PROSPECTUS
Up to 727,375 Shares of Common Stock
(Anticipated Maximum, as adjusted)
[LOGO] SFSB Holding Company
900 Saxonburg Boulevard
Pittsburgh, Pennsylvania 15223
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Stanton Federal Savings Bank is converting from the mutual form to the
stock form of organization. As part of the conversion, Stanton Federal Savings
Bank will become a wholly owned subsidiary of SFSB Holding Company. SFSB Holding
Company was formed in October 1997 and upon consummation of the conversion will
own all of the shares of Stanton Federal Savings Bank. The common stock of SFSB
Holding Company is being offered to the public in accordance with a plan of
conversion. The Office of Thrift Supervision has approved the plan of conversion
subject to the approval of a majority of the votes eligible to be cast by
members of Stanton Federal Savings. No common stock will be sold if Stanton
Federal Savings Bank does not receive these approvals or SFSB Holding Company
does not receive orders for at least the minimum number of shares.
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TERMS OF OFFERING
An independent appraiser has estimated the market value of the
converted Stanton Federal Savings Bank to be between $4,675,000 to $6,325,000,
which establishes the number of shares to be offered. Subject to Office of
Thrift Supervision approval, an additional 15% above the maximum number of
shares, or up to 727,375 shares may be offered. Based on these estimates, we are
making the following offering of shares of common stock:
<TABLE>
<CAPTION>
<S> <C> <C>
o Price Per Share: $10.00
o Number of Shares
Minimum/Maximum/Maximum, as adjusted: 467,500 to 632,500 to 727,375
o Underwriting Commissions and Other Expenses
Minimum/Maximum/Maximum, as adjusted: $320,000
o Net Proceeds to SFSB Holding Company
Minimum/Maximum/Maximum, as adjusted: $4,355,000 to $6,005,000 to $6,953,750
o Net Proceeds Per Share
Minimum/Maximum/Maximum, as adjusted: $9.32 to $9.49 to $9.56
</TABLE>
Please refer to Risk Factors beginning on page 1 of this document.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
Neither the Securities and Exchange Commission, Office of Thrift Supervision,
nor any state securities regulator has approved or disapproved these securities
or determined if this prospectus is accurate or complete. Any representation to
the contrary is a criminal offense.
For information on how to subscribe, call the Stock Information Center at (412)
487-8341
RYAN, BECK & CO.
The date of this prospectus is January 14, 1998
<PAGE>
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TABLE OF CONTENTS
Page
----
Questions and Answers About the Stock Offering.............................(i)
Summary..................................................................(iii)
Selected Financial and Other Data.........................................(vi)
Risk Factors.................................................................1
Proposed Purchases by Directors and Officers.................................4
Use of Proceeds..............................................................4
Dividends....................................................................5
Market for the Common Stock..................................................5
Capitalization...............................................................6
Pro Forma Data...............................................................7
Historical and Pro Forma Capital Compliance.................................13
The Conversion..............................................................14
Statement of Income of Stanton Federal Savings Bank.........................26
Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................27
Business of SFSB Holding Company............................................37
Business of Stanton Federal Savings Bank....................................37
Regulation..................................................................49
Taxation....................................................................53
Management of SFSB Holding Company..........................................55
Management of Stanton Federal Savings Bank..................................56
Restrictions on Acquisitions of SFSB Holding Company........................61
Description of Capital Stock................................................64
Legal and Tax Matters.......................................................65
Experts.....................................................................65
Registration Requirements...................................................66
Where You Can Find Additional Information...................................66
Index to Financial Statements of Stanton Federal Savings Bank..............F-1
This document contains forward-looking statements which involve risks
and uncertainties. SFSB Holding Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors" beginning on page 1 of this document.
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QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q: What is the purpose of the offering?
A: The offering gives you the opportunity to become a stockholder of our
newly formed holding company, SFSB Holding Company, which will allow
you to share indirectly in our future as a federal stock savings bank.
The stock offering will increase our capital and funds for lending and
investment activities. As a stock savings institution operating through
a holding company structure, we will have greater flexibility for
investments.
Q: How do I purchase the stock?
A: You must complete and return the stock order form to us together with
your payment, on or before 10:00 a.m., Eastern Time, Thursday, February
12, 1998.
Q: How much stock may I purchase?
A: The minimum purchase is 25 shares (or $250). The maximum purchase is
7,500 shares (or $75,000), for any individual person or persons
ordering through a single account. No person, related person or persons
acting together, may purchase in the conversion more than 12,500
shares. We may decrease or increase the maximum purchase limitation
without notifying you. In the event that the offering is
oversubscribed, we will allocate shares based upon your purchase
priority.
Q: What happens if there are not enough shares to fill all orders?
A: You might not receive any or all of the shares you want to purchase.
If there is an oversubscription in the subscription offering, the stock
will be offered on a priority basis to the following persons:
o Persons who had a deposit account of at least $50 with us on
December 31, 1995. Any remaining shares will be offered to:
o The employee stock ownership plan of Stanton Federal Savings
Bank. Any remaining shares will be offered to:
o Persons who had a deposit account of at least $50 with us on
December 31, 1997. Any remaining shares will be offered to:
o Other persons entitled to vote on the approval of the conversion.
If the above persons do not subscribe for all of the shares, the remaining
shares may be offered either directly by Stanton Federal Savings Bank or SFSB
Holding Company in a community offering or through Ryan, Beck & Co., Inc. in a
best-efforts public or syndicated public offering. We have the right to reject
any stock order in the community offering or public or syndicated public
offering. In the event of a community offering, preference will be given to
natural persons residing in Allegheny County. You are prohibited from
transferring or entering into any understanding to transfer your subscription
rights.
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(i)
<PAGE>
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Q: As a depositor or borrower member of Stanton Federal Savings Bank,
am I obligated to purchase stock?
A: You are not required to purchase stock.
Q: As a depositor or borrower member of Stanton Federal Savings Bank, what
will happen if I do not purchase any stock?
A: You presently have voting rights while we are in the mutual form;
however, once we convert, voting rights will be held by stockholders.
Your deposit account, certificate accounts and any loans you may have
with us will not be affected.
Q: What particular factors should I consider when deciding whether to buy
the stock?
A: Before you decide to purchase shares, you should read the Risk Factors
section on pages 1-3 of this document.
Q: Who can help answer any other questions I may have about the stock
offering?
A: In order to make an informed investment decision, you should read this
entire document. In addition, you may contact:
Stock Information Center
SFSB Holding Company
900 Saxonburg Boulevard
Pittsburgh, Pennsylvania 15223
(412) 487-8341
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(ii)
<PAGE>
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SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. To understand the
stock offering fully, you should read carefully this entire document, including
the financial statements and the notes to the financial statements of Stanton
Federal Savings Bank. References in this document to "we", "us", and "our" refer
to Stanton Federal Savings Bank. In certain instances where appropriate, "we",
"us" or "our" refers collectively to SFSB Holding Company and Stanton Federal
Savings Bank. References in this document to "SFSB" refers to SFSB Holding
Company.
The Companies
SFSB Holding Company
900 Saxonburg Boulevard
Pittsburgh, Pennsylvania 15223
(412) 487-4200
SFSB Holding Company is not an operating company and has not engaged in
any significant business to date. It was formed in October 1997 as a
Pennsylvania-chartered corporation to be the holding company for Stanton Federal
Savings Bank. The holding company structure will provide greater flexibility in
terms of operations, expansion and diversification. See page 37.
Stanton Federal Savings Bank
900 Saxonburg Boulevard
Pittsburgh, Pennsylvania 15223
(412) 487-4200
Stanton Federal Savings Bank began operations in 1890 under the name,
"F.L. Jahn Building and Loan." We are a community and customer oriented federal
mutual savings bank. We provide financial services to individuals, families and
small businesses. Historically, we have emphasized residential mortgage lending,
primarily originating one- to four-family mortgage loans. At September 30, 1997
we had total assets of $37.8 million, deposits of $33.9 million, and total
retained earnings of $3.5 million. See pages 37 to 48.
The Stock Offering
SFSB Holding Company is offering between 467,500 and 632,500 shares of
common stock at $10 per share. As a result of changes in market and financial
conditions prior to completion of the conversion or to fill the order of our
employee stock ownership plan and subject to the Office of Thrift Supervision
approval, we may increase the offering to 727,375 shares without further notice
to you. If an increase in the offering size is approved, you will not have the
opportunity to change or cancel any stock order previously delivered to us. See
page 23.
Stock Purchase Priorities
The shares of common stock will be offered on the basis of purchase
priorities. Certain depositor or borrower members will receive subscription
rights to purchase the shares. The shares will be offered first in a
subscription offering and any remaining shares may be offered in a community
offering or a public or syndicated public offering. We have engaged Ryan, Beck &
Co., Inc. to assist in the selling of common stock on a best-efforts basis. See
pages 17 to 20.
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(iii)
<PAGE>
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Subscription Rights
You may not sell or assign your subscription rights. Any transfer of
subscription rights is prohibited by law. See page 17.
The Offering Range and Determination of the Price Per Share
The offering range is based on an independent appraisal of the
estimated market value of the common stock by FinPro, Inc., an appraisal firm
experienced in appraisals of savings institutions. FinPro has estimated, that in
its opinion as of November 24, 1997 the aggregate estimated market value of the
common stock ranged between $4,675,000 and $6,325,000 (with a midpoint of
$5,500,000). The estimated market value of the shares is our estimated market
value after giving effect to the sale of shares in this offering.
The appraisal was based in part upon our financial condition and
operations and the effect of the additional capital raised by the sale of common
stock in this offering. The $10.00 price per share
was determined by our board of directors and is the price most commonly used in
stock offerings involving conversions of mutual savings institutions. The
independent appraisal will be updated prior to the consummation of the
conversion. If the updated estimated market value of the common stock is either
below $4,675,000 or above $7,273,750, you will be notified and will have the
opportunity to modify or cancel your order. See pages 22 to 23.
Termination of the Offering
The subscription offering will terminate at 10:00 a.m., Eastern Time,
on February 12, 1998. The community offering or public offering, if any, may
terminate at any time without notice but no later than 45 days after completion
of the subscription offering, without approval by the OTS. See page 19.
Benefits to Management from the Offering
Our full-time employees will participate in the offering through
individual purchases and purchases of stock by our employee stock ownership
plan, which is a form of retirement plan. We also intend to implement a
restricted stock plan and a stock option plan, no earlier than six months
following completion of the conversion, which may benefit the President and
other officers and directors. However, the restricted stock plan and stock
option plan may not be adopted until after the conversion and are subject to
stockholder approval and compliance with OTS regulations. If we adopt the
restricted stock plan, our executive officers and directors will be awarded
common stock at no cost to them. See pages 57 to 61.
Use of the Proceeds Raised from the Sale of Common Stock
SFSB Holding Company will use a portion of the net proceeds from the
stock offering to purchase all the common stock to be issued by us in the
conversion and to make a loan to our employee stock ownership plan to fund its
purchase of stock in the conversion. After payment for our common stock, SFSB
Holding Company will retain the funds received in the stock offering as its
initial capitalization. We will use the proceeds of the sale of the common stock
to make investments and fund loans. See page 4 for the range of offering
proceeds.
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(iv)
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Dividends
SFSB does not expect to pay dividends during the first year following
the conversion. We may establish a dividend policy after the first year. See
page 5.
Market for the Common Stock
Since the size of the offering is relatively small, it is unlikely that
an active and liquid trading market will develop and be maintained. Investors
should have a long-term investment intent. Persons purchasing shares may not be
able to sell their shares when they desire or sell them at a price equal to or
above $10.00. Following the completion of the Offering, it is anticipated that
the SFSB common stock will be traded on the OTC Bulletin Board. Ryan, Beck is
expected to make a market in the common stock. However, Ryan, Beck will not be
subject to any obligation with respect to such efforts. See page 5.
Important Risks in Owning Common Stock
Before you decide to purchase stock in the offering, you should read
the Risk Factors section on pages 1-3 of this document.
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(v)
<PAGE>
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SELECTED FINANCIAL AND OTHER DATA
The following summary financial information is derived from our 1996
and 1995 audited financial statements as well as our unaudited period September
30, 1997 and 1996, as shown below. The unaudited financial information at
September 30, 1997 and for the nine months ended September 30, 1997 and 1996
reflects all adjustments (consisting only of normal recurring adjustments) which
are considered necessary to present fairly the financial information for such
periods. The following information is only a summary and you should read it in
conjunction with our financial statements and notes beginning on page F-1. The
operating data for the nine month period ended September 30, 1997 and 1996 is
not necessarily indicative of the results to be expected for the full year.
Selected Financial Condition and Other Data
September 30, At December 31,
------------- --------------------
1997 1996 1995
------------- ------- --------
(Dollars in thousands)
Total Amount of:
Assets ................................ $37,810 $33,297 $29,354
Loans receivable, net ................. 11,658 10,865 9,579
Investment securities ................. 6,468 5,528 4,731
Mortgage-backed securities ............ 8,526 7,511 8,081
Deposits .............................. 33,884 29,319 25,418
Retained earnings ..................... 3,480 3,570 3,624
Number of:
Deposit accounts ...................... 6,336 4,049 3,817
Full service offices .................. 2 2 1
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(vi)
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Summary of Operations
For the Nine Months For the Years Ended
Ended September 30, December 31,
------------------- ---------------------
1997 1996 1996 1995
------- ------- ------- -------
(In thousands)
Interest income .................. $ 1,655 $ 1,406 $ 1,966 $ 1,941
Interest expense ................. 1,059 830 1,137 1,067
------- ------- ------- -------
Net interest income .............. 596 576 829 874
Provision for loan losses ........ 39 9 37 21
------- ------- ------- -------
Net interest income after
provision for loan losses ...... 557 567 792 853
Noninterest income ............... 53 142 154 17
Noninterest expense .............. 940 738 1,033(1) 628
------- ------- ------- -------
Income (loss) before income taxes (330) (29) (87) 242
Income tax expense (benefit) ..... (147) (39) (41) 79
------- ------- ------- -------
Net income (loss) ................ $ (183) $ 10 $ (46) $ 163
======= ======= ======= =======
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(1) Includes a one-time expense of $160,000 for the year ended December 31,
1996 for our deposit insurance premium paid to the Federal Deposit
Insurance Corporation.
Key Operating Ratios
<TABLE>
<CAPTION>
At or For the At or For the
Nine Months Ended Years Ended
September 30, December 31,
------------------ -------------------
1997 1996 1996 1995
-------- -------- --------- -------
<S> <C> <C> <C> <C>
Performance Ratios:
Return on average assets
(net income divided by average total assets) (.51)% .03% (.15)% .56%
Return on average equity
(net income divided by average equity) ...... (5.24) .27 (1.27) 4.72
Average equity to average assets ratio (average
equity divided by average total assets) ..... 9.70 12.24 11.92 11.90
Equity to assets at period end ................ 9.20 11.86 10.72 12.35
Loans to deposit ratio ........................ 34.70 37.82 37.30 38.00
Interest rate spread .......................... 2.19 2.42 2.62 2.76
Net yield on average interest-earning assets .. 2.40 2.73 2.90 3.12
Average interest-earning assets to average
interest-bearing liabilities ................ 106.81 110.08 109.36 111.67
Net interest income after provision for loan
losses to total noninterest expense ........... 59.22 76.82 76.74 135.92
Noninterest expense to average assets ......... 2.61 2.48 3.39 2.16
Asset Quality Ratios:
Non-performing loans to total loans ........... 1.89 3.66 2.12 1.38
Non-performing assets to total assets ......... .59 1.20 .70 .53
Allowance for loan losses to non-performing
assets ...................................... 47.09 10.47 28.45 25.81
Regulatory Capital Ratios:
Tangible ...................................... 8.40 11.00 10.10 11.60
Core .......................................... 8.40 11.00 10.10 11.60
Total Risk Based .............................. 23.70 30.00 28.00 34.50
</TABLE>
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(vii)
<PAGE>
RISK FACTORS
In addition to the other information in this document, you should
consider carefully the following risk factors in evaluating an investment in our
common stock.
Potential Impact of Changes in Interest Rates and the Current Interest Rate
Environment
Our ability to make a profit, like that of most financial institutions,
is substantially dependent on our net interest income, which is the difference
between the interest income we earn on our interest-earning assets (e.g. such as
mortgage loans and investment securities) and the interest expense we pay on our
interest-bearing liabilities (such as deposits and borrowings). All of our
mortgage loans have rates of interest which are fixed for the term of the loan
("fixed rate") and are originated with terms of up to 30 years, while deposit
accounts have significantly shorter terms to maturity. Because our
interest-earning assets generally have fixed rates of interest and have longer
effective maturities than our interest-bearing liabilities, the yield on our
interest-earning assets generally will adjust more slowly to changes in interest
rates than the cost of our interest-bearing liabilities. As a result, our net
interest income will be adversely affected by material and prolonged increases
in interest rates. In addition, rising interest rates may adversely affect our
earnings because there might be a lack of customer demand for loans. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Asset/Liability Management."
Changes in interest rates also can affect the average life of loans and
mortgage-backed securities. Historically, lower interest rates in recent periods
have resulted in increased prepayments of loans and mortgage-backed securities,
as borrowers refinanced their mortgages in order to reduce their borrowing cost.
Under these circumstances, we are subject to reinvestment risk to the extent
that we are not able to reinvest such prepayments at rates which are comparable
to the rates on the prepaid loans or securities.
Insufficient Loan Demand
The economic conditions in our market area and the stagnation in
population in the greater Pittsburgh metropolitan area in approximately the last
ten years has resulted in, among other things, a lack of demand for mortgage
loans which meet our underwriting criteria, in comparison to our relatively high
deposit origination. This has led to lower levels of loan originations. As a
result, we have increased our investment in investment securities and cash and
cash equivalents to use excess funding that would otherwise have been utilized
for investment in loans in our market area. The investment portfolio and cash
and equivalents generally bear yields which are below the yields on loans. The
insufficient mortgage loan demand has adversely affected our income. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Net Interest Income".
Loss From Insufficient Yield To Cover Noninterest Expense
The costs associated with the opening of our Shaler Township
contributed to our net loss for the year ended December 31, 1996 and nine months
ended September 30, 1997. Occupancy and equipment expense have more than doubled
and will continue to adversely affect net income, which may result in net losses
for future periods, unless and until, we are able to expand our lending and
investment activities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Recent Business Strategy; -- Noninterest
Expense."
1
<PAGE>
Dependence on Local Economy
We operate as a community-oriented financial institution, with a focus
on servicing customers in our primary market area of Shaler Township,
Lawrenceville and surrounding areas of Allegheny County, Pennsylvania. At
September 30, 1997, most of our loan portfolio consisted of loans made to
borrowers and collateralized by properties located in our primary market area.
As a result of this concentration, a downturn in the economy of our primary
market area could increase the risk of loss associated with our loan portfolio.
The population in our primary market area has decreased by 15% over the fifteen
year period ending 1995 and is projected to decrease through the year 2000. In
addition, over the last five year period ending in June 1996, total deposits at
financial institutions (i.e., banks and thrifts) within a one and one half mile
radius of our branches in Shaler Township and Lawrenceville have decreased 3%
and 4.35%, respectively. See "Business of Stanton Federal Savings Bank - Market
Area."
Lack of Active Market for Common Stock
Due to the small size of the offering, it is highly unlikely that an
active trading market will develop and be maintained. If an active market does
not develop, you may not be able to sell your shares promptly or perhaps at all,
or sell your shares at a price equal to or above the price you paid for the
shares. It is anticipated that SFSB common stock will be traded on OTC Bulletin
Board. The common stock may not be appropriate as a short-term investment. See
"Market for the Common Stock."
Anti-Takeover Provisions and Statutory Provisions That Could Discourage Hostile
Acquisitions of Control
Provisions in SFSB's articles of incorporation and bylaws, the general
corporation law of the Commonwealth of Pennsylvania, and certain federal
regulations may make it difficult and expensive to pursue a tender offer, change
in control or takeover attempt which is opposed by our management and the board
of directors. As a result, stockholders who might desire to participate in such
a transaction may not have an opportunity to do so. Such provisions will also
render the removal of the current board of directors or management of SFSB more
difficult. In addition, these provisions may reduce the trading price of our
stock. These provisions include: restrictions on the acquisition of SFSB's
equity securities and limitations on voting rights; the classification of the
terms of the members of the board of directors; certain provisions relating to
the meeting of stockholders; denial of cumulative voting by stockholders in the
election of directors; the issuance of preferred stock and additional shares of
common stock without shareholder approval; and supermajority provisions for the
approval of certain business combinations. See "Restrictions on Acquisitions of
SFSB Holding Company".
Possible Voting Control by Directors and Officers
The proposed purchases of the common stock by our directors, officers
and employee stock ownership plan, as well as the potential acquisition of the
common stock through the stock option plan and restricted stock plan, could make
it difficult to obtain majority support for stockholder proposals which are
opposed by our management and board of directors. Based upon the midpoint of the
estimated valuation range, our officers and directors intend to purchase
approximately 10.44% of the common shares offered in the conversion. In
addition, the voting of those shares could block the approval of transactions
(i.e., business combinations and amendment to our articles of incorporation and
bylaws) requiring the approval of 80% of the stockholders under the SFSB's
articles of incorporation. See "Proposed Purchases by Directors and Officers,"
"Management of Stanton Federal Savings Bank -- Executive Compensation,"
"Description of Capital Stock," and "Restrictions on Acquisitions of SFSB
Holding Company."
2
<PAGE>
Possible Dilutive Effect of Restricted Stock Plan and Stock Options
If the conversion is completed and shareholders approve the restricted
stock plan ("RSP") and stock option plan, we will issue stock to our officers
and directors through these plans. If the shares for the RSP and stock options
are issued from our authorized but unissued stock, your voting interests could
be cumulatively diluted by up to approximately 12.3% and the trading price of
our stock may be reduced. See "Pro Forma Data," "Management of Stanton Federal
Savings Bank -- Proposed Future Stock Benefit Plans," and "-- Restricted Stock
Plan."
Financial Institution Regulation and Future of the Thrift Industry
We are subject to extensive regulation, supervision, and examination by
the OTS and FDIC. Bills have been introduced in Congress that could consolidate
the OTS with the Office of the Comptroller of the Currency ("OCC") and require
us to adopt a commercial bank charter. If we become a commercial bank, our
investment authority and the ability of SFSB to engage in diversified activities
may be limited, which could adversely affect our value and profitability. See
"Regulation."
Restrictions on Repurchase of Shares
Generally, during the first year following the conversion, SFSB may not
repurchase its shares. During each of the second and third years following the
conversion, SFSB may repurchase up to 5% of its outstanding shares. During those
periods, if we decide that additional repurchases would be an appropriate use of
funds, we would not be able to do so, without obtaining OTS approval. There is
no assurance that OTS approval would be given. See "The Conversion --
Restrictions on Repurchase of Shares."
Possible Year 2000 Computer Program Problems
A great deal of information has been disseminated about the global
computer crash that may occur in the year 2000. Many computer programs that can
only distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based on the wrong date
or are expected to be unable to compute payment, interest or delinquency. Rapid
and accurate data processing is essential to our operations. Data processing is
also essential to most other financial institutions and many other companies.
All of our material data processing that could be affected by this
problem is provided by a third party service bureau. Our service bureau has
advised us that it expects to resolve this potential problem before the year
2000. However, if this potential problem is not resolved before the year 2000,
we would likely experience significant data processing delays, mistakes or
failures. These delays, mistakes or failures could have a significant adverse
impact on our financial condition and our results of operations.
3
<PAGE>
PROPOSED PURCHASES BY DIRECTORS AND OFFICERS
The following table sets forth the approximate purchases of common
stock by each director and executive officer and their associates in the
conversion. Shares purchased by officers and directors in the conversion may not
be sold for at least one year. The table assumes that 550,000 shares (the
midpoint of the estimated valuation range, "EVR") of the common stock will be
sold at $10.00 per share and that sufficient shares will be available to satisfy
subscriptions in all categories. However, officers and directors and their
associates may not buy more than 35% of the total amount of shares sold in the
conversion.
<TABLE>
<CAPTION>
Aggregate
Total Price of Percent
Shares Shares of Shares
Name Position Purchased(1) Purchased(1) Purchased(1)
- --------------------- ---------------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Timothy R. Maier Chairman and Director 12,500 $125,000 2.27%
Barbara J. Mallen President and Director 12,500 125,000 2.27
Joseph E. Gallagher Senior Vice-President, 12,500 125,000 2.27
Secretary and Director
Jerome L. Kowalewski Treasurer and Director 12,500 125,000 2.27
Mary Lois Loftus Director 7,500 75,000 1.36
------ ------- -----
57,500 $575,000 10.44%
====== ======= =====
</TABLE>
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(1) Does not include shares purchased by the employee stock ownership plan (the
"ESOP").
USE OF PROCEEDS
SFSB Holding Company will use 50% of the net proceeds from the offering
to purchase all of the capital stock we will issue in connection with the
Conversion. A portion of the net proceeds to be retained by SFSB Holding Company
will be loaned to our employee stock plan to fund its purchase of 8% of the
shares sold in the Conversion. On a short-term basis, the balance of the net
proceeds retained by SFSB Holding Company initially will be invested in
short-term investments. Although there are no current plans, the net proceeds
subsequently may be used to fund acquisitions of other financial services
institutions or to diversify into non-banking activities. The net proceeds may
also serve as a source of funds for the payment of dividends to stockholders or
for the repurchase of the shares. A portion of the net proceeds may also be used
to fund the purchase of 4% of the shares for a restricted stock plan (the RSP)
which is anticipated to be adopted following the Conversion. See "Pro Forma
Data."
The funds we receive from the sale of our capital stock to SFSB will be
added to our general funds and be used for general corporate purposes including:
(i) investment in mortgages and other loans, (ii) investment in U.S. Government
and federal agency securities, (iii) investment in mortgage-backed securities or
(iv) funding loan commitments. However, initially we intend to invest the net
proceeds in short-term investments until we can deploy the proceeds into higher
yielding assets. The funds added to our capital will further strengthen our
capital position.
The net proceeds may vary because the total expenses of the conversion
may be significantly more or less than those estimated. We estimate our expenses
to be approximately $320,000. Our estimated net proceeds will range from
$4,355,000 to $6,005,000 (or up to $6,953,750 in the event the maximum of the
estimated valuation range is increased to $7,273,750). See "Pro Forma Data." The
net proceeds will also vary if expenses are different or if the number of shares
to be issued in the conversion
4
<PAGE>
is adjusted to reflect a change in our estimated pro forma market value.
Payments for shares made through withdrawals from existing deposit accounts with
us will not result in the receipt of new funds for investment by us but will
result in a reduction of our liabilities and interest expense as funds are
transferred from interest-bearing certificates or accounts.
DIVIDENDS
Upon conversion, SFSB's board of directors will have the authority to
declare dividends on the shares, subject to statutory and regulatory
requirements. SFSB does not expect to pay cash dividends during the first year
after the conversion. Any future declarations of dividends by the board of
directors will depend upon a number of factors, including: (i) the amount of the
net proceeds retained by SFSB in the conversion, (ii) investment opportunities
available, (iii) capital requirements, (iv) regulatory limitations, (v) results
of operations and financial condition, (vi) tax considerations, and (vii)
general economic conditions. Upon review of such considerations, the board may
authorize future dividends if it deems such payment appropriate and in
compliance with applicable law and regulation. For a period of one year
following the completion of the conversion, we will not pay any dividends that
would be treated for tax purposes as a return of capital nor take any actions to
pursue or propose such dividends. In addition, there can be no assurance that
regular or special dividends will be paid, or, if paid, will continue to be
paid. See "Historical and Pro Forma Capital Compliance," "The Conversion - -
Effects of Conversion to Stock Form on Savers and Borrowers of Stanton Federal
Savings Bank -- Liquidation Account" and "Regulation -- Dividend and Other
Capital Distribution Limitations."
SFSB is not subject to OTS regulatory restrictions on the payment of
dividends to its stockholders although the source of such dividends will be
dependent in part upon the receipt of dividends from us. SFSB is subject,
however, to the requirements of Pennsylvania law, which generally limit the
payment of dividends to amounts that will not affect the ability of SFSB, after
the dividend has been distributed, to pay its debts in the ordinary course of
business.
In addition to the foregoing, the portion of our earnings which has
been appropriated for bad debt reserves and deducted for federal income tax
purposes cannot be used by us to pay cash dividends to SFSB without the payment
of federal income taxes by us at the then current income tax rate on the amount
deemed distributed, which would include the amount of any federal income taxes
attributable to the distribution. See "Taxation -- Federal Taxation" and Note 11
to our financial statements. SFSB does not contemplate any distribution by us
that would result in a recapture of our bad debt reserve or otherwise create
federal tax liabilities.
MARKET FOR THE COMMON STOCK
As a newly organized company, SFSB has never issued capital stock, and
consequently there is no established market for the common stock. Following the
completion of the offering, it is anticipated that the common stock will be
traded on the over-the-counter market with quotations available through the OTC
Electronic Bulletin Board. Ryan, Beck is expected to make a market in the common
stock. Making a market may include the solicitation of potential buyers and
sellers in order to match buy and sell orders. However, Ryan, Beck will not be
subject to any obligation with respect to such efforts. If the common stock
cannot be quoted and traded on the OTC Bulletin Board it is expected that the
transactions in the common stock will be reported in the pink sheets of the
National Quotation Bureau, Inc.
The development of an active trading market depends on the existence of
willing buyers and sellers. Due to the small size of the offering, it is highly
unlikely that an active trading market will
5
<PAGE>
develop and be maintained. You could have difficulty disposing of your shares
and you should not view the shares as a short-term investment. You may not be
able to sell your shares at a price equal to or above the price you paid for the
shares.
CAPITALIZATION
The following table presents, as of September 30, 1997, our historical
capitalization and the consolidated capitalization of SFSB after giving effect
to the conversion and the other assumptions set forth below and under "Pro Forma
Data," based upon the sale of shares at the minimum, midpoint, maximum, and 15%
above the maximum of the EVR at a price of $10.00 per share:
<TABLE>
<CAPTION>
Pro Forma Consolidated Capitalization
Based on the Sale of (2)(3)
--------------------------------------------------
Historical 467,500 550,000 632,500 727,375
Capitalization Shares at Shares at Shares at Shares At
at September 30, $10.00 $10.00 $10.00 $10.00
1997 Per Share Per Share Per Share Per Share
------ --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits(1) .................................. $33,884 $33,884 $33,884 $33,884 $33,884
====== ====== ====== ====== ======
Stockholders' Equity:
Preferred Stock, $.10 par value per share,
1,000,000 shares authorized; none to be
issued..................................... $ - $ - $ - $ - $ -
Common Stock, $.10 par value, 4,000,000
shares authorized; total shares to be
issued as reflected........................ - 47 55 63 73
Additional paid in capital.................... - 4,308 5,125 5,942 6,881
Retained earnings(4)........................ 3,480 3,480 3,480 3,480 3,480
Less:
Common Stock acquired by ESOP............... - (374) (440) (506) (582)
Common Stock acquired by RSP................ - (187) (220) (253) (291)
------ ------ ------ ------ ------
Total stockholders' equity.................... $ 3,480 $ 7,274 $ 8,000 $ 8,726 $ 9,561
====== ====== ====== ====== ======
</TABLE>
- ---------------------
(1) Excludes accrued interest payable on deposits. Withdrawals from savings
accounts for the purchase of stock have not been reflected in these
adjustments. Any withdrawals will reduce pro forma capitalization by the
amount of such withdrawals.
(2) Does not reflect the increase in the number of shares of common stock after
the conversion in the event of implementation of the Stock Option Plan or
RSP. See "Management of Stanton Federal Savings Bank -- Proposed Future
Stock Benefit Plans -- Stock Option Plan" and "-- Restricted Stock Plan."
(3) Assumes that 8% and 4% of the shares issued in the conversion will be
purchased by the ESOP and RSP, respectively. No shares will be purchased by
the RSP in the conversion. It is assumed on a pro forma basis that the RSP
will be adopted by the board of directors, approved by stockholders of
SFSB, and reviewed by the OTS. It is assumed that the RSP will purchase
common stock in the open market within one year of the conversion in order
to give an indication of its effect on capitalization. The pro forma
presentation does not show the impact of: (a) results of operations after
the conversion, (b) changing market prices of shares of common stock after
the conversion, or (c) a smaller than 4% or 8% purchase by the RSP or ESOP,
respectively. Assumes that the funds used to acquire the ESOP shares will
be borrowed from SFSB for a ten year term at the prime rate as published in
The Wall Street Journal. For an estimate of the impact of the ESOP on
earnings, see "Pro Forma Data." The Bank intends to make contributions to
the ESOP sufficient to service and ultimately retire its debt. The amount
to be acquired by the ESOP and RSP is reflected as a reduction of
stockholders' equity. The issuance of authorized but unissued shares for
the RSP in an
(footnotes continued on next page)
6
<PAGE>
amount equal to 4% of the outstanding shares of common stock will have the
effect of diluting existing stockholders' voting interests by 3.9%. There
can be no assurance that stockholder approval of the RSP will be obtained.
See "Management of Stanton Federal Savings Bank -- Proposed Future Stock
Benefit Plans -- Restricted Stock Plan."
(4) Our equity will be substantially restricted after the conversion. See
"Dividends," "Regulation -- Dividends and Other Capital Distribution
Limitations," "The Conversion -- Effects of Conversion to Stock Form on
Depositors and Borrowers of Stanton Federal Savings Bank -- Liquidation
Account" and Note 16 to the Financial Statements.
PRO FORMA DATA
The actual net proceeds from the sale of the common stock cannot be
determined until the conversion is completed. However, net proceeds are
currently estimated to be between $4,355,000 and $6,005,000 at the minimum and
maximum, as adjusted, of the EVR, based upon the following assumptions: (i) 8%
of the shares will be sold to the ESOP and 57,500 shares will be sold to
officers, directors, and members of their immediate families; (ii) Ryan, Beck
will have received advisory and marketing fees (including legal fees and other
reimbursable expenses) of $120,000; (iii) no shares will be sold in a public or
syndicated public offering; (iv) other conversion expenses, excluding the fees
and other expenses paid to Ryan, Beck, will be $200,000; and (v) 4% of the
shares will be sold to the RSP. Because management of Stanton Federal Savings
Bank presently intends to adopt the RSP within the first year following the
conversion, a purchase by the RSP in the conversion has been included with the
pro forma data to give an indication of the effect of a 4% purchase by the RSP,
at a $10.00 per share purchase price in the market, even though the RSP does not
currently exist and is prohibited by OTS regulation from purchasing shares in
the conversion. The pro forma presentation does not show the effect of: (a)
results of operations after the conversion, (b) changing market prices of the
shares after the conversion, (c) less than a 4% purchase by the RSP, or (d)
dilutive effects of newly issued shares under the restricted stock plan and the
stock option plan (see footnotes 2 and 3).
The following table sets forth, our historical net earnings and
stockholders' equity prior to the conversion and the pro forma consolidated net
earnings and stockholders' equity of SFSB following the conversion. Unaudited
pro forma consolidated net earnings and stockholders' equity have been
calculated for the nine months ended September 30, 1997 and fiscal year ended
December 31, 1996 as if the common stock to be issued in the conversion had been
sold at January 1, 1997 and January 1, 1996 and the estimated net proceeds had
been invested at 5.52%, respectively for the fiscal year ended December 31, 1996
and the nine months ended September 30, 1997, which was approximately equal to
the one-year U.S. Treasury bill rate at September 30, 1997. The one-year U.S.
Treasury bill rate, rather than an arithmetic average of the average yield on
interest-earning assets and average rate paid on deposits, has been used to
estimate income on net proceeds because it is believed that the one-year U.S.
Treasury bill rate is a more accurate estimate of the rate that would be
obtained on an investment of net proceeds from the offering. In calculating pro
forma income, a combined effective state and federal income tax rate of 37% has
been assumed for the respective periods, resulting in an after tax yield of
3.48% for the nine months ended September 30, 1997 and the fiscal year ended
December 31, 1996. Withdrawals from deposit accounts for the purchase of shares
are not reflected in the pro forma adjustments. The computations are based upon
the assumptions that 467,500 shares (minimum of EVR), 550,000 shares (midpoint
of EVR), 632,500 shares (maximum of EVR) or 727,375 shares (maximum, as
adjusted, of the EVR) are sold at a price of $10.00 per share. As discussed
under "Use of Proceeds," a portion of the net proceeds that SFSB will receive
will be loaned to the ESOP to fund its anticipated purchase of 8% of shares
issued in the conversion. It is assumed that the yield on the net proceeds of
the conversion retained by SFSB will be the same as the yield on the net
proceeds of the conversion transferred to us. Historical and pro forma per share
amounts have been calculated by dividing historical and pro forma amounts by the
indicated number of shares. Per share amounts have been computed as if the
shares had been outstanding at the beginning of the periods or at the dates
shown, but without any adjustment of per share historical or pro forma
stockholders' equity to reflect the earnings on the estimated net proceeds.
7
<PAGE>
The stockholders' equity information is not intended to represent the
fair market value of the shares, or the current value of our assets or
liabilities, or the amounts, if any, that would be available for distribution to
stockholders in the event of liquidation. For additional information regarding
the liquidation account, see "The Conversion -- Certain Effects of the
Conversion to Stock Form on Savers and Borrowers of Stanton Federal Savings Bank
- -- Liquidation Account" and Note 16 to the Financial Statements. The pro forma
income derived from the assumptions set forth above should not be considered
indicative of the actual results of our operations for any period. Such pro
forma data may be materially affected by a change in the price per share or
number of shares to be issued in the Conversion and by other factors. For
information regarding investment of the proceeds see "Use of Proceeds" and "The
Conversion -- Stock Pricing" and "-- Change in Number of Shares to be Issued in
the Conversion."
8
<PAGE>
<TABLE>
<CAPTION>
At or For the Nine Months Ended September 30, 1997
--------------------------------------------------
467,500 550,000 632,500 727,375
Shares at Shares at Shares at Shares at
$10.00 $10.00 $10.00 $10.00
per share per share per share per share
--------- --------- --------- ---------
(Dollars in Thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds ........................................... $ 4,675 $ 5,500 $ 6,325 $ 7,274
Less estimated offering expenses ......................... 320 320 320 320
------- ------- ------- -------
Estimated net proceeds ................................. 4,355 5,180 6,005 6,954
Less: ESOP funded by the Company ...................... (374) (440) (506) (582)
RSP funded by the Company .............. (187) (220) (253) (291)
------- ------- ------- -------
Estimated investable net proceeds ...................... $ 3,794 $ 4,520 $ 5,246 $ 6,081
======= ======= ======= =======
Net loss:
Historical net loss .................................... $ (183) $ (183) $ (183) $ (183)
Pro forma earnings on investable net proceeds .......... 99 118 137 159
Pro forma ESOP adjustment(1) ........................... (18) (21) (24) (27)
Pro forma RSP adjustment(2) ............................ (18) (21) (24) (27)
------- ------- ------- -------
Total ........................................... $ (120) $ (107) $ (94) $ (78)
======= ======= ======= =======
Net loss per share:
Historical net loss per share .......................... $ (.42) $ (.36) $ (.31) $ (.27)
Pro forma earnings on net proceeds ..................... .23 .23 .23 .24
Pro forma ESOP adjustment(1) ........................... (.04) (.04) (.04) (.04)
Pro forma RSP adjustment(2) ............................ (.04) (.04) (.04) (.04)
------- ------- ------- -------
Total(5) ........................................ $ (.27) $ (.21) $ (.16) $ (.11)
======= ======= ======= =======
Stockholders' equity:(3)
Historical ............................................. $ 3,480 $ 3,480 $ 3,480 $ 3,480
Estimated net proceeds ................................. 4,355 5,180 6,005 6,954
Less: Common stock acquired by ESOP(1) ................ (374) (440) (506) (582)
Common stock acquired by RSP(2) ................. (187) (220) (253) (291)
------- ------- ------- -------
Total ........................................... $ 7,274 $ 8,000 $ 8,726 $ 9,561
======= ======= ======= =======
Stockholders' equity per share:(3)
Historical ............................................. $ 7.44 $ 6.33 $ 5.50 $ 4.78
Estimated net proceeds ................................. 9.32 9.42 9.49 9.56
Less: Common stock acquired by ESOP(1) ................ (.80) (.80) (.80) (.80)
Common stock acquired by RSP(2) ................. (.40) (.40) (.40) (.40)
------- ------- ------- -------
Total ........................................... $ 15.56 $ 14.55 $ 13.79 $ 13.14
======= ======= ======= =======
Offering price as a percentage of pro forma stockholders'
equity per share(4) .................................... 64.3% 68.7% 72.5% 76.1%
======= ======= ======= =======
Ratio of offering price to pro forma earnings per share(5) N/M* N/M* N/M* N/M*
======= ======= ======= =======
</TABLE>
* Not Meaningful (footnotes on following pages)
9
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1996
-----------------------------------------------
467,500 550,000 632,500 727,375
Shares at Shares at Shares at Shares at
$10.00 $10.00 $10.00 $10.00
per share per share per share per share
--------- --------- --------- ---------
(Dollars in Thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds ........................................... $ 4,675 $ 5,500 $ 6,325 $ 7,274
Less estimated offering expenses ......................... 320 320 320 320
------- ------- ------- -------
Estimated net proceeds ................................. 4,355 5,180 6,005 6,954
Less: ESOP funded by the Company ...................... (374) (440) (506) (582)
RSP funded by the Company .............. (187) (220) (253) (291)
------- ------- ------- -------
Estimated investable net proceeds ...................... $ 3,794 $ 4,520 $ 5,246 $ 6,081
======= ======= ======= =======
Net income:
Historical net income .................................. $ (46) $ (46) $ (46) $ (46)
Pro forma earnings on investable net proceeds .......... 132 157 183 212
Pro forma ESOP adjustment(1) ........................... (24) (28) (32) (37)
Pro forma RSP adjustment(2) ............................ (24) (28) (32) (37)
------- ------- ------- -------
Total ........................................... $ 38 $ 55 $ 73 $ 92
======= ======= ======= =======
Net income per share:
Historical net income per share ........................ $ (.11) $ (.09) $ (.08) $ (.07)
Pro forma earnings on net proceeds ..................... .30 .31 .31 .31
Pro forma ESOP adjustment(1) ........................... (.06) (.05) (.05) (.05)
Pro forma RSP adjustment(2) ............................ (.06) (.05) (.05) (.05)
------- ------- ------- -------
Total(5) ........................................ $ .07 $ .12 $ .13 $ .14
======= ======= ======= =======
Stockholders' equity:(3)
Historical ............................................. $ 3,570 $ 3,570 $ 3,570 $ 3,570
Estimated net proceeds ................................. 4,355 5,180 6,005 6,954
Less: Common stock acquired by ESOP(1) ................ (374) (440) (506) (582)
Common stock acquired by RSP(2) ................. (187) (220) (253) (291)
------- ------- ------- -------
Total ........................................... $ 7,364 $ 8,090 $ 8,816 $ 9,651
======= ======= ======= =======
Stockholders' equity per share:(3)
Historical ............................................. $ 7.64 $ 6.49 $ 5.64 $ 4.91
Estimated net proceeds ................................. 9.32 9.42 9.49 9.56
Less: Common stock acquired by ESOP(1) ................ (.80) (.80) (.80) (.80)
Common stock acquired by RSP(2) ................. (.40) (.40) (.40) (.40)
------- ------- ------- -------
Total ........................................... $ 15.76 $ 14.71 $ 13.93 $ 13.27
======= ======= ======= =======
Offering price as a percentage of pro forma stockholders'
equity per share(4) .................................... 63.4% 68.0% 71.8% 75.4%
======= ======= ======= =======
Ratio of offering price to pro forma earnings per share(5) 142.86x 83.33x 76.92x 71.43x
======= ======= ======= =======
</TABLE>
(footnotes on following page)
10
<PAGE>
- --------------------
(1) Assumes 8% of the shares sold in the conversion are purchased by the ESOP,
and that the funds used to purchase such shares are borrowed from SFSB. The
approximate amount expected to be borrowed by the ESOP is not reflected as
a liability but is reflected as a reduction of capital. We intend to make
annual contributions to the ESOP over a ten year period in an amount at
least equal to the principal and interest requirement of the debt. Interest
income earned by us on the ESOP debt offsets the interest paid by Stanton
Federal Savings Bank on the ESOP loan. Therefore, only the principal
payments on the ESOP debt are recorded as a tax-effected expense. The pro
forma net income assumes: (i) that 3,740, 4,400, 5,060, and 5,819 shares at
the minimum, midpoint, maximum and maximum, as adjusted of the EVR, were
committed to be released during the year ended December 31, 1996 and the
nine months ended September 30, 1997 at an average fair value of $10.00 per
share in accordance with Statement of Position ("SOP") 93-6 of the American
Institute of Certified Public Accountants ("AICPA"); (ii) the effective tax
rate was 37% for such periods based upon a combined federal and state tax
rate; and (iii) only the ESOP shares committed to be released were
considered outstanding for purposes of the per share net earnings. The pro
forma stockholders' equity per share calculation assumes all ESOP shares
were outstanding, regardless of whether such shares would have been
released. Because SFSB will be providing the ESOP loan, only principal
payments on the ESOP loan are reflected as employee compensation and
benefits expense. As a result, to the extent the value of the shares
appreciates over time, compensation expense related to the ESOP will
increase. For purposes of the preceding tables, it was assumed that a
ratable portion of the ESOP shares purchased in the conversion were
committed to be released during the period ended September 30, 1997 and
December 31, 1996. See Note 5 below. If it is assumed that all of the ESOP
shares were included in the calculation of earnings per share for the
period ended at September 30, 1997 and December 31, 1996, earnings per
share would have been $(.26), $(.19), $(.15) and $(.11), and $.08, $.10,
$.12, and $.13 for the periods ended September 30, 1997 and December 31,
1996, respectively, based on the sale of shares at the minimum, midpoint,
maximum and the maximum, as adjusted, of the EVR. See "Management of
Stanton Federal Savings Bank -- Other Benefits -- Employee Stock Ownership
Plan."
(2) Assumes issuance to the RSP of 18,700, 22,000, 25,300, and 29,095 shares at
the minimum, midpoint, maximum, and maximum, as adjusted of the EVR. The
assumption in the pro forma calculation is that (i) shares were purchased
by SFSB following the conversion, (ii) the purchase price for the shares
purchased by the RSP was equal to the purchase price of $10 per share (iii)
20% of the amount contributed was an amortized expense during such period,
and (iv) the effective tax rate was 37% for such periods based upon a
combined federal and state tax rate. Such amount does not reflect possible
increases or decreases in the value of such stock relative to the Purchase
Price. As we accrue compensation expense to reflect the five year vesting
period of such shares pursuant to the RSP, the charge against capital will
be reduced accordingly. Implementation of the RSP within one year of
conversion would require regulatory and stockholder approval at a meeting
of our stockholders to be held no earlier than six months after the
conversion. If the shares to be purchased by the RSP are assumed at January
1, 1996 and January 1, 1995, to be newly issued shares purchased from SFSB
by the RSP at the Purchase Price, at the minimum, midpoint, maximum and
maximum, as adjusted, of the EVR, pro forma stockholders' equity per share
would have been $14.96, $13.99, $13.26, and $12.63 and $15.15, $14.14,
$13.39, and $12.76 at September 30, 1997 and December 31, 1996,
respectively, and pro forma earnings per share would have been $(.26),
$(.20), $(.15), and $(.11) and $.07, $.12, $.12, and $.13, for the nine
months ended September 30, 1997, and the year ended December 31, 1996,
respectively. As a result of the RSP from newly issued shares,
stockholders' voting interests could be diluted by up to approximately
3.9%. The pro forma data assumes the required regulatory and stockholder
approvals. See "Management of Stanton Federal Savings Bank -- Proposed
Future Stock Benefit Plans -- Restricted Stock Plan."
(3) Assumes that following the consummation of the conversion, SFSB will adopt
the Stock Option Plan, which if implemented within one year of conversion
would be subject to regulatory review and board of director and stockholder
approval, and that such plan would be considered and voted upon at a
meeting of SFSB stockholders to be held no earlier than six months after
the conversion. Under the Stock Option Plan, employees and directors could
be granted options to purchase an aggregate amount of shares equal to 10%
11
<PAGE>
of the shares issued in the conversion at an exercise price equal to the
market price of the shares on the date of grant. In the event the shares
issued under the Stock Option Plan were newly issued rather than purchased
in the open market, the voting interests of existing stockholders could be
diluted by up to approximately 9.1%. At the minimum, midpoint, maximum and
the maximum, as adjusted, of the EVR, if all shares under the Stock Option
Plan were newly issued at the beginning of the respective periods and the
exercise price for the stock option shares were equal to the Purchase
Price, the number of outstanding shares would increase to 514,250, 605,000,
695,750, and 800,113 respectively, pro forma stockholders' equity per share
would have been $14.14, $13.22, $12.54, and $11.95, and $14.32, $13.37,
$12.67, and $12.06 at September 30, 1997 and December 31, 1996,
respectively, and pro forma earnings per share for the nine months ended
September 30, 1997 and the year ended December 31, 1996 would have been
$(.23), $(.18), $(.13), and $(.10) and $.07, $.09, $.11, and $.12,
respectively.
(4) Consolidated stockholders' equity represents the excess of the carrying
value of the assets over its liabilities. The calculations are based upon
the number of shares issued in the conversion, without giving effect to SOP
93-6. The amounts shown do not reflect the federal income tax consequences
of the potential restoration to income of the tax bad debt reserves for
income tax purposes, which would be required in the event of liquidation.
The amounts shown also do not reflect the amounts required to be
distributed in the event of liquidation to eligible depositors from the
liquidation account which will be established upon the consummation of the
conversion. Pro forma stockholders' equity information is not intended to
represent the fair market value of the shares, the current value of our
assets or liabilities or the amounts, if any, that would be available for
distribution to stockholders in the event of liquidation. Such pro forma
data may be materially affected by a change in the number of shares to be
sold in the conversion and by other factors.
(5) Pro forma net income per share calculations include the number of shares
assumed to be sold in the conversion and, in accordance with SOP 93-6,
exclude ESOP shares which would not have been released during the period.
Accordingly, 33,660, 39,600, 45,540, and 52,371 shares have been subtracted
from the shares assumed to be sold at the minimum, midpoint, maximum, and
maximum, as adjusted, of the EVR, respectively, and 433,840, 510,400,
586,960, and 675,004 shares are assumed to be outstanding at the minimum,
midpoint, maximum, and maximum, as adjusted of the EVR. See Note 1 above.
12
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents our historical and pro forma
capital position relative to our capital requirements as of September 30, 1997.
For a discussion of the assumptions underlying the pro forma capital
calculations presented below, see "Use of Proceeds," "Capitalization" and "Pro
Forma Data." The definitions of the terms used in the table are those provided
in the capital regulations issued by the OTS. For a discussion of the capital
standards applicable to us, see "Regulation -- Savings Institution Regulation --
Regulatory Capital Requirements."
<TABLE>
<CAPTION>
Pro Forma(1)
-------------------------------------------------------------------------------
$4,675,000 $5,500,000 $6,325,000 $7,273,750
Historical Minimum Midpoint Maximum Maximum, as adjusted
------------------- ------------------- ------------------- ------------------ --------------------
Percent Percent Percent Percent Percent
Amount of Assets(2) Amount of Assets(2) Amount of Assets(2) Amount of Assets(2) Amount of Assets(2)
------ ------------ ------ ------------ ------ ------------ ------ ------------ ------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital ................. $3,480 9.20% $5,097 12.93% $5,410 13.61% $5,724 14.29% $6,086 15.05%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Tangible Capital ............. $3,119 8.38% $4,736 12.20% $5,049 12.90% $5,363 13.60% $5,723 14.38%
Tangible Capital Requirement . 558 1.50 582 1.50 587 1.50 592 1.50 599 1.50
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess ....................... $2,561 6.88% $4,154 10.70% $4,462 11.40% $4,771 12.10% $5,124 12.88%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Core Capital(3) .............. $3,119 8.38% $4,736 12.20% $5,049 12.90% $5,363 13.60% $5,723 14.38%
Core Capital Requirement(4) .. 1,116 3.00 1,165 3.00 1,177 3.00 1,183 3.00 1,197 3.00
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess ....................... $2,003 5.38% $3,571 9.20% $3,872 9.90% $4,180 10.60% $4,526 11.38%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Total Risk-Based Capital(4) .. $3,224 23.57% $4,841 34.08% $5,154 36.01% $5,468 37.92% $5,828 40.08%
Risk-Based Capital Requirement 1,094 8.00 1,136 8.00 1,145 8.00 1,153 8.00 1,163 8.00
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess ....................... $2,130 15.57% $3,705 26.08% $4,009 28.01% $4,315 29.92% $4,665 32.08%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
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(1) The pro forma data has been adjusted to reflect reductions in our capital
that would result from an assumed 8% purchase by the ESOP and 4% purchase
by the RSP as of September 30, 1997. It is assumed that SFSB will retain
50% of net conversion proceeds.
(2) GAAP, adjusted, or risk-weighted assets as appropriate.
(3) Proposed regulations of the OTS could increase the core capital requirement
to a ratio between 4% and 5%, based upon an association's regulatory
examination rating. See "Regulation - Regulatory Capital Requirements."
(4) Our Risk-Based Capital includes our Tangible Capital plus $105,000 of our
allowance for loan losses. As of September 30, 1997, our risk-weighted
assets totaled approximately $13.7 million and our total adjusted assets
were $37.2 million. Net proceeds available for investment by us are assumed
to be invested in interest earning assets that have a 50% risk-weighting.
See Note 14 to our financial statements.
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THE CONVERSION
Our board of directors and the OTS have approved the Plan subject to
the Plan's approval by our members, and subject to the satisfaction of certain
other conditions imposed by the OTS in its approval. OTS approval, however, does
not constitute a recommendation or endorsement of the Plan by the OTS.
General
On September 30, 1997, our board of directors adopted a Plan of
Conversion, pursuant to which we will convert from a federally chartered mutual
savings bank to a federally chartered stock savings bank and become a wholly
owned subsidiary of SFSB. The conversion will include adoption of the proposed
Federal Stock charter and Bylaws which will authorize the issuance of capital
stock by us. Under the Plan, our capital stock is being sold to SFSB and the
common stock of SFSB is being offered to our eligible depositors and members and
then to the public. The conversion will be accounted for at historical cost in a
manner similar to a pooling of interests.
The OTS has approved SFSB's application to become a savings and loan
holding company and to acquire all of our common stock to be issued in the
conversion. Pursuant to such OTS approval, we plan to retain 50% of the net
proceeds from the sale of shares of our common stock and to use the remaining
50% to purchase all of the common stock we will issue in the conversion. See
"Use of Proceeds."
The shares are first being offered in a subscription offering to
holders of subscription rights. To the extent shares of common stock remain
available after the subscription offering, shares of common stock may be offered
in a community offering or public or syndicated public offering. The community
offering or public or syndicated public offering, if any, may commence anytime
subsequent to the commencement of the subscription offering. Shares not
subscribed for in the subscription, community or public offerings may be offered
for sale by SFSB in a syndicated public offering. We have the right, in our sole
discretion, to accept or reject, in whole or in part, any orders to purchase
shares of the common stock received in the community offering, public or
syndicated public offering. See "-- Community Offering," "-- Public or
Syndicated Public Offering."
Shares of common stock in an amount equal to our pro forma market value
as a stock savings institution must be sold in order for the conversion to
become effective. The community offering, public or syndicated public offering
must be completed within 45 days after the last day of the subscription offering
period unless such period is extended by us with the approval of the OTS. The
Plan provides that the conversion must be completed within 24 months after the
date of the approval of the Plan by our members.
In the event that we are unable to complete the sale of common stock
and effect the conversion within 45 days after the end of the subscription
offering, we may request an extension of the period by the OTS. No assurance can
be given that the extension would be granted if requested. Due to the volatile
nature of market conditions, no assurances can be given that our estimated
market valuation would not substantially change during any such extension. If
the valuation of the shares must be amended, no assurance can be given that such
amended valuation would be approved by the OTS. Therefore, it is possible that
if the conversion cannot be completed within the requisite period, we may not be
permitted to complete the conversion. A substantial delay caused by an extension
of the period may also significantly increase the expense of the conversion. No
sales of the shares may be completed in the offering unless the Plan is approved
by our members and by the OTS.
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<PAGE>
The completion of the offering is subject to market conditions and
other factors beyond our control. No assurance can be given as to the length of
time following approval of the Plan at the meeting of our members that will be
required to complete the sale of shares being offered in the conversion. If
delays are experienced, significant changes may occur in our estimated pro forma
market value upon conversion together with corresponding changes in the offering
price and the net proceeds to be realized by us from the sale of the shares. In
the event the conversion is terminated, we will charge all conversion expenses
against current income and any funds collected by us in the offering will be
promptly returned, with interest, to each potential investor.
Effects of Conversion to Stock Form on Depositors and Borrowers of Stanton
Federal Savings Bank
Voting Rights. Currently in our mutual form, our depositor and certain
borrower members have voting rights and may vote for the election of directors.
Following the conversion, all voting rights will be held solely by stockholders.
A stockholder will be entitled to one vote for each share of common stock owned.
Savings Accounts and Loans. The balances, terms and FDIC insurance
coverage of savings accounts will not be affected by the conversion.
Furthermore, the amounts and terms of loans and obligations of the borrowers
under their individual contractual arrangements with us will not be affected by
the conversion.
Tax Effects. We have received an opinion from our counsel, Malizia,
Spidi, Sloane & Fisch, P.C. on the federal tax consequences of the conversion.
The opinion has been filed as an exhibit to the registration statement of which
this Prospectus is a part and covers those federal tax matters that are material
to the transaction. The opinion provides, in part, that: (i) the conversion will
qualify as a reorganization under Section 368(a)(1)(F) of the Code, and no gain
or loss will be recognized by us by reason of the proposed conversion; (ii) no
gain or loss will be recognized by us upon the receipt of money from SFSB for
our stock, and no gain or loss will be recognized by SFSB upon the receipt of
money for the shares; (iii) our assets will have the same basis before and after
the conversion; (iv) the holding period of our assets will include the period
during which the assets were held by us in our mutual form; (v) no gain or loss
will be recognized by the Eligible Account Holders, Supplemental Eligible
Account Holders, and Other Members upon the issuance to them of withdrawable
savings accounts in us in the stock form in the same dollar amount as their
savings accounts in us in the mutual form plus an interest in the liquidation
account of us in the stock form in exchange for their savings accounts in us in
the mutual form; (vi) provided that the amount to be paid for the shares
pursuant to the subscription rights is equal to the fair market value of such
shares, no gain or loss will be recognized by Eligible Account Holders,
Supplemental Eligible Account Holders, and Other Members under the Plan upon the
distribution to them of nontransferable subscription rights; (vii) the basis of
each account holder's savings accounts after the conversion will be the same as
the basis of his savings accounts prior to the conversion, decreased by the fair
market value of the nontransferable subscription rights received and increased
by the amount, if any, of gain recognized on the exchange; (viii) the basis of
each account holder's interest in the liquidation account will be zero; (ix) the
holding period of the common stock acquired through the exercise of subscription
rights shall begin on the date on which the subscription rights are exercised;
(x) we will succeed to and take into account the earnings and profits or deficit
in earnings and profits of us as of the date of conversion; (xi) immediately
after conversion, we will succeed to the bad debt reserve accounts previously
held by us, and the bad debt reserves will have the same character in our hands
after conversion as if no distribution or transfer had occurred; and (xii) the
creation of the liquidation account will have no effect on our taxable income.
The opinion from Malizia, Spidi, Sloane & Fisch, P.C. is based in part
on the assumption that the exercise price of the subscription rights will be
approximately equal to the fair market value of those
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<PAGE>
shares at the time of the completion of the proposed conversion. We have
received an opinion of FinPro which, based on certain assumptions, concludes
that the subscription rights to be received by Eligible Account Holders and
other eligible subscribers do not have any economic value at the time of
distribution or at the time the subscription rights are exercised. Such opinion
is based on the fact that such rights are: (i) acquired by the recipients
without payment therefor, (ii) non-transferable, (iii) of short duration, and
(iv) afford the recipients the right only to purchase shares at a price equal to
their estimated fair market value, which will be the same price at which shares
for which no subscription right is received in the subscription offering will be
offered in the community offering, public or syndicated public offering. If the
subscription rights granted to Eligible Account Holders or other eligible
subscribers are deemed to have an ascertainable value, receipt of such rights
would be taxable only to those Eligible Account Holders or other eligible
subscribers who exercise the subscription rights in an amount equal to such
value (either as a capital gain or ordinary income), and we could recognize gain
on such distribution.
We are also subject to Pennsylvania income taxes and have received an
opinion from Malizia, Spidi, Sloane & Fisch, P.C. that the conversion will be
treated for Pennsylvania state tax purposes similar to the conversion's
treatment for federal tax purposes. The opinion has been filed as an exhibit to
the registration statement to which this Prospectus is a part and covers those
state tax matters that are material to the transaction.
Unlike a private letter ruling, the opinions of Malizia, Spidi, Sloane
& Fisch, P.C. and FinPro have no binding effect or official status, and no
assurance can be given that the conclusions reached in any of those opinions
would be sustained by a court if contested by the IRS or the Pennsylvania tax
authorities. Eligible Account Holders, Supplemental Eligible Account Holders,
and Other Members are encouraged to consult with their own tax advisers as to
the tax consequences in the event the
subscription rights are deemed to have an ascertainable value.
Liquidation Account. In the unlikely event of our complete liquidation
in our present mutual form, each depositor is entitled to equal distribution of
any of our assets, pro rata to the value of his accounts, remaining after
payment of claims of all creditors (including the claims of all depositors to
the withdrawal value of their accounts). Each depositor's pro rata share of such
remaining assets would be in the same proportion as the value of his deposit
accounts was to the total value of all deposit accounts in us at the time of
liquidation.
Upon a complete liquidation after the conversion, each depositor would
have a claim, as a creditor, of the same general priority as the claims of all
other general creditors of ours. Therefore, except as described below, a
depositor's claim would be solely in the amount of the balance in his deposit
account plus accrued interest. A depositor would not have an interest in the
residual value of our assets above that amount, if any.
The Plan provides for the establishment, upon the completion of the
conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders. Each Eligible Account
Holder and Supplemental Eligible Account Holder, if he continues to maintain his
deposit account with us, would be entitled on a complete liquidation of us after
conversion, to an interest in the liquidation account prior to any payment to
stockholders. Each Eligible Account Holder would have an initial interest in
such liquidation account for each deposit account held in us on the qualifying
date, December 31, 1995. Each Supplemental Eligible Account Holder would have a
similar interest as of the qualifying date, December 31, 1997. The interest as
to each deposit account would be in the same proportion of the total liquidation
account as the balance of the deposit account on the qualifying dates was to the
aggregate balance in all the deposit accounts of Eligible Account Holders and
Supplemental Eligible Account Holders on such qualifying dates. However, if the
amount in the deposit account on
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<PAGE>
any annual closing date of ours (December 31) is less than the amount in such
account on the respective qualifying dates, then the interest in this special
liquidation account would be reduced from time to time by an amount
proportionate to any such reduction, and the interest would cease to exist if
such deposit account were closed. The interest in the special liquidation
account will never be increased despite any increase in the related deposit
account after the respective qualifying dates.
No merger, consolidation, purchase of bulk assets with assumptions of
savings accounts and other liabilities, or similar transactions with another
insured institution in which we, in our converted form, are not the surviving
institution, shall be considered a complete liquidation. In such transactions,
the liquidation account shall be assumed by the surviving institution.
Subscription Rights and the Subscription Offering
Restrictions on Transfer of Subscription Rights and Shares. Persons are
prohibited from transferring or entering into any agreement or understanding to
transfer the legal or beneficial ownership of their subscription rights.
Subscription rights may be exercised only by the person to whom they are granted
and only for his account. Each person subscribing for shares will be required to
certify that he is purchasing shares solely for his own account and has not
entered into an agreement or understanding regarding the sale or transfer of
those shares. The regulations also prohibit any person from offering or making
an announcement of an offer or intent to make an offer to purchase subscription
rights or shares of common stock prior to the completion of the conversion. We
intend to pursue any and all legal and equitable remedies in the event we become
aware of the transfer of subscription rights and we will not honor orders known
by us to involve the transfer of such rights. In addition, persons who violate
the purchase limitations may be subject to sanctions and penalties imposed by
the OTS.
Subscription Priorities. Non-transferable subscription rights to
purchase shares of the common stock have been granted to persons and entities
entitled to purchase shares in the subscription offering under the Plan. If the
community offering, public offering or syndicated public offering, as described
below, extends beyond 45 days following the completion of the subscription
offering, subscribers will be resolicited. Subscription priorities have been
established for the allocation of stock to the extent that shares are available
after satisfaction of all subscriptions of all persons having prior rights and
subject to the purchase limitations set forth in the Plan and as described below
under "-- Limitations on Purchases of Shares." The following priorities have
been established:
Category 1: Eligible Account Holders (First Priority). Eligible Account Holders
are persons who had a deposit account of at least $50 with us on December 31,
1995. Each Eligible Account Holder (or persons through a single account) will
receive non-transferable subscription rights on a priority basis to purchase
that number of shares of common stock which is equal to the greater of 7,500
shares ($75,000), or 15 times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares to be issued by a
fraction of which the numerator is the amount of the qualifying deposit of the
Eligible Account Holder and the denominator is the total amount of qualifying
deposits of all Eligible Account Holders. If the exercise of subscription rights
in this category results in an oversubscription, shares shall be allocated among
subscribing Eligible Account Holders so as to permit each such account holder,
to the extent possible, to purchase the lesser of 100 shares or the total amount
of his subscription. Any shares not so allocated shall be allocated among the
subscribing Eligible Account Holders on an equitable basis, related to the
amounts of their respective qualifying deposits as compared to the total
qualifying deposits of all subscribing Eligible Account Holders. Only a
person(s) with a qualifying deposit as of the eligibility record date (or a
successor entity or estate) shall receive subscription rights. Any Person(s)
added to a Savings Account after the Eligibility Record Date is not an Eligible
Account Holder. Subscription rights
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<PAGE>
received by officers and directors in this category based on their increased
deposits in Stanton Federal Savings Bank in the one-year period preceding
December 31, 1995, are subordinated to the subscription rights of other Eligible
Account Holders. See "-- Limitations on Purchases and Transfer of Shares."
Category 2: Tax-Qualified Employee Benefit Plans (Second Priority). Our
tax-qualified employee benefit plans ("Employee Plans") have been granted
subscription rights to purchase up to 8% of the total shares issued in the
conversion. The ESOP is an Employee Plan.
The right of Employee Plans to subscribe for shares is subordinate to
the right of the Eligible Account Holders to subscribe for shares. However, in
the event the offering results in the issuance of shares above the maximum of
the EVR (i.e., more than 632,500 shares), the Employee Plans have a priority
right to fill their subscription (the ESOP, the only Employee Plan, currently
intends to purchase up to 8% of the common stock issued in the conversion). The
Employee Plans may, however, determine to purchase some or all of the shares
covered by their subscriptions after the conversion in the open market or, if
approved by the OTS, out of authorized but unissued shares in the event of an
oversubscription.
Category 3: Supplemental Eligible Account Holders (Third Priority). Supplemental
Eligible Account Holders are persons who had a deposit account of at least $50
with us on December 31, 1997. Each Supplemental Eligible Account Holder who is
not an Eligible Account Holder (or persons through a single account) will
receive non-transferable subscription rights to purchase that number of shares
which is equal to the greater of 7,500 shares ($75,000), or 15 times the product
(rounded down to the next whole number) obtained by multiplying the total number
of shares to be issued by a fraction of which the numerator is the amount of the
qualifying deposit of the Supplemental Eligible Account Holder and the
denominator is the total amount of qualifying deposits of all Supplemental
Eligible Account Holders. If the exercise of subscription rights in this
category results in an oversubscription, shares shall be allocated among
subscribing Supplemental Eligible Account Holders so as to permit each such
account holder, to the extent possible, to purchase the lesser of 100 shares or
the total amount of his subscription. Any shares not so allocated shall be
allocated among the subscribing Supplemental Eligible Account Holders on an
equitable basis, related to the amounts of their respective qualifying deposits
as compared to the total qualifying deposits of all subscribing Supplemental
Eligible Account Holders. The right of Supplemental Eligible Account Holders to
subscribe for shares is subordinate to the rights of the Eligible Account
Holders and Employee Plans to subscribe for shares. See "-- Limitations on
Purchases and Transfer of Shares."
Category 4: Other Members (Fourth Priority). Other Members are persons who have
a deposit account of at least $50 on the voting record date of our special
meeting and certain borrowers whose loans were outstanding as of April 1, 1996
and continue to be outstanding, on the voting record date of our special
meeting. Each Other Member who is not an Eligible Account Holder or Supplemental
Eligible Account Holder, will receive non-transferable subscription rights to
purchase up to 7,500 shares ($75,000) to the extent such shares are available
following subscriptions by Eligible Account Holders, Employee Plans, and
Supplemental Eligible Account Holders. In the event there are not enough shares
to fill the orders of the Other Members, the subscriptions of the Other Members
will be allocated so that each subscribing Other Member will be entitled to
purchase the lesser of 100 shares or the number of shares ordered. Any remaining
shares will be allocated among Other Members whose subscriptions remain
unsatisfied on a 100 share (or whatever lesser amount is available) per order
basis until all orders have been filled on the remaining shares have been
allocated. See "-- Limitations on Purchases and Transfer of Shares."
Members in Non-Qualified States. We will make reasonable efforts to
comply with the securities laws of all states in the United States in which
persons entitled to subscribe for the shares pursuant to the Plan reside.
However, no person will be offered or allowed to purchase any shares under the
Plan if he resides in a foreign country or in a state with respect to which any
of the following apply: (i) a small
18
<PAGE>
number of persons otherwise eligible to subscribe for shares under the Plan
reside in that state or foreign country; (ii) the granting of subscription
rights or offer or sale of shares of common stock to those persons would require
either us, or our employees to register, under the securities laws of that state
or foreign country, as a broker or dealer or to register or otherwise qualify
our securities for sale in that state or foreign country; or (iii) such
registration or qualification would be impracticable for reasons of cost or
otherwise. No payments will be made in lieu of the granting of subscription
rights to any person.
We will pursue any and all legal and equitable remedies in the event we
become aware of the transfer of subscription rights and will not honor orders
believed by us to involve the transfer of subscription rights.
Expiration Date. The subscription offering will expire at 10:00 a.m.,
Eastern Time, on February 12, 1998, (Expiration Date). Subscription rights will
become void if not exercised prior to the Expiration Date.
Community Offering
To the extent that shares remain available for purchase after
satisfaction of all subscriptions of Eligible Account Holders, Employee Plans,
Supplemental Eligible Account Holders and Other Members, we may offer shares to
certain members of the general public with a preference to natural persons
residing in Allegheny County, Pennsylvania, under terms and conditions as
established by the Board of Directors. The community offering, if any, will
commence subsequent to the commencement of the subscription offering. No person
in the community offering, may purchase more than $7,500 shares or $75,000 of
common stock. The right of any person or entity to purchase shares in the
community offering is subject to our right to accept or reject purchases in
whole or in part either at the time of receipt of an order, or as soon as
practicable following the completion of the community offering.
Persons and entities not purchasing the common stock in the
subscription offering may purchase common stock in the community offering by
returning to us a completed and properly executed order form along with full
payment.
If all of the common stock offered in the subscription offering is
subscribed for, no common stock will be available for purchase in the community
offering. In the event an insufficient number of shares are available to fill
orders in the community offering, the available shares will be allocated among
persons submitting orders on an equitable basis determined by the Board of
Directors, provided that a preference will be given to natural persons residing
in Allegheny County, Pennsylvania. If the community offering extends beyond 45
days following the completion of the subscription offering (March 29, 1998) and
such extension is approved by the regulatory authorities, subscribers will have
the right to modify, confirm, decrease or rescind subscriptions for stock
previously submitted. All sales of common stock in the community offering will
be at the same price as in the subscription offering.
We will place cash and checks submitted in the community offering in a
segregated account. Interest will be paid on orders made by check or in cash at
the passbook savings account rate from the date the payment is received until
the completion or termination of the conversion. In the event that the
conversion is not completed for any reason, all funds submitted pursuant to the
community offering will be promptly refunded with interest.
Public or Syndicated Public Offering
All shares of common stock not purchased in the subscription offering
and community offering, if any, may be offered for sale to the general public in
a public or syndicated public offering through selected
19
<PAGE>
broker-dealers to be formed and managed by Ryan, Beck. The public or syndicated
public offering, if any, will be conducted to achieve the widest distribution of
common stock subject to our right to reject orders in whole or in part. Neither
Ryan, Beck nor any registered broker-dealer shall have any obligation to take or
purchase any shares of the common stock in the public or syndicated public
offering. Stock sold in the public or syndicated public offering will be sold at
the same price as all other shares.
No person, may purchase more than 7,500 shares or $75,000 in the public
or syndicated public offering. In the event that selected dealer agreements are
entered into in connection with a Public or syndicated public offering, we will
pay commissions to selected dealers (which may include Ryan, Beck) of no more
than 5.5% for shares sold by the selected dealer.
The public or syndicated public offering will terminate no more than 45
days following the subscription offering (March 29, 1998), unless extended with
the approval of the OTS.
Ordering and Receiving Shares
Use of Order Forms. Rights to subscribe in the subscription offering or
purchase stock in the community offering, if any, may only be exercised by
completion of an original order form. Persons ordering shares in the
subscription offering must deliver by mail or in person a properly completed and
executed original order form to us prior to the Expiration Date. Order forms
must be accompanied by full payment for all shares ordered. See "-- Payment for
Shares." Subscription rights under the Plan will expire on the Expiration Date,
whether or not we have been able to locate each person entitled to subscription
rights. Once submitted, subscription orders cannot be revoked or modified
without our consent.
In the event an order form (i) is not delivered by the United States
Postal Service, (ii) is not received or is received after the Expiration Date,
(iii) is defectively completed or executed, or (iv) is not accompanied by full
payment for the shares subscribed for (including instances where your savings
account or certificate balance from which withdrawal is authorized is
insufficient to fund the amount of such required payment), the subscription
rights for the person to whom such rights have been granted will lapse as though
that person failed to return the completed order form within the time period
specified. We may, but will not be required to, waive any irregularity on any
order form or require the submission of corrected order forms or the remittance
of full payment for subscribed shares by such date as we specify. The waiver of
an irregularity on an order form in no way obligates us to waive any other
irregularity on that, or any irregularity on any other, order form. Waivers will
be considered on a case by case basis. Photocopies of order forms, payments from
private third parties, or electronic transfers of funds may not be accepted. Our
interpretation of the terms and conditions of the Plan and of the acceptability
of the order forms will be final. We have the right to investigate any
irregularity on any order form.
To ensure that each purchaser receives a prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the order
form will confirm receipt or delivery in accordance with Rule 15c2-8. Order
forms will only be distributed with a prospectus.
Payment for Shares. Payment for shares of common stock in the
subscription offering may be made (i) in cash, if delivered in person, (ii) by
check or money order payable to us, or (iii) by authorization of withdrawal from
savings accounts (including certificates of deposit) maintained with us.
Appropriate means by which such withdrawals may be authorized are provided in
the order form. Once such a withdrawal has been authorized, none of the
designated withdrawal amount may be used by the subscriber for any purpose other
than to purchase the shares. Where payment has been authorized to be made
through withdrawal from a savings account, the sum authorized for withdrawal
will continue to earn interest at
20
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the contract rate until the conversion has been completed or terminated.
Interest penalties for early withdrawal applicable to certificate accounts will
not apply to withdrawals authorized for the purchase of shares; however, if a
partial withdrawal results in a certificate account with a balance less than the
applicable minimum balance requirement, the certificate evidencing the remaining
balance will earn interest at the passbook savings account rate subsequent to
the withdrawal. Payments made in cash or by check or money order, will be placed
in a segregated savings account and interest will be paid by us at our passbook
savings account rate from the date payment is received until the conversion is
completed or terminated. An executed order form, once received by us, may not be
modified, amended, or rescinded without our consent, unless the conversion is
not completed within 45 days after the conclusion of the subscription offering,
in which event subscribers may be given an opportunity to modify or cancel their
order. In the event that the conversion is not consummated, all funds submitted
pursuant to the offering will be refunded promptly with interest.
Individual Retirement Accounts ("IRAs") maintained with us do not
permit investment in common stock. If you are interested in using your IRA funds
to purchase our common stock, you must do so through a self-directed IRA. Since
we do not offer such accounts, we will allow you to make a trustee-to-trustee
transfer of the IRA funds to a trustee offering a self-directed IRA program with
the agreement that such funds will be used to purchase our common stock in the
offering. There will be no early withdrawal or IRS interest penalties for such
transfers. The new trustee would hold your stock in a self-directed account in
the same manner as we now hold your IRA funds. An annual administrative fee may
be payable to the new trustee. If you are interested in using your IRA funds to
purchase our common stock, you should contact our Stock Information Center as
soon as practicable so that the necessary forms may be forwarded for execution
and returned prior to the Expiration Date. In addition, the provisions of ERISA
and IRS regulations require that officers, directors and 10% stockholders who
use self-directed IRA funds to purchase shares in the Offering make such
purchases for the exclusive benefit of IRAs.
The ESOP may subscribe for shares by submitting its order form along
with evidence of a loan commitment from another financial institution or us for
the purchase of the shares during the subscription offering and by making
payment for shares on the date of completion of the conversion.
Federal regulations prohibit us from lending funds or extending credit
to any person to purchase shares in the conversion.
Delivery of Stock Certificates. Certificates representing shares of
common stock issued in the conversion will be mailed to the person(s) at the
address noted on the order form, as soon as practicable following consummation
of the conversion. Any certificates returned as undeliverable will be held until
properly claimed or otherwise disposed. Persons ordering shares might not be
able to sell their shares until they receive their stock certificates.
Plan of Distribution
Materials for the subscription offering have been distributed to
persons with subscriptions rights by mail. Additional copies are available at
our stock information center. Our officers may be available to answer questions
about the conversion. Responses to questions about us will be limited to the
information contained in this document. Officers will not be authorized to
render investment advice. All subscribers for the shares being offered in the
subscription offering and if applicable, the community offering, will be
instructed to send payment directly to us. The funds will be held in a
segregated special escrow account and will not be released until the closing of
the conversion or its termination.
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Marketing Arrangements
Ryan, Beck has been engaged as our consultant and financial advisor in
connection with the offering. Ryan, Beck has agreed to exercise its best efforts
to assist us to solicit subscriptions and purchase orders for shares in the
offering. However, Ryan, Beck is not obligated to take or purchase any shares of
common stock in the offering. Ryan, Beck will receive $120,000 which includes
payment for out-of-pocket and legal expenses. In the event that common stock is
offered through a public or syndicated public offering, we will pay an
additional fee to such selected dealers (which may include Ryan, Beck) of up to
5.5% of the aggregate amount of stock sold in connection with the public
offering or syndicated public offering. Also, we have agreed to indemnify Ryan,
Beck for reasonable costs and expenses in connection with certain claims or
liabilities which might be asserted against Ryan, Beck. This indemnification
covers the investigation, preparation of defense and defense of any action,
proceeding or claim relating to misrepresentation or breach of warranty of the
written agreement among Ryan, Beck and us or the omission or alleged omission of
a material fact required to be stated or necessary in the prospectus or other
documents.
The shares will be offered principally by the distribution of this
document and through activities conducted at a Stock Information Center located
at our Shaler Township office. The Stock Information Center is expected to
operate during our normal business hours throughout the offering. A registered
representative employed by Ryan, Beck will be available at the Stock Information
Center. Ryan, Beck will assist us in responding to questions regarding the
conversion and the offering and processing order forms.
Stock Pricing
FinPro, an independent economic consulting and appraisal firm, which is
experienced in the evaluation and appraisal of business entities, including
savings institutions involved in the conversion process has been retained by us
to prepare an appraisal of our estimated pro forma market value. FinPro will
receive a fee of $25,000 for preparing the appraisal and its assistance in
connection with the preparation of a business plan and will be reimbursed for
reasonable out-of-pocket expenses. We have agreed to indemnify FinPro under
certain circumstances against liabilities and expenses arising out of or based
on any misstatement or untrue statement of a material fact contained in the
information supplied by us to FinPro.
The appraisal was prepared by FinPro in reliance upon the information
contained herein, including the financial statements. The appraisal contains an
analysis of a number of factors including, but not limited to, our financial
condition and operating trends, the competitive environment within which we
operate, operating trends of certain savings institutions and savings and loan
holding companies, relevant economic conditions, both nationally and in the
Commonwealth of Pennsylvania which affect the operations of savings
institutions, and stock market values of certain savings institutions. In
addition, FinPro has advised us that it has considered the effect of the
additional capital raised by the sale of the shares on our estimated aggregate
pro forma market value.
On the basis of the above, FinPro has determined, in its opinion, that
as of November 24, 1997 our estimated aggregate pro forma market value was
$5,500,000. OTS regulations require, however, that the appraiser establish a
range of value for the stock to allow for fluctuations in the aggregate value of
the stock due to changing market conditions and other factors. Accordingly,
FinPro has established a range of value from $4,675,000 to $6,325,000 for the
offering, the EVR. The EVR will be updated prior to consummation of the
conversion and the EVR may increase to $7,273,750.
The board of directors has reviewed the independent appraisal,
including the stated methodology of the independent appraiser and the
assumptions used in the preparation of the independent appraisal.
22
<PAGE>
The board of directors is relying upon the expertise, experience and
independence of the appraiser and is not qualified to determine the
appropriateness of the assumptions.
In order for stock sales to take place FinPro must confirm to the OTS
that, to the best of FinPro's knowledge and judgment, nothing of a material
nature has occurred which would cause FinPro to conclude that the Purchase Price
on an aggregate basis was incompatible with FinPro's estimate of our pro forma
market value of us in converted form at the time of the sale. If, however, facts
do not justify such a statement, an amended EVR may be established.
The appraisal is not a recommendation of any kind as to the
advisability of purchasing these shares. In preparing the appraisal, FinPro has
relied upon and assumed the accuracy and completeness of financial and
statistical information provided by us. FinPro did not independently verify the
financial statements and other information provided by us, nor did FinPro value
independently our assets and liabilities. The appraisal considers us only as a
going concern and should not be considered as our liquidation value. Moreover,
because the appraisal is based upon estimates and projections of a number of
matters which are subject to change, the market price of the common stock could
decline below $10.00.
Change in Number of Shares to be Issued in the Conversion
Depending on market and financial conditions at the time of the
completion of the offerings, we may significantly increase or decrease the
number of shares to be issued in the conversion. In the event of an increase in
the valuation, we may increase the total number of shares to be issued in the
conversion. An increase in the total number of shares to be issued in the
conversion would decrease a subscriber's percentage ownership interest and the
pro forma net worth (book value) per share and increase the pro forma net income
and net worth (book value) on an aggregate basis. In the event of a material
reduction in the valuation, we may decrease the number of shares to be issued to
reflect the reduced valuation. A decrease in the number of shares to be issued
in the conversion would increase a subscriber's percentage ownership interest
and the pro forma net worth (book value) per share and decrease pro forma net
income and net worth on an aggregate basis.
Persons ordering shares will not be permitted to modify or cancel their
orders unless the change in the number of shares to be issued in the conversion
results in an offering which is either less than $4,675,000 or more than
$7,273,750. If the offering is either less than $4,675,000 or more than
$7,273,750, only, persons who subscribed for shares will have an opportunity to
modify or cancel their orders. We will resolicit such persons by providing them
an updated prospectus or supplement (and filing a post-effective amendment to
this offering). Persons who did not subscribe for shares will not have the
opportunity to do so.
Limitations on Purchases and Transfer of Shares
The Plan provides for certain additional purchase limitations. The
minimum purchase is 25 shares and the maximum purchase for any individual person
or persons ordering through a single account in the subscription offering, and
if applicable, the community offering, public or syndicated public offering, is
7,500 shares. In addition, no person or persons ordering through a single
account, together with their associates, or group of persons acting together,
may purchase in all categories of the conversion more than 12,500 shares, except
for the Employee Plans which may purchase up to 8% of the shares sold. The OTS
regulations governing the conversion provide that officers and directors and
their associates may not purchase, in the aggregate, more than 35% of the shares
issued pursuant to the conversion. Pursuant to the Plan, the board of directors
has the authority to determine whether persons are associates or acting in
concert.
23
<PAGE>
Depending on market conditions and the results of the offering, the
board of directors may increase or decrease any of the purchase limitations
without the approval of our members and without resoliciting subscribers. If the
maximum purchase limitation is increased, persons who ordered the maximum amount
will be given the first opportunity to increase their orders. In doing so the
preference categories in the offerings will be followed.
In the event of an increase in the total number of shares offered in
the conversion due to an increase in the EVR of up to 15% (the "Adjusted
Maximum"), the additional shares will be allocated in the following order of
priority: (i) to fill the Employee Plans' subscription of up to 8% of the
Adjusted Maximum number of shares (the ESOP currently intends to subscribe for
8%); (ii) in the event that there is an oversubscription by Eligible Account
Holders, to fill unfulfilled subscriptions of Eligible Account Holders; (iii) in
the event that there is an oversubscription by Supplemental Eligible Account
Holders, to fill unfulfilled subscriptions to Supplemental Eligible Account
Holders; (iv) in the event that there is an oversubscription by Other Members,
to fill unfulfilled subscriptions of Other Members; and (v) to fill unfulfilled
subscriptions in the community offering or public or syndicated public offering
to the extent possible.
The term "associate" of a person means (i) any corporation or
organization (other than us or a majority-owned subsidiary of ours) of which
such person is an officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of equity securities, (ii) any
trust or other estate in which such person has a substantial beneficial interest
or as to which such person serves as director or in a similar fiduciary capacity
(excluding tax-qualified employee stock benefit plans), and (iii) any relative
or spouse of such person or any relative of such spouse, who has the same home
as such person or who is a director or officer of us, or any of our
subsidiaries. For example, a corporation of which a person serves as an officer
would be an associate of that person, and therefore all shares purchased by that
corporation would be included with the number of shares which that person
individually could purchase under the above limitations.
The term "officer" may include our chairman of the board, president,
vice presidents in charge of principal business functions, Secretary and
Treasurer and any other person performing similar functions. All references
herein to an officer have the same meaning as used for an officer in the Plan.
Persons must certify on their order form that their purchase does not
conflict with the purchase limitations. In the event that the purchase
limitations are violated by any person (including any associate or group of
persons affiliated or otherwise acting in concert with such persons), we will
have the right to purchase from that person at $10.00 per share all shares
acquired by that person in excess of the purchase limitations. If the excess
shares have been sold by that person, we may recover the profit from the sale of
the shares by that person. We may assign our right either to purchase the excess
shares or to recover the profits from their sale.
Shares of common stock purchased pursuant to the conversion will be
freely transferable, except for shares purchased by our directors and officers.
For certain restrictions on the shares purchased by directors and officers, see
" -- Restrictions on Sales and Purchases of Shares by Directors and Officers."
In addition, under guidelines of the NASD, members of the NASD and their
associates are subject to certain restrictions on the transfer of securities
purchased in accordance with subscription rights and to certain reporting
requirements upon purchase of such securities.
Restrictions on Repurchase of Shares
Generally, during the first year following the conversion, SFSB may not
repurchase its shares and during each of the second and third years following
the conversion, SFSB may repurchase five percent of the outstanding shares
provided they are purchased in open-market transactions. Repurchases must
24
<PAGE>
not cause us to become undercapitalized and at least 10 days prior notice of the
repurchase must be provided to the OTS. The OTS may disapprove a repurchase
program upon a determination that (1) the repurchase program would adversely
affect our financial condition, (2) the information submitted is insufficient
upon which to base a conclusion as to whether the financial condition would be
adversely affected, or (3) a valid business purpose was not demonstrated.
However, the OTS may grant special permission to repurchase shares after six
months following the conversion and to repurchase more than five percent during
each of the second and third years. In addition, SEC rules also govern the
method, time, price, and number of shares of common stock that may be
repurchased by SFSB and affiliated purchasers. If, in the future, the rules and
regulations regarding the repurchase of stock are liberalized, SFSB may utilize
the rules and regulations then in effect.
Restrictions on Sales and Purchases of Shares by Directors and Officers
Shares purchased by directors and officers of SFSB may not be sold for
one year following the conversion, except in the event of the death of the
director or officer. Any shares issued to directors and officers as a stock
dividend, stock split, or otherwise with respect to restricted stock shall be
subject to the same restrictions.
For three years following the conversion, directors and officers may
purchase shares only through a registered broker or dealer. Exceptions are
available only if the OTS has approved the purchase or the purchase is an arm's
length transaction and involves more than one percent of the outstanding shares.
Interpretation and Amendment of the Plan
We have the authority to interpret and amend the Plan. Our
interpretations are final. Amendments to the Plan after the receipt of member
approval will not need further member approval unless required by the OTS.
Conditions and Termination
Completion of the conversion requires (i) the approval of the Plan by
the affirmative vote of not less than a majority of the total number of votes
eligible to be cast by our members; and (ii) completion of the sale of shares
within 24 months following approval of the Plan by our members. If these
conditions are not satisfied, the Plan will be terminated and we will continue
our business in the mutual form of organization. We may terminate the Plan at
any time prior to the meeting of members to vote on the Plan or at any time
thereafter with the approval of the OTS.
Other
All statements made in this document are hereby qualified by the
contents of the Plan of conversion, the material terms of which are set forth
herein. The Plan of Conversion is attached to the proxy statement mailed to
certain depositors and borrowers. Copies of the Plan are available from us and
should be consulted for further information. Adoption of the Plan by our members
authorizes us to interpret, amend or terminate the Plan.
25
<PAGE>
STANTON FEDERAL SAVINGS BANK
STATEMENT OF INCOME
The statement of income for the years ended December 31, 1996 and 1995
have been audited by LaFrance, Walker, Jackley & Saville, whose report appears
elsewhere in this Prospectus. The statement of income for the nine months ended
September 30, 1997 and 1996 are unaudited and have been prepared in accordance
with the requirements for a presentation of interim financial statements and are
in accordance with generally accepted accounting principles. In the opinion of
management, all adjustments, consisting of normal recurring adjustments, that
are necessary for a fair presentation of the interim periods have been
reflected.
<TABLE>
<CAPTION>
Nine Months Ended Years ended
September 30, December 31,
------------------------------------ ---------------------------------------
1997 1996 1996 1995
----------------- ---------------- ----------------- -------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans receivable................................. $ 678,482 $ 598,336 $ 834,482 $ 776,386
Interest-bearing deposits with other banks....... 271,582 218,877 294,199 346,932
Investment securities
Taxable........................................ 265,666 181,849 250,711 239,544
Exempt from federal income tax................. 40,626 36,698 49,209 47,728
Mortgage-backed securities....................... 398,505 370,582 537,353 530,470
---------- ---------- ---------- ----------
Total interest and dividend income............. 1,654,861 1,406,342 1,965,954 1,941,060
--------- --------- --------- ---------
INTEREST EXPENSE
Deposits......................................... 1,059,221 830,195 1,136,528 1,066,938
--------- ---------- --------- ---------
Total interest expense......................... 1,059,221 830,195 1,136,528 1,066,938
--------- ---------- --------- ---------
NET INTEREST INCOME................................ 595,640 576,147 829,426 874,122
Provision for Loan Losses...................... 39,000 9,000 36,500 21,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES........................ 556,640 567,147 792,926 853,122
---------- ---------- ---------- ----------
NONINTEREST INCOME
Service charges.................................. 41,973 8,708 16,393 11,867
Net securities gains (losses).................... - 124,468 124,468 -
Other income..................................... 11,394 8,941 12,729 4,900
---------- ---------- ---------- ----------
Total noninterest income....................... 53,367 142,117 153,590 16,767
---------- ---------- ---------- ----------
NONINTEREST EXPENSE
Compensation and employee benefits............... 441,565 294,132 447,279 328,764
Occupancy and equipment ......................... 166,920 64,853 128,242 66,544
Federal insurance premium........................ 28,289 208,702 211,724 66,882
Data processing.................................. 96,882 44,372 67,933 56,426
Stationary and printing.......................... 18,469 16,342 25,793 8,591
Other operating expenses......................... 187,860 109,884 152,232 100,443
---------- ---------- ---------- ----------
Total noninterest expense...................... 939,985 738,285 1,033,203 627,650
---------- ---------- --------- ----------
Income before income taxes....................... (329,978) (29,021) (86,687) 242,239
Income tax expense (benefit)..................... (146,693) (39,345) (40,416) 79,164
---------- ---------- ----------- -----------
NET INCOME (LOSS).................................. $ (183,285) $ 10,324 $ (46,271) $ 163,075
========== ========== ========== ==========
</TABLE>
See accompanying notes beginning on page F-7.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations is intended to assist you in understanding our financial condition
and results of operations. The information in this section should also be read
with our Financial Statements and Notes to the Financial Statements elsewhere in
this document.
General
SFSB has recently been formed and, accordingly, has no results of
operations. The following discussion relates only to our financial condition and
results of operations. Please refer to our Pro Forma Data discussion beginning
on page 7 to see the potential effects of the offering on our financial
statements.
Our results of operations depend primarily on net interest income,
which is determined by (i) the difference between rates of interest we earn on
our interest-earning assets and the rates we pay on interest-bearing liabilities
(our interest rate spread), and (ii) the relative amounts of interest-earning
assets and interest-bearing liabilities, consisting of deposits. Our results of
operations are also affected by non-interest income, including, primarily,
income from customer deposit account service charges, gains and losses from the
sale of investments and mortgage-backed securities and non-interest expense,
including, primarily, compensation and employee benefits, federal deposit
insurance premiums, office occupancy costs, and data processing costs. Our
results of operations also are affected significantly by general, and economic
and competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities, all of which are
beyond our control.
Recent Business Strategy
Prior to September 1996, we conducted business from one office, our
Lawrenceville office located within the City of Pittsburgh. The Lawrenceville
office has limited space and physical facilities, and the community's economy is
stagnant. Accordingly, we built a new office on Saxonburg Boulevard in Shaler
Township, a growing suburb of Pittsburgh, which opened in September 1996. The
new office provides expanded teller areas, drive in facilities and offices for
growth and expansion of existing and new services. During our first year, our
new office opened approximately $9 million in deposits, which significantly
exceeded our expectations and business plan.
The costs associated with opening the office contributed to our net
loss for the year ended December 31, 1996 and nine months ended September 30,
1997. Compensation, employee benefits, occupancy and equipment expense have more
than doubled and will continue to adversely affect net income, which might
result in net losses for future periods, unless and until, we are able to expand
our lending and investment activities. We face extensive competition in our new
market area for loan originations beyond the competition for insured savings
deposits. In addition to commercial banks, thrifts institutions and other
financial institutions, we compete for loan originations with mortgage banking
companies, insurance companies and investment banking companies. Because of this
competition for loans, and combined with the fact that it is typical with
opening a new banking office, the amount of loan originations from the new
office is significantly below the amount of new deposits. Our loans to deposit
ratio was 34.7% at September 30, 1997.
To the extent new deposits have exceeded our loan originations, we have
invested these deposits primarily in short-term securities so that they are
readily available to fund new loans in our market area. As discussed herein,
this has reduced our interest rate risk, but has adversely affected our net
interest income.
27
<PAGE>
One of the business reasons for the stock conversion is to raise capital to
expand our business commensurate with our new physical facilities. Since the new
deposits and stock proceeds are expected to exceed our ability to originate
loans in our market area, we may purchase loans, mortgage-backed securities and
other investments with higher yields that will improve our interest income and
net income.
Market Risk Analysis
Asset/Liability Management. Our assets and liabilities are interest
rate sensitive. An asset or liability is interest rate sensitive within a
specific time period if it will mature or reprice within that time period. If
our assets mature or reprice more quickly or to a greater extent than our
liabilities, our net portfolio value and net interest income would tend to
increase during periods of rising interest rates but decrease during periods of
falling interest rates. Conversely, if our assets mature or reprice more slowly
or to a lesser extent than our liabilities, our net portfolio value and net
interest income would tend to decrease during periods of rising interest rates
but increase during periods of falling interest rates. Our policy has been to
address the interest rate risk inherent in the historical savings institution
business of originating long-term loans funded by short-term deposits by
maintaining sufficient liquid assets for material and prolonged changes in
interest rates. We do not engage in, or intend to engage in, trading activities
or use derivative instruments to control our interest rate risk.
We emphasize origination of fixed rate real estate loans in the nature
of one- to- four family and home equity loans. These loans approximated 89% of
our loan portfolio at September 30, 1997. Currently liquid assets are at an
unusually high level due to the influx of new deposits at the new Shaler
Township office opened in September 1996, which have not yet been invested in
loans or longer-term securities. Although maintaining liquid assets reduces
interest rate risk, it also tends to reduce potential net income because liquid
assets usually provide a lower yield than less liquid assets. At September 30,
1997, the average weighted term to maturity of our mortgage loan portfolio was
slightly more than 20 years and the average weighted term to maturity of our
deposits was slightly less than 11 months. See "Risk Factors- Insufficient Loan
Demand" and "Business of Stanton Federal Savings Bank -- Lending Activities."
Net Portfolio Value. In recent years, we have measured our interest
rate sensitivity by computing the "gap" between the assets and liabilities which
were expected to mature or reprice within certain time periods, based on
assumptions regarding loan prepayment and deposit decay rates formerly provided
by the OTS. However, we now compute amounts by which the net present value of
expected cash flows from assets, liabilities and off balance sheet items (our
net portfolio value or "NPV") would change in the event of a range of assumed
changes in market interest rates. These computations estimate the effect on our
NPV from instantaneous and permanent 1% to 4% (100 to 400 basis points)
increases and decreases in market interest rates. Based upon OTS assumptions,
the following table presents our NPV at September 30, 1997.
28
<PAGE>
Percentage Change in Net Portfolio Value
----------------------------------------
Changes Change in NPV
in Market NPV Ratio(1) Ratio(2)
Interest Rates ------------ --------
--------------
(basis points)
+ 400 7.29% - 473 bp
+ 300 8.46 - 346 bp
+ 200 9.72 - 220 bp
+ 100 10.91 - 101 bp
0 11.92
- 100 12.62 + 70 bp
- 200 13.31 + 139 bp
- 300 14.24 + 222 bp
- 400 15.21 + 329 bp
- ------------------
(1) Calculated as the estimated NPV divided by present value of total assets.
(2) Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming no
change in interest rates.
Management believes these calculations indicate that we would be deemed
to have an average or normal level of interest rate risk under applicable
regulatory capital requirements. See "Regulation -- Savings Institution
Regulation -- Regulatory Capital Requirements."
While we cannot predict future interest rates or their effects on our
NPV or net interest income, we do not expect current interest rates, assuming
rates remain stable, to have a material adverse effect on our NPV or net
interest income. Computations of prospective effects of hypothetical interest
rate changes are based on numerous assumptions, including relative levels of
market interest rates, prepayments and deposit run-offs and should not be relied
upon as indicative of actual results. Certain shortcomings are inherent in such
computations. Although certain assets and liabilities may have similar maturity
or periods of repricing they may react at different times and in different
degrees to changes in the market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while rates on other types of assets and liabilities may lag
behind changes in market interest rates. In the event of a change in interest
rates, prepayments and early withdrawal levels could deviate significantly from
those assumed in making calculations set forth above. Additionally, an increased
credit risk may result as the ability of many borrowers to service their debt
may decrease in the event of an interest rate increase.
The board of directors reviews our asset and liability policies. The
board of directors meets quarterly to review interest rate risk and trends, as
well as liquidity and capital ratios and requirements. Management administers
the policies and determinations of the board of directors with respect to our
asset and liability goals and strategies. We expect that our asset and liability
policies and strategies will continue as described so long as competitive and
regulatory conditions in the financial institution industry and market interest
rates continue as they have in recent years.
Financial Condition
Our total assets increased $4.5 million, or 13.5%, to $37.8 million at
September 30, 1997 from $33.3 million at December 31, 1996. Our increase was
primarily attributable to a $1.1 million increase in our interest-bearing
deposits with other banks, a $1.8 million in our investment securities and
mortgage-
29
<PAGE>
backed securities held to maturity, and a $793,000 increase in our net loan
portfolio. Our increase in investment and mortgage-backed securities outpaced
our loan originations. The increase in our deposits funded our increase in
assets at September 30, 1997 from December 31, 1996. Our total liabilities
increased $4.6 million, or 15.5%, to $34.3 million at September 30, 1997 from
$29.7 million at December 31, 1996. Our increase was primarily attributable to a
$4.6 million increase in our deposits. Our deposits increased as a result of new
deposits being attracted to our new Shaler Township office, which opened in
September 1996.
Results of Operations
Our net income decreased $193,000 for the nine months ended September
30, 1997, to a net loss of $183,000 from net income of $10,000 for the nine
months ended September 30, 1996. Our decrease was primarily attributable to a
$30,000 increase in our provision for loan losses, an $89,000 decrease in our
noninterest income, a $198,000 increase in our noninterest expense partially
offset by a $19,000 increase in our net interest income and a $107,000 decrease
in our income taxes due to our net loss on operations.
Our net income decreased $209,000 for the year ended December 31, 1996,
to a net loss of $46,000 from net income of $163,000 for the year ended December
31, 1995. Our decrease was primarily attributable to a $46,000 decrease in net
interest income, a $16,000 increase in our provision for loan losses, a $406,000
increase in our noninterest expense offset by a $137,000 increase in our
noninterest income and a $119,000 decrease in our income taxes due to our net
loss on operations.
Net Interest Income. Net interest income is the most significant
component of our income from operations. Net interest income is the difference
between interest we receive on our interest-earning assets primarily loans,
investment and mortgage-backed securities and interest we pay on our
interest-bearing liabilities, primarily deposits. Net interest income depends on
the volume of and rates earned on interest-earning assets and the volume of and
rates paid on interest-bearing liabilities.
30
<PAGE>
The following tables set forth a summary of average balances of assets
and liabilities as well as average yield and cost information. Average balances
are derived from month-end balances, however, we do not believe the use of
month-end balances has caused any material differences in the information
presented. Tax equivalent adjustments have been made to yields on securities
that are exempt from federal income tax, assuming a tax rate of 34%.
<TABLE>
<CAPTION>
Nine Months Ended September 30,(4) At September 30,
------------------------------------------------------------- -----------------------
1997 1996 1997
------------------------------ ----------------------------- -----------------------
Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Yield/Cost
------- -------- ---------- ------- -------- ---------- ------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1)........................$11,220 $ 678 8.06% $9,564 $ 598 8.32% $11,768 8.18%
Mortgage-backed securities.................. 8,146 399 6.53 8,119 371 6.09 8,526 6.47
Investment securities....................... 7,129 306 6.11 5,116 219 6.20 6,468 5.96
Other interest-earning assets............... 6,611 272 5.43 5,300 219 5.51 7,736 5.68
------ ----- ------ ----- ------
Total interest-earning assets................. 33,106 1,655 6.75 28,099 1,407 6.76 34,498 6.78
----- -----
Non-interest-earning assets................... 2,866 1,700 3,312
------ ------ ------
Total assets..................................$35,972 $29,799 $37,810
====== ====== ======
Interest-bearing liabilities:
Interest-bearing demand deposits............$ 2,786 48 2.30% $ 2,383 44 2.46% $ 2,893 2.33%
Certificates of deposit..................... 19,268 811 5.61 14,548 595 5.44 20,399 5.67
Savings deposits............................ 8,940 200 2.98 8,594 192 2.98 9,284 3.00
------ ----- ------ ----- -------
Total interest-bearing liabilities............ 30,994 1,059 4.56 25,525 831 4.34 32,576 4.61
------ ----- ------ ----- ------
Non-interest-bearing liabilities............ 1,488 627 1,754
------ ------ ------
Total liabilities......................... 32,482 26,152 34,330
------ ------ ------
Retained earnings............................. 3,490 3,647 3,480
------ ------ ------
Total liabilities and retained earnings.......$35,972 $29,799 $37,810
====== ====== ======
Net interest income........................... $ 596 $ 576
===== =====
Interest rate spread (2)...................... 2.19% 2.42% 2.17%
Net yield on interest-earning assets (3)...... 2.40% 2.73% 2.40%
Ratio of average interest-earning assets to
average interest-bearing liabilities........ 106.81% 110.08% 105.90%
</TABLE>
- ---------------------------------
(1) Average balances include non-accrual loans.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
(4) Annualized (where appropriate) for purposes of comparability with fiscal
year data.
31
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------------
1996 1995
---------------------------------- -------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1).............................. $9,845 $ 834 8.47% $ 9,130 $ 776 8.50%
Mortgage-backed securities........................ 7,992 537 6.72 8,048 530 6.59
Investment securities............................. 5,151 301 6.33 4,692 288 6.67
Other interest-earning assets..................... 5,564 294 5.28 6,180 347 5.61
------ ----- ------ -----
Total interest-earning assets....................... 28,552 1,966 6.97 28,050 1,941 7.01
----- -----
Non-interest-earning assets......................... 1,939 981
------ ------
Total assets........................................ $30,491 $29,031
====== ======
Interest-bearing liabilities:
Interest-bearing demand deposits.................. $ 2,402 59 2.46% $ 2,566 64 2.49
Certificates of deposit........................... 15,062 820 5.44 13,499 730 5.41
Savings deposits.................................. 8,645 258 2.98 9,053 273 3.02
------ ----- -------- -----
Total interest-bearing liabilities.................. 26,109 1,137 4.35 25,118 1,067 4.25
------ ----- ------ -----
Non-interest-bearing liabilities.................. 746 457
------ ------
Total liabilities............................... 26,855 25,575
------ ------
Retained earnings................................... 3,636 3,456
------ ------
Total liabilities and retained earnings............. $30,491 $29,031
====== ======
Net interest income............................... $ 829 $ 874
===== =====
Interest rate spread (2).......................... 2.62% 2.76%
Net yield on interest-earning assets (3)............ 2.90% 3.12%
Ratio of average interest-earning assets to
average interest-bearing liabilities................ 109.36% 111.67%
</TABLE>
- ---------------------------------
(1) Average balances include non-accrual loans.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
32
<PAGE>
The table below sets forth information regarding changes in our
interest income and interest expense for the periods indicated. For each
category of our interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in volume multiplied by old rate), and (ii) changes in rate (changes in
rate multiplied by old volume). Increases and decreases due to both rate and
volume, which cannot be segregated, have been allocated proportionately to the
change due to volume and the change due to rate.
<TABLE>
<CAPTION>
Nine Months Ended September 30, Year Ended December 31,
------------------------------- -----------------------
1997 vs. 1996 1996 vs. 1995
------------------------------- -----------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------- -----------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable ............. $103 $(22) $ 81 $ 61 $ (3) $ 58
Mortgage-backed securities ... 1 27 28 (4) 11 7
Investment securities ........ 86 1 87 30 (17) 13
Other interest-earning assets 54 (1) 53 (35) (18) (53)
---- ---- ---- ---- ---- ----
Total interest-earning assets 244 5 249 52 (27) 25
---- ---- ---- ---- ---- ----
Interest expense:
Interest-bearing
demand deposits ........... $ 7 $ (3) $ 4 $ (4) $ (1) $ (5)
Certificates of deposit ..... 193 24 217 85 5 90
Savings deposits ............ 8 -- 8 (12) (3) (15)
---- ---- ---- ---- ---- ----
Total interest-bearing ..... 208 21 229 69 1 70
---- ---- ---- ---- ---- ----
liabilities
Change in net interest income . $ 36 $(16) $ 20 $(17) $(28) $(45)
==== ==== ==== ==== ==== ====
</TABLE>
33
<PAGE>
Our net interest income increased $19,000, or 3.3%, to $595,000 for the
nine months ended September 30, 1997, as compared to the same period in 1996.
The increase was primarily due to the growth in our average interest-earning
assets to $33.1 million in 1997 from $28.1 million in 1996, partially offset by
a decline in our interest rate spread of 2.19% in 1997 compared to 2.42% in
1996. The decline in our interest rate spread had a corresponding impact on our
net yield on interest-earning assets which declined 33 basis points to 2.40% in
1997.
The increase in our average interest-earning assets of $5.0 million
reflects increases of $1.7 million in our balance of average loans, $2.0 million
in the average investment securities and $1.3 million in average other
interest-earning assets, which was funded by our increase in average
interest-bearing deposits. The increase in our average interest-bearing deposits
reflects the opening of our Shaler Township office in September 1996.
Our interest rate spread and net yield on interest-earning assets
declined for the nine months ended at September 30, 1997 compared to the same
period in 1996 primarily due to an increase in our average cost of funds to
4.56% in 1997 compared to 4.34% in 1996. The increase in our average cost of
funds was affected by a $4.7 million increase in our balance of average
certificates of deposits, primarily from the new deposits obtained from the
opening of our Shaler Township office and the movement from our lower paying
savings accounts to our higher yielding certificate accounts.
Our net interest income decreased $45,000, or 5.1%, to $829,000 for
1996 from $874,000 for the same period in 1995. The decrease was primarily due
to the increase in our average interest-bearing liabilities to $26.1 million in
1996 from $25.1 million in 1995 coupled with a decline in our interest rate
spread to 2.62% in 1996 from 2.76% in 1995. The decline in interest rate spread
had a corresponding impact on our net yield on interest-earning assets which
declined 22 basis points to 2.90% in 1996.
The increase in our average interest-bearing liabilities of $1.0
million reflects an increase of $1.6 million in our average certificates of
deposit offset by a $164,000 decrease in our interest-bearing demand deposits
and a $408,000 decrease in our savings deposit accounts. The increase in our
average deposits reflects the opening of our Shaler Township office in September
1996 and the movement of our lower paying savings accounts to our higher
yielding certificate accounts.
Provision for Loan Losses. Our provision for loan losses increased
$30,000 to $39,000 for the nine months ended September 30, 1997 compared with
$9,000 for the same period in 1996. Our provision for loan losses increased
$16,000 to $37,000 in 1996 from $21,000 in 1995. Our provision for loan losses
increased for the nine months ended September 30, 1997 in part as a result of a
larger loan portfolio and a $923,000 increase from December 31, 1996 in our home
equity loan portfolio. Home equity loans are generally considered to involve a
higher inherent degree of credit risk than one-to four-family residential
mortgage loans. At September 30, 1997, most of our loan portfolio consisted of
loans made to borrowers and collateralized by properties located in our Shaler
Township, Lawrenceville, and surrounding areas of Allegheny County, Pennsylvania
market area (our "primary market area"). As a result of this concentration, a
downturn in the economy of our primary market area could increase the risk of
loss associated with our loan portfolio. See "Risk Factors - Dependence on Local
Economy; Business of Stanton Federal Savings Bank - Market Area".
Historically, we have emphasized our loss experience over other factors
in establishing the provision for loan losses. We review the allowance for loan
losses in relation to (i) our past loan loss experience, (ii) known and inherent
risks in our portfolio, (iii) adverse situations that may affect the borrower's
ability to repay, (iv) the estimated value of any underlying collateral, and (v)
current economic conditions. Because of the increased coverage of the allowances
for loan losses to total loans, management believes the allowance
34
<PAGE>
for loan losses is at a level that is considered to be adequate to provide for
estimated losses; however, there can be no assurance that further additions will
not be made to the allowance and that such losses will not exceed the estimated
amount.
Noninterest Income. Our noninterest income decreased $89,000 for the
nine months ended September 30, 1997, compared to the same period in 1996 and
increased $137,000 in 1996 compared to 1995. For the nine months ended September
30, 1997, we had no sales from our available for sale portfolio. In 1996, we
recognized $124,000 of gains from the sales of FHLMC common stock. However,
since the opening of our Shaler Township office in September 1996, our service
fees increased due to a higher fee structure and a larger deposit base. Our
other income increased in 1997 due to our safe deposit rental income of $3,000.
Our Shaler Township office offers safe deposit rental to our depositors. In
order to promote this service, we offered free rental to our depositors for the
remainder of 1996. Our Lawrenceville office does not offer this service. In
fiscal 1996, our other income increased $7,800 from fiscal 1995. Of this
increase, our rental income increased $2,900, since we recognized a full year's
rental on our property at 920 Saxonburg Boulevard. Due to the increase in our
mortgage loans, our appraisal fee and credit report income increased $1,200. Due
to our larger depositor base, our miscellaneous income increased $1,400.
Noninterest Expense. Our noninterest expense increased by $202,000, to
$940,000 for the nine months ended September 30, 1997, compared to $738,000 for
the same period in 1996. The increase was the result of our operating a larger
organization including the opening of our Shaler Township office in September
1996. Of the increase, $147,000 was in compensation and employee benefits,
$102,000 in expenses associated with the Shaler Township office, $53,000 in data
processing and $78,000 in other operating expenses. For the nine months ended
September 30, 1997, we also began a directors consultation and retirement plan
and recognized $56,000 of expense to implement this plan, which is included in
other operating expenses. Our increase in noninterest expenses was partially
offset by a $180,000 decrease in federal insurance premiums. The decrease in
federal insurance premiums was the result of the recapitalization of the Savings
Association Insurance Fund ("SAIF"). The SAIF insurance assessment rate paid by
us before the recapitalization was 23(cent) per $100 of deposits and decreased
to 6.5(cent) per $100 of deposits after the recapitalization of SAIF.
Our noninterest expense increased by $406,000, to $1,033,000 in 1996
compared to $627,000 in 1995. Of the increase, $160,000 relates to our special
assessment required to recapitalize the SAIF. On September 30, 1996, the
President signed into law legislation which included the recapitalization of
SAIF by a one time charge to SAIF-insured institutions of 65.7 basis points per
$100 of insurable deposits as of March 31, 1995. Future deposit expense is
expected to be lower as a result of this one-time charge. The legislation also
provides that we will pay, in addition to the normal deposit insurance premium
as a member of the SAIF, an annual amount equal to approximately 6.5 basis
points of outstanding SAIF deposits toward the retirement of the Financing
Corporation Bonds ("Fico Bonds") issued in the 1980's to assist in the recovery
of the savings and loan industry. Members of the Bank Insurance Fund ("BIF"), by
contrast, will pay, in addition to their normal deposit insurance premium,
approximately 1.3 basis points toward the retirement of the Fico Bonds.
Beginning no later than January 1, 2000, the rate paid to retire the Fico Bonds
will be equal for members of the BIF and the SAIF. The Act also provides for the
merging of the BIF and the SAIF by January 1, 1999 provided there are no
financial institutions still chartered as savings associations at that time.
Should the insurance funds be merged before January 1, 2000, the rate paid by
all members of this new fund to retire the Fico Bonds would be equal.
In fiscal 1996, due to the hiring and training of five full time
equivalent personnel in connection with the opening of our Shaler Township
office in September 1996, our noninterest expenses increased significantly from
fiscal 1995. Because of these changes, our compensation and employee benefits
expenses
35
<PAGE>
increased $119,000. Our occupancy and equipment expenses increased $62,000 due
to our additional operating expenses incurred in operating an additional office.
Our data processing costs increased $11,000 due to our new office and the number
of new accounts we opened, particularly our demand deposit accounts. Our other
operating expenses increased $52,000 due to miscellaneous items pertaining to
our new office start up.
As a result of the conversion and in addition to the effects of opening
a new office, our noninterest expense might also increase because of the costs
associated with our employee stock ownership plan, restricted stock ownership
plan, if implemented, and the costs of becoming a public company.
A great deal of information has been disseminated about the global
computer year 2000. Many computer programs that can only distinguish the final
two digits of the year entered (a common programming practice in earlier years)
are expected to read entries for the year 2000 as the year 1900 and compute
payment, interest or delinquency based on the wrong date or are expected to be
unable to compute payment, interest or delinquency. Rapid and accurate data
processing is essential to our operation. Data processing is also essential to
most other financial institutions and many other companies. All of our material
data processing that could be affected by this problem is provided by a third
party service bureau. Our service bureau has advised us that it expects to
resolve this potential problem before the year 2000. However, if our service
bureau is unable to resolve this potential problem in time, we would likely
experience significant data processing delays, mistakes or failures. These
delays, mistakes or failures could have a significant adverse impact on our
financial condition and our results of operation.
Income Tax Expense (Benefit). Our income tax benefit increased
$107,000, to $146,000 for the nine months ended September 30, 1997 from $39,000
for the same period in 1996. The increase resulted from our larger net loss on
operations. Our income taxes decreased $120,000 to a net tax benefit of $40,000
in 1996 from an income tax expense of $79,000 in 1995, due to a net loss on
operations in 1996.
Liquidity and Capital Resources
We are required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which varies from time to time depending
upon economic conditions and deposit flows, is based upon a percentage of our
deposits and short-term borrowings. The required minimum ratio currently is 5.0%
and our regulatory liquidity ratio was 24.88%, 19.83%, and 30.07% at September
30, 1997, December 31, 1996, and December 31, 1995, respectively.
Our primary sources of funds are deposits, repayment of loans and
mortgage-backed securities, maturities of investments, interest-bearing deposits
with other banks and funds provided from operations. While scheduled repayments
of loans and mortgage-backed securities and maturities of investment securities
are predicable sources of funds, deposit flows, and loan prepayments are greatly
influenced by the general level of interest rates, economic conditions and
competition. We use our liquid resources principally to fund loan commitments,
maturing certificates of deposit and demand deposit withdrawals, to invest in
other interest-earning assets, and to meet operating expenses.
Net cash used for our operating activities (the cash effects of
transactions that enter into our determination of net income -- e.g., non-cash
items, amortization and depreciation, provision for loan losses) for the nine
months ended September 30, 1997 was $140,000 compared to net cash provided by
our operating activities of $225,000 for the nine months ended September 30,
1996. Net cash used for our operating activities for fiscal 1996 was $32,000
compared to net cash provided by our operations of $180,000 for fiscal 1995.
36
<PAGE>
Net cash used for our investing activities (i.e., cash disbursed,
primarily for investment securities and mortgage-backed securities portfolios
and our loan portfolio) totaled $2.8 million for the nine months ended September
30, 1997, an increase of $1.7 million from September 30, 1996. The increase was
primarily attributable to our use of $564,000 in cash to fund the increase in
loan originations and the use of $2.0 million in cash to fund the net increase
in investment and mortgage-backed securities. Net cash used for our investing
activities for the year ended December 31, 1996 totalled $3.1 million, an
increase of $3.3 million from December 31, 1995. The increase was primarily
attributable to our use of $2.2 million in cash to fund the purchase of
certificates of deposits, $546,000 in cash to fund the increase in loan
originations and $448,000 to construct and equip the Shaler Township office.
Net cash provided by our financing activities (i.e., cash receipts from
our net increases in deposits) totaled $4.5 million and $3.9 million, for the
nine months ended September 30, 1997 and the year ended December 31, 1996,
respectively.
BUSINESS OF SFSB HOLDING COMPANY
SFSB is not an operating company and has not engaged in any significant
business to date. It was formed in October 1997 as a Pennsylvania-chartered
corporation to be the holding company for Stanton Federal Savings Bank. The
holding company structure and retention of proceeds will facilitate: (i)
diversification into non-banking activities, (ii) acquisitions of other
financial institutions, such as savings institutions, (iii) expansion within
existing and into new market areas and (iv) stock repurchases without adverse
tax consequences. There are no present plans regarding diversification,
acquisitions, expansion, or repurchases.
Since SFSB will own only one savings bank, it generally will not be
restricted in the types of business activities in which it may engage, provided
that we retain a specified amount of our assets in housing-related investments.
SFSB initially will not conduct any active business and does not intend to
employ any persons other than officers but will utilize our support staff from
time to time.
The office of the SFSB is located at 900 Saxonburg Boulevard,
Pittsburgh, Pennsylvania. The telephone number is (412) 487-4200.
BUSINESS OF STANTON FEDERAL SAVINGS BANK
The principal sources of funds for our activities are deposits and
payments on loans and investments. Our deposits totalled $33.9 million at
September 30, 1997. Funds are used primarily for the origination of fixed rate
loans secured by mortgages on one- to four-family residences and home equity
loans which are located in our market area and the purchase of investment
securities. Such loans totalled $10.5 million, or 89%, of our total loans
receivable portfolio at September 30, 1997. Our principal source of revenue is
interest received on loans and investments and our principal expense is interest
paid on deposits.
Market Area
Our main office is located in Shaler Township, a suburb of Pittsburgh
and our branch office is located in the Lawrenceville section of Pittsburgh. The
communities of Shaler Township, Lawrenceville and surrounding areas of Allegheny
County are considered to be our primary market area. Most of our deposits and
lending activity is generated from individuals who live in these areas. We are a
community- oriented institution and have served the local Allegheny County
community since 1890. Until September 1996, we operated from our Lawrenceville
office where there was limited growth opportunities for loan
37
<PAGE>
originations and deposit needs. We moved to our new office in Shaler Township in
September 1996. Since the opening of the Shaler Township office, we have
generated a significant amount of deposits.
The population in our primary market area has decreased by 15% over the
fifteen year period ending 1995 and is projected to decrease through the year
2000. In addition, over the last five years, total deposits at financial
institutions (i.e., banks and thrifts) in the communities of Shaler Township and
Lawrenceville have decreased 3% and 4.35%, respectively. However, compared to
other financial institutions in our Lawrenceville market area, at June 30, 1996
(the latest available data from the Federal Deposit Insurance Corporation), we
had a 6.54% market share. In addition, over the last four years, we had an 8.20%
increase in deposits. Since we did not open our Shaler Township office until
September 1996, we have no current available data comparing us to other
financial institutions in this market area. We believe that the economic
vitality of these communities depend on the economic vitality of the city of
Pittsburgh, which has been relatively stable in recent years.
The Greater Pittsburgh area has been in the process of restructuring
over the past decade. Once centered on heavy manufacturing, primarily steel, its
economic base is now more diverse, including technology, health and business
services. Several "Fortune 500" industrial firms are headquartered in the
Greater Pittsburgh area, including USX Corporation. The largest employers in
Pittsburgh, by the number of local employees, include the United States
Government, the Commonwealth of Pennsylvania, USAir, University of Pittsburgh
Medical Center, and the University of Pittsburgh. Seven colleges and
universities are located in the greater Pittsburgh area.
Lending Activities
Most of our loans are mortgage loans which are secured by one- to
four-family residences. We also make home equity, multi-family, commercial real
estate and consumer loans. Loans originated by us historically have rates of
interest which are fixed for the term of the loan ("fixed rate"). In the future,
we anticipate that any home equity lines of credit and business loans will be
offered at adjustable rates of interest.
The following table sets forth information concerning the types of
loans held by us.
<TABLE>
<CAPTION>
At September 30, At December 31,
--------------------------- -----------------------------------------------------
1997 1996 1995
--------------------------- ---------------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of Loans:
Real Estate Loans:
One- to four-family ........................ $ 7,554 64.19% $ 7,539 68.88% $6,623 68.63%
Home equity................................. 2,929 24.89 2,017 18.43 1,460 15.13
Multi-family................................ 33 .28 69 .63 81 .84
Commercial.................................. 789 6.70 921 8.41 1,087 11.27
Consumer Loans:
Share loans................................. 348 2.96 329 3.01 364 3.77
Other....................................... 115 .98 70 .64 35 .36
------- ------ ------- ------ ------ ------
Total loans............................. 11,768 100.00% 10,945 100.00% 9,650 100.00%
------ ====== ------ ====== ------ ======
Less:
Deferred loan origination fees and costs.... 5 14 31
Allowance for loan losses .................. 105 66 40
------- -------- ------
Total loans, net......................... $11,658 $10,865 $9,579
====== ====== =====
</TABLE>
38
<PAGE>
The following table sets forth the estimated maturity of our loan
portfolio at September 30, 1997. All of our loans have fixed rates of interest.
The table does not include the effects of possible prepayments or scheduled
repayments. Prepayments and scheduled principal repayments of loans totaled $1.6
million at September 30, 1997. All mortgage loans are shown as maturing based on
the date of the last payment required by the loan agreement.
<TABLE>
<CAPTION>
One- to four-
Family
Real Estate Home Multi-
Mortgage Equity Family Commercial Consumer Total
-------- ------ ------ ---------- -------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Amounts due:
Within 1 year............ $ 147 $ 4 $ - $ 4 $352 $ 507
Over 1 to 3 years........ 10 201 33 - 40 284
Over 3 to 5 years........ 399 793 - 136 62 1,390
Over 5 to 10 years....... 932 1,228 - 38 9 2,207
Over 10 to 20 years...... 1,982 703 - 611 - 3,296
Over 20 years............ 4,084 - - - - 4,084
----- ----- --- ---- ---- ------
Total amount due......... $7,554 $2,929 $ 33 $789 $463 $11,768
===== ===== === === === ======
</TABLE>
One- to Four-Family Residential Loans. Our primary lending activity
consists of the origination of one- to four-family fixed rate residential
mortgage loans secured by property located in our primary market area. We
generally originate one- to four-family fixed rate residential mortgage loans in
amounts up to 97% of the lesser of the appraised value or purchase price, with
private mortgage insurance required on loans with a loan-to-value ratio in
excess of 80%. The maximum loan-to-value ratio on mortgage loans secured by
non-owner occupied properties generally is limited to 70%. We retain all of our
mortgage loans and originate these loans with maturities of up to 30 years.
Mortgage loans originated and held by us generally include due-on-sale
clauses. This gives us the right to deem the loan immediately due and payable in
the event the borrower transfers ownership of the property securing the mortgage
loan without our consent.
Home Equity Loans, Second Mortgages and Other Loans. We originate home
equity loans and second mortgage loans which are secured by one to four-family
residences. We originate these loans on one- to four-family residences with
fixed rate terms of up to 15 years. The loans are generally subject to a 80%
combined loan-to-value limitation, including any other outstanding mortgages or
liens. We anticipate offering adjustable rate home equity lines of credit loans
and commercial business loans within the next year.
Commercial Real Estate Loans. Our commercial real estate loans are
secured by office buildings, retail establishments, and other commercial
properties. These loans generally have not exceeded $400,000 or had terms
greater than 20 years.
Commercial real estate lending entails significant additional risks
compared to residential property lending. These loans typically involve large
loan balances to single borrowers or groups of related borrowers. The repayment
of these loans typically is dependent on the successful operation of the real
estate project securing the loan. These risks can be significantly affected by
supply and demand conditions in the market for office and retail space and may
also be subject to adverse conditions in the economy.
39
<PAGE>
Loan Approval Authority and Underwriting. We establish various lending
limits for our officers and maintain a loan committee consisting of the
President, the Secretary and two outside board members. Ms. Mallen, our
President, and Mr. Gallagher, our Senior Vice President have loan authority to
approve home equity loans up to $75,000 and unsecured consumer loans up to
$10,000. The loan committee ratifies all residential mortgage loans and all
other real estate and consumer loans.
Upon receipt of a completed loan application from a prospective
borrower, a credit report is ordered. Income and certain other information is
verified. If necessary, additional financial information may be requested. An
appraisal or other estimate of value of the real estate intended to be used as
security for the proposed loan is obtained. Appraisals are processed by
independent fee appraisers.
Title insurance is generally required on all real estate mortgage
loans. We do not require title insurance on home equity loans and second
mortgages, but we obtain a property report from Select Business Services, a
division of the Credit Bureau, which indicates whether there are any liens or
other encumbrances against the property. Borrowers also must obtain fire and
casualty insurance. Flood insurance is also required on loans secured by
property that is located in a flood zone.
Loan Commitments. Written commitments are given to prospective
borrowers on all approved real estate loans. Generally, the commitment requires
acceptance within 10 days of the date of issuance. At September 30, 1997,
commitments to cover originations of mortgage loans totalled $460,000. We
believe that virtually all of our commitments will be funded.
Loans to One Borrower. The maximum amount of loans which we may make to
any one borrower may not exceed the greater of $500,000 or 15% of our unimpaired
capital and unimpaired surplus. We may lend an additional 10% of our unimpaired
capital and unimpaired surplus if the loan is fully secured by readily
marketable collateral. Our maximum loan-to-one borrower limit has been $450,000.
At September 30, 1997, the aggregate loans outstanding of our five largest
borrowers have outstanding balances of between $145,000 and $381,000. These
loans are performing loans.
Nonperforming and Problem Assets
Loan Delinquencies. When a mortgage loan becomes 20 days past due, a
notice of nonpayment is sent to the borrower. If such payment is not received by
month end, an additional notice of nonpayment is sent to the borrower. After 60
days, if payment is still delinquent, a notice of right to cure default is sent
to the borrower giving 30 additional days to bring the loan current before
foreclosure is commenced. If the loan continues in a delinquent status for 90
days past due and no repayment plan is in effect, foreclosure proceedings will
be initiated. The customer will be notified when foreclosure is commenced.
Loans are reviewed on a monthly basis and are placed on a non-accrual
status when the loan becomes more than 90 days delinquent or when, in our
opinion, the collection of additional interest is doubtful. Interest accrued and
unpaid at the time a loan is placed on nonaccrual status is charged against
interest income. Subsequent interest payments, if any, are either applied to the
outstanding principal balance or recorded as interest income, depending on the
assessment of the ultimate collectibility of the loan.
Nonperforming Assets. The following table sets forth information
regarding nonaccrual loans and real estate owned, as of the dates indicated. We
have no loans categorized as troubled debt restructurings within the meaning of
SFAS 15 and no impaired loans within the meaning of SFAS 114, as amended by SFAS
118. Interest income that would have been recorded on loans accounted for on a
nonaccrual basis under the original terms of such loans was approximately $9,200
for the nine months ended September 30, 1997.
40
<PAGE>
<TABLE>
<CAPTION>
At September 30, At December 31,
---------------- -----------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Real estate loans:
One- to four-family residential real estate............. $ 49 $ 85 $ 80
Commercial real estate.................................. 4 - -
Consumer.................................................. 9 - -
---- ---- ----
Total non-accrual loans................................... 62 85 80
---- ---- ----
Accruing loans which are contractually past
due 90 days or more:
Real estate loans:
One- to four-family residential real estate............. 152 141 44
Commercial real estate.................................. - 4 4
Home equity............................................. 7 - -
Consumer.................................................. 2 2 5
---- ---- ----
Total accrual loans....................................... 161 147 53
---- ---- ----
Total non-performing loans................................ $223 $232 $133
==== ==== ====
Real estate owned......................................... $ - $ - $ 22
==== ==== ====
Total non-performing assets............................... $223 $232 $155
==== ==== ====
Total non-performing loans to total loans................. 1.89% 2.12% 1.38%
==== ==== ====
Total non-performing loans to total assets................ .59% .70% .45%
==== ==== ====
Total non-performing assets to total assets............... .59% .70% .53%
==== ==== ====
</TABLE>
Classified Assets. OTS regulations provide for a classification system
for problem assets of savings associations which covers all problem assets.
Under this classification system, problem assets of savings institutions such as
ours are classified as "substandard," "doubtful," or "loss." An asset is
considered substandard if it is inadequately protected by the current net worth
and paying capacity of the borrower or of 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 may be designated "special
mention" because of potential weaknesses that do not currently warrant
classification in one of the aforementioned categories.
When a savings association classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which 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 association classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. A savings association's determination as to the classification
of its assets and the amount of its valuation allowances is subject to review by
the OTS, which may order the establishment of additional general or specific
loss allowances. A portion of general loss allowances established to cover
possible losses related to assets classified as substandard or doubtful may be
included in determining a savings
41
<PAGE>
association's regulatory capital. Specific valuation allowances for loan losses
generally do not qualify as regulatory capital.
At September 30, 1997, we had no loans classified as doubtful or loss
and had $223,000 of loans classified as substandard. These substandard loans are
classified as nonperforming loans. See "-- Nonperforming and Problem Assets."
Allowances for Loan Losses. A provision for loan losses is charged to
operations based on management's evaluation of the losses that may be incurred
in our loan portfolio. The evaluation, including a review of all loans on which
full collectibility of interest and principal may not be reasonably assured,
considers: (i) our past loan loss experience, (ii) known and inherent risks in
our portfolio, (iii) adverse situations that may affect the borrower's ability
to repay, (iv) the estimated value of any underlying collateral, and (v) current
economic conditions.
We monitor our allowance for loan losses and make additions to the
allowance as economic conditions dictate. Although we maintain our allowance for
loan losses at a level that we consider adequate for the inherent risk of loss
in our loan portfolio, future losses could exceed estimated amounts and
additional provisions for loan losses could be required. In addition, our
determination of the amount of the allowance for loan losses is subject to
review by the OTS, as part of its examination process. After a review of the
information available, the OTS might require the establishment of an additional
allowance. Any increase in the loan loss allowance required by the OTS would
have a negative impact on our earnings.
The following table illustrates the allocation of the allowance for
loan losses for each category of loan. The allocation of the allowance to each
category is not necessarily indicative of future loss in any particular category
and does not restrict our use of the allowance to absorb losses in other loan
categories.
<TABLE>
<CAPTION>
At September 30, At December 31,
---------------------------------- ---------------------------------------------------------------------
1997 1996 1995
---------------------------------- ------------------------------------ -------------------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One-to four-family $ 100 89.08% $ 63 87.31% $ 37 83.76%
Multi-family 1 .28 1 .63 1 .84
Commercial 3 6.70 2 8.41 2 11.27
Consumer 1 3.94 - 3.65 - 4.13
----- ------ ----- ------ ------ ------
Total $ 105 100.00% $ 66 100.00% $ 40 100.00%
====== ====== ===== ====== ====== ======
</TABLE>
42
<PAGE>
The following table sets forth information with respect to our
allowance for loan losses at the dates and for the periods indicated:
<TABLE>
<CAPTION>
For the Nine
Months Ended For the Years Ended
September 30, December 31,
-------------------- ----------------------
1997 1996 1996 1995
-------- -------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Total loans outstanding ................ $ 11,768 $ 9,905 $ 10,945 $ 9,650
======== ======== ======== ========
Average loans outstanding .............. $ 11,220 $ 9,606 $ 9,845 $ 9,130
======== ======== ======== ========
Allowance balance at beginning of period $ 66 $ 40 $ 40 $ 34
Provision:
Real estate .......................... 39 9 37 16
Consumer ............................. -- -- -- 5
Charge-offs:
Real estate .......................... -- (10) (10) (10)
Consumer ............................. -- (1) (1) (5)
Recoveries:
Real estate .......................... -- -- -- --
Consumer ............................. -- -- -- --
-------- -------- -------- --------
Allowance balance at end of period ..... $ 105 $ 38 $ 66 $ 40
======== ======== ======== ========
Allowance for loan losses as a percent
of total loans outstanding ........... 0.89% 0.39 % 0.60 % 0.41 %
Net loans charged off as a percent
of average loans outstanding ......... -- (.11)% (.11)% (.16)%
</TABLE>
Investment Activities
Investment Securities. We are required under federal regulations to
maintain a minimum amount of liquid assets which may be invested in specified
short-term securities and certain other investments. See "Regulation -- Savings
Institution Regulation -- Federal Home Loan Bank System" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources." The level of liquid assets varies depending
upon several factors, including: (i) the yields on investment alternatives, (ii)
our judgment as to the attractiveness of the yields then available in relation
to other opportunities, (iii) expectation of future yield levels, and (iv) our
projections as to the short-term demand for funds to be used in loan origination
and other activities. We classify our investment securities as "available for
sale" or "held to maturity" in accordance with SFAS No. 115. At September 30,
1997, our investment portfolio policy allowed investments in instruments such
as: (i) U.S. Treasury obligations, (ii) U.S. federal agency or federally
sponsored agency obligations, (iii) local municipal obligations, (iv)
mortgage-backed securities, (v) banker's acceptances, (vi) certificates of
deposit, (vii) federal funds, including FHLB overnight and term deposits, and
(viii) investment grade corporate bonds, commercial paper and mortgage
derivative products. See "-- Mortgage-backed Securities." The board of directors
may authorize additional investments.
43
<PAGE>
Mortgage-backed Securities. To supplement lending activities, we have
invested in residential mortgage-backed securities. Mortgage-backed securities
can serve as collateral for borrowings and, through repayments, as a source of
liquidity. Mortgage-backed securities represent a participation interest in a
pool of single-family or other type of mortgages. Principal and interest
payments are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interests in the form of securities, to investors such as us. The
quasi-governmental agencies guarantee the payment of principal and interest to
investors and include the Federal Home Loan Mortgage Corporation ("FHLMC"),
Government National Mortgage Association ("GNMA"), and Federal National Mortgage
Association ("FNMA.")
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed rate or adjustable
rate mortgage loans. Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through certificates. The interest
rate risk characteristics of the underlying pool of mortgages (i.e., fixed rate
or adjustable rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages. Expected maturities will differ from contractual
maturities due to scheduled repayments and because borrowers may have the right
to call or prepay obligations with or without prepayment penalties.
Mortgage-backed securities issued by FHLMC and GNMA make up a majority of the
pass-through certificates market.
Securities Portfolio. The following table sets forth the carrying
(i.e., amortized cost) value of our investment securities held to maturity, at
the dates indicated. Our securities portfolio classified as available for sale
is carried at market value.
At
September 30, At December 31,
------------- -----------------
1997 1996 1995
---------- ------- -------
(In thousands)
Securities held to maturity:
U.S. Government agencies ......................... $ 3,257 $ 2,678 $ 2,385
Obligations of state and political subdivisions .. 1,803 1,606 1,604
Mortgage-backed securities ....................... 8,472 7,457 7,991
------- ------- -------
Total securities held to maturity ............. 13,532 11,741 11,980
------- ------- -------
Securities available for sale:
Mutual funds ..................................... 784 756 247
FHLMC common stock ............................... 624 489 495
Mortgage-backed securities ....................... 53 53 90
------- ------- -------
Total securities available for sale ........... 1,461 1,298 832
------- ------- -------
Total investment and mortgage-backed securities $14,993 $13,039 $12,812
======= ======= =======
44
<PAGE>
The following table sets forth information regarding the scheduled
maturities, carrying values, approximate fair values, and weighted average
yields for our investment and mortgage-backed securities portfolio at September
30, 1997 by contractual maturity. The following table does not take into
consideration the effects of scheduled repayments or the effects of possible
prepayments.
<TABLE>
<CAPTION>
As of September 30, 1997
---------------------------------------------------------------------------------------------------------
Total Investment
More than More than Securities and
One Year or Less One to Five Years Five to Ten Years More than Ten Years Mortgage-Backed Securities
---------------- ----------------- ----------------- ------------------- --------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
------------- ------- -------- -------- -------- ------- --------- ------- -------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government agencies... $ 250 4.80% $1,700 6.06% $450 7.27% $ 856 7.70% $ 3,256 6.56% $ 3,248
Obligations of state and
political subdivisions... 300 5.12 418 8.82 311 9.21 774 6.24 1,803 7.17 1,870
Mutual funds............... 784 5.35 -- -- -- -- -- -- 784 5.35 784
FHLMC common stock......... 624 .11 -- -- -- -- -- -- 624 0.11 624
Mortgage-backed securities. 454 5.28 2,496 5.94 66 8.57 5,510 6.78 8,526 6.47 8,638
----- ---- ----- ---- --- ---- ----- ---- ------ ---- ------
Total.................... $2,412 3.90% $4,614 6.25% $827 8.10% $7,140 6.83% $14,993 6.25% $15,164
===== ==== ===== ==== === ==== ===== ==== ====== ==== ======
</TABLE>
45
<PAGE>
Sources of Funds
Deposits are our major external source of funds for lending and other
investment purposes. Funds are also derived from the receipt of payments on
loans and prepayment of loans and maturities of investment securities and
mortgage-backed securities and, to a much lesser extent, borrowings and
operations. Scheduled loan principal repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general interest rates and market conditions.
Deposits. Consumer and commercial deposits are attracted principally
from within our primary market area through the offering of a selection of
deposit instruments including regular savings accounts, money market accounts,
and term certificate accounts. IRA accounts are also offered. Deposit account
terms vary according to the minimum balance required, the time period the funds
must remain on deposit, and the interest rate.
The interest rates paid by us on deposits are set weekly at the
direction of our senior management. Interest rates are determined based on our
liquidity requirements, interest rates paid by our competitors, and our growth
goals and applicable regulatory restrictions and requirements.
At September 30, 1997, we had no brokered deposits and our deposits
were represented by the following types of savings programs.
<TABLE>
<CAPTION>
Minimum Balance as of Percentage
Interest Balance September 30, of Total
Category Term Rate(1) Amount 1997 Deposits
- -------- ---- ------- ------ ---- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-interest Accounts -- -- $1,308 3.90%
NOW Accounts 2.00% $ 300 1,603 4.69
Regular Savings None 3.00 100 9,284 27.40
Money Market Accounts 2.75 2,500 1,290 3.81
Certificates of Deposit:
Fixed Term, Fixed Rate 3 months 4.25 500 128 .38
Fixed Term, Fixed Rate 6 months 5.00 500 2,644 7.80
Fixed Term, Fixed Rate 12 months 5.87 500 9,630 28.42
Fixed Term, Fixed Rate 30 months 6.02 500 4,157 12.27
Fixed Term, Fixed Rate 60 months 5.87 500 1,382 4.08
Fixed Term, Fixed Rate 72 - 120 months 5.87 500 929 2.74
Jumbo Certificates (2) 100,000 1,529 4.51
------ ------
Total $33,884 100.00%
====== ======
</TABLE>
- ---------------
(1) Interest rate offerings as of September 30, 1997.
(2) Negotiated rates and terms
46
<PAGE>
The following table sets forth our time deposits classified by interest
rate at the dates indicated.
At
September 30, As of December 31,
------------- ----------------------------
1997 1996 1995
------------- ----------- -----------
(In thousands)
Interest Rate
4.00% or less $ 32 $ 181 $ 131
4.01 - 6.00% 16,353 13,037 10,188
6.01 - 8.00% 3,986 4,091 4,205
8.01 - 10.00 28 26 24
------- ------- -------
Total $20,399 $17,335 $14,548
======= ======= =======
The following table sets forth the amount and maturities of our time
deposits at September 30, 1997.
<TABLE>
<CAPTION>
Amount Due
-------------------------------------------------------------------------------------------------------
After
September 30, September 30, September 30, September 30,
Interest Rate 1998 1999 2000 2000 Total
- ------------- ----------------- ------------------- ------------------ ------------------- ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
2.00 - 4.00% $ 4 $ 28 $ - $ - $ 32
4.01 - 6.00% 13,509 1,133 659 1,052 16,353
6.01 - 8.00% 2,673 525 538 250 3,986
8.01 - 10.00% - - - 28 28
------- ------ ------ ------ -------
Total $16,186 $1,686 $1,197 $1,330 $20,399
====== ===== ===== ===== ======
</TABLE>
The following table indicates the amount of our certificates of deposit
of $100,000 or more by time remaining until maturity as of September 30, 1997.
Certificates
Maturity Period of Deposits
--------------- -----------
(In thousands)
Within three months $ 306
Three through six months 721
Six through twelve months 502
Over twelve months -
-------
$1,529
======
Borrowings. Advances (borrowing) may be obtained from the FHLB of
Pittsburgh to supplement our supply of lendable funds. Advances from the FHLB of
Pittsburgh are typically secured by a pledge of our stock in the FHLB of
Pittsburgh, a portion of our first mortgage loans and other assets. Each FHLB
credit program has its own interest rate, which may be fixed or adjustable, and
range of maturities. We may borrow up to $16.2 million from the FHLB of
Pittsburgh. If the need arises, we may also access the Federal Reserve Bank
discount window to supplement our supply of lendable funds and to meet deposit
withdrawal requirements. At September 30, 1997, we had no borrowings from the
FHLB of Pittsburgh.
47
<PAGE>
Competition
Competition for deposits comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions,
finance companies, and multi-state regional banks in our market areas.
Competition for funds also includes a number of insurance products sold by local
agents and investment products such as mutual funds and other securities sold by
local and regional brokers. Loan competition varies depending upon market
conditions and comes from commercial banks, thrift institutions, credit unions
and mortgage bankers, most of whom have far greater resources than we have.
Properties
We operate from our main office and one branch office.
Net Book Value
Year at
Location Owned Acquired September 30, 1997
- -------- ------------ -------- ------------------
900 Saxonburg Boulevard Owned 1996 $1,082,078
Pittsburgh, Pennsylvania 15223
5200 Butler Street Owned 1958 $ 200,097
Pittsburgh, Pennsylvania 15201
In addition, we own property at 920 Saxonburg Boulevard which consists
of a single family dwelling that we rent for $650 per month. Upon termination of
our lease, we plan to use this property as a paved parking area for our
customers and employees. At September 30, 1997, the net book value of the
property was $65,000. On November 14, 1997, we purchased property at 922
Saxonburg Boulevard for $66,000. This property was acquired for possible future
business needs. However, temporarily, this property is being leased as
residential real estate and is included in "premises and equipment" on the
balance sheet of the financial statements of Stanton Federal Savings Bank. See
"Financial Statements of Stanton Federal Savings Bank."
Personnel
At September 30, 1997 we had 12 full-time and three part-time
employees. None of our employees are represented by a collective bargaining
group. We believe that our relationship with our employees is good.
Legal Proceedings
We are, from time to time, a party to legal proceedings arising in the
ordinary course of our business, including legal proceedings to enforce our
rights against borrowers. We are not currently a party to any legal proceedings
which are expected to have a material adverse effect on our financial
statements.
48
<PAGE>
REGULATION
Set forth below is a brief description of certain laws which relate to
us. The description is not complete and is qualified in its entirety by
references to applicable laws and regulation.
Holding Company Regulation
General. SFSB will be required to register and file reports with the
OTS and will be subject to regulation and examination by the OTS. In addition,
the OTS will have enforcement authority over SFSB and any non-savings
institution subsidiaries. This will permit the OTS to restrict or prohibit
activities that it determines to be a serious risk to us. This regulation is
intended primarily for the protection of our depositors and not for the benefit
of you, as stockholders of SFSB.
QTL Test. Since SFSB will only own one savings institution, it will be
able to diversify its operations into activities not related to banking, but
only so long as we satisfy the QTL test. If SFSB controls more than one savings
institution, it would lose the ability to diversify its operations into
non-banking related activities, unless such other savings institutions each also
qualify as a QTL or were acquired in a supervised acquisition. See "-- Savings
Institution Regulation -- Qualified Thrift Lender Test."
Restrictions on Acquisitions. SFSB must obtain approval from the OTS
before acquiring control of any other SAIF-insured savings institution. No
person may acquire control of a federally insured savings institution without
providing at least 60 days written notice to the OTS and giving the OTS an
opportunity to disapprove the proposed acquisition.
Savings Institution Regulation
General. As a federally chartered, SAIF-insured savings institution, we
are subject to extensive regulation by the OTS and the FDIC. Our lending
activities and other investments must comply with various federal and state
statutory and regulatory requirements. We are also subject to certain reserve
requirements promulgated by the Board of Governors of the Federal Reserve System
("Federal Reserve System").
The OTS, in conjunction with the FDIC, regularly examines us and
prepares reports for the consideration of our board of directors on any
deficiencies that the OTS finds in our operations. Our relationship with our
depositors and borrowers is also regulated to a great extent by federal and
state law, especially in such matters as the ownership of savings accounts and
the form and content of our mortgage documents.
We must file reports with the OTS and the FDIC concerning our
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other financial institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in regulations, whether by the OTS, the FDIC or any other
government agency, could have a material adverse impact on our operations.
Insurance of Deposit Accounts. The FDIC is authorized to establish
separate annual assessment rates for deposit insurance for members of the BIF
and the SAIF. The FDIC may increase assessment rates for either fund if
necessary to restore the fund's ratio of reserves to insured deposits to its
target
49
<PAGE>
level within a reasonable time and may decrease such assessment rates if such
target level has been met. The FDIC has established a risk-based assessment
system for both SAIF and BIF members. Under this system, assessments are set
within a range, based on the risk the institution poses to its deposit insurance
fund. This risk level is determined based on the institution's capital level and
the FDIC's level of supervisory concern about the institution.
Because a significant portion of the assessments paid into the SAIF by
savings institutions were used to pay the cost of prior savings institution
failures, the reserves of the SAIF were below the level required by law. The BIF
had, however, met its required reserve level during the third calendar quarter
of 1995. As a result, deposit insurance premiums for deposits insured by the BIF
were substantially less than premiums for deposits such as ours which are
insured by the SAIF. Legislation to capitalize the SAIF and to eliminate the
significant premium disparity between the BIF and the SAIF became effective
September 30, 1996. The recapitalization plan provided for a special assessment
equal to $.657 per $100 of SAIF deposits held at September 30, 1995, in order to
increase SAIF reserves to the level required by law. Certain BIF institutions
holding SAIF-insured deposits were required to pay a lower special assessment.
Based on our deposits at September 30, 1995, we paid a pre-tax special
assessment of $161,000.
The recapitalization plan also provides that the cost of prior failures
which were funded through the issuance of Fico Bonds (bonds issued to fund the
cost of savings institution failures in prior years) will be shared by members
of both the SAIF and the BIF. This will increase BIF assessments for healthy
banks to approximately $.013 per $100 of deposits in 1997. SAIF assessments for
healthy savings institutions in 1997 will be approximately $.064 per $100 in
deposits and may be reduced, but not below the level set for healthy BIF
institutions.
The FDIC has lowered the rates on assessments paid to the SAIF and
widened the spread of those rates. The FDIC's action established a base
assessment schedule for the SAIF with rates ranging from 4 to 31 basis points,
and an adjusted assessment schedule that reduces these rates by 4 basis points.
As a result, the effective SAIF rates range from 0 to 27 basis points as of
October 1, 1996. In addition, the FDIC's final rule prescribed a special interim
schedule of rates ranging from 18 to 27 basis points for SAIF-member savings
institutions for the last quarter of calendar 1996, to reflect the assessments
paid to the Financing Corp. (Fico Bonds). Finally, the FDIC's action established
a procedure for making limited adjustments to the base assessment rates by
rulemaking without notice and comment, for both the SAIF and the BIF.
The recapitalization plan also provides for the merger of the SAIF and
BIF effective January 1, 1999, assuming there are no savings institutions under
federal law. Under separate proposed legislation, Congress is considering the
elimination of the federal thrift charter and elimination of the separate
federal regulation of thrifts. As a result, we might have to convert to a
different financial institution charter and be regulated under federal law as a
bank, including being subject to the more restrictive activity limitations
imposed on national banks. We cannot predict the impact of our conversion to, or
regulation as, a bank until the legislation requiring such change is enacted.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) core capital equal to at least 3% of total
adjusted assets, and (3) risk-based capital equal to 8% of total risk-weighted
assets. Our capital ratios are set forth under "Historical and Pro Forma Capital
Compliance."
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), less certain mortgage servicing rights and
less certain investments. Core capital is defined as common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
minority
50
<PAGE>
interests in the equity accounts of consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits of mutual savings associations and
qualifying supervisory goodwill, less nonqualifying intangible assets, certain
mortgage servicing rights and certain investments.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock, and the portion of the allowance for loan
losses not designated for specific loan losses. The portion of the allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is
limited to 100% of core capital. A savings association must calculate its
risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans, and other assets.
The risk-based capital standards of the OTS generally require savings
institutions with more than a "normal" level of interest rate risk to maintain
additional total capital. An institution's interest rate risk will be measured
in terms of the sensitivity of its "net portfolio value" to changes in interest
rates. Net portfolio value is defined, generally, as the present value of
expected cash inflows from existing assets and off-balance sheet contracts less
the present value of expected cash outflows from existing liabilities. A savings
institution will be considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. An institution with a greater than normal interest rate
risk will be required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest rate risk
component") equal to one-half the difference between the institution's measured
interest rate risk and the normal level of interest rate risk, multiplied by the
economic value of its total assets.
The OTS calculates the sensitivity of an institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the OTS. The amount of the interest rate risk component, if any, to
be deducted from an institution's total capital will be based on the
institution's Thrift Financial Report filed two quarters earlier. Savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are generally exempt from filing the interest rate risk schedule
with their Thrift Financial Reports. However, the OTS may require any exempt
institution that it determines may have a high level of interest rate risk
exposure to file such schedule on a quarterly basis and may be subject to an
additional capital requirement based upon its level of interest rate risk as
compared to its peers. However, due to our net size and risk-based capital
level, we are exempt from the interest rate risk component.
Dividend and Other Capital Distribution Limitations. OTS regulations
require us to give the OTS 30 days advance notice of any proposed declaration of
dividends to SFSB, and the OTS has the authority under its supervisory powers to
prohibit the payment of dividends by us to SFSB. In addition, we may not declare
or pay a cash dividend on our capital stock if the effect would be to reduce our
regulatory capital below the amount required for the liquidation account to be
established at the time of the conversion. See "The Conversion -- Effects of
Conversion to Stock Form on Depositors and Borrowers of Stanton Federal Savings
Bank -- Liquidation Account."
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to stockholders of another institution in
a cash-out merger, and other distributions charged against capital. The rule
establishes three
51
<PAGE>
tiers of institutions based primarily on an institution's capital level. An
institution that exceeds all fully phased-in capital requirements before and
after a proposed capital distribution ("Tier 1 institution") and has not been
advised by the OTS that it is in need of more than the normal supervision can,
after prior notice but without the approval of the OTS, make capital
distributions during a calendar year equal to the greater of (i) 100% of its net
income to date during the calendar year plus the amount that would reduce by
one-half its "surplus capital ratio" (the excess capital over its fully
phased-in capital requirements) at the beginning of the calendar year, or (ii)
75% of its net income over the most recent four quarter period. Any additional
capital distributions require prior regulatory notice. As of September 30, 1997,
we qualified as a Tier 1 institution.
In the event our capital falls below our fully phased-in requirement or
the OTS notifies us that we are in need of more than normal supervision, we
would become a Tier 2 or Tier 3 institution and as a result, our ability to make
capital distributions could be restricted. Tier 2 institutions, which are
institutions that before and after the proposed distribution meet their current
minimum capital requirements, may only make capital distributions of up to 75%
of net income over the most recent four quarter period. Tier 3 institutions,
which are institutions that do not meet current minimum capital requirements and
propose to make any capital distribution, and Tier 2 institutions that propose
to make a capital distribution in excess of the noted safe harbor level, must
obtain OTS approval prior to making such distribution. In addition, the OTS
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice. The OTS has
proposed rules relaxing certain approval and notice requirements for
well-capitalized institutions.
A savings institution is prohibited from making a capital distribution
if, after making the distribution, the savings institution would be
undercapitalized (i.e., not meet any one of its minimum regulatory capital
requirements). Further, a savings institution cannot distribute regulatory
capital that is needed for its liquidation account.
Qualified Thrift Lender Test. Savings institutions must meet a
qualified thrift lender ("QTL") test. If we maintain an appropriate level of
qualified thrift investments ("QTIs") (primarily residential mortgages and
related investments, including certain mortgage-related securities) and
otherwise qualify as a QTL, we will continue to enjoy full borrowing privileges
from the FHLB of Pittsburgh. The required percentage of QTIs is 65% of portfolio
assets (defined as all assets minus intangible assets, property used by the
institution in conducting its business and liquid assets equal to 10% of total
assets). Certain assets are subject to a percentage limitation of 20% of
portfolio assets. In addition, savings institutions may include shares of stock
of the FHLBs, FNMA, and FHLMC as QTIs. Compliance with the QTL test is
determined on a monthly basis in nine out of every 12 months. As of September
30, 1997, we were in compliance with our QTL requirement with approximately
69.22% of our assets invested in QTIs.
Transactions With Affiliates. Generally, restrictions on transactions
with affiliates require that transactions between a savings institution or its
subsidiaries and its affiliates be on terms as favorable to the savings
institution as comparable transactions with non-affiliates. In addition, certain
of these transactions are restricted to an aggregate percentage of the savings
institution's capital. Collateral in specified amounts must usually be provided
by affiliates in order to receive loans from the savings institution. Our
affiliates include SFSB and any company which would be under common control with
us. In addition, a savings institution may not extend credit to any affiliate
engaged in activities not permissible for a bank holding company or acquire the
securities of any affiliate that is not a subsidiary. The OTS has the discretion
to treat subsidiaries of savings institution as affiliates on a case-by-case
basis.
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Liquidity Requirements. All savings institutions are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At September 30, 1997, our required liquid
asset ratio was 5.0% and our actual ratio was 25.40%. Monetary penalties may be
imposed upon institutions for violations of liquidity requirements.
Federal Home Loan Savings Bank System. We are a member of the FHLB of
Pittsburgh, which is one of 12 regional FHLBs. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from funds deposited by savings institutions and proceeds derived from the sale
of consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board of
directors of the FHLB.
As a member, we are required to purchase and maintain stock in the FHLB
of Pittsburgh in an amount equal to at least 1% of our aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At September 30, 1997, we had $171,000 in FHLB
stock, at cost, which was in compliance with this requirement. The FHLB imposes
various limitations on advances such as limiting the amount of certain types of
real estate related collateral to 30% of a member's capital and limiting total
advances to a member.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future.
Federal Reserve System. The Federal Reserve System requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve System may be used
to satisfy the liquidity requirements that are imposed by the OTS. At September
30, 1997, our reserve met the minimum level required by the Federal Reserve
System.
Savings institutions have authority to borrow from the Federal Reserve
System "discount window," but Federal Reserve System policy generally requires
savings institutions to exhaust all other sources before borrowing from the
Federal Reserve System. We had no borrowings from the Federal Reserve System at
September 30, 1997.
TAXATION
Federal Taxation
We are subject to the provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), in the same general manner as other corporations.
However, prior to August 1996, savings institutions such as us, which met
certain definitional tests and other conditions prescribed by the Code could
benefit from certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. The amount of the
bad debt deduction that a qualifying savings institution could claim with
respect to additions to its reserve for bad debts was subject to certain
limitations. We reviewed the most favorable way to calculate the deduction
attributable to an addition to our bad debt reserve on an annual basis.
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In August 1996, the Code was revised to equalize the taxation of
thrifts and banks. Thrifts, such as us, no longer have a choice between the
percentage of taxable income method and the experience method in determining
additions to bad debt reserves. Thrifts with $500 million of assets or less may
still use the experience method, which is generally available to small banks
currently. Larger thrifts must use the specific charge off method regarding bad
debts. Any reserve amounts added after 1987 will be taxed over a six year period
beginning in 1996; however, bad debt reserves set aside through 1987 are
generally not taxed. A savings institution may delay recapturing into income its
post-1987 bad debt reserves for an additional two years if it meets a
residential-lending test. At September 30, 1997, we had excess bad debt reserves
of approximately $85,000 which will create a tax recapture of approximately
$29,000.
Under the percentage of taxable income method, the bad debt deduction
attributable to "qualifying real property loans" could not exceed the greater of
(i) the amount deductible under the experience method, or (ii) the amount which,
when added to the bad debt deduction for non-qualifying loans, equaled the
amount by which 12% of the sum of the total deposits and the advance payments by
borrowers for taxes and insurance at the end of the taxable year exceeded the
sum of the surplus, undivided profits and reserves at the beginning of the
taxable year. The amount of the bad debt deduction attributable to qualifying
real property loans computed using the percentage of taxable income method was
permitted only to the extent that the institution's reserve for losses on
qualifying real property loans at the close of the taxable year did not exceed
6% of such loans outstanding at such time.
Under the experience method, the bad debt deduction may be based on (i)
a six-year moving average of actual losses on qualifying and non-qualifying
loans, or (ii) a fill-up to the institution's base year reserve amount, which is
the tax bad debt reserve determined as of December 31, 1987.
The percentage of specially computed taxable income that was used to
compute a savings institution's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8%. The
percentage of taxable income bad debt deduction thus computed was reduced by the
amount permitted as a deduction for non-qualifying loans under the experience
method. The availability of the percentage of taxable income method permitted
qualifying savings institutions to be taxed at a lower effective federal income
tax rate than that applicable to corporations (generally, approximately 31.3%,
assuming the maximum percentage bad debt deduction).
If a savings institution's qualifying assets (generally, loans secured
by residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
institution may not deduct any addition to a bad debt reserve and generally must
include existing reserves in income over a four year period, which is
immediately accruable for financial reporting purposes. As of September 30,
1997, at least 60% of our assets were qualifying assets as defined in the Code.
No assurance can be given that we will meet the 60% test for subsequent taxable
years.
Earnings appropriated to our bad debt reserve and claimed as a tax
deduction including our supplemental reserves for losses will not be available
for the payment of cash dividends or for distribution to you, our stockholders
(including distributions made on dissolution or liquidation), unless we include
the amount in income, along with the amount deemed necessary to pay the
resulting federal income tax. As of September 30, 1997, we had approximately
$975,000 of accumulated earnings, representing our base year tax reserve, for
which federal income taxes have not been provided. If such amount is used for
any purpose other than bad debt losses, including a dividend distribution or a
distribution in liquidation, it will be subject to federal income tax at the
then current rate.
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Generally, for taxable years beginning after 1986, the Code also
requires most corporations, including savings institutions, to utilize the
accrual method of accounting for tax purposes. Further, for taxable years ending
after 1986, the Code disallows 100% of a savings institution's interest expense
deemed allocated to certain tax-exempt obligations acquired after August 7,
1986. Interest expense allocable to (i) tax-exempt obligations acquired after
August 7, 1986 which are not subject to this rule, and (ii) tax-exempt
obligations issued after 1982 but before August 8, 1986, are subject to the rule
which applied prior to the Code disallowing the deductibility of 20% of the
interest expense.
The Code imposes a tax ("AMT") on alternative minimum taxable income
("AMTI") at a rate of 20%. AMTI is increased by certain preference items,
including 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. Only 90% of AMTI can be offset by net operating loss
carryovers of which we currently have none. AMTI is also adjusted by determining
the tax treatment of certain items in a manner that negates the deferral of
income resulting from the regular tax treatment of those items. Thus, our AMTI
is increased by an amount equal to 75% of the amount by which our adjusted
current earnings exceeds our AMTI (determined without regard to this adjustment
and prior to reduction for net operating losses). In addition, for taxable years
beginning after December 31, 1986 and before January 1, 1996, an environmental
tax of 0.12% of the excess of AMTI (with certain modifications) over $2 million
is imposed on corporations, including us, whether or not an AMT is paid. Under
pending legislation, the AMT rate would be reduced to zero for taxable years
beginning after December 31, 1994, but this rate reduction would be suspended
for taxable years beginning in 1995 and 1996 and the suspended amounts would be
refunded as tax credits in subsequent years.
SFSB may exclude from its income 100% of dividends received from us as
a member of the same affiliated group of corporations. A 70% dividends received
deduction generally applies with respect to dividends received from corporations
that are not members of such affiliated group, except that an 80% dividends
received deduction applies if SFSB owns more than 20% of the stock of a
corporation paying a dividend. The above exclusion amounts, with the exception
of the affiliated group figure, were reduced in years in which we availed
ourself of the percentage of taxable income bad debt deduction method.
Our federal income tax returns have not been audited by the IRS since
our fiscal year ended December 31, 1991. As a result of the audit, there was no
material effect to our financial statements.
State Taxation
We are subject to the Mutual Thrift Institutions Tax of the
Commonwealth of Pennsylvania based on our financial net income determined in
accordance with generally accepted accounting principles with certain
adjustments. Our tax rate under the Mutual Thrift Institutions Tax is 11.5%.
Interest on state and federal obligations is excluded from net income. An
allocable portion of net interest expense incurred to carry the obligations is
disallowed as a deduction. Three year carryforwards of losses are allowed.
Upon consummation of the conversion, we will also be subject to the
Corporate Net Income Tax and the Capital Stock Tax of the Commonwealth of
Pennsylvania.
MANAGEMENT OF SFSB HOLDING COMPANY
SFSB board of directors consists of the same individuals who serve as
directors of Stanton Federal Savings Bank. The articles of incorporation and
bylaws of SFSB require that directors be divided into four classes, as nearly
equal in number as possible. Each class of directors serves for a four-year
period, with approximately one-fourth of the directors elected each year. The
officers of SFSB will be elected
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annually by the board and serve at the board's discretion. Such officers are
also officers of Stanton Federal Savings Bank. See "Management of Stanton
Federal Savings Bank."
MANAGEMENT OF STANTON FEDERAL SAVINGS BANK
Directors and Executive Officers
Our board of directors is composed of five members each of whom serves
for a term of three years, with approximately one-third of the directors elected
each year. Our proposed stock articles of incorporation and bylaws for SFSB
require that directors be divided into four classes, as nearly equal in number
as possible. Our officers are elected annually by our board and serve at the
board's discretion.
The following table sets forth information with respect to our
directors and executive officers, all of whom will continue to serve in the same
capacities after the conversion.
<TABLE>
<CAPTION>
Age at Current
September 30, Director Term
Directors 1997 Position Since Expires(1)
- --------- ------------------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Timothy R. Maier 38 Chairman of the Board 1986 1998
and Director
Barbara J. Mallen 55 President and Director 1972 2000
Joseph E. Gallagher 45 Senior Vice President, 1989 2000
Secretary, and Director
Jerome L. Kowalewski 53 Treasurer and Director 1993 1999
Mary Lois Loftus 68 Director 1995 1998
</TABLE>
- -------------------
(1) The terms for directors of SFSB are the same as those of Stanton
Federal Savings Bank except that Ms. Mallen's term will expire in 2001.
The business experience for the past five years of each of the
directors and executive officers is as follows:
Timothy R. Maier has been a member of the board since 1986 and Chairman
since 1996. Mr. Maier is in the insurance business and owns two insurance
agencies in the local Pittsburgh area. Mr. Maier is the Past President and the
President Elect of the Rotary Club of Lawrenceville and a member of the
Lawrenceville Business Association and the Lawrenceville Development
Corporation.
Barbara J. Mallen has been employed by us since 1960 and has been the
President since 1988 and a member of the board since 1972. Ms. Mallen is a
member of the Lawrenceville Business Association and past Director of the
Western Pennsylvania League of Savings Associations.
Joseph E. Gallagher has been employed by us since 1979 and has been
Senior Vice President and Secretary since 1996 and a member of the board since
1989.
Jerome L. Kowalewski has been a member of the board since 1993 and
Treasurer since 1996. Mr. Kowalewski is the majority shareholder and President
of Al & Bob's Auto Parts Inc., in the local Pittsburgh area. Mr. Kowalewski is a
member of the Lawrenceville Business Association.
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Mary Lois Loftus has been a member of the board since 1995. Ms. Loftus
is a retired real estate agent and the former owner of Loftus Florist in the
local Pittsburgh area.
Meetings and Committees of the Board of Directors
The board of directors conducts its business through meetings of the
board and through activities of its committees. During the year ended December
31, 1996, the board of directors held 12 regular meetings. No director attended
fewer than 75% of the total meetings of the board of directors and committees on
which such director served during the year ended December 31, 1996.
Director Compensation
Each director is paid quarterly and total aggregate fees paid to the
directors for the year ended December 31, 1996 were $30,000. Beginning July 1,
1997, directors' compensation was increased to a monthly fee of $650.
Directors Consultant and Retirement Plan ("DRP"). Our DRP provides
retirement benefits to our directors based upon the number of years of service
to our board, which must be at least 5 years. If a director agrees to become a
consulting director to our board upon retirement, he or she will receive a
monthly payment of between $450 to $650 for 5 years or until death, whichever is
earlier. Benefits under our DRP will begin upon a director's retirement. In the
event there is a change in control, all directors will be presumed to have not
less than 5 years of service and each director will receive a lump sum payment
equal to the present value of future benefits payable.
Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by our chief executive officer at
December 31, 1996. No employee earned in excess of $100,000 for the year ended
December 31, 1996.
Annual Compensation
----------------------------------------
Other Annual
Compensation
Name and Principal Position Salary Bonus(1) (2)
- --------------------------- ------ -------- -------------
Barbara J. Mallen, President $78,420 $25,300 $6,000
- --------------------
(1) Included in this bonus amount is a special bonus of $15,000, for services
in connection with the construction of our Shaler Township office.
(2) Consists of $6,000 in director fees.
Employment Agreement. We have entered into an employment agreement with
our President, Barbara J. Mallen. Ms. Mallen's base salary under the employment
agreement is $96,000. The employment agreement has a term of three years. The
agreement is terminable by us for "just cause" as defined in the agreement. If
we terminate Ms. Mallen without just cause, Ms. Mallen will be entitled to a
continuation of her salary from the date of termination through the remaining
term of the agreement. The employment agreement contains a provision stating
that in the event of the termination of employment in connection with any change
in control of us, Ms. Mallen will be paid a lump sum amount equal to 2.99 times
her five year average annual taxable cash compensation. If such payments had
been made under the agreement
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as of September 30, 1997, such payments would have equaled approximately
$287,000. The aggregate payments that would have been made to Ms. Mallen would
be an expense to us, thereby reducing our net income and our capital by that
amount. The agreement may be renewed annually by our board of directors upon a
determination of satisfactory performance within the board's sole discretion. If
Ms. Mallen shall become disabled during the term of the agreement, she shall
continue to receive payment of 100% of the base salary for a period of 12 months
and 60% of such base salary for the remaining term of such agreement. Such
payments shall be reduced by any other benefit payments made under other
disability programs in effect for our employees.
Supplemental Executive Retirement Plan. We have implemented a
supplemental executive retirement plan ("SERP") for the benefit of our
President, Barbara J. Mallen. The SERP provides that Ms. Mallen may receive the
full income replacement percentage provided under our pension plan (67% of final
average compensation payable at age 62 rather than at age 65), provided she
remains employed until she becomes 58 years old, in the year 2000. In such
event, she will be eligible to receive a supplemental retirement benefit that
will have the effect of reducing the early retirement discount payable under our
pension plan from a reduction of 7% for each year that benefits commence prior
to age 65 to a reduction of approximately 3% per year for retirement prior to
age 62, but after age 58. Upon a termination of employment following a change in
control, Ms. Mallen will be presumed to have attained not less than the minimum
retirement age under the SERP. Payments under the SERP will be accrued for
financial reporting purposes during the period of employment of Ms. Mallen. The
SERP shall be unfunded. All benefits payable under the SERP will be paid from
our current assets. There are no tax consequences to either Ms. Mallen or us
related to the SERP prior to payment of benefits. Upon receipt of payment of
benefits, Ms. Mallen will recognize taxable ordinary income in the amount of
such payments received and we will be entitled to recognize a tax-deductible
compensation expense at that time.
Employee Stock Ownership Plan. We have established an employee stock
ownership plan, the ESOP, for the exclusive benefit of participating employees
of ours, to be implemented upon the completion of the conversion. Participating
employees are employees who have completed one year of service with us or our
subsidiary and have attained the age of 21. An application for a letter of
determination as to the tax-qualified status of the ESOP will be submitted to
the IRS. Although no assurances can be given, we expect that the ESOP will
receive a favorable letter of determination from the IRS.
The ESOP is to be funded by contributions made by us in cash or common
stock. Benefits may be paid either in shares of the common stock or in cash. In
accordance with the Plan, the ESOP may borrow funds with which to acquire up to
8% of the common stock to be issued in the conversion. The ESOP intends to
borrow funds from SFSB. The loan is expected to be for a term of ten years at an
annual interest rate equal to the prime rate as published in The Wall Street
Journal. Presently it is anticipated that the ESOP will purchase up to 8% of the
common stock to be issued in the offering (i.e., $440,000, based on the midpoint
of the EVR). The loan will be secured by the shares purchased and earnings of
ESOP assets. Shares purchased with such loan proceeds will be held in a suspense
account for allocation among participants as the loan is repaid. We anticipate
contributing approximately $44,000 annually (based on a $440,000 purchase) to
the ESOP to meet principal obligations under the ESOP loan, as proposed. It is
anticipated that all such contributions will be tax-deductible. We will also
make additional contributions, as necessary to meet the interest obligations of
the ESOP loan. This loan is expected to be fully repaid in approximately 10
years.
Shares sold above the maximum of the EVR (i.e., more than 632,500
shares) may be sold to the ESOP before satisfying remaining unfilled orders of
Eligible Account Holders to fill the ESOP's subscription or the ESOP may
purchase some or all of the shares covered by its subscription after the
conversion in the open market.
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Contributions to the ESOP and shares released from the suspense account
will be allocated among participants on the basis of total compensation. All
participants must be employed at least 1,000 hours in a plan year, or have
terminated employment following death, disability or retirement, in order to
receive an allocation. Participant accounts under the plan shall become vested
following 5 years of service. Employment prior to the adoption of the ESOP shall
be credited for the purposes of vesting. Vesting will be accelerated upon
retirement, death, disability, our change in control, or termination of the
ESOP. Forfeitures will be reallocated to participants on the same basis as other
contributions in the plan year. Benefits may be payable in the form of a lump
sum upon retirement, death, disability or separation from service. Our
contributions to the ESOP are discretionary and may cause a reduction in other
forms of compensation. Therefore, benefits payable under the ESOP cannot be
estimated.
The board of directors has appointed non-employee directors to the ESOP
Committee to administer the ESOP and to serve as the initial ESOP Trustees. The
board of directors or the ESOP Committee may instruct the ESOP Trustees
regarding investments of funds contributed to the ESOP. The ESOP Trustees must
vote all allocated shares held in the ESOP in accordance with the instructions
of the participating employees. Unallocated shares and allocated shares for
which no timely direction is received will be voted by the ESOP Trustees as
directed by the board of directors or the ESOP Committee, subject to the
Trustees' fiduciary duties.
Pension Plan. We sponsor a tax-qualified defined benefit pension plan
(the "Pension Plan"). All our full-time employees are eligible to participate
after one year of service and attainment of age 21. A qualifying employee
becomes fully vested in the Pension Plan upon completion of six years of
qualifying service. The Pension Plan is intended to comply with the Employee
Retirement Income Security Act of 1974, as amended ("ERISA").
Our Pension Plan provides for monthly payments to each participating
employee at normal retirement age (the later of age 65 or five years after entry
into the plan). Benefits payable at normal retirement are equal to 66.6% of your
average monthly compensation multiplied by your earned benefit percentage. Such
earned benefit percentage equals your years of benefit service divided by the
greater of your maximum years of service until your normal retirement age, or
age 25. Such benefits payable at normal retirement are reduced for participants
completing less than six years of service upon retirement at the normal
retirement age, termination of service prior to the normal retirement age or
commencement of benefits prior to the normal retirement age.
Benefits are paid for the life of the participant following retirement.
The Pension Plan also provides for payments in the event of death. At September
30, 1997, Ms. Mallen had 36 years of credited service under the Pension Plan.
Upon normal retirement at age 65, Ms. Mallen would receive an annual benefit of
$69,000.
Benefits are payable in the form of various annuity alternatives,
including a joint and survivor option. For the Pension Plan year ended September
30, 1997, the highest permissible annual benefit under the Internal Revenue Code
is $125,000. Benefits under the Pension Plan are not subject to offset for
Social Security benefits.
Proposed Future Stock Benefit Plans
Stock Option Plan. Our board of directors intend to adopt a stock
option plan (the Option Plan) following the conversion, subject to approval by
SFSB's stockholders, at a stockholders meeting to be held no sooner than six
months after the conversion. The Option Plan would be in compliance with the OTS
regulations in effect. See "-- Restrictions on Stock Benefit Plans." If the
Option Plan is implemented
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within one year after the conversion, in accordance with OTS regulations, a
number of shares equal to 10% of the aggregate shares of common stock to be
issued in the offering (i.e., 55,000 shares based upon the sale of 550,000
shares at the midpoint of the EVR) would be reserved for issuance by SFSB upon
exercise of stock options to be granted to our officers, directors and employees
from time to time under the Option Plan. The purpose of the Option Plan would be
to provide additional performance and retention incentives to certain officers,
directors and employees by facilitating their purchase of a stock interest in
SFSB. Under the OTS regulations, the Option Plan, would provide that options
awarded would vest over a five year period (i.e., 20% per year), beginning one
year after the date of grant of the option. Options would be granted based upon
several factors, including seniority, job duties and responsibilities, job
performance, our financial performance and a comparison of awards given by other
savings institutions converting from mutual to stock form.
SFSB would receive no monetary consideration for the granting of stock
options under the Option Plan. It would receive the option price for each share
issued to optionees upon the exercise of such options. Shares issued as a result
of the exercise of options will be either authorized but unissued shares,
treasury shares, or shares purchased in the open market by SFSB. The exercise of
options and payment for the shares received would contribute to the equity of
SFSB.
If the Option Plan is implemented more than one year after the
conversion, the Option Plan will comply with OTS regulations and policies that
are applicable at such time.
Restricted Stock Plan. Our board of directors intends to adopt the RSP
following the conversion, the objective of which is to enable us to retain
personnel and directors of experience and ability in key positions of
responsibility. SFSB expects to hold a stockholders' meeting no sooner than six
months after the conversion in order for stockholders to vote to approve the
RSP. If the RSP is implemented within one year after the conversion, in
accordance with applicable OTS regulations, the shares granted under the RSP
will be in the form of restricted stock vesting over a five year period (i.e.,
20% per year) beginning one year after the date of grant of the award.
Compensation expense in the amount of the fair market value of the common stock
granted will be recognized pro rata over the years during which the shares are
payable. Until they have vested, such shares may not be sold, pledged or
otherwise disposed of and are required to be held in escrow. Any shares not so
allocated would be voted by the RSP Trustees. The RSP will be implemented in
accordance with applicable OTS regulations. See "-- Restrictions on Stock
Benefit Plans." Awards would be granted based upon a number of factors,
including seniority, job duties and responsibilities, job performance, our
performance and a comparison of awards given by other institutions converting
from mutual to stock form. The RSP would be managed by a committee of
non-employee directors (the "RSP Trustees"). The RSP Trustees would have the
responsibility to invest all funds contributed by us to the trust created for
the RSP (the "RSP Trust").
We expect to contribute sufficient funds to the RSP so that the RSP
Trust can purchase, in the aggregate, up to 4% of the amount of common stock
that is sold in the conversion. The shares purchased by the RSP would be
authorized but unissued shares, treasury shares or would be purchased in the
open market. In the event the market price of the common stock is greater than
$10.00 per share, our contribution of funds will be increased. Likewise, in the
event the market price is lower than $10.00 per share, our contribution will be
decreased. In recognition of their prior and expected services to us and SFSB,
as the case may be, the officers, other employees and directors responsible for
implementation of the policies adopted by the board of directors and our
profitable operation will, without cost to them, be awarded stock under the RSP.
Based upon the sale of 550,000 shares of common stock in the offering at the
midpoint of the EVR, the RSP Trust is expected to purchase up to 22,000 shares
of common stock. If the RSP is implemented more than one year after the
conversion, the RSP will comply with such OTS regulations and policies that are
applicable at such time.
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Restrictions on Stock Benefit Plans. OTS regulations provide that in
the event stock option or management and/or employee stock benefit plans are
implemented within one year from the date of conversion, such plans must comply
with the following restrictions: (1) the plans must be fully disclosed in the
prospectus, (2) for stock option plans, the total number of shares for which
options may be granted may not exceed 10% of the shares issued in the
conversion, (3) for restricted stock plans, the shares may not exceed 3% of the
shares issued in the conversion (4% for institutions with 10% or greater
tangible capital), (4) the aggregate amount of stock purchased by the ESOP in
the conversion may not exceed 10% (8% for well-capitalized institutions
utilizing a 4% restricted stock plan), (5) no individual employee may receive
more than 25% of the available awards under the option plan or the restricted
stock plans, (6) directors who are not employees may not receive more than 5%
individually or 30% in the aggregate of the awards under any plan, (7) all plans
must be approved by a majority of the total votes eligible to be cast at any
duly called meeting of SFSB's stockholders held no earlier than six months
following the conversion, (8) for stock option plans, the exercise price must be
at least equal to the market price of the stock at the time of grant, (9) for
restricted stock plans, no stock issued in a conversion may be used to fund the
plan, (10) neither stock option awards nor restricted stock awards may vest
earlier than 20% as of one year after the date of stockholder approval and 20%
per year thereafter, and vesting may be accelerated only in the case of
disability or death (or if not inconsistent with applicable OTS regulations in
effect at such time, in the event of a change in control), (11) the proxy
material must clearly state that the OTS in no way endorses or approves of the
plans, and (12) prior to implementing the plans, all plans must be submitted to
the Regional Director of the OTS within five days after stockholder approval
with a certification that the plans approved by the stockholders are the same
plans that were filed with and disclosed in the proxy materials relating to the
meeting at which stockholder approval was received.
RESTRICTIONS ON ACQUISITIONS OF SFSB HOLDING COMPANY
While the board of directors is not aware of any effort that might be
made to obtain control of SFSB after conversion, the board of directors believes
that it is appropriate to include certain provisions as part of SFSB's articles
of incorporation to protect the interests of SFSB and its stockholders from
hostile takeovers ("anti-takeover"provisions) which the board of directors might
conclude are not in the best interests of us or our stockholders. These
provisions may have the effect of discouraging a future takeover attempt which
is not approved by the board of directors but which individual stockholders may
deem to be in their best interests or in which stockholders may receive a
substantial premium for their shares over the current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have an opportunity to do so. Such provisions will also render the removal
of the current board of directors or management of SFSB more difficult.
The following discussion is a general summary of the material
provisions of the articles of incorporation, bylaws, and certain other
regulatory provisions of SFSB, which may be deemed to have such an anti-takeover
effect. The description of these provisions is necessarily general and reference
should be made in each case to the articles of incorporation and bylaws of SFSB
which are filed as exhibits to the registration statement of which this
prospectus is a part. See "Where You Can Find Additional Information" as to how
to obtain a copy of these documents.
Provisions of SFSB Articles of Incorporation and Bylaws
Limitations on Voting Rights. The articles of incorporation of SFSB
provide that for a period of five years from completion of the conversion, in no
event shall any record owner of any outstanding equity security which is
beneficially owned, directly or indirectly, by a person who beneficially owns in
excess of 10% of any class of equity security outstanding (the "Limit") be
entitled or permitted to any vote in respect of the shares held in excess of the
Limit. The number of votes which may be cast by any
61
<PAGE>
record owner who beneficially owned shares in excess of the Limit shall be a
number equal to the total number of votes which a single record owner of all
common stock owned by such person would be entitled to cast, multiplied by a
fraction, the numerator of which is the number of shares of such class or series
which are both beneficially owned by such person and owned of record by such
record owner and the denominator of which is the total number of shares of
common stock beneficially owned by such person owning shares in excess of the
Limit. In addition, for a period of five years from the completion of our
conversion, no person may directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10% of any class of an equity security of
SFSB.
The impact of these provisions on the submission of a proxy on behalf
of a beneficial holder of more than 10% of the common stock is (1) to disregard
for voting purposes and require divestiture of the amount of stock held in
excess of 10% (if within five years of the conversion more than 10% of the
common stock is beneficially owned by a person) and (2) limit the vote on common
stock held by the beneficial owner to 10% or possibly reduce the amount that may
be voted below the 10% level (if more than 10% of the common stock is
beneficially owned by a person more than five years after the conversion).
Unless the grantor of a revocable proxy is an affiliate or an associate of such
a 10% holder or there is an arrangement, agreement or understanding with such a
10% holder, these provisions would not restrict the ability of such a 10% holder
of revocable proxies to exercise revocable proxies for which the 10% holder is
neither a beneficial nor record owner. A person is a beneficial owner of a
security if he has the power to vote or direct the voting of all or part of the
voting rights of the security, or has the power to dispose of or direct the
disposition of the security. The articles of incorporation of SFSB further
provide that this provision limiting voting rights may only be amended upon the
vote of a majority of the outstanding shares of voting stock.
Election of Directors. Certain provisions of SFSB's articles of
incorporation and bylaws will impede changes in majority control of the board of
directors. SFSB's articles of incorporation provide that the board of directors
of SFSB will be divided into four staggered classes, with directors in each
class elected for four-year terms. Thus, it would take three annual elections to
replace a majority of SFSB's board. SFSB's articles of incorporation provide
that the size of the board of directors may be increased or decreased only if
two-thirds of the directors then in office concur in such action. The articles
of incorporation also provide that any vacancy occurring in the board of
directors, including a vacancy created by an increase in the number of
directors, shall be filled for the remainder of the unexpired term by a majority
vote of the directors then in office. Finally, the articles of incorporation and
the bylaws impose certain notice and information requirements in connection with
the nomination by stockholders of candidates for election to the board of
directors or the proposal by stockholders of business to be acted upon at an
annual meeting of stockholders.
The articles of incorporation provide that a director may only be
removed for cause by the affirmative vote of at least a majority of the shares
of SFSB entitled to vote generally in an election of directors cast at a meeting
of stockholders called for that purpose.
Restrictions on Call of Special Meetings. The articles of incorporation
of SFSB provide that a special meeting of stockholders may be called only
pursuant to a resolution adopted by a majority of the board of directors.
Absence of Cumulative Voting. SFSB's articles of incorporation provide
that stockholders may not cumulate their votes in the election of directors.
Authorized Shares. The articles of incorporation authorizes the
issuance of 4,000,000 shares of common stock and 1,000,000 shares of preferred
stock. The shares of common stock and preferred
62
<PAGE>
stock were authorized in an amount greater than that to be issued in the
conversion to provide SFSB's board of directors with as much flexibility as
possible to effect, among other transactions, financings, acquisitions, stock
dividends, stock splits and the exercise of stock options. However, these
additional authorized shares may also be used by the board of directors
consistent with its fiduciary duty to deter future attempts to gain control of
SFSB. The board of directors also has sole authority to determine the terms of
any one or more series of Preferred Stock, including voting rights, conversion
rates, and liquidation preferences. As a result of the ability to fix voting
rights for a series of Preferred Stock, the board has the power, to the extent
consistent with its fiduciary duty, to issue a series of Preferred Stock to
persons friendly to management in order to attempt to block a post-tender offer
merger or other transaction by which a third party seeks control, and thereby
assist management to retain its position.
Procedures for Certain Business Combinations. The articles of
incorporation require the affirmative vote of at least 80% of the outstanding
shares of SFSB entitled to vote in the election of directors in order for SFSB
to engage in or enter into certain "Business Combinations," as defined therein,
with any Principal Shareholder (as defined below) or any affiliates of the
Principal Shareholder, unless the proposed transaction has been approved in
advance by SFSB's board of directors, excluding those who were not directors
prior to the time the Principal Shareholder became the Principal Shareholder.
The term "Principal Shareholder" is defined to include any person and the
affiliates and associates of the person (other than SFSB or its subsidiary) who
beneficially owns, directly or indirectly, 20% or more of the outstanding shares
of voting stock of SFSB. Any amendment to this provision requires the
affirmative vote of at least 80% of the shares of SFSB entitled to vote
generally in an election of directors.
Amendment to Articles of Incorporation and Bylaws. Amendments to SFSB's
articles of incorporation must be approved by SFSB's board of directors and also
by a majority of the outstanding shares of SFSB's voting stock, provided,
however, that approval by at least 80% of the outstanding voting stock is
generally required for certain provisions (i.e., provisions relating to
restrictions on the acquisition and voting of greater than 10% of the common
stock; number, classification, election and removal of directors; amendment of
bylaws; call of special stockholder meetings; director liability; certain
business combinations; power of indemnification; and amendments to provisions
relating to the foregoing in the articles of incorporation).
The bylaws may be amended by a majority vote of the board of directors
or the affirmative vote of the holders of at least 80% of the outstanding shares
of SFSB entitled to vote in the election of directors cast at a meeting called
for that purpose.
Benefit Plans. In addition to the provisions of SFSB's articles of
incorporation and bylaws described above, certain benefit plans of ours adopted
in connection with the conversion contain provisions which also may discourage
hostile takeover attempts which the boards of directors might conclude are not
in the best interests for us or our stockholders. For a description of the
benefit plans and the provisions of such plans relating to changes in control,
see "Management of Stanton Federal Savings Bank -- Proposed Future Stock Benefit
Plans."
Regulatory Restrictions. A federal regulation prohibits any person
prior to the completion of a conversion from transferring, or entering into any
agreement or understanding to transfer, the legal or beneficial ownership of the
subscription rights issued under a plan of conversion or the stock to be issued
upon their exercise. This regulation also prohibits any person prior to the
completion of a conversion from offering, or making an announcement of an offer
or intent to make an offer, to purchase such subscription rights or stock. For
three years following conversion, OTS regulations prohibit any person, without
the prior approval of the OTS, from acquiring or making an offer to acquire more
than 10% of the stock of any converted savings institution if such person is, or
after consummation of such acquisition
63
<PAGE>
would be, the beneficial owner of more than 10% of such stock. In the event that
any person, directly or indirectly, violates this regulation, the securities
beneficially owned by such person in excess of 10% shall not be counted as
shares entitled to vote and shall not be voted by any person or counted as
voting shares in connection with any matter submitted to a vote of stockholders.
Federal regulations require that, prior to obtaining control of an
insured institution, a person, other than a company, must give 60 days notice to
the OTS and have received no OTS objection to such acquisition of control, and a
company must apply for and receive OTS approval of the acquisition. Control,
involves a 25% voting stock test, control in any manner of the election of a
majority of the institution's directors, or a determination by the OTS that the
acquiror has the power to direct, or directly or indirectly to exercise a
controlling influence over, the management or policies of the institution.
Acquisition of more than 10% of an institution's voting stock, if the acquiror
also is subject to any one of either "control factors," constitutes a rebuttable
determination of control under the regulations. The determination of control may
be rebutted by submission to the OTS, prior to the acquisition of stock or the
occurrence of any other circumstances giving rise to such determination, of a
statement setting forth facts and circumstances which would support a finding
that no control relationship will exist and containing certain undertakings. The
regulations provide that persons or companies which acquire beneficial ownership
exceeding 10% or more of any class of a savings association's stock after the
effective date of the regulations must file with the OTS a certification that
the holder is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable.
DESCRIPTION OF CAPITAL STOCK
SFSB is authorized to issue 4,000,000 shares of the common stock, $0.10
par value per share, and 1,000,000 shares of serial preferred stock, no par
value per share. SFSB currently expects to issue up to 727,375 shares of common
stock in the conversion. SFSB does not intend to issue any shares of serial
preferred stock in the conversion, nor are there any present plans to issue such
preferred stock following the conversion. The aggregate par value of the issued
shares will constitute the capital account of SFSB. The balance of the purchase
price will be recorded for accounting purposes as additional paid-in capital.
See "Capitalization." The capital stock of SFSB will represent nonwithdrawable
capital and will not be insured by us, the FDIC, or any other government agency.
Common Stock
Voting Rights. Each share of the common stock will have the same
relative rights and will be identical in all respects with every other share of
the common stock. The holders of the common stock will possess exclusive voting
rights in SFSB, except to the extent that shares of serial preferred stock
issued in the future may have voting rights, if any. Each holder of the common
stock will be entitled to only one vote for each share held of record on all
matters submitted to a vote of holders of the common stock and will not be
permitted to cumulate their votes in the election of SFSB's directors.
Liquidation. In the unlikely event of the complete liquidation or
dissolution of SFSB, the holders of the common stock will be entitled to receive
all assets of SFSB available for distribution in cash or in kind, after payment
or provision for payment of (i) all debts and liabilities of SFSB; (ii) any
accrued dividend claims; and (iii) liquidation preferences of any serial
preferred stock which may be issued in the future.
Restrictions on Acquisition of the Common Stock. See "Certain
Restrictions on Acquisition of SFSB" for a discussion of the limitations on
acquisition of shares of the common stock.
64
<PAGE>
Other Characteristics. Holders of the common stock will not have
preemptive rights with respect to any additional shares of the common stock
which may be issued. Therefore, the board of directors may sell shares of
capital stock of SFSB without first offering such shares to existing
stockholders of SFSB. The common stock is not subject to call for redemption,
and the outstanding shares of common stock when issued and upon receipt by SFSB
of the full purchase price therefor will be fully paid and non-assessable.
Issuance of Additional Shares. Except in the subscription offering, or,
if any, the community offering or public or syndicated public offering and
possibly pursuant to the RSP or Stock Option Plan, the SFSB has no present
plans, proposals, arrangements or understandings to issue additional authorized
shares of the common stock. In the future, the authorized but unissued and
unreserved shares of the common stock will be available for general corporate
purposes, including, but not limited to, possible issuance: (i) as stock
dividends; (ii) in connection with mergers or acquisitions; (iii) under a cash
dividend reinvestment or stock purchase plan; (iv) in a public or private
offering; or (v) under employee benefit plans. See "Risk Factors -- Possible
Dilutive Effect of RSP and Stock Options" and "Pro Forma Data." Normally no
stockholder approval would be required for the issuance of these shares, except
as described herein or as otherwise required to approve a transaction in which
additional authorized shares of the common stock are to be issued.
For additional information, see "Dividends," "Regulation" and
"Taxation" with respect to restrictions on the payment of cash dividends; "The
Conversion -- Restrictions on Sales and Purchases of Shares by Directors and
Officers" relating to certain restrictions on the transferability of shares
purchased by directors and officers; and "Restrictions on Acquisitions of SFSB
Holding Company" for information regarding restrictions on acquiring common
stock of SFSB.
Serial Preferred Stock
None of the 1,000,000 authorized shares of serial preferred stock of
SFSB will be issued in the conversion. After the conversion is completed, the
board of directors of SFSB will be authorized to issue serial preferred stock
and to fix and state voting powers, designations, preferences or other special
rights of such shares and the qualifications, limitations and restrictions
thereof, subject to regulatory approval but without stockholder approval. If and
when issued, the serial preferred stock is likely to rank prior to the common
stock as to dividend rights, liquidation preferences, or both, and may have full
or limited voting rights. The board of directors, without stockholder approval,
can issue serial preferred stock with voting and conversion rights which could
adversely affect the voting power of the holders of the common stock. The board
of directors has no present intention to issue any of the serial preferred
stock.
LEGAL AND TAX MATTERS
The legality of the common stock has been passed upon for us by
Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C. Certain legal matters for
Ryan, Beck & Co., Inc. may be passed upon by Tucker Arensburg, P.C.. The federal
and state income tax consequences of the conversion have been passed upon for us
by Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C.
EXPERTS
The financial statements of Stanton Federal Savings Bank as of and
for the years ended December 31, 1996 and 1995 appearing in this document have
been audited by LaFrance, Walker, Jackley & Saville, independent certified
public accountants, as set forth in their report which appears elsewhere in this
document, and is included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
65
<PAGE>
FinPro has consented to the publication herein of a summary of its
letters to Stanton Federal Savings Bank setting forth its opinion as to the
estimated pro forma market value of us in the converted form and its opinion
setting forth the value of subscription rights and to the use of its name and
statements with respect to it appearing in this document.
REGISTRATION REQUIREMENTS
The common stock of SFSB will be registered pursuant to Section 12(g)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act") prior to
completion of the conversion. SFSB will be subject to the information, proxy
solicitation, insider trading restrictions, tender offer rules, periodic
reporting and other requirements of the SEC under the Exchange Act. SFSB may not
deregister the common stock under the Exchange Act for a period of at least
three years following the conversion.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
SFSB and Stanton Federal Savings Bank are not currently subject to the
informational requirements of the Exchange Act.
SFSB has filed with the SEC a registration statement on Form SB-2 under
the Securities Act of 1933, as amended, with respect to the common stock offered
in this document. As permitted by the rules and regulations of the SEC, this
document does not contain all the information set forth in the registration
statement. Such information can be examined without charge at the public
reference facilities of the SEC located at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of such material can be obtained from the SEC at
prescribed rates. The SEC also maintains an internet address ("Web site") that
contains reports, proxy and information statements and other information
regarding registrants, including the Company, that file electronically with the
SEC. The address for this Web site is "http://www.sec.gov." The statements
contained in this document as to the contents of any contract or other document
filed as an exhibit to the Form SB-2 are, of necessity, brief descriptions and
are not necessarily complete; each such statement is qualified by reference to
such contract or document.
Stanton Federal Savings Bank has filed an Application for conversion
with the OTS with respect to the conversion. Pursuant to the rules and
regulations of the OTS, this document omits certain information contained in
that Application. The Application may be examined at the principal office of the
OTS, 1700 G Street, N.W., Washington, D.C. 20552 and at the Northeast Regional
Office of the OTS, 10 Exchange Place, Jersey City, New Jersey 07302, without
charge.
A copy of the Articles of Incorporation and the Bylaws of SFSB are
available without charge from Stanton Federal Savings Bank.
66
<PAGE>
Stanton Federal Savings Bank
Index to Financial Statements
Page
----
Independent Auditors' Report..............................................F-2
Balance Sheets............................................................F-3
Statement of Income...................................................... 26
Statement of Changes in Retained Earnings.................................F-4
Statement of Cash Flows...................................................F-5
Notes to Financial Statements.............................................F-7
All schedules are omitted because the required information is either not
applicable or is included in the financial statements or related notes.
Separate financial statements for SFSB have not been included since it will not
engage in material transactions until after the conversion. SFSB, which has been
inactive to date, has no significant assets, liabilities, revenues, expenses or
contingent liabilities.
F-1
<PAGE>
LaFrance, Walker, Jackley & Saville
CERTIFIED PUBLIC ACCOUNTANTS
1373 WASHINGTON PIKE
BRIDGEVILLE, PA 15017-2821
SERVICE IN
TELE: (412) 200-5000 PRINCIPAL CITIES OF
FAX: (412) 220-7050 THE UNITED STATES AND
OTHER COUNTRIES
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors
Stanton Federal Savings Bank
We have audited the accompanying balance sheet of Stanton Federal Savings Bank
as of December 31, 1996 and 1995, and the related statements of income, retained
earnings, and cash flows for the years then ended. These financial statements
are the responsibility of the Bank's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the balance sheet of Stanton Federal Savings Bank, as of
December 31, 1996 and 1995, and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
As discussed in the notes to the financial statements, effective January 1,
1995, the Bank changed its method of accounting for the impairment of loans and
the related allowance for loan losses.
/s/LaFrance, Walker, Jackley & Saville
Bridgeville, PA
March 6, 1997, except for the
first paragraph of Note 16
as to which date is September 30, 1997
F-2
<PAGE>
STANTON FEDERAL SAVINGS BANK
BALANCE SHEET
<TABLE>
<CAPTION>
September 30, December 31,
---------------- ----------------------------------
1997 1996 1995
---------------- ---------------- ----------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 1,321,349 $ 770,715 $ 253,452
Interest-bearing overnight deposits with other banks 4,627,998 3,607,995 3,352,197
---------------- ---------------- ----------------
Cash and cash equivalents 5,949,347 4,378,710 3,605,649
---------------- ---------------- ----------------
Certificates of deposits with other banks 2,936,349 2,844,900 2,173,638
Investment securities available for sale 1,408,229 1,244,753 742,243
Investment securities held to maturity (market
value of $5,118,005, $4,268,173 and $4,008,600) 5,059,392 4,283,449 3,988,300
Mortgage-backed securities available for sale 53,197 53,791 89,535
Mortgage-backed securities held to maturity (market
value of $8,584,674, $7,402,651 and
$8,047,081) 8,472,389 7,457,415 7,991,446
Loans receivable (net of allowance for loan losses of
$104,951, $40,951 and $40,013) 11,657,657 10,864,801 9,579,231
Accrued interest receivable 259,615 225,714 213,430
Premises and equipment 1,617,570 1,664,306 752,374
Federal Home Loan Bank stock 171,700 161,800 153,500
Other assets 224,152 117,238 64,736
---------------- ---------------- ----------------
TOTAL ASSETS $ 37,809,597 $ 33,296,877 $ 29,354,082
================ ================ ================
Commitments and contingencies
LIABILITIES
Deposits $ 33,884,171 $ 29,318,964 $ 25,418,128
Advances by borrowers for taxes and insurance 66,531 125,711 131,812
Accrued interest payable and other liabilities 378,782 282,073 179,771
---------------- ---------------- ----------------
TOTAL LIABILITIES 34,329,484 29,726,748 25,729,711
---------------- ---------------- ----------------
RETAINED EARNINGS
Retained earnings-substantially restricted 3,118,707 3,301,992 3,348,263
Net unrealized gain on securities available for sale,
net of taxes 361,406 268,137 276,108
---------------- ---------------- ----------------
TOTAL RETAINED EARNINGS 3,480,113 3,570,129 3,624,371
---------------- ---------------- ----------------
TOTAL LIABILITIES AND
RETAINED EARNINGS $ 37,809,597 $ 33,296,877 $ 29,354,082
================ ================ ================
</TABLE>
See accompanying notes to the financial statements.
F-3
<PAGE>
STANTON FEDERAL SAVINGS BANK
STATEMENT OF RETAINED EARNINGS
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss)
on Securities
Retained Available for
Earnings Sale, Net of Taxes Total
---------------- ---------------- ----------------
<S> <C> <C> <C>
Balance, December 31, 1994 $ 3,185,188 $ 192,746 $ 3,377,934
Net income 163,075 163,075
Net unrealized gain on securities 83,362 83,362
---------------- ---------------- ----------------
Balance, December 31, 1995 3,348,263 276,108 3,624,371
Net loss (46,271) (46,271)
Net unrealized loss on securities (7,971) (7,971)
---------------- ---------------- ----------------
Balance, December 31, 1996 3,301,992 268,137 3,570,129
Net loss (unaudited) (183,285) (183,285)
Net unrealized gain on securities 93,269 93,269
---------------- ---------------- ----------------
Balance, September 30, 1997
(unaudited) $ 3,118,707 $ 361,406 $ 3,480,113
================ ================ ================
</TABLE>
See acompanying notes to the financial statements.
F-4
<PAGE>
STANTON FEDERAL SAVINGS BANK
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30, Year Ended December 31,
--------------------------------- ----------------------------------
1997 1996 1996 1995
---------------- ---------------- ---------------- ----------------
(Unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (183,285) $ 10,324 $ (46,271) $ 163,075
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for loan losses 39,000 9,000 36,500 21,000
Depreciation and amortization 91,125 18,900 58,203 23,357
Net securities gains - (124,468) (124,468) -
Deferred income taxes (50,233) 10,363 789 (3,544)
Decrease (increase) in accrued interest
receivable (33,901) 52,891 (12,284) 38,598
Other, net (2,316) 248,360 55,759 (62,651)
---------------- ---------------- ---------------- ----------------
Net cash provided by (used for)
operating activities (139,610) 225,370 (31,772) 179,835
---------------- ---------------- ---------------- ----------------
INVESTING ACTIVITIES
Decrease (increase) in certificates
of deposits (86,772) (11,069) (668,453) 1,509,044
Investment securities available for sale:
Purchases (24,401) (522,269) (525,018) -
Proceeds from sales - 130,333 130,333 -
Maturities and repayments 2,305 3,278 3,998 3,727
Investment securities held to maturity:
Purchases (2,346,537) - (700,000) (624,856)
Maturities and repayments 1,571,749 269,819 405,240 790,472
Mortgage-backed securities available for sale:
Maturities and repayments 532 36,617 36,795 91,422
Mortgage-backed securities held to
maturity:
Purchases (2,665,318) (1,094,529) (1,094,529) (1,271,781)
Maturities and repayments 1,638,807 1,322,676 1,622,237 978,042
Net increase in loans
receivable (831,856) (268,219) (1,322,070) (775,891)
Purchase of Federal Home Loan
Bank stock (9,900) (8,300) (8,300) (5,200)
Purchase of premises and
equipment, net (44,389) (941,268) (970,135) (522,182)
---------------- ---------------- ---------------- ----------------
Net cash provided by (used for)
investing activities (2,795,780) (1,082,931) (3,089,902) 172,797
---------------- ---------------- ---------------- ----------------
</TABLE>
See accompanying notes to the financial statements.
F-5
<PAGE>
STANTON FEDERAL SAVINGS BANK
STATEMENT OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Nine Months Ended September 30, Year Ended December 31,
--------------------------------- ----------------------------------
1997 1996 1996 1995
---------------- ---------------- ---------------- ----------------
(Unaudited)
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES
Net increase in deposits $ 4,565,207 $ 782,625 $ 3,900,836 $ 995,066
Net decrease in advances by borrowers
for taxes and insurance (59,180) (63,290) (6,101) (22,291)
---------------- ---------------- ---------------- ----------------
Net cash provided by
financing activities 4,506,027 719,335 3,894,735 972,775
---------------- ---------------- ---------------- ----------------
Increase (decrease) in cash and cash
equivalents 1,570,637 (138,226) 773,061 1,325,407
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 4,378,710 3,605,649 3,605,649 2,280,242
---------------- ---------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 5,949,347 $ 3,467,423 $ 4,378,710 $ 3,605,649
================ ================ ================ ================
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid during the year for:
Interest on deposits and
borrowings $ 1,057,984 $ 829,382 $ 1,135,755 $ 1,066,980
Income taxes - 19,389 19,389 75,332
Non-cash items:
Loans transferred to real estate
owned - - - 22,010
</TABLE>
See accompanying notes to the financial statements.
F-6
<PAGE>
STANTON FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(ALL DATA RELATED TO SEPTEMBER 30, 1997 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996 ARE UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Stanton Federal Savings Bank (the "Bank") is a federally
chartered mutual savings bank located in Pittsburgh,
Pennsylvania. The Bank's principal sources of revenue emanate
from its investment, mortgage-backed securities, and mortgage
loan portfolios. The Bank is supervised by the Office of Thrift
Supervision.
Basis of Presentation
---------------------
The accounting policies followed by the Bank and the methods of
applying these principles conform with generally accepted
accounting principles and with general practice within the
banking industry. In preparing the financial statements,
management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses for the
period. Actual results could differ significantly from those
estimates.
The balance sheet as of September 30, 1997 and the related
statement of income, changes in retained earnings and cash flows
for the nine months ended September 30, 1997 and the related
statement of income and cash flows for the nine months ended
September 30, 1996 are unaudited and have been prepared in
accordance with the requirements for a presentation of interim
financial statements and are in accordance with generally
accepted accounting principles. In the opinion of management all
adjustments consisting of normal recurring adjustments that are
necessary for a fair presentation of the periods have been
reflected.
A summary of significant accounting and reporting policies
applied in the presentation of the accompanying financial
statements follows:
Investment Securities Including Mortgage-Backed Securities
----------------------------------------------------------
Debt securities, including mortgage-backed securities, acquired
with the intent and ability to hold to maturity are stated at
cost and adjusted for amortization of premium and accretion of
discount, which are computed using a level yield method and are
recognized as adjustments of interest income. Certain other debt
and equity securities have been classified as available for sale
to serve principally as a source of liquidity. Unrealized holding
gains and losses for available for sale securities are reported
as a separate component of retained earnings, net of tax, until
realized. Realized securities gains and losses are computed using
the specific identification method. Interest and dividends on
investment securities are recognized as income when earned.
Common stock of the Federal Home Loan Bank (the "FHLB")
represents ownership in an institution which is wholly-owned by
other financial institutions. This equity security is accounted
for at cost and reported separately on the accompanying statement
of financial condition.
Loans Receivable
----------------
Loans receivable are stated at their unpaid principal amounts net
of any unearned income. Interest on loans is credited to income
as earned. Interest accrued on loans more than 90 days delinquent
is generally offset by a reserve for uncollected interest and is
not recognized as income.
F-7
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans Receivable (Continued)
The accrual of interest is generally discontinued when the
contractual payment of principal and interest has become 90 days
past due or management has serious doubts about further
collectibility of principal or interest even though the loan is
currently performing. A loan may remain on accrual status if it
is in the process of collection and is either guaranteed or well
secured. When a loan is placed on nonaccrual status unpaid
interest is credited to income. Interest received on nonaccrual
loans is either applied to principal or reported as interest
income, according to management's judgment as to the
collectibility of principal.
Loan Origination Fees
---------------------
Loan origination and commitment fees and certain direct loan
origination costs are being deferred and the net amount amortized
as an adjustment of the related loan's yield. The Bank is
amortizing these amounts over the contractual life of the related
loans using the interest method.
Allowance for Loan Losses
-------------------------
Effective January 1, 1995, the Bank adopted Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan," as amended by Statement No. 118. Under
this Standard, the Bank estimates credit losses on impaired loans
based on the present value of expected cash flows or fair value
of the underlying collateral if the loan repayment is expected to
come from the sale or operation of such collateral. Prior to
1995, the credit losses related to these loans were estimated
based on undiscounted cash flows or the fair value of the
underlying collateral. Statement 118 amends Statement 114 to
permit a creditor to use existing methods for recognizing
interest income on impaired loans eliminating the income
recognition provisions of Statement 114. The adoption of these
statements did not have a material effect on the Bank's financial
position or results of operation.
Impaired loans are commercial and commercial real estate loans
for which it is probable that the Bank will not be able to
collect all amounts due according to the contractual terms of the
loan agreement. The Bank individually evaluates such loans for
impairment and does not aggregate loans by major risk
classifications. The definition of "impaired loans" is not the
same as the definition of "nonaccrual loans," although the two
categories overlap. The Bank may choose to place a loan on
nonaccrual status due to payment delinquency or uncertain
collectibility, while not classifying the loan as impaired if the
loan is not a commercial or commercial real estate loan. Factors
considered by management in determining impairment include
payment status and collateral value. The amount of impairment for
these types of impaired loans is determined by the difference
between the present value of the expected cash flows related to
the loan, using the original interest rate, and its recorded
value, or, as a practical expedient in the case of collateralized
loans, the difference between the fair value of the collateral
and the recorded amount of the loans. When foreclosure is
probable, impairment is measured based on the fair value of the
collateral.
Mortgage loans on one-to-four family properties and all consumer
loans are large groups of smaller balance homogeneous loans and
are measured for impairment collectively. Loans that experience
insignificant payment delays, which are defined as 90 days or
less, generally are not classified as impaired. Management
determines the significance of payment delays on a case-by-case
basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of
the delay, the borrower's prior payment record, and the amount of
shortfall in relation to the principal and interest owed.
F-8
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (Continued)
The allowance for loan losses represents the amount which
management estimates is adequate to provide for losses in its
loan portfolio. The allowance method is used in providing for
loan losses. Accordingly, all loan losses are charged to the
allowance and all recoveries are credited to it. The allowance
for loan losses is established through a provision for loan
losses charged to operations. The provision for loan losses is
based on management's periodic evaluation of individual loans,
economic factors, past loan loss experience, changes in the
composition and volume of the portfolio, and other relevant
factors. The estimates used in determining the adequacy of the
allowance for loan losses, including the amounts and timing of
future cash flows expected on impaired loans, are particularly
susceptible to changes in the near term.
Premises and Equipment
----------------------
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is calculated using straight-line and
accelerated methods over the useful lives of the related assets.
Expenditures for maintenance and repairs are charged to
operations as incurred. Costs of major additions and improvements
are capitalized.
Real Estate Owned
-----------------
Real estate owned, acquired in settlement of foreclosed loans, is
carried at the lower of cost or fair value minus estimated cost
to sell. Valuation allowances for estimated losses are provided
when the carrying value exceeds the fair value. Direct costs
incurred on such properties are recorded as expenses of current
operations.
Federal Income Taxes
--------------------
Deferred tax assets or liabilities are computed based on the
difference between the financial statement and income tax basis
of assets and liabilities using the enacted marginal tax rates.
Deferred income tax expenses or benefits are based on the changes
in the deferred tax asset or liability from period to period.
Cash and Cash Equivalents
-------------------------
The Bank has defined cash and cash equivalents as those cash and
due from banks and overnight deposits with the FHLB.
Reclassification of Comparative Amounts
---------------------------------------
Certain comparative account balances for prior periods have been
reclassified to conform to the current period classifications.
Such reclassifications did not effect net income.
Recent Accounting Pronouncements
--------------------------------
In June 1996, the Financial Accounting Standards Board ("the
FASB") issued Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities," which provides accounting and
reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities. This statement applies
prospectively in fiscal years beginning after December 31, 1996,
and establishes new standards that focus on control whereas,
after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. The
adoption of Statement 125 did not have a material impact on the
Bank's results of operations or financial position at or for the
nine months ended September 30, 1997.
F-9
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------------------
In December 1996, the FASB issued Statement of Financial
Accounting Standards No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125." Statement 127
defers for one year the effective date of portions of Statement
125 that address secured borrowings and collateral for all
transactions. Additionally, Statement 127 defers for one year the
effective date of transfers of financial assets that are part of
repurchase agreements, securities lending and similar
transactions. The Bank does not expect adoption of Statement 127
to have a material impact on the Bank's results of operations or
financial position.
In July 1997 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income." Statement No. 130 is effective for fiscal
years beginning after December 15, 1997. This statement
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.
Statement 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. Reclassification of financial statements
for earlier periods provided for comprehensive purposes is
required.
2. INVESTMENT SECURITIES
<TABLE>
<CAPTION>
September 30, 1997
----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Available for Sale
Mutual funds $ 843,428 $ 744 $ (60,291) $ 783,881
FHLMC common stock 17,353 606,995 - 624,348
---------------- ---------------- ---------------- ----------------
Total $ 860,781 $ 607,739 $ (60,291) $ 1,408,229
================ ================ ================ ================
Held to Maturity
Securities of U.S. Government
agencies $ 3,255,999 $ 9,451 $ (17,021) $ 3,248,429
Obligations of state and political
subdivisions 1,803,393 66,377 (194) 1,869,576
---------------- ---------------- ---------------- ----------------
Total $ 5,059,392 $ 75,828 $ (17,215) $ 5,118,005
================ ================ ================ ================
</TABLE>
F-10
<PAGE>
2. INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------- ---------------- ---------------- ----------------
Available for Sale
<S> <C> <C> <C> <C>
Mutual funds $ 821,332 $ - $ (65,319) $ 756,013
FHLMC common stock 17,353 471,387 - 488,740
---------------- ---------------- ---------------- ----------------
Total $ 838,685 $ 471,387 $ (65,319) $ 1,244,753
================ ================ ================ ================
Held to Maturity
Securities of U.S. Government
agencies $ 2,678,012 $ - $ (34,444) $ 2,643,568
Obligations of state and political
subdivisions 1,605,437 47,474 (28,306) 1,624,605
---------------- ---------------- ---------------- ----------------
Total $ 4,283,449 $ 47,474 $ (62,750) $ 4,268,173
================ ================ ================ ================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Available for Sale
Mutual funds $ 300,314 $ - $ (53,059) $ 247,255
FHLMC common stock 23,218 471,770 - 494,988
---------------- ---------------- ---------------- ----------------
Total $ 323,532 $ 471,770 $ (53,059) $ 742,243
================ ================ ================ ================
Held to Maturity
Securities of U.S. Government
agencies $ 2,384,165 $ 5,473 $ (38,099) $ 2,351,539
Obligations of state and political
subdivisions 1,604,135 60,341 (7,415) 1,657,061
---------------- ---------------- ---------------- ----------------
Total $ 3,988,300 $ 65,814 $ (45,514) $ 4,008,600
================ ================ ================ ================
</TABLE>
F-11
<PAGE>
2. INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of investments in
debt securities by contractual maturity are shown below.
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
Held to Maturity Held to Maturity
Estimated Estimated
----------------------------------------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Due within one year $ 550,000 $ 548,736 $ 100,000 $ 100,000
Due after one year through
five years 2,117,804 2,121,172 2,916,318 2,868,433
Due after five years through
ten years 761,619 802,101 889,123 923,613
Due after ten years 1,629,969 1,645,996 378,008 376,127
---------------- ---------------- ---------------- ----------------
Total $ 5,059,392 $ 5,118,005 $ 4,283,449 $ 4,268,173
================ ================ ================ ================
</TABLE>
Proceeds from sales of investment securities available for sale
and gross gains and losses realized on those sales were as
follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30, Year Ended December 31,
1997 1996 1996 1995
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Proceeds from sales $ - $ 130,333 $ 130,333 $ -
Gross gains - 124,468 124,468 -
Gross losses - - - -
</TABLE>
3. MORTGAGE-BACKED SECURITIES
<TABLE>
<CAPTION>
September 30, 1997
----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Available for Sale
FNMA $ 53,059 $ 138 $ - $ 53,197
---------------- ---------------- --------------- ----------------
Total $ 53,059 $ 138 $ - $ 53,197
================ ================ =============== ================
Held to Maturity
Government National
Mortgage Association $ 4,044,025 $ 93,861 $ (25,181) $ 4,112,705
Federal Home Loan
Mortgage Corporation 3,467,099 40,888 (12,583) 3,495,404
Federal National Mortgage
Association 961,265 15,300 - 976,565
---------------- ---------------- --------------- ---------------
Total $ 8,472,389 $ 150,049 $ (37,764) $ 8,584,674
================ ================ ================ ================
</TABLE>
F-12
<PAGE>
3. MORTGAGE-BACKED SECURITIES (Continued)
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------- ---------------- ---------------- ----------------
Available for Sale
<S> <C> <C> <C> <C>
FNMA $ 53,589 $ 202 $ - $ 53,791
---------------- ---------------- ---------------- ----------------
Total $ 53,589 $ 202 $ 0 $ 53,791
================ ================ ================ ================
Held to Maturity
Government National
Mortgage Association $ 4,130,286 $ 34,324 $ (84,994) $ 4,079,616
Federal Home Loan
Mortgage Corporation 2,725,306 25,342 (29,136) 2,721,512
Federal National Mortgage
Association 601,823 1,601 (1,901) 601,523
---------------- ---------------- ---------------- ----------------
Total $ 7,457,415 $ 61,267 $ (116,031) $ 7,402,651
================ ================ ================ ================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Available for Sale
FNMA $ 54,269 $ 117 $ - $ 54,386
Collateralized mortgage
obligations 35,632 - (483) 35,149
---------------- ---------------- ---------------- ----------------
Total $ 89,901 $ 117 $ (483) $ 89,535
================ ================ ================ ================
Held to Maturity
Government National
Mortgage Ass $ 4,388,626 $ 88,739 $ (32,392) $ 4,444,973
Federal Home Loan
Mortgage Corporation 3,450,333 33,704 (39,189) 3,444,848
Federal National Mortgage
Association 152,487 5,873 (1,100) 157,260
---------------- ---------------- ---------------- ----------------
Total $ 7,991,446 $ 128,316 $ (72,681) $ 8,047,081
================ ================ ================ ================
</TABLE>
The amortized cost and estimated market value of mortgage-backed
securities by contractual maturity are shown below.
Mortgage-backed securities provide for periodic payments of
principal and interest. Due to expected repayment terms being
significantly less than the underlying mortgage loan pool
contractual maturities, the estimated lives of these securities
could be significantly shorter.
F-13
<PAGE>
3. MORTGAGE-BACKED SECURITIES (Continued)
<TABLE>
<CAPTION>
September 30, 1997
Available for Sale Held to Maturity
-----------------------------------------------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
-------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Due within one year $ - $ - $ 453,805 $ 448,763
Due after one year through
five years - - 2,496,354 2,496,465
Due after five years through
ten years - - 65,737 67,927
Due after ten years 53,059 53,197 5,456,493 5,571,519
-------------- -------------- ---------------- ----------------
Total $ 53,059 $ 53,197 $ 8,472,389 $ 8,584,674
============== ============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
Available for Sale Held to Maturity
---------------------------------------------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Due within one year $ - $ - $ 348,387 $ 340,842
Due after one year through
five years - - 1,839,235 1,829,778
Due after five years through
ten years - - 74,560 80,035
Due after ten years 53,589 53,791 5,195,233 5,151,997
--------------- ---------------- ---------------- ----------------
Total $ 53,589 $ 53,791 $ 7,457,415 $ 7,402,652
=============== ================ ================ ================
</TABLE>
F-14
<PAGE>
4. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Mortgage loans:
One to four family $ 7,554,279 $ 7,539,096 $ 6,622,814
Home equity 2,928,898 2,016,854 1,460,215
Multi - family 33,055 68,569 81,258
Commercial 788,941 921,368 1,087,530
---------------- ---------------- ----------------
11,305,173 10,545,887 9,251,817
---------------- ---------------- ----------------
Consumer loans:
Share loans 347,432 328,573 363,769
Other 115,736 70,215 35,005
---------------- ---------------- ----------------
463,168 398,788 398,774
---------------- ---------------- ----------------
Less:
Deferred loan origination costs, net 5,733 13,923 31,347
Allowance for loan losses 104,951 65,951 40,013
---------------- ---------------- ----------------
110,684 79,874 71,360
---------------- ---------------- ----------------
Total $ 11,657,657 $ 10,864,801 $ 9,579,231
================ ================ ================
</TABLE>
The Bank's primary business activity is with customers located
within its local trade area. The repayment of these loans is
dependent upon the local economic conditions in its immediate
trade area.
Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30, Year Ended December 31,
1997 1996 1996 1995
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Balance, at beginning of
period $ 65,951 $ 40,013 $ 40,013 $ 33,994
Loans charged off - (10,562) (10,562) (14,981)
Recoveries - - - -
---------------- ---------------- ---------------- ----------------
Net loans charged off - (10,562) (10,562) (14,981)
Provision for loan losses 39,000 9,000 36,500 21,000
---------------- ---------------- ---------------- ----------------
Balance, at end of period $ 104,951 $ 38,451 $ 65,951 $ 40,013
================ ================ ================ ================
</TABLE>
The Bank had nonaccrual loans of $61,859, $85,100 and $79,945 at
September 30, 1997, December 31, 1996 and 1995, respectively,
which in management's opinion did not meet the definition of
impaired in accordance with Statement 114. Interest income on
loans would have been increased by $9,177, $7,365 and $3,268,
respectively, if these loans had performed in accordance with
their original terms.
F-15
<PAGE>
4. LOANS RECEIVABLE (Continued)
In the normal course of business, loans are extended to directors
and executive officers and their associates. In management's
opinion, all of these loans are on substantially the same terms
and conditions as loans to other individuals and businesses of
comparable creditworthiness. A summary of loan activity for those
directors, executive officers, and their associates with loan
balances in excess of $60,000 for the nine months ended September
30, 1997 and the year ended December 31, 1996, is as follows:
<TABLE>
<CAPTION>
For the Nine For the Year
Months Ended Ended
September 30, December 31,
1997 1996
---------------- ----------------
<S> <C> <C>
Balance beginning of period $ 380,986 $ 378,232
Additions - 17,000
Repayments (12,534) (14,246)
---------------- ----------------
Balance end of period $ 368,452 $ 380,986
================ ================
</TABLE>
5. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Investment securities $ 79,164 $ 59,577 $ 68,266
Mortgage-backed securities 55,216 56,489 51,669
Interest-bearing deposits 43,964 44,008 36,126
Loans receivable 81,271 65,640 57,369
---------------- ---------------- ----------------
Total $ 259,615 $ 225,714 $ 213,430
================ ================ ================
</TABLE>
6. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Land and improvements $ 422,181 $ 422,181 $ 93,082
Buildings and improvements 1,075,989 1,074,317 696,998
Furniture and equipment 643,273 600,556 336,839
---------------- ---------------- ----------------
2,141,443 2,097,054 1,126,919
Less accumulated depreciation 523,873 432,748 374,545
---------------- ---------------- ----------------
Total $ 1,617,570 $ 1,664,306 $ 752,374
================ ================ ================
</TABLE>
Depreciation expense for the nine months ended September 30, 1997
and 1996, and the years ended December 31, 1996 and 1995 was
$91,125, $18,900, $58,203, and $23,357, respectively.
F-16
<PAGE>
7. FEDERAL HOME LOAN BANK STOCK
The Bank is a member of the Federal Home Loan Bank System. As a
member, the Bank maintains an investment in the capital stock of
the Federal Home Loan Bank of Pittsburgh, at cost, in an amount
not less than the greater of 1% of its outstanding home loans or
5% of its outstanding notes payable to the Federal Home Loan Bank
of Pittsburgh as calculated at December 31 of each year.
8. DEPOSITS
Comparative details of deposits are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996 1995
---------------------------- ----------------------------------------------------
Amount % Amount % Amount %
---------------- -------- --------------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing $ 1,307,867 3.9 % $ 678,870 2.3 % 107,118 0.4 %
---------------- ----- --------------- ------ ----------- -----
Interest-bearing
Savings 9,283,887 27.4 8,829,611 30.1 8,329,693 32.8
NOW checking 1,602,832 4.7 1,075,071 3.7 961,907 3.8
Money market 1,290,294 3.8 1,400,519 4.8 1,471,189 5.8
---------------- ----- --------------- ----- ----------- -----
12,177,013 35.9 11,305,201 38.6 10,762,789 42.4
---------------- ----- --------------- ----- ----------- -----
Time certificates of deposit
2.00 - 3.99% 32,581 0.1 180,745 0.6 130,259 0.5
4.00 - 5.99% 16,353,187 48.2 13,036,968 44.4 10,187,877 40.1
6.00 - 7.99% 3,985,835 11.8 4,091,085 14.0 4,205,982 16.5
8.00 - 9.99% 27,688 0.1 26,095 0.1 24,103 0.1
---------------- ----- --------------- ----- ----------- -----
20,399,291 60.2 17,334,893 59.1 14,548,221 57.2
---------------- ----- --------------- ----- ----------- -----
Total $ 33,884,171 100.0 % $ 29,318,964 100.0 % $25,418,128 100.0 %
================ ===== =============== ===== =========== =====
</TABLE>
The aggregate amount of certificates of deposit with a minimum
denomination of $100,000 was $1,528,559 and $702,554 at September
30, 1997 and December 31, 1996, respectively. There were no
certificates of deposit with a minimum denomination of $100,000
at December 31, 1995. Deposits in excess of $100,000 are not
insured by the Savings Association Insurance Fund (SAIF).
The scheduled maturities of time certificates of deposit are as
follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---------------- -----------
<S> <C> <C>
Within one year $ 16,186,875 $14,026,134
Beyond one year but within three years 1,686,812 2,574,725
Beyond three years but within five years 1,196,832 681,888
Beyond five years 1,328,772 52,146
---------------- -----------
Total $ 20,399,291 $17,334,893
================ ===========
</TABLE>
F-17
<PAGE>
8. DEPOSITS (Continued)
Interest expense by deposit category is as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30, Year Ended December 31,
1997 1996 1996 1995
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Savings $ 199,554 $ 192,248 $ 258,295 $ 273,390
NOW and money market 48,506 43,642 58,793 63,499
Time certificates of deposit 811,161 594,305 819,440 730,049
---------------- ---------------- ---------------- ---------------
Total $ 1,059,221 $ 830,195 $ 1,136,528 $ 1,066,938
================ ================ ================ ================
</TABLE>
9. BORROWING CAPACITY
Borrowing capacity consists of credit arrangements with the
Federal Home Loan Bank of Pittsburgh. FHLB borrowings are subject
to annual renewal, incur no service charges, and are secured by a
blanket security agreement on certain investment and
mortgage-backed securities, outstanding residential mortgages and
the Bank's investment in FHLB stock. As of December 31, 1996, the
Bank's maximum borrowing capacity with the FHLB was approximately
$16.2 million. As of September 30, 1997, December 31, 1996 and
1995, there were no outstanding borrowings.
10. SAVINGS ASSOCIATION INSURANCE FUNDS RECAPITALIZATION
On September 30, 1996, the President signed into law legislation
which included, among other things, recapitalization of the
Savings Association Insurance Fund ("SAIF") of the Federal
Deposit Insurance Corporation ("FDIC") by a one time charge to
SAIF-insured institutions of 65.7 basis points per one hundred
dollars of insurable deposits. The gross effect to the Bank
amounted to $160,102, which is reflected in the financial results
of the Bank for the year ended December 31, 1996.
11. INCOME TAXES
The components of income tax expense (benefit) are summarized as
follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30, Year Ended December 31,
1997 1996 1996 1995
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Current payable
Federal $ (78,106) $ (39,495) $ (27,912) $ 66,552
State (18,354) (10,213) (13,293) 16,156
---------------- ---------------- ---------------- ----------------
(96,460) (49,708) (41,205) 82,708
Deferred taxes
Federal (30,979) 18,425 8,867 (3,544)
State (19,254) (8,062) (8,078) -
---------------- ---------------- ---------------- ----------------
$ (146,693) $ (39,345) $ (40,416) $ 79,164
================ ================ ================ ================
</TABLE>
F-18
<PAGE>
11. INCOME TAXES (Continued)
Income taxes applicable to net securities gains were $42,319 for
the nine months ended September 30, 1996 and for the year ended
December 31, 1996.
On August 20, 1996, The Small Business Job Protections Act (the
"Act") was signed into law. The Act eliminated the percentage of
taxable income bad debt deduction for thrift institutions for tax
years beginning after December 31, 1995. The Act provides that
bad debt reserves accumulated prior to 1988 be exempt from
recapture. Bad debt reserves accumulated after 1987 are subject
to recapture. The Bank has accumulated additional bad debt
reserves since 1987 of $85,251.
The following temporary differences gave rise to the net deferred
tax assets (liabilities):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Deferred Tax Assets:
Allowance for loan losses $ 35,684 $ 13,923 $ 13,604
Pension adjustment 32,150 28,621 28,471
Deferred compensation 19,040 - -
Deferred loan origination costs, net 1,949 9,604 10,900
Other 1,338 689 -
---------------- ---------------- ----------------
Total gross deferred tax assets 90,161 52,837 52,975
---------------- ---------------- ----------------
Deferred Tax Liabilities:
Net unrealized gain on securities 189,179 138,131 142,237
Premises and equipment 10,166 6,272 -
Discount on mortgage-backed securities 17,547 15,096 12,639
Excess tax bad debt reserve 28,985 28,985 28,985
---------------- ---------------- ----------------
Total gross deferred tax liabilities 245,877 188,484 183,861
---------------- ---------------- ----------------
Net deferred tax asse $ (155,716) $ (135,647) $ (130,886)
================ ================ ================
</TABLE>
No valuation allowance was established at September 30, 1997 or
December 31, 1996 and 1995, in view of the Bank's ability to
carryback taxes paid in previous years and to a lesser extent
future anticipated taxable income.
The reconciliation of the federal statutory rate and the Bank's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
-------------------------------- -----------------------------------
% of % of
Pre-tax Pre-tax
Amount Income Amount Income
---------------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
Provision at statutory rate $ (112,193) (34.0)% $ (9,867) (34.0)%
State tax expense, net of
federal tax benefit (12,114) (3.4) (12,062) (41.6)
Tax free income (13,813) (4.2) (12,477) (43.0)
Other, net (8,573) (2.6) (4,939) (17.0)
---------------- ----------- --------------- -----------
Actual tax expense
and effective rate $ (146,693) (44.5)% $ (39,345) (135.6)%
================ =========== =============== ===========
</TABLE>
F-19
<PAGE>
11. INCOME TAXES (Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
% of % of
Pre-tax Pre-tax
Amount Income Amount Income
---------------- ----- --------------- ----
<S> <C> <C> <C> <C>
Provision at statutory rate $ (20,974) (34.0)% $ 82,361 34.0 %
State tax expense, net of
federal tax benefit (8,773) (10.1) 10,663 4.4
Tax free income (16,731) (19.3) (16,228) (6.7)
Other, net 14,562 16.8 2,368 1.0
---------------- ----- --------------- ----
Actual tax expense
and effective $ (40,416) (46.6)% $ 79,164 32.7 %
================ ===== =============== ====
</TABLE>
12. EMPLOYEE BENEFITS
Defined Benefit Plan
The Bank sponsors a trusteed, defined benefit pension plan
covering substantially all employees and officers. The plan calls
for benefits to be paid to eligible employees at retirement based
primarily upon years of service with the Bank and compensation
rates near retirement. The Bank's funding policy is to make
annual contributions as needed based upon the funding formula
developed by the plan's actuary. Net periodic pension cost is
comprised of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
---------------- ----------------
<S> <C> <C>
Service cost of the current period $ 40,058 $ 26,295
Interest cost on projected benefit obligation 52,882 43,424
Actual return on plan assets (21,803) (65,614)
Net amortization and deferral (14,237) 27,984
---------------- ----------------
Net periodic pension cost $ 56,900 $ 32,089
================ ================
</TABLE>
The actuarial present value of accumulated benefit obligations at
December 31, 1996 and 1995, was $428,196 and $508,342, including
vested benefits of $391,647 and $469,395, respectively. The
following table sets forth the funded status and amounts
recognized in the statement of financial condition:
<TABLE>
<CAPTION>
December 31,
1996 1995
---------------- ----------------
<S> <C> <C>
Plan assets at fair value $ 549,600 $ 556,114
Projected benefit obligation 713,241 855,089
---------------- ----------------
Funded status (163,641) (298,975)
Unrecognized net loss 55,013 188,410
Unrecognized prior service costs 1,960 2,127
Unrecognized transition liability 22,488 24,699
---------------- ----------------
Net pension liability $ (84,180) $ (83,739)
================ ================
</TABLE>
F-20
<PAGE>
12. EMPLOYEE BENEFITS (Continued)
Assumptions used in the accounting for the defined benefit plan
are as follows:
<TABLE>
<CAPTION>
1996 1995
---------------- ----------------
<S> <C> <C>
Weighted average discount rate 7.25 % 6.25 %
Rates of increase in compensation levels 4.96 % 4.99 %
Expected long - term rate of return on assets 7.75 % 7.75 %
</TABLE>
Supplemental Retirement Plan
Effective September 30, 1997, the Directors Consultation and
Retirement Plan was adopted to provide post-retirement payments
over a five year period to members of the Board of Directors who
have completed five or more years of service. Expenses for the
nine months ended September 30, 1997 amounted to $56,000.
13. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments
In the normal course of business, the Bank makes various
commitments which are not reflected in the accompanying financial
statements. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount
recognized in the statement of financial condition. The Bank's
exposure to credit loss in the event of nonperformance by the
other parties to the financial instruments is represented by the
contractual amounts as disclosed. The Bank minimizes its exposure
to credit loss under these commitments by subjecting them to
credit approval and review procedures, and collateral
requirements, as deemed necessary. Commitments generally have
fixed expiration dates within one year of their origination.
The off-balance sheet commitments were comprised of the
following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Commitments to extend credit:
One to four family $ 360,000 $ 108,000 $ 238,000
Other mortgage loans 100,000 - -
---------------- ---------------- ----------------
Total $ 460,000 $ 108,000 $ 238,000
================ ================ ================
</TABLE>
All of the Bank's commitments to fund future loans are fixed rate
and at September 30, 1997 those rates ranged from 7.75% to 8.50%.
Contingent Liabilities
In the normal course of business, the Bank is involved in various
legal proceedings primarily involving the collection of
outstanding loans. None of these proceedings are expected to have
a material effect on the consolidated financial position or
operations of the Bank.
F-21
<PAGE>
14. CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. The Office of
Thrift Supervision sets forth capital standards applicable to all
thrifts. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary
actions by the regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements.
Capital adequacy guidelines involve quantitative measures of the
Bank's assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The Bank's
capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by the regulation to ensure
capital adequacy require the Bank to maintain minimum amounts and
ratios of Total and Tier I capital (as defined in the
regulations) to risk-weighted assets, and of tangible and core
capital (as defined in the regulations) to adjusted assets (as
defined). Management believes as of December 31, 1996 that the
Bank meets all capital adequacy requirements to which they are
subject.
As of December 31, 1996, the most recent notification from the
Bank's primary regulator categorized the Bank as "well
capitalized" under the regulatory framework for prompt corrective
action. To be categorized as "well capitalized" the Bank must
maintain minimum tangible, core, and risk-based ratios. There
have been no conditions or events since that notification that
management believes have changed the Bank's category.
The following table reconciles capital under generally accepted
accounting principles to regulatory capital.
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996 1995
---------------- ---------------- ----------
<S> <C> <C> <C>
Total equity $ 3,480,113 $ 3,570,129 $3,624,371
Unrealized gain on securities
available for sale (361,406) (268,137) (276,108)
---------------- ---------------- ----------
Tier I, core and tangible capital 3,118,707 3,301,992 3,348,263
General allowance for loan losses 104,951 65,951 40,013
---------------- ---------------- ----------
Risk-based capital $ 3,223,658 $ 3,367,943 $3,388,276
================ ================ ==========
</TABLE>
F-22
<PAGE>
14. CAPITAL REQUIREMENTS (Continued)
Actual capital levels of the Bank and minimum required levels are
as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996 1995
----------------------- ------------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
------------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk-Weighted Assets
-------------------------------------
Actual $ 3,223,658 23.7 % $ 3,367,943 28.0 % $ 3,388,276 34.5 %
For Capital Adequacy Purposes 1,086,480 8.0 786,000 8.0 964,000 8.0
To be "Well Capitalized" 1,358,100 10.0 982,500 10.0 1,205,000 10.0
Tier I Capital to Risk-Weighted Assets
--------------------------------------
Actual $ 3,118,707 23.0 % $ 3,301,992 27.4 % $ 3,348,263 34.1 %
For Capital Adequacy Purposes 543,240 4.0 393,000 4.0 482,000 4.0
To be "Well Capitalized" 814,860 6.0 589,500 6.0 723,000 6.0
Core Capital to Adjusted Assets
-------------------------------
Actual $ 3,118,707 8.4 % $ 3,301,992 10.1 % $ 3,348,263 11.6 %
For Capital Adequacy Purposes 1,116,780 3.0 984,810 3.0 866,760 3.0
To be "Well Capitalized" 1,861,300 5.0 1,641,350 5.0 1,444,600 5.0
Tangible Capital to Adjusted Assets
-----------------------------------
Actual $ 3,118,707 8.4 % $ 3,301,992 10.1 % $ 3,348,263 11.6 %
For Capital Adequacy Purposes 558,390 1.5 492,405 1.5 433,380 1.5
To be "Well Capitalized" N/A N/A N/A N/A N/A N/A
</TABLE>
Prior to the enactment of The Small Business Job Protection Act
discussed in Note 12, the Bank accumulated approximately $975,000
of retained earnings at December 31, 1996, which amount
represents allocations of income to bad debt deductions for tax
purposes only. Since this amount represents the accumulated bad
debt reserves prior to 1988, no provision for federal income tax
has been made for such amount. If any portion of this amount is
used other than to absorb loan losses (which is not anticipated),
the amount will be subject to federal income tax at the current
corporate rate.
F-23
<PAGE>
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Bank's financial instruments at
December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------- -------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks,
interest-bearing deposits
and certificates of
deposits with other bank $ 7,223,610 $ 7,223,610 $ 5,779,287 $ 5,779,287
Investment securities
available for sale 1,244,753 1,244,753 742,243 742,243
Investment securities
held to maturity 4,283,449 4,268,173 3,988,300 4,008,600
Mortgage-backed securities
available for sale 53,791 53,791 89,535 89,535
Mortgage-backed securities
held to maturity 7,457,415 7,402,651 7,991,446 8,047,081
FHLB stock 161,800 161,800 153,500 153,500
Loans receivable 10,864,801 10,949,438 9,579,231 9,926,374
Accrued interest receivable 225,714 225,714 213,430 213,430
----------- ----------- ----------- -----------
Total $31,515,333 $31,529,930 $28,536,972 $28,960,050
=========== =========== =========== ===========
Financial liabilities:
Deposits $29,318,964 $29,361,112 $25,418,128 $25,541,297
Advances by borrowers
for taxes and insurance 125,711 125,711 131,812 131,812
Accrued interest payable 2,327 2,327 1,554 1,554
----------- ----------- ----------- -----------
Total $29,447,002 $29,489,150 $25,551,494 $25,674,663
=========== =========== =========== ===========
</TABLE>
Financial instruments are defined as cash, evidence of an
ownership interest in an entity, or a contract which creates an
obligation or right to receive or deliver cash or another
financial instrument from/to a second entity on potentially
favorable or unfavorable terms.
Fair value is defined as the amount at which a financial
instrument could be exchanged in a current transaction between
willing parties other than in a forced or liquidation sale. If a
quoted market price is available for a financial instrument, the
estimated fair value would be calculated based upon the market
price per trading unit of the instrument.
If no readily available market exists, the fair value estimates
for financial instruments are based upon management's judgment
regarding current economic conditions, interest rate risk,
expected cash flows, future estimated losses, and other factors
as determined through various option pricing formulas or
simulation modeling. As many of these assumptions result from
judgments made by management based upon estimates which are
inherently uncertain, the resulting estimated fair values may not
be indicative of the amount realizable in the sale of a
particular financial instrument. In addition, changes in the
assumptions on which the estimated fair values are based may have
a significant impact on the resulting estimated fair values.
As certain assets, such as deferred tax assets and premises and
equipment, are not considered financial instruments, the
estimated fair value of financial instruments would not represent
the full value of the Bank.
F-24
<PAGE>
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The Office of Thrift Supervision employed simulation modeling in
determining the estimated fair value of financial instruments for
which quoted market prices were not available based upon the
following assumptions:
Cash and Due From Banks, Interest-bearing Deposits and
-----------------------------------------------------------------
Certificates of Deposits with Other Banks, Accrued Interest
-----------------------------------------------------------------
Receivable, FHLB Stock, Advances By Borrowers For Taxes and
-----------------------------------------------------------------
Insurance, and Accrued Interest Payable
---------------------------------------
The fair value is equal to the current carrying value.
Investment Securities and Mortgage-Backed Securities
----------------------------------------------------
The fair value of these securities is equal to the available
quoted market price. If no quoted market price is available, fair
value is estimated using the quoted market price for similar
securities.
Loans Receivable and Deposits
-----------------------------
The fair value of loans is estimated by discounting the future
cash flows using a simulation model which estimates future cash
flows based upon current market rates adjusted for prepayment
risk and credit quality. Savings, checking, and money market
deposit accounts are valued at the amount payable on demand as of
year end. Fair values for time deposits are estimated using a
discounted cash flow calculation that applies contractual costs
currently being offered in the existing portfolio to current
market rates being offered for deposits of similar remaining
maturities.
Commitments to Extend Credit
----------------------------
These financial instruments are generally not subject to sale,
and estimated fair values are not readily available. The carrying
value, represented by the net deferred fee arising from the
unrecognized commitment and the fair value, determined by
discounting the remaining contractual fee over the term of the
commitment using fees currently charged to enter into similar
agreements with similar credit risk, are not considered material
for disclosure. The contractual amounts of unfunded commitments
are presented in Note 14.
16. SUBSEQUENT EVENT
Plan of Conversion
------------------
On September 30, 1997, the Board of Directors of the Bank,
subject to regulatory approval and approval by the members of the
Bank, adopted a Plan of Conversion (the "Plan") to convert from a
federally chartered mutual savings bank to a federally chartered
stock savings bank and the concurrent formation of a holding
company for the Bank. The Plan provides that the holding company
will offer nontransferable subscription rights to purchase common
stock of the holding company. The rights will be offered first to
eligible account holders, the Bank's tax-qualified employee stock
benefits plans, supplemental eligible account holders, and
directors, officers, and employees. Any shares remaining may then
be offered to the general public.
Conversion costs will be deferred and deducted from the proceeds
of the stock offering. If the offering is unsuccessful for any
reason, the deferred costs will be charged to operations. There
were no conversion cost incurred as of September 30, 1997.
F-25
<PAGE>
16. SUBSEQUENT EVENT (Continued)
At the date of conversion, the Bank will establish a liquidation
account in an amount equal to its retained earnings reflected in
the statement of financial condition appearing in the final
prospectus. The liquidation account will be maintained for the
benefit of eligible account holders and supplemental eligible
account holders who continue to maintain their accounts at the
Bank after the conversion. The liquidation will be reduced
annually to the extent these account holders have reduced their
qualifying deposits. In the event of a complete liquidation, each
eligible savings account holder will be entitled to receive a
distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for
accounts then held.
The Bank may not declare or pay a cash dividend on, or repurchase
any of its common shares if the effect thereof would cause the
Bank's shareholders' equity to be reduced below either the amount
required for the liquidation account or the regulatory capital
requirements for insured institutions.
F-26
<PAGE>
No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this document in connection with
the offering made hereby, and, if given or made, such information or
representations must not be relied upon as having been authorized by Stanton
Federal Savings Bank, SFSB Holding Company or Ryan, Beck & Co., Inc. This
document does not constitute an offer to sell, or the solicitation of an offer
to buy, any of the securities offered hereby to any person in any jurisdiction
in which such offer or solicitation would be unlawful. Neither the delivery of
this document by Stanton Federal Savings Bank, SFSB Holding Company or Ryan,
Beck & Co., Inc. nor any sale made hereunder shall in any circumstances create
an implication that there has been no change in the affairs of Stanton Federal
Savings Bank or SFSB Holding Company since any of the dates as of which
information is furnished herein or since the date hereof.
SFSB Holding Company
Up to 727,375 Shares
(Anticipated Maximum As Adjusted)
Common Stock
PROSPECTUS
Ryan, Beck & Co.
Dated January 14, 1998
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED.
Until the later of April 23, 1998, or 90 days after commencement of the
offering of common stock, all dealers that buy, sell or trade these securities,
whether or not participating in this distribution, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
