plan, 10,160 shares held by
the MRP that have been awarded to Mr. DiSandro, 6,114 shares held by Mr.
DiSandro directly and 16,593 shares subject to immediately exercisable
options. Also includes 42,280 shares held by the ESOP of which Mr.
DiSandro is a trustee.
(3) The Trustees of the MHC intend to vote their shares, and to cause the MHC
to vote its shares in favor of the Conversion.
Compensation of Officers and Directors Through Benefit Plans
Defined Benefit Retirement Plan. The Savings Bank has maintained a
noncontributory defined benefit retirement plan ("Retirement Plan"). Under the
terms of the Retirement Plan, all employees age 21 or older who have worked at
the Savings Bank for a period of one year and have been credited with 1,000 or
more hours of employment with the Savings Bank during the year are eligible to
accrue benefits under the Retirement Plan. The Savings Bank would annually
contribute an amount to the Retirement Plan necessary to satisfy the
actuarially determined minimum funding requirements in accordance with the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). At
December 31, 1997, the Retirement Plan fully met its funding requirements under
Section 412 of the Code. Employee contributions are not permitted under the
Retirement Plan. The Retirement Plan was "frozen" as of September 30, 1994 and
benefits no longer accrue thereunder. Since the Retirement Plan is fully
funded, the Savings Bank will generally not be required to make any additional
contributions unless asset depreciation from investment occurs. Participants
will continue to vest in accordance with the provisions of the Retirement Plan.
No new employees will be eligible for participation. The Plan, however, remains
subject to all other requirements of the Code.
Benefits under the Retirement Plan begin to vest after three years in
accordance with the following schedule:
Years of Service Percentage Vested
---------------- -----------------
3 years or less 0%
After 3 years 20%
After 4 years 40%
After 5 years 60%
After 6 years 80%
After 7 years 100%
74
<PAGE>
The following table indicates the annual retirement benefit that would be
payable under the Retirement Plan upon retirement at age 65 in calendar year
1998, expressed in the form of a single life annuity for the final average
salary and benefit service classifications specified below.
<TABLE>
<CAPTION>
Years of Service and Benefits Payable at Retirement
Final Average ---------------------------------------------------------------------------
Compensation 15 20 25 30 35 40
- --------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ 50,000 $13,804 $18,405 $23,006 $27,608 $27,608 $27,608
$ 75,000 $21,950 $29,267 $36,583 $43,900 $43,900 $43,900
$ 100,000 $30,096 $40,128 $50,160 $60,192 $60,192 $60,192
$ 125,000 $38,242 $50,990 $63,827 $65,827 $65,827 $65,827
$ 150,000* $46,388 $61,851 $65,827 $65,827 $65,827 $65,827
</TABLE>
- ------------
* Represents the limit on plan compensation imposed by the Code effective
January 1, 1994.
As of December 31, 1997, Mr. Fumo, Mr. DiSandro, and Mr. Polimeno had 18,
17 and 19 years of credited service (i.e. benefit service), respectively.
Pennsylvania Savings Bank Cash or Deferred Profit Sharing Plan
(401(k)). The Savings Bank also maintains the Pennsylvania Savings Cash or
Deferred Profit Sharing Plan, which is a qualified, tax-exempt profit sharing
plan with a cash-or-deferred feature under Section 401(k) of the Code (the
"401(k) Plan"). All employees who have attained age 21 and have completed two
years of employment during which they worked at least 1,000 hours are eligible
to participate. Assets of the 401(k) Plan are managed by the 401(k) Plan's
trustees. Mr. Fumo and Mr. DiSandro presently serve as trustees to the 401(k)
Plan.
Under the 401(k) Plan, participants are permitted to make pre-tax salary
reduction contributions to the plan equal to a percentage of up to 15% of
compensation. Additional after-tax contributions of up to 10% of compensation
may be made to the Plan. For these purposes, "compensation" includes total
compensation (including salary reduction contributions made under the 401(k)
Plan sponsored by the Savings Bank), but does not include compensation in
excess of the Code Section 401(a)(17) limits (presently $160,000). The Savings
Bank may also annually make a discretionary profit sharing contribution to the
401(k) Plan. A participant must complete 1,000 hours of service during the plan
year and be employed on the last day of the plan year to receive an allocation
of the profit sharing contribution. For the 1997 and 1996 plan years, the
Savings Bank made profit sharing contributions of $0 and $40,568.
All employee contributions and profit sharing contributions to the 401(k)
plan and earnings thereon are fully and immediately vested.
Plan benefits will be paid to each participant as a joint and survivor or
single life annuity. In addition, a participant may, under certain
circumstances, elect a lump sum or period certain payment upon normal
retirement, death or disability, or after termination of employment.
Pennsylvania Savings Bank Profit Sharing Plan. The Savings Bank also
maintains the Pennsylvania Savings Bank Profit Sharing Plan, which is a
qualified plan pursuant to Section 401(a) of the Code. Employees who have
completed at least two years of service during which they have worked 1,000
hours or more and who have attained age 21 are eligible to participate in the
Profit Sharing Plan. Pursuant to the Profit Sharing Plan the Savings Bank, in
its discretion, makes contributions to the accounts of eligible employees.
Employee contributions are neither permitted nor required. Benefits under the
Profit Sharing Plan become 100% vested upon entry to the Plan.
Employee Stock Ownership Plan. The Savings Bank ESOP acquired 42,780
shares of the Savings Bank Common Stock with the proceeds of a $427,800 loan
from an unaffiliated financial institution ("1995 Loan"). Upon consummation of
the Conversion and Reorganization, the Savings Bank Common Stock held by the
ESOP will be converted into Exchange Shares based upon the Exchange Ratio.
In order to fund the purchase of up to 8% of the Conversion Shares to be
issued in the Conversion and Reorganization, it is anticipated that the ESOP
will borrow funds from the Holding Company equal to 100% of the
aggregate-purchase price of the Conversion Shares. In addition, the Holding
Company will lend sufficient funds to the ESOP to enable the ESOP to repay the
1995 Loan which had an outstanding principal balance of
75
<PAGE>
$295,000 at December 31, 1997. 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 10- 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 and
Reorganization. See "PRO FORMA DATA." To the extent that the ESOP is unable to
acquire 8% of the Common Stock issued in the Conversion and Reorganization, it
is anticipated that the additional shares will be acquired following the
Conversion and Reorganization through open market purchases.
Shares purchased by the ESOP with the proceeds of the loan (including
shares originally acquired by the ESOP with the proceeds of the 1995 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.
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 shareholders or which
constitute authorized but unissued shares or shares held in treasury by 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.
Employees of the Savings Bank who have completed 1,000 hours of service
during 12 consecutive months and who have attained age 21 are eligible to
participate in the ESOP.
Benefits under the ESOP generally become 100% vested after the third year
of service or upon normal retirement (as defined in the ESOP), disability or
death of the participant. If a participant terminates employment for any other
reason prior to fully vesting, his nonvested account balance will be forfeited.
Forfeitures will be reallocated among remaining participating employees in the
same proportion as contribution. Benefits may be payable upon death,
retirement, early retirement, disability or separation from service. The
Savings Bank's contribution to the ESOP will not be fixed, so benefits payable
under the ESOP cannot be estimated. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Impact of New Accounting
Standards."
A committee consisting of the Savings Bank's Chairman and Chief Executive
Officer, President and Vice President and Treasurer, will administer the ESOP
(the "ESOP Committee"). An unrelated corporate trustee for the ESOP will be
appointed prior to the completion of the Offering. The ESOP Committee may
instruct the trustee regarding investment of funds contributed to the ESOP. The
ESOP trustee must vote all allocated shares held in the suspense account in a
manner calculated to most accurately reflect the instructions the ESOP trustee
has received from participants regarding the allocated stock, subject to and in
accordance with the fiduciary duties under ERISA owed by the ESOP trustee to
the ESOP participants.
Pursuant to SOP 93-6, compensation expense for a leveraged ESOP is
recorded at the fair market value of the ESOP shares when committed to be
released to participants' accounts. See "PRO FORMA DATA" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Comparison of Operating Results for the Years Ended December 31, 1996 and
1995."
The ESOP is subject to the requirements of ERISA and the regulations of
the IRS and the Department of Labor issued thereunder. The Savings Bank has
received a favorable determination letter from the IRS regarding the
tax-qualified status of the ESOP.
1995 Stock Option and Incentive Plan. In connection with the MHC
Reorganization, the Savings Bank adopted the 1995 Stock Option Plan. The plan
was approved by the Public Shareholders at the Savings Bank's 1996 annual
meeting of shareholders. Options for all shares reserved for issuance under the
1995 Stock Option Plan have been granted to officers and employees of the
Savings Bank. In connection with the Conversion and Reorganization, the 1995
Stock Option Plan will be assumed by the Holding Company and appropriate
adjustments will be made to the exercise price and the number of shares
underlying each option to reflect the applicable Exchange Ratio.
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<PAGE>
The following options were granted to Messrs. Fumo, DiSandro and Polimeno
under the 1995 Stock Option Plan during the fiscal year ended December 31,
1997.
<TABLE>
<CAPTION>
Number % of
of Shares Total Options
Underlying Granted Exercise Expiration
Name Options to Employees Price Date
- -------------------------- ------------ ---------------- ---------- ------------------
<S> <C> <C> <C> <C>
Vincent J. Fumo .......... 13,368 46.27%(1) $ 11.88 May 29, 2006
3,225 13.25 December 18, 2006
Anthony DiSandro ......... 13,368 46.27%(1) $ 11.88 May 29, 2006
3,225 13.25 December 18, 2006
Gary Polimeno ............ 2,673 7.46% $ 11.88 April 30, 2006
</TABLE>
- ------------
(1) Percentage based on aggregate number of options held by each holder of
options.
There was no exercise of options by any of Messrs. Fumo, DiSandro and
Polimeno under the 1995 Stock Option Plan at and for the fiscal year ended
December 31, 1997.
<TABLE>
<CAPTION>
Value of
Unexercised
In-the Money
Number of Options
Securities at Fiscal Year-
Shares Underlying End ($)(2)
Acquired Value Unexercised Exercisable/
Name on Exercise Realized Options Unexercisable
- -------------------------- ------------- ---------- ------------- ----------------
<S> <C> <C> <C> <C>
Vincent J. Fumo .......... 0 0 16,593 $238,171/$0
Anthony DiSandro ......... 0 0 16,593 238,171/ 0
Gary Polimeno ............ 0 0 16,593 39,079/ 0
</TABLE>
1995 Management Development and Recognition Plans. In connection with the
MHC Reorganization, the Savings Bank adopted Management Development and
Recognition Plans (collectively, the "1995 MRPs") for officers, employees and
nonemployee directors of the Savings Bank. The 1995 MRPs were approved by the
Public Shareholders at the Savings Bank's 1996 annual meeting of shareholders.
All shares under the 1995 MRP have been awarded. For purposes of the Conversion
and Reorganization, the shares awarded under the 1995 MRP participants will be
treated in the same manner as shares held by other minority shareholders.
1998 Stock Option Plan. The Board of Directors of the Holding Company
intends to adopt the 1998 Stock Option Plan and to submit it to the
shareholders for approval at a meeting held no earlier than six months
following consummation of the Conversion and Reorganization. Under current FDIC
regulations, the approval of a majority vote of the Holding Company's
outstanding shares is required prior to the implementation of the 1998 Stock
Option Plan within one year of the consummation of the Conversion and
Reorganization. The Stock Option Plan will comply with all applicable
regulatory requirements. However, the 1998 Stock Option Plan will not be
approved or endorsed by the FDIC.
The 1998 Stock Option Plan will be designed to attract and retain
qualified management personnel, to provide such officers, and key employees
with a proprietary interest in the Holding Company as an incentive to
contribute to the success of the Holding Company and the Savings Bank, and to
reward officers and key employees for outstanding performance. The 1998 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 shareholder approval of
the 1998 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 1998 Stock Option Plan will continue in effect for a
period of ten years from the date the 1998 Stock Option Plan is approved by
shareholders.
A number of authorized shares of Common Stock equal to 10% of the number
of Conversion Shares of issued in connection with the Conversion and
Reorganization will be reserved for future issuance under the 1998 Stock Option
Plan (161,100 shares based on the issuance of 1,610,000 Conversion Shares at
the maximum of the Estimated Valuation Range). Shares acquired upon exercise of
options will be authorized but unissued shares
77
<PAGE>
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 1998
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 (as
defined below) to reflect the increase or decrease in the total number of
shares of Common Stock outstanding.
The 1998 Stock Option Plan will be administered and interpreted by a
committee of the Board of Directors ("Committee"). Subject to applicable FDIC
regulations, the Committee will determine which 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 FDIC regulations, if the 1998 Stock Option Plan is
implemented within one year of the consummation of the Conversion and
Reorganization, (i) no officer or employees 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 1998 Stock
Option Plan.
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 shareholder approval is
obtained it would provide awards to its officers and employees to the extent
and under terms and conditions permitted by applicable regulations. The size of
individual awards will be determined prior to submitting the 1998 Stock Option
Plan for shareholder approval and disclosure of anticipated awards will be
included in the proxy materials for such meeting.
1998 Management Recognition Plan. Following the Conversion and
Reorganization, the Board of Directors of the Holding Company intends to adopt
the 1998 MRP for officers and employees of the Holding Company and the Savings
Bank, subject to shareholder approval. The 1998 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 1998 MRP will comply with all
applicable regulatory requirements. However, the 1998 MRP will not be approved
or endorsed by the FDIC. Under current FDIC regulations, the approval of a
majority vote of the Holding Company's outstanding shares is required prior to
the implementation of the 1998 MRP within one year of the consummation of the
Conversion and Reorganization.
The 1998 MRP expects to acquire a number of shares of Common Stock equal
to 4% of the Conversion Shares issued in connection with the Conversion and
Reorganization (64,440 shares based on the issuance of 1,610,000 Conversion
Shares at the maximum of the Estimated Valuation Range). 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 1998 MRP ("1998 MRP Trust") or from
authorized but unissued shares or treasury shares of the Holding Company.
78
<PAGE>
A committee of the Board of Directors of the Holding Company will
administer the 1998 MRP, the members of which will also serve as trustees of
the 1998 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 1998 MRP Trust. The Board of Directors of the Holding Company may
terminate the 1998 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 1998 MRP will be in the
form of restricted stock payable ratably over a specified vesting period
following the date of grant. During the period of restriction, all shares will
be held in escrow by the Holding Company or by the 1998 MRP Trust. All unvested
1998 MRP awards will vest in the event of the recipient's death or disability.
Unvested 1997 MRP awards will also vest following a change in control (as
defined in the 1998 MRP) of the Holding Company or the Savings Bank to the
extent authorized or not prohibited by applicable law or regulations.
A recipient of a 1998 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 shareholder approval is
obtained it would provide awards to its directors, officers and employees to
the extent and under terms and conditions permitted by applicable regulations.
Under current FDIC regulations, if the 1998 MRP is implemented within one year
of the consummation of the Conversion and Reorganization, (i) no officer or
employees could receive an award 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 1998 MRP. The size of individual awards will be determined
prior to submitting the 1998 MRP for shareholder 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 generally be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons (unless the loan or
extension of credit is made under a benefit program generally available to all
other employees and does not give preference to any insider over any other
employee) and must not involve more than the normal risk of repayment or
present other unfavorable features. Pursuant to the above regulations, the
Savings Bank adopted an Insiders' Loan Policy in December 1996 pursuant to
which trustees/directors, officers and employees of the Savings Bank or any of
its subsidiaries are eligible to receive a 1% reduction of the interest rate of
mortgage loans. Federal regulations also require that 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 related interests, are in excess of the
greater of $25,000 or 5% of the Savings Bank's capital and surplus (up to a
maximum of $500,000) must be approved in advance by a majority of the
disinterested members of the Board of Directors. See "REGULATION -- Federal
Regulation of Savings Banks -- Transactions with Affiliates." The aggregate
amount of loans by the Savings Bank to its executive officers and directors was
$1.18 million at December 31, 1997, which is less than .01% of pro forma
shareholders' equity (based on the issuance of the maximum of the Estimated
Valuation Range).
Certain Relationships and Related Transactions
The Savings Bank's Insiders' Loan Policy applies to the following loans:
(1) a first mortgage on an employee's residence, (2) a first mortgage on the
employee's secondary home when it is used by the employee
79
<PAGE>
as a vacation home and not as an investment property, and (3) a second mortgage
home equity loan on the employee's personal residence. The interest rate
discount is subject to increase by 1% if the employee does not complete five
years of continuous service with the Savings Bank or its subsidiaries. In
December 1996, mortgage loans were extended to Mr. Fumo and Mr. DiSandro on the
following terms: (1) principal amount of $750,000 at an interest rate of 6.5%
for a term of 360 months to Mr. Fumo; and (2) principal amount of $250,000 at
an interest rate of 6.5% for a term of 360 months to Mr. DiSandro. As of
December 31, 1997, Mr. Fumo's mortgage loan balance was $744,472 and Mr.
DiSandro's mortgage loan balance was $247,921. No additional similar loans were
extended through the year ended December 31, 1997.
80
<PAGE>
THE CONVERSION AND REORGANIZATION
The PDOB has approved the Plan of Conversion subject to its approval by
the members of the Savings Bank and the shareholders of the Savings Bank
entitled to vote thereon and to the satisfaction of certain other conditions
imposed by the PDOB. Regulatory approval does not constitute a recommendation
or endorsement of the Plan of Conversion.
General
The Boards of Trustees of the Savings Bank and the MHC adopted, on July
17, 1997 and amended on September 25, 1997 and the Board of Directors of the
Holding Company adopted, on _______________, 1998 the Plan of Conversion which
describes and controls the Conversion and Reorganization. pursuant to which the
MHC will convert from a mutual holding company to a stock holding company and
the Savings Bank simultaneously will reorganize as a wholly-owned subsidiary of
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 both the MHC's
Proxy Statement and the Savings Bank's Proxy Statement, and is available to
both members of the MHC and shareholders of the Savings Bank upon request. The
Plan of Conversion is also filed as an exhibit to the Registration Statement.
See "ADDITIONAL INFORMATION." The PDOB has approved the Plan of Conversion
subject to (i) its approval by the members of the MHC entitled to vote on the
matter at the Special Meeting of Members called for that purpose to be held on
__________, 1998, (ii) its approval by the shareholders of the Savings Bank
entitled to vote on the matter at a special meeting of shareholders (including
the MHC) called for that purpose to be held on ____________, 1998, (iii)
approval by two-thirds of the votes of holders of Public Savings Bank Shares
voting at the Special Meeting of Shareholders, and (iv) subject to the
satisfaction of certain other conditions imposed by the PDOB and the FDIC.
Shareholders of the Savings Bank are entitled to dissent with respect to the
Plan of Conversion and to obtain "fair value" of their Savings Bank Common
Stock if the Plan of Conversion is consummated. See "Dissenders' Rights" in the
Savings Bank's Proxy Statement.
Pursuant to the Plan of Conversion, (i) the MHC will convert from a
state-chartered mutual holding company to a state-chartered interim stock
savings bank ("Interim A") and simultaneously merge with and into the Savings
Bank, pursuant to which the MHC will cease to exist and the shares of Savings
Bank Common Stock held by the MHC will be canceled, and (ii) an interim state
stock savings bank ("Interim B") will be formed as a wholly-owned subsidiary of
the Holding Company and will then merge with and into the Savings Bank. As a
result of the merger of Interim B with and into the Savings Bank, the Savings
Bank will become a wholly-owned subsidiary of the Holding Company and the
Public Savings Bank shares will be converted into the Exchange Shares pursuant
to the Exchange Ratio, which will result in the holders of such shares owning
in the aggregate approximately the same percentage of the Common Stock to be
outstanding upon the completion of the Conversion and Reorganization (i.e. the
Conversion Shares and the Exchange shares) as the percentage of Savings Bank
Common Stock owned by them in the aggregate immediately prior to consummation
of the Conversion and Reorganization without regard to (a) the payment of cash
in lieu of issuing fractional Exchange Shares and (b) any shares of Conversion
Stock purchased by the Savings Bank's shareholders in the Conversion Offerings
or the ESOP thereafter.
As part of the Conversion and Reorganization, the Holding Company is
offering Conversion Shares in the Subscription Offering to holders of
Subscription Rights in the following order of priority: (i) Eligible Account
Holders (depositors of the Savings Bank with $50.00 or more on deposit as of
June 30, 1996); (ii) the ESOP; and (iii) Supplemental Eligible Account Holders
(depositors of the Savings Bank with $50.00 or more on deposit as of December
31, 1997).
Concurrently with the Subscription Offering, any Conversion Shares not
subscribed for in the Subscription Offering may be offered for sale in the
Direct Community Offering to members of the general public, with priority being
given first to Public Shareholders (who are not Eligible Account Holders or
Supplemental Eligible Account Holders) and then to natural persons and trusts
of natural persons residing in the Local Community. Conversion Shares not sold
in the Subscription and Direct Community Offerings may be offered in the
Syndicated Community Offering. Regulations require that the Direct Community
and Syndicated Community Offerings be completed within 45 days after completion
of the fully extended Subscription Offering unless extended
81
<PAGE>
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 Conversion Shares. The Plan of Conversion provides
that the Conversion and Reorganization must be completed within 24 months after
the date of the approval of the Plan of Conversion by the members of the MHC.
No sales of Common Stock may be completed, either in the Subscription
Offering, Direct Community Offering or Syndicated Community Offerings unless
the Plan of Conversion is approved by the members of the MHC and the
shareholders of the Savings Bank.
The completion of the Conversion 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 Members Meeting and the Shareholders Meeting that will be
required to complete the Direct Community or Syndicated Community Offerings or
other sale of the Conversion Shares. If delays are experienced, significant
changes may occur in the estimated pro forma market value of the MHC and the
Savings Bank, as converted, together with corresponding changes in the net
proceeds realized by the Holding Company from the sale of the Conversion
Shares. If the Conversion and Reorganization is terminated, the Savings Bank
would be required to charge all Conversion and Reorganization expenses against
current income.
Orders for Conversion Shares will not be filled until at least 1,190,000
Conversion Shares have been subscribed for or sold and the PDOB approves the
final valuation and the Conversion and Reorganization closes. If the Conversion
and Reorganization is not completed within 45 days after the last day of the
fully extended Subscription Offering and the PDOB consents to an extension of
time to complete the Conversion and Reorganization, 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 and Reorganization 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 and
Reorganization is terminated.
Purposes of Conversion and Reorganization
The MHC, as a state-chartered mutual holding company, does not have
shareholders and has no authority to issue capital stock. As a result of the
Conversion and Reorganization, the Holding Company will be structured in the
form used by holding companies of commercial banks, most business entities and
a growing number of savings institutions. The holding company form of
organization will provide the Holding Company with the ability to diversify the
Holding Company's and the Savings Bank's business activities through
acquisition of, or mergers with, both stock savings institutions and commercial
banks, as well as other companies. Although there are no current arrangements,
understandings or agreements regarding any such opportunities, the Holding
Company will be in a position after the Conversion and Reorganization, subject
to regulatory limitations and the Holding Company's financial position, to take
advantage of any such opportunities that may arise.
The Conversion and Reorganization will be important to the future growth
and performance of the holding company organization by providing a larger
capital base to support the operations of the Savings Bank and Holding Company
and by enhancing their future access to capital markets, their ability to
diversify into other financial services related activities, and their ability
to provide services to the public. Although the Savings Bank currently has the
ability to raise additional capital through the sale of additional shares of
Savings Bank Common Stock, that ability is limited by the mutual holding
company structure which, among other things, requires that the MHC hold a
majority of the outstanding shares of Savings Bank Common Stock.
The Conversion and Reorganization also will result in an increase in the
number of shares of Common Stock to be outstanding as compared to the number of
outstanding shares of Public Savings Bank Shares, which will increase the
likelihood of the development of an active and liquid trading market for the
Common Stock. See "MARKET FOR COMMON STOCK." In addition, the Conversion and
Reorganization permit the Holding Company to engage in stock repurchases
without adverse federal income tax consequences, unlike the Savings
82
<PAGE>
Bank. Currently, the Holding Company has no plans or intentions to engage in
any stock repurchases, other than repurchases to acquire shares for the ESOP
(to the extent the ESOP is unable to purchase shares in the Conversion and
Reorganization) and repurchases to fund the 1998 MRP (assuming it is adopted by
shareholders of the Holding Company).
An additional benefit of the Conversion and Reorganization will be an
increase in the accumulated earnings and profits of the Savings Bank for
federal income tax purposes. When the Savings Bank (as a mutual institution)
transferred substantially all of its assets and liabilities to its stock
savings bank successor in the MHC Reorganization, its accumulated earnings and
profits tax attribute was not able to be transferred to the Savings Bank
because no tax-free reorganization was involved. Accordingly, this tax
attribute was retained by the Savings Bank when it converted its charter to
that of the MHC, even though the underlying retained earnings were transferred
to the Savings Bank. The Conversion and Reorganization has been structured to
re-unite the accumulated earnings and profits tax attribute retained by the MHC
in the MHC Reorganization with the retained earnings of the Savings Bank by
merging the MHC with and into the Savings Bank in a tax-free reorganization.
This transaction will increase the Savings Bank's ability to pay dividends to
the Holding Company in the future. See "DIVIDEND POLICY."
If the Savings Bank had undertaken a standard conversion involving the
formation of a stock holding company in 1995, applicable Pennsylvania law and
FDIC regulations would have required a greater amount of common stock to be
sold than the amount of net proceeds raised in the MHC Reorganization.
Management believed that it was advisable to profitably invest only the $5.58
million of net proceeds raised in the MHC Reorganization rather than the larger
amount of capital that would have been raised in a standard conversion. A
standard conversion in 1995 also would have immediately eliminated all aspects
of the mutual form of organization.
In light of the foregoing, the Boards of Directors of the Primary Parties
believe that the Conversion and Reorganization is in the best interests of the
MHC and the Savings Bank, their respective members and shareholders, and the
communities served by the Savings Bank.
Effects of Conversion and Reorganization on Depositors and Borrowers of the
Savings Bank
General. Prior to the Conversion and Reorganization, each depositor in the
Savings Bank has both a deposit account in the institution and a pro rata
interest in the net worth of the MHC based upon the balance in his or her
account. This interest may only be realized in the event of a liquidation of
the MHC. Furthermore, this interest is dependent upon the existence of the
depositor's account and has no tangible market value separate from such deposit
account. A depositor who reduces or closes his account receives a portion or
all of the balance in the account but nothing for his interest in the net worth
of the MHC, which is lost to the extent that the balance in the account is
reduced.
Consequently, the depositors of the Savings Bank have only an inchoate
ownership interest in the MHC, which has realizable value only in the unlikely
event that the MHC is liquidated. In such event, the depositors of record at
that time would share pro rata in any residual surplus and reserves of the MHC
after other claims are paid.
Upon consummation of the Conversion and Reorganization, permanent
nonwithdrawable capital stock will be created to represent the ownership of the
net worth of the Holding Company. The Common Stock is separate and apart from
deposit accounts and cannot be and is not insured by the FDIC or any other
governmental agency. Certificates are issued to evidence ownership of the
permanent stock. The share certificates are transferable, and therefore the
stock may be sold or traded if a purchaser is available with no effect on any
deposit and/or loan account(s) the seller may hold in the Savings Bank.
Continuity. The Conversion and Reorganization will not interrupt the
Savings Bank's normal business of accepting deposits and making loans. The
Savings Bank will continue to be subject to regulation by the FDIC and the
PDOB. After the Conversion and Reorganization, the Savings Bank will continue
to provide services for depositors and borrowers under current policies by its
present management and staff.
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<PAGE>
The directors and officers of the Savings Bank at the time of the
Conversion and Reorganization will continue to serve as directors and officers
of the Savings Bank after the Conversion and Reorganization. The directors and
officers of the Holding Company consist of individuals currently serving as
directors and officers of the MHC and the Savings Bank, and they generally will
retain their positions in the Holding Company after the Conversion and
Reorganization.
Effect on Public Savings Bank shares. Under the Plan of Conversion, upon
consummation of the Conversion and Reorganization, the Public Savings Bank
Shares shall be converted into Exchange Shares based upon the Exchange Ratio
without any further action on the part of the holder thereof. Upon surrender of
the Public Savings Bank Shares, Common Stock will be issued in exchange for
such shares and the Public Shareholders will become shareholders of the Holding
Company. See "-- Delivery and Exchange of Stock Certificates."
Voting Rights. Presently, depositors of the Savings Bank are members of,
and have very limited voting rights in, the MHC. Upon completion of the
Conversion and Reorganization, the MHC will cease to exist and all voting
rights in the Savings Bank will be vested in the Holding Company as the sole
shareholder of the Savings Bank. Exclusive voting rights with respect to the
Holding Company will be vested in the holders of Common Stock. Depositors of
the Savings Bank will not have voting rights in the Holding Company after the
Conversion and Reorganization, except to the extent that they become
shareholders of the Holding Company.
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 and Reorganization. Furthermore, the Conversion and
Reorganization 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 Stevens & Lee
that the Conversion and Reorganization will constitute one or more
reorganizations under Section 368(a) of the Code. Based on certain facts and
assumptions contained in such opinion, such opinion provides, among other
things, that: (i) the conversion of the MHC from a mutual holding company to a
state-chartered interim stock savings bank (i.e., Interim A) and its
simultaneous merger with and into the Savings Bank, with the Savings Bank as
the surviving entity, will qualify as one or more reorganizations within the
meaning of Section 368(a) of the Code, (ii) no gain or loss will be recognized
by the Savings Bank upon the receipt of the assets of the MHC in such merger,
(iii) the merger of Interim B with and into the Savings Bank, with the Savings
Bank as the surviving entity, will qualify as a reorganization within the
meaning of Section 368(a)(1)(A) and (a)(2)(E) of the Code, (iv) no gain or loss
will be recognized by Interim B upon the transfer of its assets to the Savings
Bank, (v) no gain or loss will be recognized by the Savings Bank upon the
receipt of the assets of Interim B, (vi) no gain or loss will be recognized by
the Holding Company upon the receipt of Savings Bank Common Stock from the
Public Shareholders solely in exchange for Common Stock, (vii) no gain or loss
will be recognized by the Public Shareholders upon the receipt of Exchange
Shares in exchange for their Public Savings Bank Shares, (viii) the basis of
the Exchange Shares to be received by the Public Shareholders will be the same
as the basis of the Public Savings Bank Shares surrendered in exchange
therefor, before giving effect to any payment of cash in lieu of fractional
Exchange Shares, (ix) the holding period of the Exchange Shares to be received
by the Public Shareholders will include the holding period of the Public
Savings Bank Shares, provided that the Public Savings Bank Shares were held as
a capital asset on the date of the exchange, (x) no gain or loss will be
recognized by the Holding Company upon the sale of shares of Conversion Shares
in the Conversion Offerings, (xi) the Eligible Account Holders and Supplemental
Eligible Account Holders will recognize gain, if any, upon the issuance to them
of withdrawable savings accounts in the Savings Bank following the Conversion
and Reorganization, interests in the liquidation account and nontransferable
Subscription Rights to purchase Conversion Stock, but only to the extent of the
value, if any, of the subscription rights, and (xii) the tax basis to the
holders of Conversion Shares purchased in the Conversion Offerings will be the
amount paid therefor, plus, in the case of shares purchased in the Subscription
Offering, the basis, if any, of the Subscription Rights exercised by the holder
to acquire such shares and the holding period for the Conversion Shares will
begin on the date of consummation of the Conversion Offerings, if purchased
through the exercise of Subscription Rights, and on the day after the date of
purchase, if purchased in the Community Offering or the Syndicated Community
Offering. Unlike a private letter ruling issued by the IRS, an opinion of
counsel is not binding on the IRS and the IRS could disagree with the
conclusions reached therein. In the event of such disagreement, no assurance
can be given that the conclusions reached in an opinion of counsel would be
sustained by a court if contested by the IRS.
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<PAGE>
Based upon past rulings issued by the IRS, the opinion provides that the
receipt of Subscription Rights by Eligible Account Holders and Supplemental
Eligible Account Holders under the Plan of Conversion will be taxable to the
extent, if any, that the Subscription Rights are deemed to have ascertainable
value. RP Financial, a financial consulting firm retained by the Savings Bank,
whose findings are not binding on the IRS, has issued a letter indicating 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. The Savings Bank could also recognize a
gain on the distribution of such Subscription Rights. Eligible Account Holders
and Supplemental Eligible Account Holders are encouraged to consult with their
own tax advisors as to the tax consequences in the event the Subscription
Rights are deemed to have ascertainable value.
The Savings Bank has also received an opinion from Stevens & Lee,
concerning certain Pennsylvania tax matters. Based on certain facts and
assumptions contained in such opinion, such opinion provides, among other
things that: (a) the Savings Bank will not recognize any net income or net loss
for purposes of the Mutual Thrift Institutions Tax solely as a result of the
Conversion and the Reorganization, provided the Savings Bank does not recognize
any net income or net loss under generally accepted accounting principles,
applied as required by the law imposing such tax; and (b) the account holders
of the Savings Bank and the Holding Company will not recognize any gain or loss
for Pennsylvania income tax purposes solely as a result of the Conversion and
the Reorganization, provided they do not recognize any gain or loss for federal
income tax purposes solely as a result of such transactions.
The opinion of Stevens & Lee and the letter from RP Financial are filed as
exhibits to the Registration Statement. See "ADDITIONAL INFORMATION."
PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF THE CONVERSION AND REORGANIZATION PARTICULAR
TO THEM.
Liquidation Account. In the unlikely event of a complete liquidation of
the MHC, each depositor of the Savings Bank would receive his or her pro rata
share of any assets of the MHC remaining after payment of claims of all
creditors. 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 was to the total
value of all deposit accounts in the Savings Bank at the time of liquidation.
After the Conversion and Reorganization, each depositor, in the event of a
complete liquidation of the Savings Bank, would have a claim as a creditor of
the same general priority as the claim of all other general creditors of the
Savings Bank. However, except as described below, his or her claim would be
solely in the amount of the balance in his or her deposit account plus accrued
interest. Each shareholder would not have an interest in the value or assets of
the Savings Bank or the Holding Company above that amount.
The Plan of Conversion provides for the establishment upon the completion
of the Conversion and Reorganization, of a special "liquidation account" for
the benefit of Eligible Account Holders and Supplemental Eligible Account
Holders in an amount equal to the amount of the greater of (1) the Savings
Bank's retained earnings of $8.74 million at March 31, 1995, the date of the
latest statement of financial condition contained in the final offering
circular utilized in the MHC Reorganization, or (2) 51.5% of the Savings Bank's
total shareholders' equity as reflected in its latest statement of financial
condition contained in the final Prospectus utilized in the Conversion
Offerings. As of the date of this Prospectus, the initial balance of the
liquidation account would be $8.74 million. Each Eligible Account Holder and
Supplemental Eligible Account Holder, if he or she were to continue to maintain
his deposit account at the Savings Bank, would be entitled, upon a complete
liquidation of the Savings Bank after the Conversion and Reorganization to an
interest in the liquidation account prior to any payment to the Holding Company
as the sole shareholder of the Savings Bank. Each Eligible Account Holder and
Supplemental Eligible Account Holder would have an initial interest in such
liquidation account for each deposit account, including passbook accounts,
transaction accounts such as checking accounts, money market deposit accounts
and certificates of deposit, held in the Savings Bank at the close of business
on June 30, 1996 or December 31, 1997, as the case may be. Each Eligible
Account Holder and Supplemental Eligible Account Holder will have a pro rata
interest in the total liquidation account for each of his or her deposit
accounts based on the proportion that the balance of each such deposit account
on the Eligibility Record Date or the Supplemental Eligibility Record Date, as
the case may be, bore to the balance of all deposit accounts in the Savings
Bank on such date.
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<PAGE>
If, however, on any December 31 annual closing date of the Savings Bank,
commencing December 31, 1997, the amount in any deposit account is less than
the amount in such deposit account on ____________________ or _____________, as
the case may be, or any other annual closing date, then the interest in the
liquidation account relating to such deposit account would be reduced by the
proportion of any such reduction, and such interest will cease to exist if such
deposit account is closed. In addition, no interest in the liquidation account
would ever be increased despite any subsequent increase in the related deposit
account. Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders are satisfied would
be distributed to the Holding Company as the sole shareholder of the Savings
Bank.
The Subscription, Direct Community and Syndicated Community Offerings
Subscription Offering. In accordance with the Plan of Conversion,
nontransferable Subscription Rights to purchase the Conversion Shares have been
issued to persons and entities entitled to purchase the Conversion Shares in
the Subscription Offering. The amount of Conversion Shares that these parties
may purchase will be subject to the availability of the Conversion Shares for
purchase under the categories set forth in the Plan of Conversion. Subscription
priorities have been established for the allocation of stock to the extent that
the Conversion Shares are available. These priorities are as follows:
Category 1: Eligible Account Holders. Each depositor with $50.00 or more
on deposit at the Savings Bank as of June 30, 1996 will receive nontransferable
Subscription Rights to subscribe for up to the greater of 1% of the shares of
Conversion Stock issued in the Conversion and Reorganization, 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 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 100 shares or the number of shares actually
subscribed for, whichever is less. Thereafter, unallocated shares will be
allocated among subscribing Eligible Account Holders proportionately, based on
the amount of their respective qualifying deposits as compared to total
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 June 30, 1996 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 and Reorganization. The ESOP intends
to purchase 8% of the shares of Common Stock issued in the Conversion and
Reorganization.
Category 3: Supplemental Eligible Account Holders. Each depositor with
$50.00 or more on deposit as of December 31, 1997 will receive nontransferable
Subscription Rights to subscribe for up to the greater of 1% of the shares of
Conversion Stock issued in the Conversion and Reorganization, 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 his total allocation equal 100
shares or the number of shares actually subscribed for, whichever is less.
Thereafter, unallocated shares will be allocated among subscribing Supplemental
Eligible Account Holders proportionately, based on the amount of their
respective qualifying deposits as compared to total qualifying deposits of all
Supplemental Eligible Account Holders.
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
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<PAGE>
another person will be subject to forfeiture of such rights and possible
further sanctions and penalties imposed by the FDIC or another agency of the
U.S. Government. Each person exercising Subscription Rights will be required to
certify that he or she is purchasing such shares solely for his or her own
account and that he or she has no agreement or understanding with any other
person for the sale or transfer of such shares. ONCE TENDERED, SUBSCRIPTION
ORDERS CANNOT BE REVOKED WITHOUT THE CONSENT OF THE SAVINGS BANK AND THE
HOLDING COMPANY.
The Holding Company and the Savings Bank will make reasonable attempts to
provide a Prospectus and related offering materials to holders of Subscription
Rights. However, the Subscription Offering and all Subscription Rights under
the Plan of Conversion will expire at __________, Eastern Time, on the
Expiration Date, whether or not the Savings Bank has been able to locate each
person entitled to such Subscription Rights. Orders for Common Stock in the
Subscription Offering physically received by the Savings Bank after the
Expiration Date will not be accepted. The Subscription Offering may be extended
by the Holding Company and the Savings Bank up to __________, 1998 without
regulatory approval. Applicable regulations require that the Holding Company
complete the sale of Conversion Shares within 45 days after the close of the
Subscription Offering. If the Direct Community Offering and the Syndicated
Community Offerings are not completed by __________, 1998 (or __________, 1998,
if the Subscription Offering is fully extended), all funds received will be
promptly returned with interest at the Savings Bank's passbook rate and all
withdrawal authorizations will be canceled or, if regulatory approval of an
extension of the time period has been granted, all subscribers and purchasers
will be notified of such extension and its duration 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. Any shares of Common Stock that remain
unsubscribed for in the Subscription Offering will be offered by the Holding
Company to certain members of the general public in a Direct Community
Offering, with preference given first to Public Shareholders (who are not
eligible to subscribe for Conversion Shares in the Subscription Offering) and
then 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 1% of the shares of Conversion Stock issued in the Conversion and
Reorganization. In the event an insufficient number of shares are available to
fill orders in the Direct Community Offering, the available shares will be
allocated on a pro rata basis determined by the amount of the respective
orders. The Direct Community Offering is expected to commence concurrently with
the commencement of the Subscription Offering. The Direct Community Offering
may terminate on or at any time subsequent to the Expiration Date, but no later
than 45 days after the close of the Subscription Offering, unless extended by
the Holding Company and the Savings Bank, with approval of the PDOB. 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 and Reorganization.
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 of Conversion provides that, if
necessary, all shares of Common Stock not purchased in the Subscription
Offering 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 managed by Webb acting
as agent of the Holding Company. 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 Webb 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, Webb has agreed to use its best
efforts in the sale of shares in the Syndicated Community Offering.
Conversion Shares sold in the Syndicated Community Offering also will be
sold at the Purchase Price. See "-- Stock Pricing, Exchange Ratio and Number of
Shares to be Issued." No person will be permitted to
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<PAGE>
subscribe in the Syndicated Offering for Conversion Shares that exceeds 1% of
the Conversion Shares issued in the Conversion and Reorganization. See "-- Plan
of Distribution for the Subscription, Direct Community and Syndicated Community
Offerings" for a description of the commission to be paid to the selected
dealers and to Webb.
Webb may enter into agreements with selected dealers to assist in the sale
of shares in the Syndicated Community Offering. During the Syndicated Community
Offering, selected dealers may only solicit indications of interest from their
customers to place orders with the Holding Company as of a certain date ("Order
Date") for the purchase of shares of Conversion Stock. When and if Webb and the
Holding Company believe that enough indications of interest and orders have
been received in the Subscription Offering, the Direct Community Offering and
the Syndicated Community Offering to consummate the Conversion and
Reorganization, Webb will request, as of the Order Date, selected dealers to
submit orders to purchase shares for which they have received indications of
interest from their customers. Selected dealers will send confirmations to such
customers on the next business day after the Order Date. Selected dealers may
debit the accounts of their customers on a date which will be three business
days from the Order Date ("Settlement Date"). Customers who authorize selected
dealers to debit their brokerage accounts are required to have the funds for
payment in their account on but not before the Settlement Date. On the
Settlement Date, selected dealers will remit funds to the account that the
Holding Company established for each selected dealer. Each customer's funds so
forwarded to the Holding Company, along with all other accounts held in the
same title, will be insured by the FDIC up to the applicable $100,000 legal
limit. After payment has been received by the Holding Company from selected
dealers, funds will earn interest at the Savings Bank's passbook rate until the
completion of the Conversion Offerings. At the completion of the Conversion and
Reorganization, the funds received in the Conversion Offerings will be used to
purchase the shares of Common Stock ordered. The shares issued in the
Conversion and Reorganization cannot and will not be insured by the FDIC or any
other government agency. In the event the Conversion and Reorganization is not
consummated as described above, funds with interest will be returned promptly
to the selected dealers, who, in turn will promptly credit their customers'
brokerage accounts.
The Syndicated Community Offering may terminate on or at any time
subsequent to the Expiration Date, but no later than 45 days after the close of
the Subscription Offering, unless extended by the Holding Company and the
Savings Bank, with approval of the PDOB.
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 PDOB. The PDOB 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 of Conversion. If the Conversion and Reorganization
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 PDOB 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 of Conversion 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 or (ii) the Holding
Company or the Savings Bank determines that compliance with the securities laws
of such state would be impracticable for reasons of cost or otherwise,
including but not limited to a request or requirement that the Holding Company
and the Savings Bank or their officers, directors or trustees register as a
broker, dealer, salesman or selling agent, under the securities laws of such
state, or a request or requirement to register or otherwise qualify the
Subscription Rights or Common Stock
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for sale or submit any filing with respect thereto in such state. Where the
number of persons eligible to subscribe for shares in one state is small, the
Holding Company and the Savings Bank will base their decision as to whether or
not to offer the Common Stock in such state on a number of factors, including
the size of accounts held by account holders in the state, the cost of
reviewing the registration and qualification requirements of the state (and of
actually registering or qualifying the shares) or the need to register the
Holding Company, its officers, directors or employees as brokers, dealers or
salesmen.
The Exchange
General. The regulations and policies governing mutual holding companies
provide that in a conversion of a mutual holding company to the stock holding
company form of organization, the Public Shareholders will be entitled to
exchange their Public Savings Bank Shares for Exchange Shares, provided the
Savings Bank and the MHC demonstrate to the satisfaction of the PDOB that the
basis for the exchange is fair and reasonable. The Boards of Directors of the
Savings Bank and the Holding Company have determined that each Public Savings
Bank Share will, at the Effective Time of the Conversion and Reorganization, be
converted into and become the right to receive a number of Exchange Shares
determined pursuant to the Exchange Ratio that ensures that after the
Conversion and Reorganization and before giving effect to purchases of
Conversion Shares by Public Shareholders in the Conversion Offerings, and
receipt by Public Shareholders of cash in lieu of fractional shares, Public
Shareholders will own approximately the same aggregate percentage of the
Holding Company Common Stock as they own of the Savings Bank Common Stock
immediately prior to the Effective Time adjusted downward to reflect the
aggregate amount of Savings Bank Common Stock dividends waived by the MHC and
the amount of assets, other than Savings Bank Common Stock, held by the MHC.
The MHC had assets of $247,000. No Savings Bank Common Stock dividends were
waived.
The adjustments described above decrease the Public Shareholders'
ownership interest to 48.06% from 48.5% based on the following calculation:
<TABLE>
<CAPTION>
<S> <C>
Savings Bank Shareholders' Equity at 12/31/97 X Public Shareholders' 48.5% Ownership = 48.5%
- --------------------------------------------------------------------------------------------
Savings Bank Shareholders' Equity at 12/31/97
</TABLE>
The adjustments described above would further adjust the Public
Shareholders' ownership interest as follows:
<TABLE>
<CAPTION>
<S> <C>
48.5% x Pro Forma Market Value of the Holding Company-Market Value of Assets of MHC Other than Savings Bank Common Stock = 48.06%
- ---------------------------------------------------------------------------------------------------------------------------------
Pro Forma Market Value of the Holding Company
</TABLE>
To determine the Exchange Ratio, the adjusted Public Shareholders'
ownership interest was multiplied by the number of shares to be issued in the
Conversion and Reorganization, and the result was divided by the number of
Savings Bank Public Shares outstanding (579,390) shares as of December 31,
1997. Immediately prior to consummation of the Conversion and Reorganization,
the Savings Bank will recalculate the Public Shareholders' ownership interest
pursuant to the above formula, which will take into account changes in
shareholders' equity and percentage ownership at such date.
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The following table sets forth, based upon the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Valuation Range, the following: (i)
the total number of Conversion Shares and Exchange Shares to be issued in the
Conversion and Reorganization, (ii) the percentage of the total Common Stock
represented by the Conversion Shares and the Exchange Shares, and (iii) the
Exchange Ratio. The table assumes that there is no cash paid in lieu of issuing
fractional Exchange Shares.
<TABLE>
<CAPTION>
Conversion Shares to be Exchange Shares to be Total Shares of
Issued (1) Issued (1) Common Stock to Exchange
Amount Percent Amount Percent be Outstanding Ratio
----------- ----------- ----------- ----------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Minimum ................... 1,190,000 51.94% 1,101,131 48.06% 2,291,131 1.9005
Midpoint .................. 1,400,000 51.94 1,295,417 48.06 2,695,417 2.2358
Maximum ................... 1,610,000 51.94 1,489,728 48.06 3,099,728 2.5712
15% above maximum ......... 1,851,500 51.94 1,713,198 48.06 3,564,698 2.9569
</TABLE>
(1) Assumes that outstanding options to purchase 35,859 shares of Savings Bank
Common Stock at December 31, 1997 are not exercised prior to consummation
of the Conversion and Reorganization.
The actual Exchange Ratio is not dependent on the market value of the
Public Savings Bank Shares. It will be determined based upon the number of
Conversion Shares issued in the Conversion Offerings and the Public
Shareholders' percentage ownership in the Savings Bank prior to consummation of
the Conversion and Reorganization adjusted downward to take into account the
effect of the aggregate amount of assets of the MHC other than Savings Bank
Common Stock. At the minimum, midpoint and maximum of the Valuation Price
Range, one Public Savings Bank Share will be exchanged for 1.9005, 2.2358 and
2.5712 shares of Holding Company Common Stock, respectively (which have
calculated equivalent estimated value of $19.05, $22.36 and $25.71 based on the
Purchase Price of Conversion Shares in the Conversion Offerings and the
aforementioned Exchange Ratios). However, there can be no assurance as to the
actual market value of a share of Holding Company Common Stock after the
Conversion and Reorganization or that such shares can be sold at or above the
$10.00 per share Purchase Price. Any increase or decrease in the number of
Conversion Shares will result in a corresponding change in the number of
Exchange Shares, so that upon consummation of the Conversion and
Reorganization, the Conversion Shares and the Exchange Shares will represent
approximately 51.94% and 48.06%, respectively, of the Holding Company's total
outstanding shares of Common Stock. Each holder of a certificate or
certificates evidencing issued and outstanding Public Savings Bank Shares will
be entitled to receive in exchange therefor a certificate or certificates
representing the number of full shares of Common Stock for which the Public
Savings Bank Shares will have been converted based on the Exchange Ratio. To
effect the Exchange, a duly appointed agent of the Savings Bank will promptly
mail to each such holder of record of an outstanding certificate which
immediately prior to the consummation of the Conversion and Reorganization
evidenced Public Savings Bank Shares, a letter of transmittal (which will
specify that delivery shall be effected, and risk of loss and title to such
certificate shall pass, only upon delivery of such certificate to the Exchange
Agent) advising such holder of the terms of the Exchange effected by the
Conversion and Reorganization and of the procedure for surrendering to the
Exchange Agent such certificate in exchange for a certificate or certificates
evidencing Common Stock. Public Shareholders should not forward to the Savings
Bank or the Exchange Agent certificates until they have received the
transmittal letter.
Plan of Distribution for the Subscription, Direct Community and Syndicated
Community Offerings
The Primary Parties have retained Webb to consult with and to advise the
Savings Bank and the Holding Company, and to assist the Holding Company on a
best efforts basis, in the distribution of the Conversion Shares in the
Subscription Offering and Direct Community Offering. The services that Webb
will provide include, but are not limited to (i) training the employees of the
Savings Bank who will perform certain ministerial functions in the Subscription
Offering and the Direct Community Offering regarding the mechanics and
regulatory requirements of the stock offering process, (ii) managing the Stock
Information Center by assisting interested stock subscribers and by keeping
records of all stock orders, (iii) preparing marketing materials, and (iv)
assisting in the solicitation of proxies from the MHC's members and the
shareholders of the Savings Bank for use at the Special Members' Meeting and
the Shareholders' Meeting, respectively. For its services, Webb will receive a
management fee of $25,000 and a success fee of 1.5% of the aggregate Purchase
Price of the Conversion Shares sold in the Subscription Offering and the Direct
Community Offering, excluding shares purchased by the ESOP
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and officers, directors and employees of the Savings Bank, or members of their
immediate families. The management fee shall be applied to the success fee and
the success fee shall not exceed $100,000. The Primary Parties have agreed to
reimburse Webb for its out-of-pocket expenses up to $7,500 and its legal fees
up to $30,000. The Primary Parties have also agreed to indemnify Webb against
certain claims or liabilities, including certain liabilities under the
Securities Act, and will contribute to payments Webb may be required to make in
connection with any such claims or liabilities.
Description of Sales Activities
The Common Stock will be offered in the Subscription Offering 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 Offering and Direct
Community Offering. It is expected that at any particular time one or more Webb
employees will be working at the Stock Information Center. Stock Information
Center personnel will be responsible for mailing materials relating to the
Conversion Offerings, responding to questions regarding the Conversion and
Reorganization and the Conversion Offerings and processing stock orders.
Sales of Common Stock will be made by registered representatives
affiliated with Webb. The management and employees of the Savings Bank may
participate in the Conversion 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 and
Reorganization.
None of the Savings Bank's personnel participating in the Conversion
Offerings 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
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 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
Offerings
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 original Order Forms. The
Savings Bank is not obligated to accept orders submitted on photocopied or
telecopied Order Forms. Orders cannot and will not be accepted without the
execution of the Certification appearing on the reverse side of the Order Form.
To purchase shares in the Subscription Offering, an executed Order Form
with the required full payment for each share subscribed for, or with
appropriate authorization for withdrawal of full payment from the subscriber's
deposit account with the Savings Bank (which may be given by completing the
appropriate blanks in
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the Order Form), must be received by the Savings Bank by __________, Eastern
Time, on the Expiration Date. Order Forms that 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. 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. In
order to purchase shares in the Direct Community Offering, the Order Form,
accompanied by the required payment for each share subscribed for, must be
received by the Savings Bank prior to the time the Direct Community Offering
terminates, which may be on or at any time subsequent to the Expiration Date.
Once received, an executed Order Form may not be modified, amended or rescinded
without the consent of the Savings Bank unless the Conversion and
Reorganization 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, and Supplemental
Eligible Account Holders are properly identified as to their stock purchase
priorities, depositors as of the Eligibility Record Date (June 30, 1996) and/or
the Supplemental Eligibility Record Date (December 31, 1997) must list all
accounts on the Order Form giving all names in each account, the account number
and the approximate account balance as of such date.
Full payment for subscriptions may be made (i) in cash if delivered in
person at the Stock Information Center, (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 and Reorganization. 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 and Reorganization (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 and Reorganization), but a hold will be placed on such funds,
thereby making them unavailable to the depositor until completion or
termination of the Conversion and Reorganization. At the completion of the
Conversion and Reorganization, the funds received in the Conversion Offerings
will be used to purchase the shares of Common Stock ordered. The shares of
Common Stock issued in the Conversion and Reorganization cannot and will not be
insured by the FDIC or any other government agency. If the Conversion and
Reorganization 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 and Reorganization, 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.
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 and
Reorganization, 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.
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 Common
Stock in the Conversion Offerings. There will be no early withdrawal or IRS
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interest penalties for such transfers. The new trustee would hold the Common
Stock in a self-directed account in the same manner as the Savings Bank now
holds the depositor's IRA funds. An annual administrative fee may be payable to
the new trustee. Depositors interested in using funds in a Savings Bank IRA to
purchase Common Stock should contact the Stock Information Center 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% shareholders who use self-directed IRA
funds to purchase shares of Common Stock in the Subscription Offering, make
such purchases for the exclusive benefit of IRAs.
Stock Pricing, Exchange Ratio and Number of Shares to be Issued
The Plan of Conversion requires that the purchase price of the Conversion
Shares must be based on the appraised pro forma market value of the Conversion
Shares, as determined on the basis of an independent valuation. The Primary
Parties have retained RP Financial to make such valuation. For its services in
making the Appraisal and any expenses incurred in connection therewith, RP
Financial will receive a maximum fee of $20,000 plus out of pocket expenses,
together with a fee of no greater that $7,500 plus out of pocket expenses for
the preparation of a business plan and other services performed in connection
with the Holding Company's application to the FDIC. The Primary Parties have
agreed to indemnify RP Financial and its employees and affiliates against
certain losses (including any losses in connection with claims under the
federal securities laws) arising out of its services as appraiser, except where
RP Financial's liability results from its negligence or bad faith.
The Appraisal has been prepared by RP Financial in reliance upon the
information contained in this Prospectus, including the Consolidated Financial
Statements. RP Financial also considered the following factors, among others:
the present and projected operating results and financial condition of the
Primary Parties and the economic and demographic conditions in the Savings
Bank's existing market area; certain historical, financial and other
information relating to the Savings Bank; a comparative evaluation of the
operating and financial statistics of the Savings Bank with those of other
similarly situated publicly-traded companies located in Pennsylvania and other
regions of the United States; the aggregate size of the offering of the
Conversion Shares; the impact of the Conversion and Reorganization on the
Savings Bank's capital and earnings potential; the proposed dividend policy of
the Holding Company and the Savings Bank; and the trading market for the
Savings Bank Common Stock and securities of comparable companies and general
conditions in the market for such securities.
On the basis of the foregoing, RP Financial has advised the Primary
Parties in its opinion that the estimated pro forma market value of the MHC and
the Savings Bank, as converted, was $26,954,178 as of February 13, 1998.
Because the holders of the Public Savings Bank Shares will continue to hold the
same aggregate percentage ownership interest in the Holding Company as they
currently hold in the Savings Bank (before giving effect to the payment of cash
in lieu of issuing fractional Exchange Shares and any Conversion Shares
purchased by the Public Shareholders in the Conversion Offerings), the
Appraisal was multiplied by 51.94% which represents, the MHC's 51.5% interest
in the Savings Bank, adjusted for assets held by the MHC. The resulting amount
represents the midpoint of the valuation ($14.00 million), and the minimum and
maximum of the valuation were set at 15% below and above the midpoint,
respectively, resulting in a range of $11.9 million to $16.10 million. The
Boards of Directors of the Primary Parties determined that the Conversion
Shares would be sold at $10.00 per share, resulting in a range of 1,190,000 to
1,610,000 Conversion Shares being offered. Upon consummation of the Conversion
and Reorganization, the Conversion Shares and the Exchange Shares will
represent approximately 51.94% and 48.06%, respectively, of the Holding
Company's total outstanding shares. The Boards of Directors of the Primary
Parties reviewed RP Financial's appraisal report, including the methodology and
the assumptions used by RP Financial, and determined that the Estimated
Valuation Range was reasonable and adequate. The Boards of Directors of the
Primary Parties also established the formula for determining the Exchange
Ratio. Based upon such formula and the Estimated Valuation Range, the Exchange
Ratio ranged from a minimum of 1.9005 to a maximum of 2.5712 Exchange Shares
for each Public Savings Bank Share, with a midpoint of 2.2358. Based upon these
Exchange Ratios, the Holding Company expects to issue between 1,101,131 and
1,489,728 shares of Exchange Shares to the holders of Public Savings Bank
Shares outstanding immediately prior to the consummation of the Conversion and
Reorganization. The Estimated Valuation Range
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and the Exchange Ratio may be amended with the approval of the PDOB and the
FDIC, if required, or if necessitated by subsequent developments in the
financial condition of any of the Primary Parties or market conditions
generally. If the Appraisal is updated to below $11.90 million or above $18.51
million (the maximum of the Estimated Valuation Range, as adjusted by 15%),
such Appraisal will be filed with the SEC by post-effective amendment.
Based upon current market and financial conditions and recent practices
and policies of the PDOB in the event the Holding Company receives orders for
Conversion Shares in excess of $16.10 million (the maximum of the Estimated
Valuation Range) and up to $18.51 million (the maximum of the Estimated
Valuation Range, as adjusted by 15%), the Holding Company may be required by
the PDOB to accept all such orders. No assurances, however, can be made that
the Holding Company will receive orders for Conversion Shares in excess of the
maximum of the Estimated Valuation Range or that, if such orders are received,
that all such orders will be accepted because the Holding Company's first
valuation and number of shares to be issued are subject to the receipt of an
updated appraisal from RP Financial that reflects such an increase in the
valuation and the approval of such increase by the PDOB. There is no obligation
or understanding on the part of management to take and/or pay for any shares of
Conversion Shares to complete the Conversion Offerings.
RP Financial's valuation is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing Conversion
Shares. RP Financial did not independently verify the Savings Bank's
Consolidated Financial Statements and other information provided by the Savings
Bank and the MHC, nor did RP Financial value independently the assets or
liabilities of the Savings Bank. The valuation considers the Savings Bank and
the MHC as going concerns and should not be considered as an indication of the
liquidation value of the Savings Bank and the MHC. Moreover, because such
valuation is necessarily based upon estimates and projections of a number of
matters, all of which are subject to change from time to time, no assurance can
be given that persons purchasing Conversion Shares or receiving Exchange Shares
in the Conversion and Reorganization will thereafter be able to sell such
shares at prices at or above the Purchase Price or in the range of the
foregoing valuation of the pro forma market value thereof.
No sale of Conversion Shares or issuance of Exchange Shares may be
consummated unless prior to such consummation RP Financial confirms that
nothing of a material nature has occurred that, taking into account all
relevant factors, would cause it to conclude that the Purchase Price is
materially incompatible with the estimate of the pro forma market value of a
share of Common Stock upon consummation of the Conversion and Reorganization.
If such is not the case, a new Estimated Valuation Range may be set, a new
Exchange Ratio may be determined based upon the new Estimated Valuation Range,
a new Subscription, Direct Community Offering and/or Syndicated Community
Offering may be held or such other action may be taken as the Primary Parties
shall determine and the PDOB may permit or require.
Depending upon market or financial conditions following the commencement
of the Subscription Offering, the total number of Conversion Shares to be
issued in the Conversion Offerings may be increased or decreased without a
resolicitation of subscribers, provided that the product of the total number of
shares times the Purchase Price is not below the minimum or more than 15% above
the maximum of the Estimated Valuation Range. In the event market or financial
conditions change so as to cause the aggregate Purchase Price of the shares to
be below the minimum of the Estimated Valuation Range or more than 15% above
the maximum of the Estimated Valuation Range, purchasers will be resolicited
(i.e. permitted to continue their orders, in which case they will need to
affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their subscription funds will be promptly refunded
with interest at the Savings Bank's passbook rate of interest, or be permitted
to modify or rescind their subscriptions). Any increase or decrease in the
number of Conversion Shares will result in a corresponding change in the number
of Exchange Shares, so that upon consummation of the Conversion and
Reorganization, the Conversion Shares and the Exchange Shares will represent
approximately 51.94% and 48.06%, respectively, of the Holding Company's total
outstanding shares of Common Stock (exclusive of the effects of the exercise of
outstanding stock options).
An increase in the number of Conversion Shares as a result of an increase
in the appraisal of the estimated pro forma market value would decrease both a
subscriber's ownership interest and the Holding Company's pro forma net
earnings and shareholders' equity on a per share basis while increasing pro
forma net earnings and shareholders' equity on an aggregate basis. A decrease
in the number of Conversion Shares would increase both
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a subscriber's ownership interest and the Holding Company's pro forma net
earnings and shareholders' equity on a per share basis while decreasing pro
forma net earnings and shareholders' equity on an aggregate basis. See "RISK
FACTORS -- Possible Dilutive Effect of Benefit Plans" and "PRO FORMA DATA."
The Appraisal of RP Financial has been filed as an exhibit to this
Registration Statement and Application for Conversion of which this Prospectus
is a part and is available for inspection in the manner set forth under
"ADDITIONAL INFORMATION."
Limitations on Purchases of Conversion Shares
The Plan of Conversion provides for certain limitations to be placed upon
the purchase of Conversion Shares by eligible subscribers and others in the
Conversion and Reorganization. Each subscriber must subscribe for a minimum of
25 Conversion Shares. Except for the ESOP, which is expected to subscribe for
8% of the Conversion Shares issued in the Conversion and Reorganization, the
Plan of Conversion provides for the following purchase limitations: (i) the
maximum number of shares of Conversion Shares that may be subscribed for or
purchased in all categories in the Conversion and Reorganization by any person,
when combined with any Exchange Shares received, shall not exceed 1% of the
Conversion Shares issued in the Conversion and Reorganization, and (ii) the
maximum number of shares of Conversion Shares that may be subscribed for or
purchased in all categories in the Conversion and Reorganization by any person,
together with all associates or any group of persons acting in concert when
combined with any Exchange Shares received, shall not exceed 2% of the
Conversion Shares issued in the Conversion and Reorganization. For purposes of
the Plan of Conversion, 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 Boards of Directors of the Primary Parties may, in their sole
discretion, increase the maximum purchase limitation set forth above up to 5%
of the Conversion Shares sold in the Conversion and Reorganization, provided
that orders for shares exceed 5% of the Conversion Shares sold in the
Conversion and Reorganization may not exceed, in the aggregate, 10% of the
shares sold in the Conversion and Reorganization. If the minimum or maximum
purchase limitations are changed, subscribers will be provided with notice in
writing. Factors considered in determining whether to change such limitations
will be: (1) whether there is significant demand in which case the limitations
could be increased and thereby provide broader distribution, and (2) whether
there is not a significant demand, in which case the limitations could thereby
be increased to encourage large purchases to ensure the purchase of the number
of shares necessary to consummate the transaction. 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 of the Primary
Parties decide to increase the purchase limitation, persons who subscribed for
the maximum number of Conversion Shares will be, and other large subscribers in
the discretion of the Holding Company and the Savings Bank may 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 of Conversion 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 party also
shall be deemed to be acting in concert with any person who also is acting in
concert with that other party.
The term "associate" of a person is defined in the Plan of Conversion 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
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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 that
such person could purchase individually under the above limitations.
The term "officer" is defined in the Plan of Conversion 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 or exchanged pursuant to the Conversion and
Reorganization will be freely transferable, except for shares purchased by
directors and officers of the Savings Bank and the Holding Company and by NASD
members. See "-- Restrictions on Transferability by Directors and Officers and
NASD Members."
Delivery and Exchange of Stock Certificates
Conversion Shares. Certificates representing Conversion Shares will be
mailed by the Holding Company's transfer agent to the persons entitled thereto
at the addresses of such persons appearing on the Stock Order Form as soon as
practicable following the consummation of the Conversion and Reorganization.
Any undeliverable certificates will be held by the Holding Company until
claimed by persons legally entitled thereto or otherwise disposed according to
applicable law. Purchasers of Conversion Shares may be unable to sell such
shares until certificates are available and delivered to them.
Exchange Shares. After the consummation of the Conversion and
Reorganization, each holder of a certificate(s) theretofore evidencing issued
and outstanding shares of Savings Bank Common Stock (other than the MHC), upon
surrender of the same to an agent, duly appointed by the Holding Company, which
is anticipated to be the transfer agent for the Common Stock ("Exchange
Agent"), shall be entitled to receive in exchange therefor certificates
representing the number of full Exchange Shares based on the Exchange Ratio.
The Exchange Agent shall mail a form of letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to such
certificate shall pass, only upon delivery of such certificate to the Exchange
Agent) advising such holder of the terms of the Exchange Offering and the
procedure for surrendering to the Exchange Agent such certificates in exchange
for a certificate(s) evidencing Common Stock. The Public Shareholders should
not forward Savings Bank Common Stock certificates to the Savings Bank or the
Exchange Agent until they have received the letter of transmittal.
No holder of a certificate theretofore representing shares of Savings Bank
Common Stock shall be entitled to receive any dividends on the Common Stock
until the certificate representing such shares is surrendered in exchange for
certificates representing shares of Common Stock. In the event that dividends
are declared and paid by the Holding Company in respect of Common Stock after
the consummation of the Conversion and Reorganization, but before surrender of
certificates representing shares of Savings Bank Common Stock, dividends
payable in respect of shares of Common Stock not then issued shall accrue
(without interest). Any such dividends shall be paid (without interest) upon
surrender of the certificates representing such shares of Savings Bank Common
Stock. After the consummation of the Conversion and Reorganization, the Holding
Company shall be entitled to treat certificates representing shares of Savings
Bank Common Stock as evidencing ownership of the number of full shares of
Common Stock into which the shares of Savings Bank Common Stock represented by
such certificates shall have been converted, notwithstanding the failure on the
part of the holder thereof to surrender such certificates.
The Holding Company shall not be obligated to deliver a certificate(s)
representing shares of Common Stock to which a holder of Savings Bank Common
Stock would otherwise be entitled as a result of the Conversion and
Reorganization until such holder surrenders the certificate(s) representing the
shares of Savings Bank Common Stock for exchange as provided above, or, in
default thereof, an appropriate affidavit of loss and indemnity agreement
and/or a bond as may be required in each case by the Holding Company. If any
certificate evidencing shares of Common Stock is to be issued in a name other
than that in which the certificate evidencing Savings Bank Common Stock
surrendered in exchange therefor is registered, it shall be a condition of the
issuance thereof that the certificate so surrendered shall be properly endorsed
and otherwise in proper form for
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transfer and that the person requesting such exchange pay to the Exchange Agent
any transfer or other tax required by reason of the issuance of a certificate
for shares of Common Stock in any name other than that of the registered holder
of the certificate surrendered or otherwise establish to the satisfaction of
the Exchange Agent that such tax has been paid or is not payable.
Restrictions on Repurchase of Stock
Pursuant to applicable regulations, savings banks (and their holding
companies) may not for a period of three years from the date of an
institution's mutual-to-stock conversion repurchase any of its common stock
from any person, except in the event of (i) an offer made to all of its
shareholders to repurchase the common stock on a pro rata basis; 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
of any common stock are prohibited if the effect thereof would cause the
savings bank's regulatory capital to be reduced below (a) the amount required
for the liquidation account or (b) the regulatory capital requirements.
Repurchases are generally prohibited during the first year following
conversion. Upon ten days' written notice to the FRB, and if the FRB does not
object, a holding company may make open market repurchases of its outstanding
common stock during years two and the following the conversion, provided that
certain regulatory conditions are met and that the repurchase would not
adversely affect the financial condition of the holding company or the savings
bank.
Restrictions on Transferability by Directors and Officers and NASD Members
Shares of Common Stock purchased in the Conversion Offerings by directors
and officers of the Holding Company may not be sold for a period of one year
following consummation of the Conversion and Reorganization, except in the
event of the death of the shareholder 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 1998 MRP
or upon exercise of options issued pursuant to the 1998 Stock Option Plan or
purchased subsequent to the Conversion and Reorganization 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 by directors, executive
officers (or any person who was an executive officer or trustee of the Savings
Bank after adoption of the Plan of Conversion and Reorganization) and their
associates during the three-year period following Conversion and Reorganization
may be made only through a broker or dealer registered with the SEC, except
with the prior written approval of the FDIC. This restriction does not apply,
however, to negotiated transactions involving more than 1% of the outstanding
Common Stock or to the purchase of Common Stock pursuant to either the 1995 or
1998 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 and Reorganization. The registration under the
Securities Act of shares of the Common Stock to be issued in the Conversion and
Reorganization 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 Common Stock 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.
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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.
CERTAIN RESTRICTIONS ON ACQUISITION
OF THE HOLDING COMPANY
Pennsylvania Law
The Pennsylvania BCL contains certain provisions applicable to the Company
that may have the effect of impeding a change in control of the Company. These
provisions, among other things, (a) require that, following any acquisition by
any person or group of 20% of a public corporation's voting power, the
remaining shareholders have the right to receive payment for their shares, in
cash, from such person or group in an amount equal to the "fair value" of their
shares, including an increment representing a proportion of any value payable
for acquisition of control of the corporation; and (b) prohibit, for five years
after an interested shareholder's acquisition date, a "business combination"
(which includes a merger or consolidation of the corporation or a sale, lease
or exchange of assets having a minimum specified aggregate value or
representing a minimum specified percentage earning power or net income of the
corporation) with a shareholder or group of shareholders beneficially owning
20% or more of a public corporation's voting power.
In 1990, the Pennsylvania legislature further amended the Pennsylvania BCL
to expand the antitakeover protections afforded by Pennsylvania law by
redefining the fiduciary duty of directors and adopting disgorgement and
control-share acquisition statutes. To the extent applicable to the Holding
Company at the present time, this legislation generally (a) expands the factors
and groups (including shareholders) that the Board of Directors can consider in
determining whether a certain action is in the best interests of the
corporation; (b) provides that the Board of Directors need not consider the
interests of any particular group as dominant or controlling; (c) provides that
directors, in order to satisfy the presumption that they have acted in the best
interests of the corporation, need not satisfy any greater obligation or higher
burden of proof with respect to actions relating to an acquisition or potential
acquisition of control; (d) provides that actions relating to acquisitions of
control that are approved by a majority of "disinterested directors" are
presumed to satisfy the directors' standard unless it is proven by clear and
convincing evidence that the directors did not assent to such action in good
faith after reasonable investigation; and (e) provides that the fiduciary duty
of directors is solely to the corporation and may be enforced by the
corporation or by a shareholder in a derivative action, but not by a
shareholder directly. The 1990 amendments to the BCL explicitly provide that
the fiduciary duty of directors shall not be deemed to require directors (a) to
redeem any rights under, or to modify or render inapplicable, any shareholder
rights plan; (b) to render inapplicable, or make determinations under,
provisions of the BCL relating to control transactions, business combinations,
control-share acquisitions or disgorgement by certain controlling shareholders
following attempts to acquire control; or (c) to act as the board of directors,
a committee of the board or an individual director solely because of the effect
such action might have on an acquisition or potential or proposed acquisition
of control of the corporation or the consideration that might be offered or
paid to shareholders in such an acquisition. One of the effects of these
fiduciary duty provisions may be to make it more difficult for a shareholder to
successfully challenge the actions of the Holding Company's Board of Directors
in a potential change in control context. Pennsylvania case law appears to
provide that the fiduciary duty standard under the 1990 amendment to the BCL
grants directors the statutory authority to reject or refuse to consider any
potential or proposed acquisition of the corporation.
Under the Pennsylvania control-share acquisition statute, a person or
group is entitled to voting rights with respect to "control shares" only after
shareholders (both disinterested shareholders and all shareholders) have
approved the granting of such voting rights at a meeting of shareholders.
"Control shares" are shares acquired since January 1, 1988, that upon
acquisition of voting power by an "acquiring person," would result in a
"control-share acquisition." ("Control shares" also include voting shares where
beneficial ownership was acquired by the "acquiring person" within 180 days of
the control-share acquisition or with the intention of making a control-share
acquisition.) An "acquiring person" is a person or group who makes or proposes
to make a "control-share acquisition." A "control-share acquisition" is an
acquisition, directly or indirectly, of voting power over voting shares that
would, when added to all voting power of the person over other voting shares,
98
<PAGE>
entitle the person to cast or direct the casting of such percentage of votes
for the first time with respect to any of the following ranges that all
shareholders would be entitled to cast in an election of directors: (a) at
least 20% but less than 33 1/3%; (b) at least 33 1/3 but less than 50%; or (c)
50% or more. The effect of these provisions is to require a new shareholder
vote when each threshold is exceeded. In the event shareholders do not approve
the granting of voting rights, voting rights are lost only with respect to
"control shares."
A special meeting of shareholders is required to be called to establish
voting rights of control shares if an acquiring person (a) files with the
corporation an information statement containing specified information, (b)
makes a written request for a special meeting at the time of delivery of the
information statement, (c) makes a control-share acquisition or a bona fide
written offer to make a control-share acquisition, and (d) provides a written
undertaking at the time of delivery of the information statement to pay or
reimburse the corporation for meeting expenses. If the information statement is
filed and a control-share acquisition is made or proposed to be made, but no
request for a special meeting is made or no written undertaking to pay expenses
is provided, the issue of voting rights will be submitted to shareholders at
the next annual or special meeting of shareholders of the corporation.
A corporation may redeem all "control shares" at the average of the high
and low sales price, as reported on a national securities exchange or national
quotation system or similar quotation system, on the date the corporation
provides notice of redemption (a) at any time within 24 months after the date
on which the control-share acquisition occurs if the acquiring person does not,
within 30 days after the completion of the control-share acquisition, properly
request that shareholders consider the issue of voting rights to be accorded to
control shares and (b) at any time within 24 months after the issue of voting
rights is submitted to shareholders and such voting rights either are not
accorded or are accorded and subsequently lapse. Voting rights accorded to
control shares by a vote of shareholders lapse and are lost if any proposed
control-share acquisition is not consummated within 90 days after shareholder
approval is obtained.
A person will not be considered an "acquiring person" if the person holds
voting power within any of the ranges specified in the definition of
"control-share acquisition" as a result of a solicitation of revocable proxies
if such proxies (a) are given without consideration in response to a proxy or
consent solicitation made in accordance with the Exchange Act and (b) do not
empower the holder to vote the shares except on the specific matters described
in the proxy and in accordance with the instructions of the giver of the proxy.
The statute does not apply to certain control-share acquisitions effected
pursuant to a gift or laws of inheritance, in connection with certain family
trusts or pursuant to a merger, consolidation or plan of share exchange if the
corporation is a party to the agreement.
The effect of this statutory provision is to deter the accumulation of a
substantial block of Common Stock, including accumulation with a view to
effecting a non-negotiated tender or exchange offer for Common Stock.
Under the disgorgement provisions of the Pennsylvania BCL, any profit
realized by any person or group who is or was a "controlling person or group"
from the disposition of any equity security of a corporation shall belong to
and be recoverable by the corporation where the profit is realized (i) within
18 months after the person becomes a "controlling person or group" and (ii) the
equity security had been acquired by the "controlling person or group" within
24 months prior to or 18 months after obtaining the status of a "controlling
person or group."
A "controlling person or group" is a person or group who (a) has acquired,
offered to acquire or, directly or indirectly, publicly disclosed the intention
of acquiring 20% voting power of the corporation or (b) publicly disclosed that
it may seek to acquire control of the corporation.
A person will not be deemed a "controlling person or group" if the person
holds voting power as a result of a solicitation of revocable proxies if, among
other things, such proxies (a) are given without consideration in response to a
proxy or consent solicitation made in accordance with the Exchange Act and (b)
do not empower the holder to vote the shares except on the specific matters
described in the proxy and in accordance with the instructions of the giver of
the proxy. This exception does not apply to proxy contests in connection with
or as a means toward acquiring control of the Holding Company.
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The effect of this statutory provision is to deter the accumulation of a
substantial block of Common Stock with a view to putting the Holding Company
"in play" and then selling shares at a profit (whether to the Holding Company,
in the market or in connection with an acquisition of the Holding Company).
Certain Anti-Takeover Provisions in the Articles of Incorporation and Bylaws of
the Holding Company
While the Board of Directors of the Holding Company is not aware of any
effort that might be made to obtain control of the Holding Company after
Conversion, the Board believes that it is appropriate to include certain
provisions as part of the Holding Company's Articles of Incorporation to
protect the interests of the Holding Company and its shareholders from hostile
takeovers that the Board might conclude are not in the best interests of the
Holding Company or the Holding Company's shareholders. These provisions may
have the effect of discouraging a future takeover attempt that is not approved
by the Holding Company's Board of Directors but which individual shareholders
may deem to be in their best interests or in which shareholders may receive a
substantial premium for their shares over the then current market price. As a
result, shareholders 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 Holding Company's current Board of Directors or management more
difficult.
The following discussion is a general summary of certain provisions of the
Articles of Incorporation and Bylaws of the Holding Company that may be deemed
to have such an "anti-takeover" effect. The description of these provisions is
necessarily general and reference should be made in each case to the Articles
of Incorporation and Bylaws of the Holding Company. For information regarding
how to obtain a copy of these documents without charge, see "Additional
Information."
Classified Board of Directors and Related Provisions
The Holding Company's Articles of Incorporation provide that the Holding
Company's Board of Directors is to be divided into three classes that shall be
as nearly equal in number as possible. The directors in each class will hold
office following their initial appointment to office for terms of one year, two
years and three years, respectively, and, upon reelection, will serve for terms
of three years thereafter. Each director will serve until his or her successor
is elected and qualified. The Holding Company's Articles of Incorporation
provide that a director may be removed by shareholders only upon the
affirmative vote of at least a majority of the votes that all shareholders
would be entitled to cast. The Holding Company's Articles of Incorporation
further provide that any vacancy occurring in the Holding Company's Board of
Directors, including a vacancy created by an increase in the number of
directors, shall be filled for the remainder of the unexpired term by a
majority vote of the directors then in office.
The classified board of directors of the Holding Company could make it
more difficult for shareholders, including those holding a majority of the
outstanding, shares, to force an immediate change in the composition of a
majority of the Holding Company's Board of Directors. Because the terms of only
one-third of the incumbent directors expire each year, it requires at least two
annual elections for the shareholders to chance a majority, whereas a majority
of a non-classified board may be changed in one year. In the absence of the
provisions of the Holding Company's Articles of Incorporation classifying the
Holding Company's Board, all of the Holding Company's directors would be
elected each year.
Management of the Holding Company believes that the staggered election of
directors tends to promote continuity of management because only one-third of
the Holding Company's Board of Directors is subject to election each year.
Staggered terms guarantee that in the ordinary course approximately two-thirds
of the directors, or more, at any one time have had at least one year's
experience as directors of the Holding Company, and moderate the pace of change
in the composition of the Holding Company's Board of Directors by extending the
minimum time required to elect a majority of directors from one to two years.
Other Antitakeover Provisions
The Holding Company's Articles of Incorporation and Bylaws contain certain
other provisions that may also have the effect of deterring or discouraging,
among other things, a non-negotiated tender or exchange offer for the Common
Stock, a proxy contest for control of the Holding Company, the assumption of
control of the
100
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Holding Company by a holder of a large block of the Common Stock and the
removal of the Holding Company's management. These provisions: (1) empower the
Holding Company's Board of Directors, without shareholder approval, to issue
preferred stock, the terms of which, including voting power, are set by the
Holding Company's Board; (2) restrict the ability of shareholders to remove
directors; (3) require that shares with at least 80% of total voting power
approve mergers and other similar transactions with a person or entity holding
Common Stock with more than 5% of the Holding Company's voting power, if the
transaction is not approved, in advance, by the Holding Company's Board of
Directors; (4) prohibit shareholders' actions without a meeting; (5) require
that shares with at least 80%, or in certain instances a majority, of total
voting power approve the repeal or amendment of the Holding Company's Articles
of Incorporation; (6) require any person who acquires stock of the Holding
Company with voting power of 25% or more to offer to purchase for cash all
remaining shares of the Holding Company's voting stock at the highest price
paid by such person for shares of the Holding Company's voting stock during the
preceding year; (7) eliminate cumulative voting in elections of directors; and
(8) require that shares with at least 66 2/3% of total voting power approve,
repeal or amend the Bylaws of the Holding Company.
DESCRIPTION OF CAPITAL STOCK
General
The Holding Company is authorized to issue 15,000,000 shares of Common
Stock, no par value, and 5,000,000 shares of preferred stock, having such par
value as the Board of Directors of the Holding Company shall fix and determine.
The Holding Company currently expects to issue between 1,190,000 and 1,610,000
shares (or, as permitted by the Plan, up to 1,851,500 shares), subject to
adjustment, of the Common Stock and no shares of preferred stock in the
Conversion and Reorganization. The Holding Company has reserved for future
issuance under the 1997 Stock Option Plan and the 1998 MRP an amount of
authorized but unissued shares of Common Stock equal to 10% and 4%,
respectively, of the shares to be issued in the Conversion Offerings.
Common Stock
Voting Rights
Each share of Common Stock will have the same relative rights and will be
identical in all respects with every other share of the Common Stock. The
holders of Common Stock will possess exclusive voting rights in the Holding
Company, except to the extent that shares of preferred stock issued in the
future may have voting rights, if any. Each holder of shares of the Common
Stock will be entitled to one vote for each share held of record on all matters
submitted to a vote of holders of shares of the Common Stock. Holders of Common
Stock will not be entitled to cumulate their votes for election of directors.
Dividends
The Holding Company may, from time to time, declare dividends to the
holders of Common Stock, who will be entitled to share equally in any such
dividends. For additional information as to cash dividends, see "DIVIDEND
POLICY."
Liquidation
In the event of any liquidation, dissolution or winding up of the Savings
Bank, the Holding Company, as holder of all of the capital stock of the Savings
Bank, would be entitled to receive all assets of the Savings Bank after payment
of all debts and liabilities of the Savings Bank. In the event of a
liquidation, dissolution or winding up of the Holding Company, each holder of
shares of Common Stock would be entitled to receive, after payment of all debts
and liabilities of the Holding Company, a pro rata portion of all assets of the
Holding Company available for distribution to holders of Common Stock. If any
preferred stock is issued, the holders thereof may have a priority in
liquidation or dissolution over the holders of Common Stock.
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Other Characteristics
Holders of Common Stock will not have preemptive rights with respect to
any additional shares of Common Stock that may be issued. The Common Stock is
not subject to call for redemption, and the outstanding shares of Common Stock,
when issued and upon receipt by the Holding Company of the full purchase price
therefor, will be fully paid and nonassessable.
Preferred Stock
None of the 5,000,000 authorized shares of preferred stock of the Holding
Company will be issued in the Conversion and Reorganization. After the
Conversion and Reorganization is completed, the Board of Directors of the
Holding Company will be authorized, without shareholder approval, to issue
preferred stock and to fix and state voting powers, designations, preferences
or other special rights of such shares and the qualifications, limitations and
restrictions thereof. The preferred stock may rank prior to the Common Stock as
to dividend rights or liquidation preferences, or both, and may have full or
limited voting rights. The Holding Company's Board of Directors has no present
intention to issue any preferred stock. Should the Board of Directors of the
Holding Company subsequently issue preferred stock, no holder of any such stock
shall have any preemptive right to subscribe for or purchase any stock or any
other securities of the Holding Company other than such, if any, as the Holding
Company's Board of Directors, in its sole discretion, may determine and at such
price or prices and upon such other terms as the Holding Company's Board of
Directors, in its sole discretion, may fix.
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
Reorganization and will not deregister its Common Stock for a period of at
least three years following the completion of the Conversion and
Reorganization. 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 Stevens & Lee, Wayne, Pennsylvania. The federal and Pennsylvania tax
consequences of the Conversion and Reorganization have been opined upon by
Stevens & Lee. Stevens & Lee has consented to the references herein to their
opinions. Certain legal matters will be passed upon for Webb by Breyer &
Aguggia, Washington, D.C.
EXPERTS
The consolidated financial statements of the Savings Bank for the years
ended December 31, 1997 and 1996, the three months ended December 31, 1995 and
the year ended September 30, 1995 included in this Prospectus have been audited
by Stockton Bates & Co., P.C., Philadelphia, Pennsylvania, independent
auditors, as stated in their report appearing herein, and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
RP Financial has consented to the publication herein of the summary of its
report to the Savings Bank setting forth its opinion as to the estimated pro
forma market value of the MHC 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.
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ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a Registration Statement on
Form S-1 (File No. 333-37511) under the Securities Act with respect to the
Common Stock offered in the Conversion and Reorganization. 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.
The Company's Common Stock has received conditional approval to be listed on
the Nasdaq National Market, and such material is also available for inspection
and copying at the Nasdaq National Market's Listings Department, 1735 K Street,
N.W., Washington, D.C. 20006. The Registration Statement also is available
through the SEC's World Wide Web site on the Internet (http://www.sec.gov).
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----------
<S> <C>
Independent Auditors' Report ............................................................. F-2
Financial Statements:
Consolidated Statement of Financial Condition, Years Ended December 31, 1997 and 1996 . F-3
Consolidated Statement of Income for the Years Ended December 31, 1997 and 1996, and
September 30, 1995 and the Three Months Ended December 31, 1995 ...................... F-4 - 5
Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 1997
and 1996, and September 30, 1995 and the Three Months Ended December 31, 1995 ........ F-6
Consolidated Statement of Cash Flows for the Years Ended December 31, 1997 and 1996,
and September 30, 1995 and the Three Months Ended December 31, 1995 .................. F-7 - 9
Notes to Consolidated Financial Statements ............................................... F-10 - 33
</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 for the MHC have not been included herein
because the MHC has no material assets other than its shares of Savings Bank
Common Stock (which will be canceled as part of the Conversion and
Reorganization) and no significant liabilities (contingent or otherwise),
revenues or expenses, and has not engaged in any significant activities to
date.
Separate financial statements for the Holding Company have not been
included herein because the Holding Company, which has engaged in only
organizational activities to date, has no significant assets, liabilities
(contingent or otherwise), revenues or expenses.
F-1
<PAGE>
Stockton Bates
&
Company, P.C.
Certified Public Accountants
Independent Auditors' Report
To the Board of Trustees
Pennsylvania Savings Bank
Eleven Penn Center
1835 Market Street
Philadelphia, Pennsylvania 19103-2986
We have audited the accompanying consolidated statement of financial
condition of Pennsylvania Savings Bank and Subsidiaries as of December 31, 1997
and 1996 and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years ended December 31, 1997 and
1996, and September 30, 1995 and the three months ended December 31, 1995.
These consolidated 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 consolidated 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 condition of
Pennsylvania Savings Bank and Subsidiaries at December 31, 1997 and 1996, the
results of their operations and their cash flows for each of the three years
ended December 31, 1997 and 1996, and September 30, 1995 and the three months
ended December 31, 1995 in conformity with generally accepted accounting
principles.
/s/ Stockton Bates & Company, P.C.
Certified Public Accountants
Philadelphia, Pennsylvania
February 6, 1998
F-2
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1996
---------------- ----------------
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and due from banks .................................................... $ 1,193,195 $ 1,390,220
Interest bearing deposits in other financial institutions .................. 26,695,455 30,232,245
INVESTMENTS:
Investment securities available-for-sale, at fair value .................... 14,401,388 6,316,282
Mortgage-backed securities available-for-sale at fair value ................ 2,933,804 3,193,840
Investment securities held-to-maturity (fair value of $8,234,639 and
$12,628,003) ............................................................. 8,219,223 12,656,815
Mortgage-backed securities held-to-maturity (fair value of $2,182,322 and
$2,851,532) .............................................................. 2,068,059 2,748,444
LOANS RECEIVABLE, net ....................................................... 61,915,068 52,585,549
LOANS HELD FOR SALE ......................................................... 6,574,585 4,597,700
REAL ESTATE:
Acquired in settlement of loans ............................................ 456,528 464,651
OFFICE PROPERTIES AND EQUIPMENT, net of accumulated
depreciation ............................................................... 1,329,145 1,273,448
FEDERAL HOME LOAN BANK STOCK, at cost (Restricted investment
required by law) ........................................................... 559,900 533,600
ACCRUED INTEREST RECEIVABLE ................................................. 1,285,102 1,216,957
INVESTMENT IN DATA CENTER, common stock, at cost ............................ 15,000 15,000
PREPAID CORPORATE TAXES ..................................................... 445,092 390,971
EXCESS OF ACQUISITION COST OVER FAIR VALUE OF ASSETS
ACQUIRED, net of accumulated amortization .................................. 7,250 8,250
NET DEFERRED TAXES .......................................................... 25,296
CAPITALIZED CONVERSION COSTS ................................................ 155,292
PREPAID EXPENSES AND OTHER ASSETS ........................................... 1,083,865 785,244
------------ ------------
TOTAL ASSETS ............................................................. $129,337,951 $118,434,512
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits ................................................................... $108,734,107 $100,574,376
Securities purchased under agreements to resell ............................ 2,841,733 1,536,188
Advances from borrowers for taxes .......................................... 999,611 930,670
Income taxes payable ....................................................... 308,000 142,000
Net Deferred Taxes ......................................................... 51,158
Accrued pension cost ....................................................... 145,843 149,144
Accrued interest payable on savings accounts ............................... 260,363 183,801
Employee Stock Ownership Plan debt ......................................... 295,355 356,483
Accrued expenses and other liabilities ..................................... 703,957 393,308
------------ ------------
Total liabilities ........................................................ 114,340,127 104,265,970
------------ ------------
STOCKHOLDERS' EQUITY:
Common Stock, $1 par value, 10,000,000 shares authorized; 1,194,640
shares issued and outstanding for December 31, 1997 and 1996 ............. 1,194,640 1,194,640
Additional paid-in capital ................................................. 13,563,087 13,563,087
Employee Stock Ownership Plan .............................................. (295,355) (356,483)
Retained earnings (accumulated deficit) .................................... 545,743 (162,734)
Unrealized loss, investments available-for-sale ............................ (10,291) (69,968)
------------ ------------
Total stockholders' equity ............................................... 14,997,824 14,168,542
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................... $129,337,951 $118,434,512
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended Three Months Ended Year Ended
December 31, December 31, September 30,
----------------------------- -------------------- --------------
1997 1996 1995 1995
------------- ------------- -------------------- --------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest on loans ............................ $5,539,747 $5,217,737 $1,306,833 $4,824,892
Mortgage-backed securities ................... 373,900 430,798 116,557 493,305
Investment securities:
Taxable interest ........................... 1,424,915 1,063,520 235,637 1,042,105
Taxable dividends .......................... 191,364 119,290 31,187 92,408
Interest-earning deposits .................... 1,210,030 1,207,302 360,530 817,234
---------- ---------- ---------- ----------
Total interest income ................... 8,739,956 8,038,647 2,050,744 7,269,944
INTEREST EXPENSE:
Interest on deposits ....................... 4,533,646 4,082,377 1,059,230 3,437,143
Interest -- other .......................... 30,607 36,099 6,733 6,146
---------- ---------- ---------- ----------
Total interest expense .................. 4,564,253 4,118,476 1,065,963 3,443,289
---------- ---------- ---------- ----------
Net interest income ..................... 4,175,703 3,820,615 984,781 3,826,655
Provision for loan losses .................. 60,000 132,633 77,383 26,937
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses ........................ 4,115,703 3,687,982 907,398 3,799,718
NONINTEREST INCOME:
Gain on sale of loans ...................... 555,987 335,736 102,701 185,425
Loan fees .................................. 81,180 127,041 169,030 289,185
Service charges ............................ 347,792 371,210 15,621 71,679
Rental income .............................. 38,767 44,286 4,953 28,248
Other income ............................... 47,368 136,712 118,292 381,688
---------- ---------- ---------- ----------
Total noninterest income ................ 1,071,094 915,429 410,597 876,809
---------- ---------- ---------- ----------
NONINTEREST EXPENSES:
Compensation and employee benefits ......... 2,283,110 1,938,979 878,606 2,244,878
Premises and occupancy costs ............... 684,098 455,652 101,915 327,683
Federal insurance premiums ................. 64,167 735,530 51,414 201,366
Data Processing ............................ 126,700 120,782 74,897 102,914
Advertising ................................ 81,400 62,121 24,356 75,970
Directors Fees ............................. 232,300 237,200 122,696 92,700
Stationary, printing and postage ........... 103,040 113,460 26,041 48,944
Expenses of real estate owned .............. 8,244 143,177 73,889 35,739
Loss on sale of real estate held for
investment ................................ 2,465 --
Other ...................................... 550,592 553,379 166,172 454,015
---------- ---------- ---------- ----------
Total noninterest expenses .............. 4,133,651 4,362,745 1,469,986 3,584,209
---------- ---------- ---------- ----------
</TABLE>
F-4
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended Three Months Ended Year Ended
December 31, December 31, September 30,
-------------------------------- -------------------- --------------
1997 1996 1995 1995
--------------- -------------- -------------------- --------------
<S> <C> <C> <C> <C>
INCOME BEFORE PROVISION FOR
INCOME TAXES ...................... $ 1,053,146 $ 340,222 $(151,991) $1,092,318
Provision (credit) for federal and
state income taxes:
Current ......................... 308,000 142,000 (61,598) 399,528
Deferred ........................ 36,669 59,465 21,711 33,131
----------- ---------- --------- ----------
Total income tax provision
(credit) .................... 344,669 201,465 (39,887) 432,659
----------- ---------- --------- ----------
NET INCOME ......................... $ 708,477 $ 138,757 (112,104) $ 659,659
=========== ========== ========= ==========
BASIC EARNINGS PER SHARE ........... $ .61 $ .12 ($ .10) $ N/A
=========== ========== ========= ==========
DILUTED EARNINGS PER SHARE ......... $ .60 $ .12 ($ .10) $ N/A
=========== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Employee
Additional Stock
Common Paid-in Ownership
Stock Capital Plan
------------- -------------- --------------
<S> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1994 $ -0- $ -0- $ -0-
Net income for the year ended
September 30, 1995 ................
Change in unrealized loss on
investment and mortgage-
backed securities available-for-
sale, net of taxes ................
---------- ----------- ----------
BALANCE, SEPTEMBER 30, 1995 $ -0- $ -0- $ -0-
========== =========== ==========
BALANCE, DECEMBER 31, 1995 $1,173,250 $13,330,472 ($ 417,612)
Net loss for the three months
ended December 31, 1995 ...........
Retained Earnings which
remained in PSB Mutual Hold-
ing Company following conver-
sion ..............................
Issuance of common stock upon
completion of stock offering ...... 1,173,250 13,907,352
Expenses relating to stock offering (576,880)
Employee Stock Ownership Plan.......
Principal payments made by
Employee Stock Ownership
Plan ..............................
Change in unrealized loss on
investment and mortgage traded
securities available-for-sale, net
of taxes ..........................
---------- ----------- ----------
BALANCE, DECEMBER 31, 1995...........
Net income for the year ended
December 31, 1996 .................
Issuance of common stock to
Management Recognition Plan 21,390 232,615
Dividends paid .....................
Principal payments made by
Employee Stock Ownership
Plan .............................. 61,129
Change in unrealized loss on
investment and mortgage-
backed securities available-for-
sale, net of taxes ................
---------- ----------- ----------
BALANCE, DECEMBER 31, 1996 $1,194,640 $13,563,087 ($ 356,483)
Net income for the year ended
December 31, 1997 .................
Principal payments made by
Employee Stock Ownership
Plan .............................. 61,128
Change in unrealized loss on
investment and mortgage-
backed securities available-for-
sale, net of taxes ................
---------- ----------- ----------
BALANCE, DECEMBER 31, 1997 $1,194,640 $13,563,087 ($ 295,355)
========== =========== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Unrealized gain (loss)
on Investment and
Mortgage-backed
Retained Securities
Earnings Available-for-sale
(Deficit) Net of Taxes Total
--------------- ----------------------- ---------------
<S> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1994 $ 8,945,553 ($ 606,513) $ 8,339,040
Net income for the year ended
September 30, 1995 ................ 659,659 659,659
Change in unrealized loss on
investment and mortgage-
backed securities available-for-
sale, net of taxes ................ 492,070 492,070
------------ --------- ------------
BALANCE, SEPTEMBER 30, 1995 $ 9,605,212 ($ 114,443) $ 9,490,769
============ ========= ============
BALANCE, DECEMBER 31, 1995 ($ 257,494) ($ 13,715) $ 13,814,901
Net loss for the three months
ended December 31, 1995 ........... (112,104) (112,104)
Retained Earnings which
remained in PSB Mutual Hold-
ing Company following conver-
sion .............................. (9,750,602) (9,750,602)
Issuance of common stock upon
completion of stock offering ...... 15,080,602
Expenses relating to stock offering (576,880)
Employee Stock Ownership Plan....... (427,800) (427,800)
Principal payments made by
Employee Stock Ownership
Plan .............................. 10,188 10,188
Change in unrealized loss on
investment and mortgage traded
securities available-for-sale, net
of taxes .......................... 100,728 100,728
------------ --------- ------------
BALANCE, DECEMBER 31, 1995...........
Net income for the year ended
December 31, 1996 ................. 138,757 138,757
Issuance of common stock to
Management Recognition Plan 254,005
Dividends paid ..................... (43,997) (43,997)
Principal payments made by
Employee Stock Ownership
Plan .............................. 61,129
Change in unrealized loss on
investment and mortgage-
backed securities available-for-
sale, net of taxes ................ (56,253) (56,253)
------------ --------- ------------
BALANCE, DECEMBER 31, 1996 ($ 162,734) ($ 69,968) $ 14,168,542
Net income for the year ended
December 31, 1997 ................. 708,477 708,477
Principal payments made by
Employee Stock Ownership
Plan .............................. 61,128
Change in unrealized loss on
investment and mortgage-
backed securities available-for-
sale, net of taxes ................ 59,677 59,677
------------ --------- ------------
BALANCE, DECEMBER 31, 1997 $ 545,743 ($ 10,291) $ 14,997,824
============ ========= ============
</TABLE>
F-6
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Year Ended Three Months Ended Year Ended
December 31, December 31, September 30
--------------------------------- -------------------- ---------------
1997 1996 1995 1995
--------------- --------------- -------------------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income ................................. $ 708,477 $ 138,757 ($ 112,104) $ 659,659
------------- ------------- ----------- ------------
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Amortization of premium/discount on
mortgage-backed securities .............. 1,784 (4,824) (1,437) (5,747)
Depreciation and amortization ............ 122,037 90,943 20,982 88,475
Write-down and expenses of real estate
owned ................................... 8,123 14,000
Loss on sale of real estate .............. 2,465
Gain on sale of equipment ................ (977)
Gain on sale of loans .................... (555,987) (335,736) (102,701) (185,425)
Provision for losses on loans ............ 60,000 132,633 77,383 26,937
Deferred taxes ........................... 36,669 59,467 21,710 33,131
Change in assets and liabilities:
Increase in loans held for sale ......... (1,420,898) (1,752,764) (1,365,799) (670,675)
Increase in accrued interest
receivable ............................ (68,145) (137,214) 15,904 (90,236)
Increase in prepaid expenses ............ (298,621) (491,183) 225,227 (331,460)
(Increase) decrease in prepaid
corporate taxes ....................... (54,121) 65,494 (429,581) (26,884)
Increase (decrease) in corporate
taxes payable ......................... 166,000 (236,000) 378,000 (20,897)
Increase (decrease) in accrued
pension cost .......................... (3,301) 5,768 143,376
Increase in accrued interest payable . 76,562 25,468 (15,514) 85,839
Increase in accrued expenses ............ 310,649 210,608 (189,651) 30,259
------------- ------------- ----------- ------------
Total adjustments ........................ (1,619,249) (2,365,852) (1,365,477) (909,307)
------------- ------------- ----------- ------------
Net cash provided by (used in)
operating activities .................... (910,772) (2,227,095) (1,477,581) (249,648)
------------- ------------- ----------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of investment securities,
available-for-sale ....................... (9,042,458) (5,000,000) -- (2,500,000)
Purchase of investment securities, held-
to-maturity .............................. (11,714,219) (10,999,687) -- (2,000,000)
Mortgage-backed security maturities and
principal repayments ..................... 991,525 864,783 103,519 639,539
Maturities of investment securities,
available-for-sale ....................... 1,000,000 3,000,000 5,995,391 700,000
Maturities of investment securities, held-
to-maturity .............................. 16,155,737 8,842,857 --
Acquisition costs of, and proceeds from
the sale of, Federal Home Loan Bank
stock .................................... (26,300) (32,600) 34,400
</TABLE>
F-7
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Year Ended Three Months Ended Year Ended
December 31, December 31, September 30,
---------------------------------- -------------------- ----------------
1997 1996 1995 1995
---------------- --------------- -------------------- ----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM INVESTING
ACTIVITIES: (Continued)
Increase in total loans receivable, net . ($ 9,389,519) ($ 988,164) (720,562) ($ 1,057,133)
Purchase and improvement of real
estate for investment .................. (500) -- (63,190)
Proceeds from sale of real estate
owned net of improvements .............. 140,921 --
Increase in capitalized conversion
costs .................................. (155,292) --
Net proceeds from stock offering ......... 4,753,420
Increase in advances for stock offering (6,261,000) 6,261,000
Proceeds from sale of equipment .......... 5,300
Capital expenditures ..................... (176,734) (613,361) (13,314)
------------ ----------- ---------- -----------
Net cash used in investing activities. (12,357,260) (4,780,451) 3,870,468 2,001,302
------------ ----------- ---------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Increase in deposits, net ................ $ 8,159,731 $ 4,097,882 423,715 $ 6,623,403
Change in securities purchased under
agreements to resell ................... 1,305,545 69,451 1,466,737
Proceeds from issuance of stock to
Management Recognition Plan ............ 254,005 --
Dividends Paid ........................... (43,997) --
Change in advances for borrowers'
taxes and insurance .................... 68,941 (215,594) 407,585 30,944
------------ ----------- ---------- -----------
Net cash provided by financing
activities ............................ 9,534,217 4,161,747 2,298,037 6,654,347
------------ ----------- ---------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS .............................. (3,733,815) (2,845,799) 4,690,924 8,406,001
Cash and cash equivalents, beginning
of period .............................. 31,622,465 34,468,264 29,777,340 21,371,339
------------ ----------- ---------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD ............................ $ 27,888,650 $31,622,465 $ 34,468,264 $29,777,340
============ =========== ============ ===========
</TABLE>
F-8
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Year Ended Three Months Ended Year Ended
December 31, December 31, September 30,
-------------------------------- -------------------- --------------
1997 1996 1995 1995
-------------- --------------- -------------------- --------------
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on deposits and borrowings $ 4,457,084 $4,056,909 $1,074,744 $3,357,447
=========== =========== ========== ==========
Income taxes ................................. $ 280,000 $ 267,788 $ 124,367 $ 238,015
=========== =========== ========== ==========
Noncash activities:
Loans transferred to real estate owned ......... $ -0- $ 79,156 $ 109,873 $ 103,120
=========== =========== ========== ==========
(Increase) decrease in unrealized
loss on investment mortgage-
backed securities available-for-sale,
net of taxes ................................ $ 59,677 ($ 56,253) $ 100,728 $ 492,070
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-9
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995
1. DESCRIPTION OF ORGANIZATION:
Pennsylvania Savings Bank, through its six branch offices, makes
residential and consumer loans to customers and provides community banking
services principally within Southeastern Pennsylvania and Southern New Jersey.
Transnational Mortgage Corporation, a wholly owned subsidiary, originates
residential loans. PSA Financial Corporation, a wholly owned subsidiary,
originates residential and consumer loans. PSA Consumer Discount, a wholly
owned subsidiary of PSA Financial, originates consumer loans. All loan
originations are to customers principally within, but not limited to, the
County of Philadelphia, Pennsylvania. PSA Service Corporation, a wholly owned
subsidiary, processes all loans for Pennsylvania Savings Bank and the other
subsidiaries.
The Bank competes with other banking and financial institutions in its
primary markets. Commercial banks, savings banks, savings and loan
associations, mortgage bankers and brokers, credit unions and money market
funds actively compete for deposits and loans. Such institutions, as well as
consumer finance, mutual funds, insurance companies, and brokerage and
investment banking firms, may be considered competitors of the Bank with
respect to one or more of the services it renders.
The Bank is subject to regulations of certain state and federal agencies
and, accordingly, it is periodically examined by those regulatory authorities.
As a consequence of the extensive regulation of commercial banking activities,
the Bank's business is particularly susceptible to being affected by state and
federal legislation and regulations.
Effective October 20, 1995, Pennsylvania Savings Bank, a mutual savings
bank (the "Mutual Bank"), effected a mutual savings bank holding company
reorganization. This reorganization entailed the following: (1) the Mutual Bank
reorganized into a Pennsylvania chartered mutual savings bank holding company
named PSB Mutual Holding Company, (2) a new Pennsylvania chartered stock
savings bank (the "Stock Bank") was formed, (3) substantially all of the Mutual
Bank's assets (except $250,000 in cash retained by PSB Mutual Holding Company)
and liabilities were transferred to the Stock Bank, (4) 615,250 shares of
common stock, par value $1.00 per share of the Stock Bank, were issued to PSB
Mutual Holding Company and 558,000 shares of such common stock at a price of
$10.00 per share were sold to minority stockholders in a subscription offering,
(5) the Stock Bank received proceeds from the minority stock offering of
$5,580,000 net of commissions and other related expenses totaling $576,880, and
(6) the Stock Bank (named Pennsylvania Savings Bank) registered its common
stock pursuant to the Securities Exchange Act of 1934 ("Exchange Act").
As an Exchange Act registrant, the Bank became subject to the Exchange Act
proxy rules and the periodic reporting and other requirements of the Exchange
Act.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation:
The consolidated financial statements include the accounts of the Bank and
its wholly-owned subsidiaries, PSA Service Corporation, Transnational Mortgage
Corporation and PSA Financial Corporation. Significant intercompany balances
and transactions have been eliminated.
Cash and Cash Equivalents:
Cash and cash equivalents include unrestricted cash on hand, demand
deposits maintained in depository institutions and other readily convertible
investments with original contractual terms to maturity of three months or
less.
Investment in Debt and Marketable Equity Securities and Accounting Change:
SFAS No. 115 requires the Bank to classify its investments, including
marketable securities and mortgage-backed securities in one of three
categories: held-to-maturity, trading or available-for-sale. Debt securities
that
F-10
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 -- (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
the Bank has the positive intent and ability to hold to maturity will be
classified as held-to-maturity and are reported at amortized cost. The Bank
does not engage in security trading and, therefore, the balance of its debt
securities and any equity securities will be classified as available-for-sale.
Net unrealized gains and losses for such securities will be required to be
recognized as a separate component of retained earnings net of taxes and
excluded from the determination of net income.
Investment and Mortgage-Backed Securities Available-for-Sale:
Securities classified as available-for-sale are carried at fair value. Net
unrealized gains and losses are reflected as a separate component of
stockholders' equity, net of tax effects. Securities classified as
available-for-sale are those that management intends to sell or that would be
sold for liquidity, investment management or similar reasons, even if there is
not a present intention of such a sale. Equity securities that have a readily
determinable fair value are also classified as available-for-sale.
Investment and Mortgage-Backed Securities Held-to-Maturity:
Securities are classified as held-to-maturity securities when purchased,
because the Bank has the ability and the intent to hold the securities to
maturity. Decisions to acquire investments of a particular type are based upon
interest rate risk, liquidity and capital adequacy considerations. Investment
securities are stated at cost, adjusted for premium amortization and accretion
of discounts. Premiums paid and discounts received at the time of purchase are
deferred and amortized over the remaining life of the securities using a method
which approximates a level yield. Mortgage-backed security amortization rates
are periodically adjusted to reflect changes in the prepayment speeds of the
underlying mortgages.
Gains and losses realized on sales of investment securities represent
differences between net proceeds and carrying values determined by the specific
identification method.
Loans and Allowance for Loan Losses:
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at the amount of
unpaid principal and reduced by an allowance for loan losses. Interest on loans
is accrued and credited to operations based upon the principal amounts
outstanding. Loan origination fees and discounts on mortgage loans are
amortized to income using the interest method over the remaining period to
contractual maturity, adjusted for actual prepayments. The allowance for loan
losses is established through a provision for possible loan losses charged to
expense. Loans are charged against the allowance for loan losses when
management believes that the collectibility of the principal is unlikely. The
allowance is an amount that management believes will be adequate to absorb
possible loan losses on existing loans that may become uncollectible based on
evaluations of the collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans and current economic conditions that may affect the borrower's
ability to pay.
Effective January 1, 1997, interest is discontinued on all loans that are
contractually past due 3 months. Prior to January 1, 1997, interest was
discontinued on residential loans that were contractually past due 12 months.
unless the value of the mortgaged property well exceeded the loan balance in
which case interest continued to accrue until the loan balance plus accrued
interest equalled the fair market value of the property securing the loan. The
bank has recorded interest income, net of taxes, of $80,341 and $45,646 for the
years ended December 31, 1996 and September 30, 1995, respectively on loans
that were contractually past due for more than three months. The effect on net
income per share would have been a reduction of $.06 for the year ended
December 31, 1996 if this interest had not been accrued. Interest was
discontinued on commercial, consumer
F-11
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 -- (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
and unsecured loans that were contractually past due 3 months. No adjustment is
made for interest previously accrued. Income is subsequently recognized only to
the extent that cash payments are received, or until in management's judgment,
the borrower's ability to make periodic interest and principal payments is back
to normal, in which case the loan is returned to accrual status.
In May 1994, the Financial Accounting Standards Board (FASB) issued SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114
requires an adjustment to the carrying value of a loan through the provision
for loan losses when it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan. SFAS No. 114
was subsequently amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosure" to allow a creditor to
use existing methods for recognizing interest income on an impaired loan. SFAS
Nos. 114 and 118 are effective for financial statements issued for years
beginning after December 31, 1995. The adoption of SFAS Nos. 114 and 118 did
not have a material impact on the Bank's financial condition or results of
operations.
Loan Origination and Commitment Fees:
Loan fees and certain direct loan origination costs are deferred and the
net fee or cost is recognized as an adjustment of the loan yield over the
contractual life of the loan using the interest method. When a loan is sold,
unamortized fees are recognized as income. Other loan fees and charges
representing service costs for the prepayment of loans, for delinquent payments
or for miscellaneous loan services are recognized when collected. Commitment
fees and costs relating to commitments whose likelihood of exercise is remote
are recognized over the commitment period on a straight-line basis. If the
commitment is subsequently exercised during the commitment period, the
remaining unamortized commitment fee at the time of exercise is recognized over
the life of the loan as an adjustment of yield.
Loans Held for Sale:
Included in loans held for sale are any loans which the Bank believes may
be involved in interest rate risk management or other decisions which might
reasonably result in such loans not being held until maturity. Any such
conforming loans are transferred to loans held for sale and valued at the lower
of aggregrate cost or market, including considering of forward commitments to
sell, until ultimate disposition.
The FSAB issued SFAS No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," as amended by SFAS No.
127, which provides accounting guidance on transfers of financial assets,
servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1996. The adoption of SFAS No. 125 did not have a material
impact on the Bank's consolidated financial position or results of operations.
Real Estate Owned:
Real estate owned consists of properties acquired through foreclosure.
Real estate owned is stated at the lower of cost or estimated fair value minus
estimated costs to sell. Write-downs of real estate owned which occur after the
initial transfer from the loan portfolio are recorded as expenses of real
estate owned. Costs of holding foreclosed property are charged to expense in
the current period, except for significant property improvements which are
capitalized to the extent that carrying value does not exceed estimated fair
value. Real estate held for investment is carried at the lower of cost,
including cost of improvements and amenities incurred subsequent to
acquisition, or net realizable value.
Income Taxes:
The Bank records deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
F-12
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 -- (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Office Properties and Equipment:
Land is carried at cost. Office properties and equipment are recorded at
cost less accumulated depreciation. Depreciation is computed based on cost
using the straight-line method over estimated useful lives of 25-50 years for
buildings, 10-25 years for land improvements and 3-10 years for office
equipment. Maintenance and repair of property and equipment are charged to
operations. Major improvements are capitalized.
Excess of Acquisition Cost Over Fair Value of Assets Acquired:
Excess of acquisition cost over fair value of assets acquired is
recognized at cost, net of amortization. The asset is being amortized over 19
years using the straight-line method.
Financial Statement Presentation:
Certain items in prior year financial statements have been reclassified to
conform to the 1997 presentation.
Advertising:
Advertising costs are charged to operations when incurred and amounted to
$81,400, $62,121 and $75,970 for the years ended December 31, 1997 and 1996 and
September 30, 1995, respectively, and $24,356 for the three months ended
December 31, 1995.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The principal estimate that is susceptible to significant change in the
near term relates to the allowance for loan losses. The evaluation of the
adequacy of the allowance for loan losses includes an analysis of the
individual loans and overall risk characteristics and size of the different
loan portfolios, and takes into consideration current economic and market
condition, the capability of specific borrowers to pay specific loan
obligations as well as current loan collateral values. However, actual losses
on specific loans, which also are encompassed in the analysis, may vary from
estimated losses.
Per Share Information:
Earnings per share have been calculated based on the weighted average
common shares outstanding for the respective periods less the uncommitted ESOP
shares. The number of shares used in the computation of earnings per share for
the years ended December 31, 1997 and 1996 was 1,165,105 and 1,152,328 for
basic earnings per share, respectively and 1,179,678 and 1,152,328 for diluted
earnings per share, respectively.
In February 1997, the FSAB issued SFAS No. 128, "Earnings per Share." SFAS
No. 128 establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicy held common stock or potential
common stock. This statement simplifies the standards for computing EPS
previously found in Accounting Principles Board (APB) Opinion No. 15, "Earnings
per share," and makes them comparable to international EPS standards. It
replaces the presentation of primary EPS with a presentation of basic EPS and
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS
F-13
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 -- (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
computation to the numerator and denominator of the diluted EPS computation.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. This statement requires restatement of all prior period EPS and
diluted EPS and did not have a material impact on the Bank.
Long-Lived Assets:
In March 1995, the FASB issued SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed of, which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets
carrying amount. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected be disposed of. Pennsylvania Savings Bank adopted SFAS
No. 121 in the first quarter of 1996. The adoption of SFAS No. 121 did not have
a material effect on Pennsylvania Saving Bank's operations.
Stock-Based Compensation:
SFAS No. 123 "Accounting for Stock-Based Compensation," encourages, but
does not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Bank has elected to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Bank's stock at the date of the grant over the amount an employee must pay
to acquire the stock.
Cash deposited in Financial Institutions:
The Bank maintains cash balances at other financial institutions in the
Philadelphia regional area. Accounts at these financial institutions are
insured by the Federal Deposit Insurance Corporation up to $100,000. In the
normal course of business, the Bank may have deposits that exceed the insured
balance.
3. INVESTMENTS AND MORTGAGE-BACKED SECURITIES:
The following is a summary of the Bank's investment in available-for-sale
and held-to-maturity securities;
<TABLE>
<CAPTION>
Available-for-Sale
December 31, 1997
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Investment Securities:
Equity:
Investment in mutual funds ...................... $ 2,354,210 $ 11,884 $ -- $ 2,366,094
Debt:
FNMA .......................................... 998,186 12,876 1,011,062
Federal Farm Credit ........................... 2,000,000 11,642 2,011,642
SLMA .......................................... 1,000,000 (5,843) 994,157
FHLB Notes .................................... 7,995,161 23,272 8,018,433
----------- -------- --------- -----------
11,993,347 47,790 (5,843) 12,035,294
----------- -------- --------- -----------
14,347,557 59,674 (5,843) 14,401,388
----------- -------- --------- -----------
Mortgage-backed Securities:
FNMA .......................................... 2,227,373 (64,963) 2,162,410
FHLMC ......................................... 777,413 (6,019) 771,394
----------- -------- --------- -----------
3,004,786 (70,982) 2,933,804
----------- -------- --------- -----------
Total Available-for-Sale Securities .......... 17,352,343 59,674 (76,825) 17,335,192
----------- -------- --------- -----------
</TABLE>
F-14
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 -- (Continued)
3. INVESTMENTS AND MORTGAGE-BACKED SECURITIES: -- (Continued)
<TABLE>
<CAPTION>
Held-to-Maturity
December 31, 1997
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Investment Securities:
Debt:
FNMA ....................................... $ 1,000,000 $ 7,306 $ -- $ 1,007,306
FHLB Notes ................................. 7,219,223 8,110 -- 7,227,333
----------- -------- --------- -----------
8,219,223 15,416 -- 8,234,639
----------- -------- --------- -----------
Mortgage-backed Securities:
GNMA ....................................... 1,979,474 105,576 2,085,050
FHLMC ...................................... 88,585 8,687 -- 97,272
2,068,059 114,263 -- 2,182,322
----------- -------- --------- -----------
Total Held-to-Maturity Securities ......... 10,287,282 129,679 -- 10,416,961
----------- -------- --------- -----------
TOTAL INVESTMENTS AND
MORTGAGE-BACKED
SECURITIES ............................. $27,639,625 $189,353 ($ 76,825) $27,752,153
=========== ======== ========= ===========
</TABLE>
The following is a summary of the Bank's investment in available-for-sale
and held-to-maturity securities;
<TABLE>
<CAPTION>
Available-for-Sale
December 31, 1996
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Investment Securities:
Equity:
Investment in mutual funds ..................... $ 2,304,878 $ 47,318 $ -- $ 2,352,196
Debt:
SLMA ......................................... 1,000,000 (20,466) 979,534
FNMA Notes ................................... 3,000,000 (15,448) 2,984,552
----------- -------- ---------- -----------
4,000,000 (35,914) 3,964,086
----------- -------- ---------- -----------
6,304,878 47,318 (35,914) 6,316,282
----------- -------- ---------- -----------
Mortgage-backed Securities:
FNMA ......................................... 2,529,793 (110,404) 2,419,389
FHLMC ........................................ 792,065 (17,614) 774,451
3,321,858 (128,018) 3,193,840
----------- -------- ---------- -----------
Total Available-for-Sale Securities ......... 9,626,736 47,318 (163,932) 9,510,122
----------- -------- ---------- -----------
</TABLE>
F-15
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 -- (Continued)
3. INVESTMENTS AND MORTGAGE-BACKED SECURITIES: -- (Continued)
<TABLE>
<CAPTION>
Held-to-Maturity
December 31, 1996
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Investment Securities:
Debt:
Federal Farm Credit ......................... $ 657,046 $ -- ($ 6) $ 657,040
FNMA ........................................ 2,999,456 3,510 3,002,966
FHLMC ....................................... 1,000,000 155 1,000,155
FHLB Notes .................................. 8,000,313 (32,471) 7,967,842
----------- -------- --------- -----------
12,656,815 3,665 (32,477) 12,628,003
----------- -------- --------- -----------
Mortgage-backed Securities:
Collateralized mortgage obligations ......... 227,494 (2,849) 224,645
GNMA ........................................ 2,355,143 89,774 2,444,917
FHLMC ....................................... 165,807 16,163 181,970
----------- -------- --------- -----------
2,748,444 105,937 (2,849) 2,851,532
----------- -------- --------- -----------
Total Held-to-Maturity Securities .......... 15,405,259 109,602 (35,326) 15,479,535
----------- -------- --------- -----------
TOTAL INVESTMENTS AND
MORTGAGE-BACKED
SECURITIES .............................. $25,031,995 $156,920 ($ 199,258) $24,989,657
=========== ======== ========= ===========
</TABLE>
Assets, principally securities, carried at approximately $2,841,107 and
$1,536,188 at December 31, 1997 and 1996, respectively were pledged to secure
deposits as required or permitted by law.
F-16
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 -- (Continued)
3. INVESTMENTS AND MORTGAGE-BACKED SECURITIES: -- (Continued)
The amortized cost and estimated market values of securities at December
31, 1997 and 1996 by contractual maturities, are as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
-------------- --------------
<S> <C> <C>
December 31, 1997:
Due less than one year ........................ $18,214,445 $18,249,608
Due after one year through five years ......... 1,998,125 2,020,325
----------- -----------
20,212,570 20,269,933
Mutual Funds .................................. 2,354,210 2,366,094
Mortgage-backed securities .................... 5,072,845 5,116,126
----------- -----------
$27,639,625 $27,752,153
=========== ===========
December 31, 1996:
Due less than one year ........................ $14,156,815 $14,077,913
Due after one year through five years ......... 2,500,000 2,514,176
----------- -----------
16,656,815 16,592,089
Mutual Funds .................................. 2,304,878 2,352,196
Mortgage-backed securities .................... 6,070,302 6,045,372
----------- -----------
$25,031,995 $24,989,657
=========== ===========
</TABLE>
Proceeds from maturities of investment securities available-for-sale
during the years ended December 31, 1997 and 1996 and September 30, 1995
totaled $1,000,000 and $3,000,000 and $700,000, respectively, and for the three
months ended December 31, 1995 was $5,995,391. The proceeds for all periods
were the result of security call options which were exercised and no gains or
losses were realized on those sales.
4. LOANS RECEIVABLE:
Loans receivable consist of the following:
December 31,
-------------------------------
1997 1996
-------------- --------------
Real Estate Loans:
One-to-four family .................... $44,940,010 $45,017,742
Five or more family residence ......... 702,055 654,292
Construction loans .................... 2,597,061 660,898
Nonresidential ........................ 11,420,738 5,575,209
----------- -----------
59,659,864 51,908,141
Consumer loans ......................... 1,201,351 1,016,277
Commercial loans ....................... 1,907,393 368,413
----------- -----------
62,768,608 53,292,831
Less:
Unearned fees and discounts ........... (477,979) (495,686)
Undisbursed loan proceeds ............. (137,677) (4,712)
Allowance for loan losses ............. (237,884) (206,884)
----------- -----------
$61,915,068 $52,585,549
=========== ===========
F-17
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 -- (Continued)
4. LOANS RECEIVABLE: -- (Continued)
Loans receivable at December 31, 1997 and 1996 includes $55,289,037 and
$48,700,787 of fixed rate loans and $7,479,571 and $4,592,044 of adjustable
rate loans, respectively.
A summary of loan maturities at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Multi-Family
and Consumer
Commercial and
One to Four Real Commercial Total
Family Estate Construction Business Loans
------------- ------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Amounts due:
Non-accrual ...................... $ 1,497,050 $ 396,662 $ -- $ -- $ 1,893,712
----------- ----------- ---------- ---------- -----------
Within one year .................. 2,070,509 1,230,528 2,597,061 2,513,640 8,411,738
----------- ----------- ---------- ---------- -----------
After one year:
1 to 3 years .................... 694,583 1,639,735 281,848 2,616,166
3 to 5 years .................... 2,147,317 6,183,775 263,842 8,594,934
5 to 10 years ................... 4,059,398 1,162,408 49,414 5,271,220
Over 10 years ................... 34,471,153 1,509,685 35,980,838
----------- ----------- ---------- ---------- -----------
Total due after one year ......... 41,372,451 10,495,603 595,104 52,463,158
----------- ----------- ---------- ---------- -----------
TOTAL AMOUNTS DUE ................ $44,940,010 $12,122,793 $2,597,061 $3,108,744 $62,768,608
=========== =========== ========== ========== ===========
</TABLE>
A summary of changes in the allowance for possible loan losses is as
follows:
<TABLE>
<CAPTION>
Three Months Ended
December 31, September 30, December 31,
--------------------------- --------------- -------------------
1997 1996 1995 1995
----------- ------------- --------------- -------------------
<S> <C> <C> <C> <C>
BALANCE, BEGINNING OF PERIOD ............ $ 206,884 $ 207,589 $ 207,589 $ 207,589
Provision charged to operation ......... 60,000 132,633 26,937 77,383
Charged off ............................ (29,000) (133,338) (26,937) (77,383)
--------- ---------- --------- ---------
BALANCE, END OF PERIOD ................. $ 237,884 $ 206,884 $ 207,589 $ 207,589
========= ========== ========= =========
</TABLE>
The provision for loan losses charged to expense is based upon past loan
and loss experience and an evaluation of potential losses in the current loan
portfolio, including the evaluation of impaired loans under SFAS Nos. 114 and
118. A loan is considered to be impaired when, based upon current information
and events, it is probable that the Bank will be unable to collect all amounts
due according to the contractual terms of the loan. As of December 31, 1997 and
1996, 100% of the impaired loan balance was measured for impairment based on
the fair value of the loans' collateral. Impairment losses are included in the
provision for loan losses. SFAS Nos. 114 and 118 do not apply to large groups
of smaller balance homogeneous loans that are collectively evaluated for
impairment, except for those loans restructured under a trouble debt
restructuring. Loans collectively evaluated for impairment include consumer
loans and residential real estate loans. At December 31, 1997, the Bank's
impaired loans consisted of two commercial real estate loans with a total
recorded balance of $321,052 for which specific allowances of $16,053 has been
established. The average investment in impaired loans for the year ended
December 31, 1997 was $332,507. At December 31, 1996 and 1995, and for the year
then ended, and the three months then ended the Bank's impaired loans consisted
of smaller balance residential mortgage loans.
Loans on which the accrual of interest has been discontinued amounted to
$1,893,712 and $769,995 and $607,281 at December 31, 1997 and 1996 and 1995,
respectively. If interest on those loans had been accrued, accrued interest
would have increased by $352,516 and $175,423 and $158,118 at December 31, 1997
and 1996 and 1995, respectively and income would have increased by $116,138 and
$60,724 and $16,937 for the years ended December 31, 1997 and 1996 and for the
three months ended December 31, 1995, respectively.
F-18
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 -- (Continued)
4. LOANS RECEIVABLE: -- (Continued)
Certain directors and officers of the Bank have loans with the Bank. Such
loans were made in the ordinary course of business and do not represent more
than a normal risk of collection. Loans to officers and directors amounted to
$1,177,541 and $324,178 at December 31, 1997 and 1996, respectively. During the
years ended December 31, 1997 and 1996 loans of $1,045,000 and $-0-,
respectively, were disbursed to executive officers and trustees, while
principal repayments of $191,637 and $8,391 were received in those years,
respectively.
5. LOANS HELD FOR SALE:
Loans held for sale are as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------
Gross Gross Fair
unrealized unrealized Market
Cost Gains Losses Value
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Residential mortgage loans ......... $6,574,585 $ -0- $ -0- $6,574,585
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------------
Gross Gross Fair
unrealized unrealized Market
Cost Gains Losses Value
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Residential mortgage loans ......... $4,597,700 $ -0- $ -0- $4,597,700
</TABLE>
6. ACCRUED INTEREST RECEIVABLE:
A summary of accrued interest receivable is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Loans .............................. $ 687,128 $ 754,462
FHLB Overnight ..................... 105,533 118,804
Mortgage-backed securities ......... 28,571 35,049
Investment securities .............. 463,870 308,642
---------- ----------
$1,285,102 $1,216,957
========== ==========
</TABLE>
7. OFFICE PROPERTIES AND EQUIPMENT:
Office properties and equipment are summarized by major classification as
follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Land, buildings and improvements .......... $ 1,856,499 $ 1,793,292
Furniture, fixtures and equipment ......... 1,329,386 1,215,859
------------ ------------
3,185,885 3,009,151
Less accumulated depreciation ............. (1,856,740) (1,735,703)
------------ ------------
$ 1,329,145 $ 1,273,448
============ ============
</TABLE>
Depreciation expense was $121,037, $89,943 and $87,475 for the years ended
December 31, 1997 and 1996 and September 30, 1995, respectively.
F-19
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 -- (Continued)
8. REAL ESTATE OWNED -- ACQUIRED THROUGH SETTLEMENT OF LOANS:
Real estate owned consists of the following:
December 31,
-------------------------
1997 1996
----------- -----------
Real estate acquired through
settlement of loans ................. $456,528 $464,651
======== ========
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 in an amount not less than 1% of its outstanding home loans
or 1/20 of its outstanding notes payable, if any, to the Federal Home Loan Bank
of Pittsburgh, whichever is greater, as calculated December 31 of each year.
F-20
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 -- (Continued)
10. DEPOSITS:
Deposits at December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
NOTES (Continued) 1997 1996
Weighted Average ---------------------------- ----------------------------
Interest Rate Amount % Amount %
------------------ --------------- ---------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Types of Deposits:
Noninterest bearing accounts:
1997 ........................ $ 6,454,066 5.93%
1996 ........................ $ 1,958,303 1.95%
Passbook accounts:
1997 ........................ 3.00% 26,146,377 24.05
1996 ........................ 3.00 26,803,311 26.65
Statement savings accounts:
1997 ........................ 2.49 63,088 .06
1996 ........................ 2.49 28,198 .03
Club accounts:
1997 ........................ 2.00 191,810 .18
1996 ........................ 2.00 202,855 .20
Now accounts:
1997 ........................ .90 5,373,905 4.94
1996 ........................ 1.09 9,104,871 9.05
Money Market: ..................
1997 ........................ 3.57 7,201,284 6.62
1996 ........................ 3.63 6,265,482 6.23
------------ ------ ------------ ------
45,430,530 41.78 44,363,020 44.11
------------ ------ ------------ ------
Certificate of deposit:
Less than 4.00%
1997 ........................ 3.00 293,168 .27
1996 ........................ 3.00 319,688 .32
4.00 - 5.00%
1997 ........................ 4.40 1,188,515 1.09
1996 ........................ 4.68 8,154,337 8.11
5.01 - 6.00%
1997 ........................ 5.53 60,737,995 55.86
1996 ........................ 5.46 46,025,469 45.76
6.01 - 7.00%
1997 ........................ 6.77 1,050,766 .97
1996 ........................ 6.64 624,417 .62
7.01 - 8.00%
1997 ........................ 7.85 33,133 .03
1996 ........................ 7.60 1,087,445 1.08
------------ ------ ------------ ------
Total of certificates of deposit 63,303,577 58.22 56,211,356 55.89
------------ ------ ------------ ------
TOTAL DEPOSITS .............. $108,734,107 100.00% $100,574,376 100.00%
============ ====== ============ ======
</TABLE>
F-21
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 -- (Continued)
10. DEPOSITS: -- (Continued)
Certificates of deposit have scheduled maturities as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Within one year ........................ $45,450,499 $40,728,765
One year through two years ............. 14,167,969 10,838,411
Two years through three years .......... 1,571,762 1,947,108
Three years through five years ......... 1,707,871 1,593,958
Five years through ten years ........... 405,476 1,094,302
Over ten years ......................... -- 8,812
----------- -----------
$63,303,577 $56,211,356
=========== ===========
</TABLE>
Interest expense on deposits is comprised of the following:
<TABLE>
<CAPTION>
December 31, September 30,
------------------------------- --------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
NOW Accounts ....................... $ 90,827 $ 93,641 $ 87,158
Savings Accounts ................... 786,897 829,578 973,300
Money Market Accounts .............. 258,951 199,467 144,885
Certificates of Deposit ............ 3,424,647 2,977,210 2,260,582
---------- ---------- ----------
4,561,322 4,099,896 3,465,925
Early Withdrawal Penalties ......... (27,676) (17,519) (28,782)
---------- ---------- ----------
$4,533,646 $4,082,377 $3,437,143
========== ========== ==========
</TABLE>
The aggregate amount of certificates of deposit accounts with a minimum
denomination of $100,000 was approximately $10,791,394 and $6,240,394 at
December 31, 1997 and 1996, respectively.
The aggregate amount of demand deposits that have been re-classified as
loan balances at December 31, 1997 and 1996 was $88,129 and $104,164,
respectively.
11. INCOME TAX MATTERS:
The Bank and its wholly owned subsidiary file a consolidated federal
income tax return and separate state and local income tax returns on a calendar
year end basis.
F-22
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 -- (Continued)
11. INCOME TAX MATTERS: -- (Continued)
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended Year Ended Three Months Ended
December 31, September 30, December 31,
------------------------- --------------- -------------------
1997 1996 1995 1995
----------- ----------- --------------- -------------------
<S> <C> <C> <C> <C>
Currently payable:
Federal .......... $292,000 $122,000 $324,551 ($ 61,598)
State ............ 16,000 20,000 74,977 --
-------- -------- -------- --------
308,000 142,000 399,528 (61,598)
Deferred ......... 36,669 59,465 33,131 21,711
-------- -------- -------- --------
TOTAL ......... $344,669 $201,465 $432,659 ($ 39,887)
======== ======== ======== ========
</TABLE>
The reconciliation between the actual provision for federal and state
income taxes and the amount of income taxes which would have been provided at
statutory rates is as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Three Months Ended
December 31, September 30, December 31,
------------------------- --------------- -------------------
1997 1996 1995 1995
----------- ----------- --------------- -------------------
<S> <C> <C> <C> <C>
Expected Income Tax Expense at Federal
tax rate ................................ $ 358,070 $115,675 $371,388 ($ 51,676)
Travel and Entertainment ................. 15,937 25,162 13,987 3,500
State Tax net of Federal benefit ......... 10,560 13,200 49,485 8,825
Other differences, net ................... (39,898) 47,428 (2,201) (536)
--------- -------- -------- --------
$ 344,669 $201,465 $432,659 ($ 39,887)
========= ======== ======== ========
</TABLE>
Deferred taxes are included in the accompanying statements of financial
condition as of December 31, 1997 and 1996 for the estimated future tax effects
of differences between the financial statement and federal income tax basis of
assets and liabilities given the provisions of currently enacted tax laws.
The net deferred tax assets (liability) consist of the following
components:
December 31,
-----------------------------
1997 1996
------------- -------------
Deferred Tax Assets:
Unrealized loss on available-for-sale
securities .......................... $ 6,860 $ 46,646
Allowance for loan losses ............. 94,754 82,754
Property and equipment ................ -- 11,557
Deferred income ....................... 99,873 119,847
--------- ----------
201,487 260,804
Deferred Tax Liability:
Bad debt expense ...................... (235,508) (235,508)
Property and equipment .................. (17,137
--------- ----------
NET DEFERRED TAX ................. ($ 51,158) $ 25,296
Prior to January 1, 1996, the Bank was allowed a special bad debt
deduction for tax purposes based on a percentage of taxable income (8%) or on
specified experience formulas, subject to certain limitations based upon
F-23
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 -- (Continued)
11. INCOME TAX MATTERS: -- (Continued)
aggregate loan balances at the end of the year. If the above amounts deducted
were used for purposes other than for loan losses, such as in a distribution in
liquidation, or if the Bank would cease to be a qualified thrift lender under
the tax law, or otherwise, the amounts deducted would be subject to federal
income tax at the then current corporate tax rate.
The special bad debt method of accounting for bad debts for tax purposes
utilized by qualified thrift institutions was repealed effective for tax years
beginning January 1, 1996. Thrift institutions must now use either the direct
write-off or experience method of accounting for bad debts and must treat this
change as a change in accounting method. Any adjustment that is required to be
taken into account because of the change will be determined solely with respect
to the applicable excess reserves of the thrift which will be taken into income
over a six-year period for tax purposes. Pennsylvania Savings Bank qualifies as
a small bank. The Banks applicable excess reserves will be the excess of the
balance of its reserves as of the close of its last tax year beginning before
January 1, 1996 over the greater of (a) its pre-1988 reserves, or (b) what the
thrift's reserves would have been at the close of its last tax year beginning
before January 1, 1996, had the thrift used the experience method. If a Bank
meets the residential loan requirement, the income to be recognized may be
deferred. A Bank meets the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the Bank during the year is
not less than its base amount. The "base amount" generally is the average of
the principal amounts of the residential loans made by the Bank during the six
most recent tax years beginning before January 1, 1996. For the year ended
December 31, 1996, the Bank meets the residential loan requirement and has
elected to deferred recognition of the income.
Prior to January 1, 1988, the Bank was not required and did not record
deferred income taxes on the difference between the allowance for loan losses
reported for financial reporting purposes and the special bad debt deduction
for income tax purposes.
Retained earnings at December 31, 1997 and 1996 includes $2,450,099 for
which no deferred federal income tax liability has been recognized.
Subsequent to December 31, 1987, the base year, and prior to January 1,
1996, the Bank was required to record a deferred tax asset related to the
allowance for loan losses reported for financial reporting purposes and a
deferred tax liability for special bad debt deduction. However, if it is more
likely than not that some portion or all of the deferred tax asset will not be
realized, the deferred tax asset should be reduced by a valuation allowance.
The valuation allowance should be sufficient to reduce the deferred tax asset
to the amount that is more likely than not to be realized.
As required by SFAS No. 109 "Accounting for Income Taxes," the Bank
determined that no valuation reserve was necessary for the net deferred tax
asset since it is more likely than not that the deferred tax asset will be
realized through carryforwards to taxable income in future years and future
reversals of existing temporary differences. The Bank will continue to review
the criteria related to the recognition of deferred tax assets on a quarterly
basis.
The Bank has made additions to the special bad debt deduction allowance
since December 31, 1987 and, therefore, deferred tax liability for the special
bad debt deduction has been recorded in the amount of $235,508 at December 31,
1997 and 1996, respectively.
F-24
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 -- (Continued)
11. INCOME TAX MATTERS: -- (Continued)
Deferred tax expense results from timing differences in the recognition of
revenue and expense for tax and financial statement purposes. The sources of
these differences are as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Three Months Ended
December 31, September 30, December 31,
-------------------------- --------------- -------------------
1997 1996 1995 1995
------------- ---------- --------------- -------------------
<S> <C> <C> <C> <C>
Bad debts ....................... ($ 12,000) $31,035 $ 51,574 $ --
Depreciation .................... 28,694 8,455 (11,452) 1,736
Deferred loan fees .............. 19,975 19,975 (6,991) 19,975
-------- ------- --------- -------
DEFERRED TAX EXPENSE ......... $ 36,669 $59,465 $ 33,131 $21,711
======== ======= ========= =======
</TABLE>
12. DIVIDENDS PAID:
On June 30, 1996, the Bank paid a cash dividend of $.0375 per share to
stockholders of record as of June 15, 1996. This dividend was paid from
accumulated net earnings as of June 30, 1996. Subsequently, in September 1996,
the Savings Association Insurance Fund (SAIF) assessed and collected from the
Bank a one time special assessment of $567,000. This assessment eliminated the
Bank's prior earnings and resulted in the bank reporting both significantly
lower net income for the year ended December 31, 1996 and an accumulated
deficit as of December 31, 1996.
13. FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 (FDICIA):
FDICIA was signed into law on December 19, 1991 and includes significant
changes to the legal and regulatory environment for insured depository
institutions, including reductions in insurance coverage for certain kinds of
deposits, increased supervision by the federal regulatory agencies, increased
reporting requirements for insured institutions, and new regulations concerning
internal controls, accounting and operations.
The regulations require institutions to have a minimum 4% leverage capital
ratio, a minimum 4% tier 1 risk-based capital ratio and a minimum 8% total
risk-based capital ratio to be considered "adequately capitalized". An
institution is deemed to be "critically undercapitalized" if it has a tangible
equity ratio of 2% or less.
The following table sets out the Bank's various regulatory capital
categories:
<TABLE>
<CAPTION>
December 31,
1997
-------------------------------------------------------------
Required Actual
--------------------- ------------------------
(Dollars in thousands) % Amount % Amount Excess
- ----------------------------------------- ---------- -------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Tangible equity ratio ................... >2.0% $2,246 13.36% $15,001 $12,755
Leverage capital ratio .................. 6.0 6,739 13.36 15,001 8,262
Total risk-based capital ratio .......... 8.0 4,865 25.06 15,239 10,374
Tier 1 risk-based capital ratio ......... 4.0 2,432 24.67 15,001 12,569
</TABLE>
<TABLE>
<CAPTION>
December 31,
1996
-------------------------------------------------------------
Required Actual
--------------------- ------------------------
% Amount % Amount Excess
---------- -------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Tangible equity ratio ................... >2.0% $2,324 12.24% $14,230 $11,906
Leverage capital ratio .................. 6.0 4,648 12.24 14,230 9,582
Total risk-based capital ratio .......... 8.0 4,003 28.85 14,437 10,434
Tier 1 risk-based capital ratio ......... 4.0 2,002 28.44 14,230 12,228
</TABLE>
F-25
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 -- (Continued)
14. DIFFERENCES BETWEEN FEDERAL DEPOSITORY INSURANCE CORPORATION CALL REPORT
AND CONSOLIDATED FINANCIAL STATEMENTS:
An adjustment has been made to the accounts which is reflected in the
consolidated financial statements but is not reflected in the Bank's December
Federal Depository Insurance Corporation Call Reports. The adjustment and its
effect on retained earnings are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Retained earnings per the Bank's December Federal
Depository Insurance Corporation Call Report ............. $ 682,271 ($ 19,574)
Increase in federal and state income tax provision ......... (117,601) (96,803)
Adjustments made to financial statement, subsequently
recorded by Bank ......................................... (18,927) (46,357)
---------- ---------
RETAINED EARNINGS PER ACCOMPANYING
FINANCIAL STATEMENTS ..................................... $ 545,743 ($ 162,734)
========== =========
</TABLE>
15. LEASE COMMITMENTS:
On October 12, 1995, the Bank signed a lease agreement for office and
branch space in center city Philadelphia. The lease commenced on July 1, 1996
and extends for 11 years. Lease expense for this lease for the year ended
December 31, 1997 and 1996 was $265,118 and $79,908.
The Bank was obligated under various other leases. Lease expense for these
leases for the year ended December 31, 1997 and 1996 and September 30, 1995 and
was $37,203, $37,437, and $42,202, respectively.
Minimum annual rentals are as follows:
1998 $ 380,465
1999 352,157
2000 348,651
2001 363,907
2002 374,686
Thereafter 1,761,410
16. RETIREMENT PLANS:
The Bank sponsors the following retirement plans:
A. Defined Benefit Pension Plan:
Covers employees who were at least 21 years of age, with 12 months of
service with the Bank and have accumulated 1,000 hours of service during the
Plan year. The Plan calls for benefits to be paid to eligible employees at
retirement based upon years of service with the Bank and compensation rates
near retirement. Contributions to the Plan reflect benefits attributed to
employees' service. Plan assets consist of common stock, investment grade
corporate bonds and U.S. Government obligations. The Retirement Plan was
"frozen" as of September 30, 1994 and benefits no longer accrue thereunder. No
new employees will be eligible for participation.
F-26
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 -- (Continued)
16. RETIREMENT PLANS: -- (Continued)
The following table sets forth the Pension Plan's funded status in the
Bank's balance sheet as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31, December 31,
-------------- -------------
1997 1996
-------------- -------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested obligation ................................................... ($ 642,384) ($ 720,684)
Nonvested ........................................................... (1,390) (3,252)
--------- ---------
Accumulated benefit obligation ...................................... (643,774) (723,936)
--------- ---------
Projected benefit obligation for service rendered to date ........... (643,774) (723,936)
Plan assets at fair value ............................................ 739,135 703,874
--------- ---------
Excess of projected benefit obligation over plan assets .............. 95,361 (20,062)
Unrecognized net gain from past experience different from that assumed
and effects of changes in assumptions ............................... (299,351) (191,732)
Unrecognized prior service cost ...................................... (46,800) (48,471)
Unrecognized obligation at December 31, being recognized over 24 years 104,947 111,121
--------- ---------
ACCRUED PENSION COST ................................................. ($ 145,843) ($ 149,144)
========= =========
</TABLE>
Net pension cost included the following components:
<TABLE>
<CAPTION>
December 31, September 30, December 31,
---------------------------- --------------- -------------
1997 1996 1995 1995
------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
Interest cost on projected benefit obligation ......... $ 47,172 $ 53,315 $ 56,072 $ 56,072
Actuarial return on plan assets ....................... (133,177) (94,606) (117,334) (117,334)
Net amortization and deferral ......................... 82,703 47,059 76,627 76,627
--------- --------- ---------- ----------
NET PERIODIC PENSION COST FOR THE
YEARS ENDED DECEMBER 31, 1997 AND
1996 AND SEPTEMBER 30, 1995 .......................... ($ 3,302) $ 5,768 $ 15,365 $ 15,365
========= ========= ========== ==========
</TABLE>
The significant actuarial assumptions used in calculating the above
information is as follows:
<TABLE>
<CAPTION>
December 31, September 30, December 31,
--------------- --------------- -------------
1997 1996 1995 1995
------ ------ --------------- -------------
<S> <C> <C> <C> <C>
Weighted average discount rate ................... 8% 8% 8% 8%
Weighted average rate of compensation ............ N/A N/A 4% 4%
Weighted average expected long-term rate of return
on Plan Assets .................................. 8% 8% 8% 8%
</TABLE>
Pension contributions were $-0- and $-0- and $51,102 and $-0- for the
years ended December 31, 1997 and 1996 and September 30, 1995 and the three
months ended December 31, 1995, respectively.
The following three employee benefit plans cover all eligible employees,
those with two years of service, (a year of service defined as having at least
1,000 hours of service) and being at least 21 years of age on the first day of
the plan year.
F-27
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 -- (Continued)
16. RETIREMENT PLANS: -- (Continued)
B. Cash or Deferred Profit-Sharing Plan:
Contributions to this Plan are determined by the participant's written
election to reduce their compensation by no more than 15% of eligible
compensation and also not to exceed code section 401(k) and other limitations
as set by the plan documents.
The Bank may also make discretionary contributions made out of net income.
Bank contributions to the Plan for the year ended December 31, 1997 and
1996 and September 30, 1995 and the three months ended December 31, 1995, were
$-0-, $-0-, $18,190 and $-0-, respectively.
C. Profit-sharing Plan:
Contributions to the Plan are determined annually by the Board of Trustees
based upon net income. Allocation of the contributions to participants is based
upon annual compensation.
Contributions to the Plan for the year ended December 31, 1997 and 1996
and September 30, 1995 and the three months ended December 31, 1995 were $-0-
and $74,894, $111,567 and $118,660, respectively.
D. Employee Stock Ownership Plan ("ESOP"):
Effective October 23, 1995, the Bank has established an ESOP for eligible
employees. The ESOP is a tax-qualified plan subject to the requirements of
ERISA and the Code. Employees with a 12-month period of employment with the
Bank during which they worked at least 1,000 hours and who have attained age 21
are eligible to participate. The ESOP borrowed funds from an unrelated third
party lender and used the funds to purchase 42,780 shares of Common Stock.
The Common Stock purchased by the ESOP serves as collateral for the ESOP
loan. The loan will be repaid principally from the Bank's contributions to the
ESOP over a period of up to seven years. Shares purchased by the ESOP will be
held in a suspense account for allocation among participants as the loan is
repaid. Shares released from the suspense account in an amount proportional to
the repayment of the ESOP loan will be allocated among participants on the
basis of compensation in the year of allocation, up to an annual adjusted
maximum level of compensation (currently $150,000).
Benefits under the ESOP generally become 100% vested after the third year
of service or upon normal retirement (as defined in the ESOP), disability or
death of the participant. If a participant terminates employment for any other
reason prior to fully vesting, his nonvested account balance will be forfeited.
Forfeitures will be reallocated among remaining participating employees in the
same proportion as contributions. Benefits may be payable upon death,
retirement, early retirement disability or separation from service. The Bank's
contributions to the ESOP will not be fixed, so benefits payable under the ESOP
cannot be estimated. The Bank's contributions to the ESOP were recorded as
compensation expense for the year ended December 31, 1997 and 1996 and 1995
were $91,736 and $97,228 and $16,921, respectively.
Information with respect to the ESOP is as follows:
<TABLE>
<CAPTION>
December 31, September 30, December 31,
------------------- --------------- -------------
1997 1996 1995 1995
-------- -------- --------------- -------------
<S> <C> <C> <C> <C>
Allocated shares ........................... 42,780 42,780 N/A 42,780
Committed shares ........................... 13,245 7,132 N/A 1,019
Uncommitted shares ......................... 29,535 35,648 N/A 41,761
Fair value of unearned ESOP shares ......... 84,561 75,662 N/A 12,735
Interest expense incurred .................. 30,607 36,099 N/A 6,733
Dividends received ......................... N/A 1,604 N/A N/A
</TABLE>
F-28
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 -- (Continued)
16. RETIREMENT PLANS: -- (Continued)
E. Management Recognition Plan:
The Bank's Board of Trustees has also adopted a Management Recognition
Plan (the "MRP") effective October 20, 1995, as a method of providing certain
senior executive officers of the Bank with a propriety interest in the Bank, to
such officers for their service and to encourage such persons to remain in the
service of the Bank. Benefits may be granted at the sole discretion of the
Compensation Committee of the Bank's Board of Trustees. The MRP is managed by
trustees who are directors of the Bank and who have responsibility to invest
all funds contributed by the Bank to the trust created for the MRP. The Bank
contributed $254,005 to the MRP trust which enabled the MRP to purchase 21,390
shares of Common Stock. Unless the Compensation Committee of the Board
specifies otherwise, shares granted to MRP participants will be in the form of
restricted stock payable over a five-year period at the rate of 20% of such
shares per year. Compensation expense in the amount of the fair market value of
the common stock at the date of the grant to the employee will be recognized
pro rata over the five years during which the shares are payable. As of
December 31, 1997 and 1996, 21,390 shares have been allocated to individual
employees. For the year ended December 31, 1997 and 1996, the Bank recorded
compensation expense of $50,801 and $18,624, respectively for the Management
Recognition Plan.
F. Stock Option Plan:
The Bank's Board of Trustees adopted the Pennsylvania Savings Bank Stock
Option Plan (the "Option Plan") and was approved by a majority of stockholders
on April 30, 1996. The Option Plan provides for the grant of (I) options to
purchase Common Stock intended to qualify as incentive stock options
("Incentive Stock Option") under Section 422 of the Code, and (ii) options that
do not so qualify ("Nonqualified Stock Options"). Pursuant to the Option Plan,
up to 53,475 shares of Common Stock (subject to adjustment) will be reserved
for issuance by the Bank upon exercise of stock options to be granted to
certain officers and employees of the Bank from time to time under the Option
Plan. The purpose of the Option Plan is to give certain officers and employees
an opportunity to acquire Common Stock and thereby help the Bank attract,
retain and motivate key employees and officers.
At April 30, 1996, 29,409 shares of Common Stock were granted at the
market price of $11.87 and on December 31, 1996, 6,450 were granted at the
market price of $13.25. No option was granted in 1997.
If the bank had elected to adopt the accounting provision of SFAS 123 then
compensation cost would have reduced net income and earnings per share by
$241,232 and $.21 in 1996.
The weighted average fair value at date of grant for options granted in
1996 were $6.59 for options granted at April 30th and $7.35 for options granted
at December 31st. The fair value of options at date of grant was estimated
using the Black-Scholes Option Pricing Model with the following assumptions:
expected life 10 years, interest rate 8.00%, volatility 17.00% and dividend
yield of 0.00%. All options expire in 2006. All of the options remained
outstanding at December 31, 1997.
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit generally
consisting of residential purchase money mortgage commitments, or the unfunded
portion of construction loans in process and standby letter of credit.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the loan agreement.
These commitments are comprised of the undisbursed portion of construction
loans and residential loan originations. The Bank's exposure to credit loss
from nonperformance by the other party to the financial instruments for
commitments to extend credit is represented by the contractual
F-29
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 -- (Continued)
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK: -- (Continued)
amount of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments. Generally, collateral, usually in the form of real estate, is
required to support financial instruments with credit risk.
18. SIGNIFICANT CONCENTRATIONS OF CREDIT RISK:
The Bank grants mortgage, consumer and construction loans primarily to
customers in Southeastern Pennsylvania and Southern New Jersey. Although the
Bank has a diversified loan portfolio, a substantial portion of its customers'
ability to honor their contracts is dependent upon the local economy. The
Bank's net investment in loans is subject to a significant concentration of
credit risk given that the investment is primarily within a specific geographic
area.
As of December 31, 1997 and 1996, the Bank had a net investment of
$61,915,068 and $52,585,549, respectively, in loans receivable. These loans
possess an inherent credit risk given the uncertainty regarding the borrower's
compliance with the terms of the loan agreement. To reduce credit risk, the
loans are secured by varying forms of collateral, including first mortgages on
real estate, liens on personal property, savings accounts, etc. It is generally
Bank policy to file liens on titled property taken as collateral on loans. In
the event of default, the Bank's policy is to foreclose or repossess collateral
on which it has filed liens.
In the event that any borrower completely failed to comply with the terms
of the loan agreement and the related collateral proved worthless, the Bank
would incur a loss equal to the loan balance.
19. COMMITMENTS:
In the normal course of business the Bank makes various commitments and
incurs certain contingent liabilities which are not reflected in the
accompanying financial statements. These commitments and contingent liabilities
include open-end credit available. At December 31, 1997 and 1996, the Bank's
customers had unused lines of credit available of $1,134,820 and $830,247,
respectively.
Outstanding commitments to originate loans are as follows:
December 31,
---------------------------
1997 1996
------------ ------------
First mortgage loans:
Fixed rates ............ $ 521,095 $ 121,590
Variable rates ......... 2,468,000 -0-
---------- ---------
$2,989,095 $ 121,590
========== =========
Commitments under standby letters of credit totaled approximately $387,694
and $565,948 at December 31, 1997 and 1996, respectively.
20. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires the disclosure of the fair value
of financial instruments, both assets and liabilities recognized and not
recognized in the statement of financial position.
A financial instrument is defined as cash, evidence of an ownership
interest in equity, or a contract that both imposed on one entity a contractual
obligation to deliver cash or another financial instrument to a second entity
or to exchange other financial instruments on potentially unfavorable terms
with the second entity, conveys to that second entity a contractual right to
receive cash or another financial instrument from the first entity or the
exchange of other financial instruments on potentially favorable terms with the
first entity.
F-30
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 -- (Continued)
20. FAIR VALUE OF FINANCIAL INSTRUMENTS: -- (Continued)
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. Quoted market prices should be used
when available, if not available management's best estimate of fair value may
be based on quoted market price of financial instruments with similar
characteristics or on valuation techniques, such as using the present value of
estimated future cash flows using a discount rate commensurate with the
corresponding risk associated with those cash flows. These techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows and future economic conditions. In that regard,
the fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of
the instrument. In addition, these estimates are only indicative of individual
financial instruments' values and should not be considered an indication of the
fair value of the Bank taken as a whole. Statement No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements.
The following tables represents the carrying value and fair market value
of financial instruments as of December 31, 1997:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
-------------- --------------
<S> <C> <C>
Assets:
Cash and cash equivalents ............................. $27,888,650 $27,888,650
Investments securities available-for-sale ............. 14,401,388 14,401,388
Mortgage-backed securities available-for-sale ......... 2,933,804 2,933,804
Investment securities held-to-maturity ................ 8,219,223 8,234,639
Mortgage-backed securities held-to-maturity ........... 2,068,059 2,182,322
Loans receivable - net ................................ 61,915,068 61,915,068
Loans Held for Sale ................................... 6,574,585 6,574,585
Federal Home Loan Bank stock .......................... 559,900 559,900
Liabilities:
NOW, MMDA and Passbook accounts ....................... 45,430,530 45,430,530
Certificate of Deposits ............................... 63,303,577 63,303,577
</TABLE>
The following tables represents the carrying value and fair market value
of financial instruments as of December 31, 1996:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
-------------- --------------
<S> <C> <C>
Assets:
Cash and cash equivalents ............................. $31,622,465 $31,622,465
Investments securities available-for-sale ............. 6,316,282 6,316,282
Mortgage-backed securities available-for-sale ......... 3,193,840 3,193,840
Investment securities held-to-maturity ................ 12,656,815 12,628,003
Mortgage-backed securities held-to-maturity ........... 2,748,444 2,851,532
Loans receivable - net ................................ 52,585,549 52,585,549
Loans Held for Sale ................................... 4,597,700 4,597,700
Federal Home Loan Bank stock .......................... 533,600 533,600
Liabilities:
NOW, MMDA and Passbook accounts ....................... 44,363,020 44,363,020
Certificate of Deposits ............................... 56,211,356 56,211,356
</TABLE>
F-31
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 -- (Continued)
20. FAIR VALUE OF FINANCIAL INSTRUMENTS: -- (Continued)
The following methods and assumptions, where practical to implement as
noted, were used by the Bank in estimating its fair value for those assets.
Cash and Cash Equivalents:
The carrying amounts reported in the statement of financial condition for
cash and cash equivalents approximate the fair value for those assets.
Investments Securities:
The fair value for investments are based on quoted market prices.
Mortgage-backed Securities:
The fair value of mortgage-backed securities issued by quasi-governmental
agencies is based on quoted market prices.
Loans Receivable:
The Bank estimates that the fair value of its real estate, consumer and
commercial loans approximates the carrying amount. The carrying amount is
adjusted for the estimated future possible loan losses through a valuation
allowance. The Bank's real estate loan portfolio was $59,659,864 and
$51,908,141 at December 31, 1997 and 1996, respectively with rates ranging from
6.00% to 18.00% and maturities through 30 years. The Bank's consumer loan
portfolio was $1,201,351 and $1,016,277 at December 31, 1997 and 1996,
respectively with rates ranging from 5.00% to 22.53% with maturities through 18
years. The Bank's commercial loan portfolio was $1,907,393 and $368,413 at
December 31, 1997 and 1996, respectively with rates ranging from 8.25% to
10.25% with maturities through one year and monthly repayment terms.
Deposits:
The fair value of deposits with no stated maturity, such as non-interest
bearing demand deposits, NOW accounts, savings accounts and money market
accounts, is equal to the amount payable on demand as of December 31, 1997 and
1996. The Bank has not determined the fair values of its time deposits (e.g.
certificates of deposit) due to it not being practical to make such estimates
based on varying interest rates and maturities involved and the excessive cost
that would be incurred. Time deposits were $63,303,577 and $56,211,356 at
December 31, 1997 and 1996, respectively with rates ranging from 3.00% to
8.00%.
Commitments to Extend Credit and Letters to Credit:
The majority of the Bank's commitments to extend credit and letters of
credit carry current market interest rates if converted to loans. Because
commitments to extend credit and letters of credit are generally unassignable
by either the Bank or the borrower, they only have value to the Bank and the
borrower. The Bank is unable to estimate the fair value of the recorded
deferred fee amounts.
F-32
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 -- (Continued)
21. EARNINGS PER SHARE:
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------
Per
Income Shares Share
Numerator Denominator Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS:
Income available to Common Stockholders . $708,477 1,165,105 $ .61
Effect of Dilute Securities:
Stock options ........................... -0- 14,573
-------- ---------
Diluted EPS
Income available to common stockholders
and assumed conversions ............... $708,477 1,179,678 $ .60
======== =========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------
Per
Income Shares Share
Numerator Denominator Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS:
Income available to Common Stockholders . $138,757 1,152,328 $ .12
Effect of Dilute Securities:
Stock options ........................... -0- -0-
-------- ---------
Diluted EPS
Income available to common stockholders
and assumed conversions ............... $138,757 1,152,328 $ .12
======== =========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------------
Per
Income Shares Share
Numerator Denominator Amount
-------------- ------------- ----------
<S> <C> <C> <C>
Basic EPS:
Income available to Common Stockholders . ($ 112,104) 1,173,250 ($.10)
Effect of Dilute Securities:
Stock options ........................... -0- -0-
--------- ---------
Diluted EPS
Income available to common stockholders
and assumed conversions ............... ($ 112,104) 1,173,250 ($.10)
========= =========
</TABLE>
22. NEW PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting of
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of financial statements. This statement also 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
displayed with the same prominence as other financial statements. This
statement is effective for fiscal years beginning after
F-33
<PAGE>
PENNSYLVANIA SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995 AND THE
THREE MONTHS ENDED DECEMBER 31, 1995 -- (Continued)
22. NEW PRONOUNCEMENTS: -- (Continued)
December 15, 1997. Earlier application is permitted. Reclassification of
financial statements for earlier periods provided for comparative purposes is
required. The Bank does not anticipate that adoption of SFAS No. 130 will have
a material impact on the Bank's financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of an Enterprise and Related Information"
(SFAS No. 131), which establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that such enterprises report selected information about
operating segments in interim financial reports issued to shareholders. This
statement also establishes standards for related disclosures about products and
services, geographic areas, and major customers. This statement requires the
reporting of financial and descriptive information about the enterprise's
reportable operating segments. This statement is effective for financial
statements for periods beginning after December 15, 1997. In the initial year
of application, comparative information for earlier years is to be restated.
The Bank does not anticipate that the adoption of SFAS No. 131 will have a
material impact on the Bank's financial statements.
23. FINAL SAVINGS ASSOCIATION INSURANCE FUND LEGISLATION:
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the Funds
Act) was signed into law which, among other things, imposed a special one-time
assessment to recapitalize the Savings Association Insurance Fund (SAIF). As
required by the Funds Act, the Federal Deposit Insurance Corporation (FDIC)
imposed a special assessment on SAIF-assessable deposits held on March 31,
1995, payable November 27, 1996. The special assessment was recognized as a
tax-deductible expense in 1996. The Bank recorded a special after-tax charge of
$374,397 ($567,269 before tax) as a result of the FDIC special assessment.
24. SUBSEQUENT EVENT:
On July 17, 1997, the Board of Trustees of the Bank adopted a Plan of
Conversion. The Board amended the Plan of Conversion on September 25, 1997 (as
amended, the "Plan"). Under the Plan (i) PSB Mutual Holding Company will
convert to an interim Pennsylvania stock savings bank ("Interim A") and
simultaneously merge with and into the Bank, pursuant to which PSB Mutual
Holding Company will cease to exist and the outstanding shares of the Bank's
Common Stock held by PSB Mutual Holding Company (615,250 shares or 51.5% of the
outstanding Bank Common Stock) will be cancelled, and (ii) an interim
Pennsylvania stock savings bank ("Interim B") will be formed as a wholly-owned
subsidiary of PSB Bancorp, Inc., a newly formed a holding company, and will
merge with and into the Bank resulting in the Bank becoming a wholly-owned
subsidiary of PSB Bancorp, Inc. Any outstanding shares of Bank Common Stock not
owned by PSB Mutual Holding Company (579,390 shares or 48.5% of the outstanding
Bank Common Stock) will be converted into shares of PSB Bancorp, Inc. at an
exchange ratio determined in accordance with the Plan. In conjunction with the
conversion being undertaken pursuant to the Plan, PSB Bancorp, Inc. will offer
up to 1,610,000 shares of its common stock (subject to adjustment up to
1,851,500 shares under certain circumstances) in a subscription and community
offering.
F-34
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Sections 1741 and 1742 of the Pennsylvania Business Corporation Law of
1988 provide that the Holding Company may indemnify any officer or director
acting in his capacity as a representative of the Holding Company who was, is,
or is threatened to be made a party to any action or proceeding against
expenses, judgments, penalties, fines and amounts paid in settlement in
connection with such action or proceeding whether the action was instituted by
a third party or arose by or in the right of the Holding Company (a derivative
action). Generally, the only limitation on the ability of the Holding Company
to indemnify its officers and directors is if the act violates a criminal
statute (unless the person had no reasonable cause to believe his conduct was
unlawful) or if the officer or director did not act in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests
of the corporation. Indemnification is not permitted in a derivative action if
the officer or director in question has been adjudged liable to the
Corporation, unless such indemnification is approved by the court.
The Holding Company's Bylaws provide a right to indemnification to the
full extent permitted by law, for expenses (including attorney's fees),
damages, punitive damages, judgments, penalties, fines and amounts paid in
settlement actually and reasonably incurred by any director or officer whether
or not the indemnified liability arises or arose from any threatened, pending
or completed proceeding by or in the right of the Holding Company (a derivative
action) by reason of the fact that such director or officer is or was serving
as a director, officer, employee or agent of the Holding Company or, at the
request of the Holding Company, as a director, officer, partner, fiduciary or
trustee of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise. The Holding Company's Bylaws provide for the
advancement of expenses to an indemnified party upon receipt of an undertaking
by the party to repay those amounts if it is finally determined that the
indemnified party is not entitled to indemnification.
The Holding Company's Bylaws authorize the Holding Company to take steps
to ensure that all persons entitled to the indemnification are properly
indemnified, including, if the Board of Directors so determines, purchasing and
maintaining insurance. As of the date of this Prospectus, no such insurance has
been purchased.
Item 25. Other Expenses of Issuance and Distribution
The estimated expenses payable by the Holding Company in connection with
the issuance and distribution of the securities being registered (other than
underwriting discounts and commissions and the Underwriter's non-accountable
expense allowance) are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee ......... $ 10,131.61
Edgar, printing, copying, postage, mailing .................. 60,000.00
Appraisal/business plan fees and expenses ................... 30,000.00
Securities marketing fees ................................... 100,000.00
Securities marketing firm legal fees ........................ 30,000.00
Data processing fees and expenses ........................... 7,000.00
Legal fees and expenses ..................................... 150,000.00
Accounting fees and expenses ................................ 75,000.00
Blue Sky fees and expenses (including legal fees) ........... 7,000.00
Total ..................................................... $475,000.00
</TABLE>
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities
Within the past three years no securities of the Holding Company have been
sold without registration under the Securities and Exchange Act of 1933 (the
"Act"), as amended.
Item 27. Exhibits
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------------ ----------- ------
<S> <C> <C>
1.1** Form of Agency Agreement.
2* PSB Mutual Holding Company and Pennsylvania Savings Bank Plan of Conversion
From Mutual Holding Company to Stock Holding Company and Agreement and Plan of
Reorganization.
3.1* Articles of Incorporation of PSB Bancorp, Inc.
3.2* Bylaws of PSB Bancorp, Inc.
4.1 Specimen Stock Certificate representing the Common Stock of PSB Bancorp, Inc.
5.1 Form of Opinion of Stevens & Lee regarding legality of securities being registered.
5.2* Subscription Rights Letter of RP Financial, L.C.
8.1 Form of Opinion of Stevens & Lee regarding certain tax matters.
10.1* Pennsylvania Savings Bank Retirement Plan.
10.2* Pennsylvania Savings Cash or Deferred Profit Sharing Plan.
10.3* Pennsylvania Savings Bank Profit Sharing Plan.
10.4* Employment Agreement with Vincent J. Fumo.
10.5* Employment Agreement with Anthony DiSandro.
10.6* Pennsylvania Savings Bank Employee Stock Ownership Plan.
10.7* Lease Agreement between Eleven Colonial Penn Plaza Associates and Pennsylvania
Savings Bank, dated as of October 10, 1995.
10.8* Lease Agreement between Eleven Colonial Penn Plaza Associates and Pennsylvania
Savings Bank, dated as of October 12, 1995.
21.1* Schedule of Subsidiaries.
23.1 Form of Consent of Stevens & Lee (included in its opinion filed as Exhibit 5.1).
23.2 Consent of Stockton Bates & Co., P.C.
23.3 Consent of RP Financial, LC.
24.1* Power of Attorney (included on signature page).
27.1* Financial Data Schedule.
99.1 Appraisal Agreement with RP Financial, LC.
99.2* Appraisal Report of RP Financial, LC.
99.3* Updated Appraisal Report of RP Financial, L.C.
99.4** Order and Acknowledgment Form (contained in the marketing materials included herein
as Exhibit 99.5).
99.5** Solicitation and Marketing Materials.
99.6* Proxy Statement for Special Meeting of Members of PSB Mutual Holding Company.
99.7* Proxy Statement for Special Meeting of Pennsylvania Savings Bank.
</TABLE>
- ------------
*Previously filed.
**To be filed by amendment.
II-2
<PAGE>
Item 28. Undertakings.
The Undersigned registrant hereby undertakes to:
(1) file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by section 10(a)(3) of the
Securities Act.
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information set forth in the Registration Statement, and
(iii) include any additional or changed material information on the
plan of distribution;
(2) for determining liability under the Act, treat each such
post-effective amendment as a new registration of the securities offered
and the offering of such securities at that time to be the initial bona
fide offering; and
(3) file a post-effective amendment to remove from registration any of
the securities that remain unsold at the termination of this offering.
Insofar as indemnification for liabilities arising under the 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 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes: (12) to provide to the
underwriters at the closing specified in the underwriting agreement
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for the
purpose of determining any liability under the Act, treat the information
omitted from the form of prospectus filed as part of this Registration
Statement in reliance upon Rule 430A, and contained in a prospectus filed by
the Registrant pursuant to Rule 424(b)(1) or (4) or 497(b) under the Act as a
part of this Registration Statement as of the time the Securities and Exchange
Commission declares it effective and (3) that for the purpose of determining
any liability under the Act, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement for the
securities offered in the Registration Statement therein and that the offering
of the securities at that time is the initial bona fide offering of those
securities.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Amendment No. 3 to Form S-1 and has
authorized this Registration Statement to be signed on its behalf by the
undersigned, in the City of Philadelphia, Commonwealth of Pennsylvania on May
6, 1998.
PSB BANCORP, INC.
By /s/ Anthony DiSandro
----------------------------------------
Anthony DiSandro
Chairman and Chief Operating
Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Vincent J. Fumo Chairman, Chief Executive Officer May 6, 1998
- ---------------------------- and Director
Vincent J. Fumo
/s/ Anthony DiSandro* President and Chief Operating May 6, 1998
- ---------------------------- Officer
Anthony DiSandro
/s/ Gary Polimeno Vice President and Treasurer May 6, 1998
- ---------------------------- (Principal Accounting and
Gary Polimeno Financial Officer)
/s/ Jane Scaccetti Fumo Director May 6, 1998
- ----------------------------
Jane Scaccetti Fumo
/s/ Roseanne Pauciello Director May 6, 1998
- ----------------------------
Roseanne Pauciello
</TABLE>
*Attorney-in-fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ----------- ------------ -------
<S> <C> <C>
1.1** Form of Agency Agreement.
2* PSB Mutual Holding Company and Pennsylvania Savings Bank Plan of
Conversion From Mutual Holding Company to Stock Holding Company
and Agreement and Plan of Reorganization.
3.1* Articles of Incorporation of PSB Bancorp, Inc.
3.2* Bylaws of PSB Bancorp, Inc.
4.1 Specimen Stock Certificate representing the Common Stock of PSB Ban-
corp, Inc.
5.1 Form of Opinion of Stevens & Lee regarding legality of securities being
registered.
5.2* Subscription Rights Letter of RP Financial, L.C.
8.1 Form of Opinion of Stevens & Lee regarding certain tax matters.
10.1* Pennsylvania Savings Bank Retirement Plan.
10.2* Pennsylvania Savings Cash or Deferred Profit Sharing Plan.
10.3* Pennsylvania Savings Bank Profit Sharing Plan.
10.4* Employment Agreement with Vincent J. Fumo.
10.5* Employment Agreement with Anthony DiSandro.
10.6* Pennsylvania Savings Bank Employee Stock Ownership Plan.
10.7* Lease Agreement between Eleven Colonial Penn Plaza Associates and
Pennsylvania Savings Bank, dated as of October 10, 1995.
10.8* Lease Agreement between Eleven Colonial Penn Plaza Associates and
Pennsylvania Savings Bank, dated as of October 12, 1995.
21.1* Schedule of Subsidiaries.
23.1 Form of Consent of Stevens & Lee (included in its opinion filed as Exhibit
5.1).
23.2 Consent of Stockton Bates & Co., P.C.
23.3 Consent of RP Financial, LC.
24.1* Power of Attorney (included on signature page).
27.1* Financial Data Schedule.
99.1 Appraisal Agreement with RP Financial, LC.
99.2* Appraisal Report of RP Financial, LC.
99.3* Updated Appraisal Report of RP Financial, L.C.
99.4** Order and Acknowledgment Form (contained in the marketing materials
included herein as Exhibit 99.5).
99.5** Solicitation and Marketing Materials.
99.6* Proxy Statement for Special Meeting of Members of PSB Mutual Holding
Company.
99.7* Proxy Statement for Special Meeting of Pennsylvania Savings Bank.
</TABLE>
- ------------
*Previously filed.
**To be filed by amendment.
<PAGE>
[LOGO OF EAGLE]
PSB BANCORP, INC.
INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA
5,000,000 SHARES PREFERRED STOCK 15,000,000 SHARES COMMON STOCK
Without Par Value Without Par Value
SPECIMEN
THIS CERTIFIES THAT______________________________________________________is the
owner of__________________________________________shares of the PREFERRED STOCK
of PSB BANCORP, INC., fully paid and non-assessable, transferable only on the
books of the Corporation in person or by Attorney upon surrender of this
Certificate properly endorsed.
The Corporation will furnish to any shareholder upon request and without
charge, a full or summary statement of the designations, voting rights,
preferences, limitations and special rights of the shares of each class
authorized to be issued.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed this__________________________________________________________________
day of_____________________________________________________A.D. 19______.
_______________________________________ _________________________________
SECRETARY PRESIDENT
<PAGE>
Form of Opinion of Stevens & Lee, P.C.
March , 1998
Board of Directors
PSB Bancorp, Inc.
Pennsylvania Savings Bank
Eleven Penn Center
Suite 2601
1835 Market Street
Philadelphia, Pennsylvania 19103
Re: Registration Statement on Form S-1 (SEC File No. 333-37511)
Gentlemen:
In connection with the proposed offering by PSB Bancorp, Inc. (the
"Holding Company") of up to 3,099,728 shares of the Holding Company's common
stock, no par value per share (the "Common Stock"), covered by the Holding
Company's Registration Statement on Form S-1 (No. 333-37511) (the "Registration
Statement"), we, as special counsel to the Holding Company and the Savings Bank,
have reviewed:
1. the Articles of Incorporation of the Holding Company;
2. the Bylaws of the Holding Company;
3. the Plan of Conversion of PSB Mutual Holding Company to a
stock holding company and the simultaneous reorganization of
Pennsylvania Savings Bank to a wholly-owned subsidiary of the
Holding Company;
4. the minute books of the Company;
5. the Registration Statement; and
6. copies of the certificates representing shares of the Common
Stock.
Based upon our review of such documents, it is our opinion that:
1. The Holding Company has been duly incorporated under the laws
of the Commonwealth of Pennsylvania and is validly existing
and in good standing under the laws of such Commonwealth.
2. The 3,099,728 shares of Common Stock covered by the
Registration Statement has been duly authorized and, when
issued and sold for cash pursuant to the terms described in
the Registration Statement, will be legally issued by the
Holding Company and fully paid and nonassessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement, and to the reference to us under the heading "Legal
Matters" in the related Prospectus. In giving this consent, we do not thereby
admit that we come within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the Rules and
Regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
STEVENS & LEE
<PAGE>
Direct Dial
(717) 399-6629
_______________, 1998
Board of Directors
Pennsylvania Savings Bank
Eleven Penn Center, Suite 2601
1835 Market Street
Philadelphia, PA 19103
Re: Acquisition of Pennsylvania Savings Bank
By PSB Bancorp, Inc.
Ladies and Gentlemen:
You have requested our opinion as to certain federal and Pennsylvania
income tax consequences of the transactions contemplated by the Plan of
Conversion From Mutual Holding Company to Stock Holding Company and Agreement
and Plan of Reorganization, as originally adopted by the Boards of Directors of
PSB Mutual Holding Company, Philadelphia, Pennsylvania ("MHC"), a
Pennsylvania-chartered mutual holding company, and Pennsylvania Savings Bank,
Philadelphia, Pennsylvania (the "Savings Bank"), a Pennsylvania-chartered
savings bank, on __________________________, as thereafter amended according to
its terms (the"Plan"), pursuant to which the Savings Bank will become a
wholly-owned subsidiary of a stock holding company, PSB Bancorp, Inc. (the
"Holding Company"), which was organized on October 3, 1997, at the direction and
as a subsidiary of the Savings Bank to become the holding company for the
Savings Bank.
On the effective date, as provided in Section X of the Plan, the
Savings Bank will become a wholly-owned subsidiary of the Holding Company upon
consummation of the transactions described below (collectively, the "Conversion
and Reorganization"),which shall occur consecutively and essentially
simultaneously:
<PAGE>
Board of Directors
Pennsylvania Savings Bank
__________, 1998
Page 2
(1) The MHC Merger. The MHC will convert into an interim state stock
savings bank ("Interim A") and merge with and into the Savings Bank, with the
Savings Bank as the surviving entity (the "MHC Merger"). As a result of the MHC
Merger, (a) the Savings Bank Common Stock held by the MHC will be cancelled, (b)
certain "Eligible Account Holders" (as defined in the Plan) and "Supplemental
Eligible Account Holders" (as defined in the Plan) of the Savings Bank will be
granted ratable interests in the liquidation account to be established by the
Savings Bank, as described in Section XIV of the Plan, (c) the separate
existence of the MHC will cease, and (d) holders of Savings Accounts in the
Savings Bank will cease to have any voting rights in or with respect to the MHC
or the Savings Bank.
(2) The Savings Bank Merger. PSB Interim B Savings Bank, a transitory
state stock savings bank formed as a wholly-owned subsidiary of the Holding
Company ("Interim B"), will merge with and into the Savings Bank, with the
Savings Bank as the surviving entity (the "Savings Bank Merger"). As a result of
the Savings Bank Merger, (a) the shares of Holding Company Common Stock held by
the Savings Bank will be cancelled, (b) the shares of common stock of Interim B
held by the Holding Company will be converted on a one-to-one basis into shares
of Savings Bank Common Stock, which will result in the Savings Bank becoming a
wholly-owned subsidiary of the Holding Company, (c) the separate existence of
Interim B will cease, and (d) the "Public Shareholders" (as defined in the Plan)
who own Savings Bank Common Stock will exchange their shares of Savings Bank
Common Stock for shares of Holding Company Common Stock based upon the "Exchange
Ratio," as defined and provided in the Plan. In addition, all options to
purchase shares of Savings Bank Common Stock that are outstanding immediately
prior to consummation of the Conversion and Reorganization will be converted
into options to purchase shares of Holding Company Common Stock.
<PAGE>
Board of Directors
Pennsylvania Savings Bank
__________, 1998
Page 3
Upon consummation of the Conversion and the Reorganization, all of the
Savings Bank Common Stock will be owned by the Holding Company, and the Public
Shareholders who exchanged Savings Bank Common Stock for Holding Company Common
Stock will own the same percentage of the Holding Company Common Stock as the
percentage of the Savings Bank Common Stock owned by them immediately prior to
the exchange, except for (a) any cash paid in lieu of any fractional interests
of Holding Company Common Stock, (b) any shares of "Conversion Stock" (as
defined in the Plan) purchased by the Public Shareholders and other subscribers
in the Offerings described in the Plan, and (c) any shares of Savings Bank
Common Stock with respect to which the holder exercises statutory appraisal
rights.
Upon consummation of the Conversion and the Reorganization, (a) all
Savings Accounts in the Savings Bank shall have the same status as existed prior
to the Conversion and the Reorganization, (b) all loans granted by the Savings
Bank shall have the same status as existed prior to the Conversion and the
Reorganization, and (c) the Savings Bank will establish the liquidation account
described in Section XIV of the Plan for the benefit of Eligible Account Holders
and Supplemental Eligible Account Holders who retain their Savings Accounts in
the Savings Bank. In addition, the Holding Company will issue rights (the
"Subscription Rights"), without charge, to purchase at the uniform price of
$__________ per share (the "Purchase Price"), shares of Holding Company Common
Stock (the "Conversion Stock") in a subscription offering (the "Subscription
Offering"). The Subscription Rights will be nontransferable, non-negotiable,
personal rights to purchase at the Purchase Price shares of Conversion Stock
offered for sale in the Subscription Offering, and will be issued to Eligible
Account Holders, Tax-Qualified Employee Stock Benefit Plans of the Savings Bank
or the Holding Company and Supplemental Eligible Account Holders in the
priorities established for the purchase of Conversion Stock in the Plan.
<PAGE>
Board of Directors
Pennsylvania Savings Bank
__________, 1998
Page 4
This opinion is being furnished pursuant to Section IV.G. of the Plan.
All capitalized terms herein have the meanings assigned to them in the Plan,
except as otherwise specified herein.
In connection with our opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
the Plan, the exhibits thereto, including the Articles and Plan of Merger for
the MHC Merger and the Articles and Plan of Reorganization for the Savings Bank
Merger, and such other documents as we have deemed necessary or appropriate for
the opinions set forth below. In our examination, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals, the conformity to original documents of all documents submitted to
us as certified or photostatic copies, and the authenticity of such latter
documents. As to any facts material to this opinion which we did not
independently establish or verify, we have relied upon the foregoing documents
and upon statements and representations of officers and other representatives of
the MHC and the Savings Bank annexed hereto. The opinions expressed herein are
conditioned on the initial and continuing accuracy of the facts, information,
and representations contained in the aforesaid documents or otherwise referred
to above.
<PAGE>
Board of Directors
Pennsylvania Savings Bank
__________, 1998
Page 5
In preparing our opinion, we have considered applicable provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
regulations, pertinent judicial authorities, interpretive rulings of the
Internal Revenue Service, private letter rulings issued by the Internal Revenue
Service to other taxpayers in comparable transactions (which may not be used or
cited as precedent), the Pennsylvania Tax Reform Code of 1971, as amended, and
such other authorities as we have deemed relevant.
Based solely upon the foregoing and upon the assumptions set forth
herein, and subject to the qualifications and caveats set forth herein, we are
of the opinion that, under present law, for federal income tax purposes:
(1) The conversion of the MHC from a mutual holding company to a
state-chartered interim stock savings bank (Interim A) and its simultaneous
merger with and into the Savings Bank, with the Savings Bank as the surviving
entity, will qualify as one or more reorganizations within the meaning of
Section 368(a) of the Code;
<PAGE>
Board of Directors
Pennsylvania Savings Bank
__________, 1998
Page 6
(2) No gain or loss will be recognized by the Savings Bank upon the
receipt of the assets of the MHC in the MHC Merger;
(3) The merger of Interim B with and into the Savings Bank, with the
Savings Bank as the surviving entity, will qualify as a reorganization within
the meaning of Section 368(a)(1)(A) and (a)(2)(E) of the Code;
(4) No gain or loss will be recognized by Interim B upon the transfer
of its assets to the Savings Bank in the Savings Bank Merger;
(5) No gain or loss will be recognized by the Savings Bank upon the
receipt of the assets of Interim B in the Savings Bank Merger;
(6) No gain or loss will be recognized by the Holding Company upon the
receipt of Savings Bank Common Stock from the Public Shareholders solely in
exchange for Holding Company Common Stock in the Savings Bank Merger;
(7) No gain or loss will be recognized by the Public Shareholders upon
the receipt of Holding Company Common Stock (including any fractional share
interests) from the Holding Company solely in exchange for Savings Bank Common
Stock in the Savings Bank Merger;
<PAGE>
Board of Directors
Pennsylvania Savings Bank
__________, 1998
Page 7
(8) The basis of the Holding Company Common Stock (including any
fractional share interests) to be received by the Public Shareholders in the
Savings Bank Merger (the "Exchange Shares") will be the same as the basis of the
Savings Bank Common Stock surrendered in exchange therefor (the "Public Savings
Bank Shares"), before giving effect to any payment of cash in lieu of fractional
Exchange Shares;
(9) The holding period of the Exchange Shares to be received by the
Public Shareholders will include the holding period of the Public Savings Bank
Shares surrendered in exchange therefor, provided the Public Savings Bank Shares
were held as a capital asset on the date of the exchange;
(10) No gain or loss will be recognized by the Holding Company upon the
sale of shares of Conversion Stock in the Offerings;
(11) The Eligible Account Holders and Supplemental Eligible Account
Holders will recognize gain, if any, upon the issuance to them on consummation
of the Conversion and Reorganization of withdrawable savings accounts in the
Savings Bank, ratable interests in the liquidation account to be established by
the Savings Bank and Subscription Rights to purchase Conversion Stock, but only
to the extent of the value, if any, of the Subscription Rights; and
<PAGE>
Board of Directors
Pennsylvania Savings Bank
__________, 1998
Page 8
(12) The basis to the holders of Conversion Stock purchased in the
Offerings will be the amount paid therefor, plus, in the case of shares
purchased in the Subscription Offering, the basis, if any, of the Subscription
Rights exercised by the holder to acquire such shares, and the holding period
for the Conversion Stock will begin on the date of purchase for shares acquired
pursuant to the exercise of Subscription Rights in the Subscription Offering, or
on the day following the date of purchase for shares acquired in the Direct
Community Offering or the Syndicated Community Offering.
We are also of the opinion that, for Pennsylvania tax purposes: (a) the
Savings Bank will not recognize any net income or net loss for purposes of the
Mutual Thrift Institutions Tax solely as a result of the Conversion and the
Reorganization, provided the Savings Bank does not recognize any net income or
net loss under generally accepted accounting principles, applied as required by
the law imposing such tax; and (b) the Eligible Account Holders, Supplemental
Eligible Account Holders, and the Holding Company will not recognize any gain or
loss for Pennsylvania income tax purposes, solely as a result of consummation of
the transactions constituting the Conversion and the Reorganization, provided
that the Eligible Account Holders, Supplemental Eligible Account Holders and the
Holding Company do not recognize any gain or loss for federal income tax
purposes solely as a result of such transactions. Nevertheless, it is likely
that the Eligible Account Holders and Supplemental Eligible Account Holders will
recognize gain for Pennsylvania income tax purposes upon the receipt of
Subscription Rights to the same extent, if any, that such account holders are
required to recognize gain upon the receipt of Subscription Rights for federal
income tax purposes.
<PAGE>
Board of Directors
Pennsylvania Savings Bank
__________, 1998
Page 9
We call to your attention that, notwithstanding our opinions concerning
the tax effects of the Conversion and the Reorganization: (a) the Savings Bank
could be required to recognize gain in connection with the distribution of
Subscription Rights if and to the extent, if any, that the Subscription Rights
are determined to have any ascertainable value; and (b) any payments of cash in
lieu of fractional share interests of Holding Company Common Stock in the
Savings Bank Merger will be treated as if the fractional share interests were
distributed as part of such merger and then redeemed by the Holding Company.
Such cash payments will be treated as having been received as distributions in
full payment in exchange for the fractional share interests redeemed, as
provided in Section 302(a) of the Code.
We also call to your attention the fact that certain portions of this
opinion relating to the treatment of Savings Bank shareholders may not be
applicable to persons who received their Savings Bank stock pursuant to the
exercise of employee stock options or otherwise as compensation, or to foreign
persons or persons who, because of their circumstances or status, are subject to
special federal or Pennsylvania income tax treatment.
<PAGE>
Board of Directors
Pennsylvania Savings Bank
__________, 1998
Page 10
Except as set forth above, we express no other opinion as to the tax
consequences of the transactions constituting the Conversion, the Reorganization
or the Offerings to any party under federal, state, local or foreign laws.
Sincerely,
STEVENS & LEE
JP/jbh
<PAGE>
Stockton Bates
&
Company, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the inclusion of our Independent Auditors' Report
dated February 6, 1998, pertaining to the financial statements of Pennsylvania
Savings Bank at and for the years ended December 31, 1997 and 1996 and September
30, 1995 for use in Amendment No. 2 to the Registration Statement on Form S-1 of
PSB Bancorp, Inc. under the Securities Act of 1933.
/s/ Stockton Bates & Company, P.C.
Certified Public Accountants
Philadelphia, Pennsylvania
May 1, 1998
42 South 15th Street, Suite 600; Philadelphia, Pennsylvania
19102; 215.241.7500 Fax 215.567.3813
Offices in Haddonfield, New Jersey and Lancaster, Pennsylvania.
Member of American Group of CPA Firms with Worldwide Affiliations
<PAGE>
RP FINANCIAL, LC
Financial Servies Industry Consultants
May 7, 1998
Board of Directors
PSB Mutual Holding Company
Pennsylvania Savings bank
1835 Market Street
Philadelphia, Pennsylvania 19103
Gentlemen:
We hereby consent to the use of our firm's name in the
Application for Conversion of PSB Mutual Holding Company, the
mutual holding company for Pennsylvania Savings Bank,
Philadelphia, Pennsylvania and any amendments thereto, in the
Form 18(c) and any amendments thereto, in the Form S-1
Registration Statement and any amendments thereto and in the
Form FRY-1 for PSB Bancorp, Inc. We also hereby consent to the
inclusion of, summary of and references to our Appraisal Report,
including any updated appraisal reports, in such filings
including the Prospectus of PSB Bancorp, Inc.
Sincerely,
RP FINANCIAL, L.C.
/s/ James J. Oren
James J. Oren
Senior Vice President
Washington Headquarters
Rosslyn Center
1700 North Moore Street, Suite 2210
Arlington, VA 22209 Telephone: (703) 528-1700
Fax No: (703) 528-1788
<PAGE>
RP FINANCIAL, LC.
- ---------------------------------------
Financial Services Industry Consultants
July 29, 1997
Mr. Anthony Disandro
President and Chief Executive Officer
PSB Financial Corporation
Pennsylvania Savings Bank
1210 Tasker Street
Philadelphia, Pennsylvania 19148-1019
Dear Mr. Disandro:
This letter sets forth the agreement between Pennsylvania Savings Bank,
Philadelphia, Pennsylvania ("Pennsylvania Savings" or the "Bank") and RP
Financial, LC. ("RP Financial") for certain conversion appraisal services
pertaining to the mutual-to-stock conversion of PSB Financial Corporation (the
"MHC"), the mutual holding company and the majority shareholder of Pennsylvania
Savings, and the plan of reorganization between the MHC and the Pennsylvania
Savings. The specific services to be rendered by RP Financial are described
below. These services will be rendered by a team of two senior consultants on
staff.
Description of Conversion Appraisal Services
RP Financial will prepare a written detailed valuation report which will be
fully consistent with applicable regulatory guidelines and standard valuation
practices. The valuation report will conclude with an estimate of the pro forma
market value of the shares of stock to be offered and sold in the conversion. RP
Financial understands that as part of the conversion, the shares of Pennsylvania
Savings which are held by public shareholders (i.e. stockholders other than the
MHC) will be exchanged for newly issued shares of common stock of a newly
organized stock holding company ("SHC") and that shares offered in the
conversion will be SHC shares. The valuation report will incorporate such key
transaction parameters as the financial strength and operations of Pennsylvania
Savings, the proposed treatment in the conversion of the publicly-traded shares
of Pennsylvania Savings (including the proposed exchange), and the financial
strength and operations of the MHC unconsolidated. The estimate of pro forma
market value will be a preliminary value, subject to confirmation by RP
Financial at the closing of the offering.
Prior to preparing the valuation report, RP Financial will conduct a
financial due diligence, including on-site interviews of senior management and
reviews of financial and other documents and records, to gain insight into the
operations, financial condition, profitability, risks and external factors which
impact the Bank. The valuation will include an in-depth analysis of the Bank's
financial condition and operating results, as well as assess the Bank's interest
rate risk, credit risk and liquidity risk. The valuation report will describe
the Bank's business strategies and market area and prospects for the future. A
peer group analysis relative to publicly-traded savings institutions will be
conducted for the purpose of determining appropriate valuation adjustments
relative to the group. The valuation report will conclude with a midpoint pro
forma valuation for the shares to be offered in the conversion, as well as a
range of value around the midpoint value. The valuation report may be
periodically updated throughout the conversion process and there will be at
least one updated valuation prepared at the time of the closing of the stock
offering.
- -------------------------------------------------------------------------------
Washington Headquarters
Rosslyn Center
1700 North Moore Street, Suite 2210 Telephone: (703) 528-1700
Arlington, VA 22209 Fax No.: (703) 528-1788
<PAGE>
RP Financial, LC.
Mr. Anthony Disandro
July 29, 1997
Page 2
RP Financial agrees to deliver the valuation appraisal and subsequent
updates, in writing, to Pennsylvania Savings at the above address in conjunction
with the filing of the regulatory application. Subsequent updates will be filed
promptly as certain events occur which would warrant the preparation and filing
of such valuation updates. Further, RP Financial agrees to perform such other
services as are necessary or required in connection with the regulatory review
of the appraisal and respond to the regulatory comments, if any, regarding the
valuation appraisal and subsequent updates.
Fee Structure and Payment Schedule
Pennsylvania Savings agrees to pay RP Financial a fixed fee of $20,000 for
these services, plus reimbursable expenses. Payment of these fees shall be made
according to the following schedule:
o $5,000 upon execution of the letter of agreement engaging RP Financial's
services as outlined herein;
o $12,500 upon delivery of the completed original appraisal report; and
o $2,500 upon completion of the conversion to cover all subsequent
valuation updates that may be required.
The Bank will reimburse RP Financial for out-of-pocket expenses incurred in
the preparation of the appraisal report. Such out-of-pocket expenses, which are
not expected to exceed $5,000 inclusive of expenses for the business plan and
appraisal, will include travel, telephone, facsimile, copying, shipping,
computer and data. RP Financial will make all attempts to keep out-of-pocket
expenses to a minimum.
In the event Pennsylvania Savings or the MHC shall, for any reason,
discontinue the proposed conversion prior to delivery of the completed documents
set forth above and payment of the respective progress payment fees,
Pennsylvania Savings agrees to compensate RP Financial according to RP
Financial's standard billing rates for consulting services based on accumulated
and verifiable time expenses, not to exceed the respective fee caps noted above,
after giving full credit to the initial retainer fee. RP Financial's standard
billing rates range from $75 per hour for research associates to $250 per hour
for managing consultants.
If during the course of the proposed transaction, unforeseen events occur
so as to materially change the nature of the work content of the services
described in this contract, the terms of said contract shall be subject to
renegotiation by Pennsylvania Savings and RP Financial. Such unforeseen events
shall include, but not be limited to, major changes in the conversion
regulations, appraisal guidelines or processing procedures as they relate to
conversion appraisals, major changes in management or procedures, operating
policies or philosophies, and excessive delays or suspension of processing of
conversion applications by the regulators such that completion of the conversion
transaction requires the preparation by RP Financial of a new appraisal.
Representations and Warranties
Pennsylvania Savings and RP Financial agree to the following:
1. The Bank agrees to make available or to supply to RP Financial such
information with respect to its business and financial condition as RP Financial
may reasonably request in order to provide the aforesaid valuation. Such
information heretofore or hereafter supplied or made available to RP Financial
shall include:
<PAGE>
RP Financial, LC.
Mr. Anthony Disandro
July 29, 1997
Page 3
annual financial statements, periodic regulatory filings and material
agreements, debt instruments, off balance sheet assets or liabilities,
commitments and contingencies, unrealized gains or losses and corporate books
and records. All information provided by the Bank of RP Financial shall remain
strictly confidential (unless such information is otherwise made available to
the public), and if conversion is not consummated or the services of RP
Financial are terminated hereunder, RP Financial shall upon request promptly
return to the Bank the original and any copies of such information.
2. The Bank hereby represents and warrants to RP Financial that any
information provided to RP Financial does not and will not, to the best of the
Bank's knowledge, at the times it is provided to RP Financial, contain any
untrue statement of a material fact or fail to state a material fact necessary
to make the statements therein not false or misleading in light of the
circumstances under which they were made.
3. (a) The Bank agrees that it will indemnify and hold harmless RP
Financial, any affiliates of RP Financial, the respective directors, officers,
agents and employees of RP Financial or their successors and assigns who act for
or on behalf of RP Financial in connection with the services called for under
this agreement (hereinafter referred to as "RP Financial"), from and against any
and all losses, claims, damages and liabilities (including, but not limited to,
all losses and expenses in connection with claims under the federal securities
laws) attributable to (i) any untrue statement or alleged untrue statement of a
material fact contained in the financial statements or other information
furnished or otherwise provided by Pennsylvania Savings to RP Financial, either
orally or in writing, (ii) the omission or alleged omission of a material fact
from the financial statements or other information furnished or otherwise made
available by Pennsylvania Savings to RP Financial or (iii) any action or
omission to act by Pennsylvania Savings, or Pennsylvania Savings' respective
officers, directors, employees or agents which action or omission is willful or
negligent. Pennsylvania Savings will be under no obligation to indemnify RP
Financial hereunder if a court determines that RP Financial was negligent or
acted in bad faith with respect to any actions or omissions of RP Financial
related to a matter for which indemnification is sought hereunder. Any time
devoted by employees of RP Financial to situations for which indemnification is
provided hereunder, shall be an indemnifiable cost payable by Pennsylvania
Savings at the normal hourly professional rate chargeable by such employee.
(b) RP Financial shall give written notice to the Bank of such claim or
facts within thirty days of the assertion of any claim or discovery of material
facts upon which the RF Financial intends to base a claim for indemnification
hereunder. In the event the Bank elects, within seven days of the receipt of the
original notice thereof, to contest such claim by written notice to RP
Financial, RP Financial will be entitled to be paid any amounts payable by the
Bank hereunder, together with interest on such costs from the date incurred at
the rate of fifteen percent (15%) per annum within five days after the final
determination of such content either by written acknowledgement of the Bank or a
final judgment of a court of competent jurisdiction. If the Bank does not so
elect, RP Financial shall be paid promptly and in any event within thirty days
after receipt by the Bank of the notice of the claim.
(c) The Bank shall pay for or reimburse the reasonable expenses, including
attorneys' fees, incurred by RP Financial in advance of the final disposition of
any proceeding within thirty days of the receipt of such request if RP Financial
furnishes the Bank: (1) a written statement of RP Financial's good faith belief
that it is entitled to indemnification hereunder; and (2) a written undertaking
to repay the advance if it ultimately is determined in a final adjudication of
such proceeding that it or he is not entitled to such indemnification.
(d) In the event the Bank does not pay any indemnified loss or make advance
reimbursements of expenses in accordance with the terms of this agreement, RP
Financial shall have all remedies available at law or in equity to enforce such
obligation.
<PAGE>
RP Financial, LC.
Mr. Anthony Disandro
July 29, 1997
Page 4
It is understood that, in connection with RP Financial's above-mentioned
engagement, RP Financial may also be engaged to act for the Bank in one or more
additional capacities, and that the terms of the original engagement may be
embodied in one or more separate agreements. The provisions of Paragraph 3
herein shall apply to the original engagement, any such additional engagement,
any modification of the original engagement or such additional engagement and
shall remain in full force and effect following the completion or termination of
RP Financial's engagement(s). This agreement constitutes the entire
understanding of the Bank and RP Financial concerning the subject matter
addressed herein. This agreement may not be modified, supplemented or amended
except by written agreement executed by both parties.
Pennsylvania Savings and RP Financial are not affiliated, and neither
Pennsylvania Savings nor RP Financial has an economic interest in, or is held in
common with, the other and has not derived a significant portion of its gross
revenues, receipts or net income for any period from transactions with the
other.
The MHC and RP Financial are not affiliated, and neither the MHC nor RP
Financial has an economic interest in, or is held in common with, the other and
has not derived a significant portion of its gross revenues, receipts or net
income for any period from transactions with the other.
* * * * * * * * * * *
Please acknowledge your agreement to the foregoing by signing as indicated
below and returning to RP Financial a signed copy of this letter, together with
the initial retainer fee of $5,000.
Sincerely,
/s/ William E. Pommerening
--------------------------
William E. Pommerening
Chief Executive Officer
and Managing Director
Agreed To and Accepted By: Mr. Anthony Disandro /s/ Anthony Disandro
--------------------------------
President and Chief Executive Officer
For: Pennsylvania Savings Bank
Philadelphia, Pennsylvania
Date Executed: 7/31/97
------------
