UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(X) Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the year ended
December 31, 1998 or
( ) Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from ________ to ________.
No. 000-24601
(Commission File Number)
PSB BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 23-2930740
(State of Incorporation) (IRS Employer ID Number)
11 Penn Center, Suite 2601
1835 Market Street, Philadelphia, PA 19103
(Address of Principal Executive Offices) (Zip Code)
(215) 979-7900
(Registrant's Telephone Number)
Securities registered pursuant to Section 12(b) of the Exchange
Act: None.
Securities registered pursuant to Section 12(g) of the Exchange
Act: Common Stock, no par value per share.
Check whether the issuer (1) has filed all reports required to be
filed by section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes __x___ No _______
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this form, and no
disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Issuer's revenues for its most recent fiscal year: $11,412,154.
The aggregate market value of common stock of the issuer held by
non-affiliates, based on a sale price of $7.50 on March 18, 1999
was $16,045,493.
As of March 18, 1999, the issuer had 3,101,140 shares of Common
Stock outstanding. The registrant originally issued shares as
of July 17, 1998, and the registrant had no shares outstanding
prior to such date.
<PAGE>
PSB BANCORP, INC.
FORM 10-K
For the Year Ended December 31, 1998
Contents Page No.
PART I
Item 1. Description of Business....................
Item 2. Description of Property....................
Item 3. Legal Proceedings..........................
Item 4. Submission of Matters to a Vote of
Securities Holders.........................
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters........................
Item 6. Selected Financial Data....................
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................
Item 8. Financial Statements.......................
Item 9. Changes In and Disagreements With
Accountants on Accounting and Financial
Disclosure.................................
PART III
Item 10. Directors, Executive Officers, Promoters
and Control Persons; Compliance With
Section 16(a) of the Exchange Act..........
Item 11. Executive Compensation.....................
Item 12. Security Ownership of Certain Beneficial
Owners and Management......................
Item 13. Certain Relationships and Related
Transactions...............................
Item 14. Exhibits and Reports on Form 8-K (F-3).....
<PAGE>
Item 1. Description of Business.
General.
Effective July 18, 1998, Pennsylvania Savings Bank (the
"Savings Bank") and PSB Mutual Holding Company ("MHC") completed
the Plan of Conversion and Reorganization from Mutual Holding
Company to Stock Holding Company. Under the Plan of Conversion,
the newly formed holding company, PSB Bancorp, Inc. ("Holding
Company"), issued 1,610,732 shares of common stock, no par value,
at a price of $10.00 per share. Existing shareholders of the
Savings Bank exchanged their shares for 2.572374 shares of PSB
Bancorp, Inc. shares and the Mutual Holding Company merged with
and into the Savings Bank.
The Holding Company was organized as a Pennsylvania business
corporation on October 3, 1997 at the direction of the Savings
Bank for the purpose of becoming a holding company for the
Savings Bank upon completion of the Conversion and
Reorganization. The Holding Company is subject to regulation by
the Federal Reserve, and its principal business is the ownership
of the Savings Bank. In the future, the Holding Company may
acquire or organize other operating subsidiaries, although there
are no current plans, arrangements or understandings, written or
oral, to do so.
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.
At December 31, 1998, the Savings Bank had total assets of
$164.01 million, total deposits of $128.16 million and
shareholders' equity of $30.39 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 multifamily real estate loans
which together totalled 30.77% of the Savings Bank's total loans
at December 31, 1998. 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 Transnational Mortgage Company
("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, At September 30,
1998 1997 1996 1995 1994
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One-to-four family $49,796 67.64% $44,940 71.59% $45,018 84.47% $43,033 82.93% $43,105 84.28%
Construction loans 3,286 4.46 2,597 4.14 661 1.24 829 1.60 339 0.66
Five or more family residence 1,576 2.14 702 1.12 654 1.23 508 0.98 405 0.79
Nonresidential 14,722 20.00 11,421 18.20 5,575 10.46 5,940 11.45 5,819 11.38
Commercial loans 3,074 4.17 1,908 3.04 369 0.69 602 1.16 780 1.53
Consumer loans (1) 1,168 1.59 1,201 1.91 1,016 1.91 977 1.88 696 1.36
Total loans(2) $73,622 100.00% $62,769 100.00% $53,293 100.00% $51,889 100.00% $51,144 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
Less:
Unearned fees and discounts $431 $478 $495 $464 $0
Undisbursed loan proceeds 7 138 5 5 24
Allowance for loan losses 304 238 207 208 208
Net Loans $72,880 $61,915 $52,586 $51,212 $50,912
======= ======= ======= ======= =======
Total loans with:
Fixed rates $64,651 87.81% $55,289 88.08% $48,701 91.38% $47,632 91.80% $46,740 91.39%
Adjustable rate 8,971 12.19 7,480 11.92 4,592 8.62 4,257 8.20 4,404 8.61
Total loans(2) 73,622 100.00% 62,769 100.00% $53,293 100.00% $51,889 100.00% $51,144 100.00%
======= ====== ====== ====== ======= ====== ======= ====== ======= ======
_________________________
</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
$6.94 million, $6.57 million and $4.60 million, at
December 31, 1998, 1997 and 1996, respectively and
$1.04 million and $185,000 at September 30, 1995 and 1994,
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 1998, consistent with the Savings Bank's
strategy regarding diversification of its loan portfolio,
origination of loans other than residential mortgages loans
totalled $33.86 million, or 58.73%, of originations in 1998.
However, at December 31, 1998, $49.80 million, or 67.64%, 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 12.19% of the Savings Bank's total loan portfolio at
December 31, 1998 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 mortgage 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 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 $3.3 million of construction loans at December 31, 1998,
which amounted to 4.46% 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, 1998 had a principal balance of approximately
$899,000. Construction loans at December 31, 1998 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 $1.58 million, or 2.14%, of the Savings
Bank's total loan portfolio at December 31, 1998. 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, 1998, 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, 1998, had a
principal balance of approximately $616,000.
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
$14.72 million, or 20.00%, of the Savings Bank's total loan
portfolio at December 31, 1998. 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 $1.10 million at
December 31, 1998, 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. 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, 1998, commercial loans totalled
approximately $3.07 million or 4.17% 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 meet 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, 1998, consumer loans
totalled $1.17 million, or 1.59%, 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 securities, or as participation certificates
issued or guaranteed by FNMA or FHLMC. Loans may be sold either
on a servicing retained or servicing released basis.
As of December 31, 1998, the Savings Bank's equity
investment in TNMC totaled $74,000. For the year ended
December 31, 1998, TNMC's loan originations totaled $21.45
million and net income totaled $134,000. For the year ended
December 31, 1998, 1997 and 1996, TNMC sold 98.30%, 89.10% and
81.79%, respectively, 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.
During 1998, the Savings Bank established loan servicing
capabilities. 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, 1998, the Savings Bank mortgage
servicing portfolio consisted of $9.46 million in loans serviced
for FNMA.
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, 1998. 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, 1998
Multi-Family Consumer
and and
One to Four Commercial Commercial
Family Real Estate Construction Business Total Loans
<S> <C> <C> <C> <C> <C>
Amounts due:
Non-accrual $1,239 $370 $0 $0 $1,609
Within one year 1,739 1,817 3,286 3,361 10,203
After one year:
1-3 years 578 3,261 0 309 4,148
3 to 5 years 2,269 5,877 0 348 8,494
5 to 10 years 5,288 3,201 0 224 8,713
Over 10 years 38,683 1,772 0 0 40,455
Total due after one year 46,818 14,111 0 881 61,810
Total amounts due $49,796 $16,298 $3,286 $4,242 $73,622
</TABLE>
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 Years Ended
December 31, September 30,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Loans receivable,net and loans held for sale at beginning of period $68,490 $57,183 $54,318 $51,097 $52,816
Originations
1-4 Family Residential Real Estate 45,237 28,318 20,038 4,447 14,041
Other Real Estate 5,649 5,377 24 4,214 0
Consumer and commercial business loans 6,761 3,248 1,033 961 398
Total loan originations 57,647 36,943 21,095 9,622 14,439
Loans purchased 0 0 0 0 0
Transfer to REO (443)
Principal repayments (25,171) (9,648) (8,821) (5,996) (11,526)
Sales of loans (21,083) (16,152) (9,378) (2,451) (4,667)
Increase(decrease) in loans in process (131) 133 (31) (19) 14
Increase(decrease) in allowance for loan losses 66 31 0 0 21
Net increase(decrease) in loans 11,328 11,307 2,865 1,156 (1,719)
Loans receivable,net and loans held for sale at end of period $79,818 $68,490 $57,183 $52,253 $51,097
======= ======= ======= ======= =======
</TABLE>
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, 1998, the Savings Bank's largest
loan to one borrower consisted of three loans to one borrower.
Of the three loans, two loans were commercial loans which had an
aggregate outstanding balance of $441,000 and one loans was
construction loan with an aggregate outstanding balance of
$899,000 at December 31, 1998 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 conservative 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, 1998, the Savings
Bank had approximately $629,000 of property acquired as a result
of foreclosure.
At December 31, 1998, the Savings Bank had nonperforming
loans of $1.61 million, and a ratio of nonperforming loans to
total loans of 2.19%. Of the total nonperforming loans, $1.24
million are single-family residential mortgage loans. At
December 31, 1998, the Savings Bank had nonperforming assets of
$2.24 million and a ratio of nonperforming assets to total assets
of 1.36%. 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.
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,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Loans past due 90 days or more as to interest or
principal and accruing interest $0 $200 $2,009 $1,565 $1,417
Nonaccrual loans(1) 1,609 1,894 770 770 738
Loans restructured to provide a reduction or deferral
of interest or principal 0 0 0 0 0
Total nonperforming loans 1,609 2,094 2,779 2,335 2,155
Real estate owned (REO) 629 457 465 482 330
Total nonperforming assets $2,238 $2,551 $3,244 $2,817 $2,485
====== ====== ====== ====== ======
Nonperforming loans to total loans 2.19% 3.34% 5.21% 4.50% 4.21%
Nonperforming assets to total assets 1.36 1.97 2.74 2.49 2.49
Allowance for loan losses to total
loans 0.41 0.38 0.39 0.40 0.41
Allowance for loan losses to
nonperforming loans 18.89 11.37 7.45 8.91 9.65
Allowance for loan losses to
nonperforming assets 13.58 9.33 6.38 7.38 8.37
Net charge-offs as a percentage of
total loans 0.37 0.05 0.25 0.05 0
</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, 1998, 1997 and 1996, gross
interest income of approximately $41,019, $49,696, 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, 1998,
the Bank's impaired loans consisted of two commercial real estate
loans with a total recorded balance of $325,537 for which
specific allowances of $16,227 have been established. 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 $16,053 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 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, 1998, the Savings Bank had $681,000 of substandard
loans and $977,000 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, 1998, 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, 1998, loans past due between 30
and 89 days that are not included in the preceding table totalled
$423,000.
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 $283,000, $60,000 and $132,000 to
its allowance for loan losses for the years ended December 31,
1998, 1997 and 1996, respectively. At December 31, 1998, the
total allowance for loan losses was $304,000, which amounted to
13.58% 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, 1998, 1997 and 1996, respectively,
the Savings Bank had $270,000, $29,000 and $133,000 in
charge-offs against this allowance.
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>
Year Ended
December 31, Years Ended September 30,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Allowance, beginning of period $238 $207 $208 $208 $187
Charge-offs:
Real Estate: One-to-four-family 270 29 125 27
Consumer 8
Total charge-offs 270 29 133 27 0
Total recoveries 53 0 0 0 0
Net charge-offs (recoveries) 217 29 133 27 0
Provision charged to operations 283 60 132 27 21
Allowance, end of period $304 $238 $207 $208 $208
==== ==== ==== ==== ====
</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, At September 30,
1998 1997 1996 1995 1994
Amount Percent(1) Amount Percent(1) Amount Percent(1) Amount Percent(1) Amount Percent(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential including
multifamily real estate $109 69.78% $166 72.71% $150 85.70% $150 83.91% $149 85.07%
Commercial real estate
and commercial
business 88 28.63 67 25.38 44 12.39 39 14.21 46 13.57
Consumer 4 1.59 5 1.91 13 1.91 16 1.88 3 1.36
Unallocated 103 0 0 0 3 0 9 0
Total $304 100.00% $238 100.00% $207 100.00% $208 100.00% $207 100.00%
==== ====== ==== ====== ==== ====== ==== ====== ==== ======
</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 $44.30 million at December 31, 1998 compared to $27.62
million at December 31, 1997. The Savings Bank's cash and cash
equivalents, consisting of cash and due from banks, and interest-
earning deposits with other financial institutions, totalled
$34.96 million at December 31, 1998 compared to $27.89 million at
December 31, 1997, a increase of $7.07 million or 25.35%. 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, 1998, mortgage-backed securities
totalled $23.40 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.
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, 1998,
$5.32 million of the Savings Bank's investment securities and
mortgaged-backed securities were classified held-to-maturity and
$38.98 million of the Savings Bank's investment securities and
mortgaged-backed securities were classified available for sale.
The Savings Bank did not carry any trading securities at
December 31, 1998.
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, 1998, 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.
On January 29, 1999, the Holding Company purchased 1,600,000
shares of Series A Convertible Preferred Stock, $.01 par value
per share, of McGuire Performance Solutions, Inc. ("MPS"). The
Holding Company purchased the shares for $.78125 per share for a
total cost of $1,250,000. The Holding Company owns 100% of MPS's
Series A Convertible Preferred Stock. MPS is a nationally
recognized firm delivering cost-effective solutions for high
performance total balance sheet management to banks, thrifts,
credit unions and other financial institutions.
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,
1998
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
<S> <C> <C> <C> <C>
Investment Securities:
Debt:
FNMA $ 1,000 $ 1 $- $ 1,001
FHLMC 2,996 8 - 3,004
Total Debt Securities held
to maturity 3,996 9 - 4,005
Mortgage-backed securities:
GNMA 1,269 74 1,343
FHLMC 58 4 - 62
Total mortgage-backed
securities held to
maturity 1,327 78 - 1,405
Total securities held to
maturity $ 5,323 $ 87 $- $ 5,410
<CAPTION>
Held to Maturity
At December 31,
1997
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
<S> <C> <C> <C> <C>
Investment Securities:
Debt:
FNMA $ 7,219 $ 8 $- $ 7,227
FHLMC 1,000 8 - 1,008
Total Debt Securities held
to maturity 8,219 16 - 8,235
Mortgage-backed securities:
GNMA 1,980 105 - 2,085
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>
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, 1998
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
<S> <C> <C> <C> <C>
Investment Securities:
Equity:
Investments in mutual funds $ 2,354 $ - $1 $ 2,353
Debt:
FNMA Notes 3,500 11 - 3,511
Municipal Tax-exempt 3,544 - - 3,544
FHLB Notes 6,498 - - 6,498
SLMA 1,000 1 - 1,001
Total Debt Securities held
to maturity 14,542 12 - 14,554
Mortgage-backed securities:
FNMA 11,884 - 6 11,878
GNMA 10,195 - - 10,195
Total mortgage-backed
securities available
for sale 22,079 - 6 22,073
Total available-for-sale
securities $38,975 $12 $7 $38,980
<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:
Investments 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>
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, 1998.
Adjustable-rate, mortgage-backed securities are included in the
period in which interest rates are next scheduled to adjust.
<TABLE>
<CAPTION>
At December 31, 1998
In one year After one year After five years
or less to five years to ten years Over ten years
No Stated
Carrying Average Carrying Average Carrying Average Carrying Average Maturity
Value Yield Value Yield Value Yield Value Yield or Rate Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity:
Investment Securities $ - - 1,996 6.37% $1,000 6.50% $ 1,000 7.09% $ - $ 3,996
Mortgage-backed
securities - - - - - - 1,327 8.50% - 1,327
Total held to
maturity $ - - $1,996 6.37% $1,000 0 $ 2,327 15.59% $ - $ 5,323
Available for sale:
Investment Securities $ - $5,998 5.78% $4,000 6.80% $ 4,544 5.41% $2,354 $16,896
Mortgage-backed securities 1,182 5.50% 589 5.50% - - 20,308 6.75% - 22,079
Total available for sale $1,182 5.50% $6,587 11.28% $4,000 6.80% $24,852 12.16% $2,354 $38,975
</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 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.
Year Ended Year Ended
December 31, September 30,
1998 1997 1996 1995 1994
Increase before
Interest credited $15,003 $4,249 $ 527 $3,187 $ 587
Interest credited 4,424 3,911 3,571 3,437 3,038
Net deposit
increase $19,427 $8,160 $4,098 $6,624 $3,625
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,
1998
Weighted
Average
% of Nominal
Balance Deposits Rate
<S> <C> <C> <C>
Savings deposit accounts $ 28,952 22.59% 2.50%
NOW Accounts 13,016 10.16 0.38
Money market accounts 8,705 6.79 3.53
Retail certificate of deposit 72,096 56.25 5.42
Jumbo certificates of deposit(1) 5,391 4.21 5.58
Total deposits $128,160 100.00%
</TABLE>
<TABLE>
<CAPTION>
At December 31, At December 31,
1997 1996
Weighted Weighted
Average Average
% of Nominal % of Nominal
Balance Deposits Rate Balance Deposits Rate
<S> <C> <C> <C> <C> <C> <C>
Savings deposit accounts $ 29,694 27.31% 2.50% $ 28,992 28.83% 2.49%
NOW Accounts 8,535 7.85 0.90 9,105 9.05 1.09
Money market accounts 7,201 6.62 3.57 6,266 6.23 3.63
Retail certificate of deposit 57,536 52.91 5.57 50,175 49.89 5.41
Jumbo certificates of
deposit(1) 5,768 5.31 5.81 6,036 6.00 5.72
Total deposits $108,734 100.00% $100,574 100.00%
</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, 1998.
Period to Maturity from December 31, 1998
Within One to
One Year Three Years Thereafter Total
(In Thousands)
Less than 4.00% $ 770 $ 29 $ 263 $ 1,062
4.001% - 6.000% 62,627 8,928 1,501 73,056
6.001% - 8.000% 1,958 575 789 3,322
8.001% - 10.000% 25 22 - 47
over 10.000% - - - -
Total $65,380 $9,554 $2,553 $77,487
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, 1998.
Certificates
Maturity Period of Deposit
(In thousands)
One year or less $11,991
Over one year though two years 1,179
Over two years through three years 159
Over three years through five years 566
Over five years through ten years -
Over ten years -
$13,895
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, 1998, 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." 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, 1998, the Savings Bank had 48 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.
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.
Regulation of the Holding Company
General. The Holding Company is 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 the bank, without 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 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 and 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 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,
1998, 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 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, 1998, 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 1998 is $.012 for each $100 of BIF deposits and
$.0588 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, a substantial portion 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 that do not engage in such activities
but that desire to engage in other impermissible activities 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 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, 1998 of $572,200.
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 reports
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.
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.
Item 2. Description of Property.
As of December 31, 1998, the Savings Bank conducted its
business through an executive/administrative office and six full-
service offices. In December 1998, the Savings Bank sold its
branch administrative office for $220,000 and recognized a loss
of $9,000. The Savings Bank owns five of the six full-service
offices. The aggregate net book value of the Savings Bank's
office premises and equipment was $990,000 as of December 31,
1998. The Savings Bank is leasing its Center City full-service
office and executive office for a term of eleven years. Lease
expense for the years ended December 31, 1998, 1997 and 1996 was
$281,698, $ 265,118 and $79,908, respectively.
Item 3. 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.
Item 4. Submission of Matters to a Vote of Securities Holders.
None.
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters.
The common stock of PSB Bancorp, Inc. is traded over-the-
counter and is quoted in the NASDAQ Stock Market. The NASDAQ
symbol is PSBi. Prior to the Reorganization and Conversion, the
Public Savings Bank Shares traded on the OTC Bulletin Board under
the symbol "PSBI." The following table sets forth the high and
low trading prices, as reported by NASDAQ, since the Conversion
and Reorganization on July 17, 1998. As the table indicates, the
Holding Company has never declared cash dividends.
Cash
Dividend
High Low Declared
Year ended December 31, 1998
Quarter ended September 30, 1998 9.188 6.500 -
Quarter ended December 31, 1998 8.000 6.250 -
January 1, 1999 to Present
Quarter ended March 31, 1999
(through March 18, 1999) 8.000 7.500 -
Dividend payments by the Savings Bank are subject to the
restrictions of the Banking Code. Under the Banking Code, no
dividends may be paid except from "accumulated net earnings"
(generally, undivided profits). Under the Federal Deposit
Insurance 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.
<PAGE>
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
At and for the At and for the
Year Ended Year Ended
December 31, September 30,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $164,007 $129,338 $118,435 $113,232 $ 99,696
Cash and cash equivalents 34,957 27,888 31,622 29,777 21,371
Loans receivable, net 72,880 61,915 52,586 51,212 50,912
Loans held for sale 6,938 6,575 4,598 1,041 185
Investment securities 20,903 22,621 18,973 20,737 16,362
Mortgage-backed securities 23,400 5,002 5,942 6,905 7,382
Deposits 128,160 108,734 100,574 94,588 89,429
Retained earnings or
Shareholders' equity(1) 30,393 14,998 14,169 9,491 8,339
Book value per share 9.80 12.55 11.94 - -
SUMMARY STATEMENT OF
OPERATIONS:
Interest Income 10,097 8,740 8,039 7,270 6,714
Interest Expense 5,090 4,564 4,118 3,443 3,045
Net interest income 5,007 4,176 3,921 3,827 3,669
Provision for loan losses 283 60 133 27 21
Net interest income after
provision for loan losses 4,724 4,116 3,788 3,800 3,648
Noninterest income 1,315 1,071 915 876 674
Noninterest expense (2) 4,625 4,134 4,363 3,584 3,211
Income before income taxes 1,414 1,053 340 1,092 1,111
Income tax provision 502 345 201 433 470
Net Income 912 708 139 659 641
Earnings per share - basic(3) $ 0.31 $ 0.61 $ 0.12 $ - $ -
Earnings per share - diluted $ 0.31 $ 0.60 $ 0.12 $ - $ -
PERFORMANCE DATA:
Return on average assets(4) 0.62% 0.57% 0.12% 0.60% 0.63%
Return on average equity(4) 4.00% 4.83% 0.98% 6.94% 7.24%
Dividend payout - - 31.25% - -
Equity to assets 15.62% 11.88% 12.29% 8.65% 8.74%
Interest rate spread 2.65% 3.01% 3.00% 3.32% 3.61%
ASSET QUALITY RATIOS:
Nonperforming loans to total
loans 2.19% 3.34% 5.21% 4.50% 4.21%
Nonperforming assets to total
assets 1.36% 1.97% 2.74% 2.49% 2.49%
Allowance for loan losses to
total loans 0.41% 0.38% 0.39% 0.40% 0.41%
Allowance for loan losses to
nonperforming loans 18.89% 11.37% 7.45% 8.91% 9.65%
Allowance for loan losses to
nonperforming assets 13.58% 9.33% 6.38% 7.38% 8.37%
Net charge-offs as a percentage
of total loans 0.37% 0.05% 0.25% 0.05% -
Loans past due 90 days or more
as to interest or principal
and accruing interest $ - $ 200 $ 2,009 $ 1,565 $ 1,417
Nonaccrual loans 1,609 1,894 770 770 738
Total nonperforming loans 1,609 2,094 2,779 2,335 2,155
Real estate owned (REO) 629 457 465 482 330
Total nonperforming assets 2,238 2,551 3,244 2,817 2,485
</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 for
periods prior to the period ended December 31, 1998.
(4) Ratios annualized.
<PAGE>
Item 7. 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 (financial
institution). 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. On March 19, 1999, the Holding Company and the
Savings Bank signed a definitive agreement to acquire First Bank
of Philadelphia ("FBKP"), a one branch bank located in
Philadelphia with $63.5 million in assets and $57.5 million in
deposits.
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;
alternative mortgage lending is being expanded through
telemarketing origination programs for B through D quality paper
and FHA streamline programs. 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, 1998, loan
originations other than residential mortgage loans totalled
$33.86 million or 58.73% 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 and
reduce interest rate risk through the origination of higher
yielding assets. This diversification strategy represents a
conscious effort by management to migrate over time from the
profile of a thrift institution to a profile more typical of a
commercial bank.
The Savings Bank expects this diversification trend to continue
and accelerate with the acquisition of FBKP. In connection with
that transaction, the Savings Bank will merge into FBKP which
will be the surviving subsidiary of the Holding Company. As a
result the Holding Company's operating subsidiary will hold a
commercial bank charter rather than a savings bank charter.
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) 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.
Financial Condition -- December 31, 1998 Compared to December 31,
1997
The Savings Bank's total assets increased $34.67 million or
26.81% to $164.01 million at December 31, 1998 from
$129.34 million at December 31, 1997. The increase in assets was
primarily the result of higher levels of cash and cash
equivalents, net loans, loans held for sale and mortgage-backed
securities which were partially offset by a decrease in
investment securities and office properties and equipment.
Net loans increased by $10.96 million to $72.88 million at
December 31, 1998 from $61.92 million at December 31, 1997. The
increase of 17.70% was primarily the result of increased loan
origination of other loan products such as commercial real
estate, commercial business loans, construction loans and
consumer loans as well as modest growth in residential mortgage
loans. Commercial real estate (nonresidential) increased by
$3.30 million to $14.72 million at December 31, 1998 from
$11.42 million at December 31, 1997. Commercial business loans
increased by $1.17 million to $3.07 million at December 31, 1998
from $1.91 million at December 31, 1997. Construction loans
increased by $689,000 to $3.29 million at December 31, 1998 from
$2.60 million at December 31, 1997.
Total investment securities (including mortgage-backed
securities) increased $16.68 million, or 60.39%, to
$44.30 million at December 31, 1998 from $27.62 million at
December 31, 1997. 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, 1998.
Cash and cash equivalents, including interest-bearing
deposits with banks, increased $7.07 million to $34.96 million at
December 31, 1998 from $27.89 million at December 31, 1997. This
increase was the result of cash provided from proceeds from the
stock conversion, new deposits, maturities of investments and
loan payments net of cash used for the purchase of investments,
capital expenditures and disbursements of loan proceeds.
Total liabilities increased to $133.61 million at
December 31, 1998 from $114.34 million at December 31, 1997.
This $19.27 million, or 16.85% increase reflected an increase in
the Savings Bank's primary source of funds, saving deposits,
which aggregated $128.16 million at December 31, 1998, an
increase of $19.43 million, or 17.87% from $108.73 million at
December 31, 1997.
Shareholder's equity increased by $15.39 million, or 102.6%,
from $15.00 million at December 31, 1997 to $30.39 million at
December 31, 1998. This increase reflects the sale of stock by
the Holding Company and the Savings Bank's earnings for the year
ended December 31, 1998 and a decrease of $14,000 in unrealized
gain (losses) (net of taxes) on investment and mortgage-backed
securities held in the Savings Bank's available for sale
portfolio as well as the release of uncommitted ESOP shares.
Results of Operations for the Years Ended December 31, 1998 and
December 31,1997
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>
Years Ended December 31,
1998 1997 1996
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
(Dollars in Thousands) (Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Interest-earning deposits(1) $40,396 $1,895 4.69% $25,648 $1,210 4.72% $27,803 $1,207 4.34%
Investment securities 18,029 1,201 6.66 23,182 1,616 6.97 18,880 1,183 6.27
Mortgage-backed securities 6,326 327 5.17 5,696 374 6.57 6,494 431 6.64
Net loans(2) 75,571 6,674 8.83 62,213 5,540 8.90 56,048 5,218 9.31
Total interest-earning assets 140,322 $10,097 7.20% 116,739 $8,740 7.49% 109,225 $8,039 7.36%
Noninterest-earning assets 5,604 6,565 6,777
Total assets $145,926 $123,304 $116,002
======== ======== ========
LIABILITIES
Interest-bearing liabilities:
Savings deposits $41,474 1,196 2.88% $40,061 1,137 2.84% $40,677 1,122 2.76%
Certificates 67,776 3,869 5.71 59,178 3,397 5.74 52,253 2,960 5.66
Total deposits 109,250 5,065 4.64 99,239 4,534 4.57 92,930 4,082 4.39
Borrowed money 2,737 25 0.91 2,621 31 1.18 1,505 36 2.39
Total interest-bearing liabilities 111,987 5,090 4.55% 101,860 4,565 4.48% 94,435 4,118 4.36%
Non-interest-bearing liabilities 11,139 6,798 7,313
Total liabilities 123,126 108,658 101,748
Retained earnings or shareholders' equity 22,800 14,646 14,254
Total liabilities and retained
earnings or shareholders' equity $145,926 $123,304 $116,002
======== ======== ========
Net interest income $5,007 $4,175 $3,921
====== ====== ======
Interest rate spread(3) 2.65% 3.01% 3.00%
Net yield on interest-earning assets(4) 3.57% 3.58% 3.59%
Ratio of interest-earning assets to
interest-bearing liabilities 1.25 1.15 1.16
</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.
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>
Year Ended December 31, Year Ended December 31,
1998 vs. 1997 1997 vs. 1996
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) $348 ($78) $270 $198 $238 $436
Mortgage-backed securities 33 (80) (47) (52) (5) (57)
Loans(2) 1,109 25 1,134 549 (227) 322
Total interest earning assets 1,490 (133) 1,357 695 6 701
Interest bearing liabilities:
Deposits 532 (1) 531 380 72 452
Borrowings 1 (7) (6) (6) 1 (5)
Total interest bearing
liabilities 533 (8) 525 374 73 447
Net change in net interest income $957 ($125) $832 $321 ($67) $254
===== ===== ===== ==== ==== ====
</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 $912,000
and $708,000 for the year ended December 31, 1998 and
December 31, 1997, respectively. Holding Company earnings per
share for the year ended December 31, 1998 was $.31. Savings
Bank earnings per share for the year ended December 31, 1997 was
$.61. The decrease in earnings per share reflects the increased
number of shares outstanding as a result of the completion of the
Conversion and Reorganization.
Interest Income. Total interest income increased by
$1.36 million, or 15.56%, to $10.10 million for the year ended
December 31, 1998, from $8.74 million for the year ended
December 31, 1997. This reflected a $23.58 million, or 20.20%,
increase in average interest-earning assets. The increase in
average interest-earning assets was comprised of a $14.75 million
increase in average interest-earning deposits and a
$13.36 million increase in average net loans. The increase in
interest-earning assets generally reflected management's strategy
of pursuing diversification of the Savings Bank's loan
composition while maintaining adequate margins over minimum
required capital levels.
Interest Expense. Total interest expense increased to
$5.09 million for the year ended December 31, 1998, from
$4.56 million for the year ended December 31, 1997, representing
an increase of $530,000 or 11.62%. Higher interest expense
resulted from a $4.34 million increase in average-interest
bearing liabilities and a 7 basis point increase in the average
yield on interest-bearing liabilities. This increase in
interest-bearing liabilities was comprised of a $8.60 million
increase in higher yielding average certificates of deposit and
a $1.41 million increase in average savings 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.
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 equaled 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, 1998,
1997 and 1996, the Savings Bank had charge-offs against the
allowance for loan losses of $270,000, $29,000 and $133,000,
respectively, reflecting write-offs on several different loans in
both periods. During such periods, the Savings Bank provided
$283,000, $60,000 and $133,000, respectively, for loan losses in
order to protect against future losses. The provision for loan
losses was higher in 1998 compared to prior periods. This
occurred 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 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, 1998, increased to $4.72 million from
$4.12 million for the year ended December 31, 1997, an increase
of $600,000, or 14.56%.
Noninterest Income. Noninterest income consists of gain on
sale of loans, loan fees, service charges, rental income and
other income. Noninterest income increased by $250,000, or
23.36%, to $1.32 million for the year ended December 31, 1998
from $1.07 million for the year ended December 31, 1997. The
principal reasons for the increase in noninterest income was a
$307,000 increase in gain on sale of loans to $863,000 in 1998
from $556,000 in 1997 due to an increase in the number of loans
sold by TNMC in 1998 and a $14,000 increase in service charges.
This increase was offset by a $55,000 decrease in loan fees and a
$22,000 decrease in other income.
Noninterest Expense. Noninterest expense principally
consists of employees' compensation and benefits, deposit
insurance premiums and premises and occupancy costs. Noninterest
expense increased by $500,000, or 12.11%, to $4.63 million for
the year ended December 31, 1998, from $4.13 million for the year
ended December 31, 1997. The principal reasons for the increase
was a $249,000 increase in compensation and employee benefits due
to normal salary increases, a $21,000 increase in data processing
costs, a $78,000 increase in expenses of real estate owned due to
a write-down of REO and a $109,000 increase in other expenses.
Income Taxes. Income tax provisions for the year ended
December 31, 1998 and 1997 of $502,000 and $345,000,
respectively, generally reflect the Savings Bank's pre-tax income
at rates then in effect, except that a $37,000 and $37,000
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, 1998 and
1997 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 58.14% as of
December 31, 1998. 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 $33.54 million at
December 31, 1998. At December 31, 1998, the Savings Bank had
unfunded loan commitments of $2.23 million and certificates of
deposit due to mature within one year of $65.67 million. The
Savings Bank believes it has sufficient liquidity to meet these
obligations. For additional information about cash flows from
the Savings Bank, operating, financing and investment activities,
see Item 8 herein.
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.
The Savings Bank's portfolio of adjustable rate loans
constituted only 12.19% of the total loan portfolio at
December 31, 1998. 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. 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 market interest rates.
Of the Savings Bank's $128.16 million in deposits at
December 31, 1998, $50.67 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.
The following table sets forth the amounts of interest-
earning assets and interest-bearing liabilities outstanding at
December 31, 1998, 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.
<PAGE>
<TABLE>
<CAPTION>
More than More Than More Than More Than
One Year Two Years Three Five Years
Within One To Two To Three Years To To Ten More Than
Year Years Years Five Years Years Ten Years Total
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest Earning Assets:
Loans(1)(2)
Mortgage loans:
Residential $2,978 $334 $245 $2,267 $5,288 $38,685 $49,797
Commercial 2,187 747 2,514 5,877 3,201 1,772 16,298
Land and construction
loans 3,286 3,286
Consumer loans 501 83 226 348 224 0 1,382
Other loans 2,859 2,859
Total loans 11,811 1,164 2,985 8,492 8,713 40,457 73,622
Mortgage-backed
securities(3) 3,243 2,764 2,364 8,823 6,206 0 23,400
Mortgage loans held for
sale 6,938 6,938
Investment securities(4) 0 3,497 0 4,500 5,013 5,540 18,550
Other interest earning
assets 32,526 32,526
Total interest-earning
assets $54,518 $7,425 $5,349 $21,815 $19,932 $45,997 $155,036
======= ====== ====== ======= ======= ======= ========
Interest Bearing Liabilities:
Transaction accounts $5,360 $5,360
Money Market accounts 8,705 8,705
Other Savings Accounts 1,345 1,345
Passbook accounts(5) 4,138 3,518 2,990 5,083 11,860 0 27,589
Certificate of deposit over
100,000- 11,991 1,177 159 566 0 0 13,893
Certificate of deposit under
100,000- 53,866 6,983 1,038 1,478 412 0 63,777
Repurchase agreement 1,154 1,175 166 0 0 0 2,495
Total interest-bearing
liabilities $86,559 $12,853 $4,353 $7,127 $12,272 $0 $123,164
======= ======= ====== ====== ======= ======= ========
Interest-bearing assets net of
interest-bearing liabilities (32,041) (5,428) 996 14,688 7,660 45,997 31,872
Cumulative excess (deficiency)
interest-bearing assets over
interest-bearing liabilities. (32,041) (37,469) (36,473) (21,785) (14,125) 31,872
Cumulative excess (deficiency)
of interest-earning assets
over interest-bearing
liabilities as a percentage
of total assets (19.54%) (22.85%) (22.24%) (13.28%) (8.61%) 19.43%
</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 $27.31 million, or
21.31% of total deposits at December 31, 1998, assumes an
annual decay rate of 15% through the fifth year, based upon
historical trends.
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.
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.
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.
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 did
not 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's Board of
Directors and management are aware of the possible consequences
the Year 2000 ("Y2K") may pose with regard to the computer system
utilized to conduct business on a daily basis. The Y2K presents
several potential risks to the Holding Company and the Savings
Bank:
1. The Banking transactions of the Savings Bank's
customers are processed by an external data processing
service bureau. The failure of the service bureau's
system to function as a result of the millennium date
change could result in the Savings Bank's inability to
properly process customer transactions.
2. Concern on the part of certain depositors that Y2K
related problems could impair access to their deposit
balances following the millennium date change could
result in the Savings Bank experiencing a deposit
outflow prior to December 31, 1999.
3. A number of the Savings Bank's borrowers utilize
computers and computer software to varying degrees in
conjunction with the operation of their businesses.
The customers and suppliers of those businesses may
utilize computers as well. Should the Savings Bank's
borrowers, or the businesses on which they depend,
experience Y2K related computer problems, such
borrowers' cash flow could be disrupted, adversely
affecting their ability to repay their loans with the
Savings Bank.
4. Certain utility services, such as electrical power and
telecommunications services could be disrupted if those
service experience Y2K related problems.
The Holding Company and Savings Bank's Board of Directors
and management have addressed the Y2K issue by developing a Y2K
Compliance Plan. This plan involves five separate phases:
awareness, assessment, renovation, validation and implementation.
During 1997, the Savings Bank completed the systems
assessment phase, identifying each internal and external system
that could potentially be affected by the Y2K issue. Those
systems include the Savings Bank's external data processing
system as well as equipment such as elevators, bank alarms, vault
locks, etc. that may contain imbedded microprocessors. For each
such system, a determination was made whether or not the system
is Y2K compliant. Those determinations involved obtaining Y2K
compliant certification from third-party processors and outside
vendors.
The Savings Bank outsources all major data processing
applications related to customers' banking transactions to
Intrieve, Incorporated ("Intrieve"). Under the agreement with
Intrieve, Intrieve is obligated to incur all software related
costs to make its system Y2K compliant. Intrieve has prepared a
detailed schedule of functions to be performed in its compliance
project. As of December 31, 1998, Intrieve has completed its
"awareness", "assessment" and "renovation" and "validation"
phases. In October 1998, Intrieve conducted internal testing of
its data processing system. Results of these tests were
distributed to their customers in November 1998. In March 1999,
Intrieve will conduct additional internal testing. On
November 8, 1998, the Savings Bank conducted testing in-house
using Intrieve's data processing system. The Savings Bank
performed various banking transactions on customers' accounts
using the date of January 10, 2000. All transactions were
completed successfully. Intrieve has completed much of its Y2K
testing but will continue testing and renovation throughout 1999.
The Savings Bank is obligated to incur only the hardware costs
associated with implementing the changes required by Intrieve,
however hardware costs are not expected to be material.
The Savings Bank expects that all other outside vendors will
be Y2K compliant by March 31, 1999. If any vendor is not
compliant by this date the Savings Bank will consider contracting
with alternative vendors.
In certain cases, however, such as the potential loss of
electrical power or telecommunications services due to Y2K
problems, testing by the Savings Bank is either not practical or
not possible. In those cases, contingency plans are being
designed that specify how the Savings Bank will deal with each
such potential situation. The Savings Bank has developed a
contingency plan which will address failure of the data
processing service bureau system. The Savings Bank has
determined that if the service bureau system were to fail, the
Savings Bank would implement manual systems until such systems
could be re-established. The Savings Bank does not anticipate
that such short-term manual systems would have a material impact
upon the operations of the Savings Bank. Intrieve, Inc. has also
developed their own contingency plan.
The total costs associated with becoming Year 2000 compliant
are expected to be less than $15,000 and are not expected to have
a material effect on the results of operation. As of December
31, 1998, the Savings Bank had spent approximately $7,000 to
become Year 2000 compliant. Money to fund Year 2000 compliance
will come from normal operating cash flow. Expenses associated
with Year 2000 compliance will directly reduce otherwise reported
net income of the Savings Bank in the period incurred.
The costs of the project and the date on which the Savings
Bank plans to complete the Year 2000 modification are based on
management's best estimates, which were derived utilizing
numerous assumptions of future events including the continued
availability of certain resources, third party modifications
plans and other factors. However, there can be no assurances that
these estimates will be achieved and actual results could differ
from those plans.
Item 7A Quantitative and Qualitative Disclosures About Market
Risk
Incorporated herein by reference from Part II, Item 7
"Management Discussion and Analysis of Financial Condition and
Results of Operations - Asset and Liability Management" hereof.
Item 8. Financial Statements.
The audited financial statements of PSB Bancorp, Inc. as of
December 31, 1998, 1997 and 1996 and for the years ended
December 31, 1998, 1997 and 1996, including the report of
Stockton Bates & Company, P.C. thereon, which are included at
Exhibit 99 to this Annual Report on Form 10-K, are hereby
incorporated herein by reference.
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.
None.
<PAGE>
PART III
Item 10. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16 (a) of the Exchange Act.
Directors and Executive Officers of PSB Bancorp, Inc. The
Holding Company's Bylaws require that the Board of Directors of
the Holding Company consist of at least six and not more than
twenty-five directors, and that the Board of directors shall set
the exact number from time to time. The Holding Company's Board
of Directors has fixed the number of directors at six members.
Such Bylaws establish three classes of directors. Directors are
elected for three year terms, with one class to be elected each
year.
The following table sets forth information, as of
December 31, 1998, with respect to the directors and executive
officers of PSB Bancorp, Inc.:
<TABLE>
<CAPTION>
Class I Directors (Term expiring 1999)
Year First
Elected Principal Occupation During Past
Name Age Director Past Five Years
<S> <C> <C> <C>
Anthony DiSandro, Director, President511997 President and Chief Operating Officer
and Chief Operating Officer of PSB Bancorp, Inc. and Pennsylvania
Savings Bank
Rosanne Pauciello, Director and54 1997 Corporate Secretary of PSB Bancorp,
Corporate Secretary Inc., and Pennsylvania Savings Bank;
School District of Philadelphia Home
and School Visitor
<CAPTION>
Class II Directors (Term expiring 2000)
Year First
Elected Principal Occupation During Past
Name Age Director Past Five Years
<S> <C> <C> <C>
Jane Scaccetti Fumo, Director(2)(3)441997 Certified Public Accountant, Drucker &
Scaccetti, P.C.
James W. Eastwood, Director 53 1997 President of Granary Associates
(hospital development and consulting
firm)
<CAPTION>
Class III Director (Term expiring 2001)
Year First
Elected Principal Occupation During Past
Name Age Director Past Five Years
<S> <C> <C> <C>
Vincent J. Fumo, Chairman and55 1997 Chairman and Chief Executive Officer
Chief Executive Officer (2) of PSB Bancorp, Inc. and Pennsylvania
Savings Bank and Pennsylvania State
Senator
Thomas J. Finley, Jr., Director78 1997 Retired
</TABLE>
(1) Each Director was elected as an initial director of PSB
Bancorp, Inc. in connection with the Conversion and
Reorganization.
(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").
The following table sets forth information, as of
December 31, 1998, with respect to the directors and executive
officers of the Savings Bank.
<TABLE>
<CAPTION>
Year Term First ElectedPrincipal Occupation During
Name Age Expires Trustee(1) Past Five Years
<S> <C> <C> <C> <C>
Sylvia M. DiBona, Trustee44 2000 1998 Chairman and Chief Executive
Officer of the William Penn
Agency (insurance agency)
James W. Eastwood, Trustee532000 1998 President of Granary
Associates (hospital
development and consulting
firm)
P. Charles DeRita, Trustee872000 1998 Vice President and Manager
of Hallmark Abstract Co.
Vincent J. Fumo, Chairman and552000 1998 Chairman and Chief Executive
Chief Executive Officer (2) Officer of Pennsylvania
Savings Bank, and
Pennsylvania State Senator
James F. Kenney, Trustee40 2001 1998 City of Philadelphia
Councilman since 1992.
Rosanne Pauciello, Trustee542001 1998 Corporate Secretary of
and Corporate Secretary Pennsylvania Savings Bank;
School District of
Philadelphia Home and School
Visitor
Thomas J. Finley, Jr., Trustee782001 1998 Retired
S. Michael Palermo, Trustee582001 1998 Assistant Executive Director
of Pennsylvania Turnpike
Commission
Jane Scaccetti Fumo, Trustee (2)(3)4419991998 Certified Public Accountant,
Drucker & Scaccetti, P.C.
Alfonso Tumini, Trustee48 1999 1998 Attorney
Anthony DiSandro, Trustee,511999 1998 President and Chief
President and Chief Operating Operating Officer of
Officer Pennsylvania Savings Bank.
_______________
</TABLE>
(1) Period indicated excludes service as a trustee of the Bank's
predecessors; each Trustee was elected as an initial trustee
of the Savings Bank in connection with the Conversion and
Reorganization.
(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 During
Name Age Past Five Years
<S> <C> <C>
Gary Polimeno, Vice President46Vice President of Pennsylvania
and Treasurer Savings Bank. Also Treasurer of
Pennsylvania Savings Bank since 1994.
</TABLE>
Stock Ownership of Management as of December 31, 1998
Amount and Percent of
Nature of Outstanding
Beneficial Shares of
Name of Beneficial Owner Ownership Common Stock
Anthony DiSandro 372,784 (1) 12.02%
James W. Eastwood 30,949 *
Thomas J. Finley, Jr. 18,515 *
Jane Scaccetti Fumo 289,276 (2) 9.32%
Vincent J. Fumo 526,890 (2) 16.99%
Rosanne Pauciello 10,731 *
All executive officers and
trustees as a group (6 persons) 1,249,145 40.28%
______________
* Ownership percentage is less than 1%.
(1) Amount includes 50,511 shares held indirectly through the
401(k) Plan, 25,724 shares held through the Profit Sharing
Plan, 26,135 shares held by the 1995 MRP that have been
awarded to Mr. DiSandro, 15,727 shares held by Mr. DiSandro
directly and 17,073 shares subject to immediately
exercisable options. Also includes 237,614 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 46,303 shares held through the 401(k) Plan,
20,265 shares held through the Profit Sharing Plan, 109,668
held in IRA accounts, 26,138 shares held by the 1995 MRP
that have been awarded to Mr. Fumo, 6,014 shares held by
Jane Scaccetti Fumo, 772 shares held on behalf of the
daughter of Vincent and Jane Scaccetti Fumo and 17,073
shares subject to immediately exercisable options. Also
includes 237,614 shares held by the ESOP of which Mr. Fumo
is a trustee.
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 1998, 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 1998.
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 1998.
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 1998.
The Nominating Committee consists of Trustee Vincent J.
Fumo, who serves as Chairman, and Trustees Anthony DiSandro,
Rosanne Pauciello and Jane Scaccetti Fumo. The Nominating
Committee, which met once in 1998, 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 1998.
The Savings Bank's Strategic Planning Committee consists of
Trustee Jane Scaccetti Fumo, who serves as Chairperson, and
Trustees DiBona 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 1998.
The Savings Bank's Loan Committee consists of Trustee
Pauciello, who serves as Chairman, together with Trustees DeRita,
Eastwood, DiSandro and Tumini. The Loan Committee approves loans
of up to $1 million. It submits larger loans to the Board of
Trustees for approval. The Loan Committee met at least once each
month in 1998.
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 1998.
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 1998.
Trustee Compensation
For the year ended December 31, 1998, 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.
Item 11. Executive compensation.
The following table sets forth, for the years ended
December 31, 1998, 1997 and 1996 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>
Annual Compensation Long Term Compensation
Other All
Annual Security Other
Fiscal Salary Compensation Restricted Underlying Compensation
Name and Principal Position Year (1) Bonuses (2) Stock(3) Option (4) (5)
<S> <C> <C> <C> <C> <C> <C> <C>
Vincent J. Fumo 1998 $147,788 $150,000 $67,876 0 0 $22,750
Chairman and Chief Executive Officer 1997 $139,987 $117,500 $60,671 0 0 $23,800
1996 $130,478 $117,500 $19,174 $120,713 42,683 $40,758
Anthony DiSandro 1998 $165,115 $150,000 $61,104 0 0 $27,650
President and Chief Operating Officer 1997 $147,456 $125,000 $56,540 0 0 $27,650
1996 $145,782 $125,000 $18,263 $120,701 42,683 $47,250
Gary Polimeno 1998 $102,942 $35,000 $5,671 0 0 $8,400
President and Treasurer 1997 $87,282 $35,000 $2,966 0 0 $8,400
1996 $87,282 $45,000 $0 $12,700 6,876 $17,660
</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,
1998, Mr. Fumo, Mr. DiSandro and Mr. Polimeno recognized
compensation expense of $47,209, $47,209 and $5,671 for
those shares which were vested as of December 31, 1998.
(3) Mr. Fumo, Mr. DiSandro and Mr. Polimeno hold 26,138 shares,
26,135 shares, and 2,750 shares of restricted stock,
respectively, which, as of December 31, 1998, had a fair
market value of $199,302, $199,279 and $20,969,
respectively. Of such shares, 13,754, 13,754 and 2,750
shares of each of Messrs. Fumo, DiSandro and Polimeno,
respectively, were awarded at April 30, 1996 and vest at a
rate of 20% per year over a five (5) year period and 12,383
and 12,381 shares of Messrs. Fumo and DiSandro, repectively,
were granted on December 31, 1996 and vest at a rate of 20%
per year over a five (5) year period.
(4) Includes trustees fees of $14,350 and $19,250 paid to
Mr. Fumo and Mr. DiSandro, respectively, for the year ended
December 31, 1998, 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, 1998. Includes trustees fees of
$15,400 and $19,250 paid to Mr. Fumo and Mr. DiSandro,
respectively, for the year ended December 31, 1998, 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.
(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 401(k) contributions to the accounts of
Mr. Fumo, Mr. DiSandro, and Mr. Polimeno, respectively.
For the year ended December 31, 1998 and 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. These agreements were
assumed by the Holding Company upon completion of the Conversion.
Under the terms of his Employment Agreement, Mr. Fumo serves as
Chairman and Chief Executive Officer of the Holding Company and
the Savings Bank at a base salary of $145,000. Under the terms
of his Employment Agreement, Mr. DiSandro serves as President and
Chief Operating Officer of the Holding Company and the Savings
Bank at a base salary of $162,000. 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 Holding Company 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 Holding
Company, 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 Holding Company
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.
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, 1998, 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%
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, 1998, Mr. Fumo, Mr. DiSandro, and
Mr. Polimeno had 19, 18 and 20 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 1998, 1997 and 1996 plan
years, the Savings Bank made profit sharing contributions of $0,
$0 and $45,568.
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. In 1995, 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"). Due to the Conversion and
Reorganization, the Savings Bank Common Stock held by the ESOP
was converted into 110,046 shares of PSB Bancorp, Inc. Common
Stock.
In connection with the Conversion and Reorganization, the ESOP
borrowed $1,288,540 from the Holding Company to purchase an
additional 128,854 shares of PSB Bancorp, Inc. Common Stock. 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 $234,000 at December 31, 1998. The loan by
the Holding company 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
8.5%.
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, administers the ESOP (the "ESOP Committee"). Messrs.
Fumo and DiSandro serve as trustees of the ESOP. The ESOP
Committee may instruct the trustee regarding investment of funds
contributed to the ESOP. The ESOP trustees must vote all
allocated shares held in the suspense account in a manner
calculated to most accurately reflect the instructions the ESOP
trustees have 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
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Comparison of Operating Results for the
Years Ended December 31, 1998 and 1997."
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. 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 was assumed by the
Holding Company and appropriate adjustments were made to the
exercise price and the number of shares underlying each option to
reflect the exchange ratio.
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, 1998.
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. All shares under the 1995 MRP have been
awarded. For purposes of the Conversion and Reorganization, the
shares awarded under the 1995 MRP participants were treated in
the same manner as shares held by other minority shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The Holding Company is not aware of any holder of 5% or
more of Holding Company Common Stock other than the management
personnel identified in Item 10 herein.
Item 13. Certain Relationships and Related Transactions.
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 $1.38 million at December 31, 1998, which is 4.54% of
shareholders' equity.
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 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 1998, mortgage loans were extended to
Mr. Fumo and Mr. DiSandro on the following terms: (1) principal
amount of $200,000 at an interest rate of 7.5% for a term of 360
months to Mr. Fumo; and (2) principal amount of $400,000 at an
interest rate of 6.0% for a term of 360 months to Mr. DiSandro.
In December 1997, 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, 1998, Mr. Fumo's mortgage loan balance was $927,652
and Mr. DiSandro's mortgage loan balance was $397,989. No
additional similar loans were extended through the year ended
December 31, 1997.
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) Exhibits.
Exhibit No. Document
2.1 Agreement and Plan of Reorganization, dated as of March
19, 1999, between PSB Bancorp, Inc. and First Bank of
Philadelphia. (filed herewith)
3.1 Articles of Incorporation of Pennsylvania Savings Bank
(incorporated herein by reference to Exhibit 3.1 of the
SB-2 Registration Statement of PSB Bancorp, Inc. filed
October 9, 1997).
3.2 Bylaws of Pennsylvania Savings Bank (incorporated
herein by reference to Exhibit 3.2 of the SB-2
Registration Statement of PSB Bancorp, Inc. filed
October 9, 1997).
10.1* Pennsylvania Savings Bank Retirement Plan (incorporated
herein by reference to Exhibit 10.1 of the SB-2
Registration Statement of PSB Bancorp, Inc. filed
October 9, 1997).
10.2* Pennsylvania Savings Cash or Deferred Profit Sharing
Plan (incorporated herein by reference to Exhibit 10.2
of the SB-2 Registration Statement of PSB Bancorp, Inc.
filed October 9, 1997).
10.3* Pennsylvania Savings Bank Profit Sharing Plan
(incorporated herein by reference to Exhibit 10.3 of
the SB-2 Registration Statement of PSB Bancorp, Inc.
filed October 9, 1997).
10.4* Employment Agreement with Vincent J. Fumo (incorporated
herein by reference to Exhibit 7.1 of the SB-2
Registration Statement of PSB Bancorp, Inc. filed
October 9, 1997).
10.5* Employment Agreement with Anthony DiSandro
(incorporated herein by reference to Exhibit 7.2 of SB-
2 Registration Statement of PSB Bancorp, Inc. filed
October 9, 1997).
10.6* Pennsylvania Savings Bank Employee Stock Ownership Plan
(incorporated herein by reference to Exhibit 10.4 of
the SB-2 Registration Statement of PSB Bancorp, Inc.
filed on October 9, 1997).
10.7 Lease Agreement between Eleven Colonial Penn Plaza
Associates and Pennsylvania Savings Bank, dated as of
October 10, 1995(incorporated herein by reference to
Exhibit 10.7 of Form S-1, Amendment No. 3 of PSB
Bancorp, Inc. filed May 5, 1998).
10.8 Lease Agreement between Eleven Colonial Penn Plaza
Associates and Pennsylvania Savings Bank, dated as of
October 12, 1995 (incorporated herein by reference to
Exhibit 10.8 of Form S-1, Amendment No. 3 of PSB
Bancorp, Inc. filed on May 5, 2998).
10.9* Pennsylvania Savings Bank Stock Option Plan (filed
herewith).
10.10* Pennsylvania Savings Bank Management Recognition Plan
(filed herewith).
21 Schedule of Subsidiaries (filed herewith).
27 Financial Data Schedules
99 Financial Statements( filed herewith).
_______________________________
* Denotes a management contract or compensatory plan or
arrangement.
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
March 18, 1999 PSB BANCORP, INC.
By /s/ Anthony DiSandro
Anthony DiSandro
President and Chief Operating
Officer
In accordance with the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates
indicated.
Signature Title Date
/s/ Vincent J. Fumo Chairman and Chief March 18, 1999
Vincent J. Fumo Executive Officer
/s/ Anthony DiSandro President and Chief March 18, 1999
Anthony DiSandro Operating Officer
/s/Jane Scaccetti Fumo Director March 18, 1999
Jane Scaccetti Fumo
/s/ Rosanne Pauciello Corporate Secretary March 18, 1999
Rosanne Pauciello and Director
/s/James W. Eastwood Director March 18, 1999
James W. Eastwood
/s/Thomas J. Finley, Jr. Director March 18, 1999
Thomas J. Finley, Jr.
/s/ Gary Polimeno Vice President and March 18, 1999
Gary Polimeno Treasurer (Principal
Accounting and Financial
Officer)
<PAGE>
EXHIBIT INDEX
Exhibit No. Document
2.1 Agreement and Plan of Reorganization, dated as of March
19, 1999, between PSB Bancorp, Inc. and First Bank of
Philadelphia. (filed herewith)
3.1 Articles of Incorporation of Pennsylvania Savings Bank
(incorporated herein by reference to Exhibit 3.1 of the
SB-2 Registration Statement of PSB Bancorp, Inc. filed
October 9, 1997).
3.2 Bylaws of Pennsylvania Savings Bank (incorporated
herein by reference to Exhibit 3.2 of the SB-2
Registration Statement of PSB Bancorp, Inc. filed
October 9, 1997).
10.1* Pennsylvania Savings Bank Retirement Plan (incorporated
herein by reference to Exhibit 10.1 of the SB-2
Registration Statement of PSB Bancorp, Inc. filed
October 9, 1997).
10.2* Pennsylvania Savings Cash or Deferred Profit Sharing
Plan (incorporated herein by reference to Exhibit 10.2
of the SB-2 Registration Statement of PSB Bancorp, Inc.
filed October 9, 1997).
10.3* Pennsylvania Savings Bank Profit Sharing Plan
(incorporated herein by reference to Exhibit 10.3 of
the SB-2 Registration Statement of PSB Bancorp, Inc.
filed October 9, 1997).
10.4* Employment Agreement with Vincent J. Fumo (incorporated
herein by reference to Exhibit 7.1 of the SB-2
Registration Statement of PSB Bancorp, Inc. filed
October 9, 1997).
10.5* Employment Agreement with Anthony DiSandro
(incorporated herein by reference to Exhibit 7.2 of SB-
2 Registration Statement of PSB Bancorp, Inc. filed
October 9, 1997).
10.6* Pennsylvania Savings Bank Employee Stock Ownership Plan
(incorporated herein by reference to Exhibit 10.4 of
the SB-2 Registration Statement of PSB Bancorp, Inc.
filed on October 9, 1997).
10.7 Lease Agreement between Eleven Colonial Penn Plaza
Associates and Pennsylvania Savings Bank, dated as of
October 10, 1995(incorporated herein by reference to
Exhibit 10.7 of Form S-1, Amendment No. 3 of PSB
Bancorp, Inc. filed on May 5, 1998).
10.8 Lease Agreement between Eleven Colonial Penn Plaza
Associates and Pennsylvania Savings Bank, dated as of
October 12, 1995 (incorporated herein by reference to
Exhibit 10.8 of Form S-1, Amendment No. 3 of PSB
Bancorp, Inc. filed on May 5, 1998).
10.9* Pennsylvania Savings Bank Stock Option Plan. (filed
herewith)
10.10* Pennsylvania Savings Bank Management Recognition Plan
(filed herewith)
21 Schedule of Subsidiaries (filed herewith).
27 Financial Data Schedules
99 Financial Statements (filed herewith).
_______________________________
* Denotes a management contract or compensatory plan or
arrangement.
AGREEMENT AND PLAN
OF REORGANIZATION
among
PSB BANCORP, INC.
PENNSYLVANIA SAVINGS BANK
and
FIRST BANK OF PHILADELPHIA
March 19, 1999<PAGE>
AGREEMENT
TABLE OF CONTENTS
Page
BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . 1
AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE I
THE MERGERS
Section 1.01 Definitions. . . . . . . . . . . . . . . . . . . 1
Section 1.02 The Merger . . . . . . . . . . . . . . . . . . . 6
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF FBKP
Section 2.01 Organization . . . . . . . . . . . . . . . . . . 13
Section 2.02 Capitalization . . . . . . . . . . . . . . . . . 13
Section 2.03 Authority; No Violation. . . . . . . . . . . . . 14
Section 2.04 Consents . . . . . . . . . . . . . . . . . . . . 15
Section 2.05 Financial Statements . . . . . . . . . . . . . . 16
Section 2.06 Taxes. . . . . . . . . . . . . . . . . . . . . . 16
Section 2.07 No Material Adverse Effect . . . . . . . . . . . 17
Section 2.08 Contracts. . . . . . . . . . . . . . . . . . . . 17
Section 2.09 Ownership of Property; Insurance Coverage. . . . 18
Section 2.10 Legal Proceedings. . . . . . . . . . . . . . . . 19
Section 2.11 Compliance With Applicable Law . . . . . . . . . 20
Section 2.12 ERISA. . . . . . . . . . . . . . . . . . . . . . 20
Section 2.13 Brokers, Finders and Financial Advisors. . . . . 21
Section 2.14 Environmental Matters. . . . . . . . . . . . . . 22
Section 2.15 Allowance for Loan Losses. . . . . . . . . . . . 22
Section 2.16 Information to be Supplied . . . . . . . . . . . 22
Section 2.17 Securities Documents . . . . . . . . . . . . . . 22
Section 2.18 Related Party Transactions . . . . . . . . . . . 23
Section 2.19 Loans. . . . . . . . . . . . . . . . . . . . . . 23
Section 2.20 Accounting for the Merger; Reorganization. . . . 23
Section 2.21 Fairness Opinion . . . . . . . . . . . . . . . . 23
Section 2.22 Quality of Representations . . . . . . . . . . . 23
Section 2.23 Year 2000 Compliance . . . . . . . . . . . . . . 24
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PSB
Section 3.01 Organization . . . . . . . . . . . . . . . . . . 24
Section 3.02 Capital Structure. . . . . . . . . . . . . . . . 25
Section 3.03 Authority; No Violation. . . . . . . . . . . . . 25
Section 3.04 Consents . . . . . . . . . . . . . . . . . . . . 26
Section 3.05 Financial Statements . . . . . . . . . . . . . . 27
Section 3.06 Taxes. . . . . . . . . . . . . . . . . . . . . . 27
Section 3.07 No Material Adverse Effect . . . . . . . . . . . 28
Section 3.08 Ownership of Property; Insurance Coverage. . . . 28
Section 3.09 Legal Proceedings. . . . . . . . . . . . . . . . 28
Section 3.10 Compliance With Applicable Law . . . . . . . . . 29
Section 3.11 Information to be Supplied . . . . . . . . . . . 29
Section 3.12 ERISA. . . . . . . . . . . . . . . . . . . . . . 30
Section 3.13 Securities Documents . . . . . . . . . . . . . . 31
Section 3.14 Environmental Matters. . . . . . . . . . . . . . 31
Section 3.15 Allowance for Loan Losses. . . . . . . . . . . . 31
Section 3.16 Brokers and Finders. . . . . . . . . . . . . . . 31
Section 3.17 Loans. . . . . . . . . . . . . . . . . . . . . . 31
Section 3.18 Accounting for the Merger; Reorganization. . . . 32
Section 3.19 Quality of Representations . . . . . . . . . . . 32
Section 3.20 Year 2000 Compliance . . . . . . . . . . . . . . 32
ARTICLE IV
COVENANTS OF THE PARTIES
Section 4.01 Conduct of FBKP's Business . . . . . . . . . . . 32
Section 4.02 Access; Confidentiality. . . . . . . . . . . . . 35
Section 4.03 Regulatory Matters and Consents. . . . . . . . . 36
Section 4.04 Taking of Necessary Action . . . . . . . . . . . 37
Section 4.05 Indemnification; Insurance . . . . . . . . . . . 38
Section 4.06 No Other Bids and Related Matters. . . . . . . . 39
Section 4.07 Duty to Advise; Duty to Update Disclosure
Schedule. . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 4.08 Conduct of PSB's Business. . . . . . . . . . . . 40
Section 4.09 Current Information. . . . . . . . . . . . . . . 40
Section 4.10 Undertakings by PSB and FBKP . . . . . . . . . . 40
Section 4.11 Employee Benefits and Termination Benefits . . . 42
Section 4.12 Stock Exchange Listing. . . . . . . . . . . . . 43
Section 4.13 Affiliate Letters . . . . . . . . . . . . . . . 43
Section 4.14 . . . . . . . . . . . . . . . . . . . . . . . . . 43
ARTICLE V
CONDITIONS
Section 5.01 Conditions to FBKP's Obligations under this
Agreement . . . . . . . . . . . . . . . . . . . . . . . . 43
Section 5.02 Conditions to PSB's Obligations under this
Agreement . . . . . . . . . . . . . . . . . . . . . . . . 45
ARTICLE VI
TERMINATION, WAIVER AND AMENDMENT
Section 6.01 Termination. . . . . . . . . . . . . . . . . . . 47
Section 6.02 Effect of Termination. . . . . . . . . . . . . . 48
ARTICLE VII
MISCELLANEOUS
Section 7.01 Expenses . . . . . . . . . . . . . . . . . . . . 48
Section 7.02 Non-Survival of Representations and
Warranties. . . . . . . . . . . . . . . . . . . . . . . . 48
Section 7.03 Amendment, Extension and Waiver. . . . . . . . . 48
Section 7.04 Entire Agreement . . . . . . . . . . . . . . . . 49
Section 7.05 No Assignment. . . . . . . . . . . . . . . . . . 49
Section 7.06 Notices. . . . . . . . . . . . . . . . . . . . . 49
Section 7.07 Captions . . . . . . . . . . . . . . . . . . . . 51
Section 7.08 Counterparts . . . . . . . . . . . . . . . . . . 51
Section 7.09 Severability . . . . . . . . . . . . . . . . . . 51
Section 7.10 Governing Law. . . . . . . . . . . . . . . . . . 51
Exhibit 1 Articles and Plan of Merger
Exhibit 2 FBKP's Affiliate Agreement
Exhibit 3 Stock Option Agreement
Exhibit 4 Form of Opinion of PSB's Counsel
Exhibit 5 Matters to be Covered in Tax Opinion of
Counsel to PSB
Exhibit 6 Form of Opinion of FBKP's Counsel
Exhibit 7 Amendment to PSB Articles of Incorporation
<PAGE>
AGREEMENT
THIS AGREEMENT AND PLAN OF REORGANIZATION, dated as of
March 19, 1999, is made by and among PSB BANCORP, INC. ("PSB"), a
Pennsylvania corporation and its wholly-owned subsidiary
PENNSYLVANIA SAVINGS BANK (the "Bank"), each having its principal
place of business in Philadelphia, Pennsylvania, and FIRST BANK
OF PHILADELPHIA ("FBKP"), a Pennsylvania bank, having its
principal place of business in Philadelphia, Pennsylvania.
BACKGROUND
1. PSB and FBKP desire for the Bank to merge with and
into FBKP, with FBKP surviving such merger and FBKP shareholders
receiving PSB Common Stock in exchange for FBKP Common Stock in
accordance with the applicable laws of the Commonwealth of
Pennsylvania, and in accordance with the articles and plan of
merger in the form attached hereto as Exhibit 1.
2. PSB and FBKP desire that the merger constitute a
reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended, and be accounted for
as a pooling-of-interests under generally accepted accounting
principles.
3. As a condition and inducement to PSB's willingness
to enter into this Agreement, (a) the directors and certain
officers of FBKP are concurrently executing a Letter Agreement in
the form attached hereto as Exhibit 2, and (b) FBKP is
concurrently granting to PSB an option to acquire, under certain
circumstances, FBKP Common Stock (the "PSB Option") pursuant to a
Stock Option Agreement between PSB and FBKP in the form attached
hereto as Exhibit 3.
4. PSB and FBKP desire to provide the terms and
conditions governing the transactions contemplated herein.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and of
the mutual covenants, agreements, representations and warranties
herein contained, the parties hereto, intending to be legally
bound, do hereby agree as follows:
ARTICLE I
THE MERGERS
Section 1.01 Definitions. As used in this Agreement,
the following terms shall have the indicated meanings (such
meanings to be equally applicable to both the singular and plural
forms of the terms defined):
Affiliate means, with respect to any Person, any
Person who directly, or indirectly, through one or more
<PAGE 1> intermediaries, controls, or is controlled by, or
is under common control with, such Person and, without
limiting the generality of the foregoing, includes any
executive officer or director of such Person and any
Affiliate of such executive officer or director.
Agreement means this agreement, and any amendment
or supplement hereto, which constitutes a "plan of merger"
among PSB, the Bank and FBKP.
Applicable Exchange Ratio shall have the meaning
given to such term in Section 1.02(e)(ii)(A).
Applications means the applications for regulatory
approval which are required by the transactions contemplated
hereby.
Articles of Merger means the articles of merger to
be executed by the Bank and FBKP and to be filed in the PDS,
in accordance with the applicable laws of the Commonwealth
of Pennsylvania.
Banking Code means the Pennsylvania Banking Code
of 1965, as amended.
BCL means the Pennsylvania Business Corporation
Law of 1988, as amended.
BHCA means the Bank Holding Company Act of 1956,
as amended.
Closing Date means the earlier of (i) the day
specified by PSB to FBKP upon five (5) days written notice,
that follows the satisfaction or waiver, to the extent
permitted hereunder, of the conditions to the consummation
of the Merger specified in Article V of this Agreement
(other than the delivery of certificates, opinions and other
instruments and documents to be delivered at the Closing),
(ii) thirty (30) days after the satisfaction or waiver, to
the extent permitted hereunder, of the conditions to the
consummation of the Merger specified in Article V of this
Agreement (other than the delivery of certificates, opinions
and other instruments and documents to be delivered at the
Closing) or (iii) such other date as PSB and FBKP may
mutually agree.
Dissenting Shares shall have the meaning set forth
in Section 1.02(e)(ii)(E) hereof.
DOJ means the United States Department of Justice.
Effective Date means the date upon which the
Articles of Merger shall be filed in the PDS, and shall be
the same as the Closing Date. <PAGE 2>
Environmental Law means any federal, state, local
or foreign law, statute, ordinance, rule, regulation, code,
license, permit, authorization, approval, consent, order,
judgment, decree, injunction or agreement with any
Regulatory Authority relating to (i) the protection,
preservation or restoration of the environment (including,
without limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface soil, subsurface
soil, plant and animal life or any other natural resource),
and/or (ii) the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling,
production, release or disposal of any substance presently
listed, defined, designated or classified as hazardous,
toxic, radioactive or dangerous, or otherwise regulated,
whether by type or by quantity, including any material
containing any such substance as a component.
ERISA means the Employee Retirement Income
Security Act of 1974, as amended.
Exchange Act means the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated
from time to time thereunder.
FDIA means the Federal Deposit Insurance Act, as
amended.
FDIC means the Federal Deposit Insurance
Corporation.
FBKP Common Stock means the common stock of FBKP
described in Section 2.02(a).
FBKP Disclosure Schedule means a disclosure
schedule delivered by FBKP to PSB pursuant to Article II of
this Agreement.
FBKP Financials means (i) the audited consolidated
financial statements of FBKP as of December 31, 1998,
including the notes, and (ii) the unaudited interim
consolidated financial statements of FBKP as of each
calendar quarter thereafter included in Securities Documents
filed by FBKP.
FBKP Options means options to purchase shares of
FBKP Common Stock granted pursuant to the FBKP Stock Option
Plan and the FBKP Standby Options.
FBKP Standby Options means the options
certificates issued pursuant to the Standby Purchase Agreement
dated December 15, 1994 and the Option Certificates issued
thereunder.
<PAGE 3>
FBKP Regulatory Reports means the annual and
quarterly reports of FBKP filed with the FRB since
December 31, 1996 through the Closing Date.
FBKP Stock Option Plan means the First Bank of
Philadelphia 1998 Stock Option Plan.
FBKP Subsidiaries means (i) any corporation, 50%
or more of the capital stock of which is owned, either
directly or indirectly, by FBKP, except any corporation the
stock of which is held in the ordinary course of the lending
activities of FBKP.
FRB means the Board of Governors of the Federal
Reserve System.
GAAP means generally accepted accounting
principles as in effect at the relevant date.
IRC means the Internal Revenue Code of 1986, as
amended.
IRS means the Internal Revenue Service.
Material Adverse Effect shall mean, with respect
to PSB or FBKP, respectively, any effect that is material
and adverse to its assets, financial condition or results of
operations on a consolidated basis, provided, however, that
Material Adverse Effect shall not be deemed to include
(a) any change in the value of the respective investment and
loan portfolios of PSB or FBKP resulting from a change in
interest rates generally, (b) any change occurring after the
date hereof in any federal or state law, rule or regulation
or in GAAP, which change affects banking institutions
generally, (c) reasonable expenses incurred in connection
with this Agreement and the transactions contemplated
hereby, (d) actions or omissions of a party (or any of its
Subsidiaries) taken with the prior informed written consent
of the other party in contemplation of the transactions
contemplated hereby, and (e) any effect with respect to a
party hereto caused, in whole or in part, by the other
party.
Merger means the merger of the Bank with and into
FBKP, with FBKP surviving such merger, and the exchange of
shares of FBKP Common Stock for shares of PSB Common Stock,
contemplated by this Agreement.
NASD means the National Association of Securities
Dealers, Inc.
PDOB means the Pennsylvania Department of Banking.
<PAGE 4>
PDS means the Department of State of the
Commonwealth of Pennsylvania.
Person means any individual, corporation, limited
liability company, partnership, joint venture, association,
trust or "group" (as that term is defined in
Section 13(d)(3) of the Exchange Act).
Prospectus/Proxy Statement means the
prospectus/proxy statement, together with any amendments and
supplements thereto, to be transmitted to holders of FBKP
Common Stock and PSB Common Stock in connection with the
transactions contemplated by this Agreement.
PSB Common Stock has the meaning given to that
term in Section 3.02(a) of this Agreement.
PSB Disclosure Schedule means a disclosure
schedule delivered by PSB to FBKP pursuant to Article III of
this Agreement.
PSB Financials means (i) the audited consolidated
financial statements of PSB as of December 31, 1998 and for
the three years ended December 31, 1998, including the notes
thereto, and (ii) the unaudited interim consolidated
financial statements of PSB as of each calendar quarter
thereafter included in Securities Documents filed by PSB.
PSB Market Price means, as of any date, the
average between the closing high bid and low asked prices of
a share of PSB Common Stock on the Nasdaq National Market
System (as reported in The Wall Street Journal, or if not
reported therein, in another authoritative source).
PSB Market Value means the average of the PSB
Market Prices for the twenty (20) consecutive trading days
ending on the trading day three (3) trading days preceding
the Closing Date.
PSB Option means the option granted to PSB to
acquire shares of FBKP Common Stock referenced in the
recitals to this Agreement.
PSB Regulatory Reports means the annual and
quarterly reports of PSB and the Bank with the FRB and the
FDIC since December 31, 1996 through the Closing Date.
PSB Subsidiaries means any corporation, 50% or
more of the capital stock of which is owned, either directly
or indirectly, by PSB, except any corporation the stock of
which is held in the ordinary course of the lending
activities of a bank.
<PAGE 5>
Registration Statement means the registration
statement on Form S-4, including any pre-effective or
post-effective amendments or supplements thereto, as filed
with the SEC under the Securities Act with respect to the
PSB Common Stock to be issued in connection with the
transactions contemplated by this Agreement.
Regulatory Agreement has the meanings given to
that term in Sections 2.11 and 3.10 of this Agreement.
Regulatory Authority means any banking agency or
department of any federal or state government, including
without limitation the FRB, the FDIC, the PDOB, or the
respective staffs thereof.
Rights means warrants, options, rights,
convertible securities and other capital stock equivalents
which obligate an entity to issue its securities.
SEC means the Securities and Exchange Commission.
Securities Act means the Securities Act of 1933,
as amended, and the rules and regulations promulgated from
time to time thereunder.
Securities Documents means all registration
statements, schedules, statements, forms, reports, proxy
material, and other documents required to be filed under the
Securities Laws.
Securities Laws means the Securities Act, the
Exchange Act, the Investment Company Act of 1940, as
amended, the Investment Advisors Act of 1940, as amended,
the Trust Indenture Act of 1939, as amended, and in each
case the rules and regulations promulgated from time to time
thereunder.
Subsidiary means any corporation, 50% or more of
the capital stock of which is owned, either directly or
indirectly, by another entity, except any corporation the
stock of which is held in the ordinary course of the lending
activities of a bank.
Section 1.02 The Merger.
(a) Closing. The closing will take place at
10:00 a.m. on the Closing Date at the offices of Stevens & Lee,
1818 Market Street, Philadelphia, Pennsylvania, unless another
time and place are agreed to by the parties hereto; provided, in
any case, that all conditions to closing set forth in Article V
(other than the delivery of certificates, opinions and other
instruments and documents to be delivered at the Closing) have
been satisfied or waived at or prior to the Closing Date. On the
<PAGE 6> Closing Date, FBKP, PSB and the Bank shall cause the
Articles of Merger to be duly executed and to be filed in the
PDS.
(b) The Merger. Subject to the terms and
conditions of this Agreement, on the Effective Date, the Bank
shall merge with and into FBKP in accordance with the provisions
of the Banking Code and the BCL and the outstanding shares of
FBKP Common Stock shall be converted into shares of PSB Common
Stock as provided in Section 1.02(e). FBKP shall be the
surviving corporation of the Merger and shall continue its
corporate existence under the laws of the Commonwealth of
Pennsylvania. From and after the Effective Date, the Merger
shall have the effects set forth in Section 1606 of the Banking
Code.
(c) Articles of Incorporation and Bylaws. On and
after the Effective Date, the articles of incorporation and the
bylaws of PSB, as in effect immediately prior to the Effective
Date, shall automatically be and remain the articles of
incorporation and bylaws of PSB, until thereafter altered,
amended or repealed. On and after the Effective Date, the
Articles of Incorporation and Bylaws of FBKP, as in effect
immediately prior to the Effective Date, shall automatically be
and remain the Articles of Incorporation and Bylaws of the
surviving bank, until altered, amended or repealed.
(d) Board of Directors and Officers of the Bank.
(i) On the Effective Date, the Board of
Directors of FBKP shall resign and the existing Board of
Directors of the Bank shall be elected the Board of Directors of
FBKP.
(ii) On the Effective Date the newly elected
Board of Directors of FBKP shall elect the following officers:
Chairman - Vincent J. Fumo
President - Anthony DiSandro
Vice President - Carl A. Lingle
Treasurer - Gary Polimeno
and such other officers as such Board may determine.
(e) Conversion of Shares.
(i) PSB Common Stock.
(A) Each share of PSB Common Stock
issued and outstanding immediately prior to the Effective
Date shall, on and after the Effective Date, continue to be
issued and outstanding as an identical share of PSB Common
Stock. Shares of PSB Common Stock owned by FBKP (other than
shares held in trust, managed, custodial or nominee accounts
<PAGE 7> and the like, that in any such case are
beneficially owned by third parties (any such shares, "trust
account shares") and shares acquired in respect of debts
previously contracted (any such shares, "DPC shares")) shall
become treasury stock of PSB on the Effective Date.
(B) Each share of PSB Common Stock
issued and held in the treasury of PSB as of the Effective
Date, if any, shall, on and after the Effective Date,
continue to be issued and held in the treasury of PSB.
(ii) FBKP Common Stock.
(A) Subject to the provisions of
subparagraphs (B), (C), (D) and (E) of this Section
1.02(e)(ii), each share of FBKP Common Stock issued and
outstanding immediately prior to the Effective Date (other
than shares of FBKP Common Stock, if any, then owned by PSB
or FBKP or any FBKP Subsidiary) shall, on the Effective
Date, by reason of the Merger and without any action on the
part of the holder thereof, be converted into and become a
right to receive:
(i) if the PSB Market Value is
greater than or equal to $7.00 and less than or equal
to $9.00, then that number of shares of fully paid and
nonassessable shares of PSB Common Stock as shall equal
$6.00 divided by the PSB Market Value;
(ii) if the PSB Market Value is
less than $7.00, then .857 shares of fully paid and
nonassessable shares of PSB Common Stock, provided that
if the PSB Market Value is less than $6.50 and FBKP
exercises its rights under Section 6.01(c) hereof, PSB
shall have the option to elect, by written notice to
FBKP, within 3 business days of FBKP exercise, to have
the Exchange Ratio be equal to that number (rounded to
the nearest thousandth) of shares of fully paid and
nonassessable shares of PSB Common Stock, equal to
$6.00 divided by the PSB Market Value; or
(iii) if the PSB Market Value is
greater than $9.00, then .667 shares of fully paid and
nonassessable shares of PSB Common Stock.
The Exchange Ratio, as determined pursuant to any of
Sections 1.02(e)(ii)(A)(i), 1.02(e)(ii)(A)(ii) or
1.02(e)(ii)(A)(iii), is hereinafter referred to as the
"Applicable Exchange Ratio".
(B) Each share of FBKP Common Stock
(other than trust account shares or DPC shares) owned by PSB
or a PSB Subsidiary on the Effective Date, if any, shall be
cancelled. <PAGE 8>
(C) Each share of FBKP Common Stock
issued and held in the treasury of FBKP or owned by FBKP or
any FBKP Subsidiary (other than trust account shares or DPC
shares) as of the Effective Date, if any, shall be
cancelled, and no cash, stock or other property shall be
delivered in exchange therefor.
(D) No fraction of a whole share of PSB
Common Stock and no scrip or certificates therefor shall be
issued in connection with the Merger. Any former holder of
FBKP Common Stock who would otherwise be entitled to receive
a fraction of a share of PSB Common Stock shall receive, in
lieu thereof, cash in an amount equal to such fraction of a
share multiplied by the PSB Market Price determined as of
the Effective Date.
(E) Each outstanding share of FBKP
Common Stock the holder of which has perfected his right to
dissent under Section 1607 of the Banking Code and the BCL
and has not effectively withdrawn or lost such right as of
the Effective Date shall not be converted into or represent
a right to receive shares of PSB Common Stock hereunder, and
the holder thereof shall be entitled only to such rights as
are granted by the BCL. FBKP shall give PSB prompt notice
upon receipt by FBKP of any such written demands for payment
of the fair value of such shares of FBKP Common Stock
("Dissenting Shares") and of withdrawals of such demands and
any other instruments provided pursuant to the BCL (any
shareholder duly making such demand being hereinafter called
a "Dissenting Shareholder"). If any Dissenting Shareholder
shall effectively withdraw or lose (through failure to
perfect or otherwise) his right to such payment at any time,
such holder's shares of FBKP Common Stock shall be converted
into the right to receive PSB Common Stock in accordance
with Section 1.02(e)(ii) of this Agreement. Any payments
made in respect of Dissenting Shares shall be made by FBKP,
as the surviving corporation of the Merger.
(f) Stock Options.
(i) On the Effective Date, each FBKP Option
which is then outstanding, whether or not exercisable, shall
cease to represent a right to acquire shares of FBKP Common
Stock and shall be converted automatically into an option to
purchase shares of PSB Common Stock, and PSB shall assume
each FBKP Option, in accordance with the terms of the FBKP
Stock Option Plan, the FBKP Standby Options and the stock
option agreements and certificates by which they are
evidenced, except that from and after the Effective Date,
(i) PSB and its Board of Directors or a duly authorized
committee thereof shall be substituted for FBKP and FBKP's
Board of Directors or duly authorized committee thereof
administering such FBKP Stock Option Plan, (ii) each FBKP
Option assumed by PSB may be exercised solely for shares of
<PAGE 9> PSB Common Stock, (iii) the number of shares of PSB
Common Stock subject to such FBKP Option shall be equal to
the number of shares of FBKP Common Stock subject to such
FBKP Option immediately prior to the Effective Date
multiplied by the Applicable Exchange Ratio, provided that
any fractional shares of PSB Common Stock resulting from
such multiplication shall be rounded to the nearest share,
and (iv) the per share exercise price under each such FBKP
Option shall be adjusted by dividing the per share exercise
price under each such FBKP Option by the Applicable Exchange
Ratio, provided that such exercise price shall be rounded
to the nearest cent. Notwithstanding clauses (iii) and (i
v) of the preceding sentence, each FBKP Option which is an
"incentive stock option" shall be adjusted as required by
Section 424 of the IRC, and the regulations promulgated
thereunder, so as not to constitute a modification,
extension or renewal of the option within the meaning of
Section 424(h) of the IRC. PSB and FBKP agree to take all
necessary steps to effect the foregoing provisions of this
Section 1.02(f).
(ii) On the Effective Date, PSB shall
deliver an assumption agreement expressly assuming the FBKP
Standby Options in accordance with the terms of this
Section 1.02(f)(i). As soon as practicable after the
Effective Date, PSB shall deliver to each holder of the
other FBKP Options an appropriate notice setting forth such
participant's rights pursuant thereto and the grants subject
to such FBKP Options shall continue in effect on the same
terms and conditions, including without limitation the
duration thereof, subject to the adjustments required by
Section 1.02(f)(i) hereof after giving effect to the Merger.
Within 30 days after the Effective Date, PSB shall file a
registration statement on Form S-3 or Form S-8, as the case
may be (or any successor or other appropriate forms), with
respect to the shares of PSB Common Stock subject to such
options and shall use its reasonable best efforts to
maintain the current status of the prospectus or
prospectuses contained therein for so long as such options
remain outstanding.
(g) Surrender and Exchange of FBKP Stock
Certificates.
(i) Exchange of Certificates. Each holder
of shares of FBKP Common Stock who surrenders to PSB (or its
agent) the certificate or certificates representing such
shares will be entitled to receive, as soon as practicable
after the Effective Date, in exchange therefor a certificate
or certificates for the number of whole shares of PSB Common
Stock into which such holder's shares of FBKP Common Stock
have been converted pursuant to the Merger, together with a
check for cash in lieu of any fractional share in accordance
with Section 1.02(e)(ii)(D) hereof. <PAGE 10>
(ii) Rights Evidenced by Certificates. Each
certificate for shares of PSB Common Stock issued in
exchange for certificates for FBKP Common Stock pursuant to
Section 1.02(g)(i) hereof will be dated the Effective Date
and be entitled to dividends and all other rights and
privileges pertaining to such shares of stock from and after
the Effective Date. Until surrendered, each certificate
theretofore evidencing shares of FBKP Common Stock will,
from and after the Effective Date, evidence solely the right
to receive certificates for shares of PSB Common Stock
pursuant to Section 1.02(g)(i) hereof and a check for cash
in lieu of any fractional share in accordance with
Section 1.02(e)(ii)(D) hereof. If certificates for shares
of FBKP Common Stock are exchanged for PSB Common Stock at a
date following one or more record dates for the payment of
dividends or of any other distribution on the shares of PSB
Common Stock, PSB will pay cash in an amount equal to
dividends theretofore payable on such PSB Common Stock and
pay or deliver any other distribution to which holders of
shares of PSB Common Stock have theretofore become entitled.
Upon surrender of certificates for shares of FBKP Common
Stock in exchange for certificates for PSB Common Stock, PSB
also shall pay any dividends to which such holder of FBKP
Common Stock may be entitled as a result of the declaration
of a dividend on the FBKP Common Stock by FBKP in accordance
with the terms of this Agreement with a record date prior to
the Effective Date and a payment date after the Effective
Date. No interest will accrue or be payable in respect of
dividends or cash otherwise payable under this
Section 1.02(g) upon surrender of certificates for shares of
FBKP Common Stock. Notwithstanding the foregoing, no party
hereto will be liable to any holder of FBKP Common Stock for
any amount paid in good faith to a public official or agency
pursuant to any applicable abandoned property, escheat or
similar law. Until such time as certificates for shares of
FBKP Common Stock are surrendered by a FBKP shareholder to
PSB for exchange, PSB shall have the right to withhold
dividends or any other distributions on the shares of PSB
Common Stock issuable to such shareholder.
(iii) Exchange Procedures. Each certificate
for shares of FBKP Common Stock delivered for exchange under
this Section 1.02(g) must be endorsed in blank by the
registered holder thereof or be accompanied by a power of
attorney to transfer such shares endorsed in blank by such
holder. If more than one certificate is surrendered at one
time and in one transmittal package for the same shareholder
account, the number of whole shares of PSB Common Stock for
which certificates will be issued pursuant to this
Section 1.02(g) will be computed on the basis of the
aggregate number of shares represented by the certificates
so surrendered. If shares of PSB Common Stock or payments
of cash are to be issued or made to a person other than the
one in whose name the surrendered certificate is registered,
<PAGE 11> the certificate so surrendered must be properly
endorsed in blank, with signature(s) guaranteed, or
otherwise in proper form for transfer, and the person to
whom certificates for shares of PSB Common Stock is to be
issued or to whom cash is to be paid shall pay any transfer
or other taxes required by reason of such issuance or
payment to a person other than the registered holder of the
certificate for shares of FBKP Common Stock which are
surrendered. As promptly as practicable after the Effective
Date, PSB shall send or cause to be sent to each shareholder
of record of FBKP Common Stock transmittal materials for use
in exchanging certificates representing FBKP Common Stock
for certificates representing PSB Common Stock into which
the former have been converted in the Merger. Certificates
representing shares of PSB Common Stock and checks for cash
in lieu of fractional shares shall be mailed to former
shareholders of FBKP as soon as reasonably possible but in
no event later than thirty (30) business days following the
receipt of certificates representing former shares of FBKP
Common Stock duly endorsed or accompanied by the materials
referenced herein and delivered by certified mail, return
receipt requested (but in no event earlier than the second
business day following the Effective Date).
(iv) Closing of Stock Transfer Books;
Cancellation of FBKP Certificates. Upon the Effective Date,
the stock transfer books for FBKP Common Stock will be
closed and no further transfers of shares of FBKP Common
Stock will thereafter be made or recognized. All
certificates for shares of FBKP Common Stock surrendered
pursuant to this Section 1.02(g) will be cancelled by PSB.
(h) Anti-Dilution Provisions. If, PSB has, at
any time after the date hereof and before the Effective Date,
(A) issued a dividend in shares of PSB Common Stock, (B) combined
the outstanding shares of PSB Common Stock into a smaller number
of shares, (C) subdivided the outstanding shares of PSB Common
Stock, or (D) reclassified the shares of PSB Common Stock, then
the number of shares of PSB Common Stock to be delivered to FBKP
shareholders who are entitled to receive shares of PSB Common
Stock in exchange for shares of FBKP Common Stock shall be
adjusted so that each FBKP shareholder shall be entitled to
receive such number of shares of PSB Common Stock as such
shareholder would have been entitled to receive if the Effective
Date had occurred prior to the happening of such event. (By way
of illustration, if PSB shall declare a stock dividend of 7%
payable with respect to a record date on or prior to the
Effective Date and the conditions set forth above are satisfied,
the Applicable Exchange Ratio shall be adjusted upward by 7%).
<PAGE 12>
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF FBKP
FBKP hereby represents and warrants to PSB that, except
as specifically set forth in the FBKP Disclosure Schedule
delivered to PSB by FBKP on the date hereof:
Section 2.01 Organization.
(a) FBKP is a banking corporation duly organized,
validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania. FBKP has the corporate power and
authority to carry on its business and operations as now being
conducted and to own and operate the properties and assets now
owned and being operated by it. FBKP is not qualified or
licensed to do business as a foreign corporation in any other
jurisdiction and is not required to be so qualified or licensed
as the result of the ownership or leasing of property or the
conduct of its business except where the failure to be so
qualified or licensed would not have a Material Adverse Effect on
FBKP.
(b) There are no FBKP Subsidiaries other than
those identified in the FBKP Disclosure Schedule.
(c) The deposits of FBKP are insured by the FDIC
to the extent provided in the FDIA.
(d) The respective minute books of FBKP and each
FBKP Subsidiary accurately record, in all material respects, all
material corporate actions of their respective shareholders and
boards of directors (including committees).
(e) Prior to the date of this Agreement, FBKP has
delivered to PSB true and correct copies of the articles of
incorporation and bylaws of FBKP.
Section 2.02 Capitalization.
(a) The authorized capital stock of FBKP consists
of (a) 3,500,000 shares of common stock, $0.25 par value ("FBKP
Common Stock"), of which 1,676,875 shares are outstanding,
validly issued, fully paid and nonassessable and free of
preemptive rights, and (b) 500,000 shares of preferred stock,
$2.00 par value, none of which are issued or outstanding.
Neither FBKP nor any FBKP Subsidiary has or is bound by any
subscription, option, warrant, call, commitment, agreement, plan
or other Right of any character relating to the purchase, sale or
issuance or voting of, or right to receive dividends or other
distributions on any shares of FBKP Common Stock, FBKP preferred
stock or any other security of FBKP or any securities
representing the right to vote, purchase or otherwise receive any
shares of FBKP Common Stock, FBKP preferred stock or any other
security of FBKP, other than (i) shares issuable under the PSB
<PAGE 13> Option and (ii) 1,612,500 shares of FBKP Common Stock
issuable under the FBKP Options.
(b) FBKP owns all of the outstanding shares of
capital stock of each FBKP Subsidiary free and clear of all
liens, security interests, pledges, charges, encumbrances,
agreements and restrictions of any kind or nature.
(c) Except as set forth in the FBKP Disclosure
Schedule, neither (i) FBKP, nor (ii) any FBKP Subsidiary, owns
any equity interest, directly or indirectly, other than treasury
stock, in any other company or controls any other company, except
for equity interests held in the investment portfolios of FBKP
Subsidiaries, equity interests held by FBKP Subsidiaries in a
fiduciary capacity, and equity interests held in connection with
the commercial loan activities of FBKP. There are no
subscriptions, options, warrants, calls, commitments, agreements
or other Rights outstanding and held by FBKP with respect to any
other company's capital stock or the equity of any other person.
(d) To the best of FBKP's knowledge, except as
disclosed in FBKP's proxy statement dated June 18, 1998, no
person or "group" (as that term is used in Section 13(d)(3) of
the Exchange Act), is the beneficial owner (as defined in Section
13(d) of the Exchange Act) of 5% or more of the outstanding
shares of FBKP Common Stock.
Section 2.03 Authority; No Violation.
(a) FBKP has full corporate power and authority
to execute and deliver this Agreement and to complete the
transactions contemplated hereby. The execution and delivery of
this Agreement by FBKP and the completion by FBKP of the
transactions contemplated hereby have been duly and validly
approved by the Board of Directors of FBKP and, except for
approval by the shareholders of FBKP as required under the
Banking Code, FBKP's articles of incorporation and bylaws and
Nasdaq requirements applicable to it, no other corporate
proceedings on the part of FBKP are necessary to complete the
transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by FBKP and, subject to
approval of the shareholders of FBKP as required under the
Banking Code, FBKP's articles of incorporation and bylaws and
Nasdaq requirements applicable to it and receipt of the required
approvals from Regulatory Authorities described in Section 3.04
hereof, constitutes the valid and binding obligation of FBKP,
enforceable against FBKP in accordance with its terms, subject to
applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally and subject, as to enforceability, to
general principles of equity.
(b) (A) The execution and delivery of this
Agreement by FBKP, (B) subject to receipt of approvals from the
Regulatory Authorities referred to in Section 3.04 hereof and
<PAGE 14> FBKP's and PSB's compliance with any conditions
contained therein, the completion of the transactions
contemplated hereby, and (C) compliance by FBKP with any of the
terms or provisions hereof, will not (i) conflict with or result
in a breach of any provision of the articles of incorporation or
other organizational document or bylaws of FBKP or any FBKP
Subsidiary; (ii) violate any statute, code, ordinance, rule,
regulation, judgment, order, writ, decree or injunction
applicable to FBKP or any FBKP Subsidiary or any of their
respective properties or assets; or (iii) except as set forth in
the FBKP Disclosure Schedule, violate, conflict with, result in a
breach of any provisions of, constitute a default (or an event
which, with notice or lapse of time, or both, would constitute a
default) under, result in the termination of, accelerate the
performance required by, or result in a right of termination or
acceleration or the creation of any lien, security interest,
charge or other encumbrance upon any of the properties or assets
of FBKP or any FBKP Subsidiary under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture,
deed of trust, license, lease, agreement, commitment or other
instrument or obligation to which FBKP or any FBKP Subsidiary is
a party, or by which they or any of their respective properties
or assets may be bound or affected, except for such violations,
conflicts, breaches or defaults under clause (ii) or (iii) hereof
which, either individually or in the aggregate, will not have a
Material Adverse Effect on FBKP.
Section 2.04 Consents. Except for the consents,
approvals, filings and registrations from or with the Regulatory
Authorities referred to in Section 3.04 hereof and compliance
with any conditions contained therein, and the approval of this
Agreement by the shareholders of FBKP under the Banking Code,
FBKP's articles of incorporation and bylaws and Nasdaq
requirements applicable to it, and except as disclosed in the
FBKP Disclosure Schedule, no consents or approvals of, or filings
or registrations with, any public body or authority are
necessary, and no consents or approvals of any third parties are
necessary, or will be, in connection with (a) the execution and
delivery of this Agreement by FBKP, and (b) the completion by
FBKP of the transactions contemplated hereby. As of the date
hereof, FBKP has no reason to believe that (i) any required
consents or approvals will not be received or will be received
with conditions, limitations or restrictions unacceptable to it
or which would adversely impact FBKP's ability to complete the
transactions contemplated by this Agreement or that (ii) any
public body or authority, the consent or approval of which is not
required or any filing with which is not required, will object to
the completion of the transactions contemplated by this
Agreement.
<PAGE 15>
Section 2.05 Financial Statements.
(a) FBKP has made available to PSB the FBKP
Regulatory Reports. The FBKP Regulatory Reports have been, or
will be, prepared in all material respects in accordance with
applicable regulatory accounting principles and practices
throughout the periods covered by such statements, and fairly
present, or will fairly present in all material respects, the
financial position, results of operations and changes in
shareholders' equity of FBKP as of and for the periods ended on
the dates thereof, in accordance with applicable regulatory
accounting principles applied on a consistent basis.
(b) FBKP has previously delivered to PSB the FBKP
Financials. The FBKP Financials have been, or will be, prepared
in accordance with GAAP applied on a consistent basis throughout
the periods covered by such statements, and fairly present, or
will fairly present, the consolidated financial position, results
of operations, changes in shareholders' equity and cash flows of
FBKP as of and for the periods ending on the dates thereof, in
accordance with generally accepted accounting principles applied
on a consistent basis, except as noted therein.
(c) At the date of each balance sheet included in
the FBKP Financials or the FBKP Regulatory Reports, FBKP did not
have, or will not have any liabilities, obligations or loss
contingencies of any nature (whether absolute, accrued,
contingent or otherwise) of a type required to be reflected in
such FBKP Financials or FBKP Regulatory Reports or in the
footnotes thereto which are not fully reflected or reserved
against therein or fully disclosed in a footnote thereto, except
for liabilities, obligations and loss contingencies which are not
material in the aggregate and which are incurred in the ordinary
course of business, consistent with past practice and except for
liabilities, obligations and loss contingencies which are within
the subject matter of a specific representation and warranty
herein and subject, in the case of any unaudited statements, to
normal, recurring audit adjustments and the absence of footnotes.
(d) All amounts payable as of any date under the
First Bank of Philadelphia Deferred Compensation Plan upon a
Change in Control (as defined therein) have been accrued as
compensation expense on each income statement heretofore
delivered to PSB.
Section 2.06 Taxes.
(a) FBKP has duly filed, and will file, all
federal, state and local tax returns required to be filed by or
with respect to FBKP and all FBKP Subsidiaries on or prior to the
Closing Date (all such returns being accurate and correct in all
material respects) and has duly paid or will pay, or made or will
make, provisions for the payment of all federal, state and local
taxes which have been incurred by or are due or claimed to be due
<PAGE 16> from FBKP and any FBKP Subsidiary by any taxing
authority or pursuant to any tax sharing agreement or arrangement
(written or oral) on or prior to the Closing Date other than
taxes which (i) are not delinquent or (ii) are being contested in
good faith.
(b) No consent pursuant to IRC Section 341(f) has
been filed (or will be filed prior to the Closing Date) by or
with respect to FBKP or any FBKP Subsidiary.
Section 2.07 No Material Adverse Effect. FBKP has not
suffered any Material Adverse Effect since December 31, 1998.
Section 2.08 Contracts.
(a) Except as described in FBKP's proxy statement
dated June 18, 1998 and Annual Reports on Form 10-K for the years
ended December 31, 1996, 1997 and 1998, previously delivered to
PSB, in the footnotes to the audited consolidated financial
statements of FBKP as of December 31, 1998, and for the three
years ended December 31, 1998, or in the FBKP Disclosure
Schedule, neither FBKP nor any FBKP Subsidiary is a party to or
subject to: (i) any employment, consulting or severance contract
or arrangement with any past or present officer, director or
employee of FBKP or any FBKP Subsidiary, except for "at will"
arrangements; (ii) any plan, arrangement or contract providing
for bonuses, pensions, options, deferred compensation, retirement
payments, profit sharing or similar arrangements for or with any
past or present officers, directors or employees of FBKP or any
FBKP Subsidiary; (iii) any collective bargaining agreement with
any labor union relating to employees of FBKP or any FBKP
Subsidiary; (iv) any agreement which by its terms limits the
payment of dividends by any FBKP Subsidiary; (v) any instrument
evidencing or related to indebtedness for borrowed money whether
directly or indirectly, by way of purchase money obligation,
conditional sale, lease purchase, guaranty or otherwise, in
respect of which FBKP or any FBKP Subsidiary is an obligor to any
person, which instrument evidences or relates to indebtedness
other than deposits, repurchase agreements, Federal Home Loan
Bank advances, bankers acceptances and "treasury tax and loan"
accounts established in the ordinary course of business and
transactions in "federal funds" or which contains financial
covenants or other restrictions (other than those relating to the
payment of principal and interest when due) which would be
applicable on or after the Closing Date to PSB or any PSB
Subsidiary; or (vi) any contract (other than this Agreement)
limiting the freedom of any FBKP Subsidiary to engage in any type
of banking or bank-related business permissible under law.
(b) True and correct copies of agreements, plans,
arrangements and instruments referred to in Section 2.08(a),
described in the FBKP proxy statement dated June 18, 1998 or in a
footnote to the FBKP Financials, have been provided to PSB on or
before the date hereof, are listed on the FBKP Disclosure
<PAGE 17> Schedule and are in full force and effect on the date
hereof and neither FBKP nor any FBKP Subsidiary (nor, to the
knowledge of FBKP, any other party to any such contract, plan,
arrangement or instrument) has breached any provision of, or is
in default in any respect under any term of, any such contract,
plan, arrangement or instrument which breach has resulted in or
will result in a Material Adverse Effect with respect to FBKP.
Except as set forth in the FBKP Disclosure Schedule, no party to
any material contract, plan, arrangement or instrument will have
the right to terminate any or all of the provisions of any such
contract, plan, arrangement or instrument as a result of the
transactions contemplated by this Agreement. Except as set forth
in the FBKP Disclosure Schedule, none of the employees (including
officers) of FBKP or any FBKP Subsidiary have written employment
contracts which include the right to terminate their employment
as a result of the execution of this Agreement. Except as set
forth in the FBKP Disclosure Schedule, no plan, employment
agreement, termination agreement, or similar agreement or
arrangement to which FBKP or any FBKP Subsidiary is a party or
under which FBKP or any FBKP Subsidiary may be liable contains
provisions which permit an employee or independent contractor to
terminate it without cause and continue to accrue future benefits
thereunder. Except as set forth in the FBKP Disclosure Schedule,
no such agreement, plan or arrangement (x) provides for
acceleration in the vesting of benefits or payments due
thereunder upon the occurrence of a change in ownership or
control of FBKP or any FBKP Subsidiary absent the occurrence of a
subsequent event; (y) provides for benefits which may cause the
disallowance of a federal income tax deduction under IRC
Section 280G; or (z) requires FBKP or any FBKP Subsidiary to
provide a benefit in the form of FBKP Common Stock or determined
by reference to the value of FBKP Common Stock.
Section 2.09 Ownership of Property; Insurance
Coverage.
(a) Except as disclosed in the FBKP Disclosure
Schedule, FBKP and the FBKP Subsidiaries have, or will have as to
property acquired after the date hereof, good and, as to real
property, marketable title to all assets and properties owned by
FBKP or any FBKP Subsidiary in the conduct of their businesses,
whether such assets and properties are real or personal, tangible
or intangible, including assets and property reflected in the
balance sheets contained in the FBKP Regulatory Reports and in
the FBKP Financials or acquired subsequent thereto (except to the
extent that such assets and properties have been disposed of for
fair value, in the ordinary course of business, since the date of
such balance sheets), subject to no encumbrances, liens,
mortgages, security interests or pledges, except (i) those items
which secure repurchase agreements and liabilities for borrowed
money from a Federal Home Loan Bank, (ii) statutory liens for
amounts not yet delinquent or which are being contested in good
faith and (iii) items permitted under Article IV. FBKP and the
FBKP Subsidiaries, as lessee, have the right under valid and
<PAGE 18> subsisting leases of real and personal properties used
by FBKP and its Subsidiaries in the conduct of their businesses
to occupy or use all such properties as presently occupied and
used by each of them. Except as disclosed in the FBKP Disclosure
Schedule, such existing leases and commitments to lease
constitute or will constitute operating leases for both tax and
financial accounting purposes and the lease expense and minimum
rental commitments with respect to such leases and lease
commitments are as disclosed in the notes to the FBKP Financials.
(b) With respect to all agreements pursuant to
which FBKP or any FBKP Subsidiary has purchased securities
subject to an agreement to resell, if any, FBKP or such FBKP
Subsidiary, as the case may be, has a valid, perfected first lien
or security interest in the securities or other collateral
securing the repurchase agreement, and the value of such
collateral equals or exceeds the amount of the debt secured
thereby.
(c) FBKP and the FBKP Subsidiaries currently
maintain insurance considered by FBKP to be reasonable for their
respective operations and similar in scope and coverage to that
maintained by other businesses similarly engaged. Neither FBKP
nor any FBKP Subsidiary has received notice from any insurance
carrier that (i) such insurance will be cancelled or that
coverage thereunder will be reduced or eliminated, or
(ii) premium costs with respect to such policies of insurance
will be substantially increased. There are presently no material
claims pending under such policies of insurance and no notices
have been given by FBKP under such policies. All such insurance
is valid and enforceable and in full force and effect, and within
the last three years FBKP has received each type of insurance
coverage for which it has applied and during such periods has not
been denied indemnification for any material claims submitted
under any of its insurance policies.
Section 2.10 Legal Proceedings. Except as disclosed
in the FBKP Disclosure Schedule, neither FBKP nor any FBKP
Subsidiary is a party to any, and there are no pending or, to the
best of FBKP's knowledge, threatened legal, administrative,
arbitration or other proceedings, claims (whether asserted or
unasserted), actions or governmental investigations or inquiries
of any nature (i) against FBKP or any FBKP Subsidiary, (ii) to
which FBKP or any FBKP Subsidiary's assets are or may be subject,
(iii) challenging the validity or propriety of any of the
transactions contemplated by this Agreement, or (iv) which could
adversely affect the ability of FBKP to perform under this
Agreement, except for any proceedings, claims, actions,
investigations or inquiries referred to in clauses (i) or (ii)
which, if adversely determined, individually or in the aggregate,
could not be reasonably expected to have a Material Adverse
Effect on FBKP.
<PAGE 19>
Section 2.11 Compliance With Applicable Law.
(a) FBKP and FBKP Subsidiaries hold all licenses,
franchises, permits and authorizations necessary for the lawful
conduct of their businesses under, and have complied in all
material respects with, applicable laws, statutes, orders, rules
or regulations of any federal, state or local governmental
authority relating to them, other than where such failure to hold
or such noncompliance will neither result in a limitation in any
material respect on the conduct of their businesses nor otherwise
have a Material Adverse Effect on FBKP.
(b) Except as disclosed in the FBKP Disclosure
Schedule, neither FBKP nor any FBKP Subsidiary has received any
notification or communication from any Regulatory Authority
(i) asserting that FBKP or any FBKP Subsidiary is not in
compliance with any of the statutes, regulations or ordinances
which such Regulatory Authority enforces; (ii) threatening to
revoke any license, franchise, permit or governmental
authorization which is material to FBKP or any FBKP Subsidiary;
(iii) requiring or threatening to require FBKP or any FBKP
Subsidiary, or indicating that FBKP or any FBKP Subsidiary may be
required, to enter into a cease and desist order, agreement or
memorandum of understanding or any other agreement restricting or
limiting, or purporting to restrict or limit, in any manner the
operations of FBKP or any FBKP Subsidiary, including without
limitation any restriction on the payment of dividends; or
(iv) directing, restricting or limiting, or purporting to direct,
restrict or limit, in any manner the operations of FBKP or any
FBKP Subsidiary, including without limitation any restriction on
the payment of dividends (any such notice, communication,
memorandum, agreement or order described in this sentence is
hereinafter referred to as a "Regulatory Agreement"). Neither
FBKP nor any FBKP Subsidiary has consented to or entered into any
Regulatory Agreement, except as heretofore disclosed to PSB.
Section 2.12 ERISA. FBKP has previously delivered to
PSB true and complete copies of all employee pension benefit
plans within the meaning of ERISA Section 3(2), profit sharing
plans, stock purchase plans, deferred compensation and
supplemental income plans, supplemental executive retirement
plans, employment agreements, annual or long term incentive
plans, severance plans, policies and agreements, group insurance
plans, and all other employee welfare benefit plans within the
meaning of ERISA Section 3(1) (including vacation pay, sick
leave, short-term disability, long-term disability, and medical
plans) and all other employee benefit plans, policies, agreements
and arrangements, all of which are set forth in the FBKP
Disclosure Schedule, maintained or contributed to for the benefit
of the employees or former employees (including retired
employees) and any beneficiaries thereof or directors or former
directors of FBKP or any FBKP Subsidiary, together with (i) the
most recent actuarial (if any) and financial reports relating to
those plans which constitute "qualified plans" under IRC
<PAGE 20> Section 401(a), (ii) the most recent annual reports
relating to such plans filed by them, respectively, with any
government agency, and (iii) all rulings and determination
letters which pertain to any such plans. Neither FBKP, any FBKP
Subsidiary nor any pension plan maintained by FBKP or any FBKP
Subsidiary, has incurred, directly or indirectly, within the past
six (6) years any liability under Title IV of ERISA (including to
the Pension Benefit Guaranty Corporation) or to the IRS with
respect to any pension plan qualified under IRC Section 401(a)
which liability has resulted in or will result in a Material
Adverse Effect with respect to FBKP, except liabilities to the
Pension Benefit Guaranty Corporation pursuant to ERISA
Section 4007, all of which have been fully paid, nor has any
reportable event under ERISA Section 4043 occurred with respect
to any such pension plan. With respect to each of such plans
that is subject to Title IV of ERISA, the present value of the
accrued benefits under such plan, based upon the actuarial
assumptions used for funding purposes in the plan's most recent
actuarial report did not, as of its latest valuation date, exceed
the then current value of the assets of such plan allocable to
such accrued benefits. Neither FBKP nor any FBKP Subsidiary has
incurred or is subject to any liability under ERISA Section 4201
for a complete or partial withdrawal from a multi-employer plan.
All "employee benefit plans," as defined in ERISA Section 3(3),
comply and within the past six (6) years have complied in all
material respects with (i) relevant provisions of ERISA and
(ii) in the case of plans intended to qualify for favorable
income tax treatment, provisions of the IRC relevant to such
treatment. No prohibited transaction (which shall mean any
transaction prohibited by ERISA Section 406 and not exempt under
ERISA Section 408 or any transaction prohibited under IRC
Section 4975) has occurred within the past six (6) years with
respect to any employee benefit plan maintained by FBKP or any
FBKP Subsidiary which would result in the imposition, directly or
indirectly, of an excise tax under IRC Section 4975 or other
penalty under ERISA or the IRC, which, individually or in the
aggregate, has resulted in or will result in a Material Adverse
Effect with respect to FBKP. FBKP and the FBKP Subsidiaries
provide continuation coverage under group health plans for
separating employees and "qualified beneficiaries" in accordance
with the provisions of IRC Section 4980B(f). Such group health
plans are in compliance with Section 1862(b)(1) of the Social
Security Act. Neither FBKP nor any FBKP Subsidiary is aware of
any existing or contemplated audit of any of its employee benefit
plans by the Internal Revenue Service or U.S. Department of
Labor.
Section 2.13 Brokers, Finders and Financial Advisors.
Except for FBKP's engagement of Berwind Financial L.P. in
connection with the transactions contemplated by this Agreement,
neither FBKP nor any FBKP Subsidiary, nor any of their respective
officers, directors, employees or agents, has employed any
broker, finder or financial advisor in connection with the
transactions contemplated by this Agreement or in connection with
<PAGE 21> any transaction other than the Merger, or, except for
its commitments disclosed in the FBKP Disclosure Schedule,
incurred any liability or commitment for any fees or commissions
to any such person in connection with the transactions
contemplated by this Agreement or in connection with any
transaction other than the Merger, which has not been reflected
in the FBKP Financials. The FBKP Disclosure Schedule shall
contain as an exhibit the engagement letter between FBKP and
Berwind Financial L.P.
Section 2.14 Environmental Matters. To the knowledge
of FBKP, neither FBKP nor any FBKP Subsidiary, nor any properties
owned or operated by FBKP or any FBKP Subsidiary has been or is
in violation of or liable under any Environmental Law which
violation or liability, individually or in the aggregate,
resulted in, or will result, in a Material Adverse Effect with
respect to FBKP. There are no actions, suits or proceedings, or
demands, claims, notices or investigations (including without
limitation notices, demand letters or requests for information
from any environmental agency) instituted or pending, or to the
knowledge of FBKP, threatened, relating to the liability of any
property owned or operated by FBKP or any FBKP Subsidiary under
any Environmental Law.
Section 2.15 Allowance for Loan Losses. The allowance
for loan losses reflected, and to be reflected, in the FBKP
Regulatory Reports, and shown, and to be shown, on the balance
sheets contained in the FBKP Financials have been, and will be,
established in accordance with the requirements of GAAP and all
applicable regulatory criteria.
Section 2.16 Information to be Supplied. The
information to be supplied by FBKP for inclusion in the
Registration Statement (including the Prospectus/Proxy Statement)
will not, at the time the Registration Statement is declared
effective pursuant to the Securities Act and as of the date the
Prospectus/Proxy Statement is mailed to shareholders of PSB and
FBKP and up to and including the date(s) of the meetings of
shareholders of PSB and FBKP to which such Prospectus/Proxy
Statement relates, contain any untrue statement of a material
fact or omit to state any material fact necessary in order to
make the statements therein not misleading. The information
supplied, or to be supplied, by FBKP for inclusion in the
Applications will, at the time such documents are filed with any
Regulatory Authority and up to and including the date(s) of the
obtainment of any required regulatory approvals or consents, be
accurate in all material aspects.
Section 2.17 Securities Documents. FBKP has made
available to PSB copies of its (i) annual reports on SEC
Form 10-K for the years ended December 31, 1998, 1997 and 1996,
and (ii) proxy materials used in connection with its meetings of
shareholders held in 1998, 1997 and 1996. Such reports and such
proxy materials complied, at the time filed with the FRB, in all
<PAGE 22> material respects, with the Exchange Act and all
applicable rules and regulations of the FRB.
Section 2.18 Related Party Transactions. Except as
disclosed (i) in the FBKP Disclosure Schedule, (ii) in the FBKP
proxy statement dated June 18, 1998 or (iii) in the footnotes to
the FBKP Financials, FBKP is not a party to any transaction
(including any loan or other credit accommodation but excluding
deposits in the ordinary course of business) with any Affiliate
of FBKP (except an FBKP Subsidiary); and all such transactions
(a) were made in the ordinary course of business, (b) were made
on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable
transactions with other Persons, and (c) did not involve more
than the normal risk of collectability or present other
unfavorable features. Except as set forth on the FBKP Disclosure
Schedule, no loan or credit accommodation to any Affiliate of
FBKP is presently in default or, during the three year period
prior to the date of this Agreement, has been in default or has
been restructured, modified or extended. FBKP has not been
notified that principal and interest with respect to any such
loan or other credit accommodation will not be paid when due or
that the loan grade classification accorded such loan or credit
accommodation by FBKP is inappropriate.
Section 2.19 Loans. Each loan reflected as an asset
in the FBKP Financial Statements (i) is evidenced by notes,
agreements or other evidences of indebtedness which are true,
genuine and correct (ii) to the extent secured, has been secured
by valid liens and security interests which have been perfected,
and (ii) is the legal, valid and binding obligation of the
obligor named therein, enforceable in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent conveyance and
other laws of general applicability relating to or affecting
creditors' rights and to general equity principles, in each case
other than loans as to which the failure to satisfy the foregoing
standards would not have a Material Adverse Effect on FBKP.
Section 2.20 Accounting for the Merger;
Reorganization. As of the date hereof, FBKP does not have any
reason to believe that the Merger will fail to qualify (i) for
pooling-of-interests accounting treatment under GAAP, or (ii) as
a reorganization under Section 368(a) of the IRC.
Section 2.21 Fairness Opinion. FBKP has received a
written opinion from Berwind Financial L.P. to the effect that,
as of the date hereof, the consideration to be received by
shareholders of FBKP pursuant to this Agreement is fair, from a
financial point of view, to such shareholders.
Section 2.22 Quality of Representations. The
representations made by FBKP in this Agreement are true, correct
and complete in all material respects, and do not omit statements
<PAGE 23> necessary to make them not misleading under all facts
and circumstances.
Section 2.23 Year 2000 Compliance. To the best of
FBKP's knowledge, the advent of the year 2000 will not adversely
effect the FBKP's operations or the performance of information
technology used by FBKP. Without limiting the generality of the
foregoing, (i) the hardware and software used by FBKP is designed
to be used prior to, during, and after the calendar 2000 A.D. and
such hardware and software will operate during each time period
without error relating to date data which represents or
references different centuries or more than one century, (ii) the
hardware and software will not abnormally end or provide invalid
or incorrect results as a result of date data, and (iii) the
hardware and software used by FBKP will be designed to ensure
year 2000 A.D. compatibility, including date data, century
recognition, leap year, calculations which accommodate same
century and multi-century formulae in date values, and date data
interface values that reflect the century.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PSB
PSB hereby represents and warrants to FBKP that, except
as set forth in the PSB Disclosure Schedule delivered by PSB to
FBKP on or prior to the date hereof:
Section 3.01 Organization.
(a) PSB is a corporation duly organized, validly
existing and in good standing under the laws of the Commonwealth
of Pennsylvania. PSB is a bank holding company duly registered
under the BHCA. PSB has the corporate power and authority to
carry on its business and operations as now being conducted and
to own and operate the properties and assets now owned and being
operated by it. Each PSB Subsidiary is duly organized, validly
existing, and in good standing under the laws of the jurisdiction
of its incorporation and each possesses full corporate power and
authority to carry on its respective business and to own, lease
and operate its properties as presently conducted. Neither PSB
nor any PSB Subsidiary is required by the conduct of its business
or the ownership or leasing of its assets to qualify to do
business as a foreign corporation in any jurisdiction other than
the Commonwealth of Pennsylvania except where the failure to be
so qualified would not have a Material Adverse Effect on PSB.
(b) The Bank is a state savings bank, duly
organized and validly existing under the laws of the Commonwealth
of Pennsylvania. The Bank has the corporate power and authority
to carry on its business and operations as now being conducted
and to own and operate the properties and assets now owned and
being operated by it.
<PAGE 24>
(c) The deposits of the Bank are insured by the
FDIC to the extent provided in the FDIA.
(d) The respective minute books of PSB and the
Bank accurately record in all material respects all material
corporate action of their respective shareholders and boards of
directors (including committees).
(e) Prior to the execution of this Agreement, PSB
has delivered to FBKP true and correct copies of the articles of
incorporation and the bylaws of PSB and the Bank, respectively,
as in effect on the date hereof.
Section 3.02 Capital Structure.
(a) The authorized capital stock of PSB consists
of (a) 10,000,000 shares of common stock, no par value ("PSB
Common Stock"), of which, at the date of this Agreement, no
shares were issued and held by PSB as treasury stock and
3,101,140 shares are outstanding, validly issued, fully paid and
nonassessable, and (b) 5,000,000 shares of preferred stock, no
par value, of which no shares are issued or outstanding. No
shares of PSB Common Stock were issued in violation of any
preemptive rights. PSB has no Rights authorized, issued or
outstanding, other than options to acquire 92,242 shares of PSB
Common Stock under PSB's stock option plan.
(b) To the best of PSB's knowledge, except as
disclosed in the PSB Disclosure Schedule, no person or "group"
(as that term is used in Section 13(d)(3) of the Exchange Act) is
the beneficial owner (as defined in Section 13(d) of the Exchange
Act) of 5% or more of the outstanding shares of PSB Common Stock.
(c) PSB owns all of the capital stock of the
Bank, free and clear of any lien or encumbrance. Except for the
PSB Subsidiaries, PSB does not possess, directly or indirectly,
any material equity interest in any corporation, except for
equity interests held in the investment portfolios of PSB
Subsidiaries, equity interests held by PSB Subsidiaries in a
fiduciary capacity, and equity interests held in connection with
the commercial loan activities of the Bank.
Section 3.03 Authority; No Violation.
(a) PSB has full corporate power and authority to
execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The Bank has full corporate
power and authority to execute and deliver the plan of merger and
to consummate the Merger. The execution and delivery of this
Agreement by PSB and the completion by PSB of the transactions
contemplated hereby have been duly and validly approved by the
Board of Directors of PSB and, except for approval of the
shareholders of PSB under Nasdaq requirements applicable to it,
no other corporate proceedings on the part of PSB are necessary
<PAGE 25> to complete the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by PSB
and, subject to approval by the shareholders of PSB under Nasdaq
requirements applicable to it and receipt of the required
approvals of Regulatory Authorities described in Section 3.04
hereof, constitutes the valid and binding obligation of PSB,
enforceable against PSB in accordance with its terms, subject to
applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally and subject, as to enforceability, to
general principles of equity.
(b) (A) The execution and delivery of this
Agreement by PSB, (B) subject to receipt of approvals from the
Regulatory Authorities referred to in Section 3.04 hereof and
FBKP's and PSB's compliance with any conditions contained
therein, the consummation of the transactions contemplated
hereby, and (C) compliance by PSB with any of the terms or
provisions hereof or of the plan of merger will not (i) conflict
with or result in a breach of any provision of the articles of
incorporation or other organizational document or bylaws of PSB
or any PSB Subsidiary; (ii) violate any statute, code, ordinance,
rule, regulation, judgment, order, writ, decree or injunction
applicable to PSB or any PSB Subsidiary or any of their
respective properties or assets; or (iii) violate, conflict with,
result in a breach of any provisions of, constitute a default (or
an event which, with notice or lapse of time, or both, would
constitute a default), under, result in the termination of,
accelerate the performance required by, or result in a right of
termination or acceleration or the creation of any lien, security
interest, charge or other encumbrance upon any of the properties
or assets of PSB or any PSB Subsidiary under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture,
deed of trust, license, lease, agreement or other investment or
obligation to which PSB or any PSB Subsidiary is a party, or by
which they or any of their respective properties or assets may be
bound or affected, except for such violations, conflicts,
breaches or defaults under clause (ii) or (iii) hereof which,
either individually or in the aggregate, will not have a Material
Adverse Effect on PSB.
Section 3.04 Consents. Except for consents,
approvals, filings and registrations from or with the FRB, the
DOJ, the SEC, the PDOB, the PDS, the NASD and state "blue sky"
authorities, and compliance with any conditions contained
therein, and the approval of this Agreement by the shareholders
of PSB in accordance with Nasdaq requirements applicable to it,
and the approval of the plan of merger by PSB as the sole
shareholder of the Bank, no consents or approvals of, or filings
or registrations with, any public body or authority are
necessary, and no consents or approvals of any third parties are
necessary, or will be, in connection with (a) the execution and
delivery of this Agreement by PSB and (b) the completion by PSB
of the transactions contemplated hereby. As of the date hereof,
PSB has no reason to believe that (i) any required consents or
<PAGE 26> approvals will not be received or will be received with
conditions, limitations or restrictions unacceptable to it or
which would adversely impact PSB's or the Bank's ability to
complete the transactions contemplated by this Agreement or that
(ii) any public body or authority, the consent or approval of
which is not required or any filing with which is not required,
will object to the completion of the transactions contemplated by
this Agreement.
Section 3.05 Financial Statements.
(a) PSB has made, or will make, the PSB
Regulatory Reports available to FBKP for inspection. The PSB
Regulatory Reports have been, or will be, prepared in all
material respects in accordance with applicable regulatory
accounting principles and practices throughout the periods
covered by such statements, and fairly present, or will fairly
present in all material respects, the financial position, results
of operations, and changes in shareholders' equity of PSB as of
and for the periods ended on the dates thereof, in accordance
with applicable regulatory accounting principles applied on a
consistent basis.
(b) PSB has previously delivered, or will
deliver, to FBKP the PSB Financials. The PSB Financials have
been, or will be, prepared in accordance with GAAP applied on a
consistent basis throughout the periods covered by such
statements, except as noted therein, and fairly present, or will
fairly present, the consolidated financial position, results of
operations and cash flows of PSB as of and for the periods ending
on the dates thereof, in accordance with GAAP applied on a
consistent basis, except as noted therein.
(c) At the date of each balance sheet included in
the PSB Financials or PSB Regulatory Reports, PSB did not have
any liabilities, obligations or loss contingencies of any nature
(whether absolute, accrued, contingent or otherwise) of a type
required to be reflected in such PSB Financials or PSB Regulatory
Reports or in the footnotes thereto which are not fully reflected
or reserved against therein or disclosed in a footnote thereto,
except for liabilities, obligations or loss contingencies which
are not material in the aggregate and which are incurred in the
ordinary course of business, consistent with past practice, and
except for liabilities, obligations or loss contingencies which
are within the subject matter of a specific representation and
warranty herein and subject, in the case of any unaudited
statements, to normal recurring audit adjustments and the absence
of footnotes.
Section 3.06 Taxes. PSB and the PSB Subsidiaries are
members of the same affiliated group within the meaning of IRC
Section 1504(a). PSB has duly filed, and will file, all federal,
state and local tax returns required to be filed by or with
respect to PSB and all PSB Subsidiaries on or prior to the
<PAGE 27> Closing Date (all such returns being accurate and
correct in all material respects) and has duly paid or will pay,
or made or will make, provisions for the payment of all federal,
state and local taxes which have been incurred by or are due or
claimed to be due from PSB and any PSB Subsidiary by any taxing
authority or pursuant to any tax sharing agreement or arrangement
(written or oral) on or prior to the Closing Date other than
taxes which (i) are not delinquent or (ii) are being contested in
good faith.
Section 3.07 No Material Adverse Effect. PSB has not
suffered any Material Adverse Effect since December 31, 1998.
Section 3.08 Ownership of Property; Insurance
Coverage.
(a) PSB and the PSB Subsidiaries have good and,
as to real property, marketable title to all assets and
properties owned by PSB or any of its Subsidiaries in the conduct
of their businesses, whether such assets and properties are real
or personal, tangible or intangible, including assets and
property reflected in the balance sheets contained in the PSB
Regulatory Reports and in the PSB Financials or acquired
subsequent thereto (except to the extent that such assets and
properties have been disposed of for fair value, in the ordinary
course of business, since the date of such balance sheets),
subject to no encumbrances, liens, mortgages, security interests
or pledges, except (i) those items that secure liabilities for
borrowed money and that are described in the PSB Disclosure
Schedule or permitted under Article IV hereof, and (ii) statutory
liens for amounts not yet delinquent or which are being contested
in good faith. PSB and the PSB Subsidiaries, as lessee, have the
right under valid and subsisting leases of real and personal
properties used by PSB and its Subsidiaries in the conduct of
their businesses to occupy and use all such properties as
presently occupied and used by each of them.
(b) PSB and the PSB Subsidiaries currently
maintain insurance in amounts considered by PSB to be reasonable
for their respective operations, and such insurance is similar in
scope and coverage to that maintained by other businesses
similarly engaged. Neither PSB nor any PSB Subsidiary has
received notice from any insurance carrier that (i) such
insurance will be cancelled or that coverage thereunder will be
reduced or eliminated or (ii) premium costs with respect to such
insurance will be substantially increased.
Section 3.09 Legal Proceedings. Neither PSB nor any
PSB Subsidiary is a party to any, and there are no pending or, to
the best of PSB's knowledge, threatened legal, administrative,
arbitration or other proceedings, claims, actions or governmental
investigations or inquiries of any nature (i) against PSB or any
PSB Subsidiary, (ii) to which PSB's or any PSB Subsidiary's
assets are or may be subject, (iii) challenging the validity or
<PAGE 28> propriety of any of the transactions contemplated by
this Agreement, or (iv) which could adversely affect the ability
of PSB to perform under this Agreement, except for any
proceedings, claims, actions, investigations or inquiries
referred to in clauses (i) or (ii) which, individually or in the
aggregate, could not be reasonably expected to have a Material
Adverse Effect on PSB.
Section 3.10 Compliance With Applicable Law.
(a) PSB and the PSB Subsidiaries hold all
licenses, franchises, permits and authorizations necessary for
the lawful conduct of their businesses under, and have complied
in all material respects with, applicable laws, statutes, orders,
rules or regulations of any federal, state or local governmental
authority relating to them, other than where such failure to hold
or such noncompliance will neither result in a limitation in any
material respect on the conduct of their businesses nor otherwise
have a Material Adverse Effect on PSB.
(b) Neither PSB nor any PSB Subsidiary has
received any notification or communication from any Regulatory
Authority (i) asserting that PSB or any PSB Subsidiary is not in
compliance with any of the statutes, regulations or ordinances
which such Regulatory Authority enforces; (ii) threatening to
revoke any license, franchise, permit or governmental
authorization which is material to PSB or any PSB Subsidiary;
(iii) requiring or threatening to require PSB or any PSB
Subsidiary, or indicating that PSB or any PSB Subsidiary may be
required, to enter into a cease and desist order, agreement or
memorandum of understanding or any other agreement restricting or
limiting, or purporting to restrict or limit, in any manner the
operations of PSB or any PSB Subsidiary, including without
limitation any restriction on the payment of dividends; or
(iv) directing, restricting or limiting, or purporting to direct,
restrict or limit, in any manner the operations of PSB or any PSB
Subsidiary, including without limitation any restriction on the
payment of dividends (any such notice, communication, memorandum,
agreement or order described in this sentence is hereinafter
referred to as a "Regulatory Agreement"). Neither PSB nor any
PSB Subsidiary has consented to or entered into any Regulatory
Agreement, except as heretofore disclosed to FBKP.
Section 3.11 Information to be Supplied. The
information to be supplied by PSB for inclusion in the
Registration Statement (including the Prospectus/Proxy Statement)
will not, at the time the Registration Statement is declared
effective pursuant to the Securities Act and as of the date the
Prospectus/Proxy Statement is mailed to shareholders of PSB and
FBKP and up to and including the date(s) of the meetings of
shareholders of PSB and FBKP to which such Prospectus/Proxy
Statement relates, contain any untrue statement of a material
fact or omit to state any material fact necessary in order to
make the statements therein not misleading. The information
<PAGE 29> supplied, or to be supplied, by PSB for inclusion in
the Applications will, at the time such documents are filed with
any Regulatory Authority and up to and including the date(s) of
the obtainment of any required regulatory approvals or consents,
be accurate in all material aspects.
Section 3.12 ERISA. PSB has previously made available
to FBKP true and complete copies of the employee pension benefit
plans within the meaning of ERISA Section 3(2), profit sharing
plans, stock purchase plans, deferred compensation and
supplemental income plans, supplemental executive retirement
plans, annual incentive plans, group insurance plans, and all
other employee welfare benefit plans within the meaning of ERISA
Section 3(1) (including vacation pay, sick leave, short-term
disability, long-term disability, and medical plans), and all
other employee benefit plans, policies, agreements and
arrangements, all of which are set forth on the PSB Disclosure
Schedule, maintained or contributed to for the benefit of the
employees or former employees (including retired employees) and
any beneficiaries thereof or directors or former directors of PSB
or any PSB Subsidiary, together with (i) the most recent
actuarial (if any) and financial reports relating to those plans
which constitute "qualified plans" under IRC Section 401(a),
(ii) the most recent annual reports relating to such plans filed
by them, respectively, with any government agency, and (iii) all
rulings and determination letters which pertain to any such
plans. Neither PSB nor any PSB Subsidiary, and no pension plan
maintained by PSB or any PSB Subsidiary, has incurred, directly
or indirectly, within the past six (6) years any liability under
Title IV of ERISA (including to the Pension Benefit Guaranty
Corporation) or to the IRS with respect to any pension plan
qualified under IRC Section 401(a) which liability has resulted
in or will result in a Material Adverse Effect with respect to
PSB, except liabilities to the Pension Benefit Guaranty
Corporation pursuant to ERISA Section 4007, all of which have
been fully paid, nor has any reportable event under ERISA Section
4043 occurred with respect to any such pension plan. With
respect to each of such plans that is subject to Title IV of
ERISA, the present value of the accrued benefits under such plan,
based upon the actuarial assumptions used for funding purposes in
the plan's most recent actuarial report did not, as of its latest
valuation date, exceed the then current value of the assets of
such plan allocable to such accrued benefits. Neither PSB nor
any PSB Subsidiary has incurred or is subject to any liability
under ERISA Section 4201 for a complete or partial withdrawal
from a multi-employer plan. All "employee benefit plans," as
defined in ERISA Section 3(3), comply and within the past six
(6) years have complied in all material respects with
(i) relevant provisions of ERISA, and (ii) in the case of plans
intended to qualify for favorable income tax treatment,
provisions of the IRC relevant to such treatment. No prohibited
transaction (which shall mean any transaction prohibited by ERISA
Section 406 and not exempt under ERISA Section 408 or any
transaction prohibited under IRC Section 4975) has occurred
<PAGE 30> within the past six (6) years with respect to any
employee benefit plan maintained by PSB or any PSB Subsidiary
that would result in the imposition, directly or indirectly, of
an excise tax under IRC Section 4975 or other penalty under ERISA
or the IRC, which individually or in the aggregate, has resulted
in or will result in a Material Adverse Effect with respect to
PSB. PSB and the PSB Subsidiaries provide continuation coverage
under group health plans for separating employees and "qualified
beneficiaries" in accordance with the provisions of IRC Section
4980B(f). Such group health plans are in compliance with Section
1862(b)(1) of the Social Security Act.
Section 3.13 Securities Documents. PSB has made, or
will make, available to FBKP copies of its annual reports on SEC
Form 10-K for the years ended December 31, 1996, 1997 and 1998.
Such reports complied, at the time filed with the FDIC, in all
material respects, with the Exchange Act and the applicable rules
and regulations of the FDIC and the SEC.
Section 3.14 Environmental Matters. To the knowledge
of PSB, neither PSB nor any PSB Subsidiary, nor any properties
owned or operated by PSB or any PSB Subsidiary has been or is in
violation of or liable under any Environmental Law which
violation or liability, individually or in the aggregate,
resulted in or will result in a Material Adverse Effect with
respect to PSB. There are no actions, suits or proceedings, or
demands, claims, notices or investigations (including without
limitation notices, demand letters or requests for information
from any environmental agency) instituted or pending, or to the
knowledge of PSB, threatened, relating to the liability of any
property owned or operated by PSB or any PSB Subsidiary under any
Environmental Law.
Section 3.15 Allowance for Loan Losses. The allowance
for loan losses reflected, and to be reflected, in the PSB
Regulatory Reports, and shown, and to be shown, on the balance
sheets contained in the PSB Financials have been, and will be,
established in accordance with the requirements of GAAP and all
applicable regulatory criteria.
Section 3.16 Brokers and Finders. Except for PSB's
engagement of Hopper Soliday in connection with the transactions
contemplated by this Agreement, neither PSB nor any PSB
Subsidiary, nor any of their respective officers, directors,
employees or agents, has employed any broker, finder or financial
advisor, or incurred any liability for any fees or commissions to
any such person, in connection with the transactions contemplated
by this Agreement.
Section 3.17 Loans. Each loan reflected as an asset
in the PSB Financials (i) is evidenced by notes, agreements or
other evidences of indebtedness which are true, genuine and
correct (ii) to the extent secured, has been secured by valid
liens and security interests which have been perfected, and
<PAGE 31> (ii) is the legal, valid and binding obligation of the
obligor named therein, enforceable in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent conveyance and
other laws of general applicability relating to or affecting
creditors' rights and to general equity principles, in each case
other than loans as to which the failure to satisfy the foregoing
standards would not have a Material Adverse Effect on PSB.
Section 3.18 Accounting for the Merger;
Reorganization. As of the date hereof, PSB does not have any
reason to believe that the Merger will fail to qualify (i) for
pooling-of-interests treatment under GAAP, or (ii) as a
reorganization under Section 368(a) of the IRC.
Section 3.19 Quality of Representations. The
representations made by PSB in this Agreement are true, correct
and complete in all material respects and do not omit statements
necessary to make the representations not misleading under the
circumstances.
Section 3.20 Year 2000 Compliance. To the best of
PSB's knowledge, the advent of the year 2000 will not adversely
effect PSB's or the Bank's operations or the performance of
information technology used by PSB or the Bank. Without limiting
the generality of the foregoing, (i) the hardware and software
used by PSB or the Bank is designed to be used prior to, during,
and after the calendar 2000 A.D. and such hardware and software
will operate during each time period without error relating to
date data which represents or references different centuries or
more than one century, (ii) the hardware and software will not
abnormally end or provide invalid or incorrect results as a
result of date data, and (iii) the hardware and software used by
PSB or the Bank will be designed to ensure year 2000 A.D.
compatibility, including date data, century recognition, leap
year, calculations which accommodate same century and multi-
century formulae in date values, and date data interface values
that reflect the century."
ARTICLE IV
COVENANTS OF THE PARTIES
Section 4.01 Conduct of FBKP's Business.
(a) From the date of this Agreement to the
Closing Date, FBKP and each FBKP Subsidiary will conduct its
business and engage in transactions, including extensions of
credit, only in the ordinary course and consistent with past
practice and policies, except as otherwise required by this
Agreement or with the written consent of PSB. FBKP will use its
reasonable good faith efforts, to (i) preserve its business
organizations intact, (ii) maintain good relationships with
employees, and (iii) preserve for itself the good will of
customers of FBKP and FBKP Subsidiaries and others with whom
<PAGE 32> business relationships exist. From the date hereof to
the Closing Date, except as otherwise consented to or approved by
PSB in writing or as permitted or required by this Agreement,
FBKP will not, and FBKP will not permit any FBKP Subsidiary to:
(i) amend or change any provision of its
articles of incorporation or bylaws;
(ii) change the number of authorized or
issued shares of its capital stock or issue or grant any
option, warrant, call, commitment, subscription, Right or
agreement of any character relating to its authorized or
issued capital stock or any securities convertible into
shares of such stock, or split, combine or reclassify any
shares of capital stock, or declare, set aside or pay any
dividend or other distribution in respect of capital stock,
or redeem or otherwise acquire any shares of capital stock,
except that (A) FBKP may issue up to an aggregate of
1,612,500 shares of FBKP Common Stock upon the valid
exercise of FBKP Options, and (B) FBKP may issue shares of
FBKP Common Stock pursuant to the PSB Option.
(iii) grant any severance or termination pay
(other than pursuant to written policies or written
agreements of FBKP or FBKP Subsidiaries in effect on the
date hereof and provided to PSB prior to the date hereof)
to, or enter into any new or amend any existing employment
agreement with, or increase the compensation of, any
employee, officer or director of FBKP or any FBKP
Subsidiary, except for routine periodic increases,
individually and in the aggregate, in accordance with past
practice;
(iv) merge or consolidate FBKP or any FBKP
Subsidiary with any other corporation; sell or lease all or
any substantial portion of the assets or business of FBKP or
any FBKP Subsidiary; make any acquisition of all or any
substantial portion of the business or assets of any other
person, firm, association, corporation or business
organization other than in connection with the collection of
any loan or credit arrangement between any FBKP Subsidiary
and any other person; enter into a purchase and assumption
transaction with respect to deposits and liabilities; permit
the revocation or surrender by any FBKP Subsidiary of its
certificate of authority to maintain, or file an application
for the relocation of, any existing branch office, or file
an application for a certificate of authority to establish a
new branch office;
(v) Sell or otherwise dispose of any asset
of FBKP or of any FBKP Subsidiary other than in the ordinary
course of business consistent with past practice; subject
any asset of FBKP or of any FBKP Subsidiary to a lien,
pledge, security interest or other encumbrance (other than
<PAGE 33> in connection with deposits, repurchase
agreements, bankers acceptances, "treasury tax and loan"
accounts established in the ordinary course of business and
transactions in "federal funds" and the satisfaction of
legal requirements in the exercise of trust powers) other
than in the ordinary course of business consistent with past
practice; incur any indebtedness for borrowed money (or
guarantee any indebtedness for borrowed money), except in
the ordinary course of business consistent with past
practice;
(vi) take any action which would result in
any of the representations and warranties of FBKP set forth
in this Agreement becoming untrue as of any date after the
date hereof or in any of the conditions set forth in
Article V hereof not being satisfied, except in each case as
may be required by applicable law;
(vii) change any method, practice or
principle of accounting, except as may be required from time
to time by GAAP (without regard to any optional early
adoption date) or any Regulatory Authority responsible for
regulating FBKP;
(viii) waive, release, grant or transfer any
rights of value or modify or change in any material respect
any existing material agreement to which FBKP or any FBKP
Subsidiary is a party, other than in the ordinary course of
business consistent with past practice;
(ix) implement any pension, retirement,
profit sharing, bonus, welfare benefit or similar plan or
arrangement that was not in effect on the date of this
Agreement, or, except as required by law, materially amend
any existing plan or arrangement except to the extent such
amendments do not result in an increase in cost;
(x) purchase any security for its investment
portfolio not rated "A" or higher by either Standard &
Poor's Corporation or Moody's Investor Services, Inc.;
(xi) amend or otherwise modify the
underwriting and other lending guidelines and policies of
FBKP in effect as of the date hereof or otherwise fail to
conduct its lending activities in the ordinary course of
business consistent with past practice;
(xii) enter into, renew, extend or modify
any other transaction with any Affiliate, other than deposit
and loan transactions in the ordinary course of business and
which are in compliance with the requirements of applicable
laws and regulations;
<PAGE 34>
(xiii) enter into any interest rate swap,
floor or cap or similar commitment, agreement or
arrangement;
(xiv) except for the execution of this
Agreement, take any action that would give rise to a right
of payment to any individual under any employment agreement;
(xv) take any action that would preclude the
Merger from qualifying (A) for pooling-of-interests
accounting treatment under GAAP or (B) as a reorganization
within the meaning of Section 368 of the IRC, provided,
however, that nothing contained herein shall limit the
ability of FBKP to comply with its obligations under the PSB
Option; or
(xvi) agree to do any of the foregoing.
For purposes of this Section 4.01, it shall not be
considered in the ordinary course of business for FBKP or any
FBKP Subsidiary to do any of the following: (i) make any capital
expenditure of $10,000 or more not disclosed on FBKP Disclosure
Schedule 4.01, without the prior written consent of PSB;
(ii) make any sale, assignment, transfer, pledge, hypothecation
or other disposition of any assets having a book or market value,
whichever is greater, in the aggregate in excess of $100,000,
other than pledges of assets to secure government deposits, to
exercise trust powers, sales of assets received in satisfaction
of debts previously contracted in the normal course of business,
issuance and sales of loans, or transactions in the investment
securities portfolio by FBKP or a FBKP Subsidiary or repurchase
agreements, in each case, in the ordinary course of business; or
(iii) undertake or enter any lease, contract or other commitment
for its account, other than in the normal course of providing
credit to customers as part of its banking business, involving a
payment by FBKP or any FBKP Subsidiary of more than $10,000
annually, or containing a material financial commitment and
extending beyond 12 months from the date hereof.
Section 4.02 Access; Confidentiality.
(a) From the date of this Agreement through the
Closing Date, FBKP or PSB, as the case may be, shall afford to,
the other party and its authorized agents and representatives,
complete access to their respective properties, assets, books and
records and personnel, at reasonable hours and after reasonable
notice; and the officers of FBKP and PSB will furnish any person
making such investigation on behalf of the other party with such
financial and operating data and other information with respect
to the businesses, properties, assets, books and records and
personnel as the person making such investigation shall from time
to time reasonably request.
<PAGE 35>
(b) FBKP and PSB each agree to conduct such
investigation and discussions hereunder in a manner so as not to
interfere unreasonably with normal operations and customer and
employee relationships of the other party.
(c) In addition to the access permitted by
subparagraph (a) above, from the date of this Agreement through
the Closing Date, FBKP shall permit employees of PSB reasonable
access to and participation in matters relating to problem loans,
loan restructurings and loan work-outs of FBKP and the FBKP
Subsidiaries, provided that nothing contained in this
subparagraph shall be construed to grant PSB or any PSB employee
any decision-making authority with respect to such matters. PSB
shall have the right, however, at PSB's expense, to cause FBKP or
any FBKP Subsidiary to obtain an appraisal by an independent
third party experienced in such matters, and mutually
satisfactory to PSB and FBKP, of the assets or property securing
any loan made by FBKP or any FBKP Subsidiary, with a principal
balance of $250,000 or more.
(d) All information furnished to PSB by FBKP or
by FBKP to PSB previously in connection with the transactions
contemplated by this Agreement or pursuant hereto shall be held
in confidence to the extent required by, and in accordance with,
the confidentiality agreement executed between FBKP and PSB (the
"Confidentiality Agreement").
Section 4.03 Regulatory Matters and Consents.
(a) FBKP and PSB shall promptly prepare a
Prospectus/Proxy Statement to be mailed to their respective
shareholders in connection with the meetings of their respective
shareholders and transactions contemplated hereby, which
Prospectus/Proxy Statement shall conform to all applicable legal
requirements. PSB shall, as promptly as practicable following
the preparation thereof, file the Registration Statement with the
SEC and FBKP and PSB shall use all reasonable efforts to have the
Registration Statement declared effective under the Securities
Act as promptly as practicable after such filing. PSB will
advise FBKP, promptly after PSB receives notice thereof, of the
time when the Registration Statement has become effective or any
supplement or amendment has been filed, of the issuance of any
stop order or the suspension of the qualification of the shares
of capital stock issuable pursuant to the Registration Statement,
or the initiation or threat of any proceeding for any such
purpose, or of any request by the SEC for the amendment or
supplement of the Registration Statement or for additional
information. PSB shall use its reasonable best efforts to
obtain, prior to the effective date of the Registration
Statement, all necessary state securities laws or "Blue Sky"
permits and approvals required to carry out the transactions
contemplated by this Agreement. PSB will provide FBKP with as
many copies of such Registration Statement and all amendments
<PAGE 36> thereto promptly upon the filing thereof as FBKP may
reasonably request.
(b) PSB and FBKP will prepare all Applications to
Regulatory Authorities and make all filings for, and use their
reasonable best efforts to obtain as promptly as practicable
after the date hereof, all necessary permits, consents,
approvals, waivers and authorizations of all Regulatory
Authorities necessary or advisable to consummate the transactions
contemplated by this Agreement.
(c) FBKP will furnish PSB with all information
concerning FBKP and FBKP Subsidiaries as may be reasonably
necessary or advisable in connection with the Registration
Statement and any Application or filing made by or on behalf of
PSB to any Regulatory Authority in connection with the
transactions contemplated by this Agreement.
(d) PSB and FBKP shall have the right to review
in advance, and to the extent practicable each will consult with
the other on, all information which appears in any filing made
with or written materials submitted to the SEC, any Regulatory
Authority or any third party in connection with the transactions
contemplated by this Agreement. In exercising the foregoing
right, each of the parties hereto shall act reasonably and as
promptly as practicable. The parties hereto agree that they will
consult with each other with respect to the obtaining of all
permits, consents, approvals and authorizations of the SEC,
Regulatory Authorities and third parties necessary or advisable
to consummate the transactions contemplated by this Agreement and
each party will keep the other apprised of the status of matters
relating to completion of the transactions contemplated hereby
and thereby.
(e) PSB will promptly furnish FBKP with copies of
all Applications and other written communications to, or received
by PSB or any PSB Subsidiary from, any Regulatory Authority in
respect of the transactions contemplated hereby.
Section 4.04 Taking of Necessary Action. PSB and FBKP
shall each use its reasonable best efforts in good faith, and
each of them shall cause its Subsidiaries to use their reasonable
best efforts in good faith, to take or cause to be taken all
action necessary or desirable on its part so as to permit
completion of the Merger as soon as practicable after the date
hereof, including, without limitation, (A) obtaining the consent
or approval of each individual, partnership, corporation,
association or other business or professional entity whose
consent or approval is required or desirable for consummation of
the transactions contemplated hereby (including assignment of
leases without any change in terms), provided that neither FBKP
nor any FBKP Subsidiary shall agree to make any payments or
modifications to agreements in connection therewith without the
prior written consent of PSB, and (B) requesting the delivery of
<PAGE 37> appropriate opinions, consents and letters from its
counsel and independent auditors. No party hereto shall take, or
cause, or to the best of its ability permit to be taken, any
action that would substantially impair the prospects of
completing the Merger pursuant to this Agreement; provided that
nothing herein contained shall preclude PSB or FBKP or from
exercising its rights under this Agreement or the PSB Option.
Section 4.05 Indemnification; Insurance.
(a) In the event of any threatened or actual
claim, action, suit, proceeding or investigation, whether civil,
criminal or administrative, in which any person who is now, or
has been at any time prior to the date of this Agreement, or who
becomes prior to the Effective Date, a director or officer or
employee of FBKP or any of its Subsidiaries (the "Indemnified
Parties") is, or is threatened to be, made a party to a suit
based in whole or in part on, or arising in whole or in part out
of, or pertaining to (i) the fact that he is or was a director,
officer or employee of FBKP, any of the FBKP Subsidiaries or any
of their respective predecessors or (ii) this Agreement or any of
the transactions contemplated hereby, whether in any case
asserted or arising before or after the Effective Date, the
parties hereto agree to cooperate and use their best efforts to
defend against and respond thereto to the extent permitted by the
BCL and the Articles of Incorporation and Bylaws of FBKP. On and
after the Effective Date, PSB shall indemnify, defend and hold
harmless all prior and then-existing directors and officers of
FBKP or of any FBKP Subsidiary, against (i) all losses, claims,
damages, costs, expenses, liabilities or judgments or amounts
that are paid in settlement (with the prior approval of PSB) of
or in connection with any claim, action, suit, proceeding or
investigation ("Indemnified Liabilities") based in whole or in
part on or arising in whole or in part out of the fact that such
person is or was a director, officer or employee of FBKP or any
FBKP Subsidiary, whether pertaining to any matter existing or
occurring at or prior to the Effective Date and whether asserted
or claimed prior to, or at or after, the Effective Date and
(ii) all Indemnified Liabilities based in whole or in part on, or
arising in whole or in part out of, or pertaining to this
Agreement or the transactions contemplated hereby, to the same
extent as such officer, director or employee may be indemnified
by FBKP or any FBKP Subsidiary as of the date hereof including
the right to advancement of expenses, provided, however, that any
such officer, director or employee of FBKP or any FBKP Subsidiary
may not be indemnified by PSB and/or the Bank if such
indemnification is prohibited by applicable law.
(b) PSB shall maintain FBKP's existing directors'
and officers' liability insurance policy (or a policy providing
comparable coverage amounts on terms generally no less favorable,
including PSB's existing policy if it meets the foregoing
standard) covering persons who are currently covered by such
insurance for a period of five years after the Effective Date;
<PAGE 38> provided, however, that in no event shall PSB be
obligated to expend, in order to maintain or provide insurance
coverage pursuant to this Section 4.05(b), any amount per annum
in excess of 125% of the amount of the annual premiums paid as of
the date hereof by FBKP for such insurance (the "Maximum
Amount"). If the amount of the annual premiums necessary to
maintain or procure such insurance coverage exceeds the Maximum
Amount, PSB shall use all reasonable efforts to maintain the most
advantageous policies of directors' and officers' insurance
obtainable for an annual premium equal to the Maximum Amount.
(c) In the event that PSB or any of its
respective successors or assigns (i) consolidates with or merges
into any other person and shall not be the continuing or
surviving corporation or entity of such consolidation or merger
or (ii) transfers all or substantially all of its properties and
assets to any Person, then, and in each such case the successors
and assigns of such entity shall assume the obligations set forth
in this Section 4.05.
Section 4.06 No Other Bids and Related Matters. So
long as this Agreement remains in effect, FBKP shall not and FBKP
shall not authorize or permit any of its directors, officers,
employees or agents, to directly or indirectly (i) respond to,
solicit, initiate or encourage any inquiries relating to, or the
making of any proposal which relates to, an Acquisition
Transaction (as defined below), (ii) recommend or endorse an
Acquisition Transaction, (iii) participate in any discussions or
negotiations regarding an Acquisition Transaction, (iv) provide
any third party (other than PSB or an affiliate of PSB) with any
nonpublic information in connection with any inquiry or proposal
relating to an Acquisition Transaction or (v) enter into an
agreement with any other party with respect to an Acquisition
Transaction. Notwithstanding the foregoing, (i) the Board of
Directors of FBKP may respond to unsolicited inquiries relating
to an Acquisition Transaction or (ii) the Board of Directors of
FBKP may recommend or endorse an Acquisition Transaction, in each
case, if it receives a written opinion of outside counsel that
the failure to do so would constitute a breach of their fiduciary
duty. FBKP will immediately cease and cause to be terminated any
existing activities, discussions or negotiations previously
conducted with any parties other than PSB with respect to any of
the foregoing, and will take all actions necessary or advisable
to inform the appropriate individuals or entities referred to in
the first sentence hereof of the obligations undertaken in this
Section 4.06. FBKP will notify PSB orally (within one day) and
in writing (as promptly as practicable) if any inquiries or
proposals relating to an Acquisition Transaction are received by,
any such information is requested from, or any such negotiations
or discussions are sought to be initiated or continued with,
FBKP. As used in this Agreement, "Acquisition Transaction" shall
mean one of the following transactions with a party other than
PSB or an affiliate of PSB: (i) a merger or consolidation, or
any similar transaction, involving FBKP or an FBKP Subsidiary,
<PAGE 39> (ii) a purchase, lease or other acquisition of all or a
substantial portion of the assets or liabilities of FBKP or an
FBKP Subsidiary or (iii) a purchase or other acquisition
(including by way of share exchange, tender offer, exchange offer
or otherwise) of a substantial interest in any class or series of
equity securities of FBKP (other than as permitted by Section
4.01(a)(ii) hereof) or an FBKP Subsidiary.
Section 4.07 Duty to Advise; Duty to Update Disclosure
Schedule. Each party shall promptly advise the other party of
any change or event having a Material Adverse Effect on it or
which it believes would or would be reasonably likely to cause or
constitute a material breach of any of its representations,
warranties or covenants set forth herein. Each party shall
update its respective Disclosure Schedule as promptly as
practicable after the occurrence of an event or fact which, if
such event or fact had occurred prior to the date of this
Agreement, would have been disclosed in such Disclosure Schedule.
The delivery of such updated Schedule shall not relieve a party
from any breach or violation of this Agreement and shall not have
any effect for the purposes of determining the satisfaction of
the condition set forth in Section 5.01(c) or 5.02(c) hereof, as
applicable.
Section 4.08 Conduct of PSB's Business. From the date
of this Agreement to the Closing Date, PSB will use its best
efforts to (x) preserve its business organizations intact,
(y) maintain good relationships with employees, and (z) preserve
for itself the goodwill of customers of PSB and PSB Subsidiaries
and others with whom business relationships exist.
Section 4.09 Current Information.
(a) During the period from the date of this
Agreement to the Effective Date, the respective Presidents shall
confer on a monthly or more frequent basis with representatives
of the other party regarding its financial condition, operations
and business and matters relating to the completion of the
transactions contemplated hereby. As soon as reasonably
available, but in no event more than 45 days after the end of
each calendar quarter ending after the date of this Agreement,
and within 25 days after the end of each month, FBKP and PSB will
deliver to the other party a consolidated balance sheet and a
consolidated statement of operations, without related notes, for
such month.
Section 4.10 Undertakings by PSB and FBKP.
(a) From and after the date of this Agreement,
FBKP shall:
(i) Phase I Environmental Audit. Permit
PSB, if PSB elects to do so, at its own expense, to cause a
"phase I environmental audit" to be performed at any
<PAGE 40> physical location owned or occupied by FBKP or any
FBKP Subsidiary on the date hereof;
(ii) Timely Review. If requested by PSB at
PSB's sole expense, cause its independent certified public
accountants to perform a review of its unaudited
consolidated financial statements as of the end of any
calendar quarter, in accordance with Statement of Auditing
Standards No. 36, and to issue its report on such financial
statements as soon as is practicable thereafter; and
(iii) List of Nonperforming Assets. Provide
PSB, within fifteen (15) days after each quarter a written
list of nonperforming assets;
(b) From and after the date of this Agreement,
PSB and FBKP shall each:
(i) Shareholders Meetings. Take all action
necessary to properly call and convene a special meeting of
its shareholders as soon as practicable after the date
hereof to consider and vote upon this Agreement and the
transactions contemplated hereby. Subject to the provisions
of Section 4.06, the Board of Directors of FBKP and the
Board of Directors of PSB will recommend that the
shareholders of FBKP and PSB, respectively, approve this
Agreement and the transactions contemplated hereby.
(ii) Public Announcements. Cooperate and
cause its respective officers, directors, employees and
agents to cooperate in good faith, consistent with their
respective legal obligations, in the preparation and
distribution of, and agree upon the form and substance of,
any press release related to this Agreement and the
transactions contemplated hereby, and any other public
disclosures related thereto, including without limitation,
communications to FBKP shareholders and FBKP's internal
announcements and customer disclosures, but nothing
contained herein shall prohibit either party from making any
disclosure which its counsel deems necessary under
applicable law;
(iii) Maintenance of Insurance. Maintain,
and cause their respective Subsidiaries to maintain,
insurance in such amounts as are reasonable to cover such
risks as are customary in relation to the character and
location of its properties and the nature of its business;
(iv) Maintenance of Books and Records.
Maintain, books of account and records in accordance with
GAAP applied on a basis consistent with those principles
used in preparing the financial statements heretofore
delivered;
<PAGE 41>
(v) Delivery of Securities Documents.
Deliver to the other, copies of all Securities Documents
simultaneously with the filing thereof; and
(vi) Taxes. File all federal, state, and
local tax returns required to be filed by them or their
respective Subsidiaries on or before the date such returns
are due (including any extensions) and pay all taxes shown
to be due on such returns on or before the date such payment
is due.
Section 4.11 Employee Benefits and Termination
Benefits.
(a) Employee Benefits. On and after the
Effective Date, the employee pension and welfare benefit plans of
PSB and FBKP (as well as any other plan of FBKP providing for
benefits not subject to ERISA) may, at PSB's election and subject
to the requirements of the IRC, continue to be maintained
separately or consolidated, except as set forth below. In
connection with implementation of the foregoing, the following
provisions and guidelines shall apply:
(i) PSB Employee Stock Ownership Plan
("ESOP"). Employees of FBKP and FBKP Subsidiaries who
become employees of PSB or a PSB Subsidiary shall become
entitled to participate in the PSB ESOP in accordance with
its terms by treating them as newly employed individuals
without any prior service credit under such plan.
(ii) PSB 401(k) Retirement Savings Plan
("401(k) Plan") and Profit Sharing Plan. Employees of FBKP
and FBKP Subsidiaries who become employees of PSB or a PSB
Subsidiary shall become entitled to participate in the PSB
401(k) Plan and the PSB Profit Sharing Plan in accordance
with their terms. In this regard, each such employee shall
(A) receive, for purposes of participation and vesting only,
credit for all service with FBKP or an FBKP Subsidiary, and
(B) enter the PSB 401(k) Plan and the PSB Profit Sharing
Plan on the entry date concurrent with or next following the
employee's satisfaction of such plan's minimum participation
requirements.
(iii) Welfare Benefit Plans. Following the
Merger, the welfare benefit plans of PSB and FBKP (and their
respective subsidiaries) shall initially remain unchanged.
PSB shall undertake a study, in consultation with
appropriate professional advisors, with a view toward the
possible combination of some or all of such plans or the
benefits provided thereunder. Following such study, PSB
shall take such action with respect to such plans (which may
include the implementation of new benefits, reduction or
elimination of some benefits, and the alteration of the
<PAGE 42> respective cost allocation between employer and
employee) as it deems appropriate under the circumstances.
(b) Severance Policy. PSB agrees to cause the
Bank to adopt the severance policy dated October 1, 1998 adopted
by FBKP for executive officers named therein.
(c) Deferred Compensation Plan. PSB agrees to
pay all amounts due under the First Bank of Philadelphia Deferred
Compensation Plan in accordance with its terms.
Section 4.12 Stock Exchange Listing. PSB shall use
all reasonable efforts to cause the shares of PSB Common Stock to
be issued in connection with the Merger to be approved for
quotation on the Nasdaq Stock Market's National Market, subject
to official notice of issuance, as of or prior to the Effective
Date.
Section 4.13 Affiliate Letters.
(a) FBKP has provided to PSB a schedule of each
person that, to the best of its knowledge, is deemed to be an
"Affiliate" of it, as that term is used in Rule 145 under the
Securities Act or Accounting Series Releases 130 and 135 of the
Commission.
(b) FBKP shall use its reasonable best efforts to
cause each person who may be deemed to be an Affiliate of FBKP to
execute and deliver to PSB as soon as practicable after the date
of this Agreement, and in any event prior to the date of the
meetings of shareholders of FBKP and PSB to be called pursuant to
Section 4.10(b)(i) hereof, a written agreement in the form of
Exhibit 2.
Section 4.14 Covenant of PSB. Neither PSB or the Bank
shall take any action that would preclude the Merger from
qualifying (A) for pooling-of-interests accounting treatment
under GAAP or (B) as a reorganization within the meaning of
Section 368 of the IRC.
ARTICLE V
CONDITIONS
Section 5.01 Conditions to FBKP's Obligations under
this Agreement. The obligations of FBKP hereunder shall be
subject to satisfaction at or prior to the Closing Date of each
of the following conditions, unless waived by FBKP pursuant to
Section 7.03 hereof:
(a) Corporate Proceedings. All action required
to be taken by, or on the part of, PSB and the Bank to authorize
the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated by this Agreement
shall have been duly and validly taken by PSB and the Bank; and
<PAGE 43> FBKP shall have received certified copies of the
resolutions evidencing such authorizations;
(b) Covenants. The obligations and covenants of
PSB required by this Agreement to be performed by PSB at or prior
to the Closing Date shall have been duly performed and complied
with in all material respects;
(c) Representations and Warranties. The
representations and warranties of PSB set forth in this Agreement
shall be true and correct, as of the date of this Agreement, and
as of the Closing Date as though made on and as of the Closing
Date, except as to any representation or warranty (i) which
speaks only as of an earlier date or (ii) where the breach of the
representation or warranty would not, either individually or in
the aggregate, constitute a Material Adverse Effect with respect
to PSB;
(d) Approvals of Regulatory Authorities. PSB
shall have received all required approvals of Regulatory
Authorities of the Merger, and delivered copies thereof to FBKP;
and all notice and waiting periods required thereunder shall have
expired or been terminated;
(e) No Injunction. There shall not be in effect
any order, decree or injunction of a court or agency of competent
jurisdiction which enjoins or prohibits consummation of the
transactions contemplated hereby;
(f) Officer's Certificate. PSB shall have
delivered to FBKP a certificate, dated the Closing Date and
signed, without personal liability, by its chairman or president,
to the effect that the conditions set forth in subsections (a)
through (e) of this Section 5.01 have been satisfied, to the best
knowledge of the officer executing the same;
(g) Opinion of PSB's Counsel. FBKP shall have
received an opinion of Stevens & Lee, counsel to PSB, dated the
Closing Date, in form and substance reasonably satisfactory to
FBKP and its counsel to the effect set forth on Exhibit 4
attached hereto;
(h) Registration Statement. The Registration
Statement shall be effective under the Securities Act and no
proceedings shall be pending or threatened by the SEC to suspend
the effectiveness of the Registration Statement; all required
approvals by state securities or "blue sky" authorities with
respect to the transactions contemplated by this Agreement, shall
have been obtained; and neither the Registration Statement nor
any such approval by state securities or "blue sky" authorities
shall be subject to a stop order or threatened stop order by the
SEC or any such authority.
<PAGE 44>
(i) Tax Opinion. FBKP shall have received an
opinion of Stevens & Lee as to federal tax matters substantially
to the effect set forth on Exhibit 5 attached hereto; and
(j) Approval of FBKP's Shareholders. This
Agreement shall have been approved by the shareholders of FBKP by
such vote as is required under the Banking Code, FBKP's articles
of incorporation and bylaws or under Nasdaq requirements
applicable to it;
(k) Fairness Opinion. As of the date of this
Agreement, the Board of Directors of FBKP shall have received a
written or oral fairness opinion from its financial advisor,
Berwind Financial, L.P., that the transaction contemplated by
this Agreement is fair from a financial viewpoint to FBKP
shareholders.
(l) Employment Agreements. Carl A. Lingle and
James T. Schaeffer each shall have executed employment agreements
with the Bank reasonably acceptable to them and the Bank.
Section 5.02 Conditions to PSB's Obligations under
this Agreement. The obligations of PSB hereunder shall be
subject to satisfaction at or prior to the Closing Date of each
of the following conditions, unless waived by PSB pursuant to
Section 7.03 hereof:
(a) Corporate Proceedings. All action required
to be taken by, or on the part of, FBKP to authorize the
execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated by this Agreement
shall have been duly and validly taken by FBKP; and PSB shall
have received certified copies of the resolutions evidencing such
authorizations;
(b) Covenants. The obligations and covenants of
FBKP required by this Agreement to be performed by FBKP at or
prior to the Closing Date shall have been duly performed and
complied with in all material respects;
(c) Representations and Warranties. The
representations and warranties of FBKP set forth in this
Agreement shall be true and correct as of the date of this
Agreement, and as of the Closing Date as though made on and as of
the Closing Date, except as to any representation or warranty
(i) which specifically relates to an earlier date or (ii) where
the breach of the representation or warranty would not, either
individually or in the aggregate, result in a Material Adverse
Effect with respect to FBKP;
(d) Approvals of Regulatory Authorities. PSB
shall have received all required approvals of Regulatory
Authorities for the Merger, without the imposition of any term or
condition that would have a Material Adverse Effect on PSB upon
<PAGE 45> completion of the Merger; and all notice and waiting
periods required thereunder shall have expired or been
terminated;
(e) No Injunction. There shall not be in effect
any order, decree or injunction of a court or agency of competent
jurisdiction which enjoins or prohibits consummation of the
transactions contemplated hereby;
(f) Officer's Certificate. FBKP shall have
delivered to PSB a certificate, dated the Closing Date and
signed, without personal liability, by its chairman of the board
or president, to the effect that the conditions set forth in
subsections (a) through (c) and (e) of this Section 5.02 have
been satisfied, to the best knowledge of the officer executing
the same;
(g) Opinions of FBKP's Counsel. PSB shall have
received an opinion of Pepper Hamilton L.L.P., special counsel to
FBKP, dated the Closing Date, in form and substance reasonably
satisfactory to PSB and its counsel to the effect set forth on
Exhibit 6 attached hereto;
(h) Registration Statement. The Registration
Statement shall be effective under the Securities Act and no
proceedings shall be pending or threatened by the SEC to suspend
the effectiveness of the Registration Statement; all required
approvals by state securities or "blue sky" authorities with
respect to the transactions contemplated by this Agreement, shall
have been obtained; and neither the Registration Statement nor
any such approval by state securities or "blue sky" authorities
shall be subject to a stop order or threatened stop order by the
SEC or any such authority;
(i) Tax Opinion. PSB shall have received an
opinion of Stevens & Lee as to federal tax matters substantially
to the effect set forth on Exhibit 5 attached hereto;
(j) Pooling Letter. PSB shall have received a
letter from Stockton Bates & Company to the effect that, based on
a review of this Agreement and related agreements and the facts
and circumstances then known to it, the Merger shall be accounted
for as a pooling-of-interests under GAAP.
(k) Fairness Opinion. As of the date of this
Agreement, the Board of Directors of PSB shall have received a
written or oral fairness opinion from its financial advisor,
Hopper Soliday, that the transaction contemplated by this
Agreement is fair from a financial viewpoint to PSB shareholders.
(l) Approval of PSB's Shareholders. This
Agreement shall have been approved by the shareholders of PSB by
such vote as is required under PSB's articles of incorporation
and bylaws or under Nasdaq requirements applicable to it;
<PAGE 46>
(m) Approval of Amendment to PSB Articles of
Incorporation. PSB shareholders shall have approved the
amendment to the PSB Articles of Incorporation attached hereto as
Exhibit 7.
(n) Other. FBKP shall have furnished PSB with
such certificates of its officers or others and such documents to
evidence fulfillment of the conditions set forth in this
Section 5.02 as PSB may reasonably request.
ARTICLE VI
TERMINATION, WAIVER AND AMENDMENT
Section 6.01 Termination. This Agreement may be
terminated on or at any time prior to the Closing Date:
(a) By the mutual written consent of the parties
hereto;
(b) By PSB or FBKP:
(i) if the Closing Date shall not have
occurred on or before December 31 1999, unless the failure
of such occurrence shall be due to the failure of the party
seeking to terminate this Agreement to perform or observe in
any material respect its agreements set forth in this
Agreement required to be performed or observed by such party
on or before the Closing Date; or
(ii) if either party has received a final
unappealable administrative order from a Regulatory
Authority whose approval or consent has been requested that
such approval or consent will not be granted, or in the case
of a termination by PSB, will not be granted absent the
imposition of terms and conditions which would permit
satisfaction of the condition set forth at Section 5.02(d)
hereof, unless the failure of such occurrence shall be due
to the failure of the party seeking to terminate this
Agreement to perform or observe in any material respect its
agreements set forth herein required to be performed or
observed by such party on or before the Closing Date;
(c) By FBKP if the PSB Market Value is less than
$6.50 and PSB shall not make the election specified in the
proviso clause to Section 1.02(e)(ii)(A)(ii) hereof;
(d) at any time on or prior to the Effective
Date, by FBKP in writing if PSB has, or by PSB in writing if FBKP
has, in any material respect, breached (i) any material covenant
or undertaking contained herein or (ii) any representation or
warranty contained herein, which in the case of a breach by PSB
<PAGE 47> would have a Material Adverse Effect on PSB and in the
case of a breach by FBKP would have a Material Adverse Effect on
FBKP, in any case if such breach has not been substantially cured
by the earlier of (i) 30 days after the date on which written
notice of such breach is given to the party committing such
breach or (ii) or if on such date such breach no longer causes a
Material Adverse Effect; or
(e) by either the Board of Directors of PSB or
the Board of Directors of FBKP if the Board of Directors of the
other party shall have withdrawn, modified or changed in a manner
adverse to the terminating party its approval or recommendation
of this Agreement and the transactions contemplated hereby.
(f) By PSB on or before April 30, 1999 if either
Mr. Lingle or Mr. Schaeffer shall fail to confirm in writing
(which confirmation shall be deemed satisfaction of the condition
to closing set forth in Section 5.01(l)) that the form of
employment agreement tendered to them is acceptable.
Section 6.02 Effect of Termination. If this Agreement
is terminated pursuant to Section 6.01 hereof, this Agreement
shall forthwith become void (other than Section 4.02(d) and
Section 7.01 hereof, which shall remain in full force and
effect), and there shall be no further liability on the part of
PSB or FBKP to the other, except for any liability arising out of
any uncured willful breach of any covenant or other agreement
contained in this Agreement, any fraudulent breach of a
representation or warranty, in this Agreement and any obligation
or liability arising under the PSB Option. Nothing contained in
this Section 6.02 shall be deemed to prohibit PSB or FBKP from
maintaining an action against a third party for tortious
interference or otherwise.
ARTICLE VII
MISCELLANEOUS
Section 7.01 Expenses. Except for the cost of
printing and mailing the Proxy Statement/Prospectus which shall
be shared equally, each party hereto shall bear and pay all costs
and expenses incurred by it in connection with the transactions
contemplated hereby, including fees and expenses of its own
financial consultants, accountants and counsel.
Section 7.02 Non-Survival of Representations and
Warranties. All representations, warranties and, except to the
extent specifically provided otherwise herein, agreements and
covenants, other than those covenants that by their terms are to
be performed after the Effective Date, including without
limitation the covenants set forth in Sections 1.02(f) and (g)
and 4.05 hereof, which will survive the Merger, shall terminate
on the Closing Date.
<PAGE 48>
Section 7.03 Amendment, Extension and Waiver. Subject
to applicable law, at any time prior to the consummation of the
transactions contemplated by this Agreement, the parties may
(a) amend this Agreement, (b) extend the time for the performance
of any of the obligations or other acts of either party hereto,
(c) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto, or
(d) waive compliance with any of the agreements or conditions
contained in Articles IV and V hereof or otherwise, provided that
any amendment, extension or waiver granted or executed after
shareholders of FBKP or PSB have approved this Agreement shall
not modify either the amount or the form of the consideration to
be provided hereby to holders of FBKP Common Stock upon
consummation of the Merger or otherwise materially adversely
affect the shareholders of FBKP or PSB without the approval of
the shareholders who would be so affected. This Agreement may
not be amended except by an instrument in writing authorized by
the respective Boards of Directors and signed, by duly authorized
officers, on behalf of the parties hereto. Any agreement on the
part of a party hereto to any extension or waiver shall be valid
only if set forth in an instrument in writing signed by a duly
authorized officer on behalf of such party, but such waiver or
failure to insist on strict compliance with such obligation,
covenant, agreement or condition shall not operate as a waiver
of, or estoppel with respect to, any subsequent or other failure.
Section 7.04 Entire Agreement. This Agreement,
including the documents and other writings referred to herein or
delivered pursuant hereto, contains the entire agreement and
understanding of the parties with respect to its subject matter.
This Agreement supersedes all prior arrangements and
understandings between the parties, both written or oral with
respect to its subject matter. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their
respective successors; provided, however, that nothing in this
Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto and their respective
successors, any rights, remedies, obligations or liabilities
other than pursuant to Sections 1.02(f) and (g) and 4.05.
Section 7.05 No Assignment. Neither party hereto may
assign any of its rights or obligations hereunder to any other
person, without the prior written consent of the other party
hereto.
Section 7.06 Notices. All notices or other
communications hereunder shall be in writing and shall be deemed
given if delivered personally, mailed by prepaid registered or
certified mail (return receipt requested), or sent by telecopy,
addressed as follows:
<PAGE 49>
(a) If to PSB, to:
PSB Bancorp, Inc.
1835 Market Street
Eleven Penn Center
Suite 2601
Philadelphia, Pennsylvania 19103
Attention: Anthony DiSandro, President and
Chief Executive Officer
Telecopy No.: (610) 979-7979
with a copy to:
Stevens & Lee
One Glenhardie Corporate Center
Suite 202
1275 Drummers Lane
P.O. Box 236
Wayne, Pennsylvania 19087-0236
Attention: Jeffrey P. Waldron, Esquire
Telecopy No.: (610) 687-1384
(b) If to FBKP, to:
First Bank of Philadelphia
1424 Walnut Street
Philadelphia, Pennsylvania 19102
Attention: Carl A. Lingle,
President and Chief
Executive Officer
Telecopy No.: (215) 790-5209
<PAGE 50>
with copies to:
Hal Jonathan Shaffer, Esquire
Shaffer, Bonfigleo, Scerni & D'Elia, L.L.C.
Pleasant Valley Building
921 Pleasant Valley Avenue, 2nd Floor
Mt. Laurel, New Jersey 08054
Telecopy No.: (609) 866-1188
and
Pepper Hamilton, L.L.P.
3000 Two Logan Square
Eighteenth and Arch Streets
Philadelphia, Pennsylvania 19103
Attention: L. Garrett Dutton, Jr., Esquire
Telecopy No.: (215) 981-4750
Section 7.07 Captions. The captions contained in this
Agreement are for reference purposes only and are not part of
this Agreement.
Section 7.08 Counterparts. This Agreement may be
executed in any number of counterparts, and each such counterpart
shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one agreement.
Section 7.09 Severability. If any provision of this
Agreement or the application thereof to any person or
circumstance shall be invalid or unenforceable to any extent, the
remainder of this Agreement and the application of such
provisions to other persons or circumstances shall not be
affected thereby and shall be enforced to the greatest extent
permitted by law.
Section 7.10 Governing Law. This Agreement shall be
governed by and construed in accordance with the domestic
<PAGE 51> internal law (including the law of conflicts of law) of
the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the parties have caused this
Agreement to be executed by their duly authorized officers as of
the day and year first above written.
PSB BANCORP, INC.
By
Anthony DiSandro,
President and Chief
Executive Officer
PENNSYLVANIA SAVINGS BANK
By
Anthony DiSandro,
President and Chief
Executive Officer
FIRST BANK OF PHILADELPHIA
By
Carl A. Lingle,
President and Chief
Executive Officer
<PAGE 52>
<PAGE>
Exhibit 1
ARTICLES AND PLAN OF REORGANIZATION
THESE ARTICLES AND Plan of Reorganization ("Plan of
Reorganization") dated ____________, 1999, is by and between
PENNSYLVANIA SAVINGS BANK, a Pennsylvania-chartered savings bank
(the "Bank"), with offices at 1835 Market Street, Eleven Penn
Center, Philadelphia, Pennsylvania 19103, and FIRST BANK OF
PHILADELPHIA, a Pennsylvania-chartered bank ("FBKP"), with
offices at 1424 Walnut Street, Philadelphia, Pennsylvania 19102.
BACKGROUND
1. The Bank is a Pennsylvania bank and a wholly-owned
subsidiary of PSB Bancorp, Inc., a Pennsylvania corporation
("PSB"). The authorized capital stock of the Bank consists of
3,000 shares of common stock, par value $1.00 per share ("Bank
Common Stock"), of which at the date hereof 3,000 shares are
issued and outstanding, and 3,000 shares of preferred stock, none
of which are outstanding.
2. FBKP is a Pennsylvania bank. The authorized
capital stock of FBKP consists of 3,500,000 shares of common
stock, par value $.25 per share ("FBKP Common Stock"), of which
at the date hereof 1,676,875 shares are issued and outstanding,
and 500,000 shares of preferred stock $2.00 par value, none of
which are outstanding.
3. The respective Boards of Directors of PSB, the
Bank and FBKP deem the merger of the Bank with and into FBKP,
pursuant to the terms and conditions set forth or referred to
herein, to be desirable and in the best interests of the
respective corporations and their respective shareholders.
4. The respective Boards of Directors of PSB, the
Bank and FBKP have adopted resolutions approving this Plan of
Merger and approving an Agreement dated March __, 1999 (the
"Agreement") between the Bank, PSB, and FBKP, pursuant to which
this Plan of Reorganization is being executed by the Bank and
FBKP.
AGREEMENT
In consideration of the premises and of the mutual
covenants and agreements herein contained, and in accordance with
the applicable laws and regulations of the Commonwealth of
<PAGE 53> Pennsylvania, the Bank and FBKP, intending to be
legally bound hereby, agree:
ARTICLE I
MERGER
Subject to the terms and conditions of this Plan of
Reorganization and in accordance with the applicable laws and
regulations of the Commonwealth of Pennsylvania, on the Effective
Date (as that term is defined in Article V hereof): the Bank
shall merge with and into FBKP; the separate existence of the
Bank shall cease; and FBKP shall be the surviving corporation
(such transaction referred to herein as the "Reorganization" and
FBKP, as the surviving corporation in the Reoriganization,
referred to herein as the "Surviving Bank"). The name of the
Surviving Bank shall be "________" and it shall have its home
office at 1835 Market Street, Eleven Penn Center, Philadelphia,
Pennsylvania 19103.
ARTICLE II
ARTICLES OF INCORPORATION AND BYLAWS
On and after the Effective Date, the Articles of
Incorporation and Bylaws of FBKP, as in effect immediately prior
to the Effective Date, shall automatically be and remain the
Articles of Incorporation and Bylaws of the Surviving Bank, until
altered, amended or repealed.
ARTICLE III
BOARD OF DIRECTORS AND OFFICERS
3.1 Board of Directors. On and after the Effective
Date, the directors of the Surviving Bank shall consist of the
directors of the Bank duly elected and holding office immediately
prior to the Effective Date. Directors shall be elected annually
and shall hold office until their successors are elected and
qualified. The names and residence addresses of the directors
are:
Name Residence Address
P. Charles DeRita
Sylvia M. DiBona
Anthony DiSandro
James W. Eastwood
Thomas J. Finley, Jr.
Jane Scaccetti Fumo
Vincent J. Fumo
James F. Kenney <PAGE 54>
S. Michael Palermo
Rosanne Pauciello
Alfonso Tumini
3.2 Officers. On and after the Effective Date, the
officers of the Surviving Bank shall consist of the officers of
the Bank duly elected and holding office immediately prior to the
Effective Date and such other officers as the Board of Directors
of FBKP may elect.
ARTICLE IV
CONVERSION OF SHARES
4.1 Stock of the Bank. Each share of FBKP Common
Stock issued and outstanding immediately prior to the Effective
Date shall be automatically converted into ________ shares of
common stock of PSB pursuant to the provisions of Section 1.02(e)
of the Agreement.
4.2 Stock of FBKP. Each share of the Bank Common
Stock issued and outstanding immediately prior to the Effective
Date, shall, on the Effective Date, be cancelled, and no cash,
stock or other property shall be delivered in exchange therefor.
4.3 FBKP Stock Options. Each option to acquire FBKP
Common Stock issued and outstanding immediately prior to the
Effective Date shall be automatically converted into an option to
acquire PSB common stock pursuant to the provisions of
Section 1.02(f) of the Agreement.
ARTICLE V
EFFECTIVE DATE OF THE MERGER
The Merger shall be effective on the date on which
articles of merger executed by the Bank and FBKP are filed with
the Secretary of State of the Commonwealth of Pennsylvania,
unless a later date is specified in such articles (the "Effective
Date").
ARTICLE VI
EFFECT OF THE MERGER
6.1 Separate Existence. On the Effective Date: the
separate existence of the Bank shall cease; and all of the
property (real, personal and mixed), rights, powers, duties and
obligations of the Bank shall be taken and deemed to be
transferred to and vested in the Surviving Bank, without further
act or deed, as provided by applicable laws and regulations.
<PAGE 55>
ARTICLE VII
APPROVALS
The approval of this Plan of Reorganization has been
received by (i) PSB, as sole shareholder of the Bank, (ii) a vote
of ______ issued and outstanding shares of FBKP which constitutes
more than 2/3 of the issued and outstanding shares of FBKP Common
Stock (iii) the Board of Governors of the Federal Reserve System,
and (iv) the Pennsylvania Department of Banking.
ARTICLE VIII
AMENDMENT
Subject to applicable law, this Plan of Reorganization
may be amended, by action of the respective Boards of Directors
of the parties hereto, at any time prior to consummation of the
Merger, but only by an instrument in writing signed by duly
authorized officers on behalf of the parties hereto.
ARTICLE IX
MISCELLANEOUS
10.1 Extensions; Waivers. Any of the terms and
conditions of this Plan of Reorganization may be waived at any
time by whichever of the parties hereto is, or the shareholders
of which are, entitled to the benefit thereof by a written
instrument signed by a duly authorized officer of such party.
10.2 Notices. Any notice or other communication
required or permitted under this Plan of Reorganization shall be
given, and shall be effective, in accordance with the provisions
of Section 7.06 of the Agreement.
10.3 Captions. The headings of the several Articles
and Sections herein are inserted for convenience of reference
only and are not intended to be part of, or to affect the meaning
or interpretation of, this Plan of Reorganization.
10.4 Counterparts. For the convenience of the parties
hereto, this Plan of Reorganization may be executed in several
counterparts, each of which shall be deemed the original, but all
of which together shall constitute one and the same instrument.
<PAGE 56>
10.5 Governing Law. This Plan of Reorganization shall
be governed by and construed in accordance with the laws of the
Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the Bank and FBKP have caused this
Plan of Reorganization to be executed by their duly authorized
officers and their corporate seals to be hereunto affixed on the
date first written above.
PENNSYLVANIA SAVINGS BANK
By________________________________
Anthony DiSandro,
President and Chief Executive
Officer
Attest:____________________________
FIRST BANK OF PHILADELPHIA
By_________________________________
Carl A. Lingle,
President and Chief Executive
Officer
Attest:____________________________
PAGE 57
<PAGE>
EXHIBIT 2
March 19, 1999
PSB Bancorp, Inc.
1835 Market Street
Eleven Penn Center
Philadelphia, Pennsylvania 19103
Ladies and Gentlemen:
PSB Bancorp, Inc. ("PSB") and First Bank of Philadelphia
("FBKP") desire to enter into an agreement dated March 19, 1999
("Agreement"), pursuant to which, subject to the terms and
conditions set forth therein, (a) Pennsylvania Savings Bank, a
wholly owned subsidiary of PSB, will merge with and into FBKP
with FBKP surviving the merger, and (b) shareholders of FBKP will
receive common stock of PSB outstanding on the closing date (the
foregoing, collectively, referred to herein as the "Merger").
PSB has required, as a condition to its execution and
delivery to FBKP of the Agreement, that the undersigned execute
and deliver to PSB this Letter Agreement.
In consideration of the foregoing, each of the undersigned
hereby irrevocably:
(a) Agrees to be present (in person or by proxy) at
all meetings of shareholders of FBKP called to vote for approval
of the Agreement and the Merger so that all shares of common
stock of FBKP then owned by the undersigned will be counted for
the purpose of determining the presence of a quorum at such
meetings and to vote or cause to be voted all such shares in
favor of approval and adoption of the Agreement and the
transactions contemplated thereby (including any amendments or
modifications of the terms thereof approved by the Board of
Directors of FBKP);
(b) Agrees not to vote or execute any written consent
to rescind or amend in any manner any prior vote or written
consent, as a shareholder of FBKP, to approve or adopt the
Agreement;
(c) Agrees to use reasonable best efforts to cause the
Merger to be consummated; <PAGE 58>
(d) Agrees not to offer, sell, transfer or otherwise
dispose of any shares of common stock of PSB received in the
Merger, except (i) at such time as a registration statement under
the Securities Act of 1933, as amended ("Securities Act")
covering sales of such PSB common stock is effective and a
prospectus is made available under the Securities Act,
(ii) within the limits, and in accordance with the applicable
provisions of, Rule 145(d) under the Securities Act, or (iii) in
a transaction which, in the opinion of counsel satisfactory to
PSB or as described in a "no-action" or interpretive letter from
the staff of the Securities and Exchange Commission ("SEC"), is
not required to be registered under the Securities Act; and
acknowledges and agrees that PSB is under no obligation to
register the sale, transfer or other disposition of PSB common
stock by the undersigned or on behalf of the undersigned, or to
take any other action necessary to make an exemption from
registration available;
(e) Notwithstanding the foregoing, agrees not to sell,
or in any other way reduce the risk of the undersigned relative
to, any shares of common stock of FBKP or of common stock of PSB,
during the period commencing thirty days prior to the effective
date of the Merger and ending on the date on which financial
results covering at least thirty days of post-Merger combined
operations of PSB and FBKP have been published within the meaning
of Section 201.01 of the SEC's Codification of Financial
Reporting Policies;
(f) Agrees that neither FBKP nor PSB shall be bound by
any attempted sale of any shares of FBKP common stock or PSB
common stock, respectively, and FBKP's and PSB's transfer agents
shall be given appropriate stop transfer orders and shall not be
required to register any such attempted sale, unless the sale has
been effected in compliance with the terms of this Letter
Agreement; and further agrees that the certificate representing
shares of PSB common stock owned by the undersigned may be
endorsed with a restrictive legend consistent with the terms of
this Letter Agreement;
(g) Acknowledges and agrees that the provisions of
subparagraphs (d), (e) and (f) hereof also apply to shares of PSB
common stock and FBKP common stock owned by (i) his or her
spouse, (ii) any of his or her relatives or relatives of his or
her spouse occupying his or her home, (iii) any trust or estate
in which he or she, his or her spouse, or any such relative owns
at least a 10% beneficial interest or of which any of them serves
as trustee, executor or in any similar capacity, and (iv) any
corporation or other organization in which the undersigned, any
affiliate of the undersigned, his or her spouse, or any such
<PAGE 59> relative owns at least 10% of any class of equity
securities or of the equity interest;
(h) Represents that the undersigned has no plan or
intention to sell, exchange, or otherwise dispose of any shares
of common stock of PSB prior to expiration of the time period
referred to in subparagraph (e) hereof; and
(i) Represents that the undersigned has the capacity
to enter into this Letter Agreement and that it is a valid and
binding obligation enforceable against the undersigned in
accordance with its terms, subject to bankruptcy, insolvency and
other laws affecting creditors' rights and general equitable
principles.
_________________________
It is understood and agreed that the provisions of this
Letter Agreement relate solely to the capacity of the undersigned
as a shareholder or other beneficial owner of shares of FBKP
Common Stock and is not in any way intended to affect the
exercise by the undersigned of the undersigned's responsibilities
as a director or officer of FBKP. It is further understood and
agreed that this Letter Agreement is not in any way intended to
affect the exercise by the undersigned of any fiduciary
responsibility which the undersigned may have in respect of any
shares of FBKP common stock held by the undersigned as of the
date hereof.
_________________________
This Letter Agreement may be executed in two or more
counterparts, each of which shall be deemed to constitute an
original, but all of which together shall constitute one and the
same Letter Agreement.
_________________________
This Letter Agreement shall terminate concurrently with any
termination of the Agreement in accordance with its terms.
_________________________
<PAGE 60>
The undersigned intend to be legally bound hereby.
Sincerely,
___________________________________
Hal Jonathan Shaffer
___________________________________
Carl A. Lingle
___________________________________
Alvin B. Heller
___________________________________
Thomas J. Hessert, Jr.
___________________________________
Ronald H. Portnoy
___________________________________
James T. Schaeffer <PAGE 61>
<PAGE>
EXHIBIT 3
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT ("Stock Option Agreement")
dated March 19, 1999, is by and between PSB BANCORP, INC., a
Pennsylvania corporation ("PSB") and FIRST BANK OF PHILADELPHIA,
INC., a Pennsylvania banking corporation ("FBKP").
BACKGROUND
1. PSB and FBKP desire to enter into an Agreement and
Plan of Reorganization, dated March 19, 1999 (the "Agreement"),
providing, among other things, for the acquisition by PSB of FBKP
(the "Merger").
2. As a condition to PSB to enter into the Plan, FBKP
is granting to PSB an option to purchase up to 210,625 shares of
common stock, par value $.25 per share (the "Common Stock") of
FBKP, on the terms and conditions hereinafter set forth.
AGREEMENT
In consideration of the foregoing and the mutual
covenants and agreements set forth herein, PSB and FBKP,
intending to be legally bound hereby, agree:
1. Grant of Option. FBKP hereby grants to PSB, on
the terms and conditions set forth herein, the option to purchase
(the "Option") up to 210,625 shares of Common Stock of FBKP (as
adjusted as set forth herein, the "Option Shares") at a price per
share (as adjusted as set forth herein, the "Option Price") equal
to $5.75.
2. Exercise of Option.
(a) Provided that (i) PSB shall not be, on the
date of exercise, in material breach of the agreements or
covenants contained in the Agreement or this Stock Option
Agreement, and (ii) no preliminary or permanent injunction or
other order against the delivery of shares covered by the Option
issued by any court of competent jurisdiction in the United
States shall be in effect on the date of exercise, upon or after
the occurrence of a Triggering Event (as such term is hereinafter
defined) PSB may exercise the Option, in whole or in part, at any
time or one or more times, from time to time; provided that the
Option shall terminate and be of no further force and effect upon
the earliest to occur of (A) the Effective Date of the Merger, as
<PAGE 62> provided in the Agreement, (B) termination of the
Agreement in accordance with the terms thereof prior to the
occurrence of a Triggering Event or a Preliminary Triggering
Event, other than a termination of the Agreement pursuant to
Section 6.01(d), unless in the case of termination by FBKP
pursuant to Section 6.01(d), such termination is as a result of a
willful breach of the Agreement by PSB (a termination pursuant to
Section 6.01(d), except a termination by FBKP as a result of a
willful breach by PSB, being referred to herein as a "Default
Termination"), (C) 18 months after the termination of the
Agreement by PSB or FBKP pursuant to a Default Termination, and
(D) 18 months after termination of the Agreement (other than
pursuant to a Default Termination) following the occurrence of a
Triggering Event or a Preliminary Triggering Event; and provided,
further, that any purchase of shares upon exercise of the Option
shall be subject to compliance with applicable securities and
banking laws. The rights set forth in Section 3 hereof shall
terminate when the right to exercise the Option terminates (other
than as a result of a complete exercise of the Option) as set
forth above.
(b) As used herein, the term "Triggering Event"
means the occurrence of any of the following events:
(i) a person or group (as such terms are
defined in the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and the rules and regulations
thereunder), other than PSB or an affiliate of PSB, acquires
beneficial ownership (within the meaning of Rule 13d-3 under
the Exchange Act) of 25% or more of the then outstanding
shares of Common Stock (excluding any shares eligible to be
reported on Schedule 13G of the Securities and Exchange
Commission); or
(ii) a person or group, other than PSB or an
affiliate of PSB, enters into an agreement or letter of
intent or memorandum of understanding with FBKP pursuant to
which such person or group or any affiliate of such person
or group would (i) merge or consolidate, or enter into any
similar transaction, with FBKP, (ii) acquire all or
substantially all of the assets or liabilities of FBKP or
(iii) acquire beneficial ownership of securities
representing, or the right to acquire beneficial ownership
or to vote securities representing, 25% or more of the then
outstanding shares of Common Stock (excluding any shares
eligible to be reported on Schedule 13G of the Securities
and Exchange Commission) or the then outstanding shares of
common stock of FBKP Bank, or FBKP shall have authorized,
recommended or publicly proposed, or publicly announced an
<PAGE 63> intention to authorize, recommend or propose, such
an agreement or letter of intent or memorandum of
understanding.
(c) As used herein, the term "Preliminary
Triggering Event" means the occurrence of any of the following
events:
(i) a person or group (as such terms are
defined in the Exchange Act and the rules and regulations
thereunder), other than PSB or an affiliate of PSB, acquires
beneficial ownership (within the meaning of Rule 13d-3 under
the Exchange Act) of 10% or more of the then outstanding
shares of Common Stock (excluding any shares eligible to be
reported on Schedule 13G of the Securities and Exchange
Commission);
(ii) a person or group, other than PSB or an
affiliate of PSB, publicly announces a bona fide proposal
(including a written communication that is or becomes the
subject of public disclosure) for (i) any merger,
consolidation or acquisition of all or substantially all the
assets or liabilities of FBKP or all or substantially all
the assets or liabilities of FBKP Bank, or any other
business combination involving FBKP or FBKP Bank, or (ii) a
transaction involving the transfer of beneficial ownership
of securities representing, or the right to acquire
beneficial ownership or to vote securities representing, 10%
or more of the then outstanding shares of Common Stock or
the then outstanding shares of Common Stock of FBKP Bank
(collectively, a "Proposal"), and thereafter, if such
Proposal has not been Publicly Withdrawn (as such term is
hereinafter defined) at least 30 days prior to the meeting
of shareholders of FBKP called to vote on the Merger, FBKP's
shareholders fail to approve the Merger by the vote required
by applicable law at the meeting of shareholders called for
such purpose or such meeting has been cancelled; or
(iii) the Board of Directors of FBKP shall
(A) fail to recommend the Merger, (B) recommend an
Acquisition Transaction or (C) have withdrawn or modified
in a manner adverse to PSB the recommendation of the Board
of Directors of FBKP with respect to the Agreement and
thereafter FBKP's shareholders fail to approve the Merger by
the vote required by law at the meeting of shareholders
called for such purpose or such meeting is not scheduled or
is cancelled; or
<PAGE 64>
(iv) a person or group, other than PSB or an
affiliate of PSB, makes a bona fide Proposal and thereafter,
but before such Proposal has been Publicly Withdrawn, FBKP
shall have breached any representation, warranty, covenant
or obligation contained in the Agreement and such breach
would entitle PSB to terminate the Agreement under Section
6.01(d) thereof (without regard to the cure period provided
for therein unless such cure is promptly effected without
jeopardizing consummation of the Merger pursuant to the
Agreement).
If more than one of the transactions giving rise to a Triggering
Event or a Preliminary Triggering Event under this Section 2 is
undertaken or effected, then all such transactions shall give
rise only to one Triggering Event or Preliminary Triggering
Event, as applicable, which Triggering Event or Preliminary
Triggering Event shall be deemed continuing for all purposes
hereunder until all such transactions are abandoned.
"Publicly Withdrawn" for purposes of this Section 2
shall mean an unconditional bona fide withdrawal of the Proposal
coupled with a public announcement of no further interest in
pursuing such Proposal or in acquiring any controlling influence
over FBKP or in soliciting or inducing any other person (other
than PSB or an affiliate of PSB) to do so.
Notwithstanding the foregoing, the obligation of FBKP
to issue Option Shares upon exercise of the Option shall be
deferred (but shall not terminate): (i) until the receipt of all
required governmental or regulatory approvals or consents
necessary for FBKP to issue the Option Shares or PSB to exercise
the Option, or until the expiration or termination of any waiting
period required by law, or (ii) so long as any injunction or
other order, decree or ruling issued by any federal or state
court of competent jurisdiction is in effect which prohibits the
sale or delivery of the Option Shares, and, in each case,
notwithstanding any provision to the contrary set forth herein,
the Option shall not expire or otherwise terminate.
FBKP shall notify PSB promptly in writing of the
occurrence of any Triggering Event known to it, it being
understood that the giving of such notice by FBKP shall not be a
condition to the right of PSB to exercise the Option. FBKP will
not take any action which would have the effect of preventing or
disabling FBKP from delivering the Option Shares to PSB upon
exercise of the Option or otherwise performing its obligations
under this Stock Option Agreement, except to the extent required
by applicable securities and banking laws and regulations. In
the event PSB wishes to exercise the Option, PSB shall send a
<PAGE 65> written notice to FBKP (the date of which is
hereinafter referred to as the "Notice Date") specifying the
total number of Option Shares it wishes to purchase and a place
and date between two and ten business days inclusive from the
Notice Date for the closing of such a purchase (a "Closing");
provided, however, that a Closing shall not occur prior to two
days after the later of receipt of any necessary regulatory
approvals or the expiration of any legally required notice or
waiting period, if any.
3. Repurchase of Option by FBKP.
(a) Subject to the last sentence of Section 2(a),
at the request of PSB at any time commencing upon the first
occurrence of a Repurchase Event (as defined in Section 3(d)) and
ending 18 months immediately thereafter, FBKP shall repurchase
from PSB (x) the Option and (y) all shares of Common Stock
purchased by PSB pursuant hereto with respect to which PSB then
has beneficial ownership. The date on which PSB exercises its
rights under this Section 3 is referred to as the "Request Date."
Such repurchase shall be at an aggregate price (the "Section 3
Repurchase Consideration") equal to the sum of:
(i) the aggregate Purchase Price paid by PSB
for any shares of Common Stock acquired pursuant to the
Option with respect to which PSB then has beneficial
ownership;
(ii) the excess, if any, of (x) the
Applicable Price (as defined below) for each share of Common
Stock over (y) the Option Price (subject to adjustment
pursuant to Section 6), multiplied by the number of shares
of Common Stock with respect to which the Option has not
been exercised; and
(iii) the excess, if any, of the Applicable
Price over the Option Price (subject to adjustment pursuant
to Section 6) paid (or, in the case of Option Shares with
respect to which the Option has been exercised, but the
Closing has not occurred, payable) by PSB for each share of
Common Stock with respect to which the Option has been
exercised and with respect to which PSB then has beneficial
ownership, multiplied by the number of such shares.
(b) If PSB exercises it rights under this
Section 3, FBKP shall, within ten (10) business days after the
Request Date, pay the Section 3 Repurchase Consideration to PSB
in immediately available funds, and contemporaneously with such
payment, PSB shall surrender to FBKP the Option and the
<PAGE 66> certificate evidencing the shares of Common Stock
purchased thereunder with respect to which PSB then has
beneficial ownership, and PSB shall warrant that it has sole
record and beneficial ownership of such shares, and that the same
are then free and clear of all liens, claims, charges and
encumbrances of any kind whatsoever. Notwithstanding the
foregoing, to the extent that prior notification to or approval
of any banking agency or department of any federal or state
government, or the respective staffs thereof (the "Regulatory
Authority"), is required in connection with the payment of all or
any portion of the Section 3 Repurchase Consideration, PSB shall
have the ongoing option to revoke its request for repurchase
pursuant to Section 3, in whole or in part, or to require that
FBKP deliver from time to time that portion of the Section 3
Repurchase Consideration that it is not then so prohibited from
paying and promptly file the required notice or application for
approval and expeditiously process the same (and each party shall
cooperate with the other in the filing of any such notice or
application and the obtaining of any such approval), in which
case the ten (10) business day period of time that would
otherwise run pursuant to the preceding sentence for the payment
of the portion of the Section 3 Repurchase Consideration shall
run instead from the date on which, as the case may be, any
required notification period has expired or been terminated or
such approval has been obtained and, in either event, any
requisite waiting period shall have passed. If any Regulatory
Authority disapproves of any part of FBKP's proposed repurchase
pursuant to this Section 3, FBKP shall promptly give notice of
such fact to PSB. If any Regulatory Authority prohibits the
repurchase pursuant to this Section 3, FBKP shall promptly give
notice of such fact to PSB. If any Regulatory Authority
prohibits the repurchase in part but not in whole, then PSB shall
have the right (i) to revoke the repurchase request or (ii) to
the extent permitted by such Regulatory Authority, determine
whether the repurchase should apply to the Option and/or Option
Shares and to what extent to each, and PSB shall thereupon have
the right to exercise the Option as to the number of Option
Shares for which the Option was exercisable at the Request Date
less the sum of the number of shares covered by the Option in
respect of which payment has been made pursuant to
Section 3(a)(ii) and the number of shares covered by the portion
of the Option (if any) that has been repurchased. PSB shall
notify FBKP of its determination under the preceding sentence
within five (5) business days of receipt of notice of disapproval
of the repurchase.
(c) For purposes of this Agreement, the
"Applicable Price" means the highest of (i) the highest price per
share of Common Stock paid for any such share by the person or
<PAGE 67> groups described in Section 3(d)(i), (ii) the price per
share of Common Stock received by a holder of Common Stock in
connection with any merger or other business combination
transaction described in Section 3(d)(ii), (iii) or (iv), or
(iii) the highest closing sales price per share of Common Stock
quoted on the Nasdaq Stock Market during the 40 business days
preceding the Request Date; provided, however, that in the event
of a sale of less than all of FBKP's assets, the Applicable Price
shall be the sum of the price paid in such sale for such assets
and the current market value of the remaining assets of FBKP as
determined by a nationally-recognized investment banking firm
selected by PSB, divided by the number of shares of Common Stock
outstanding at the time of such sale. If the consideration to be
offered, paid or received pursuant to either of the foregoing
clauses (i) or (ii) shall be other than in cash, the value of
such consideration shall be determined in good faith by an
independent nationally-recognized investment banking firm
selected by PSB and reasonably acceptable to FBKP, which
determination shall be conclusive for all purposes of this
Agreement.
(d) As used herein, a Repurchase Event shall
occur if (i) any person or group (as such terms are defined in
the Exchange Act and the rules and regulations thereunder), other
than PSB or an affiliate of PSB, acquires beneficial ownership
(within the meaning of Rule 13d-3 under the Exchange Act) of, or
the right to acquire beneficial ownership of, 25% or more of the
then-outstanding shares of Common Stock, (ii) FBKP shall have
merged or consolidated with any person, other than PSB or an
affiliate of PSB, and shall not be the surviving or continuing
corporation of such merger or consolidation, (iii) any person,
other than PSB or an affiliate of PSB, shall have merged into
FBKP and FBKP shall be the surviving corporation, but, in
connection with such merger, the then-outstanding shares of
Common Stock have been changed into or exchanged for stock or
other securities of FBKP or any other person or cash or any other
property or the outstanding shares of Common Stock immediately
prior to such merger shall after such merger represent less than
50% of the outstanding shares and share equivalents of the
surviving corporation or (iv) FBKP shall have sold or otherwise
transferred more than 25% of its consolidated assets to any
person, other than PSB or an affiliate of PSB.
4. Payment and Delivery of Certificates. At any
Closing hereunder, (a) PSB will make payment to FBKP of the
aggregate price for the Option Shares so purchased by wire
transfer of immediately available funds to an account designated
by FBKP, (b) FBKP will deliver to PSB a stock certificate or
certificates representing the number of Option Shares so
<PAGE 68> purchased, registered in the name of PSB or its
designee, in such denominations as were specified by PSB in its
notice of exercise, and (c) PSB will pay any transfer or other
taxes required by reason of the issuance of the Option Shares so
purchased.
A legend will be placed on each stock certificate
evidencing Option Shares issued pursuant to this Stock Option
Agreement, which legend will read substantially as follows:
"The shares of stock evidenced by this
certificate have not been the subject of a registration
statement filed under the Securities Act of 1933, as
amended (the "Act"), and declared effective by the
Securities and Exchange Commission. These shares may
not be sold, transferred or otherwise disposed of prior
to such time unless FBKP Bancorp, Inc. receives an
opinion of counsel acceptable to it stating that an
exemption from the registration provisions of the Act
is available for such transfer."
5. Adjustment Upon Changes in Capitalization. In the
event of any change in the Common Stock by reason of stock
dividends, split-ups, recapitalizations, combinations,
conversions, divisions, exchanges of shares or the like, then the
number and kind of Option Shares and the Option Price shall be
appropriately adjusted.
6. Filings and Consents. Each of PSB and FBKP will
use its reasonable best efforts to make all filings with, and to
obtain consents of, all third parties and governmental
authorities necessary to the consummation of the transactions
contemplated by this Stock Option Agreement. Within 10 days from
the date hereof, PSB shall file a report of beneficial ownership
on Form 13D with the Securities and Exchange Commission under the
Exchange Act which discloses the rights of PSB hereunder.
7. Representations and Warranties of FBKP. FBKP
hereby represents and warrants to PSB as follows:
(a) Due Authorization. FBKP has full corporate
power and authority to execute, deliver and perform this Stock
Option Agreement and all corporate action necessary for
execution, delivery and performance of this Stock Option
Agreement has been duly taken by FBKP. This Stock Option
Agreement constitutes a legal, valid and binding obligation of
FBKP, enforceable against FBKP in accordance with its terms
(except as may be limited by applicable bankruptcy, insolvency,
Reorganization, moratorium, fraudulent transfer and similar laws
<PAGE 69> of general applicability relating to or affecting
creditors' rights or by general equity principles).
(b) Authorized Shares. FBKP has taken all
necessary corporate action to authorize and reserve for issuance
all shares of Common Stock that may be issued pursuant to any
exercise of the Option.
8. Representations and Warranties of PSB. PSB hereby
represents and warrants to FBKP that PSB has full corporate power
and authority to execute, deliver and perform this Stock Option
Agreement and all corporate action necessary for execution,
delivery and performance of this Stock Option Agreement has been
duly taken by PSB. This Stock Option Agreement constitutes a
legal, valid and binding obligation of PSB, enforceable against
PSB in accordance with its terms (except as may be limited by
applicable bankruptcy, insolvency, Reorganization, moratorium,
fraudulent transfer and similar laws of general applicability
relating to or affecting creditors' rights or by general equity
principles).
9. Specific Performance. The parties hereto
acknowledge that damages would be an inadequate remedy for a
breach of this Stock Option Agreement and that the obligations of
the parties hereto shall be specifically enforceable.
10. Entire Agreement. This Stock Option Agreement and
the Agreement constitute the entire agreement between the parties
with respect to the subject matter hereof and supersede all other
prior agreements and understandings, both written and oral, among
the parties or any of them with respect to the subject matter
hereof.
11. Assignment or Transfer. PSB may not sell, assign
or otherwise transfer its rights and obligations hereunder, in
whole or in part, to any person or group of persons other than to
a subsidiary of PSB. PSB represents that it is acquiring the
Option for PSB's own account and not with a view to, or for sale
in connection with, any distribution of the Option or the Option
Shares. PSB is aware that neither the Option nor the Option
Shares is the subject of a registration statement filed with, and
declared effective by, the Securities and Exchange Commission
pursuant to Section 5 of the Securities Act, but instead each is
being offered in reliance upon the exemption from the
registration requirement provided by Section 4(2) thereof and the
representations and warranties made by PSB in connection
therewith.
<PAGE 70>
12. Amendment of Stock Option Agreement. By mutual
consent of the parties hereto, this Stock Option Agreement may be
amended in writing at any time, for the purpose of facilitating
performance hereunder or to comply with any applicable regulation
of any governmental authority or any applicable order of any
court or for any other purpose.
13. Validity. The invalidity or unenforceability of
any provision of this Stock Option Agreement shall not affect the
validity or enforceability of any other provisions of this Stock
Option Agreement, which shall remain in full force and effect.
14. Notices. All notices, requests, consents and
other communications required or permitted hereunder shall be in
writing and shall be deemed to have been duly given when
delivered personally, by telegram or telecopy, or by registered
or certified mail (postage prepaid, return receipt requested) to
the respective parties as follows:
(i) If to PSB, to:
PSB Bancorp, Inc.
1835 Market Street
Eleven Penn Center - Suite 2601
Philadelphia, Pennsylvania 19103
Attention: Anthony DiSandro, President
and Chief Executive Officer
Telecopy No.: (215) 979-7979
with a copy to:
Stevens & Lee
One Glenhardie Corporate Center
1275 Drummers Lane
P.O. Box 236
Wayne, Pennsylvania 19087-0236
Attention: Jeffrey P. Waldron, Esquire
Telecopy No.: (610) 687-1384
(ii) If to FBKP, to:
First Bank of Philadelphia
1424 Walnut Street
Philadelphia, Pennsylvania 19102
<PAGE 71>
Attention: Carl A. Lingle,
President and Chief Executive
Officer
Telecopy No.: (215) 790-5209
with copies to:
Pepper Hamilton, L.L.P.
3000 Two Logan Square
Eighteenth and Arch Streets
Philadelphia, Pennsylvania 19103
Attention: L. Garrett Dutton, Jr., Esquire
Telecopy No.: (215) 981-4750
or to such other address as the person to whom notice is to be
given may have previously furnished to the others in writing in
the manner set forth above (provided that notice of any change of
address shall be effective only upon receipt thereof).
15. Governing Law. This Stock Option Agreement shall
be governed by and construed in accordance with the domestic
internal law (but not the law of conflicts of law) of the
Commonwealth of Pennsylvania.
16. Captions. The captions in this Stock Option
Agreement are inserted for convenience and reference purposes,
and shall not limit or otherwise affect any of the terms or
provisions hereof.
17. Waivers and Extensions. The parties hereto may,
by mutual consent, extend the time for performance of any of the
obligations or acts of either party hereto. Each party may waive
(i) compliance with any of the covenants of the other party
contained in this Stock Option Agreement and/or (ii) the other
party's performance of any of its obligations set forth in this
Stock Option Agreement.
18. Parties in Interest. This Stock Option Agreement
shall be binding upon and inure solely to the benefit of each
party hereto, and, nothing in this Stock Option Agreement,
express or implied, is intended to confer upon any other person
any rights or remedies of any nature whatsoever under or by
reason of this Stock Option Agreement.
19. Counterparts. This Stock Option Agreement may be
executed in two or more counterparts, each of which shall be
<PAGE 72> deemed to be an original, but all of which shall
constitute one and the same agreement.
20. Expenses. Except as otherwise provided herein,
all costs and expenses incurred by the parties hereto in
connection with the transactions contemplated by this Stock
Option Agreement or the Option shall be paid by the party
incurring such cost or expense.
21. Defined Terms. Capitalized terms which are used
but not defined herein shall have the meanings ascribed to such
terms in the Agreement.
IN WITNESS WHEREOF, each of the parties hereto,
pursuant to resolutions adopted by its Board of Directors, has
caused this Stock Option Agreement to be executed by its duly
authorized officer and has caused its corporate seal to be
affixed hereunto and to be duly attested, all as of the day and
year first above written.
PSB BANCORP, INC.
By________________________________
Anthony DiSandro,
President and Chief
Executive Officer
FIRST BANK OF PHILADELPHIA
By_________________________________
Carl A. Lingle,
President and Chief Executive
Officer <PAGE 73>
<PAGE>
EXHIBIT 4
FORM OF OPINION OF COUNSEL TO PSB
FBKP shall have received from counsel to PSB, an
opinion, dated as of the Closing Date, substantially to the
effect that, subject to normal exceptions and qualifications:
(a) PSB and the Bank have full corporate power to
carry out the transactions contemplated in the Agreement. The
execution and delivery of the Agreement and the consummation of
the transactions contemplated thereunder have been duly and
validly authorized by all necessary corporate action on the part
of PSB and the Bank, and constitutes valid and legally binding
obligations of PSB and the Bank, respectively, except as may be
limited by (i) bankruptcy, insolvency, Reorganization,
moratorium, receivership, conservatorship, and other laws now or
hereafter in effect relating to or affecting the enforcement of
creditors' rights generally or the rights of creditors of federal
savings institutions or their holding companies, (ii) general
equitable principles, and (iii) laws relating to the safety and
soundness of insured depository institutions, and except that no
opinion need be rendered as to the effect or availability of
equitable remedies or injunctive relief (regardless of whether
such enforceability is considered in a proceeding in equity or at
law). Subject to satisfaction of the conditions set forth in the
Agreement, neither the transactions contemplated in the
Agreement, nor compliance by PSB and the Bank with any of the
provisions thereof, will (i) conflict with or result in a breach
or default under (A) the articles of incorporation or bylaws of
PSB or of the Bank, or, (B) to the knowledge of such counsel, any
note, bond, mortgage, indenture, license, agreement or other
material instrument or obligation to which PSB or the Bank is a
party; or (ii) based on certificates of officers and without
independent verification, to the knowledge of such counsel,
result in the creation or imposition of any material lien or
encumbrance upon the property of PSB or the Bank, except such
material lien, instrument or obligation that has been disclosed
pursuant to the Agreement; or (iii) violate in any material
respect any order, writ, injunction or decree known to such
counsel, or any federal or Pennsylvania statute, rule or
regulation applicable to PSB or the Bank.
(b) The Bank is a validly existing savings bank
organized under the laws of the Commonwealth of Pennsylvania.
The deposits of the Bank are insured to the maximum extent
provided by law by the Federal Deposit Insurance Corporation.
<PAGE 74>
(c) There is, to the knowledge of such counsel, no
legal, administrative, arbitration or governmental proceeding or
investigation pending or threatened to which PSB or the Bank is a
party which would, if determined adversely to PSB or the Bank,
have a material adverse effect on the financial condition or
results of operation of PSB and the Bank taken as a whole, or
which presents a claim to restrain or prohibit the transactions
contemplated by the Agreement.
(d) No consent, approval, authorization or order of
any federal or state court or federal or state governmental
agency or body, or to such counsel's knowledge is required for
the consummation by PSB or the Bank of the transactions
contemplated by the Agreement, except for such consents,
approvals, authorizations or orders as have been obtained or
which would not have a Material Adverse Effect upon PSB upon
consummation of the Merger.
(e) Upon the filing and effectiveness of the Articles
of Merger with the PDS in accordance with the Agreement, the
merger of FBKP and of the Bank contemplated by the Agreement,
respectively, will have been effected in compliance with all
applicable federal and Pennsylvania laws and regulations in all
material respects.
(f) The shares of PSB Common Stock to be issued in
connection with the merger have been duly authorized and will,
when issued in accordance with the terms of the Agreement, be
validly issued, fully paid and nonassessable, free and clear of
any mortgage, pledge, lien, encumbrance or claim (legal or
equitable).
(g) In addition to the foregoing opinions, counsel
shall state that the sole basis of such counsel's participation
in conferences with officers and employees of PSB in connection
with the Proxy Statement/Prospectus, and without other
independent investigation or inquiry, such counsel has no reason
to believe that the Proxy Statement/Prospectus, including any
amendments or supplements thereto (except for the financial
information, financial statements, notes to financial statements,
financial schedules and other financial or statistical data and
stock valuation information contained or incorporated by
reference therein and except for any information supplied by FBKP
for inclusion therein, as to which counsel need express no
belief), as of the date of mailing thereof, contained any untrue
statement of a material fact with respect to PSB or omitted to
state any material fact with respect to PSB necessary to make any
statement therein with respect to PSB, in light of the
circumstances under which it was made, not misleading. Counsel
<PAGE 75> may state in connection with the foregoing, that such
counsel has not independently verified and does not assume the
responsibility for the accuracy, completeness or fairness of any
information or statements contained in the Proxy
Statement/Prospectus, except with respect to identified
statements of law or regulations or legal conclusions relating to
PSB or the transactions contemplated in the Agreement and that it
is relying as to materiality as to factual matters on
certificates of officers and representatives of the parties to
the Agreement and other factual representations by FBKP.
such counsel's opinion shall be limited to matters
governed by federal banking and securities laws and by the
Banking Code and BCL.
PAGE 76
<PAGE>
EXHIBIT 5
PENNSYLVANIA SAVINGS BANK
FIRST BANK OF PHILADELPHIA
TAX OPINIONS
1. The Merger (a) will constitute a "Reorganization"
within the meaning of IRC Section 368(a)(1)(A), and (b) will not
be disqualified by reason of the fact that stock of PSB is issued
in the transaction, as permitted by IRC Section 368(a)(2)(E).
2. PSB, Bank and FBKP will each be "a party to a
Reorganization" within the meaning of IRC Section 368(b).
3. No gain or loss will be recognized by PSB on the
constructive receipt of FBKP Common Stock in exchange for Bank
Common Stock surrendered in the Merger.
4. The basis of the FBKP Common Stock to be received
by PSB in the Merger will be determined pursuant to Treasury
regulation Section 1.358-6(c)(2).
5. No gain or loss will be recognized by the Bank or
FBKP by reason of the Merger and upon (a) the transfer of the
assets of the Bank to FBKP, and (b) the assumption by FBKP of the
liabilities of the Bank.
6. The basis of the assets of the Bank in the hands
of FBKP will be the same as the basis of such assets in the hands
of the Bank immediately prior to the Merger.
7. The holding period of the assets of the Bank in
the hands of FBKP will include the period during which such
assets were held by the Bank.
8. No gain or loss will be recognized by the
shareholders of FBKP on the receipt of PSB Common Stock
(including fractional share interests) solely in exchange for
their shares of FBKP Common Stock.
9. The basis of the PSB Common Stock (including
fractional share interests) to be received by the FBKP
shareholders in the Merger will be the same as the basis of the
FBKP Common Stock surrendered in exchange therefor.
10 The holding period of the PSB Common Stock
(including fractional share interests) to be received by the FBKP
<PAGE 77> shareholders in the Merger will include the period
during which the FBKP shareholders held their FBKP Common Stock,
provided the shares of FBKP Common Stock are held as a capital
asset on the [Effective Date] of the Merger.
11. The payment of cash in lieu of fractional share
interests of PSB Common Stock will be treated as if the
fractional share interests were distributed as part of the Merger
and then redeemed by PSB. 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 IRC
Section 302(a).
12. As provided in IRC Section 381(a)(2) and related
Treasury regulations, FBKP will succeed to and take into account
the earnings and profits, or deficit in earnings and profits, of
the Bank as of the Effective Date of the Merger. Any deficit in
the earnings and profits of the Bank or FBKP will be used only to
offset the earnings and profits accumulated after the Merger.
13. Pursuant to IRC Section 381(a) and related
Treasury regulations, FBKP will succeed to and take into account
the items of the Bank described in IRC Section 381(c). Such
items will be taken into account by FBKP subject to the
conditions and limitations of IRC Sections 269, 381, 382, 383,
384 and 1502 and the Treasury regulations thereunder.
Certain portions of the opinions relating to the
federal income tax treatment of FBKP shareholders may not be
applicable to persons who received their FBKP common 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
income tax treatment.
PAGE 78
<PAGE>
EXHIBIT 6
FORM OF OPINION OF COUNSEL TO FBKP
PSB shall have received from counsel to FBKP, an
opinion, dated as of the Closing Date, substantially to the
effect that, subject to normal exceptions and qualifications:
(a) FBKP has full corporate power to carry out the
transactions contemplated in the Agreement. The execution and
delivery of the Agreement and the consummation of the
transactions contemplated thereunder have been duly and validly
authorized by all necessary corporate action on the part of FBKP
and the Agreement constitutes a valid and legally binding
obligation, in accordance with its terms, of FBKP, except as may
be limited by (i) bankruptcy, insolvency, reorganization,
moratorium, receivership, conservatorship, and other laws now or
hereafter in effect relating to or affecting the enforcement of
creditors' rights generally or the rights of creditors of federal
savings institutions or their holding companies, (ii) general
equitable principles, and (iii) laws relating to the safety and
soundness of insured depository institutions, and except that no
opinion need be rendered as to the effect or availability of
equitable remedies or injunctive relief (regardless of whether
such enforceability is considered in a proceeding in equity or at
law). Subject to satisfaction of the conditions set forth in the
Agreement, neither the transactions contemplated in the
Agreement, nor compliance by FBKP with any of the respective
provisions thereof, will (i) conflict with or result in a breach
or default under (A) the articles of incorporation or bylaws of
FBKP, or (B) based on certificates of officers and without
independent verification, to the knowledge of such counsel, any
note, bond, mortgage, indenture, license, agreement or other
instrument or obligation to which FBKP is a party; or (ii) to the
knowledge of such counsel, result in the creation or imposition
of any material lien, instrument or encumbrance upon the property
of FBKP, except such material lien, instrument or obligation that
has been disclosed to PSB pursuant to the Agreement, or
(iii) violate in any material respect any order, writ,
injunction, or decree known to such counsel, or any statute, rule
or regulation applicable to FBKP.
(b) FBKP is a validly existing bank organized under
the laws of the Commonwealth of Pennsylvania. The deposits of
FBKP are insured to the maximum extent provided by law by the
Federal Deposit Insurance Corporation.
<PAGE 79>
(c) There is, to the knowledge of such counsel, no
legal, administrative, arbitration or governmental proceeding or
investigation pending or threatened to which FBKP is a party
which would, if determined adversely to FBKP, have a material
adverse effect on the business, properties, results of
operations, or condition, financial or otherwise, of FBKP taken
as a whole or which presents a claim to restrain or prohibit the
transactions contemplated by the Agreement, respectively.
(d) No consent, approval, authorization, or order of
any federal or state court or federal or state governmental
agency or body, or to such counsel's knowledge of any third
party, is required for the consummation by FBKP of the
transactions contemplated by the Agreement, except for such
consents, approvals, authorizations or orders as have been
obtained or which would not have a Material Adverse Effect upon
PSB upon consummation of the Merger.
In addition to the foregoing opinions, counsel shall
state that on the sole basis of such counsel's participation in
conferences with officers and employees of FBKP in connection
with the preparation of the Prospectus/Proxy Statement and
without other independent investigation or inquiry, such counsel
has no reason to believe that the Prospectus/Proxy Statement,
including any amendments or supplements thereto (except for the
financial information, financial statements, notes to financial
statements, financial schedules and other financial or
statistical data and stock valuation information contained or
incorporated by reference therein and except for any information
supplied by PSB for inclusion therein, as to which counsel need
express no belief), as of the date of mailing thereof and as of
the date of the meeting of shareholders of FBKP to approve the
Merger, contained any untrue statement of a material fact or
omitted to state a material fact necessary to make any statement
therein, in light of the circumstances under which it was made,
not misleading. Counsel may state in connection with the
foregoing that such counsel has not independently verified and
does not assume any responsibility for the accuracy, completeness
or fairness of any information or statements contained in the
Prospectus/Proxy Statement, except with respect to identified
statements of law or regulations or legal conclusions relating to
FBKP or the transactions contemplated in the Agreement and that
it is relying as to materiality as to factual matters on
certificates of officers and representatives of the parties to
the Agreement and other factual representations by FBKP.
Such counsel's opinion shall be limited to matters
governed by federal banking and securities laws and by the
Banking Code and the BCL. <PAGE 80>
<PAGE>
EXHIBIT 7
* Article TENTH of PSB Bancorp's Articles of Incorporation shall
be amended as follows:
TENTH: The affirmative vote of both directors and
shareholders of the Corporation as set forth in this
ARTICLE NINTH shall be required to approve any of the
following (each a "Transaction"):
(a) any merger or consolidation of the
Corporation with or into any other corporation or
any division involving the Corporation;
(b) any share exchange in which a corporation, person
or entity acquires the issued or outstanding shares of
capital stock of the Corporation pursuant to a vote of
shareholders;
(c) any sale, lease, exchange or other transfer of
all, or substantially all, of the assets of the Corporation
to any other corporation, person or entity;
(d) a liquidation or dissolution involving the
Corporation; or
(e) any transaction similar to, or having similar
effect as, any of the foregoing transactions.
In the event of any proposed Transaction, then the
following voting requirements shall apply during the
following applicable time periods: (A) on or before
January 1, 2006, the affirmative vote of both (i) 80%
of the total number of directors then in office
(rounding up to the nearest whole number) and (ii) 80%
of the total votes which all shareholders of the
Corporation are entitled to cast, and if any class of
shares is entitled to vote as a separate class, the
affirmative vote of at least a majority of the votes
entitled to be cast by the outstanding shares of such
class shall be required to approve any Transaction; and
(B) after January 1, 2006, the affirmative vote of both
(i) 66-2/3% of the total number of directors then in
office (rounding up to the nearest whole number) and
(ii) at least a majority of the total votes which all
shareholders are entitled to cast, and if any class of
shares is entitled to vote as a separate class, the
affirmative vote of at least a majority of the votes
<PAGE 81> entitled to be cast by the outstanding shares
of such class shall be required to approve any
Transaction.
The provisions of this ARTICLE TENTH shall not
apply to (A) any Transaction occurring prior to
January 1, 2006 in which members of the Corporation's
Board of Directors immediately prior to the Transaction
continue to constitute at least a majority of the Board
of Directors of the resulting or surviving corporation
upon completion thereof provided the transaction is
approved by both (i) 80% of the total number of
directors then in office (rounding up to the nearest
whole number) and (ii) at least a majority of the total
vote which all shareholders are entitled to cast, and
if any class of shares is entitled to vote as a
separate class, the affirmative vote of at least a
majority of the votes entitled to be cast by the
outstanding shares of such class or (B) any Transaction
approved in advance by the unanimous vote of all
directors of the Corporation then in office.
An affirmative vote as provided in the foregoing
provisions shall be in addition to any vote of the
shareholders otherwise required by law.
The Board of Directors of the Corporation shall
have the power and duty to determine, for purposes of
this ARTICLE TENTH, if any transaction is similar to,
or has a similar effect as, any of the Transactions
identified above in this ARTICLE TENTH. Any such
determination shall be conclusive and binding for all
purposes of this ARTICLE TENTH.
A new Section 2.16 shall be added to PSB Bancorp's Bylaws as
follows:
Section 2.16. Special Director Voting
Requirements. Notwithstanding anything contained
herein to the contrary, until January 1, 2006, approval
of any of the following actions shall require a vote of
80% of the total number of directors of the Corporation
then in office (rounding up to the nearest whole
number):
(i) adopting a motion or resolution to
study sale of the Corporation as a strategic
alternative, or engaging a financial advisor with
respect thereto; <PAGE 82>
(ii) adopting a motion or resolution
approving a fundamental transaction (a
"Fundamental Transaction") involving the
Corporation within the meaning of Chapter 19 of
Title 15 of the Pennsylvania Business Corporation
Law of 1988, as amended, or any successor
provisions (whether by merger, consolidation,
share exchange or otherwise), or calling a special
meeting of shareholders of the Corporation to
consider any such proposal or placing any such
proposal on the agenda for an annual meeting of
shareholders of the Corporation;
(iii) recommending that shareholders of
the Corporation (A) accept a transaction or tender
their shares of the Corporation's voting
securities in connection with a tender or exchange
offer for the Corporation's voting securities or
(B) cast votes with respect to their voting
securities in a proxy solicitation conducted by a
party other than the Corporation's Board of
Directors contrary to the recommendation of the
Board of Directors;
(iv) soliciting indications of interest
or responding to proposals relating to a
Fundamental Transaction in which the Corporation,
upon completion of such Fundamental Transaction,
would not be the surviving or controlling entity;
or
(v) amending or repealing this
Section 209 of these Bylaws.<PAGE 83>
2/95
PENNSYLVANIA SAVINGS BANK
STOCK OPTION PLAN
<PAGE>
TABLE OF CONTENTS
Article Page
1. PURPOSE OF THE PLAN. . . . . . . . . . . . . . . . . . . . 1
2. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . 1
3. ADMINISTRATION OF THE PLAN . . . . . . . . . . . . . . . . 2
4. COMMON STOCK SUBJECT TO THE PLAN . . . . . . . . . . . . . 4
5. STOCK OPTIONS. . . . . . . . . . . . . . . . . . . . . . . 4
6. ELIGIBILITY. . . . . . . . . . . . . . . . . . . . . . . . 5
7. TERM AND EXERCISE OF OPTIONS . . . . . . . . . . . . . . . 6
8. TERMINATION OF EMPLOYMENT. . . . . . . . . . . . . . . . . 7
9. ADJUSTMENT PROVISIONS. . . . . . . . . . . . . . . . . . . 8
10. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . 9
<PAGE>
Article 1. PURPOSE OF THE PLAN
1.1 Purpose - The Pennsylvania Savings Bank Stock Option
Plan (the "Plan") is intended to provide key employees
of Pennsylvania Savings Bank (the "Corporation") and
its Subsidiaries an opportunity to acquire Common Stock
of the Bank. The Plan is being instituted in
connection with a reorganization of Pennsylvania
Savings Bank from a mutual savings bank to a stock
savings bank in accordance with a Plan of
Reorganization and Stock Issuance in Connection With
Formation of a Mutual Savings Bank Holding Company
first approved by the Bank's Board of Trustees in
December 1994. The Plan is designed to help the Bank
attract, retain and motivate key employees to make
substantial contributions to the success of the Bank's
business. Stock Options are granted under the Plan
based on the Participant's level of responsibility and
performance within the Bank.
1.2 Stock Options to be Granted - Incentive Stock Options
within the meaning of Code Section 422(b) and
Nonqualified Stock Options may be granted within the
limitations of the Plan.
Article 2. DEFINITIONS
2.1 "Agreement" - The written instrument evidencing the
grant of an Option. A Participant may be issued one or
more Agreements from time to time, reflecting one or
more Options.
2.2 "Bank" - Pennsylvania Savings Bank or any Subsidiary.
2.3 "Board" - The Board of Trustees of the Bank.
2.4 "Code" - The Internal Revenue Code of 1986, as amended.
2.5 "Committee" - The Committee which the Board appoints to
administer the Plan.
2.6 "Common Stock" - The common stock of the Bank ($1.00
par value) as described in the Bank's Articles of
Incorporation, or such other stock as shall be
substituted therefor.
2.7 "Employee" - Any key employee (including officers) of
the Bank.
2.8 "Exchange Act" - The Securities Exchange Act of 1934,
as amended.
2.9 "Incentive Stock Option" - A stock option intended to
satisfy the Requirements of Code Section 422(b).
2.10 "Nonqualified Stock Option" - A stock option other than
an Incentive Stock Option.
2.11 "Optionee" - A Participant who is awarded a Stock
Option pursuant to the provisions of the Plan.
2.12 "Participant" - An Employee selected by the Committee
to receive a grant of an Option under the Plan.
2.13 "Plan" - Pennsylvania Savings Bank Stock Option Plan.
2.14 "Retirement" - The later of the attainment of age
sixty-five or retirement as provided in the
Pennsylvania Savings Bank Defined Benefit Pension Plan
and Trust.
2.15 "Securities Act" - The Securities Act of 1933, as
amended.
2.16 "Stock Option" or "Option" - An award of a right to
purchase Common Stock pursuant to the provisions of the
Plan.
2.17 "Subsidiary" - A subsidiary corporation as defined in
Code Section 424(f) that is a subsidiary of the Bank.
Article 3. ADMINISTRATION OF THE PLAN
3.1 The Committee - The Plan shall be administered by a
committee of the Board (the "Committee") composed of those
members of the Board (at least three in number) who (a) are not
employees of the Bank, and (b) are "Disinterested Persons" as
such term is defined by the Securities and Exchange Commission
pursuant to Section 16(b) of the Exchange Act. No Committee
member shall be eligible (or shall have been eligible within one
year prior to his appointment) to be granted Options under the
Plan or to be selected as a Participant under any other
discretionary plan of the Bank entitling them to acquire stock,
stock options or stock appreciation rights of the Bank. The
Board may from time to time remove members from, or add members
to, the Committee. Vacancies on the Committee, howsoever caused,
shall be filled by the Board.
3.2 Powers of the Committee -
(a) The Committee shall be vested with full authority
to make such rules and regulations as it deems
necessary or desirable to administer the Plan and
to interpret the provisions of the Plan, unless
otherwise determined by the Board. Any
determination, decision or action of the
Committee in connection with the construction,
interpretation, administration or application of
the Plan shall be final, conclusive and binding
upon all Optionees and any person claiming under
or through an Optionee, unless otherwise
determined by the Board.
(b) Subject to the terms, provisions and conditions of
the Plan and subject to review and approval by a
majority of the disinterested members of the
Board, the Committee shall have exclusive
authority to:
(i) select, based upon the recommendation of the
Bank's Chief Executive Officer, the key
Employees to be granted Options (it being
understood that more than one Option may be
granted to the same person);
(ii) determine the number of shares subject to
each Option;
(iii) determine the date or dates when the Options
will be granted;
(iv) determine the purchase price of the shares
subject to each Option in accordance with
Article 5 of the Plan;
(v) determine the date or dates when each Option
may be exercised within the term of the
Option specified pursuant to Article 7 of the
Plan;
(vi) determine whether or not an Option
constitutes an Incentive Stock Option; and
(vii) prescribe the form, which shall be consistent
with the Plan, of the Agreement evidencing
any Options granted under the Plan.
3.3 Terms - The grant of an Option under the Plan shall be
evidenced by an Agreement and may include any terms and
conditions consistent with this Plan, as the Committee
may determine.
3.4 Liability - No member of the Board or the Committee
shall be liable for any action or determination made in
good faith by the Board or the Committee with respect
to this Plan or any Options granted under this Plan.
Article 4. COMMON STOCK SUBJECT TO THE PLAN
4.1 Common Stock Authorized - The aggregate number of
shares of Common Stock for which Options may be granted
under the Plan shall not exceed ten percent (10%) of
the number of shares sold in the Minority Offering as
defined in the Plan of Reorganization and Stock
Issuance in Connection with Formation of a Mutual
Holding Company. The limitation established by the
preceding sentence shall be subject to adjustment as
provided in Article 9 of the Plan.
4.2 Shares Available - The Common Stock to be issued upon
exercise of Options granted under the Plan shall be the
Bank's Common Stock which shall be made available at
the discretion of the Board, either from authorized but
unissued Common Stock or from Common Stock acquired by
the Bank, including shares purchased in the open
market. In the event that any outstanding Option under
the Plan for any reason expires or is terminated, the
shares of Common Stock allocable to the unexercised
portion of such Option may thereafter be regranted
subject to option under the Plan.
Article 5. STOCK OPTIONS
5.1 Exercise Price - The exercise price of Common Stock
shall be, in the case of an Incentive Stock Option, 100
percent of the fair market value of one share of Common
Stock on the date the Option is granted, except that
the purchase price per share shall be 110 percent of
such fair market value in the case of an Incentive
Stock Option granted to any individual described in
Section 6.2 of the Plan. The exercise price of Common
Stock shall be, in the case of a Nonqualified Stock
Option, not less than one hundred percent (100%) of the
fair market value of one share of Common Stock on the
date the Option is granted. The exercise price shall
be subject to adjustment only as provided in Article 9
of the Plan.
5.2 Limitation on Incentive Stock Options - The aggregate
fair market value (determined as of the date an Option
is granted) of the stock with respect to which
Incentive Stock Options are exercisable for the first
time by any individual in any calendar year (under the
Plan and all other plans maintained by the Bank) shall
not exceed $100,000.
5.3 Determination of Fair Market Value -
(a) If the Common Stock is listed on an established
stock exchange or exchanges, the fair market value
shall be deemed to be the closing price of Common
Stock on such stock exchange or exchanges on the
day the Option is granted or, if no sale of Common
Stock has been made on any stock exchange on that
day, the fair market value shall be determined by
reference to such price for the next preceding day
on which a sale occurred.
(b) During such time as Common Stock is not listed on
an established stock exchange or exchanges but is
listed on the NASDAQ Small-Cap Market or National
Market System, the fair market value per share
shall be the closing sale price for the Common
Stock on the day the Option is granted. If no
sale of Common Stock has occurred on that day, the
fair market value shall be determined by reference
to such price for the next preceding day on which
a sale occurred.
(c) During such time as the Common Stock is not listed
on an established stock exchange or on the NASDAQ
Small-Cap Market or National Market System, fair
market value per share shall be the mean between
the closing dealer "bid" and "asked" prices for
the Common Stock for the day of the grant, and if
no "bid" and "asked" prices are quoted for the day
of the grant, the fair market value shall be
determined by reference to such prices on the next
preceding day on which such prices were quoted.
(d) In the event that the Common Stock is not traded
on an established stock exchange or on the NASDAQ
Small-Cap Market or National Market System, and no
closing dealer "bid" and "asked" prices are
available, or within a reasonable period prior to,
the date of a grant, then fair market value will
be the price established by the Committee in good
faith.
Article 6. ELIGIBILITY
6.1 Participation - Options shall be granted only to
persons who are Employees of the Bank, as determined by
the Committee, based upon the recommendation of the
Chief Executive Officer and ratified by a majority of
the disinterested members of the Board. Neither the
members of the Committee nor any member of the Board
who is not an employee of the Bank shall be eligible to
receive an Option under the Plan.
6.2 Incentive Stock Option Eligibility - Notwithstanding
any other provision of the Plan, an individual who owns
more than 10 percent of the total combined voting power
of all classes of outstanding stock of the Bank shall
not be eligible for the grant of an Incentive Stock
Option, unless the special requirements set forth in
Sections 5.1 and 7.1 of the Plan are satisfied. For
purposes of this Section 6.2, in determining stock
ownership, an individual shall be considered as owning
the stock owned, directly or indirectly, by or for his
brothers and sisters (whether by the whole or half
blood), spouse, ancestors and lineal descendants.
Stock owned, directly or indirectly, by or for a
corporation, partnership, estate or trust shall be
considered as being owned proportionately by or for its
shareholders, partners or beneficiaries, as the case
may be, "outstanding stock" shall include all stock
actually issued and outstanding immediately before the
grant of the Option. "Outstanding stock" shall not
include shares authorized for issue under outstanding
Options held by the Optionee or by any other person.
Article 7. TERM AND EXERCISE OF OPTIONS
7.1 Termination - Each Option granted under the Plan shall
terminate on the date determined by the Committee and
approved by a majority of the disinterested members of
the Board, and specified in the corresponding
Agreement; provided, however, that (i) each intended
Incentive Stock Option granted to an individual
described in Section 6.2 of the Plan shall terminate
not later than five years after the date of the grant,
(ii) each other intended Incentive Stock Option shall
terminate not later than ten years after the date of
grant, and (iii) each Option granted under the Plan
which is intended to be a Nonqualified Stock Option
shall terminate not later than ten years and one month
after the date of grant. Except as otherwise provided
in Section 8, each Option granted under the Plan shall
become exercisable only after the Optionee has
completed one year of continuous employment with the
Bank immediately following the date of the grant of the
Option. The Committee at its discretion may provide
further limitations on the exercisability of Options
granted under the Plan. An Option may be exercised
only during the continuance of the Optionee's
employment, except as provided in Article 8 of the
Plan.
7.2 Exercise -
(a) A person electing to exercise an Option shall give
written notice to the Bank of such election and of
the number of shares he has elected to purchase,
in such form as the Committee shall have
prescribed or approved, and shall at the time of
exercise tender the full purchase price of the
shares he has elected to purchase. The purchase
price shall be paid in full, in cash, upon the
exercise of the Option, provided, however, that in
lieu of cash, with the approval of the Committee
at or prior to exercise, an Optionee may exercise
his Option by tendering to the Bank shares of
Common Stock owned by him and having a fair market
value equal to the cash exercise price applicable
to his Option (with the fair market value of such
stock to be determined in the manner provided in
Section 5.3 hereof) or by delivering such
combination of cash and such shares as the
Committee in its sole discretion may approve.
Notwithstanding the foregoing, Common Stock
acquired pursuant to the exercise of an Incentive
Stock Option may not be tendered as payment unless
the holding period requirements of Code Section
422(a)(1) have been satisfied, and Common Stock
acquired other than pursuant to the exercise of an
Incentive Stock Option may not be tendered as
payment unless it has been held, beneficially and
of record, for at least one year.
(b) A person holding more than one Option at any
relevant time may, in accordance with the
provisions of the Plan, elect to exercise such
Options in any order.
(c) At the request of the Participant and to the
extent permitted by applicable law, the Bank may,
in its sole discretion, selectively approve
arrangements with a brokerage firm under which
such brokerage firm, on behalf of the Participant,
shall pay to the Bank the exercise price of the
Stock Options being exercised, and the Bank,
pursuant to an irrevocable notice from the
Participant, shall promptly deliver the shares
being purchased to such firm.
Article 8. TERMINATION OF EMPLOYMENT
8.1 Retirement - In the event of Retirement, an Option
shall lapse at the earlier of the term of the Option
or:
(a) in the case of an Incentive Stock Option, three
months from the date of Retirement; and
(b) in the case of Options other than Incentive Stock
Options, up to 24 months, at the discretion of the
Committee, from the date of Retirement.
8.2 Voluntary Termination - In the event of voluntary
termination of employment at the election of the
Optionee or termination at the election of the Bank,
all Options shall lapse as of the date of termination.
8.3 Death or Total and Permanent Disability - In the event
of termination due to death or total and permanent
disability, the Option shall lapse at the earlier of
the term of the Option or one year after termination
due to such causes.
Article 9. ADJUSTMENT PROVISIONS
9.1 Share Adjustments -
(a) In the event that the shares of Common Stock of
the Bank, as presently constituted, shall be
changed into or exchanged for a different number
or kind of shares of stock or other securities of
the Bank or of another corporation (whether by
reason of merger, consolidation, recapitalization,
reclassification, split-up, combination of shares
or otherwise) or if the number of such shares of
stock shall be increased through the payment of a
stock dividend, then, subject to the provisions of
Subsection (c) below, there shall be substituted
for or added to each share of stock of the Bank
which was theretofore appropriated, or which
thereafter may become subject to an option under
the Plan, the number and kind of shares of stock
or other securities into which each outstanding
share of the stock of the Bank shall be so changed
or for which each such share shall be exchanged or
to which each such share shall be entitled, as the
case may be. Outstanding Options shall also be
appropriately amended as to price and other terms,
as may be necessary to reflect the foregoing
events.
(b) If there shall be any other change in the number
or kind of the outstanding shares of the stock of
the Bank, or of any stock or other securities in
which such stock shall have been changed, or for
which it shall have been exchanged, and if a
majority of the disinterested members of the Board
shall, in its sole discretion, determine that such
change equitably requires an adjustment in any
Option which was theretofore granted or which may
thereafter be granted under the Plan, then such
adjustment shall be made in accordance with such
determination.
(c) The grant of an Option pursuant to the Plan shall
not affect in any way the right or power of the
Bank to make adjustments, reclassifications,
reorganizations or changes of its capital or
business structure, to merge, to consolidate, to
dissolve, to liquidate or to sell or transfer all
or any part of its business or assets.
9.2 Corporate Changes - A dissolution or liquidation of the
Bank, or a merger or consolidation in which the Bank is
not the surviving Corporation, shall cause each
outstanding Option to terminate, except to the extent
that another corporation may and does in the
transaction assume and continue the Option or
substitute its own options.
9.3 Fractional Shares - Fractional shares resulting from
any adjustment in Options pursuant to this Article 9
may be settled as the Board or the Committee (as the
case may be) shall determine.
9.4 Binding Determination - To the extent that the
foregoing adjustments relate to stock or securities of
the Bank, such adjustments shall be made by the Board,
whose determination in that respect shall be final,
binding and conclusive. Notice of any adjustment shall
be given by the Bank to each holder of an Option which
shall have been so adjusted.
Article 10. GENERAL PROVISIONS
10.1 Effective Date - The Plan shall become effective upon
its adoption by the Board, provided that any grant of
Option is subject to the approval of the Plan by the
shareholders of the Bank within 12 months of adoption
by the Board.
10.2 Termination of the Plan - Unless previously terminated
by the Board, the Plan shall terminate on, and no
Options shall be granted after, then tenth anniversary
of its adoption by the Board.
10.3 Limitation on Termination, Amendment or Modification
(a) The Board may at any time terminate, amend, modify
or suspend the Plan, provided that no amendment or
modification shall be made by the Board, without
the approval of the stockholders of the Bank,
which:
(i) increases the maximum number of shares of
Common Stock as to which Options may be
granted under the Plan (other than pursuant
to Article 9);
(ii) changes the class of eligible Employees; or
(iii) otherwise requires the approval of
shareholders in order to maintain the
exemption available under Rule 16b-3 (or any
similar rule) under the Exchange Act.
(b) No amendment, modification, suspension or
termination of the Plan shall in any manner affect
any Option theretofore granted under the Plan
without the consent of the Optionee or any person
validly claiming under or through the Optionee.
10.4 No Right to Employment - Neither anything contained in
the Plan or in any instrument under the Plan nor the
grant of any Option hereunder shall confer upon any
Optionee any right to continue in the employ of the
Bank or of any Subsidiary or limit in any respect the
right of the Bank or of any Subsidiary to terminate the
Optionee's employment at any time and for any reason.
10.5 Withholding Taxes -
(a) Subject to the provisions of Subsection (b), the
Bank will require that an Optionee, as a condition
of the exercise of an Option, other than an
Incentive Stock Option or any other person or
entity receiving Common Stock upon exercise of an
Option, pay or reimburse any taxes which the Bank
is required to withhold in connection with the
exercise of the Option.
(b) An Optionee may satisfy the withholding obligation
described in Subsection (a), in whole or in part,
by electing to have the Bank withhold shares of
Common Stock (otherwise issuable upon the exercise
of an Option) having a fair market value equal to
the amount required to be withheld. An election
by an Optionee to have shares withheld for this
purpose shall be subject to the following
restrictions:
(i) it shall be made prior to the date on which
the amount of tax to be withheld is
determined (the "Tax Date");
(ii) it shall be irrevocable;
(iii) it shall be subject to disapproval by the
Committee;
(iv) if the Optionee is an officer of the Bank
within the meaning of Section 16 of the
Exchange Act (an "Officer"), such election
may not be made within six months of the
grant of the Option (except that this
restriction shall not apply in the event of
the death or disability of the Optionee prior
to the expiration of the six-month period);
(v) if the Optionee is an Officer, such election
must be made either at least six months prior
to the Tax Date or in the ten-day "window
period" beginning on the third day following
the release of the Bank's quarterly or annual
summary statement of revenues and earnings;
and
(vi) where the Tax Date of an Officer is deferred
up to six months after the exercise of an
Option, the full number of Option shares will
be issued or transferred to him upon
exercise, but he will be unconditionally
obligated to tender back to the Bank the
proper number of shares of Common Stock on
the Tax Date.
10.6 Listing and Registration of Shares - No Option granted
pursuant to the Plan shall be exercisable in whole or
in part if at any time the Board shall determine in its
discretion that the listing, registration or
qualification of the shares of Common Stock subject to
such Option on any securities exchange or under any
applicable law, or the consent or approval of any
governmental regulatory body, is necessary or desirable
as a condition of, or in connection with, the granting
of such Option or the issue of shares thereunder,
unless such listing, registration, qualification,
consent or approval shall have been effected or
obtained free of any conditions not acceptable to the
Board.
* * *
<PAGE>
STOCK OPTION AGREEMENT FOR
INCENTIVE STOCK OPTION
______________________
BETWEEN
PENNSYLVANIA SAVINGS BANK
AND
______________________
(the Optionholder)
Date of Grant: ____________________
Number of Shares: _____________ shares
Purchase Price: $___________________
Option Expires: ____________________
<PAGE>
INCENTIVE STOCK OPTION AGREEMENT
Number of shares subject to option: ______________ shares.
This Agreement dated ________________ is by and between
Pennsylvania Savings Bank (the "Bank") and ___________________
(the "Optionholder"),
WITNESSETH:
1. Grant of Option
Pursuant to the provisions of the Pennsylvania Savings Bank
Stock Option Plan (the "Plan") the Bank hereby grants to the
Optionholder, subject to the terms and conditions of the Plan and
subject further to the terms and conditions herein set forth, the
right and option to purchase from the Bank for cash, or for
common stock of the Bank subject to the approval of the Committee
(as defined in the Plan), all or any part of an aggregate of
__________ shares of Common Stock ($1.00 par value) of the Bank
("Common Stock") at the purchase price of $_______________ per
share, such option to be exercised as hereinafter provided.
2. Terms and Conditions
It is understood and agreed that the option evidenced hereby
is subject to the following terms and conditions:
(a) Expiration Date. Subject to the provisions of
Paragraph 2(d), the option granted hereby shall expire
on __________________ [not more than 10 years from the
date of grant, except for an option granted to a 10%
shareholder, which shall be limited to 5 years].
(b) Exercise of Option. Except as set forth in the Plan,
no part of this option may be exercised until the
Optionholder has remained in the employ of the Bank or
of a Subsidiary of the Bank for a period of one year
after the date hereof.
This option may be exercised, to the extent exercisable
by its terms, in whole or from time to time in part at
any time prior to the expiration hereof. Any exercise
shall be accompanied by a written notice to the Bank
specifying the number of shares as to which the option
is being exercised.
(c) Payment of Purchase Price Upon Exercise. At the time
of any exercise, the purchase price of the shares as to
which this option shall be exercised shall be paid in
cash (or, subject to the conditions and limitations
described in the Plan, by delivering shares of Common
Stock of the Bank or by delivering a combination of
such shares and cash equal to the purchase price set
forth in Paragraph 1 hereof) to the Bank.
(d) Exercise Upon Death or Termination of Employment.
(1) In the event of the death of the Optionholder
while an employee of the Bank or of a Subsidiary,
this option may be exercised, to the extent that
the Optionholder was entitled to do so at the date
of termination of employment, by the person or
persons to whom the Optionholder's rights under
this option pass by will or applicable law, or if
no such person has such right by his executors or
administrators, at any time, or from time to time,
but in no event later than the expiration date
specified in Paragraph 2(a) or one year after the
Optionholder's death, whichever is earlier.
(2) If the Optionholder's employment with the Bank
terminates because of total and permanent
disability, then the Optionholder may exercise
this option at any time, or from time to time,
within one year after the date of termination, but
in no event later than the expiration date.
(3) If the Optionholder's employment with the Bank
terminates because of retirement after attaining
age 65 or retirement at an earlier age with the
consent of the Board of Trustees, then the
Optionholder may exercise this option at any time,
or from time to time, within three months after
the date of termination, but in no event later
than the expiration date set forth in 2(a).
(4) If the Optionholder's employment with the Bank is
voluntarily terminated by the Optionholder, except
for retirement after attaining age 65 or
retirement at an earlier age with the consent of
the Board of Trustees, then the option will expire
on the date of termination of employment.
(5) Notwithstanding anything herein to the contrary,
if the Optionholder's employment is terminated by
the Bank, all rights to exercise this option shall
terminate at the date of such termination.
(e) Nontransferability. This option shall not be
transferable other than by will or by the laws of
descent and distribution. During the lifetime of the
Optionholder, this option shall be exercisable only by
the Optionholder.
(f) Adjustments. In the event of any change in the Common
Stock of the Bank by reason of any stock dividend,
recapitalization, reclassification, merger,
consolidation, split-up, combination or exchange of
shares, or of any similar change affecting the Common
Stock, then in any such event the number and kind of
shares subject to this option and their purchase price
per share shall be appropriately adjusted consistent
with such change. If any other change in the number or
kind of the outstanding shares of stock of the Bank
occurs, an adjustment may be made to the number and
kind of shares subject to this option and their
purchase price per share in such manner as a majority
of the disinterested members of the Board of Directors
may deem equitable to prevent substantial dilution or
enlargement of the rights granted to the Optionholder
hereunder. Any adjustment so made shall be final and
binding upon the Optionholder.
(g) No Rights as Stockholder. The Optionholder shall have
no rights as a stockholder with respect to any shares
of Common Stock subject to this option prior to the
date of issuance to him of a certificate or
certificates for such shares.
(h) No Right To Continued Employment. This option shall
not confer upon the Optionholder any right with respect
to continuance of employment by the Bank or any
Subsidiary, nor shall it interfere in any way with the
right of his or her employer to terminate his or her
employment at any time.
(i) Compliance with Law and Regulations. This option and
the obligation of the Bank to sell and deliver shares
hereunder shall be subject to all applicable federal
and state laws, rules and regulations and to such
approvals by any government or regulatory agency as may
be required. The Bank shall not be required to issue
or deliver any certificates for shares of Common Stock
prior to (1) the listing of such shares on any stock
exchange on which the Common Stock may then be listed
and (2) the completion of any registration or
qualification of such shares under any federal or state
law, or any rule or regulation of any government body
which the Bank shall, in its sole discretion, determine
to be necessary or advisable.
3. Investment Representation
The Committee appointed pursuant to Article 3 of the Plan
may require the Optionholder to furnish to the Bank, prior to the
issuance of any shares upon the exercise of all or any part of
this option, an agreement (in such form as such Committee may
specify) in which the Optionholder represents that the shares
acquired by him upon exercise are being acquired for investment
and not with a view to the sale or distribution thereof.
4. Optionholder Bound by Plan
The Optionholder hereby acknowledges receipt of a copy of
the Plan and agrees to be bound by all the terms and provisions
thereof, which, to the extent relevant, are incorporated herein
by reference. The terms of this Agreement shall not supersede
any term of the Plan.
5. Notices
Any notice hereunder to the Bank shall be addressed to it at
its office, 1210 Tasker Street, Philadelphia, Pennsylvania 19148;
Attention: Anthony DiSandro, President, and any notice hereunder
to Optionholder shall be addressed to him or her at the address
below, subject to the right of either party to designate at any
time hereafter in writing some other address.
IN WITNESS WHEREOF, Pennsylvania Savings Bank has caused
this Agreement to be executed by a duly authorized officer and
the Optionholder has executed this Agreement, both as of the day
and year first above written.
PENNSYLVANIA SAVINGS BANK OPTIONHOLDER
By_______________________ _____________________________
(Signature) (Signature)
_________________________ _____________________________
(Print Name)
_________________________ _____________________________
(Print Title) (Print Address)
<PAGE>
STOCK OPTION AGREEMENT FOR
NONQUALIFIED STOCK OPTION
_________________________
BETWEEN
PENNSYLVANIA SAVINGS BANK
AND
_________________________
(the Optionholder)
Date of Grant: ____________________
Number of Shares: _____________ shares
Purchase Price: $___________________
Option Expires: ____________________
<PAGE>
NONQUALIFIED STOCK OPTION AGREEMENT
Number of shares subject to option: _____________ shares.
This Agreement dated ______________________ is by and
between Pennsylvania Savings Bank (the "Bank") and
____________________ (the "Optionholder"),
WITNESSETH:
1. Grant of Option.
Pursuant to the provisions of the Pennsylvania Savings Bank
Stock Option Plan (the "Plan") the Bank hereby grants to the
Optionholder, subject to the terms and conditions of the Plan and
subject further to the terms and conditions herein set forth, the
right and option to purchase from the Bank for cash, or for
common stock of the Bank subject to the approval of the Committee
(as defined in the Plan), all or any part of an aggregate of
__________ shares of Common Stock ($1.00 par value) of the Bank
("Common Stock") at the purchase price of $___________ per share,
such option to be exercised as hereinafter provided.
2. Terms and Conditions.
It is understood and agreed that the option evidenced hereby
is subject to the following terms and conditions:
(a) Expiration Date. Subject to the provisions of
Paragraph 2(d), the option granted hereby shall expire
on _____________ [not more than 10 years and one month
from the date of grant].
(b) Exercise of Option. Except as otherwise provided in
Paragraph 2(d)(6), no part of this option may be
exercised until the Optionholder has remained in the
employ of the Bank or of a Subsidiary of the Bank for a
period of one year after the date hereof.
This option may be exercised, to the extent exercisable
by its terms, in whole or from time to time in part at
any time prior to the expiration hereof. Any exercise
shall be accompanied by a written notice to the Bank
specifying the number of shares as to which the option
is being exercised.
(c) Payment of Purchase Price Upon Exercise. At the time
of any exercise the purchase price of the shares as to
which this option shall be exercised shall be paid in
cash (or, subject to the conditions and limitations
described in the Plan, by delivering shares of Common
Stock of the Bank or by delivering a combination of
such shares and cash equal to the price per share set
forth in Paragraph 1 hereof) to the Bank.
(d) Exercise Upon Death or Termination of Employment.
(1) In the event of the death of the Optionholder
while an employee of the Bank or of a Subsidiary,
this option may be exercised, to the extent that
the Optionholder was entitled to do so at the date
of termination of employment, by the person or
persons to whom the Optionholder's rights under
this option pass by will or applicable law, or if
no such person has such right by his executors or
administrators, at any time, or from time to time,
but in no event later than the expiration date
specified in Paragraph 2(a) or one year after the
Optionholder's death, whichever is earlier.
(2) If the Optionholder's employment with the Bank
terminates because of total and permanent
disability, then the Optionholder may exercise
this option at any time, or from time to time,
within one year after the date of termination, but
in no event later than the expiration date.
(3) If the Optionholder's employment with the Bank
terminates because of retirement after attaining
age 65 or retirement at an earlier age with the
consent of the Board of Trustees, then the
Optionholder may exercise this option at any time,
or from time to time, within ____________ [not
more than 24] months after the date of
termination, but in no event later than the
expiration date.
(4) If the Optionholder's employment with the Bank is
voluntarily terminated by the Optionholder, except
for retirement after attaining age 65 or
retirement at an earlier age with the consent of
the Board of Trustees, then the option will expire
on the date of termination of employment, except
as otherwise provided in Paragraph 2(d)(6).
(5) If the Optionholder's employment is terminated by
the Bank, all rights to exercise this option shall
terminate at the date of such termination, except
as otherwise provided in Paragraph 2(d)(6).
(6) In the event the Optionholder's employment is
terminated pursuant to Paragraph 2(d)(4) or
2(d)(5) and, no later than 30 days thereafter, the
Committee in its discretion makes a determination
that such termination is or was "at the
convenience of the employer," then any
nonqualified options held by such Optionholder on
the date of termination shall lapse on the earlier
of (i) its otherwise scheduled expiration date, or
(ii) a date that is the first anniversary of the
Optionholder's termination of employment. In
addition, the requirement of Paragraph 2(b) shall
not apply to such Optionholder, provided, however,
that no affected option may be exercised until one
year has elapsed from its grant date.
For purposes of this Paragraph 2(d)(6), the phrase
"at the convenience of the employer" means, with
respect to the termination of employment of an
Optionholder, a termination in the nature of a
layoff, whether effected through a general
reduction in force or on an individual or small
group basis, provided such termination of
employment is unrelated to the terminated
individual's specific work performance.
(e) Nontransferability. This option shall not be
transferable other than by will or by the laws of
descent and distribution. During the lifetime of the
Optionholder, this option shall be exercisable only by
the Optionholder.
(f) Adjustments. In the event of any change in the Common
Stock of the Bank by reason of any stock dividend,
recapitalization, reclassification, merger,
consolidation, split-up, combination or exchange of
shares, or of any similar change affecting the Common
Stock, then in any such event the number and kind of
shares subject to this option and their purchase price
per share shall be appropriately adjusted consistent
with such change. If any other change in the number or
kind of the outstanding shares of stock of the Bank
occurs, an adjustment may be made to the number and
kind of shares subject to this Option and their
purchase price per share in such manner as a majority
of the disinterested members of the Board of Directors
may deem equitable to prevent substantial dilution or
enlargement of the rights granted to the Optionholder
hereunder. Any adjustment so made shall be final and
binding upon the Optionholder.
(g) No Rights As Stockholder. The Optionholder shall have
no rights as a stockholder with respect to any shares
of Common Stock subject to this option prior to the
date of issuance to him of a certificate or
certificates for such shares.
(h) No Right to Continued Employment. This option shall
not confer upon the Optionholder any right with respect
to continuance of employment by the Bank or any
Subsidiary, nor shall it interfere in any way with the
right of his or her employer to terminate his or her
employment at any time.
(i) Compliance with Law and Regulations. This option and
the obligation of the Bank to sell and deliver shares
hereunder, shall be subject to all applicable federal
and state laws, rules and regulations and to such
approvals by any government or regulatory agency as may
be required. The Bank shall not be required to issue
or deliver any certificates for shares of Common Stock
prior to (1) the listing of such shares on any stock
exchange on which the Common Stock may then be listed
and (2) the completion of any registration or
qualification of such shares under any federal or state
law, or any rule or regulation of any government body
which the Bank shall, in its sole discretion, determine
to be necessary or advisable.
3. Investment Representation.
The Committee appointed pursuant to Article 3 of the Plan
may require the Optionholder to furnish to the Bank, prior to the
issuance of any shares upon the exercise of all or any part of
this option, an agreement (in such form as such Committee may
specify) in which the Optionholder represents that the shares
acquired by him upon exercise are being acquired for investment
and not with a view to the sale or distribution thereof.
4. Optionholder Bound By Plan.
The Optionholder hereby acknowledges receipt of a copy of
the Plan and any amendments thereto, and agrees to be bound by
all the terms and provisions thereof, which, to the extent
relevant, are incorporated herein by reference. The terms of
this Agreement shall not supersede any term of the Plan.
5. Withholding of Taxes.
The Bank will require as a condition precedent to the
exercise of this option that appropriate arrangements be made for
the withholding of any applicable taxes. The obligation of the
Optionholder under this paragraph to provide for the payment of
withholding taxes may be satisfied, subject to the provisions of
Section 10.5 of the Plan, by electing to have the Bank withhold
certain of the shares that would otherwise be issuable pursuant
to the exercise of the option granted hereby.
6. Notices.
Any notice hereunder to the Bank shall be addressed to it at
its office, 1210 Tasker Street, Philadelphia, Pennsylvania 19148;
Attention: Anthony DiSandro, President, and any notice hereunder
to Optionholder shall be addressed to him or her at the address
below, subject to the right of either party to designate at any
time hereafter in writing some other address.
IN WITNESS WHEREOF, Pennsylvania Savings Bank has caused
this Agreement to be executed by a duly authorized officer and
the Optionholder has executed this Agreement, both as of the day
and year first above written.
PENNSYLVANIA SAVINGS BANK OPTIONHOLDER
By_______________________ _____________________________
(Signature) (Signature)
_________________________ _____________________________
(Print Name)
_________________________ _____________________________
(Print Title) (Print Address)
Pennsylvania Savings Bank
Management Recognition
Plan and Trust Agreement
<PAGE>
SUMMARY
I. PLAN PURPOSE
This management recognition plan is adopted by Pennsylvania
Savings Bank, a wholly-owned subsidiary of PSB Mutual Holding
Company. The Bank is adopting the Plan in connection with (i) of
the Bank's predecessor (Pennsylvania Savings Bank in mutual form)
the reorganization, consisting of: (i) the conversion of PSB
Mutual Holding Company into a mutual bank holding company,
(ii) the creation of the Bank as a new stock savings bank called
Pennsylvania Savings Bank; (iii) the purchase and assumption by
the Bank of substantially all of the existing mutual bank's
assets and liabilities in exchange for a majority of the Common
Stock of the Bank; and (iv) the issuance of a minority of the
Bank's common stock to certain depositors and potentially to
officers, trustees, and employees of the Bank and the public.
This reorganization was completed on October 20, 1995. (As the
context requires, the "Bank" refers either to the mutual savings
bank or the newly formed stock savings bank.)
The purpose of the Plan is to retain employees of the Bank
with experience and ability in key positions by providing them
with a proprietary interest in the Bank (in the form of shares of
Common Stock). Awards of Common Stock will be made in
recognition of service to the Bank and its subsidiaries and
affiliates and as encouragement to continue such contributions in
the future.
II. PLAN SHARE AWARDS
A. Aggregate Number: The total number of Plan Shares that
may be issued pursuant to the Plan will be equal to the number of
shares of Common Stock that are purchased by the Trust, not to
exceed 4% of the shares of Common Stock issued in connection with
the Bank's minority stock offering (i.e., 21,390 shares). The
Trust will acquire Common Stock with funds contributed to it by
the Bank.
B. Individual Awards: All trustees, executive officers
and employees of the Bank and its subsidiaries are eligible to
receive awards; however, it is anticipated that Plan Share Awards
will be made primarily to executive officers of the Bank. The
Compensation Committee of the Board of Trustees of the Bank will
determine which eligible persons will be granted Plan Share
Awards and the number of shares covered by each Plan Share Award.
Such determinations will be based upon the position and
responsibilities of the eligible person, the value of their
services, and any other fact the Compensation Committee deems
relevant.
Plan Share Awards will not be made until the Bank's
shareholders have approved the Plan. <PAGE MRP-1>
C. Conditions Upon Earning of Plan Shares Subject to
Awards: Plan Shares covered by Plan Share Awards are earned
(i.e., become vested) at the rate determined by the Compensation
Committee and as provided herein.
Awards are nontransferable and nonassignable.
Recipients of Plan Share Awards may direct the voting of all
shares of Common Stock allocated to them, and will receive
dividends paid on Plan Shares when shares are distributed.
D. Distribution of Earned Plan Shares: Earned Plan Shares
are distributed to recipients as soon as practicable following
the date on which they are earned. The Plan Trustee may withhold
cash distributions as needed for tax purposes and, if necessary,
can require distributees to provide funds required to satisfy tax
obligations as a condition to distributing Plan Shares.
E. Forfeitures: Plan Shares forfeited in accordance with
Section 7.01(b) will be returned to the pool of Plan Shares with
respect to which additional Plan Share Awards may be granted.
III. Plan Administration
A. Plan Administration: The Plan will be administered by
the Compensation Committee of the Bank's Board of Trustees and a
Plan Trustee appointed by the Board. The Board may designate as
Plan Trustee one or more persons or an entity, subject to
replacement by the Board at any time. Expenses of administering
the Plan and the Trust will be borne by the Bank. The Bank shall
indemnify the Plan Trustee and Board members as to activities
with respect to the Plan.
B. ERISA: The Plan is not "qualified" within the meaning
of the Internal Revenue Code, and is not subject to ERISA's
requirements and restrictions.
C. Duration: The Plan will become effective upon
execution and will continue until the earliest of (1) 21 years
from such Effective Date, (2) the time at which the Board
terminates the Plan, or (3) the time at which all of the Trust
assets have been expended. The Board may amend or terminate the
Plan at any time.
PAGE MRP-2
<PAGE>
ARTICLE I
ESTABLISHMENT OF THE PLAN AND TRUST
1.01 The Bank hereby establishes the Pennsylvania Savings
Bank Management Recognition Plan (the "Plan") and Trust upon the
terms and conditions hereinafter stated in this Agreement.
1.02 The Plan Trustee hereby accepts this Trust and agrees
to hold legal title to the Trust assets existing on the date of
this Agreement and all additions and accretions thereto on the
terms and conditions hereinafter stated.
ARTICLE II
PURPOSE OF THE PLAN
2.01 The purpose of the Plan is to retain personnel of
experience and ability in key positions by providing such key
employees with a proprietary interest in the Bank in
consideration for, and in recognition of, their contributions to
the Bank, its subsidiaries and its affiliates and as an incentive
to make such contributions in the future.
ARTICLE III
DEFINITIONS
The following words and phrases when used in this Agreement
with an initial capital letter, unless the context clearly
indicates otherwise, shall have the meanings set forth below.
Wherever appropriate, the masculine pronoun shall include the
feminine pronoun and the singular shall include the plural. All
terms used herein and not defined shall have the meanings given
such terms in the Plan of Reorganization.
3.01 "Agreement" means this Management Recognition Plan and
Trust Agreement between the Bank and the Plan Trustee.
3.02 "Bank" means Pennsylvania Savings Bank, a wholly-owned
subsidiary of PSB Mutual Holding Company.
3.03 "Beneficiary" means the person or persons designated
by a Recipient to receive any benefits payable under the Plan in
the event of such Recipient's death. Such person or persons
shall be designated in writing on forms provided for this purpose
by the Board and may be changed from time to time by similar
written notice to the Board. In the absence of a written
designation, the Beneficiary shall be the recipient's surviving
spouse, if any, or if none, his estate.
3.04 "Board" means, for purposes of administering the Plan,
the Board of Trustees of the Bank.
<PAGE MRP-3>
3.05 "Cause" means:
(i) willful violation of any law, rule or
regulation (other than traffic violations or similar
offenses that would not in the Board's good faith reasonable
determination effect the ability to perform and discharge
one's duties to the Bank or a subsidiary);
(ii) breach of fiduciary duty involving personal
profit or an act of personal dishonesty in connection with
the performance of one's duties; or
(iii) willful failure to follow the lawful
instructions of the Board of Trustees after receipt of
written notice of such instructions, other than a failure
resulting from the incapacity because of physical or mental
illness.
3.06 "Common Stock" means shares of the Bank's common
stock, par value $1.00 per share.
3.07 "Disability" means any physical or mental impairment
which qualifies an employee for disability benefits under the
applicable long-term disability plan maintained by the Bank, or a
subsidiary, or, if no such plan applies to the employee, which
would qualify such employee for disability benefits under the
long-term disability plan maintained by the Bank, if such
employee were covered by that Plan.
3.08 "Eligible Person" means any person who is currently
employed by the Bank or a subsidiary or affiliate of the Bank.
3.09 "Plan of Reorganization" means the Bank's Plan of
Reorganization and Stock Issuance in Connection With the
Formation of a Mutual Savings Bank Holding Company.
3.010 "Plan Shares" means shares of Common Stock held in
the Trust and issued or issuable to a Recipient pursuant to the
Plan.
3.11 "Plan Share Award" means a right granted under this
Agreement to earn Plan Shares.
3.12 "Plan Share Reserve" means the shares of Common Stock
held by the Trustee as determined pursuant to Sections 5.03 and
5.04.
3.13 "Plan Trustee" means that person(s) or entity
nominated and approved by the Board pursuant to Section 4.01 and
4.02 to hold legal title to the Plan assets for the purposes set
forth herein.
3.14 "Recipient" means an Eligible Person who receives a
Plan Share Award under the Plan.
<PAGE MRP-4>
3.15 "Retirement" means a termination of employment which
constitutes a "retirement" under any applicable qualified pension
benefit plan maintained by the Bank or any subsidiary which
employs the Recipient, or, if no such Plan is maintained,
pursuant to the retirement policy of the Bank.
3.16 "Trust" means the trust established pursuant to this
Agreement.
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 Role and Powers of the Board. The Plan shall be
administered and interpreted by the Compensation Committee of the
Board. The interpretation and construction by the Compensation
Committee of any provisions of this Agreement or of any Plan
Share Award granted hereunder shall be final and binding.
Subject to the express provisions and limitations of this
Agreement, the Compensation Committee may adopt such rules,
regulations and procedures as it deems appropriate for the Plans'
affairs. The Board shall appoint one or more persons (excluding
Eligible Persons) or an entity to act as Plan Trustee in
accordance with this Agreement and the terms of Article VIII
hereof. The Board may reverse or override any action taken or
decision made with respect to the Plan, provided, however, except
as provided in Section 7.01(b) hereof, that the Board may not
revoke any Plan Share Award already made.
4.02 Limitation on Liability. No member of the Board or
Plan Trustee shall be liable for any determination made in good
faith with respect to the Plan or any Plan Shares or Plan Share
Awards granted under it. If a member of the Board or any Plan
Trustee is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by
reason of anything done or not done by him in such capacity under
or with respect to the Plan, the Bank shall indemnify such member
or Plan Trustee against expenses (including, but not limited to,
attorneys' fees and disbursements), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if 1) he acted in
good faith and in a manner he reasonably believed to be in the
best interests of the Bank (in the case of a member of the Board)
or in the best interests of the beneficiaries of the Trust (in
the case of the Plan Trustee), and 2) with respect to any
criminal action or proceeding, he had no reasonable cause to
believe his conduct was unlawful.
<PAGE MRP-5>
ARTICLE V
CONTRIBUTIONS; PLAN SHARE RESERVE
5.01 Amount and Timing of Contributions. The Board shall
determine the amounts (or the method of computing the amounts) to
be contributed by the Bank to the Trust. Such amounts shall be
paid to the Plan Trustee at the time of contribution. No
contributions by Eligible Persons shall be permitted.
5.02 Initial Investment. Any amounts held by the Trust
prior to the purchase of Common Stock shall be invested by the
Plan Trustee in such interest-bearing account or accounts at the
Bank as the Plan Trustee shall determine to be appropriate.
5.03 Investment of Trust Assets; Conversion; Creation of
Plan Share Reserve. Except as otherwise permitted under this
Agreement, the Plan Trustee shall invest all of the Trust's
assets exclusively in Common Stock. The Common Stock initially
acquired by the Trust, together with any shares thereafter
acquired by the Trust, shall constitute the "Plan Share Reserve."
Any cash earnings received with respect to Common Stock held in
the Trust subject to the Plan Share Awards shall be distributed
to the Individual Recipient.
5.04 Effect of Allocations, Returns and Forfeitures Upon
Plan Share Reserves. Upon the allocation of Plan Share Awards
under Section 6.02, the Plan Share Reserve shall be reduced by
the number of Plan Shares subject to the Plan Share Awards so
allocated. Any Plan Shares subject to a Plan Share Award which
may no longer be earned because of a forfeiture by the Recipient
pursuant to Section 7.01(b) shall be added to the Plan Share
Reserve.
ARTICLE VI
ELIGIBILITY; ALLOCATIONS
6.01 Allocations. The Compensation Committee will
determine which Eligible Persons will be granted Plan Share
Awards and the number of Plan Shares covered by each Plan Share
Award, provided, however, that the number of Plan Shares covered
by such Plan Share Awards may not exceed the number of Plan
Shares in the Plan Share Reserve immediately prior to the grant
of such Plan Share Awards, and provided, further, that in no
event shall any Plan Share Award be made which will violate the
Bank's Articles of Incorporation or Bylaws or any applicable law.
In the event Plan Shares are forfeited for any reason, the
Compensation Committee may, from time to time, determine which
Eligible Persons will be granted Plan Share Awards from forfeited
Plan Shares.
In selecting those Eligible Persons to whom Plan Share
Awards will be granted and the number of Plan Shares covered by
such Plan Share Awards, the Compensation Committee shall consider
<PAGE MRP-6> the position and responsibilities of the Eligible
Persons, the value of their services to the Bank and/or its
subsidiaries and any other fact the Compensation Committee may
deem relevant.
6.02 Form of Allocation. Promptly after making a Plan
Share Award, the Compensation Committee shall notify the
Recipient in writing of the grant of the Plan Share Award, the
number of Plan Shares covered by the Plan Share Award, and the
terms upon which the Plan Shares subject to the Plan Share Award
may be earned. The date on which the Compensation Committee so
notifies the Recipient shall be considered the date of grant of
the Plan Share Awards. The Compensation Committee shall maintain
records as to all grants of Plan Share Awards under the Plan.
6.03 Allocations Not Required. Notwithstanding anything to
the contrary in Sections 6.01 and 6.02, no Eligible Person shall
have any right or entitlement to receive a Plan Share Award
hereunder, the grant of Plan Share Awards being at the total
discretion of the Compensation Committee.
ARTICLE VII
EARNING AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 Earning Plan Shares; Forfeitures.
(a) General Rules. Unless the Compensation Committee
shall specifically state otherwise at the time a Plan Share Award
is granted, Plan Shares subject to a Plan Share Award shall be
earned by a Recipient at the rate of twenty percent (20%) of the
aggregate number of Plan Shares covered by the Plan Share Award
at the end of each full twelve month period following the date of
the grant. Except as set forth in Section 7.01(b) below. The
termination of a Recipient's employment with the Bank shall
constitute revocation of the unearned Plan Share Award.
(b) Revocation for Misconduct. Notwithstanding
anything hereinafter to the contrary, the Compensation Committee
of the Board may, by resolution, immediately revoke, rescind and
terminate any Plan Share Award, or portion thereof, previously
awarded under this Plan, to the extent Plan Shares have not been
delivered thereunder to the Recipient, whether or not yet earned,
in the case of a Recipient who is discharged from the employ of
the Bank or a subsidiary for Cause, or who is discovered after
termination of employment to have engaged in conduct that would
have justified termination for Cause, and in the case of a member
of the Board, who is removed from the Board for Cause.
7.02 Payment of Dividends. Cash dividends on Plan Shares
shall be allocated and distributed to a Recipient when declared
and paid by the Bank with respect to all shares.
<PAGE MRP-7>
7.03 Distribution of Plan Shares.
(a) Timing of Distributions. Plan Shares shall be
distributed to the Recipient or his Beneficiary, as the case may
be, as soon as practicable after they have been earned.
(b) Form of Distribution. All Plan Shares, together
with any shares representing stock dividends, shall be
distributed in the form of Common Stock. One share of Common
Stock shall be given for each Plan Share earned and payable.
(c) Withholding. The Plan Trustee may withhold from
any payment or distribution made under this Plan sufficient
amounts of cash or shares of Common Stock to cover any applicable
withholding and employment taxes, and if the amount of such
payment is insufficient, the Plan Trustee may require the
Recipient or Beneficiary to pay to the Plan Trustee the amount
required to be withheld as a condition of delivering the Plan
Shares. The Plan Trustee shall pay over to the Bank or a
Subsidiary which employs or employed such Recipient any such
amount withheld from or paid by the Recipient or Beneficiary.
7.04 Voting of Plan Shares. After a Plan Share Award has
been granted, the Recipient shall be entitled to direct the
Trustee as to the voting of the Plan Shares which are covered by
the Plan Share Award and which have not yet been earned and
distributed to him pursuant to Section 7.03, subject to rules and
procedures adopted by the Compensation Committee of the Board for
this purpose. All shares of Common Stock held by the Trust as to
which Recipients are not entitled to direct, or have not
directed, the voting, shall be voted by the Plan Trustee in the
same proportion as Plan Shares which have been awarded and voted.
ARTICLE VIII
TRUST
8.01 Trust. The Plan Trustee shall receive, hold,
administer, invest and make distributions and disbursements from
the Trust in accordance with the provisions of this Agreement and
the applicable directions, rules, regulations, procedures and
policies established by the Compensation Committee pursuant to
this Agreement.
8.02 Management of Trust. It is the intent of this
Agreement that, subject to the provisions of this Agreement, the
Plan Trustee shall have complete authority and discretion with
respect to the management, control and investment of the Trust,
and that the Plan Trustee shall invest all assets of the Trust in
Common Stock to the fullest extent practicable, and except to the
extent that the Plan Trustee determines that the holding of
monies in cash or cash equivalents is necessary to meet the
obligations of the Trust. In performing its duties, the Plan
Trustee shall have the power to do all things and execute such
<PAGE MRP-8> instruments as may be deemed necessary or proper,
including the following powers:
(a) To invest up to one hundred percent (100%) of all
Trust assets in Common Stock without regard to any law now or
hereafter in force limiting investments by trustees or other
fiduciaries. The investment authorized herein constitutes the
only investment of the Trust, and in making such investment, the
Plan Trustee is authorized to purchase Common Stock from the Bank
or from any other source, and such Common Stock so purchased may
be outstanding, newly issued, or treasury shares.
(b) To invest any Trust assets not otherwise invested
in accordance with (a) above in such deposit accounts,
certificates of deposit (including those issued by the Bank),
obligations of the United States government or its agencies or
such other investments as shall be considered the equivalent of
cash, or to invest in mutual funds which invest in such
securities.
(c) To sell, exchange or otherwise dispose of any
property at any time held or acquired by the Trust.
(d) To cause stocks, bonds or other securities to be
registered in the name of a nominee, without the addition of
words indicating that such security is an asset of the Trust (but
accurate records shall be maintained showing that such security
is an asset of the Trust).
(e) To hold cash without interest in such amounts as
may be in the opinion of the Trustee reasonable for the proper
operation of the Plan and Trust.
(f) To employ brokers, agents, consultants and
accountants.
(g) To hire counsel to render advice with respect to
the Plan Trustee's rights, duties and obligations hereunder, and
such other legal services or representation as the Plan Trustee
may deem desirable.
(h) To hold funds and securities representing the
amounts to be distributed to a Recipient or his Beneficiary as a
consequence of a dispute as to the disposition thereof, whether
in a segregated account or held in common with other assets of
the Trust.
Notwithstanding anything herein contained to the
contrary, the Plan Trustee shall not be required to make any
inventory, appraisal or settlement or report to any court, or to
secure any order of court for the exercise of any power herein
contained, or give bond.
8.03 Records and Accounts. The Trustee shall maintain
accurate and detailed records and accounts of all transactions of
<PAGE MRP-9> the Trust, which shall be available at all
reasonable times for inspection by any legally entitled person or
entity to the extent required by applicable law, or any other
person determined by the Board.
8.04 Earnings. All earnings, gains and losses with respect
to Trust assets shall be allocated in accordance with a
reasonable procedure adopted by the Compensation Committee of the
Board.
8.05 Expenses. All costs and expenses incurred in the
operation and administration of this Plan shall be borne by the
Bank.
ARTICLE IX
MISCELLANEOUS
9.01 Adjustments for Capital Changes. The aggregate number
of Plan Shares available for issuance pursuant to Plan Share
Awards and the number of Plan Shares to which any Plan Share
Award relates shall be proportionately adjusted for any increase
or decrease in the total number of outstanding shares of Common
Stock issued subsequent to the Effective Date resulting from any
split, subdivision or consolidation of shares or other capital
adjustment, or other increase or decrease in such Common Stock
effected without receipt or payment of consideration, by the
Bank.
9.02 Amendment and Termination of Plan. The Board may, by
resolution, at any time amend or terminate the Agreement. Upon
termination, the Bank may direct the Plan Trustee to return to
the Bank Common Stock held in the Plan Share Reserve and any
other unallocated assets of the Trust. Termination or amendment
of the Trust shall not affect a Recipient's right to earn Plan
Shares pursuant to previously granted Plan Share Awards or to the
distribution of Common Stock relating thereto, including earnings
thereon. Termination of the Plan shall not become effective as
to previously awarded Plan Share Awards that remain outstanding
on the proposed termination date unless the Board elects to
distribute all unearned Plan Shares subject to such Plan Share
Awards immediately upon such termination.
9.03 Nontransferable. Plan Share Awards and rights to Plan
Shares shall not be transferable by a Recipient or Beneficiary,
and during the lifetime of the Recipient, Plan Shares may only be
earned by and paid to the Recipient who was notified in writing
of the Plan Share Award by the Compensation Committee of the
Board pursuant to Section 6.03.
9.04 Employment Rights. Neither the Plan nor any grant of
a Plan Share Award or Plan Shares hereunder nor any action taken
by the Plan Trustee or the Compensation Committee of the Board in
connection with the Plan shall create any right on the part of
<PAGE MRP-10> any Eligible Person to continue in the employ of
the Bank or to continue to sit on the Board thereof.
9.05 Voting and Dividend Rights. No Recipient shall have
any voting or dividend rights or other rights of a shareholder in
respect of any Plan Shares covered by a Plan Share Award, except
as expressly provided in Sections 7.02 and 7.04 above, prior to
the time said Plan Shares are actually distributed to him.
9.06 Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the Commonwealth of
Pennsylvania without regard to its conflicts of law rules.
9.07 Effective Date. The date of its execution by the Bank
and the Plan Trustee.
9.08 Term of Plan. This Plan shall remain in effect until
the earlier of (1) 21 years from the Effective Date,
(2) termination by the Board, or (3) the distribution of all
assets of the Trust. Termination or amendment of the Plan shall
not affect any Plan Share Awards previously granted, and such
Plan Share Awards shall remain valid and in effect until they
have been earned and paid, or by their terms expire or are
forfeited.
IN WITNESS WHEREOF, the Bank has caused this Agreement to be
executed by its duly authorized officers and the corporate seal
to be affixed and duly attested, as of the ____ day of _________,
1996.
PENNSYLVANIA SAVINGS BANK
By:________________________________
Attest:____________________________
IN WITNESS WHEREOF, the undersigned, JAMES W. EASTWOOD,
P. CHARLES DeRITA and ROSANNE PAUCIELLO, as members of the
Pennsylvania Savings Bank Compensation Committee, hereby execute
this Agreement, as Plan Trustee undertaking to perform the
obligations and duties of the Plan Trustee hereunder and
consenting to the foregoing Management Recognition Plan and Trust
Agreement.
Signed: ___________________________________
James W. Eastwood
___________________________________
P. Charles DeRita
___________________________________
Rosanne Pauciello <PAGE MRP-11>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 1,413 1,193
<INT-BEARING-DEPOSITS> 33,543 26,695
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 5,323 10,287
<INVESTMENTS-CARRYING> 38,975 17,353
<INVESTMENTS-MARKET> 38,981 17,335
<LOANS> 79,818 68,490
<ALLOWANCE> 304 238
<TOTAL-ASSETS> 164,007 129,338
<DEPOSITS> 128,161 108,734
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 5,454 5,606
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 0 1,195
<OTHER-SE> 30,393 13,803
<TOTAL-LIABILITIES-AND-EQUITY> 30,393 14,998
<INTEREST-LOAN> 6,674 5,540
<INTEREST-INVEST> 1,528 1,990
<INTEREST-OTHER> 1,895 1,210
<INTEREST-TOTAL> 10,097 8,740
<INTEREST-DEPOSIT> 5,065 4,534
<INTEREST-EXPENSE> 5,090 4,564
<INTEREST-INCOME-NET> 4,724 4,116
<LOAN-LOSSES> 283 60
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 4,625 4,134
<INCOME-PRETAX> 1,414 1,053
<INCOME-PRE-EXTRAORDINARY> 1,414 1,053
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 912 708
<EPS-PRIMARY> 0.31 0.61
<EPS-DILUTED> 0.31 0.61
<YIELD-ACTUAL> 3.57 3.58
<LOANS-NON> 1,609 1,894
<LOANS-PAST> 0 200
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 238 207
<CHARGE-OFFS> 270 29
<RECOVERIES> 53 0
<ALLOWANCE-CLOSE> 304 238
<ALLOWANCE-DOMESTIC> 304 238
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
PSB Bancorp, Inc. and Subsidiary
Consolidated Financial Statements
December 31, 1998
<PAGE>
PSB BANCORP, INC. AND SUBSIDIARY
CONTENTS
Page
Independent Auditors' Report 1
Financial Statements:
Consolidated Statement of Financial Condition
December 31, 1998 and 1997 2
Consolidated Statement of Income for the Years
Ended December 31, 1998, 1997, and 1996 3 - 4
Consolidated Statement of Stockholders' Equity
for the Years Ended December 31, 1998, 1997,
and 1996 5
Consolidated Statement of Cash Flows for the
Years Ended December 31, 1998, 1997,
and 1996 6 - 8
Consolidated Statement of Comprehensive Income
for the Years Ended December 31, 1998, 1997
and 1996 9
Notes to Consolidated Financial Statements 10 - 44
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
PSB Bancorp, Inc.
Eleven Penn Center
1835 Market Street
Philadelphia, Pennsylvania 19103-2986
We have audited the accompanying consolidated statement of
financial condition of PSB Bancorp, Inc. and Subsidiary as of
December 31, 1998 and 1997 and the related consolidated
statements of income, stockholders' equity, cash flows and
comprehensive income for each of the three years ended
December 31, 1998, 1997 and 1996. 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 PSB Bancorp, Inc. and Subsidiary at
December 31, 1998 and 1997, the results of their operations and
their cash flows for each of the three years ended December 31,
1998, 1997 and 1996 in conformity with generally accepted
accounting principles.
/s/ Stockton Bates, LLP
Certified Public Accountants
Philadelphia, Pennsylvania
March 10, 1999
PAGE 1
<PAGE>
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
ASSETS
December 31,
1998 1997
CASH AND CASH EQUIVALENTS:
Cash and due from banks $ 1,413,249 $ 1,193,195
Interest bearing deposits in
other financial institutions 33,543,499 26,695,455
INVESTMENTS:
Investment securities available-
for-sale, at fair value 16,907,350 14,401,388
Mortgage-backed securities
available-for-sale at fair
value 22,073,453 2,933,804
Investment securities held-to-
maturity (fair value of
$4,005,600 and $8,234,639) 3,996,118 8,219,223
Mortgage-backed securities held-
to-maturity (fair value of
$1,404,753 and $2,182,322) 1,326,737 2,068,059
LOANS RECEIVABLE, net 72,880,160 61,915,068
LOANS HELD FOR SALE 6,938,160 6,574,585
REAL ESTATE:
Acquired in settlement of loans 629,263 456,528
OFFICE PROPERTIES AND EQUIPMENT,
net of accumulated depreciation 990,071 1,329,145
FEDERAL HOME LOAN BANK STOCK, at cost 572,200 559,900
(Restricted investment required by
law)
ACCRUED INTEREST RECEIVABLE 1,288,666 1,285,102
INVESTMENT IN DATA CENTER, common
stock, at cost 15,000 15,000
PREPAID CORPORATE TAXES 448,317 445,092
EXCESS OF ACQUISITION COST OVER FAIR
VALUE OF ASSETS ACQUIRED, net of
accumulated amortization 6,250 7,250
<PAGE 2>
NET DEFERRED TAXES
CAPITALIZED CONVERSION COSTS 155,292
PREPAID EXPENSES AND OTHER ASSETS 978,789 1,083,865
TOTAL ASSETS $164,007,282 $129,337,951
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $128,160,510 $108,734,107
Securities purchased under
agreements to resell 2,495,030 2,841,733
Advances from borrowers for taxes 1,096,339 999,611
Income taxes payable 465,108 308,000
Net Deferred Taxes 97,100 51,158
Accrued pension cost 138,815 145,843
Accrued interest payable on
savings accounts 320,896 260,363
Employee Stock Ownership Plan debt 234,226 295,355
Accrued expenses and other
liabilities 606,413 703,957
Total liabilities 133,614,437 114,340,127
STOCKHOLDERS' EQUITY:
Common Stock, $1 par value,
10,000,000 shares authorized;
1,194,640 shares issued and
outstanding for December 31,
1997 1,194,640
Common Stock, no par value,
15,000,000 shares authorized;
3,101,140 shares issued and
outstanding for December 31,
1998
Additional paid-in capital 30,128,052 13,563,087
Employee Stock Ownership Plan (1,442,886) (295,355)
Retained earnings (accumulated
deficit) 1,704,436 545,743
Unrealized loss, investments
available-for-sale 3,243 (10,291)
Total stockholders' equity 30,392,845 14,997,824
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $164,007,282 $129,337,951
The accompanying notes are an integral part of the
consolidated financial statements.
PAGE 3
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31,
1998 1997 1996
INTEREST AND DIVIDEND INCOME:
Interest on loans $ 6,673,774 $5,539,747 5,217,737
Mortgage-backed securities 326,738 373,900 430,798
Investment securities:
Taxable interest 1,060,169 1,424,915 1,063,520
Taxable dividends 135,001 191,364 119,290
Tax-exempt interest 6,419
Interest-earning deposits 1,894,883 1,210,030 1,207,302
Total interest income 10,096,984 8,739,956 8,038,647
INTEREST EXPENSE:
Interest on deposits 5,065,107 4,533,646 4,082,377
Interest - other 25,142 30,607 36,099
Total interest expense 5,090,249 4,564,253 4,118,476
Net interest income 5,006,735 4,175,703 3,920,171
Provision for loan losses 283,066 60,000 132,633
Net interest income
after provision for
loan losses 4,723,669 4,115,703 3,787,538
NONINTEREST INCOME:
Gain on sale of loans 863,407 555,987 335,736
Loan fees 26,297 81,180 27,485
Service charges 362,234 347,792 371,210
Rental income 37,721 38,767 44,286
Other income 25,511 47,368 136,712
Total noninterest
income 1,315,170 1,071,094 915,429
<PAGE 4>
NONINTEREST EXPENSES:
Compensation and employee
benefits 2,532,303 2,283,110 1,938,979
Premises and occupancy
costs 688,006 684,098 455,652
Federal insurance premiums 68,768 64,167 735,530
Data Processing 147,528 126,700 120,782
Advertising 111,111 81,400 62,121
Directors Fees 223,900 232,300 237,200
Stationary, printing and
postage 107,420 103,040 113,460
Expenses of real estate
owned 86,463 8,244 143,177
Loss on sale of real
estate held for
investment 2,465
Other 659,501 550,592 553,379
Total noninterest
expenses 4,625,000 4,133,651 4,362,745
INCOME BEFORE PROVISION FOR
INCOME TAXES 1,413,839 1,053,146 340,222
Provision for federal and
state income taxes:
Current 465,108 308,000 142,000
Deferred 36,920 36,669 59,465
Total income tax
provision 502,028 344,669 201,465
NET INCOME $ 911,811 $ 708,477 $ 138,757
BASIC EARNINGS PER SHARE $ .31 $ .61 $ .12
DILUTED EARNINGS PER SHARE $ .31 $ .61 $ .12
The accompanying notes are an integral part of the
consolidated financial statements.
PAGE 5
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Accum-
ulated
Employee Other
Additional Stock Retained Compre- Compre-
Common Paid-in Ownership Earnings hensive hensive
Stock Capital Plan (Deficit) Income Total Income
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $ 1,173,250 $13,330,472 $ (417,612) $ (257,494) $(13,715) $13,814,901
Net income for the year ended
December 31, 1996 138,757 138,757 138,757
Issuance of common stock to
Management Recognition Plan 21,390 232,615 254,005
Dividends paid (43,997) (43,997)
Other comprehensive income, net
of tax:
Change in unrealized loss on
investment and mortgage-
backed securities available-
for-sale (56,253) (56,253) (56,253)
Employee Stock Ownership Plan:
Shares Released 61,129 61,129
BALANCE, DECEMBER 31, 1996 $ 1,194,640 $13,563,087 $ (356,483) $ (162,734) $(69,968) $14,168,542 $ 82,504
========
Net income for the year ended
December 31, 1997 708,477 708,477 708,477
Other comprehensive income, net
of tax:
Change in unrealized loss on
investment and mortgage-backed
securities available-for-sale 59,677 59,677 59,677
Employee Stock Ownership Plan: 61,128 61,128
Shares Released
BALANCE, DECEMBER 31, 1997 $ 1,194,640 $13,563,087 $ (295,355) $ 545,743 $(10,291) $14,997,824 $768,154
========
Net income for the year ended
December 31, 1998 911,811 911,811 911,811
Other comprehensive income,
net of tax:
Change in unrealized loss on
investment and mortgage-backed
securities available-for-sale 13,534 13,534 13,534
Cash of PSB Mutual Holding
Company from merger of PSB
Mutual Holding Company and
Pennsylvania Savings Bank
upon completion of Conversion
and Reorganization 246,882 246,882
Employee Stock Ownership Plan:
Shares Released (18,862) 141,009 122,147
Issuance of common stock to
Employee Stock Ownership Plan
upon completion of Conversion
and Reorganization (1,288,540) (1,288,540)
Exchange of Pennsylvania Savings
Bank common stock for PSB
Bancorp Inc. common stock upon
completion of Conversion and
Reorganization (1,194,640) 1,194,640 0
Issuance of common stock upon
completion of Conversion and
Reorganization 16,107,320 16,107,320
Expenses relating to stock
offering (718,133) (718,133)
BALANCE, DECEMBER 31, 1998 $ 0 $30,128,052 $(1,442,886) $1,704,436 $ 3,243 $30,392,845 $925,345
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
PAGE 6
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Increase (Decrease) in Cash and Cash Equivalents
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 911,811 $ 708,477 $ 138,757
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Amortization of premium/discount
on mortgage-backed securities (7,045) 1,784 (4,824)
Depreciation and amortization 145,740 122,037 90,943
Write-down and expenses of real
estate owned 95,599 8,123
Gain (loss) on sale of real estate (36,882) 2,465
Gain (loss) on sale of property &
equipment 9,446 (977)
Gain on sale of loans (863,407) (555,987) (335,736)
Provision for losses on loans 283,066 60,000 132,633
Deferred taxes 36,920 36,669 59,467
Compensation expense-Employee Stock
Ownership Plan 61,017
Change in assets and liabilities:
(Increase)decrease in loans held-
for-sale 499,832 (1,420,898) (1,752,764)
Increase in accrued interest
receivable (3,564) (68,145) (137,214)
(Increase) decrease in prepaid
expenses 105,076 (298,621) (491,183)
(Increase) decrease in prepaid
corporate taxes (3,225) (54,121) 65,494
Increase (decrease) in corporate
taxes payable 157,108 166,000 (236,000)
Increase (decrease) in accrued
pension cost (7,028) (3,301) 5,768
Increase in accrued interest
payable 60,533 76,562 25,468
Increase (decrease) in accrued
expenses (90,193) 310,649 210,608
Total adjustments 442,993 (1,619,249) (2,365,852)
Net cash provided by (used in)
operating activities 1,354,804 (910,772) (2,227,095)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities,
available-for-sale (11,543,781) (9,042,458) (5,000,000)
Purchase of investment securities,
held-to-maturity (12,000,000) (11,714,219) (10,999,687)
Purchase of mortgage-backed securities,
available-for-sale (20,307,890)
Mortgage-backed security maturities and
principal repayments 1,980,089 991,525 864,783
Maturities of investment securities,
available-for-sale 8,720,000 1,000,000 3,000,000
Maturities of investment securities,
held-to-maturity 16,500,000 16,155,737 8,842,857
<PAGE 7>
CASH FLOWS FROM INVESTING ACTIVITIES: (Continued)
Acquisition costs of, and proceeds
from the sale of, Federal Home Loan
Bank stock (12,300) (26,300) (32,600)
Increase in total loans receivable, net (11,698,839) (9,389,519) (988,164)
Purchase and improvement of real estate
for investment (500)
Proceeds from sale of real estate owned
net of improvements 211,878 140,921
(Increase) decrease in capitalized
conversion costs 155,292 (155,292)
Proceeds from sale of property &
equipment 220,464 5,300
Capital expenditures (35,575) (176,734) (613,361)
Net cash used in investing
activities (27,810,662) (12,357,260) (4,708,451)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits, net $ 19,426,403 $ 8,159,731 $ 4,097,882
Change in securities purchased under
agreements to resell (346,703) 1,305,545 69,451
Net proceeds from stock offering 14,100,647
Proceeds received from merger with
PSB Mutual Holding Company 246,881
Proceeds from issuance of stock to
Management Recognition Plan 254,005
Dividends Paid (43,997)
Change in advances for borrowers'
taxes and insurance 96,728 68,941 (215,594)
Net cash provided by financing
activities 33,523,956 9,534,217 4,161,747
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 7,068,098 (3,733,815) (2,845,799)
Cash and cash equivalents, beginning
of year 27,888,650 31,622,465 34,468,264
CASH AND CASH EQUIVALENTS, END OF YEAR $ 34,956,748 $ 27,888,650 $31,662, 465
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest on deposits and borrowings $ 5,029,716 $ 4,457,084 $ 4,056,909
Income taxes $ 400,000 $ 280,000 $ 267,788
Noncash activities:
Loans transferred to real estate owned $ 443,330 $ -0- $ 79,156
Unrealized gain (loss)
on investment mortgage-backed
securities available-for-sale,
net of taxes $ 13,534 $ 59,677 $ (56,253)
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
PAGE 8
<PAGE>
PSB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year Ended
December 31,
1998 1997 1996
Net Income $911,811 $708,477 $138,757
Other Comprehensive Income,
net of tax:
Unrealized Gain (Loss),
Investments Available
for Sale 13,534 59,677 (56,253)
Other Comprehensive income 13,534 59,677 (56,253)
Comprehensive Income $925,345 $768,154 $ 82,504
The accompanying notes are an integral part of the consolidated
financial statements.
PAGE 9
<PAGE>
PSB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. DESCRIPTION OF ORGANIZATION:
PSB Bancorp, Inc. (the "Holding Company") was organized
as Pennsylvania business corporation on October 3, 1997 at the
direction of Pennsylvania Savings Bank (the "Savings Bank") for
the purposes of becoming a holding company for the Savings Bank
upon the Conversion and Reorganization. The Holding Company is
subject to regulation by the Federal Reserve, and its principal
business is the ownership of the Savings Bank. In the future,
the Holding Company may acquire or organize other operating
subsidiaries, although there are no current plans, arrangements
or understandings, written or oral, to do so.
Effective July 17, 1998, Pennsylvania Savings Bank (the
"Savings Bank") and PSB Mutual Holding Company ("MHC") completed
the Plan of Conversion from Mutual Holding Company to Stock
Holding Company. Under the Plan of Conversion, the newly formed
holding company, PSB Bancorp, Inc. (the "Holding Company") issued
1,610,732 shares of common stock, no par value, at a price of
$10.00 per share in a direct and syndicated offering.
Furthermore, based on an independent appraisal, existing
stockholders of Pennsylvania Savings Bank, other than the MHC,
exchanged their shares (579,390 shares) for 2.572374 shares of
PSB Bancorp, Inc. and the Mutual Holding Company merged with and
into the Savings Bank. The common stock of PSB Bancorp, Inc.
began trading on the Nasdaq National Market under the symbol
"PSBi" on July 17, 1998.
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 origination 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 in the Bank's market area. Such
institutions, as well as consumer finance, mutual funds,
insurance companies, and brokerage and investment banking firms,
<PAGE 10> 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation:
The consolidated financial statements for the periods
prior to July 17, 1998 are those of Pennsylvania Savings Bank
(the "Savings Bank:) and its wholly-owned subsidiaries, PSA
Service Corporation, Transnational Mortgage Corporation and PSA
Financial Corporation. The Savings Bank became the wholly-owned
subsidiary of the PSB Bancorp, Inc.(the "Holding Company") on
July 17, 1998 and as a result the consolidated financial
statements for the period subsequent to July 17, 1998 also
include the accounts of the Holding Company and its wholly-owned
subsidiary, Pennsylvania Savings Bank. The Holding Company's
business is conducted principally through the Savings Bank and
its wholly-owned subsidiaries. Significant intercompany balances
and transactions have been eliminated.
Year 2000 Issue:
Year 2000 issues result from the inability of many
computer programs or computerized equipment to accurately
calculate, store or use a date after December 31, 1999 (the "Y2K
Issue"). The erroneous date can be interpreted in a number of
different ways; typically the year 2000 is interpreted as the
year 1900. Correctly identifying the year 2000 as a leap year
may also be an issue. These misidentifications could result in a
system failure or miscalculations causing disruptions of
operations, including among other things, a temporary inability
to process transactions, track important customer account
information, provide convenient access to this information or
engage in normal business operations.
The Holding Company and Savings Bank's Board of
Directors and management have addressed the Y2K issue by
developing a Y2K Compliance Plan. This plan involves five
separate phases: awareness, assessment, renovation, validation
and implementation.
During 1997, the Savings Bank completed the systems
assessment phase, identifying each internal and external system
that could potentially be affected by the Y2K issue. Those
systems include the savings Bank's external data processing
system as well as equipment such as elevators, bank alarms, vault
<PAGE 11> locks, etc. that may contain imbedded microprocessors.
For each such system, a determination was made whether or not the
system is Y2K compliant. Those determinations involved obtaining
Y2K compliant certification from third-party processors and
outside vendors.
The Savings Bank outsources all major data processing
applications related to customers' banking transactions to
Intrieve, Incorporated ("intrieve"). Under the Bank's agreement
with Intrieve, Intrieve is obligated to incur all software
related costs to make its system Y2K compliant. Intrieve has
prepared a detailed schedule of functions to be performed in its
compliance project. As of December 31, 1998, Intrieve has
completed its "awareness," "assessment" and "renovation" and
"validation" phases. In October 1998, Intrieve conducted
internal testing of its data processing system. Results of these
tests were distributed to their customers in November 1998. In
March 1999, Intrieve will conduct additional internal testing.
On November 8, 1998, the Savings Bank conducted testing in-house
using Intrieve's data processing system. The Savings Bank
performed various banking transactions on customers' accounts
using the date of January 10, 2000. All transactions were
completed successfully. Intrieve has completed much of its Y2K
testing but will continue testing and renovation throughout 1999.
The Savings Bank will be obligated to incur only the hardware
costs associated with implementing the charges required by
Intrieve; however, hardware costs are not expected to be
material.
The savings Bank expects that all other outside vendors
will be Y2K compliant by March 31, 1999. If any vendor is not
compliant by this date the Savings Bank will consider contracting
with alternative vendors.
In certain cases, however, such as the potential loss
of electrical power or telecommunications services due to Y2K
problems, testing by the Savings Bank is either not practical or
not possible. In those cases, contingency plans are being
designed that specify how the Savings Bank will deal with each
such potential situation. The Savings Bank has developed a
contingency plan which will address failure of the data
processing service bureau system. The Savings Bank has
determined that if the service bureau system were to fail, the
Savings Bank would implement manual systems until such systems
could be re-established. The Savings Bank does not anticipate
the potential use of short-term manual systems would have a
material impact upon the operations of the Savings Bank.
Intrieve, Inc. has also developed their own contingency plan.
To the extent the Savings Bank's systems are not fully
Year 2000 compliant, there can be no assurance that potential
system interruptions would not have a materially adverse effect
on the Bank's business, financial condition, results of
operations and business prospects. Further, any Year 2000
<PAGE 12> failure on the part of the Savings Bank customers or
vendors could result in additional expense or loss to the Savings
Bank.
Reporting Comprehensive Income - New Pronouncement:
In 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes new rules for the reporting
and display of comprehensive income and its components; however,
the adoption of this Statement had no impact on the Company's net
income or stockholders' equity. SFAS No. 130 requires the
Company's unrealized holding gains and losses to be included in
other comprehensive income. Prior year's financial statements
have been reclassified to conform to these requirements.
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:
Gains and losses realized on sales of investment
securities represent differences between net proceeds and
carrying values determined by the specific identification method.
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.
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 expenses.
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
<PAGE 13> 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 ended December 31, 1996 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 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.
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
aggregate cost or market, including considering of forward
commitments to sell, until ultimate disposition.
Effective January 1, 1997, the Savings Bank adopted the
provision of Statement of Financial Accounting Standards
No. 125 - "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" ("SFAS No. 125"). The
<PAGE 14> adoption of SFAS No. 125 had no significant impact on
the earnings or financial condition of the Bank. The Bank
carries any retained interest in a transferred asset on the
statement of condition as a servicing asset. The servicing
assets represent the fair value of the servicing contracts
associated with purchase or origination and subsequent
securitization of the mortgage loans. Servicing assets are
amortized in proportion to and over the period of estimated net
servicing income. Servicing assets are evaluated periodically
for impairment based on their fair value and impairment, if any,
is recognized through a valuation allowance and a charge to
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 Savings 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 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.
<PAGE 15>
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 1998 presentation.
Advertising:
Advertising costs are charged to operations when
incurred and amounted to $111,111, $81,400 and $62,121 for the
years ended December 31, 1998, 1997 and 1996, respectively.
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, 1998, 1997 and 1996 was 2,956,851, 1,165,105 and
1,152,328 for basic earnings per share, and 2,988,037, 1,179,678
and 1,152,328 for diluted earnings per share, respectively.
Earnings per share for the year ended December 31, 1998 reflect
the shares issued and outstanding due to the Conversion and
Reorganization effective July 17, 1998. As a result, earnings
per share are not comparable to prior years.
In February 1997, the FASB issued SFAS No. 128,
"Earnings per Share." SFAS No. 128 establishes standards for
computing and presenting earnings per share (EPS) and applies to
<PAGE 16> entities with publicly 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 computation to the numerator and
denominator of the diluted EPS computation.
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, 1998
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 $ (1,242) $ 2,352,968
Debt:
FNMA 3,500,000 11,300 3,511,300
Municipal Tax-exempt 3,543,782 3,543,782
SLMA 1,000,000 1,100 1,001,100
FHLB Notes 6,497,991 209 6,498,200
14,541,773 12,609 14,554,382
16,895,983 12,609 (1,242) 16,907,350
<PAGE 17>
<CAPTION>
Available-for-Sale
December 31, 1998
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Mortgage-backed Securities:
FNMA $11,884,026 $ - $ (5,963) $11,878,063
GNMA 10,195,390 10,195,390
22,079,416 (5,963) 22,073,453
Total Available-for-
Sale Securities 38,975,399 12,609 (7,205) 38,980,803
<CAPTION>
Held-to-Maturity
December 31, 1998
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Investment Securities:
Debt:
FNMA $ 1,000,000 $ 1,100 $ - $ 1,001,100
FHLMC 2,996,118 8,382 3,004,500
3,996,118 9,482 4,005,600
Mortgage-backed Securities:
GNMA 1,269,163 73,583 1,342,746
FHLMC 57,574 4,433 62,007
1,326,737 78,016 1,404,753
Total Held-to-Maturity
Securities 5,322,855 87,498 5,410,353
TOTAL INVESTMENTS
AND MORTGAGE-
BACKED
SECURITIES $44,298,254 $100,107 $ (7,205) $44,391,156
</TABLE>
The following is a summary of the Bank's investment in
available-for-sale and held-to-maturity securities:
<PAGE 18>
<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
<CAPTION>
Available-for-Sale
December 31, 1997
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
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
<PAGE 19>
<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>
Assets, principally securities, carried at approximately
$2,495,030 and $2,841,107 at December 31, 1998 and 1997,
respectively were pledged to secure deposits as required or
permitted by law.
The amortized cost and estimated market values of securities
at December 31, 1998 and 1997 by contractual maturities, are as
follows:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
<S> <C> <C>
December 31, 1998:
Due after one year through five years $ 7,996,456 $8,006,200
Due after five years through fifteen years 6,997,653 7,010,000
Due after fifteen years 3,543,781 3,543,782
18,537,890 18,559,982
Mutual Funds 2,354,210 2,352,968
Mortgage-backed securities 23,406,154 23,478,206
$44,298,254 $44,391,156 <PAGE 20>
December 31, 1997:
Due less than one year $18,214,444 $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
</TABLE>
Proceeds from maturities of investment securities available-
for-sale during the years ended December 31, 1998, 1997 and 1996
totaled $9,000,000 and $1,000,000 and $3,000,000, respectively.
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:
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Real Estate Loans:
One-to-four family $49,796,287 $44,940,010
Five or more family residence 1,575,767 702,055
Construction loans 3,286,280 2,597,061
Nonresidential 14,722,269 11,420,738
69,380,603 59,659,864
Consumer loans 1,167,376 1,201,351
Commercial loans 3,073,768 1,907,393
73,621,747 62,768,608
Less:
Unearned fees and discounts (430,338) (477,979)
Undisbursed loan proceeds (7,351) (137,677)
Allowance for loan losses (303,898) (237,884)
$72,880,160 $61,915,068
</TABLE>
Loans receivable at December 31, 1998 and 1997 includes
$64,650,536 and $55,289,037 of fixed rate loans and $8,971,211
and $7,479,571 of adjustable rate loans, respectively.
PAGE 21
<PAGE>
A summary of loan maturities at December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Multi-Family
and Consumer
Commercial and
One to Four Real Construc- Commercial Total
Family Estate tion Business Loans
<S> <C> <C> <C> <C> <C>
Amounts due:
Non-accrual $ 1,238,907 $ 369,863 $ - $ - $ 1,608,770
Within one year 1,738,970 1,816,841 3,286,280 3,360,516 10,202,607
After one year:
1 to 3 years 578,375 3,260,900 309,234 4,148,509
3 to 5 years 2,268,930 5,877,093 347,664 8,493,687
5 to 10 years 5,287,964 3,201,033 223,730 8,712,727
Over 10 years 38,683,141 1,772,306 40,455,447
Total due after
one year 46,818,410 14,111,332 880,628 61,810,370
TOTAL AMOUNTS DUE $49,796,287 $16,298,036 $3,286,280 $4,241,144 $73,621,747
</TABLE>
A summary of changes in the allowance for loan losses is as
follows:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
<S> <C> <C> <C>
BALANCE, BEGINNING OF YEAR $237,884 $206,884 $207,589
Provision charged to operation 283,066 60,000 132,633
Recoveries of loans previously
charged-off 53,200
Charged-off (270,252) (29,000) (133,338)
BALANCE, END OF YEAR $303,898 $237,884 $206,884
</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, 1998 and 1997, 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, 1998, the Bank's impaired loans consisted
<PAGE 22> of two commercial real estate loans with a total
recorded balance of $325,537 for which specific allowances of
$16,227 has been established. 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, 1998
and 1997 was $339,946 and $332,507, respectively. At December
31, 1996 and for the year 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 $1,608,770, and $1,893,712 at December 31, 1998 and
1997, respectively. If interest on those loans had been accrued,
accrued interest would have increased by $41,019 and $49,696 at
December 31, 1998 and 1997, respectively.
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 $1,571,832 and
$1,177,541 at December 31, 1998 and 1997, respectively.
During the years ended December 31, 1998 and 1997 loans of
$668,495 and $1,045,000, respectively, were disbursed to
executive officers and trustees, while principal repayments of
$274,205 and $191,637 were received in those years, respectively.
5. LOANS HELD FOR SALE:
Loans held for sale are as follows:
<TABLE>
<CAPTION>
December 31, 1998
Gross un- Gross un- Fair
realized realized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Residential mortgage loans $6,938,160 $ - $ - $6,938,160
<CAPTION>
December 31, 1997
Gross un- Gross un- Fair
realized realized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Residential mortgage loans $6,574,585 $ - $ - $6,574,585
</TABLE>
PAGE 23
<PAGE>
6. ACCRUED INTEREST RECEIVABLE:
A summary of accrued interest receivable is as follows:
December 31,
1998 1997
Loans $ 748,325 $ 687,128
FHLB Overnight 181,773 105,533
Mortgage-backed securities 128,150 28,571
Investment securities 230,418 463,870
$1,288,666 $1,285,102
7. OFFICE PROPERTIES AND EQUIPMENT:
Office properties and equipment are summarized by major
classification as follows:
December 31,
1998 1997
Land, buildings and improvements $ 1,388,068 $ 1,856,499
Furniture, fixtures and equipment 1,358,962 1,329,386
2,747,030 3,185,885
Less accumulated depreciation $(1,756,959) (1,856,740)
$ 990,071 $ 1,329,145
Depreciation expense was $144,740, $121,037, and $89,943 for
the years ended December 31, 1998, 1997 and 1996, respectively.
8. REAL ESTATE OWNED - ACQUIRED THROUGH SETTLEMENT OF LOANS:
Real estate owned consists of the following:
December 31,
1998 1997
Real estate acquired through
settlement of loans $ 629,263 $ 456,528
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.
<PAGE 24>
10. DEPOSITS:
Deposits at December 31, 1998 and 1997 are summarized as
follows:
Weighted Average 1998 1997
Interest Rate Amount % Amount %
Types of Deposits:
Noninterest bearing
accounts:
1998 $ 8,835,928 6.90
1997 $ 6,454,066 5.93%
Passbook accounts:
1998 3.00% 27,311,565 21.31
1997 3.00 26,146,377 24.05
Statement savings
accounts:
1998 2.50 276,940 .22
1997 2.49 63,088 .06
Club accounts:
1998 2.00 183,060 .14
1997 2.00 191,810 .18
Now accounts:
1998 .38 5,360,948 4.18
1997 .90 5,373,905 4.94
Money Market:
1998 3.53 8,705,147 6.79
1997 3.57 7,201,284 6.62
50,673,588 39.54 45,430,530 41.78
Certificate of deposit:
Less than 4.00%
1998 3.00 296,372 .23
1997 3.00 293,168 .27
4.00 - 5.00%
1998 4.58 1,644,136 1.28
1997 4.40 1,188,515 1.09
5.01 - 6.00%
1998 5.42 74,460,160 58.10
1997 5.53 60,737,995 55.86
6.01 - 7.00%
1998 6.64 1,051,066 .82
1997 6.77 1,050,766 .97
7.01 - 8.00%
1998 7.85 35,188 .03
1997 7.85 33,133 .03
Total of certificates
of deposit 77,486,922 60.46 63,303,577 58.22
TOTAL DEPOSITS $128,160,510 100.00% $108,734,107 100.00%
PAGE 25
<PAGE>
Certificates of deposit have scheduled maturities as
follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Within one year $65,674,320 $45,450,499
One year through two years 8,160,362 14,167,969
Two years through three years 1,196,369 1,571,762
Three years through five years 2,043,473 1,707,871
Five years through ten years 412,398 405,476
Over ten years
$77,486,922 $63,303,577
</TABLE>
Interest expense on deposits is comprised of the following:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
<S> <C> <C> <C>
NOW Accounts $ 78,191 $ 90,827 $ 93,641
Savings Accounts 822,550 786,897 829,578
Money Market Accounts 295,089 258,951 199,467
Certificates of Deposit 3,885,914 3,424,647 2,977,210
5,081,744 4,561,322 4,099,896
Early Withdrawal Penalties (16,637) (27,676) (17,519)
$5,065,107 $4,533,646 $ 4,082,377
</TABLE>
The aggregate amount of certificates of deposit accounts
with a minimum denomination of $100,000 was approximately
$13,992,726 and $10,791,394 at December 31, 1998 and 1997,
respectively.
The aggregate amount of demand deposits that have been re-
classified as loan balances at December 31, 1998 and 1997 was
$41,735 and $88,129,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.
The provision for income taxes consists of the following:
<PAGE 26>
Year Ended
December 31,
1998 1997 1996
Currently payable:
Federal $453,108 $292,000 $122,000
State 12,000 16,000 20,000
465,108 308,000 142,000
Deferred 36,920 36,669 59,465
TOTAL $502,028 $344,669 $201,465
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:
Year Ended
December 31,
1998 1997 1996
Expected Income Tax Expense
at Federal tax rate $480,705 $358,070 $115,675
Travel and Entertainment 20,083 15,937 25,162
State Tax net of Federal benefit 7,920 10,560 13,200
Other differences, net (6,680) (39,898) (47,428)
$502,028 $344,669 $201,465
Deferred taxes are included in the accompanying statements
of financial condition as of December 31, 1998 and 1997 for the
estimated future tax effects of differences between the financial
statement and federal income tax bases of assets and liabilities
given the provisions of currently enacted tax laws.
<PAGE 27>
The net deferred tax asset (liability) consist of the
following components:
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Deferred Tax Asset:
Unrealized loss on available-for-
sale securities $ - $ 6,860
Deferred income 79,898 99,873
79,898 106,733
Deferred Tax Liability:
Unrealized gain on
available-for-sale securities (2,162)
Allowance for Loan Losses (152,754) (140,754)
Property and equipment (22,082) (17,137)
NET DEFERRED TAX LIABILITY $ (97,100) $ (51,158)
</TABLE>
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 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
<PAGE 28> 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, 1998 and 1997 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, a
deferred tax liability for the special bad debt deduction has
been recorded in the amount of $152,754 and $140,754 for years
ended December 31, 1998 and 1997, respectively.
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: <PAGE 29>
<TABLE>
<CAPTION>
Year Ended
December 31,
1998 1997 1996
<S> <C> <C> <C>
Bad debts $ 12,000 ($12,000) $ 31,035
Depreciation 4,945 28,694 8,455
Deferred loan fees 19,975 19,975 19,975
DEFERRED TAX EXPENSE $ 36,920 $36,669 $ 59,465
</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.
<PAGE 30>
The following table sets out the Bank's various regulatory
capital categories:
<TABLE>
<CAPTION>
December 31,
1998
Required Actual
(Dollars in thousands) % Amount % Amount Excess
<S> <C> <C> <C> <C> <C>
Tangible equity ratio >2.0% $2,681 22.67% $30,382 $27,701
Leverage capital ratio 6.0 8,042 22.67 30,382 22,340
Total risk-based
capital ratio 8.0 5,720 42.89 30,667 24,947
Tier 1 risk-based
capital ratio 4.0 2,860 42.49 30,382 27,522
</TABLE>
PAGE 31
<PAGE>
<TABLE>
<CAPTION>
December 31,
1997
Required Actual
% 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>
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:
December 31,
1998 1997
Retained earnings per the Bank's
December Federal Depository
Insurance Corporation Call Report $1,765,453 $682,271
PSB Bancorp, Inc. Net Income for the
period ended December 31, 1998
not reflected on Call Report (61,017)
Increase in federal and
state income tax provision (117,601)
Adjustments made to financial
statement, subsequently
recorded by Bank (18,927)
RETAINED EARNINGS PER ACCOMPANYING
FINANCIAL STATEMENTS $1,704,436 $545,743
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 years ended December 31, 1998,
1997 and 1996 was $281,698, $265,118 and $79,908, respectively.
The Bank was obligated under various other leases. Lease
expense for these leases for the year ended December 31, 1998,
1997 and 1996 was $34,567, $37,203, and $37,437, respectively.
<PAGE 32>
Minimum annual rentals are as follows:
1998 $380,179
1999 368,874
2000 367,796
2001 374,686
2002 385,465
Thereafter 1,375,945
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.
The following table sets forth the Plan's required
disclosures with SFAS No. 132, "Employers' Disclosures About
Pensions and Other Postretirement Benefits."
PAGE 33
<PAGE>
PSB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997
Change in benefit obligation:
Benefit obligation at prior year end $643,774 $723,936
Service cost
Interest cost 48,252 47,172
Actuarial (gain) loss 21,256 ( 29,418)
Benefits paid ( 42,592) ( 97,916)
Benefit obligation at current year-end $670,690 $643,774
Change in plan assets:
Fair value of plan assets at
prior year-end $739,135 $703,874
Actual return on plan assets 77,771 133,177
Employer contributions
Benefits paid ( 42,592) ( 97,916)
Fair value of plan assets at
current year-end $774,314 $739,195
Funded status $103,624 $ 95,361
Unrecognized actuarial gain ( 296,083) ( 299,351)
Unrecognized prior service cost ( 45,129) ( 46,800)
Unrecognized transition obligation
(asset) 98,773 104,947
Accrued benefit cost ($138,815) ($145,843)
Amount recognized in the statement of
financial position - accrued
benefit cost ($138,815) ($145,843)
Net pension cost included the following components:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
<S> <C> <C> <C>
Service cost $ - $ - $ -
Interest cost 48,252 47,172 53,315
Expected return on plan assets ( 50,248) ( 48,274) ( 48,677)
Amortization of transition amount 6,174 6,174 6,174
Amortization of prior service cost ( 1,671) ( 1,671) ( 1,671)
Amortization of gain ( 9,535) ( 6,703) ( 3,373)
NET PERIODIC PENSION COST (CREDIT) ($ 7,028) ($ 3,302) ($ 5,768)
</TABLE> <PAGE 34>
The significant actuarial assumptions used in
calculating the above information is as follows:
December 31,
1998 1997 1996
Weighted average discount rate 7% 8% 8%
Weighted average rate of compensation N/A N/A N/A
Weighted average expected long-term
rate of return on Plan Assets 7% 8% 8%
Pension contributions were $-0- and $-0- and $51,102
for the years ended December 31, 1998, 1997 and 1996,
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.
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 years ended
December 31, 1998, 1997 AND 1996 amounted to $-0-, $-0- and
$18,190, 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 years ended
December 31, 1998, 1997 and 1996 were $-0- and $-0 and $74,984,
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
<PAGE 35> unrelated third party lender and used the funds to
purchase 42,780 shares of Common Stock. Due to the Conversion
and Reorganization, the Savings Bank Common Stock held by the
ESOP was converted into 110,046 shares of PSB Bancorp, Inc.
Stock. The ESOP borrowed $1,288,540 from the Holding Company to
purchase an additional 128,854 shares of PSB Bancorp, Inc. Stock.
The Common Stock purchased by the ESOP serves as
collateral for the ESOP loans. The loans 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 loans are repaid. Shares released from the suspense
account in an amount proportional to the repayment of the ESOP
loans 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 recorded as
compensation expense for the years ended December 31, 1998, 1997
and 1996 were $147,290, $91,736 and $97,228, respectively.
Information with respect to the ESOP is as follows:
December 31, September 30,
1998 1997 1996
Allocated shares 238,900 42,780 42,780
Committed shares 57,782 13,245 7,132
Uncommitted shares 181,118 29,535 35,648
Fair value of uncommitted
ESOP shares $1,381,025 $856,515 $454,512
Interest expense incurred $25,142 $30,607 $6,099
Dividends received N/A N/A $1,604
E. Management Recognition Plan:
The Bank's Board of Trustees has also adopted a
Management Recognition Plan (the "MRP") effective October 20,
<PAGE 36> 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 in 1996 which
enabled the MRP to purchase 21,390 shares of Common Stock. Due
to the Conversion and Reorganization, the Savings Bank Common
Stock held by the MRP was converted into 55,023 shares of PSB
Bancorp, Inc. Stock. Unless the Compensation Committee of the
Board specifies otherwise, shares granted to MRP participants
will be in the form of restricted stock which vest 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 vested. As of December 31, 1998 55,023 shares have been
allocated to individual employees. For the years ended
December 31, 1998, 1997 and 1996, the Bank recorded compensation
expense of $50,799, $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") 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 options
were granted in 1998 or 1997. The shares granted on April 30,
1996 and December 31, 1996 were converted to 75,651 and 16,592
shares of PSC Bancorp, Inc. Stock, respectively, due to the
Conversion and Reorganization.
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.
<PAGE 37>
The weighted average fair value at date of grants for
options granted in 1996 were $6.59 for options granted at
April 30 and $7.35 for options granted at December 31, 1996. 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, 1998 and 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 origination. 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 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, 1998 and 1997, the Bank had a net
investment of $72,880,160 and $61,915,068, 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
<PAGE 38> 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 is exposed to 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, 1998 and 1997, the Bank's
customers had unused lines of credit available of $1,478,807 and
$1,134,820, respectively.
Outstanding commitments to originate loans are as
follows:
December 31,
1998 1997
First mortgage loans:
Fixed rates $ 290,000 $ 521,095
Variable rates 1,939,632 2,468,000
$2,229,632 $2,989,095
Commitments under standby letters of credit totaled
approximately $193,797 and $387,694 at December 31, 1998 and
1997, 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.
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
<PAGE 39> 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,
1998:
Carrying Fair
Amount Value
Assets:
Cash and cash equivalents $34,586,998 $34,586,998
Investments securities
available-for-sale 16,907,350 16,907,350
Mortgage-backed securities
available-for-sale 22,073,453 22,073,453
Investment securities held-
to-maturity 3,996,118 4,005,600
Mortgage-backed securities
held-to-maturity 1,326,737 1,404,753
Loans receivable - net 72,887,511 72,887,511
Loans Held for Sale 7,307,910 7,307,910
Federal Home Loan Bank stock 572,200 572,200
Liabilities:
NOW, MMDA and Passbook accounts 50,673,588 50,673,588
Certificate of Deposits 77,486,922 77,486,922
<PAGE 40>
The following tables represents the carrying value and
fair market value of financial instruments as of December 31,
1997:
Carrying Fair
Amount Value
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
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 $69,380,603 and $59,659,864 at
December 31, 1998 and 1997, respectively with rates ranging from
6.00% to 18.00% and maturities through 30 years. The Bank's
consumer loan portfolio was $1,167,376 and $1,201,351 at
December 31, 1998 and 1997, respectively with rates ranging from
<PAGE 41> 5.00% to 22.53% with maturities through 18 years. The
Bank's commercial loan portfolio was $3,073,768 and $1,907,393 at
December 31, 1998 and 1997, 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, 1998 and 1997. 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 $77,486,922 and $63,303,577
$56,211,356 at December 31, 1998 and 1997, 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.
21. EARNINGS PER SHARE:
December 31, 1998
Per
Income Shares Share
Numerator Denominator Amount
Basic EPS:
Income available to Common
Stockholders $911,811 2,956,851 $.31
Effect of Dilutive Securities:
Stock options - 31,186
Diluted EPS
Income available to common
stockholders and assumed
conversions $911,811 2,988,037 $.31
<PAGE 42>
December 31, 1997
Per
Income Shares Share
Numerator Denominator Amount
Basic EPS:
Income available to Common
Stockholders $708,477 1,165,105 $.61
Effect of Dilutive Securities:
Stock options - 14,573
Diluted EPS
Income available to common
stockholders and assumed
conversions $708,477 1,179,678 $.61
December 31, 1996
Per
Income Shares Share
Numerator Denominator Amount
Basic EPS:
Income available to Common
Stockholders $138,757 1,152,328 $.12
Effect of Dilutive Securities:
Stock options - -
Diluted EPS
Income available to common
stockholders and assumed
conversions $138,757 1,152,328 $.12
22. OTHER COMPREHENSIVE INCOME:
In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income." SFAS
No. 130 establishes requirements for the disclosure of
comprehensive income in financial statements. Comprehensive
income is defined as net income plus transactions and other
occurrences which are the result of nonowner changes in equity.
For financial statement presented for the Savings Bank, nonowner
equity changes are only comprised of unrealized gains or losses
on available for sale debt securities that will be accumulated
with net income in operations and is effective for years
beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes
is required. Adoption of this standard did not have an impact on
the Savings Bank's results of operations. Changes in the balance
of Accumulated Other Comprehensive Income in the Consolidated
Statement of Stockholders' Equity are the direct result of
changes in the unrealized gains (losses) on available for sale
debt securities.
<PAGE 43>
23. NEW PRONOUNCEMENTS:
In June 1998, the Financial Accounting standards Board
("FASB") issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). The Statement becomes effective
for fiscal years beginning after June 15, 1999 and will not be
applied retroactively. The statement establishes accounting and
reporting standards for derivative instruments and hedging
activity. Under the standard, all derivatives must be measured
at fair value and recognized as either assets or liabilities in
the financial statements.
The accounting for changes in fair value (gains and
losses) of a derivative is dependent on the intended use of the
derivative and its designation. Derivatives may be sued to:
1) hedge exposure to change the fair value of a recognized asset
or liability or a firm commitment, referred to as a fair value
hedge, 2) hedge exposure to variable cash flow of forecasted
transactions, referred to as a cash flow hedge, or 3) hedge
foreign currency exposure.
The Savings Bank does not currently have any derivative
instruments or participate in any hedging activity.
The FASB issued Statement of Financial Accounting
Standards No. 134, "Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale
by a Mortgage Banking Enterprise" ("SFAS No. 134") during October
1998, which becomes effective for all periods beginning after
December 15, 1998. SFAS No. 134 conforms the accounting by
mortgage banking enterprises for mortgage-backed securities
subsequent to securitization of other types of assets by non-
mortgage-backed securities subsequent to securitization of other
types of assets by non-mortgage banking enterprises. This
statement should not have a material impact on the Savings Bank's
results of operations.
24. 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.
<PAGE 44>
25. SUBSEQUENT EVENT:
On January 29, 1999, the Holding Company purchased
1,600,000 shares of Series A Convertible Preferred Stock, $.01
par value per share, of McGuire Performance Solutions, Inc.
("MPS"). The Holding Company purchased the shares for $.78125
per share for a total cost of $1,250,000. The Holding Company
owns 100% of MPS's Series A Convertible Preferred Stock. MPS is
a nationally recognized firm delivering cost-effective solutions
for high performance total balance sheet management to banks,
thrifts, credit unions and other financial institutions.
<PAGE 45>
