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As filed with the Securities and Exchange Commission on December 24, 1997
Registration No. 333-__________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF HAZLETON
401(k) EMPLOYEE BENEFIT PLAN
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6036 BEING APPLIED FOR
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer Identification No.)
Incorporation or Organization) Classification Code Number)
</TABLE>
12 E. BROAD STREET
HAZLETON, PENNSYLVANIA 18201
(717) 459-3700
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
E. LEE BEARD
PRESIDENT AND CHIEF EXECUTIVE OFFICER
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF HAZLETON
12 E. BROAD STREET
HAZLETON, PENNSYLVANIA 18201
(717) 459-3700
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
Copies to:
DOUGLAS P. FAUCETTE, ESQUIRE
LAWRENCE M. F. SPACCASI, ESQUIRE
MULDOON, MURPHY & FAUCETTE
5101 WISCONSIN AVENUE, N.W.
WASHINGTON, D.C. 20016
(202) 362-0840
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. / X /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum Amount of
Title of each Class of Amount to Offering Price Aggregate Offering Registration
Securities to be Registered be Registered Per Unit Price (2) Fee
<S> <C> <C> <C> <C>
Common Stock 6,427,350
$.01 par value(1) Shares $10.00 $64,273,500 $18,961
Participation (3) _______ $835,931 (4)
Interests
</TABLE>
(1) Includes shares of Common Stock to be issued to the First Federal
Charitable Foundation, a private foundation.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) In addition, pursuant to Rule 416(c) under the Securities Act, this
registration statement also covers an indeterminate amount of interests to
be offered or sold pursuant to the employee benefit plan described herein.
(4) The securities of Northeast Pennsylvania Financial Corp. to be purchased
by First Federal Savings and Loan Association of Hazleton 401(k) Savings
Plan are included in the amount shown for Common Stock. Accordingly, no
separate fee is required for the participation interests. In accordance
with Rule 457(h) of the Securities Act, as amended, the registration fee
has been calculated on the basis of the number of shares of Common Stock
that may be purchased with the current assets of such Plan.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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[To be used in connection with sales to Participants in the FIRST FEDERAL
SAVINGS AND LOAN ASSOCIATION 401(K) PLAN]
PROSPECTUS SUPPLEMENT
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
FIRST FEDERAL BANK
PARTICIPATION INTERESTS
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF HAZLETON
401(K) PLAN
This Prospectus Supplement relates to the offer and sale to
participants (the "Participants") in the First Federal Savings and Loan
Association of Hazleton 401(k) Plan (the "Plan") of participation interests and
shares of common stock, par value $.01 per share of Northeast Pennsylvania
Financial Corp. (the "Common Stock"), as set forth herein.
In connection with the proposed conversion of First Federal Bank (the
"Bank") from a mutual savings bank to a stock savings bank (the "Conversion"),
the Plan will be amended to permit the investment of Plan assets in Common Stock
of Northeast Pennsylvania Financial Corp. (the "Holding Company"). The amended
Plan will permit Participants to direct the trustee of the Plan (the "Trustee")
to invest in Common Stock with amounts in the Plan attributable to such
Participants. Such investments in Common Stock would be made by means of the
Northeast Pennsylvania Financial Corp. Stock Fund (the "Employer Stock Fund").
Based upon the value of the Plan assets at September 30, 1997, 83,593 shares of
Common Stock could be purchased with Plan assets (assuming a purchase price of
$10.00 per share). This Prospectus Supplement relates to the initial election of
Participants to direct that all or a portion of their accounts be invested in
the Employer Stock Fund in connection with the Conversion and also to elections
by Participants to direct that all or a portion of their accounts be invested in
the Employer Stock Fund after the Conversion.
The prospectus dated ______________, 1998 of the Holding Company (the
"Prospectus"), which is attached to this Prospectus Supplement, includes
detailed information with respect to the Conversion, the Common Stock and the
financial condition, results of operations and business of the Bank. This
Prospectus Supplement, which provides detailed information with respect to the
Plan, should be read only in conjunction with the Prospectus and should be
retained for future reference.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PARTICIPANT, SEE "RISK FACTORS."
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS ______________, 1998.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY
OTHER STATE OR FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS SUCH
COMMISSION OR OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT FEDERALLY INSURED OR GUARANTEED, NOR ARE THE SHARES OF
COMMON STOCK GUARANTEED BY THE COMPANY OR THE BANK. THE ENTIRE AMOUNT OF A
PURCHASER'S PRINCIPAL IS SUBJECT TO LOSS.
No person has been authorized to give any information or to make any
representations other than those contained in the Prospectus or this Prospectus
Supplement, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Bank or the Plan. This
Prospectus Supplement does not constitute an offer to sell or solicitation of an
offer to buy any securities in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction. Neither the
delivery of this Prospectus Supplement and the Prospectus nor any sale made
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Bank or the Plan since the date hereof, or
that the information herein contained or incorporated by reference is correct as
of any time subsequent to the date hereof.
<PAGE> 4
TABLE OF CONTENTS
THE OFFERING............................................................... 1
Securities Offered................................................ 1
Election to Purchase Common Stock in the Conversion............... 1
Value of Participation Interests.................................. 1
Method of Directing Transfer...................................... 2
Time for Directing Transfer....................................... 2
Irrevocability of Transfer Direction.............................. 2
Direction to Purchase Common Stock After the Conversion........... 2
Purchase Price of Common Stock.................................... 2
Nature of a Participant's Interest in the Common Stock............ 3
Voting and Tender Rights of Common Stock.......................... 3
DESCRIPTION OF THE PLAN.................................................... 3
Introduction...................................................... 3
Eligibility and Participation..................................... 4
Contributions Under the Plan...................................... 5
Limitations on Contributions...................................... 5
Investment of Contributions....................................... 7
Benefits Under the Plan...........................................10
Withdrawals and Distributions From the Plan.......................10
Administration of the Plan........................................11
Reports to Plan Participants......................................11
Plan Administrator................................................11
Amendment and Termination.........................................12
Merger, Consolidation or Transfer.................................12
Federal Income Tax Consequences...................................12
ERISA and Other Qualification.....................................14
Restrictions on Resale............................................15
SEC Reporting and Short-Swing Profit Liability....................15
EXPERTS....................................................................16
LEGAL OPINIONS.............................................................16
INVESTMENT FORM
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THE OFFERING
SECURITIES OFFERED
The securities offered hereby are participation interests in the Plan.
Up to 83,593 shares (assuming the actual purchase price is $10.00 per share) of
Common Stock may be acquired by the Plan to be held in the Employer Stock Fund.
The Holding Company is the issuer of the Common Stock. Employees of the Bank
(hereinafter referred to as the "Employer"), other than employees paid on an
hourly basis, may participate in the Plan. The Common Stock to be issued hereby
is conditioned on the consummation of the Conversion. A Participant's investment
in units in the Employer Stock Fund in the Conversion is subject to the priority
set forth in the Plan of Conversion.
Information with regard to the Plan is contained in this Prospectus
Supplement and information with regard to the Conversion and the financial
condition, results of operations and business of the Bank is contained in the
attached Prospectus. The address of the principal executive office of the Bank
is 12 East Broad Street, Hazleton, Pennsylvania 18201. The Bank's telephone
number is (717) 459-3700.
ELECTION TO PURCHASE COMMON STOCK IN THE CONVERSION
In connection with the Bank's Conversion, the Plan has been amended to
permit each Participant to direct that all or part of the funds which represent
his or her beneficial interest in the assets of the Plan may be transferred to
an investment fund that will invest in Common Stock (the "Employer Stock Fund")
and, to the extent shares are available, to use such funds to purchase Common
Stock issued in connection with the Conversion, and to purchase Common Stock in
the open market. If there is not enough Common Stock in the Conversion to fill
all subscriptions, the Common Stock would be apportioned and the Plan may not be
able to purchase all of the Common Stock requested by the Participants. In such
case, the Trustee will purchase shares in the open market after the Conversion
to fulfill Participants' requests. Such purchases may be at prices higher than
the purchase price in the Conversion. The ability of each Participant to invest
in the Employer Stock Fund in the Conversion pursuant to directions to transfer
all or a portion of their beneficial assets in the Plan will be based on such
Participant's status as an Eligible Account Holder or Supplemental Eligible
Account Holder pursuant to the Plan of Conversion, the subscription priorities
set forth in the Plan of Conversion and the availability of Common Stock. The
Trustee of the Plan will follow the Participants' directions.
VALUE OF PARTICIPATION INTERESTS
The market value of the assets of the Plan, as of September 30, 1997,
was $835,931 and each Participant was informed of the value of his or her
beneficial interest in the Plan. This value represented the past contributions
to the Plan by the Employers and the Participants and any earnings or losses
thereon, less previous withdrawals.
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METHOD OF DIRECTING TRANSFER
The last page of this Prospectus Supplement is a form to direct a
transfer to the Employer Stock Fund (the "Investment Form"). If a Participant
wishes to transfer all or part of his or her beneficial interest in the assets
of the Plan to the Employer Stock Fund being established in connection with the
Conversion, he or she should indicate that decision in Part 2 of the Investment
Form. If a Participant does not wish to make such an election, he or she does
not need to take any action.
TIME FOR DIRECTING TRANSFER
The deadline for submitting a direction to transfer amounts to the
Employer Stock Fund which will purchase Common Stock issued in connection with
the Conversion is ten days prior to ____________________(the "Expiration Date")
of the Offering. The Investment Form should be returned to the Bank's Human
Resources Department by _:__ p.m. on such date.
IRREVOCABILITY OF TRANSFER DIRECTION
A Participant's direction to transfer amounts credited to such
Participant's account in the Plan to the Employer Stock Fund in connection with
the Conversion shall be irrevocable. Participants, however, will be able to
direct the investment of their accounts ("Accounts") after the Conversion under
the Plan as explained below.
DIRECTION TO PURCHASE COMMON STOCK AFTER THE CONVERSION
After the Conversion, a Participant shall be able to direct that a
certain percentage of the net value of such Participant's interests in the trust
fund established for the Plan (the "Trust Fund") be transferred to the Employer
Stock Fund and invested in Common Stock, or to the other investment funds
available under the Plan. Alternatively, a Participant may direct that a certain
percentage of such Participant's interest in the Employer Stock Fund be
transferred to the Trust Fund to be invested in accordance with the terms of the
Plan. Participants will be permitted to direct that future contributions made to
the Plan by or on their behalf will be invested in Common Stock. Following the
initial election, the allocation of a Participant's interest in the Employer
Stock Fund may be changed ________________ in any Plan Year by filing a written
notice with the Plan Administrator. Special restrictions apply to transfers
directed by those Participants who are officers, directors and principal
shareholders of the Bank who are subject to the provisions of Section 16(b) of
the Securities Exchange Act of 1934, as amended (the "1934 Act").
PURCHASE PRICE OF COMMON STOCK
The funds transferred to the Employer Stock Fund for the purchase of
Common Stock in connection with the Conversion will be used by the Trustee to
purchase shares of Common Stock. The price to be paid by the Trust Fund for such
shares of Common Stock will be the same price as is paid by all persons who
purchase shares of Common Stock in the Conversion.
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Common Stock purchased by the Trustee after the Conversion will be
acquired in open market transactions. The prices paid by the Trustee for shares
of Common Stock will not exceed "adequate consideration" as defined in Section
3(18) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA").
NATURE OF A PARTICIPANT'S INTEREST IN THE COMMON STOCK
The Common Stock will be held in the name of the Trustee for the Plan,
as trustee. Each Participant has an allocable interest in the investment funds
of the Plan but not in any particular assets of the Plan. Accordingly, a
specific number of shares of Common Stock will not be directly attributable to
the account of any Participant. Earnings, e.g., gains and losses, are allocated
to the Account of a Participant based on units in the Employer Stock Fund held
by the Participants. Therefore, earnings with respect to a Participant's Account
should not be affected by the investment designations (including investments in
Common Stock) of other Participants.
VOTING AND TENDER RIGHTS OF COMMON STOCK
The Trustee generally will exercise voting and tender rights
attributable to all Common Stock held by the Trust Fund as directed by
Participants with interests in the Employer Stock Fund. With respect to each
matter as to which holders of Common Stock have a right to vote, each
Participant will be allocated a number of voting instruction rights reflecting
such Participant's proportionate interest in the Employer Stock Fund. The number
of shares of Common Stock held in the Employer Stock Fund that are voted in the
affirmative and negative on each matter shall be proportionate to the number of
voting instruction rights exercised in the affirmative and negative,
respectively. In the event of a tender offer for Common Stock, the Plan provides
that each Participant will be allotted a number of tender instruction rights
reflecting such Participant's proportionate interest in the Employer Stock Fund.
The percentage of shares of Common Stock held in the Employer Stock Fund that
will be tendered will be the same as the percentage of the total number of
tender instruction rights that are exercised in favor of tendering. The
remaining shares of Common Stock held in the Employer Stock Fund will not be
tendered. The Plan makes provision for Participants to exercise their voting
instruction rights and tender instruction rights on a confidential basis.
DESCRIPTION OF THE PLAN
I. INTRODUCTION
The Plan was established effective January 1, 1994, as the First
Federal Savings and Loan Association of Hazleton 401(k) Plan. The Plan is a cash
or deferred arrangement established in accordance with the requirements under
Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986 (the
"Code"). The Plan will be amended effective __________, 1998 to provide for an
investment in Common Stock. The amended and restated Plan will be submitted to
the Internal Revenue Service (the "IRS") in a timely manner for a determination
that the Plan, as amended and restated, is qualified under Section 401(a) of the
Code, and that its related trust(s) are qualified under Section 501(a) of the
Code.
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<PAGE> 8
The Bank intends that the Plan, in operation, will comply with the
requirements under Section 401(a) and Section 401(k) of the Code. The Bank will
adopt any amendments to the Plan that may be necessary to ensure the qualified
status of the Plan under the Code and applicable Treasury Regulations.
Employee Retirement Income Security Act. The Plan is an "individual
account plan" other than a "money purchase pension plan" within the meaning of
ERISA. As such, the Plan is subject to all of the provisions of Title I
(Protection of Employee Benefit Rights) and Title II (Amendments to the Internal
Revenue Code Relating to Retirement Plans) of ERISA, except the funding
requirements contained in Part 3 of Title I of ERISA which by their terms do not
apply to an individual account plan (other than a money purchase pension plan).
The Plan is not subject to Title IV (Plan Termination Insurance) of ERISA.
Neither the funding requirements contained in Part 3 of Title I of ERISA nor the
plan termination insurance provisions contained in Title IV of ERISA will be
extended to Participants (as defined below) or beneficiaries under the Plan.
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL
RESTRICTIONS ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS
BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF EMPLOYMENT WITH
THE BANK. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON WITHDRAWALS
MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59-1/2, REGARDLESS OF WHETHER
SUCH A WITHDRAWAL OCCURS DURING HIS EMPLOYMENT WITH THE BANK OR AFTER
TERMINATION OF EMPLOYMENT.
Reference to Full Text of Plan. The following statements are summaries
of certain provisions of the Plan. They are not complete and are qualified in
their entirety by the full text of the Plan. Copies of the Plan are available to
all employees by filing a request with the Plan Administrator, Patricia Purvis,
First Federal Bank, 12 East Broad Street, Hazleton, Pennsylvania 18201. The Plan
Administrator's telephone number is (717) 459-3700. Each employee is urged to
read carefully the full text of the Plan.
II. ELIGIBILITY AND PARTICIPATION
Employees, other than employees paid on an hourly basis, are eligible
to participate in the Plan upon completion of six months of service with the
Employer and the attainment of age 21. In order to commence participation, an
employee must submit an enrollment form in advance of the date he desires to
enter the Plan. A Participant may elect to commence salary reductions as of the
first day of each month. A Participant may modify the amount of salary
reductions as of January 1 and July 1 each Plan Year.
As of September 30, 1997, there were approximately 112 employees
eligible to participate in the Plan, and 101 employees had elected to
participate in the Plan.
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III. CONTRIBUTIONS UNDER THE PLAN
401(k) Plan Contributions. Subject to certain limitations on
contributions, each Participant in the Plan is permitted to elect to reduce such
Participant's Compensation (as defined below) pursuant to a "Salary Reduction
Arrangement" by an amount not more than 12% and have that amount contributed to
the Plan on such Participant's behalf. Such amounts are credited to the
Participant's "Elective Contribution Account." See "Section IV Limitations on
Contributions" below. For purposes of the Plan, "Compensation" means
compensation reportable as wages on Form W-2. Compensation shall also include
compensation which is not currently includible in the Participant's gross income
by reason of the application of Code Sections 125,402(a)(8), 402(h)(B) or
403(b). As of January 1, 1998, the annual compensation of each Participant taken
into account under the Plan is limited to $160,000 (adjusted for increases in
the cost of living as permitted by the Code). Generally, a Participant may elect
to modify the amount contributed to the Plan under such participant's Salary
Reduction Arrangement not more often than twice in any calendar year by
providing notice to the Plan Administrator. However, special restrictions apply
to persons subject to Section 16 of the 1934 Act. Elective Contributions are
transferred by the Employer to the Trustee of the Plan.
Notwithstanding the preceding, a Participant who receives a hardship
distribution under the terms of the Plan may not be eligible to make additional
contributions under a Compensation Reduction Agreement or have matching
contributions made on his behalf for a period of twelve (12) months after the
receipt of the hardship distribution.
Employer Contributions. The Employer contributes to the Plan for each
Plan Year 100% of the Participant's first 2% of Elective Contributions and 50%
of any additional percentage up to 4% of Compensation deferred by the
Participant for the Plan Year. Such amounts are credited to the Participant's
"Matching Contribution Account." After the Conversion, at the discretion of the
Bank, the Employer contributions may be credited to the Participant's Account in
First Federal Bank Employee Stock Ownership Plan.
IV. LIMITATIONS ON CONTRIBUTIONS
Limitations on Annual Additions and Benefits. Pursuant to the
requirements of the Code, the Plan provides that the amount of contributions
allocated to each Participant's Elective Contribution Account and Matching
Contribution Account during any Plan Year may not exceed the lesser of 25% of
the Participant's Section 415 Compensation for the Plan Year or $30,000
(adjusted for increases in the cost of living as permitted by the Code). A
Participant's Section 415 Compensation is a Participant's Compensation,
excluding any Employer contribution to the Plan or to any other plan of deferred
compensation or any distributions from a plan of deferred compensation. In
addition, annual additions shall be limited to the extent necessary to prevent
the limitations set forth in the Code for all of the qualified defined benefit
plans and defined contribution plans maintained by the Bank from being exceeded.
To the extent that these limitations would be exceeded by reason of excess
annual additions with respect to a Participant, such excess will be disposed of
as follows:
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(i) Any excess amount in the Participant's Account will be used to
reduce the Employer's contributions for such Participant in the next Limitation
Year, and each succeeding Limitation Year if necessary;
(ii) If, an excess amount still exists, and the Participant is not
covered by the Plan at the end of the Limitation Year, the excess amount will be
held unallocated in a suspense account which will then be applied to reduce
future Employer contributions for all remaining Participants in the next
Limitation Year, and each succeeding Limitation Year if necessary;
(iii) If a suspense account is in existence at any time during the
Limitation Year, it will not participate in the allocation of investment gains
and losses.
Limitation on 401(k) Plan Contributions. The annual amount of deferred
Compensation under a Salary Reduction Arrangement of a Participant (when
aggregated with any elective deferrals of the Participant under a simplified
employee pension plan or a tax-deferred annuity) may not exceed $7,000 adjusted
for increases in the cost of living as permitted by the Code (the limitation for
1998 is $10,000). Contributions in excess of this limitation ("excess
deferrals") will be included in the Participant's gross income for federal
income tax purposes in the year they are made. In addition, any such excess
deferral will again be subject to federal income tax when distributed by the
Plan to the Participant, unless the excess deferral (together with any income
allocable thereto) is distributed to the Participant not later than the first
April 15th following the close of the taxable year in which the excess deferral
is made. Any income on the excess deferral that is distributed not later than
such date shall be treated, for federal income tax purposes, as earned and
received by the Participant in the taxable year in which the excess deferral is
made.
Limitation on Plan Contributions for Highly Compensated Employees.
Sections 401(k) and 401(m) of the Code limit the amount of deferred compensation
that may be made to the Plan in any Plan Year on behalf of Highly Compensated
Employees (defined below) in relation to the amount of deferred compensation
made by or on behalf of all other employees eligible to participate in the Plan.
Specifically, the actual deferral percentage (i.e., the average of the ratios,
calculated separately for each eligible employee in each group, by dividing the
amount of deferred compensation credited to the Elective Contribution Account of
such eligible employee by such eligible employee's compensation for the Plan
Year) of the Highly Compensated Employees may not exceed the greater of (i) 125%
of the actual deferral percentage of all other eligible employees, or (ii) the
lesser of (x) 200% of the actual deferral percentage of all other eligible
employees, or (y) the actual deferral percentage of all other eligible employees
plus two percentage points. In addition, the actual contribution percentage for
such Plan Years (i.e., the average of the ratios calculated separately for each
eligible employee in each group, by dividing the amount of voluntary employee
and employer matching contributions credited to the Matching Contribution
Account of such eligible employee by such eligible employee's compensation for
the Plan Year) of the Highly Compensated Employees may not exceed the greater of
(i) 125% of the actual contribution percentage of all other eligible employees,
or (ii) the lesser of (x) 200% of the actual contribution percentage of all
other eligible employees, or (y) the actual contribution percentage of all other
eligible employees plus two percentage points.
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<PAGE> 11
In general, a Highly Compensated Employee includes any employee who,
(1) was a five percent owner of the Employer at any time during the year or
preceding year; or (2) had compensation for the preceding year in excess of
$80,000 and, if the Employer so elects, was in the top 20% of employees by
compensation for such year. The dollar amounts in the foregoing sentence are for
1998. Such amounts are adjusted annually to reflect increases in the cost of
living.
In addition, the compensation of an employee who is a family member of
a 5% owner, or one of the ten most highly compensated employees during the
relevant period is aggregated with that of the Highly Compensated Employee. All
such family members are treated as a single employee with respect to the
application of the limitations on Highly Compensated Employees.
In order to prevent the disqualification of the Plan, any amount
contributed by Highly Compensated Employees that exceed the average deferral
limitation in any Plan Year ("excess contributions"), together with any income
allocable thereto, must be distributed to such Highly Compensated Employees
before the close of the following Plan Year. However, the Employer will be
subject to a 10% excise tax on any excess contributions unless such excess
contributions, together with any income allocable thereto, either are
recharacterized or are distributed before the close of the first 2 1/2 months
following the Plan Year to which such excess contributions relate.
Top-Heavy Plan Requirements. If for any Plan Year the Plan is a
Top-Heavy Plan (as defined below), then (i) the Bank may be required to make
certain minimum contributions to the Plan on behalf of non-key employees (as
defined below), and (ii) certain additional restrictions would apply with
respect to the combination of annual additions to the Plan and projected annual
benefits under any defined benefit plan maintained by the Bank.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any
Plan Year if, as of the last day of the preceding Plan Year, the aggregate
balance of the Accounts of Participants who are Key Employees (as defined below)
exceeds 60% of the aggregate balance of the Accounts of all Participants. Key
Employees generally include any employee who, at any time during the Plan Year
or any of the four preceding Plan Years, is (1) an officer of the Bank having
annual compensation in excess of $60,000 who is in an administrative or
policy-making capacity, (2) one of the ten employees having annual compensation
in excess of $30,000 and owning, directly or indirectly, the largest interests
in the Bank, (3) a 5% owner of the Bank, (i.e., owns directly or indirectly more
than 5% of the stock of the Bank, or stock possessing more than 5% of the total
combined voting power of all stock of the Bank) or (4) a 1% owner of the Bank
having annual compensation in excess of $150,000. The dollar amounts in the
foregoing sentence are for 1998.
V. INVESTMENT OF CONTRIBUTIONS
All amounts credited to Participants' Accounts under the Plan are held
in the Plan Trust (the "Trust") which is administered by the Trustee appointed
by the Bank's Board of Directors.
Prior to [insert date of Prospectus here], the Accounts of a
Participant held in the Trust have been invested by the Trustee at the direction
of the Participant in the following funds:
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[LIST INVESTMENTS]
The Plan, as amended effective _______, 1998, now provides that in
addition to the Funds specified above, a Participant who is employed by the Bank
may direct the Trustee to invest all or a portion of his or her accounts under
the Plan in the Employer Stock Fund.
Participants may elect to have both past and future contributions and
additions to the Participant's Elective Contribution Account invested either in
the Employer Stock Fund or among such other Funds. Participants Matching
Contribution Accounts may be invested in Employer Stock under the proposed terms
of the First Federal Bank Employee Stock Ownership Plan being implemented by the
Bank. These elections will be effective on the effective date of the
Participant's written notice to the Plan Administrator, provided such notice is
filed with the Plan Administrator at least __ days before it is to become
effective. Any amounts credited to a Participant's Account for which investment
directions are not given will be invested in the_________________ Fund in
accordance with the terms of the Plan.
The Participants interest in the Employer Stock Fund consists of units
whose value is related to a pro rata portion of the net asset value ("NAV") of
the Employer Stock Fund. The NAV is determined daily and all realized and
unrealized gains, dividends, and expenses are used to calculate the NAV. For
purposes of such valuation, all assets of the Trust are valued at their fair
market value.
A. Previous Funds.
Prior to __________, contributions under the Plan were invested in the
Funds listed below. The annual percentage return on these funds for the prior
three years was:
1996 1995 1994
---- ---- ----
[INSERT FUNDS]
8
<PAGE> 13
B. The Employer Stock Fund.
The Employer Stock Fund will consist of investments in Common
Stock made on and after the effective date of the Conversion. Each Participant's
proportionate undivided beneficial interest in the Employer Stock Fund is
measured by units. Each day a unit value will be calculated by determining the
market value of the Common Stock actually held and adding to that any cash held
by the Trustee. This total will be divided by the number of units outstanding to
determine the unit value of the Employer Stock Fund.
On the occasion of the payment of a cash dividend, the unit value will
be determined before the dividend is distributed. The Trustee may use the
dividend to purchase additional shares of Common Stock, thereby increasing the
total value of the Employer Stock Fund, and the value of each unit. The Board of
Directors of the Holding Company may consider a policy of paying cash dividends
on the Common Stock in the future; however, no decision as to the amount or
timing of cash dividends, if any, has been made. The Trustee will, to the extent
practicable, use all amounts held by it in the Employer Stock Fund to purchase
shares of Common Stock of the Bank. It is expected that all purchases will be
made at prevailing market prices. Under certain circumstances, the Trustee may
be required to limit the daily volume of shares purchased. Pending investment in
Common Stock, assets held in the Employer Stock Fund will be placed in bank
deposits and other short-term investments.
Any brokerage commissions, transfer fees and other expenses incurred in
the sale and purchase of Common Stock for the Employer Stock Fund will be paid
out of a cash account managed by the trustee. Therefore, although Participants'
accounts will not be directly adjusted for such fees, the market value of their
accounts will be reduced.
As of the date of this Prospectus Supplement, none of the shares of
Common Stock have been issued or are outstanding and there is no established
market for the Common Stock. Accordingly, there is no record of the historical
performance of the Employer Stock Fund. Performance will be dependent upon a
number of factors, including the financial condition and profitability of the
Holding Company and the Bank and market conditions for the Common Stock
generally. See "Market for the Common Stock" in the Prospectus.
INVESTMENTS IN THE EMPLOYER STOCK FUND MAY INVOLVE CERTAIN SPECIAL
RISKS IN INVESTMENTS IN COMMON STOCK OF THE COMPANY. FOR A DISCUSSION OF THESE
RISK FACTORS, SEE "RISK FACTORS" IN THE PROSPECTUS.
9
<PAGE> 14
VI. BENEFITS UNDER THE PLAN
Vesting. A Participant, at all times, has a fully vested,
nonforfeitable interest in his Basic Contribution Account and the earnings
thereon under the Plan. A Participant vests in his Matching Contribution Account
under the Plan according to the following schedule:
PERIOD OF SERVICE VESTED PERCENTAGE
- ----------------- -----------------
1 year 25%
2 years 50
3 years 75
4 years 100
VII. WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN
Withdrawals Prior to Termination of Employment. Subject to the hardship
distribution rules under the Plan, a Participant may withdraw all or a portion
of his (i) Elective Contribution Account, and (ii) the vested interest in his or
her Matching Contribution Account. The hardship distribution requirements ensure
that Participants have a true financial need before a withdrawal may be made.
Distribution Upon Retirement, Disability or Termination of Employment.
Payment of benefits to a Participant who retires, incurs a disability, or
otherwise terminates employment generally shall be made in a lump sum cash
payment as soon as administratively feasible after such termination of
employment if the vested value of the Participant's Account is $5,000 or less.
If the vested portion of the Participant's Account balance is greater than
$5,000, the Participant may request a distribution (subject to the minimum
distribution rules) in a lump sum payment: (a) as soon as administratively
possible after termination, (b) as of any valuation date up to 13 months after
termination or (c) as of the date the Participant attains normal retirement age.
At the request of the Participant, the distribution may include an in kind
distribution of Common Stock of the Holding Company equal to the number of
shares that can be purchased with the Participant's balance in the Employer
Stock Fund. Benefit payments ordinarily shall be made not later than 60 days
following the end of the Plan Year in which occurs the latest of the
Participant's: (i) termination of employment; (ii) the attainment of age 65 or
(iii) 10th anniversary of commencement of participation in the Plan; but in no
event later than the April 1 following the calendar year in which the
Participant attains age 70 1/2. However, if the vested portion of the
Participant's Account balances exceeds or has ever exceeded $5,000, no
distribution shall be made from the Plan prior to the Participant's attaining
age 65 unless the Participant elects to receive an earlier distribution.
10
<PAGE> 15
Distribution upon Death. A Participant who dies prior to the benefit
commencement date for retirement, disability or termination of employment, and
who has a surviving spouse shall have his benefits paid to the surviving spouse
in a lump sum as soon as administratively possible following the date of his
death, unless the Participant elected prior to his death or the beneficiary so
elects within 90 days of the Participant's death, to receive such distribution
in a lump sum payment as of any Valuation Date which occurs within one year of
the Participant's death. With respect to an unmarried Participant, and in the
case of a married Participant with spousal consent to the designation of another
beneficiary, payment of benefits to the beneficiary of a deceased Participant
shall be made in the form of a lump-sum payment in cash or in Common Stock in
the same manner described above as to a Participant with a surviving spouse.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations order
(as defined in the Code), benefits payable under the Plan shall not be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to
benefits payable under the Plan shall be void.
ADMINISTRATION OF THE PLAN
The Trustee with respect to the Plan is the named fiduciary of the Plan
for purposes of Section 402 of ERISA.
Trustees. The Trustee(s) is appointed by the Board of Directors of the
Bank to serve at its pleasure. The current Trustee(s) of the Plan are Gary
Gatski, Patricia Purvis and Patrick Owens. However, an unaffiliated Trustee is
being appointed to hold funds invested in the Employer Stock Fund.
The Trustee receives, holds and invests the contributions to the Plan
in trust and distributes them to Participants and beneficiaries in accordance
with the terms of the Plan and the directions of the Plan Administrator. The
Trustee is responsible for investment of the assets of the Trust.
REPORTS TO PLAN PARTICIPANTS
The Plan Administrator will furnish to each Participant a statement
showing (i) the balance in the Participant's Account as of the end of that
period, (ii) the amount of contributions allocated to such participant's Account
for that period, and (iii) the adjustments to such participant's Account to
reflect earnings or losses (if any).
PLAN ADMINISTRATOR
Pursuant to the terms of the Plan, the Plan is administered by one or
more persons who are appointed by and who serve at the pleasure of the Bank.
Currently, the Plan Administrator is Patricia Purvis, of the Bank. The address
of the Plan Administrator is c/o 12 East Broad Street,
11
<PAGE> 16
Hazleton, Pennsylvania and telephone number is (717) 459-3700. The Plan
Administrator is responsible for the administration of the Plan, interpretation
of the provisions of the Plan, prescribing procedures for filing applications
for benefits, preparation and distribution of information explaining the Plan,
maintenance of Plan records, books of account and all other data necessary for
the proper administration of the Plan, and preparation and filing of all returns
and reports relating to the Plan which are required to be filed with the U.S.
Department of Labor and the IRS, and for all disclosures required to be made to
Participants, Beneficiaries and others under Sections 104 and 105 of ERISA.
AMENDMENT AND TERMINATION
It is the intention of the Bank to continue the Plan indefinitely.
Nevertheless, the Bank may terminate the Plan at any time. If the Plan is
terminated in whole or in part, then regardless of other provisions in the Plan,
each employee affected by such termination shall have a fully vested interest in
his Accounts. The Bank reserves the right to make, from time to time, any
amendment or amendments to the Plan which do not cause any part of the Trust to
be used for, or diverted to, any purpose other than the exclusive benefit of
Participants or their beneficiaries; provided, however, that the Bank may make
any amendment it determines necessary or desirable, with or without retroactive
effect, to comply with ERISA.
MERGER, CONSOLIDATION OR TRANSFER
In the event of the merger or consolidation of the Plan with another
plan, or the transfer of the Trust assets to another plan, the Plan requires
that each Participant would (if either the Plan or the other plan then
terminated) receive a benefit immediately after the merger, consolidation or
transfer which is equal to or greater than the benefit he would have been
entitled to receive immediately before the merger, consolidation or transfer (if
the Plan had then terminated).
FEDERAL INCOME TAX CONSEQUENCES
The following is only a brief summary of certain federal income tax
aspects of the Plan which are of general application under the Code and is not
intended to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan. The
summary is necessarily general in nature and does not purport to be complete.
Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws. PARTICIPANTS ARE URGED TO
CONSULT THEIR TAX ADVISORS WITH RESPECT TO ANY DISTRIBUTION FROM THE PLAN AND
TRANSACTIONS INVOLVING THE PLAN.
The Plan will be submitted to the IRS in a timely manner for a
determination that it is qualified under Section 401(a) and 401(k) of the Code,
and that the related Trust is exempt from tax under Section 501(a) of the Code.
A plan that is "qualified" under these sections of the Code is afforded special
tax treatment which include the following: (1) The sponsoring employer is
allowed an immediate tax deduction for the amount contributed to the Plan each
year; (2) Participants pay
12
<PAGE> 17
no current income tax on amounts contributed by the employer on their behalf;
and (3) earnings of the plan are tax-deferred thereby permitting the tax-free
accumulation of income and gains on investments. The Plan will be administered
to comply in operation with the requirements of the Code as of the applicable
effective date of any change in the law. The Bank expects to timely adopt any
amendments to the Plan that may be necessary to maintain the qualified status of
the Plan under the Code. Following such an amendment, the Bank will submit the
Plan to the IRS for a determination that the Plan, as amended, continues to
qualify under Sections 401(a) and 501(a) of the Code and that it continues to
satisfy the requirements for a qualified cash or deferred arrangement under
Section 401(k) of the Code. Should the Plan receive from the IRS an adverse
determination letter regarding its tax exempt status, all participants would
generally recognize income equal to their vested interest in the Plan, the
participants would not be permitted to transfer amounts distributed from the
Plan to an IRA or to another qualified retirement plan, and the Bank may be
denied certain deductions taken with respect to the Plan.
Lump Sum Distribution. A distribution from the Plan to a Participant or
the beneficiary of a Participant will qualify as a Lump Sum Distribution if it
is made: (i) within one taxable year of the Participant or beneficiary; (ii) on
account of the Participant's death, disability or separation from service, or
after the Participant attains age 59 1/2; and (iii) consists of the balance to
the credit of the Participant under this Plan and all other profit sharing
plans, if any, maintained by the Bank. The portion of any Lump Sum Distribution
that is required to be included in the Participant's or beneficiary's taxable
income for federal income tax purposes (the "total taxable amount") consists of
the entire amount of such Lump Sum Distribution less the amount of after-tax
contributions, if any, made by the Participant to any other profit sharing plans
maintained by the Bank which is included in such distribution.
Averaging Rules. The portion of the total taxable amount of a Lump Sum
Distribution that is attributable to participation after 1973 in this Plan or in
any other profit-sharing plan maintained by the Bank (the "ordinary income
portion") will be taxable generally as ordinary income for federal income tax
purposes. However, a Participant who has completed at least five years of
participation in this Plan before the taxable year in which the distribution is
made, or a beneficiary who receives a Lump Sum Distribution on account of the
Participant's death (regardless of the period of the Participant's participation
in this Plan or any other profit-sharing plan maintained by the Employers), may
elect to have the ordinary income portion of such Lump Sum Distribution taxed
according to a special averaging rule ("five-year averaging"). The election of
the special averaging rules may apply only to one Lump Sum Distribution received
by the Participant or beneficiary, provided such amount is received on or after
the Participant turns 59-1/2 and the recipient elects to have any other Lump Sum
Distribution from a qualified plan received in the same taxable year taxed under
the special averaging rule. Under a special grandfather rule, individuals who
turned 50 by 1986 may elect to have their Lump Sum Distribution taxed under
either the five-year averaging rule or under the prior law ten-year averaging
rule. Such individuals also may elect to have that portion of the Lump Sum
Distribution attributable to the participant's pre-1974 participation in the
Plan taxed at a flat 20% rate as gain from the sale of a capital asset.
13
<PAGE> 18
Common Stock Included in Lump Sum Distribution. If a Lump Sum
Distribution includes Common Stock, the distribution generally will be taxed in
the manner described above, except that the total taxable amount will be reduced
by the amount of any net unrealized appreciation with respect to such Common
Stock, i.e., the excess of the value of such Common Stock at the time of the
distribution over its cost or other basis of the securities to the Trust. The
tax basis of such Common Stock to the Participant or beneficiary for purposes of
computing gain or loss on its subsequent sale will be the value of the Common
Stock at the time of distribution less the amount of net unrealized
appreciation. Any gain on a subsequent sale or other taxable disposition of such
Common Stock, to the extent of the amount of net unrealized appreciation at the
time of distribution, will be considered long-term capital gain regardless of
the holding period of such Common Stock. Any gain on a subsequent sale or other
taxable disposition of the Common Stock in excess of the amount of net
unrealized appreciation at the time of distribution will be considered either
short-term, medium term or long-term capital gain depending upon the length of
the holding period of the Common Stock. The recipient of a distribution may
elect to include the amount of any net unrealized appreciation in the total
taxable amount of such distribution to the extent allowed by the regulations to
be issued by the IRS.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan
or to an IRA. Pursuant to a change in the law, effective January 1, 1993,
virtually all distributions from the Plan may be rolled over to another
qualified Plan or to an individual retirement account ("IRA") without regard to
whether the distribution is a Lump Sum Distribution or a Partial Distribution.
Effective January 1, 1993, Participants have the right to elect to have the
Trustee transfer all or any portion of an "eligible rollover distribution"
directly to another plan qualified under Section 401(a) of the Code or to an
IRA. If the Participant does not elect to have an "eligible rollover
distribution" transferred directly to another qualified plan or to an IRA, the
distribution will be subject to an mandatory federal withholding tax equal to
20% of the taxable distribution. An "eligible rollover distribution" means any
amount distributed from the Plan except: (1) a distribution that is (a) one of a
series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the Participant or the joint
lines of the Participant and his or her designated beneficiary, or (b) for a
specified period of ten years or more; (2) any amount that is required to be
distributed under the minimum distribution rules; and (3) any other
distributions excepted under applicable federal law. The tax law change
described above did not modify the special tax treatment of Lump Sum
Distributions, that are not rolled over or transferred i.e., forward averaging,
capital gains tax treatment and the nonrecognition of net unrealized
appreciation, discussed earlier.
ERISA AND OTHER QUALIFICATION
As noted above, the Plan is subject to certain provisions of ERISA and
will be submitted to the IRS for a determination that it is qualified under
Section 401(a) of the Code.
14
<PAGE> 19
THE FOREGOING IS ONLY A BRIEF SUMMARY OF CERTAIN FEDERAL INCOME TAX
ASPECTS OF THE PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND IS NOT
INTENDED TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME TAX
CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN.
ACCORDINGLY, EACH PARTICIPANT IS URGED TO CONSULT A TAX ADVISOR CONCERNING THE
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND RECEIVING
DISTRIBUTIONS FROM THE PLAN.
RESTRICTIONS ON RESALE
Any person receiving a distribution of shares of Common Stock under the
Plan who is an "affiliate" of the Bank as the term "affiliate" is used in Rules
144 and 405 under the Securities Act of 1933, as amended (the "Securities Act")
(e.g., directors, officers and substantial shareholders of the Bank) may reoffer
or resell such shares only pursuant to a registration statement filed under the
Securities Act assuming the availability thereof, pursuant to Rule 144 or some
other exemption of the registration requirements of the Securities Act Any
person who may be an "affiliate" of the Bank may wish to consult with counsel
before transferring any Common Stock owned by him. In addition, Participants are
advised to consult with counsel as to the applicability of Section 16 of the
1934 Act which may restrict the sale of Common Stock where acquired under the
Plan, or other sales of Common Stock.
Persons who are not deemed to be "affiliates" of the Bank at the time
of resale will be free to resell any shares of Common Stock to them under the
Plan, either publicly or privately, without regard to the Registration and
Prospectus delivery requirements of the Securities Act or compliance with the
restrictions and conditions contained in the exemptive rules thereunder. An
"affiliate" of the Bank is someone who directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under common control,
with the Bank. Normally, a director, principal officer or major shareholder of a
corporation may be deemed to be an "affiliate" of that corporation. A person who
may be deemed an "affiliate" of the Bank at the time of a proposed resale will
be permitted to make public resales of the Bank's Common Stock only pursuant to
a "reoffer" Prospectus or in accordance with the restrictions and conditions
contained in Rule 144 under the Securities Act or some other exemption from
registration, and will not be permitted to use this Prospectus in connection
with any such resale. In general, the amount of the Bank's Common Stock which
any such affiliate may publicly resell pursuant to Rule 144 in any three-month
period may not exceed the greater of one percent of the Bank's Common Stock then
outstanding or the average weekly trading volume reported on the National
Association of Securities Dealers Automated Quotation System during the four
calendar weeks prior to the sale. Such sales may be made only through brokers
without solicitation and only at a time when the Bank is current in filing the
reports required of it under the 1934 Act.
SEC REPORTING AND SHORT-SWING PROFIT LIABILITY
Section 16 of the 1934 Act imposes reporting and liability requirements
on officers, directors and persons beneficially owning more than ten percent of
public companies such as the Holding Company. Section 16(a) of the 1934 Act
requires the filing of reports of beneficial ownership.
15
<PAGE> 20
Within ten days of becoming a person subject to the reporting requirements of
Section 16(a), a Form 3 reporting initial beneficial ownership must be filed
with the Securities and Exchange Commission. Certain changes in beneficial
ownership, such as purchases, sales, gifts and participation in savings and
retirement plans must be reported periodically, either on a Form 4 within ten
days after the end of the month in which a change occurs, or annually on a Form
5 within 45 days after the close of the Bank's fiscal year. Participation in the
Employer Stock Fund of the Plan by officers, directors and persons beneficially
owning more than ten percent of Common Stock of the Holding Company must be
reported to the SEC annually on a Form 5 by such individuals.
In addition to the reporting requirements described above, Section
16(b) of the 1934 Act provides for the recovery by the Holding Company of
profits realized by any officer, director or any person beneficially owning more
than ten percent of the Holding Company's Common Stock ("Section 16(b) Persons")
resulting from the purchase and sale or sale and purchase of the Holding
Company's Common Stock within any six-month period.
The SEC has adopted rules that provide exemption from the profit
recovery provisions of Section 16(b) for participant-directed employer security
transactions within an employee benefit plan, such as the Plan, provided certain
requirements are met. These requirements generally involve restrictions upon the
timing of elections to acquire or dispose of employer securities for the
accounts of Section 16(b) Persons.
Except for distributions of Common Stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order, Section 16(b) Persons are required to hold shares of Common Stock
distributed from the Plan for six months following such distribution.
EXPERTS
The financial statements and schedules of the Plan as of December 31,
1996 and 1995 and for the years then ended have been included herein in reliance
upon the report of Parente, Randolph, Orlando, Carey & Associates, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in auditing and accounting.
LEGAL OPINIONS
The validity of the issuance of the Common Stock will be passed upon by
Muldoon, Murphy & Faucette, Washington, D.C., which firm acted as special
counsel for the Bank in connection with the Bank's Conversion from a mutual
savings bank to a stock based organization.
16
<PAGE> 21
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1995
AND
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
AND
SUPPLEMENTAL SCHEDULES
<PAGE> 22
TABLE OF CONTENTS
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS:
Statement of Net Assets Available for Benefits,
With Fund Information F3-F6
Statement of Changes in Net Assets Available
for Benefits, With Fund Information F7-F10
Notes to Financial Statements F11-F15
SUPPLEMENTAL SCHEDULES:
Item 27a - Schedule of Assets Held for Investment Purposes F-16
Item 27d - Schedule of Reportable Transactions F-17
F-1
<PAGE> 23
[PARENTE-RANDOLPH-ORLANDO-
CAREY & ASSOCIATES - LOGO]
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
First Federal Savings & Loan Association
of Hazleton 401(k) Plan:
We were engaged to audit the financial statements and supplemental
schedules of First Federal Savings & Loan Association of Hazleton 401(k) Plan as
of December 31, 1996 and 1995, and for the years then ended, as listed in the
accompanying table of contents. These financial statements and schedules are the
responsibility of the Plan's management.
As permitted by 29 CFR 2520.103-8 of the Department of Labor's Rules and
Regulations for Reporting and Disclosure under the Employee Retirement Income
Security Act of 1974, the plan administrator instructed us not to perform, and
we did not perform, any auditing procedures with respect to the information
discussed in Note 2, which was certified by Lincoln National Life Insurance Co.
the custodian of the Plan, except for comparing such information with the
related information included in the financial statements and supplemental
schedules. We have been informed by the plan administrator that the custodian
holds the Plan's investment assets and executes investment transactions. The
plan administrator has obtained a certification from the custodian as of and for
the years ended December 31, 1996 and 1995, that the information provided to the
plan administrator by the custodian is complete and accurate.
Because of the significance of the information that we did not audit, we
are unable to, and do not, express an opinion on the accompanying financial
statements and schedules taken as a whole. The form and content of the
information included in the financial statements and schedules, other than that
derived from the information certified by the custodian, have been audited by us
in accordance with generally accepted auditing standards and, in our opinion,
are presented in compliance with the Department of Labor's Rules and Regulations
for Reporting and Disclosure under the Employee Retirement Income Security Act
of 1974.
Parente, Randolph, Orlando, Carey
& Associates
Hazleton, Pennsylvania
August 29, 1997
F-2
<PAGE> 24
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS,
WITH FUND INFORMATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
GOVERNMENT/
GOVERNMENT CORPORATE HIGH YIELD VALUE CORE
GUARANTEED SHORT-TERM BOND BOND BOND EQUITY EQUITY
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
---------- ---------- ---------- --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments:
Guaranteed Account $64,977
Short-Term Account $1,734
Government Bond Account $25,961
Government/Corporate Bond Account $10,559
High Yield Bond Account $6,618
Value Equity Account $2,003
Core Equity Account $162,547
Large Capitalization Equity Account
Medium Capitalization Equity Account
Small Capitalization Equity Account
International Equity Account
Delaware Global Bond Account
Balanced Equity Account
Conservative Balanced Account
Aggressive Balanced Account
Fidelity Asset Manager Account
Janus Account
Fidelity Contrafund Account
Strong Discovery Account
T. Rowe Price International Equity Account
------ ----- ------ ------ ----- ----- -------
Total assets 64,977 1,734 25,961 10,559 6,618 2,003 162,547
LIABILITIES -- -- -- -- -- -- --
------ ----- ------ ------ ----- ----- -------
NET ASSETS AVAILABLE FOR BENEFITS $64,977 $1,734 $25,961 $10,559 $6,618 $2,003 $162,547
======= ====== ======= ======= ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
LARGE MEDIUM SMALL DELAWARE
CAPITALIZATION CAPITALIZATION CAPITALIZATION INTERNATIONAL GLOBAL
EQUITY EQUITY EQUITY EQUITY BOND
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
-------------- -------------- -------------- ------------- -------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments:
Guaranteed Account
Short-Term Account
Government Bond Account
Government/Corporate Bond Account
High Yield Bond Account
Value Equity Account
Core Equity Account
Large Capitalization Equity Account $149,865
Medium Capitalization Equity Account $12,530
Small Capitalization Equity Account $2,123
International Equity Account $9,250
Delaware Global Bond Account $39
Balanced Equity Account
Conservative Balanced Account
Aggressive Balanced Account
Fidelity Asset Manager Account
Janus Account
Fidelity Contrafund Account
Strong Discovery Account
T. Rowe Price International Equity Account
------- ------ ----- ----- ---
Total assets 149,865 12,530 2,123 9,250 39
LIABILITIES -- -- -- -- --
------- ------ ----- ----- ---
NET ASSETS AVAILABLE FOR BENEFITS $149,865 $12,530 $2,123 $9,250 $39
======== ======= ====== ====== ===
</TABLE>
F-3
<PAGE> 25
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS,
WITH FUND INFORMATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
FIDELITY
BALANCED CONSERVATIVE AGGRESSIVE ASSET FIDELITY
EQUITY BALANCED BALANCED MANAGER JANUS CONTRAFUND
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments:
Guaranteed Account
Short-Term Account
Government Bond Account
Government/Corporate Bond Account
High Yield Bond Account
Value Equity Account
Core Equity Account
Large Capitalization Equity Account
Medium Capitalization Equity Account
Small Capitalization Equity Account
International Equity Account
Delaware Global Bond Account
Balanced Equity Account $93,817
Conservative Balanced Account $5,866
Aggressive Balanced Account $2,476
Fidelity Asset Manager Account $8,149
Janus Account $31,917
Fidelity Contrafund Account $7,137
Strong Discovery Account
T. Rowe Price International Equity Account
------- ------ ------ ------ ------- ------
Total assets 93,817 5,866 2,476 8,149 31,917 7,137
LIABILITIES -- -- -- -- -- --
------- ------ ------ ------ ------- ------
NET ASSETS AVAILABLE FOR BENEFITS $93,817 $5,866 $2,476 $8,149 $31,917 $7,137
======= ====== ====== ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
T. ROWE PRICE
STRONG INTERNATIONAL
DISCOVERY EQUITY
ACCOUNT ACCOUNT TOTAL
------- ------- -----
<S> <C> <C> <C>
ASSETS:
Investments:
Guaranteed Account $64,977
Short-Term Account 1,734
Government Bond Account 25,961
Government/Corporate Bond Account 10,559
High Yield Bond Account 6,618
Value Equity Account 2,003
Core Equity Account 162,547
Large Capitalization Equity Account 149,865
Medium Capitalization Equity Account 12,530
Small Capitalization Equity Account 2,123
International Equity Account 9,250
Delaware Global Bond Account 39
Balanced Equity Account 93,817
Conservative Balanced Account 5,866
Aggressive Balanced Account 2,476
Fidelity Asset Manager Account 8,149
Janus Account 31,917
Fidelity Contrafund Account 7,137
Strong Discovery Account $3,025 3,025
T. Rowe Price International Equity Account $1,885 1,885
------ ------ --------
Total assets 3,025 1,885 602,478
LIABILITIES -- -- --
------ ------ --------
NET ASSETS AVAILABLE FOR BENEFITS $3,025 $1,885 $602,478
====== ====== ========
</TABLE>
See Notes to Financial Statements
F-4
<PAGE> 26
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS,
WITH FUND INFORMATION
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
GOVERNMENT/
GOVERNMENT CORPORATE VALUE CORE
GUARANTEED SHORT-TERM BOND BOND EQUITY EQUITY
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments:
Guaranteed Account $41,005
Short-Term Account $1,357
Government Bond Account $20,467
Government/Corporate Bond Account $11,483
Value Equity Account $596
Core Equity Account $94,382
Large Capitalization Equity Account
Medium Capitalization Equity Account
Small Capitalization Equity Account
International Equity Account
Balanced Equity Account
Conservative Balanced Account
Aggressive Balanced Account
Fidelity Asset Manager Account
Janus Account
Fidelity Contrafund Account
Strong Discovery Account
T. Rowe Price International Equity Account
Contributions receivable:
Employer
Participants
------- ------ ------- ------- ---- -------
Total assets 41,005 1,357 20,467 11,483 596 94,382
LIABILITIES -- -- -- -- -- --
------- ------ ------- ------- ---- -------
NET ASSETS AVAILABLE FOR BENEFITS $41,005 $1,357 $20,467 $11,483 $596 $94,382
======= ====== ======= ======= ==== =======
</TABLE>
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
LARGE MEDIUM SMALL
CAPITALIZATION CAPITALIZATION CAPITALIZATION INTERNATIONAL
EQUITY EQUITY EQUITY EQUITY
ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- -------
<S> <C> <C> <C> <C>
ASSETS:
Investments:
Guaranteed Account
Short-Term Account
Government Bond Account
Government/Corporate Bond Account
Value Equity Account
Core Equity Account
Large Capitalization Equity Account $87,356
Medium Capitalization Equity Account $6,659
Small Capitalization Equity Account $961
International Equity Account $4,730
Balanced Equity Account
Conservative Balanced Account
Aggressive Balanced Account
Fidelity Asset Manager Account
Janus Account
Fidelity Contrafund Account
Strong Discovery Account
T. Rowe Price International Equity Account
Contributions receivable:
Employer
Participants
------- ------ ---- ------
Total assets 87,356 6,659 961 4,730
LIABILITIES -- -- -- --
------- ------ ---- ------
NET ASSETS AVAILABLE FOR BENEFITS $87,356 $6,659 $961 $4,730
======= ====== ==== ======
</TABLE>
F-5
<PAGE> 27
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS,
WITH FUND INFORMATION
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
FIDELITY
BALANCED CONSERVATIVE AGGRESSIVE ASSET FIDELITY
EQUITY BALANCED BALANCED MANAGER JANUS CONTRAFUND
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments:
Guaranteed Account
Short-Term Account
Government Bond Account
Government/Corporate Bond Account
Value Equity Account
Core Equity Account
Large Capitalization Equity Account
Medium Capitalization Equity Account
Small Capitalization Equity Account
International Equity Account
Balanced Equity Account $60,376
Conservative Balanced Account $2,208
Aggressive Balanced Account $1,094
Fidelity Asset Manager Account $3,059
Janus Account $10,097
Fidelity Contrafund Account $2,172
Strong Discovery Account
T. Rowe Price International Equity Account
Contributions receivable:
Employer
Participant
------- ------ ------ ------ ------- ------
Total assets 60,376 2,208 1,094 3,059 10,097 2,172
LIABILITIES -- -- -- -- -- --
------- ------ ------ ------ ------- ------
NET ASSETS AVAILABLE FOR BENEFITS $60,376 $2,208 $1,094 $3,059 $10,097 $2,172
======= ====== ====== ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
T. ROWE PRICE
STRONG INTERNATIONAL
DISCOVERY EQUITY
ACCOUNT ACCOUNT OTHER TOTAL
------- ------- ----- -----
<S> <C> <C> <C> <C>
ASSETS:
Investments:
Guaranteed Account $41,005
Short-Term Account 1,357
Government Bond Account 20,467
Government/Corporate Bond Account 11,483
Value Equity Account 596
Core Equity Account 94,382
Large Capitalization Equity Account 87,356
Medium Capitalization Equity Account 6,659
Small Capitalization Equity Account 961
International Equity Account 4,730
Balanced Equity Account 60,376
Conservative Balanced Account 2,208
Aggressive Balanced Account 1,094
Fidelity Asset Manager Account 3,059
Janus Account 10,097
Fidelity Contrafund Account 2,172
Strong Discovery Account $487 487
T. Rowe Price International Equity Account $2,623 2,623
Contributions receivable:
Employer $2,074 2,074
Participant 4,858 4,858
---- ------ ------ --------
Total assets 487 2,623 6,932 358,044
LIABILITIES -- -- -- --
---- ------ ------ --------
NET ASSETS AVAILABLE FOR BENEFITS $487 $2,623 $6,932 $358,044
==== ====== ====== ========
</TABLE>
See Notes to Financial Statements
F-6
<PAGE> 28
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS,
WITH FUND INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
GOVERNMENT/ HIGH
SHORT- GOVERNMENT CORPORATE YIELD VALUE CORE
GUARANTEED TERM BOND BOND BOND EQUITY EQUITY
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS ATTRIBUTED TO:
Investment income $2,993
Net appreciation in fair value of investments $64 $985 $233 $521 $197 $23,134
Investment expenses (642) (12) (221) (116) (23) (11) (1,170)
------- ------ ------- ------- ------ ------ --------
Total investment income 2,351 52 764 117 498 186 21,964
------- ------ ------- ------- ------ ------ --------
Contributions:
Employer 9,064 2,990 381 485 19,394
Participants 15,665 325 6,428 5,083 1,023 736 33,609
------- ------ ------- ------- ------ ------ --------
Total contributions 24,729 325 6,428 8,073 1,404 1,221 53,003
------- ------ ------- ------- ------ ------ --------
Total additions 27,080 377 7,192 8,190 1,902 1,407 74,967
------- ------ ------- ------- ------ ------ --------
DEDUCTIONS FROM NET ASSETS ATTRIBUTED TO:
Benefits paid to participants 2,854 84 10,360
Administrative fees
------- ------ ------- ------- ------ ------ --------
Total deductions 2,854 -- -- -- 84 -- 10,360
------- ------ ------- ------- ------ ------ --------
Net increase prior to interfund
transfers 24,226 377 7,192 8,190 1,818 1,407 64,607
INTERFUND TRANSFERS (254) (1,698) (9,114) 4,800 3,558
------- ------ ------- ------- ------ ------ --------
Net increase 23,972 377 5,494 (924) 6,618 1,407 68,165
NET ASSETS AVAILABLE FOR BENEFITS:
Beginning of year 41,005 1,357 20,467 11,483 -- 596 94,382
------- ------ ------- ------- ------ ------ --------
End of year $64,977 $1,734 $25,961 $10,559 $6,618 $2,003 $162,547
======= ====== ======= ======= ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
LARGE MEDIUM SMALL DELAWARE
CAPITALIZATION CAPITALIZATION CAPITALIZATION INTERNATIONAL GLOBAL
EQUITY EQUITY EQUITY EQUITY BOND
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS ATTRIBUTED TO:
Investment income
Net appreciation in fair value of investments $19,551 $1,303 $74 $611
Investment expenses (1,104) (92) (14) (65)
-------- ------- ------ ------
Total investment income 18,447 1,211 60 546
-------- ------- ------ ------
Contributions:
Employer 19,830 2,025 476 1,782 $13
Participants 29,979 3,852 626 3,611 26
-------- ------- ------ ------ ---
Total contributions 49,809 5,877 1,102 5,393 39
-------- ------- ------ ------ ---
Total additions 68,256 7,088 1,162 5,939 39
-------- ------- ------ ------ ---
DEDUCTIONS FROM NET ASSETS ATTRIBUTED TO:
Benefits paid to participants 1,577 1,554 1,419
Administrative fees
-------- ------- ------ ------ ---
Total deductions 1,577 1,554 -- 1,419 --
-------- ------- ------ ------ ---
Net increase prior to interfund
transfers 66,679 5,534 1,162 4,520 39
INTERFUND TRANSFERS (4,170) 337
-------- ------- ------ ------ ---
Net increase 62,509 5,871 1,162 4,520 39
NET ASSETS AVAILABLE FOR BENEFITS:
Beginning of year 87,356 6,659 961 4,730 --
-------- ------- ------ ------ ---
End of year $149,865 $12,530 $2,123 $9,250 $39
======== ======= ====== ====== ===
</TABLE>
F-7
<PAGE> 29
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
STATEMENT OF CHANGES NET ASSETS AVAILABLE FOR BENEFITS,
WITH FUND INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
FIDELITY
BALANCED CONSERVATIVE AGGRESSIVE ASSET
EQUITY BALANCED BALANCED MANAGER JANUS
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS ATTRIBUTED TO:
Investment income
Net appreciation in fair value of investments $7,343 $272 $194 $707 $3,394
Investment expenses (693) (38) (16) (51) (190)
------- ------ ------ ------ -------
Total investment income 6,650 234 178 656 3,204
------- ------ ------ ------ -------
Contributions:
Employer 12,401 1,315 526 1,596 3,509
Participants 10,444 2,109 678 2,838 7,432
------- ------ ------ ------ -------
Total contributions 22,845 3,424 1,204 4,434 10,941
------- ------ ------ ------ -------
Total additions 29,495 3,658 1,382 5,090 14,145
------- ------ ------ ------ -------
DEDUCTIONS FROM NET ASSETS ATTRIBUTED TO:
Benefits paid to participants 4,691
Administrative fees
------- ------ ------ ------ -------
Total deductions 4,691 -- -- -- --
------- ------ ------ ------ -------
Net increase prior to interfund
transfers 24,804 3,658 1,382 5,090 14,145
INTERFUND TRANSFERS 8,637 7,675
------- ------ ------ ------ -------
Net increase 33,441 3,658 1,382 5,090 21,820
NET ASSETS AVAILABLE FOR BENEFITS:
Beginning of year 60,376 2,208 1,094 3,059 10,097
------- ------ ------ ------ -------
End of year $93,817 $5,866 $2,476 $8,149 $31,917
======= ====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
T. ROWE PRICE
FIDELITY STRONG INTERNATIONAL
CONTRAFUND DISCOVERY EQUITY
ACCOUNT ACCOUNT ACCOUNT OTHER TOTAL
------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS ATTRIBUTED TO:
Investment income $2,993
Net appreciation in fair value of investments $918 $111 $364 59,976
Investment expenses (41) (14) (21) (4,534)
------ ------ ------ --------
Total investment income 877 97 343 58,435
------ ------ ------ --------
Contributions:
Employer 1,730 851 561 78,929
Participants 2,637 1,338 1,170 129,609
------ ------ ------ --------
Total contributions 4,367 2,189 1,731 208,538
------ ------ ------ --------
Total additions 5,244 2,286 2,074 266,973
------ ------ ------ --------
DEDUCTIONS FROM NET ASSETS ATTRIBUTED TO:
Benefits paid to participants 22,539
Administrative fees
------ ------ ------ --------
Total deductions -- -- -- 22,539
------ ------ ------ --------
Net increase prior to interfund
transfers 5,244 2,286 2,074 244,434
INTERFUND TRANSFERS (279) 252 (2,812) ($6,932) --
------ ------ ------ ------- --------
Net increase 4,965 2,538 (738) (6,932) 244,434
NET ASSETS AVAILABLE FOR BENEFITS:
Beginning of year 2,172 487 2,623 6,932 358,044
------ ------ ------ ----- --------
End of year $7,137 $3,025 $1,885 $ -- $602,478
====== ====== ====== ====== ========
</TABLE>
See Notes to Financial Statements
F-8
<PAGE> 30
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS,
WITH FUND INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
GOVERNMENT/ HIGH
SHORT- GOVERNMENT CORPORATE YIELD VALUE CORE
GUARANTEED TERM BOND BOND BOND EQUITY EQUITY
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS ATTRIBUTED TO:
Investment income $2,006 $44
Net appreciation in fair value of investments $1,722 $1,272 $10 $74 $19,994
Investment expenses (7) (148) (66) (1) (2) (622)
------- ------ ------- ------- --- ---- -------
Total investment income 2,006 37 1,574 1,206 9 72 19,372
------- ------ ------- ------- --- ---- -------
Contributions:
Employer 9,637 106 5,208 2,653 77 199 14,486
Participants 16,290 141 7,685 4,404 154 325 24,984
------- ------ ------- ------- --- ---- -------
Total contributions 25,927 247 12,893 7,057 231 524 39,470
------- ------ ------- ------- --- ---- -------
Total additions 27,933 284 14,467 8,263 240 596 58,842
------- ------ ------- ------- --- ---- -------
DEDUCTIONS FROM NET ASSETS ATTRIBUTED TO:
Benefits paid to participants 2,203 881 2,928
Administrative fees 266
------- ------ ------- ------- ---- ---- -------
Total deductions 2,469 -- 881 -- -- -- 2,928
------- ------ ------- ------- ---- ---- -------
Net increase prior to interfund
transfers 25,464 284 13,586 8,263 240 596 55,914
INTERFUND TRANSFERS (166) 921 (522) (240) 69
------- ------ ------- ------- ---- ---- -------
Net increase 25,298 1,205 13,064 8,263 -- 596 55,983
NET ASSETS AVAILABLE FOR BENEFITS:
Beginning of year 15,707 152 7,403 3,220 38,399
------- ------ ------- ------- ---- ---- -------
End of year $41,005 $1,357 $20,467 $11,483 $ -- $596 $94,382
======= ====== ======= ======= ==== ==== =======
</TABLE>
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
LARGE MEDIUM SMALL
CAPITALIZATION CAPITALIZATION CAPITALIZATION INTERNATIONAL
EQUITY EQUITY EQUITY EQUITY
ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- -------
<S> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS ATTRIBUTED TO:
Investment income
Net appreciation in fair value of investments $14,679 $344 $92 $355
Investment expenses (585) (16) (8) (25)
------- ------ ---- ------
Total investment income 14,094 328 84 330
------- ------ ---- ------
Contributions:
Employer 15,521 1,034 662 1,691
Participants 22,977 2,058 970 3,461
------- ------ ----- ------
Total contributions 38,498 3,092 1,632 5,152
------- ------ ----- ------
Total additions 52,592 3,420 1,716 5,482
------- ------ ----- ------
DEDUCTIONS FROM NET ASSETS ATTRIBUTED TO:
Benefits paid to participants 1,136
Administrative fees
------- ------ ---- ------
Total deductions 1,136 -- -- --
------- ------ ---- ------
Net increase prior to interfund
transfers 51,456 3,420 1,716 5,482
INTERFUND TRANSFERS (1,310) 3,239 (755) (973)
------- ------ ----- ------
Net increase 50,146 6,659 961 4,509
NET ASSETS AVAILABLE FOR BENEFITS:
Beginning of year 37,210 221
------- ------ --- ------
End of year $87,356 $6,659 $961 $4,730
======= ====== ==== ======
</TABLE>
F-9
<PAGE> 31
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
STATEMENT OF CHANGES NET ASSETS AVAILABLE FOR BENEFITS,
WITH FUND INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
FIDELITY
BALANCED CONSERVATIVE AGGRESSIVE ASSET
EQUITY BALANCED BALANCED MANAGER JANUS
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS ATTRIBUTED TO:
Investment income
Net appreciation in fair value of investments $9,086 $152 $99 $260 $933
Investment expenses (405) (7) (4) (12) (36)
------- ------ ------ ------ -------
Total investment income 8,681 145 95 248 897
------- ------ ------ ------ -------
Contributions:
Employer 10,814 812 434 1,076 2,378
Participants 16,908 1,251 565 1,735 4,717
------- ------ ------ ------ -------
Total contributions 27,722 2,063 999 2,811 7,095
------- ------ ------ ------ -------
Total additions 36,403 2,208 1,094 3,059 7,992
------- ------ ------ ------ -------
DEDUCTIONS FROM NET ASSETS ATTRIBUTED TO:
Benefits paid to participants 1,424
Administrative fees
------- ------ ------ ------ -------
Total deductions 1,424 -- -- -- --
------- ------ ------ ------ -------
Net increase prior to interfund
transfers 34,979 2,208 1,094 3,059 7,992
INTERFUND TRANSFERS 126 2,105
------- ------ ------ ------ -------
Net increase 35,105 2,208 1,094 3,059 10,097
NET ASSETS AVAILABLE FOR BENEFITS:
Beginning of year 25,271
------- ------ ------ ------ -------
End of year $60,376 $2,208 $1,094 $3,059 $10,097
======= ====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
T. ROWE PRICE
FIDELITY STRONG INTERNATIONAL
CONTRAFUND DISCOVERY EQUITY
ACCOUNT ACCOUNT ACCOUNT OTHER TOTAL
------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS ATTRIBUTED TO:
Investment income $2,050
Net appreciation in fair value of investments $367 $88 $297 49,824
Investment expenses (9) (2) (18) (1,973)
------ ---- ------ --------
Total investment income 358 86 279 49,901
------ ---- ------ --------
Contributions:
Employer 750 159 1,227 $434 69,358
Participants 1,064 242 2,690 834 113,455
------ ---- ------ ------ --------
Total contributions 1,814 401 3,917 1,268 182,813
------ ---- ------ ------ --------
Total additions 2,172 487 4,196 1,268 232,714
------ ---- ------ ------ --------
DEDUCTIONS FROM NET ASSETS ATTRIBUTED TO:
Benefits paid to participants 8,572
Administrative fees 266
------ ---- ------ ------ --------
Total deductions -- -- -- -- 8,838
------ ---- ------ ------ --------
Net increase prior to interfund
transfers 2,172 487 4,196 1,268 223,876
INTERFUND TRANSFERS (1,573) (921) --
------ ---- ------ ------ --------
Net increase 2,172 487 2,623 347 223,876
NET ASSETS AVAILABLE FOR BENEFITS:
Beginning of year 6,585 134,168
------ ---- ------ ------ --------
End of year $2,172 $487 $2,623 $6,932 $358,044
====== ==== ====== ====== ========
</TABLE>
See Notes to Financial Statements
F-10
<PAGE> 32
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF PLAN
The following description of the First Federal Savings & Loan Association of
Hazleton 401(k) Plan (the "Plan") provides only general information. The
participants should refer to the Plan document for a more complete
description of the Plan's provisions.
GENERAL
The Plan is a contributory, defined contribution plan covering
substantially all salaried employees of the First Federal Savings & Loan
Association of Hazleton (the "Association"). The Plan was established on
January 1, 1994 and is subject to the provisions of the Employee
Retirement Income Security Act of 1974 (ERISA).
ELIGIBILITY
Employees of the Association are eligible to participate in the Plan if
the employee has completed six months of service and attained the age of
twenty-one, provided he is a salaried employee.
CONTRIBUTIONS
Participants in the Plan may elect to have a portion of their annual
compensation reduced and paid into the Plan. The salary deferral
percentage can be changed semiannually. The Association also contributes
to the Plan on behalf of each participant. The Association's contribution
for each participant is based on a "floating" match. For the years ended
December 31, 1996 and 1995, the Association matched 100% of the
participants' annual compensation on the first 2% and fifty percent on the
next 2% contributed.
PARTICIPANT ACCOUNTS
Each participant's account is credited with the participant's contribution
and an allocation of the Association's contributions and Plan earnings.
Plan earnings are allocated based upon participant's account balances as
defined.
VESTING
Participants vest in their employee contribution account balances 100%
immediately upon entering the Plan. Participants vest in their employer's
contribution account balances according to the vesting schedule outlined
in the Plan agreement which provides that participants are 100% vested
after 4 years of service.
F-11
<PAGE> 33
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
INVESTMENT OPTIONS
Participants may direct employee contributions in the following
investments administered by Lincoln National Life Insurance Co.
Guaranteed Account - Account consists primarily of high-quality bonds
and mortgages. The assets of the account are backed by the general
assets of Lincoln National Life Insurance Co.
Short-Term Account- Account consists of high-quality money market
securities that include commercial paper, bankers acceptances,
certificates of deposit, loan participation and short-term U.S.
government debt.
Government Bond Account - Account consists primarily of bonds backed by
the United States government that will mature in 3 to 5 years.
Government/Corporate Bond Account - Account consists primarily of
government and high-quality mortgage-backed corporate bonds.
High Yield Bond Account - Account consists primarily of below
investment-grade bonds.
Value Equity Account - Account consists of stocks of conservative
companies that are leaders in their industries.
Core Equity Account - Account consists of large capitalization stocks
of well-established companies.
Large Capitalization Equity Account - Account consists of stocks of
large companies that have the potential to grow 50% within 18 months
from the date of purchase.
Medium Capitalization Equity Account - Account consists of stocks of
medium-sized companies that have strong financial characteristics.
Small Capitalization Equity Account - Account consists of stocks of
small companies having the potential to grow rapidly and produce
superior returns.
International Equity Account - Account consists of stocks of non-United
States companies.
Delaware Global Bond Account - Account invests primarily in fixed
income securities that may also provide the potential for capital
appreciation.
F-12
<PAGE> 34
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
Balanced Equity Account - Account consists of holdings in three
different asset classes: stocks, bonds and money market instruments.
Conservative Balanced Account - Account consists of holdings in three
different asset classes: stocks, bonds and money market instruments.
The account places an emphasis on a bond portfolio.
Aggressive Balanced Account - Account consists of holdings in three
different asset classes: stocks, bonds and money market instruments.
The account places an emphasis on common stocks, both domestic and
international.
Fidelity Asset Manager Account - Account consists of shares from a
mutual fund, Fidelity Asset Manager, that invests in three different
asset classes: stocks, bonds and short-term, fixed-income instruments.
Janus Account - Account consists of shares of The Janus Fund, a mutual
fund which invests primarily in common stocks of companies experiencing
favorable demand for their products and services.
Fidelity Contrafund Account - Account consists of shares exclusively
from a mutual fund, Fidelity Contrafund, that invests in undervalued
stocks of medium-sized and smaller companies not currently favored by
the public, but which show a potential for capital appreciation.
Strong Discovery Account - Account consists of shares of the Strong
Discovery Fund, a mutual fund. The fund invests primarily in common
stocks, emphasizing smaller companies with favorable prospects for
earnings growth.
T. Rowe Price International Equity Account - Account consists of shares
exclusively in the T. Rowe Price International Stock Fund, a mutual
fund. This fund invests primarily in common stocks of established
non-U.S. companies having the potential for growth of capital.
Participants may transfer amounts among investment funds daily.
PLAN BENEFITS
Participants are eligible for distribution of their account balances at
the earlier of the participant's termination, disability or death.
Participants may also receive distributions in the event of financial
hardship. Distributions are made in single sum amounts or installment
payments or in the form of an annuity.
F-13
<PAGE> 35
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
The Plan's investments include the Guaranteed Account and the Short-Term
Account which are valued at contract value, which approximates fair value.
Contract value represents contributions made under the contract plus
earnings, less withdrawals. The remaining investments are valued at fair
value based upon market prices provided to the Plan by Lincoln National
Life Insurance Co.
Lincoln National Life Insurance Co. has provided the plan administrator
with a certification as to the completeness and accuracy of substantially
all investment information presented in the accompanying statement of net
assets available for benefits, with fund information as of December 31,
1996 and 1995 and in the statement of changes in net assets available for
benefits for the years then ended.
A summary of the Plan's total units and unit values of investments by
account type as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
TOTAL UNIT TOTAL UNIT
UNITS VALUES UNITS VALUES
----- ------ ----- ------
<S> <C> <C> <C> <C>
Short-Term Account 628.67 $2.758008 518.02 $2.620501
Government Bond Account 17,245.33 1.505387 14,138.59 1.447598
Government/Corporate Bond Account 2,158.51 4.905633 2,390.16 4.804281
Value Equity Account 1,268.67 1.579151 439.55 1.355926
Core Equity Account 19,736.20 8.236001 13,735.07 6.871594
Large Capitalization Equity
Account 26,492.41 5.656885 18,239.90 4.789281
Medium Capitalization Equity
Account 1,403.92 8.924848 850.65 7.828105
Small Capitalization Equity
Account 662.79 3.203282 313.18 3.068546
International Equity Account 1,844.52 5.014649 1,031.62 4.585028
Balanced Equity Account 21,399.95 4.383997 15,147.84 3.985784
Conservative Balanced Account 4,728.18 1.244969 1,874.69 1.177797
Aggressive Balanced Account 1,816.33 1.363246 891.87 1.226633
Fidelity Asset Manager Account 6,255.75 1.302662 2,638.17 1.159514
Janus Account 20,221.38 1.578357 7,640.35 1.321536
Fidelity Contra Fund Account 4,201.00 1.698761 1,553.89 1.397784
Strong Discovery Account 2,087.83 1.449088 339.84 1.433009
T. Rowe Price International
Equity Account 1,464.68 1.287258 2,355.84 1.113401
High Yield Bond Account 3,176.10 2.083805 -- --
Delaware Global Bond Account 34.93 1.106640 -- --
</TABLE>
F-14
<PAGE> 36
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
BENEFIT PAYMENTS
Benefit payments to participants are recorded when paid.
ESTIMATES
The preparation of financial statements requires the plan administrator to
make estimates and assumptions that affect certain reported amounts and
disclosures. Actual results could differ from those estimates.
3. PLAN TERMINATION
Although it has not expressed any intent to do so, the Association have the
right under the Plan to discontinue contributions at any time and to
terminate the Plan subject to the provisions of ERISA. In the event of plan
termination, participants will become one hundred percent vested in their
accounts.
4. INCOME TAX STATUS
The trust established under the Plan to hold the Plan's assets is qualified
pursuant to the appropriate sections of the Internal Revenue Code, and
accordingly, the trust's net investment income is exempt from income taxes.
The Plan has obtained a favorable tax determination letter from the Internal
Revenue Service, and in the opinion of the Plan's sponsor, the Plan, as
amended, continues to operate in a manner that qualifies its tax-exempt
status.
5. RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500
The following is a reconciliation of benefits paid to participants reported
in the accompanying financial statements to the Form 5500 for the years
ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Benefits paid to participants reported in
financial statements $23,435 $8,572
Deduct refund of salary deferral (896) (972)
------- ------
Benefits paid to participants reported in Form 5500 $22,539 $7,600
======= ======
</TABLE>
F-15
<PAGE> 37
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
ITEM 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
CURRENT
IDENTITY OF ISSUE DESCRIPTION OF INVESTMENT COST VALUE
----------------- ------------------------- ---- -----
<S> <C> <C> <C>
GROUP ANNUITY CONTRACT
ADMINISTERED BY LINCOLN
NATIONAL LIFE INSURANCE
COMPANY: SEPARATE ACCOUNTS:
Guaranteed Fixed Income Account $60,191 $64,977
Short-Term Account, 628.67 units 1,677 1,734
Government Bond Account, 17,245.33 units 24,106 25,961
Government/Corporate Bond Account, 2,158.51 unit 9,809 10,559
High Yield Bond Account, 3,176.10 units 6,124 6,618
Value Equity Account, 1,268.67 units 1,747 2,003
Core Equity Account, 19,736.20 units 124,173 162,547
Large Capitalization Equity Account, 26,492.41 units 118,620 149,865
Medium Capitalization Equity Account, 1,403.92 units 11,294 12,530
Small Capitalization Equity Account, 662.79 unit 2,202 2,123
International Equity Account, 1,844.52 units 8,609 9,250
Delaware Global Bond Account, 34.93 units -- 39
Balanced Equity Account, 21,399.95 units 80,321 93,817
Conservative Balanced Account, 4,728.18 units 5,509 5,866
Aggressive Balanced Account, 1,816.33 units 2,089 2,476
Fidelity Asset Manager Account, 6,255.75 units 7,283 8,149
Janus Account, 20,221.38 units 27,875 31,917
Fidelity Contrafund Account, 4,201 units 6,115 7,137
Strong Discovery Account, 2,087.83 units 2,883 3,025
T. Rowe Price International Equity Account, 1,464.68 units 1,694 1,885
-------- --------
TOTAL ASSETS HELD FOR INVESTMENT PURPOSES $502,321 $602,478
======== ========
</TABLE>
See Notes to Financial Statements
F-16
<PAGE> 38
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
ITEM 27d - SCHEDULE OF REPORTABLE TRANSACTIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f) (g) (h) (I)
PURCHASE SELLING LEASE CURRENT NET GAIN
IDENTITY OF PARTY DESCRIPTION OF ASSET PRICE PRICE RENTAL EXPENSES COST VALUE (LOSS)
- ----------------- -------------------- ----- ----- ------ -------- ---- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LINCOLN NATIONAL LIFE
INSURANCE COMPANY GUARANTEED FIXED ACCOUNT
Purchases $24,145 $24,145
Sales $3,151 $3,151 3,151
CORE EQUITY ACCOUNT
Purchases 58,650 58,650
Sales 12,964 12,964 12,964
BALANCED ACCOUNT
Purchases 41,332 41,332
Sales 14,555 14,555 14,555
LARGE CAPITALIZATION EQUITY ACCOUNT
Purchases 50,234 50,234
Sales 6,203 6,203 6,203
JANUS EQUITY ACCOUNT
Purchases 18,616 18,616
</TABLE>
See Notes to Financial Statements
F-17
<PAGE> 39
FIRST FEDERAL BANK
401(K) PLAN
Investment Form
Name of Plan Participant:
Social Security Number:
1. INSTRUCTIONS. In connection with the proposed Conversion of
First Federal Bank from a mutual savings bank to a stock based organization (the
"Conversion"), First Federal Savings and Loan Association of Hazleton 401(k)
Plan ("Plan") has been amended and restated to permit participants to direct
their current account balances for their Elective Contribution Account and
Employer Contribution Account into a new fund: the Employer Stock Fund. The
percentage of a participant's account transferred at the direction of the
participant into the Employer Stock Fund will be used to purchase shares of
common stock of Northeast Pennsylvania Financial Corp. (the "Common Stock").
To direct a transfer of all or a part of the funds credited to your
accounts to the Employer Stock Fund, you should complete and file this form with
the Human Resources Department, no later than 4:00 p.m. on ______ __, 1998. A
representative for the Plan Administrator will retain a copy of this form and
return a copy to you. If you need any assistance in completing this form, please
contact Patricia Purvis at ( ) - . If you do not complete and return this form
to the Plan Administrator by _____________, 1998, the funds credited to your
accounts under the Plan will continue to be invested in accordance with your
prior investment direction, or in accordance with the terms of the Plan if no
investment direction has been provided.
2. INVESTMENT DIRECTIONS. I hereby authorize the Plan Administrator to direct
the Trustee to sell the units currently credited to my Elective Contribution
Account and Employer Contribution Account and to purchase units in the Employer
Stock Fund:
PURCHASE UNITS IN EMPLOYER
SELL UNITS FROM STOCK FUND
Sell ___% of ____%
Sell ___% of ____%
Sell ___% of ____%
Sell ___% of ____%
Sell ___% of ____%
Sell ___% of ____%
Sell ___% of ____%
NOTE: The total percentage of directed investments, above, may not exceed 100%.
3. PURCHASER INFORMATION. The ability of participants in the Plan to purchase
Common Stock in the Conversion and to direct their current account balances into
the Employer Stock Fund is based upon the participant's status as an Eligible
Account Holder and/or Supplemental Eligible Account Holder. Please indicate your
status.
a. / / Eligible Account Holder - Check here if you were a
depositor with $___ or more on deposit with First
Federal Bank as of____________
b. / / Supplemental Eligible Account Holder - Check here if
you were a depositor with $_____ or more on deposit
with First Federal Bank as of_____________, 1997, but
are not an Eligible Account Holder.
<PAGE> 40
4. ACKNOWLEDGMENT OF PARTICIPANT. I understand that this Investment Form shall
be subject to all of the terms and conditions of the Plan. I acknowledge that I
have received a copy of the Prospectus and the Prospectus Supplement.
____________________________ ______________________
Signature of Participant Date
ACKNOWLEDGMENT OF RECEIPT BY ADMINISTRATOR. This Investment Form was received by
the Plan Administrator and will become effective on the date noted below.
______________________
By:_________________________ Date
THE PARTICIPATION INTERESTS REPRESENTED BY COMMON STOCK OFFERED HEREBY
ARE NOT DEPOSIT ACCOUNTS AND ARE NOT INSURED BY THE BANK INSURANCE FUND OR THE
SAVINGS ASSOCIATION INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY AND ARE NOT GUARANTEED BY THE COMPANY OR BANK.
THE COMMON STOCK IS SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF
THE PRINCIPAL INVESTED.
<PAGE> 41
[To be used in connection with the Syndicated Community Offering only]
SYNDICATED PROSPECTUS SUPPLEMENT
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
(PROPOSED HOLDING COMPANY FOR FIRST FEDERAL
SAVINGS AND LOAN ASSOCIATION OF HAZLETON)
__________ SHARES OF COMMON STOCK
Northeast Pennsylvania Financial Corp. (the "Company"), a Delaware
corporation, is offering for sale in a syndicated community offering (the
"Syndicated Community Offering") __________ shares, at a per share price of
$10.00, of its common stock, par value $.01 per share (the "Common Stock"), to
be sold upon the conversion (the "Conversion") of First Federal Savings and Loan
Association of Hazleton, Hazleton, Pennsylvania (the "Bank") from a federally
chartered mutual savings bank to a federally chartered stock savings bank and
the issuance of the Bank's outstanding capital stock to the Company pursuant to
a plan of conversion, (the "Plan of Conversion"). The remaining __________
shares of the Common Stock to be sold in the Conversion have been subscribed for
in subscription and community offerings (the "Subscription and Community
Offerings") by holders of deposit accounts with the Bank with a balance of $50
or more as of September 30, 1996, by the First Federal Bank Employee Stock
Ownership Plan, a tax-qualified employee benefit plan, and related trust (the
"ESOP"), by holders of deposit accounts with the Bank with a balance of $50 or
more as of ______________, 1997, by certain other account holders and borrowers
of the Bank and, then, by certain members of the general public. See "The
Conversion General." Contained herein is the Prospectus in the form used in the
Subscription and Community Offerings. The purchase price for all shares sold in
the Syndicated Community Offering will be the same as the price paid by
subscribers in the Subscription and Community Offerings (the "Purchase Price").
The Purchase Price of $10.00 per share is the amount to be paid for each share
at the time a purchase order is submitted. See the cover page of the Prospectus
and the table below for information as to the method by which the range within
which the number of shares offered may vary and the method of subscribing for
shares of the Common Stock.
Funds submitted to the Bank with purchase orders will earn interest at
the Bank's passbook rate of interest from the date of receipt until completion
or termination of the Conversion. The Syndicated Community Offering will expire
no later than _______________, 199_, unless extended by the Bank and the Company
with the approval of the Office of Thrift Supervision (the "OTS"). Such
extensions may not go beyond _______________, 199_. If an extension of time has
been granted, all subscribers will be notified of such extension, and of their
rights to confirm their subscriptions, or to modify or rescind their
subscriptions and have their funds returned promptly with interest, and of the
time period within which the subscriber must notify the Bank of his intention to
confirm, modify or rescind his subscription. If an affirmative response to any
resolicitation is not received by the Bank and the Company from subscribers,
such orders will be rescinded and all funds
<PAGE> 42
will be returned promptly with interest. The minimum number of shares which may
be purchased is 25 shares. Except for the ESOP, which may purchase up to 10% of
the total number of shares of Common Stock issued in the Conversion, no person,
together with associates of and persons acting in concert with such person, may
purchase more than the total number of shares offered in the Community Offering
and the Syndicated Community Offering that could be purchased for $175,000 at
the Purchase Price and no person, together with associates of and persons acting
in concert with such person, may purchase more than 1% of the total number of
shares sold in the Conversion. See "Plan of Conversion - Subscription Rights and
Limitations on Common Stock Purchases." The Company reserves the right, in its
absolute discretion, to accept or reject, in whole or in part, any or all
subscriptions in the Syndicated Community Offering.
The Company and the Bank have engaged Sandler, O'Neill & Partners, L.P.
("Sandler O'Neill") as financial advisors to assist them in the sale of the
Common Stock in the Syndicated Community Offering. It is anticipated that
Sandler O'Neill will use the services of other registered broker-dealers
("Selected Dealers") and that fees to Sandler O'Neill and such Selected Dealers
will not exceed ____% of the aggregate Purchase Price of the shares sold in the
Syndicated Community Offering. Neither Sandler O'Neill nor any Selected Dealer
shall have any obligation to take or purchase any shares of Common Stock in the
Syndicated Community Offering.
The Company has applied to have its Common Stock listed on the American
Stock Exchange ("AMEX") under the symbol "___." Prior to this offering, there
has not been a public market for the Common Stock, and there can be no assurance
that an active and liquid trading market for the Common Stock will develop. The
absence or discontinuance of a market may have an adverse impact on both the
price and liquidity of the stock.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, DEPARTMENT OF THE
TREASURY, OR ANY OTHER FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR
HAS SUCH COMMISSION, OFFICE, OTHER AGENCY OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED.
2
<PAGE> 43
<TABLE>
<CAPTION>
Estimated Estimated Net Pro-
Underwriting Estimated Net ceeds of Subscrip-
Commissions Proceeds of tion, Community
Syndicated and Other Syndicated and Syndicated
Community Fees and Community Community
Offering Price Expenses(1) Offering Offerings(2)(3)
<S> <C> <C> <C> <C>
Minimum Per Share $10.00 $ $ $
Midpoint Per Share $10.00 $ $ $
Maximum Per Share $10.00 $ $ $
Total Minimum(4) $ $ $ $
Total Midpoint $ $ $ $
Total Maximum(4) $ $ $ $
Total Maximum, As Adjusted(5) $ $ $ $
</TABLE>
- ------------------------------
(1) Consists of a pro rata allocation of estimated expenses of the Bank and the
Company in connection with the Conversion (other than estimated fees to be
paid to Sandler O'Neill for services in connection with the Subscription
and Community Offerings) and estimated compensation of Sandler O'Neill and
Selected Dealers in connection with the sale of the remaining shares in the
Syndicated Community Offering which fees are estimated to be $__________
and $__________ at the minimum and the maximum of the estimated price range
and may be deemed to be underwriting fees. The information under "Pro Forma
Data" in the Prospectus was based on the assumptions stated therein, which
may differ from the estimates used for this table. See "The Conversion -
Marketing and Underwriting Arrangements" for a more detailed discussion of
fee arrangements.
(2) The Company applied to retain up to 50% of the net proceeds. The balance of
the net proceeds will be transferred to the Bank in exchange for all of the
capital stock of the Bank to be issued in connection with the Conversion.
(3) The net proceeds of the Subscription and Community Offerings (based upon
the sale of the __________ shares subscribed for at a price of $_____ per
share and after allocation of a pro rata portion of the estimated expenses
relating to the Conversion) are estimated to be $___________.
(4) Based on an estimated price range of $__________ to $__________ at $10.00
per share (the "Estimated Price Range"). The Total Minimum reflects the
sale of __________ shares at a per share price of $_____, leaving a total
of __________ shares to be sold in the Syndicated Community Offering.
(5) Gives effect to an increase in the number of shares which could occur due
to an increase in the Estimated Price Range of up to 15% to reflect changes
in market and financial conditions following commencement of the offerings.
See "The Conversion - Stock Pricing." For a discussion of the distribution
and allocation of the additional shares, see "The Conversion - Subscription
Rights and Limitations on Common Stock Purchases."
SANDLER O'NEILL & PARTNERS, L.P.
---------------------------------
The date of this Prospectus Supplement is _______________, 1997.
62297
3
<PAGE> 44
PROSPECTUS [SUBJECT TO COMPLETION]
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
(Proposed Holding Company for
First Federal Savings and Loan Association of Hazleton)
5,175,000 SHARES OF COMMON STOCK
Northeast Pennsylvania Financial Corp. (the "Company"), a Delaware
corporation, is offering up to 5,175,000 shares of its common stock, par value
$.01 per share (the "Common Stock"), in connection with the conversion of First
Federal Savings and Loan Association of Hazleton (the "Bank" or "First Federal")
from a federally-chartered mutual savings and loan association to a
federally-chartered capital stock savings bank, under the name First Federal
Bank, pursuant to the Bank's plan of conversion (the "Plan" or "Plan of
Conversion"). The simultaneous conversion of the Bank to stock form, the
issuance of the Bank's stock to the Company and the offer and sale of the Common
Stock by the Company are herein referred to as the "Conversion." In certain
circumstances, the Company may increase the amount of Common Stock offered
hereby to 5,951,250 shares. See Footnote 4 to the table below. (continued on
following page)
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE __.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION
("OTS"), OR ANY OTHER FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION,
NOR HAS SUCH COMMISSION, OFFICE OR OTHER AGENCY OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS
OR DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION ("FDIC"), THE BANK INSURANCE FUND ("BIF"),
THE SAVINGS ASSOCIATION INSURANCE FUND ("SAIF") OR ANY OTHER GOVERNMENT
AGENCY NOR ARE THEY INSURED OR GUARANTEED BY THE BANK OR THE COMPANY. THE
COMMON STOCK IS SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL INVESTED.
<TABLE>
<CAPTION>
ESTIMATED UNDERWRITING
COMMISSIONS AND OTHER FEES ESTIMATED
SUBSCRIPTION PRICE(1) AND EXPENSES(2) NET PROCEEDS(3)
--------------------- -------------------------- ---------------
<S> <C> <C> <C>
Minimum Per Share .................. $ 10.00 $ 0.31 $ 9.69
Midpoint Per Share ................. $ 10.00 $ 0.28 $ 9.72
Maximum Per Share .................. $ 10.00 $ 0.26 $ 9.74
Total Minimum(1) ................... $38,250,000 $1,189,500 $37,060,500
Total Midpoint(1) .................. $45,000,000 $1,266,600 $43,733,400
Total Maximum(1) ................... $51,750,000 $1,343,700 $50,406,300
Total Maximum, as adjusted(4) ...... $59,512,500 $1,432,306 $58,080,194
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by Keller
& Company, Inc. ("Keller") dated November 28 1997 which states that the
aggregate estimated pro forma market value of the Common Stock being
offered for sale ranged from $38.3 million to $51.8 million, with a
midpoint of $45.0 million (the "Valuation Range"). Based on the Valuation
Range, the Board of Directors (the "Board of Directors") established the
estimated price range of $38.3 million to $51.8 million (the "Estimated
Price Range"), or between 3,825,000 and 5,175,000 shares of Common Stock
at the $10.00 per share (the "Purchase Price") to be paid for each share
of Common Stock subscribed for or purchased in the Offerings (as described
herein). The independent appraisal of Keller is based upon estimates and
projections that are subject to change and the valuation must not be
construed as a recommendation as to the advisability of purchasing such
shares nor an assurance that a purchaser will thereafter be able to sell
such shares at the Purchase Price. See "The Conversion -- Stock Pricing"
and " -- Number of Shares to be Issued."
(2) Consists of the estimated costs to the Bank and the Company arising from
the Conversion, including estimated fixed expenses of $775,000 and
marketing fees to be paid to Sandler O'Neill & Partners, L.P. ("Sandler
O'Neill") estimated to be $414,000 and $568,000 at the minimum and the
maximum of the Estimated Price Range, respectively. See "The Conversion --
Marketing and Underwriting Arrangements." See "Pro Forma Data" for the
assumptions used to arrive at these estimates. The actual fees and
expenses may vary from the estimates.
(3) Actual net proceeds may vary substantially from estimated amounts
depending on the number of shares sold in each of the offerings and other
factors. Includes the purchase of shares of Common Stock by the First
Federal Bank Employee Stock Ownership Plan and related trust (the "ESOP")
and funded by a loan to the ESOP, by the Company or from a third party,
which will be deducted from the Company's stockholders' equity. See "Use
of Proceeds" and "Pro Forma Data."
(4) As adjusted to reflect the sale of up to an additional 15% of the Common
Stock which may be offered at the Purchase Price, without resolicitation
of subscribers or any right of cancellation, due to regulatory
considerations, changes in market conditions or general financial and
economic conditions. See "Pro Forma Data" and "The Conversion -- Stock
Pricing." For a discussion of the distribution and allocation of the
additional shares, if any, see "The Conversion -- Subscription Offering
and Subscription Rights," " -- Community Offering" and " --Limitations on
Common Stock Purchases."
SANDLER O'NEILL & PARTNERS, L.P.
The date of this Prospectus is ___________________, 1998.
<PAGE> 45
NON-TRANSFERABLE RIGHTS TO SUBSCRIBE FOR THE COMMON STOCK IN A
SUBSCRIPTION OFFERING (THE "SUBSCRIPTION OFFERING") HAVE BEEN GRANTED IN THE
FOLLOWING ORDER OF PRIORITY: (1) DEPOSITORS WHOSE ACCOUNTS IN THE BANK TOTALED
$50 OR MORE ON SEPTEMBER 30, 1996 ("ELIGIBLE ACCOUNT HOLDERS"); (2) THE EMPLOYEE
PLANS, CONSISTING OF THE ESOP WHICH INTENDS TO SUBSCRIBE FOR UP TO 8% OF THE
COMMON STOCK ISSUED IN CONNECTION WITH THE CONVERSION (INCLUDING SHARES ISSUED
TO FIRST FEDERAL CHARITABLE FOUNDATION (THE "FOUNDATION")); (3) DEPOSITORS WHOSE
ACCOUNTS IN THE BANK TOTALED $50 OR MORE ON DECEMBER 31, 1997 ("SUPPLEMENTAL
ELIGIBLE ACCOUNT HOLDERS"); AND (4) MEMBERS OF THE BANK CONSISTING OF DEPOSITORS
OF THE BANK AS OF __________, 1997, THE VOTING RECORD DATE ("VOTING RECORD
DATE") FOR THE SPECIAL MEETING (AS DEFINED HEREIN), AND BORROWERS WITH LOANS
OUTSTANDING AS OF DECEMBER 16, 1997 WHICH CONTINUE TO BE OUTSTANDING AS OF THE
VOTING RECORD DATE, OTHER THAN THOSE MEMBERS WHO OTHERWISE QUALIFY AS ELIGIBLE
ACCOUNT HOLDERS OR SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS ("OTHER MEMBERS").
SUBSCRIPTION RIGHTS ARE NON-TRANSFERABLE. PERSONS FOUND TO BE TRANSFERRING
SUBSCRIPTION RIGHTS WILL BE SUBJECT TO THE FORFEITURE OF SUCH RIGHTS AND
POSSIBLE FURTHER SANCTIONS AND PENALTIES IMPOSED BY THE OTS. Subsequent to the
Subscription Offering, and subject to the prior rights of holders of
subscription rights, the Company will offer any shares of Common Stock not
subscribed for in the Subscription Offering for sale in a community offering to
certain members of the general public (the "Community Offering"). Shares not
subscribed for in the Subscription and Community Offerings will be offered to
certain members of the general public in a syndicated community offering (the
"Syndicated Community Offering") (the Subscription Offering, Community Offering,
and the Syndicated Community Offering are referred to collectively as the
"Offerings").
Except for the ESOP, which intends to subscribe for up to 8% of the Common
Stock issued in connection with the Conversion, including shares issued to the
Foundation, no Eligible Account Holder or Supplemental Eligible Account Holder
or Other Member may, in their respective capacities as such, purchase in the
Subscription Offering more than $175,000 of Common Stock; no person, together
with associates or persons acting in concert with such person, may purchase in
the Community Offering and Syndicated Community Offering more than $175,000 of
Common Stock; and no person, together with associates of or persons acting in
concert with such person, may purchase in the aggregate more than the overall
maximum purchase limitation of 1% of the total number of shares of Common Stock
offered in the Conversion; provided, however, that the overall maximum purchase
limitations may be increased and the amount that may be subscribed for may be
increased or decreased at the sole discretion of the Bank or the Company without
further approval of the Bank's members. See "The Conversion - Subscription
Offering and Subscription Rights," " -- Community Offering" and " -- Limitations
on Common Stock Purchases." The minimum purchase is 25 shares.
Pursuant to the Plan, the Company intends to establish a charitable
foundation in connection with the Conversion. The Plan provides that the Company
and the Bank will create the Foundation, which will be incorporated under
Delaware law as a non-stock corporation, and will be funded with shares of
Common Stock contributed by the Company in an amount equal to 8% of the number
of shares of Common Stock sold in the Conversion. The Foundation will be
dedicated to charitable purposes within the communities in which the Bank
operates. The establishment of the Foundation is subject to the approval of the
Bank's members at the special meeting being held to consider the Plan of
Conversion. For a discussion of the Foundation and the effects on the
Conversion, including if the members do not approve the establishment of the
Foundation, see "Risk Factors -- Establishment of the Charitable Foundation,"
"Pro Forma Data," and "The Conversion -- Establishment of the Charitable
Foundation."
THE SUBSCRIPTION OFFERING WILL TERMINATE AT __________, EASTERN TIME, ON
________, 1998 (THE "EXPIRATION DATE") UNLESS EXTENDED BY THE BANK AND THE
COMPANY, WITH THE APPROVAL OF THE OTS, IF NECESSARY. Orders submitted are
irrevocable until the completion of the Conversion; provided, that, if the
Conversion is not completed within 45 days after the close of the Subscription
Offering, unless such period has been extended with the consent of the OTS, if
necessary, all subscribers will have their funds returned promptly with
interest, and all withdrawal authorizations will be canceled. Such extensions
may not go beyond __________, 1998. See "The Conversion -- Subscription Offering
and Subscription Rights," " -- Procedure for Purchasing Shares in Subscription
Offering."
The Company has received conditional approval to have its Common Stock
listed on the American Stock Exchange ("AMEX") under the symbol "____" upon
completion of the Conversion. Prior to this offering there has not been a public
market for the Common Stock, and there can be no assurance that an active and
liquid trading market for the Common Stock will develop or that the Common Stock
will trade at or above the Purchase Price. The absence or discontinuance of a
market may have an adverse impact on both the price and liquidity of the Common
Stock. See "Risk Factors -- Absence of Market for Common Stock."
2
<PAGE> 46
INSERT MAP PAGE HERE
3
<PAGE> 47
SUMMARY OF THE CONVERSION AND THE OFFERINGS
The following summary of the Conversion and the Offerings is qualified in
its entirety by the more detailed information appearing elsewhere in this
Prospectus.
Risk Factors.................. A purchase of the Common Stock involves a
substantial degree of risk. Eligible Account
Holders, Supplemental Eligible Account Holders,
Other Members and other prospective investors
should carefully consider the matters set forth
under "Risk Factors." THE SHARES OF COMMON
STOCK OFFERED HEREBY ARE NOT INSURED OR
GUARANTEED BY THE FDIC, BIF OR SAIF OR ANY
OTHER GOVERNMENT AGENCY AND ARE NOT GUARANTEED
BY THE COMPANY OR BANK.
Northeast Pennsylvania Northeast Pennsylvania Financial Corp. is a
Financial Corp. .............. Delaware corporation organized at the
direction of the Bank to become a savings
and loan holding company and own all of the
Bank's capital stock to be issued upon its
conversion from mutual form to stock form.
To date, the Company has not engaged in
any business. Its executive office is
located at 12 E. Broad Street, Hazleton,
Pennsylvania 18201 and its telephone number
is (717) 459-3700.
First Federal Savings and Loan The Bank is a federally-chartered mutual
Association of Hazleton ........ savings and loan association. At September 30,
1997, the Bank had total assets of $369.2
million, total deposits of $314.1 million and
total equity of $28.5 million. Concurrent with
the Conversion, the Bank will change its name
to First Federal Bank. The Bank is located at
12 E. Broad Street, Hazleton, Pennsylvania
18201, and its telephone number is (717)
459-3700. The Bank currently operates 10
banking offices in Luzerne, Carbon, Columbia
and Schuylkill Counties in Northeast
Pennsylvania and a loan production office in
Monroe County, also in Northeast Pennsylvania.
The Bank has historically operated as a
community-oriented savings institution
primarily providing one- to four-family
residential mortgage loans and a variety of
retail deposit products to consumers. The Bank
considers that its market area consists of the
five counties in Northeast Pennsylvania in
which it has a banking office or a loan
production office. Since 1993, the Bank has
implemented a strategy to operate as a
consumer-oriented community bank by placing
greater emphasis on the origination of
adjustable-rate and shorter-term fixed-rate
one- to four-family loans and short-term
consumer loans and commercial loans, limiting
the origination of longer-term fixed-rate
mortgage loans and increasing investment in
other short-term and adjustable-rate loans and
securities investments.
The Conversion and The Board of Directors of the Bank has adopted
Reasons for Conversion ....... a Plan of Conversion pursuant to which the
Bank intends to convert to a
federally-chartered capital stock savings
bank, under the name First Federal Bank, and
issue all of its stock to the Company. The
Company is offering shares of its Common Stock
in the Offerings in connection with the Bank's
Conversion. Management believes the Conversion
offers a number of advantages, including: (i)
providing a larger capital base with which to
operate; (ii) providing enhanced future access
to capital markets; (iii) providing enhanced
ability to diversify into other financial
services related activities; and (iv)
providing enhanced ability to increase its
presence in the communities it serves through
the acquisition or establishment of branch
offices or the acquisition of other financial
institutions. The Conversion and the Offerings
are subject to approval by the OTS, and
approval of members of the Bank eligible to
vote at a special meeting to be held on
__________, 1998 (the "Special Meeting"). The
OTS issued an approval letter on _______,
1998. See "The Conversion -- General."
4
<PAGE> 48
First Federal Charitable The Bank's Plan of Conversion provides for the
Foundation ..................... establishment of a charitable foundation in
connection with the Conversion. The
Foundation, which will be incorporated under
Delaware law as a non-stock corporation, will
be funded with a contribution by the Company
equal to 8% of the Common Stock sold in the
Conversion. The authority for the affairs of
the Foundation will be vested in the Board of
Directors of the Foundation, all of whom are
existing Directors of the Company or the Bank
or officers of the Company or the Bank. See
"The Conversion - Establishment of the
Charitable Foundation."
Terms of the Subscription The shares of Common Stock to be sold in
Offering ....................... connection with the Conversion are being
offered at a fixed price of $10.00 per share
in the Subscription Offering pursuant to
subscription rights in the following order of
priority to: (i) Eligible Account Holders;
(ii) the ESOP; (iii) Supplemental Eligible
Account Holders; and (iv) Other Members.
Subject to the prior rights of holders of
subscription rights, any shares of Common
Stock not subscribed for in the Subscription
Offering will be offered in the Community
Offering at $10.00 per share to certain
members of the general public. Subscription
rights will expire if not exercised by
_______, Eastern time, on __________, 1998,
unless extended by the Bank and the Company,
with the approval of the OTS, if necessary.
See "The Conversion - Subscription Offering
and Subscription Rights" and " - Community
Offering."
Procedure for Ordering Shares Forms to order Common Stock offered in the
and Prospectus Delivery ......... Subscription Offering and the Community
Offering will be preceded or accompanied by a
Prospectus. Any person receiving a stock order
and certification form who desires to
subscribe for shares must do so prior to the
Expiration Date by delivering to the Bank a
properly executed stock order and
certification form together with full payment.
ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT BE
REVOKED OR MODIFIED WITHOUT THE CONSENT OF THE
BANK. To ensure that each purchaser receives a
prospectus at least 48 hours prior to the
Expiration Date in accordance with Rule 15c2-8
of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), no prospectus
will be mailed any later than five days prior
to the Expiration Date or hand delivered any
later than two days prior to such date. The
Bank is not obligated to accept subscriptions
not submitted on an original stock order form.
See "The Conversion - Procedure for Purchasing
Shares in Subscription Offerings."
Form of Payment for Shares ...... Payment for subscriptions may be made: (i) in
cash (if delivered in person); (ii) by check,
bank draft or money order; or (iii) by
authorization of withdrawal from deposit
accounts maintained at the Bank. Orders for
Common Stock submitted by subscribers in the
Subscription Offering which aggregate $50,000
or more must be paid by official bank or
certified check or by withdrawal authorization
from a deposit account of the Bank. No wire
transfers will be accepted. See "The
Conversion - Procedure for Purchasing Shares
in Subscription Offerings."
Nontransferability of The subscription rights of Eligible Account
Subscription Rights ........... Holders, Supplemental Eligible Account
Holders, Other Members and the Employee Plans,
including the ESOP, are nontransferable. See
"The Conversion - Restrictions on Transfer of
Subscription Rights and Shares."
5
<PAGE> 49
Purchase Limitations........... No Eligible Account Holder, Supplemental
Eligible Account Holder or Other Voting Member
may purchase in the Subscription Offering more
than $175,000 of Common Stock. No person,
together with associates or persons acting in
concert with such person, may purchase in the
Community Offering and the Syndicated
Community Offering more than $175,000 of
Common Stock. No person, together with
associates or persons acting in concert with
such person, may purchase in the aggregate
more than 1% of the Common Stock offered.
However, the ESOP, may purchase up to 10% of
the Common Stock issued, including shares
issued to the Foundation. Pursuant to the Plan
of Conversion, it is intended that the ESOP
will purchase 8% of the Common Stock issued,
including shares issued to the Foundation. The
minimum purchase is 25 shares of Common Stock.
At any time during the Conversion and without
approval of the Bank's depositors or a
resolicitation of subscribers, the Bank and
the Company may, in their sole discretion,
decrease the maximum purchase limitation below
$175,000 of Common Stock; however, such amount
may not be reduced to less than 0.10% of the
Common Stock offered. Additionally, at any
time during the Conversion, the Bank and the
Company may, in their sole discretion,
increase the maximum purchase limitation in
the Subscription and Community Offerings to an
amount in excess of $175,000 up to a maximum
of 5% of the shares to be issued in the
Conversion. Similarly, the 1% overall maximum
purchase limitation may be increased up to 5%
of the total shares of Common Stock offered in
the Conversion.
Securities Offered and The Company is offering between 3,825,000 and
Purchase Price............... 5,175,000 shares of Common Stock at a Purchase
Price of $10.00 per share. The maximum of the
Estimated Price Range may be increased by up
to 15% and the maximum number of shares of
Common Stock to be issued may be increased up
to 5,951,250 shares due to regulatory
considerations and changes in market or
general financial or economic conditions. See
"The Conversion - Stock Pricing" and " -
Number of Shares to be Issued."
Appraisal...................... The Purchase Price per share has been fixed at
$10.00. The total number of shares to be
issued in the Conversion is based upon an
independent appraisal prepared by Keller,
dated as of November 28, 1997, which states
that the estimated pro forma market value of
the Common Stock ranged from $38.3 million to
$51.8 million, taking into account shares
issued to the Foundation. The final aggregate
value will be determined at the time of
closing of the Offerings and is subject to
change due to changing market conditions and
other factors. See "The Conversion - Stock
Pricing."
Use of Proceeds................ The Company will use 50% of the net proceeds
of the Offerings to purchase all of the
outstanding common stock of the Bank to be
issued in the Conversion. The portion of net
proceeds retained by the Company will be used
for general business activities, including the
loan of funds to the ESOP (to the extent such
loan is not funded by a third party) to enable
the ESOP to purchase up to 8% of the stock
issued in connection with the Conversion,
including shares issued to the Foundation. The
Company intends initially to invest the
remaining net proceeds in federal funds and
securities, primarily mortgage-related
securities and federal agency obligations. The
Bank intends to utilize the net proceeds from
the sale of its stock to the Company for
general business purposes, including
investment in loans, mortgage-related
securities and, under appropriate market
conditions, the possible repayment of advances
from the Federal Home Loan Bank ("FHLB") of
Pittsburgh. See "Use of Proceeds."
Dividend Policy............... Upon Conversion, the Board of Directors of the
Company will have the authority to declare
dividends on the Common Stock, subject to
statutory and regulatory requirements. In the
future, the Board of Directors of the Company
may consider a policy of paying cash dividends
on the Common Stock. However, no decision has
been made with respect to such dividends, if
any. See "Dividend Policy."
6
<PAGE> 50
Benefits of the Conversion to Among the benefits to the Bank and the Company
Management..................... anticipated from the Conversion is the ability
to attract and retain personnel through the
use of stock options and other stock related
benefit programs. Subsequent to the
Conversion, the Company intends to adopt a
Stock-Based Incentive Plan (as defined herein)
for the benefit of directors, officers and
employees of the Company and Bank. If the
Stock-Based Incentive Plan is adopted within
one year after the Conversion, the plan will
be subject to stockholders' approval at a
meeting of stockholders which may not be held
earlier than six months after the Conversion.
The Stock-Based Incentive Plan would provide
for the granting of stock-based benefits,
including Common Stock in an amount equal to
4% of the Common Stock issued in the
Conversion, including shares issued to the
Foundation, and options to purchase Common
Stock in an amount equal to 10% of the Common
Stock issued in the Conversion, including
shares issued to the Foundation.
Additionally, certain officers of the Company
and the Bank will be provided with employment
agreements or change in control agreements
which provide such officers with employment
rights and/or payments upon their termination
of service following a change in control. The
Stock-Based Incentive Plan may also provide
participants with benefits upon a change in
control of the Company or the Bank. For a
further description of the Stock-Based
Incentive Plan and employment and change in
control agreements, see "Risk Factors - Stock
Based Benefits to Management and Directors,
Employment Contracts and Change in Control
Payments" and "Management of the Bank -
Benefits." See "Management of the Bank -
Subscriptions by Executive Officers and
Directors," "Restrictions on Acquisition of
the Company and the Bank - Restrictions in the
Company's Certificate of Incorporation and
Bylaws," and "The Conversion - Establishment
of the Charitable Foundation."
Voting Control of Officers Directors and executive officers of the Bank
and Directors.................. and the Company expect to purchase
approximately 4.48% or 3.35% of shares of
Common Stock outstanding, based upon the
minimum and the maximum of the Estimated Price
Range, including shares issued to the
Foundation, respectively. Additionally,
assuming the implementation of the ESOP and
Stock-Based Incentive Plan, directors,
executive officers and employees have the
potential to control the voting of
approximately 23.89% or 22.75% of the Common
Stock at the minimum and the maximum of the
Estimated Price Range, including shares issued
to the Foundation, respectively. See
"Management of the Bank - Subscriptions by
Executive Officers and Directors," and
"Restrictions on Acquisition of the Company
and the Bank - Restrictions in the Company's
Certificate of Incorporation and Bylaws."
Market for Stock............... As a mutual institution, the Bank has never
issued capital stock and, consequently, there
is no existing market for the Common Stock.
The Company has applied to have its Common
Stock listed on the American Stock Exchange
under the symbol "____" subject to the
completion of the Conversion and compliance
with certain conditions. See "Market for the
Common Stock."
No Board Recommendations........ The Bank's Board of Directors and the
Company's Board of Directors are not making
any recommendations to depositors or other
potential investors regarding whether such
persons should purchase the Common Stock. An
investment in the Common Stock must be made
pursuant to each investor's evaluation of his
or her best interests.
Conversion Center.............. If you have any questions regarding
Conversion, call the Conversion Center at
(717) ____________.
7
<PAGE> 51
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE BANK
The selected consolidated financial and other data of the Bank
set forth below is derived in part from, and should be read in
conjunction with, the Consolidated Financial Statements of the Bank
and Notes thereto presented elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- --------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED FINANCIAL DATA:
Total assets ........................ $369,242 $362,464 $318,931 $283,344 $280,237
Loans, net (1) ...................... 261,469 242,916 213,515 188,501 180,132
Securities held-to-maturity (2):
Mortgage-related securities, net .. 9,965 13,386 51,868 51,045 28,434
Investment securities, net ........ 28,960 30,100 26,355 27,661 23,316
Securities available-for-sale (2):
Mortgage-related securities, net .. 29,982 37,259 497 -- 14,950
Investment securities, net ........ 14,791 22,899 12,826 -- 2,166
Deposits ............................ 314,123 306,806 280,010 257,161 257,598
FHLB advances ....................... 23,516 25,534 11,050 120 123
Total equity ........................ 28,538 26,127 25,550 23,183 20,432
Real estate owned, net .............. 319 453 423 250 119
Nonperforming assets and
troubled debt restructurings ...... 1,208 1,169 1,670 1,863 1,982
</TABLE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income ................. $ 26,599 $24,323 $ 21,280 $ 19,578 $22,054
Interest expense ...................... 14,194 13,007 10,845 8,827 10,244
-------- ------- -------- -------- -------
Net interest income ................. 12,405 11,316 10,435 10,751 11,810
Provision for loan losses ............. 651 97 25 (54) --
-------- ------- -------- -------- -------
Net interest income after provision 11,754 11,219 10,410 10,805 11,810
for loan losses ...................
Noninterest income:
Net gain (loss) on sale of securities (563) -- (6) 153 234
Other(3) ............................ 430 508 605 460 1,800
Noninterest expense ................... 9,492 10,774(4) 8,360 7,924 8,456
-------- ------- -------- -------- -------
Income before income taxes ............ 2,129 953 2,649 3,494 5,388
Income taxes .......................... 748 12 899 743 2,143
-------- ------- -------- -------- -------
Net income .......................... $ 1,381 $ 941 $ 1,750 $ 2,751 $ 3,245
======== ======= ======== ======== =======
</TABLE>
(See footnotes on next page)
8
<PAGE> 52
<TABLE>
<CAPTION>
AT OR FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------
1997 1996 1995 1994 1993
----------- --------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING RATIOS (5):
PERFORMANCE RATIOS:
Average yield on interest-earning assets(6) ...... 7.53% 7.44% 7.38% 7.18% 8.16%
Average rate paid on interest-bearing liabilities 4.22 4.23 3.98 3.44 4.01
Average interest rate spread (7) ................. 3.31 3.21 3.40 3.74 4.15
Net interest margin (8) .......................... 3.49 3.45 3.60 4.06 4.21
Ratio of interest-earning assets to 108.56 104.93 105.07 105.99 104.68
interest-bearing liabilities ...................
Net interest income after provision for loan 124.49 104.12 124.50 136.28 139.97
losses to noninterest expense ..................
Noninterest expense as a percent of 2.51 3.17 2.78 2.80 2.99
average assets .................................
Return on average assets ......................... 0.38 0.28 0.58 0.98 1.17
Return on average equity ......................... 4.88 3.64 7.19 12.61 16.66
Ratio of average equity to average assets ........ 7.36 7.58 8.10 7.67 7.54
REGULATORY CAPITAL RATIOS:(9) .......................
Tangible capital ratio ........................... 7.37 7.14 8.49 8.21 7.29
Core capital ratio ............................... 7.37 7.14 8.49 8.21 7.29
Risk-based capital ratio ......................... 14.40 14.88 15.85 16.91 15.13
ASSET QUALITY RATIOS:
Nonperforming loans and troubled debt ............ 0.34 0.29 0.58 0.85 1.03
restructurings as a percent of total loans (10)
Nonperforming assets and troubled debt 0.38 0.38 0.52 0.66 0.71
restructurings as a percent of total assets(11)
Allowance for loan losses as a percent 0.48 0.30 0.33 0.40 0.53
of total loans .................................
Allowance for loan losses as a percent of 143.57 101.96 58.67 48.27 52.80
nonperforming loans and troubled debt ..........
restructurings(1)(10) ..........................
Net loans charged-off to average interest- 0.04 0.04 0.03 0.08 0.35
earning loans ..................................
FULL SERVICE OFFICES AT END OF PERIOD(12) ........... 9 9 9 8 8
</TABLE>
- ---------------
(1) Loans, net, represents gross loans receivable net of the allowance for
loan losses, loans in process and deferred loan origination fees. The
allowance for loan losses at September 30, 1997, 1996 , 1995, 1994 and
1993 was $1.3 million, $730,000, $724,000, $769,000 and $979,000,
respectively.
(2) The Bank adopted Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," during fiscal 1994.
(3) Includes $176,000 net loss for disposition of branch equipment in
connection with a branch relocation in fiscal 1998 and $1.2 million net
gain on sale of real estate loans in fiscal 1993.
(4) Includes a one-time special assessment of $1.7 million in order to
recapitalize the SAIF fund in fiscal 1996.
(5) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based
on average daily balances during the indicated periods.
(6) Calculations of yield for 1997 and 1996 are presented on a taxable
equivalent basis using the combined Federal and state income tax rate of
40% for 1997 and 1996. The Bank did not have securities exempt from
Federal or state income taxes in previous years.
(7) The average interest rate spread represents the difference between the
weighted average yield on average interest-earning assets and the
weighted average cost of average interest-bearing liabilities.
(8) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(9) For definitions and further information relating to the Bank's
regulatory capital requirements, see "Regulation - Capital
Requirements." See "Regulatory Capital Compliance" for the Bank's pro
forma capital levels as a result of the Offerings.
(10) Non-performing loans consist of all non-accrual loans and all other
loans 90 days or more past due. It is the Bank's policy to generally
cease accruing interest on all loans 90 days or more past due. See
"Business of the Bank - Delinquent Loans, Classified Assets, and Real
Estate Owned."
(11) Non-performing assets consist of non-performing loans, other repossessed
assets and real estate owned, net ("REO").
(12) In January 1998, the Bank opened an additional branch office and
combined one of its previous two separate loan production offices with
that branch office.
9
<PAGE> 53
RISK FACTORS
The following risk factors, in addition to those discussed elsewhere in
this Prospectus, should be considered by investors in deciding whether to
purchase the Common Stock offered hereby.
SENSITIVITY TO CHANGES IN INTEREST RATES
The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as loans
and investments, and its interest expense on interest-bearing liabilities, such
as deposits and borrowings. Accordingly, the Bank's results of operations and
financial condition are largely dependent on movements in market interest rates
and its ability to manage its assets in response to such movements.
The Bank anticipates that an increase in interest rates could have an
adverse effect on the Bank. The Bank primarily monitors its interest rate
sensitivity through the use of a model which estimates the change in the Bank's
net portfolio value ("NPV") over a range of interest rate scenarios. NPV is the
present value of expected cash flows from assets, liabilities and off-balance
sheet contracts. As of September 30, 1997, based on assumptions utilized by the
Bank, it is estimated that a 200 basis point increase in market interest rates
would result in a 25% decrease in NPV, compared to a 10% estimated increase in
NPV as a result of a 200 basis point decrease in market interest rates. Such
estimates are not intended and do not provide a precise forecast of the effect
of changes in market interest rates on the Bank's net interest income. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Management of Interest Rate Risk."
Another measurement of interest rate sensitivity is a comparison of
interest-bearing assets and interest-bearing liabilities maturing or repricing
during a period. At September 30, 1997, the Bank's total interest-bearing
liabilities maturing or repricing within one year exceeded its total
interest-earning assets maturing or repricing in the same time period by $36.4
million, representing a cumulative one-year interest sensitivity gap as a
percentage of total assets of negative 9.9%. However, that interest sensitivity
gap reflected the temporary use of proceeds from the sale of investment and
mortgage-related securities at the end of fiscal 1997, which significantly
increased interest-bearing deposits and reduced FHLB advances as of September
30, 1997 compared to their levels immediately prior to the sale of securities.
The Bank believes that, after giving effect to the subsequent reinvestment of
such proceeds, its cumulative one-year interest rate sensitivity gap as a
percent of total assets would have approximated a negative 15% as of September
30, 1997. Such a negative interest rate gap indicates that, in a rapidly rising
interest rate environment, the cost of the Bank's interest-bearing liabilities
will generally increase at a rate faster than the yield on its interest-earning
assets, thereby adversely affecting the Bank's net interest income. Increases in
interest rates also could adversely affect the type (fixed-rate or
adjustable-rate) and amount of loans originated by the Bank and the average life
of loans and securities which, in turn, could adversely impact the yields earned
on the Bank's loan and securities portfolios as well as the amount of secondary
market activity in which the Bank engages.
The Bank attempts to manage its interest rate risk primarily by
emphasizing the origination and retention of adjustable-rate and shorter-term
fixed-rate loans, limiting its retention of longer-term, fixed-rate one- to
four-family loans to 20% of loan originations during a year and investing in
securities with shorter stated or estimated maturities. Although the interest
rate gap analysis presents the stated maturity of the Bank's investment
securities, the Bank also evaluates the estimated life of such securities.
Therefore, the
10
<PAGE> 54
Bank could be subject to an increased interest rate risk or reinvestment risk
compared to its evaluation of that risk if changes in interest rates exceed
ranges anticipated by the Bank in estimating the anticipated life of callable
investment securities in which it has invested and/or if such changes result in
changes in prepayments on loans and mortgage-related securities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Management of Interest Rate Risk."
Increases in market interest rates would result in an increase in the
interest rates on the Bank's adjustable-rate loans, thereby causing higher loan
payment amounts by the borrowers which, in turn, may result in elevated
delinquencies on such loans. Increases in the level of interest rates may also
adversely affect the value of the Bank's investment and mortgage-related
securities and other interest-earning assets and, in turn, its results of
operations or retained earnings. At September 30, 1997, the Bank's investment
securities available-for-sale had an estimated fair value of $44.8 million,
which was greater than the amortized cost of $42.6 million. At the same date,
the Bank's investment securities, including mortgage-related securities,
held-to-maturity had an estimated fair value of $38.9 million, which was $56,000
less than their amortized cost. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Management of Interest Rate
Risk," "Business of Bank - Lending Activities - One- to Four-Family Mortgage
Lending" and " - Investment Activities."
POTENTIAL LOW RETURN ON EQUITY FOLLOWING THE CONVERSION
At September 30, 1997, the Bank's ratio of equity to total assets was
7.7%. The Company's equity position will be significantly increased as a result
of the Conversion. On a pro forma basis as of September 30, 1997, assuming the
sale of Common Stock at the midpoint of the Estimated Price Range, the Company's
ratio of equity to assets would exceed 17.2%. The Company's ability to deploy
this new capital through investments in interest-earning assets, such as loans
and securities which bear rates of return comparable to its current loans and
securities investments, will be significantly affected by industry competition.
The Company currently anticipates that it will take time to prudently deploy
such capital. As a result, the Company's return on equity initially is expected
to be below its historical return on equity and may be below peer group
institutions after the Conversion. Additionally, due to the implementation of
stock-based benefit plans such as the ESOP and Stock-Based Incentive Plan, the
Company's future compensation expense will be increased, thereby, adversely
affecting its net income and return on equity.
WEAKNESS OF REGIONAL AND LOCAL ECONOMY
Economic conditions at the local and national levels, as well as
government policies and regulations concerning, among other things, monetary and
fiscal affairs, significantly affect the operations of financial institutions
such as the Bank. The population of the market in which the Bank operates is
relatively small and in recent years has grown slowly, or in the case of Luzerne
County in which the Bank is headquartered, remained relatively static. In
addition, the population of Luzerne County has one of the oldest average ages of
all counties in the United States and the unemployment rate in the Bank's market
area is greater than the national average. Further, because of the number of
financial institutions competing for funds in the market, the Bank has
experienced increased competition for loan and deposit customers. Accordingly,
the Bank could be exposed to a higher cost of funds and/or a decreased net
interest margin in the future.
11
<PAGE> 55
INCREASED LENDING RISK ASSOCIATED WITH THE BANK'S CONSUMER, COMMERCIAL,
MULTI-FAMILY AND COMMERCIAL REAL ESTATE, AND CONSTRUCTION LENDING.
The Bank's aggregate portfolio of consumer, commercial, multi-family and
commercial real estate, and construction loans aggregated $85.1 million, or
32.2% of its total loan portfolio as of September 30, 1997. These types of loans
are generally considered to involve a higher degree of risk compared to first
mortgage loans on one- to four-family real property. See "Business of the Bank
- -- Lending Activities."
Consumer Loans. At September 30, 1997, the Bank's consumer loan
portfolio totaled $61.8 million, or 23.4% of total loans. These consumer loans
include home equity loans and home equity lines of credit, which although
secured by one- to four-family real property, generally are secured by a second
lien rather than a first mortgage on such property. The consumer loans also
include automobile and other loans for the purchase of recreational vehicles and
boats, the collateral for which depreciates rapidly and, if the loan is
defaulted upon, may not provide an adequate source of repayment. In addition,
consumer loans generally are dependent on the borrower's continuing financial
stability and, therefore, are more likely to be adversely affected by
unemployment, divorce, illness or personal bankruptcy.
Commercial Loans. The Bank's commercial loans at September 30, 1997
totaled $10.8 million, or 4.1% of total loans. Risk of loss on commercial
business lending is dependent in significant part on the business success of the
borrower and on general economic conditions in the region or industry in which
the borrower operates. Commercial business loans also require continued review
and evaluation regarding the performance of the borrower.
Multi-family and Commercial Real Estate Loans. The Bank's multi-family
and commercial real estate loans aggregated $6.7 million or 2.5% of total loans
at September 30, 1997. Multi-family and commercial real estate loans generally
involve larger principal amounts than one- to four-family mortgage loans. In
addition, because multi-family and commercial real estate loans often are
dependent on successful operation and management of the properties, repayment of
such loans may be subject to adverse conditions in the real estate market or the
economy to a greater extent than one- to four-family loans.
Construction Loans. At September 30, 1997, construction loans totaled
$5.8 million, or 2.2% of total loans, and during fiscal year 1997 the Bank
originated $14.2 million of construction loans for one- to four-family
properties, or 19.7% of total loan originations for that year. The Bank has
primarily originated construction loans for the construction of one- to
four-family properties but offers such loans for the development of multi-family
and commercial properties. Construction loans are generally considered to
involve a higher degree of credit risk than long-term financing on improved,
owner-occupied real estate because the risk of loss on such loans is dependent
largely upon the accuracy of the initial estimate of the property's value at
completion of construction or development compared to the estimated cost
(including interest) of construction. If the estimate of value proves to be
inaccurate, the property securing the loan, when completed, may have a value
which is insufficient to assure full repayment of the loan.
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
Pursuant to the Plan, the Company intends to establish a charitable
foundation in connection with the Conversion. The Plan provides that the Bank
and the Company will establish the Foundation, which will be incorporated under
Delaware law as a non-stock corporation and will be funded with shares of Common
Stock contributed by the Company. Establishment of the Foundation is subject to
the approval of the Bank's
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<PAGE> 56
members at the Special Meeting. If approved by members, the establishment of the
Foundation will be dilutive to the voting and ownership interests of
stockholders and will have an adverse impact on the operating results of the
Company in fiscal 1998, possibly resulting in an operating loss in fiscal 1998,
the fiscal year in which the Foundation is established.
Dilution of Stockholders' Interests. The Company proposes to establish
the Foundation with Company Common Stock in an amount equal to 8% of the Common
Stock sold in the Conversion. At the minimum, midpoint and maximum of the
Estimated Price Range, the contribution to the Foundation would be 306,000,
360,000, and 414,000 shares, with a value of $3.1 million, $3.6 million and $4.1
million, respectively, based on the Purchase Price of $10.00 per share. Upon
completion of the Conversion and establishment of the Foundation, the Company
will have 5,589,000 shares issued and outstanding at the maximum of the
Estimated Price Range, of which the Foundation will own 414,000 shares, or 7.4%.
AS A RESULT, PERSONS PURCHASING SHARES IN THE CONVERSION WILL HAVE THEIR
OWNERSHIP AND VOTING INTERESTS IN THE COMPANY DILUTED BY 7.4%. SEE "PRO FORMA
DATA."
Negative Impact on Earnings. Assuming receipt of approval of the Bank's
members, establishment of the Foundation will have an adverse impact on the
Company's and the Bank's earnings in the year in which the contribution is made.
The Company will recognize an expense in the amount of the contribution to the
Foundation in the quarter in which it occurs, which is expected to be the third
quarter of fiscal 1998. Such expense will reduce earnings and have a material
adverse impact on the Company's earnings for the year. The amount of the
contribution will range from $3.1 million to $4.1 million, depending on the
amount of Common Stock sold in the Conversion. The contribution expense will be
partially offset by the tax deductibility of the expense. The Company has been
advised by its independent accountants that the contribution to the Foundation
will be deductible for federal income tax purposes, subject to a limitation
based on 10% of the Company's annual taxable income. Assuming a contribution of
$4.1 million in Common Stock, based on the maximum of the Estimated Price Range,
the Company estimates a net tax effected expense of $2.7 million. If the
Foundation had been established at September 30, 1997, the Bank would have
reported a net loss of $1.3 million for fiscal 1997 rather than reporting net
income of $1.4 million. In addition to the contribution to the Foundation, the
Bank expects in the future to continue making ordinary charitable contributions
within its community.
Possible Nondeductibility of the Contribution. The Company and the Bank
have been advised by their independent accountants that an organization created
for charitable purposes will qualify as a Section 501(c)(3) exempt organization
under the Code, and will be classified as a private foundation. In this regard,
the Foundation will submit a request to the Internal Revenue Service ("IRS") to
be recognized as a tax-exempt organization. The Company and the Bank have
received an opinion of their independent accountants that the Foundation will
qualify as a Section 501(c)(3) exempt organization under the Code, except that
such opinion does not consider the impact of the regulatory condition on the
gift imposed by the OTS which requires the shares of Common Stock of the Company
held by the Foundation to be voted in the same ratio as all other shares of the
Company's Common Stock on all proposals considered by stockholders of the
Company. See "The Conversion -- Establishment of the Charitable Foundation
- --Regulatory Conditions Imposed on the Foundation." In the event that the
Company or the Foundation receives an opinion of their tax counsel satisfactory
to OTS that compliance with the voting restriction would have the effect of
causing the Foundation to lose its tax exempt status, otherwise have material
adverse tax consequences on the Foundation or subject the Foundation to an
excise tax under Section 4941 of the Code, the OTS will waive such voting
restriction upon submission of such opinion(s) by the Company or the Foundation.
The independent accountants' opinion further provides that the Company's
contribution of its own stock to the
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<PAGE> 57
Foundation will not constitute an act of self-dealing, and that the Company will
be entitled to a deduction in the amount of the fair market value of the stock
at the time of the contribution less the nominal par value that the Foundation
is required to pay to the Company for such stock, subject to an annual
limitation based on 10% of the Company's annual taxable income. The Company,
however, would be able to carry forward any unused portion of the deduction for
five years following the year in which the contribution is initially made for
federal tax purposes, subject to the 10% annual limitation. Thus, while the
Company expects, based on the maximum of the Estimated Price Range, to be able
to utilize for federal income tax purposes a charitable contribution deduction
of approximately $450,000 in fiscal year 1998, the Company is permitted under
the Code to carryover the excess of the total contribution over such 1998
deduction over a five-year period for federal tax purposes. For Commonwealth of
Pennsylvania income tax purposes, the Company also will be able to deduct its
contributions and to carry forward the unused portion of the deduction for a
five-year period following the year in which the contribution is initially made,
subject to limitations based on 10% of the Company's unconsolidated annual
taxable income, and provided the Company generates sufficient state taxable
income on an unconsolidated basis. Assuming the sale of Common Stock at the
maximum of the Estimated Price Range, the Company estimates that substantially
all of the contribution should be deductible for federal tax purposes over the
combined six-year period. However, no assurances can be made that the Company
will have sufficient pre-tax income over the five-year period following the year
in which the contribution is initially made to fully utilize the carryover
related to the excess contribution. Although the Company and the Bank have
received an opinion of their independent accountants that the Company will be
entitled to the deduction for the charitable contribution, there can be no
assurances that the IRS will recognize the Foundation as a Section 501(c)(3)
exempt organization or that the deduction will be permitted. In such event,
there would be no tax benefit related to the Foundation.
Comparison of Valuation and Other Factors Assuming the Foundation is
Not Established as Part of the Conversion. The establishment of the Foundation
was taken into account by Keller in determining the estimated pro forma market
value of the Company. The aggregate price of the shares of Common Stock being
offered in the Subscription and Community Offerings is based upon the
independent appraisal conducted by Keller of the estimated pro forma market
value of the Company. The pro forma aggregate price of the shares being offered
for sale in the Conversion is currently estimated to be between $38.3 million
and $51.8 million, with a midpoint of $45.0 million. Based on the appraisal, the
pro forma market capitalization of the Bank at the midpoint, including shares
contributed to the Foundation, is $48.6 million. The pro forma price to book
ratio and the pro forma price to earnings ratio are 71.78% and 15.15x,
respectively, at the midpoint of the Estimated Price Range. In the event that
the Conversion did not include the Foundation, Keller has estimated that the
estimated pro forma market capitalization of the Bank would be approximately
$53.1 million at the midpoint based on the pro forma price to book ratio and the
pro forma price to earnings ratio that are approximately the same as the
independent appraisal at 71.85% and 15.40x, respectively. If the Foundation was
not part of the Conversion, the pro forma market value of the shares being
offered is estimated to be between $45.1 million and $61.1 million. See
"Comparison of Valuation and Pro Forma Information with No Foundation." This
estimate by Keller was prepared at the request of the OTS and is solely for
purposes of providing depositors with sufficient information with which to make
an informed decision on the Foundation. There is no assurance that if the
Foundation is not approved the appraisal prepared at that time would conclude
that the pro forma market value of the Company would be the same as the amount
estimated herein. Any appraisal prepared at that time would be based on the
facts and circumstances existing at that time, including, among other things,
market and economic conditions.
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<PAGE> 58
The Bank believes that the establishment of the Foundation is in the
best interests of the Bank, its depositors, its prospective stockholders and the
communities in which it operates. The Foundation is integrally tied to the
Bank's business of operating a community banking institution and the Bank
believes that the Foundation will have a positive impact on the Bank's long-term
franchise value. The amount of Common Stock being offered in the Conversion at
the midpoint of the Estimated Price Range is approximately $8.1 million less
than the estimated amount of Common Stock that would be offered in the
Conversion without the Foundation based on the estimate provided by Keller.
Accordingly, certain depositors of the Bank who subscribe to purchase Common
Stock in the Subscription Offering may receive fewer shares depending on the
appraisal valuation at that time, the number of shares sold based on that
appraisal, the size of a depositor's stock order, the amount of his or her
qualifying deposits in the Bank and the overall level of subscriptions. The
decrease in the amount of Common Stock being offered will not have a significant
effect on the Company or the Bank's capital position. The Bank's regulatory
capital is significantly in excess of its regulatory capital requirements and
will further exceed such requirements following the Conversion. The Bank's
tangible, leverage and risk-based capital ratios at September 30, 1997 were
7.4%, 7.4% and 14.4%, respectively. Assuming the sale of shares at the midpoint
of the Estimated Price Range, the Bank's pro forma tangible, leverage and
risk-based capital ratios at September 30, 1997 would be 12.6%, 12.6% and 24.1%,
respectively. On a consolidated basis, the Company's pro forma stockholders'
equity would be $67.7 million or approximately 16.5% of pro forma consolidated
assets, assuming the sale of shares at the midpoint of the Estimated Price
Range. Pro forma stockholders' equity per share and pro forma net earnings per
share would be $13.93 and $0.66, respectively. If the Foundation was not being
established in the Conversion, based on the Keller estimate, the Company's pro
forma stockholders' equity would be approximately $73.9 million or approximately
17.8% of pro forma consolidated assets at the midpoint of the estimate and pro
forma stockholders' equity per share and pro forma net earnings per share would
be approximately the same with the Foundation as without the establishment of
the Foundation. See "Comparison of Valuation and Pro Forma Information with No
Foundation."
Potential Anti-Takeover Effect. If approved by the Bank's members, upon
completion of the Conversion, the Foundation will own 7.4% of the total shares
of the Company's Common Stock outstanding. Such shares will be owned solely by
the Foundation; however, pursuant to the terms of the contribution as mandated
by the OTS, the shares of Common Stock held by the Foundation must be voted in
the same ratio as all other shares of the Company's Common Stock on all
proposals considered by the stockholders of the Company. See "The Conversion --
Establishment of the Charitable Foundation -- Regulatory Conditions Imposed on
the Foundation." The Company and the Foundation will take the necessary steps to
provide such requirement in the Foundation's corporate governance documents. As
such, the Company does not believe the Foundation will have an anti-takeover
effect on the Company. In the event that the OTS were to waive this voting
restriction, the Foundation's board of directors would exercise sole voting
power over such shares and would no longer be subject to the restriction.
However, the OTS could impose additional conditions at that time on the
composition of the board of directors of the Foundation or which otherwise
related to control of the Common Stock of the Company held by the Foundation.
See "The Conversion -- Establishment of the Charitable Foundation -- Regulatory
Conditions Imposed on the Foundation." If a waiver of the voting restriction
were granted by the OTS and no further conditions were imposed on the Foundation
at that time, management of the Company and the Bank may benefit to the extent
that the board of directors of the Foundation determines to vote the shares of
Common Stock held by the Foundation in favor of proposals supported by the
Company and the Bank. In such event, when the Foundation's shares are combined
with shares purchased directly by officers and directors of the Company, shares
held by proposed stock benefit plans, if approved by stockholders, and shares
held in the Bank's ESOP, the aggregate of such shares could exceed 20% of the
Company's outstanding Common Stock, which could enable management to defeat
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<PAGE> 59
stockholder proposals requiring 80% approval. Consequently, in the event the
voting restriction was waived, this potential voting control might preclude
takeover attempts that certain stockholders deem to be in their best interest,
and might tend to perpetuate management. Since the ESOP shares are allocated to
all eligible employees of the Bank, and any unallocated shares will be voted by
an independent trustee, and because awards under the proposed stock benefit
plans may be granted to employees other than executive officers and directors,
management of the Company does not expect to have voting control of all shares
held or allocated by the ESOP or other stock benefit plans. See " -- Certain
Anti-Takeover Provisions Which May Discourage Takeover Attempts -- Voting
Control of Officers and Directors."
Further, there will be no agreements or understandings, written or
tacit, with respect to the exercise of either direct or indirect control over
the management or policies of the Company by the Foundation which may discourage
takeover attempts, including agreements related to voting, acquisition or
disposition of the Company's Common Stock. Finally, as the Foundation sells its
shares of Common Stock over time, its ownership interest and voting power in the
Company are expected to decrease.
Potential Challenges. The establishment and funding of a charitable
foundation as part of a conversion is innovative and has been done in a limited
number of instances in connection with a conversion. As such, the Foundation may
be subject to potential challenges notwithstanding that the Boards of Directors
of the Company and the Bank have carefully considered the various factors
involved in the establishment of the Foundation in reaching its determination to
establish the Foundation as part of the Conversion. See "The Conversion --
Establishment of the Charitable Foundation -- Purpose of the Foundation." In
conjunction with its approval of the Conversion, the Bank determined to submit
the Foundation for a vote of members so that members have a right to vote on
whether the Foundation should be established as part of the Conversion. If
certain parties were to institute an action seeking to require the Bank to
eliminate establishment of the Foundation in connection with the Conversion, no
assurances can be made that the resolution of such action would not result in a
delay in the consummation of the Conversion or that any objecting persons would
not be ultimately successful in obtaining such removal or other equitable relief
or monetary damages against the Company or the Bank. Additionally, if the
Company and the Bank are forced to eliminate the Foundation, the Company may be
required to resolicit subscribers in the Offerings.
Approval of Members. Establishment of the Foundation is subject to the
approval of a majority of the total outstanding votes of the Bank's members
eligible to be cast at the Special Meeting. The Foundation will be considered as
a separate matter from approval of the Plan of Conversion. If the Bank's members
approve the Plan of Conversion, but not the establishment of the Foundation, the
Bank intends to complete the Conversion without the establishment of the
Foundation. Failure to approve the Foundation may materially increase the pro
forma market value of the Common Stock being offered for sale in the Offerings
since the Valuation Range, as set forth herein, takes into account the dilutive
impact of the issuance of shares to the Foundation. If the pro forma market
value of the Common Stock without the Foundation is either greater than $59.5
million or less than $38.2 million, the Bank will establish a new Estimated
Price Range and commence a resolicitation of subscribers (i.e., subscribers will
be permitted to continue their orders, in which case they will need to
affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their subscriptions funds will be promptly refunded
with interest at the Bank's passbook rate of interest, or be permitted to
increase, decrease, or cancel their subscriptions). Any change in the Estimated
Price Range must be approved by the OTS. See "The Conversion -- Stock Pricing."
A resolicitation, if any, following the conclusion of the Subscription and
Community Offerings would not exceed 45 days unless further extended by the OTS
for periods of up to 90 days not to extend beyond _______________, 199_.
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<PAGE> 60
HIGHLY COMPETITIVE INDUSTRY
The Bank faces significant competition in its market area both in
attracting deposits and in originating loans. The Bank's market area is a highly
competitive market. The population of the market is relatively small and
population growth is moderate and is static in the county in which the Bank is
headquartered. The Bank faces direct competition from a significant number of
financial service providers operating in its market area, many with a state-wide
or regional presence, and, in some cases, a national presence. This competition
arises from commercial banks, savings banks, mortgage brokers, mortgage banking
companies, credit unions, and other providers of financial services, many of
which are significantly larger than the Bank and, therefore, have greater
financial and marketing resources than those of the Bank. The Bank's competitive
environment raises the possibility of increasing its cost of funds and lowering
the yields the Bank may achieve on its loans. See "Business of the Bank --
Market Area and Competition."
FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION
The Bank is subject to extensive regulation and supervision as a federal
savings association. In addition, the Company, as a savings and loan holding
company, is subject to extensive regulation and supervision. Such regulations,
which affect the Bank on a daily basis, may be changed at any time, and the
interpretation of the relevant law and regulations is also subject to change by
the authorities who examine the Bank and interpret those laws and regulations.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the OTS, the FDIC or the Congress, could have a material
impact on the Company, the Bank, its operations or the Bank's Conversion. See
"Regulation."
STOCK-BASED BENEFITS TO MANAGEMENT AND DIRECTORS, EMPLOYMENT CONTRACTS AND
CHANGE IN CONTROL PAYMENTS
Stock-Based Incentive Plan. The Company intends to adopt a Stock-Based
Incentive Plan which would provide for the granting of options to purchase
common stock ("Stock Options"), awards of common stock ("Stock Awards"), and
certain related rights to eligible officers, employees and directors of the
Company and Bank. While the Company currently anticipates granting Stock Options
and Stock Awards under a single plan, it may establish separate plans to provide
for such awards. In the event such plan is adopted within one year after
conversion, OTS regulations require the plan to be approved by stockholders at a
meeting of stockholders which may be held no earlier than six months after
completion of the Conversion. It is anticipated the Stock-Based Incentive Plan
will provide for the granting of options to purchase shares of Common Stock
equal to 10% of the shares of Common Stock issued in the Conversion, including
shares issued to the Foundation (413,100 shares and 558,900 shares at the
minimum and maximum of the Estimated Price Range, respectively) and the granting
of Stock Awards in an amount equal to 4% of the shares of Common Stock issued in
the Conversion, including shares issued to the Foundation (165,240 shares and
233,560 shares at the minimum and maximum of the Estimated Price Range,
respectively). Shares of common stock used to satisfy such awards will be
acquired by the Plan or a trust established for the Plan either through open
market purchases or from authorized but unissued Common Stock. See " -- Possible
Dilutive Effect of Stock-Based Incentive Plan."
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<PAGE> 61
Under the Stock-Based Incentive Plan, Stock Awards would be granted in
the form of non-transferable, non-assignable shares of Common Stock. The Board
of Directors intends to appoint an independent trustee who will vote unallocated
stock awards in the same proportion as it receives instructions from recipients
with respect to allocated shares which have not been earned and distributed. The
trustee will not vote allocated shares which have not been distributed if it
does not receive instructions from the recipient.
It is anticipated that the exercise price of Stock Options granted under
the Stock-Based Incentive Plan will be equal to the fair market value of the
underlying Common Stock on the date of grant. Such options will permit such
officers and directors to benefit from any increase in the market value of the
shares in excess of the exercise price at the time of exercise. Officers and
directors receiving Stock Options will not be required to pay for the shares
until the date of exercise. The granting of Stock Awards and the exercise of
non-statutory stock options (and disqualifying dispositions of stock acquired
through the exercise of incentive stock options) will result in additional
compensation expense to the Company and, accordingly, may result in an increase
in the overall compensation expense in future periods. See "Management of the
Bank -- Benefits -- Stock-Based Incentive Plan."
Although no specific award determinations have been made, the Company
anticipates that it will provide Stock Awards and/or Stock Options to directors,
officers and employees to the extent permitted by applicable regulations.
Current OTS regulations provide that, with respect to any non-tax qualified
stock benefit plan such as the Stock-Based Incentive Plan, which is implemented
within one year after consummation of the Conversion, no individual may receive
more than 25% of the shares or options of any such plan and non-employee
directors may not receive more than 5% individually, or 30% in the aggregate, of
the shares or options awarded under any such plan. Such regulations also provide
that any awards granted under such a Plan may not vest at a rate greater than
20% per year except in limited circumstances. It is also anticipated that the
Stock-Based Incentive Plan will provide for cash payments to participants in the
event of a change in control of the Company or Bank.
The Board of Directors, in determining specific allocations and grants
of Stock Awards and Stock Options, will consider various factors, including but
not limited to, the financial condition of the Company, current and past
performance of plan participants and tax and securities law and regulation
requirements.
Employment Contracts and Change in Control Provisions. Employment and
change in control agreements with certain officers and the employee severance
compensation plan provide for benefits and cash payments in the event of a
change in control of the Company or the Bank. The provisions in such agreements
and plan would provide the recipient with a change in control payment in the
event of the recipient's involuntary or, in certain circumstances, voluntary
termination of employment subsequent to a change in control of the Company or
the Bank. In addition to any payments which may be made under the Stock-Based
Incentive Plan upon a change in control, these provisions may have the effect of
increasing the cost of acquiring the Company, thereby discouraging future
attempts to take over the Company or the Bank. Based on current salaries, cash
payments to be paid in the event of a change in control pursuant to the terms of
the employment agreements, change in control agreements and an employee
severance compensation plan would be approximately $3.7 million. However, the
actual amount to be paid in the event of a change in control of the Company or
Bank cannot be estimated at this time because the actual amount is based on the
average salary of the employee and other factors existing at the time of the
change in control. See "Restrictions on Acquisition of the Company and the Bank
- -- Restrictions in the Company's Certificate of Incorporation and Bylaws,"
"Management of the Bank -- Employment Agreements," " -- Change in Control
Agreements," " -- Employee Severance Compensation Plan" and "Benefits --
Stock-Based Incentive Plan."
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<PAGE> 62
POSSIBLE DILUTIVE EFFECT OF STOCK-BASED INCENTIVE PLAN
Following the Conversion, the Stock-Based Incentive Plan will acquire an
amount of shares equal to 4% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation, either through open
market purchases or the issuance of authorized but unissued shares of Common
Stock from the Company. If the Stock-Based Incentive Plan is funded by the
issuance of authorized but unissued shares, the voting interests of existing
stockholders at that time will be diluted by 3.8%. Also following the
Conversion, directors, officers and employees will be granted stock options
under the Stock-Based Incentive Plan in an amount equal to 10% of the Common
Stock issued in the Conversion, including shares issued to the Foundation. The
exercise of such stock options may be satisfied by the issuance of authorized
but unissued shares. Under certain circumstances, such options may be exercised
and sold on the same day, thereby eliminating any risk to officers and directors
in exercising options in the event that the market price exceeds the exercise
price. If all of the stock options were to be exercised using authorized but
unissued Common Stock and the stock awards granted under the Stock-Based
Incentive Plan were funded with authorized but unissued shares, the voting
interests of existing stockholders at that time would be diluted at that time by
12.3%.
CERTAIN ANTI-TAKEOVER PROVISIONS WHICH MAY DISCOURAGE TAKEOVER ATTEMPTS
Provisions in the Company's and the Bank's Governing Instruments.
Certain provisions of the Company's Certificate of Incorporation and Bylaws,
particularly a provision limiting voting rights, and the Bank's Stock Charter
and Bylaws, as well as certain federal regulations, assist the Company in
maintaining its status as an independent publicly owned corporation. These
provisions provide for, among other things, supermajority voting on certain
matters, staggered boards of directors, non-cumulative voting for directors,
limits on the calling of special meetings, limits on voting shares in excess of
10% of outstanding shares, and certain uniform price provisions for certain
business combinations. The Bank's Stock Charter also prohibits, for five years,
the acquisition or offer to acquire, directly or indirectly, the beneficial
ownership of more than 10% of the Bank's equity securities. Any person violating
this restriction may not vote the Bank's securities in excess of 10%. These
provisions in the Bank's and the Company's governing instruments may discourage
potential proxy contests and other potential takeover attempts, particularly
those which have not been negotiated with the Board of Directors, and thus,
generally may serve to perpetuate existing management. For a more detailed
discussion of these provisions, see "Restrictions on Acquisitions of the Company
and the Bank."
Voting Control of Officers and Directors. Directors and officers of the
Bank and the Company expect to purchase approximately 4.48% or 3.35% of the
shares of Common Stock to be issued in the Conversion, including shares issued
to the Foundation based upon the minimum and the maximum of the Estimated Price
Range, respectively, exclusive of shares that may be attributable to directors
and officers through the Stock-Based Incentive Plan (exclusive of shares to be
issued upon the exercise of options) and the ESOP, which plans may give
directors, officers and employees the potential to control the voting of an
additional 12.0% of the Company's Common Stock assuming such plans were funded
with authorized but unissued shares. In addition, the Foundation will be funded
with a contribution by the Company equal to 8% of the Common Stock sold in the
Conversion, which if a waiver of the voting restriction imposed on such Common
Stock is obtained from the OTS, may be voted as determined by the directors of
the Foundation who also will be directors or officers of the Company and Bank.
Management's potential voting control could, together with additional
stockholder support, defeat stockholder proposals requiring 80% approval of
stockholders. As a result, this potential voting control may preclude takeover
attempts that certain stockholders deem to be in their best interest and may
tend to perpetuate existing
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<PAGE> 63
management. See "Restrictions on Acquisition of the Company and the Bank
- --Restrictions in the Company's Certificate of Incorporation and Bylaws."
ABSENCE OF MARKET FOR COMMON STOCK
The Company and the Bank have never issued capital stock. The Company
has received conditional approval to have its Common Stock quoted on the AMEX
under the symbol "____" upon completion of the Conversion. However, there can be
no assurance that an active and liquid trading market for the Common Stock will
develop or, once developed, will continue, nor can there be any assurances that
purchasers of the Common Stock will be able to sell their shares at or above the
Purchase Price. The absence or discontinuance of a market for the Common Stock
would have an adverse impact on both the price and liquidity of the Common
Stock. See "Market for the Common Stock."
POSSIBLE INCREASE IN ESTIMATED PRICE RANGE AND NUMBER OF SHARES ISSUED
The number of shares to be issued in the Conversion, including shares
issued to the Foundation may be increased as a result of an increase in the
Estimated Price Range of up to 15% to reflect changes in market and financial
conditions following the commencement of the Subscription and Community
Offerings. In the event that the Estimated Price Range is so increased, it is
expected that the Company will issue up to 5,951,250 shares of Common Stock at
the Purchase Price for an aggregate purchase price of up to $59.5 million. An
increase in the number of shares issued will decrease a subscriber's pro forma
net earnings per share and stockholders' equity per share and will increase the
Company's pro forma consolidated stockholders' equity and net earnings. Such an
increase will also increase the Purchase Price as a percentage of pro forma
stockholders' equity per share and net earnings per share.
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
The Bank has received an opinion of Keller that, pursuant to Keller's
Valuation, subscription rights granted to Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members have no value. However, such
valuation is not binding on the IRS. If the subscription rights granted to
Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members are deemed to have an ascertainable value, receipt of such rights could
result in taxable gain to those Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members who receive and/or exercise the subscription
rights in an amount equal to such value. Additionally, the Bank could recognize
a gain for tax purposes on such distribution. Whether subscription rights are
considered to have ascertainable value is an inherently factual determination.
See "The Conversion -- Effects of Conversion" and " -- Tax Aspects."
YEAR 2000 COMPLIANCE
As the year 2000 approaches, a critical business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. In brief, many existing application software
products in the marketplace were designed to only accommodate a two digit date
position which represents the year (e.g., '95 is stored on the system and
represents the year 1995). The Company has been identifying potential problems
associated with the year 2000 issue and is in the process of implementing a plan
designed to ensure that all software used in connection with the Company's
business will manage and manipulate data involving the transition with data from
1999 to 2000 without functional or data abnormality and without inaccurate
results related to such data. In addition, the Bank recognizes that
20
<PAGE> 64
its ability to be "Year 2000" compliant, to some extent, is dependent upon the
cooperation of its vendors. The Bank is requiring its computer systems and
software vendors to represent that the products provided are or will be Year
2000 compliant and has planned a program of testing for compliance. There can be
no assurances that such plan or the performance by the Bank's vendors will be
effective to remedy all potential problems. To the extent the Company's systems
are not fully Year 2000 compliant, there can be no assurance that potential
systems interruptions or the cost necessary to update software would not have a
material adverse effect on the Company's business, financial condition, results
of operations and business prospects. Further, any Year 2000 failures on the
part of the Bank's customers could result in additional expense or loss to the
Bank. The Bank's plan also contemplates working with its customers to address
any potential Year 2000 problems.
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
The Company was organized in Delaware at the direction of the Board of
Directors of the Bank for the purpose of acquiring all of the capital stock to
be issued by the Bank in the Conversion. The Company has received approval from
the OTS to become a savings and loan holding company and, as such, will be
subject to regulation by the OTS. See "The Conversion -- General." Upon
consummation of the Conversion, the Company will conduct business initially as a
unitary savings and loan holding company. See "Regulation -- Holding Company
Regulation." After completion of the Conversion, the Company's assets will
consist of all of the outstanding shares of the Bank's capital stock issued to
the Company in the Conversion and that portion of the net proceeds of the
Offerings retained by the Company. The Company intends to use part of the net
proceeds it retains to loan funds to the ESOP to enable the ESOP to purchase 8%
of the Common Stock issued in the Conversion, including shares issued to the
Foundation. The Company and Bank may, however, alternatively choose to fund the
ESOP through a loan to the ESOP trust by a third-party financial institution.
The Company intends to initially utilize the remaining proceeds for investments
in mortgage-related securities and federal agency obligations. See "Use of
Proceeds." Immediately after the Conversion, the Company will have no
significant liabilities. The management of the Company is set forth under
"Management of the Company." Initially, the Company will neither own nor lease
any property, but will instead use the premises, equipment and furniture of the
Bank. At the present time, the Company does not intend to employ any persons
other than officers of the Company who are also officers of the Bank, but will
utilize the support staff of the Bank from time to time. Additional employees
will be hired as appropriate to the extent the Company expands its business in
the future.
Management believes that the holding company structure will provide the
Company with additional flexibility to diversify, should it decide to do so, its
business activities through existing or newly-formed subsidiaries, or through
acquisitions of other financial institutions and financial services related
companies. In addition, management believes that the Company will be in a
position after the Conversion, subject to regulatory limitations and the
Company's financial position, to take advantage of any acquisition and expansion
opportunities that may arise. There are no current arrangements, understandings
or agreements, written or oral, regarding any such opportunities or
transactions. The initial activities of the Company are anticipated to be funded
by the net proceeds retained by the Company and earnings thereon or,
alternatively, through dividends from the Bank.
The Company's executive offices are located at 12 E. Broad Street,
Hazleton, Pennsylvania 18201 and its telephone number is (717) 459-3700.
21
<PAGE> 65
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF HAZLETON
The Bank was organized in 1935 as a federally chartered savings and loan
association. The Bank operates as a community bank and its corporate philosophy
has traditionally been focused on providing a competitive array of financial
products and services to consumers within its market area. The Bank's business
primarily consists of accepting deposits from customers and investing those
funds primarily in mortgage loans secured by one- to four-family residences,
consumer loans and, to a lesser extent, other types of loans and securities. At
September 30, 1997, the Bank had $264.2 million, or 71.6% of total assets, of
loans, consisting of: $179.1 million, or 48.5% of total assets, of one- to
four-family mortgage loans, $61.8 million, or 16.7% of total assets, of consumer
loans (consisting primarily of home equity loans, home equity lines of credit,
automobile loans and education loans); $10.8 million, or 2.9% of total assets,
of commercial loans; $6.7 million, or 1.8% of total assets, of multi-family and
commercial real estate loans, and $5.8 million, or 1.6% of total assets, of
construction loans. Securities at September 30, 1997 totaled $83.7 million, or
22.7% of total assets, consisting of: $43.8 million, or 11.9% of total assets of
investment securities (consisting primarily of U.S. Government agency and
municipal obligations) and $39.9 million, or 10.8% of total assets, of
mortgage-related securities (consisting primarily of those issued by government
agencies such as Fannie Mae ("FNMA"), Freddie Mac ("FHLMC"), and Ginnie Mae
("GNMA"). At September 30, 1997, the Bank's deposit accounts totaled $314.1
million, or 92.2% of total liabilities. The Bank also utilizes advances from the
FHLB of Pittsburgh as a source of funds. At September 30, 1997, such advances
totaled $23.5 million, or 6.9% of total liabilities.
The Bank is subject to extensive regulation, supervision and examination
by the OTS, its primary regulator, and the FDIC, which insures its deposits. As
of September 30, 1997, the Bank exceeded all regulatory capital requirements
with tangible, core and risk-based capital of $27.3 million, $27.3 million and
$28.5 million, respectively. Additionally, the Bank's regulatory capital was in
excess of the amount necessary for the Bank to be deemed "well capitalized"
under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"). See "Regulatory Capital Compliance" and "Regulation." The Bank is a
member of the FHLB of Pittsburgh which is one of the twelve regional banks which
comprise the FHLB system. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business of the Bank."
The Bank's executive offices are located at 12 E. Broad Street,
Hazleton, Pennsylvania 18201 and its telephone number is (717) 459-3700.
22
<PAGE> 66
REGULATORY CAPITAL COMPLIANCE
At September 30, 1997, the Bank exceeded all regulatory capital
requirements. See "Regulation -- Federal Savings Institution Regulation --
Capital Requirements." Set forth below is a summary of the Bank's compliance
with the regulatory capital standards as of September 30, 1997, on a historical
and pro forma basis assuming that the indicated number of shares were sold as of
such date and receipt by the Bank of 50% of the net proceeds. For purposes of
the table below, the amount expected to be borrowed by the ESOP and the cost of
the shares expected to be acquired by the Stock-Based Incentive Plan are
deducted from pro forma regulatory capital.
<TABLE>
<CAPTION>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF HAZLETON
PRO FORMA AT SEPTEMBER 30, 1997 BASED UPON THE SALE AT $10.00 PER SHARE
-----------------------------------------------------------------------
3,825,000 SHARES 4,500,000 SHARES 5,175,000 SHARES
HISTORICAL AT (MINIMUM OF ESTIMATED (MIDPOINT OF ESTIMATED (MAXIMUM OF ESTIMATED
SEPTEMBER 30, 1997 PRICE RANGE) PRICE RANGE) PRICE RANGE)
------------------ ------------ ------------ ------------
PERCENT PERCENT PERCENT PERCENT
OF OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
------ --------- ------ --------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital(3) ............ $28,538 7.7% $47,068 12.1% $50,405 12.9% $53,741 13.6%
======= ==== ======= ==== ======= ==== ======= ====
Tangible Capital:
Capital Level ..... $27,255 7.4% $45,735 11.8% $49,122 12.6% $52,458 13.8%
Requirement ....... 5,539 1.5 5,826 1.5 5,867 1.5 5,927 1.5
------- ---- ------- ---- ------- ---- ------- ----
Excess ............ $21,716 5.9% $39,950 10.3% 43,255 11.1% $48,531 11.8%
======= ==== ======= ==== ======= ==== ======= ====
Core Capital:
Capital Level ..... $27,255 7.4% $45,785 11.8% $49,122 12.6% $52,458 13.3%
Requirement(4) .... 11,077 3.0 11,651 3.0 1,733 3.0 11,854 3.0
------- ---- ------- ---- ------- ---- ------- ----
Excess ............ $16,178 4.4% $34,134 8.8% $37,388 9.6% $40,605 10.3%
======= ==== ======= ==== ======= ==== ======= ====
Risk-Based Capital:
Capital Level(5)(6) $28,527 14.4% $47,057 22.7% $50,394 24.1% $53,730 25.5%
Requirement ....... 15,845 8.0 16,610 8.0 $16,720 8.0 16,853 8.0
------- ---- ------- ---- ------- ---- ------- ----
Excess ............ $12,682 6.4% $30,447 14.7% $33,674 16.1% $36,877 17.5%
======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
<TABLE>
<CAPTION>
FIRST FEDERAL SAVINGS AND
LOAN ASSOCIATION OF HAZLETON
PRO FORMA AT
SEPTEMBER 30, 1997
BASED UPON THE SALE
AT $10.00 PER SHARE
-----------------------------
5,951,250 SHARES
(15% ABOVE
MAXIMUM OF
ESTIMATED
PRICE RANGE)(1)
---------------
PERCENT
OF
AMOUNT ASSETS(2)
--------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
GAAP Capital(3) .................... $57,578 14.5%
======= ====
Tangible Capital:
Capital Level ............. $56,295 14.1%
Requirement ............... 5,974 1.5
------- ----
Excess .................... $50,321 12.6%
======= ====
Core Capital:
Capital Level ............. $56,295 14.1%
Requirement(4) ............ 11,948 3.0
------- ----
Excess .................... $44,347 11.1%
======= ====
Risk-Based Capital:
Capital Level(5)(6) ....... $57,567 27.1%
Requirement ............... 17,007 8.0
------- ----
Excess .................... $40,580 19.1%
======= ====
</TABLE>
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to
15% as a result of regulatory considerations or changes in market or
general financial and economic conditions following the commencement of
the Subscription and Community Offerings.
(2) Tangible capital levels are shown as a percentage of tangible assets.
Core capital levels are shown as a percentage of total adjusted assets.
Risk-based capital levels are shown as a percentage of risk-weighed
assets.
(3) GAAP Capital includes unrealized gain on available-for-sale securities,
net, which is not included as regulatory capital.
(4) The current OTS core capital requirement for savings associations is 3%
of total adjusted assets. The OTS has proposed core capital
requirements which would require a core capital ratio of 3% of total
adjusted assets for thrifts that receive the highest supervisory rating
for safety and soundness and a 4% to 5% core capital ratio requirement
for all other thrifts. See "Regulation -- Federal Savings Institution
Regulation -- Capital Requirements."
(5) Assumes net proceeds are invested in assets that carry a 50%
risk-weighting.
(6) The difference between equity under generally accepted accounting
principles ("GAAP") and regulatory risk-based capital is attributable
to the addition of the general valuation allowance of $1.3 million at
September 30, 1997 (in addition to the exclusion of unrealized gain on
available-for-sale securities, net).
23
<PAGE> 67
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock
cannot be determined until the Conversion is completed, it is presently
anticipated that the net proceeds from the sale of the Common Stock will be
between $37.1 million and $50.4 million (or $58.1 million if the Estimated Price
Range is increased by 15%). See "Pro Forma Data" and "The Conversion-- Stock
Pricing" as to the assumptions used to arrive at such amounts. The Company will
be unable to utilize any of the net proceeds of the Offerings until the
consummation of the Conversion.
The Company will purchase all of the outstanding capital stock of the
Bank to be issued upon Conversion in exchange for 50% of the net proceeds, with
the remaining net proceeds to be retained by the Company. Based on the midpoint
of the Estimated Price Range, the Company expects to utilize the $21.9 million
of net proceeds to purchase the common stock of the Bank. Such portion of net
proceeds will be added to the Bank's general funds which the Bank currently
intends to utilize for general corporate purposes, including investments in
loans, mortgage-related and investment securities, the possible repayment of
FHLB advances under appropriate market conditions, and the funding of
stock-based benefit plans. The Bank may also use such funds for the expansion of
its facilities, and to expand operations through acquisitions of other financial
institutions, branch offices or other financial services companies. The Bank has
not yet determined the approximate amount of net proceeds to be used for any of
the purposes mentioned above.
The Company intends to use a portion of the net proceeds to make a loan
directly to the ESOP to enable the ESOP to purchase 8% of the Common Stock
issued in the Conversion, including shares issued to the Foundation. The Company
and Bank may alternatively choose to fund the ESOP's stock purchases through a
loan by a third-party financial institution. The remaining net proceeds retained
by the Company will initially be invested in mortgage-related securities and
federal agency obligations. Based upon the sale of 3,825,000 shares or 5,175,000
shares at the minimum and maximum of the Estimated Price Range, and the issuance
of shares to the Foundation, the amount of the loan to the ESOP would be $3.3
million or $4.5 million, respectively (or $5.1 million if the Estimated Price
Range is increased by 15%) to be repaid over a 10-year period at the prevailing
prime rate of interest, which currently is 8.5%. See "Management of the Bank --
Benefits -- Employee Stock Ownership Plan."
The net proceeds retained by the Company may also be used to support
the future expansion of operations through branch acquisitions, the
establishment of branch offices and the acquisition of other financial
institutions or their assets, including those located within the Bank's market
area or diversification into other banking related businesses. The Company has
no current arrangements, understandings or agreements regarding any such
opportunities or transactions. The Company, upon the Conversion, will be a
unitary savings and loan holding company, which under existing laws would
generally not be restricted as to the types of business activities in which it
may engage, provided that the Bank continues to be a qualified thrift lender
("QTL"). See "Regulation -- Holding Company Regulation" for a description of
certain regulations applicable to the Company.
Upon completion of the Conversion, the Board of Directors of the
Company will have the authority to adopt stock repurchase plans, subject to
statutory and regulatory requirements. Unless approved by the OTS, the Company,
pursuant to OTS regulations, will be prohibited from repurchasing any shares of
the Common Stock for three years except (i) for an offer to all stockholders on
a pro rata basis, or (ii) for the repurchase of qualifying shares of a director.
Notwithstanding the foregoing and except as provided below, beginning one year
following completion of the Conversion, the OTS regulations permit the Company
to
24
<PAGE> 68
repurchase its Common Stock so long as: (i) the repurchases within the following
two years are part of an open-market program not involving greater than 5% of
its outstanding capital stock during a 12-month period; (ii) the repurchases do
not cause the Bank to become "undercapitalized" within the meaning of the OTS
prompt corrective action regulation; and (iii) the Company provides to the
Regional Director of the OTS no later than 10 days prior to the commencement of
a repurchase program written notice containing a full description of the program
to be undertaken and such program is not disapproved by the Regional Director.
See "Regulation -- Prompt Corrective Regulatory Action." In addition, under
current OTS policies, repurchases may be allowed in the first year following
Conversion and in amounts greater than 5% in the second and third years
following Conversion provided there are valid and compelling business reasons
for such repurchases and the OTS does not object to such repurchases.
Based upon facts and circumstances following Conversion and subject to
applicable regulatory requirements, the Board of Directors may determine to
repurchase stock in the future. Such facts and circumstances may include but are
not limited to: (i) market and economic factors such as the price at which the
stock is trading in the market, the volume of trading, the attractiveness of
other investment alternatives in terms of the rate of return and risk involved
in the investment, the ability to increase the book value and/or earnings per
share of the remaining outstanding shares, and the opportunity to improve the
Company's return on equity; (ii) the avoidance of dilution to stockholders by
not having to issue additional shares to cover the exercise of stock options or
to fund employee stock benefit plans; and (iii) any other circumstances in which
repurchases would be in the best interests of the Company and its shareholders.
In the event the Company determines to repurchase stock, such repurchases may be
made at market prices which may be in excess of the Purchase Price in the
Conversion.
Any stock repurchases will be subject to the determination of the Board
of Directors that both the Company and the Bank will be capitalized in excess of
all applicable regulatory requirements after any such repurchases and that such
capital will be adequate, taking into account, among other things, the level of
non-performing and other risk assets, the Company's and the Bank's current and
projected results of operations and asset/liability structure, the economic
environment, tax and other considerations. See "The Conversion-- Certain
Restrictions on Purchase or Transfer of Shares After Conversion."
DIVIDEND POLICY
Upon Conversion, the Board of Directors of the Company will have the
authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. In the future, the Board of Directors intends to
consider a policy of paying cash or stock dividends on the Common Stock.
However, no decision has been made with respect to the payment of dividends.
Declarations of dividends by the Board of Directors, if any, will depend upon a
number of factors, including the amount of net proceeds retained by the Company
in the Conversion, investment opportunities available to the Company or the
Bank, capital requirements, regulatory limitations, the Company's and the Bank's
financial condition and results of operations, tax considerations and general
economic conditions. No assurances can be given, however, that any dividends
will be paid or, if commenced, will continue to be paid.
The Bank will not be permitted to pay dividends to the Company on its
capital stock if its stockholders' equity would be reduced below the amount
required for the liquidation account. See "The Conversion-- Liquidation Rights."
For information concerning federal regulations which apply to the Bank in
determining the amount of proceeds which may be retained by the Company and
regarding a savings
25
<PAGE> 69
institution's ability to make capital distributions, including payment of
dividends to its holding company, see "Federal and State Taxation -- Federal
Taxation -- Distributions" and "Regulation -- Federal Savings Institution
Regulation -- Limitation on Capital Distributions."
Unlike the Bank, the Company is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders, although the
source of such dividends will be dependent on the net proceeds retained by the
Company and earnings thereon and may be dependent, in part, upon dividends from
the Bank. The Company is subject, however, to the requirements of Delaware law,
which generally limits dividends to an amount equal to the excess of the net
assets of the Company (the amount by which total assets exceed total
liabilities) over its statutory capital (generally defined as the aggregate par
value of the outstanding shares of the Company's capital stock having a par
value plus the amount of the consideration paid for shares of the Company's
capital stock without par value) or, if there is no such excess, to its net
profits for the current and/or immediately preceding fiscal year.
MARKET FOR THE COMMON STOCK
The Company and Bank have not previously issued capital stock and,
consequently, there is no established market for the Common Stock. The Company
has received conditional approval to have its Common Stock listed on the AMEX
under the symbol "____" upon completion of the Conversion. Such approval is
subject to various conditions, including completion of the Conversion and the
satisfaction of applicable listing criteria. There can be no assurance that the
Common Stock will be able to meet the applicable listing criteria in order to
maintain its listing on the AMEX or that an active and liquid trading market
will develop or, if developed, will be maintained. A public market having the
desirable characteristics of depth, liquidity and orderliness, however, depends
upon the presence in the marketplace of both willing buyers and sellers of
Common Stock at any given time, which is not within the control of the Company.
No assurance can be given that an investor will be able to resell the Common
Stock at or above the purchase price of the Common Stock after the Conversion.
26
<PAGE> 70
CAPITALIZATION
The following table presents the unaudited historical consolidated
capitalization of the Bank at September 30, 1997, and the pro forma consolidated
capitalization of the Company after giving effect to the Conversion, including
the issuance of shares to the Foundation, based upon the sale of the number of
shares indicated in the table and the other assumptions set forth under "Pro
Forma Data."
<TABLE>
<CAPTION>
COMPANY PRO FORMA BASED UPON SALE AT $10.00 PER SHARE
------------------------------------------------------
5,951,250
SHARES
3,825,000 4,500,000 5,175,000 (15% ABOVE
SHARES SHARES SHARES MAXIMUM OF
(MINIMUM (MIDPOINT OF (MAXIMUM ESTIMATED
BANK OF ESTIMATED ESTIMATED OF ESTIMATED PRICE
HISTORICAL PRICE RANGE) PRICE RANGE) PRICE RANGE) RANGE)(1)
---------- ------------ ------------ ------------ ---------
(IN THOUSANDS)
Borrowings:
<S> <C> <C> <C> <C> <C>
Deposits(2) ......................................... $314,123 $ 314,123 $ 314,123 $ 314,123 $ 314,123
FHLB advances and other borrowings .................. 23,608 23,608 23,608 23,608 23,608
-------- --------- --------- --------- ---------
Total ...................................... $337,731 $ 337,731 $ 337,731 $ 337,731 $ 337,731
======== ========= ========= ========= =========
Stockholders' equity:
Preferred Stock, $.01 par value, 2,000,000 shares
authorized; none to be issued...................... $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par value, 16,000,000 shares
authorized; shares to be issued as reflected....... -- 41 49 56 64
Additional paid-in capital(3) ....................... -- 37,019 43,684 50,350 58,016
Retained earnings(4) ................................ 27,255 27,255 27,255 27,255 27,255
Unrealized gain on available-for-sale securities, net 1,283 1,283 1,283 1,283 1,283
Less: Expense of contribution to the Foundation,
net of taxes(5).................................... -- (1,986) (2,336) (2,687) (3,090)
Plus: Shares issued to the Foundation .............. -- 3,060 3,600 4,140 4,761
Less: Common Stock acquired by the ESOP(6) ......... -- (3,305) (3,888) (4,471) (5,142)
Less: Common Stock acquired by the Stock-Based
Incentive Plan (7)................................. -- (1,652) (1,944) (2,236) (2,571)
-------- --------- --------- --------- ---------
Total stockholders' equity ........ $ 28,538 $ 61,715 $ 67,703 $ 73,690 $ 80,576
======== ========= ========= ========= =========
</TABLE>
- --------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to
15% as a result of regulatory considerations or changes in market or
general financial and economic conditions following the commencement of
the Subscription and Community Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) No effect has been given to the issuance of additional shares of Common
Stock to the Foundation at a value of $10.00 per share or to the
issuance of additional shares for option grants under the Company's
Stock-Based Incentive Plan intended to be adopted by the Company. An
amount equal to 10% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation, will be reserved
for issuance upon the exercise of options to be granted under the
Stock-Based Incentive Plan. See "Risk Factors -- Possible Dilutive
Effect of Stock-Based Incentive Plan," Footnote 4 to the tables under
"Pro Forma Data" and "Management of the Bank -- Benefits -- Stock-Based
Incentive Plan."
(4) The retained earnings of the Bank will be substantially restricted
after the Conversion. See "The Conversion -- Liquidation Rights" and
"Regulation -- Federal Savings Institution Regulation -- Limitations on
Capital Distributions."
(5) Represents the value of the contribution of Common Stock to the
Foundation at $10.00 per share reduced by the associated tax benefit of
$1.1 million, $1.3 million, $1.5 million and $1.7 million at the
minimum, midpoint, maximum and 15% above the maximum of the range,
respectively. The realization of the federal tax benefit is limited
annually to 10% of the Company's annual taxable income, subject to the
ability of the Company to carry forward any unused portion of the
deduction for five years following the year in which the contribution
is made. For state income tax purposes, the Company will be able to
utilize any such carry forward for a five-year period following the
year in which the contribution is initially made. Such unused portion
can be utilized by the Company for Pennsylvania tax purposes, provided
the Company generates sufficient state taxable income on a
nonconsolidated basis.
(6) Assumes that 8% of the shares issued in connection with the Conversion,
including shares issued to the Foundation, will be purchased by the
ESOP and that the funds used to acquire such shares will be borrowed
from the Company. The Common Stock acquired by the ESOP is reflected as
a reduction of stockholders' equity. See "Management of the Bank --
Benefits -- Employee Stock Ownership Plan."
(7) Assumes an amount equal to 4% of the shares of Common Stock sold in the
Conversion and issued to the Foundation, is purchased by the
Stock-Based Incentive Plan through open market purchases at the
offering price of $10.00 per share. The Common Stock purchased by the
Stock-Based Incentive Plan is reflected as a reduction of stockholders'
equity. See "Risk Factors -- Possible Dilutive Effect of Stock-Based
Incentive Plan," Footnote 3 to the tables under "Pro Forma Data" and
"Management of the Bank -- Benefits -- Stock-Based Incentive Plan."
27
<PAGE> 71
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 $37.1 million and $50.4 million (or $58.1
million in the event the Estimated Price Range is increased by 15%) based upon
the following assumptions: (i) 100% of the shares of Common Stock will be sold
in the Subscription Offering to Eligible Account Holders, the ESOP and
Supplemental Eligible Account Holders; (ii) directors, officers and employees of
the Bank and members of their immediate families (collectively, "Insiders") will
purchase an aggregate of $1.8 million of Common Stock and the ESOP will purchase
8% of the Common Stock issued in connection with the Conversion, including
shares issued to the Foundation; (iii) Sandler O'Neill will receive a fee equal
to 1.25% of the aggregate Purchase Price of shares sold in the Subscription and
Community Offerings, excluding shares purchased by directors, officers,
employees and any immediate family member thereof and the ESOP for which Sandler
O'Neill will not receive a fee; and (iv) Conversion expenses, excluding the
marketing fees paid to Sandler O'Neill, will be approximately $775,000. Actual
Conversion expenses may vary from those estimated.
Pro forma consolidated net income of the Company for the fiscal year
ended September 30, 1997, has been calculated as if the Common Stock had been
sold at the beginning of the fiscal year and the net proceeds had been invested
at 5.85%, which is the arithmetic average of the weighted average yield earned
by the Bank on its interest-earning assets and the weighted average rate paid on
its deposits during such period (as required by OTS regulations). The tables
below do not reflect the effect of withdrawals from deposit accounts for the
purchase of Common Stock or the effect of any possible use of the net Conversion
proceeds. The pro forma after-tax yield for the Company and the Bank is assumed
to be 3.59% for the fiscal year ended September 30, 1997, based on an effective
tax rate of 38.65%. Historical and pro forma net earnings per share amounts have
been calculated by dividing historical and pro forma amounts by the indicated
number of shares of Common Stock issued, as adjusted to give effect to the
purchase of shares by the ESOP and the issuance of shares to the Foundation.
Historical and pro forma stockholders' equity per share amounts have been
calculated by dividing historical and pro forma amounts by the indicated number
of shares of Common Stock issued.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company. The pro forma stockholders' equity is not intended to represent the
fair market value of the Common Stock and may be stated in an amount greater
than amounts that would be available for distribution to stockholders in the
event of liquidation.
The following tables summarize historical data of the Bank and pro
forma data of the Company at or for the fiscal year ended September 30, 1997,
based on the assumptions set forth above and in the table and should not be used
as a basis for projections of market value of the Common Stock following the
Conversion. The tables below give effect to Stock Awards reserved for grant
under the Stock-Based Incentive Plan, which is expected to be adopted by the
Company following the Conversion. See Footnote 3 to the tables and "Management
of the Bank-- Benefits-- Stock-Based Incentive Plan." No effect has been given
in the tables to the possible issuance of additional shares of Common Stock upon
the exercise of stock options to be granted under the Stock-Based Incentive
Plan, nor does book value give any effect to the liquidation account to be
established for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders or, in the event of liquidation of the Bank, to the tax
effect of the bad debt reserve and other factors. See Footnote 5 to the tables
below, "The Conversion-- Liquidation Rights" and "Management of the Bank--
Benefits-- Stock-Based Incentive Plan." THE FOLLOWING TABLE ASSUMES THAT THE
FOUNDATION IS APPROVED AS PART OF THE CONVERSION AND THEREFORE GIVES EFFECT TO
THE ISSUANCE OF AUTHORIZED BUT UNISSUED SHARES OF THE COMPANY'S COMMON STOCK TO
THE FOUNDATION CONCURRENTLY WITH THE COMPLETION OF THE CONVERSION. THE VALUATION
RANGE, AS SET FORTH HEREIN AND IN THE TABLE BELOW, TAKES INTO ACCOUNT THE
DILUTIVE IMPACT OF THE ISSUANCE OF SHARES TO THE FOUNDATION.
28
<PAGE> 72
<TABLE>
<CAPTION>
AT OR FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
------------------------------------------------------------
5,951,250
3,825,000 4,500,000 5,175,000 SHARES SOLD
SHARES SOLD SHARES SOLD SHARES SOLD AT $10.00
AT $10.00 AT $10.00 AT $10.00 PER SHARE
PER SHARE PER SHARE PER SHARE (15% ABOVE
(MINIMUM (MIDPOINT (MAXIMUM MAXIMUM
OF ESTIMATED OF ESTIMATED OF ESTIMATED OF ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(7)
------------ ------------ ------------ ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross Proceeds .................................................... $ 38,250 $ 45,000 $ 51,750 $ 59,512
Plus: Shares issued to Foundation (equal to 8% of
the stock sold in the Conversion)............. 3,060 3,600 4140 4761
-------- -------- -------- --------
Pro forma market capitalization ................................... $ 41,310 $ 48,600 $ 55,890 $ 64,273
======== ======== ======== ========
Gross proceeds .................................................... $ 38,250 $ 45,000 $ 51,750 $ 59,512
Less: Offering expenses and commissions .......................... (1,190) (1,267) (1,344) (1,432)
Estimated net proceeds ............................................ 37,060 43,733 50,406 58,080
Less: Common Stock purchased by ESOP ............................. (3,305) (3,888) (4,471) (5,142)
Common Stock purchased by Stock-Based ..........
Incentive Plan (1,652) (1,944) (2,236) (2,571)
------ ------ ------ ------
Estimated net proceeds, as adjusted ...................... $ 32,103 $ 37,901 $ 43,699 $ 50,367
======== ======== ======== ========
Consolidated net earnings(1):
Historical ............................................... $ 2,093 $ 2,093 $ 2,093 $ 2,093
Pro forma earnings on net proceeds ....................... 1,152 1,360 1,568 1,808
Less: Pro forma ESOP adjustment(2)........................ (203) (239) (274) (316)
Pro forma Stock-Based Incentive Plan
adjustment(3).................................. (203) (238) (274) (315)
---- ---- ---- ----
Pro forma net earnings .......................... $ 2,839 $ 2,976 $ 3,113 $ 3,270
======== ======== ======== ========
Per share net earnings(1):
Historical ............................................... $ 0.55 $ 0.46 $ 0.40 $ 0.35
Pro forma earnings on net proceeds ....................... 0.30 0.30 0.30 0.30
Less: Pro forma ESOP adjustment(2) ...................... 0.05 0.05 0.05 0.05
Pro forma Stock-Based Incentive 0.05 0.05 0.05 0.05
Plan adjustment(3)............................... ---- ---- ---- ----
Pro forma net earnings per share .................. $ 0.74 $ 0.66 $ 0.60 $ 0.55
======== ======== ======== ======
Stockholders' equity:
Historical ............................................... $ 28,538 $ 28,538 $ 28,538 $ 28,538
Estimated net proceeds ................................... 37,060 43,733 50,406 58,080
Plus: Shares issued to Foundation ....................... 3,060 3,600 4,140 4,761
Less: After tax cost of Foundation(4).................... (1,986) (2,336) (2,687) (3,090)
Common Stock acquired by ESOP(2) ...... (3,305) (3,888) (4,471) (5,142)
Common Stock acquired by Stock-Based
Incentive Plan (3).................. (1,652) (1,944) (2,236) (2,571)
-------- -------- -------- --------
Pro forma stockholders' equity(3)(4)(5)(6) $ 61,175 $ 67,703 $ 73,690 $ 80,576
======== ======== ======== ========
Stockholders' equity per share:
Historical ............................................... $ 6.91 $ 5.87 $ 5.11 $ 4.44
Estimated net proceeds ................................... 8.97 9.00 9.02 9.04
Plus: Shares issued to the Foundation ................... 0.74 0.74 0.74 0.74
Less: After tax cost of Foundation(4).................... (0.48) (0.48) (0.48) (0.48)
Common Stock acquired by ESOP(2) ...... (0.80) (0.80) (0.80) (0.80)
Common Stock acquired by Stock-Based ..
Incentive Plan (3).................. (0.40) (0.40) (0.40) (0.40)
----- ----- ----- -----
Pro forma stockholders' equity per
share(3)(4)(5)(6).................... $ 14.94 $ 13.93 $ 13.19 $12.54
======== ======== ======== ======
Offering price as a percentage of pro forma stockholders'
equity per share................................................. 66.94% 71.78% 75.84% 79.77%
Offering price to pro forma net earnings per share ................ 13.50 15.15 16.66 18.24
</TABLE>
(Footnotes on next page)
29
<PAGE> 73
- ---------------
(1) Does not give effect to the non-recurring expense that is expected to
be recognized in the third quarter of fiscal 1998 if the
establishment of the Foundation is approved. In that event, the
Company will recognize an after-tax expense for the amount of the
contribution to the Foundation which is expected to be $2.0 million,
$2.3 million, $2.7 million, and $3.1 million at the minimum,
midpoint, maximum, and maximum as adjusted, of the Estimated Price
Range, respectively.
(2) It is assumed that 8% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation, will be
purchased by the ESOP. For purposes of this table, the funds used to
acquire such shares are assumed to have been borrowed by the ESOP
from the Company. The amount to be borrowed is reflected as a
reduction of stockholders' equity. The Bank intends to make annual
contributions to the ESOP in an amount at least equal to the
principal and interest requirement of the debt. The Bank's total
annual payment of the ESOP debt is based upon 10 equal annual
installments of principal, with an assumed interest rate at 8.5%. The
pro forma net earnings assume: (i) that the Bank's contribution to
the ESOP is equivalent to the debt service requirement for the year
ended September 30, 1997, and was made at the end of the period; (ii)
that 33,048, 38,880, 44,712 and 51,419 shares at the minimum,
midpoint, maximum and 15% above the maximum of the range,
respectively, were committed to be released during the year ended
September 30, 1997 at an average fair value of $10.00 per share in
accordance with Statement of Position ("SOP") 93-6; and (iii) only
the ESOP shares committed to be released were considered outstanding
for purposes of the net earnings per share calculations. See
"Management of the Bank --Benefits --Employee Stock Ownership Plan."
(3) Gives effect to the Stock Awards available for grant under the
Stock-Based Incentive Plan expected to be adopted by the Company
following the Conversion and presented for approval at a meeting of
stockholders. The Stock-Based Incentive Plan intends to acquire an
amount of Common Stock equal to 4% of the shares of Common Stock sold
in the Conversion and issued to the Foundation, or 165,240, 194,400,
233,560 and 257,095 shares of Common Stock at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range,
respectively, either through open market purchases, if permissible,
or from authorized but unissued shares of Common Stock or treasury
stock of the Company, if any. Funds used by the Stock-Based Incentive
Plan to purchase the shares will be contributed to the Stock-Based
Incentive Plan by the Bank. In calculating the pro forma effect of
the Stock-Based Incentive Plan, it is assumed that the shares were
acquired by the Stock-Based Incentive Plan at the beginning of the
period presented in open market purchases at the Purchase Price and
that 20% of the amount contributed was an amortized expense during
such period. The issuance of authorized but unissued shares of the
Company's Common Stock to the Stock-Based Incentive Plan instead of
open market purchases would dilute the voting interests of existing
stockholders by approximately 3.8% and pro forma net earnings per
share would be $0.73, $0.65, $0.59, and $0.54 at the minimum,
midpoint, maximum, and 15% above the maximum of the range,
respectively, and pro forma stockholders' equity per share would be
$14.75, $13.78, $13.06 and $12.44 at the minimum, midpoint, maximum,
and 15% above the maximum of the range, respectively. There can be no
assurance that stockholder approval of the Stock-Based Incentive Plan
will be obtained, or that the actual purchase price of the shares
will be equal to the Purchase Price. See "Management of the
Bank--Benefits --Stock-Based Incentive Plan."
(4) Assumes a combined federal and state effective income tax rate of
35.1%
(5) No effect has been given to the issuance of additional shares of
Common Stock upon the exercise of options to be granted under the
Stock-Based Incentive Plan. An amount equal to 10% of the Common
Stock issued in the Conversion, including shares issued to the
Foundation, or 413,100, 486,000, 558,900 and 642,738 shares at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Price Range, respectively, will be reserved for future issuance upon
the exercise of options to be granted under the Stock-Based Incentive
Plan. The issuance of Common Stock pursuant to the exercise of
options under the Stock-Based Incentive Plan will result in the
dilution of existing stockholders' interests. Assuming all options
were exercised at the end of the period at an exercise price of
$10.00 per share, the pro forma net earnings per share would be
$0.70, $0.63, $0.58, and $0.53, respectively, and the pro forma
stockholders' equity per share would be $14.49, $13.57, $12.90 and
$12.31, respectively. See "Management of the Bank--Benefits
--Stock-Based Incentive Plan."
(6) The retained earnings of the Bank will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The
Conversion--Liquidation Rights" and "Regulation --Federal Savings
Institution Regulation --Limitation on Capital Distributions."
(7) As adjusted to give effect to an increase in the number of shares
which could occur due to an increase in the Estimated Price Range of
up to 15% as a result of regulatory considerations or changes in
market or general financial and economic conditions following the
commencement of the Subscription and Community Offerings.
30
<PAGE> 74
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO FOUNDATION
In the event that the Foundation was not being established as part of
the Conversion, Keller has estimated that the pro forma market capitalization of
the Bank would be approximately $53.1 million, at the midpoint, which is
approximately $4.5 million greater than the pro forma market capitalization of
the Bank if the Foundation is approved by members of the Bank and would result
in approximately a $8.1 million increase, or 9.3%, in the amount of Common Stock
offered for sale in the Conversion. The pro forma price to book ratio and pro
forma price to earnings ratio would be approximately the same under both the
current appraisal and the estimate of the value of the Company without the
Foundation. Further, assuming the midpoint of the Estimated Price Range, pro
forma stockholders' equity per share and pro forma earnings per share would be
substantially the same with the Foundation as without the Foundation. In this
regard, pro forma stockholders' equity and pro forma net income per share would
be $13.93 and $0.66, respectively, at the midpoint of the estimate, assuming no
Foundation, and $13.96 and $0.66, respectively, with the Foundation. The pro
forma price to book ratio and the pro forma price to earnings ratio are 71.85%
and 15.40x, respectively, at the midpoint of the estimate, assuming no
Foundation and are 71.78% and 15.15x, respectively, with the Foundation. This
estimate by Keller was prepared at the request of the OTS and is solely for
purposes of providing members with sufficient information with which to make an
informed decision on the Foundation. There is no assurance that in the event the
Foundation is not approved at the Special Meeting of members that the appraisal
prepared at that time would conclude that the pro forma market value of the
Company would be the same as that estimated herein. Any appraisal prepared at
that time would be based on the facts and circumstances existing at that time,
including, among other things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing
ratios and financial data and ratios, at the minimum, midpoint, maximum and
maximum, as adjusted, of the Estimated Price Range, assuming the Conversion was
completed at September 30, 1997.
<TABLE>
<CAPTION>
AT THE MINIMUM AT THE MIDPOINT
-------------- ---------------
WITH NO WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Estimated offering amount ................ $ 38,250 $ 45,135 $ 45,000 $ 53,100
Pro forma market capitalization .......... 41,310 45,135 48,600 53,100
Total assets ............................. 403,313 408,583 409,301 415,501
Total liabilities ........................ 341,598 341,598 341,598 341,598
Pro forma stockholders' equity ........... 61,715 66,985 67,703 73,903
Pro forma consolidated net earnings ...... 2,839 3,030 2,976 3,200
Pro forma stockholders' equity per share.. 14.94 14.84 13.93 13.92
Pro forma consolidated net earnings
per share............................... 0.74 0.72 0.66 0.65
Pro Forma Pricing Ratios:
Offering Price as a percentage of
pro forma stockholders' equity
per share...................... 66.94% 67.38% 71.78% 71.85%
Offering price to pro forma net
earnings per share............. 13.50x 13.82x 15.15x 15.40x
Offering price to assets ........ 10.24% 11.05% 11.87% 12.78%
Pro Forma Financial Ratios:
Return on Assets ................ 0.70% 0.74% 0.73% 0.77%
Return on stockholders' equity .. 4.60% 4.52% 4.40% 4.33%
Stockholders' equity to assets .. 15.30% 16.39% 16.54% 17.79%
</TABLE>
<TABLE>
<CAPTION>
AT THE MAXIMUM,
AT THE MAXIMUM AS ADJUSTED
-------------- -----------
WITH NO WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Estimated offering amount ................ $ 51,750 $ 61,065 $ 59,513 $ 70,225
Pro forma market capitalization .......... 55,890 61,065 64,274 70,225
Total assets ............................. 415,289 422,418 422,174 430,373
Total liabilities ........................ 341,598 341,598 341,598 341,598
Pro forma stockholders' equity ........... 73,690 80,820 80,576 88,775
Pro forma consolidated net earnings ...... 3,173 3,370 3,270 3,566
Pro forma stockholders' equity per share . 13.19 13.24 12.54 12.64
Pro forma consolidated net earnings per .. 0.60 0.59 0.55 0.55
share
Pro Forma Pricing Ratios:
Offering Price as a percentage of
pro forma stockholders'
equity per share............... 75.84% 75.56% 79.77% 79.10%
Offering price to pro forma net
earnings per share............. 16.66x 16.82x 18.24x 18.28x
Offering price to assets ........ 13.45% 14.46% 15.22% 16.32%
Pro Forma Financial Ratios:
Return on Assets ................ 0.75% 0.80% 0.77% 0.83%
Return on stockholders' equity .. 4.22% 4.17% 4.06% 4.02%
Stockholders' equity to assets .. 17.74% 19.13% 19.09% 20.63%
</TABLE>
31
<PAGE> 75
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statement of Income of the Bank and
Subsidiaries for the fiscal year ended September 30, 1997 has been audited by
KPMG Peat Marwick LLP, independent certified public accountants, whose report
thereon is included elsewhere in this Prospectus. The Consolidated Statements of
Income of the Bank and Subsidiaries for the fiscal years ended September 30,
1996 and 1995 have been audited by Parente, Randolph, Orlando, Carey &
Associates, independent certified public accountants, whose report thereon is
included elsewhere in this Prospectus. These Consolidated Statements of Income
should be read in conjunction with the Consolidated Financial Statements and
notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
---------------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
Interest income:
<S> <C> <C> <C>
Loans ...................................... $ 20,071 $ 18,105 $ 16,149
Mortgage-related securities ................ 3,306 3,064 3,121
Investment securities:
Taxable ........................... 2,948 3,051 2,010
Non-taxable ....................... 274 103 --
-------- -------- --------
Total interest income .... $ 26,599 $ 24,323 $ 21,280
-------- -------- --------
Interest expense:
Deposits ................................... 12,699 12,195 10,714
FHLB advances and other .................... 1,495 812 131
-------- -------- --------
Total interest expense .................. 14,194 13,007 10,845
-------- -------- --------
Net interest income ................................. 12,405 11,316 10,435
Provision for loan losses ........................... 651 97 25
-------- -------- --------
Net interest income after provision
for loan losses.................................... 11,754 11,219 10,410
-------- -------- --------
Noninterest Income:
Service charges and other fees ................... 650 522 498
Gain (loss) on sale of:
Real estate owned ............................. (66) (46) (8)
Loans ......................................... 22 18 10
Available-for-sale securities ................. (563) -- (6)
Other ......................................... (176) 14 105
-------- -------- --------
Total noninterest income (133) 508 599
-------- -------- --------
Noninterest expense:
Salaries and net employee benefits ............... 5,395 4,989 4,203
Occupancy costs .................................. 1,757 1,809 1,982
Federal deposit insurance premiums ............... 368 2,390 596
Data Processing .................................. 365 490 566
Professional fees ................................ 274 312 317
FHLB service charges ............................. 269 220 172
Other ............................................ 1,064 564 524
-------- -------- --------
Total noninterest expense ............... 9,492 10,774 8,360
-------- -------- --------
Income before income taxes .......................... 2,129 953 2,649
Income taxes ........................................ 748 12 899
-------- -------- --------
Net income .......................................... $ 1,381 $ 941 $ 1,750
======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
32
<PAGE> 76
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has only recently been formed and, accordingly, has no
results of operations. The Bank's results of operations are dependent primarily
on net interest income, which is the difference between the income earned on its
loan and investment portfolios and its cost of funds, consisting of the interest
paid on deposits and borrowings. Results of operations are also affected by the
Bank's provision for loan losses, loan and security sales activities, service
charges and other fee income, and noninterest expense. The Bank's noninterest
expense principally consists of compensation and employee benefits, office
occupancy and equipment expense, federal deposit insurance premiums, data
processing, advertising and business promotion and other expenses. Results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in interest rates, government policies and
actions of regulatory authorities.
MANAGEMENT STRATEGY
Since fiscal 1993, the Bank's operating strategy has been that of a
community-based bank, offering a wide variety of savings products to its retail
customers, while concentrating on residential and construction lending and, to a
lesser extent, consumer lending and small business and municipal commercial
lending. In order to promote long-term financial strength and profitability, the
Bank's operating strategy has focused on: (i) maintaining strong asset quality
by originating one- to four-family loans located in its market area; (ii)
increasing profitability by emphasizing higher yielding consumer and commercial
loans; (iii) managing its interest rate risk by emphasizing shorter-term,
fixed-rate, one- to four-family loans, in addition to consumer and commercial
loans; limiting its retention of newly originated longer-term fixed-rate one- to
four-family loans; soliciting longer-term deposits; utilizing longer-term
advances from the FHLB; and investing in investment and mortgage-related
securities having shorter estimated durations; (iv) meeting the banking needs of
its customers through expanded products and improved delivery systems by taking
advantage of technological advances; and (v) maintaining a strong regulatory
capital position.
The Bank has attempted to diversify and expand its loan products to
better serve its customer base by placing a greater emphasis on its
consumer-lending and its commercial lending, primarily to small businesses and
municipalities. Additionally, the Bank is in the process of implementing a
program to sell in the secondary market longer-term, fixed-rate one- to
four-family loans which it could originate in excess of its retention policy for
such loans. As a result of its policy to limit its retention of newly originated
longer-term, fixed-rate one- to four-family loans to 20% of total loan
origination during a fiscal year, periodically the Bank has had to limit its
originations of such loans. The Bank is also evaluating the offering of loan
products which it has historically not offered, such as nonconforming or
subprime one-to -four family loans. In the event the Bank originates such loan
products, it currently intends to originate such loans for sale in the secondary
market.
MANAGEMENT OF INTEREST RATE RISK
The principal objective of the Bank's interest rate risk management is
to evaluate the interest rate risk included in certain balance sheet accounts,
determine the level of risk appropriate given the Bank's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the Board of Directors' approved
guidelines. Through such management, the Bank seeks to reduce the vulnerability
of its operations to changes in interest rates. The Board of Directors has
established an Asset Liability Committee ("ALCO"), which is responsible for
reviewing asset/liability policies and interest rate risk position. The ALCO
meets at least on a quarterly basis, reports
33
<PAGE> 77
trends and interest rate risk position to the Board of Directors and reviews
with the Board its activities and strategies, the effect of those strategies on
the Bank's net interest margin, the market value of the portfolio, and the
effect the changes in interest rates will have on the Bank's portfolio and
exposure limits. The extent of the movement of interest rates is an uncertainty
that could have a negative impact on the earnings of the Bank. See "Risk Factors
- -- Sensitivity to Changes in Interest Rates."
In recent years, the Bank has utilized the following strategies to
manage interest rate risk: (i) emphasizing the origination and retention of
fixed-rate mortgages having terms to maturity of not more than fifteen years,
adjustable-rate and shorter-term loans, commercial loans, and consumer loans;
(ii) limiting the origination of all greater than 15-year fixed-rate mortgage
loans to no more than 20% of the total originations in a given year; and (iii)
investing in shorter-term and, to a lesser extent, adjustable-rate securities
which generally bear lower yields, compared to longer-term investments, but
which better position the Bank for increases in market interest rates.
Management believes that reducing its exposure to interest rate risk
fluctuations will enhance long-term profitability. However, the Bank's
strategies may adversely impact net interest income due to lower initial yields
on some of these investments in comparison to longer-term fixed-rate investments
and whole loans. To promote a higher yield on its investment securities while at
the same time addressing the Bank's interest rate risk management policies, the
Bank has invested a significant portion of its portfolio of investment
securities in longer-term (more than five years) federal agency obligations
which have call features. Given the rates of such securities in comparison to
current market interest rates, the Bank anticipates the substantial majority of
such securities will be called prior to their contractual maturity. However, if
changes in interest rates exceed ranges anticipated by the Bank in estimating
the anticipated life of such callable securities, the Bank would be subject to
increased interest rate or reinvestment risk, depending on the direction of the
change in market interest rates.
Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a bank's interest rate sensitivity "gap." An asset
or liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
same time period. At September 30, 1997, the Bank's cumulative interest rate gap
(which is the difference between the amount of interest-earning assets maturing
or repricing within one year and interest-bearing liabilities maturing or
repricing within one year) as a percentage of total assets, was a negative 9.9%.
However, this interest sensitivity gap reflected the temporary use of proceeds
from the sale of investment and mortgage-related securities at the end of fiscal
1997, which significantly increased interest-bearing deposits and reduced FHLB
advances as of September 30, 1997 compared to their levels immediately prior to
the sale of securities. The Bank believes that, after giving effect to the
subsequent reinvestment of such proceeds, its cumulative one-year interest rate
gap as a percentage of total assets would have been approximately a negative 15%
as of September 30, 1997. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
Accordingly, during a period of rising interest rates, an institution with a
negative gap position would be in a worse position to invest in higher yielding
assets as compared to an institution with a positive gap position which,
consequently, may result in the cost of its interest-bearing liabilities
increasing at a rate faster than its yield on interest-earning assets than if it
had a positive gap. During a period of falling interest rates, an institution
with a negative gap position would tend to have its interest-earning liabilities
repricing downward at a faster rate than its interest-earning assets as compared
to an institution with a positive gap which, consequently, may tend to
positively affect the growth of its net interest income.
34
<PAGE> 78
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at September 30, 1997, which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature in
each of the future time periods shown (the "GAP Table"). Except as stated below,
the amount of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of term to
repricing or the contractual maturity of the asset or liability. The table sets
forth an approximation of the projected repricing of assets and liabilities at
September 30, 1997, on the basis of contractual maturities, anticipated
prepayments, and scheduled rate adjustments within a series of time intervals.
For loans on residential mortgages, adjustable-rate loans, and fixed-rate loans,
prepayment rates were assumed to range from 8% to 28% annually. Mortgage-related
securities were assumed to prepay at rates between 8% and 65% annually.
Investment securities, which include callable federal agency obligations, are
presented based on their stated maturities. Savings accounts, negotiable order
of withdrawal ("NOW") accounts and Money Market Cash accounts were assumed to
decay at 17%, 37%, and 79%, respectively, for each of the following periods: one
year, one to two years, two to three years, three to four years, four to five
years and over five years. Prepayment of deposit rates can have a significant
impact on the Bank's estimated gap. While the Bank believes such assumptions to
be reasonable, there can be no assurance that assumed prepayment rates and decay
rates will approximate actual loan prepayment and deposit/withdrawal activity.
See "Business of the Bank -- Lending Activities," "-- Investment Activities" and
"-- Sources of Funds."
35
<PAGE> 79
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
--------------------------------------------------------------------------------
MORE MORE
THAN MORE MORE THAN
ONE 1 YEAR THAN THAN 4 YEARS
YEAR TO 2 YEARS TO 3 YEARS TO TO
OR LESS 2 YEARS 3 YEARS 4 YEARS 5 YEARS
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C>
Interest-bearing deposits ......... $ 11,689 -- -- -- --
Investment securities ............. 1,991 3,000 3,994 -- 3,999
Mortgage-related securities ....... 2,628 1,628 -- -- --
Equity securities (FHLB & FHLMC)... 2,101 -- -- -- --
Loans(1) .......................... 113,854 29,680 33,377 18,958 16,144
------- ------ ------ ------ ------
Total interest
earning assets.......... $ 132,263 $ 34,308 $ 37,371 $ 18,958 $ 20,143
--------- --------- --------- --------- ---------
INTEREST-BEARING LIABILITIES:
Money market accounts ............. 10,919 2,293 482 101 21
Savings accounts .................. 12,202 10,128 8,406 6,977 5,791
NOW accounts ...................... 10,102 6,408 4,037 2,543 1,602
Certificate accounts .............. 127,375 37,223 21,563 4,697 1,878
FHLB advances ..................... 8,000 -- -- 5,000 10,000
Other borrowings .................. 92 -- -- -- --
--------- --------- --------- --------- ---------
Total interest-
bearing liabilities..... $ 168,690 $ 56,052 $ 34,488 $ 19,318 $ 19,292
--------- --------- --------- --------- ---------
Interest-earning assets less
interest-bearing liabilities ...... $ (36,427) $ (21,744) $ 2,883 $ (360) $ 851
Cumulative interest-rate
sensitivity gap ................... $ (36,427) $ (58,171) $ (55,288) $ (55,648) $ (54,791)
Cumulative interest-rate gap as
a percentage of total assets ...... (9.9)% (15.8)% (15.0)% (15.1)% 14.8%
Cumulative interest-rate gap as
a percentage of total interest
earning assets .................... (10.2)% (16.3)% (15.5)% (15.6)% (15.3)%
Cumulative interest-earning assets
as a percentage of cumulative
interest-bearing liabilities ........... 78.4% 74.1% 78.7% 80.0% 81.6%
Cumulative earning assets ............... $ 132,263 $ 166,571 $ 203,942 $ 222,900 $ 243,043
Cumulative interest-bearing liabilities.. $ 168,690 $ 224,742 $ 259,230 $ 278,548 $ 297,840
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
---------------------------------------
MORE
THAN TOTAL FAIR
5 YEARS AMOUNT VALUE
------- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing deposits ......... -- $ 11,689 $ 11,689
Investment securities ............. 26,960 39,944 40,103
Mortgage-related securities ....... 35,200 39,456 39,793
Equity securities (FHLB & FHLMC)... -- 2,101 3,746
Loans(1) .......................... 52,225 264,238 264,214
------ ------- -------
Total interest-
earning assets.......... $114,385 $357,428 $359,545
-------- -------- --------
INTEREST-BEARING LIABILITIES:
Money market accounts ............. 6 13,821 13,821
Savings accounts .................. 28,275 71,779 71,779
NOW accounts ...................... 2,610 27,302 27,302
Certificate accounts .............. -- 192,736 191,328
FHLB advances ..................... 516 23,516 23,431
Other borrowings .................. -- 92 92
-------- -------- --------
Total interest-
bearing liabilities........ $ 31,407 $329,246 $327,753
-------- -------- --------
Interest-earning assets less
interest-bearing liabilities ...... $ 82,978 $ 28,182
Cumulative interest-rate
sensitivity gap ................... $28,181
Cumulative interest-rate gap as
a percentage of total assets ...... 7.6%
Cumulative interest-rate gap as
a percentage of total interest
earning assets .................... 7.9%
Cumulative interest-earning assets
as a percentage of cumulative
interest-bearing liabilities ........... 108.6%
Cumulative earning assets ............... $357,428
Cumulative interest-bearing liabilities.. $329,247
</TABLE>
- -----------------
(1) Excludes nonaccrual loans
36
<PAGE> 80
Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable rate loans, have
features which restrict changes in interest rates both on a short-term basis and
over the life of the asset. Further, in the event of changes in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their adjustable-rate loans may decrease in the event of an interest
rate increase.
Net Portfolio Value. The Bank's interest rate sensitivity is primarily
monitored by management through the use of a model which internally generates
estimates of the change in the Bank's net portfolio value ("NPV") over a range
of interest rate scenarios. Such analysis was prepared by a third party for the
Bank. NPV is the present value of expected cash flows from assets, liabilities,
and off-balance sheet contracts. The NPV ratio, under any interest rate
scenario, is defined as the NPV in that scenario divided by the market value of
assets in the same scenario. The model assumes estimated loan prepayment rates,
reinvestment rates, and deposit decay rates similar to the assumptions utilized
for the gap table. The OTS also produces a similar analysis using its own model,
based upon data submitted on the Bank's quarterly Thrift Financial Reports, the
results of which may vary from the Bank's internal model primarily due to
differences in assumptions utilized, including estimated loan prepayment rates,
reinvestment rates and deposit decay rates. See "Regulation -- Federal Savings
Institution Regulation." The following table sets forth the Bank's NPV as of
September 30, 1997.
<TABLE>
<CAPTION>
NPV AS % OF PORTFOLIO
CHANGE IN NET PORTFOLIO VALUE VALUE OF ASSETS
INTEREST RATES ------------------------------------ ----------------------------
IN BASIS POINTS % NPV
(RATE SHOCK) AMOUNT $ CHANGE CHANGE RATIO CHANGE(1)
------------ ------ -------- ------ ----- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
400 17,578 (21,673) (55.22%) 5.04% (530)
300 23,425 (15,826) (40.32%) 6.57% (377)
200 29,338 (9,913) (25.26%) 8.04% (230)
100 34,668 (4,583) (11.68%) 9.31% (104)
Static 39,251 0 0.00% 10.34% 0
-100 41,661 2,410 6.14% 10.84% 50
-200 43,249 3,998 10.19% 11.13% 79
-300 45,135 5,884 14.99% 11.48% 114
-400 48,789 9,538 24.30% 12.22% 187
</TABLE>
----------
(1) Expressed in basis points.
37
<PAGE> 81
As is the case with the GAP Table, certain shortcomings are inherent in
the methodology used in the above interest rate risk measurements. Modeling
changes in NPV require the making of certain assumptions which may or may not
reflect the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV model presented assumes that the
composition of the Bank's interest sensitive assets and liabilities existing at
the beginning of a period remains constant over the period being measured and
also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV table provides an
indication of the Bank's interest rate risk exposure at a particular point in
time, such measurements are not intended to and do not provide a precise
forecast of the effect of changes in market interest rates on the Bank's net
interest income and will differ from actual results.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income also depends upon the relative amounts of interest-earning
assets and interest-bearing liabilities and the interest rate earned or paid on
them.
38
<PAGE> 82
Average Balance Sheet. The following table sets forth certain
information relating to the Bank at and for the fiscal years ended September 30,
1997, 1996 and 1995. The average yields and costs are derived by dividing income
or expense by the average balance of interest-earning assets or interest-bearing
liabilities, respectively, for the periods shown, except where noted, otherwise
and reflect annualized yields and costs. Average balances are derived from
average daily balances. The yields and costs include fees which are considered
adjustments to yields.
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------
AT SEPTEMBER 30, 1997 1997 1996
--------------------- ------------------------------ ---------------------
AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE RATE BALANCE INTEREST RATE BALANCE INTEREST
-------- -------- ------- ----------- ------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans (1):
Real estate ...................................... $184,919 7.66% $180,080 $ 13,856 7.69% $166,692 $12,925
Consumer ......................................... 61,843 8.52 58,717 4,980 8.48 49,409 4,268
Commercial ....................................... 17,476 7.49 15,151 1,235 8.15 11,182 912
-------- ---- -------- -------- ---- -------- -------
Total loans: ................................... 264,238 7.85 253,948 20,071 7.90 227,283 18,105
Mortgage-related securities (2) .................... 39,947 6.45 54,112 3,306 6.11 51,268 3,064
Investment securities (3):
Taxable ......................................... 34,788 6.99 40,902 2,866 7.01 45,492 2,959
Non-taxable (4) ................................. 8,963 8.32 5,417 457 8.44 2,014 172
Interest-bearing deposits .......................... 11,689 8.31 1,516 82 5.41 1,583 92
------- ---- -------- -------- ---- -------- -------
Total interest-earning assets .................. 359,625 7.57 355,895 26,782 7.53 327,640 24,392
Noninterest-earning assets ......................... 9,617 ---- 12,284 ---- 9,968
------- -------- --------
Total assets ................................... 369,242 368,179 337,608
======= ======= =======
INTEREST-BEARING LIABILITIES:
Deposits:
Demand accounts ............................... 41,123 1.96 49,723 778 1.56 44,583 738
Savings accounts .............................. 71,779 2.43 72,292 1,771 2.45 73,654 1,871
Certificates of deposit ....................... 192,736 5.50 187,270 10,150 5.42 174,617 9,586
------- ---- ------- ------ ---- ------- -----
Total deposits ............................. 305,637 4.30 309,285 12,699 4.11 292,854 12,195
FHLB advances and other borrowings ................. 23,608 5.73 27,264 1,495 5.48 14,971 812
------- ---- ------- ------ ---- ------- -----
Total interest-bearing liabilities ......... 329,246 4.40 336,583 14,194 4.22 307,825 13,007
---- ------ ---- ------
Noninterest-bearing liabilities .................... 11,458 3,883 3,636
------- ------- --------
Total liabilities .......................... 340,704 340,466 311,461
Equity.............................................. 28,538 27,713 26,147
-------- -------- --------
Total liabilities and equity ............... $369,242 $368,179 $337,608
======== ======== ========
Net interest-earning assets ................ $ 19,312 $ 19,815
Net interest income/interest rate spread(5). 3.17% $ 12,588 3.31% $11,385
==== ======== ==== =======
Net interest margin as a percentage
of interest-earning assets(6) ............ 3.54% 3.47%
======== =======
Ratio of interest-earning assets to interest-
bearing liabilities ...................... 109.23% 105.74% 106.44%
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
----------------------------------------
1996 1995
--------- ------------------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/
RATE BALANCE INTEREST RATE
-------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INTEREST EARNING ASSETS: Loans (1):
Real estate ........................................ 7.75% $151,373 $ 11,801 7.80%
Consumer ........................................... 8.64 43,206 3,852 8.92
Commercial ......................................... 8.16 7,582 596 7.86
---- -------- ------ ----
Total loans: ..................................... 7.97 202,161 16,249 7.99
Mortgage-related securities (2) ...................... 5.98 53,281 3,121 5.86
Investment securities (3): ...........................
Taxable ........................................... 6.50 31,896 1,870 5.86
Non-taxable (4) ................................... 8.54 -- -- --
Interest-bearing deposits ............................ 5.81 2,206 140 6.35
---- ------- ----- ----
Total interest-earning assets .................... 7.44 289,544 21,380 7.38
---- ----
Noninterest-earning assets ........................... 10,760
-------
Total assets ..................................... 300,304
=======
INTEREST-BEARING LIABILITIES:
Deposits:
Demand accounts ................................. 1.66 43,898 900 2.05
Savings accounts ................................ 2.54 78,478 2,080 2.65
Certificates of deposit ......................... 5.49 148,163 7,734 5.22
---- ------- ----- ----
Total deposits ............................... 4.16 270,539 10,714 3.96
FHLB advances and other borrowings ................... 5.42 2,243 131 5.84
---- ------- --- ----
Total interest-bearing liabilities ........... 4.23 272,782 10,845 3.98
---- ------ ----
Noninterest-bearing liabilities ...................... 2,751
-----
Total liabilities ............................ 275,533
Equity ................................................ 24,771
------
Total liabilities and equity ................. $300,304
========
Net interest-earning assets .................. $ 16,762
Net interest income/interest rate spread(5) .. 3.22% $ 10,535 3.40%
==== ======== ====
Net interest margin as a percentage
of interest-earning assets(6) .............. 3.64%
====
Ratio of interest-earning assets to interest-
bearing liabilities ........................ 106.14%
======
</TABLE>
- --------------------
(1) Balances are net of deferred loan origination costs, undisbursed
proceeds of construction loans in process, and includes nonperforming
loans.
(2) Includes mortgage-related securities available-for-sale and
held-to-maturity.
(3) Includes investment securities available-for-sale and held-to-maturity,
stock in the FHLB of Pittsburgh and FHLMC.
(4) Interest and Yield/Rate are presented on a taxable equivalent basis
using the combined Federal and state income tax marginal rate of 40% for
1997 and 1996. The Bank did not have securities exempt from federal or
state income taxes in 1995.
(5) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost
of interest-bearing liabilities.
(6) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
39
<PAGE> 83
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Bank's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate); (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume); and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated on a proportional basis between changes in rate and volume.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
COMPARED TO COMPARED TO
FISCAL YEAR ENDED FISCAL YEAR ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
---------------------------------- -----------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
----------------------- ----------------------
RATE VOLUME NET RATE VOLUME NET
---------- ---------- --------- --------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans:
Real estate loans $ (91) $ 1,025 $ 934 $ (28) $ 1,183 $ 1,155
Consumer loans (76) 788 712 (20) 536 516
Commercial loans (17) 337 320 (26) 311 285
---- ----- ----- --- ----- -----
Total loans (185) 2,151 1,966 (73) 2,029 1,956
---- ----- ----- --- ----- -----
Mortgage-related securities(1) 69 173 242 66 (123) (57)
Investment securities(1) 128 64 192 400 861 1,261
Interest-earning deposits (5) (5) (10) (11) (37) (48)
---- ----- ----- --- ----- -----
Total interest-earning assets 7 2,383 2,390 382 2,730 3,112
---- ----- ----- --- ----- -----
INTEREST-BEARING LIABILITIES:
Deposits:
Demand accounts (6) 46 38 (150) (35) (185)
Savings accounts (72) (34) (106) (83) (125) (208)
Certificates of deposit (111) 682 571 445 1,429 1,874
FHLB advances and other
borrowings 9 675 684 (9) 690 681
---- ----- ----- --- ----- -----
Total interest-bearing liabilities (182) 1,369 1,187 204 1,958 2,162
---- ----- ----- --- ----- -----
Increase(decrease) in net interest income $ 183 $ 1,020 $ 1,203 $ 178 $ 772 $ 950
===== ======= ======= ===== ======= =======
</TABLE>
- --------------------
(1) Includes securities available-for-sale and held-to-maturity on a tax
equivalent basis.
40
<PAGE> 84
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996.
Total assets increased by $6.9 million, or 1.8%, from $362.5 million at
September 30, 1996 to $369.2 million at September 30, 1997. The growth in assets
was primarily due to one- to -four family loan growth which was funded primarily
through deposit inflows and retained earnings.
At the end of fiscal 1997, the Bank restructured its available-for-sale
securities portfolio in an effort to increase its yield on such portfolio then
held by the Bank. This restructuring involved the sale of its lower yielding
shorter-term available-for-sale securities in order to reinvest the proceeds in
higher yielding mortgage-related securities and federal agency and municipal
obligations with stated or estimated terms of three to five years and to utilize
such funds for investments in loans. A substantial portion of the proceeds from
such security sales was held as interest-bearing deposits included under cash
and cash equivalents at September 30, 1997, pending such reinvestment. As a
result, cash and cash equivalents totaled $4.0 million at September 30, 1996 as
compared to $13.2 million at September 30, 1997. The Bank's portfolio of
securities available-for-sale decreased by $15.4 million, or 25.6% from $60.2
million at September 30, 1996 to $44.8 million at September 30, 1997 and its
portfolio of securities held-to-maturity decreased by $4.6 million, or 10.6%
from $43.5 million to $38.9 million, respectively, while loans, net, increased
$18.6 million, or 7.1%, from $242.9 million to $261.5 million, respectively.
Real estate loans, increased by $11.3 million, or 6.3%, from $180.3
million at September 30, 1996, to $191.6 million at September 30, 1997 primarily
due to increases in the origination of one- to four-family loans, including the
conversion of construction loans to permanent financing, and multi-family loans
exceeding repayments on such loans. One-to four-family loans increased by $8.3
million or 4.9% and multi-family and commercial real estate loans increased by
$2.3 million, or 51.3%. Commercial loans increased from $9.3 million at
September 30, 1996 to $10.8 million at September 30, 1997, a 16.1% increase,
primarily due to the Bank's more competitive pricing of local municipal loans as
well as increased business development efforts. Consumer loans increased by $6.3
million, or 11.4%, from $55.5 million at September 30, 1996 to $61.8 million at
September 30, 1997, primarily due to an increase in home equity loans and lines
of credit and automobile loans due to increased marketing efforts and
competitive pricing of such loans.
Non-performing loans remained relatively stable, increasing from
$716,000 at September 30, 1996 to $774,000 at September 30, 1997, representing
0.29% and 0.30%, respectively, of total loans at such dates. Non-performing
assets and troubled debt restructurings also remained stable, increasing from
$1.2 million at September 30, 1997 to $1.3 million at September 30, 1997,
representing 0.32% and 0.35%, respectively, of total assets at such dates.
Total deposits increased by $7.3 million, or 2.4%, from $306.8
million at September 30, 1996 to $314.1 million at September 30, 1997. The
increase was primarily due to an increase of $6.0 million, or 3.2%, in
certificates of deposit from $186.7 million at September 30, 1996 to $192.7
million at September 30, 1997. The increase in certificates of deposit was
primarily due to the Bank's strategy of offering more competitive rates on such
deposits and expanding the number of certificate products offered in order to
attract deposits. The increase in certificate accounts was offset, in part, by a
slight decrease in core deposits (savings, money market and NOW accounts) which
declined slightly from $113.3 million at September 30, 1996 to $112.9 million at
September 30, 1997. Noninterest-bearing demand accounts increased by $1.7
million, or 25.2%, due primarily to an increase in the Bank's business checking
accounts resulting from its more active solicitation of such accounts.
41
<PAGE> 85
FHLB advances and other borrowings decreased by $1.9 million, or 7.5%,
from $25.5 million at September 30, 1996 to $23.6 million at September 30, 1997.
The decrease in FHLB advances and other borrowings was primarily due to the
utilization of proceeds from the sale of securities in accordance with the
Bank's restructuring of its securities portfolio to repay a portion of the
Bank's outstanding FHLB advances.
Total equity increased by $2.4 million, or 9.2%, from $26.1 million at
September 30, 1996 to $28.5 million at September 30, 1997. The increase in
equity was a result of retained earnings of $1.4 million, and a $1.0 million
increase in net unrealized gain, net of taxes, related to available-for-sale
securities.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1997
AND SEPTEMBER 30, 1996.
General. Net income for fiscal 1997 increased by $440,000, or 46.8%,
from $941,000 for fiscal 1996 to $1.4 million for fiscal 1997. The increase was
primarily due to a decrease in noninterest expense resulting from the absence of
the one time special assessment of $1.7 million to recapitalize the SAIF which
occurred in the fourth quarter of fiscal 1996. Net income also increased due to
an increase in net interest income. These items were substantially offset by an
increase in the provision for loan losses and a decrease in noninterest income
due to losses on the sale of securities and a writedown of fixed assets
resulting from the proposed relocation of a branch office.
Interest Income. Total interest income increased by $2.3 million, or
9.5%, from $24.3 million for fiscal 1996 to $26.6 for fiscal 1997 primarily due
to a $28.3 million, or 8.7%, increase in the average balance of interest earning
assets and a slight increase in the weighted average yield on interest earning
assets, which increased from 7.45% for fiscal 1996 to 7.48% for fiscal 1997.
Interest income on real estate loans increased $1.0 million, or 7.8%, from $12.9
million for fiscal 1996 to $13.9 million for fiscal 1997, primarily due to a
$13.3 million increase in the average balance of real estate loans
notwithstanding a 6 basis point decrease in the weighted average yield from an
7.72% for fiscal 1997 to 7.66% for fiscal 1997. The increase in the average
balance of real estate loans was primarily due to an increase in the average
balance of one- to four-family loans. Interest income on consumer loans
increased $700,000, from $4.3 million for fiscal 1996 to $5.0 million for fiscal
1997. This was principally due to increases in the average balance of consumer
loans from $49.4 million in 1996 to $58.7 million in 1997, offset by a 16 basis
point decrease in the yield on such loans. Interest income on securities
increased by $300,000, or 4.8%, to $6.5 million for 1997 from $6.2 million for
1996. This increase was a result of a $200,000 increase in interest income on
mortgage-related securities, attributable to a $2.9 million increase in the
average balance of such securities to $54.1 million, and an increase in weighted
average yield of 13 basis points. Interest income on investment securities
remained stable at $3.2 million for fiscal 1997 and fiscal 1996 due to the lower
average balance of such securities being offset by an increase in the weighted
average yield of such portfolio from 6.60% for fiscal 1996 to 7.17% for fiscal
1997.
Interest Expense. Interest expense increased by $1.2 million, or 9.2%,
from $13.0 million for fiscal 1996 to $14.2 million for fiscal 1997. The
increase in interest expense was primarily the result of a $12.3 million
increase in the average balance of FHLB advances, which increased from $15
million for fiscal 1996 to $27.3 million for fiscal 1997, and a slight increase
in the weighted average rate paid on such borrowings from 5.42% for fiscal 1996
to 5.48% for fiscal 1997. The increase in FHLB advances reflects management's
determination to more heavily utilize FHLB advances to fund asset growth. The
increase in interest expense also resulted from increased interest expense on
certificates of deposit, which was a result of a $12.7 million, or 7.3%,
increase in the average balance of such accounts from $174.6 million for fiscal
1996 to $187.3 million for fiscal 1997. This increase was offset in part by a 7
basis point decrease in the rate paid on such accounts for fiscal 1997. These
net increases were partially offset by a decrease in interest expense on
42
<PAGE> 86
savings accounts of $106,000 due to the combined effect of a decline in the
average balance of such accounts, which declined from an average balance of
$73.7 million for fiscal 1996 to $72.3 million for fiscal 1997, and a 9 basis
point decrease in the average rate paid on such accounts from 2.54% at September
30, 1996 for fiscal 1996 to 2.45%. The increase in the average balance of
certificates of deposit and the decrease in the average balance of savings
accounts was due primarily to the Bank's efforts to solicit certificate accounts
by more competitively pricing such accounts, expanding the number of certificate
products it offers and by customers shifting funds from lower-yielding savings
accounts to higher-yielding certificates of deposit.
Provisions for Loan Losses. The Bank's provision for possible loan
losses for fiscal 1997 was $651,000, compared to $97,000 for fiscal 1996. The
increase in the provision for loan losses and corresponding increase in the
Bank's allowance for loan losses reflects management's revision of its loan loss
allowance evaluation methodology to give a greater consideration to the
allowance for loan loss ratio levels of peer group institutions. The increase in
the provision also reflects the change in the composition of the Bank's loan
portfolio resulting from increased levels of consumer, commercial and
construction loans. Such loans generally bear a greater degree of credit risk
than the one-to four family loans which represented 69.7% of the loan portfolio
at September 30, 1996 compared to 67.8% of the loan portfolio at September 30,
1997. As a result, at September 30, 1997, the allowance for possible loan losses
was 0.48% of total loans, compared to 0.30% at September 30, 1996. The Bank
anticipates that, as a result of its increasing emphasis on consumer,
commercial, multi-family and commercial real estate and construction lending, in
the future, it may need to maintain an allowance for loan losses at a level that
is higher than that which it maintained in recent periods to offset any greater
risk resulting from the shifting composition of its loan portfolio. See
"Business of the Bank - Delinquent Loans, Classified Assets and Real Estate
Owned " and "Allowance for Loan Losses."
Noninterest Income. In fiscal 1997, the Bank experienced a $641,000
decrease in noninterest income from $508,000 in fiscal 1996 to a loss of
$133,000 for fiscal 1997 due primarily to losses on sale of securities
available-for-sale in connection with the Bank's restructuring of its securities
portfolio. Security sales totaling $26.8 million and resulted in net losses of
$563,000. The decrease in noninterest income also was caused by a $176,000 write
down of fixed assets resulting from the Bank's decision to relocate its Columbia
Mall office to an alternate site in Columbia County. These decreases in
noninterest income were offset by an increase in loan fees and other income from
$615,000 in fiscal 1996 to $650,000 in fiscal 1997, primarily due to the
implementation of surcharges on ATM transactions.
Noninterest Expense. Total noninterest expense decreased from $10.8
million for fiscal 1996 to $9.5 million for fiscal 1997 due primarily to a
reduction in the FDIC deposit insurance premiums in fiscal 1997 and the absence
of a one-time charge of $1.7 million in order to recapitalize the SAIF fund
which occurred in the last quarter of fiscal 1996. As a result of the FDIC
premium reduction and absence of the SAIF assessment in fiscal 1997, FDIC
insurance assessments and premiums decreased from $2.4 million for fiscal 1996
to $368,000 for fiscal 1997. Noninterest expense other than FDIC premiums and
the SAIF special assessment increased approximately $700,000 for fiscal 1997
compared to fiscal 1996. Compensation and employee benefits expense increased
$400,000, or 8.0%, from $5.0 million for fiscal 1996 to $5.4 million for fiscal
1997, primarily due to normal increases in salaries as well as increases in
benefit costs.
Provision for Income Taxes. Income tax expense totaled $748,000 for
fiscal 1997, compared to $12,000 for fiscal 1996, resulting in an effective tax
rate of 35.1% for fiscal 1997 compared to 1.3% for fiscal 1996. The increase in
income tax expense in fiscal 1997 was attributable to higher pre-tax income,
which increased from $953,000 in 1996 to $2.1 million in 1997, and to the fact
that for fiscal 1996 the Bank had a $250,000 state tax credit relating to the
construction of an addition to its main office.
43
<PAGE> 87
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1996
AND SEPTEMBER 30, 1995.
General. Net income decreased $800,000, or 4.6%, from $1.7 million for
fiscal 1995, to $900,000 for fiscal 1996. The decrease was primarily
attributable to a one-time special assessment of $1.7 million from the FDIC in
order to recapitalize the SAIF, which was offset, in part, by a $900,000
increase in net interest income and a reduction in taxes due to a state tax
credit of $250,000.
Interest Income. Interest income increased by $3.0 million, or 14.1%,
from $21.3 million in 1995, to $24.3 million in 1996, due primarily to a $36.2
million, or 12.4%, increase in the average balance of interest earning assets
from $291.2 million for fiscal 1995 to $327.5 million for fiscal 1996 and a 6
basis point increase in the weighted average yield on such assets. The increase
in the average balance of interest earning assets was due to a $25.1 million, or
12.4%, increase in the average balance of loans and a $15.6 million, or 48.9%,
increase in the average balance of securities. The average balance in investment
securities increased from $33.6 million for fiscal 1995 to $47.4 million for
fiscal 1996, an increase of $13.8 million, or 41.1%. Combined with an increase
in the average yield on investment securities of 105 basis points, this increase
caused the interest income from investment securities and other assets to
increase by $1.3 million, or 60%, from $1.9 million in 1995 to $3.1 million for
1996. The increase in interest on loans was attributable to an increase of $1.1
million, or 9.3%, on real estate loans from $11.8 million for fiscal 1995 to
$12.9 million for fiscal 1996, resulting from the average balance of real estate
loans increasing from $151.4 million for 1995 to $166.7 million for 1996.
Commercial loan income increased $285,000 from $684,000 for 1995 to $969,000 for
1996, an increase of 41.2%, primarily due to the increase in the average balance
of commercial loans from $7.6 million in 1995 to $11.2 million for 1996, an
increase of $3.6 million, or 47.4%. Interest on consumer loans increased from
$3.8 million for 1995 to $4.3 million for 1996, an increase of $500,000, or
13.2%, resulting from the average balance on consumer loans increasing from
$43.2 million for 1995 to $49.4 million for 1996.
Interest Expense. Interest expense increased by $2.2 million, or 20.4%,
from $10.8 million for fiscal 1995 to $13 million for fiscal 1996 primarily due
to a $32.8 million increase in the average balance of interest-bearing
liabilities, and an increase in the weighted average cost of such liabilities
from 4.01% for 1995 to 4.29% for 1996 due to higher average balances of deposits
and FHLB advances. Interest expense on savings accounts decreased by $200,000,
or 9.6%, from $2.1 million for 1995 to $1.9 million for 1996, due primarily to
the Bank's decision to reduce the rate paid on such accounts during 1996. The
average rate paid on savings accounts for 1996 was 2.54% compared to 2.65% for
1995. Despite the effect of the lower interest rate environment and the
decreased cost of savings accounts, interest expense increased, primarily due to
higher rates paid on certificate of deposit accounts. The average rate paid on
certificate of deposit accounts increased from 5.22% for the year ended
September 30, 1995 to 5.49% for the year ended September 30, 1996, due primarily
to the Bank's deposit pricing strategy, whereby it offered more competitive
rates on certificate of deposit accounts than on savings accounts in an effort
to extend the maturity of its deposit accounts, resulting in an increase in the
average balance of such accounts from $148.2 million for 1995 to $174.6 million
for 1996. The increase in interest expense for certificate of deposit accounts
of $1.9 million more than offset the decrease in interest expense on savings
accounts.
Provision for Loan Losses. During 1996, the provision for loan losses
was increased by $97,000 from the prior year's level of $25,000. The higher
provision was based on management's evaluation of existing real estate market
conditions, the level of charge-offs and non-performing loans, as well as an
evaluation of the general economic conditions in the Bank's market areas. In
particular, the Bank experienced increased charge-offs, which increased from
$70,000 for fiscal 1995 to $91,000 for fiscal 1996. At September 30, 1995, the
Bank's allowance for loan losses to total non-performing loans and to total
loans was 58.7% and 0.34%, respectively, compared to 102% and 0.30% at September
30, 1996.
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<PAGE> 88
Noninterest Income. Noninterest income decreased by $91,000, or 18.0%,
from $599,000 in 1995 to $507,000 in 1996. The decrease was primarily
attributable to the writedown of fixed assets totaling $75,000 for fiscal 1996
due to the phase out of obsolete assets.
Noninterest Expense. Noninterest expense increased $2.4 million, or
28.6%, in 1996 to $10.8 million compared to $8.4 million in 1995. The increase
primarily relates to the special assessment by the FDIC for the SAIF
recapitalization of $1.7 million and the increase in compensation and employee
benefits, which increased by $700,000, or 18%, from $3.9 million in 1995 to $4.6
million in 1996, primarily as a result of normal salary increases, staff
additions, and an increase in the Bank's benefit expenses.
Provision for Income Taxes. Income tax expense decreased by $887,000, or
98.8%, from $899,000 in fiscal 1995 to $12,000 in fiscal 1996, resulting in an
effective tax rate of 1.3% for fiscal 1996 compared to 33.9% for fiscal 1995.
The decrease in income tax expense in fiscal 1996 was primarily attributable to
a decrease in the Bank's pre-tax earnings for fiscal 1996 and a $250,000 state
tax credit in fiscal 1996 related to construction of an addition to its main
office.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, principal and interest
payments on loans, mortgage-backed and investment securities and FHLB advances.
While maturities and scheduled amortization of loans are predictable sources of
funds, deposit flows, mortgage prepayments and the exercise of call features are
greatly influenced by general interest rates, economic conditions and
competition. The Bank has continued to maintain the required levels of liquid
assets as defined by OTS regulations. This requirement of the OTS, which may be
varied at the direction of the OTS depending upon economic conditions and
deposit flows, is based upon a percentage of deposits and short-term borrowings.
The Bank's currently required liquidity ratio is 4.0%. At September 30, 1997,
1996, 1995, 1994, and 1993, the Bank's liquidity ratios were 8.8%, 11.9%, 18.0%,
12.2% and 19.4%, respectively.
At September 30, 1997, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $27.3 million, or 7.4%, of total
adjusted assets, which is above the required level of $5.5 million, or 1.5%;
core capital of $27.3 million, or 7.4%, of total adjusted assets, which is above
the required level of $11.1 million, or 3%; and risk-based capital of $28.5
million, or 14.4%, of risk-weighted assets, which is above the required level of
$15.8 million, or 8%. See "Regulatory Capital Compliance."
The Bank's most liquid assets are cash and cash equivalents and its
investment and mortgage-related securities held for sale. The levels of these
assets are dependent on the Bank's operating, financing, lending and investing
activities during any given period. At September 30, 1997, cash and cash
equivalents and investment and mortgage-related securities held for sale totaled
$58.0 million, or 15.7% of total assets.
The Bank has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At September 30, 1997, the Bank had $23.5
million in advances outstanding from the FHLB, and at September 30, 1997, had an
additional overall borrowing capacity from the FHLB of $214.5 million. Depending
on market conditions, the pricing of deposit products and FHLB advances, the
Bank may continue to rely on FHLB borrowing to fund asset growth.
At September 30, 1997, the Bank had commitments to originate and
purchase loans and unused outstanding lines of credit and undisbursed proceeds
of construction mortgages totaling $25.4 million. The Bank anticipates that it
will have sufficient funds available to meet its current loan origination
commitments. Certificate accounts, including Individual Retirement Account
("IRA") and KEOGH accounts, which are
45
<PAGE> 89
scheduled to mature in less than one year from September 30, 1997, totaled
$127.4 million. The Bank expects that substantially all of the maturing
certificate accounts will be retained by the Bank at maturity.
In accordance with the Bank's plans to improve its customer delivery
systems and expand the services it offers, the Bank anticipates that it will be
investing in new computer hardware and software during fiscal 1998 and may
expand branch facilities. The Bank anticipates that during fiscal 1998 it will
incur capital expenditures of approximately $1.5 million to fund such plans.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which require the measurement of
financial position and operating results generally in terms of historical dollar
amounts without considering the changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased cost of the Bank's operations. Unlike industrial companies, nearly all
of the assets and liabilities of the Bank are monetary in nature. As a result,
interest rates have a greater impact on the Bank's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the prices of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
Accounting for Long Lived Assets. In March 1995, the FASB issued
Statement of Financial Accounting Standards No. 121, "Accounting for Impairment
of Long-Lived Assets and for Long Lived Assets to be Disposed of" ("SFAS No.
121"). This Statement establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. The Statement requires that
long-lived assets and certain identifiable intangibles to be held and used by an
institution be reviewed for impairment whenever events change and circumstances
indicate the carrying amount of the asset may not be recoverable. If impaired,
such assets are written down to fair value. Long-lived assets to be disposed of
are carried at the lower of cost or fair value, less cost to dispose. This
Statement became effective for the Bank on September 30, 1996. Adoption of this
Statement did not have a material impact on the earnings, equity, or financial
position of the Bank.
Accounting for Mortgage Servicing Rights. In May 1995, the FASB issued
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights" ("SFAS 122"), which amends Statement of Financial Accounting
Standards No. 65, "Accounting for Certain Mortgage Banking Activities." SFAS 122
is effective for fiscal years beginning after December 15, 1995. SFAS 122
requires that a mortgage banking enterprise recognize, as separate assets,
rights to service mortgage loans for others regardless of how those servicing
rights are acquired. Additionally, the Statement requires that the capitalized
mortgage servicing rights be assessed for impairment based on the fair value of
those rights, and the impairment be recognized through a valuation allowance.
These requirements will accelerate the income recognition associated with
mortgage banking activities, increase future operating expense due to the
amortization of servicing rights and will also result in greater earnings
volatility for those institutions involved in mortgage banking activities. SFAS
No. 122 was adopted by the Bank in fiscal 1997. Adoption of this statement did
not have a material impact on the earnings, equity, or financial position of the
Bank.
Accounting for Stock-Based Compensation. In November 1995, the FASB
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock Based Compensation" ("SFAS No. 123"). This statement establishes financial
accounting standards for stock-based employee compensation plans. SFAS No. 123
permits the Bank to choose either a new fair value based method or the current
Accounting
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<PAGE> 90
Principles Board ("APB") Opinion 25 intrinsic value based method of accounting
for its stock-based compensation arrangements. For companies that continue to
follow current practice in accounting for such arrangements under APB Opinion
25, SFAS No. 123 requires pro forma disclosures of net earnings and earnings per
share computed as if the fair value based method had been applied. SFAS No. 123
applies to all stock-based employee compensation plans in which an employer
grants shares of its stock or other equity instruments to employees except for
employee stock ownership plans. SFAS No. 123 also applies to plans in which the
employer incurs liabilities to employees in amounts based on the price of the
employer's stock, (e.g., Stock Option Plan, stock purchase plans, restricted
stock plans, and stock appreciation rights). The statement also specifies the
accounting for transactions in which a company issues stock options or other
equity instruments for services provided by nonemployees or to acquire goods or
services from outside suppliers or vendors. The recognition provisions of SFAS
No. 123 for companies choosing to adopt the new fair value based method of
accounting for stock-based compensation arrangements apply to all transactions
entered into in fiscal years that begin after December 15, 1995, however,
disclosure of the pro forma net earnings and earnings per share, as if the fair
value method of accounting for stock-based compensation had been elected, is
required for all awards granted in fiscal years beginning after December 31,
1994. Any effect that this statement will have on the Bank will be applicable
upon the consummation of the Conversion. The Bank has elected to continue to
follow the APB Opinion 25 method upon adoption, and will provide the required
pro forma disclosure as if the fair value method had been applied.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In June 1996 the FASB issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 125"). This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under the financial-components approach,
after a transfer of financial assets, an entity recognizes all financial and
servicing assets it controls and liabilities it has incurred and derecognizes
financial assets it no longer controls and liabilities that have been
extinguished. The financial-components approach focuses on the assets and
liabilities that exist after the transfer. If a transfer does not meet the
criteria for a sale, the transfer is accounted for as a secured borrowing with a
pledge of collateral. The Statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996, and is to be applied prospectively. Earlier or retroactive application of
this Statement is not permitted. Adoption of this Statement did not have a
material impact on the net income, equity, or financial position of the Bank.
Accounting for Earnings Per Share. In February 1997 the FASB issued SFAS
No. 128, "Earnings Per Share." This statement establishes standards for
computing and presenting earnings per share ("EPS") and applies to entities with
publicly-held common stock or potential common stock. This statement simplifies
the standards for computing earnings per share previously found in APB Opinion
No. 15, "Earnings per Share," and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
This statement is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted.
Reporting Comprehensive Income. In September 1997, the FASB issued SFAS
No. 130, "Reporting Comprehensive Income." This statement establishes standards
for the reporting and display of comprehensive income and its components in a
full set of general purpose financial statements. SFAS No. 130 requires that all
items that are required to be recognized as components of comprehensive income
47
<PAGE> 91
be reported in a financial statement that is displayed with the same prominence
as other financial statements. The statement does not require a specific format
for that financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. The Bank will make the appropriate disclosures in the applicable
consolidated financial statements, as required.
Disclosure About Segments of an Enterprise and Related Information. In
September 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS No. 131
is effective for financial statements for periods beginning after December 15,
1997. Management has not yet determined the impact, if any, of this statement on
the Bank.
BUSINESS OF THE BANK
GENERAL
The Bank's principal business has been and continues to be attracting
retail deposits from the general public in the areas surrounding its 10 banking
offices and investing those deposits, together with funds generated from
operations and borrowings, primarily in one- to four-family mortgage loans,
consumer loans and commercial loans. The Bank currently originates, primarily
for investment, adjustable-rate and shorter-term (15 years or less) one- to
four-family mortgage loans and longer-term, fixed-rate one- to four-family
mortgage loans. Since the Bank has a policy to limit its retention of newly
originated longer-term, fixed-rate one- to four-family loans to 20% of total
originations for a fiscal year, periodically the Bank has had to limit its
origination of such loans. The Bank is in the process of implementing a program
for resale in the secondary market of longer-term fixed-rate one- to four-family
mortgage loans originated in excess of its retention limit. Also, the Bank is
currently considering the origination for sale of subprime one- to four-family
mortgage loans, if the origination of such loans were warranted under market
conditions. The Bank also originates a variety of consumer loans, including home
equity loans, home equity lines of credit, direct and indirect automobile loans
and education loans, and commercial loans. To a lesser extent, the Bank also
originates multi-family and commercial real estate loans and construction loans.
The Bank also invests in mortgage-related securities and investment securities,
primarily U.S. government and agency and municipal obligations, and other
permissible investments. The Bank's revenues are derived principally from
interest on its loans, and to a lesser extent, interest and dividends on its
investment and mortgage-related securities and other noninterest income. The
Bank's primary sources of funds are deposits, principal and interest payments on
loans and mortgage-related securities, FHLB advances and proceeds from the sale
of loans.
MARKET AREA AND COMPETITION
The Bank is a community-oriented banking institution offering a variety
of financial products and services to meet the needs of the communities it
serves. The Bank's lending and deposit gathering is concentrated in its market
area consisting of Luzerne, Carbon, Columbia, Monroe and Schuylkill counties in
Northeast Pennsylvania. The Bank invests primarily in loans secured by first or
second mortgages on properties located in areas surrounding its offices.
48
<PAGE> 92
The Bank maintains its headquarters in Hazleton and three other banking
offices in Luzerne County, although one of those offices only opened in January
1998. The Bank's three offices in Luzerne County, including Hazleton, which were
open during fiscal 1997 accounted for $152.2 million or 48.5% of the Bank's
total deposits at September 30, 1997. Hazleton is situated approximately 100
miles from Philadelphia and New York City and approximately 50 miles from
Allentown and the Wilkes-Barre/Scranton area. The Bank also maintains two
banking branch offices in Bloomsburg (Columbia County), one in Lehighton (Carbon
County), and one each in Frackville, Pottsville and Shenandoah (all in
Schuylkill County). The Bank also operates, separate from its branch office
locations, a loan production office in Pocono Pines in Monroe County. A second
loan production office was combined with the branch office which was opened in
January 1998. The Bank's two loan production offices existing in fiscal 1997,
together with a separate loan production facility at one of its branch offices,
were the source of 29.7% of the Bank's one- to four-family mortgage loans
originated in fiscal 1997.
The economy of the greater Hazleton area is characterized by diversified
light manufacturing and is the site of production facilities for several major
manufacturers including Union Camp, Hershey-Cadbury Chocolates, Quebacor and
Hazleton Pumps, Inc. As a consequence, the manufacturing sector employs more
than one third of the area's work force. The Hazleton area has excellent access
to major highway transportation routes including Interstates 80 and 81 as well
as rail transportation. The population of Luzerne County has remained relatively
static and has one of the oldest average ages for all counties in the United
States. The overall population in the Bank's market area is relatively small
and, in recent years, has grown slowly, and the unemployment rate in the area is
greater than the national average.
Monroe County, the location of the Pocono Pines loan production office,
is dominated by the Pocono Mountains, making the area one of the
Middle-Atlantic's most popular resort areas. The Pocono Mountains, with their
ski areas and other recreational facilities, draw vacationers primarily from
Eastern Pennsylvania, New Jersey, Maryland, and New York. The Bank established
its loan production office to take advantage of the market for vacation
properties existing in Monroe County as well as to be involved in the growth in
the number of permanent residents relocating into the County.
The Bank faces significant competition both in generating loans and in
attracting deposits. The Bank's primary market area is highly competitive and
the Bank faces direct competition from a significant number of financial
institutions, many with a state wide or regional presence and, in some cases, a
national presence. Many of these financial institutions are significantly larger
and have greater financial resources than the Bank. The Bank's competition for
loans comes principally from commercial banks, savings banks, credit unions,
mortgage brokers, mortgage banking companies and insurance companies. Its most
direct competition for deposits has historically come from savings banks and
associations, commercial banks and credit unions. In addition, the Bank faces
increasing competition for deposits from non-bank institutions such as brokerage
firms and insurance companies in such instruments as short-term money market
funds, corporate and government securities funds, mutual funds and annuities.
Competition may also increase as a result of the lifting of restrictions on the
interstate operations of financial institutions. See "Risk Factors -- Highly
Competitive Industry and Geographic Area."
In addition, the Bank recognizes that its customer base increasingly
focuses on convenience and access to services. The Bank has addressed these
customer desires recently through the implementation of PC banking and voice
response capabilities, a computerized loan origination and document system and
the issuance of debit cards. The Bank intends to continue to evaluate and
enhance its service delivery system.
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<PAGE> 93
LENDING ACTIVITIES
Loan Portfolio Composition. The Bank's loan portfolio consists primarily
of mortgage loans secured by one- to four-family residential real estate. In
addition, the Bank has a significant amount of consumer loans and commercial
loans. At September 30, 1997, the Bank's loans totaled $264.2 million, of which
$179.1 million, or 68.5%, were one- to four-family residential mortgage loans.
Such residential mortgage loans consisted of 34.8% of adjustable-rate loans,
which are indexed to various indexes, primarily a Federal Housing Finance Board
average, a National Average Monthly Median Cost of Funds Ratio, or a one-year
U.S. Treasury Constant Maturity Yield ("CMT") index, 29.4% of shorter-term (15
years or less to maturity as of the date of origination) fixed-rate loans, and
35.8% of longer-term fixed-rate loans. At September 30, 1997, the Bank also had
$12.4 million, or 4.7% of total loans, in multi-family and commercial real
estate loans and construction loans.
The Bank's consumer loans at September 30, 1997 aggregated $61.8
million, or 23.4% of total loans. Such consumer loans included $32.8 million of
home equity loans, $8.5 million of home equity lines of credit, $13.7 million of
direct and indirect automobile loans, $2.3 million of education loans and $4.5
million of other consumer loans.
The Bank's commercial loan portfolio at September 30, 1997,
aggregating $10.8 million, or 4.1% of total loans, consisted of $5.7 million of
commercial business loans, $3.9 million of participations in loans originated by
other financial institutions, and $928,000 of municipal, tax-advantaged loans.
The commercial business loans generally are secured by real estate.
The types of loans that the Bank may originate are subject to federal
and state laws and regulations. Interest rates charged by the Bank on loans are
affected by the demand for such loans and the supply of money available for
lending purposes and the rates offered by competitors. These factors are, in
turn, affected by, among other things, economic conditions, monetary policies of
the federal government, including the Federal Reserve Board, and legislative tax
policies.
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<PAGE> 94
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------------------------------------------------------
1997 1996 1995
--------------------- -------------------- ---------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- --------- --------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family ............... $179,101 67.78% $170,773 69.68% $157,360 73.01%
Multi-family and commercial ....... 6,701 2.54 4,429 1.81 3,457 1.60
Construction ...................... 5,818 2.20 5,129 2.09 4,040 1.87
-------- ------- -------- ------- -------- --------
Total real estate loans ... 191,620 72.52 180,331 73.58 164,857 76.49
-------- ------- -------- ------- -------- --------
Consumer loans:
Home equity loans and
lines of credit ................. 41,278 15.62 38,054 15.53 33,275 15.44
Automobile ........................ 13,678 5.18 10,594 4.32 6,705 3.11
Education ......................... 2,348 0.89 2,538 1.04 2,432 1.13
Unsecured lines of credit ......... 1,310 0.50 959 0.39 495 0.23
Other ............................. 3,229 1.22 3,309 1.35 3,241 1.50
Total consumer loans ...... 61,843 23.40 55,454 22.63 46,148 21.41
-------- ------- -------- ------- -------- -------
Commercial loans ...................... 10,775 4.08 9,280 3.79 4,523 2.10
-------- ------- -------- ------- -------- -------
Total loans ................... 264,238 100.00% 245,065 100.00% 215,528 100.00%
======= ======= =======
Less:
Deferred loan origination fees
and discounts ................... 1,497 1,419 1,289
Allowance for loan losses ......... 1,272 730 724
-------- -------- --------
Total loans, net .............. $261,469 $242,916 $213,515
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------
1994 1993
--------------------- ---------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- --------
Dollars in Thousands
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family ............... $138,506 72.70% $137,951 75.68%
Multi-family and commercial ....... 5,741 3.01 6,781 3.72
Construction ...................... 4,263 2.24 2,763 1.52
-------- ------- -------- -------
Total real estate loans ... 148,510 77.95 147,495 80.92
-------- ------- -------- -------
Consumer loans:
Home equity loans and
lines of credit.................. 28,957 15.20 25,687 14.09
Automobile ........................ 4,842 2.54 2,834 1.55
Education ......................... 2,505 1.31 1,953 1.07
Unsecured lines of credit ......... 418 0.22 255 0.14
Other ............................. 3,585 1.88 3,880 2.13
Total consumer loans ...... 40,307 21.16 34,609 18.99
-------- ------- -------- -------
Commercial loans ...................... 1,707 0.90 179 0.10
-------- ------- -------- -------
Total loans ................... 190,524 100.00% 182,283 100.00%
======= =======
Less:
Deferred loan origination fee
and discounts.................... 1,254 1,172
Allowance for loan losses.......... 769 979
-------- --------
Total loans, net $188,501 $180,132
======== ========
</TABLE>
51
<PAGE> 95
Loan Maturity. The following table shows the remaining contractual
maturity of the Bank's total loans at September 30, 1997. The table does not
include the effect of future principal prepayments.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
--------------------------------------------------------------------------
MULTI-
ONE-TO FAMILY AND
FOUR- COMMERCIAL TOTAL
FAMILY REAL ESTATE CONSTRUCTION CONSUMER COMMERCIAL LOANS
--------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Amounts due in:
One year or less ............................... $ 8,551 $ 435 $ -- $ 18,608 $ 1,942 $ 31,049
After one year:
More than one year to three years .......... 17,869 830 -- 13,360 695 34,096
More than three years to five years ........ 17,192 916 -- 15,071 565 31,515
More than five years to 10 years ........... 40,696 2,088 -- 9,947 1,132 53,237
More than 10 years to 20 years ............. 55,207 1,780 -- 3,612 37 60,636
More than 20 years ........................ 39,586 652 5,818(1) 1,245 6,404 53,705
-------- -------- -------- -------- -------- --------
Total amount due ................... $179,101 $ 6,701 $ 5,818 $ 61,893 $ 10,775 $264,238
======== ======== ======== ======== ======== ========
</TABLE>
- --------------------
(1) Construction loans, which consist of loans to the owner for the
construction of one- to four-family residences, automatically convert to
permanent financing upon completion of the construction phase.
52
<PAGE> 96
The following table sets forth, at September 30, 1997, the dollar amount
of loans contractually due after September 30, 1998, and whether such loans have
fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER SEPTEMBER 30, 1998
--------------------------------
FIXED ADJUSTABLE TOTAL
-------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans:
One- to four-family ................... $110,277 $ 60,273 $170,550
Multi-family and commercial real estate 850 5,416 6,266
Construction .......................... 5,818 -- 5,818
Total real estate loans ............ 121,514 61,120 182,634
Consumer loans ............................ 43,235 -- 42,235
Commercial loans .......................... 3,462 5,371 8,833
-------- -------- --------
Total loans ....................... $163,642 $ 71,060 $234,702
======== ======== ========
</TABLE>
Origination and Sale of Loans. The Bank's mortgage lending activities are
conducted primarily by its loan personnel operating at its branch offices and
loan origination office. All loans originated by the Bank are underwritten
pursuant to the Bank's policies and procedures. For fiscal 1997 and 1996, the
Bank originated $72.1 million and $75.2 million in loans, respectively. The Bank
originates both adjustable-rate and longer-term and shorter-term fixed-rate
loans. The Bank's ability to originate fixed- or adjustable-rate loans is
dependent upon the relative customer demand for such loans, which is affected by
the current and expected future level of interest rates.
In recent years, all real estate loans originated by the Bank have been
originated for investment, although, in the past, the Bank has sold loans. It
currently is the policy of the Bank to retain for investment longer-term
(greater than 15 years to maturity at date of origination) fixed-rate one- to
four-family loans originated during a fiscal year only up to 20% of its total
loan originations during that year. In addition, the Bank generally retains the
adjustable rate and shorter-term (maturities of 15 years or less) fixed-rate
loans originated. In recent years, the Bank has not resold loans and has had to
limit its solicitation of longer-term one-to four-family loans to meet its
retention policy regarding such loans. The Bank currently is implementing a
program to sell longer-term fixed-rate one- to four-family mortgage loans which
are originated in an amount in excess of the 20% limit on retentions of such
loans. The Bank intends to retain servicing rights on mortgage loans sold.
During fiscal years 1997 and 1996, the Bank originated $17.7 million and
$24.4 million, respectively, of one- to four-family mortgage loans, of which
$10.1 million and $8.2 million, respectively, were adjustable-rate loans, $5.6
million and $10.7 million, respectively, were shorter-term fixed-rate loans, and
$2.0 million and $5.5 million, respectively, were longer-term fixed-rate loans.
In addition, during fiscal years 1997 and 1996, the Bank originated $14.2
million and $12.2 million, respectively of construction loans. Approximately
100% of such construction loans were for owner financing of single family
properties, which, upon completion of the construction phase, generally would
convert to permanent financing. Also, the Bank originated $2.1 million and $1.6
million, respectively, of multi-family and commercial real estate loans during
fiscal 1997 and 1996.
Also, during fiscal 1997 and 1996, respectively, the Bank originated $30.8
million and $30.4 million of consumer loans, consisting of $13.6 million and
$14.5 million, respectively, of home equity loans, $3.1 million and $3.0
million, respectively, of home equity lines of credit, $8.9 million and $8.1
million, respectively, of direct and indirect automobile loans, $1.7 million and
$1.7 million, respectively, of education loans, and $3.5 million and $3.1
million, respectively, of other consumer loans. In addition, during fiscal 1997
and 1996, the Bank originated $7.4 million and $6.6 million, respectively, of
commercial loans, of which 0% and 6%, respectively, were participation interests
in commercial loans originated by other financial institutions, and 54.7% and
19.2%, respectively, were municipal loans.
53
<PAGE> 97
The following table sets forth the Bank's loan originations, purchases,
sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
---------------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Loans at beginning of period ............................... $250,142 $219,633 $193,909
Originations:
Real estate:
One- to four-family ............................ 17,698 24,355 24,554
Multi-family and commercial .................... 2,055 1,588 312
Construction ................................... 14,151 12,238 11,368
-------- -------- --------
Total real estate loans .................... 33,904 38,181 36,234
Consumer:
Home equity loans and lines of credit .......... 16,710 17,464 14,597
Automobile ..................................... 8,912 8,107 4,782
Education ...................................... 1,658 1,727 1,766
Unsecured lines of credit ...................... 837 711 315
Other .......................................... 2,671 2,361 1,936
-------- -------- --------
Total consumer loans ....................... 30,788 30,370 23,396
Commercial ......................................... 7,426 6,614 4,513
-------- -------- --------
Total loans originated ..................... 72,118 75,165 64,143
Deduct:
Principal loan repayments and prepayments .............. 51,298 42,619 37,265
Loan sales ......................................... 1,789 1,534 793
Transfers to REO ................................... 201 503 361
Sub-total .................................. 53,288 44,656 38,419
Net loan activity .......................................... 18,830 30,509 25,724
-------- -------- --------
Loans at end of period(1) .......................... $268,972 $250,142 $219,633
======== ======== ========
</TABLE>
- ------------------
(1) Loans at end of period include loans in process of $4,734, $5,077 and
$4,105 for fiscal years 1997, 1996 and 1995, respectively.
One- to Four-Family Mortgage Lending. The Bank currently offers both
fixed-rate and adjustable-rate mortgage ("ARM") loans with maturities of up to
30 years secured by one- to four-family residences. In excess of 85% of such
loans are located in the Bank's market area. One- to four-family mortgage loan
originations are generally obtained from the Bank's in-house loan
representatives, from existing or past customers, and through referrals from
members of the Bank's local communities. At September 30, 1997, the Bank's one-
to four-family mortgage loans totaled $179.1 million, or 68.5% of total loans.
Of the one- to four-family mortgage loans outstanding at that date, 41.1% were
longer-term fixed-rate mortgage loans, 29.1% were shorter-term fixed-rate loans
and 29.8% were ARM loans.
54
<PAGE> 98
The Bank currently offers a variety of fixed-rate mortgage loans,
including 30-year and 15-year mortgage loans and five and seven year balloon
loans. The Bank retains for its portfolio shorter-term, fixed-rate loans and
adjustable-rate one- to four-family loans. In addition, in July 1994, the Bank
adopted a policy to limit its retention of newly-originated longer-term
fixed-rate loans to 20% of loan originations during a fiscal year. The Bank is
in the process of implementing a program to sell in the secondary market
longer-term fixed-rate one- to four-family mortgage loans originated in excess
of the Bank's retention policy.
The Bank currently offers a number of ARM loans with terms of up to 30
years and interest rates which adjust initially one, three or seven years from
the outset of the loan and thereafter annually, or in the case of the three year
ARM, every three years, for the duration of the loan. The interest rates for the
Bank's ARM loans are indexed to various indexes, particularly a Federal Housing
Finance Board average, a National Average Monthly Cost of Funds Ratio, or a CMT
Index. The Bank originates ARM loans with initially discounted rates, often
known as "teaser rates." The Bank's ARM loans generally provide for periodic
(not more than 2%) caps on the increase or decrease in the interest rate at any
adjustment date. Currently, the Bank has a contractual rate ceiling for the life
of the loan of 5%.
The origination of adjustable-rate mortgage loans, as opposed to
fixed-rate residential mortgage loans, helps reduce the Bank's exposure to
increases in interest rates. However, adjustable-rate loans generally pose
credit risks not inherent in fixed-rate loans, primarily because as interest
rates rise, the underlying payments of the borrower rise, thereby increasing the
potential for default. Periodic and lifetime caps on interest rate increases
help to reduce the credit risks associated with adjustable-rate loans but also
limit the interest rate sensitivity of such loans.
Most one- to four-family mortgage loans are underwritten according to FNMA
and FHLMC guidelines. However, the Bank is evaluating whether to offer solely
for resale one- to four-family mortgage loans to borrowers whose credit does not
fully meet established FNMA or FHLMC standards, for example, income to debt
ratios for the borrower ("subprime loans"). Generally, the Bank originates one-
to four-family residential mortgage loans in amounts up to 80% of the lower of
the appraised value or the selling price of the property securing the loan and
up to 95% of the appraised value or selling price if private mortgage insurance
("PMI") is obtained. Mortgage loans originated by the Bank generally include
due-on-sale clauses which provide the Bank with the contractual right to deem
the loan immediately due and payable in the event the borrower transfers
ownership of the property without the Bank's consent. Due-on-sale clauses are an
important means of adjusting the yields on the Bank's fixed-rate mortgage loan
portfolio and the Bank has generally exercised its rights under these clauses.
The Bank requires fire, casualty, title and, in certain cases, flood insurance
on all properties securing real estate loans made by the Bank.
Multi-family and Commercial Real Estate Lending. The Bank originates
fixed-rate and adjustable-rate multi-family loans and commercial real estate
loans that generally are secured by properties used for business purposes or a
combination of residential and retail purposes. At September 30, 1997, the Bank
had $6.7 million of multi-family and commercial real estate loans. At that date,
the Bank's largest multi-family or commercial real estate loan was a commercial
real estate loan for $575,159 secured by a restaurant located in Hazleton,
Pennsylvania.
Pursuant to the Bank's underwriting policies, a multi-family mortgage loan
may be made in an amount up to 80% of the lower of the appraised value or sales
price of the underlying property with terms generally of 15 years, with an
amortization period up to 20 years. The Bank's adjustable-rate multi-family
loans generally have rates that adjust every three years. In addition, the Bank
generally requires a debt service coverage ratio of a minimum of 125% and the
personal guarantee of principals, if appropriate. The Bank also generally
requires an appraisal on the property conducted by an independent appraiser and
title insurance.
55
<PAGE> 99
The Bank's underwriting procedures provide that commercial real estate
loans generally may be made in amounts up to 80% of the lower of the appraised
value or sales value of the property. These loans may be made with terms up to
25 years and are generally offered at interest rates which adjust in accordance
with an index based on prime rate or an appropriate certificate of deposit rate.
The factors considered by the Bank include: the net operating income of the
mortgaged premises before debt service and depreciation; the debt coverage ratio
(the ratio of net earnings to debt service); and the ratio of loan amount to
appraised value. The Bank has generally required that the properties securing
commercial real estate loans have debt service coverage ratios of at least 125%.
Multi-family and commercial real estate loans generally are considered to
involve a higher degree of credit risk than financing on improved,
owner-occupied real estate. Multi-family and commercial real estate loans
generally involve larger principal amounts than one- to four-family residential
mortgage loans. In addition, because multi-family and commercial real estate
loans often are dependent on successful operation and management of the
properties, repayment of such loans may be subject to adverse conditions in the
real estate market or the economy to a greater extent than one- to four-family
residential loans.
Construction Lending. The Bank also offers residential construction loans.
Such loans primarily have been for presold one- to four-family residences for
the construction phase and convert into permanent financing. The Bank generates
residential construction loans primarily through direct contact with the
borrower or home builders, and these loans involve properties located in the
Bank's market area. Such loans require that the Bank review plans,
specifications and cost estimates and that the contractor be known to the Bank
to be reputable. The amount of construction advances to be made, together with
the sum of previous disbursements, may not exceed the percentage of completion
of the construction. The maximum loan-to-value limit applicable to such loans is
80%. At September 30, 1997, the Bank's largest construction loan was a
performing loan with an aggregate commitment of $489,000, secured by a
single-family residence located in Luzerne County. At that date, construction
loans totaled $5.8 million (net), or 2.2% of the Bank's total loans. Risk of
loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction or
development.
Consumer Lending. Consumer loans at September 30, 1997 amounted to $61.8
million or 23.4% of the Bank's total loans. These loans include home equity
loans, home equity lines of credit, direct and indirect automobile loans,
education loans and other consumer loans. The Bank's home equity loans are
generated primarily through the Bank's retail offices. The Bank generally offers
home equity loans with a term of 180 months or less. The Bank also offers home
equity lines of credit with terms up to 20 years, the last 10 years of which
require full amortization of the principal balance. The maximum loan amount for
both home equity loans and home equity lines of credit is subject to a combined
loans-to-value ratio of 80%.
The Bank also offers automobile loans, both on a direct and an indirect
basis (through new and used car dealers) in amounts up to $35,000 with 60 month
terms and loan-to-value ratios of 100% for new cars. The Bank also finances new
cars with prices in excess of $35,000 for up to 72 months. For used cars, the
maximum loan-to-value ratio is the lesser of the retail value shown in the NADA
Used Car Guide or the contract price, and the terms for such loans range between
60 months for automobiles up to 3 years old to 30 months for older vehicles. The
indirect automobile loans are originated by dealers through an independent
contractor with the Bank in accordance with underwriting standards
pre-established by the Bank. While the contractual arrangements would permit the
making of such a loan prior to review by the Bank, in practice, all such
indirect loans are made only after an underwriting review and acceptance by the
Bank. The Bank also offers loans on recreational vehicles and boats with terms
up to 84 months for new and 60 months for used vehicles and boats and
loan-to-value ratios of 90% of the retail price for new recreational vehicles
and boats. Used recreational vehicles and boats can be financed up to 85% of the
estimated retail value plus taxes and fees and new options. Other consumer loans
include education loans which are federally
56
<PAGE> 100
guaranteed and originated under regulations of the Pennsylvania Higher Education
Assistance Agency, deposit-secured loans, and other personal and unsecured
loans. The Bank's policy is to sell its education loans once the borrower has
left school to Sallie Mae with servicing released.
Loans secured by rapidly depreciable assets such as automobiles or that
are unsecured entail greater risks than one- to four-family mortgage loans. In
such cases, repossessed collateral for a defaulted loan may not provide an
adequate source of repayment of the outstanding loan balance, since there is a
greater likelihood of damage, loss or depreciation of the underlying collateral.
Further, consumer loan collections on these loans are dependent on the
borrower's continuing financial stability and, therefore, are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Finally, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans in the event of a default.
Commercial Lending. At September 30, 1997, the Bank had $10.8 million in
commercial loans which amounted to 4.1% of total loans. The Bank makes
commercial business loans primarily in its market area to a variety of
professionals, sole proprietorships and small businesses. The Bank offers a
variety of commercial lending products, including term loans for fixed assets
and working capital, revolving lines of credit, letters of credit, and Small
Business Administration guaranteed loans. Interest rates charged generally float
based on the prime rate as published in the Wall Street Journal. Prior to making
commercial business loans, the borrower is required to provide the Bank with
sufficient information to allow a prudent loan decision to be made. Such
information generally includes financial statements and projected cash flows,
and is reviewed to evaluate debt service capability. Commercial business loans
are generally secured by a variety of collateral, primarily real estate, and
frequently are supported by personal guarantees. In addition, the Bank actively
participates in industrial loans arranged through and with the Greater
Wilkes-Barre Industrial Fund and CanDo, Inc. a Hazleton area industrial fund. At
September 30, 1997, $2.2 million or 20.4% of the commercial loan portfolio were
participation loans of this nature. In addition, the Bank makes loans to various
political subdivisions in its lending area, primarily tax and revenue
anticipation loans, five year capital improvement loans and general obligation
loans. At September 30, 1997, the Bank had $3.9 million, or 36.1% of the
commercial loan portfolio in these municipal loans. The interest income on such
municipal loans is exempt from state and/or federal income taxes. The average
tax equivalent rate on these municipal loans at September 30, 1997 was 7.74%.
The Bank's commercial business loans, other than the participation loans
and the municipal loans, aggregated $4.7 million, or 42.6% of its commercial
loan portfolio as of September 30, 1997, and the average outstanding balance of
such loans was $65,000.
Commercial lending is generally considered to involve a higher degree of
credit risk than long-term financing on improved, owner-occupied real estate.
Risk of loss on commercial business lending is dependent in significant part to
the business success of the borrower and on general economic conditions in the
region. Also, commercial business loans require continued review and evaluation
regarding the performance of the borrower. At September 30, 1997, the Bank's
largest commercial loan was $1.5 million to a local municipality for capital
improvements.
Loan Approval Procedures and Authority. The Board of Directors establishes
the lending policies of the Bank and oversees the Bank's lending activity. The
Board of Directors has established a Loan Committee comprised of the Bank's
Chairman of the Board of Directors, President, Senior Vice President Lending,
Senior Vice President Retail, Senior Vice President Chief Financial Officer and
at least one outside director. Loans in excess of $500,000 must be submitted to
the Loan Committee for its consideration and thereafter presented to the Board,
with a recommendation from the Loan Committee. The Loan Committee has been
granted authority to approve all loans of $500,000 or less. In addition,
individual officers have been
57
<PAGE> 101
granted specific loan approval authority. For example, the Chief Executive
Officer has authority to approve mortgage and commercial loans up to $300,000,
unsecured consumer loans up to $75,000 and secured consumer loans up to
$150,000. Various other senior and subordinate lending officers have been
granted more limited loan approval authority. All approved loans are reported
monthly to the Board of Directors.
DELINQUENT LOANS, CLASSIFIED ASSETS AND REAL ESTATE OWNED
Delinquencies and Classified Assets. Reports listing all delinquent
accounts are generated and reviewed by management on a monthly basis and the
Board of Directors performs a monthly review of all loans or lending
relationships delinquent 30 days or more and all REO. The procedures taken by
the Bank with respect to delinquencies vary depending on the nature of the loan,
period and cause of delinquency and whether the borrower has been habitually
delinquent. When a borrower fails to make a required payment on a loan, the Bank
takes a number of steps to have the borrower cure the delinquency and restore
the loan to current status. The Bank generally sends the borrower a written
notice of non-payment after the loan is first past due. The Bank's guidelines
provide that telephone, written correspondence and/or face-to-face contact will
be attempted to ascertain the reasons for delinquency and the prospects of
repayment. When contact is made with the borrower at any time prior to
foreclosure, the Bank will attempt to obtain full payment, work out a repayment
schedule with the borrower to avoid foreclosure or, in some instances, accept a
deed in lieu of foreclosure. In the event payment is not then received or the
loan not otherwise satisfied, additional letters and telephone calls generally
are made. If the loan is still not brought current or satisfied and it becomes
necessary for the Bank to take legal action, which typically occurs after a loan
is 90 days or more delinquent, the Bank will commence foreclosure proceedings
against any real or personal property that secures the loan. If a foreclosure
action is instituted and the loan is not brought current, paid in full, or
refinanced before the foreclosure sale, the property securing the loan generally
is sold at foreclosure and, if purchased by the Bank, becomes real estate owned.
Federal regulations and the Bank's Asset Classification Policy require
that the Bank utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Bank has incorporated the
OTS internal asset classifications as a part of its credit monitoring system.
The Bank currently classifies problem and potential problem assets as
"Substandard," "Doubtful" or "Loss" assets. An asset is considered "substandard"
if it is inadequately protected by the current net worth and paying capacity of
the obligor or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the insured 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 which do not currently expose the insured institution
to sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are required to be designated "Special
Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation 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 an insured institution classifies one or more assets, or
portions thereof, as "Loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the asset so classified or
to charge off such amount.
58
<PAGE> 102
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
Although management believes that, based on information currently available to
it at this time, its allowance for loan losses is adequate, actual losses are
dependent upon future events and, as such, further additions to the level of
allowances for loan losses may become necessary. In addition, the OTS or other
federal banking agencies may require the Bank to recognize additions to the
allowance, based on their judgments about information available to them at the
time of their examination.
The Bank's Classification of Assets Committee reviews and classifies the
Bank's assets on a quarterly basis and the Board of Directors reviews the
results of the reports on a quarterly basis. The Bank classifies assets in
accordance with the management guidelines described above. At September 30,
1997, the Bank had $598,000 of assets designated as Substandard which consisted
of REO and mortgage and consumer loans. At that same date the Bank had $229,000
of assets classified as Loss consisting of $129,000 of five loans and a $100,000
equity investment in a community development corporation. All assets designated
Loss by the Bank are fully reserved. At September 30, 1997, the Bank had $44,000
of assets classified as Doubtful consisting of one loan. As of September 30,
1997, the Bank also had a total of 49 loans, totaling $1.5 million, designated
as Special Mention. At September 30, 1997, the largest loan designated as
Special Mention was a commercial loan with a carrying balance of $208,000, and
was secured by real estate. At September 30, 1997, the largest adversely (other
than Special Mention) classified loan was $81,000.
59
<PAGE> 103
The following table sets forth the delinquencies in the Bank's loan
portfolio as of the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
-------------------------------------------- -----------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
-------------------------------------------- -----------------------------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family ............. 8 $ 137 22 $ 575 8 $ 265 15 $ 562
Multi-family and commercial...... -- -- 1 47 -- -- -- --
Consumer Loans:
Home equity loans and lines .........
of credit.......................... 8 81 9 108 9 112 8 114
Automobile .......................... 1 6 2 22 2 7 5 23
Unsecured lines of credit ........... -- -- -- -- -- -- 1 2
Other ............................... 9 57 3 22 7 24 4 9
Commercial Loans ........................ 1 59 -- -- 1 300 -- --
------ ------ ------ ------ ------ ------ ------ ------
Total ....................... 27 $ 340 37 $ 774 27 $ 708 33 $ 713
====== ====== ====== ====== ====== ====== ====== ======
Delinquent loans to total loans ......... 0.13% 0.30% 0.29% 0.29%
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
-------------------------------------------
60-89 DAYS 90 DAYS OR MORE
-------------------------------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family ............. 12 $ 519 22 $ 879
Multi-family and commercial...... 1 16 -- --
Consumer Loans:
Home equity loans and lines
of credit........................ 13 212 11 320
Automobile .......................... 1 9 -- --
Unsecured lines of credit ........... -- -- 1 9
Other ............................... 11 30 8 25
Commercial Loans ........................ -- -- 1 1
------ ------ ------ ------
Total ....................... 38 $ 786 43 $1,234
====== ====== ====== ======
Delinquent loans to total loans ......... 0.37% 0.58%
</TABLE>
60
<PAGE> 104
Non-Performing Assets and Impaired Loans. The following table sets forth
information regarding non-accrual loans and REO. At September 30, 1997,
non-accrual loans totaled $774,000, consisting of 37 loans, and REO totaled
$319,000 consisting of five one- to four-family loans. It is the policy of the
Bank to cease accruing interest on loans 90 days or more past due (unless the
loan principal and interest are determined by management to be fully secured and
in the process of collection) and to charge off all accrued interest. For the
year ended September 30, 1997, the amount of additional interest income that
would have been recognized on non-accrual loans if such loans had continued to
perform in accordance with their contractual terms was $19,000. On September 30,
1995, the Bank adopted Statement of Financial Accounting Standards No. 114
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118.
At September 30, 1996, the Bank had a $491,000 recorded investment in impaired
loans which had specific allowances of $69,000. At September 30, 1997, there
were $477,000 of impaired loans with specific loan loss allowances of $176,000.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family
real estate................... $ 622 $ 562 $ 879 $1,173 $1,292
Consumer ....................... 152 154 354 333 433
Commercial ..................... -- -- 1 87 129
------ ------ ------ ------ ------
Total(1) .................... 774 716 1,234 1,593 1,854
Real estate owned (REO)(2) ........ 319 453 423 250 119
Other repossessed assets .......... 3 -- 13 20 9
------ ------ ------ ------ ------
Total nonperforming assets(3) $1,096 $1,169 $1,670 $1,863 $1,982
====== ====== ====== ====== ======
Troubled debt restructurings ...... $ 112 -- -- -- --
Troubled debt restructurings and
total non-performing assets .... $1,208 $1,169 $1,670 $1,863 $1,982
====== ====== ====== ====== ======
Total nonperforming loans and
troubled debt restructurings as a
percentage of total loans ....... 0.34% 0.29% 0.58% 0.85% 1.03%
Total nonperforming assets and
troubled debt restructurings as a
percentage of total assets ...... 0.38% 0.38% 0.52% 0.66% 0.71%
</TABLE>
- ---------------
(1) Total non-accruing loans equals total non-performing loans.
(2) Real estate owned balances are shown net of related loss allowances.
(3) Nonperforming assets consist of nonperforming loans (and impaired loans),
other repossessed assets and REO.
61
<PAGE> 105
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance for
loan losses is maintained at an amount management considers adequate to cover
estimated losses in loans receivable which are deemed probable and estimable
based on information currently known to management. The allowance is based upon
a number of factors, including current economic conditions, actual loss
experience and industry trends. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to make additional
provisions for estimated loan losses based upon their judgments about
information available to them at the time of their examination. As of September
30, 1997, the Bank's allowance for loan losses was 0.48% of total loans compared
to 0.30% as of September 30, 1996. The Bank had non-accrual loans of $774,000
and $716,000 at September 30, 1997 and September 30, 1996, respectively. Such
increase in the allowance from September 30, 1996 to September 30, 1997 was the
result of a revision in the Bank's method of calculation to give greater
consideration to allowance for loan loss ratio levels of peer group institutions
and to the shifting emphasis in the Bank's loan portfolio towards consumer,
commercial and construction loans, which involves inherently greater risks than
traditional one- to four-family mortgage loans. The Bank will continue to
monitor and modify its allowances for loan losses as conditions dictate. While
management believes the Bank's allowance for loan losses is sufficient to cover
losses inherent in its loan portfolio at this time, no assurances can be given
that the Bank's level of allowance for loan losses will be sufficient to cover
future loan losses incurred by the Bank or that future adjustments to the
allowance for loan losses will not be necessary if economic and other conditions
differ substantially from the economic and other conditions used by management
to determine the current level of the allowance for loan losses. In light of the
increased lending focus of the Bank on loans involving greater risk than one- to
four-family mortgage loans, and the anticipated future growth in such loans as a
percentage of the Bank's total loan portfolio, the Bank anticipates that its
allowance for loan losses as a percentage of total loans will increase in future
periods.
62
<PAGE> 106
The following table sets forth activity in the Bank's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
AT OR FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses, beginning
of year ................................................. $ 730 $ 724 $ 769 $ 979 $ 1,488
Charged-off loans:
One- to four-family real estate ......................... 66 34 25 72 149
Multi-family and commercial real estate ................. -- -- -- -- 321
Consumer ................................................ 66 60 70 88 75
------- ------- ------- ------- -------
Total charged-off loans ............................. 132 94 95 160 545
------- ------- ------- ------- -------
Recoveries on loans previously charged off:
One- to four-family real estate ......................... -- -- 10 -- 18
Consumer ................................................ 23 3 15 4 18
------- ------- ------- ------- -------
Total recoveries .................................... 23 3 25 4 36
------- ------- ------- ------- -------
Net loans charged-off ....................................... (109) (91) (70) (156) (509)
Provision for loan losses ................................... 651 97 25 (54)
------- ------- ------- ------- -------
Allowance for loan losses, end of period .................... $ 1,272 $ 730 $ 724 $ 769 $ 979
======= ======= ======= ======= =======
Net loans charged-off to average
interest-earning loans .................................. 0.04% 0.04% 0.03% 0.08% 0.35%
------- ------- ------- ------- -------
Allowance for loan losses to total loans .................... 0.48% 0.30% 0.33% 0.40% 0.53%
------- ------- ------- ------- -------
Allowance for loan losses to nonperforming
loans and troubled debt restructuring ................... 143.57% 101.96% 58.67% 48.27% 52.80%
------- ------- ------- ------- -------
Net loans charged-off to allowance for
loan losses ............................................. (8.57)% (12.47)% (9.67)% (20.29)% (51.99)%
------- ------- ------- ------- -------
Recoveries to charge-offs ................................... 17.42% 3.19% 26.32% 2.50% 6.61%
------- ------- ------- ------- -------
</TABLE>
63
<PAGE> 107
The following table set forth the Bank's allowance for loan losses in each
of the categories listed at the dates indicated and the percentage of such
amounts to the total allowance and to total loans.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------- ----------------------------- --------------------------------
% OF PERCENT % OF PERCENT % OF PERCENT
ALLOWANCE OF LOANS ALLOWANCE OF LOANS ALLOWANCE OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
-------------------------------- ------------------------------ --------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate .......... $ 607 47.72% 75.52% $ 427 58.50% 73.58% $ 462 63.81% 76.90%
Consumer ............. 194 15.25 23.40 157 21.51 22.63 170 23.48 21.00
Commercial ........... 141 11.08 4.08 146 20.00 3.79 82 11.33 2.10
Unallocated .......... 330 25.94 -- -- -- -- 10 1.38 --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance
for loan losses. $1,272 100.00% 100.00% $ 730 100.00% 100.00% $ 724 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------------------------
1994 1993
----------------------------- ------------------------------
% OF PERCENT % OF PERCENT
ALLOWANCE OF LOANS ALLOWANCE OF LOANS
IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
----------------------------- ------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate .......... $ 535 69.57% 78.20% $ 688 70.28% 81.10%
Consumer ............. 157 20.42 20.90 156 15.93 18.80
Commercial ........... 52 6.76 0.90 3 0.31 0.10
Unallocated .......... 25 3.25 -- 132 13.48 --
------ ------ ------ ----- ------ ------
Total allowance
for loan losses. $ 769 100.00% 100.00% $ 979 100.00% 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
64
<PAGE> 108
Real Estate Owned. At September 30, 1997, the Bank had $319,000 of real
estate owned consisting of five one- to four-family properties. When the Bank
acquires property through foreclosure or deed in lieu of foreclosure, it is
initially recorded at the lesser of carrying value of the loan or fair value of
the property at the date of acquisition less costs to sell. Thereafter, if there
is a further deterioration in value, the Bank provides for a specific valuation
allowance and charges operations for the diminution in value. It is the policy
of the Bank to have obtained an appraisal or broker's price opinion on all real
estate subject to foreclosure proceedings prior to the time of foreclosure. It
is the Bank's policy to require appraisals on a periodic basis on foreclosed
properties and conducts inspections on foreclosed properties.
INVESTMENT ACTIVITIES
Federally-chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certificates of deposit of insured banks
and savings institutions, bankers' acceptances, repurchase agreements and
federal funds. Subject to various restrictions, federally-chartered savings
institutions may also invest their assets in commercial paper, investment-grade
corporate debt securities and mutual funds whose assets conform to the
investments that a federally-chartered savings institution is otherwise
authorized to make directly. Additionally, the Bank must maintain minimum levels
of investments that qualify as liquid assets under OTS regulations. See
"Regulation-- Federal Savings Institution Regulation-- Liquidity." Historically,
the Bank has maintained liquid assets above the minimum OTS requirements and at
a level considered to be adequate to meet its normal daily activities.
The investment policy of the Bank, as approved by the Board of Directors,
requires management to maintain adequate liquidity, generate a favorable return
on investments without incurring undue interest rate and credit risk and to
complement the Bank's lending activities. The Bank primarily utilizes
investments in securities for liquidity management and as a method of deploying
excess funding not utilized for loan originations or sales. Generally, the
Bank's investment policy is more restrictive than the OTS regulations allow and,
accordingly, the Bank has invested primarily in U.S. Government and agency
securities, which qualify as liquid assets under the OTS regulations, federal
funds and U.S. Government sponsored agency issued mortgage-backed securities. As
required by SFAS No. 115, the Bank has established an investment portfolio of
securities that are categorized as held-to-maturity, available-for-sale or held
for trading. The Bank generally invests in securities as a method of utilizing
funds not utilized for loan origination activity and as a method of maintaining
liquidity at levels deemed appropriate by management. The Bank does not
currently maintain a portfolio of securities categorized as held for trading. At
September 30, 1997, the available-for-sale securities portfolio totaled $44.8
million, or 12.1% of assets and the held-to-maturity portfolio totaled $38.9
million, or 10.5% of assets. As of September 30, 1997, $20 million, of the
Bank's investment securities held-to-maturity consisted of U.S. Government and
related obligations with a weighted average maturity of 85 months.
At September 30, 1997, the Bank had invested $39.9 million in FNMA, FHLMC
and GNMA mortgage-related securities, or 10.8% of total assets, of which 25%
were classified as held-to-maturity. Of the $39.9 million, $20.5 million were
adjustable-rate with maximum interest rate adjustments of 2% at any adjustment
or 6% over the life of the security. In addition, $29.0 million, or 34.7%, of
the Bank's securities, were debt obligations issued by federal agencies which
generally have stated maturities from 3 to 15 years but which also have call
features. Such callable securities allow the issuer, after a certain time
period, to repay the security prior to its stated maturity. Based on interest
rate ranges anticipated by the Bank, the Bank estimates that the substantial
majority of such securities would be called prior to their stated maturities.
The Bank is subject to additional interest rate risk and reinvestment risk
compared to its evaluation of that risk if changes in interest rates exceed
ranges anticipated by the Bank in estimating the anticipated life of such
callable investment securities. Investments in mortgage-related securities
involve a risk that actual prepayments will be greater than estimated
prepayments over the life of the security, which may require adjustments to the
amortization of any premium or accretion of any discount relating to such
instruments thereby changing the net yield on such securities. There is also
reinvestment risk associated with the cash flows from such securities or in the
event such securities are redeemed by the issuer. In addition, the market value
of such securities may be adversely affected by changes in interest rates. Of
the Bank's investment in mortgage-related securities at September 30, 1997, 25%
were being held-to-maturity.
65
<PAGE> 109
The following table sets forth certain information regarding the amortized
cost and fair value of the Bank's securities at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- -------- --------- -------- --------- --------
Investment securities: (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Debt securities held-to-maturity:
Obligations of U.S. government
agencies ................................ $ 19,997 $ 19,953 $ 25,995 $ 25,475 $ 25,655 $ 25,523
Other securities ......................... 8,963 9,105 4,105 4,109 700 700
-------- -------- -------- -------- -------- --------
Total ................................. $ 28,960 $ 29,058 $ 30,100 $ 29,584 $ 26,355 $ 26,223
======== ======== ======== ======== ======== ========
Debt securities available-for-sale:
Obligations of U.S. Treasury and
U.S. government agencies ............... 10,984 11,045 19,935 19,769 9,940 10,211
Other securities ......................... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total ................................. $ 10,984 $ 11,045 $ 19,935 $ 19,769 $ 9,940 $ 10,211
======== ======== ======== ======== ======== ========
Equity securities available-for-sale:
FHLB stock ............................... $ 2,054 $ 2,054 $ 1,958 $ 1,958 $ 1,785 $ 1,785
FHLMC stock .............................. 47 1,692 47 1,172 47 830
-------- -------- -------- -------- -------- --------
Total equity securities available-
for-sale ............................. 2,101 3,746 2,005 3,130 1,832 2,615
-------- -------- -------- -------- -------- --------
Total debt and equity securities ...... $ 42,045 $ 43,849 $ 52,040 $ 52,483 $ 38,127 $ 39,049
======== ======== ======== ======== ======== ========
Mortgage-related securities:
Mortgage-related securities
held-to-maturity:
FHLMC .................................... $ 5,772 $ 5,678 $ 6,833 $ 6,561 $ 18,667 $ 18,346
FNMA ..................................... 3,948 3,891 4,576 4,403 16,996 16,719
GNMA ..................................... -- -- -- -- 918 907
Collateralized mortgage obligations ...... 245 242 1,977 1,967 15,287 14,867
-------- -------- -------- -------- -------- --------
Total mortgage-related securities
held-to-maturity ..................... $ 9,965 $ 9,811 $ 13,386 $ 12,931 $ 51,868 $ 50,839
======== ======== ======== ======== ======== ========
Mortgage-related securities available-
for-sale:
FHLMC .................................... $ 5,690 $ 5,769 $ 11,548 $ 11,485 $ 494 $ 497
FNMA ..................................... 2,168 2,188 11,768 11,666 -- --
GNMA ..................................... 18,253 18,600 3,791 3,817 -- --
Collateralized mortgage obligations ...... 3,380 3,425 10,678 10,301 -- --
-------- -------- -------- -------- -------- --------
Total mortgage-related securities
available-for-sale ................... 29,491 29,982 37,785 37,259 494 497
-------- -------- -------- -------- -------- --------
Total mortgage-related securities ..... 39,456 39,793 51,171 50,190 52,362 51,336
-------- -------- -------- -------- -------- --------
Net unrealized (losses) gains on
available-for-sale securities ........ 1,283 -- 253 -- 617 --
-------- -------- -------- -------- -------- --------
Total securities ...................... $ 82,784 $ 83,642 $103,464 $102,673 $ 91,106 $ 90,385
======== ======== ======== ======== ======== ========
</TABLE>
66
<PAGE> 110
The following table sets forth the Bank's securities activities for the
periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
MORTGAGE-RELATED SECURITIES:
Mortgage-related securities, beginning of period(1).. $ 50,645 $ 52,365 $ 51,045
======== ======== ========
Purchases:
Mortgage-related securities - held-to-maturity.. $ -- $ -- $ 6,295
Mortgage-related securities - available-for-sale.. 16,805 8,231 491
Sales:
Mortgage-related securities - available-for-sale.. (19,069) -- --
Repayments and prepayments:
Mortgage-related securities .................... (9,385) (9,330) (5,286)
Increase (decrease) in net premium ................ (110) (93) (182)
Increase (decrease) in unrealized gain ............ 1,061 (528) 2
Net increase in mortgage-related securities . (10,698) (1,720) 1,320
-------- -------- --------
Mortgage-related securities, end of period ........ $ 39,947 $ 50,645 $ 52,365
======== ======== ========
INVESTMENT SECURITIES:
Investment securities, beginning of period(2) ..... $ 51,181 $ 37,796 $ 28,065
======== ======== ========
Purchases:
Investment securities - held-to-maturity ....... $ 6,880 $ 25,115 $ 12,570
Investment securities - available-for-sale ..... 6,000 12,000 10,000
Sales:
Investment securities - held-to-maturity ....... -- -- --
Investment securities - available-for-sale ..... (8,000) -- (3,000)
Calls:
Investment securities - held-to-maturity ....... (8,000) (11,645) (4,000)
Investment securities - available-for-sale ..... (7,000) (4,000) --
Maturities:
Investment securities - held-to-maturity ....... -- (5,200) (6,775)
Investment securities - available-for-sale ..... -- (2,500) --
Increase (decrease) in net premium ................ 29 (29) (82)
Increase (decrease) in unrealized gain ............ 640 (356) 1,018
-------- -------- --------
Net increase in investment securities ....... (9,451) 13,385 9,731
-------- -------- --------
Investment securities, end of period .............. $ 41,730 $ 51,181 $ 37,796
======== ======== ========
</TABLE>
- -------------------
(1) Includes mortgage-related securities available-for-sale.
(2) Includes investment securities available-for-sale.
67
<PAGE> 111
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Bank's
investment securities and mortgage-related securities as of September 30, 1997.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
---------------------------------------------------------------------------
MORE THAN ONE YEAR MORE THAN 5 YEARS
ONE YEAR OR LESS TO FIVE YEARS TO 10 YEARS
--------------------- -------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Held-to-maturity securities:
Investment securities:
Municipal securities(1) ............... $ -- --% $ -- --% $ 2,417 7.98%
Obligations of U.S. Government agencies -- -- 5,000 6.00 12,997 6.94
Mortgage-related securities ............. -- -- 244 4.96 -- --
------- ---- ------- ---- ------- -------
Total securities at amortized cost .. $ -- --% $ 5,244 5.95% $15,414 7.10%
======= ==== ======= ==== ======= =======
Available-for-sale securities:
Investment securities: .................. $ 991 7.38 $ -- -- $ -- --
Obligations of the U.S. Treasury
Obligations of U.S. Government agencies 1,000 7.75 5,993 7.55 3,000 7.29
Equity securities ..................... 2,101 7.08 -- -- -- --
Mortgage-related securities ............. 2,628 5.67 1,384 6.90 -- --
------- ---- ------- ---- ------- -------
Total securities at fair value ...... $ 6,720 6.67% $ 7,377 7.43% $ 3,000 7.29%
======= ==== ======= ==== ======= =======
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1997
------------------------------------------
MORE THAN 10 YEARS TOTAL
-------------------- ------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
-------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Held-to-maturity securities:
Investment securities:
Municipal securities(1) ................ $ 6,546 8.45% $ 8,963 8.32%
Obligations of U.S. Government agencies. 2,000 7.51 19,997 6.74
Mortgage-related securities .............. 9,721 6.13 9,965 6.10
------- ------- ------- ----
Total securities at amortized cost ... $18,267 7.09% $38,925 6.94%
======= ======= ======= ====
Available-for-sale securities:
Investment securities:
Obligations of the U.S. Treasury ....... $ -- -- $ 991 7.38%
Obligations of U.S. Government agencies. -- -- 9,993 7.49
Equity securities ...................... -- -- 2,101 7.08
Mortgage-related securities .............. 25,479 6.64 29,491 6.57
------- ------- ------- ----
Total securities at fair value ....... $25,479 6.64% $42,576 6.83%
======= ======= ======= ====
</TABLE>
--------------------
(1) Weighted Average Yield data for municipal securities is presented on a tax
equivalent basis based on an assumed tax rate of 40%.
68
<PAGE> 112
SOURCES OF FUNDS
General. Deposits, loan repayments and prepayments, proceeds from sales of
loans, cash flows generated from operations and FHLB advances are the primary
sources of the Bank's funds for use in lending, investing and for other general
purposes.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposits consist of checking, money market,
savings, NOW, certificate accounts and Individual Retirement Accounts. More than
61.4% of the funds deposited in the Bank are in certificate of deposit accounts.
At September 30, 1997, core deposits (savings, NOW and money market accounts)
represented 35.9% of total deposits. The flow of deposits is influenced
significantly by general economic conditions, changes in money market rates,
prevailing interest rates and competition. The Bank's deposits are obtained
predominantly from the areas in which its branch offices are located. The Bank
has historically relied primarily on customer service and long-standing
relationships with customers to attract and retain these deposits; however,
market interest rates and rates offered by competing financial institutions
significantly affect the Bank's ability to attract and retain deposits. The Bank
uses traditional means of advertising its deposit products, including radio and
print media and generally does not solicit deposits from outside its market
area. The Bank does not actively solicit certificate accounts in excess of
$100,000 or use brokers to obtain deposits. At September 30, 1997, the weighted
average remaining maturity of the Bank's certificate of deposit accounts was
10.8 months. Further increases in short-term certificate of deposit accounts,
which tend to be more sensitive to movements in market interest rates than core
deposits, may result in the Bank's deposit base being less stable than if it had
a large amount of core deposits which, in turn, may result in further increases
in the Bank's cost of deposits.
The following table presents the deposit activity of the Bank for the
periods indicated:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
SEPTEMBER 30,
--------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Increase (decrease) before interest
credited ............................... $(2,625) $16,664 $13,721
Interest credited ...................... 9,942 10,132 9,128
------- ------- -------
Net increase ........................... $ 7,317 $26,796 $22,849
======= ======= =======
</TABLE>
At September 30, 1997, the Bank had $30.9 million in certificate accounts
in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
MATURITY PERIOD AMOUNT
- ------------------------ --------------
(IN THOUSANDS)
<S> <C>
Three months or less ................. $22,309
Over 3 through 6 months .............. 3,519
Over 6 through 12 months.............. 2,032
Over 12 months ....................... 3,032
-------
Total ........................ $30,892
=======
</TABLE>
69
<PAGE> 113
The following table sets forth the distribution of the Bank's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented and such information at September
30, 1997. Averages for the periods presented utilize month-end balances.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------
AT SEPTEMBER 30, 1997 1997 1996
-------------------------------- ------------------------------ ------------------------------
PERCENT PERCENT
PERCENT OF TOTAL AVERAGE OF TOTAL
OF TOTAL AVERAGE AVERAGE RATE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE PAID BALANCE DEPOSITS PAID BALANCE DEPOSITS RATE PAID
------- -------- --------- ------- -------- ---- ------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Savings account ............. $ 71,779 22.9% 2.43% $ 72,292 23.4% 2.45% $ 73,654 25.2% 2.54%
Money market accounts ....... 13,821 4.4 2.86 14,238 4.6 2.81 14,746 5.0 2.78
NOW accounts ................ 27,302 8.7 1.50 27,870 9.0 1.49 24,258 8.3 1.49
Certificates of deposit ..... 192,736 61.3 5.50 187,270 60.5 5.42 174,617 59.6 5.49
Noninterest-bearing deposits:
Demand deposits ........... 8,485 2.7 -- 7,615 2.5 -- 5,579 1.9 --
-------- ----- ---- -------- ----- ---- -------- ----- ----
Total average deposits .. $314,123 100.0% 4.18% $309,285 100.0% 4.11% $292,854 100.0% 4.16%
======== ===== ==== ======== ===== ==== ======== ===== ====
</TABLE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
SEPTEMBER 30,
-----------------------------
1995
---------------------------
PERCENT
OF TOTAL AVERAGE
AVERAGE AVERAGE RATE
BALANCE DEPOSITS PAID
------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Savings account ............. $ 78,478 29.0% 2.65%
Money market accounts ....... 17,392 6.4 2.82
NOW accounts ................ 23,727 8.8 2.00
Certificates of deposit ..... 148,163 54.8 5.22
Noninterest-bearing deposits:
Demand deposits ........... 2,779 1.0 --
-------- ----- ----
Total average deposits .. $270,539 100.0% 3.96%
======== ===== ====
</TABLE>
- --------------------
(1) Based on remaining maturity of certificates.
70
<PAGE> 114
The following table presents by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at September 30, 1997.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM SEPTEMBER 30, 1997
-----------------------------------------------------------
LESS THAN ONE TO TWO TO OVER
ONE YEAR TWO YEARS THREE YEARS THREE YEARS TOTAL
--------- --------- ----------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CERTIFICATE ACCOUNTS:
4.01 to 6.00% ................... $123,629 $35,630 $11,614 $6,575 $177,448
6.01 to 8.00% ................... 3,746 819 9,949 -- 14,514
8.01 to 10.00% .................. -- 774 -- -- 774
-------- ------- ------- ------ --------
Total certificate accounts.... $127,375 $37,223 $21,563 $6,575 $192,736
======== ======= ======= ====== ========
</TABLE>
Borrowings. The Bank utilizes advances from the FHLB of Pittsburgh as an
alternative to retail deposits to fund its operations as part of its operating
strategy. These FHLB advances are collateralized primarily by certain of the
Bank's mortgage loans and mortgage-related securities and secondarily by the
Bank's investment in capital stock of the FHLB of Pittsburgh. FHLB advances are
made pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. The maximum amount that the FHLB of
Pittsburgh will advance to member institutions, including the Bank, fluctuates
from time to time in accordance with the policies of the FHLB of Pittsburgh. See
"Regulation-- Federal Home Loan Bank System." At September 30, 1997, the Bank
had $23.5 million in outstanding FHLB advances, compared to $25.5 million at
September 30, 1996. Other borrowings consist of overnight retail repurchase
agreements and for the periods presented were immaterial.
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE FISCAL YEAR ENDED
SEPTEMBER 30,
-------------------------------
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances and other borrowings:
Average balance outstanding ........ $27,372 $14,971 $ 2,243
Maximum amount outstanding at any
month-end during the period ...... 42,191 25,000 11,050
Balance outstanding at end of period 23,608 25,534 11,050
Weighted average interest rate
during the period ................ 5.45% 5.42% 5.80%
Weighted average interest rate at
end of period .................... 5.73% 5.90% 7.12%
</TABLE>
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<PAGE> 115
SUBSIDIARY ACTIVITIES
The Bank owns 100% of FIDACO, Inc. which was incorporated in Pennsylvania
in August 1978. Currently, FIDACO, Inc.'s sole activity is to act as a conduit
for the Bank's $100,000 investment in the Hazleton Community Development
Corporation, of which FIDACO is a 25% owner. Its total assets as of September
30, 1997 were $131,000. The Bank has no other active subsidiaries.
PROPERTIES
The Bank currently conducts its business through 10 full service banking
offices located in Luzerne, Carbon, Columbia and Schuylkill counties in
Northeast Pennsylvania and one loan origination office in Monroe County in
Northeast Pennsylvania. The following table sets forth the Bank's offices as of
September 30, 1997.
<TABLE>
<CAPTION>
NET BOOK VALUE
OF PROPERTY OR
LEASEHOLD TOTAL
ORIGINAL YEAR IMPROVEMENTS DEPOSITS AT
LEASED OR LEASED OR DATE OF LEASE AT SEPTEMBER 30, SEPTEMBER 30,
LOCATION OWNED ACQUIRED EXPIRATION 1997 1997
- --------------------------- --------- ------------- ------------- ---------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ADMINISTRATIVE/HOME OFFICE:
12 E. Broad Street
Hazleton, PA 18201 Owned 1947 -- $3,243 $88,892
2 E. Broad Street
Hazleton, PA 18201 Leased 1992 1998 -- --
BRANCH OFFICES:
Bloomsburg Office:
17 E. Main Street
Bloomsburg, PA 17815 Owned 1963 -- 489 22,904
Shenandoah Office:
5 -7 N. Main Street
Shenandoah, PA 17976 Owned 1968 -- 432 50,612
Pottsville Office:
111 E. Norwegian Street
Pottsville, PA 17901 Owned 1968 -- 653 30,283
Lehighton Office:
111 N. First Street
Lehighton, PA 18235 Owned 1977 -- 144 26,408
Laurel Mall Office:
240 Laurel Mall
Hazleton, PA 18201 Leased 1994 2003 219 55,638
Schuylkill Mall Office:
611 Schuylkill Mall
Frackville, PA 17976 Leased 1978 1998 39 21,674
Columbia Mall Office:
225 Columbia Mall Drive
Bloomsburg, PA 17815 Leased 1988 1998 204 10,001
Gould's Office:
Route 93
Sugarloaf, PA 18249 Leased 1995 2000 31 7,712
</TABLE>
72
<PAGE> 116
<TABLE>
<CAPTION>
NET BOOK VALUE
OF PROPERTY OR
LEASEHOLD TOTAL
ORIGINAL YEAR IMPROVEMENTS DEPOSITS AT
LEASED OR LEASED OR DATE OF LEASE AT SEPTEMBER 30, SEPTEMBER 30,
LOCATION OWNED ACQUIRED EXPIRATION 1997 1997
- ---------------------------------- ------------- ------------- ------------- ---------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mountaintop Office:(1) Owned 1997 -- 143 0
360 S. Mountain Boulevard (Under
Mountaintop, PA 18707 Construction)
LOAN PRODUCT ORIGINATION OFFICES:
Pocono L.P.O. Office Leased 1997 1998
P.O. Box 1092
Pocono Pines. PA 18350
Mountaintop L.P.O. Office:(1) Leased N/A [Month to
129 N. Mountain Boulevard Month]
Mountaintop, PA 18707
</TABLE>
- ---------------
(1) In January 1998, the Mountaintop branch office was opened and the
Mountaintop loan production office was closed (its lease terminated)
and combined into the new branch office.
LEGAL PROCEEDINGS
The Bank is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operations.
PERSONNEL
As of September 30, 1997, the Bank had 121 authorized full-time
employee positions and 19 authorized part-time employee positions. The employees
are not represented by a collective bargaining unit and the Bank considers its
relationship with its employees to be good. See "Management of the
Bank--Benefits" for a description of certain compensation and benefit programs
offered to the Bank's employees.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Company and the Bank will report their income on a
September 30 fiscal year basis using the accrual method of accounting and will
be subject to federal income taxation in the same manner as other corporations
with some exceptions, including particularly the Bank's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Company. The Bank has not been audited by the IRS
in the past five years.
Bad Debt Reserve. Historically, savings institutions such as the Bank
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrifts") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have been
deducted in arriving at their taxable income. The Bank's deductions with respect
to "qualifying real property loans," which are generally loans secured by
certain interest in real property, were computed using an amount based on the
Bank's actual loss experience, or a percentage equal to 8% of the Bank's taxable
income, computed
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<PAGE> 117
with certain modifications and reduced by the amount of any permitted addition
to the non-qualifying reserve. Due to the Bank's loss experience, the Bank
generally recognized a bad debt deduction equal to 8% of taxable income.
In August 1996, the provisions repealing the above thrift bad debt
rules were passed by Congress as part of "The Small Business Job Protection Act
of 1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988. The Bank has previously
recorded a deferred tax liability equal to the bad debt recapture and as such,
the new rules will have no effect on net income or federal income tax expense.
For taxable years beginning after December 31, 1995, the Bank's bad debt
deduction will be equal to net charge-offs. The new rules allow an institution
to suspend the bad debt reserve recapture for the 1996 and 1997 tax years if the
institution's lending activity for those years is equal to or greater than the
institution's average mortgage lending activity for the six taxable years
preceding 1996. For this purpose, only home purchase and home improvement loans
are included and the institution can elect to have the tax years with the
highest and lowest lending activity removed from the average calculation. If an
institution is permitted to postpone the reserve recapture, it must begin its
six year recapture no later than the 1998 tax year. The unrecaptured base year
reserves will not be subject to recapture as long as the institution continues
to carry on the business of banking. In addition, the balance of the pre-1988
bad debt reserves continue to be subject to a provision of present law referred
to below that require recapture in the case of certain excess distributions to
shareholders.
Distributions. To the extent that the Bank makes "non-dividend
distributions" to the Company that are considered as made (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for such
losses exceeds the amount that would have been allowed under the experience
method, or (ii) from the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the Bank's taxable income. Non-dividend distributions include distributions
in excess of the Bank's current and accumulated earnings and profits,
distributions in redemption of stock, and distributions in partial or complete
liquidation. However, dividends paid out of the Bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not be
considered to result in a distribution from the Bank's bad debt reserve. Thus,
any dividends to the Company that would reduce amounts appropriated to the
Bank's bad debt reserve and deducted for federal income tax purposes would
create a tax liability for the Bank. The amount of additional taxable income
created from an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. Thus,
if, after the Conversion, the Bank makes a "non-dividend distribution," then
approximately one and one-half times the amount so used would be includable in
gross income for federal income tax purposes, assuming a 34% corporate income
tax rate (exclusive of state and local taxes). See "Regulation" and "Dividend
Policy" for limits on the payment of dividends of the Bank. The Bank does not
intend to pay dividends that would result in a recapture of any portion of its
bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the
bad debt reserve deduction claimed by the Bank over the deduction that would
have been allowable under the experience method is treated as a preference item
for purposes of computing the AMTI. Only 90% of AMTI can be offset by net
operating loss carryovers of which the Bank currently has none. AMTI is
increased by an amount equal to 75% of the amount by which the Bank's adjusted
current earnings exceeds its AMTI (determined without regard to this preference
and prior to reduction for net operating losses). In addition, for taxable years
beginning after June 30, 1986 and before January 1, 1996, an environmental tax
of 0.12% of the excess of AMTI (with certain modifications)
74
<PAGE> 118
over $2.0 million is imposed on corporations, including the Bank, whether or not
an Alternative Minimum Tax ("AMT") is paid. The Bank does not expect to be
subject to the AMT.
Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company or the Bank own more than 20% of the stock of a
corporation distributing a dividend then 80% of any dividends received may be
deducted.
STATE AND LOCAL TAXATION
The Company and its non-thrift Pennsylvania subsidiaries are subject to
the Pennsylvania Corporate Net Income Tax and Capital Stock and Franchise Tax.
The Corporate Net Income Tax rate for 1998 is 9.99% and is imposed on the
Company's and its non-thrift subsidiaries' unconsolidated taxable income for
federal purposes with certain adjustments. In general, the Capital Stock Tax is
a property tax imposed at the rate of 1.275% of a corporation's capital stock
value, which is determined in accordance with a fixed formula. The Company is
also required to file an annual report with and pay an annual Franchise tax to
the State of Delaware.
The Bank is taxed under the Pennsylvania Mutual Thrift Institutions Tax
Act (the "MTIT"), as amended, to include thrift institutions having capital
stock. Pursuant to the MTIT, the Company's tax rate is 11.5%. The MTIT exempts
the Company from all other taxes imposed by the Commonwealth of Pennsylvania for
state income tax purposes and from all local taxation imposed by political
subdivisions, except taxes on real estate and real estate transfers. The MTIT is
a tax upon net earnings, determined in accordance with generally accepted
accounting principals ("GAAP") with certain adjustments. The MTIT, in computing
GAAP income, allows for the deduction of interest earned on Pennsylvania and
federal securities, while disallowing a percentage of a thrift's interest
expense deduction in the proportion of interest income on those securities to
the overall interest income of the Company. Net operating losses, if any,
thereafter can be carried forward three years for MTIT purposes. The Bank has
not been audited by the Commonwealth of Pennsylvania in the last five years.
REGULATION
GENERAL
The Bank is subject to extensive regulation, examination and
supervision by the OTS, as its chartering agency, and the FDIC, as the deposit
insurer. The Bank is a member of the FHLB System. The Bank's deposit accounts
are insured up to applicable limits by the SAIF managed by the FDIC. The Bank
must file reports with the OTS and the FDIC concerning its activities and
financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other financial institutions. There are periodic examinations by the OTS and the
FDIC to test the Bank's compliance with various regulatory requirements. 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 insurance fund 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 such policies, whether by
the OTS, the FDIC or the Congress, could have a material adverse impact on the
Company, the Bank and their operations. Assuming
75
<PAGE> 119
that the holding company form of organization is utilized, the Company, as a
savings and loan holding company, will also be required to file certain reports
with, and otherwise comply with the rules and regulations of the OTS and of the
Securities and Exchange Commission (the "SEC") under the federal securities
laws.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the OTS, the FDIC or the Congress, could have a material
impact on the Company, the Bank, their operations or the Bank's Conversion.
Congress is expected to consider in 1998 the elimination of the federal thrift
charter and abolishment of the OTS. The results of such consideration, including
possible enactment of legislation is uncertain. Therefore, the Bank is unable to
determine the extent to which the results of consideration or possible
legislation, if enacted, would affect its business. See "Risk Factors
- --Financial Institution Regulation and Possible Legislation."
Certain of the regulatory requirements applicable to the Bank and to
the Company are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to savings associations set
forth in this Prospectus do not purport to be complete descriptions of such
statutes and regulations and their effects on the Bank and the Company and is
qualified in its entirety by reference to such statutes and regulations.
FEDERAL SAVINGS INSTITUTION REGULATION
Business Activities. The activities of federal savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDI Act") and the regulations
issued by the agencies to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which federal associations
may engage. In particular, many types of lending authority for federal
associations, e.g., commercial, non-residential real property loans and consumer
loans, are limited to a specified percentage of the institution's capital or
assets.
Loans-to-One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans-to-one borrower.
Generally, this limit is 15% of the Bank's unimpaired capital and surplus, plus
an additional 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. At September 30, 1997, the Bank's general limit on
loans-to-one borrower was $4.5 million. At September 30, 1997, the Bank's
largest aggregate amount of loans-to-one borrower consisted of a $1.5 million
commercial loan to a local municipality.
QTL Test. The HOLA requires savings institutions to meet a QTL test.
Under the QTL test, a savings association is required to maintain at least 65%
of its "portfolio assets" (total assets less: (i) specified liquid assets up to
20% of total assets; (ii) intangibles, including goodwill; and (iii) the value
of property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed and related securities) in at least 9 months out of each
12-month period. A savings association that fails the QTL test must either
convert to a bank charter or operate under certain restrictions. As of September
30, 1997, the Bank maintained 90.05% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test. Recent legislation has expanded
the extent to which education loans, credit card loans and small business loans
may be considered as "qualified thrift investments."
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<PAGE> 120
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in regulatory capital requirements before and after a proposed
capital distribution ("Tier 1 Bank") and has not been advised by the OTS that it
is in need of more than normal supervision, could, after prior notice to, but
without the approval of the OTS, make capital distributions during a calendar
year equal to the greater of: (i) 100% of its net earnings 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 earnings for the previous
four quarters. Any additional capital distributions would require prior OTS
approval. In the event the Bank's capital fell below its capital requirements or
the OTS notified it that it was in need of more than normal supervision, the
Bank's ability to make capital distributions could be restricted. 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.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable deposit accounts plus
short-term borrowings. Monetary penalties may be imposed for failure to meet
these liquidity requirements. The Bank's average liquidity ratio for the three
months ended September 30, 1997 was 8.8%, which exceeded the applicable
requirements. The Bank has never been subject to monetary penalties for failure
to meet its liquidity requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Assessments. Savings institutions are required by regulation to pay
assessments to the OTS to fund the agency's operations. The general assessment,
paid on a semi-annual basis, is based upon the savings institution's total
assets, including consolidated subsidiaries, as reported in the Bank's latest
quarterly Thrift Financial Report. The assessments paid by the Bank for the year
ended September 30, 1997 totaled $90,714.
Branching. OTS regulations permit federally-chartered savings
associations to branch nationwide under certain conditions. Generally, federal
savings associations may establish interstate networks and geographically
diversify their loan portfolios and lines of business. The OTS authority
preempts any state law purporting to regulate branching by federal savings
associations. For a discussion of the impact of proposed legislation, see "Risk
Factors --Financial Institution Regulation and Possible Legislation."
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries that the Company may establish) is
limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A
restricts the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B generally requires that certain transactions with
affiliates, including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies.
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<PAGE> 121
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including stockholders, and any
attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive or
cease and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1 million per
day in especially egregious cases. Under the FDI Act, the FDIC has the authority
to recommend to the Director of the OTS that enforcement action be taken with
respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances. Federal and state law also establishes criminal penalties for
certain violations.
Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted final regulations and Interagency
Guidelines Establishing Standards for Safety and Soundness ("Guidelines") to
implement these safety and soundness standards. The Guidelines set forth the
safety and soundness standards that the federal banking agencies use to identify
and address problems at insured depository institutions before capital becomes
impaired. The Guidelines address internal controls and information systems;
internal audit system; credit underwriting; loan documentation; interest rate
risk exposure; asset growth; asset quality; earnings; and compensation, fees and
benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3% leverage (core capital) ratio and an 8% risk based capital standard. Core
capital is defined as common stockholder's equity (including retained earnings),
certain non-cumulative perpetual preferred stock and related surplus, minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain mortgage servicing rights ("MSRs") and credit card relationships.
The OTS regulations require that, in meeting the leverage ratio, tangible and
risk-based capital standards institutions generally must deduct investments in
and loans to subsidiaries engaged in activities not permissible for a national
bank. In addition, the OTS prompt corrective action regulation provides that a
savings institution that has a leverage capital ratio of less than 4% (3% for
institutions receiving the highest CAMEL examination rating) will be deemed to
be "undercapitalized" and may be subject to certain restrictions. See "-- Prompt
Corrective Regulatory Action."
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8%. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet assets,
are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed earlier under
the 3% leverage standard. The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate preferred
stock and, within specified limits, the allowance for loan and lease losses.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
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<PAGE> 122
The OTS has adopted an interest rate risk component into its regulatory
capital requirements; however, the OTS has postponed indefinitely any adjustment
to capital which would be required by such interest rate risk component. The OTS
interest rate risk rule as written would also adjust the risk-weighting for
certain mortgage derivative securities. Under the rule as written, savings
associations with "above normal" interest rate risk exposure would be subject to
a deduction from total capital for purposes of calculating their risk-based
capital requirements. A savings association's interest rate risk would be
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the Bank's assets, as calculated in
accordance with guidelines set forth by the OTS. A savings association whose
measured interest rate risk exposure exceeds 2% would be required to deduct an
interest rate component in calculating its total risk-based capital. The
interest rate risk component would be an amount equal to one-half of the
difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the Bank's assets. That dollar
amount would be deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule as written,
there is a two quarter lag between the reporting date of an institution's
financial data and the effective date for the new capital requirement based on
that data. A savings association with assets of less than $300 million and
risk-based capital ratios in excess of 12% would be not subject to the interest
rate risk component, unless the OTS determined otherwise. The rule also provides
that the Director of the OTS may waive or defer an association's interest rate
risk component on a case-by-case basis. No prediction can be made when such
interest rate risk component requirement will be implemented, or if it ever will
be implemented.
At September 30, 1997, the Bank met each of its capital requirements,
in each case on a fully phased-in basis. See "Regulatory Capital Compliance" for
a table which sets forth in terms of dollars and percentages the OTS tangible,
leverage and risk-based capital requirements, the Bank's historical amounts and
percentages at September 30, 1997, and pro forma amounts and percentages based
upon the issuance of the shares within the Estimated Price Range and assuming
that a portion of the net proceeds are retained by the Company.
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS prompt corrective action regulations, the OTS is required
to take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has a total risk-based capital of less
than 8.0% or a leverage ratio or a Tier 1 capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has a total
risk-based capital less than 6.0%, a Tier 1 risk-based capital ratio of less
than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the Banking regulator is
required to appoint a receiver or conservator for an institution that is
critically undercapitalized. The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
association receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions may become immediately applicable to the
institution depending upon its category, including, but not limited to,
increased monitoring by regulators, restrictions on growth, and capital
distributions and limitations on expansion. The OTS could also take any one of a
number of discretionary supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and directors.
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<PAGE> 123
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. [Assessment rates for SAIF member institutions currently range from 23
basis points to 31 basis points. However, the FDIC has recently proposed to
lower assessment rates for SAIF member institutions to 0 to 27 basis points
effective January 1, 1997.] The FDIC is authorized to raise the assessment rates
in certain circumstances. The FDIC has exercised this authority several times in
the past and may raise insurance premiums in the future. If such action is taken
by the FDIC, it could have an adverse effect on the earnings of the Bank. The
Bank's assessment rate for the years ended September 30, 1997, 1996 and 1995 was
.064%, .23% and .23% of assessable deposits.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital stock in the FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. The Bank was in compliance with this
requirement with an investment in FHLB stock at September 30, 1997 of $2.1
million. FHLB advances must be secured by specified types of collateral and all
long-term advances may only be obtained for the purpose of providing funds for
residential housing finance. At September 30, 1997, the Bank had $23.5 million
in FHLB advances.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended September 30, 1997, 1996 and
1995, dividends from the FHLB to the Bank amounted to approximately $127,000,
$121,000 and $114,000, respectively. If dividends were reduced, the Bank's net
interest income would likely also be reduced. Further, there can be no assurance
that the impact of recent or future legislation on the FHLBs will not also cause
a decrease in the value of the FHLB stock held by the Bank.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts. The
Federal Reserve Board regulations generally require that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$47.8 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement is 3%; and for accounts greater than $47.8
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<PAGE> 124
million, the reserve requirement is $1.4 million plus 10% (subject to adjustment
by the Federal Reserve Board between 8% and 14%) against that portion of total
transaction accounts in excess of $47.8 million. The first $4.7 million of
otherwise reservable balances (subject to adjustment by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank is in compliance
with the foregoing requirements. Because required reserves must be maintained in
the form of either vault cash, a non-interest-bearing account at a Federal
Reserve Bank or a pass-through account as defined by the Federal Reserve Board,
the effect of this reserve requirement is to reduce the Bank's interest-earning
assets. FHLB System members are also authorized to borrow from the Federal
Reserve "discount window," but Federal Reserve Board regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal Reserve
Bank.
HOLDING COMPANY REGULATION
The Company, if utilized, will be a non-diversified unitary savings and
loan holding company within the meaning of the HOLA. As such, the Company will
be required to register with the OTS and will be subject to OTS regulations,
examinations, supervision and reporting requirements. In addition, the OTS has
enforcement authority over the Company and its non-savings institution
subsidiaries. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings institution. The Bank must notify the OTS 30 days before declaring any
dividend to the Company.
As a unitary savings and loan holding company, the Company generally
will not be restricted under existing laws as to the types of business
activities in which it may engage, provided that the Bank continues to be a QTL.
See "-- Federal Savings Institution Regulation-- QTL Test" for a discussion of
the QTL requirements. Upon any non-supervisory acquisition by the Company of
another savings association, the Company would become a multiple savings and
loan holding company (if the acquired institution is held as a separate
subsidiary) and would be subject to extensive limitations on the types of
business activities in which it could engage. The HOLA limits the activities of
a multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act, as amended (the "BHC
Act"), subject to the prior approval of the OTS, and to other activities
authorized by OTS regulation. Previously proposed legislation would have treated
all savings and loan holding companies as bank holding companies and limit the
activities of such companies to those permissible for bank holding companies.
See "Risk Factors -- Financial Institution Regulation and Possible Legislation."
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution, or holding company thereof,
without prior written approval of the OTS; from acquiring or retaining, with
certain exceptions, more than 5% of a non-subsidiary holding company or savings
association. The HOLA also prohibits a savings and loan holding company from
acquiring more than 5% of a company engaged in activities other than those
authorized for savings and loan holding companies by the HOLA; or acquiring or
retaining control of a depository institution that is not insured by the FDIC.
In evaluating applications by holding companies to acquire savings institutions,
the OTS must consider the financial and managerial resources and future
prospects of the company and institution involved, the effect of the acquisition
on the risk to the insurance funds, the convenience and needs of the community
and competitive factors.
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The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, except: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition of
a savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act for the registration of the Common Stock to be issued pursuant to
the Conversion. Upon completion of the Conversion, the Company's Common Stock
will be registered with the SEC under the Exchange Act. The Company will then be
subject to the information, proxy solicitation, insider trading restrictions and
other requirements under the Exchange Act.
The registration under the Securities Act of shares of the Common Stock
to be issued in the Conversion does not cover the resale of such shares. Shares
of the Common Stock purchased by persons who are not affiliates of the Company
may be resold without registration. Shares purchased by an affiliate of the
Company will be subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information requirements
of Rule 144 under the Securities Act, each affiliate of the Company who complies
with the other conditions of Rule 144 (including those that require the
affiliate's sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of the Company or (ii) the average weekly volume of trading in such
shares during the preceding four calendar weeks. Provision may be made in the
future by the Company to permit affiliates to have their shares registered for
sale under the Securities Act under certain circumstances.
MANAGEMENT OF THE COMPANY
The Board of Directors' of the Company is divided into three classes,
each of which contains approximately one-third of the Board. The directors shall
be elected by the stockholders of the Company for staggered three year terms, or
until their successors are elected and qualified. One class of directors,
consisting of Mrs. Barbara M. Ecker and Messrs. R. Peter Haentjens, Jr. and
William J. Spear, has a term of office expiring at the first annual meeting of
stockholders, a second class, consisting of Messrs. Paul L. Conard, John P.
Lavelle and Michael J. Leib, has a term of office expiring at the second annual
meeting of stockholders, and a third class, consisting of Mrs. E. Lee Beard and
Messrs. William R. Davidson and Thomas L. Kennedy, has a term of office expiring
at the third annual meeting of stockholders. Information concerning the
principal occupations, employment and other information concerning the directors
and officers of the Company during the past five years is set forth under
"Management of the Bank -- Biographical Information."
The Company has established an Audit Committee of the Board of
Directors, consisting of the following members: Barbara M. Ecker (Chair), Paul
L. Conard, John P. Lavelle, Michael J. Leib and William J. Spear. The Company
has also established a Personnel and Compensation Committee of the Board of
Directors, consisting of the following members: John P. Lavelle (Chair), E. Lee
Beard, William R. Davidson, Thomas L. Kennedy and Michael J. Leib.
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The following individuals are the executive officers of the Company and
hold the offices set forth below opposite their names.
NAME POSITION(S) HELD WITH COMPANY
---- -----------------------------
Thomas L. Kennedy Chairman of the Board
E. Lee Beard Director, President and Chief Executive Officer
Patrick J. Owens, Jr. Chief Financial Officer, Treasurer and Secretary
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal at the discretion of the Board of Directors.
DIRECTOR COMPENSATION
Since the formation of the Company, none of the executive officers,
directors or other personnel has received remuneration from the Company.
Directors of the Company will receive an annual retainer of $4,000 but will not
receive additional fees for meetings of the Board of Directors of the Company.
For information regarding fees paid to the Bank's Board of Directors see
"Management of the Bank - Director Compensation."
MANAGEMENT OF THE BANK
DIRECTORS
The following table sets forth certain information regarding the Board
of Directors of the Bank.
<TABLE>
<CAPTION>
POSITION(S) HELD WITH THE DIRECTOR TERM
NAME AGE(1) BANK SINCE EXPIRES
- ------------------------- ------ ------------------------------- -------- -------
<S> <C> <C> <C> <C>
Thomas L. Kennedy 53 Chairman of the Board and 1985 2001
General Counsel
E. Lee Beard 46 Director, President and Chief 1993 2001
Executive Officer
Paul L. Conard 64 Director 1989 2000
William R. Davidson 61 Director 1988 2001
Barbara M. Ecker 55 Director 1987 1999
R. Peter Haentjens, Jr. 52 Director 1981 1999
John P. Lavelle 66 Director 1972 2000
Michael J. Leib 49 Director 1989 2000
William J. Spear 61 Director 1981 1999
</TABLE>
- ----------------
(1) As of September 30, 1997
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<PAGE> 127
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth certain information regarding the
executive officers of the Bank who are not also directors.
NAME AGE (1) POSITION(S) HELD WITH BANK
- ------------------------- ------- --------------------------------------
Patrick J. Owens, Jr. 54 Senior Vice President, Chief
Financial Officer
Joseph K. Osiecki 59 Senior Vice President, Loan Division
Gary M. Gatski 43 Senior Vice President, Retail Division
Bernard M. Miskin 46 Senior Vice President, Operations
Division/Compliance
- ---------------
(1) As of September 30, 1997
Each of the executive officers of the Bank will retain his/her office
in the converted Bank until their re-election at the annual meeting of the Board
of Directors of the Bank, held immediately after the first annual meeting of
stockholders subsequent to the Conversion, and until their successors are
elected and qualified or until they are removed or replaced. Officers are
subject to re-election by the Board of Directors annually.
BIOGRAPHICAL INFORMATION
DIRECTORS
Thomas L. Kennedy. Mr. Kennedy has been a practicing attorney for the past 28
years. He is a shareholder in the law firm of Kennedy and Lucadamo, P.C. On
November 18, 1997, Mr. Kennedy became the General Counsel of the Bank, although
he also remains a shareholder in his law firm.
E. Lee Beard. Mrs. Beard has served as President and Chief Executive Officer
since January 1993. Prior to 1993, Mrs. Beard spent 15 years in the thrift
industry in the Washington, D.C. area. She served as an Executive Vice President
of Citizens Savings Bank in Silver Spring, Maryland, Senior Vice
President/Treasurer for Perpetual Savings Bank and is a Certified Public
Accountant.
Paul L. Conard. Mr. Conard is a retired university Administrator from Bloomsburg
University, Bloomsburg, Pennsylvania where he had been Assistant Vice President
of Administration since 1964.
William R. Davidson, Ph.D. Mr. Davidson is a retired Superintendent from the
Pottsville City School District, Pottsville, Pennsylvania where he had been a
Superintendent from 1973-1993. He is currently an adjunct faculty member at
Widener University and part-time instructor at Penn State Schuylkill Campus.
Barbara M. Ecker. Mrs. Ecker has been employed as an Accountant at Hazleton St.
Joseph Medical Center, Hazleton, Pennsylvania since 1993. Prior to 1993, Mrs.
Ecker served as a Tax Accountant and Tax Department Administrator with Parente,
Randolph, Orlando, Carey & Associates, Hazleton, Pennsylvania and is a Certified
Public Accountant. Prior to 1989, she worked in the banking industry and was an
Adjunct Professor of banking and accounting.
R. Peter Haentjens, Jr. Mr. Haentjens is employed as a Vice President, General
Manager of Hazleton Pumps, Inc., Hazleton, Pennsylvania (former Barrett,
Haentjens, & Co.).
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<PAGE> 128
The Honorable John P. Lavelle. Judge Lavelle was a general practitioner of law
for 18 years before election to the bench. He was elected President Judge for
the Court of Common Pleas of Carbon County, Pennsylvania in 1977 and has served
continuously since that time.
Michael J. Leib. Mr. Leib has been president of Weatherly Casting & Machine
Company, Weatherly, Pennsylvania since November 1989.
William J. Spear. Mr. Spear has been owner and President of Hazle Drugs, Inc.,
Hazleton, Pennsylvania, a retail pharmacy, since 1969.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Patrick J. Owens, Jr. Mr. Owens joined the Bank as a Chief Financial Officer in
1992. In 1993, Mr. Owens was promoted to his current position of Senior Vice
President and Chief Financial Officer. Prior to 1992, Mr. Owens was employed in
the thrift industry for twenty-eight (28) years in the Philadelphia,
Pennsylvania area.
Gary M. Gatski. Mr. Gatski joined the Bank as a loan officer in 1973 and became
Assistant Vice President of Loan Administration in September 1984. He was
promoted to Vice President of Loan Administration in January 1985 and in 1993
was promoted to his current position of Senior Vice President of the Retail
Division.
Joseph K. Osiecki. Mr. Osiecki joined the Bank as a Senior Vice President-Chief
Lending Officer in July 1993. Prior to 1993, Mr. Osiecki served as a Commercial
Lender with various commercial banks and thrifts in Luzerne County,
Pennsylvania.
Bernard M. Miskin. Mr. Miskin joined the Bank as an Internal Auditor in 1992. He
was promoted to Senior Vice President Operations Division/Compliance in 1995.
Prior to joining First Federal, Mr. Miskin worked in the thrift and commercial
bank industry in Northeast Pennsylvania.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE BANK AND COMPANY
The Bank's Board of Directors meets once per month and may have
additional special meetings called in the manner specified in the Bylaws.
The Board of Directors of the Bank has established the following
committees:
The Audit Committee consists of Barbara M. Ecker (Chair), Paul L.
Conard, John P. Lavelle, Michael J. Leib and William J. Spear. The purpose of
this committee is to oversee both internal and external audit activities. The
Audit Committee generally meets at least six times a year and met six times
during the fiscal year ended September 30, 1997.
The Business Development/Marketing Committee consists of William R.
Davidson (Chair), Paul L. Conard, R. Peter Haentjens, Jr., William R. Davidson,
John P. Lavelle and William J. Spear. The Business Development/Marketing
Committee meets every other month, if necessary, or as
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<PAGE> 129
needed and is responsible for branch locations and physical properties,
marketing and business development plans of the Bank. The Business
Development/Marketing Committee met six times during the fiscal year ended
September 30, 1997.
The Finance Committee consists of Michael J. Leib (Chair), Paul L.
Conard, William R. Davidson, Barbara M. Ecker and R. Peter Haentjens, Jr. The
Finance Committee meets every other month, if necessary, or as needed and is
responsible for ALCO, interest rate risk management, budget reviews and
personnel matters. The Finance Committee met eight times during the fiscal year
ended September 30, 1997.
The Loan Committee consists of William J. Spear (Chair), Thomas L.
Kennedy, Barbara M. Ecker and E. Lee Beard. The Loan Committee meets twice a
month, if necessary, or as needed and met 19 times during the fiscal year ended
September 30, 1997.
The Personnel and Compensation Committee consists of John P. Lavelle
(Chair), E. Lee Beard, William R. Davidson, Thomas L. Kennedy and Michael J.
Leib.
DIRECTOR COMPENSATION
All directors receive an annual retainer of $10,500 a year, paid
quarterly, and $325 for each Board meeting attended. All non-employee directors
of the Bank also receive $325 for each committee meeting attended. Directors may
defer receipt of fees under the Deferred Compensation Plan for key employees of
the Bank. See "Executive Compensation--Deferred Compensation Plan."
ADVISORY BOARDS
The Bank has three advisory boards serving Schuylkill, Bloomsburg and
Lehighton Counties. Each advisory board meets four times per year. Such Advisory
Boards, which are composed of members of the Bank's Board of Directors, officers
of the Bank and other members of the communities that the Bank serves are
designed to provide the Bank with a forum for exchanging ideas with members of
its local communities so that the Bank may better serve the needs of its
customers and communities it serves. Each director of the Bank and the other
non-employees of the Bank who serve on the Advisory Boards receive $150 for each
meeting attended.
DIRECTOR EMERITUS
Effective January 1, 1998, the Bank entered into a consulting agreement
with a director emeritus. The consulting agreement provides for a one-year term
and a $10,000 annual consulting fee. The Director Emeritus is required to attend
six (6) Advisory Board meetings and to be available for advice and counsel at
the request of the Board of Directors. The Director Emeritus will not receive
Advisory Board meeting fees.
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<PAGE> 130
EXECUTIVE COMPENSATION
Cash Compensation. The following table sets forth the cash compensation
paid by the Bank for services rendered in all capacities during the fiscal year
ended September 30, 1997, to the Chief Executive Officer and to executive
officers of the Bank who received cash compensation in excess of $100,000
("Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
ANNUAL COMPENSATION (1) AWARDS PAYOUTS
---------------------------------------------------------------------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL FISCAL COMPENSATION STOCK AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
POSITIONS (1) YEAR SALARY($) BONUS($) ($)(2) ($) ($) ($) ($)(3)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
E. Lee Beard ....................... 1997 $148,770.18 $31,241.74 -- -- -- -- $4,409.16
President and Chief Executive Officer
</TABLE>
- ---------------
(1) Under Annual Compensation, the column titled "Salary" and "Bonus"
includes amounts deferred by the Named Executive Officer.
(2) For fiscal year 1997, there were no (a) perquisites over the lesser of
$50,000 or 10% of the individual's total salary and bonus for the year;
(b) payments of above-market preferential earnings on deferred
compensation; (c) payments of earnings with respect to long-term
incentive plans prior to settlement or maturation; (d) tax payment
reimbursements; or (e) preferential discounts on stock. For fiscal year
1997, the Bank had no restricted stock or stock related plans in
existence.
(3) Other compensation consists of the Bank's matching contribution under
the Bank's 401(k) Plan.
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<PAGE> 131
EMPLOYMENT AGREEMENTS
Upon consummation of the Conversion, the Bank and the Company intend to
enter into employment agreements (collectively, the "Employment Agreements")
with E. Lee Beard and Thomas L. Kennedy (individually, the "Executive"). The
Employment Agreements are subject to the review and approval of the OTS and may
be amended as a result of such OTS review. Review of compensation arrangements
by the OTS does not indicate, and should not be construed to indicate, that the
OTS has passed upon the merits of such arrangements. The Employment Agreements
are intended to ensure that the Bank and the Company will be able to maintain a
stable and competent management base after the Conversion. The continued success
of the Bank and the Company depends to a significant degree on the skills and
competence of Ms. Beard and Mr. Kennedy.
The Employment Agreements provide for a three-year term. The Bank
Employment Agreements provide that, commencing on the first anniversary date and
continuing each anniversary date thereafter, the Board of Directors may extend
the agreement for an additional year so that the remaining term shall be three
years, unless written notice of non-renewal is given by the Board of Directors
after conducting a performance evaluation of the Executive. The terms of the
Company Employment Agreements shall be extended on a daily basis, unless written
notice of non-renewal is given by the Board of the Company. The Bank and Company
Employment Agreements provide that the Executive's base salary will be reviewed
annually. The base salaries which will be effective for such Employment
Agreements for Ms. Beard and Mr. Kennedy will be $182,000, and $118,000,
respectively. In addition to the base salary, the Employment Agreements provide
for, among other things, participation in stock benefits plans and other fringe
benefits applicable to similarly situated executive personnel. The Employment
Agreements provide for termination by the Bank or the Company for cause as
defined in the agreements at any time. In the event the Bank or the Company
chooses to terminate the Executive's employment for reasons other than for
cause, or in the event of the Executive's resignation from the Bank and the
Company upon: (i) failure to re-elect the Executive to his current offices; (ii)
a material change in the Executive's functions, duties or responsibilities;
(iii) a relocation of the Executive's principal place of employment by more than
25 miles; (iv) liquidation or dissolution of the Bank or the Company; or (v) a
breach of the Employment Agreements by the Bank or the Company, the Executive
or, in the event of death, his beneficiary would be entitled to receive an
amount equal to the remaining base salary payments due to the Executive and the
contributions that would have been made on the Executive's behalf to any
employee benefit plans of the Bank or the Company during the remaining term of
the Employment Agreements. The Bank and the Company would also continue and pay
for the Executive's life, health and disability coverage for the remaining term
of the Employment Agreement. Upon any termination of the Executive, the
Executive is subject to a covenant not to compete with the Company or the Bank
for one year.
Under the agreements, if involuntary termination or under certain
circumstances, voluntary termination follows a change in control of the Bank or
the Company, the Executive or, in the event of the Executive's death, his
beneficiary, would be entitled to a severance payment equal to the greater of:
(i) the payments due for the remaining terms of the agreement; or (ii) three
times the average of the five preceding taxable years' annual compensation. The
Bank and the Company would also continue the Executive's life, health, and
disability coverage for thirty-six months. Notwithstanding that both agreements
provide for a severance payment in the event of a change in control, the
Executive would only be entitled to receive a severance payment under one
agreement.
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<PAGE> 132
Payments to the Executive under the Bank employment agreement will be
guaranteed by the Company in the event that payments or benefits are not paid by
the Bank. Payment under the Company Employment Agreements would be made by the
Company. All reasonable costs and legal fees paid or incurred by the Executive
pursuant to any dispute or question of interpretation relating to the Employment
Agreements shall be paid by the Bank or Company, respectively, if the Executive
is successful on the merits pursuant to a legal judgment, arbitration or
settlement. The Employment Agreements also provide that the Bank and Company
shall indemnify the Executive to the fullest extent allowable under federal and
Pennsylvania law, respectively. In the event of a change in control of the Bank
or Company, the total amount of payments due under the Agreements, based solely
on the base salaries to be paid to Ms. Beard and Mr. Kennedy effective upon the
consummation of the Conversion and excluding any benefits under any employee
benefit plan which may be payable, would be approximately $900,000.
CHANGE IN CONTROL AGREEMENTS
Upon Conversion, the Bank intends to enter into two-year Change in
Control Agreements (the "Bank CIC Agreements") with four senior vice presidents,
none of whom will be covered by an Employment Agreement. The Company also
intends to enter into a two-year Change in Control Agreement with Patrick J.
Owens, Jr. Commencing on the first anniversary date and continuing on each
anniversary thereafter, the Bank CIC Agreements may be renewed by the Board of
Directors of the Bank for an additional year. The Company Change in Control
Agreement shall be extended on a daily basis unless written notice of
non-renewal is given by the Board of Directors. The Bank and Company CIC
Agreements will provide that in the event involuntary termination or, under
certain circumstances, voluntary termination follows a change in control of the
Bank or the Company, the officer would be entitled to receive a severance
payment equal to three times the officer's average annual compensation for the
five most recent taxable years preceding termination. The Company and Bank would
also continue and pay for the officer's life, health and disability coverage for
24 months following termination. Payments to the officer under the Bank's CIC
Agreements will be guaranteed by the Company in the event that payments or
benefits are not paid by the Bank. In the event of a change in control of the
Bank or Company, the total payments that would be due under the Change in
Control agreements, based solely on the current annual compensation paid to the
four senior vice presidents covered by the Change in Control Agreements and
excluding any benefits under any employee benefit plan which may be payable,
would be approximately $945,000.
EMPLOYEE SEVERANCE COMPENSATION PLAN
The Bank's Board of Directors, upon consummation of the Conversion,
intends to establish the First Federal Bank Employee Severance Compensation Plan
("Severance Plan") which will provide eligible employees with severance pay
benefits in the event of a change in control of the Bank or the Company.
Management personnel with employment or CIC agreements are not eligible to
participate in the Severance Plan. Generally, all employees are eligible to
participate in the Severance Plan if they have completed at least six months of
service with the Bank. The Severance Plan vests in each participant a
contractual right to the benefits such participant is entitled to thereunder.
Under the Severance Plan, in the event of a change in control of the Bank or the
Company, eligible employees who are terminated from or terminate their
employment within one year (for reasons specified under the Severance Plan),
will be entitled to receive a severance payment. If the participant, whose
employment has terminated, has completed at least six months of service, the
participant will be entitled to a cash severance payment equal to one-twelfth of
annual compensation for each year of service up to a maximum of 199% of annual
compensation. Such payments may tend to discourage takeover attempts by
increasing costs to be incurred by the Bank in the event of a
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<PAGE> 133
takeover. In the event the provisions of the Severance Plan were triggered, the
total amount of payments that would be due thereunder, based solely upon current
salary levels, would be approximately $1.9 million. However, it is management's
belief that substantially all of the Bank's employees would be retained in their
current positions in the event of a change in control, and that any amount
payable under the Severance Plan would be considerably less than the total
amount that could possibly be paid under the Severance Plan.
INSURANCE PLANS
All full-time employees of the Bank, upon completion of the applicable
introductory period, are covered as a group for comprehensive hospitalization,
including major medical and long-term disability insurance. Life insurance is
also provided to employees and directors.
BENEFITS
PERFORMANCE INCENTIVE PLAN. The Bank maintains the First Federal
Savings and Loan Association of Hazleton Performance Incentive Plan
("Performance Incentive Plan"). The Performance Incentive Plan was designed by
senior officers and approved by the Board to give all employees an incentive for
effectively operating the Bank. The Performance Incentive Plan provides all
employees an opportunity to earn quarterly cash payments, equal to a certain
percentage of their base salaries upon the attainment of specific performance
goals. In establishing the performance goals the Bank considers the following
financial criteria: (i) net income before taxes; (ii) net burden ratio; and
(iii) earnings on assets.
RETIREMENT PLAN. The Bank participates in the Financial Institutions
Retirement Fund (the "Retirement Fund") to provide retirement benefits for
eligible employees. Employees are eligible to participate in the Retirement Plan
after the completion of 12 consecutive months of employment with the Bank and
the attainment of age 21. Hourly paid employees are excluded from participating
in the Retirement Plan. Benefits payable to a participant under the Retirement
Plan are based on the participant's years of service and salary. The formula for
normal retirement benefits payable annually under the Retirement Plan is 2%
multiplied by years of benefit service multiplied by the average of the
participant's highest three years of salary paid by the Bank. A participant may
elect early retirement as early as age 45. However, such participant's normal
retirement benefits will be reduced by an early retirement factor based on an
age at early retirement. Participants generally have no vested interest in
Retirement Plan benefits prior to the completion of five years of service with
the Bank. Following the completion of five years of vesting service, or in the
event of a participant's attainment of age 65, death or termination of
employment due to disability, a participant will become 100% vested in the
accrued benefits under the Retirement Plan. The table below reflects the pension
benefit payable to a participant assuming various levels of earnings and years
of service.
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<PAGE> 134
The following table sets forth the estimated annual benefits payable
upon retirement at age 65 for the period ended September 30, 1997.
<TABLE>
<CAPTION>
YEARS OF BENEFIT SERVICE
--------------------------------------------------------
FIVE YEAR
AVERAGE
COMPENSATION 15 20 25 30 35
- ----------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 15,000 $ 5,000 $ 6,000 $ 8,000 $ 9,000 $ 11,000
30,000 9,000 12,000 15,000 18,000 21,000
45,000 14,000 18,000 23,000 27,000 32,000
60,000 18,000 24,000 30,000 36,000 42,000
75,000 23,000 30,000 38,000 45,000 53,000
90,000 27,000 36,000 45,000 54,000 63,000
105,000 32,000 42,000 53,000 63,000 74,000
120,000 36,000 48,000 60,000 72,000 84,000
135,000 41,000 54,000 68,000 81,000 95,000
150,000 $ 45,000 $ 60,000 $ 75,000 $ 90,000 $105,000
</TABLE>
SAVINGS PLAN. The Bank maintains the First Federal Savings and Loan
Association of Hazleton Savings Plan (the "401(k) Plan"), a tax-qualified plan
under Section 401(a) of the Code with a cash or deferred arrangement under
Section 401(k) of the Code. Employees, other than employees paid on an hourly
basis, become eligible to participate in the 401(k) Plan upon the completion of
six months of service and the attainment of age 21. An employee's first service
period is the six-month period beginning on the employee's date of hire.
Subsequent service periods begin on January 1 and end on December 31.
Under the 401(k) Plan, participants may elect to have the Bank
contribute up to 10% of their compensation to the 401(k) Plan, subject to
certain limitations imposed by the Code. The Bank currently makes matching
contributions to the 401(k) Plan equal to 100% of the first 2% and 50% of any
additional percentage up to 4% of compensation deferred by a participant. The
Board periodically reviews the level of matching contributions under the 401(k)
Plan and has the discretion to change the match from time to time.
Currently, participants in the 401(k) Plan may direct the investment of
their accounts in several types of investment funds. In connection with the
Conversion, the Bank intends to amend the 401(k) Plan to permit plan
participants to invest their account balances in Company Common Stock through an
Employer Stock Fund. Participants may utilize their subscription rights to
purchase stock in the Conversion but may not purchase more than $175,000 in
aggregate value of the Common Stock in the Conversion (subject to the overall
purchase limitations). A participant's ability to direct all or some of his
vested account to purchase Common Stock in the Offering will be dependent upon
such individual being an Eligible Account Holder or Supplemental Eligible
Account Holder. A participant may directly vote shares of Common Stock held in
his or her 401(k) Plan account.
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<PAGE> 135
Participants are always 100% vested in their elective deferrals and
related earnings under the 401(k) Plan. Participants become fully vested in
matching contributions and related earnings upon the completion of four years of
vesting service. Participants also become 100% vested in matching contributions
and related earnings upon the earlier of attainment of normal retirement age
(age 65), death or disability. Participants may receive distributions from the
401(k) Plan in the form of a lump sum cash payment.
DEFERRED COMPENSATION PLAN. The Bank maintains the Deferred
Compensation Plan for Key Employees of First Federal Savings and Loan
Association of Hazleton, a non-qualified deferred compensation plan which
provides key employees and directors an opportunity to defer receipt of a
portion of their compensation, including any bonuses, payable to them by the
Bank until a separation from service or death. Upon a participant's separation
from service the participant shall receive his or her account balance in a lump
sum cash payment unless the participant elects to receive installment payments
over a period of time not to exceed ten years. In the event of a participant's
death, the value of the participant's account balance shall be paid to a
designated beneficiary or, if none, by the participant's surviving spouse or
estate in a single sum cash payment. If a participant owes any amounts to the
Bank at the time of his or her distribution, the Bank has the right to offset
such amounts against the participant's account balance.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Bank intends to implement a
supplemental executive retirement plan to provide for supplemental benefits to
employees whose benefits under the ESOP and/or 401(k) Plan are reduced by
limitations imposed by the Code. From time to time, the Board will designate
which employees may participate in this additional supplemental executive
retirement plan. This supplemental executive retirement plan will be an
"unfunded" promise to pay supplemental benefits in the future and the benefits
under the plan remain subject to the claims of the Bank's general creditors
until they are paid to plan participants. The Bank may establish a grantor trust
in connection with the plan to satisfy the obligations of the Bank under the
plan. The grantor trust would be permitted to invest in a wide-variety of
investments, including Company Common Stock.
EMPLOYEE STOCK OWNERSHIP PLAN. The Bank intends to establish an
Employee Stock Ownership Plan and related trust in connection with the
Conversion. Employees, other than hourly paid employees employed with the Bank
as of the effective date of the conversion and attainment of age 21 shall become
participants in the ESOP immediately. Eligible employees employed after the
effective date of the Conversion, shall become participants in the ESOP upon the
attainment of age 21 and the completion of six months of service. An employee's
first eligibility computation period will be the six-month period beginning of
the employee's date of hire. Subsequent eligibility computation periods will
begin on January 1 and end on December 31. Participants will become fully vested
in their benefits under the ESOP upon the completion of four years of service
(with credit for prior service). Participants will also become 100% vested in
their benefits upon the attainment of normal retirement age (age 65), death,
disability, or upon a change in control of the Bank or Company. Benefits become
payable in a lump sum upon death, retirement, disability or separation from
service.
The ESOP intends to purchase 8% of the Common Stock issued in the
Conversion, including the issuance of shares to the Foundation. As part of the
Conversion and in order to fund the ESOP's purchase of the Common Stock issued
in the Conversion, the ESOP intends to borrow 100% of the aggregate purchase
price of the Common Stock either from the Company or a third party lender. In
either case, the loan will have a 10 year term and be repaid principally from
the Bank's contribution's to the ESOP. Subject to receipt
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<PAGE> 136
of any necessary regulatory approvals or opinions, the Bank may make
contributions to the ESOP for repayment of the loan since the participants are
all employees of the Bank or to reimburse the Company for contributions made by
it. Contributions to the ESOP will be discretionary; however, the Company or the
Bank intend to make annual contributions to the ESOP in an aggregate amount at
least equal to the principal and interest requirement on the debt. The interest
rate for the loan is expected to be the prime rate. The contributions to the
ESOP are not fixed, so benefits payable under the ESOP cannot be estimated.
Shares purchased by the ESOP will initially be pledged as collateral
for the loan and will be held in a suspense account until released for
allocation among participants as the loan is repaid. The pledged shares will be
released annually from the suspense account in an amount proportional to the
repayment of the ESOP loan for each plan year. The released shares will be
allocated among the accounts of participants on the basis of the participant's
compensation for the year of allocation.
In connection with the establishment of the ESOP, a Committee of the
Board of Directors was appointed to administer the ESOP (the "ESOP Committee").
An unrelated corporate trustee for the ESOP will be appointed prior to the
Conversion and continuing thereafter. The ESOP Committee may instruct the
trustee regarding investment of funds contributed to the ESOP. The ESOP trustee,
subject to its fiduciary duty, must vote all allocated shares held in the ESOP
in accordance with the instructions of the participants. The trustee will vote
the unallocated shares (i.e., those held in the suspense account) and allocated
shares for which the trustee receives no instructions in a manner calculated to
most accurately reflect the instructions the Trustee has received from
participants regarding the allocated stock, provided that such vote is in
accordance with the provisions of the Employee Retirement Income Security Act of
1974, as amended ("ERISA").
MANAGEMENT SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Bank intends to
implement a non-qualified Management Supplemental Executive Retirement Plan
("MSERP") to provide certain officers and highly compensated employees of the
Bank and its affiliates, including the Company, with additional retirement
benefits. The MSERP benefit is intended to make up benefits lost under the ESOP
allocation procedures to participants who retire prior to the complete repayment
of the ESOP loan. At the retirement of a participant, the benefits under the
MSERP are determined by first: (i) projecting the number of shares that would
have been allocated to the participant under the ESOP if they had been employed
throughout the period of the ESOP loan (measured from the participant's first
date of ESOP participation); and (ii) first reducing the number determined by
(i) above by the number of shares actually allocated to the Participant's
account under the ESOP; and second, by multiplying the number of shares that
represent the difference between such figures by the average fair market value
of the Common Stock over the preceding five years. Benefits under the MSERP vest
in 20% annual increments over a five year period commencing as of the date of a
Participant's participation in the MSERP. The vested portion of the MSERP
Participant's benefits are payable to the Participant upon Retirement (as
defined in the ESOP) or to the Participant's beneficiary in the event of the
Participant's death.
STOCK-BASED INCENTIVE PLAN. Following the Conversion, the Board of
Directors of the Company intends to adopt the Stock-Based Incentive Plan which
will provide for the granting of options to purchase Common Stock ("Stock
Options"), Common Stock ("Stock Awards"), Limited Option Rights and Limited
Stock Rights to eligible officers, employees, and directors of the Company and
Bank. The Company may provide such stock based benefits under the Stock-Based
Incentive Plan or may establish one or more separate plans which would provide
for the benefits described herein.
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<PAGE> 137
In the event the Stock-Based Incentive Plan (or any separate plan(s))
is adopted within one year after conversion, OTS regulations require such plan
to be approved by a majority of the Company's stockholders at a meeting of
stockholders to be held no earlier than six months after the completion of the
Conversion. Under the Stock-Based Incentive Plan, the Company may grant Stock
Options in an amount equal to 10% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation (558,900 shares based upon
the maximum of the Estimated Price Range), and intends to grant Stock Awards in
an amount equal to 4% of the shares of Common Stock issued in the Conversion,
including shares issued to the Foundation (223,560 shares based upon the maximum
of the Estimated Price Range). The plan may be funded through a purchase of
Common Stock by a trust established in connection with the Stock-Based Incentive
Plan (or any separate plan(s)) or from authorized but unissued shares. The Board
intends to appoint an independent fiduciary to serve as trustee of a trust to be
established in connection with the Stock-Based Incentive Plan. In the event that
additional authorized but unissued shares are acquired by the Stock-Based
Incentive Plan after the Conversion, the interests of existing shareholders
would be diluted. See "Pro Forma Data."
The grants of Stock Options and Stock Awards will be designed to
attract and retain qualified personnel in key positions, provide officers and
key employees with a propriety interest in the Company as an incentive to
contribute to the success of the Company and reward key employees for
outstanding performance. All employees of the Company and its subsidiaries,
including the Bank, will be eligible to participate in the Stock-Based Incentive
Plan. It is expected that the committee administering the plan will determine
the terms of awards granted to officers and employees. The committee will also
determine whether Stock Options will be Incentive or Non-Statutory Stock
Options, as defined below, the number of shares subject to each stock option and
Stock Award, the exercise price of each Non-Statutory Stock Option, whether
Stock Options may be exercised by delivering other shares of Common Stock, and
when Stock Options become exercisable or Stock Awards vest. Only employees may
receive grants of Incentive Stock Options. Therefore, under the Stock-Based
Incentive Plan directors may receive only grants of Non-Statutory Stock Options.
If the plan is adopted within one year after conversion, OTS regulations provide
that no individual officer or employee of the Bank may receive more than 25% of
the stock options available under the Stock-Based Incentive Plan (or any
separate plan for officers and employees) and non-employee directors may not
receive more than 5% individually, or 30% in the aggregate, of the stock options
available under the Stock-Based Incentive Plan (or any separate plan for
directors). OTS regulations also provide that no individual officer or employee
of the Bank may receive more than 25% of the restricted stock awards available
under the Stock-Based Incentive Plan (or any separate plan for officers and
employees) and non-employee directors may not receive more than 5% individually,
or 30% in the aggregate, of the restricted stock awards available under the
Stock-Based Incentive Plan (or any separate plan for directors).
The Stock-Based Incentive Plan will provide for the grant of: (i)
Stock Options intended to qualify as incentive Stock Options under Section 422
of the Code ("Incentive Stock Options"); (ii) Stock Options that do not so
qualify ("Non-Statutory Stock Options"); and (iii) limited option rights
("Limited Option Rights"). Limited Option Rights are exercisable only upon a
change in control of the Bank or the Company. Subject to OTS regulations, upon
exercise of Limited Option Rights, the recipient will be entitled to receive a
lump sum cash payment equal to the difference between the exercise price of any
unexercised Stock Option, whether exercisable or unexercisable at such time, and
the fair market value of the shares of Common Stock subject to the Stock Option
on the date of
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<PAGE> 138
exercise of the right in lieu of purchasing the Common Stock underlying the
Stock Option. It is anticipated that all Stock Options granted contemporaneously
with stockholder approval of the Stock-Based Incentive Plan will qualify as
Incentive Stock Options to the extent permitted under Section 422 of the Code.
Unless sooner terminated, the Stock-Based Incentive Plan will be in effect for a
period of ten years from the earlier of adoption by the Board of Directors or
approval by the Company's Stockholders. Subject to stockholder approval, the
Company intends to grant Stock Options with Limited Option Rights under the plan
at an exercise price equal to at least the fair market value of the underlying
Common Stock on the date of grant.
An individual will not be deemed to have received taxable income upon
the grant or exercise of any Incentive Stock Option, provided that such shares
received through the exercise of such option are not disposed of by the employee
for at least one year after the date the stock is received in connection with
the stock option exercise and two years after the date of grant of the stock
option (a "disqualifying disposition"). No compensation deduction will be
available to the Company as a result of the grant or exercise of Incentive Stock
Options unless there has been a disqualifying disposition. In the case of a
Non-Statutory Stock Option and in the case of a disqualifying disposition of an
Incentive Stock Option, an individual will realize ordinary income upon exercise
of the stock option (or upon the disqualifying disposition) in an amount equal
to the amount by which the exercise price exceeds the fair market value of the
Common Stock purchased by exercising the stock option on the date of exercise.
The amount of any ordinary income realized by an optionee upon the exercise of a
Non-Statutory Stock Option or due to a disqualifying disposition of an Incentive
Stock Option will be a deductible expense to the Company for tax purposes. In
the case of Limited Rights, the option holder will have to include the amount
paid to him or her upon exercise in his gross income for federal income tax
purposes in the year in which the payment is made and the Company will be
entitled to a deduction for federal income tax purposes of the amount paid.
The Stock-Based Incentive Plan will provide for the granting of Stock
Awards and Limited Stock Rights. Limited Stock Rights would be exercisable by
participants upon a change in control of the Company or Bank as described in the
plan. Subject to OTS regulations, upon the exercise of a Limited Stock Right,
the recipient will be entitled to receive a cash payment equal to the fair
market value of all unvested Stock Awards in exchange for any rights to such
unvested Stock Awards. Grants of Stock Awards, and Limited Stock Rights, to
officers and employees may be made in the form of base grants and/or performance
grants (the vesting of which would be contingent upon performance goals
established by the committee administering the plan). In establishing any
performance goals, the committee may utilize the annual financial results of the
Bank, actual performance of the Bank as compared to targeted goals such as the
ratio of the Bank's net worth to total assets, the Bank's return on average
assets, or such other performance standards as determined by the committee with
the approval of the Board of Directors.
When a participant becomes vested with respect to Stock Award, the
participant will realize ordinary income equal to the fair market value of the
Common Stock at the time of vesting (unless the participant made an election
pursuant to Section 83(b) of the Code). The amount of income recognized by the
participants will be a deductible expense for tax purposes for the Bank. When
restricted Stock Awards become vested and shares of Common Stock are actually
distributed to participants, the participants would receive amounts equal to any
accrued dividends with respect thereto. Prior to vesting, recipients of Stock
Awards may direct the voting of the shares awarded to them. Shares not subject
to grants and shares allocated subject to the achievement of performance goals
will be voted by the trustee in proportion to the directions provided with
respect to shares subject to grants. Vested shares will be distributed to
recipients as soon as practicable following the day on which they vest.
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<PAGE> 139
The vesting periods for awards under the Stock-Based Incentive Plan
will be determined by the Committee administering the Plan. If the Stock-Based
Incentive Plan (or any separate plans for employees and directors) is adopted
within one year after conversion, awards would become vested and exercisable
subject to applicable OTS regulations, which such regulations require that any
awards begin vesting no earlier than one year from the date of shareholder
approval of the plan and thereafter vest at a rate of no more than 20% per year
and may not be accelerated except in the case of death or disability. Stock
Options could be exercisable for three months following the date on which the
employee or director ceases to perform services for the Bank or the Company,
except that in the event of death or disability, options accelerate and become
fully vested and could be exercisable for up to one year thereafter or such
longer period as determined by the Company. In the case of death or disability,
Stock Options may be exercised for a period of 12 months. However, any Incentive
Stock Options exercised more than three months following the date the employee
ceases to perform services as an employee would be treated as a Non-Statutory
Stock Option. In the event of retirement, if the optionee continues to perform
services as a director or consultant on behalf of the Bank, the Company or an
affiliate, unvested options would continue to vest in accordance with their
original vesting schedule until the optionee ceases to serve as a consultant or
director. In the event of death, disability or normal retirement, the Company,
if requested by the optionee, or the optionee's beneficiary, could elect, in
exchange for vested options, to pay the optionee, or the optionee's beneficiary
in the event of death, the amount by which the fair market value of the Common
Stock exceeds the exercise price of the options on the date of the employee's
termination of employment.
Subject to any applicable regulatory requirements, the Stock-Based
Incentive Plan (or any separate plans for employees and directors) may be
amended subsequent to the expiration of the one-year period to provide for
accelerated vesting of previously granted Stock Options or Stock Awards in the
event of a change in control of the Company or the Bank. A change in control
would generally be considered to occur when a person or group of persons acting
in concert acquires beneficial ownership of 20% or more of any class of equity
security of the Company or the Bank or in the event of a tender or exchange
offer, merger or other form of business combination, sale of all or
substantially all of the assets of the Company or the Bank or contested election
of directors which resulted in the replacement of a majority of the Board of
Directors by persons not nominated by the directors in office prior to the
contested election.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
Federal regulations require that all loans or extensions of credit to
executive officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with the general public and must not involve more than
the normal risk of repayment or present other unfavorable features. In addition,
loans made to a director or executive officer in excess of the greater of
$25,000 or 5% of the Bank's capital and surplus (up to a maximum of $500,000)
must be approved in advance by a majority of the disinterested members of the
Board of Directors.
The Bank currently makes loans to its executive officers and directors
on the same terms and conditions offered to the general public. The Bank's
policy provides that all loans made by the Bank to its executive officers and
directors be made in the ordinary course of business, on substantially the same
terms, including collateral, as those prevailing at the time for comparable
transactions with other persons and may not involve more than the normal risk of
collectibility or present other unfavorable features. As of September 30, 1997,
39 of the Bank's executive officers or directors had loans with outstanding
balances totaling $724,000 in the aggregate. All such loans were made by the
Bank in the ordinary course of business, with no favorable terms and such loans
do not involve more than the normal risk of collectibility or present
unfavorable features.
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<PAGE> 140
The Company intends that all transactions in the future between the
Company and its executive officers, directors, holders of 10% or more of the
shares of any class of its common stock and affiliates thereof, will contain
terms no less favorable to the Company than could have been obtained by it in
arm's length negotiations with unaffiliated persons and will be approved by a
majority of independent outside directors of the Company not having any interest
in the transaction.
OTHER TRANSACTIONS WITH AFFILIATES
The Bank utilizes the services of the law firm of Kennedy and Lucadamo,
P.C., of which Mr. Kennedy, the Chairman of the Board and general counsel of the
Bank is a member, for a variety of legal work relating to the ordinary course of
the Bank's business. For each of fiscal years 1996 and 1997, the Bank paid less
than $60,000 per year to such law firm.
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<PAGE> 141
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the number of shares of Common Stock the
Bank's officers and directors and their associates propose to purchase, assuming
shares of Common Stock are issued at the minimum and maximum of the Estimated
Price Range, including the effect of shares issued to the Foundation, and that
sufficient shares will be available to satisfy their subscriptions. The table
also sets forth the total expected beneficial ownership of Common Stock as to
all directors and officers as a group.
<TABLE>
<CAPTION>
AT THE MINIMUM OF THE AT THE MAXIMUM OF THE
ESTIMATED PRICE RANGE ESTIMATED PRICE RANGE
------------------------------ -----------------------------
AS A AS A
PERCENT OF PERCENT OF
NUMBER OF SHARES NUMBER OF SHARES
NAME AMOUNT(1) SHARES SOLD SHARES SOLD
- ------------------------------------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Thomas L. Kennedy ................... $ 400,000 38,000 1.00% 40,000 0.77%
E. Lee Beard ........................ 175,000 17,500 0.46 17,500 0.34
Paul L. Conard ...................... 25,000 2,500 0.07 2,500 0.05
William R. Davidson ................. 90,000 9,000 0.24 9,000 0.17
Barbara M. Ecker .................... 250,000 25,000 0.65 25,000 0.48
R. Peter Haentjens, Jr. ............. 175,000 17,500 0.46 17,500 0.34
John P. Lavelle ..................... 175,000 17,500 0.46 17,500 0.34
Michael J. Leib ..................... 200,000 20,000 0.52 20,000 0.39
William J. Spear .................... 100,000 10,000 0.26 10,000 0.19
Patrick J. Owens, Jr. ............... 35,000 3,500 0.09 3,500 0.07
Joseph K. Osiecki ................... 75,000 7,500 0.20 7,500 0.14
Gary M. Gatski ...................... 150,000 15,000 0.39 15,000 0.29
Bernard M. Miskin ................... 20,000 2,000 0.05 2,000 0.04
---------- ------- ---- ------- ----
All Directors and Executive .... $1,870,000 185,000 4.83% 187,000 3.61%
========== ======= ==== ======= ====
Officers as a Group (13 persons)
Other officers (6 persons) .......... $ 98,500 9,850 0.26% 9,850 0.19%
All Directors and Officers as a Group
(19 persons) ........................ $1,968,500 194,850 5.09% 196,850 3.80%
========== ======= ==== ======= ====
</TABLE>
- ----------------
(1) Includes proposed subscriptions, if any, by associates which in the
aggregate may not exceed 1% of the shares offered for sale. Also
includes funds from the Bank's 401(k) Plan which may be used to
purchase shares of Common Stock under such plan's new employer stock
fund investment option. See " -- Benefits -- Savings Plan." Does not
include subscription orders by the ESOP. Intended purchases by the
ESOP are expected to be 8% of the shares issued in the Conversion,
including shares issued to the Foundation.
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<PAGE> 142
THE CONVERSION
THE BOARD OF DIRECTORS OF THE BANK AND THE OTS HAVE APPROVED THE PLAN
OF CONVERSION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE BANK ENTITLED TO VOTE
ON THE MATTER AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS. SUCH OTS
APPROVAL, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE
PLAN BY SUCH AGENCY. THE OTS NEITHER APPROVED NOR DISAPPROVED THE ESTABLISHMENT
OF THE FOUNDATION.
GENERAL
On November 18, 1997, the Bank's Board of Directors unanimously
adopted, subject to approval by the OTS, the Plan pursuant to which the Bank
will be converted from a federally-chartered mutual savings bank to a
federally-chartered capital stock savings bank. It is currently intended that
all of the outstanding capital stock of the Bank will be held by the Company,
which is incorporated under Delaware law. The Plan was approved by the OTS,
subject to, among other things, approval of the Plan by the Bank's members. A
special meeting of members has been called for this purpose to be held on
_______________, 1997.
The Company has received the approval of the OTS to become a savings
and loan holding company and to acquire all of the Common Stock of the Bank to
be issued in the Conversion. The Company plans to purchase the shares of issued
and outstanding capital stock of the Bank in exchange for 50% of the net
proceeds and retain the remaining net proceeds. The Conversion will be effected
only upon completion of the sale of all of the shares of Common Stock of the
Company or the Bank, if the holding company form of organization is not
utilized, to be issued pursuant to the Plan.
The Plan provides that the Board of Directors of the Bank may, at any
time prior to the issuance of the Common Stock and for any reason, decide not to
use a holding company form. Such reasons may include possible delays resulting
from overlapping regulatory processing or policies which could adversely affect
the Bank's or the Company's ability to consummate the Conversion and transact
its business as contemplated herein and in accordance with the Bank's operating
policies. In the event such a decision is made, the Bank will withdraw the
Company's registration statement from the SEC and take steps necessary to
complete the Conversion without the Company, including filing any necessary
documents with the OTS. In such event, and provided there is no regulatory
action, directive or other consideration upon which basis the Bank determines
not to complete the Conversion, if permitted by the OTS, the Bank will issue and
sell the Common Stock of the Bank and subscribers will be notified of the
elimination of a holding company and resolicited (i.e., be permitted to affirm
their orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
funds will be promptly refunded with interest at the Bank's passbook rate of
interest; or be permitted to modify or rescind their subscriptions), and
notified of the time period within which the subscriber must affirmatively
notify the Bank of his intention to affirm, modify or rescind his subscription.
The following description of the Plan assumes that a holding company form of
organization will be used in the Conversion. In the event that a holding company
form of organization is not used, all other pertinent terms of the Plan as
described below will apply to the conversion of the Bank from the mutual to
stock form of organization and the sale of the Bank's common stock.
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<PAGE> 143
The Plan provides generally that (i) the Bank will convert from a
mutual savings bank to a capital stock savings bank and (ii) the Company will
offer shares of Common Stock for sale in the Subscription Offering to the Bank's
Eligible Account Holders, the ESOP, Supplemental Eligible Account Holders, and
Other Members. Subsequent to the Subscription Offering, any remaining shares
will be offered in a Community Offering with preference given to natural persons
residing in the Bank's Local Community. It is anticipated that all shares not
subscribed for in the Subscription and Community Offerings will be offered for
sale by the Company to the general public in a Syndicated Community Offering.
The Bank has the right to accept or reject, in whole or in part, any orders to
purchase shares of the Common Stock received in the Community Offering or in the
Syndicated Community Offering. See " -- Community Offering" and " -- Syndicated
Community Offering."
The aggregate price of the shares of Common Stock to be sold in the
Conversion within the Estimated Price Range, currently estimated to be between
$38.3 million and $51.8 million, will be determined based upon an independent
appraisal, prepared by Keller of the estimated pro forma market value of the
Common Stock of the Company. All shares of Common Stock to be issued and sold in
the Conversion, will be sold at the same price. The independent appraisal will
be affirmed or, if necessary, updated at the completion of the Subscription and
Community Offerings, if all shares are subscribed for, or at the completion of
the Syndicated Community Offering. The appraisal has been performed by Keller, a
consulting firm experienced in the valuation and appraisal of savings
institutions. See " -- Stock Pricing" for additional information as to the
determination of the estimated pro forma market value of the Common Stock.
The following is a brief summary of pertinent aspects of the
Conversion. The summary is qualified in its entirety by reference to the
provisions of the Plan. A copy of the Plan is available for inspection at each
branch of the Bank and at the Northeast Region and Washington, D.C. offices of
the OTS.
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
General. In furtherance of the Bank's long-standing commitment to its
local community, the Bank's Plan of Conversion provides for the establishment of
a charitable foundation in connection with the Bank's Conversion. The Plan
provides that the Bank and the Company will establish the Foundation, which will
be incorporated under Delaware law as a non-stock corporation, and will fund the
Foundation with Common Stock of the Company, as further described below. The
Company and the Bank believe that the funding of the Foundation with Common
Stock of the Company is a means of establishing a common bond between the Bank
and the communities in which the Bank operates and thereby enables such
communities to share in the potential growth and success of the Company and the
Bank over the long term. By further enhancing the Bank's visibility and
reputation in the communities in which it operates, the Bank believes that the
Foundation will enhance the long-term value of the Bank's community banking
franchise.
The Foundation would be dedicated to the promotion of charitable
purposes within the communities in which the Bank operates, including, but not
limited to, providing grants or donations to support housing assistance,
not-for-profit medical facilities, community groups and other types of
organizations or projects. Establishment of the Foundation is subject to the
approval of a majority of the total outstanding votes of the Bank's members
eligible to be cast at the Special Meeting. The Foundation will be considered as
a separate matter from approval of the Plan of Conversion. If the Bank's members
approve the Plan of Conversion, but not the Foundation, the Bank intends to
complete the Conversion without the establishment of the Foundation. Failure to
approve the establishment of the Foundation may materially affect the pro forma
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market value of the Common Stock. In such an event, the Bank may establish a new
Estimated Price Range and commence a resolicitation of subscribers. In the event
of a resolicitation, unless an affirmative response is received within a
specified period of time, all funds will be promptly returned to investors, as
described elsewhere herein. See " -- Stock Pricing."
Purpose of the Foundation. The purpose of the Foundation is to provide
funding to support charitable purposes within the communities in which the Bank
operates. The Bank has long emphasized community lending and community
development activities and currently has a "satisfactory" Community Reinvestment
Act ("CRA") rating. The Foundation is being formed as a complement to the Bank's
existing community activities, not as a replacement for such activities. Indeed,
the Bank intends to continue to emphasize community lending and community
development activities following the Conversion. However, such activities are
not the Bank's sole corporate purpose. The Foundation, conversely, will be
completely dedicated to community activities and the promotion of charitable
causes, and may be able to support such activities in ways that are not
presently available to the Bank. Since the Bank has an outstanding record of
serving its community under the CRA and already engages in community development
activities, the Bank believes that the Foundation will enable the Company and
the Bank to assist their local community in areas beyond community development
and lending. In this regard, the Board of Directors believes the establishment
of a charitable foundation is consistent with the Bank's commitment to community
service. The Boards of Directors of the Bank and Company also believe that the
funding of the Foundation with Common Stock of the Company is a means of
enabling the communities in which the Bank operates to share in the potential
growth and success of the Company long after completion of the Conversion. The
Foundation accomplishes that goal by providing for continued ties between the
Foundation and Bank, thereby forming a partnership with the Bank's community.
The establishment of the Foundation would also enable the Company and the Bank
to develop a unified charitable donation strategy and would centralize the
responsibility for administration and allocation of corporate charitable funds.
The Bank, however, does not expect the contribution to the Foundation to take
the place of the Bank's traditional community lending and charitable activities.
The Bank expects in future periods to continue making charitable contributions
within its communities.
Structure of the Foundation. The Foundation will be incorporated under
Delaware law as a non-stock corporation. Pursuant to the Foundation's bylaws,
the Foundation's board of directors will be comprised of four members, all of
whom will be individuals elected from existing directors and officers of the
Bank. The initial board of directors of the Foundation will be comprised of
officers and directors of the Bank. On an on-going basis, a Nominating Committee
of the board of directors of the Foundation, will nominate individuals eligible
for election to the board of directors of the Foundation. The members of the
Foundation, who are comprised of its board members, will elect the directors at
the annual meeting of the Foundation from those nominated by the Nominating
Committee. Only persons serving as directors of the Foundation qualify as
members of the Foundation with voting authority. Directors will be divided into
three classes with each class appointed for three-year terms. The certificate of
incorporation of the Foundation provides that the corporation is organized
exclusively for charitable purposes as set forth in Section 501(c)(3) of the
Code. The Foundation's certificate of incorporation further provides that no
part of the net earnings of the Foundation will inure to the benefit of, or be
distributable to its directors, officers or members.
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The authority for the affairs of the Foundation will be vested in the
board of directors of the Foundation. The directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the stated purposes for
which the Foundation was established. Although no formal policy governing
Foundation grants exists at this time, the Foundation's board of directors will
adopt such a policy upon establishment of the Foundation. The directors will
also be responsible for directing the assets of the Foundation. Pursuant to the
terms of the contribution as mandated by the OTS, all shares of Common Stock
held by the Foundation must be voted in the same ratio as all other shares of
the Company's Common Stock on all proposals considered by stockholders of the
Company; provided, however, that the OTS will waive this voting restriction
under certain circumstances if compliance with the restriction would: (i) cause
a violation of the law of the State of Delaware and the OTS determines that
federal law would not preempt the application of the laws of the State of
Delaware to the Foundation; (ii) would cause the Foundation to lose its
tax-exempt status or otherwise have a material and adverse tax consequence on
the Foundation; or (iii) would cause the Foundation to be subject to an excise
tax under Section 4941 of the Code. In order for the OTS to waive such voting
restriction, the Company's or the Foundation's legal counsel must render an
opinion satisfactory to OTS that compliance with the voting restriction would
have the effect described in clauses (i), (ii) or (iii) above. Under those
circumstances, the OTS will grant a waiver of the voting restriction upon
submission of such legal opinion(s) by the Company or the Foundation. In the
event that the OTS waived the voting restriction, the directors would direct the
voting of the Common Stock held by the Foundation. However, a condition to the
OTS approval of the Conversion provides that in the event such voting
restriction is waived or becomes unenforceable, the Director of the OTS, or his
designees, at that time may impose conditions on the composition of the board of
directors of the Foundation or such other conditions or restrictions relating to
the control of the Common Stock held by the Foundation, any of which could limit
the ability of the board of directors of the Foundation to control the voting of
the Common Stock held by the Foundation. There will be no agreements or
understandings with directors of the Foundation regarding the exercise of
control, directly or indirectly, over the management or policies of the Company
or the Bank, including agreements related to voting, acquisition or disposition
of the Company's stock. As directors of a nonprofit corporation, directors of
the Foundation will at all times be bound by their fiduciary duty to advance the
Foundation's charitable goals, to protect the assets of the Foundation and to
act in a manner consistent with the charitable purpose for which the Foundation
is established.
The Company will provide office space and administrative support
services to the Foundation. Initially, the Foundation is expected to have no
employees. The board of directors of the Foundation will appoint such officers
as may be necessary to manage the operations of the Foundation. It is
anticipated that initially such officers will be selected from the board of
directors of the Foundation. Any transaction between the Bank and the Foundation
will comply with the affiliate transaction restrictions set forth in Sections
23A and 23B of the Federal Reserve Act, as amended.
The Company proposes to capitalize the Foundation with Company Common
Stock in an amount equal to 8% of the total amount of Common Stock to be sold in
connection with the Conversion. At the minimum, midpoint and maximum of the
Estimated Price Range, the contribution to the Foundation would equal 306,000,
360,000 and 414,000 shares, which would have a market value of $3.1 million,
$3.6 million and $4.1 million, respectively, based on the Purchase Price of
$10.00 per share. Such contribution, once made, will not be recoverable by the
Company or the Bank. The Company and the Bank determined to fund the Foundation
with Common Stock rather than cash because it desired to form a bond with its
community in a manner that would allow the community to share in the potential
growth and success of the Company and the Bank over the long term. The funding
of the Foundation with stock also provides the Foundation
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with a potentially larger endowment than if the Company contributed cash to the
Foundation since, as a shareholder, the Foundation will share in the potential
growth and success of the Company. As such, the contribution of stock to the
Foundation has the potential to provide a self-sustaining funding mechanism
which reduces the amount of cash that the Company, if it were not making the
stock contribution, would have to contribute to the Foundation in future years
in order to maintain a level amount of charitable grants and donations.
The Foundation would receive working capital from any dividends that
may be paid on the Common Stock in the future, and subject to applicable federal
and state laws, loans collateralized by the Common Stock or from the proceeds of
the sale of any of the Common Stock in the open market from time to time as may
be permitted to provide the Foundation with additional liquidity. As a private
foundation under Section 501(c)(3) of the Code, the Foundation will be required
to distribute annually in grants or donations, a minimum of 5% of the average
fair market value of its net investment assets. One of the conditions imposed on
the gift of Common Stock by the Company is that the amount of Common Stock that
may be sold by the Foundation in any one year shall not exceed 5% of the average
market value of the assets held by the Foundation, except where the board of
directors of the Foundation, by three-fourths vote, determines that the failure
to sell an amount of common stock greater than such amount would result in a
long-term reduction of the value of the Foundation's assets or would otherwise
jeopardize the Foundation's capacity to carry out its charitable purposes. While
there may be a greater risk associated with a one-stock portfolio in comparison
to a diversified portfolio, the Company believes any such risk is mitigated by
the ability of the Foundation's directors to sell more than 5% of its stock in
such circumstances. Upon completion of the Conversion and the contribution of
shares to the Foundation immediately following the Conversion, the Company would
have 4,130,100, 4,860,000 and 5,589,000 shares issued and outstanding at the
minimum, midpoint and maximum of the Estimated Price Range. Because the Company
will have an increased number of shares outstanding, the voting and ownership
interests of shareholders in the Company's common stock would be diluted by
7.4%, as compared to their interests in the Company if the Foundation was not
established. For additional discussion of the dilutive effect, see "Comparison
of Valuation and Pro Forma Information With No Foundation" and "Pro Forma Data."
Tax Considerations. The Company and the Bank have been advised by their
independent accountants that an organization created for the above purposes will
qualify as a 501(c)(3) exempt organization under the Code, and will be
classified as a private foundation rather than a public charity. A private
foundation typically receives its support from one person or one corporation
whereas a public charity receives its support from the public. The Foundation
will submit a request to the IRS to be recognized as an exempt organization
after approval of the Foundation by the Bank's members at the Special Meeting
being held to consider the Conversion. As long as the Foundation files its
application for tax-exempt status within 15 months from the date of its
organization, and provided the IRS approves the application, the effective date
of the Foundation's status as a Section 501(c)(3) organization will be the date
of its organization. The Company's independent accountants, however, have not
rendered any advice on the condition of the gift which requires that all shares
of Common Stock of the Company held by the Foundation must be voted in the same
ratio as all other shares of the Company's Common Stock, on all proposals
considered by stockholders of the Company. In the event that the Company or the
Foundation receives an opinion of their tax counsel satisfactory to the OTS that
compliance with the voting restriction would cause the Foundation to lose its
tax-exempt status, otherwise have a material adverse tax consequence on the
Foundation or subject the Foundation to an excise tax under Section 4941 of the
Code, the OTS will waive such condition upon submission of such opinion(s) by
the Company or the Foundation. See " --Regulatory Conditions Imposed on the
Foundation."
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A legal opinion of the OTS which addresses the establishment of
charitable foundations by savings associations opines that as a general rule
funds contributed to a charitable foundation should not exceed the deductible
limitations set forth in the Code, and if an association's contributions exceed
the deductible limit, such action must be justified by the board of directors.
In addition, under Delaware law, the Company is authorized by statute to make
charitable contributions and case law has recognized the benefits of such
contributions to a Delaware corporation. In this regard, Delaware case law
provides that a charitable gift must merely be within reasonable limits as to
amount and purpose to be valid. Under the Code, the Company may deduct up to 10%
of its taxable income in any one year and any contributions made by the Company
in excess of the deductible amount will be deductible for federal tax purposes
over each of the five succeeding taxable years. The Company and the Bank believe
that the Conversion presents a unique opportunity to establish and fund a
charitable foundation given the substantial amount of additional capital being
raised in the Conversion. In making such a determination, the Company and the
Bank considered the dilutive impact of the Foundation on the amount of Common
Stock available to be offered for sale in the Conversion. See "Comparison of
Valuation and Pro Forma Information with No Foundation." Based on such
consideration, the Company and Bank believe that the contribution to the
Foundation in excess of the 10% annual limitation is justified given the Bank's
capital position and its earnings, the substantial additional capital being
raised in the Conversion and the potential benefits of the Foundation to the
Bank's community. In this regard, assuming the sale of the Common Stock at the
midpoint of the Estimated Price Range, the Company would have pro forma
consolidated capital of $67.8 million, or 16.6% of consolidated assets and the
Bank's pro forma tangible, core and risk-based capital ratios would be 12.6%,
12.6% and 24.1%, respectively. See "Regulatory Capital Compliance,"
"Capitalization," and "Comparison of Valuation and Pro Forma Information with No
Foundation." Thus, the amount of the contribution will not adversely impact the
financial condition of the Company and the Bank and the Company and the Bank
therefore believe that the amount of the charitable contribution is reasonable
given the Company and the Bank's pro forma capital positions. As such, the
Company and the Bank believe that the contribution does not raise safety and
soundness concerns.
The Company and the Bank have received an opinion of their independent
accountants that the Company's contribution of its own stock to the Foundation
will not constitute an act of self-dealing, and that the Company will be
entitled to a deduction in the amount of the fair market value of the stock at
the time of the contribution less the nominal par value that the Foundation is
required to pay to the Company for such stock, subject to a limitation based on
10% of the Company's annual taxable income. The Company, however, would be able
to carry forward any unused portion of the deduction for five years following
the year in which the contribution is made for federal tax purposes. Thus, while
the Company expects, based on the maximum of the Estimated Price Range, to be
able to utilize for federal income tax purposes a charitable contribution
deduction of approximately $450,000 in fiscal year 1998, the Company is
permitted under the Code to carryover the excess of the total contribution over
such 1998 deduction over a five-year period for federal income tax purposes. For
Commonwealth of Pennsylvania state income tax purposes, the Company also would
be able to deduct its contribution to the Foundation and to carry forward any
unused portion over a five-year period, subject to the limitation based on 10%
of the Company's unconsolidated annual taxable income, and provided the Company
generates sufficient state taxable income on an unconsolidated basis. Assuming
the close of the Offerings at the midpoint of the Estimated Price Range, the
Company estimates that all of the federal tax deduction should be deductible
over the six-year period. However, no assurances can be made that the Company
will have sufficient pre-tax income over the five year period following the year
in which the contribution was made to fully utilize the carryover related to the
excess contribution. Neither the Company nor the Bank expect to make any further
contributions to the Foundation within the first five years following the
initial contribution. After that time, the Company and the Bank may consider
future contributions to the Foundation. Any such decisions would be based on an
assessment of, among other
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factors, the financial condition of the Company and the Bank at that time, the
interests of shareholders and depositors of the Company and the Bank, and the
financial condition and operations of the Foundation.
Although the Company and the Bank have received an opinion of their
independent accountants that the Company is entitled to a deduction for the
charitable contribution, there can be no assurances that the IRS will recognize
the Foundation as a Section 501(c)(3) exempt organization or that the deduction
will be permitted. In such event, the Company's contribution to the Foundation
would be expensed without tax benefit, resulting in a reduction in earnings in
the year in which the IRS makes such a determination. The Bank has agreed to a
limitation on the liability of its independent accountants to it solely as a
result of, and to indemnify its independent accountants solely in connection
with, certain claims or liabilities relating to the above-discussed federal
income tax opinion except to the extent determined to have resulted from
professional negligence or intentional or deliberate misconduct. See "Risk
Factors -- Establishment of the Charitable Foundation." In cases of willful,
flagrant or repeated acts or failures to act which result in violations of the
IRS rules governing private foundations, a private foundation's status as a
private foundation may be involuntarily terminated by the IRS. In such event,
the managers of a private foundation could be liable for excise taxes based on
such violations and the private foundation could be liable for a termination tax
under the Code. The Foundation's certificate of incorporation provides that it
shall have a perpetual existence. In the event, however, the Foundation were
subsequently dissolved as a result of a loss of its tax exempt status, the
Foundation would be required under the Code and its certificate of incorporation
to distribute any assets remaining in the Foundation at that time for one or
more exempt purposes within the meaning of Section 501(c)(3) of the Code, or to
distribute such assets to the federal government, or to a state or local
government, for a public purpose.
As a private foundation, earnings and gains, if any, from the sale of
Common Stock or other assets are exempt from federal and state corporate
taxation. However, investment income, such as interest, dividends and capital
gains, will be subject to a federal excise tax of 2.0%. The Foundation will be
required to make an annual filing with the IRS within four and one-half months
after the close of the Foundation's fiscal year to maintain its tax-exempt
status. The Foundation will be required to publish a notice that the annual
information return will be available for public inspection for a period of 180
days after the date of such public notice. The information return for a private
foundation must include, among other things, an itemized list of all grants made
or approved, showing the amount of each grant, the recipient, any relationship
between a grant recipient and the Foundation's managers and a concise statement
of the purpose of each grant.
Regulatory Conditions Imposed on the Foundation. Establishment of the
Foundation is subject to the following conditions imposed by the OTS: (i) the
Foundation will be subject to examination by the OTS, at the Foundation's own
expense; (ii) the Foundation must comply with supervisory directives imposed by
the OTS; (iii) the Foundation will provide annual reports to the OTS describing
grants made and grant recipients; (iv) the Foundation will operate in accordance
with written policies adopted by the board of directors, including a conflict of
interest policy; (v) the Foundation will not engage in self-dealing and will
comply with all laws necessary to maintain its tax-exempt status; (vi) any
purchases of Common Stock by the Foundation following that Conversion will be
subject to OTS regulations on stock repurchases; and (vii) any shares of Common
Stock of the Company held by the Foundation must be voted in the same ratio as
all other shares of the Company's Common Stock on all proposals considered by
stockholders of the Company; provided, however, that the OTS will waive this
voting restriction under certain circumstances if compliance with the voting
restriction would: (a) cause a violation of the law of the State of Delaware and
the OTS determines the federal law does not preempt the application of the laws
of the State of Delaware to the Foundation; (b) cause the Foundation to lose its
tax-exempt status or otherwise have a material and adverse tax consequence on
the Foundation; or (c) cause the Foundation to be subject to an excise tax under
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4941 of the Code. In order for the OTS to waive such voting restriction, the
Company's or the Foundation's legal counsel must render an opinion satisfactory
to OTS that compliance with the voting restriction would have the effect
described in clauses (a), (b) or (c) above. Under those circumstances, the OTS
will grant a waiver of the voting restriction upon submission of such opinion(s)
by the Company or the Foundation. There can be no assurances that either a legal
or tax opinion addressing these issues will be rendered, or if rendered, that
the OTS will grant an unconditional waiver of the voting restriction. In this
regard, a condition to the OTS approval of the Conversion provides that in the
event such voting restriction is waived or becomes unenforceable, the Director
of the OTS, or his designees, at that time may impose conditions on the
composition of the board of directors of the Foundation or such other conditions
or restrictions relating to the control of the Common Stock held by the
Foundation, any of which could limit the ability of the board of directors of
the Foundation to control the voting of Common Stock held by the Foundation. In
no event will the voting restriction survive the sale of shares of the Common
Stock held by the Foundation.
In addition, establishment of the Foundation is subject to the approval
of a majority of the total outstanding votes of the Bank's members eligible to
be cast at the special meeting being held to consider the Conversion. The
Foundation will be considered as a separate matter from approval of the Plan of
Conversion. If the Bank's members approve the Plan of Conversion, but not the
Foundation, the Bank intends to complete the Conversion without the
establishment of the Foundation. Failure to approve the Foundation may
materially increase the pro forma market value of the Common Stock being offered
for sale in the Offering since the Valuation Range, as set forth herein, takes
into account the dilutive impact of the issuance of shares to the Foundation.
See "Comparison of Valuation and Pro Forma Information With No Foundation."
PURPOSES OF CONVERSION
The Bank, as a federally-chartered mutual savings and loan association,
does not have shareholders and has no authority to issue capital stock. By
converting to the capital stock form of organization, the Bank will be
structured in the form used by commercial banks, other business entities and a
growing number of savings institutions. The Conversion will enhance the Bank's
ability to access capital markets, expand its current operations, acquire other
financial institutions or branch offices, provide affordable home financing
opportunities to the communities it serves or diversify into other financial
services to the extent allowable by applicable law and regulation. The
Conversion would also position the Bank for a conversion to a commercial bank
charter if the Board of the Bank chooses to do so in the future.
The holding company form of organization, if used, would provide
additional flexibility to diversify the Bank's business activities through
existing or newly formed subsidiaries, or through acquisitions of or mergers
with both mutual and stock institutions, as well as other companies. Although
there are no current arrangements, understandings or agreements regarding any
such opportunities, the Company will be in a position after the Conversion,
subject to regulatory limitations and the Company's financial position, to take
advantage of any such opportunities that may arise.
The potential impact of the Conversion upon the Bank's capital base is
significant. Due to the Bank's capital position, it has sought to limit its
asset growth to a level sustainable by its capital position. The Conversion will
significantly increase the Bank's capital position to a level whereby the Bank
will be better positioned to take advantage of business opportunities and engage
in activities which, prior to Conversion, would have been more difficult for the
Bank to engage in and still continue to meet its status as a "well capitalized"
institution. At September 30, 1997, the Bank had total equity, determined in
accordance with
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GAAP, of $28.5 million, or 7.7% of total assets, which approximated the Bank's
regulatory tangible capital at that date of 7.4% of assets. An institution with
a ratio of tangible capital to total assets of greater than or equal to 5.0% is
considered to be "well-capitalized" pursuant to OTS regulations. Assuming that
the Company uses 50% of the net proceeds at the maximum of the Estimated Price
Range to purchase the stock of the Bank, the Bank's GAAP capital will increase
to $53.7 million or a ratio of GAAP capital to adjusted assets, on a pro forma
basis, of 13.6% after the Conversion. In the event that the holding company form
of organization is not utilized and all of the net Conversion proceeds, at the
midpoint of the Estimated Price Range, are retained by the Bank, the Bank's
ratios of tangible and core capital to adjusted assets, on a pro forma basis,
will both increase to 17.2% after Conversion. The investment of the net proceeds
from the sale of the Common Stock is expected to provide the Bank with
additional income to increase further its capital position. The additional
capital may also assist the Bank in offering new programs and expanded services
to its customers. See "Use of Proceeds."
After completion of the Conversion, the unissued common and preferred
stock authorized by the Company's Certificate of Incorporation will permit the
Company, subject to market conditions and regulatory approval of an offering, to
raise additional equity capital through further sales of securities, and to
issue securities in connection with possible acquisitions. At the present time,
the Company has no plans with respect to additional offerings of securities,
other than the possible issuance of additional shares upon exercise of Stock
Options under the Stock-Based Incentive Plan or the possible issuance of
authorized but unissued shares to the Stock-Based Incentive Plan for Stock
Awards. Following the Conversion, the Company will also be able to use
stock-related incentive plans to attract and retain executive and other
personnel for itself and its subsidiaries. See "Management of the Bank --
Executive Compensation."
EFFECTS OF CONVERSION
General. Each depositor in a mutual savings institution has both a
deposit account in the institution and a pro rata ownership interest in the net
worth of the institution based upon the balance in his or her account, which
interest may only be realized in the event of a liquidation of the institution
or in the event the institution declares a capital distribution to depositors,
subject to applicable regulations of the OTS. However, this ownership interest
is tied to the depositor's account and has no tangible market value separate
from such deposit account. Any depositor who opens a deposit account obtains a
pro rata ownership interest in the net worth of the institution without any
additional payment beyond the amount of the deposit. A depositor who reduces or
closes his account receives a portion or all of the balance in the account but
nothing for his ownership interest in the net worth of the institution, which is
lost to the extent that the balance in the account is reduced.
Consequently, mutual savings institution depositors normally have no
way to realize the value of their ownership interest, which has realizable value
only in the unlikely event that the mutual savings institution is liquidated or
in the event the institution declares a capital distribution to depositors,
subject to applicable regulations of the OTS. In such event, the depositors of
record at that time, as owners, would share pro rata in any residual surplus and
reserves after other claims, including claims of depositors to the amounts of
their deposits, are paid.
When a mutual savings institution converts to stock form, permanent
nonwithdrawable capital stock is created to represent the ownership of the
institution's net worth. THE COMMON STOCK IS SEPARATE AND APART FROM DEPOSIT
ACCOUNTS AND CANNOT BE AND IS NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENTAL
AGENCY. Certificates are issued to evidence ownership of the capital stock. The
stock certificates are
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transferable and, therefore, the stock may be sold or traded if a purchaser is
available with no effect on any account the seller may hold in the institution.
Continuity. While the Conversion is being accomplished, the normal
business of the Bank of accepting deposits and making loans will continue
without interruption. The Bank will continue to be subject to regulation by the
OTS and the FDIC. After the Conversion, the Bank will continue to provide
services for depositors and borrowers under current policies by its present
management and staff.
The Directors serving the Bank at the time of Conversion will serve
initially as Directors of the Bank after the Conversion. The Directors of the
Company will consist initially of individuals currently serving on the Board of
Directors of the Bank. All officers of the Bank at the time of Conversion will
retain their positions immediately after Conversion.
Effect on Deposit Accounts. Under the Plan, each depositor in the Bank
at the time of Conversion will automatically continue as a depositor after the
Conversion, and each such deposit account will remain the same with respect to
deposit balance, interest rate and other terms. Each such account will be
insured by the FDIC to the same extent as before the Conversion (i.e., up to
$100,000 per depositor). Depositors will continue to hold their existing
certificates, passbooks and other evidences of their accounts.
Effect on Loans. No loan outstanding from the Bank will be affected by
the Conversion, and the amount, interest rate, maturity and security for each
loan will remain as they were contractually fixed prior to the Conversion.
Effect on Voting Rights of Members. At present, all depositors and
certain borrowers of the Bank are members of, and have voting rights in, the
Bank as to all matters requiring membership action. Upon Conversion, depositors
and borrowers will cease to be members and will no longer be entitled to vote at
meetings of the Bank. Upon Conversion, all voting rights in the Bank will be
vested in the Company as the sole stockholder of the Bank. Exclusive voting
rights with respect to the Company will be vested in the holders of Common
Stock. Depositors and borrowers of the Bank will not have voting rights after
the Conversion except to the extent that they become stockholders of the Company
through the purchase of Common Stock.
Tax Effects. The Bank has received an opinion of counsel with regard to
federal income taxation and an opinion from KPMG Peat Marwick LLP with regard to
Pennsylvania income taxation which provide that the adoption and implementation
of the Plan of Conversion set forth herein will not be taxable for federal or
Pennsylvania tax purposes to the Bank, its Eligible Account Holders, or its
Supplemental Eligible Account Holders or the Company, except as discussed below.
See " -- Tax Aspects."
Effect on Liquidation Rights. If a mutual savings institution were to
liquidate, all claims of creditors (including those of depositors, to the extent
of deposit balances) would be paid first. Thereafter, if there were any assets
remaining, depositors would be entitled to such remaining assets, pro rata,
based upon the deposit balances in their deposit accounts immediately prior to
liquidation. In the unlikely event that the Bank were to liquidate after
Conversion, all claims of creditors (including those of depositors, to the
extent of their deposit balances) would also be paid first, followed by
distribution of the "liquidation account" to certain depositors (see " --
Liquidation Rights"), with any assets remaining thereafter distributed to the
Company as the holder of the Bank's capital stock. Pursuant to the rules and
regulations of the OTS, a post-Conversion merger, consolidation, sale of bulk
assets or similar combination or transaction with another insured savings
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institution would not be considered a liquidation and, in such a transaction,
the liquidation account would be assumed by the surviving institution.
STOCK PRICING
The Plan of Conversion requires that the aggregate purchase price of
the Common Stock must be based on the appraised pro forma market value of the
Common Stock, as determined on the basis of an independent valuation. The Bank
and the Company have retained Keller to make such valuation. For its services in
making such appraisal, Keller will receive a fee of $21,000, plus reasonable
expenses not to exceed $500. The Bank and the Company have agreed to indemnify
Keller and its employees and affiliates against certain losses (including any
losses in connection with claims under the federal securities laws) arising out
of its services as appraiser, except where Keller's liability results from its
negligence, willful misconduct or bad faith.
An appraisal has been made by Keller in reliance upon the information
contained in this Prospectus, including the Consolidated Financial Statements.
Keller also considered the following factors, among others: the present and
projected operating results and financial condition of the Company and the Bank
and the economic and demographic conditions in the Bank's existing marketing
area; certain historical, financial and other information relating to the Bank;
a comparative evaluation of the operating and financial statistics of the Bank
with those of other similarly situated publicly-traded savings banks and savings
institutions located in the Bank's market area and the Midwest and the
midatlantic areas of the United States; the aggregate size of the offering of
the Common Stock; the impact of Conversion on the Bank's net worth and earnings
potential; the proposed dividend policy of the Company and the Bank; and the
trading market for securities of comparable institutions and general conditions
in the market for such securities.
On the basis of the foregoing, Keller has advised the Company and the
Bank that, in its opinion, dated November 28, 1997, the estimated pro forma
market value of the Common Stock, being offered for sale ranged from a minimum
of $38.3 million to a maximum of $51.8 million with a midpoint of $45.0 million.
Based upon the Valuation Range and the Purchase Price of $10.00 per share for
the Common Stock established by the Board of Directors, the Board of Directors
has established the Estimated Price Range of $38.3 million to $51.8 million,
with a midpoint of $45.0 million, and the Company expects to issue between
3,825,000 and 5,175,000 shares of Common Stock. The Board of Directors of the
Company and the Bank have reviewed the appraisal of Keller and in determining
the reasonableness and adequacy of such appraisal consistent with OTS
regulations and policies, have reviewed the methodology and reasonableness of
the assumptions utilized by Keller in the preparation of such appraisal. The
Estimated Price Range may be amended with the approval of the OTS (if required),
if necessitated by subsequent developments in the financial condition of the
Company or the Bank or market conditions generally.
SUCH APPRAISAL, HOWEVER, IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS
A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING COMMON STOCK
IN THE OFFERINGS. KELLER DID NOT INDEPENDENTLY VERIFY THE CONSOLIDATED FINANCIAL
STATEMENTS AND OTHER INFORMATION PROVIDED BY THE BANK, NOR DID KELLER VALUE
INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE BANK. THE APPRAISAL CONSIDERS THE
BANK AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE
LIQUIDATION VALUE OF THE BANK. MOREOVER, BECAUSE SUCH APPRAISAL IS NECESSARILY
BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH ARE
SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS
PURCHASING COMMON STOCK IN THE CONVERSION WILL THEREAFTER BE ABLE TO SELL COMMON
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STOCK AT PRICES AT OR ABOVE THE PURCHASE PRICE OR IN THE RANGE OF THE FOREGOING
VALUATION OF THE PRO FORMA MARKET VALUE THEREOF. SEE "RISK FACTORS -- ABSENCE OF
MARKET FOR COMMON STOCK."
Following commencement of the Subscription Offering, the maximum of the
Estimated Price Range may be increased up to 15% and the number of shares of
Common Stock to be issued in the Conversion may be increased to 5,951,250 shares
due to regulatory considerations, changes in the market and general financial
and economic conditions, without the resolicitation of subscribers. See " --
Limitations on Common Stock Purchases" as to the method of distribution and
allocation of additional shares that may be issued in the event of an increase
in the Estimated Price Range to fill unfilled orders in the Subscription
Offering.
No sale of shares of Common Stock may be consummated unless, prior to
such consummation, Keller confirms to the Bank and the OTS that, to the best of
its knowledge, nothing of a material nature has occurred which, taking into
account all relevant factors, would cause Keller to conclude that the value of
the Common Stock at the price so determined is incompatible with its estimate of
the pro forma market value of the Common Stock at the conclusion of the
Subscription Offering.
If the pro forma market value of the Common Stock is either more than
15% above the maximum of the Estimated Price Range or less than the minimum of
the Estimated Price Range, the Bank and the Company, after consulting with the
OTS, may terminate the Plan and return all funds promptly with interest at the
Bank's passbook rate of interest on payments made by check, bank draft or money
order, extend or hold a new Subscription Offering and/or Community Offering,
establish a new Estimated Price Range, commence a resolicitation of subscribers
or take such other actions as permitted by the OTS in order to complete the
Conversion. In the event that a resolicitation is commenced, unless an
affirmative response is received within a reasonable period of time, all funds
will be promptly returned to investors as described above. A resolicitation, if
any, following the conclusion of the Subscription Offering would not exceed 45
days unless further extended by the OTS for periods of up to 90 days not to
extend beyond _______________, 199_.
If all shares of Common Stock are not sold through the Subscription
Offering or Community Offering, then the Bank and the Company expect to offer
the remaining shares in a Syndicated Community Offering which would occur as
soon as practicable following the close of the Subscription Offering but may
commence during the Subscription Offering subject to prior rights of
subscribers. All shares of Common Stock will be sold at the same price per share
in the Syndicated Community Offering as in the Subscription Offering and
Community Offering. See " -- Syndicated Community Offering."
No sale of shares of Common Stock may be consummated unless, prior to
such consummation, Keller confirms to the Bank, the Company and the OTS that, to
the best of its knowledge, nothing of a material nature has occurred which,
taking into account all relevant factors, including those which would be
involved in a cancellation of the Syndicated Community Offering, would cause
Keller to conclude that the aggregate value of the Common Stock at the Purchase
Price is incompatible with its estimate of the pro forma market value of the
Common Stock of the Company at the time of the Syndicated Community Offering.
Any change which would result in an aggregate purchase price which is below or
more than 15% above the Estimated Price Range would be subject to OTS approval.
If such confirmation is not received, the Bank may extend the Conversion,
extend, reopen or commence new Subscription Offering, Community Offering or
Syndicated Community Offering, establish a new Estimated Price Range and
commence a resolicitation of all subscribers with the approval of the OTS or
take such other actions as permitted by the OTS in order to complete the
Conversion, or terminate the Plan and cancel the Subscription and Community
Offerings
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and/or the Syndicated Community Offering. In the event market or financial
conditions change so as to cause the aggregate purchase price of the shares to
be below the minimum of the Estimated Price Range or more than 15% above the
maximum of such range, and the Company and the Bank determine to continue the
Conversion, subscribers will be resolicited (i.e., be permitted to continue
their orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
subscription funds will be promptly refunded with interest at the Bank's
passbook rate of interest, or be permitted to decrease or cancel their
subscriptions). Any change in the Estimated Price Range must be approved by the
OTS. A resolicitation, if any, following the conclusion of the Subscription
Offering would not exceed 45 days unless further extended by the OTS for periods
up to 90 days not to extend beyond _______________, 199_. If such resolicitation
is not effected, the Bank will return all funds promptly with interest at the
Bank's passbook rate of interest on payments made by check, bank draft or money
order.
Copies of the appraisal report of Keller, including any amendments
thereto, and the detailed memorandum of the appraiser setting forth the method
and assumptions for such appraisal are available for inspection at the main
office of the Bank and the other locations specified under "Additional
Information."
NUMBER OF SHARES TO BE ISSUED
Depending upon market or financial conditions following the
commencement of the Subscription Offering, the total number of shares to be
issued in the Conversion may be increased or decreased without a resolicitation
of subscribers, provided that the product of the total number of shares times
the price per share is not below the minimum of the Estimated Price Range or
more than 15% above the maximum of the Estimated Price Range. Based on a fixed
purchase price of $10.00 per share and Keller's estimate of the pro forma market
value of the Common Stock ranging from a minimum of $38.3 million to a maximum,
as increased by 15%, of $59.5 million, the number of shares of Common Stock
expected to be sold in the Conversion is between a minimum of 3,825,000 shares
and a maximum, as adjusted by 15%, of 5,951,250 shares. The actual number of
shares sold between this range will depend on a number of factors and shall be
determined by the Bank and Company subject to OTS approval, if necessary.
In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the Estimated
Price Range or more than 15% above the maximum of the Estimated Price Range, if
the Plan is not terminated by the Company and the Bank after consultation with
the OTS, purchasers will be resolicited (i.e., permitted to continue their
orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
subscription funds will be promptly refunded, or be permitted to modify or
rescind their subscriptions). Any change in the Estimated Price Range must be
approved by the OTS. If the number of shares issued in the Conversion is
increased due to an increase of up to 15% in the Estimated Price Range to
reflect changes in market or financial condition, persons who subscribed for the
maximum number of shares will not be given the opportunity to subscribe for an
adjusted maximum number of shares, except for the ESOP which will be able to
subscribe for such adjusted amount. See " -- Limitations on Common Stock
Purchases."
In the event the members of the Bank approve the establishment of the
Foundation, the number of shares to be issued and outstanding following the
Conversion will be increased by a number of shares equal to 8.0% of the Common
Stock sold in the Conversion. Assuming the sale of shares in the Offerings at
the maximum of the Estimated Price Range, the Company will issue 414,000 shares
of its Common Stock from authorized but unissued shares to the Foundation
immediately following the completion of the Conversion. In that event, the
Company will have total shares of Common Stock outstanding of 5,589,000 shares.
Of that
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amount, the Foundation will own 7.4%. Funding the Foundation with authorized but
unissued shares will have the effect of diluting the ownership and voting
interests of persons purchasing shares in the Conversion by 7.4% since a greater
number of shares will be outstanding upon completion of the Conversion than
would be if the Foundation were not established. See "Pro Forma Data."
An increase in the number of shares to be issued in the Conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and the Company's pro forma net earnings
and stockholders' equity on a per share basis while increasing pro forma net
earnings and stockholders' equity on an aggregate basis. A decrease in the
number of shares to be issued in the Conversion would increase both a
subscriber's ownership interest and the Company's pro forma net earnings and
stockholders' equity on a per share basis while decreasing pro forma net
earnings and stockholder's equity on an aggregate basis. For a presentation of
the effects of such changes, see "Pro Forma Data."
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock have been granted under the Plan of Conversion to the
following persons in the following order of descending priority: (1) holders of
deposit accounts with a balance of $50 or more as of September 30, 1996
("Eligible Account Holders"); (2) the ESOP; (3) holders of deposit accounts with
a balance of $50 or more as of December 31, 1997 ("Supplemental Eligible Account
Holders"); and (4) members of the Bank, consisting of depositors of the Bank as
of __________, 199_, the Voting Record Date, and borrowers with loans
outstanding as of December 16, 1997, which continue to be outstanding as of the
Voting Record Date other than Eligible Account Holders and Supplemental Eligible
Account Holders ("Other Members"). All subscriptions received will be subject to
the availability of Common Stock after satisfaction of all subscriptions of all
persons having prior rights in the Subscription Offering and to the maximum and
minimum purchase limitations set forth in the Plan of Conversion and as
described below under " -- Limitations on Common Stock Purchases."
Priority 1: Eligible Account Holders. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable subscription
rights to subscribe for in the Subscription Offering up to the greater of (1)
the amount permitted to be purchased in the Community Offering, currently
$175,000 of Common Stock; (2) one-tenth of one percent (.10%) of the total
offering of shares of Common Stock; or (3) fifteen times the product (rounded
down to the next whole number) obtained by multiplying the total number of
shares of Common Stock to be issued by a fraction of which the numerator is the
amount of the Eligible Account Holder's Qualifying Deposit (defined by the Plan
as any deposit account in the Bank with a balance of $50 or more as of September
30, 1996) and the denominator is the total amount of Qualifying Deposits of all
Eligible Account Holders, in each case on the Eligibility Record Date, subject
to the overall purchase limitation and exclusive of an increase in the shares
issued pursuant to an increase in the Estimated Price Range of up to 15%. See "
- -- Limitations on Common Stock Purchases."
In the event that Eligible Account Holders exercise subscription rights
for a number of shares of Conversion Stock in excess of the total number of such
shares eligible for subscription, the shares of Conversion Stock shall be
allocated among the subscribing Eligible Account Holders so as to permit each
subscribing Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation of Conversion
Stock equal to the lesser of 100 shares or the number of shares subscribed for
by the Eligible Account Holder. Any shares remaining after that allocation will
be allocated among the subscribing Eligible Account Holders whose subscriptions
remain unsatisfied in the proportion
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that the amount of the Qualifying Deposit of each Eligible Account Holder whose
subscription remains unsatisfied bears to the total amount of the Qualifying
Deposits of all Eligible Account Holders whose subscriptions remain unsatisfied.
If the amount so allocated exceeds the amount subscribed for by any one or more
Eligible Account Holders, the excess shall be reallocated (one or more times as
necessary) among those Eligible Account Holders whose subscriptions are still
not fully satisfied on the same principle until all available shares have been
allocated or all subscriptions satisfied..
To ensure proper allocation of stock, each Eligible Account Holder must
list on his subscription order form all accounts in which he has an ownership
interest. Failure to list an account could result in less shares being allocated
than if all accounts had been disclosed. The subscription rights of Eligible
Account Holders who are also Directors or Officers of the Bank or their
associates will be subordinated to the subscription rights of other Eligible
Account Holders to the extent attributable to increased deposits in the 12
months preceding September 30, 1996.
Priority 2: Employee Stock Ownership Plan. To the extent that there are
sufficient shares remaining after satisfaction of the subscriptions by Eligible
Account Holders, the ESOP will receive, without payment therefor, second
priority, nontransferable subscription rights to purchase, in the aggregate, up
to 10% of Common Stock issued in the Conversion, including shares issued to the
Foundation, and any increase in the number of shares of Common Stock to be
issued in the Conversion after the date hereof as a result of an increase of up
to 15% in the maximum of the Estimated Price Range. The ESOP intends to purchase
8% of the shares to be issued in the Conversion, including shares issued to the
Foundation, or 330,480 shares and 447,120 shares, based on the minimum and
maximum of the Estimated Price Range, respectively. Subscriptions by the ESOP
will not be aggregated with shares of Common Stock purchased directly by or
which are otherwise attributable to any other participants in the Subscription
Offering, including subscriptions of any of the Bank's directors, officers,
employees or associates thereof. See "Management of the Bank -- Benefits --
Employee Stock Ownership Plan."
Priority 3: Supplemental Eligible Account Holders. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third priority,
nontransferable subscription rights to subscribe for in the Subscription
Offering up to the greater of the amount permitted to be purchased in the
Community Offering, currently $175,000 of Common Stock, one-tenth of one percent
(.10%) of the total offering of shares of Common Stock or fifteen times the
product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Common Stock to be issued by a fraction of which the
numerator is the amount of the Supplemental Eligible Account Holder's Qualifying
Deposit and the denominator is the total amount of Qualifying Deposits of all
Supplemental Eligible Account Holders, in each case on the Supplemental
Eligibility Record Date, subject to the overall purchase limitation and
exclusive of an increase in the shares issued pursuant to an increase in the
Estimated Price Range of up to 15%. See " -- Limitations on Common Stock
Purchases."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Conversion Stock in excess of the
total number of such shares eligible for subscription, the shares of Conversion
Stock shall be allocated among the subscribing Supplemental Eligible Account
Holders so as to permit each subscribing Supplemental Eligible Account Holder,
to the extent possible, to purchase a number of shares sufficient to make his or
her total allocation of Conversion Stock equal to the lesser of 100 shares or
the number of shares subscribed for by the Supplemental Eligible Account Holder.
Any shares remaining after that allocation will be allocated among the
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied in the proportion that the amount of the Qualifying Deposit
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of each Supplemental Eligible Account Holder whose subscription remains
unsatisfied bears to the total amount of the Qualifying Deposits of all
Supplemental Eligible Account Holders whose subscriptions remain unsatisfied. If
the amount so allocated exceeds the amount subscribed for by any one or more
Supplemental Eligible Account Holders, the excess shall be reallocated (one or
more times as necessary) among those Supplemental Eligible Account Holders whose
subscriptions are still not fully satisfied on the same principle until all
available shares have been allocated or all subscriptions satisfied.
To ensure proper allocation of stock, each Supplemental Eligible
Account Holder must list on his subscription order form all accounts in which he
has an ownership interest. Failure to list an account could result in less
shares being allocated than if all accounts had been disclosed. The subscription
rights received by Eligible Account Holders will be applied in partial
satisfaction to the subscription rights to be received as a Supplemental
Eligible Account Holder.
Priority 4: Other Members. To the extent that there are sufficient
shares remaining after satisfaction of subscriptions by the Eligible Account
Holders, the ESOP and the Supplemental Eligible Account Holders, each Other
Member will receive, without payment therefor, fourth priority nontransferable
subscription rights to subscribe for Common Stock in the Subscription Offering
up to the greater of the amount permitted to be purchased in the Community
Offering, currently $175,000 of Common Stock, or one-tenth of one percent (.10%)
of the total offering of shares of Common Stock, subject to the overall purchase
limitation and exclusive of an increase in shares issued pursuant to an increase
in the Estimated Price Range of up to 15%.
In the event that Other Members subscribe for a number of shares of
Conversion Stock which, when added to the shares of Conversion Stock subscribed
for by the Eligible Account Holders, the Employee Plans and the Supplemental
Eligible Account Holders is in excess of the total number of shares of
Conversion Stock being issued, the subscriptions of such Other Members will be
allocated among the subscribing Other Members so as to permit each subscribing
Other Member, to the extent possible, to purchase a number of shares sufficient
to make his or her total allocation of Conversion Stock equal to the lesser of
100 shares or the number of shares subscribed for by the Other Member. Any
shares remaining after that allocation will be allocated among the subscribing
Other Members whose subscriptions remain unsatisfied pro rata in the same
proportion that the number of votes of a subscribing Other Member on the Voting
Record Date bears to the total votes on the Voting Record Date of all
subscribing Other Members whose subscriptions remain unsatisfied. If the amount
so allocated exceeds the amount subscribed for by any one or more remaining
Other Members, the excess shall be reallocated (one or more times as necessary)
among those remaining Other Members whose subscriptions are still not fully
satisfied on the same principle until all available shares have been allocated
or all subscriptions satisfied.
Expiration Date for the Subscription Offering. The Subscription
Offering will expire on _______________, 1998, unless extended for up to 45 days
by the Bank or such additional periods with the approval of the OTS.
Subscription rights which have not been exercised prior to the Expiration Date
will become void.
The Bank will not execute orders until all shares of Common Stock have
been subscribed for or otherwise sold. If all shares have not been subscribed
for or sold within 45 days after the Expiration Date, unless such period is
extended with the consent of the OTS, all funds delivered to the Bank pursuant
to the Subscription Offering will be returned promptly to the subscribers with
interest and all withdrawal authorizations will be canceled. If an extension
beyond the 45 day period following the Expiration Date is granted, the Bank will
notify subscribers of the extension of time and of any rights of subscribers to
modify
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or rescind their subscriptions and have their funds returned promptly with
interest, and of the time period within which subscribers must affirmatively
notify the Bank of their intention to confirm, modify, or rescind their
subscription. If an affirmative response to any resolicitation is not received
by the Company from a subscriber, such order will be rescinded and all
subscription funds will be promptly returned with interest. Such extensions may
not go beyond _______________, 199_.
COMMUNITY OFFERING
To the extent that shares remain available for purchase after
satisfaction of all subscriptions of the Eligible Account Holders, the ESOP, the
Supplemental Eligible Account Holders and Other Members, the Bank has determined
to offer shares pursuant to the Plan to certain members of the general public
and may reserve a number of shares equal to the lesser of 25% of the Common
Stock offered or the Common Stock not subscribed for in the Subscription
Offering for institutional investors. Any excess of shares available will be
available for purchase by the general public, subject to the right of the
Company to accept or reject any such orders, in whole or in part, in their sole
discretion. Such persons, together with associates of and persons acting in
concert with such persons, may purchase up to $175,000 of Common Stock subject
to the maximum purchase limitation and exclusive of shares issued pursuant to an
increase in the Estimated Price Range by up to 15%. See " --Limitations on
Common Stock Purchases." This amount may be increased to up to a maximum of 5%
or decreased to less than $175,000 at the sole discretion of the Company and the
Bank. THE OPPORTUNITY TO SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE COMMUNITY
OFFERING CATEGORY IS SUBJECT TO THE RIGHT OF THE BANK AND THE COMPANY, IN ITS
SOLE DISCRETION, TO ACCEPT OR REJECT ANY SUCH ORDERS IN WHOLE OR IN PART EITHER
AT THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING THE
EXPIRATION DATE.
Subject to the foregoing, if the amount of stock remaining is
insufficient to fill the orders of subscribers after completion of the
Subscription Offering and the filling of institutional orders, such stock will
be allocated first to each subscriber whose order is accepted by the Bank, in an
amount equal to the lesser of 100 shares or the number of shares subscribed for
by each such subscriber, if possible. Thereafter, unallocated shares will be
allocated among the subscribers whose order remains unsatisfied on a 100 shares
per order basis until all such orders have been filled or the remaining shares
have been allocated.
PERSONS IN NONQUALIFIED STATES OR FOREIGN COUNTRIES
The Company and the Bank will make reasonable efforts to comply with
the securities laws of all states in the United States in which persons entitled
to subscribe for stock pursuant to the Plan reside. However, the Plan provides
that the Bank and the Company are not required to offer stock in the
Subscription Offering to any person who resides in a foreign country or resides
in a state of the United States with respect to which both of the following
apply: (i) a small number of persons otherwise eligible to subscribe for shares
of Common Stock reside in such state; and (ii) the Company or the Bank
determines that compliance with the securities laws of such state would be
impracticable for reasons of cost or otherwise, including but not limited to a
request that the Company and the Bank or their officers, directors or trustees
register as a broker, dealer, salesman or selling agent, under the securities
laws of such state, or a request to register or otherwise qualify the
subscription rights or Common Stock for sale or submit any filing with respect
thereto in such state. Where the number of persons eligible to subscribe for
shares in one state is small, the Bank and the Company will base their decision
as to whether or not to offer the Common Stock in such state on a number of
factors, including the size of accounts held by account holders in the state,
the cost of registering or
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qualifying the shares or the need to register the Company, its officers,
directors or employees as brokers, dealers or salesmen.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Bank and the Company have engaged Sandler O'Neill as a consultant
and financial advisor in connection with the offering of the Common Stock, and
Sandler O'Neill has agreed to use its best efforts to solicit subscriptions and
purchase orders for shares of Common Stock in the Offerings. Based upon
negotiations between the Bank and the Company concerning fee structure, Sandler
O'Neill will receive a fee equal to 1.25% of the aggregate Purchase Price of the
shares sold in the Subscription and Community Offerings, excluding shares
purchased by directors, officers, employees, and any immediate family member
thereof, and any employee benefit plan of the Company or Bank, including the
ESOP for which Sandler O'Neill will not receive a fee. In the event that a
selected dealers agreement is entered into in connection with a Syndicated
Community Offering, the Bank will pay a fee (to be negotiated at such time under
such agreement) to such selected dealers, any sponsoring dealers fees, and a
management fee to Sandler O'Neill of 1.25% for shares sold by a National
Association of Securities Dealers, Inc. member firms pursuant to a selected
dealers agreement; provided, however, that any fees payable to Sandler O'Neill
for Common Stock sold by them pursuant to such a selected dealers agreement
shall not exceed 1.25% of the Purchase Price and provided, further, however,
that the aggregate fees payable to Sandler O'Neill and the selected dealers will
not exceed 7% of the aggregate purchase price of the Common Stock sold by
selected dealers. Fees to Sandler O'Neill and to any other broker-dealer may be
deemed to be underwriting fees, and Sandler O'Neill and such broker-dealers may
be deemed to be underwriters. Notwithstanding the foregoing, in the event the
Offerings are not consummated or Sandler O'Neill ceases, under certain
circumstances after the subscription solicitation activities are commenced, to
provide assistance to the Company, Sandler O'Neill will be entitled to a fee for
its management advisory services in an amount to be agreed upon by the Bank and
Sandler O'Neill, and based upon the amount of services performed by Sandler
O'Neill. The Company and the Bank have agreed to indemnify Sandler O'Neill for
reasonable costs and expenses in connection with certain claims or liabilities,
including certain liabilities under the Securities Act. Sandler O'Neill has
received advances towards its fees totaling $50,000. Total marketing fees to
Sandler O'Neill are expected to be $414,500 and $568,700 at the minimum and the
maximum of the Estimated Price Range, respectively. See "Pro Forma Data" for the
assumptions used to arrive at these estimates.
Sandler O'Neill will perform proxy solicitation services, conversion
agent services and records management services for the Bank in the Conversion
and will receive a fee for these services of $20,000. Reasonable out-of-pocket
expenses shall not exceed $50,000.
Directors and executive officers of the Company and Bank may
participate in the solicitation of offers to purchase Common Stock. Questions of
prospective purchasers will be directed to executive officers or registered
representatives. Other employees of the Bank may participate in the Offering in
ministerial capacities or providing clerical work in effecting a sales
transaction. Such other employees have been instructed not to solicit offers to
purchase Common Stock or provide advice regarding the purchase of Common Stock.
The Company will rely on Rule 3a4-1 under the Exchange Act, and sales of Common
Stock will be conducted within the requirements of Rule 3a4-1, so as to permit
officers, directors and employees to participate in the sale of Common Stock. No
officer, director or employee of the Company or the Bank will be compensated in
connection with his participation by the payment of commissions or other
remuneration based either directly or indirectly on the transactions in the
Common Stock.
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PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION OFFERING
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 stock
order form and certification form will confirm receipt or delivery in accordance
with Rule 15c2-8. Stock order and certification forms will only be distributed
with a prospectus.
To purchase shares in the Offerings, an executed stock order form and
certification form with the required payment for each share subscribed for, or
with appropriate authorization for withdrawal from the Bank's deposit account
(which may be given by completing the appropriate blanks in the stock order
form), must be received by the Bank at any of its offices by ____ p.m., Eastern
time, on the Expiration Date. Stock order forms which are not received by such
time or are executed defectively or are received without full payment (or
appropriate withdrawal instructions) are not required to be accepted. In
addition, the Bank and Company are not obligated to accept orders submitted on
photocopied or facsimilied stock order forms and will not accept stock order
forms unaccompanied by an executed certification form. Notwithstanding the
foregoing, the Company shall have the right, in its sole discretion, to permit
institutional investors to submit irrevocable orders together with a legally
binding commitment for payment and to thereafter pay for the shares of Common
Stock for which they subscribe in the Community Offering at any time prior to 48
hours before the completion of the Conversion. The Company and the Bank have the
right to waive or permit the correction of incomplete or improperly executed
forms, but do not represent that they will do so. Once received, an executed
stock order form may not be modified, amended or rescinded without the consent
of the Bank unless the Conversion has not been completed within 45 days after
the end of the Subscription Offering, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (September 30,
1996) and/or the Supplemental Eligibility Record Date (December 31, 1997) and/or
the Voting Record Date (_______, 1997) must list all accounts on the stock order
form giving all names in each account and the account number.
Payment for subscriptions may be made (i) in cash if delivered in
person at any branch office of the Bank, (ii) by check, bank draft or money
order, or (iii) by authorization of withdrawal from deposit accounts maintained
with the Bank. No wire transfers will be accepted. Interest will be paid on
payments made by cash, check, bank draft or money order at the Bank's passbook
rate of interest from the date payment is received until the completion or
termination of the Conversion. Orders for Common Stock submitted by subscribers
in the Subscription Offering which aggregate $50,000 or more must be paid by
official or certified check or by withdrawal authorization from a deposit
account of the Bank. If payment is made by authorization of withdrawal from
deposit accounts, the funds authorized to be withdrawn from a deposit account
will continue to accrue interest at the contractual rates until completion or
termination of the Conversion, but a hold will be placed on such funds, thereby
making them unavailable to the depositor until completion or termination of the
Conversion.
If a subscriber authorizes the Bank to withdraw the amount of the
purchase price from his deposit account, the Bank will do so as of the effective
date of the Conversion. The Bank will waive any applicable penalties for early
withdrawal from certificate accounts. If the remaining balance in a certificate
account is reduced below the applicable minimum balance requirement at the time
that the funds actually are transferred
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under the authorization, the certificate will be canceled at the time of the
withdrawal, without penalty, and the remaining balance will earn interest at the
Bank's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the
ESOP will not be required to pay for the shares subscribed for at the time it
subscribes, but rather, may pay for such shares of Common Stock subscribed for
at the Purchase Price upon consummation of the Subscription Offering, if all
shares are sold, or upon consummation of the Community Offering or Syndicated
Community Offering if shares remain to be sold in such offerings; provided, that
there is in force from the time of its subscription until such time, a loan
commitment from an unrelated financial institution or the Company to lend to the
ESOP, at such time, the aggregate Purchase Price of the shares for which it
subscribed.
Owners of self-directed Individual Retirement Accounts ("IRAs") and
Qualified Plans may use the assets of such IRAs and Qualified Plans to purchase
shares of Common Stock in the Subscription Offering and/or Community Offering,
provided that such IRAs are not maintained at the Bank. Persons with
self-directed IRAs and Qualified Plans maintained at the Bank must have their
accounts transferred to an unaffiliated institution or broker to purchase shares
of Common Stock in the Subscription Offering and/or Community Offering. In
addition, the provisions of ERISA and IRS regulations require that officers,
directors and ten percent shareholders who use self-directed IRA funds and
Qualified Plans to purchase shares of Common Stock in the Subscription Offering
and/or Community Offering, make such purchases for the exclusive benefit of the
IRAs and Qualified Plans.
Certificates representing shares of Common Stock purchased will be
mailed to purchasers at the address specified in properly completed stock order
forms, as soon as practicable following consummation of the sale of all shares
of Common Stock. Any certificates returned as undeliverable will be disposed of
in accordance with applicable law.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the completion of the Conversion, the OTS conversion
regulations prohibit any person with subscription rights, including the Eligible
Account Holders, the ESOP, the Supplemental Eligible Account Holders and Other
Members of the Bank, from transferring or entering into any agreement or
understanding to transfer the legal or beneficial ownership of the subscription
rights issued under the Plan or the shares of Common Stock to be issued upon
their exercise. Such rights may be exercised only by the person to whom they are
granted and only for his account. Each person exercising such subscription
rights will be required to certify that he is purchasing shares solely for his
own account and that he has no agreement or understanding regarding the sale or
transfer of such shares. The regulations also prohibit any person from offering
or making an announcement of an offer or intent to make an offer to purchase
such subscription rights or shares of Common Stock prior to the completion of
the Conversion.
THE BANK AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES (INCLUDING FORFEITURE) IN THE EVENT THEY BECOME AWARE OF THE TRANSFER
OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE
TRANSFER OF SUCH RIGHTS.
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SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion, the Plan provides that, if feasible,
all shares of Common Stock not purchased in the Subscription and Community
Offerings, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed and managed by Sandler O'Neill acting as agent of the Company to
assist the Company and the Bank in the sale of the Common Stock. The Company and
the Bank have the right to reject orders in whole or in part in their sole
discretion in the Syndicated Community Offering. Neither Sandler O'Neill nor any
registered broker-dealer shall have any obligation to take or purchase any
shares of the Common Stock in the Syndicated Community Offering, however,
Sandler O'Neill has agreed to use its best efforts in the sale of shares in the
Syndicated Community Offering.
The price at which Common Stock is sold in the Syndicated Community
Offering will be determined as described above under " -- Stock Pricing."
Subject to overall purchase limitations, no person, together with any associate
or group of persons acting in concert, will be permitted to subscribe in the
Syndicated Community Offering for more than $175,000 of the Common Stock,
exclusive of an increase in shares issued pursuant to an increase in the
Estimated Price Range of up to 15%; provided, however, that shares of Common
Stock purchased in the Community Offering by any persons, together with
associates of or persons acting in concert with such persons, will be aggregated
with purchases in the Syndicated Community Offering and be subject to an overall
maximum purchase limitation of 1.0% of the shares offered, exclusive of an
increase in shares issued pursuant to an increase in the Estimated Price Range
by up to 15%.
Payments made in the form of a check, bank draft, money order or in
cash will earn interest at the Bank's passbook rate of interest from the date
such payment is actually received by the Bank until completion or termination of
the Conversion.
In addition to the foregoing, if a syndicate of broker-dealers
("selected dealers") is formed to assist in the Syndicated Community Offering, a
purchaser may pay for his shares with funds held by or deposited with a selected
dealer. If an order form is executed and forwarded to the selected dealer or if
the selected dealer is authorized to execute the order form on behalf of a
purchaser, the selected dealer is required to forward the order form and funds
to the Bank for deposit in a segregated account on or before noon of the
business day following receipt of the order form or execution of the order form
by the selected dealer. Alternatively, selected dealers may solicit indications
of interest from their customers to place orders for shares. Such selected
dealers shall subsequently contact their customers who indicated an interest and
seek their confirmation as to their intent to purchase. Those indicating an
intent to purchase shall execute order forms and forward them to their selected
dealer or authorize the selected dealer to execute such forms. The selected
dealer will acknowledge receipt of the order to its customer in writing on the
following business day and will debit such customer's account on the third
business day after the customer has confirmed his intent to purchase (the "debit
date") and on or before noon of the next business day following the debit date
will send order forms and funds to the Bank for deposit in a segregated account.
Although purchasers' funds are not required to be in their accounts with
selected dealers until the debit date in the event that such alternative
procedure is employed once a confirmation of an intent to purchase has been
received by the selected dealer, the purchaser has no right to rescind his
order.
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Certificates representing shares of Common Stock purchased, together
with any refund due, will be mailed to purchasers at the address specified in
the order form, as soon as practicable following consummation of the sale of the
Common Stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
The Syndicated Community Offering will terminate no more than 45 days
following the Subscription Expiration Date, unless extended by the Company with
the approval of the OTS. Such extensions may not be beyond _______________,
1998. See " -- Stock Pricing" above for a discussion of rights of subscribers,
if any, in the event an extension is granted.
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased during the Conversion:
(1) No less than 25 shares;
(2) Each Eligible Account Holder may subscribe for and purchase in
the Subscription Offering up to the greater of: 1) the amount
permitted to be purchased in the Community Offering, currently
$175,000 of Common Stock; 2) one-tenth of one percent (.10%) of
the total offering of shares of Common Stock; or 3) fifteen times
the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be
issued by a fraction of which the numerator is the amount of the
Qualifying Deposit of the Eligible Account Holder and the
denominator is the total amount of Qualifying Deposits of all
Eligible Account Holders, in each case on the Eligibility Record
Date subject to the overall maximum purchase limitation in (8)
below and exclusive of an increase in the total number of shares
issued due to an increase in the Estimated Price Range of up to
15%;
(3) The ESOP is permitted to purchase in the aggregate up to 10% of
the shares of Common Stock issued in the Conversion, including
shares issued to the Foundation, including shares issued in the
event of an increase in the Estimated Price Range of 15%, and
intends to purchase 8% of the shares of Common Stock issued in
the Conversion, including shares issued to the Foundation;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of: 1)
the amount permitted to be purchased in the Community Offering,
currently $175,000 of Common Stock; 2) one-tenth of one percent
(.10%) of the total offering of shares of Common Stock; or 3)
fifteen times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Common
Stock to be issued by a fraction of which the numerator is the
amount of 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,
in such case on the Supplemental Eligibility Record Date subject
to the overall maximum purchase limitation in (8) below and
exclusive of an increase in the total number of shares issued due
to an increase in the Estimated Price Range of up to 15%;
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(5) Each Other Member may subscribe for and purchase in the
Subscription Offering up to the greater of: 1) the amount
permitted to be purchased in the Community Offering, currently
$175,000 of Common Stock; or 2) one-tenth of one percent (.10%)
of the total offering of shares of Common Stock, in each case
subject to the overall maximum purchase limitation in (8) below
and exclusive of an increase in the total number of shares issued
due to an increase in the Estimated Price Range of up to 15%;
(6) Persons purchasing shares of Common Stock in the Community
Offering, together with associates of and groups of persons
acting in concert with such persons, may purchase in the
Community Offering up to $175,000 of Common Stock, subject to the
overall maximum purchase limitation in (8) below and exclusive of
an increase in the total number of shares issued due to an
increase in the Estimated Price Range of up to 15%;
(7) Persons purchasing shares of Common Stock in the Syndicated
Community Offering, together with associates of and persons
acting in concert with such persons, may purchase in the
Syndicated Offering up to $175,000 of Common Stock, subject to
the overall maximum purchase limitation in (8) below and
exclusive of an increase in the total number of shares issued due
to an increase in the Estimated Price Range of up to 15% and,
provided further that shares of Common Stock purchased in the
Community Offering by any persons, together with associates of or
persons acting in concert with such persons, will be aggregated
with purchases in the Syndicated Community Offering in applying
the $175,000 purchase limitation;
(8) Except for the ESOP, the overall maximum number of shares of
Common Stock subscribed for or purchased in all categories of the
Conversion by any person, together with associates of or persons
acting in concert with such persons, shall not exceed 1.0% of the
shares of Common Stock offered in the Conversion and exclusive of
an increase in the total number of shares issued due to an
increase in the Estimated Price Range of up to 15%; and
(9) No more than 30% of the total number of shares offered for sale
in the Conversion may be purchased by directors and officers of
the Bank and their associates in the aggregate, excluding
purchases by the ESOP.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
the Bank, both the individual amount permitted to be subscribed for and the
overall maximum purchase limitation may be increased to up to a maximum of 5% at
the sole discretion of the Company and the Bank. If such amount is increased,
subscribers for the maximum amount will be, and certain other large subscribers
in the sole discretion of the Bank may be, given the opportunity to increase
their subscriptions up to the then applicable limit. In addition, the Boards of
Directors of the Company and the Bank may, in their sole discretion, increase
the maximum purchase limitation referred to above up to 9.99%, provided that
orders for shares exceeding 5% of the shares being offering in the Subscription
and Community Offerings shall not exceed, in the aggregate, 10% of the shares
being offered in the Subscription and Community Offerings. Requests to purchase
additional shares of Common Stock under this provision will be determined by the
Boards of Directors and, if approved, allocated on a pro rata basis giving
priority in accordance with the priority rights set forth herein.
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The overall maximum purchase limitation may not be reduced to less than
1% but the individual amount permitted to be subscribed for may be reduced by
the Bank to less than $175,000, subject to paragraphs (2), (4) and (5) above
without the further approval of members or resolicitation of subscribers. An
individual Eligible Account Holder, Supplemental Eligible Account Holder or
Other Member may not purchase individually in the Subscription Offering the
overall maximum purchase limit of 1.0% of the shares offered, but may make such
purchase, together with associates of and persons acting in concert with such
person, by also purchasing in other available categories of the Conversion,
subject to availability of shares and the overall maximum purchase limit for
purchases in the Conversion.
In the event of an increase in the total number of shares offered in
the Conversion due to an increase in the Estimated Price Range of up to 15% (the
"Adjusted Maximum"), the additional shares will be allocated in the following
order or priority in accordance with the Plan: (i) to fill the ESOP's
subscription of 8% of the amount of Common Stock issued in the Conversion,
including shares issued to the Foundation, at the Adjusted Maximum number of
shares; (ii) in the event that there is an oversubscription by Eligible Account
Holders, to fill unsatisfied subscriptions of Eligible Account Holders,
exclusive of the Adjusted Maximum; (iii) in the event that there is an
oversubscription by Supplemental Eligible Account Holders, to fill unsatisfied
subscriptions of Supplemental Eligible Account Holders, exclusive of the
Adjusted Maximum; (iv) in the event that there is an oversubscription by Other
Members, to fill unsatisfied subscriptions of Other Members exclusive of the
Adjusted Maximum; and (v) to fill unsatisfied subscriptions in the Community
Offering to the extent possible, exclusive of the Adjusted Maximum, with
preference to institutional investors.
The term "associate" of a person is defined to mean: (i) any
corporation, partnership (other than the Bank or a majority-owned subsidiary of
the Bank) of which such person is an officer, partner or 10% stockholder; (ii)
any trust or other estate in which such person has a substantial beneficial
interest or serves as a trustee or in a similar fiduciary capacity; provided,
however, such term shall not include any employee stock benefit plan of the Bank
in which such person has a substantial beneficial interest or serves as a
trustee or in a similar fiduciary capacity; and (iii) any relative or spouse of
such person, or any relative of such spouse, who either has the same home as
such person or who is a director or officer of the Bank. Directors are not
treated as associates of each other solely because of their Board membership.
For a further discussion of limitations on purchases of a converting
institution's stock at the time of Conversion and subsequent to Conversion, see
"Management of the Bank -- Subscriptions by Executive Officers and Directors," "
- -- Certain Restrictions on Purchase or Transfer of Shares After Conversion" and
"Restrictions on Acquisition of the Company and the Bank."
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Bank in its
present mutual form, each depositor would receive his pro rata share of any
assets of the Bank 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 account was to the total value of all
deposit accounts in the Bank at the time of liquidation. After the Conversion,
each depositor, in the event of a complete liquidation, would have a claim as a
creditor of the same general priority as the claims of all other general
creditors of the Bank. However, except as described below, his claim would be
solely in the amount of the balance in his deposit account plus accrued
interest. He would not have an interest in the value or assets of the Bank above
that amount.
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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 in an amount equal to
the surplus and reserves of the Bank as of the date of its latest balance sheet
contained in the final Prospectus used in connection with the Conversion. Each
Eligible Account Holder and Supplemental Eligible Account Holder, if he were to
continue to maintain his deposit account at the Bank, would be entitled, on a
complete liquidation of the Bank after the Conversion, to an interest in the
liquidation account prior to any payment to the stockholders of the Bank. Each
Eligible Account Holder and Supplemental Eligible Account Holder would have an
initial interest in such liquidation account for each deposit account, including
regular accounts, transaction accounts such as NOW accounts, money market
deposit accounts, and certificates of deposit, with a balance of $50 or more
held in the Bank on September 30, 1996 and December 31, 1997, respectively. Each
Eligible Account Holder and Supplemental Eligible Account Holder will have a pro
rata interest in the total liquidation account based on the proportion that the
balance of his Qualifying Deposits on the Eligibility Record Date or
Supplemental Eligibility Record Date, respectively, bore to the total amount of
all Qualifying Deposits of all Eligible Account Holders and Supplemental
Eligible Account Holders in the Bank. For deposit accounts in existence at both
dates separate subaccounts shall be determined on the basis of the Qualifying
Deposits in such deposit accounts on such respective record dates.
If, however, on any annual closing date subsequent to the Eligibility
Record Date or Supplemental Eligibility Record Date, the amount of the
Qualifying Deposit of an Eligible Account Holder or Supplemental Eligible
Account Holder is less than the amount of the Qualifying Deposit of such
Eligible Account Holder or Supplemental Eligible Account Holder as of the
Eligibility Record Date or Supplemental Eligibility Record Date, respectively,
or less than the amount of the Qualifying Deposits as of the previous annual
closing date, then the interest in the liquidation account relating to such
Qualifying Deposit would be reduced from time to time by the proportion of any
such reduction, and such interest will cease to exist if such Qualifying Deposit
accounts are closed. In addition, no interest in the liquidation account would
ever be increased despite any subsequent increase in the related Qualifying
Deposit. Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders are satisfied would be
distributed to the Company as the sole stockholder of the Bank.
TAX ASPECTS
Consummation of the Conversion is expressly conditioned upon the
receipt by the Bank of either a favorable ruling from the IRS or an opinion with
respect to federal income taxation, and an opinion with respect to Pennsylvania
income taxation, to the effect that the Conversion will not be a taxable
transaction to the Company, the Bank, Eligible Account Holders, or Supplemental
Eligible Account Holders except as noted below. The federal and Pennsylvania
income tax consequences will remain unchanged in the event that a holding
company form of organization is not utilized.
No private ruling will be received from the IRS with respect to the
proposed Conversion. Instead, the Bank has received an opinion of its counsel,
Muldoon, Murphy & Faucette, to the effect that for federal income tax purposes,
among other matters: (i) the Bank's change in form from mutual to stock
ownership will constitute a reorganization under section 368(a)(1)(F) of the
Code and neither the Bank nor the Company will recognize any gain or loss as a
result of the Conversion; (ii) no gain or loss will be recognized to the Bank or
the Company upon the purchase of the Bank's capital stock by the Company or to
the Company upon the purchase of its Common Stock in the Conversion; (iii) no
gain or loss will be recognized by Eligible Account Holders or Supplemental
Eligible Account Holders upon the issuance to them of Deposit Accounts
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in the Bank in its stock form plus their interests in the liquidation account in
exchange for their deposit accounts in the Bank; (iv) the tax basis of the
depositors' accounts in the Bank immediately after the Conversion will be the
same as the basis of their deposit accounts immediately prior to the Conversion;
(v) the tax basis of each Eligible Account Holder's and Supplemental Eligible
Account Holder's interest in the liquidation account will be zero; (vi) no gain
or loss will be recognized by Eligible Account Holders or Supplemental Eligible
Account Holders upon the distribution to them of nontransferable subscription
rights to purchase shares of the Common Stock, provided that the amount to be
paid for the Common Stock is equal to the fair market value of such stock; and
(vii) the tax basis to the stockholders of the Common Stock of the Company
purchased in the Conversion will be the amount paid therefor and the holding
period for the shares of Common Stock purchased by such persons will begin on
the date on which their subscription rights are exercised. KPMG Peat Marwick LLP
has opined that the Conversion will not be a taxable transaction to the Company,
the Bank, Eligible Account Holders or Supplemental Eligible Account Holders for
Pennsylvania income tax purposes. Certain portions of both the federal and the
state income tax opinions are based upon the assumption that the subscription
rights issued in connection with the Conversion will have no value.
Unlike private rulings, an opinion of counsel or an opinion of an
independent accountant is not binding on the IRS and the IRS could disagree with
conclusions reached therein. In the event of such disagreement, there can be no
assurance that the IRS would not prevail in a judicial or administrative
proceeding. The Bank has agreed to a limitation on the liability of KPMG Peat
Marwick LLP to it solely as a result of, and to indemnify KPMG Peat Marwick LLP
solely in connection with, certain claims or liabilities relating to its
Pennsylvania income tax opinion, except to the extent determined to have
resulted from professional negligence or intentional or deliberate misconduct.
Keller has issued an opinion stating that, pursuant to its valuation,
Keller is of the opinion that the subscription rights do not have any value,
based on the fact that such rights are acquired by the recipients without cost,
are nontransferable and of short duration, and afford the recipients the right
only to purchase the Common Stock at a price equal to its estimated fair market
value, which will be the same price as the Purchase Price for the shares of
Common Stock sold in the Community Offering. Such valuation is not binding on
the IRS. If the subscription rights granted to Eligible Account Holders or
Supplemental Eligible Account Holders are deemed to have an ascertainable value,
receipt of such rights could be taxable to those Eligible Account Holders or
Supplemental Eligible Account Holders who receive and/or exercise the
subscription rights in an amount equal to such value and the Bank could
recognize gain on such distribution. Eligible Account Holders and Supplemental
Eligible Account Holders are encouraged to consult with their own tax advisor as
to the tax consequences in the event that such subscription rights are deemed to
have an ascertainable value.
INTERPRETATION AND AMENDMENT OF THE PLAN OF CONVERSION
To the extent permitted by law, all interpretations of the Plan by the
Board of Directors of the Bank will be final. The Plan provides that the Bank's
Board of Directors shall have the discretion to interpret and apply the
provisions of the Plan to particular circumstances and that such interpretation
or application shall be final. This includes any and all interpretations,
applications and determinations made by the Board of Directors on the basis of
such information and assistance as was then reasonably available for such
purpose.
The Plan provides that, if deemed necessary or desirable by the Board
of Directors, the Plan may be substantively amended at any time prior to
solicitation of proxies from members to vote on the Plan by a two-thirds vote of
the Bank's Board of Directors. After submission of the proxy materials to the
members, the Plan may be amended by a two-thirds vote of the Bank's Board of
Directors at any time prior to the Special Meeting with the concurrence of the
OTS. The Plan may be amended at any time after the approval of
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members with the approval of the OTS and no further approval of the members will
be necessary unless otherwise required by the OTS. By adoption of the Plan, the
Bank's members will be deemed to have authorized amendment of the Plan under the
circumstances described above.
The establishment of the Foundation will be considered as a separate
matter from approval of the Plan of Conversion. If the Bank's members approve
the Plan of Conversion, but not the creation of the Foundation, the Bank intends
to complete the Conversion without the Foundation. Failure to approve the
establishment of the Foundation may materially increase the pro forma market
value of the Common Stock since the Valuation Range, as set forth herein, takes
into account the dilutive impact of the issuance of shares to the Foundation. In
such an event, the Bank may establish a new Estimated Price Range and commence a
resolicitation of subscribers. In the event of a resolicitation, unless an
affirmative response is received within a specified period of time, all funds
will be promptly returned to investors, as described elsewhere herein. See " --
Stock Pricing."
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION
All shares of Common Stock purchased in connection with the Conversion
by a director or an officer of the Bank will be subject to a restriction that
the shares not be sold for a period of one year following the Conversion, except
in the event of the death of such director or officer. Each certificate for
restricted shares will bear a legend giving notice of this restriction on
transfer, and instructions will be issued to the effect that any transfer within
such time period of any certificate or record ownership of such shares other
than as provided above is a violation of the restriction. Any shares of Common
Stock issued at a later date as a stock dividend, stock split, or otherwise,
with respect to such restricted stock will be subject to the same restrictions.
The directors and officers of the Bank will also be subject to the insider
trading rules promulgated pursuant to the Exchange Act and any other applicable
requirements of the federal securities laws.
Purchases of outstanding shares of Common Stock of the Company by
directors, officers (or any person who was an officer or director of the Bank
after adoption of the Plan of Conversion) and their associates during the
three-year period following Conversion may be made only through a broker or
dealer registered with the SEC, except with the prior written approval of the
OTS. This restriction does not apply, however, to negotiated transactions
involving more than 1.0% of the Company's outstanding Common Stock or to the
purchase of stock pursuant to any stock option plan to be established after the
Conversion.
Unless approved by the OTS, the Company, pursuant to OTS regulations,
will be prohibited from repurchasing any shares of the Common Stock for three
years after the Conversion except: (i) for an offer to all stockholders on a pro
rata basis; or (ii) for the repurchase of qualifying shares of a director.
Notwithstanding the foregoing, beginning one year following completion of the
Conversion the Company may repurchase its Common Stock so long as: (i) the
repurchases within the following two years are part of an open-market program
not involving greater than 5% of its outstanding capital stock during a
twelve-month period; (ii) the repurchases do not cause the Company to become
undercapitalized; and (iii) the Company provides to the Regional Director of the
OTS no later than 10 days prior to the commencement of a repurchase program
written notice containing a full description of the program to be undertaken and
such program is not disapproved by the Regional Director. In addition, under
current OTS policies, repurchases may be allowed in the first year following
Conversion and in amounts greater than 5% in the second and third years
following Conversion, provided there are valid and compelling business reasons
for such repurchases and the OTS approves such repurchases.
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RESTRICTIONS ON ACQUISITION OF THE COMPANY
AND THE BANK
GENERAL
The Bank's Plan of Conversion provides for the Conversion of the Bank
from the mutual to the stock form of organization and, in connection therewith,
a new Federal Stock Charter and Bylaws to be adopted by members of the Bank. The
Plan also provides for the concurrent formation of a holding company, which form
of organization may or may not be utilized at the option of the Board of
Directors of the Bank. See "The Conversion --General." In the event that the
holding company form of organization is utilized, as described below, certain
provisions in the Company's Certificate of Incorporation and Bylaws and in its
management remuneration entered into in connection with the Conversion, together
with provisions of Delaware corporate law, may have anti-takeover effects. In
the event that the holding company form of organization is not utilized, the
Bank's Stock Charter and Bylaws and management remuneration entered into in
connection with the Conversion may have anti-takeover effects as described
below. In addition, regulatory restrictions may make it difficult for persons or
companies to acquire control of either the Company or the Bank.
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
A number of provisions of the Company's Certificate of Incorporation
and Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of certain
provisions of the Company's Certificate of Incorporation and Bylaws and certain
other statutory and regulatory provisions relating to stock ownership and
transfers, the Board of Directors and business combinations, which might be
deemed to have a potential "anti-takeover" effect. These provisions may have the
effect of discouraging a future takeover attempt which is not approved by the
Board of Directors but which individual Company stockholders may deem to be in
their best interests or in which shareholders may receive a substantial premium
for their shares over then current market prices. As a result, stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so. Such provisions will also render the removal of the current Board of
Directors or management of the Company more difficult. The following description
of certain of the provisions of the Certificate of Incorporation and Bylaws of
the Company is necessarily general and reference should be made in each case to
such Certificate of Incorporation and Bylaws, which are incorporated herein by
reference. See "Additional Information" as to how to obtain a copy of these
documents.
Limitation on Voting Rights. The Certificate of Incorporation of the
Company provides that in no event shall any record owner of any outstanding
Common Stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. Beneficial ownership is determined pursuant
to Rule 13d-3 of the General Rules and Regulations promulgated pursuant to the
Exchange Act, and includes shares beneficially owned by such person or any of
his affiliates (as defined in the Certificate of Incorporation), shares which
such person or his affiliates have the right to acquire upon the exercise of
conversion rights or options and shares as to which such person and his
affiliates have or share investment or voting power, but shall not include
shares beneficially owned by the ESOP or directors, officers and employees of
the Bank or Company or shares that are subject to a revocable proxy and that are
not otherwise beneficially owned, or deemed by the Company to be beneficially
owned, by such person and his affiliates. The Certificate of Incorporation of
the Company further provides
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that this provision limiting voting rights may only be amended upon the vote of
80% of the outstanding shares of voting stock (after giving effect to the
limitation on voting rights).
Board of Directors. The Board of Directors of the Company is divided
into three classes, each of which shall contain approximately one-third of the
whole number of members of the Board. Each class shall serve a staggered term,
with approximately one-third of the total number of directors being elected each
year. The Company's Certificate of Incorporation and Bylaws provide that the
size of the Board shall be determined by a majority of the directors. The
Certificate of Incorporation and the Bylaws provide that any vacancy occurring
in the Board, including a vacancy created by an increase in the number of
directors or resulting from death, resignation, retirement, disqualification,
removal from office or other cause, shall be filled for the remainder of the
unexpired term exclusively by a majority vote of the directors then in office.
The classified Board is intended to provide for continuity of the Board of
Directors and to make it more difficult and time consuming for a stockholder
group to fully use its voting power to gain control of the Board of Directors
without the consent of the incumbent Board of Directors of the Company. The
Certificate of Incorporation of the Company provides that a director may be
removed from the Board of Directors prior to the expiration of his term only for
cause, upon the vote of 80% of the outstanding shares of voting stock.
In the absence of these provisions, the vote of the holders of a
majority of the shares could remove the entire Board, with or without cause, and
replace it with persons of such holders' choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Company may be called
only by the Board of Directors of the Company. The Certificate of Incorporation
also provides that any action required or permitted to be taken by the
stockholders of the Company may be taken only at an annual or special meeting
and prohibits stockholder action by written consent in lieu of a meeting.
Authorized Shares. The Certificate of Incorporation authorizes the
issuance of 16,000,000 shares of Common Stock and 2,000,000 shares of Preferred
Stock. The shares of Common Stock and Preferred Stock were authorized in an
amount greater than that to be issued in the Conversion to provide the Company's
Board of Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and
employee 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 the Company. The Board of Directors also has
sole authority to determine the terms of any one or more series of Preferred
Stock, including voting rights, conversion rates, and liquidation preferences.
As a result of the ability to fix voting rights for a series of Preferred Stock,
the Board has the power, to the extent consistent with its fiduciary duty, to
issue a series of Preferred Stock to persons friendly to management in order to
attempt to block a post-tender offer merger or other transaction by which a
third party seeks control, and thereby assist management to retain its position.
The Company's Board of Directors currently has no plans for the issuance of
additional shares, other than the issuance of additional shares pursuant to the
terms of the Stock Program and upon exercise of Stock Options to be issued
pursuant to the terms of the Stock Option Plan or Master Stock-Based Benefit
Plan, all of which are to be established and presented to stockholders at the
first annual meeting after the Conversion.
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Stockholder Vote Required to Approve Business Combinations with
Principal Stockholders. The Certificate of Incorporation requires the approval
of the holders of at least 80% of the Company's outstanding shares of voting
stock to approve certain "Business Combinations," as defined therein, and
related transactions. Under Delaware law, absent this provision, Business
Combinations, including mergers, consolidations and sales of all or
substantially all of the assets of a corporation must, subject to certain
exceptions, be approved by the vote of the holders of only a majority of the
outstanding shares of Common Stock of the Company and any other affected class
of stock. Under the Certificate of Incorporation, at least 80% approval of
shareholders is required in connection with any transaction involving an
Interested Stockholder (as defined below) except (i) in cases where the proposed
transaction has been approved in advance by a majority of those members of the
Company's Board of Directors who are unaffiliated with the Interested
Stockholder and were directors prior to the time when the Interested Stockholder
became an Interested Stockholder or (ii) if the proposed transaction meets
certain conditions set forth therein which are designed to afford the
shareholders a fair price in consideration for their shares in which case, if a
stockholder vote is required, approval of only a majority of the outstanding
shares of voting stock would be sufficient. The term "Interested Stockholder" is
defined to include any individual, corporation, partnership or other entity
(other than the Company or its subsidiary) which owns beneficially or controls,
directly or indirectly, 10% or more of the outstanding shares of voting stock of
the Company. This provision of the Certificate of Incorporation applies to any
"Business Combination," which is defined to include (i) any merger or
consolidation of the Company or any of its subsidiaries with or into any
Interested Stockholder or Affiliate (as defined in the Certificate of
Incorporation) of an Interested Stockholder; (ii) any sale, lease, exchange,
mortgage, pledge, transfer, or other disposition to or with any Interested
Stockholder or Affiliate of 25% or more of the assets of the Company or combined
assets of the Company and its subsidiary; (iii) the issuance or transfer to any
Interested Stockholder or its Affiliate by the Company (or any subsidiary) of
any securities of the Company in exchange for any assets, cash or securities the
value of which equals or exceeds 25% of the fair market value of the Common
Stock of the Company; (iv) the adoption of any plan for the liquidation or
dissolution of the Company proposed by or on behalf of any Interested
Stockholder or Affiliate thereof; and (v) any reclassification of securities,
recapitalization, merger or consolidation of the Company which has the effect of
increasing the proportionate share of Common Stock or any class of equity or
convertible securities of the Company owned directly or indirectly by an
Interested Stockholder or Affiliate thereof. The directors and executive
officers of the Bank are purchasing in the aggregate approximately 3.35% of the
shares of the Common Stock to be issued in the Conversion, including share to be
issued to the Foundation, at the maximum of the Estimated Price Range. In
addition, the ESOP intends to purchase 8% of the Common Stock issued in
connection with the Conversion including shares issued to the Foundation.
Additionally, if at a meeting of stockholders following the Conversion
stockholder approval of the proposed Stock-Based Incentive Plan is received, the
Company expects to acquire 4% of the Common Stock issued in connection with the
Conversion, including shares issued to the Foundation, on behalf of the
Stock-Based Incentive Plan and expects to issue options to purchase up to 10% of
the Common Stock issued in connection with the Conversion, including shares
issued to the Foundation, under the Stock-Based Incentive Plan to directors and
executive officers. As a result, at the maximum of the Estimated Price Range,
assuming the Stock-Based Incentive Plan is approved by Stockholders, directors,
executive officers and employees have the potential to control the voting of
approximately 23% of the Company's Common Stock, if the shares held by the
Foundation and the ESOP are aggregated with the shares purchased in the
Conversion by management and acquired for award under the Stock-Based Incentive
Plan (without giving effect to any exercise of options granted under the
Stock-Based Incentive Plan), thereby enabling them to prevent the approval of
the transactions requiring the approval of at least 80% of the Company's
outstanding shares of voting stock described hereinabove.
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Evaluation of Offers. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating any
offer of another "Person" (as defined therein) to (i) make a tender or exchange
offer for any equity security of the Company, (ii) merge or consolidate the
Company with another corporation or entity, or (iii) purchase or otherwise
acquire all or substantially all of the properties and assets of the Company,
may, in connection with the exercise of its judgment in determining what is in
the best interest of the Company, the Bank and the stockholders of the Company,
give due consideration to all relevant factors, including, without limitation,
the social and economic effects of acceptance of such offer on the Company's
customers and the Bank's present and future account holders, borrowers and
employees; on the communities in which the Company and the Bank operate or are
located; and on the ability of the Company to fulfill its corporate objectives
as a savings and loan holding company and on the ability of the Bank to fulfill
the objectives of a federally-chartered stock savings bank under applicable
statutes and regulations. By having these standards in the Certificate of
Incorporation of the Company, the Board of Directors may be in a stronger
position to oppose such a transaction if the Board concludes that the
transaction would not be in the best interest of the Company, even if the price
offered is significantly greater than the then market price of any equity
security of the Company.
Amendment of Certificate of Incorporation and Bylaws. Amendments to the
Company's Certificate of Incorporation must be approved by a majority vote of
its Board of Directors and also by a majority of the outstanding shares of its
voting stock; provided, however, that an affirmative vote of at least 80% of the
outstanding voting stock entitled to vote (after giving effect to the provision
limiting voting rights) is required to amend or repeal certain provisions of the
Certificate of Incorporation, including the provision limiting voting rights,
the provisions relating to approval of certain business combinations, calling
special meetings, the number and classification of directors, director and
officer indemnification by the Company and amendment of the Company's Bylaws and
Certificate of Incorporation. The Company's Bylaws may be amended by its Board
of Directors, or by a vote of 80% of the total votes eligible to be voted at a
duly constituted meeting of stockholders.
Certain Bylaw Provisions. The Bylaws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a stockholder meeting to give at least 90
days advance notice to the Secretary of the Company. The notice provision
requires a stockholder who desires to raise new business to provide certain
information to the Company concerning the nature of the new business, the
stockholder and the stockholder's interest in the business matter. Similarly, a
stockholder wishing to nominate any person for election as a director must
provide the Company with certain information concerning the nominee and the
proposing stockholder.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AND MANAGEMENT REMUNERATION ADOPTED IN CONVERSION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its Board of Directors. The
provisions of the Employment Agreements, CIC Agreements, Employee Severance
Compensation Plan, Stock Program, Stock Option Plan or Master Stock-Based
Benefit Plan to be established may also discourage takeover attempts by
increasing the costs to be incurred by the Bank and the Company in the event of
a takeover. See "Management of the Bank -- Employment Agreements."
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The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation, Bylaws and management remuneration plans to be
established are in the best interest of the Company and its stockholders. An
unsolicited non-negotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of the Company and its
stockholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts. It is also the Board of Directors'
view that these provisions should not discourage persons from proposing a merger
or other transaction at a price that reflects the true value of the Company and
that otherwise is in the best interest of all stockholders.
DELAWARE CORPORATE LAW
The state of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Section 203 of the Delaware General Corporate Law
("Section 203"), is intended to discourage certain takeover practices by
impeding the ability of a hostile acquiror to engage in certain transactions
with the target company.
In general, Section 203 provides that a "Person" (as defined therein)
who owns 15% or more of the outstanding voting stock of a Delaware corporation
(an "Interested Stockholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such "Person" became an Interested Stockholder. The
term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
an Interested Stockholder, the Board of Directors approved either the business
combination or the transaction which resulted in the stockholder becoming an
Interested Stockholder; (ii) any business combination involving a person who
acquired at least 85% of the outstanding voting stock in the transaction in
which he became an Interested Stockholder, with the number of shares outstanding
calculated without regard to those shares owned by the corporation's directors
who are also officers and by certain employee stock plans; (iii) any business
combination with an Interested Stockholder that is approved by the Board of
Directors and by a two-thirds vote of the outstanding voting stock not owned by
the Interested Stockholder; and (iv) certain business combinations that are
proposed after the corporation had received other acquisition proposals and
which are approved or not opposed by a majority of certain continuing members of
the Board of Directors. A corporation may exempt itself from the requirements of
the statute by adopting an amendment to its Certificate of Incorporation or
Bylaws electing not to be governed by Section 203. At the present time, the
Board of Directors does not intend to propose any such amendment.
RESTRICTIONS IN THE BANK'S NEW CHARTER AND BYLAWS
Although the Board of Directors of the Bank is not aware of any effort
that might be made to obtain control of the Bank after the Conversion, the Board
of Directors believes that it is appropriate to adopt certain provisions
permitted by federal regulations to protect the interests of the converted Bank
and its stockholders from any hostile takeover. Such provisions may, indirectly,
inhibit a change in control of the Company, as the Bank's sole stockholder. See
"Risk Factors -- Certain Anti-Takeover Provisions."
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The Bank's Federal Stock Charter will contain a provision whereby the
acquisition of or offer to acquire beneficial ownership of more than 10% of the
issued and outstanding shares of any class of equity securities of the Bank by
any person (i.e., any individual, corporation, group acting in concert, trust,
partnership, joint stock company or similar organization), either directly or
through an affiliate thereof, will be prohibited for a period of five years
following the date of completion of the Conversion. Any stock in excess of 10%
acquired in violation of the Federal Stock Charter provision will not be counted
as outstanding for voting purposes. This limitation shall not apply to any
transaction in which the Bank forms a holding company without a change in the
respective beneficial ownership interests of its stockholders other than
pursuant to the exercise of any dissenter or appraisal rights. In the event that
holders of revocable proxies for more than 10% of the shares of the Common Stock
of the Company seek, among other things, to elect one-third or more of the
Company's Board of Directors, to cause the Company's stockholders to approve the
acquisition or corporate reorganization of the Company or to exert a continuing
influence on a material aspect of the business operations of the Company, which
actions could indirectly result in a change in control of the Bank, the Board of
Directors of the Bank will be able to assert this provision of the Bank's
Federal Stock Charter against such holders. Although the Board of Directors of
the Bank is not currently able to determine when and if it would assert this
provision of the Bank's Federal Stock Charter, the Board of Directors, in
exercising its fiduciary duty, may assert this provision if it were deemed to be
in the best interests of the Bank, the Company and its stockholders. It is
unclear, however, whether this provision, if asserted, would be successful
against such persons in a proxy contest which could result in a change in
control of the Bank indirectly through a change in control of the Company.
Finally, for five years, stockholders will not be permitted to call a special
meeting of stockholders relating to a change of control of the Bank or a charter
amendment or to cumulate their votes in the election of directors. Furthermore,
the staggered terms of the Board of Directors could have an anti-takeover effect
by making it more difficult for a majority of shares to force an immediate
change in the Board of Directors since only one-third of the Board is elected
each year. The purpose of these provisions is to assure stability and continuity
of management of the Bank in the years immediately following the Conversion.
Although the Bank has no arrangements, understandings or plans at the
present time, except as described in "Description of Capital Stock of the
Company -- Preferred Stock," for the issuance or use of the shares of
undesignated Preferred Stock proposed to be authorized, the Board of Directors
believes that the availability of such shares will provide the Bank with
increased flexibility in structuring possible future financings and acquisitions
and in meeting other corporate needs which may arise. In the event of a proposed
merger, tender offer or other attempt to gain control of the Bank of which
management does not approve, it might be possible for the Board of Directors to
authorize the issuance of one or more series of Preferred Stock with rights and
preferences which could impede the completion of such a transaction. An effect
of the possible issuance of such Preferred Stock, therefore, may be to deter a
future takeover attempt. The Board of Directors does not intend to issue any
Preferred Stock except on terms which the Board deems to be in the best interest
of the Bank and its then existing stockholders.
REGULATORY RESTRICTIONS
The Plan of Conversion prohibits any person, prior to the completion of
the Conversion, from transferring, or from entering into any agreement or
understanding to transfer, to the account of another, legal or beneficial
ownership of the subscription rights issued under the Plan or the Common Stock
to be issued upon their exercise. The Plan also prohibits any person, prior to
the completion of the Conversion, from offering, or making an announcement of an
offer or intent to make an offer, to purchase such subscription rights or Common
Stock.
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For three years following the Conversion, OTS regulations prohibit any
person from acquiring or making an offer to acquire more than 10% of the stock
of any converted savings institution, except for: (i) offers that, if
consummated, would not result in the acquisition by such person during the
preceding 12-month period of more than 1% of such stock; (ii) offers for up to
25% in the aggregate by the ESOP or other tax qualified plans of the Bank or the
Company; or (iii) offers which are not opposed by the Board of Directors of the
Bank and which receive the prior approval of the OTS. Such prohibition is also
applicable to the acquisition of the stock of the Company. Such acquisition may
be disapproved by the OTS if it is found, among other things, that the proposed
acquisition (a) would frustrate the purposes of the provisions of the
regulations regarding conversions; (b) would be manipulative or deceptive; (c)
would subvert the fairness of the conversion; (d) would be likely to result in
injury to the savings institution; (e) would not be consistent with economical
home financing; (f) would otherwise violate law or regulation; or (g) would not
contribute to the prudent deployment of the savings institution's conversion
proceeds. 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 matters submitted to a
vote of stockholders. The definition of beneficial ownership for this regulation
extends to persons holding revocable or irrevocable proxies for the Company's
stock under circumstances that give rise to a conclusive or rebuttable
determination of control under the OTS regulations.
In addition, any proposal to acquire 10% of any class of equity
security of the Company generally would be subject to approval by the OTS under
the Change in Bank Control Act. The OTS requires all persons seeking control of
a savings institution and, therefore, indirectly its holding company, to obtain
regulatory approval prior to offering to obtain control. Federal law generally
provides that no "person," acting directly or indirectly or through or in
concert with one or more other persons, may acquire directly or indirectly
"control," as that term is defined in OTS regulations, of a federally-insured
savings institution without giving at least 60 days' written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person. Such change in control restrictions on the acquisition
of holding company stock are not limited to three years after conversion but
will apply for as long as the regulations are in effect. Persons holding
revocable or irrevocable proxies may be deemed to be beneficial owners of such
securities under OTS regulations and therefore prohibited from voting all or the
portion of such proxies in excess of the 10% aggregate beneficial ownership
limit. Such regulatory restrictions may prevent or inhibit proxy contests for
control of the Company or the Bank which have not received prior regulatory
approval.
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DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 16,000,000 shares of Common Stock
having a par value of $0.01 per share and 2,000,000 shares of preferred stock
having a par value of $0.01 per share (the "Preferred Stock"). Based on the sale
of Common Stock in connection with the Conversion and issuance of authorized but
unissued Common Stock in an amount equal to 8.0% of the Common stock sold in the
Conversion, the Company currently expects to issue up to 5,589,000 shares of
Common Stock (or 6,427,350 in the event of an increase of 15% in the Estimated
Price Range) and no shares of Preferred Stock in the Conversion. Except as
discussed above in "Restriction on Acquisition of the Company and the Bank,"
each share of the Company's Common Stock will have the same relative rights as,
and will be identical in all respects with, each other share of Common Stock.
Upon payment of the Purchase Price for the Common Stock, in accordance with the
Plan, all such stock will be duly authorized, fully paid and non-assessable.
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NON-WITHDRAWABLE
CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY
THE FDIC.
COMMON STOCK
Dividends. The Company can pay dividends out of statutory surplus or
from certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to limitations which are imposed
by law and applicable regulation. See "Dividend Policy" and "Regulation." The
holders of Common Stock of the Company will be entitled to receive and share
equally in such dividends as may be declared by the Board of Directors of the
Company out of funds legally available therefor. If the Company issues Preferred
Stock, the holders thereof may have a priority over the holders of the Common
Stock with respect to dividends.
Voting Rights. Upon Conversion, the holders of Common Stock of the
Company will possess exclusive voting rights in the Company. They will elect the
Company's Board of Directors and act on such other matters as are required to be
presented to them under Delaware law or the Company's Certificate of
Incorporation or as are otherwise presented to them by the Board of Directors.
Except as discussed in "Restrictions on Acquisition of the Company and the
Bank," each holder of Common Stock will be entitled to one vote per share and
will not have any right to cumulate votes in the election of directors. If the
Company issues Preferred Stock, holders of the Preferred Stock may also possess
voting rights. Certain matters require an 80% shareholder vote. See
"Restrictions on Acquisition of the Company and the Bank."
As a federal mutual savings and loan association, corporate powers and
control of the Bank are vested in its Board of Directors, who elect the officers
of the Bank and who fill any vacancies on the Board of Directors as it exists
upon Conversion. Subsequent to Conversion, voting rights will be vested
exclusively in the owners of the shares of capital stock of the Bank, which will
be the Company, and voted at the direction of the Company's Board of Directors.
Consequently, the holders of the Common Stock will not have direct control of
the Bank.
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Liquidation. In the event of any liquidation, dissolution or winding up
of the Bank, the Company, as holder of the Bank's capital stock, would be
entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the special liquidation
account to Eligible Account Holders and Supplemental Eligible Account Holders
(see "The Conversion -- Liquidation Rights"), all assets of the Bank available
for distribution. In the event of liquidation, dissolution or winding up of the
Company, the holders of its Common Stock would be entitled to receive, after
payment or provision for payment of all its debts and liabilities, all of the
assets of the Company available for distribution. If Preferred Stock is issued,
the holders thereof may have a priority over the holders of the Common Stock in
the event of liquidation or dissolution.
Preemptive Rights. Holders of the Common Stock of the Company will not
be entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without stockholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights which could dilute the
voting strength of the holders of the Common Stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
DESCRIPTION OF CAPITAL STOCK OF THE BANK
GENERAL
The Federal Stock Charter of the Bank, to be effective upon the
Conversion, authorizes the issuance of capital stock consisting of 16,000,000
shares of common stock, par value $1.00 per share, and 2,000,000 shares of
preferred stock, par value $1.00 per share, which preferred stock may be issued
in series and classes having such rights, preferences, privileges and
restrictions as the Board of Directors may determine. Each share of Common Stock
of the Bank will have the same relative rights as, and will be identical in all
respects with, each other share of common stock. After the Conversion, the Board
of Directors will be authorized to approve the issuance of Common Stock up to
the amount authorized by the Federal Stock Charter without the approval of the
Bank's stockholders. Assuming that the holding company form of organization is
utilized, all of the issued and outstanding common stock of the Bank will be
held by the Company as the Bank's sole stockholder. THE CAPITAL STOCK OF THE
BANK WILL REPRESENT NON-WITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF AN
INSURABLE TYPE, AND WILL NOT BE INSURED BY THE FDIC.
COMMON STOCK
Dividends. The holders of the Bank's common stock will be entitled to
receive and to share equally in such dividends as may be declared by the Board
of Directors of the Bank out of funds legally available therefor. See "Dividend
Policy" for certain restrictions on the payment of dividends and "Federal and
State Taxation --Federal Taxation" for a discussion of the consequences of the
payment of cash dividends from income appropriated to bad debt reserves.
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Voting Rights. Immediately after the Conversion, the holders of the
Bank's common stock will possess exclusive voting rights in the Bank. Each
holder of shares of common stock will be entitled to one vote for each share
held, subject to the right of shareholders to cumulate their votes for the
election of directors. During the five-year period after the effective date of
the Conversion, cumulation of votes will not be permitted. See "Restrictions on
Acquisition of the Company and the Bank -- Anti-Takeover Effects of the
Company's Certificate of Incorporation and Bylaws and Management Remuneration
Adopted in Conversion."
Liquidation. In the event of any liquidation, dissolution, or winding
up of the Bank, the holders of common stock will be entitled to receive, after
payment of all debts and liabilities of the Bank (including all deposit accounts
and accrued interest thereon), and distribution of the balance in the special
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders, all assets of the Bank available for distribution in cash or in
kind. If preferred stock is issued subsequent to the Conversion, the holders
thereof may also have priority over the holders of common stock in the event of
liquidation or dissolution.
Preemptive Rights; Redemption. Holders of the common stock of the Bank
will not be entitled to preemptive rights with respect to any shares of the Bank
which may be issued. The common stock will not be subject to redemption. Upon
receipt by the Bank of the full specified purchase price therefor, the common
stock will be fully paid and non-assessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ___________________.
CHANGES IN ACCOUNTANTS
Prior to the year ended September 30, 1997, the Bank's financial
statements were audited by Parente, Randolph, Orlando, Carey & Associates.
Parente, Randolph, Orlando, Carey & Associates was replaced as of September 30,
1997, and KPMG Peat Marwick LLP was engaged and continues as the independent
auditors of the Bank. The decision to change auditors was recommended by the
Audit Committee and was approved by the Board of Directors. Accordingly, the
statement of financial condition as of September 30, 1997 and related statements
of operations, stockholders' equity and cash flows for each of the years in the
two-year period ended September 30, 1996, and included in this Prospectus, were
audited by Parente, Randolph, Orlando, Carey & Associates.
For the years ended September 30, 1996 and September 30, 1995 and up to
the date of replacement of Parente, Randolph, Orlando, Carey & Associates, there
were no disagreements with Parente, Randolph, Orlando, Carey & Associates on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure which, if not resolved to the satisfaction of
Parente, Randolph, Orlando, Carey & Associates, would have caused it to make
reference to the subject matter of the disagreement in connection with its
report. The independent auditors' report on the financial statements for the
year ended September 30, 1996 did not contain an adverse opinion or a disclaimer
of opinions, and was not qualified or modified as to uncertainty, audit scope or
accounting principles. In addition, during the Company's 1996 and 1995 fiscal
years and up to the date of the replacement of Parente, Randolph, Orlando,
135
<PAGE> 179
Carey & Associates, none of the kinds of events occurred which would require
disclosure under paragraph (a)(i)(v) of Item 304 of Regulation S-K adopted by
the Securities and Exchange Commission, 12 C.F.R. 229.304(a)(1)(v).
EXPERTS
The consolidated financial statements of the Bank and its subsidiaries
as of September 30, 1997 and for the year then ended have been included in this
Prospectus in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing. The consolidated financial
statements of the Bank and its subsidiaries as of September 30, 1996 and for the
years ended September 30, 1996 and 1995 have been included in this Prospectus in
reliance upon the report of Parente, Randolph, Orlando, Carey & Associates,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
Keller has consented to the publication herein of the summary of its
report to the Bank and Company setting forth its opinion as to the estimated pro
forma market value of the Common Stock upon Conversion and its valuation with
respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal income tax
consequences of the Conversion will be passed upon for the Bank and the Company
by Muldoon, Murphy & Faucette, Washington, D.C., special counsel to the Bank and
the Company. Muldoon, Murphy & Faucette will rely as to certain matters of
Delaware law on the opinion of Morris, Nichols, Arsht & Tunnel. The Commonwealth
of Pennsylvania income tax consequences of the Conversion and certain matters
related to the Foundation will be passed upon for the Bank and the Company by
KPMG Peat Marwick LLP. Certain legal matters will be passed upon for Sandler
O'Neill by Elias, Matz, Tiernan & Herrick, LLP.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus 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. In addition, the SEC maintains a
web site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC including the Company. This Prospectus contains a description of
the material terms and features of all material contracts, reports or exhibits
to the Registration Statement required to be described. The statements contained
in this Prospectus as to the contents of any contract or other document filed as
an exhibit to the registration statement are, of necessity, brief descriptions
thereof and are not necessarily complete; each such statement is qualified by
reference to such contract or document.
The 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 Prospectus 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 Office of the Regional Director of the
OTS located at 10 Exchange Place, 18th Floor, Jersey City, New Jersey 07302.
136
<PAGE> 180
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(b) of the Exchange Act and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the Exchange
Act. Under the Plan, the Company has undertaken that it will not terminate such
registration for a period of at least three years following the Conversion. In
the event that the Bank amends the Plan to eliminate the concurrent formation of
the Company as part of the Conversion, the Bank will register its stock with the
OTS under Section 12(b) of the Exchange Act and, upon such registration, the
Bank and the holders of its stock will become subject to the same obligations
and restrictions.
A copy of the Certificate of Incorporation and the Bylaws of the
Company and the Federal Stock Charter and Bylaws of the Bank and the Certificate
of Incorporation and Bylaws of the Foundation are available without charge from
the Bank.
137
<PAGE> 181
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
SEPTEMBER 30, 1997 AND 1996
AND
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
<PAGE> 182
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF HAZLETON AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports of Independent Auditors............................................... F-2 to F-3
Consolidated Balance Sheets
as of September 30, 1997 and 1996............................................ F-4
Consolidated Statements of Income For the Years Ended
September 30, 1997, 1996 and 1995............................................ 32
Consolidated Statements of Changes in Equity For the years ended
September 30, 1997, 1996 and 1995............................................ F-5
Consolidated Statements of Cash Flows For the years ended
September 30, 1997, 1996 and 1995............................................ F-6 to F-7
Notes to Consolidated Financial Statements................................... F-8 to F-29
</TABLE>
All schedules are omitted because they are not required or applicable,
or the required information is shown in the financial statements or notes
thereto.
The financial statements of Northeast Pennsylvania Financial Corp. have
been omitted because Northeast Pennsylvania Financial Corp. not yet issued any
stock, has no assets and no liabilities, and has not conducted any business
other than of an organizational nature.
<PAGE> 183
INDEPENDENT AUDITORS' REPORT
To The Board of Directors
First Federal Savings and Loan
Association of Hazleton
Hazleton, Pennsylvania:
We have audited the accompanying consolidated balance sheets of First Federal
Savings and Loan Association of Hazleton (the "Bank") as of September 30, 1997,
and the related consolidated statements of income, changes in equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these 1997 consolidated financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1997 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Bank as
of September 30, 1997, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
November 13, 1997,
except as to note 15,
which is as of November 18, 1997
F-2
<PAGE> 184
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
First Federal Savings and Loan
Association of Hazleton
Hazleton, Pennsylvania:
We have audited the accompanying consolidated balance sheet of First
Federal Savings and Loan Association of Hazleton and subsidiaries (the "Bank")
as of September 30, 1996, and the related consolidated statements of income,
changes in equity, and cash flows for the years ended September 30, 1996 and
1995. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Federal Savings and Loan Association of Hazleton and subsidiaries as of
September 30, 1996, and the results of its operations and its cash flows for
the years ended September 30, 1996 and 1995 in conformity with generally
accepted accounting principles.
/s/ Parente, Randolph, Orlando, Carey & Associates
--------------------------------------------------
Parente, Randolph, Orlando, Carey & Associates
Hazleton, Pennsylvania
November 7, 1996
<PAGE> 185
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
Assets 1997 1996
-------- --------
<S> <C> <C>
Cash and cash equivalents $ 13,214 $ 4,045
Securities held-to-maturity (estimated fair value of $38,869 in 1997 38,925 43,486
and $42,515 in 1996)
Securities available-for-sale 44,773 60,158
Loans (less allowance for loan losses of $1,272 for 1997 and 261,469 242,916
$730 for 1996)
Accrued interest receivable 2,169 2,338
Real estate owned, net 319 453
Property and equipment, net 6,762 6,763
Other assets 1,611 2,305
-------- --------
Total assets $369,242 $362,464
======== ========
Liabilities and Equity
Deposits $314,123 $306,806
Federal Home Loan Bank advances 23,516 25,534
Other borrowings 92 --
Advances from borrowers and insurance 477 592
Accrued interest payable 745 540
Other liabilities 1,751 2,865
-------- --------
Total liabilities $340,704 $336,337
Retained earnings - substantially restricted 27,255 25,874
Unrealized gain on available-for-sale securities, net 1,283 253
-------- --------
Total equity 28,538 26,127
-------- --------
Total liabilities and equity $369,242 $362,464
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 186
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
Consolidated Statements of Changes in Equity
For the Years Ended September 30, 1997, 1996, and 1995
(in thousands)
<TABLE>
<CAPTION>
Unrealized
gain on
available-for-
Retained sale securities,
earnings net Total
------- ---------------- --------
<S> <C> <C> <C>
Balance, September 30, 1994 $23,183 -- $ 23,183
Implementation of SFAS No. 115 -- $ 364 364
Increase in unrealized gains, net -- 253 253
Net income 1,750 -- 1,750
------- ------- --------
Balance, September 30, 1995 24,933 617 25,550
Decrease in unrealized gains, net -- (364) (364)
Net income 941 -- 941
------- ------- --------
Balance, September 30, 1996 25,874 253 26,127
------- ------- --------
Increase in unrealized gains, net -- 1,030 1,030
Net income 1,381 -- 1,381
------- ------- --------
Balance, September 30, 1997 $27,255 $ 1,283 $ 28,538
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 187
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
Consolidated Statements of Cash Flows
for the years ended September 30, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
Operating Activities: 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net Income $ 1,381 $ 941 $ 1,750
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 651 97 25
Depreciation 645 698 810
Deferred income tax (benefit) provision (441) 156 (29)
Amortization and accretion on:
Held-to-maturity securities 22 87 168
Available-for-sale securities 111 76 (13)
Amortization of deferred loan fees (201) (210) (192)
(Gain) loss on sale of:
Real estate acquired thorough foreclosure 66 46 (8)
Loans (22) (18) (10)
Available-for-sale securities 563 -- 6
Loss on disposal of property and equipment 176 65 75
Changes in assets and liabilities:
(Increase) Decrease in Accrued interest receivable 169 (347) (373)
Decrease in Other assets (40) 104 174
Increase in Accrued interest payable 205 17 205
Increase (Decrease) in Accrued income taxes payable 649 (547) (698)
Increase (Decrease) in Other liabilities (1,406) 2,214 (180)
-------- -------- --------
Net cash provided by operating activities 2,528 3,379 1,710
-------- -------- --------
Investing Activities:
Loan origination and principal payments on loans (21,077) (21,978) (21,599)
Proceeds from sale of:
Available-for-sale securities 26,530 -- 2,995
Real estate acquired through foreclosure 266 420 184
Loans 1,811 1,578 1,745
Proceeds from repayments of held-to-maturity securities 10,406 16,845 10,775
Proceeds from repayments of available-for-sale securities 13,849 6,500 --
Proceeds from disposal of fixed assets -- 12 --
Purchase of:
Held-to-maturity securities (5,867) (25,101) (18,823)
Available-for-sale securities (23,904) (20,286) (10,424)
Office properties and equipment (649) (2,104) (833)
Federal Home Loan Bank stock -- (173) (79)
-------- -------- --------
Net cash provided by (used in) investing activities 1,365 (44,287) (36,059)
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 188
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
Consolidated Statements of Cash Flows
for the years ended September 30, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Financing Activities:
Net increase in deposit accounts $ 7,317 $ 26,796 $ 22,849
Net increase (decrease) in Federal Home Loan Bank
advances (2,018) 14,484 10,930
Net increase in advances from borrowers for taxes
and insurance (115) (8) 114
Net increase in other borrowings 92 -- --
-------- -------- --------
Net cash provided by financing activities 5,276 41,272 33,893
-------- -------- --------
Increase (decrease) in cash and cash equivalents 9,169 364 (456)
Cash equivalents, beginning of year 4,045 3,681 4,137
-------- -------- --------
Cash and cash equivalents, end of year $ 13,214 $ 4,045 $ 3,681
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 13,989 $ 12,990 $ 10,640
======== ======== ========
Income taxes $ 540 $ 816 $ 954
======== ======== ========
Supplemental disclosure - non-cash information:
Transfer from loans to real estate owned $ 285 $ 522 $ 386
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE> 189
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies.
Business. First Federal Savings and Loan Association of Hazleton and
subsidiaries ("the Bank") provides a wide range of banking services to
individual and corporate customers through its branch network in
Hazleton, Bloomsburg, Lehighton, and Schuylkill County, Pennsylvania.
The Bank also serves its loan customers through three mortgage loan
production offices located in the Pennsylvania communities of Monroe
County, Central Susquehanna County, and Mountaintop. All of the
branches are full-service and offer commercial and retail products.
These products include checking accounts (interest and non-interest
bearing), savings accounts, certificates of deposit, commercial and
consumer loans, real estate loans, and home equity loans. The Bank is
subject to competition from other financial institutions and other
companies that provide financial services. The Bank is subject to the
regulations of certain federal agencies and undergoes periodic
examinations by those regulatory authorities.
Principles of Consolidation and Presentation. The accompanying
financial statements of the Bank include the accounts of Hazleton
Bancorp, Inc., and Fidaco, Inc., wholly-owned subsidiaries of First
Federal Savings and Loan Association of Hazleton. Both Hazleton
Bancorp, Inc. and FIDACO, Inc. are inactive subsidiaries with the only
major asset being an investment by FIDACO, Inc. in Hazleton Community
Development Corporation. All material inter-Bank balances and
transactions have been eliminated in consolidation. Prior period
amounts are reclassified, when necessary, to conform with the current
year's presentation.
The Bank follows accounting principles and reporting practices which
are in accordance with generally accepted accounting principles. The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumption that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
significantly from those estimates. Material estimates that are
particularly susceptible to significant change in the near-term relate
to determination of the allowance for loan losses. Management believes
that the allowance for loan losses is adequate.
Risks and Uncertainties. In the normal course of its business, the
Bank encounters two significant types of risk: economic and
regulatory. There are three main components of economic risk: interest
rate risk, credit risk, and market risk. The Bank is subject to
interest rate risk to the degree that its interest-bearing liabilities
mature or reprice at different speeds, or on different bases from its
interest-earning assets. The Bank's primary credit risk is the risk of
default on the Bank's loan portfolio that results from the borrowers
inability or unwillingness to make contractually required payments.
The
F-8
<PAGE> 190
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
Bank's lending activities are concentrated in Pennsylvania. The
largest concentration of the Bank's loan portfolio is located in
Northeastern Pennsylvania. The ability of the Bank's borrowers to
repay amounts owed is dependent on several factors, including the
economic conditions in the borrower's geographic region and the
borrower's financial condition. Market risk reflects changes in the
value of collateral underlying loans, the valuation of real estate
held by the Bank, and the valuation of loans held for sale,
Mortgage-related securities available for sale and mortgage servicing
assets.
The Bank is subject to the regulations of various government agencies.
These regulations can and do change significantly from period to
period. The Bank also undergoes periodic examinations by the
regulatory agencies which may subject it to further changes with
respect to asset valuations, amounts of required loss allowances, and
operating restrictions resulting from the regulators' judgements based
on information available to them at the time of their examination.
The Bank has an ongoing program designed to ensure that its
operational and financial systems will not be adversely affected by
year 2000 software failures due to processing errors arising from
calculations using the year 2000 date. While the Bank believes it is
acting prudently to assure year 2000 compliance, it is to some extent
dependent upon vendor cooperation. The Bank is requiring its computer
systems and software vendors to represent that the products provided
are or will be year 2000 compliant and has planned a program of
testing for compliance. It is recognized that any year 2000 compliance
failures, either internal or on the part of the Bank's customers,
could result in additional expense or loss to the Bank.
Cash and Cash Equivalents. For the purpose of the consolidated
statement of cash flows, cash and cash equivalents include cash and
interest bearing deposits with an original maturity of three months or
less.
Securities. The Bank divides its securities portfolio into two
segments: (a) held to maturity and (b) available for sale. Securities
in the held to maturity category are accounted for at cost, adjusted
for amortization of premiums and accretion of discounts, using a
method which approximates a level yield, based on the Bank's intent
and ability to hold the securities until maturity. All other
securities are included in the available for sale category and are
accounted for at fair value, with unrealized gains or losses, net of
taxes, being reflected as adjustments to equity.
At the time of purchase, the Bank makes a determination of whether or
not it will hold the securities to maturity, based upon an evaluation
of the probability of future events. Securities, which the Bank
believes may be involved in interest rate risk, liquidity, or other
asset/liability management decisions, which might reasonably result in
such securities not being held to maturity, are classified as
available for sale. If securities are sold, a gain or loss is
determined by specific identification and reflected in the operating
results in the period the trade occurs.
F-9
<PAGE> 191
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
Allowance for Loan Losses. The allowance for loan losses is maintained
at a level that management considers adequate to provide for potential
losses, based upon an evaluation of known and inherent risks in the
loan portfolio. Management's evaluation is based upon an analysis of
the portfolio, past loss experience, current economic conditions, and
other relevant factors. While management uses the best information
available to make evaluations, such evaluations are highly subjective,
and future adjustments to the allowance may be necessary if conditions
differ substantially from the assumptions used in making the
evaluations. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Bank's
allowance for losses on loans. Such agencies may require the Bank to
recognize additions to the allowance, based on their judgements about
information available to them at the time of their examination. The
allowance is increased by the provision for loan losses, which is
charged to operations. Loan losses are charged directly against the
allowance and recoveries on previously charged-off loans are added to
the allowance.
Loans are deemed to be "impaired" if management's assessment of the
relevant facts and circumstances, it is probable that the bank will be
unable to collect all proceeds due according to the contractual terms
of the loan agreement. For purposes of applying the measurement
criteria for impaired loans, the Bank excludes large groups of smaller
balance homogeneous loans, primarily consisting of residential real
estate and consumer loans, as well as commercial loans with balances
of less than $100,000.
The Bank's policy for the recognition of interest income on impaired
loans is the same as for non-accrual loans discussed below. Impaired
loans are charged off when the Bank determines that foreclosure is
probable, and the fair value of the collateral is less than the
recorded investment of the impaired loan.
Loans, Loan Origination Fees, and Uncollected Interest. Loans are
recorded at cost net of unearned discounts, deferred fees, and
allowances. Discounts or premiums on purchased loans are amortized
using the interest method over the remaining contractual life of the
portfolio, adjusted for actual prepayments. Loan origination fees and
certain direct origination costs are deferred and amortized using the
level yield method over the life of the related loans as an adjustment
of the yield on the loans.
Uncollected interest receivable on loans is accrued to income as
earned. Non-accrual loans are loans on which the accrual of interest
has ceased because the collection of principal or interest payments is
determined to be doubtful by management. It is the policy of the Bank
to discontinue the accrual of interest when principal or interest
payments are delinquent 90 days or more (unless the loan principal and
interest are determined by management to be fully secured and in the
process of collection), or earlier if the financial condition of the
borrower raises significant concern with regard to the ability of the
borrower to service the debt in accordance with the terms of the loan.
Interest income on such loans is not accrued until the financial
condition and payment record of the borrower demonstrates the ability
to service the debt.
F-10
<PAGE> 192
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
Loans Held for Sale. Mortgage loans originated and intended for sale
in the secondary market are carried at the lower of cost or estimated
fair value in the aggregate. Net unrealized losses are recognized
through a valuation allowance by charges to income.
Real Estate Owned (REO). Real estate acquired through foreclosure or
by deed in lieu of foreclosure is classified as REO. REO is carried at
the lower of cost (lesser of carrying value of the loan or fair value
of the property at the date of acquisition, as determined by a
certified appraiser) or fair value less selling expenses. Costs
relating to the development or improvement of the property are
capitalized; holding costs are charged to expense. At September 30,
1997, the Bank has provided a reserve of $87,000 for REO. In prior
years, no reserves were necessary.
Property and Equipment. Property and equipment are stated at cost,
less accumulated depreciation. Depreciation for each class of
depreciable asset is computed using the straight-line method over the
estimated useful lives of the assets (39 years for buildings and 3 to
7 years for furniture and equipment). When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts. The cost of maintenance and repairs is
charged to expense as incurred and renewals and betterments are
capitalized.
Income Taxes. The Bank accounts for income taxes under the
asset/liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, as well as, operating
loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled.
Retained earnings at September 30, 1997 and 1996 include approximately
$8.3 million, for which no provision for Federal income tax has been
made. These amounts represent allocations of earnings to bad debt
reserves for tax purposes and are a restriction upon retained
earnings. If, in the future, this portion of retained earnings is
reduced for any purpose other than tax bad debt losses, Federal income
taxes may be imposed at the then applicable rates.
F-11
<PAGE> 193
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
2. Securities.
Securities are summarized as follows (in thousands):
<TABLE>
<CAPTION>
....................... SEPTEMBER 30, 1997.....................
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Held-to-maturity securities:
Municipal securities $ 8,963 $ 142 $ -- $ 9,105
Obligations of U.S. government agencies 19,997 17 (61) 19,953
Mortgage-related securities 9,965 -- (154) 9,811
------- ------ ----- -------
Total $38,925 $ 159 $(215) $38,869
======= ====== ===== =======
Available-for-sale securities:
Obligations of the U.S. Treasury $ 991 $ 8 $ -- $ 999
Obligations of U.S. Government agencies 9,993 53 -- 10,046
Mortgage-related securities 29,491 492 (1) 29,982
------- ------ ----- -------
Total debt securities 40,475 553 (1) 41,027
Federal Home Loan Bank of Pittsburgh Stock 2,054 -- -- 2,054
Federal Home Loan Mortgage Corporation
Stock 47 1,645 -- 1,692
------- ------ ----- -------
Total equity securities 2,101 1,645 -- 3,746
Total $42,576 $2,198 $ (1) $44,773
======= ====== ===== =======
</TABLE>
F-12
<PAGE> 194
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
<TABLE>
<CAPTION>
....................... SEPTEMBER 30, 1996.....................
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- --------- -------
<S> <C> <C> <C> <C>
Held-to-maturity securities:
Municipal securities $ 4,105 $ 4 $ -- $ 4,109
Obligations of U.S. government agencies 25,995 -- (520) 25,475
Mortgage-related securities 13,386 -- (455) 12,931
Total $43,486 $ 4 $ (975) $42,515
======= ====== ======= =======
Available-for-sale securities:
Obligations of the U.S. Treasury $ 2,974 $ -- $ (11) $ 2,963
Obligations of U.S. Government agencies 16,961 -- (155) 16,806
Mortgage-related securities 37,785 -- (526) 37,259
------- ------ ------- -------
Total debt securities 57,720 -- (692) 57,028
Federal Home Loan Bank of Pittsburgh
Stock 1,958 -- -- 1,958
Federal Home Loan Mortgage Corporation
Stock 47 1,125 -- 1,172
------- ------ ------- -------
2,005 1,125 -- 3,130
Total $59,725 $1,125 $ (692) $60,158
======= ====== ======= =======
</TABLE>
F-13
<PAGE> 195
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
The amortized cost and estimated fair value of securities at September 30, 1997,
by contractual maturity, are shown below (dollars in thousands).
<TABLE>
<CAPTION>
MATURING MATURING
AFTER ONE AFTER 5
MATURING YEAR BUT YEARS BUT MATURING
WITHIN ONE WITHIN WITHIN 10 AFTER 10
YEAR 5 YEARS YEARS YEARS TOTAL
------ ------- --------- -------- -------
<S> <C> <C> <C> <C> <C>
Held-to-maturity securities:
Municipal securities $ -- $ -- $ 2,417 $ 6,546 $ 8,963
Obligations of U.S. Government
agencies -- 5,000 12,997 2,000 19,997
Mortgage-related securities -- 244 -- 9,721 9,965
Total securities at amortized
cost $ 0 $5,244 $15,414 $18,267 $38,925
====== ====== ======= ======= =======
Total securities at fair value $ 0 $5,247 $15,393 $18,229 $38,869
====== ====== ======= ======= =======
Weighted Average Yield -- 5.95% 6.60% 5.88% 6.17%
------ ------ ------- ------- -------
Available-for-sale securities:
Obligations of the U.S. Treasury $ 991 $ -- $ -- $ -- $ 991
Obligations of U.S. Government
agencies 1,000 5,993 3,000 -- 9,993
Mortgage-related securities 2,628 1,384 -- 25,479 29,491
Equity securities 2,101 -- -- -- 2,101
------ ------ ------- ------- -------
Total securities at amortized
cost $6,720 $7,377 $ 3,000 $25,479 $42,576
====== ====== ======= ======= =======
Total securities at fair value 8,380 7,412 3,026 25,955 44,773
====== ====== ======= ======= =======
Weighted Average Yield 6.67% 7.43% 7.29% 6.64% 6.83%
------ ------ ------- ------- -------
</TABLE>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. Weighted average yields are based on amortized cost
including municipal securities which are not reported on a tax-equivalent basis.
Proceeds from sales of securities available for sale during the year ended
September 30, 1997 were $26,804,480 resulting in gross realized gains of $63,251
and gross realized losses of $626,366.
F-14
<PAGE> 196
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
The Bank did not sell any securities during the year ended September 30, 1996.
The proceeds from sales of securities available for sale during the year ended
September 30, 1995 were $2,994,844, resulting in gross realized losses of
$5,914.
Accrued interest receivable on securities amounted to $821,363 and $1,051,488 at
September 30, 1997 and 1996, respectively.
Securities, carried at approximately $30,514,940 at September 30, 1997, were
pledged to secure public deposits as required by law.
In December 1995, the Bank transferred certain held-to-maturity securities to
the available-for-sale investment portfolio. The amortized cost of the
securities was approximately $37,785,000 with an unrealized loss net of taxes of
approximately $377,000. This transfer was in accordance with a special
reassessment provision contained within a Special Report issued by the Financial
Accounting Standards Board ("FASB").
The unamortized premiums on Mortgage-related securities amounted to $339,472 and
$425,355 as of September 30, 1997 and 1996, respectively. The unearned discount
on Mortgage-related securities amounted to $93,353 and $69,149 as of September
30, 1997 and 1996, respectively.
F-15
<PAGE> 197
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
3. Loans
Loans are summarized as follows:
<TABLE>
<CAPTION>
At September 30
---------------
1997 1996
--------- ---------
<S> <C> <C>
Real Estate loans:
One-to-four family $ 179,101 $ 170,773
Multiple family and commercial 6,701 4,429
Construction 5,818 5,129
--------- ---------
Total real estate loans 191,620 180,331
--------- ---------
Consumer Loans:
Home equity loans and lines of credit 41,278 38,054
Automobile 13,678 10,594
Education 2,348 2,538
Unsecured lines of credit 1,310 959
Other 3,229 3,309
--------- ---------
Total consumer loans 61,843 55,454
--------- ---------
Commercial loans 10,775 9,280
--------- ---------
Total loans 264,238 245,065
--------- ---------
Less:
Allowances for loan losses (1,272) (730)
Deferred loan origination fees (1,497) (1,419)
Total loans, net $ 261,469 $ 242,916
========= =========
</TABLE>
Accrued interest receivable on loans amounted to $1,347,982 and $ 1,286,374 at
September 30, 1997, and 1996, respectively.
Impaired loans and the related specific loan loss allowances were as follows (in
thousands):
<TABLE>
<CAPTION>
September 30,
-------------
1997 1996
----------------------------------------- ----------------------------------------
Allowance Allowance
Recorded for Net Recorded for Net
Investments Losses Investment Investment Losses Investment
----------- ------ ---------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans:
With specific allowances $290 $ 68 $222 $292 $ 55 $237
Other impaired loans:
With specific allowances $187 $108 $ 79 $199 $ 14 $185
---- ---- ---- ---- ---- ----
$477 $176 $301 $491 $ 69 $422
==== ==== ==== ==== ==== ====
</TABLE>
F-16
<PAGE> 198
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
The average net recorded investment in impaired loans for the years ended
September 30, 1997, 1996, and 1995, respectively, was $577,951, $515,707, and
$1,334,100. The related amount of interest income recognized on impaired loans
was $39,000, $19,000, and $66,000 for the years ended September 30, 1997, 1996,
and 1995, respectively.
Non-accrual loans amounted $774,000, $716,000, and $1,234,000 at September 30,
1997, 1996, and 1995, respectively. Loans in non-accrual status as of September
30, 1997, 1996 and 1995 had interest due but not recognized of approximately
$86,000, $54,000, and $150,000, respectively. The amount of interest income on
these loans that was included in net income in fiscal year 1997, 1996 and 1995
was $53,000, $38,000 and $ 110,000, respectively. The aggregate recorded
investment in troubled debt restructuring was $112,000 at September 30, 1997.
The gross interest income that would have been recorded if this loan had been
current in accordance with the original terms is $16,605. The amount of interest
income on the loan that was included in net income for the period was $8,443.
The Bank has no commitments to lend additional funds to borrowers whose loans
were classified as non-performing or troubled debt restructuring.
The activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
September 30,
-------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Balance, beginning $ 730 $ 724 $ 769
Provision charged to income 651 97 25
Charge-offs (132) (94) (95)
Recoveries 23 3 25
------- ------- -------
Balance, ending $ 1,272 $ 730 $ 724
======= ======= =======
</TABLE>
At September 30, 1997, 1996, and 1995, the Bank serviced loans for others of
$14,197,000, $16,186,000, and $18,785,000, respectively. Loans serviced by
others for the Bank as of September 30, 1997, 1996, and 1995 were; $7,721,000,
$9,968,000, and $11,812,000, respectively.
An analysis of the activity of loans to directors and officers follows (in
thousands):
<TABLE>
<CAPTION>
September 30,1997
-----------------
<S> <C>
Balance, beginning of year $ 1,205
New loans and line of credit advances 14
Repayments (39)
-------
Balance, end of year $ 1,180
=======
</TABLE>
F-17
<PAGE> 199
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
4. Office Properties and Equipment
Properties and equipment by major classification are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Land $ 854 $ 710
Buildings and improvements 6,550 6,496
Furniture, fixtures and equipment 3,695 3,462
Leasehold improvements 1,095 1,094
Renovations in progress 208 2
------- -------
Total 12,402 11,764
Less accumulated depreciation 5,640 5,001
------- -------
Net $ 6,762 $ 6,763
======= =======
</TABLE>
The Bank has entered into operating leases for several of its branch facilities.
The minimum annual rental payments under these leases at September 30, 1997, are
as follows (in thousands):
<TABLE>
<CAPTION>
Years ending September 30:
--------------------------
<S> <C>
1998 $213
1999 98
2000 89
2001 83
2002 and after 214
----
Total $697
====
</TABLE>
Rent expense was $261,000, $263,000, and $262,000, for the years ended September
30, 1997, 1996, and 1995, respectively.
F-18
<PAGE> 200
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
5. Deposits
Deposits consist of the following major classifications (in thousands):
<TABLE>
<CAPTION>
At September 30,
----------------
1997 1996
---- ----
Weighted Percent Weighted Percent
Average of Average of
Rate Amount Total Rate Amount Total
--------- -------- --------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Savings accounts (passbook, statement, clubs) 2.45% $ 71,779 22.8% 2.52% $ 73,415 24.0%
Money market accounts 2.81% 13,821 4.4% 2.82% 14,520 4.73%
Certificates of deposit less than $100,000 5.42% 161,844 51.5% 5.47% 164,701 53.7%
Certificates of deposit greater than $100,000 30,892 9.9% 22,043 7.1%
NOW Accounts 1.49% 27,302 8.7% 1.50% 25,349 8.3%
Non-interest bearing deposits -- 8,485 2.7% -- 6,778 2.2%
--------- -------- --------- ------- -------- -------
Total deposits at end of period 4.12% $314,123 $ 100% 4.15% $306,806 $ 100%
========= ======== ========= ======= ======== =======
</TABLE>
While the certificates frequently are renewed at maturity rather than paid out,
a summary of certificates by contractual maturity at September 30, 1997 is as
follows (in thousands):
<TABLE>
<CAPTION>
Years ending September 30, Amount
-------------------------- --------
<S> <C> <C>
1998 $127,375
1999 $ 37,223
2000 $21,563
2001 $ 4,697
2002 $ 1,878
2003 and thereafter 0
--------
Total $192,736
========
</TABLE>
Interest expense on deposits is comprised of the following:
<TABLE>
<CAPTION>
Year ended September 30,
------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Savings accounts $ 1,765 $ 1,871 $ 2,079
Money market accounts 399 371
Certificates 10,120** 9,549** 7,675**
NOW Accounts 415 404 960*
------- ------- -------
Total $12,699 $12,195 $10,714
======= ======= =======
</TABLE>
* Information regarding interest expense on money market accounts was not
available prior to the year ended September 1995.
** Information regarding interest expense on certificates of deposit of $100,000
or greater was not available prior to June 1997.
F-19
<PAGE> 201
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
6. Federal Home Loan Bank Advances
Under terms of its collateral agreement with the Federal Home Loan Bank of
Pittsburgh ("FHLB"), the Bank maintains otherwise unencumbered qualifying assets
(principally 1-4 family residential mortgage loans and U.S. Government and
Agency notes and bonds) in the amount of at least as much as its advances from
the FHLB. The Banks's FHLB stock is also pledged to secure these advances. At
September 30, 1997 and 1996, such advances mature as follows (in thousands):
<TABLE>
<CAPTION>
Due by September 30, Weighted Average Rate September 30, 1997
-------------------- --------------------- ------------------
<S> <C> <C>
1998 5.45% $8,000
1999 - -
2000 - -
2001 5.49% 5,000
2002 5.69% 10,000
Thereafter 2.53% 516
---- -------
Total FHLB advances 5.50% $23,516
==== =======
</TABLE>
<TABLE>
<CAPTION>
Due by September 30, Weighted Average Rate September 30, 1996
-------------------- --------------------- ------------------
<S> <C> <C>
1998 5.44% $25,000
1999 - -
2000 - -
2001 - -
2002 - -
Thereafter 2.53% 534
---- -------
Total FHLB advances 5.38% $25,534
==== =======
</TABLE>
The Bank has included in the preceding table annually renewable lines of credit
totalling $41,307,000. The Bank, from time to time, has used the lines of credit
to meet liquidity needs. At September 30, 1997 and 1996, the balances
outstanding on the lines of credit were $0 and $ 17,000,000 respectively.
7. Income Taxes
The Small Business Job Protection Act of 1996, enacted August 20, 1996, provides
for the repeal of the tax bad debt deduction computed under the percentage of
taxable income method. The repeal of the use of this method is effective for tax
years beginning after December 31, 1995. Prior to the change in law, the Bank
had qualified under the provisions of the Internal Revenue Service Code which
permitted it to deduct from taxable income an allowance for bad debts based on
8% of taxable income.
F-20
<PAGE> 202
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
Upon repeal, the Bank is required to recapture into income, over a six year
period, the portion of its tax bad debt reserves that exceed its base year
reserves (i.e., tax reserves for tax years beginning before 1988). The base year
tax reserves, which may be subject to recapture if the Bank ceases to qualify as
a bank for federal income tax purposes, are restricted with respect to certain
distributions. The Bank's total tax bad debt reserves at September 30, 1997, are
approximately $8.9 million, of which $8.3 million represents the base year
amount and $600,000 is subject to recapture. The Bank has previously recorded a
deferred tax liability for the amount to be recaptured; therefore, this
recapture will not impact the statement of income.
The provision (benefit) for income taxes is summarized as follows:
<TABLE>
<CAPTION>
Year ended September 30,
------------------------
<S> <C> <C> <C>
Current: 1997 1996 1995
------- ----- -----
Federal $ 1,105 $ 147 $ 827
State 84 (291) 101
Deferred - Federal (441) 156 (29)
------- ----- -----
Total $ 748 $ 12 $ 899
======= ===== =====
</TABLE>
The provision for income taxes differs from the statutory rate due to the
following:
<TABLE>
<CAPTION>
Year ended September 30,
------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Federal income taxes at statutory rate $ 724 $ 324 $ 901
Tax exempt interest, net (102) (51) (11)
State taxes, net of Federal benefit 56 (192) 67
Other, net 70 (69) (58)
----- ----- -----
Total $ 748 $ 12 $ 899
===== ===== =====
</TABLE>
F-21
<PAGE> 203
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
The components of the net deferred tax liability (asset) are as follows (in
thousands):
<TABLE>
<CAPTION>
September 30,
-------------
1997 1996
------- -----
<S> <C> <C>
Deferred tax assets:
Loan fees and costs $ (261) $(464)
Deferred compensation (127) (107)
Foreclosed asset writedowns (14) (6)
Provision for abandoned assets (59) 0
Depreciation (5) (25)
Accrued hospitalization (33) 10
Charitable contributions (15) 0
Book bad debt reserves - loans (516) 0
------- -----
$(1,030) $(592)
Deferred tax liabilities:
Accretion $ 26 $ 29
Unrealized holding gains on available-for-sale securities 914 180
Tax bad debt reserves in excess of base year 215 215
------- -----
Gross deferred tax liabilities $ 1,155 $ 424
------- -----
Net deferred tax liability (asset) $ 125 $(168)
======= =====
</TABLE>
8. Financial Instruments
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. Commitments to
originate loans amounted to $ 4.4 million as of September 30, 1997, of which
$1.39 million was for variable-rate loans. The balance of the commitments
represent fixed-rate loans with interest rates ranging from 5.385% to 9.5%. At
September 30, 1997, the Bank had undisbursed loans in process for construction
loans of $ 4.7 million and $16.3 million in undisbursed lines of credit. These
instruments involve, to varying degrees, elements of credit, interest rate or
liquidity risk in excess of the amount recognized in the balance sheet. The
contract or notional amounts of these commitments reflect the extent of
involvement the Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss from nonperformance by the other party to the
financial instruments for commitments to extend credit is represented by the
contractual amount of those instruments. The Bank uses the same credit policies
in making commitments as it does for on-balance-sheet instruments.
Commitments to extend credit are legally binding agreements to lend to
customers. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future liquidity
F-22
<PAGE> 204
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
requirements. The Bank evaluates each customer's credit-worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank on extension of credit, is based on management's credit assessment of
the counterparty. At September 30, 1997, the Bank expects all commitments to be
funded within 60 days.
The Bank is required to disclose estimated fair values for its financial
instruments. The following describes various limitations and assumptions related
to such fair value disclosures.
Limitations. Estimates of fair value are made at a specific point in time, based
upon, where available, relevant market prices and information about the
financial instrument. Such estimates do not include any premium or discount that
could result from offering for sale at one time the Bank's entire holdings of a
particular financial instrument. For a substantial portion of the Bank's
financial instruments, no quoted market exists. Therefore, estimates of fair
value are necessarily based on a number of significant assumptions (many of
which involve events outside the control of management). Such assumptions
include assessments of current economic conditions, perceived risks associated
with these financial instruments and their counterparties, future expected loss
experience, and other factors. Given the uncertainties surrounding these
assumptions, the reported fair values represent estimates only, and therefore
cannot be compared to the historical accounting model. Use of different
assumptions or methodologies are likely to result in significantly different
fair value estimates.
The estimated fair values presented neither include nor give effect to the
values associated with the Bank's banking, or other businesses, existing
customer relationships, extensive branch banking network, property, equipment,
goodwill, or certain tax implications related to the realization of unrealized
gains or losses. Also, the fair value of non-interest bearing demand deposits,
savings, and NOW accounts and money market deposit accounts is equal to the
carrying amount because these deposits have no stated maturity. Obviously, this
approach to estimating fair value excludes the significant benefit that results
from the low-cost funding provided by such deposit liabilities, as compared to
alternative sources of funding. As a consequence, the fair value of individual
assets and liabilities may not be reflective of the fair value of a banking
organization that is a going concern.
The following methods and assumptions were used to estimate the fair value of
each major classification of financial instruments at September 30, 1997 and
1996.
Cash and cash equivalents. Current carrying amounts approximate estimated fair
value.
Securities. Current quoted market prices were used to determine fair value.
Loans. Fair values were estimated for portfolios of loans with similar financial
characteristics. Loans were segregated by type, and each loan category was
further segmented by fixed and adjustable-rate interest terms. The estimated
fair value of the segregated portfolios was calculated by discounting cash flows
through the estimated maturity
F-23
<PAGE> 205
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
using estimated prepayment speeds while using estimated market discount rates
that reflect credit and interest rate risk inherent in the loans. The estimate
of the maturities and prepayment speeds was based on the Bank's historical
experience. Cash flows were discounted using market rates adjusted for portfolio
differences.
Accrued interest receivable. Current carrying amounts approximate estimated fair
value.
Deposits with no stated maturity. Current carrying amounts approximate estimated
fair value.
Certificates of deposit. Fair values were estimated by discounting the
contractual cash flows using current market rates offered in the Bank's market
area for deposits with comparable terms and maturities.
Federal Home Loan Bank Advances. The fair value of borrowings was estimated
using rates currently available to the Bank for debt with similar terms and
remaining maturities.
Other borrowings. Current carrying amounts approximate estimated fair value.
Accrued interest payable. Current carrying amounts approximate estimated fair
value.
Commitments to extend credit. The majority of the Bank's commitments to extend
credit carry current market interest rates if converted to loans. Because
commitments to extend credit are generally unassignable by either the Bank or
the borrower, they only have value to Bank and the borrower. The estimated fair
value approximates the recorded deferred fee amounts.
F-24
<PAGE> 206
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
The carrying amounts and estimated fair values of the Bank's financial
instruments were as follows (in thousands):
<TABLE>
<CAPTION>
At September 30,
----------------
1997 1996
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 13,214 $ 13,214 $ 4,045 $ 4,045
Securities available-for-sale 44,773 44,773 60,158 60,158
Securities held-to-maturity 38,925 38,869 43,486 42,515
Loans 261,469 261,445 242,916 242,350
Accrued interest receivable 2,169 2,169 2,338 2,338
Financial Liabilities:
Deposits with no stated maturity which
consist of savings, money market, NOW and
non-interest bearing deposits 121,386 121,386 120,062 120,062
Certificates of deposit 192,736 191,328 186,744 184,924
Federal Home Loan Bank advances 23,516 23,431 25,534 25,317
Other borrowings
Accrued interest payable 745 745 540 540
Off balance sheet assets (liabilities):
Loan commitments -- 9,141 -- 8,027
Consumer lines of credit -- 13,028 -- 11,806
Commercial lines of credit -- 3,240 -- 1,765
</TABLE>
9. Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that 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.
F-25
<PAGE> 207
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital and tangible capital
(as defined) to total assets (as defined). Management believes, as of September
30, 1997, that the Bank meets all capital adequacy requirements to which it is
subject.
As of September 30, 1997, the most recent notification from the Office of Thrift
Supervision 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 ratios as set forth in the table below. There are
no conditions or events since that notification that management believes have
changed the institution's category.
The Bank's actual capital amounts and ratios at September 30, 1997 and 1996 are
also presented in the following table (dollars in thousands).
<TABLE>
<CAPTION>
To be Well Capitalized
For Capital under prompt corrective
Actual Adequacy Purposes Action Provisions
------ -------------------- -----------------------
Amount Ratio(1) Amount Ratio(1) Amount Ratio(1)
As of September 30, 1997
- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Risk-based Capital (Total capital
to risk weighted assets) $28,527 14.4% $15,845 >8.0% $19,806 >10.0%
Tier I Capital (to risk weighted
assets) 27,255 13.8% 7,922 >4.0% 11,883 >6.0%
Core Capital (Tier I capital to
total assets) 27,255 7.4% 11,077 >3.0% 18,462 >5.0%
Tangible Capital (Tier I capital to
total assets) 27,255 7.4% 5,539 >1.5% n/a n/a
As of September 30, 1996
- ------------------------
Risk-based capital (Total capital
to risk weighted assets) $26,604 14.3% $14,930 >8.0% $18,662 >10.0%
Tier I Capital (to risk weighted
assets) 25,874 13.9% 7,465 4.0% 11,197 6.0%
Core Capital (Tier I capital to
total assets) 25,874 7.1% 10,874 >3.0% 18,123 >5.0%
Tangible Capital (Tier I capital to
total assets) 25,874 7.1% 5,437 >1.5% n/a n/a
</TABLE>
(1) Tangible and core capital are completed as a percentage of total assets of
$369 million and $362 million at September 30, 1997 and 1996, respectively.
Risk-based capital and Tier I capital is computed as a percentage of total
risk-weighted assets of $198 million and $187 million at September 30, 1997 and
1996, respectively.
F-26
<PAGE> 208
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
10. Employee Benefit Plans
The Bank participates in a multiple-employer defined benefit pension plan
covering all employees meeting certain eligibility requirements. Information
regarding the actual present values of vested and nonvested benefits is not
available. The plan is fully funded and no contributions were required during
the years ended September 30, 1997, 1996 and 1995.
Effective March 7, 1994, the Bank implemented a Section 401(k) defined
contribution plan which covers substantially all of its employees. The Bank made
contributions to this plan of approximately $ $83,000, $77,000 and $73,000 for
the years ended September 30, 1997, 1996 and 1995, respectively.
11. Federal Deposit Insurance Corporation (FDIC) Special Assessment
On September 30, 1996, legislation was enacted to bring the funding level of the
Savings Association Insurance Fund (of which the Bank is a member) of the FDIC
to the same level as the Bank Insurance Fund of the FDIC. As a result of that
legislation, the Bank accrued a single premium payment of $1,744,291 as of
September 30, 1996. The impact of this single premium payment, net of estimated
federal and state taxes on 1996 net income was approximately $1,047,000. The
single premium payment was assessed at 65.7 basis points of the March 31, 1995
deposit base of the Bank. With the enactment of the legislation, the regular
assessment rate for the fourth quarter, October 1 to December 31, 1996, was
lowered retroactively from 23 to 18 basis points. Beginning January 1, 1997,
annual premium assessments further decreased to an annual premium level of 6.4
basis points.
12. Related Party Transactions
The Bank retains a law firm, in which the Chairman of the Bank's Board of
Directors also is a member, that provides general legal counsel to the Bank. The
Bank paid $49,859, $41,197, and $39,501 for the years ended September 30, 1997,
1996, and 1995, respectively.
13. Service Corporation
FIDACO, Inc., a wholly owned subsidiary of the Bank, was originally formed for
the purpose of owning stock in the Bank's service bureau, Financial Accounting
Services, Inc.
Assets of FIDACO, Inc. total approximately $ 32,000, $140,000 and $400,000 at
September 30, 1997, 1996, and 1995, respectively. Such assets primarily consist
of cash and investments in the stock of Hazleton Community Development
Corporation. FIDACO, Inc. has no liabilities and results of operations are not
significant.
F-27
<PAGE> 209
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
14. Recent Accounting Pronouncements
In September 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 requires that all items that are required to
be recognized as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The statement does not require a specific format for that financial
statement but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. The Bank will make
the appropriate disclosures in the applicable consolidated financial statements,
as required.
In September 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. Management has not yet determined the impact, if any, of this
statement on the Bank.
15. Subsequent Event
On November 18, 1997, the Board of Directors of the Bank adopted the Plan of
Conversion (the "Plan") pursuant to which the Bank will convert from a federally
chartered mutual savings bank to a federally chartered stock savings bank. All
of the outstanding common stock of the Bank will be acquired in exchange for a
portion of the net conversion proceeds (the "Conversion") by a holding company
formed expressly for such purpose (the "Company") All of the stock to be issued
in the Conversion is being offered to eligible account holders as of September
30, 1996.
The Bank plans to establish an ESOP for the benefit of eligible employees, to
become effective upon the Conversion. The ESOP intends to purchase up to 8% of
the Common Stock issued in the Conversion utilizing proceeds of a loan from a
wholly-owned subsidiary of the Company or a third party lender. The loan will be
repaid over a period of 10 years and the collateral for the loan will be the
common stock purchased by the ESOP.
Pursuant to the Plan, the Company intends to establish a Charitable Foundation
("Foundation") in connection with the Conversion. The Plan provides that the
Bank and the Company will create the Foundation and donate an amount of the
Company's common stock equal to 8% of the common stock to be sold in the
Conversion. The Foundation will be dedicated to charitable purposes within the
communities in which the Bank operates and to complement the Bank's existing
community activities. Establishment of the Foundation is subject to the approval
of the Bank's members at the special meeting being held to vote upon the
Conversion.
F-28
<PAGE> 210
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
The Foundation will submit a request to the Internal Revenue Service to be
recognized as a tax-exempt organization and would likely be classified as a
private foundation. A contribution of common stock to the Foundation by the
Company would be tax deductible, subject to a limitation based on 10 percent of
the Company's taxable income. The Company, however, would be able to carry
forward any unused portion of the deduction for five years following the
contribution. Upon funding the Foundation, the Company will recognize an expense
in the full amount of the contribution, offset in part by the corresponding
benefit for the tax deduction, during the quarter in which the contribution is
made.
The Bank may provide support services to the Foundation including, but not
limited to, employee time, office space and accounting support. The Bank expects
to provide these services without compensation, however, expenses incurred on
behalf of the Foundation are not expected to be significant to the operations of
the Bank.
At the time of Conversion, the Bank will establish a liquidation account in an
amount equal to its equity as reflected in the latest balance sheet used in the
final conversion 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 account will be reduced annually to the extent that eligible account
holders and supplemental eligible account holders have reduced their qualifying
deposits as of each anniversary date. Subsequent increases will not restore an
eligible account holder's or supplemental account holder's interest in the
liquidation account. In the event of a complete liquidation of the Bank, each
eligible account holder and supplemental eligible 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 costs associated with Conversion will be deferred and will be deducted from
the proceeds upon the sale and issuance of stock. In the event the Conversion is
not consummated, costs incurred will be charged to expense. At September 30,
1997, there were no deferred conversion costs.
After the conversion, the Bank may not declare or pay dividends on its stock if
such declaration and payment would violate statutory or regulatory requirements.
F-29
<PAGE> 211
===============================================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY NORTHEAST PENNSYLVANIA FINANCIAL CORP., THE BANK OR SANDLER
O'NEILL & PARTNERS, L.P. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION
IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF NORTHEAST PENNSYLVANIA FINANCIAL CORP. OR THE
BANK SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE
THE DATE HEREOF.
______________________________
TABLE OF CONTENTS
Page
Summary .....................................................................
Selected Consolidated Financial and
Other Data of the Bank .................................................
Risk Factors ................................................................
Northeast Pennsylvania Financial Corp. ......................................
First Federal Savings and Loan Association of Hazleton ......................
Regulatory Capital Compliance ...............................................
Use of Proceeds .............................................................
Dividend Policy .............................................................
Market for the Common Stock .................................................
Capitalization ..............................................................
Pro Forma Data ..............................................................
Comparison of Valuation and Pro Forma Information With No Foundation ........
First Federal Savings and Loan Association of Hazleton and
its Subsidiaries Consolidated Statements of Income .....................
Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................................
Business of the Bank ........................................................
Federal and State Taxation ..................................................
Regulation ..................................................................
Management of the Company ...................................................
Management of the Bank ......................................................
The Conversion ..............................................................
Restrictions on Acquisition of the Company
and the Bank ...........................................................
Description of Capital Stock of the Company .................................
Description of Capital Stock of the Bank ....................................
Transfer Agent and Registrar ................................................
Experts .....................................................................
Legal and Tax Opinions ......................................................
Additional Information ......................................................
Index of Consolidated Financial Statements ..................................
------------------------------
UNTIL __________, 1998 OR 25 DAYS AFTER COMMENCEMENT OF THE SYNDICATED
COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER 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.
===============================================================================
===============================================================================
5,175,000 Shares
NORTHEAST PENNSYLVANIA
FINANCIAL CORP.
(Proposed Holding Company for
First Federal Savings and
Loan Association of Hazleton)
COMMON STOCK
______________
PROSPECTUS
______________
__________ __, 199
Sandler O'Neill & Partners, L.P.
===============================================================================
139
<PAGE> 212
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
SEC filing(1).................................................. $ 18,961
OTS filing fee................................................. 14,400
NASD filing fee(1)............................................. 6,928
AMEX listing fee(1)............................................ 30,000
Printing, postage and mailing.................................. 200,000
Legal fees and expenses (including underwriter's
counsel).................................................. 240,000
Accounting fees and expenses................................... 150,000
Appraisers' fees and expenses (including
business plan)............................................ 29,500
Marketing fees and selling commissions(1)...................... 657,300
Underwriter's expenses......................................... 10,000
Conversion agent fees and expenses............................. 20,000
Transfer agent fees and expenses............................... 10,000
Certificate printing........................................... 5,000
Telephone, temporary help and other equipment.................. 10,000
Miscellaneous.................................................. 30,211
TOTAL.......................................................... $1,432,300
==========
- ----------------------
(1) Unless otherwise noted, based upon the registration and issuance of
6,427,350 shares at $10.00 per share.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with the General Corporation Law of the State of Delaware (being
Chapter 1 of Title 8 of the Delaware Code), Articles 10 and 11 of the
registrant's Certificate of Incorporation provide as follows:
TENTH:
A. Each person who was or is made a party or is threatened to be made a party to
or is otherwise involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent, or in any other capacity while serving as a Director,
Officer, employee or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the Delaware General Corporation
Law, as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the Corporation
to provide broader indemnification rights than such law permitted the
Corporation to provide prior to such amendment), against all expense, liability
and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid in settlement) reasonably incurred or suffered by
such indemnitee in connection therewith; provided, however, that, except as
provided in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
<PAGE> 213
B. The right to indemnification conferred in Section A of this Article TENTH
shall include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition (hereinafter
an "advancement of expenses"); provided, however, that, if the Delaware General
Corporation Law requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a Director or Officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including, without
limitation, services to an employee benefit plan) shall be made only upon
delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by
or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal (hereinafter a "final adjudication") that such
indemnitee is not entitled to be indemnified for such expenses under this
Section or otherwise. The rights to indemnification and to the advancement of
expenses conferred in Sections A and B of this Article TENTH shall be contract
rights and such rights shall continue as to an indemnitee who has ceased to be a
Director, Officer, employee or agent and shall inure to the benefit of the
indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in full by
the Corporation within sixty days after a written claim has been received by the
Corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be twenty days, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall be entitled to be paid also the
expenses of prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by the indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that, and (ii) in any suit by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking the Corporation
shall be entitled to recover such expenses upon a final adjudication that, the
indemnitee has not met any applicable standard for indemnification set forth in
the Delaware General Corporation Law. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to such advancement of expenses, under this
Article TENTH or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses conferred in
this Article TENTH shall not be exclusive of any other right which any person
may have or hereafter acquire under any statute, the Corporation's Certificate
of Incorporation, Bylaws, agreement, vote of stockholders or Disinterested
Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect itself and
any Director, Officer, employee or agent of the Corporation or subsidiary or
Affiliate or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by the Board
of Directors, grant rights to indemnification and to the advancement of expenses
to any employee or agent of the Corporation to the fullest extent of the
provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
<PAGE> 214
ELEVENTH:
A Director of this Corporation shall not be personally liable to the Corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
Director, except for liability: (i) for any breach of the Director's duty of
loyalty to the Corporation or its stockholders; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) under Section 174 of the Delaware General Corporation Law; or (iv)
for any transaction from which the Director derived an improper personal
benefit. If the Delaware General Corporation Law is amended to authorize
corporate action further eliminating or limiting the personal liability of
Directors, then the liability of a Director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders of the
Corporation shall not adversely affect any right or protection of a Director of
the Corporation existing at the time of such repeal or modification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
<PAGE> 215
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits and financial statement schedules filed as a part of this
registration statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
1.1 Engagement Letter between First Federal Savings and Loan Association of
Hazleton and Sandler O'Neill & Partners, L.P.
1.2 Draft Form of Agency Agreement between First Federal Savings and Loan
Association of Hazleton and Sandler O'Neill & Partners, L.P.*
2.1 Plan of Conversion (including the Amended and Restated Articles of
Incorporation and Stock Bylaws of First Federal Savings and Loan
Association of Hazleton)
3.1 Certificate of Incorporation of Northeast Pennsylvania Financial Corp.
3.2 Bylaws of Northeast Pennsylvania Financial Corp.
3.3 Amended and Restated Articles of Incorporation and Stock Bylaws of
First Federal Savings and Loan Association of Hazleton (See Exhibit 2.1
hereto)
4.0 Draft Stock Certificate of Northeast Pennsylvania Financial Corp.
5.0 Draft Opinion of Muldoon, Murphy & Faucette re: legality
5.1 Draft Opinion of Morris, Nichols, Arsht & Tunnell re: legality
8.0 Draft Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters
8.1 Opinion of KPMG Peat Marwick LLP re: State Tax Matters
10.1 Form of First Federal Bank Employee Stock Ownership Plan and Trust
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan Documents
10.3 Form of Proposed Employment Agreement between First Federal Bank and
certain executive officers
10.4 Form of Proposed Employment Agreement between Northeast Pennsylvania
Financial Corp. and certain executive officers
10.5 Form of Proposed Change in Control Agreement between First Bank and
certain executive officers
10.6 Form of Proposed Change in Control Agreement between Northeast
Pennsylvania Financial Corp. and certain executive officers
10.7 Form of Proposed First Federal Bank Employee Severance Compensation
Plan
10.8 Form of First Federal Bank Supplemental Executive Retirement Plan
10.9 Form of First Federal Bank Management Supplemental Executive Retirement
Plan
16.1 Letter from Parente, Randolph, Orlando, Carey & Associates regarding
change in certifying accountant
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Parente, Randolph, Orlando, Carey & Associates
23.3 Consent of Muldoon, Murphy & Faucette
23.4 Consent of Morris, Nichols, Arsht & Tunnell
23.5 Consent and Subscription Rights Opinion of Keller & Company, Inc.
24.1 Powers of Attorney
27.0 Financial Data Schedule
99.1 Appraisal Report of Keller & Company, Inc. (P)
99.2 Draft of First Federal Charitable Foundation Gift Instrument*
- ----------
*To be filed by amendment
(P) Filed pursuant to Rule 202 of Regulation S-T.
<PAGE> 216
(b) Financial Statement Schedules
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
<PAGE> 217
CONFORMED
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Hazleton,
Commonwealth of Pennsylvania, on December 24, 1997.
Northeast Pennsylvania Financial Corp.
By: /s/ E. Lee Beard
--------------------------
E. Lee Beard
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ E. Lee Beard President, Chief Executive Officer December 24, 1997
- ------------------------------ and Director
E. Lee Beard (principal executive officer)
/s/ Patrick J. Owens, Jr. Chief Financial Officer, Treasurer December 24, 1997
- ------------------------------ and Secretary
Patrick J. Owens, Jr. (principal accounting
and financial officer)
/s/ Thomas L. Kennedy Chairman of the Board December 24, 1997
- ------------------------------
Thomas L. Kennedy
/s/ Paul L. Conard Director December 24, 1997
- ------------------------------
Paul L. Conard
/s/ William R. Davidson Director December 24, 1997
- ------------------------------
William R. Davidson
/s/ Barbara M. Ecker Director December 24, 1997
- ------------------------------
Barbara M. Ecker
/s/ R. Peter Haentjens, Jr. Director December 24, 1997
- ------------------------------
R. Peter Haentjens, Jr.
/s/ John P. Lavelle Director December 24, 1997
- ------------------------------
John P. Lavelle
/s/ Michael J. Leib Director December 24, 1997
- ------------------------------
Michael J. Leib
/s/ William J. Spear Director December 24, 1997
- ------------------------------
William J. Spear
</TABLE>
<PAGE> 218
As filed with the Securities and Exchange Commission on December 24, 1997
Registration No. 333-
=======================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
EXHIBITS
TO THE
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
=======================================
<PAGE> 219
TABLE OF CONTENTS
LIST OF EXHIBITS (FILED HEREWITH UNLESS OTHERWISE NOTED)
1.1 Engagement Letter between First Federal Savings and Loan Association of
Hazleton and Sandler O'Neill & Partners, L.P.
1.2 Draft Form of Agency Agreement between First Federal Savings and Loan
Association of Hazleton and Sandler O'Neill & Partners, L.P.*
2.1 Plan of Conversion (including the Amended and Restated Articles of
Incorporation and Stock Bylaws of First Federal Savings and Loan
Association of Hazleton)
3.1 Certificate of Incorporation of Northeast Pennsylvania Financial Corp.
3.2 Bylaws of Northeast Pennsylvania Financial Corp.
3.3 Amended and Restated Articles of Incorporation and Stock Bylaws of
First Federal Savings and Loan Association of Hazleton (See Exhibit 2.1
hereto)
4.0 Draft Stock Certificate of Northeast Pennsylvania Financial Corp.
5.0 Draft Opinion of Muldoon, Murphy & Faucette re: legality
5.1 Draft Opinion of Morris, Nichols, Arsht & Tunnell re: legality
8.0 Draft Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters
8.1 Opinion of KPMG Peat Marwick LLP re: State Tax Matters
10.1 Form of First Federal Bank Employee Stock Ownership Plan and Trust
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan Documents
10.3 Form of Proposed Employment Agreement between First Federal Bank and
certain executive officers
10.4 Form of Proposed Employment Agreement between Northeast Pennsylvania
Financial Corp. and certain executive officers
10.5 Form of Proposed Change in Control Agreement between First Bank and
certain executive officers
10.6 Form of Proposed Change in Control Agreement between Northeast
Pennsylvania Financial Corp. and certain executive officers
10.7 Form of Proposed First Federal Bank Employee Severance Compensation
Plan
10.8 Form of First Federal Bank Supplemental Executive Retirement Plan
10.9 Form of First Federal Bank Management Supplemental Executive Retirement
Plan
16.1 Letter from Parente, Randolph, Orlando, Carey & Associates regarding
change in certifying accountant
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Parente, Randolph, Orlando, Carey & Associates
23.3 Consent of Muldoon, Murphy & Faucette
23.4 Consent of Morris, Nichols, Arsht & Tunnell
23.5 Consent and Subscription Rights Opinion of Keller & Company, Inc.
24.1 Powers of Attorney
27.0 Financial Data Schedule
99.1 Appraisal Report of Keller & Company, Inc. (P)
99.2 Draft of First Federal Charitable Foundation Gift Instrument*
- ----------
*To be filed by amendment
(P) Filed pursuant to Rule 202 of Regulation S-T.
<PAGE> 1
[SANDLER O'NEILL & PARTNERS, L.P. LETTERHEAD]
Sandler O'Neill
Exhibit 1.1
December 11, 1997
Ms. E. Lee Beard
President and Chief Executive Officer
First Federal Savings & Loan Association of Hazleton
12 E. Broad Street
Hazleton, Pennsylvania 18201
Dear Ms. Beard:
Sandler O'Neill & Partners, L.P. ("Sandler O'Neill"), is pleased to act
as conversion agent to First Federal Savings & Loan Association of Hazleton (the
"Association") in connection with the Association's proposed conversion from
mutual to stock form (the "Conversion"). This letter is to confirm the terms and
conditions of our engagement.
SERVICES AND FEES
In our role as Conversion Agent, we anticipate that our services will
include the services outlined below, each as may be necessary and as the
Association may reasonably request:
I. Consolidation of Accounts and Development of a Central File
II. Preparation of Proxy, Order and/or Request Forms
III. Organization and Supervision of the Conversion Center
IV. Proxy Solicitation and Special Meeting Services
V. Subscription Services
Each of these services is further described in Appendix A to this agreement.
For its services hereunder, the Association agrees to pay Sandler
O'Neill a fee of $20,000. This fee is based upon a total number of
unconsolidated accounts of approximately 45,000. No change in fees will occur as
long as the variance in the number of accounts does not exceed 5%. In
<PAGE> 2
First Federal Savings & Loan Association of Hazleton
December 11, 1997
Page 2 Sandler O'Neill
the event the actual number of accounts exceeds the number specified above by
more than 5%, the fee will be proportionately increased.
The fee set forth above is based upon the requirements of current
regulations and the Plan of Conversion as currently contemplated. Any unusual or
additional items or duplication of service required as a result of a material
change in the regulations or the Plan of Conversion or a material delay or other
similar events may result in extra charges which will be covered in a separate
agreement if and when they occur.
All fees under this agreement shall be payable in cash, as follows: (a)
$5,000 payable upon execution of this agreement by the Association, which shall
be non-refundable; and (b) the balance upon the completion of the Conversion.
COSTS AND EXPENSES
In addition to any fees that may be payable to Sandler O'Neill
hereunder, the Association agrees to reimburse Sandler O'Neill, upon request
made from time to time, for its reasonable out-of-pocket expenses incurred in
connection with its engagement hereunder regardless of whether the Conversion is
consummated, including, without limitation, travel, lodging, food, telephone,
postage, listings, forms and other similar expenses and for its reasonable
out-of-pocket expenses incurred in connection with its engagement as financial
advisor to the Association and the Company as provided for in the engagement
letter dated December 11, 1997 herewith, up to maximum of $50,000 in the
aggregate, regardless of whether the Conversion is consummated; provided,
however, that Sandler O'Neill shall document such expenses to the reasonable
satisfaction of the Association. The provisions of this paragraph are not
intended to apply to or in any way impair the indemnification provisions of this
agreement.
In addition, all taxes however designated, arising from or based upon
this agreement or the payments made to Sandler O'Neill pursuant hereto,
including, but not limited to, any applicable sales, use, excise and similar
taxes, shall be paid by the Association as the same become due, and the
Association shall, upon request by Sandler O'Neill, pay the same either to
Sandler O'Neill or to the appropriate taxing authority at any time during, or
after the termination of, this Agreement; provided, however, that the
Association shall not be responsible for the payment of any state, federal, or
local franchise or income taxes based upon the net income of Sandler O'Neill.
<PAGE> 3
First Federal Savings & Loan Association of Hazleton
December 11, 1997
Page 2 Sandler O'Neill
RELIANCE ON INFORMATION PROVIDED
The Association will provide Sandler O'Neill with such information as
Sandler O'Neill may reasonably require to carry out its duties. The Association
recognizes and confirms that Sandler O'Neill (a) will use and rely on such
information in performing the services contemplated by this agreement without
having independently verified the same, and (b) does not assume responsibility
for the accuracy or completeness of the information. The Association will also
inform Sandler O'Neill within a reasonable period of time of any changes in the
Plan which require changes in Sandler O'Neill's services. If a substantial
expense results from any such change, the parties shall negotiate an equitable
adjustment in the fee.
LIMITATIONS
Sandler O'Neill, as Conversion Agent hereunder, (a) shall have no
duties or obligations other than those specifically set forth herein; (b) will
be regarded as making no representations and having no responsibilities as to
the validity, sufficiency, value or genuineness of any order form or any stock
certificates or the shares represented thereby, and will not be required to and
will make no representations as to the validity, value or genuineness of the
offer; (c) shall not be liable to any person, firm or corporation including the
Association by reason of any error of judgment or for any act done by it in good
faith, or for any mistake of law or fact in connection with this agreement and
the performance hereof unless caused by or arising out of its own willful
misconduct, bad faith or gross negligence; (d) will not be obliged to take any
legal action hereunder which might in its judgment involve any expense or
liability, unless it shall have been furnished with reasonable indemnity
satisfactory to it; and (e) may rely on and shall be protected in acting in
reliance upon any certificate, instrument, opinion, notice, letter, telex,
telegram, or other document or security delivered to it and in good faith
believed by it to be genuine and to have been signed by the proper party or
parties.
Anything in this agreement to the contrary notwithstanding, in no event
shall Sandler O'Neill be liable for special, indirect or consequential loss or
damage of any kind whatsoever (including but not limited to lost profits), even
if Sandler O'Neill has been advised of the likelihood of such loss or damage and
regardless of form of action.
<PAGE> 4
First Federal Savings & Loan Association of Hazleton
December 11, 1997
Page 4 Sandler O'Neill
INDEMNIFICATION
The Association agrees to indemnify and hold Sandler O'Neill and its
affiliates and their respective partners, directors, officers, employees, agents
and controlling persons (Sandler O'Neill and each such person being an
"Indemnified Party") harmless from and against any and all losses, claims,
damages and liabilities, joint or several, to which such Indemnified Party may
become subject under applicable federal or state law, or otherwise, related to
or arising out of the engagement of Sandler O'Neill pursuant to, and the
performance by Sandler O'Neill of the services contemplated by this letter, and
will reimburse any Indemnified Party for all expenses (including reasonable
counsel fees and expenses) as they are incurred, including expenses incurred in
connection with the investigation of, preparation for or defense of any pending
or threatened claim or any action or proceeding arising therefrom, whether or
not such Indemnified Party is a party. The Association will not be liable under
the foregoing indemnification provision to the extent that any loss, claim,
damage, liability or expense is found in a final judgment by a court of
competent jurisdiction to have resulted primarily from Sandler O'Neill's willful
misconduct, bad faith or gross negligence.
MISCELLANEOUS
The following addresses shall be sufficient for written notices to each
other:
If to you: First Federal Savings & Loan Association of Hazleton
12 E. Broad Street
Hazleton, Pennsylvania 18201
Attention: Ms. E. Lee Beard
If to us: Sandler O'Neill & Partners, L.P.
747 Middle Neck Road
Great Neck, New York 11024
Attention: Mr. Mark B. Cohen
The Agreement and appendix hereto constitute the entire Agreement
between the parties with respect to the subject matter hereof and can be altered
only by written consent signed by the parties. This Agreement is governed by the
laws of the State of New York.
<PAGE> 5
First Federal Savings & Loan Association of Hazleton
December 11, 1997
Page 5 Sandler O'Neill
Please confirm that the foregoing correctly sets forth our agreement by
signing and returning to Sandler O'Neill the duplicate copy of this letter
enclosed herewith.
Very truly yours,
Sandler O'Neill & Partners, L.P.
By: Sandler O'Neill & Partners Corp.,
the sole general partner
By: /s/ Mark B. Cohen
---------------------------------
Mark B. Cohen
Principal
Accepted and agreed to as of the date first above written:
First Federal Savings & Loan Association of Hazleton
By:
-------------------------------------
Ms. E. Lee Beard
President and Chief Executive Officer
<PAGE> 6
APPENDIX A
Sandler O'Neil
OUTLINE OF CONVERSION AGENT SERVICES
I. Consolidation of Accounts
1. Consolidate files in accordance with regulatory guidelines.
2. Accounts from various files are all linked together. The resulting
central file can then be maintained on a regular basis.
3. Our EDP format will be provided to your data processing people.
II. Proxy/Order Form/Request Card Preparation
1. Vote calculation.
2. Any combination of proxies, request cards and stock order forms for
voting and ordering stock.
3. Target group identification for subscription offering.
III. Organization and Supervision of Conversion Center
1. Advising on and supervising the physical organization of the
Conversion Center, including materials requirements.
2. Assist in the training of all Association personnel who will be
staffing the conversion center.
3. Establish reporting procedures.
4. On-site supervision of the Conversion Center during the
solicitation/offering period.
IV. Special Meeting Services
1. Direct proxy solicitation.
2. Proxy and ballot tabulation.
3. Act as or support inspector of election.
4. Delete voting record date accounts closed prior to special meeting.
5. Produce final report of vote.
V. Subscription Services
1. Produce list of depositors by state (Blue Sky report).
2. Production of subscription rights and research books.
3. Stock order form processing.
4. Acknowledgment letter to confirm receipt of stock order.
5. Daily reports and analysis.
6. Proration calculation and share allocation in the event of an
oversubscription.
7. Produce charter shareholder list.
8. Interface with Transfer Agent for Stock Certificate issuance.
9. Refund and interest calculations.
10. Confirmation letter to confirm purchase of stock.
11. Notification of full/partial rejection of orders.
12. Production of 1099/Debit tape.
A - 1
<PAGE> 7
[SANDLER O'NEILL & PARTNERS, L.P. LETTERHEAD]
Sandler O'Neill
December 11, 1997
Ms. E. Lee Beard
President and Chief Executive Officer
First Federal Savings & Loan Association of Hazleton
12 E Broad Street
Hazleton, Pennsylvania 18201
Dear Ms. Beard:
Sandler O'Neill & Partners, L.P. ("Sandler O'Neill"), is pleased to act
as an independent financial advisor to First Federal Savings & Loan Association
of Hazleton (the "Association") in connection with the Association's proposed
conversion from mutual to stock form (the "Conversion"), including the offer and
sale of certain shares of the common stock of the proposed new holding company
for the Association (the "Holding Company") to the Association's eligible
account holders in a Subscription Offering, to members of the Association's
community in a Direct Community Offering and, under certain circumstances, to
the general public in a Syndicated Community Offering (collectively, the
"Offerings"). For purposes of this letter, the term "Actual Purchase Price"
shall mean the price at which the shares of the Holding Company's common stock
are sold in the Conversion. This letter is to confirm the terms and conditions
of our engagement.
ADVISORY SERVICES
Sandler O'Neill will act as a consultant and advisor to the Association
and the Holding Company and will work with the Association's management,
counsel, accountants and other advisors in connection with the Conversion and
the Offerings. We anticipate that our services will include the following, each
as may be necessary and as the Association may reasonably request:
1. Consulting as to the securities marketing implications of any
aspect of the Plan of Conversion or related corporate
documents;
2. Reviewing with the Board of Directors the independent
appraiser's appraisal of the common stock, particularly with
regard to aspects of the appraisal involving the methodology
employed;
<PAGE> 8
First Federal Savings & Loan Association of Hazleton
December 11, 1997
Page 2 Sandler O'Neill
3. Reviewing all offering documents, including the Prospectus,
stock order forms and related offering materials (it being
understood that preparation and filing of such documents will
be the responsibility of the Association and the Holding
Company and their counsel);
4. Assisting in the design and implementation of a marketing
strategy for the Offerings;
5. Assisting in obtaining all requisite regulatory approvals;
6. Assisting Association management in scheduling and preparing
for meetings with potential investors and broker-dealers; and
7. Providing such other general advice and assistance as may be
requested to promote the successful completion of the
Conversion.
FEES
If the Conversion is consummated, the Association agrees to pay Sandler
O'Neill for its services hereunder the fees set forth below:
1. a fee of one and one quarter percent (1.25%) of the aggregate
Actual Purchase Price of the shares of common stock sold in
the Subscription Offering to eligible account holders, current
depositors and in the Direct Community Offering, excluding in
each case shares purchased by (i) any employee benefit plan of
the Holding Company or the Association established for the
benefit of their respective directors, officers and employees,
and (ii) any director, officer or employee of the Holding
Company or the Association or members of their immediate
families; and
2. with respect to any shares of the Holding Company's common
stock sold by any NASD member firm (other than Sandler
O'Neill) under any selected dealers agreement in the
Syndicated Community Offering, (a) the sales commission
payable to the selected dealer under such agreement, (b) any
sponsoring dealer's fees, and (c) a management fee to Sandler
O'Neill of one and one quarter percent (1.25%). Any fees
payable to Sandler O'Neill for common stock sold by Sandler
O'Neill under any such agreement shall be limited to an
aggregate of one and one quarter percent (1.25%) of the Actual
Purchase Price of such shares.
<PAGE> 9
First Federal Savings & Loan Association of Hazleton
December 11, 1997
Page 3 Sandler O'Neill
If (i) Sandler O'Neill's engagement hereunder is terminated for any of
the reasons provided for under the second paragraph of the section of this
letter captioned "Definitive Agreement," or (ii) the Conversion is terminated by
the Association, no fees shall be payable by the Association to Sandler O'Neill
hereunder; however, the Association shall reimburse Sandler O'Neill for its
reasonable out-of-pocket expenses incurred in connection with its engagement
hereunder.
All fees payable to Sandler O'Neill hereunder shall be payable in cash
at the time of the closing of the Conversion. In recognition of the long lead
times involved in the conversion process, the Association agrees to make advance
payments to Sandler O'Neill in the aggregate amount of $50,000, $25,000 of which
shall be payable upon execution of this letter and the remaining $25,000 of
which shall be payable upon commencement of the Subscription Offering, which
shall be credited against any fees or reimbursement of expenses payable
hereunder.
SYNDICATED COMMUNITY OFFERING
If any shares of the Holding Company's common stock remain available
after the expiration of the Subscription Offering and the Direct Community
Offering, at the request of the Association and subject to the continued
satisfaction of the conditions set forth in the second paragraph under the
caption "Definitive Agreement" below, Sandler O'Neill will seek to form a
syndicate of registered dealers to assist in the sale of such common stock in a
Syndicated Community Offering on a best efforts basis, subject to the terms and
conditions set forth in a selected dealers agreement. Sandler O'Neill will
endeavor to limit the aggregate fees to be paid by the Association under any
such selected dealers agreement to an amount competitive with gross underwriting
discounts charged at such time for underwritings of comparable amounts of stock
sold at a comparable price per share in a similar market environment, which
shall not exceed 7% of the aggregate Actual Purchase Price of the shares sold
under such agreements. Sandler O'Neill will endeavor to distribute the common
stock among dealers in a fashion which best meets the distribution objectives of
the Association and the requirements of the Plan of Conversion, which may result
in limiting the allocation of stock to certain selected dealers. It is
understood that in no event shall Sandler O'Neill be obligated to act as a
selected dealer or to take or purchase any shares of the Holding Company's
common stock.
COSTS AND EXPENSES
In addition to any fees that may be payable to Sandler O'Neill
hereunder and the expenses to be borne by the Association pursuant to the
following paragraph, the Association agrees to reimburse Sandler O'Neill, upon
request made from time to time, for its reasonable out-of-pocket expenses
incurred in connection with its engagement hereunder, including, without
limitation, legal fees, advertising, promotional, syndication, and travel
expenses and for its reasonable out-of-pocket expenses incurred in connection
with its engagement as conversion agent to the Association as
<PAGE> 10
First Federal Savings & Loan Association of Hazleton
December 11, 1997
Page 4 Sandler O'Neill
provided for in the engagement letter dated December 11, 1997 herewith, up to
maximum of $50,000 in the aggregate, regardless of whether the Conversion is
consummated; provided, however, that Sandler O'Neill shall document such
expenses to the reasonable satisfaction of the Association. The provisions of
this paragraph are not intended to apply to or in any way impair the
indemnification provisions of this letter.
As is customary, the Association will bear all other expenses incurred
in connection with the Conversion and the Offerings, including, without
limitation, (i) the cost of obtaining all securities and bank regulatory
approvals, including any required NASD filing fees; (ii) the cost of printing
and distributing the offering materials; (iii) the costs of blue sky
qualification (including fees and expenses of blue sky counsel) of the shares in
the various states; (iv) listing fees; and (v) all fees and disbursements of the
Association's and the Holding Company's counsel, accountants, conversion agent
and other advisors. In the event Sandler O'Neill incurs any such fees and
expenses on behalf of the Association or the Holding Company, the Association
will reimburse Sandler O'Neill for such fees and expenses whether or not the
Conversion is consummated; provided, however, that Sandler O'Neill shall not
incur any substantial expenses on behalf of the Association or the Holding
Company pursuant to this paragraph without the prior approval of the
Association.
POST-CONVERSION GENERAL ADVISORY SERVICES
If the Conversion is consummated, Sandler O'Neill agrees to act as an
independent financial advisor to the Holding Company and its subsidiaries in
connection with the Holding Company's general strategic planning ("General
Advisory Services"). In connection with such General Advisory Services, we would
expect to work with the Holding Company's management, its counsel, accountants
and other advisors to assess the Holding Company's strategic alternatives and
help implement a tactical plan to enhance the value of the Holding Company. We
anticipate that our activities would include, as appropriate, those activities
outlined in Exhibit A hereto. Sandler O'Neill shall provide such services at the
Holding Company's request for a period of one year following the completion of
the Conversion; provided, however, that the Holding Company shall reimburse
Sandler O'Neill for its reasonable out-of-pocket expenses incurred in connection
with providing such services. Thereafter, if both parties wish to continue the
relationship, the parties will enter into a separate advisory services agreement
on terms and conditions to be negotiated at such time. Notwithstanding the above
the parties hereby agree that the Association and Holding Company are under no
obligation to accept or request such General Advisory Services.
DUE DILIGENCE REVIEW
Sandler O'Neill's obligation to perform the services contemplated by
this letter shall be subject to the satisfactory completion of such
investigation and inquiries relating to the Association and the Holding Company,
and their respective directors, officers, agents and employees, as Sandler
<PAGE> 11
First Federal Savings & Loan Association of Hazleton
December 11, 1997
Page 5 Sandler O'Neill
O'Neill and its counsel in their sole discretion may deem appropriate under the
circumstances. In this regard, the Association agrees that, at its expense, it
will make available to Sandler O'Neill all information which Sandler O'Neill
requests, and will allow Sandler O'Neill the opportunity to discuss with the
Association's and the Holding Company's management the financial condition,
business and operations of the Association and the Holding Company. The
Association and the Holding Company acknowledge that Sandler O'Neill will rely
upon the accuracy and completeness of all information received from the
Association and the Holding Company and their directors, trustees, officers,
employees, agents, independent accountants and counsel.
BLUE SKY MATTERS
The Association agrees that if Sandler O'Neill's counsel does not serve
as counsel with respect to blue sky matters in connection with the Offerings,
the Association will cause the counsel performing such services to prepare a
Blue Sky Memorandum related to the Offerings including Sandler O'Neill's
participation therein and shall furnish Sandler O'Neill a copy thereof addressed
to Sandler O'Neill or upon which such counsel shall state Sandler O'Neill may
rely.
CONFIDENTIALITY
Other than disclosure to other firms made part of any syndicate of
selected dealers or as required by law or regulation, Sandler O'Neill agrees
that it will not disclose any Confidential Information relating to the
Association obtained in connection with its engagement hereunder (whether or not
the Conversion is consummated). As used in this paragraph, the term
"Confidential Information" shall not include information which (i) is or becomes
generally available to the public other than as a result of a disclosure by
Sandler O'Neill, (ii) was available to Sandler O'Neill on a non-confidential
basis prior to its disclosure to Sandler O'Neill by the Association, or (iii)
becomes available to Sandler O'Neill on a non-confidential basis from a person
other than the Association who is not otherwise known to Sandler O'Neill to be
bound not to disclose such information pursuant to a contractual, legal or
fiduciary obligation.
INDEMNIFICATION
Since Sandler O'Neill will be acting on behalf of the Association and
the Holding Company in connection with the Conversion, the Holding Company and
the Association agree to indemnify and hold Sandler O'Neill and its affiliates
and their respective partners, directors, officers, employees, agents and
controlling persons within the meaning of Section 15 of the Securities Act of
1933 or Section 20 of the Securities Exchange Act (Sandler O'Neill and each such
person being an "Indemnified Party") harmless from and against any and all
losses, claims, damages and liabilities, joint or several, to which such
Indemnified Party may become subject under applicable
<PAGE> 12
First Federal Savings & Loan Association of Hazleton
December 11, 1997
Page 6 Sandler O'Neill
federal or state law, or otherwise, related to or arising out of the Conversion
or the engagement of Sandler O'Neill pursuant to, or the performance by Sandler
O'Neill of the services contemplated by, this letter, and will reimburse any
Indemnified Party for all expenses (including reasonable legal fees and
expenses) as they are incurred, including expenses incurred in connection with
the investigation of, preparation for or defense of any pending or threatened
claim or any action or proceeding arising therefrom, whether or not such
Indemnified Party is a party; provided, however, that the Association and the
Holding Company will not be liable in any such case to the extent that any such
loss, claim, damage, liability or expense (i) arises out of or is based upon any
untrue statement of a material fact or the omission of a material fact required
to be stated therein or necessary to make not misleading any statements
contained in any proxy statement or prospectus (preliminary or final), or any
amendment or supplement thereto, or any of the applications, notices, filings or
documents related thereto made in reliance on and in conformity with written
information furnished to the Association by Sandler O'Neill expressly for use
therein, or (ii) is primarily attributable to the gross negligence, willful
misconduct or bad faith of Sandler O'Neill. If the foregoing indemnification is
unavailable for any reason, the Association and the Holding Company agree to
contribute to such losses, claims, damages, liabilities and expenses in the
proportion that its financial interest in the Conversion bears to that of
Sandler O'Neill.
DEFINITIVE AGREEMENT
Sandler O'Neill and the Association agree that (a) except as set forth
in clause (b), the foregoing represents the general intention of the Association
and Sandler O'Neill with respect to the services to be provided by Sandler
O'Neill in connection with the Offerings, which will serve as a basis for
Sandler O'Neill commencing activities, and (b) the only legal and binding
obligations of the Association, the Holding Company and Sandler O'Neill with
respect to the subject matter hereof shall be (1) the Association's obligation
to reimburse costs and expenses pursuant to the section captioned "Costs and
Expenses," (2) those set forth under the captions "Confidentiality" and
"Indemnification," and (3) as set forth in a duly negotiated and executed
definitive Agency Agreement to be entered into prior to the commencement of the
Subscription Offering relating to the services of Sandler O'Neill in connection
with the Offerings. Such Agency Agreement shall be in form and content
satisfactory to Sandler O'Neill, the Association and the Holding Company and
their respective counsel and shall contain standard indemnification provisions
consistent with this agreement mutually acceptable to the Association, the
Holding Company and Sandler O'Neill.
Sandler O'Neill's execution of such Agency Agreement shall also be
subject to (i) Sandler O'Neill's satisfaction with its investigation of the
Association's business, financial condition and results of operations, (ii)
preparation of offering materials that are satisfactory to Sandler O'Neill and
its counsel, (iii) compliance with all relevant legal and regulatory
requirements to the reasonable satisfaction of Sandler O'Neill's counsel, (iv)
agreement that the price established by the independent appraiser is reasonable
and (v) market conditions at the time of the proposed offering. Sandler O'Neill
may terminate this agreement if such Agency Agreement is not entered into prior
to June 30, 1999.
<PAGE> 13
First Federal Savings & Loan Association of Hazleton
December 11, 1997
Page 7 Sandler O'Neill
ELIMINATION OF HOLDING COMPANY
If the Board of Directors of the Association, for any reason, elects not to
proceed with the formation of the Holding Company but determines to proceed with
the Conversion and substitute the common stock of the Association for the common
stock of the Holding Company, all of the provisions of this letter relating to
the common stock of the Holding Company will be deemed to pertain to the common
stock of the Association on the same terms and conditions that such provisions
pertain to the common stock of the Holding Company and all of the references in
this letter to the Holding Company shall be deemed to refer to the Association
or shall have no effect, as the context of the reference requires.
Please confirm that the foregoing correctly sets forth our agreement by
signing and returning to Sandler O'Neill the duplicate copy of this letter
enclosed herewith.
Very truly yours,
Sandler O'Neill & Partners, L.P.
By: Sandler O'Neill & Partners Corp.,
the sole general partner
By: /s/ Mark B. Cohen
---------------------------
Mark B. Cohen
Principal
Accepted and agreed to as of the date first above written:
First Federal Savings & Loan Association of Hazleton
By:
----------------------------------
Ms. E. Lee Beard
President and Chief Executive Officer
<PAGE> 14
EXHIBIT A Sandler O'Neill
GENERAL ADVISORY SERVICES
- --------------------------------------------------------------------------------
1. A review and analysis of the Holding Company's current business and
financial characteristic, including its operating strategies, balance
sheet composition, historical operating performance, branch structure
and market share, and the Holding Company's competitive position
relative to selected peer groups;
2. Creation of a base case financial model to serve as a benchmark for
analyzing alternative strategies and market environments;
3. An analysis of the impact on the franchise value of altering the
Holding Company's dividend policy, implementing a stock repurchase
program, or changing the asset mix or other operating activities;
4. An analysis of the Holding Company's acquisition resources, objectives
and capacity to compete for acquisition opportunities;
5. A summary of recent merger and acquisition trends in the financial
services industry, including tactics employed by others and typical
terms and values involved;
6. A review of other strategic alternatives which could provide long-term
benefits and enhanced value to the Holding Company;
7. A review of the Holding Company's advance defensive preparation plans,
including a comprehensive financial valuation and an analysis of stock
ownership and trading activities;
8. A review with the Board of Directors of the Holding Company of Sandler
O'Neill's findings, with periodic updates as may be requested;
9. Ongoing general advice and counsel to management and the Board of
Directors of the Holding Company with respect to strategic and tactical
issues; and
10. Rendering such other financial advisory and investment banking services
as may from time to time be agreed upon by Sandler O'Neill and the
Holding Company.
<PAGE> 1
EXHIBIT 2.1
PLAN OF CONVERSION
FOR
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON
AS ADOPTED ON:
NOVEMBER 18, 1997
<PAGE> 2
PLAN OF CONVERSION
FOR
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON
1. INTRODUCTION
This Plan of Conversion ("Plan") provides for the conversion of First
Federal Savings and Loan Association of Hazleton ("BANK") from a
federally-chartered mutual savings and loan association to a federally-chartered
capital stock savings bank to be named First Federal Bank. The Board of
Directors of the BANK currently contemplates that all of the stock of the BANK
shall be held by a corporation (the "Holding Company"). The Board of Directors
has carefully considered the alternatives available to the BANK with respect to
its corporate structure and has determined that a mutual to stock conversion as
described in this Plan is in the best interests of the BANK, its depositors and
the community served by the BANK. The Board of Directors believes that the
decline in mutuality is placing mutual savings associations, such as the BANK,
at a disadvantage to the increasing base of stock thrift and commercial bank
institutions. The restructuring of the BANK into the capital stock form of
organization will enable the BANK to compete more effectively with commercial
banks and other financial institutions for new business opportunities, and as a
stock institution, to increase its equity capital base and access the capital
markets when needed and to enhance the BANK'S ability to expand its franchise
and the products it offers. The use of the Holding Company, if so utilized,
would also provide greater
<PAGE> 3
organizational and operating flexibility. Shares of capital stock of the BANK
will be sold to the Holding Company and the Holding Company will offer the
Conversion Stock upon the terms and conditions set forth herein to the Eligible
Account Holders, the Employee Plans established by the BANK or Holding Company,
Supplemental Eligible Account Holders and Other Members in the respective
priorities set forth in this Plan. Any shares of Conversion Stock not subscribed
for by the foregoing classes of persons will be offered for sale to certain
members of the public either directly by the BANK and the Holding Company
through a Community Offering or a Syndicated Community Offering or through an
underwritten firm commitment public offering or through a combination thereof.
In the event that the BANK decides not to utilize the Holding Company in the
conversion, Conversion Stock of the BANK, in lieu of the Holding Company, will
be sold as set forth above and in the respective priorities set forth in this
Plan. In addition to the foregoing, the BANK and the Holding Company, as part of
this Plan, intend to implement stock option plans and other stock benefit plans
and will provide employment or severance agreements to certain management
employees and certain other compensation to the directors, officers and
employees of the BANK as described in the prospectus for the Conversion Stock.
In furtherance of the BANK's long term commitment to its community,
this Plan provides for the establishment of a foundation (the "Foundation") as
part of the Conversion. The Foundation is intended to complement the BANK's
existing community reinvestment activities in a manner that will allow the
communities in which the BANK operates to share in the potential growth and
profitability of the Holding Company and the BANK over the long term. Consistent
with the BANK's goal, the Holding Company intends to donate to the Foundation
from its authorized but unissued common stock up to 8% of the number of shares
sold in the
2
<PAGE> 4
Conversion. The establishment of the Foundation is subject to the approval of
the Voting Members of the BANK. In the event the Foundation is not approved, the
BANK may determine to complete the Conversion without the Foundation.
This Plan, which has been unanimously approved by the Board of
Directors of the BANK, must also be approved by the affirmative vote of a
majority of the total number of outstanding votes entitled to be cast by Voting
Members of the BANK at a special meeting to be called for that purpose. Prior to
the submission of this Plan to the Voting Members for consideration, the Plan
must be approved by the Office of Thrift Supervision (the "OTS").
2. DEFINITIONS
For the purposes of this Plan, the following terms have the following
meanings:
Account Holder - The term Account Holder means any Person holding a
Savings Account in the BANK.
Acting in Concert - The term "Acting in Concert" means (i) knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement; (ii) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise; or
(iii) a person or company which acts in concert with another person or company
("other party") shall also be deemed to be acting in concert with any person or
company who is also acting in concert with that other party, except that any
Tax-Qualified Employee Stock Benefit Plan will not be deemed to be acting in
concert with its trustee or a person who serves in a similar capacity solely for
the
3
<PAGE> 5
purpose of determining whether stock held by the trustee and stock held by the
plan will be aggregated.
Actual Purchase Price - The term Actual Purchase Price means the per
share price at which the Conversion Stock is ultimately sold in accordance with
the terms hereof.
Associate - The term Associate when used to indicate a relationship
with any person, means (i) any corporation or organization (other than the BANK
or a majority-owned subsidiary of the BANK) of which such person is an officer
or partner or is, directly or indirectly, the beneficial owner of 10 percent or
more of any class of equity securities, (ii) any trust or other estate in which
such person has a substantial beneficial interest or as to which such person
serves as trustee or in a similar fiduciary capacity except that for the
purposes of Sections 9 and 14 hereof, the term "Associate" does not include any
Non-Tax-Qualified Employee Stock Benefit Plan or any Tax-Qualified Employee
Stock Benefit Plan in which a person has a substantial beneficial interest or
serves as a trustee or in a similar fiduciary capacity, and except that, for
purposes of aggregating total shares that may be held by Officers and Directors
the term "Associate" does not include any Tax-Qualified Employee Stock Benefit
Plan, 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
the BANK or the Holding Company, if utilized, or any of its parents or
subsidiaries.
Bank - The term BANK means First Federal Savings and Loan Association
of Hazleton, Hazleton, Pennsylvania, and after its conversion to stock form,
First Federal Bank.
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Community Offering - The term Community Offering means the offering
for sale to certain members of the general public directly by the BANK or the
Holding Company, if utilized, of any shares of Conversion Stock not subscribed
for in the Subscription Offering.
Conversion Stock - The term Conversion Stock means the common stock
offered and issued by the Holding Company or the $1.00 par value Common Stock
offered and issued by the BANK, if the Holding Company form of organization is
not utilized, upon conversion.
Director - The term Director means a member of the Board of Directors
of the BANK and, where applicable, a member of the Board of Directors of the
Holding Company.
Eligible Account Holder - The term Eligible Account Holder means any
person holding a Qualifying Deposit on the Eligibility Record Date.
Eligibility Record Date - The term Eligibility Record Date means the
date for determining Eligible Account Holders in the BANK and is September 30,
1996.
Employees - The term Employees means all Persons who are employed by
the BANK but does not include an Officer or Director.
Employee Plans - The term Employee Plans means the Tax Qualified
Employee Stock Benefit Plans approved by the Board of Directors of the BANK.
Estimated Price Range - The term Estimated Price Range means the
range of minimum and maximum aggregate values determined by the Board of
Directors of the BANK within which the aggregate amount of Common Stock sold in
the Conversion will fall. The Estimated Price Range will be within the estimated
pro forma market value of the Conversion Stock as determined by the Independent
Appraiser prior to the Subscription Offering and as it may be amended from time
to time thereafter.
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FDIC - The term FDIC means the Federal Deposit Insurance Corporation.
Holding Company - The term Holding Company means the corporation
formed for the purpose of acquiring all of the shares of capital stock of the
BANK to be issued upon its conversion to stock form unless the Holding Company
form of organization is not utilized. Shares of common stock of the Holding
Company will be issued in the conversion to Participants and others in a
Subscription, Community, Syndicated Community, or underwritten firm commitment
public offering, or through a combination thereof.
Independent Appraiser - The term Independent Appraiser means an
appraiser retained by the BANK to prepare an appraisal of the pro forma market
value of the Conversion Stock.
Member - The term Member means any Person or entity who qualifies as
a member of the BANK pursuant to its charter and bylaws.
OTS - The term OTS means Office of Thrift Supervision of the
Department of the Treasury and its successors.
Officer - The term Officer means an executive officer of the BANK
which includes the Chief Executive Officer, President, Executive Vice President,
Senior Vice Presidents, Vice Presidents in charge of principal business
functions, Secretary, Treasurer and Controller and any person performing
functions similar to those performed by the foregoing persons.
Order Form - The term Order Form means any form together with
attached cover letter, sent by the BANK to any Participant or Person containing
among other things a description of the alternatives available to such Person
under the Plan and by which any such Person may make elections regarding
subscriptions for Conversion Stock in the Subscription and Community Offerings.
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Other Member - The term Other Member means any person who is a Member
of the BANK (other than an Eligible Account Holder or Supplemental Eligible
Account Holder) at the close of business on the Voting Record Date.
Participants - The term Participants means the Eligible Account
Holders, Employee Plans, Supplemental Eligible Account Holders and Other
Members.
Person - The term Person means an individual, a corporation, a
partnership, an association, a joint-stock company, a trust (including
Individual Retirement Accounts and KEOGH Accounts), any unincorporated
organization, a government or political subdivision thereof or any other entity.
Plan - The term Plan means this Plan of Conversion of the BANK as it
exists on the date hereof and as it may hereafter be amended in accordance with
its terms.
Qualifying Deposit - The term Qualifying Deposit means the balance of
each Savings Account of $50 or more in the BANK at the close of business on the
Eligibility Record Date or the Supplemental Eligibility Record Date, whichever
may be the case. Savings Accounts with total deposit balances of less than $50
shall not constitute a Qualifying Deposit.
SEC - The term SEC refers to the United States Securities and
Exchange Commission.
Savings Account - The term Savings Account has the same meaning as in
Section 561.42 of the Rules and Regulations of the OTS and includes certificates
of deposit.
Special Meeting of Members - The term Special Meeting of Members
means the special meeting and any adjournments thereof held to consider and vote
upon this Plan.
Subscription Offering - The term Subscription Offering means the
offering of Conversion Stock for purchase through Order Forms to Participants.
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Subscription Price - The term Subscription Price means the amount per
share of Conversion Stock to be paid initially by Participants in the
Subscription Offering and persons in the Community Offering.
Supplemental Eligibility Record Date - The term Supplemental
Eligibility Record Date means the supplemental record date for determining
Supplemental Eligible Account Holders of the BANK. The Supplemental Eligibility
Record Date shall be the last day of the calendar quarter preceding the OTS'
approval of the application for conversion.
Supplemental Eligible Account Holder - The term Supplemental Eligible
Account Holder means any person (other than an Eligible Account Holder) holding
a Qualifying Deposit, except officers, directors and their associates, as of the
Supplemental Eligibility Record Date.
Syndicated Community Offering - The term Syndicated Community
Offering means the offering of Conversion Stock following the Subscription and
Community Offerings through a syndicate of broker-dealers.
Tax-Qualified Employee Stock Benefit Plan - The term Tax-Qualified
Employee Stock Benefit Plan means any defined benefit plan or defined
contribution plan, such as an employee stock ownership plan, stock bonus plan,
profit-sharing plan or other plan, which, with its related trust, meets the
requirements to be "qualified" under Section 401 of the Internal Revenue Code. A
"Non-Tax-Qualified Employee Stock Benefit Plan" is any defined benefit plan or
defined contribution plan which is not so qualified.
Voting Members - The term Voting Members means those persons
qualifying as voting members of the BANK pursuant to its charter and bylaws.
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Voting Record Date - The term Voting Record Date means the date fixed
by the Directors in accordance with OTS regulations for determining eligibility
to vote at the Special Meeting of Members.
3. PROCEDURE FOR CONVERSION
After approval of the Plan by a vote of not less than two-thirds
(2/3) of the Board of Directors of the BANK, the Plan shall be submitted
together with all other requisite material to the OTS for its approval. Notice
of the adoption of the Plan by the Board of Directors of the BANK and the
submission of the Plan to the OTS for its approval will be published in a
newspaper having general circulation in each community in which an office of the
BANK is located and copies of the Plan will be made available at each office of
the BANK for inspection by the Members. Upon receipt of notice from the OTS to
do so, the BANK also will cause to be published a notice of the filing with the
OTS of an application to convert in accordance with the provisions of the Plan.
Following approval by the OTS, the Plan will be submitted to a vote of the
Voting Members at the Special Meeting of Members called for that purpose. Upon
approval of the Plan by a majority of the total outstanding votes of the Voting
Members, the BANK will take all other necessary steps pursuant to applicable
laws and regulations to convert the BANK to stock form. The conversion must be
completed within 24 months of the approval of the Plan by the Voting Members,
unless a longer time period is permitted by governing laws and regulations.
The Board of Directors of the BANK intends to take all necessary
steps to form the Holding Company, including the filing of an Application on
Form H-(e)1 or H-(e)1-S, if available to the Holding Company, with the OTS. In
the event that the Holding Company is
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utilized, upon conversion the BANK will issue capital stock to the Holding
Company and the Holding Company will issue and sell the Conversion Stock in
accordance with this Plan.
The Board of Directors of the BANK may determine for any reason at
any time prior to the issuance of the Conversion Stock not to utilize a holding
company form of organization in the Conversion, in which case, the Holding
Company's registration statement on Form S-1 will be withdrawn from the SEC, the
BANK will take all steps necessary to complete the conversion from the mutual to
the stock form of organization, including filing any necessary documents with
the OTS, and will issue and sell the Conversion Stock in accordance with this
Plan. In such event, any subscriptions or orders received for Conversion Stock
of the Holding Company shall be deemed to be subscriptions or orders for
Conversion Stock of the BANK without any further action by the BANK or the
subscribers for the Conversion Stock, unless any such further action is required
by the SEC or the OTS, in which case the BANK shall take such necessary action
to complete the Conversion. Any references to the Holding Company in this Plan
shall mean the BANK in the event the Holding Company is eliminated in the
Conversion.
The Board of Directors of the BANK also intend to take all necessary
steps to establish the Foundation, and to fund such Foundation in the manner set
forth in Section 7A hereof, subject to the approval of the Voting Members.
The Conversion Stock will not be insured by the FDIC. The BANK will
not knowingly lend funds or otherwise extend credit to any Person to purchase
shares of the Conversion Stock.
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4. HOLDING COMPANY APPLICATIONS AND APPROVALS
The Holding Company shall make timely applications for any requisite
regulatory approvals, including an Application on Form H-(e)1 or an H-(e)1-S, if
available to the Holding Company, to be filed with the OTS and a Registration
Statement on Form S-1 to be filed with the SEC. The BANK shall be a wholly-owned
subsidiary of the Holding Company unless the Holding Company is eliminated in
the Conversion.
5. SALE OF CONVERSION STOCK
The Conversion Stock will be offered simultaneously in the
Subscription Offering to the Eligible Account Holders, Employee Plans,
Supplemental Eligible Account Holders and Other Members in the respective
priorities set forth in Sections 8 through 11 of this Plan. The Subscription
Offering may be commenced as early as the mailing of the Proxy Statement for the
Special Meeting of Members and must be commenced in time to complete the
Conversion within the time period specified in Section 3.
Any shares of Conversion Stock not subscribed for in the Subscription
Offering will be offered for sale in the Community Offering as provided in
Section 12 of this Plan. The Subscription Offering may be commenced prior to the
Special Meeting of Members and, in that event, the Community Offering may also
be commenced prior to the Special Meeting of Members. The offer and sale of
Conversion Stock prior to the Special Meeting of Members shall, however, be
conditioned upon approval of the Plan by the Voting Members.
If feasible, any shares of Conversion Stock remaining after the
Subscription and Community Offerings may be sold in a Syndicated Community
Offering, as provided in Section
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13 of this Plan in a manner that will achieve the widest distribution of the
Conversion Stock as determined by the BANK. The sale of all Conversion Stock
subscribed for in the Subscription and Community Offerings will be consummated
simultaneously on the date the sale of Conversion Stock in the Syndicated
Community Offering is consummated and only if all unsubscribed for Conversion
Stock is sold.
The BANK may elect to offer to pay fees on a per share basis to
brokers who assist Persons in determining to purchase shares in the Subscription
and Community Offerings.
6. NUMBER OF SHARES AND PURCHASE PRICE OF CONVERSION STOCK
The total number of shares (or a range thereof) of Conversion Stock
to be issued and offered for sale will be determined jointly by the Board of
Directors of the BANK and the Board of Directors of the Holding Company, if the
holding company form of organization is utilized, immediately prior to the
commencement of the Subscription and Community Offerings, subject to adjustment
thereafter if necessitated by market or financial conditions, with the approval
of the OTS, if necessary. In particular, the total number of shares may be
increased by up to 15% of the number of shares offered in the Subscription and
Community Offering if the Estimated Price Range is increased subsequent to the
commencement of the Subscription and Community Offering to reflect changes in
market and financial conditions.
All shares sold in the Conversion will be sold at a uniform price per
share referred to in this Plan as the Actual Purchase Price. The aggregate
purchase price for all shares of Conversion Stock will not be inconsistent with
the estimated consolidated pro forma market value of the BANK or the Holding
Company, if utilized. The estimated consolidated pro forma market value
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of the BANK or the Holding Company, if utilized, will be determined for such
purpose by the Independent Appraiser. Prior to the commencement of the
Subscription and Community Offerings, an Estimated Price Range will be
established, which range will vary within 15% above to 15% below the midpoint of
such range. The number of shares of Conversion Stock to be issued and the
purchase price per share may be increased or decreased by the BANK. In the event
that the aggregate purchase price of the Conversion Stock is below the minimum
of the Estimated Price Range, or materially above the maximum of the Estimated
Price Range, resolicitation of purchasers may be required provided that up to a
15% increase above the maximum of the Estimated Price Range will not be deemed
material so as to require a resolicitation. Up to a 15% increase in the number
of shares to be issued which is supported by an appropriate change in the
estimated pro forma market value of the BANK or the Holding Company, if
utilized, will not be deemed to be material so as to require a resolicitation of
subscriptions. In the event that the aggregate purchase price of the Conversion
Stock is below the minimum of the Estimated Price Range or in excess of 15%
above the maximum of the Estimated Price Range, and a resolicitation is
required, such resolicitation shall be effected in such manner and within such
time as the BANK shall establish, with the approval of the OTS, if required.
Based upon the independent valuation as updated prior to the
commencement of the Subscription and Community Offerings, the Board of Directors
of the Holding Company, (if a holding company form of organization is utilized)
and the Board of Directors of the BANK will fix the Subscription Price and the
range of the number of shares to be offered. If upon completion of the
Subscription and Community Offerings all of the Conversion Stock is
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subscribed for, or if because of a limited number of unsubscribed shares or
otherwise a Syndicated Community Offering cannot be effected, the total number
of shares of Conversion Stock to be issued and sold will be jointly determined
by the BANK and Holding Company (if a holding company form of organization is
utilized) as follows: (a) the estimated aggregate pro forma market value of the
BANK or the Holding Company, as the case may be, immediately after conversion as
determined by the Independent Appraiser, expressed in terms of a specific
aggregate dollar amount rather than as a range, upon completion of the
Subscription and Community Offerings or other sale of all of the Conversion
Stock shall be divided by (b) the Actual Purchase Price.
If there is a Syndicated Community Offering of shares of Conversion
Stock not subscribed for in the Subscription and Community Offerings, the price
per share at which the Conversion Stock is sold in such Syndicated Community
Offering shall be the Subscription Price.
Notwithstanding the foregoing, no sale of Conversion Stock may be
consummated unless, prior to such consummation, the Independent Appraiser
confirms to the BANK and Holding Company, if utilized, and to the OTS that, to
the best knowledge of the Independent Appraiser, nothing of a material nature
has occurred which, taking into account all relevant factors, would cause the
Independent Appraiser to conclude that the aggregate value of the Conversion
Stock at the Actual Purchase Price is incompatible with its estimate of the
aggregate consolidated pro forma market value of the Holding Company or the BANK
if no Holding Company is utilized. If such confirmation is not received, the
BANK may cancel the Subscription and Community Offerings and/or the Syndicated
Community Offering, extend the Conversion, establish a new
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Subscription Price Range and/or Estimated Price Range, extend, reopen or hold
new Subscription and Community Offerings and/or Syndicated Community Offering or
take such other action as the OTS may permit.
The Conversion Stock to be issued in the Conversion shall be fully
paid and nonassessable.
7. PURCHASE BY THE HOLDING COMPANY OF THE STOCK OF THE BANK
Upon the consummation of the sale of all of the Conversion Stock, and
in the event that a holding company form of organization is utilized, the
Holding Company will purchase from the BANK all of the capital stock of the BANK
to be issued by the BANK in the Conversion in exchange for the Conversion
proceeds that are not permitted to be retained by the Holding Company.
The Holding Company will apply to the OTS to retain up to 50% of the
proceeds of the Conversion. Assuming the Holding Company is not eliminated, a
lesser percentage may be acceptable. The BANK believes that the Conversion
proceeds will provide economic strength to the Holding Company and the BANK for
the future in a highly competitive and regulated environment and would
facilitate expansion through acquisitions, diversification into other related
businesses and for other business and investment purposes, including the payment
of dividends and future repurchases of Conversion Stock as permitted by the OTS.
If during the Conversion process the Board of Directors of the BANK determines
not to complete the Conversion utilizing a holding company form of organization,
capital stock of the BANK will be
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issued and sold in accordance with the Plan. The above activities may also be
engaged in by the BANK if the Holding Company is eliminated.
7A. ESTABLISHMENT AND FUNDING OF FOUNDATION
As part of the Conversion, the Holding Company and the BANK intend to
establish a Foundation that will qualify as an exempt organization under Section
501(c)(3) of the Internal Revenue Code and to donate to the Foundation up to 8%
of the number of shares of Common Stock sold in the Conversion. The Foundation
is being formed in connection with the Conversion in order to complement the
BANK's existing community reinvestment activities and to share with the
communities in which the BANK operates a part of the BANK's financial success as
a community-minded, financial services institution. The funding of the
Foundation with Common Stock of the Holding Company accomplishes this goal as it
enables such communities to share in the potential growth and profitability of
the Holding Company and the BANK over the long-term.
The Foundation will be dedicated to the promotion of charitable
purposes within the communities in which the BANK operates, including, but not
limited to, grants or donations to support housing assistance, scholarships,
local education, not-for-profit medical facilities, not-for-profit community
groups and other types of organizations or civic minded projects. The board of
directors of the Foundation will be responsible for establishing the polices of
the Foundation with respect to grants or donations, consistent with the stated
purposes of the Foundation. The Foundation will annually distribute total grants
to assist charitable organizations or to fund projects within its local
community of not less than 5% of the average
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fair value of Foundation assets each year. In order to serve the purposes for
which it was formed and maintain its 501(c)(3) qualification, the Foundation may
sell, on an annual basis, a limited portion of the Common Stock contributed to
it by the Holding Company.
The establishment and funding of the Foundation as part of the
Conversion is subject to the approval of the Voting Members by an affirmative
vote of a majority of the votes eligible to be cast by Voting Members in person
or by proxy at the Special Meeting. In the event that the BANK's Members approve
this Plan, but not the Foundation, the BANK may determine to complete the
Conversion without the establishment of the Foundation and may do so without
amending this Plan or obtaining any further vote of the BANK's Members. Failure
of the Voting Members to approve the Foundation may materially affect the pro
forma market value of the BANK. In such an event, the BANK may establish a new
Estimated Price Range and commence a resolicitation of subscribers. For
comparison purposes, Voting Members will be provided with a projection of the
pro forma market value of the Conversion Stock, an Estimated Price Range and
certain selected pro forma financial data that would result if the Conversion
were consummated without establishment of the Foundation.
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8. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS
(FIRST PRIORITY)
A. Each Eligible Account Holder shall receive, as first priority and
without payment, nontransferable subscription rights to subscribe for shares of
Conversion Stock equal to an amount up to the greater of: the amount permitted
to be subscribed for in the Community Offering which amount, pursuant to Section
12, currently is $175,000 of the Conversion Stock offered, but which may be
increased to 5% or decreased to less than $175,000 without the further approval
of members or resolicitation of subscribers; one-tenth of one percent (.10%) of
the total offering of shares of Conversion Stock; or fifteen times the product
(rounded down to the next whole number) obtained by multiplying the total number
of shares of Conversion Stock 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, in each case on the Eligibility Record Date, subject to the maximum
purchase limitation specified in Section 14A and the minimum purchase limitation
specified in Section 14C and exclusive of an increase in the total number of
shares issued due to an increase in the Estimated Price Range of up to 15%.
B. In the event that Eligible Account Holders exercise subscription
rights for a number of shares of Conversion Stock in excess of the total number
of shares eligible for subscription, the shares of Conversion Stock shall be
allocated among the subscribing Eligible Account Holders so as to permit each
subscribing Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation of Conversion
Stock equal to the lesser of 100 shares or the number of shares subscribed for
by the
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Eligible Account Holders. Any shares remaining after that allocation will be
allocated among the subscribing Eligible Account Holders whose subscriptions
remain unsatisfied in the proportion that the amount of the Qualifying Deposit
of each Eligible Account Holder whose subscription remains unsatisfied bears to
the total amount of the Qualifying Deposits of all Eligible Account Holders
whose subscriptions remain unsatisfied. If the amount so allocated exceeds the
amount subscribed for by any one or more Eligible Account Holders, the excess
shall be reallocated (one or more times as necessary) among those Eligible
Account Holders whose subscriptions are still not fully satisfied on the same
principle until all available shares have been allocated or all subscriptions
satisfied.
C. Subscription rights as Eligible Account Holders received by
Directors and Officers and their Associates which are based on deposits made by
such persons during the twelve (12) months preceding the Eligibility Record Date
shall be subordinated to the Subscription Rights of all other Eligible Account
Holders.
9. SUBSCRIPTION RIGHTS OF THE EMPLOYEE PLANS (SECOND PRIORITY)
The Employee Plans shall receive, without payment, as a second
priority after the filling of subscriptions of Eligible Account Holders,
nontransferable subscription rights to purchase in the Subscription Offering the
number of shares of Conversion Stock requested by such Employee Plans. If, after
the filling of subscriptions of Eligible Account Holders, a sufficient number of
shares are not available to fill the subscriptions by such Employee Plans, the
subscription by such Employee Plans shall be filled to the maximum extent
possible; provided, however, that in the event of an increase in the total
number of shares issued due to an increase in the Estimated
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Price Range of up to 15%, the additional shares may be sold to the Employee
Plans subject to the provisions of Section 14.
The Employee Plans shall not be deemed to be an associate or
affiliate of or Person Acting in Concert with any Director or Officer of the
Holding Company or the BANK.
10. SUBSCRIPTION RIGHTS OF SUPPLEMENTAL ELIGIBLE ACCOUNT
HOLDERS (THIRD PRIORITY)
A. Each Supplemental Eligible Account Holder shall receive, as third
priority and without payment, nontransferable subscription rights to subscribe
for shares of Conversion Stock equal to an amount up to the greater of: the
amount permitted to be subscribed for in the Community Offering which amount,
pursuant to Section 12, currently is $175,000 of the Conversion Stock offered,
but which may be increased to 5% or decreased to less than $175,000 without the
further approval of members or resolicitation of subscribers; one-tenth of one
percent (.10%) of the total offering of Conversion Stock; or fifteen times the
product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Conversion Stock 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 the
Qualifying Deposits of all Supplemental Eligible Account Holders in the BANK on
the Supplemental Eligibility Record Date, subject to the maximum purchase
limitation specified in Section 14A and the minimum purchase limitation
specified in Section 14C and exclusive of an increase in the total number of
shares issued due to an increase in the Estimated Price Range of up to 15%.
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B. In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Conversion Stock in excess of the
total number of shares eligible for subscription, the remaining shares of
Conversion Stock shall be allocated among the subscribing Supplemental Eligible
Account Holders so as to permit each subscribing Supplemental Eligible Account
Holder, to the extent possible, to purchase a number of shares sufficient to
make his or her total allocation of Conversion Stock equal to the lesser of 100
shares or the number of shares subscribed for by the Supplemental Eligible
Account Holder. Any shares remaining after that allocation will be allocated
among the subscribing Supplemental Eligible Account Holders whose subscriptions
remain unsatisfied in the proportion that the amount of the Qualifying Deposit
of each Supplemental Eligible Account Holder whose subscription remains
unsatisfied bears to the total amount of the Qualifying Deposits of all
Supplemental Eligible Account Holders whose subscriptions remain unsatisfied. If
the amount so allocated exceeds the amount subscribed for by any one or more
Supplemental Eligible Account Holders, the excess shall be reallocated (one or
more times as necessary) among those Supplemental Eligible Account Holders whose
subscriptions are still not fully satisfied on the same principle until all
available shares have been allocated or all subscriptions satisfied.
C. Subscription rights received by an Eligible Account Holder
pursuant to Section 8 shall be applied in partial satisfaction of the
subscription rights to be received as a Supplemental Eligible Account Holder
pursuant to this Section 10.
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11. SUBSCRIPTION RIGHTS OF OTHER MEMBERS (FOURTH PRIORITY)
A. Each Other Member shall receive, without payment, as a fourth
priority after the filling of subscriptions of the Eligible Account Holders, the
Employee Plans, and the Supplemental Eligible Account Holders, nontransferable
subscription rights to subscribe for shares of Conversion Stock equal to an
amount up to the greater of: the amount permitted to be subscribed for in the
Community Offering which amount, pursuant to Section 12, currently is $175,000
of the Conversion Stock offered, but which may be increased to 5% or decreased
to less than $175,000 without the further approval of members or resolicitation
of subscribers; or one-tenth of one percent (.10%) of the total offering of
shares of Conversion Stock, subject to the maximum purchase limitation specified
in Section 14A and the minimum purchase limitation specified in Section 14C and
exclusive of an increase in the total number of shares issued due to an increase
in the Estimated Price Range of up to 15%.
B. In the event that Other Members exercise subscription rights for a
number of shares of Conversion Stock in excess of the total number of shares
eligible for subscription, the remaining shares of Conversion Stock shall be
allocated among the subscribing Other Members so as to permit each subscribing
Other Member, to the extent possible, to purchase a number of shares sufficient
to make his or her total allocation of Conversion Stock equal to the lesser of
100 shares or the number of shares subscribed for by the Other Member. Any
shares remaining after that allocation will be allocated among the subscribing
Other Members whose subscriptions remain unsatisfied pro rata in the same
proportion that the number of votes of a subscribing Other Member on the Voting
Record Date bears to the total votes on the Voting Record Date of all
subscribing Other Members. If the amount so allocated exceeds the amount
subscribed for
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by any one or more remaining Other Members, the excess shall be reallocated (one
or more times as necessary) among those remaining Other Members whose
subscriptions are still not fully satisfied on the same principle until all
available shares have been allocated or all subscriptions satisfied.
12. COMMUNITY OFFERING (FIFTH PRIORITY)
If less than the total number of shares of Conversion Stock to be
subscribed for in the Conversion are sold in the Subscription Offering, it is
expected that shares remaining unsubscribed for will be made available for
purchase in the Community Offering to certain members of the general public,
which may subscribe together with any Associate or group of persons Acting in
Concert for up to $175,000 of the shares of Conversion Stock offered subject to
the Maximum Overall Purchase Limitation as specified in Section 14A and the
minimum purchase limitation specified in Section 14C and exclusive of an
increase in the total number of shares issued due to an increase in the
Estimated Price Range of up to 15%; provided, however, that the amount permitted
to be purchased in the Community Offering may be increased to 5% of the
Conversion Stock; or decreased to less than $175,000 without the further
approval of members or resolicitation of subscribers. The shares may be made
available in the Community Offering through a direct community marketing program
which may provide for utilization of a broker, dealer, consultant or investment
banking firm, experienced and expert in the sale of savings institution
securities. Such entities may be compensated on a fixed fee basis or on a
commission basis, or a combination thereof. The BANK shall make distribution of
the Conversion Stock to be sold in the Community Offering in such a manner as to
promote the
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widest distribution of Conversion Stock. The BANK reserves the right to reject
any or all orders, in whole or in part, which are received in the Community
Offering.
If the subscribers in the Community Offering, whose orders would
otherwise be accepted, subscribe for more shares than are available for
purchase, the shares available to them will be allocated among the subscribers
in the manner which permits each such person to the extent possible, to purchase
the number of shares necessary to make his total allocation of Conversion Stock
equal to the lesser of 100 shares or the number of shares subscribed for by such
persons. Thereafter, unallocated shares will be allocated among the subscribers
whose subscriptions remain unsatisfied on a 100 shares per order basis until all
such orders have been filled or the remaining shares have been allocated. The
BANK may establish all other terms and conditions of such offer. It is expected
that the Community Offering will commence concurrently with the Subscription
Offering. The Community Offering must be completed within 45 days after the
completion of the Subscription Offering unless otherwise extended by the OTS.
13. SYNDICATED COMMUNITY OFFERING
If feasible, all shares of Conversion Stock not subscribed for in the
Subscription and Community Offerings may be sold in a Syndicated Community
Offering, subject to such terms, conditions and procedures as may be determined
by the BANK, in a manner that will achieve the widest distribution of the
Conversion Stock subject to the right of the BANK to accept or reject in whole
or in part all subscriptions in the Syndicated Community Offering. In the
Syndicated Community Offering, any person together with any Associate or group
of persons Acting in Concert may purchase up to $175,000 of the total number of
shares of Conversion Stock offered
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subject to the maximum purchase limitation specified in Section 14A and the
minimum purchase limitation specified in Section 14C and exclusive of an
increase in the total number of shares issued due to an increase in the
Estimated Price Range of up to 15%; provided, however, that this amount may be
increased to 5% or decreased to less than $175,000 without the further approval
of members or resolicitation of subscribers. The shares purchased by any Person
together with any Associate or group of persons Acting in Concert pursuant to
Section 12 shall be counted toward meeting the maximum percentage of shares
permitted to be purchased pursuant to this Section. Provided that the
Subscription Offering has commenced, the BANK may commence the Syndicated
Community Offering at any time after the mailing to the Members of the Proxy
Statement to be used in connection with the Special Meeting of Members, provided
that the completion of the offer and sale of the Conversion Stock shall be
conditioned upon the approval of this Plan by the Voting Members. If the
Syndicated Community Offering is not sooner commenced pursuant to the provisions
of the preceding sentence, the Syndicated Community Offering will be commenced
as soon as practicable following the date upon which the Subscription and
Community Offerings terminate.
Alternatively, if a Syndicated Community Offering is not held, the
BANK shall have the right to sell any shares of Conversion Stock remaining
following the Subscription and Community Offerings in an underwritten firm
commitment public offering. The provisions of Section 14 hereof shall not be
applicable to sales to underwriters for purposes of such an offering but shall
be applicable to the sales by the underwriters to the public. The price to be
paid by the underwriters in such an offering shall be equal to the Actual
Purchase Price less an underwriting
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discount to be negotiated among such underwriters and the BANK, which will in no
event exceed an amount deemed to be acceptable by the OTS.
If for any reason a Syndicated Community Offering or an underwritten
firm commitment public offering of shares of Conversion Stock not sold in the
Subscription and Community Offerings can not be effected, or in the event that
any insignificant residue of shares of Conversion Stock is not sold in the
Subscription and Community Offerings or in the Syndicated Community Offering or
an underwritten firm commitment public offering, other purchase arrangements
will be made for the sale of unsubscribed shares by the BANK, if possible. Such
other purchase arrangements will be subject to the approval of the OTS.
14. LIMITATION ON PURCHASES
In addition to the maximum amount of Conversion Stock that may be
subscribed for as set forth in Sections 8, 10, 11, 12 and 13, the following
limitations shall apply to all purchases of shares of Conversion Stock:
A. The maximum number of shares of Conversion Stock which may be
subscribed for or purchased in all categories in the conversion by any Person or
Participant together with any Associate or group or persons Acting in Concert
shall not exceed 1.0% of the Conversion Stock offered (the "Maximum Overall
Purchase Limitation"), except for the Employee Plans which may subscribe for up
to 10% of the Conversion Stock issued and except for certain Eligible Account
Holders and Supplemental Eligible Account Holders which may subscribe for or
purchase shares in accordance with Sections 8 and 10 herein, respectively;
provided, however, in the event that the Maximum Overall Purchase Limitation is
increased to more than 2.0% of the
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shares of Conversion Stock offered, orders for Conversion Stock in the Community
Offering and in the Syndicated Community Offering (or, alternatively an
underwritten firm commitment public offering), if any, shall, as determined by
the BANK, first be filled to a maximum of 2.0% of the total number of shares of
Conversion Stock offered and thereafter remaining shares shall be allocated on
an equal number of shares basis per order until all orders have been filled.
B. The maximum number of shares of Conversion Stock which may be
purchased in all categories in the Conversion by Officers and Directors of the
BANK and their Associates in the aggregate shall not exceed 25% of the total
number of shares of Conversion Stock issued.
C. A minimum of 25 shares of Conversion Stock must be purchased by
each Person purchasing shares in the Conversion to the extent those shares are
available; provided, however, that in the event the minimum number of shares of
Conversion Stock purchased times the price per share exceeds $500, then such
minimum purchase requirement shall be reduced to such number of shares of
Conversion Stock which when multiplied by the price per share shall not exceed
$500, as determined by the Board.
If the number of shares of Conversion Stock otherwise allocable
pursuant to Sections 8, 10, 11, 12 and 13, to any Person or that Person's
Associates would be in excess of the maximum number of shares permitted as set
forth above, the number of shares of Conversion Stock allocated to each such
person shall be reduced to the lowest limitation applicable to that Person, and
then the number of shares allocated to each group consisting of a Person and
that Person's Associates shall be reduced so that the aggregate allocation to
that Person and his or her Associates complies with the above maximums, and such
maximum number of shares shall be reallocated among that Person and his or her
Associates as they may agree, or in the absence of
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an agreement, in proportion to the shares subscribed by each (after first
applying the maximums applicable to each Person, separately).
Depending upon market or financial conditions, the Board of Directors
of the BANK and the Holding Company, without further approval of the Members,
may decrease or increase the purchase limitations in this Plan, provided that
the maximum purchase limitations may not be increased to a percentage in excess
of 5%. Notwithstanding the foregoing, the Maximum Overall Purchase Limitation
may be increased up to 9.99% provided that orders for Conversion Stock exceeding
5% of the shares being offered shall not exceed, in the aggregate, 10% of the
total offering. If the BANK or the Holding Company, as the case may be,
increases the maximum purchase limitations, the BANK or the Holding Company, as
the case may be, is only required to resolicit Persons who subscribed for the
maximum purchase amount and may, in the sole discretion of the BANK or the
Holding Company, as the case may be, resolicit certain other large subscribers.
In the event shares of Conversion stock are sold in excess of the
maximum of the Estimated Price Range, (the "Adjusted Maximum") such shares will
be allocated in the following order of priority: (i) to fill the Employee Plans'
subscription to the Adjusted Maximum; (ii) in the event that there is an over
subscription at the Eligible Account Holder level, to fill unfulfilled
subscriptions of Eligible Account Holders exclusive of the Adjusted Maximum in
accordance with Section 8; (iii) in the event there is an over subscription at
the Supplemental Eligible Account Holder level, to fill unfulfilled
subscriptions of Supplemental Eligible Account Holders exclusive of the Adjusted
Maximum in accordance with Section 10; (iv) in the event that there is an over
subscription at the Other Member level, to fill unfulfilled subscriptions of
Other
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Members exclusive of the Adjusted Maximum in accordance with Section 11; and (v)
to fill unfulfilled Subscriptions in the Community Offering exclusive of the
Adjusted Maximum in accordance with Section 12.
For purposes of this Section 14, the Directors and Officers of the
BANK and the Holding Company shall not be deemed to be Associates or a group
affiliated with each other or otherwise Acting in Concert solely as a result of
their being Directors or Officers of the BANK or the Holding Company.
Each Person purchasing Conversion Stock in the Conversion shall be
deemed to confirm that such purchase does not conflict with the above purchase
limitations contained in this Plan.
For a period of three years following the Conversion, no Officer,
Director or their Associates shall purchase, without the prior written approval
of the OTS, any outstanding shares of common stock of the BANK or the Holding
Company, as the case may be, except from a broker-dealer registered with the
SEC. This provision shall not apply to negotiated transactions involving more
than one percent of the outstanding shares of common stock of the BANK or the
Holding Company, as the case may be, the exercise of any options pursuant to a
stock option plan or purchases of common stock of the BANK or the Holding
Company, as the case may be, made by or held by any Tax-Qualified Employee Stock
Benefit Plan or Non-Tax-Qualified Employee Stock Benefit Plan of the BANK or the
Holding Company (including the Employee Plans) which may be attributable to any
Officer or Director. As used herein, the term "negotiated transaction" means a
transaction in which the securities are offered and the terms and arrangements
relating to any sale are arrived at through direct communications between the
seller or any person acting on its behalf and the purchaser or his investment
representative. The term
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"investment representative" shall mean a professional investment advisor acting
as agent for the purchaser and independent of the seller and not acting on
behalf of the seller in connection with the transaction.
15. PAYMENT FOR CONVERSION STOCK
All payments for Conversion Stock subscribed for in the Subscription,
Community and Syndicated Community Offerings must be delivered in full to the
BANK, together with a properly completed and executed Order Form, or purchase
order in the case of the Syndicated Community Offering, on or prior to the
expiration date specified on the Order Form or purchase order, as the case may
be, unless such date is extended by the BANK; provided, however, that if the
Employee Plans subscribe for shares during the Subscription Offering, such plans
will not be required to pay for the shares at the time they subscribe but rather
may pay for such shares of Conversion Stock subscribed for by such plans at the
Actual Purchase Price upon consummation of the Conversion, provided that, in the
case of the employee stock ownership plan ("ESOP") there is in force from the
time of its subscription until the consummation of the Conversion, a loan
commitment from the Holding Company or an unrelated financial institution to
lend to the ESOP, at such time, the aggregate Subscription Price of the shares
for which it subscribed. The BANK may make scheduled discretionary contributions
to an Employee Plan provided such contributions do not cause the BANK to fail to
meet its regulatory capital requirement.
Notwithstanding the foregoing, the BANK and the Holding Company, if
utilized, shall have the right, in their sole discretion, to permit
institutional investors to submit contractually irrevocable orders in the
Community Offering and to thereafter submit payment for the
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Conversion Stock for which they are subscribing in the Community Offering at any
time prior to 48 hours before the completion of the Conversion, unless such 48
hour period is waived by the BANK and the Holding Company, in their sole
discretion.
Payment for Conversion Stock subscribed for shall be made either in
cash (if delivered in person), check or money order. Alternatively, subscribers
in the Subscription and Community Offerings may pay for the shares subscribed
for by authorizing the BANK on the Order Form to make a withdrawal from the
subscriber's Savings Account at the BANK in an amount equal to the purchase
price of such shares. Such authorized withdrawal, whether from a savings
passbook or certificate account, shall be without penalty as to premature
withdrawal. If the authorized withdrawal is from a certificate account, and the
remaining balance does not meet the applicable minimum balance requirement, the
certificate shall be cancelled at the time of withdrawal, without penalty, and
the remaining balance will earn interest at the passbook rate. Funds for which a
withdrawal is authorized will remain in the subscriber's Savings Account but may
not be used by the subscriber until the Conversion Stock has been sold or the
45-day period (or such longer period as may be approved by the OTS) following
the Subscription and Community Offering has expired, whichever occurs first.
Thereafter, the withdrawal will be given effect only to the extent necessary to
satisfy the subscription (to the extent it can be filled) at the purchase price
per share. Interest will continue to be earned on any amounts authorized for
withdrawal until such withdrawal is given effect. Interest will be paid by the
BANK at not less than the passbook annual rate on payments for Conversion Stock
received in cash or by check or money order. Such interest will be paid from the
date payment is received by the BANK until consummation or termination of the
Conversion. If for any reason the Conversion is not
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consummated, all payments made by subscribers in the Subscription, Community and
Syndicated Community Offerings will be refunded to them with interest. In case
of amounts authorized for withdrawal from Savings Accounts, refunds will be made
by cancelling the authorization for withdrawal. The BANK is prohibited by
regulation from knowingly making any loans or granting any lines of credit for
the purchase of stock in the Conversion, and therefore, will not do so.
16. MANNER OF EXERCISING SUBSCRIPTION RIGHTS THROUGH ORDER FORMS
As soon as practicable after the Prospectus prepared by the Holding
Company and BANK has been declared effective by the OTS and the SEC, if the
holding company form of organization is utilized, Order Forms will be
distributed to all Eligible Account Holders, the Employee Plans, the
Supplemental Eligible Account Holders and Other Members at their last known
addresses appearing on the records of the BANK for the purpose of subscribing to
shares of Conversion Stock in the Subscription Offering and will be made
available for use by those Persons entitled to purchase in the Community
Offering. Notwithstanding the foregoing, the BANK may elect to send Order Forms
only to those Persons who request them after such notice as is approved by the
OTS and is adequate to apprise all Eligible Account Holders, the Employee Plans,
Supplemental Eligible Account Holders and Other Members of the pendency of the
Subscription Offering has been given. Such notice may be included with the proxy
statement for the Special Meeting of Members and may also be included in a
notice of the pendency of the
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Conversion and the Special Meeting of Members sent to all Eligible Account
Holders and Supplemental Eligible Account Holders in accordance with regulations
of the OTS.
Each Order Form will be preceded or accompanied by the Prospectus (if
a holding company form of organization is utilized) or the Offering Circular (if
the holding company form of organization is not utilized) describing the Holding
Company, if utilized, the BANK, the Conversion Stock and the Subscription and
Community Offerings. Each Order Form will contain, among other things, the
following:
A. A specified date by which all Order Forms must be received by the
BANK, which date shall be not less than twenty (20), nor more than forty-five
(45) days, following the date on which the Order Forms are mailed by the BANK,
and which date will constitute the termination of the Subscription Offering;
B. The Subscription Price per share for shares of Conversion Stock to
be sold in the Subscription and Community Offerings;
C. A description of the minimum and maximum number of shares of
Conversion Stock which may be subscribed for pursuant to the exercise of
subscription rights or otherwise purchased in the Community Offering;
D. Instructions as to how the recipient of the Order Form is to
indicate thereon the number of shares of Conversion Stock for which such person
elects to subscribe and the available alternative methods of payment therefor;
E. An acknowledgment that the recipient of the Order Form has
received a final copy of the Prospectus or Offering Circular, as the case may
be, prior to execution of the Order Form;
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F. A statement to the effect that all subscription rights are
nontransferable, will be void at the end of the Subscription Offering, and can
only be exercised by delivering within the subscription period such properly
completed and executed Order Form, together with cash (if delivered in person),
check or money order in the full amount of the purchase price as specified in
the Order Form for the shares of Conversion Stock for which the recipient elects
to subscribe in the Subscription Offering (or by authorizing on the Order Form
that the BANK withdraw said amount from the subscriber's Savings Account at the
BANK) to the BANK; and
G. A statement to the effect that the executed Order Form, once
received by the BANK, may not be modified or amended by the subscriber without
the consent of the BANK.
Notwithstanding the above, the BANK and the Holding Company will not
accept orders received on photocopied or facsimilied order forms.
17. UNDELIVERED, DEFECTIVE OR LATE ORDER FORMS: INSUFFICIENT PAYMENT
In the event Order Forms (a) are not delivered and are returned to
the BANK by the United States Postal Service or the BANK is unable to locate the
addressee, (b) are not received back by the BANK or are received by the BANK
after the expiration date specified thereon, (c) are defectively filled out or
executed, (d) are not accompanied by the full required payment, except in the
case of institutional investors in the Community Offering, by delivering
irrevocable orders together with a legally binding commitment to pay in cash,
check, money order or wire transfer the full amount of the purchase price prior
to 48 hours before the completion of the Conversion for the shares of Conversion
Stock subscribed for (including cases in which savings
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accounts from which withdrawals are authorized are insufficient to cover the
amount of the required payment), or (e) are not mailed pursuant to a "no mail"
order placed in effect by the account holder, the subscription rights of the
person to whom such rights have been granted will lapse as though such person
failed to return the contemplated Order Form within the time period specified
thereon; provided, however, that the BANK may, but will not be required to,
waive any immaterial 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 the BANK may specify. The interpretation of the BANK of terms and
conditions of the Plan and of the Order Forms will be final, subject to the
authority of the OTS.
18. RESTRICTIONS ON RESALE OR SUBSEQUENT DISPOSITION
A. All shares of Conversion Stock purchased by Directors or Officers
of the BANK or the Holding Company in the Conversion shall be subject to the
restriction that, except as provided in Section 18B, below, or as may be
approved by the OTS, no interest in such shares may be sold or otherwise
disposed of for value for a period of one (l) year following the date of
purchase.
B. The restriction on disposition of shares of Conversion Stock set
forth in Section 18A above shall not apply to the following:
(i) Any exchange of such shares in connection with a merger or
acquisition involving the BANK or the Holding Company, as the case may be, which
has been approved by the OTS; and
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(ii) Any disposition of such shares following the death of the
person to whom such shares were initially sold under the terms of the Plan.
C. With respect to all shares of Conversion Stock subject to
restrictions on resale or subsequent disposition, each of the following
provisions shall apply:
(i) Each certificate representing shares restricted within the
meaning of Section 18A, above, shall bear a legend prominently stamped on its
face giving notice of the restriction;
(ii) Instructions shall be issued to the stock transfer
agent for the BANK or the Holding Company, as the case may be, not to recognize
or effect any transfer of any certificate or record of ownership of any such
shares in violation of the restriction on transfer; and
(iii) Any shares of capital stock of the BANK or the Holding
Company, as the case may be, issued with respect to a stock dividend, stock
split, or otherwise with respect to ownership of outstanding shares of
Conversion Stock subject to the restriction on transfer hereunder shall be
subject to the same restriction as is applicable to such Conversion Stock.
19. VOTING RIGHTS OF STOCKHOLDERS
Upon conversion, the holders of the capital stock of the BANK shall
have the exclusive voting rights with respect to the BANK as specified in its
charter. The holders of the common stock of the Holding Company (if a holding
company form of organization is utilized) shall have the exclusive voting rights
with respect to the Holding Company.
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20. ESTABLISHMENT OF LIQUIDATION ACCOUNT
The BANK shall establish at the time of conversion a liquidation
account in an amount equal to its net worth as of the latest practicable date
prior to conversion ("Liquidation Account"). The liquidation account will be
maintained by the BANK for the benefit of the Eligible Account Holders and
Supplemental Eligible Account Holders who continue to maintain their Savings
Accounts at the BANK. Each Eligible Account Holder and Supplemental Eligible
Account Holder shall, with respect to his Savings Account, hold a related
inchoate interest in a portion of the Liquidation Account balance, in relation
to his Savings Account balance at the Eligibility Record Date and/or
Supplemental Eligibility Record Date or to such balance as it may be
subsequently reduced, as hereinafter provided.
In the unlikely event of a complete liquidation of the BANK (and only
in such event), following all liquidation payments to creditors (including those
to Account Holders to the extent of their Savings Accounts) each Eligible
Account Holder and Supplemental Eligible Account Holder shall be entitled to
receive a liquidating distribution from the Liquidation Account, in the amount
of the then adjusted subaccount balance for his Savings Account then held,
before any liquidation distribution may be made to any holders of the BANK's
capital stock. No merger, consolidation, bulk purchase of assets with assumption
of Savings Accounts and other liabilities, or similar transactions with an
FDIC-insured institution, in which the BANK is not the surviving institution,
shall be deemed to be a complete liquidation for this purpose. In such
transactions, the Liquidation Account shall be assumed by the surviving
institution.
The initial subaccount balance for a Savings Account held by an
Eligible Account Holder and Supplemental Eligible Account Holder shall be
determined by multiplying the opening
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balance in the Liquidation Account by a fraction, the numerator of which is the
amount of such Eligible Account Holder's and/or Supplemental Eligible Account
Holder's Qualifying Deposit and the denominator of which is the total amount of
all Qualifying Deposits of all Eligible Account Holders and Supplemental
Eligible Account Holders in the BANK. Such initial subaccount balance shall not
be increased, but shall be subject to downward adjustment as described below.
For Savings Accounts in existence at both dates, separate subaccounts shall be
determined on the basis of the Qualifying Deposits in such Savings Account on
such record dates. Such initial subaccount balances shall not be increased but
shall be subject to downward adjustment as described below.
If, at the close of business on any annual closing date, commencing
on or after the effective date of Conversion, the deposit balance in the Savings
Account of an Eligible Account Holder or Supplemental Eligible Account Holder is
less than the lesser of (i) the balance in the Savings Account at the close of
business on any other annual closing date subsequent to the Eligibility Record
Date or Supplemental Eligibility Record Date, or (ii) the amount of the
Qualifying Deposit in such Savings Account, the subaccount balance for such
Savings Account shall be adjusted by reducing such subaccount balance in an
amount proportionate to the reduction in such deposit balance. In the event of
such downward adjustment, the subaccount balance shall not be subsequently
increased, notwithstanding any subsequent increase in the deposit balance of the
related Savings Account. If any such Savings Account is closed, the related
subaccount shall be reduced to zero.
The creation and maintenance of the Liquidation Account shall not
operate to restrict the use or application of any of the net worth accounts of
the BANK.
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21. TRANSFER OF SAVINGS ACCOUNTS AND CONTINUITY OF THE BANK
Upon Conversion, each Savings Account Holder having a Savings Account
at the BANK prior to the Conversion will continue to have a Savings Account,
without payment therefor, in the same amount and subject to the same terms and
conditions (except for voting and liquidation rights) as in effect prior to the
Conversion.
After the Conversion, the BANK will succeed to all the rights,
interests, duties and obligations of the BANK before the Conversion, including
but not limited to all rights and interests of the BANK in and to its assets and
properties, whether real, personal or mixed. The BANK will continue to be a
member of the Federal Home Loan Bank System and all its insured savings deposits
will continue to be insured by the FDIC to the extent provided by applicable
law.
22. RESTRICTIONS ON ACQUISITION OF THE BANK AND HOLDING
COMPANY
A. In accordance with OTS regulations, for a period of three years
from the date of consummation of the Conversion, no Person, other than the
Holding Company (if a holding company form of organization is utilized), shall
directly or indirectly offer to acquire or acquire the beneficial ownership of
more than 10% of any class of an equity security of the BANK without the prior
written consent of the OTS.
B. 1. The charter of the BANK contains a provision stipulating that
no person, except the Holding Company (if a holding company form of organization
is utilized), for a period of five years following the date of the Conversion
shall directly or indirectly offer to acquire or
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acquire the beneficial ownership of more than 10% of any class of an equity
security of the BANK, without the prior written approval of the OTS. In
addition, such charter may also provide that for a period of five years
following the Conversion, shares beneficially owned in violation of the
above-described charter provision shall not be entitled to vote and shall not be
voted by any person or counted as voting stock in connection with any matter
submitted to stockholders for a vote. In addition, special meetings of the
stockholders relating to changes in control or amendment of the charter may only
be called by the Board of Directors, and shareholders shall not be permitted to
cumulate their votes for the election of directors.
2. The Certificate of Incorporation of the Holding Company, if a
holding company form of organization is utilized, will contain a provision
stipulating that in no event shall any record owner of any outstanding shares of
the Holding Company's common stock who beneficially owns in excess of 10% of
such outstanding shares be entitled or permitted to any vote in respect to any
shares held in excess of 10%. In addition, the Certificate of Incorporation and
Bylaws of the Holding Company provide for staggered terms of the directors,
noncumulative voting for directors, limitations on the calling of special
meetings, a fair price provision for certain business combinations and certain
notice requirements.
C. For the purposes of this Section 22:
(i) The term "person" includes an individual, a group acting in
concert, a corporation, a partnership, an association, a joint stock company, a
trust, an unincorporated organization or similar company, a syndicate or any
other group formed for the purpose of acquiring, holding or disposing of
securities of an insured institution;
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(ii) The term "offer" includes every offer to buy or acquire,
solicitation of an offer to sell, tender offer for, or request or invitation for
tenders of, a security or interest in a security for value;
(iii) The term "acquire" includes every type of acquisition,
whether effected by purchase, exchange, operation of law or otherwise; and
(iv) The term "security" includes non-transferable subscription
rights issued pursuant to a plan of conversion as well as a "security" as
defined in 15 U.S.C. Section 78c(a)(10).
23. PAYMENT OF DIVIDENDS AND REPURCHASE OF STOCK
The BANK shall not declare or pay a cash dividend on, or repurchase
any of, its capital stock if the effect thereof would cause its regulatory
capital to be reduced below (i) the amount required for the Liquidation Account
or (ii) the federal regulatory capital requirement in Section 567.2 of the Rules
and Regulations of the OTS. Otherwise, the BANK may declare dividends, make
capital distributions or repurchase its capital stock in accordance with
applicable law and regulations.
24. AMENDMENT OF PLAN
If deemed necessary or desirable, the Plan may be substantively
amended at any time prior to solicitation of proxies from Members to vote on the
Plan by a two-thirds vote of the BANK's Board of Directors, and at any time
thereafter by such vote of such Board of Directors with the concurrence of the
OTS. Any amendment to the Plan made after approval by the Members with the
approval of the OTS shall not necessitate further approval by the Members unless
otherwise required by the OTS. The Plan may be terminated by majority vote of
the
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BANK's Board of Directors at any time prior to the Special Meeting of Members to
vote on the Plan, and at any time thereafter with the concurrence of the OTS.
By adoption of the Plan, the Members of the BANK authorize the Board
of Directors to amend or terminate the Plan under the circumstances set forth
in this Section.
25. CHARTER AND BYLAWS
By voting to adopt the Plan, members of the BANK will be voting to
adopt a Federal Stock Savings Bank Charter and Bylaws for a Federal Stock
Savings Bank attached as Exhibits I and II to this Plan. The effective date of
the BANK's stock charter and bylaws shall be the date of issuance and sale of
the Conversion Stock as specified by the OTS.
26. CONSUMMATION OF CONVERSION
The Conversion of the BANK shall be deemed to take place and be
effective upon the completion of all requisite organizational procedures for
obtaining a Federal Stock Savings Bank Charter for the BANK and sale of all
Conversion Stock.
27. REGISTRATION AND MARKETING
Within the time period required by applicable laws and regulations,
the BANK or the Holding Company, as the case may be, will register the
securities issued in connection with the Conversion pursuant to the Securities
Exchange Act of 1934 and will not deregister such securities for a period of at
least three years thereafter, except that the maintenance of registration for
three years requirement may be fulfilled by any successor to the BANK or any
holding company of the BANK. In addition, the BANK or Holding Company, as the
case may be, will
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use its best efforts to encourage and assist a market-maker to establish and
maintain a market for the Conversion Stock and to list those securities on a
national or regional securities exchange or the NASDAQ system.
28. RESIDENTS OF FOREIGN COUNTRIES AND CERTAIN STATES
The BANK will make reasonable efforts to comply with the securities
laws of all States in the United States in which Persons entitled to subscribe
for shares of Conversion Stock pursuant to the Plan reside. However, no such
Person will be issued subscription rights or be permitted to purchase shares of
Conversion Stock in the Subscription Offering if such Person resides in a
foreign country or in a state of the United States with respect to which both of
the following apply: A. a small number of Persons otherwise eligible to
subscribe for shares under the Plan reside in such state and; B. the issuance of
subscription rights or the offer or sale of shares of Conversion Stock to such
Persons would require the BANK or the Holding Company, as the case may be, under
the securities laws of such state, to register as a broker, dealer, salesman or
agent or to register or otherwise qualify its securities for sale in such state
and such registration or qualification would be impracticable for reasons of
cost or otherwise.
29. EXPENSES OF CONVERSION
The BANK shall use its best efforts to assure that expenses incurred
by it in connection with the Conversion shall be reasonable.
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30. CONDITIONS TO CONVERSION
The Conversion of the BANK pursuant to this Plan is expressly
conditioned upon the following:
(a) Prior receipt by the BANK of rulings of the United States
Internal Revenue Service and any applicable state taxing authority, or opinions
of counsel, substantially to the effect that the Conversion will not result in
any adverse federal or state tax consequences to Eligible Account Holders or to
the BANK and the Holding Company before or after the Conversion;
(b) The sale of all of the Conversion Stock offered in the
Conversion; and
(c) The completion of the Conversion within the time period specified
in Section 3 of this Plan.
31. INTERPRETATION
All interpretations of this Plan and application of its provisions to
particular circumstances by a majority of the Board of Directors of the BANK
shall be final, subject to the authority of the OTS.
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EXHIBIT I
FEDERAL STOCK CHARTER
FOR
FIRST FEDERAL BANK
Section 1. Corporate Title.
The full corporate title of the institution is First Federal Bank
(the "BANK").
Section 2. Office.
The home office shall be located in the City of Hazleton, in the
County of Luzerne, Commonwealth of Pennsylvania.
Section 3. Duration.
The duration of the BANK is perpetual.
Section 4. Purpose and Powers.
The purpose of the BANK is to pursue any or all of the lawful
objectives of a Federal savings bank chartered under Section 5 of the Home
Owners' Loan Act and to exercise all the express, implied, and incidental powers
conferred thereby and by all acts amendatory thereof and supplemental thereto,
subject to the Constitution and laws of the United States as they are now in
effect, or as they may hereafter be amended, and subject to all lawful and
applicable rules, regulations, and orders of the Office of Thrift Supervision
("Office").
Section 5. Capital Stock.
The total number of shares of all classes of the capital stock which
the BANK has authority to issue is_______ million (______), of which _________
million (_______) shall be common stock, par value $1.00 per share and of which
____ million (_______) shall be preferred stock, par value $1.00 per share. The
shares may be issued from time to time as authorized by the Board of Directors
without further approval of shareholders except as otherwise provided in this
Section 5 or to the extent that such approval is required by governing law,
rule, or regulation. The consideration for the issuance of the shares shall be
paid in full before their issuance and shall not be less than the par value.
Neither promissory notes nor future services shall constitute payment or part
payment for the issuance of shares of the BANK. The consideration for the shares
shall be cash, tangible or intangible property (to the extent direct investment
in such
<PAGE> 47
property would be permitted), labor or services actually performed for the BANK,
or any combination of the foregoing. In the absence of actual fraud in the
transaction, the value of such property, labor, or services, as determined by
the Board of Directors of the BANK, shall be conclusive. Upon payment of such
consideration, such shares shall be deemed to be fully paid and nonassessable.
In the case of a stock dividend, that part of the retained earnings of the BANK
that is transferred to common stock or paid-in capital accounts upon the
issuance of shares as a stock dividend shall be deemed to be the consideration
for their issuance.
Except for shares issued in the initial organization or in connection
with the conversion of the BANK from the mutual to the stock form of
capitalization, no shares of capital stock (including shares issuable upon
conversion, exchange, or exercise of other securities) shall be issued, directly
or indirectly, to officers, directors, or controlling persons of the BANK other
than as part of a general public offering or as qualifying shares to a director,
unless their issuance or the plan under which they would be issued has been
approved by a majority of the total votes eligible to be cast at a legal
meeting.
Nothing contained in this Section 5 (or in any supplementary sections
hereto) shall entitle the holders of any class or series of capital stock to
vote as a separate class or series or to more than one vote per share, except as
to the cumulation of votes for the election of directors, unless the charter
otherwise provides that there shall be no such cumulative voting: Provided, That
this restriction on voting separately by class or series shall not apply:
(i) To any provision which would authorize the holders of
preferred stock, voting as a class or series, to elect
some members of the Board of Directors, less than a
majority thereof, in the event of default in the payment
of dividends on any class or series of preferred stock;
(ii) To any provision that would require the holders of
preferred stock, voting as a class or series, to approve
the merger or consolidation of the BANK with another
corporation or the sale, lease, or conveyance (other than
by mortgage or pledge) of properties or business in
exchange for securities of a corporation other than the
BANK if the preferred stock is exchanged for securities of
such other corporation: Provided, That no provision may
require such approval for transactions undertaken with the
assistance or pursuant to the direction of the Office or
the Federal Deposit Insurance Corporation;
(iii) To any amendment which would adversely change the specific
terms of any class or series of capital stock as set forth
in this Section 5 (or in any supplementary sections
hereto), including any amendment which would create or
enlarge any class or series ranking prior thereto in
rights and preferences. An amendment which increases the
number of authorized shares of any class or series of
capital stock, or substitutes the surviving BANK in a
merger or consolidation for the BANK, shall not be
considered to be such an adverse change.
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A description of the different classes and series (if any) of the
BANK's capital stock and a statement of the designations, and the relative
rights, preferences, and limitations of the shares of each class of and series
(if any) of capital stock are as follows:
A. Common Stock. Except as provided in this Section 5 (or in
any supplementary sections hereto) the holders of the
common stock shall exclusively possess all voting power.
Each holder of shares of common stock shall be entitled to
one vote for each share held by each holder, except as to
the cumulation of votes for the election of directors,
unless the charter otherwise provides that there shall be
no such cumulative voting.
Whenever there shall have been paid, or declared and set
aside for payment, to the holders of the outstanding
shares of any class of stock having preference over the
common stock as to the payment of dividends, the full
amount of dividends and of sinking fund, or retirement
fund, or other retirement payments, if any, to which such
holders are respectively entitled in preference to the
common stock, then dividends may be paid on the common
stock and on any class or series of stock entitled to
participate therewith as to dividends out of any assets
legally available for the payment of dividends.
In the event of any liquidation, dissolution, or winding
up of the BANK, the holders of the common stock (and the
holders of any class or series of stock entitled to
participate with the common stock in the distribution of
assets) shall be entitled to receive, in cash or in kind,
the assets of the BANK available for distribution
remaining after: (i) payment or provision for payment of
the BANK's debts and liabilities; (ii) distributions or
provision for distributions in settlement of its
liquidation account; and (iii) distributions or provision
for distributions to holders of any class or series of
stock having preference over the common stock in the
liquidation, dissolution, or winding up of the BANK. Each
share of common stock shall have the same relative rights
as and be identical in all respects with all the other
shares of common stock.
B. Preferred Stock. The BANK may provide in supplementary
sections to its charter for one or more classes of
preferred stock, which shall be separately identified. The
shares of any class may be divided into and issued in
series, with each series separately designated so as to
distinguish the shares thereof from the shares of all
other series and classes. The terms of each series shall
be set forth in a supplementary section to the charter.
All shares of the same class shall be identical except as
to the following relative rights and preferences, as to
which there may be variations between different series:
(a) The distinctive serial designation and the
number of shares constituting such series;
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(b) The dividend rate or the amount of dividends to
be paid on the shares of such series, whether
dividends shall be cumulative and, if so, from
which date(s), the payment date(s) for
dividends, and the participating or other
special rights, if any, with respect to
dividends;
(c) The voting powers, full or limited, if any, of
the shares of such series;
(d) Whether the shares of such series shall be
redeemable and, if so, the price(s) at which,
and the terms and conditions on which, such
shares may be redeemed;
(e) The amount(s) payable upon the shares of such
series in the event of voluntary or involuntary
liquidation, dissolution, or winding up of the
BANK;
(f) Whether the shares of such series shall be
entitled to the benefit of a sinking or
retirement fund to be applied to the purchase
or redemption of such shares, and if so
entitled, the amount of such fund and the
manner of its application, including the
price(s) at which such shares may be redeemed
or purchased through the application of such
fund;
(g) Whether the shares of such series shall be
convertible into, or exchangeable for, shares
of any other class or classes of stock of the
BANK and, if so, the conversion price(s) or the
rate(s) of exchange, and the adjustments
thereof, if any, at which such conversion or
exchange may be made, and any other terms and
conditions of such conversion or exchange;
(h) The price or other consideration for which the
shares of such series shall be issued; and
(i) Whether the shares of such series which are
redeemed or converted shall have the status of
authorized but unissued shares of serial
preferred stock and whether such shares may be
reissued as shares of the same or any other
series of serial preferred stock.
Each share of each series of serial preferred stock shall have the
same relative rights as and be identical in all respects with all the other
shares of the same series.
The Board of Directors shall have authority to divide, by the
adoption of supplementary charter sections, any authorized class of preferred
stock into series, and, within the limitations set forth in this section and the
remainder of this charter, fix and determine the relative rights and preferences
of the shares of any series so established.
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Prior to the issuance of any preferred shares of a series established
by a supplementary charter section adopted by the Board of Directors, the BANK
shall file with the Secretary of the Office a dated copy of that supplementary
section of this charter establishing and designating the series and fixing and
determining the relative rights and preferences thereof.
Section 6. Preemptive Rights.
Holders of the capital stock of the BANK shall not be entitled to
preemptive rights with respect to any shares of the BANK which may be issued.
Section 7. Liquidation Account.
Pursuant to the requirements of the Office's regulations (12 C.F.R.
563b.3), the BANK shall establish and maintain a liquidation account for the
benefit of its savings account holders as of September 30, 1996 and
[_________________] ("eligible savers"). In the event of a complete liquidation
of the BANK, it shall comply with such regulations with respect to the amount
and the priorities on liquidation of each of the BANK's eligible saver's
inchoate interest in the liquidation account, to the extent it is still in
existence: provided, that an eligible saver's inchoate interest in the
liquidation account shall not entitle such eligible saver to any voting rights
at meetings of the BANK's shareholders.
Section 8. Certain Provisions Applicable for Five Years.
Notwithstanding anything contained in the BANK's charter or bylaws to
the contrary, for a period of five years from the date of consummation of the
conversion of the BANK from mutual to stock form, the following provisions shall
apply:
A. Beneficial Ownership Limitation. No person shall directly
or indirectly offer to acquire or acquire the beneficial
ownership of more than 10 percent of any class of any
equity security of the BANK. This limitation shall not
apply to a transaction in which the BANK forms a holding
company in conjunction with conversion, or thereafter, if
such formation is without change in the respective
beneficial ownership interests of the BANK's shareholders
other than pursuant to the exercise of any dissenter and
appraisal rights, the purchase of shares by underwriters
in connection with a public offering, or the purchase of
shares by a tax-qualified employee stock benefit plan
which is exempt from the approval requirements under
Section 574.3(c)(1)(vi) of the Office Regulations.
In the event shares are acquired in violation of this
Section 8, all shares beneficially owned by any person in
excess of 10 percent shall be considered "excess shares"
and shall not be counted as shares entitled to vote and
shall not be
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voted by any person or counted as voting shares in
connection with any matters submitted to the shareholders
for a vote.
For the purposes of this Section 8, the following definitions apply:
(i) The term "person" includes an individual, a
group acting in concert, a corporation, a
partnership, an association, a joint stock
company, a trust, any unincorporated
organization or similar company, a syndicate or
any other group formed for the purpose of
acquiring, holding or disposing of the equity
securities of the BANK.
(ii) The term "offer" includes every offer to buy or
otherwise acquire, solicitation of an offer to
sell, tender offer for, or request or
invitation for tenders of, a security or
interest in a security for value.
(iii) The term "acquire" includes every type of
acquisition, whether effected by purchase,
exchange, operation of law or otherwise.
(iv) The term "acting in concert" means (a) knowing
participation in a joint activity or conscious
parallel action towards a common goal whether
or not pursuant to an express agreement, or (b)
a combination or pooling of voting or other
interests in the securities of an issuer for a
common purpose pursuant to any contract,
understanding, relationship, agreement or other
arrangement, whether written or otherwise.
B. Cumulative Voting Limitation. Shareholders shall not be
permitted to cumulate their votes for the election of
directors.
C. Call for Special Meetings. Special meetings of
shareholders relating to changes in control of the BANK or
amendments to its charter shall be called only at the
direction of the Board of Directors.
Section 9. Directors.
The BANK shall be under the direction of a Board of Directors. The
authorized number of directors, as stated in the BANK's bylaws, shall be not be
less than five nor more than 15 except when a greater number is approved by the
Office or his or her delegate.
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Section 10. Amendment of Charter.
Except as provided in Section 5, no amendment, addition, alteration,
change, or repeal of this charter shall be made, unless such is proposed by the
Board of Directors of the BANK, approved by the shareholders by a majority of
the votes eligible at a legal meeting unless a higher vote is otherwise
required, and approved or preapproved by the Office.
As adopted by the BANK's members on _________________, to be
effective on the date the BANK converts from mutual to stock form of
organization.
FIRST FEDERAL BANK
Attest: By:
----------------------------- -----------------------------
Adelia Lazur E. Lee Beard
Secretary President and Chief Executive
Officer
OFFICE OF THRIFT SUPERVISION
Attest: By:
----------------------------- -----------------------------
Secretary to the Office Director
Declared effective on
the _____ day of __________, 199_
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EXHIBIT II
BYLAWS OF
FIRST FEDERAL BANK
ARTICLE I. HOME OFFICE
The home office of First Federal Bank ("BANK") is 12 E. Broad Street,
Hazleton, Pennsylvania 18201.
ARTICLE II. SHAREHOLDERS
Section l. Place of Meetings. All annual and special meetings of
shareholders shall be held at the home office of the BANK or at such other place
in the State in which the principal place of business of the BANK is located as
the board of directors may determine.
Section 2. Annual Meeting. A meeting of the shareholders of the BANK
for the election of directors and for the transaction of any other business of
the BANK shall be held annually within 120 days after the end of the BANK's
fiscal year as the board of directors may determine.
Section 3. Special Meetings. For a period of five years from the date
of the completion of the conversion of the BANK from mutual to stock form,
special meetings of the shareholders relating to a change in control of the BANK
or to an amendment of the Charter of the BANK may be called only by the board of
directors. Thereafter, special meetings of the shareholders for any purpose or
purposes, unless otherwise prescribed by the regulations of the Office of Thrift
Supervision ("OTS"), may be called at any time by the chairman of the board, the
president, or a majority of the board of directors, and shall be called by the
chairman of the board, the president or the secretary upon the written request
of the holders of not less than one-tenth of all the outstanding capital stock
of the BANK entitled to vote at the meeting. Such written request shall state
the purpose or purposes of the meeting and shall be delivered at the home office
of the BANK addressed to the chairman of the board, the president or the
secretary.
Section 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with the most current edition of Robert's Rules of Order
unless otherwise prescribed by regulations of the OTS or these bylaws. The board
of directors shall designate, when present, either the chairman of the board or
president to preside at such meetings.
Section 5. Notice of Meetings. Written notice stating the place, day
and hour of the meeting and the purpose(s) for which the meeting is called shall
be delivered not fewer than 20 nor more than 50 days before the date of the
meeting, either personally or by mail, by or at the direction of the chairman of
the board, the president, the secretary, or the directors calling the meeting,
to each shareholder of record entitled to vote at such meeting. If mailed, such
notice shall be deemed to be delivered when deposited in the mail, addressed to
the shareholder at the address as it appears on the
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stock transfer books or records of the BANK as of the record date prescribed in
Section 6 of this Article II, with postage prepaid. When any shareholders'
meeting, either annual or special, is adjourned for 30 days or more, notice of
the adjourned meeting shall be given as in the case of an original meeting. It
shall not be necessary to give any notice of the time and place of any meeting
adjourned for less than 30 days or of the business to be transacted at the
meeting, other than an announcement at the meeting at which such adjournment is
taken.
Section 6. Fixing of Record Date. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment, or shareholders entitled to receive payment of any dividend, or
in order to make a determination of shareholders for any other proper purpose,
the board of directors shall fix in advance a date as the record date for any
such determination of shareholders. Such date in any case shall be not more than
60 days and, in case of a meeting of shareholders, not fewer than 10 days prior
to the date on which the particular action, requiring such determination of
shareholders, is to be taken. When a determination of shareholders entitled to
vote at any meeting of shareholders has been made as provided in this section,
such determination shall apply to any adjournment.
Section 7. Voting Lists. At least 20 days before each meeting of the
shareholders, the officer or agent having charge of the stock transfer books for
shares of the BANK shall make a complete list of the shareholders entitled to
vote at such meeting, or any adjournment, arranged in alphabetical order, with
the address and the number of shares held by each. This list of shareholders
shall be kept on file at the home office of the BANK and shall be subject to
inspection by any shareholder at any time during usual business hours, for a
period of 20 days prior to such meeting. Such list shall also be produced and
kept open at the time and place of the meeting and shall be subject to the
inspection by any shareholder during the entire time of the meeting. The
original stock transfer book shall constitute prima facie evidence of the
shareholders entitled to examine such list or transfer books or to vote at any
meeting of shareholders.
In lieu of making the shareholder list available for inspection by
shareholders as provided in the preceding paragraph, the board of directors may
elect to follow the procedures prescribed in Section 552.6(d) of the OTS's
Regulations as now or hereafter in effect.
Section 8. Quorum. A majority of the outstanding shares of the BANK
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of shareholders. If less than a majority of the outstanding shares
is represented at a meeting, a majority of the shares so represented may adjourn
the meeting from time to time without further notice. At such adjourned meeting
at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. The shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to constitute less than a quorum.
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Section 9. Proxies. At all meetings of shareholders, a shareholder
may vote by proxy executed in writing by the shareholder or by his duly
authorized attorney in fact. Proxies solicited on behalf of the management shall
be voted as directed by the shareholder or, in the absence of such direction, as
determined by a majority of the board of directors. No proxy shall be valid more
than eleven months from the date of its execution except for a proxy coupled
with an interest.
Section 10. Voting of Shares in the Name of Two or More Persons. When
ownership stands in the name of two or more persons, in the absence of written
directions to the BANK to the contrary, at any meeting of the shareholders of
the BANK any one or more of such shareholders may cast, in person or by proxy,
all votes to which such ownership is entitled. In the event an attempt is made
to cast conflicting votes, in person or by proxy, by the several persons in
whose names shares of stock stand, the vote or votes to which those persons are
entitled shall be cast as directed by a majority of those holding such and
present in person or by proxy at such meeting, but no votes shall be cast for
such stock if a majority cannot agree.
Section 11. Voting of Shares by Certain Holders. Shares standing in
the name of another corporation may be voted by any officer, agent or proxy as
the bylaws of such corporation may prescribe, or, in the absence of such
provision, as the board of directors of such corporation may determine. Shares
held by an administrator, executor, guardian or conservator may be voted by him,
either in person or by proxy, without a transfer of such shares into his name.
Shares standing in the name of a trustee may be voted by him, either in person
or by proxy, but no trustee shall be entitled to vote shares held by him without
a transfer of such shares into his name. Shares standing in the name of a
receiver may be voted by such receiver, and shares held by or under the control
of a receiver may be voted by such receiver without the transfer into his name
if authority to do so is contained in an appropriate order of the court or other
public authority by which such receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee and
thereafter the pledgee, shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the BANK, nor shares
held by another corporation, if a majority of the shares entitled to vote for
the election of directors of such other corporation are held by the BANK, shall
be voted at any meeting or counted in determining the total number of
outstanding shares at any given time for purposes of any meeting.
Section 12. Cumulative Voting. Except as otherwise provided in the
BANK's charter, every shareholder entitled to vote at an election for directors
shall have the right to vote, in person or by proxy, the number of shares owned
by the shareholder for as many persons as there are directors to be elected and
for whose election the shareholder has a right to vote, or to cumulate the votes
by giving one candidate as many votes as the number of such directors to be
elected multiplied by the number of shares shall equal or by distributing such
votes on the same principle among any number of candidates.
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Section 13. Inspectors of Election. In advance of any meeting of
shareholders, the board of directors may appoint any persons other than nominees
for office as inspectors of election to act at such meeting or any adjournment.
The number of inspectors shall be either one or three. Any such appointment
shall not be altered at the meeting. If inspectors of election are not so
appointed, the chairman of the board or the president may, or on the request of
not fewer than 10 percent of the votes represented at the meeting shall, make
such appointment at the meeting. If appointed at the meeting, the majority of
the votes present shall determine whether one or three inspectors are to be
appointed. In case any person appointed as inspector fails to appear or fails or
refuses to act, the vacancy may be filled by appointment by the board of
directors in advance of the meeting, or at the meeting by the chairman of the
board or the president.
Unless otherwise prescribed by regulations of the OTS, the duties of
such inspectors shall include: determining the number of shares and the voting
power of each share, the shares represented at the meeting, the existence of a
quorum, and the authenticity, validity and effect of proxies; receiving votes,
ballots, or consents; hearing and determining all challenges and questions in
any way arising in connection with the rights to vote; counting and tabulating
all votes or consents; determining the result; and such acts as may be proper to
conduct the election or vote with fairness to all shareholders.
Section 14. Nominating Committee. The board of directors shall act as
a nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the death
or other incapacity of a management nominee, the nominating committee shall
deliver written nominations to the secretary at least 20 days prior to the date
of the annual meeting. Upon delivery, such nominations shall be posted in a
conspicuous place in each office of the BANK. No nominations for directors
except those made by the nominating committee shall be voted upon at the annual
meeting unless other nominations by shareholders are made in writing and
delivered to the secretary of the BANK at least five days prior to the date of
the annual meeting. Upon delivery, such nominations shall be posted in a
conspicuous place in each office of the BANK. Ballots bearing the names of all
persons nominated by the nominating committee and by shareholders shall be
provided for use at the annual meeting. However, if the nominating committee
shall fail or refuse to act at least 20 days prior to the annual meeting,
nominations for directors may be made at the annual meeting by any shareholder
entitled to vote and shall be voted upon.
Section 15. New Business. Any new business to be taken up at the
annual meeting shall be stated in writing and filed with the secretary of the
BANK at least 5 days before the date of the annual meeting, and all business so
stated, proposed, and filed shall be considered at the annual meeting, but no
other proposal shall be acted upon at the annual meeting. Any shareholder may
make any other proposal at the annual meeting and the same may be discussed and
considered, but unless stated in writing and filed with the secretary at least 5
days before the meeting, such proposal shall be laid over for action at an
adjourned, special, or annual meeting of the shareholders taking place 30 days
or more thereafter. This provision shall not prevent the consideration and
approval
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or disapproval at the annual meeting of reports of officers, directors and
committees; but in connection with such reports no new business shall be acted
upon at such annual meeting unless stated and filed as herein provided.
Section 16. Informal Action by Shareholders. Any action required to
be taken at a meeting of shareholders, or any other action which may be taken at
a meeting of the shareholders, may be taken without a meeting if consent in
writing, setting forth the action so taken, shall be given by all of the
shareholders entitled to vote with respect to the subject matter.
ARTICLE III. BOARD OF DIRECTORS
Section l. General Powers. The business and affairs of the BANK
shall be under the direction of its board of directors. The board of directors
shall annually elect a chairman of the board and a president from among its
members and shall designate, when present, either the chairman of the board or
the president to preside at its meetings.
Section 2. Number and Term. The board of directors shall consist of
nine (9) members and shall be divided into three classes as nearly equal in
number as possible. The members of each class shall be elected for a term of
three years and until their successors are elected and qualified. One class
shall be elected by ballot annually.
Section 3. Regular Meetings. A regular meeting of the board of
directors shall be held without other notice than this bylaw immediately after,
and at the same place as, the annual meeting of shareholders. The board of
directors may provide, by resolution, the time and place, for the holding of
additional regular meetings without other notice than such resolution.
Section 4. Qualification. Each director shall at all times be the
beneficial owner of not less than 100 shares of capital stock of the BANK unless
the BANK is a wholly owned subsidiary of a holding company.
Section 5. Special Meetings. Special meetings of the board of
directors may be called by or at the request of the chairman of the board, the
president or one-third of the directors. The persons authorized to call special
meetings of the board of directors may fix any place, within the BANK's normal
lending territory, as the place for holding any special meeting of the board of
directors called by such persons.
Members of the board of directors may participate in special meetings
by means of conference telephone, or by means of similar communications
equipment by which all persons participating in the meeting can hear each other.
Such participation shall constitute presence in person but shall not constitute
attendance for the purpose of compensation pursuant to Section 12 of this
Article.
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Section 6. Notice. Written notice of any special meeting shall be
given to each director at least 24 hours prior thereto when delivered personally
or by telegram, or at least five days prior thereto when delivered by mail at
the address at which the director is most likely to be reached. Such notice
shall be deemed to be delivered when deposited in the mail so addressed, with
postage prepaid if mailed, or when delivered to the telegraph company if sent by
telegram. Any director may waive notice of any meeting by a writing filed with
the secretary. The attendance of a director at a meeting shall constitute a
waiver of notice of such meeting, except where a director attends a meeting for
the express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any meeting of the board of directors need be
specified in the notice or waiver of notice of such meeting.
Section 7. Quorum. A majority of the number of directors fixed by
Section 2 of this Article III shall constitute a quorum for the transaction of
business at any meeting of the board of directors, but if less than such
majority is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time. Notice of any adjourned meeting shall be
given in the same manner as prescribed by Section 6 of this Article III.
Section 8. Manner of Acting. The act of the majority of the
directors present at a meeting at which a quorum is present shall be the act of
the board of directors, unless a greater number is prescribed by regulation of
the OTS or by these bylaws.
Section 9. Action Without a Meeting. Any action required or
permitted to be taken by the board of directors at a meeting may be taken
without a meeting if a consent in writing, setting forth the action so taken,
shall be signed by all of the directors.
Section 10. Resignation. Any director may resign at any time by
sending a written notice of such resignation to the home office of the BANK
addressed to the chairman of the board or president. Unless otherwise specified
such resignation shall take effect upon receipt by the chairman of the board or
president. More than three consecutive absences from regular meetings of the
board of directors, unless excused by resolution of the board of directors,
shall automatically constitute a resignation, effective when such resignation is
accepted by the board of directors.
Section 11. Vacancies. Any vacancy occurring in the board of
directors may be filled by the affirmative vote of a majority of the remaining
directors, although less than a quorum of the board of directors. A director
elected to fill a vacancy shall be elected to serve until the next election of
directors by the shareholders. Any directorship to be filled by reason of an
increase in the number of directors may be filled by election by the board of
directors for a term of office continuing only until the next election of
directors by the shareholders.
Section 12. Compensation. Directors, as such, may receive a stated
salary for their services. By resolution of the board of directors, a reasonable
fixed sum, and reasonable expenses of attendance, if any, may be allowed for
actual attendance at each regular or special meeting of the
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<PAGE> 59
board of directors. Members of either standing or special committees may be
allowed such compensation for actual attendance at committee meetings as the
board of directors may determine.
Section 13. Presumption of Assent. A director of the BANK who is
present at a meeting of the board of directors at which action on any BANK
matter is taken shall be presumed to have assented to the action taken unless
his dissent or abstention shall be entered in the minutes of the meeting or
unless he shall file a written dissent to such action with the person acting as
the secretary of the meeting before the adjournment thereof or shall forward
such dissent by registered mail to the secretary of the BANK within five days
after the date a copy of the minutes of the meeting is received. Such right to
dissent shall not apply to a director who voted in favor of such action.
Section 14. Removal of Directors. At a meeting of shareholders called
expressly for that purpose, any director may be removed for cause by a vote of
the holders of a majority of the shares then entitled to vote at an election of
directors. Whenever the holders of the shares of any class are entitled to elect
one or more directors by the provisions of the Charter or supplemental sections
thereto, the provisions of this section shall apply, in respect to the removal
of a director or directors so elected, to the vote of the holders of the
outstanding shares of that class and not to the vote of the outstanding shares
as a whole.
Section 15. Age Limitation on Directors. Any member of the board of
directors, upon reaching the age of 75 years shall be retired as a member of the
board, said retirement to be compulsory and shall take effect on December 31 of
the year in which such member attains the age of 75 years.
ARTICLE IV. EXECUTIVE AND OTHER COMMITTEES
Section l. Appointment. The board of directors, by resolution
adopted by a majority of the full board, may designate the chief executive
officer and two or more of the other directors to constitute an executive
committee. The designation of any committee pursuant to this Article IV and the
delegation of authority shall not operate to relieve the board of directors, or
any director, of any responsibility imposed by law or regulation.
Section 2. Authority. The executive committee, when the board of
directors is not in session, shall have and may exercise all of the authority of
the board of directors except to the extent, if any, that such authority shall
be limited by the resolution appointing the executive committee; and except also
that the executive committee shall not have the authority of the board of
directors with reference to: the declaration of dividends; the amendment of the
Charter or bylaws of the BANK, or recommending to the shareholders a plan of
merger, consolidation, or conversion; the sale, lease or other disposition of
all or substantially all of the property and assets of the BANK otherwise than
in the usual and regular course of its business; a voluntary dissolution of the
BANK; a revocation of any of the foregoing; or the approval of a transaction in
which any member of the executive committee, directly or indirectly, has any
material beneficial interest.
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Section 3. Tenure. Subject to the provisions of Section 8 of this
Article IV, each member of the executive committee shall hold office until the
next regular annual meeting of the board of directors following his or her
designation and until a successor is designated as a member of the executive
committee.
Section 4. Meetings. Regular meetings of the executive committee
may be held without notice at such times and places as the executive committee
may fix from time to time by resolution. Special meetings of the executive
committee may be called by any member thereof upon not less than one day's
notice stating the place, date and hour of the meeting, which notice may be
written or oral. Any member of the executive committee may waive notice of any
meeting and no notice of any meeting need be given to any member thereof who
attends in person. The notice of a meeting of the executive committee need not
state the business proposed to be transacted at the meeting.
Section 5. Quorum. A majority of the members of the executive
committee shall constitute a quorum for the transaction of business at any
meeting thereof, and action of the executive committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
Section 6. Action Without a Meeting. Any action required or
permitted to be taken by the executive committee at a meeting may be taken
without a meeting if a consent in writing, setting forth the action so taken,
shall be signed by all of the members of the executive committee.
Section 7. Vacancies. Any vacancy in the executive committee may be
filled by a resolution adopted by a majority of the full board of directors.
Section 8. Resignations and Removal. Any member of the executive
committee may be removed at any time with or without cause by resolution adopted
by a majority of the full board of directors. Any member of the executive
committee may resign from the executive committee at any time by giving written
notice to the president or secretary of the BANK. Unless otherwise specified,
such resignation shall take effect upon its receipt; the acceptance of such
resignation shall not be necessary to make it effective.
Section 9. Procedure. The executive committee shall elect a
presiding officer from its members and may fix its own rules of procedure which
shall not be inconsistent with these bylaws. It shall keep regular minutes of
its proceedings and report the same to the board of directors for its
information at the meeting held next after the proceedings shall have occurred.
Section 10. Other Committees. The board of directors may by
resolution establish an audit, loan, or other committees composed of directors
as they may determine to be necessary or appropriate for the conduct of the
business of the BANK and may prescribe the duties, constitution and procedures
thereof.
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ARTICLE V. OFFICERS
Section l. Positions. The officers of the BANK shall be a president,
one or more vice presidents, a secretary and a treasurer, each of whom shall be
elected by the board of directors. The board of directors may also designate the
chairman of the board as an officer. The president may also be designated by the
board of directors as the chief executive officer. The president shall be a
director of the BANK. The offices of the secretary and treasurer may be held by
the same person and a vice president may also be either the secretary or the
treasurer. The board of directors may designate one or more vice presidents as
executive vice president or senior vice president. The board of directors may
also elect or authorize the appointment of such other officers as the business
of the BANK may require. The officers shall have such authority and perform such
duties as the board of directors may from time to time authorize or determine.
In the absence of action by the board of directors, the officers shall have such
powers and duties as generally pertain to their respective offices.
Section 2. Election and Term of Office. The officers of the BANK
shall be elected annually at the first meeting of the board of directors held
after each annual meeting of the shareholders. If the election of officers is
not held at such meeting, such election shall be held as soon thereafter as
possible. Each officer shall hold office until a successor has been duly elected
and qualified or until the officer's death, resignation or removal in the manner
hereinafter provided. Election or appointment of an officer, employee or agent
shall not of itself create contractual rights. The board of directors may
authorize the BANK to enter into an employment contract with any officer in
accordance with regulations of the OTS; but no such contract shall impair the
right of the board of directors to remove any officer at any time in accordance
with Section 3 of this Article V.
Section 3. Removal. Any officer may be removed by the board of
directors whenever in its judgment the best interests of the BANK will be served
thereby, but such removal, other than for cause, shall be without prejudice to
the contractual rights, if any, of the person so removed.
Section 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by the board
of directors for the unexpired portion of the term.
Section 5. Remuneration. The remuneration of the officers shall be
fixed from time to time by the board of directors.
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ARTICLE VI. CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section l. Contracts. To the extent permitted by regulations of the
OTS, and except as otherwise prescribed by these bylaws with respect to
certificates for shares, the board of directors may authorize any officer,
employee, or agent of the BANK to enter into any contract or execute and deliver
any instrument in the name of and on behalf of the BANK. Such authority may be
general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the BANK
and no evidence of indebtedness shall be issued in its name unless authorized by
the board of directors. Such authority may be general or confined to specific
instances.
Section 3. Checks, Drafts, Etc. All checks, drafts or other orders
for the payment of money, notes or other evidences of indebtedness issued in the
name of the BANK shall be signed by one or more officers, employees or agents of
the BANK in such manner as shall from time to time be determined by the board of
directors.
Section 4. Deposits. All funds of the BANK not otherwise employed
shall be deposited from time to time to the credit of the BANK in any duly
authorized depositories as the board of directors may select.
ARTICLE VII. CERTIFICATES FOR SHARES
AND THEIR TRANSFER
Section l. Certificates for Shares. Certificates representing shares
of capital stock of the BANK shall be in such form as shall be determined by the
board of directors and approved by the OTS. Such certificates shall be signed by
the chief executive officer or by any other officer of the BANK authorized by
the board of directors, attested by the secretary or an assistant secretary, and
sealed with the corporate seal or a facsimile thereof. The signatures of such
officers upon a certificate may be facsimiles if the certificate is manually
signed on behalf of a transfer agent or a registrar, other than the BANK itself
or one of its employees. Each certificate for shares of capital stock shall be
consecutively numbered or otherwise identified. The name and address of the
person to whom the shares are issued, with the number of shares and date of
issue, shall be entered on the stock transfer books of the BANK. All
certificates surrendered to the BANK for transfer shall be canceled and no new
certificate shall be issued until the former certificate for a like number of
shares has been surrendered and canceled, except that in case of a lost or
destroyed certificate, a new certificate may be issued upon such terms and
indemnity to the BANK as the board of directors may prescribe.
Section 2. Transfer of Shares. Transfer of shares of capital stock of
the BANK shall be made only on its stock transfer books. Authority for such
transfer shall be given only by the holder of record or by his legal
representative, who shall furnish proper evidence of such authority, or by his
attorney authorized by a duly executed power of attorney and filed with the
BANK. Such transfer
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shall be made only on surrender for cancellation of the certificate for such
shares. The person in whose name shares of capital stock stand on the books of
the BANK shall be deemed by the BANK to be the owner for all purposes.
ARTICLE VIII. FISCAL YEAR; ANNUAL AUDIT
The fiscal year of the BANK shall end on September 30 of each year.
The BANK shall be subject to an annual audit as of the end of its fiscal year by
independent public accountants appointed by and responsible to the board of
directors. The appointment of such accountants shall be subject to annual
ratification by the shareholders.
ARTICLE IX. DIVIDENDS
Subject to the terms of the BANK's Charter and the regulations and
orders of the OTS, the board of directors may, from time to time, declare, and
the BANK may pay, dividends on its outstanding shares of capital stock.
ARTICLE X. CORPORATE SEAL
The board of directors shall provide a BANK seal, which shall be two
concentric circles between which shall be the name of the BANK. The year of
incorporation or an emblem may appear in the center.
ARTICLE XI. AMENDMENTS
These bylaws may be amended in a manner consistent with regulations
of the OTS at any time by a majority vote of the full board of directors, or by
a majority vote of the votes cast by the shareholders of the BANK at any legal
meeting.
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<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
FIRST: The name of the Corporation is Northeast Pennsylvania
Financial Corp. (hereinafter sometimes referred to as the "Corporation").
SECOND: The address of the registered office of the Corporation in
the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the
City of Wilmington, County of New Castle. The name of the registered agent at
that address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which a corporation may be organized under the General
Corporation Law of the State of Delaware.
FOURTH:
A. The total number of shares of all classes of stock
which the Corporation shall have authority to issue is eighteen
million (18,000,000) consisting of:
1. Two million (2,000,000) shares of Preferred
Stock, par value one cent ($.01) per share
(the "Preferred Stock"); and
2. Sixteen million (16,000,000) shares of Common
Stock, par value one cent ($.01) per share
(the "Common Stock").
B. The Board of Directors is authorized, subject to any
limitations prescribed by law, to provide for the issuance of the
shares of Preferred Stock in series, and by filing a certificate
pursuant to the applicable law of the State of Delaware (such
certificate being hereinafter referred to as a "Preferred Stock
Designation"), to establish from time to time the number of shares to
be included in each such series, and to fix the designation, powers,
preferences, and rights of the shares of each such series and any
qualifications, limitations or restrictions thereof. The number of
authorized shares of Preferred Stock may be increased or decreased
(but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the Common Stock,
without a vote of the holders of the Preferred Stock, or of any series
thereof, unless a vote of any such holders is required pursuant to the
terms of any Preferred Stock Designation.
C. 1. Notwithstanding any other provision of this
Certificate of Incorporation, in no event
shall any record owner of any outstanding
Common Stock which is beneficially owned,
directly or indirectly, by a person who, as
of any record date for the determination of
<PAGE> 2
stockholders entitled to vote on any matter,
beneficially owns in excess of 10% of the
then-outstanding shares of Common Stock (the
"Limit"), be entitled, or permitted to any
vote in respect of the shares held in excess
of the Limit. The number of votes which may
be cast by any record owner by virtue of the
provisions hereof in respect of Common Stock
beneficially owned by such person
beneficially owning 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 beneficially owned by
such person would be entitled to cast,
(subject to the provisions of this Article
FOURTH) 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.
2. The following definitions shall apply to this
Section C of this Article FOURTH:
a. "Affiliate" shall have the meaning
ascribed to it in Rule 12b-2 of the
General Rules and Regulations under
the Securities Exchange Act of 1934,
as amended, as in effect on the date
of filing of this Certificate of
Incorporation.
b. "Beneficial ownership" shall be
determined pursuant to Rule 13d-3 of
the General Rules and Regulations
under the Securities Exchange Act of
1934, as amended, (or any successor
rule or statutory provision), or, if
said Rule 13d-3 shall be rescinded
and there shall be no successor rule
or provision thereto, pursuant to
said Rule 13d-3 as in effect on the
date of filing of this Certificate
of Incorporation; provided, however,
that a person shall, in any event,
also be deemed the "beneficial
owner" of any Common Stock:
(1) which such person or any of
its affiliates beneficially
owns, directly or indirectly;
or
(2) which such person or any of
its affiliates has: (i) the
right to acquire (whether
such right is exercisable
immediately or only after the
passage of time), pursuant to
any agreement, arrangement or
understanding (but shall not
be deemed to be the
beneficial owner of any
voting shares solely by
reason
2
<PAGE> 3
of an agreement, contract, or
other arrangement with this
Corporation to effect any
transaction which is
described in any one or more
of clauses 1 through 5 of
Section A of Article EIGHTH
of this Certificate of
Incorporation ("Article
EIGHTH")), or upon the
exercise of conversion
rights, exchange rights,
warrants, or options or
otherwise, or (ii) sole or
shared voting or investment
power with respect thereto
pursuant to any agreement,
arrangement, understanding,
relationship or otherwise
(but shall not be deemed to
be the beneficial owner of
any voting shares solely by
reason of a revocable proxy
granted for a particular
meeting of stockholders,
pursuant to a public
solicitation of proxies for
such meeting, with respect to
shares of which neither such
person nor any such Affiliate
is otherwise deemed the
beneficial owner); or
(3) which are beneficially owned,
directly or indirectly, by
any other person with which
such first mentioned person
or any of its Affiliates acts
as a partnership, limited
partnership, syndicate or
other group pursuant to any
agreement, arrangement or
understanding for the purpose
of acquiring, holding, voting
or disposing of any shares of
capital stock of this
Corporation; and provided
further, however, that: (1)
no Director or Officer of
this Corporation (or any
Affiliate of any such
Director or Officer) shall,
solely by reason of any or
all of such Directors or
Officers acting in their
capacities as such, be
deemed, for any purposes
hereof, to beneficially own
any Common Stock beneficially
owned by any other such
Director or Officer (or any
Affiliate thereof); and (2)
neither any employee stock
ownership or similar plan of
this Corporation or any
subsidiary of this
Corporation, nor any trustee
with respect thereto or any
Affiliate of such trustee
(solely by reason of such
capacity of such trustee),
shall be deemed, for any
purposes hereof, to
beneficially own any Common
Stock held under any such
plan. For purposes only of
computing the percentage of
beneficial ownership of
Common Stock of a person, the
outstanding Common Stock
shall include shares deemed
owned by such person through
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<PAGE> 4
application of this
subsection but shall not
include any other Common
Stock which may be issuable
by this Corporation pursuant
to any agreement, or upon
exercise of conversion
rights, warrants or options,
or otherwise. For all other
purposes, the outstanding
Common Stock shall include
only Common Stock then
outstanding and shall not
include any Common Stock
which may be issuable by this
Corporation pursuant to any
agreement, or upon the
exercise of conversion
rights, warrants or options,
or otherwise.
c. The "Limit" shall mean 10% of the
then-outstanding shares of Common
Stock.
d. A "person" shall include an
individual, a firm, a group acting
in concert, a corporation, a
partnership, an association, a joint
venture, a pool, a joint stock
company, a trust, an unincorporated
organization or similar company, a
syndicate or any other group formed
for the purpose of acquiring,
holding or disposing of securities
or any other entity.
3. The Board of Directors shall have the power
to construe and apply the provisions of this
section and to make all determinations
necessary or desirable to implement such
provisions, including but not limited to
matters with respect to: (i) the number of
shares of Common Stock beneficially owned by
any person; (ii) whether a person is an
affiliate of another; (iii) whether a person
has an agreement, arrangement, or
understanding with another as to the matters
referred to in the definition of beneficial
ownership; (iv) the application of any other
definition or operative provision of the
section to the given facts; or (v) any other
matter relating to the applicability or
effect of this section.
4. The Board of Directors shall have the right
to demand that any person who is reasonably
believed to beneficially own Common Stock in
excess of the Limit (or holds of record
Common Stock beneficially owned by any person
in excess of the Limit) supply the
Corporation with complete information as to:
(i) the record owner(s) of all shares
beneficially owned by such person who is
reasonably believed to own shares in excess
of the Limit; and (ii) any other factual
matter relating to the applicability or
effect of this section as may reasonably be
requested of such person.
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<PAGE> 5
5. Except as otherwise provided by law or
expressly provided in this Section C, the
presence, in person or by proxy, of the
holders of record of shares of capital stock
of the Corporation entitling the holders
thereof to cast a majority of the votes
(after giving effect, if required, to the
provisions of this Section C) entitled to be
cast by the holders of shares of capital
stock of the Corporation entitled to vote
shall constitute a quorum at all meetings of
the stockholders, and every reference in this
Certificate of Incorporation to a majority or
other proportion of capital stock (or the
holders thereof) for purposes of determining
any quorum requirement or any requirement for
stockholder consent or approval shall be
deemed to refer to such majority or other
proportion of the votes (or the holders
thereof) then entitled to be cast in respect
of such capital stock.
6. Any constructions, applications, or
determinations made by the Board of Directors
pursuant to this section in good faith and on
the basis of such information and assistance
as was then reasonably available for such
purpose shall be conclusive and binding upon
the Corporation and its stockholders.
7. In the event any provision (or portion
thereof) of this Section C shall be found to
be invalid, prohibited or unenforceable for
any reason, the remaining provisions (or
portions thereof) of this Section shall
remain in full force and effect, and shall be
construed as if such invalid, prohibited or
unenforceable provision had been stricken
herefrom or otherwise rendered inapplicable,
it being the intent of this Corporation and
its stockholders that each such remaining
provision (or portion thereof) of this
Section C remain, to the fullest extent
permitted by law, applicable and enforceable
as to all stockholders, including
stockholders owning an amount of stock over
the Limit, notwithstanding any such finding.
FIFTH: The following provisions are inserted for the management of
the business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its Directors and stockholders:
A. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors. In
addition to the powers and authority expressly conferred upon them by
statute or by this Certificate of Incorporation or the Bylaws of the
Corporation, the Directors are hereby empowered to exercise all such
powers and do all such acts and things as may be exercised or done by
the Corporation.
5
<PAGE> 6
B. The Directors of the Corporation need not be elected
by written ballot unless the Bylaws so provide.
C. Any action required or permitted to be taken by the
stockholders of the Corporation must be effected at a duly called
annual or special meeting of stockholders of the Corporation and may
not be effected by any consent in writing by such stockholders.
D. Special meetings of stockholders of the Corporation
may be called only by the Board of Directors pursuant to a resolution
adopted by a majority of the Whole Board or as otherwise provided in
the Bylaws. The term "Whole Board" shall mean the total number of
authorized directorships (whether or not there exist any vacancies in
previously authorized directorships at the time any such resolution is
presented to the Board for adoption).
SIXTH:
A. The number of Directors shall be fixed from time to
time exclusively by the Board of Directors pursuant to a resolution
adopted by a majority of the Whole Board. The Directors shall be
divided into three classes, as nearly equal in number as reasonably
possible, with the term of office of the first class to expire at the
first annual meeting of stockholders, the term of office of the second
class to expire at the annual meeting of stockholders one year
thereafter and the term of office of the third class to expire at the
annual meeting of stockholders two years thereafter with each Director
to hold office until his or her successor shall have been duly elected
and qualified. At each annual meeting of stockholders following such
initial classification and election, Directors elected to succeed
those Directors whose terms expire shall be elected for a term of
office to expire at the third succeeding annual meeting of
stockholders after their election with each Director to hold office
until his or her successor shall have been duly elected and qualified.
B. Subject to the rights of holders of any series of
Preferred Stock outstanding, the newly created directorships resulting
from any increase in the authorized number of Directors or any
vacancies in the Board of Directors resulting from death, resignation,
retirement, disqualification, removal from office or other cause may
be filled only by a majority vote of the Directors then in office,
though less than a quorum, and Directors so chosen shall hold office
for a term expiring at the annual meeting of stockholders at which the
term of office of the class to which they have been chosen expires.
No decrease in the number of Directors constituting the Board of
Directors shall shorten the term of any incumbent Director.
C. Advance notice of stockholder nominations for the
election of Directors and of business to be brought by stockholders
before any meeting of the stockholders of the Corporation shall be
given in the manner provided in the Bylaws of the Corporation.
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<PAGE> 7
D. Subject to the rights of holders of any series of
Preferred Stock then outstanding, any Director, or the entire Board of
Directors, may be removed from office at any time, but only for cause
and only by the affirmative vote of the holders of at least 80 percent
of the voting power of all of the then-outstanding shares of capital
stock of the Corporation entitled to vote generally in the election of
Directors (after giving effect to the provisions of Article FOURTH of
this Certificate of Incorporation ("Article FOURTH")), voting together
as a single class.
SEVENTH: The Board of Directors is expressly empowered to
adopt, amend or repeal Bylaws of the Corporation. Any adoption, amendment or
repeal of the Bylaws of the Corporation by the Board of Directors shall require
the approval of a majority of the Whole Board. The stockholders shall also
have power to adopt, amend or repeal the Bylaws of the Corporation; provided,
however, that, in addition to any vote of the holders of any class or series of
stock of this Corporation required by law or by this Certificate of
Incorporation, the affirmative vote of the holders of at least 80 percent of
the voting power of all of the then-outstanding shares of the capital stock of
the Corporation entitled to vote generally in the election of Directors (after
giving effect to the provisions of Article FOURTH), voting together as a single
class, shall be required to adopt, amend or repeal any provisions of the Bylaws
of the Corporation.
EIGHTH:
A. In addition to any affirmative vote required by law
or this Certificate of Incorporation, and except as otherwise
expressly provided in this Article EIGHTH:
1. any merger or consolidation of the
Corporation or any Subsidiary (as hereinafter
defined) with: (i) any Interested Stockholder
(as hereinafter defined); or (ii) any other
corporation (whether or not itself an
Interested Stockholder) which is, or after
such merger or consolidation would be, an
Affiliate (as hereinafter defined) of an
Interested Stockholder; or
2. any sale, lease, exchange, mortgage, pledge,
transfer or other disposition (in one
transaction or a series of transactions) to
or with any Interested Stockholder, or any
Affiliate of any Interested Stockholder, of
any assets of the Corporation or any
Subsidiary having an aggregate Fair Market
Value (as hereinafter defined) equaling or
exceeding 25% or more of the combined assets
of the Corporation and its Subsidiaries; or
3. the issuance or transfer by the Corporation
or any Subsidiary (in one transaction or a
series of transactions) of any securities of
the Corporation or any Subsidiary to any
Interested Stockholder or any Affiliate of
any Interested Stockholder in exchange for
cash,
7
<PAGE> 8
securities or other property (or a
combination thereof) having an aggregate Fair
Market Value (as hereinafter defined)
equaling or exceeding 25% of the combined
Fair Market Value of the outstanding common
stock of the Corporation and its
Subsidiaries, except for any issuance or
transfer pursuant to an employee benefit plan
of the Corporation or any Subsidiary thereof;
or
4. the adoption of any plan or proposal for the
liquidation or dissolution of the Corporation
proposed by or on behalf of an Interested
Stockholder or any Affiliate of any
Interested Stockholder; or
5. any reclassification of securities (including
any reverse stock split), or recapitalization
of the Corporation, or any merger or
consolidation of the Corporation with any of
its Subsidiaries or any other transaction
(whether or not with or into or otherwise
involving an Interested Stockholder) which
has the effect, directly or indirectly, of
increasing the proportionate share of the
outstanding shares of any class of equity or
convertible securities of the Corporation or
any Subsidiary which is directly or
indirectly owned by any Interested
Stockholder or any Affiliate of any
Interested Stockholder;
shall require the affirmative vote of the holders of at least 80% of the voting
power of the then-outstanding shares of stock of the Corporation entitled to
vote in the election of Directors (the "Voting Stock") (after giving effect to
the provisions of Article FOURTH), voting together as a single class. Such
affirmative vote shall be required notwithstanding the fact that no vote may be
required, or that a lesser percentage may be specified, by law or by any other
provisions of this Certificate of Incorporation or any Preferred Stock
Designation in any agreement with any national securities exchange or
otherwise.
The term "Business Combination" as used in this Article EIGHTH shall
mean any transaction which is referred to in any one or more of paragraphs 1
through 5 of Section A of this Article EIGHTH.
B. The provisions of Section A of this Article EIGHTH shall not
be applicable to any particular Business Combination, and such Business
Combination shall require only the affirmative vote of the majority of the
outstanding shares of capital stock entitled to vote after giving effect to the
provisions of Article FOURTH, or such vote (if any), as is required by law or
by this Certificate of Incorporation, if, in the case of any Business
Combination that does not involve any cash or other consideration being
received by the stockholders of the Corporation solely in their capacity as
stockholders of the Corporation, the condition specified in the following
paragraph 1 is met or, in the case of any other Business Combination, all of
the conditions specified in either of the following paragraphs 1 or 2 are met:
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<PAGE> 9
1. The Business Combination shall have been
approved by a majority of the Disinterested
Directors (as hereinafter defined).
2. All of the following conditions shall have
been met:
a. The aggregate amount of the cash and
the Fair Market Value as of the date
of the consummation of the Business
Combination of consideration other
than cash to be received per share
by the holders of Common Stock in
such Business Combination shall at
least be equal to the higher of the
following:
(1) (if applicable) the Highest
Per Share Price (as
hereinafter defined),
including any brokerage
commissions, transfer taxes
and soliciting dealers' fees,
paid by the Interested
Stockholder or any of its
Affiliates for any shares of
Common Stock acquired by it:
(i) within the two-year period
immediately prior to the
first public announcement of
the proposal of the Business
Combination (the
"Announcement Date"); or (ii)
in the transaction in which
it became an Interested
Stockholder, whichever is
higher; or
(2) the Fair Market Value per
share of Common Stock on the
Announcement Date or on the
date on which the Interested
Stockholder became an
Interested Stockholder (such
latter date is referred to in
this Article EIGHTH as the
"Determination Date"),
whichever is higher.
b. The aggregate amount of the cash and
the Fair Market Value as of the date
of the consummation of the Business
Combination of consideration other
than cash to be received per share
by holders of shares of any class of
outstanding Voting Stock other than
Common Stock shall be at least equal
to the highest of the following (it
being intended that the requirements
of this subparagraph (b) shall be
required to be met with respect to
every such class of outstanding
Voting Stock, whether or not the
Interested Stockholder has
previously acquired any shares of a
particular class of Voting Stock):
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<PAGE> 10
(1) (if applicable) the Highest
Per Share Price (as
hereinafter defined),
including any brokerage
commissions, transfer taxes
and soliciting dealers' fees,
paid by the Interested
Stockholder for any shares of
such class of Voting Stock
acquired by it: (i) within
the two-year period
immediately prior to the
Announcement Date; or (ii) in
the transaction in which it
became an Interested
Stockholder, whichever is
higher; or
(2) (if applicable) the highest
preferential amount per share
to which the holders of
shares of such class of
Voting Stock are entitled in
the event of any voluntary or
involuntary liquidation,
dissolution or winding up of
the Corporation; or
(3) the Fair Market Value per
share of such class of Voting
Stock on the Announcement Date
or on the Determination Date,
whichever is higher.
c. The consideration to be received by
holders of a particular class of
outstanding Voting Stock (including
Common Stock) shall be in cash or in
the same form as the Interested
Stockholder has previously paid for
shares of such class of Voting
Stock. If the Interested
Stockholder has paid for shares of
any class of Voting Stock with
varying forms of consideration, the
form of consideration to be received
per share by holders of shares of
such class of Voting Stock shall be
either cash or the form used to
acquire the largest number of shares
of such class of Voting Stock
previously acquired by the
Interested Stockholder. The price
determined in accordance with
subparagraph B.2 of this Article
EIGHTH shall be subject to
appropriate adjustment in the event
of any stock dividend, stock split,
combination of shares or similar
event.
d. After such Interested Stockholder
has become an Interested Stockholder
and prior to the consummation of
such Business Combination: (1)
except as approved by a majority of
the Disinterested Directors (as
hereinafter defined), there shall
have been no failure to declare and
pay at the regular date therefor any
full quarterly dividends (whether or
not cumulative) on any outstanding
stock having preference over
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<PAGE> 11
the Common Stock as to dividends or
liquidation; (2) there shall have
been: (i) no reduction in the
annual rate of dividends paid on the
Common Stock (except as necessary to
reflect any subdivision of the
Common Stock), except as approved by
a majority of the Disinterested
Directors; and (ii) an increase in
such annual rate of dividends as
necessary to reflect any
reclassification (including any
reverse stock split),
recapitalization, reorganization or
any similar transaction which has
the effect of reducing the number of
outstanding shares of the Common
Stock, unless the failure to so
increase such annual rate is
approved by a majority of the
Disinterested Directors, and (3)
neither such Interested Stockholder
or any of its Affiliates shall have
become the beneficial owner of any
additional shares of Voting Stock
except as part of the transaction
which results in such Interested
Stockholder becoming an Interested
Stockholder.
e. After such Interested Stockholder
has become an Interested
Stockholder, such Interested
Stockholder shall not have received
the benefit, directly or indirectly
(except proportionately as a
stockholder), of any loans,
advances, guarantees, pledges or
other financial assistance or any
tax credits or other tax advantages
provided, directly or indirectly, by
the Corporation, whether in
anticipation of or in connection
with such Business Combination or
otherwise.
f. A proxy or information statement
describing the proposed Business
Combination and complying with the
requirements of the Securities
Exchange Act of 1934, as amended,
and the rules and regulations
thereunder (or any subsequent
provisions replacing such Act, and
the rules or regulations thereunder)
shall be mailed to stockholders of
the Corporation at least 30 days
prior to the consummation of such
Business Combination (whether or not
such proxy or information statement
is required to be mailed pursuant to
such Act or subsequent provisions).
C. For the purposes of this Article EIGHTH:
1. A "Person" shall include an individual, a
firm, a group acting in concert, a
corporation, a partnership, an association, a
joint venture, a pool, a joint stock company,
a trust, an unincorporated organization or
similar company, a syndicate or any other
group formed for the
11
<PAGE> 12
purpose of acquiring, holding or disposing of
securities or any other entity.
2. "Interested Stockholder" shall mean any
person (other than the Corporation or any
Holding Company or Subsidiary thereof) who or
which:
a. is the beneficial owner, directly or
indirectly, of more than 10% of the
voting power of the outstanding
Voting Stock; or
b. is an Affiliate of the Corporation
and at any time within the two-year
period immediately prior to the date
in question was the beneficial
owner, directly or indirectly, of
10% or more of the voting power of
the then outstanding Voting Stock;
or
c. is an assignee of or has otherwise
succeeded to any shares of Voting
Stock which were at any time within
the two-year period immediately
prior to the date in question
beneficially owned by any Interested
Stockholder, if such assignment or
succession shall have occurred in
the course of a transaction or
series of transactions not involving
a public offering within the meaning
of the Securities Act of 1933, as
amended.
3. For purposes of this Article EIGHTH,
"beneficial ownership" shall be determined in
the manner provided in Section C of Article
FOURTH hereof.
4. "Affiliate" and "Associate" shall have the
respective meanings ascribed to such terms in
Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act
of 1934, as in effect on the date of filing
of this Certificate of Incorporation.
5. "Subsidiary" means any corporation of which a
majority of any class of equity security is
owned, directly or indirectly, by the
Corporation; provided, however, that for the
purposes of the definition of Interested
Stockholder set forth in Paragraph 2 of this
Section C, the term "Subsidiary" shall mean
only a corporation of which a majority of
each class of equity security is owned,
directly or indirectly, by the Corporation.
6. "Disinterested Director" means any member of
the Board of Directors who is unaffiliated
with the Interested Stockholder and was a
member of the Board of Directors prior to the
time that the Interested
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<PAGE> 13
Stockholder became an Interested Stockholder,
and any Director who is thereafter chosen to
fill any vacancy of the Board of Directors or
who is elected and who, in either event, is
unaffiliated with the Interested Stockholder
and in connection with his or her initial
assumption of office is recommended for
appointment or election by a majority of
Disinterested Directors then on the Board of
Directors.
7. "Fair Market Value" means:
a. in the case of stock, the highest
closing sales price of the stock
during the 30-day period immediately
preceding the date in question of a
share of such stock on the National
Association of Securities Dealers
Automated Quotation System or any
system then in use, or, if such
stock is admitted to trading on a
principal United States securities
exchange registered under the
Securities Exchange Act of 1934, as
amended, Fair Market Value shall be
the highest sale price reported
during the 30-day period preceding
the date in question, or, if no such
quotations are available, the Fair
Market Value on the date in question
of a share of such stock as
determined by the Board of Directors
in good faith, in each case with
respect to any class of stock,
appropriately adjusted for any
dividend or distribution in shares
of such stock or any stock split or
reclassification of outstanding
shares of such stock into a greater
number of shares of such stock or
any combination or reclassification
of outstanding shares of such stock
into a smaller number of shares of
such stock; and
b. in the case of property other than
cash or stock, the Fair Market Value
of such property on the date in
question as determined by the Board
of Directors in good faith.
8. Reference to "Highest Per Share Price" shall
in each case with respect to any class of
stock reflect an appropriate adjustment for
any dividend or distribution in shares of
such stock or any stock split or
reclassification of outstanding shares of
such stock into a greater number of shares of
such stock or any combination or
reclassification of outstanding shares of
such stock into a smaller number of shares of
such stock.
9. In the event of any Business Combination in
which the Corporation survives, the phrase
"consideration other than cash to be
received" as used in Subparagraphs (a) and
(b) of Paragraph 2 of Section B of this
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<PAGE> 14
Article EIGHTH shall include the shares of
Common Stock and/or the shares of any other
class of outstanding Voting Stock retained by
the holders of such shares.
D. A majority of the Disinterested Directors of the
Corporation shall have the power and duty to determine for the
purposes of this Article EIGHTH, on the basis of information known to
them after reasonable inquiry: (a) whether a person is an Interested
Stockholder; (b) the number of shares of Voting Stock beneficially
owned by any person; (c) whether a person is an Affiliate or Associate
of another; and (d) whether the assets which are the subject of any
Business Combination have, or the consideration to be received for the
issuance or transfer of securities by the Corporation or any
Subsidiary in any Business Combination has an aggregate Fair Market
Value equaling or exceeding 25% of the combined Fair Market Value of
the Common Stock of the Corporation and its Subsidiaries. A majority
of the Disinterested Directors shall have the further power to
interpret all of the terms and provisions of this Article EIGHTH.
E. Nothing contained in this Article EIGHTH shall be
construed to relieve any Interested Stockholder from any fiduciary
obligation imposed by law.
F. Notwithstanding any other provisions of this
Certificate of Incorporation or any provision of law which might
otherwise permit a lesser vote or no vote, but in addition to any
affirmative vote of the holders of any particular class or series of
the Voting Stock required by law, this Certificate of Incorporation or
any Preferred Stock Designation, the affirmative vote of the holders
of at least 80 percent of the voting power of all of the
then-outstanding shares of the Voting Stock (after giving effect to
the provisions of Article FOURTH), voting together as a single class,
shall be required to alter, amend or repeal this Article EIGHTH.
NINTH: The Board of Directors of the Corporation, when evaluating any
offer of another Person (as defined in Article EIGHTH hereof) to: (A) make a
tender or exchange offer for any equity security of the Corporation; (B) merge
or consolidate the Corporation with another corporation or entity; or (C)
purchase or otherwise acquire all or substantially all of the properties and
assets of the Corporation, may, in connection with the exercise of its judgment
in determining what is in the best interest of the Corporation and its
stockholders, give due consideration to all relevant factors, including,
without limitation, those factors that Directors of any subsidiary of the
Corporation may consider in evaluating any action that may result in a change
or potential change in the control of the subsidiary, and the social and
economic effect of acceptance of such offer: on the Corporation's present and
future customers and employees and those of its Subsidiaries (as defined in
Article EIGHTH hereof); on the communities in which the Corporation and its
Subsidiaries operate or are located; on the ability of the Corporation to
fulfill its corporate objective as a savings and loan holding company under
applicable laws and regulations; and on the ability of its subsidiary savings
bank to fulfill the objectives of a stock form savings bank under applicable
statutes and regulations.
14
<PAGE> 15
TENTH:
A. Each person who was or is made a party or is
threatened to be made a party to or is otherwise involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that
he or she is or was a Director or an Officer of the Corporation or is
or was serving at the request of the Corporation as a Director,
Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with
respect to an employee benefit plan (hereinafter an "indemnitee"),
whether the basis of such proceeding is alleged action in an official
capacity as a Director, Officer, employee or agent or in any other
capacity while serving as a Director, Officer, employee or agent,
shall be indemnified and held harmless by the Corporation to the
fullest extent authorized by the Delaware General Corporation Law, as
the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than such law
permitted the Corporation to provide prior to such amendment), against
all expense, liability and loss (including attorneys' fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid in settlement)
reasonably incurred or suffered by such indemnitee in connection
therewith; provided, however, that, except as provided in Section C
hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee
in connection with a proceeding (or part thereof) initiated by such
indemnitee only if such proceeding (or part thereof) was authorized by
the Board of Directors of the Corporation.
B. The right to indemnification conferred in Section A
of this Article TENTH shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition (hereinafter an "advancement of
expenses"); provided, however, that, if the Delaware General
Corporation Law requires, an advancement of expenses incurred by an
indemnitee in his or her capacity as a Director or Officer (and not in
any other capacity in which service was or is rendered by such
indemnitee, including, without limitation, services to an employee
benefit plan) shall be made only upon delivery to the Corporation of
an undertaking (hereinafter an "undertaking"), by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further
right to appeal (hereinafter a "final adjudication") that such
indemnitee is not entitled to be indemnified for such expenses under
this Section or otherwise. The rights to indemnification and to the
advancement of expenses conferred in Sections A and B of this Article
TENTH shall be contract rights and such rights shall continue as to an
indemnitee who has ceased to be a Director, Officer, employee or agent
and shall inure to the benefit of the indemnitee's heirs, executors
and administrators.
C. If a claim under Section A or B of this Article TENTH
is not paid in full by the Corporation within sixty days after a
written claim has been received by the Corporation, except in the case
of a claim for an advancement of expenses, in which case the
applicable
15
<PAGE> 16
period shall be twenty days, the indemnitee may at any time thereafter
bring suit against the Corporation to recover the unpaid amount of the
claim. If successful in whole or in part in any such suit, or in a
suit brought by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expenses of prosecuting or defending such
suit. In (i) any suit brought by the indemnitee to enforce a right to
indemnification hereunder (but not in a suit brought by the indemnitee
to enforce a right to an advancement of expenses) it shall be a
defense that, and (ii) in any suit by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking the
Corporation shall be entitled to recover such expenses upon a final
adjudication that, the indemnitee has not met any applicable standard
for indemnification set forth in the Delaware General Corporation Law.
Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have
made a determination prior to the commencement of such suit that
indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set
forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) that the indemnitee
has not met such applicable standard of conduct, shall create a
presumption that the indemnitee has not met the applicable standard of
conduct or, in the case of such a suit brought by the indemnitee, be a
defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses
hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that
the indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Article TENTH or otherwise shall
be on the Corporation.
D. The rights to indemnification and to the advancement
of expenses conferred in this Article TENTH shall not be exclusive of
any other right which any person may have or hereafter acquire under
any statute, the Corporation's Certificate of Incorporation, Bylaws,
agreement, vote of stockholders or Disinterested Directors or
otherwise.
E. The Corporation may maintain insurance, at its
expense, to protect itself and any Director, Officer, employee or
agent of the Corporation or subsidiary or Affiliate or another
corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation
would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from
time to time by the Board of Directors, grant rights to
indemnification and to the advancement of expenses to any employee or
agent of the Corporation to the fullest extent of the provisions of
this Article TENTH with respect to the indemnification and advancement
of expenses of Directors and Officers of the Corporation.
16
<PAGE> 17
ELEVENTH: A Director of this Corporation shall not be
personally liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a Director, except for liability: (i) for any
breach of the Director's duty of loyalty to the Corporation or its
stockholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) under Section 174
of the Delaware General Corporation Law; or (iv) for any transaction from which
the Director derived an improper personal benefit. If the Delaware General
Corporation Law is amended to authorize corporate action further eliminating or
limiting the personal liability of Directors, then the liability of a Director
of the Corporation shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a Director of the Corporation existing at the time of such repeal
or modification.
TWELFTH: The Corporation reserves the right to amend or
repeal any provision contained in this Certificate of Incorporation in the
manner prescribed by the laws of the State of Delaware and all rights conferred
upon stockholders are granted subject to this reservation; provided, however,
that, notwithstanding any other provision of this Certificate of Incorporation
or any provision of law which might otherwise permit a lesser vote or no vote,
but in addition to any vote of the holders of any class or series of the stock
of this Corporation required by law or by this Certificate of Incorporation,
the affirmative vote of the holders of at least 80 percent of the voting power
of all of the then-outstanding shares of the capital stock of the Corporation
entitled to vote generally in the election of Directors (after giving effect to
the provisions of Article FOURTH), voting together as a single class, shall be
required to amend or repeal this Article TWELFTH, Section C of Article FOURTH,
Sections C or D of Article FIFTH, Article SIXTH, Article SEVENTH, Article
EIGHTH or Article TENTH.
THIRTEENTH: The name and mailing address of the sole
incorporator are as follows:
<TABLE>
<S> <C>
Name Mailing Address
---- --------------------------------
Siobain Perkins Morris, Nichols, Arsht & Tunnell
1201 North Market Street
P.O. Box 1347
Wilmington, Delaware 19899-1347
</TABLE>
17
<PAGE> 18
I, THE UNDERSIGNED, being the incorporator, for the purpose of forming
a corporation under the laws of the State of Delaware, do make, file and record
this Certificate of Incorporation and do certify that the facts herein stated
are true, and accordingly, have hereto set my hand this ___ day of __________,
1997.
----------------------------------
Siobain Perkins
Incorporator
18
<PAGE> 1
EXHIBIT 3.2
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
BYLAWS
ARTICLE I - STOCKHOLDERS
Section 1. Annual Meeting.
An annual meeting of the stockholders, for the election of Directors
to succeed those whose terms expire and for the transaction of such other
business as may properly come before the meeting, shall be held at such place,
on such date, and at such time as the Board of Directors shall each year fix,
which date shall be within thirteen (13) months subsequent to the later of the
date of incorporation or the last annual meeting of stockholders.
Section 2. Special Meetings.
Subject to the rights of the holders of any class or series of
preferred stock of the Corporation, special meetings of stockholders of the
Corporation may be called only by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of Directors which the
Corporation would have if there were no vacancies on the Board of Directors
(hereinafter the "Whole Board").
Section 3. Notice of Meetings.
Written notice of the place, date, and time of all meetings of the
stockholders shall be given, not less than ten (10) nor more than sixty (60)
days before the date on which the meeting is to be held, to each stockholder
entitled to vote at such meeting, except as otherwise provided herein or
required by law (meaning, here and hereinafter, as required from time to time
by the Delaware General Corporation Law or the Certificate of Incorporation of
the Corporation).
When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date and time
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that if the date of any adjourned meeting is more than
thirty (30) days after the date for which the meeting was originally noticed,
or if a new record date is fixed for the adjourned meeting, written notice of
the place, date, and time of the adjourned meeting shall be given in conformity
herewith. At any adjourned meeting, any business may be transacted which might
have been transacted at the original meeting.
Section 4. Quorum.
At any meeting of the stockholders, the holders of a majority of all
of the shares of the stock entitled to vote at the meeting, present in person
or by proxy (after giving effect to the provisions of Article FOURTH of the
Corporation's Certificate of Incorporation), shall constitute a quorum for
<PAGE> 2
all purposes, unless or except to the extent that the presence of a larger
number may be required by law. Where a separate vote by a class or classes is
required, a majority of the shares of such class or classes present in person
or represented by proxy (after giving effect to the provisions of Article
FOURTH of the Corporation's Certificate of Incorporation) shall constitute a
quorum entitled to take action with respect to that vote on that matter.
If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares of stock entitled to vote
who are present, in person or by proxy, may adjourn the meeting to another
place, date, or time.
If a notice of any adjourned special meeting of stockholders is sent
to all stockholders entitled to vote thereat, stating that it will be held with
those present in person or by proxy constituting a quorum, then except as
otherwise required by law, those present in person or by proxy at such
adjourned meeting shall constitute a quorum, and all matters shall be
determined by a majority of the votes cast at such meeting.
Section 5. Organization.
Such person as the Board of Directors may have designated or, in the
absence of such a person, the Chairman of the Board of the Corporation or, in
his or her absence, such person as may be chosen by the holders of a majority
of the shares entitled to vote who are present, in person or by proxy, shall
call to order any meeting of the stockholders and act as chairman of the
meeting. In the absence of the Secretary of the Corporation, the secretary of
the meeting shall be such person as the chairman appoints.
Section 6. Conduct of Business.
(a) The chairman of any meeting of stockholders shall
determine the order of business and the procedures at the meeting, including
such regulation of the manner of voting and the conduct of discussion as seem
to him or her in order. The date and time of the opening and closing of the
polls for each matter upon which the stockholders will vote at the meeting
shall be announced at the meeting.
(b) At any annual meeting of the stockholders, only such
business shall be conducted as shall have been brought before the meeting: (i)
by or at the direction of the Board of Directors or (ii) by any stockholder of
the Corporation who is entitled to vote with respect thereto and who complies
with the notice procedures set forth in this Section 6(b). For business to be
properly brought before an annual meeting by a stockholder, the business must
relate to a proper subject matter for stockholder action and the stockholder
must have given timely notice thereof in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice must be delivered or mailed
to and received at the principal executive offices of the Corporation not less
than ninety (90) days prior to the date of the annual meeting; provided,
however, that in the event that less than one
2
<PAGE> 3
hundred (100) days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholder to be
timely must be received not later than the close of business on the 10th day
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure was made. A stockholder's notice to the
Secretary shall set forth as to each matter such stockholder proposes to bring
before the annual meeting: (i) a brief description of the business desired to
be brought before the annual meeting and the reasons for conducting such
business at the annual meeting; (ii) the name and address, as they appear on
the Corporation's books, of the stockholder proposing such business; (iii) the
class and number of shares of the Corporation's capital stock that are
beneficially owned by such stockholder; and (iv) any material interest of such
stockholder in such business. Notwithstanding anything in these Bylaws to the
contrary, no business shall be brought before or conducted at an annual meeting
except in accordance with the provisions of this Section 6(b). The Officer of
the Corporation or other person presiding over the annual meeting shall, if the
facts so warrant, determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the provisions of this
Section 6(b) and, if he should so determine, he shall so declare to the meeting
and any such business so determined to be not properly brought before the
meeting shall not be transacted.
At any special meeting of the stockholders, only such business shall
be conducted as shall have been brought before the meeting by or at the
direction of the Board of Directors.
(c) Only persons who are nominated in accordance with the
procedures set forth in these Bylaws shall be eligible for election as
Directors. Nominations of persons for election to the Board of Directors of
the Corporation may be made at a meeting of stockholders at which directors are
to be elected only: (i) by or at the direction of the Board of Directors; or
(ii) by any stockholder of the Corporation entitled to vote for the election of
Directors at the meeting who complies with the notice procedures set forth in
this Section 6(c). Such nominations, other than those made by or at the
direction of the Board of Directors, shall be made by timely notice in writing
to the Secretary of the Corporation. To be timely, a stockholder's notice
shall be delivered or mailed to and received at the principal executive offices
of the Corporation not less than ninety (90) days prior to the date of the
meeting; provided, however, that in the event that less than one hundred (100)
days' notice or prior disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the 10th day following the day on which
such notice of the date of the meeting was mailed or such public disclosure was
made. Such stockholder's notice shall set forth: (i) as to each person whom
such stockholder proposes to nominate for election or re-election as a
Director, all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is
otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); and (ii) as to the stockholder giving the notice (x) the
name and address, as they appear on the Corporation's books, of such
stockholder and (y) the class and number of shares of the Corporation's capital
stock that are beneficially owned by such stockholder. At the request of the
Board of Directors, any person nominated by the Board of Directors for election
as a Director shall furnish to the Secretary of the Corporation that
information required to be set forth
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<PAGE> 4
in a stockholder's notice of nomination which pertains to the nominee. No
person shall be eligible for election as a Director of the Corporation unless
nominated in accordance with the provisions of this Section 6(c). The Officer
of the Corporation or other person presiding at the meeting shall, if the facts
so warrant, determine that a nomination was not made in accordance with such
provisions and, if he or she shall so determine, he or she shall so declare to
the meeting and the defective nomination shall be disregarded.
Section 7. Proxies and Voting.
At any meeting of the stockholders, every stockholder entitled to vote
may vote in person or by proxy authorized by an instrument in writing filed in
accordance with the procedure established for the meeting. Any facsimile
telecommunication or other reliable reproduction of the writing or transmission
created pursuant to this paragraph may be substituted or used in lieu of the
original writing or transmission for any and all purposes for which the
original writing or transmission could be used, provided that such copy,
facsimile telecommunication or other reproduction shall be a complete
reproduction of the entire original writing or transmission.
All voting, including on the election of Directors but excepting where
otherwise required by law or by the governing documents of the Corporation, may
be made by a voice vote; provided, however, that upon demand therefor by a
stockholder entitled to vote or his or her proxy, a stock vote shall be taken.
Every stock vote shall be taken by ballot, each of which shall state the name
of the stockholder or proxy voting and such other information as may be
required under the procedures established for the meeting. The Corporation
shall, in advance of any meeting of stockholders, appoint one or more
inspectors to act at the meeting and make a written report thereof. The
Corporation may designate one or more persons as alternate inspectors to
replace any inspector who fails to act. If no inspector or alternate is able
to act at a meeting of stockholders, the person presiding at the meeting shall
appoint one or more inspectors to act at the meeting. Each inspector, before
entering upon the discharge of his duties, shall take and sign an oath
faithfully to execute the duties of inspector with strict impartiality and
according to the best of his ability.
All elections shall be determined by a plurality of the votes cast,
and except as otherwise required by law or the Certificate of Incorporation,
all other matters shall be determined by a majority of the votes cast.
Section 8. Stock List.
A complete list of stockholders entitled to vote at any meeting of
stockholders, arranged in alphabetical order for each class of stock and
showing the address of each such stockholder and the number of shares
registered in his or her name, shall be open to the examination of any such
stockholder, for any purpose germane to the meeting, during ordinary business
hours for a period of at least ten (10) days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or if not so specified, at the place
where the meeting is to be held.
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<PAGE> 5
The stock list shall also be kept at the place of the meeting during
the whole time thereof and shall be open to the examination of any such
stockholder who is present. This list shall presumptively determine the
identity of the stockholders entitled to vote at the meeting and the number of
shares held by each of them.
Section 9. Consent of Stockholders in Lieu of Meeting.
Subject to the rights of the holders of any class or series of
preferred stock of the Corporation, any action required or permitted to be
taken by the stockholders of the Corporation must be effected at an annual or
special meeting of stockholders of the Corporation and may not be effected by
any consent in writing by such stockholders.
ARTICLE II - BOARD OF DIRECTORS
Section 1. General Powers, Number, Term of Office and
Limitations.
The business and affairs of the Corporation shall be under the
direction of its Board of Directors. The number of Directors who shall
constitute the Whole Board shall be such number as the Board of Directors shall
from time to time have designated, except that in the absence of such
designation shall be nine. The Board of Directors shall annually elect a
Chairman of the Board from among its members who shall, when present, preside
at its meetings.
The Directors, other than those who may be elected by the holders of
any class or series of Preferred Stock, shall be divided, with respect to the
time for which they severally hold office, into three classes, with the term of
office of the first class to expire at the first annual meeting of
stockholders, the term of office of the second class to expire at the annual
meeting of stockholders one year thereafter and the term of office of the third
class to expire at the annual meeting of stockholders two years thereafter,
with each Director to hold office until his or her successor shall have been
duly elected and qualified. At each annual meeting of stockholders, Directors
elected to succeed those Directors whose terms then expire shall be elected for
a term of office to expire at the third succeeding annual meeting of
stockholders after their election, with each Director to hold office until his
or her successor shall have been duly elected and qualified.
Section 2. Vacancies and Newly Created Directorships.
Subject to the rights of the holders of any class or series of
Preferred Stock, and unless the Board of Directors otherwise determines, newly
created directorships resulting from any increase in the authorized number of
directors or any vacancies in the Board of Directors resulting from death,
resignation, retirement, disqualification, removal from office or other cause
may be filled only by a majority vote of the Directors then in office, though
less than a quorum, and Directors so chosen shall hold office for a term
expiring at the annual meeting of stockholders at which the term of office of
the class to which they have been elected expires and until such Director's
successor shall have
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<PAGE> 6
been duly elected and qualified. No decrease in the number of authorized
directors constituting the Board shall shorten the term of any incumbent
Director.
Section 3. Regular Meetings.
Regular meetings of the Board of Directors shall be held at such place
or places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all Directors. A
notice of each regular meeting shall not be required.
Section 4. Special Meetings.
Special meetings of the Board of Directors may be called by one-third
(1/3) of the Directors then in office (rounded up to the nearest whole number),
by the Chairman of the Board or the President or, in the event that the
Chairman of the Board or President are incapacitated or otherwise unable to
call such meeting, by the Secretary, and shall be held at such place, on such
date, and at such time as they, or he or she, shall fix. Notice of the place,
date, and time of each such special meeting shall be given each Director by
whom it is not waived by mailing written notice not less than five (5) days
before the meeting or by telegraphing or telexing or by facsimile transmission
of the same not less than twenty-four (24) hours before the meeting. Unless
otherwise indicated in the notice thereof, any and all business may be
transacted at a special meeting.
Section 5. Quorum.
At any meeting of the Board of Directors, a majority of the Whole
Board shall constitute a quorum for all purposes. If a quorum shall fail to
attend any meeting, a majority of those present may adjourn the meeting to
another place, date, or time, without further notice or waiver thereof.
Section 6. Participation in Meetings By Conference Telephone.
Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and such participation shall
constitute presence in person at such meeting.
Section 7. Conduct of Business.
At any meeting of the Board of Directors, business shall be transacted
in such order and manner as the Board may from time to time determine, and all
matters shall be determined by the vote of a majority of the Directors present,
except as otherwise provided herein or required by law. Action may be taken by
the Board of Directors without a meeting if all members thereof consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors.
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Section 8. Powers.
The Board of Directors may, except as otherwise required by law,
exercise all such powers and do all such acts and things as may be exercised or
done by the Corporation, including, without limiting the generality of the
foregoing, the unqualified power:
(1) To declare dividends from time to time in accordance
with law;
(2) To purchase or otherwise acquire any property, rights
or privileges on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in
such form as it may determine, of written obligations of every kind,
negotiable or non-negotiable, secured or unsecured, and to do all
things necessary in connection therewith;
(4) To remove any Officer of the Corporation with or
without cause, and from time to time to devolve the powers and duties
of any Officer upon any other person for the time being;
(5) To confer upon any Officer of the Corporation the
power to appoint, remove and suspend subordinate Officers, employees
and agents;
(6) To adopt from time to time such stock, option, stock
purchase, bonus or other compensation plans for Directors, Officers,
employees and agents of the Corporation and its subsidiaries as it may
determine;
(7) To adopt from time to time such insurance,
retirement, and other benefit plans for Directors, Officers, employees
and agents of the Corporation and its subsidiaries as it may
determine;
(8) To adopt from time to time regulations, not
inconsistent with these Bylaws, for the management of the
Corporation's business and affairs; and
(9) To fix the Compensation of officers and employees of
the Corporation and its subsidiaries as it may determine.
Section 9. Compensation of Directors.
Directors, as such, may receive, pursuant to resolution of the Board
of Directors, fixed fees and other compensation for their services as
Directors, including, without limitation, their services as members of
committees of the Board of Directors.
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<PAGE> 8
ARTICLE III - COMMITTEES
Section 1. Committees of the Board of Directors.
The Board of Directors, by a vote of a majority of the Board of
Directors, may from time to time designate committees of the Board, with such
lawfully delegable powers and duties as it thereby confers, to serve at the
pleasure of the Board and shall, for these committees and any others provided
for herein, elect a Director or Directors to serve as the member or members,
designating, if it desires, other Directors as alternate members who may
replace any absent or disqualified member at any meeting of the committee. Any
committee so designated may exercise the power and authority of the Board of
Directors to declare a dividend, to authorize the issuance of stock or to adopt
a certificate of ownership and merger pursuant to Section 253 of the Delaware
General Corporation Law if the resolution which designates the committee or a
supplemental resolution of the Board of Directors shall so provide. In the
absence or disqualification of any member of any committee and any alternate
member in his or her place, the member or members of the committee present at
the meeting and not disqualified from voting, whether or not he or she or they
constitute a quorum, may by unanimous vote appoint another member of the Board
of Directors to act at the meeting in the place of the absent or disqualified
member.
Section 2. Conduct of Business.
Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings. The quorum requirements for each such
committee shall be a majority of the members of such committee unless otherwise
determined by the Board of Directors by a majority vote of the Board of
Directors which such quorum determined by a majority of the Board may be
one-third of such members and all matters considered by such committees shall
be determined by a majority vote of the members present. Action may be taken
by any committee without a meeting if all members thereof consent thereto in
writing, and the writing or writings are filed with the minutes of the
proceedings of such committee.
Section 3. Nominating Committee.
The Board of Directors shall appoint a Nominating Committee of the
Board, consisting of not less than three (3) members. The Nominating Committee
shall have authority: (a) to review any nominations for election to the Board
of Directors made by a stockholder of the Corporation pursuant to Section
6(c)(ii) of Article I of these Bylaws in order to determine compliance with
such Bylaw; and (b) to recommend to the Whole Board nominees for election to
the Board of Directors to replace those Directors whose terms expire at the
annual meeting of stockholders next ensuing.
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<PAGE> 9
ARTICLE IV - OFFICERS
Section 1. Generally.
(a) The Board of Directors as soon as may be practicable
after the annual meeting of stockholders shall choose a Chairman of the Board,
Chief Executive Officer, a President, one or more Vice Presidents, a Secretary
and a Treasurer and from time to time may choose such other officers as it may
deem proper. The Chairman of the Board shall be chosen from among the
Directors. Any number of offices may be held by the same person.
(b) The term of office of all Officers shall be until the
next annual election of Officers and until their respective successors are
chosen but any Officer may be removed from office at any time by the
affirmative vote of a majority of the authorized number of Directors then
constituting the Board of Directors.
(c) All Officers chosen by the Board of Directors shall
have such powers and duties as generally pertain to their respective Offices,
subject to the specific provisions of this ARTICLE IV. Such officers shall
also have such powers and duties as from time to time may be conferred by the
Board of Directors or by any committee thereof.
Section 2. Chairman of the Board of Directors.
The Chairman of the Board, subject to the provisions of these Bylaws
and to the direction of the Board of Directors, when present shall preside at
all meetings of the stockholders of the Corporation. The Chairman of the Board
shall perform such duties designated to him by the Board of Directors and which
are delegated to him or her by the Board of Directors by resolution of the
Board of Directors.
Section 3. President and Chief Executive Officer.
The President and Chief Executive Officer shall have general
responsibility for the management and control of the business and affairs of
the Corporation and shall perform all duties and have all powers which are
commonly incident to the office of President and Chief Executive Officer or
which are delegated to him or her by the Board of Directors. Subject to the
direction of the Board of Directors, the President and Chief Executive Officer
shall have power to sign all stock certificates, contracts and other
instruments of the Corporation which are authorized and shall have general
supervision of all of the other Officers (other than the Chairman of the
Board), employees and agents of the Corporation.
Section 4. Vice President.
The Vice President or Vice Presidents shall perform the duties of the
President in his absence or during his inability to act. In addition, the Vice
Presidents shall perform the duties and exercise
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<PAGE> 10
the powers usually incident to their respective offices and/or such other
duties and powers as may be properly assigned to them by the Board of
Directors, the Chairman of the Board or the President. A Vice President or
Vice Presidents may be designated as Executive Vice President or Senior Vice
President.
Section 5. Secretary.
The Secretary or Assistant Secretary shall issue notices of meetings,
shall keep their minutes, shall have charge of the seal and the corporate
books, shall perform such other duties and exercise such other powers as are
usually incident to such office and/or such other duties and powers as are
properly assigned thereto by the Board of Directors, the Chairman of the Board
or the President. Subject to the direction of the Board of Directors, the
Secretary shall have the power to sign all stock certificates.
Section 6. Treasurer.
The Treasurer shall be the Comptroller of the Corporation and shall
have the responsibility for maintaining the financial records of the
Corporation. He or she shall make such disbursements of the funds of the
Corporation as are authorized and shall render from time to time an account of
all such transactions and of the financial condition of the Corporation. The
Treasurer shall also perform such other duties as the Board of Directors may
from time to time prescribe. Subject to the direction of the Board of
Directors, the Treasurer shall have the power to sign all stock certificates.
Section 7. Assistant Secretaries and Other Officers.
The Board of Directors may appoint one or more Assistant Secretaries
and such other Officers who shall have such powers and shall perform such
duties as are provided in these Bylaws or as may be assigned to them by the
Board of Directors, the Chairman of the Board or the President.
Section 8. Action with Respect to Securities of Other
Corporations.
Unless otherwise directed by the Board of Directors, the President or
any Officer of the Corporation authorized by the President shall have power to
vote and otherwise act on behalf of the Corporation, in person or by proxy, at
any meeting of stockholders of or with respect to any action of stockholders of
any other corporation in which this Corporation may hold securities and
otherwise to exercise any and all rights and powers which this Corporation may
possess by reason of its ownership of securities in such other corporation.
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ARTICLE V - STOCK
Section 1. Certificates of Stock.
Each stockholder shall be entitled to a certificate signed by, or in
the name of the Corporation by, the Chairman of the Board or the President, and
by the Secretary or an Assistant Secretary, or any Treasurer or Assistant
Treasurer, certifying the number of shares owned by him or her. Any or all of
the signatures on the certificate may be by facsimile.
Section 2. Transfers of Stock.
Transfers of stock shall be made only upon the transfer books of the
Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 4 of Article V of these
Bylaws, an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefor.
Section 3. Record Date.
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders, or to receive payment
of any dividend or other distribution or allotment of any rights or to exercise
any rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date on which the resolution
fixing the record date is adopted and which record date shall not be more than
sixty (60) nor less than ten (10) days before the date of any meeting of
stockholders, nor more than sixty (60) days prior to the time for such other
action as hereinbefore described; provided, however, that if no record date is
fixed by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given
or, if notice is waived, at the close of business on the next day preceding the
day on which the meeting is held, and, for determining stockholders entitled to
receive payment of any dividend or other distribution or allotment or rights or
to exercise any rights of change, conversion or exchange of stock or for any
other purpose, the record date shall be at the close of business on the day on
which the Board of Directors adopts a resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
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Section 4. Lost, Stolen or Destroyed Certificates.
In the event of the loss, theft or destruction of any certificate of
stock, another may be issued in its place pursuant to such regulations as the
Board of Directors may establish concerning proof of such loss, theft or
destruction and concerning the giving of a satisfactory bond or bonds of
indemnity.
Section 5. Regulations.
The issue, transfer, conversion and registration of certificates of
stock shall be governed by such other regulations as the Board of Directors may
establish.
ARTICLE VI - NOTICES
Section 1. Notices.
Except as otherwise specifically provided herein or required by law,
all notices required to be given to any stockholder, Director, Officer,
employee or agent shall be in writing and may in every instance be effectively
given by hand delivery to the recipient thereof, by depositing such notice in
the mails, postage paid, or by sending such notice by prepaid telegram or
mailgram or other courier. Any such notice shall be addressed to such
stockholder, Director, Officer, employee or agent at his or her last known
address as the same appears on the books of the Corporation. The time when
such notice is received, if hand delivered, or dispatched, if delivered through
the mails or by telegram or mailgram or other courier, shall be the time of the
giving of the notice.
Section 2. Waivers.
A written waiver of any notice, signed by a stockholder, Director,
Officer, employee or agent, whether before or after the time of the event for
which notice is to be given, shall be deemed equivalent to the notice required
to be given to such stockholder, Director, Officer, employee or agent. Neither
the business nor the purpose of any meeting need be specified in such a waiver.
ARTICLE VII - MISCELLANEOUS
Section 1. Facsimile Signatures.
In addition to the provisions for use of facsimile signatures
elsewhere specifically authorized in these Bylaws, facsimile signatures of any
officer or officers of the Corporation may be used whenever and as authorized
by the Board of Directors or a committee thereof.
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Section 2. Corporate Seal.
The Board of Directors may provide a suitable seal, containing the
name of the Corporation, which seal shall be in the charge of the Secretary.
If and when so directed by the Board of Directors or a committee thereof,
duplicates of the seal may be kept and used by the Treasurer or by an Assistant
Secretary or an assistant to the Treasurer.
Section 3. Reliance Upon Books, Reports and Records.
Each Director, each member of any committee designated by the Board of
Directors, and each Officer of the Corporation shall, in the performance of his
or her duties, be fully protected in relying in good faith upon the books of
account or other records of the Corporation and upon such information,
opinions, reports or statements presented to the Corporation by any of its
Officers or employees, or committees of the Board of Directors so designated,
or by any other person as to matters which such Director or committee member
reasonably believes are within such other person's professional or expert
competence and who has been selected with reasonable care by or on behalf of
the Corporation.
Section 4. Fiscal Year.
The fiscal year of the Corporation shall be as fixed by the Board of
Directors.
Section 5. Time Periods.
In applying any provision of these Bylaws which requires that an act
be done or not be done a specified number of days prior to an event or that an
act be done during a period of a specified number of days prior to an event,
calendar days shall be used, the day of the doing of the act shall be excluded,
and the day of the event shall be included.
ARTICLE VIII - AMENDMENTS
The Board of Directors may amend, alter or repeal these Bylaws at any
meeting of the Board, provided notice of the proposed change was given not less
than two (2) days prior to the meeting. The stockholders shall also have power
to amend, alter or repeal these Bylaws at any meeting of stockholders provided
notice of the proposed change was given in the notice of the meeting; provided,
however, that, notwithstanding any other provisions of the Bylaws or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any affirmative vote of the holders of any particular class or
series of the voting stock required by law, the Certificate of Incorporation,
any Preferred Stock Designation or these Bylaws, the affirmative votes of the
holders of at least 80% of the voting power of all the then-outstanding shares
of the Voting Stock, voting together as a single class, shall be required to
alter, amend or repeal any provisions of these Bylaws.
The above Bylaws are effective as of December 16 1997, the date of
incorporation of Northeast Pennsylvania Financial Corp.
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<PAGE> 1
EXHIBIT 4.0
COMMON STOCK
COMMON STOCK SEE REVERSE FOR CERTAIN DEFINITIONS
PAR VALUE $.01 CUSIP
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT
S P E C I M E N
is the owner of:
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK $.01 PAR VALUE PER SHARE OF
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
The shares represented by this certificate are transferable only on the stock
transfer books of the Corporation by the holder of record hereof, or by his
duly authorized attorney or legal representative, upon the surrender of this
certificate properly endorsed. This certificate and the shares represented
hereby are issued and shall be held subject to all the provisions of the
Certificate of Incorporation of the Corporation and any amendments thereto
(copies of which are on file with the Transfer Agent), to all of which
provisions the holder by acceptance hereof, assents.
This certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar. The shares represented by this Certificate
are not insured by the Federal Deposit Insurance Corporation or any other
government agency.
IN WITNESS THEREOF, Northeast Pennsylvania Financial Corp.
has caused this certificate to be executed by the facsimile signatures of its
duly authorized officers and has caused a facsimile of its corporate seal to be
hereunto affixed.
Dated: [SEAL]
President Secretary
<PAGE> 2
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
The shares represented by this certificate are subject to a
limitation contained in the Certificate of Incorporation to the effect that in
no event shall any record owner of any outstanding common stock which is
beneficially owned, directly or indirectly, by a person who beneficially owns
in excess of 10% of the outstanding shares of common stock (the "Limit") be
entitled or permitted to any vote in respect of shares held in excess of the
Limit.
The Board of Directors of the Corporation is authorized by
resolution(s), from time to time adopted, to provide for the issuance of serial
preferred stock in series and to fix and state the voting powers, designations,
preferences and relative, participating, optional, or other special rights of
the shares of each such series and the qualifications, limitations and
restrictions thereof. The Corporation will furnish to any shareholder upon
request and without charge a full description of each class of stock and any
series thereof.
The shares represented by this certificate may not be cumulatively
voted on any matter. The affirmative vote of the holders of at least 80% of
the voting stock of the Corporation, voting together as a single class, shall
be required to approve certain business combinations and other transactions,
pursuant to the Certificate of Incorporation or to amend certain provisions of
the Certificate of Incorporation.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFTS MIN ACT - __________ custodian __________
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors Act
--------------------
(State)
JT TEN - as joint tenants with right
of survivorship and not as
tenants in common
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, __________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFICATION NUMBER OF ASSIGNEE
- --------------------------------------------------------------------------------
Please print or typewrite name and address including postal zip code of assignee
_______________________________________________ shares of the common stock
represented by the within Certificate, and do hereby irrevocably constitute and
appoint _______________________________________________________________________
_____ Attorney to transfer the said stock on the books of the within-named
Corporation with full power of substitution in the premises.
DATED
---------------- -----------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR
WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER.
SIGNATURE GUARANTEED:
---------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15
<PAGE> 1
Exhibit 5.0
______________, 1998
Board of Directors
Northeast Pennsylvania Financial Corp.
12 E. Broad Street
Hazleton, Pennsylvania 18201
Re: The offering of up to 5,951,250 shares of
Northeast Pennsylvania Financial Corp. Common Stock
Ladies and Gentlemen:
You have requested our opinion concerning certain matters of Delaware
law in connection with the conversion of First Federal Savings and Loan
Association of Hazleton (the "Bank"), a federally-chartered savings and loan
association, from the mutual form of ownership to a federally-chartered capital
stock savings bank to be named First Federal Bank (the "Conversion"), and the
related subscription offering, community offering and syndicated community
offering (the "Offerings") by Northeast Pennsylvania Financial Corp., a Delaware
corporation (the "Company"), of up to 5,175,000 shares of its common stock, par
value $.01 per share ("Common Stock"), (5,951,250 shares if the Estimated
Valuation Range is increased up to 15% to reflect changes in market and
financial conditions following commencement of the Offerings).
In connection with your request for our opinion, you have provided to
us and we have reviewed the Company's certificate of incorporation filed with
the Delaware Secretary of State on December 16, 1997 (the "Certificate of
Incorporation"); the Company's Bylaws; the Company's Registration Statement on
Form S-1, as filed with the Securities and Exchange Commission initially on
December __, 1997 and as amended on January __, 1998 (the "Registration
Statement"); a consent of the sole incorporator of the Company; resolutions of
the Board of Directors of the Company (the "Board") concerning the organization
of the Company, the Offerings and designation of a Pricing Committee of the
Board, and the form of stock certificate approved by the Board to represent
shares of Common Stock. We have also been furnished a
<PAGE> 2
Board of Directors
First Federal Savings and Loan Association
of Hazleton
___________, 1998
Page 2
certificate of the Delaware Secretary of State certifying the Company's good
standing as a Delaware corporation. Capitalized terms used but not defined
herein shall have the meaning given them in the Certificate of Incorporation.
In rendering this opinion, we have relied upon the opinion of Morris,
Nichols, Arsht & Tunnell as to matters of Delaware law upon which opinion we
believe we are justified in relying. We have examined the opinion of Morris,
Nichols, Arsht & Tunnell which opinion is in form satisfactory to us.
We understand that the Company will loan to the trust for the Bank's
Employee Stock Ownership Plan (the "ESOP") the funds the ESOP Trust will use to
purchase shares of Common Stock for which the ESOP Trust subscribes pursuant to
the Offerings and for purposes of rendering the opinion set forth in paragraph 2
below, we assume that: (a) the Board of Directors of the Company has duly
authorized the loan to the ESOP Trust (the "Loan"); (b) the ESOP serves a valid
corporate purpose for the Company; (c) the Loan will be made at an interest rate
and on other terms that are fair to the Subsidiary; (d) the terms of the Loan
will be set forth in customary and appropriate documents including, without
limitation, a promissory note representing the indebtedness of the ESOP Trust to
the Company as a result of the Loan; and (e) the closing for the Loan and for
the sale of Common Stock to the ESOP Trust will be held after the closing for
the sale of the other shares of Common Stock sold in the Offerings and the
receipt by the Company of the proceeds thereof.
Based upon and subject to the foregoing, and limited in all respects to
matters of Delaware law, it is our opinion that:
1. The Company has been duly organized and is validly existing in good
standing as a corporation under the laws of the State of Delaware.
2. Upon the due adoption by the Pricing Committee of a resolution
fixing the number of shares of Common Stock to be sold in the Offerings, the
Common Stock to be issued in the Offerings (including the shares to be issued to
the ESOP Trust and the shares to be granted to a charitable foundation to be
established by the Company in connection with the Conversion) will be duly
authorized and, when such shares are sold and paid for in accordance with the
terms set forth in the Prospectus and such resolution of the Pricing Committee,
and certificates representing such shares in the form provided to us are duly
and properly issued, will be validly issued, fully paid and nonassessable.
<PAGE> 3
Board of Directors
First Federal Savings and Loan Association
of Hazleton
___________, 1998
Page 3
The following provisions of the Certificate of Incorporation may not be
given effect by a court applying Delaware law, but in our opinion the failure to
give effect to such provisions will not affect the duly authorized, validly
issued, fully paid and nonassessable status of the Common Stock:
1. (a) Subsections C.3 and C.6 of Article FOURTH and Section
D of Article EIGHTH, which grant the Board the
authority to construe and apply the provisions of
those Articles, subsection C.4 of Article FOURTH, to
the extent that subsection obligates any person to
provide to the Board the information such subsection
authorizes the Board to demand, and the provision of
Subsection C.7 of Article EIGHTH empowering the Board
to determine the Fair Market Value of property
offered or paid for the Company's stock by an
Interested Stockholder, in each case to the extent,
if any, that a court applying Delaware law were to
impose equitable limitations upon such authority; and
(b) Article NINTH, which authorizes the Board to consider
the effect of any offer to acquire the Company on
constituencies other than stockholders in evaluating
any such offer.
We consent to the filing of this opinion as an exhibit to the
Registration Statement on Form S-1 and the Form AC and to the use of the name of
our firm where it appears in the Registration Statement, Form AC and Prospectus.
Very truly yours,
MULDOON, MURPHY & FAUCETTE
<PAGE> 1
12/23/97 Draft
[Morris, Nichols, Arsht & Tunnell Letterhead]
[Date]
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, DC 20016
Ladies and Gentlemen:
You have requested our opinion concerning certain matters of
Delaware law in connection with (i) the conversion of First Federal Savings &
Loan Association of Hazelton, a federally chartered savings and loan association
(the "Association"), from the mutual form of ownership to stock form of
ownership (the "Conversion"), (ii) the subscription and community offering (the
"Offering"), in connection with the Conversion, by Northeast Pennsylvania
Financial Corp., a Delaware corporation (the "Company"), of up to 5,951,250
shares of its common stock, par value $.01 per share (the "Common Stock"), and
(iii) the sale of up to 476,100 shares of Common Stock (the "Foundation Shares")
to First Federal Charitable Foundation, a Delaware non-stock corporation (the
"Foundation"), pursuant to the Charitable Gift to First Federal Charitable
Foundation dated as of ________________ ___, 1998 by the Company (the "Gift
Instrument").
In connection with your request for our opinion, you have
provided to us, and we have reviewed, the Company's certificate of
<PAGE> 2
Muldoon, Murphy & Faucette
[Date]
Page 2
incorporation (the "Certificate of Incorporation"), its by-laws, the
Registration Statement filed with the Securities and Exchange Commission in
connection with the Offering (the "Registration Statement"), including the
prospectus constituting a part thereof (the "Prospectus"), a consent of the sole
incorporator of the Company, resolutions of the Board of Directors of the
Company (the "Board") concerning, inter alia, the organization of the Company,
the Offering and the designation of a Pricing Committee of the Board (the
"Pricing Committee"), the form of stock certificate approved by the Board to
represent shares of Common Stock, the Foundation's certificate of incorporation
(the "Foundation Certificate of Incorporation"), its bylaws, a consent of the
sole incorporator of the Foundation, and the Gift Instrument. We have also
obtained a certificate of the Delaware Secretary of State as to the Company's
and the Foundation's good standing as Delaware corporations. Capitalized terms
used but not defined herein shall have the meanings given them in the
Certificate of Incorporation.
We understand that the Company will loan to the Association's
Employee Stock Ownership Plan (the "ESOP") the funds the ESOP will use to
purchase the shares of Common Stock for which the ESOP has subscribed as part of
the Offering. In this regard, we have assumed, for purposes of rendering the
opinion set forth in paragraph 2 below, that: (a) the Board has duly authorized
the loan to the ESOP (the "Loan"); (b) the Loan serves a valid corporate
<PAGE> 3
Muldoon, Murphy & Faucette
[Date]
Page 3
purpose; (c) the Loan will be made at an interest rate and on other terms that
are fair to the Company; (d) the terms of the Loan will be set forth in
customary and appropriate documents including, without limitation, a promissory
note representing the indebtedness of the ESOP to the Company as a result of the
Loan; and (e) the closing for the Loan and for the sale of Common Stock to the
ESOP will be held after the closing for the sale of the other shares of Common
Stock sold in the Offering and the receipt by the Company of the proceeds
thereof.
We call your attention to the fact that the opinions expressed
herein are limited in all respects to matters of Delaware corporate law. We
express no opinion concerning the requirements of any other law, rule or
regulation, state or federal, applicable to the Association, the Company, the
Offering, the Conversion, or the Foundation, including, without limitation,
those applicable to federally chartered savings and loan associations or their
holding companies.
Based upon and subject to the foregoing, it is our opinion
that:
1. The Company has been duly organized and is validly existing
in good standing as a corporation under the laws of the State of Delaware, with
the corporate power and authority to own its property and conduct its business
as now conducted as described in the Prospectus.
<PAGE> 4
Muldoon, Murphy & Faucette
[Date]
Page 4
2. Upon the due adoption by the Pricing Committee of a
resolution fixing the number of shares of Common Stock to be sold in the
Offering, the Common Stock to be issued in the Offering (including the shares to
be issued to the ESOP) will be duly authorized and, when such shares are sold
and paid for in accordance with the terms set forth in the Prospectus and such
resolution of the Pricing Committee, and certificates representing such shares
in the form provided to us are duly and properly issued, will be validly issued,
fully paid and nonassessable, with no personal liability for the payment of the
Company's debts arising solely by virtue of the ownership thereof; such issuance
and sale will not be in violation of or subject to any preemptive rights
provided for by Delaware law or by the Certificate of Incorporation.
3. The Foundation has been duly organized and is validly
existing as a non-stock corporation in good standing under the laws of the State
of Delaware with corporate power and authority to own, lease, and operate its
properties and to conduct its business as described in the Prospectus.
4. No approvals of any Delaware governmental agency, bureau,
commission, department or other organization is required to establish the
Foundation and to issue and sell the Foundation Shares to the Foundation as
described in the Prospectus pursuant to the Gift Instrument; provided, however,
that we express no opinion
<PAGE> 5
Muldoon, Murphy & Faucette
[Date]
Page 5
with respect to the Delaware Securities Act (6 Del. C. Section 7301 et seq.).
5. The Foundation Shares have been duly and validly authorized
for issuance and sale, and when issued and delivered by the Company as provided
in the Gift Instrument against payment therefor, and a certificate representing
such shares in the form provided to us is duly and properly issued, such shares
will be duly and validly issued, fully paid and non-assessable, with no personal
liability for the payment of the Company's debts arising solely by virtue of the
ownership thereof; such issuance and sale will not be in violation of or subject
to any preemptive rights provided for by Delaware law or the Certificate of
Incorporation.
The following provisions of the Certificate of Incorporation
may not be given effect by a court applying Delaware law, but in our opinion the
failure to give effect to such provisions will not affect the duly authorized,
validly issued, fully paid and nonassessable status of the Common Stock:
(a) Subsections C.3 and C.6 of Article FOURTH and Section D of
Article EIGHTH, which grant the Board the authority to construe and apply the
provisions of those Articles, subsection C.4 of Article FOURTH, to the extent
that provision obligates any person to provide to the Board the information such
subsection authorizes the Board to demand, and the provision of Section C.7 of
Article EIGHTH empowering the Board to determine the Fair Market
<PAGE> 6
Muldoon, Murphy & Faucette
[Date]
Page 6
Value of property offered or paid for the Company's stock by an Interested
Stockholder, to the extent, if any, that a court applying Delaware law were to
impose equitable limitations upon the authority of the directors of the Company
under such provisions.
(b) Article NINTH of the Certificate of Incorporation, which
purports to permit the Board to consider the effect of any offer to acquire the
Company on constituencies other than stockholders in evaluating any such offer.
Very truly yours,
<PAGE> 1
Exhibit 8.0
DRAFT
________________, 1998
Board of Directors
First Federal Savings and Loan Association of Hazleton
12 E. Broad Street
Hazleton, Pennsylvania 18201
Board of Directors
Northeast Pennsylvania Financial Corp.
12 E. Broad Street
Hazleton, Pennsylvania 18201
Re: Certain Federal Tax Consequences of the Conversion of First
Savings and Loan Association of Hazleton from a
Federally-chartered Mutual Savings and Loan Association to a
Federally-chartered Capital Stock Savings Bank and the Offer
and Sale of Common Stock of Northeast Pennsylvania Financial
Corp. (the "Conversion")
Ladies and Gentlemen:
You have requested an opinion on certain federal income tax
consequences of the proposed conversion of First Federal Savings and Loan
Association of Hazleton (the "Bank") from a federally-chartered mutual savings
and loan association to a federally-chartered capital stock savings bank and the
acquisition of the Bank's capital stock by Northeast Pennsylvania Financial
Corp., a Delaware corporation (the "Holding Company"), pursuant to the plan of
conversion adopted by the Board of Directors on November 18, 1997 (the "Plan of
Conversion").
The proposed transaction is described in the Prospectus and the Plan of
Conversion, and the tax consequences of the proposed transaction will be as set
forth in the section of this letter entitled "FEDERAL TAX OPINION."
<PAGE> 2
Board of Directors
_______________, 1998
Page 2
DRAFT
We have made such inquiries and have examined such documents and
records as we have deemed appropriate for the purpose of this opinion. In
rendering this opinion, we have received certain standard representations of the
Holding Company and the Bank concerning the Holding Company and the Bank as well
as the transaction ("Representations"). These Representations are required to be
furnished prior to the execution of this letter and again prior to the closing
of the Conversion. We will rely upon the accuracy of the Representations of the
Holding Company and the Bank and the statements of facts contained in the
examined documents, particularly the Plan of Conversion. We have also assumed
the authenticity of all signatures, the legal capacity of all natural persons
and the conformity to the originals of all documents submitted to us as copies.
Each capitalized term used herein, unless otherwise defined, has the meaning set
forth in the Plan of Conversion. We have assumed that the Conversion will be
consummated strictly in accordance with the terms of the Plan of Conversion.
The Plan of Conversion and the Prospectus contain a detailed
description of the Conversion. These documents as well as the Representations to
be provided by the Holding Company and the Bank are incorporated in this letter
as part of the statement of the facts.
First Federal Savings and Loan Association of Hazleton, with its
headquarters office in Hazleton, Pennsylvania, is a federally-chartered mutual
savings and loan association. As a mutual savings and loan associatin, the Bank
has never been authorized to issue stock. Instead, the proprietary interest in
the reserves and undivided profits of the Bank belong to the deposit account
holders of the Bank, hereinafter sometimes referred to as "depositors." A
depositor of the Bank has a right to share, pro rata, with respect to the
withdrawal value of his respective deposit account in any liquidation proceeds
distributed in the event the Bank is ever liquidated. In addition, a depositor
of the Bank is entitled to interest on his account balance as fixed and paid by
the Bank.
In order to provide organizational and economic strength to the Bank,
the Board of Directors has adopted the Plan of Conversion whereby the Bank will
convert itself into a federally-chartered capital stock savings bank (the
"Converted Bank"), the stock of which will be held entirely by the Holding
Company. Assuming that the Holding Company form of organization is utilized, the
Holding Company will acquire the stock of the Bank by purchase, in exchange for
the Conversion proceeds that are not permitted to be retained by the Holding
Company. The Holding Company will apply to the Office of Thrift Supervision
("OTS") to retain up to 50% of the proceeds received from the Conversion. The
aggregate sales price of the Common Stock issued in the Conversion will be based
on an independent appraiser's valuation of the estimated pro forma market value
of the Common Stock of the Converted Bank. The
<PAGE> 3
Board of Directors
_______________, 1998
Page 3
DRAFT
Conversion and sale of the Common
Stock will be subject to approval by the OTS and the approval of the Voting
Members.
ESTABLISHMENT OF LIQUIDATION ACCOUNT. The Bank shall establish at the
time of Conversion a liquidation account in an amount equal to its net worth as
of the latest practicable date prior to Conversion. The liquidation account will
be maintained by the Bank for the benefit of the Eligible Account Holders and
Supplemental Eligible Account Holders who continue to maintain their Savings
Accounts at the Bank. Each Eligible Account Holder and Supplemental Eligible
Account Holder shall, with respect to his Savings Account, hold a related
inchoate interest in a portion of the liquidation account balance, in relation
to his Savings Account balance on the Eligibility Record Date and/or
Supplemental Eligibility Record Date or to such balance as it may be
subsequently reduced, as provided in the Plan of Conversion.
In the unlikely event of a complete liquidation of the Bank (and only
in such event), following all liquidation payments to creditors (including those
to Account Holders to the extent of their Savings Accounts) each Eligible
Account Holder and Supplemental Eligible Account Holder shall be entitled to
receive a liquidating distribution from the liquidation account, in the amount
of the then adjusted subaccount balance for his Savings Account then held,
before any liquidation distribution may be made to any holders of the Bank's
capital stock. No merger, consolidation, purchase of bulk assets with assumption
of Savings Accounts and other liabilities, or similar transaction with an FDIC
institution, in which the Bank is not the surviving institution, shall be deemed
to be a complete liquidation for this purpose. In such transactions, the
liquidation account shall be assumed by the surviving institution.
ESTABLISHMENT OF FOUNDATION. As part of the Conversion, the Company and
the Bank intend to establish a charitable foundation (the "Foundation") that
will qualify as an exempt organization under Section 501(c)(3) of the Internal
Revenue Code of 1986, as amended (the "Code") and to donate to the Foundation up
to 8.0% of the number of shares of Common Stock sold in the Conversion. The
establishment and funding of the Foundation as part of the Conversion is subject
to the approval of the Voting Members of the Bank at the Special Meeting of
Members. In the event that the Foundation does not receive the prerequisite
approval, the Bank may determine to complete the Conversion without the
Foundation.
The Plan of Conversion provides that the Foundation is being formed to
further the Converted Bank's long term commitment to its community. The Plan of
Conversion states that the Foundation is intended to complement the Bank's
existing community reinvestment activities so as to allow the local community to
share in the growth and profitability of the Holding Company and the Converted
Bank over the long term.
<PAGE> 4
Board of Directors
_______________, 1998
Page 4
DRAFT
The Foundation will be dedicated to the promotion of charitable and
educational purposes within the Bank's Local Community, including, but not
limited to, grants or donations to support housing assistance, scholarships,
local education, not-for-profit medical facilities, not-for-profit community
groups and other types of organizations or civic minded projects. The Foundation
will annually distribute total grants and donations to assist charitable
organizations or to fund projects within its local community of not less than 5%
of the average fair value of the Foundation assets each year.
* * *
You have provided the following representations concerning this
transaction:
(a) The fair market value of the withdrawable deposit accounts
plus interests in the liquidation account of the Converted
Bank to be constructively received under the Plan of
Conversion will, in each instance, be equal to the fair market
value of the withdrawable deposit accounts (plus the related
interest in the residual equity of the Bank) deemed to be
surrendered in exchange therefor.
(b) If an individual's total deposits in the Bank equal or exceed
$50 as of the Eligibility Record Date or the Supplemental
Eligibility Record Date, then no amount of that individual's
total deposits will be excluded from participating in the
liquidation account. The fair market value of the deposit
accounts of the Bank which have a balance of less than $50 on
the Eligibility Record Date or the Supplemental Eligibility
Record Date will be less than 1% of the total fair market
value of all deposit accounts of the Bank.
(c) Immediately following the Conversion, the Eligible Account
Holders and the Supplemental Eligible Account Holders of the
Bank will own all of the outstanding interests in the
liquidation account and will own such interest solely by
reason of their ownership of deposits in the Bank immediately
before the Conversion.
<PAGE> 5
Board of Directors
_______________, 1998
Page 5
DRAFT
(d) After the Conversion, the Converted Bank will continue the
business of the Bank in the same manner as prior to the
Conversion. The Converted Bank has no plan or intention and
the Holding Company has no plan or intention to cause the
Converted Bank to sell its assets other than in the ordinary
course of business.
(e) The Holding Company has no plan or intention to sell,
liquidate or otherwise dispose of the stock of the Converted
Bank other than in the ordinary course of business.
(f) The Holding Company and the Converted Bank have no current
plan or intention to redeem or otherwise acquire any of the
Common Stock issued in the Conversion transaction.
(g) Immediately after the Conversion, the assets and liabilities
of the Converted Bank will be identical to the assets and
liabilities of the Bank immediately prior to the Conversion,
plus the net proceeds from the sale of the Converted Bank's
common stock to the Holding Company and any liability
associated with indebtedness incurred by the Employee Plans in
the acquisition of Common Stock by the Employee Plans.
(h) The Bank, Converted Bank and the Holding Company are
corporations within the meaning of section 7701(a)(3) of the
Internal Revenue Code.
(i) None of the shares of the Common Stock to be purchased by the
depositor-employees of the Bank in the Conversion will be
issued or acquired at a discount. However, shares may be given
to certain Directors and employees as compensation by means of
the Employee Plans. Compensation to be paid to such Directors
and depositor-employees will be commensurate with amounts paid
to third parties bargaining at arm's length for similar
services.
(j) The fair market value of the assets of the Bank, which will be
transferred to the Converted Bank in the Conversion, will
equal or exceed the sum of the liabilities of the Bank which
will be assumed by the Converted Bank and any liabilities to
which the transferred assets are subject.
(k) The Bank is not under the jurisdiction of a bankruptcy or
similar court in any Title 11 or similar case within the
meaning of section 368(a)(3)(A) of the Code.
<PAGE> 6
Board of Directors
_______________, 1998
Page 6
DRAFT
(l) Upon the completion of the Conversion, the Holding Company
will own and hold 100% of the issued and outstanding capital
stock of the Converted Bank and no other shares of capital
stock of the Converted Bank will be issued and/or outstanding.
At the time of the Conversion, the Converted Bank does not
have any plan or intention to issue additional shares of its
stock following the transaction. Further, no shares of
preferred stock of the Converted Bank will be issued and/or
outstanding.
(m) Upon the completion of the Conversion, there will be no
rights, warrants, contracts, agreements, commitments or
understandings with respect to the capital stock of the
Converted Bank, nor will there be any securities outstanding
which are convertible into the capital stock of the Converted
Bank.
(n) No cash or property will be given to Eligible Account Holders,
Supplemental Eligible Account Holders, or others in lieu of
(a) nontransferable subscription rights, or (b) an interest in
the liquidation account of the Converted Bank.
(o) The Bank has utilized a reserve for bad debts in accordance
with section 593 and, following the Conversion, to the extent
allowed under the Code, the Converted Bank shall maintain a
reserve for bad debts in accordance with the applicable
provisions of the Code.
(p) The Bank currently satisfies the 60% "qualified assets" test
of section 7701(a)(19) of the Code. Management expects the
Converted Bank to be able to continue to satisfy the test in
the future. The Converted Bank will also satisfy the
"qualified thrift lender" tests set out in sections 301 and
303 of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989.
(q) Depositors will pay the expenses of the Conversion solely
applicable to them, if any. The Holding Company and the Bank
will each pay expenses of the transaction attributable to them
and will not pay any expenses solely attributable to the
depositors or to the Holding Company shareholders.
(r) The exercise price of the subscription rights received by the
Bank's Eligible Account Holders, Supplemental Eligible Account
Holders, and other holders of subscription rights to purchase
Holding Company Common Stock will be equal to the fair market
value of the stock of the Holding Company at the time of the
completion of the Conversion as determined by an independent
appraisal.
<PAGE> 7
Board of Directors
_______________, 1998
Page 7
DRAFT
(s) The proprietary interests of the Eligible Account Holders and
the Supplemental Eligible Account Holders in the Bank arise
solely by virtue of the fact that they are account holders in
the Bank.
(t) There is no plan or intention for the Converted Bank to be
liquidated or merged with another corporation following this
proposed transaction.
(u) The liabilities of the Bank assumed by the Converted Bank plus
the liabilities, if any, to which the transferred assets are
subject were incurred by the Bank in the ordinary course of
its business and are associated with the assets transferred.
(v) The Bank currently has no net operating losses for federal tax
purposes, and has no such losses available for carryover to
future tax years. The Bank has neither generated nor carried
forward a net operating loss for federal tax purposes in the
past ten tax years.
LIMITATIONS ON OPINION
Our opinions expressed herein are based solely upon current provisions
of the Internal Revenue Code of 1986, as amended, including applicable
regulations thereunder and current judicial and administrative authority. Any
future amendments to the Code or applicable regulations, or new judicial
decisions or administrative interpretations, any of which could be retroactive
in effect, could cause us to modify our opinion. No opinion is expressed herein
with regard to the federal, state, or city tax consequences of the Conversion
under any section of the Code except if and to the extent specifically
addressed.
FEDERAL TAX OPINION
Based solely upon the foregoing representations and information and
assuming the transaction occurs in accordance with the Plan of Conversion, and
taking into consideration the limitations noted throughout this opinion, it is
our opinion that under current federal income tax law:
(1) Pursuant to the Conversion, the changes at the corporate level
other than changes in the form of organization will be
insubstantial. Based upon that fact and the fact that the
equity interest of a depositor in a mutual savings and loan
association is
<PAGE> 8
Board of Directors
_______________, 1998
Page 8
DRAFT
more nominal than real, unlike that of a shareholder of a
corporation, the Conversion of the Bank from a mutual savings
and loan association to a stock savings bank is a tax-free
reorganization since it is a mere change in identity, form or
place of organization within the meaning of section
368(a)(1)(F) of the Code (see Rev. Rul. 80-105, 1980-1 C.B.
78). Neither the Bank nor the Converted Bank shall recognize
gain or loss as a result of the Conversion. The Bank and the
Converted Bank shall each be "a party to a reorganization"
within the meaning of section 368(b) of the Code.
(2) No gain or loss shall be recognized by the Converted Bank or
the Holding Company on the receipt by the Converted Bank of
money from the Holding Company in exchange for shares of the
Converted Bank's capital stock or by the Holding Company upon
the receipt of money from the sale of its Common Stock
(Section 1032(a) of the Code).
(3) The basis of the assets of the Bank in the hands of the
Converted Bank shall be the same as the basis of such assets
in the hands of the Bank immediately prior to the Conversion
(Section 362(b) of the Code).
(4) The holding period of the assets of the Bank in the hands of
the Converted Bank shall include the period during which the
Bank held the assets (Section 1223(2) of the Code).
(5) No gain or loss shall be recognized by the Eligible Account
Holders and the Supplemental Eligible Account Holders of the
Bank on the issuance to them of withdrawable deposit accounts
in the Converted Bank plus interests in the liquidation
account of the Converted Bank in exchange for their deposit
accounts in the Bank or to the other depositors on the
issuance to them of withdrawable deposit accounts (Section
354(a) of the Code).
(6) Provided that the amount to be paid for such stock pursuant to
the subscription rights is equal to the fair market value of
the stock, no gain or loss will be recognized by Eligible
Account Holders and Supplemental Eligible Account Holders upon
the distribution to them of the nontransferable subscription
rights to purchase shares of stock in the Holding Company
(Section 356(a)). Gain realized, if any, by the Eligible
Account Holders and Supplemental Eligible Account Holders on
the distribution to them of nontransferable subscription
rights to purchase shares of Common Stock will be recognized
but only in an amount not
<PAGE> 9
Board of Directors
_______________, 1998
Page 9
DRAFT
in excess of the fair market value of such subscription rights
(Section 356(a)). Eligible Account Holders and Supplemental
Eligible Account Holders will not realize any taxable income
as a result of the exercise by them of the nontransferable
subscription rights (Rev. Rul. 56-572, 1956-2 C.B. 182).
(7) The basis of the deposit accounts in the Converted Bank to be
received by the Eligible Account Holders, Supplemental
Eligible Account Holders and other depositors of the Bank will
be the same as the basis of their deposit accounts in the Bank
surrendered in exchange therefor (Section 358(a)(1) of the
Code). The basis of the interests in the liquidation account
of the Converted Bank to be received by the Eligible Account
Holders of the Bank shall be zero (Rev. Rul. 71-233, 1971-1
C.B. 113). The basis of the Holding Company Common Stock to
its stockholders will be the purchase price thereof plus the
basis, if any, of nontransferable subscription rights (Section
1012 of the Code). Accordingly, assuming the nontransferable
subscription rights have no value, the basis of the Common
Stock to the Eligible Account Holders and Supplemental
Eligible Account Holders will be the amount paid therefor. The
holding period of the Common Stock purchased pursuant to the
exercise of subscription rights shall commence on the date on
which the right to acquire such stock was exercised (Section
1223(6) of the Code).
Our opinion under paragraph (6) above is predicated on the
representation that no person shall receive any payment, whether in money or
property, in lieu of the issuance of subscription rights. Our opinion under
paragraphs (6) and (7) above assumes that the subscription rights to purchase
shares of Common Stock received by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members have a fair market value of zero. We
understand that you have received a letter from Keller & Company, Inc. that the
subscription rights do not have any value. We express no view regarding the
valuation of the subscription rights.
If the subscription rights are subsequently found to have a fair market
value, income may be recognized by various recipients of the subscription rights
(in certain cases, whether or not the rights are exercised) and Holding Company
and/or the Converted Bank may be taxable on the distribution of the subscription
rights.
<PAGE> 10
Board of Directors
_______________, 1998
Page 10
DRAFT
* * *
Since this letter is rendered in advance of the closing of this
transaction, we have assumed that the transaction will be consummated in
accordance with the Plan of Conversion as well as all the information and
Representations referred to herein. Any change in the transaction could cause us
to modify our opinion.
We consent to the inclusion of this opinion as an exhibit to the Form
AC and Form S-1 Registration Statement of Northeast Pennsylvania Financial Corp.
and the references to and summary of this opinion in such Form AC and Form S-1
Registration Statement.
Sincerely,
MULDOON, MURPHY & FAUCETTE
<PAGE> 1
EXHIBIT 8.1
[KPMG PEAT MARWICK LLP LETTERHEAD]
December 22, 1997
The Board of Directors
First Federal Savings and Loan of Hazleton
12 East Broad Street
Hazleton, Pennsylvania 18201
Ladies and Gentlemen:
You have requested the opinion of KPMG Peat Marwick, LLP (KPMG) as to certain
state income tax consequences to First Federal Savings and Loan of Hazleton (the
Bank), Northeast Pennsylvania Financial Corp. (the Holding Company), and
Eligible Account Holders or Supplemental Eligible Account Holders of the Bank,
resulting from the proposed conversion and reorganization of First Federal
Savings and Loan Association of Hazleton from a federally-chartered mutual
savings and loan association to a federally-chartered capital stock savings
bank, under the name First Federal Bank, in which First Federal Bank will issue
all of its stock to Northeast Pennsylvania Financial Corp., a newly formed
savings and loan holding company, which will own all of First Federal Bank's
capital stock (the Conversion).
In preparing this opinion letter, we have relied, in part, upon certain factual
descriptions provided in the PLAN OF CONVERSION dated November 18, 1997, as well
as the facts and representations which are provided below under the headings
"STATEMENT OF FACTS" and "REPRESENTATIONS". If any fact or representation
contained herein is not complete or accurate it is important that we be notified
immediately in writing as this may cause us to change our opinion.
STATEMENT OF FACTS
First Federal Savings and Loan of Hazleton, a federally chartered mutual savings
bank organized and operated in the Commonwealth of Pennsylvania, desires to
convert to a federal stock institution which similarly, will be organized and
operated under the laws of the Commonwealth of Pennsylvania. The conversion will
be accomplished by the use of a holding company to purchase and hold the stock
of the Bank. The Holding Company, a Delaware corporation, will offer for sale,
through a subscription offering and a syndicated community offering, shares of
its common stock. The Bank, upon the amendment of its charter to authorize and
issue stock, will simultaneously sell its capital stock to the Holding Company
pursuant to a plan of conversion. The Holding Company will authorize 16 million
shares of common stock, with a par value of $.01 per share. In addition, the
Holding Company will authorize 2 million shares of preferred stock, with a par
value of $.01 per share. Based upon preliminary estimates provided by the Bank,
the Holding Company will initially issue between 3,825,000 and 5,175,000 of
their authorized shares of common stock.
The plan of conversion provides that non-transferable rights to subscribe for
the common stock of the Holding Company will be granted, in order of priority:
(i) to each of the Bank's Eligible Account Holders (depositors whose accounts in
the Bank totaled $50 or more on September 30,
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KPMG Peat Marwick LLP
The Board of Directors
First Federal Savings and Loan of Hazleton
December 22, 1997
Page 2
1996), (ii) to the Bank's employee benefit plans, consisting of the ESOP which
intends to subscribe for up to 8% of the common stock issued in connection with
the Conversion, (iii) to each of the Bank's Supplemental Eligible Account
Holders (depositors whose accounts in the Bank totaled $50 or more on December
31, 1997), and (iv) to certain other members of the Bank as of the close of
business on the voting record date. The Holding Company will offer its shares of
common stock not subscribed for in the above subscription offering for sale in a
community offering or, if necessary, in a syndicated community offering, to
certain members of the general public with preference given to institutional
investors and/or natural persons residing in the boroughs or counties in which
the Bank maintains an office.
Keller and Company, Inc., has issued an opinion stating that, pursuant to its
valuation, the subscription rights have no value based on the fact that such
rights are acquired by the recipients without cost, are nontransferable and of
short duration, and afford the recipients the right only to purchase the Holding
Company stock at a price equal to its estimated fair market value, which will be
the same price as the actual purchase price for any unsubscribed shares of
Holding Company stock.
In the event of a complete liquidation of the Bank in its present mutual form,
each depositor would receive his pro rata share of any assets of the Bank
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 account was to the total value of all deposit accounts in the Bank
at the time of liquidation.
Upon the change in legal form of the Bank to a stock institution, a "liquidation
account" will be created for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders in an amount equal to its net worth as of
the latest practicable date prior to conversion. Each Eligible Account Holder
and Supplemental Eligible Account Holder, if they were to continue to maintain
their deposit account at the Bank, would be entitled to receive a payment for
their respective interest in the liquidation account prior to any payment made
to the stockholder upon a complete liquidation of the Bank. Each Eligible
Account Holder and Supplemental Eligible Account Holder will have an initial
interest in the liquidation account for each deposit account, including regular
accounts, transaction accounts such as NOW accounts, money market deposit
accounts, and certificates of deposits, with a balance of $50 or more held in
the Bank on September 30, 1996 and December 31, 1997, respectively. Each
Eligible Account Holder's and Supplemental Eligible Account Holder's interest in
the total liquidation account will be based on the proportion that the balance
of their deposit account bore on the eligibility date to the balance of all
deposit accounts in the Bank on such date.
If, however, on any annual closing date subsequent to the Eligibility Record
Date or Supplemental Eligibility Record Date, the amount of Qualifying Deposit
of an Eligible Account Holder or Supplemental Eligible Account Holder is less
than the amount of the Qualifying Deposit of such Eligible Account Holder or
Supplemental Eligible Account Holder as of the Eligibility Record Date or
Supplemental Eligibility Record Date, respectively, or less than the
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KPMG Peat Marwick LLP
The Board of Directors
First Federal Savings and Loan of Hazleton
December 22, 1997
Page 3
amount of the Qualifying Deposits as of the previous annual closing date, then
the interest in the liquidation account relating to such Deposit would be
reduced by the proportion of any such reduction, and such interest will cease to
exist if such Qualifying Deposit accounts are closed. In addition, no interest
in the liquidation account would ever be increased despite any subsequent
increase in the related Qualifying Deposit. Any assets remaining after the above
liquidation rights of Eligible Account Holder and Supplemental Eligible Account
Holders are satisfied would be distributed to the Holding Company as the sole
stockholder of the Bank.
REPRESENTATIONS
KPMG is relying on the following representations in rendering the opinions
contained herein. It is understood that KPMG has not independently verified the
accuracy of any of these representations:
(1) The fair market value of the withdrawable deposit accounts plus
interests in the liquidation account of the converted Bank to be
constructively received under the PLAN OF CONVERSION will, in each
instance, be equal to the fair market value of the withdrawable deposit
accounts (plus the related interest in the residual equity of the Bank)
deemed to be surrendered in exchange therefor.
(2) If an individual's total deposits in the Bank equal or exceed $50
as of the Eligibility Record Date or the Supplemental Eligibility
Record Date, then no amount of that individual's total deposits will be
excluded from participating in the liquidation account. The fair market
value of the deposit accounts of the Bank which have a balance of less
than $50 on the Eligibility Record Date or the Supplemental Eligibility
Record Date will be less than 1% of the total fair market value of all
deposit accounts of the Bank.
(3) Immediately following the Conversion, the Eligible Account Holders
and the Supplemental Eligible Account Holders of the Bank will own all
of the outstanding interests in the liquidation account and will own
such interest solely by reason of their ownership of deposits in the
Bank immediately before the Conversion.
(4) After the Conversion, the converted Bank will continue the business
of the Bank in the same manner as prior to the Conversion. The
converted Bank has no plan or intention and the Holding Company has no
plan or intention to cause the converted Bank to sell its assets other
than in the ordinary course of business.
(5) The Holding Company has no plan or intention to sell, liquidate or
otherwise dispose of the stock of the converted Bank other than in the
ordinary course of business.
(6) The Holding Company and the converted Bank have no current plan or
intention to redeem or otherwise acquire any of the common stock issued
in the Conversion transaction.
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KPMG Peat Marwick LLP
The Board of Directors
First Federal Savings and Loan of Hazleton
December 22, 1997
Page 4
(7) Immediately after the Conversion, the assets and liabilities of the
converted Bank will be identical to the assets and liabilities of the
Bank immediately prior to the Conversion, plus the net proceeds from
the sale of the converted Bank's common stock to the Holding Company
and any liability associated with indebtedness incurred by the Employee
Plans in the acquisition of Holding Company common stock by the
Employee Plans.
(8) The Bank and the Holding Company are corporations within the
meaning of section 7701(a)(3) of the Internal Revenue Code.
(9) None of the shares of the Holding Company common stock to be
purchased by the depositor-employees of the Bank in the Conversion will
be issued or acquired at a discount. However, shares may be given to
certain directors and employees as compensation by means of the
Employee Plans. Compensation to be paid to such directors and
depositor-employees will be commensurate with amounts paid to third
parties bargaining at arm's length for similar services.
(10) The fair market value of the assets of the Bank, which will be
transferred to the converted Bank in the Conversion, will equal or
exceed the sum of the liabilities of the Bank which will be assumed by
the converted Bank and any liabilities to which the transferred assets
are subject.
(11) The Bank is not under the jurisdiction of a bankruptcy or similar
court in any Title 11 or similar case within the meaning of section
368(a)(3)(A) of the Code.
(12) Upon the completion of the Conversion, the Holding Company will
own and hold 100% of the issued and outstanding capital stock of the
converted Bank and no other shares of capital stock of the converted
Bank will be issued and/or outstanding. At the time of the Conversion,
the converted Bank does not have any plan or intention to issue
additional shares of its stock following the transaction. No shares of
preferred stock of the converted Bank are authorized, issued, and/or
outstanding.
(13) Upon the completion of the Conversion, there will be no rights,
warrants, contracts, agreements, commitments or understandings with
respect to the capital stock of the converted Bank, nor will there be
any securities outstanding which are convertible into the capital stock
of the converted Bank.
(14) No cash or property will be given to Eligible Account Holders,
Supplemental Eligible Account Holders, or others in lieu of (a)
nontransferable subscription rights, or (b) an interest in the
liquidation account of the converted Bank.
(15) The Bank has maintained a reserve for bad debts in accordance with
sections 593 and 585 of the Code and, following the Conversion, to the
extent allowed under the
<PAGE> 5
KPMG Peat Marwick LLP
The Board of Directors
First Federal Savings and Loan of Hazleton
December 22, 1997
Page 5
Code, the converted Bank shall maintain a reserve for bad debts in
accordance with the applicable provisions of the Code.
(16) Depositors will pay the expense of the Conversion solely
applicable to them, if any. The Holding Company and the Bank will each
pay expenses of the transaction attributable to them and will not pay
any expenses solely attributable to the depositors or to the Holding
Company shareholders.
(17) The exercise price of the subscription rights received by the
Bank's Eligible Account Holders, Supplemental Eligible Account Holders,
and other holders of subscription rights to purchase Holding Company
common stock will be equal to the fair market value of the stock of the
Holding Company at the time of the completion of the Conversion as
determined by an independent appraisal.
(18) The proprietary interests of the Eligible Account Holders and the
Supplemental Eligible Account Holders in the Bank arise solely by
virtue of the fact that they are account holders in the Bank.
(19) There is no plan or intention for the converted Bank to be
liquidated or merged with another corporation following this proposed
transaction.
(20) The liabilities of the Bank assumed by the converted Bank plus the
liabilities, if any, to which the transferred assets are subject were
incurred by the Bank in the ordinary course of its business and are
associated with the assets transferred.
(21) External legal counsel (Muldoon, Murphy & Faucette) has opined
that for federal income tax purposes no gain or loss will be recognized
as a result of the proposed Conversion by either the Bank or the
Holding Company, and that the proposed conversion of the Bank from a
mutual savings bank to a stock savings bank qualifies as a tax-free
reorganization for federal income tax purposes pursuant to Section
368(a)(1)(F) of the Internal Revenue Code.
(22) External legal counsel has opined that for federal income tax
purposes, no gain or loss will be recognized by Eligible Account
Holders and Supplemental Eligible Account Holders of the Bank on the
issuance to them of withdrawable deposit accounts in the converted Bank
plus interests in the liquidation account of the converted Bank in
exchange for deposit accounts in the Bank and their related interest in
the residual equity of the Bank or to the other depositors on the
issuance to them of withdrawable deposit accounts.
(23) External legal counsel has opined that for federal income tax
purposes, no gain or loss will be recognized by Eligible Account
Holders and Supplemental Eligible Account Holders of the Bank upon the
distribution to them of the nontransferable subscription rights to
purchase shares of stock in the Holding Company, provided that the
amount
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KPMG Peat Marwick LLP
The Board of Directors
First Federal Savings and Loan of Hazleton
December 22, 1997
Page 6
paid for the Holding Company common stock is equal to the fair
market value of such stock. Gain realized, if any, by the Eligible
Account Holders and Supplemental Eligible Account Holders of the Bank
on the distribution to them of nontransferable subscription rights to
purchase the Holding Company stock will be recognized but only in an
amount not in excess of the fair market value of such subscription
rights. Eligible Account Holders and Supplemental Eligible Account
Holders of the Bank will not realize any taxable income for federal
income tax purposes as a result of the exercise by them of the
nontransferable subscription rights.
(24) Based on the opinion of Keller and Company, Inc., the
nontransferable subscription rights do not have any value.
(25) No gain or loss will be recognized by the Bank under Generally
Accepted Accounting Principles (GAAP) as a result of the Conversion and
the purchase accounting method will not be used by the Bank to account
for the transaction in accordance with GAAP.
(26) The Bank is a federally chartered savings institution. The Bank is
neither incorporated nor currently conducting business in the State of
Delaware.
(27) The Holding Company is a domestic Delaware corporation, organized
at the direction of the Bank to become a savings and loan holding
company and own all of the Bank's capital stock to be issued upon its
conversion from mutual form to stock form. The Holding Company does not
maintain any physical presence in nor conduct any business in the State
of Delaware. The Holding Company conducts its business activities in
the State of Pennsylvania.
STATE INCOME TAX OPINION
Pennsylvania Corporate Net Income Tax
STATEMENT OF FACTS, REPRESENTATIONS AND DISCUSSION - PENNSYLVANIA CORPORATE NET
INCOME TAX (CNI)
Pennsylvania Corporate Net Income Tax (CNI) is imposed on domestic and foreign
corporations and business trusts for the privilege of doing business, carrying
on activities, or having capital employed or used or owning property in
Pennsylvania (72 P.S. Section 7402, Act of March 4, 1971, P.L. 6). Certain
entities are specifically excluded from the tax including building and loan
associations, banks, bank and trust companies, national banks, savings
institutions, trust companies, insurance and surety companies and PA S
corporations (72 P.S. Section 7401(1)). The Holding Company is not an entity
that is exempt from CNI taxation under one of the above exceptions. Accordingly,
the Holding Company is subject to CNI taxation.
<PAGE> 7
KPMG Peat Marwick LLP
The Board of Directors
First Federal Savings and Loan of Hazleton
December 22, 1997
Page 7
The computation of Pennsylvania taxable income begins with federal taxable
income before any net operating loss and special deductions, reported on federal
Form 1120 (72 P.S. Section 7401(3)1(a) & 61 Pa. Code Section 153.11(a)). Certain
modifications are made to federal taxable income to arrive at Pennsylvania
taxable income.
Adjustments that would increase Pennsylvania taxable income include:
- certain tax preference items under the federal alternative minimum
taxation system that are not deductible for Pennsylvania CNI purposes
(72 P.S. Section 7401(3)1(d));
- foreign and state income taxes(72 P.S. Section 7401(3)1(o));
- employment incentive payments (Section 491(a), Act of June 13, 1967,
P.L. 31); and
- expenses related to interest on federal obligations (72 P.S. Section
7401(3)1(b.1)).
Adjustments that would decrease Pennsylvania taxable income include:
- the dividends received deduction (72 P.S. Section 7401(3)1(b));
- interest on federal obligations (72 P.S. Section 7401(3)1(b.1));
- wages related to federal tax credits (72 P.S. Section 7401(3)1(c) &
61 Pa Code Section 153.12);
- foreign dividend gross up (72 P.S. Section 7401(3)1(b));
- additional capital loss or contributions deductions for corporations
participating in a federal consolidated return filing (72 P.S.
Section 7404);
- depreciation adjustments (72 P.S. Section 7401(3)1(h) & 61 Pa Code
Section 153.14(3)&(4)); and
- Pennsylvania net operating loss deductions (72 P.S. Section
7401(4)(a)).
As opined by external legal counsel, for federal income tax purposes, no gain or
loss will be recognized in the proposed Conversion by the Holding Company. In
addition, the transaction does not give rise to any positive or negative
adjustments required to be made for Pennsylvania CNI purposes.
OPINION
Based solely on the STATEMENT OF FACTS, REPRESENTATIONS, AND DISCUSSIONS set
forth in this opinion letter, it is the opinion of KPMG that no Pennsylvania
Corporate Net Income Tax will arise to the Holding Company as a result of the
Conversion.
Pennsylvania Mutual Thrift Institutions Tax
STATEMENT OF FACTS, REPRESENTATIONS AND DISCUSSION - PENNSYLVANIA MUTUAL THRIFT
INSTITUTIONS TAX (MTIT)
Section 1501 of the Pennsylvania Mutual Thrift Institutions Tax Act (72 P.S.
Section 8501; the Act) defines a mutual thrift institution as every:
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KPMG Peat Marwick LLP
The Board of Directors
First Federal Savings and Loan of Hazleton
December 22, 1997
Page 8
(1) savings bank without capital stock;
(2) building and loan association;
(3) savings and loan association; and
(4) savings institutions having capital stock.
The Bank has represented that it qualifies as a savings institution with capital
stock and is therefore, subject to the MTIT.
The Act provides for a mutual thrift institution to compute its tax based on
separate company net income computed in accordance with Generally Accepted
Accounting Principles (GAAP), subject to certain defined exceptions (72 P.S.
Section 8502(c)).
One of the exceptions, as provided in the Act (72 P.S. Section
8502(c)(3))provides that:
"In the case of a business combination entered into after December 31, 1986,
which is treated as a reorganization for purposes of section 368 of the Internal
Revenue Code of 1986, or a similar successor provision, and accounted for under
the purchase accounting method, net earnings or loss shall be determined as
though the acquisition has been accounted for under the pooling of interest
method."
It has been represented to KPMG that upon the Conversion, no gain or loss will
be recognized by the Bank under Generally Accepted Accounting Principles (GAAP)
as a result of the Conversion and the purchase accounting method will not be
used by the bank to account for the transaction in accordance with GAAP.
OPINION
Based solely on the STATEMENT OF FACTS, REPRESENTATIONS, AND DISCUSSIONS set
forth in this opinion letter, it is the opinion of KPMG that the following
Pennsylvania Mutual Thrift Institutions Tax consequences will occur as a result
of the above Conversion:
(1) The Bank will not recognize any gain or loss as a result of the
proposed Conversion.
(2) The Bank will continue to file a Pennsylvania Mutual Thrift
Institution Tax Return, with the basis of the Bank's taxable income
to be determined under GAAP. The purchase accounting method will not
be used to account for the transaction.
Pennsylvania Personal Income Tax
STATEMENT OF FACTS, REPRESENTATIONS AND DISCUSSION - PENNSYLVANIA PERSONAL
INCOME TAX
<PAGE> 9
KPMG Peat Marwick LLP
The Board of Directors
First Federal Savings and Loan of Hazleton
December 22, 1997
Page 9
External legal counsel has opined that for federal income tax purposes, no gain
or loss will be recognized by Eligible Account Holders and Supplemental Account
Holders of the Bank on the issuance to them of withdrawable deposit accounts in
the Bank plus interests in the liquidation account of the converted Bank in
exchange for their deposit accounts in the Bank and their related interest in
the residual equity of the Bank or to the other depositors on the issuance to
them of withdrawable deposit accounts.
External legal counsel has opined that for federal income tax purposes, no gain
or loss will be recognized by Eligible Account Holders and Supplemental Eligible
Account Holders of the Bank upon the distribution to them of the nontransferable
subscription rights to purchase shares of stock in the Holding Company, provided
that the amount paid for the Holding Company common stock is equal to the fair
market value of such stock. Gain realized, if any, by the Eligible Account
Holders and Supplemental Eligible Account Holders of the Bank on the
distribution to them of nontransferable subscription rights to purchase the
Holding Company stock will be recognized but only in an amount not in excess of
the fair market value of such subscription rights. Eligible Account Holders and
Supplemental Eligible Account Holders of the Bank will not realize any taxable
income for federal income tax purposes as a result of the exercise by them of
the nontransferable subscription rights.
In addition, Keller and Company, Inc., has issued an opinion stating that,
pursuant to its valuation, the subscription rights have no value based on the
fact that such rights are acquired by the recipients without cost, are
nontransferable and of short duration, and afford the recipients the right only
to purchase the Holding Company stock at a price equal to its estimated fair
market value, which will be the same price as the actual purchase price for any
unsubscribed shares of Holding Company stock.
Pennsylvania personal income tax is imposed on eight specified categories of
income received by individuals. Income is taxable if it emanates from one of the
following classes (72 P.S. Section 7303(a)):
(1) Compensation;
(2) Net profits from the operation of a business, profession or other
activity;
(3) Net gains from the sale, exchange or other disposition of real or
personal property;
(4) Net gains or income from or in the form of rents, royalties,
patents and copyrights;
(5) Dividends;
(6) Interest;
(7) Gambling and lottery winnings other than prizes of the Pennsylvania
State Lottery; or
(8) Net gains or interest obtained through estates and trusts.
Eligible Account Holders and Supplemental Account Holders of the Bank will be
receiving withdrawable deposit accounts in the Bank plus interests in the
liquidation account of the converted Bank in exchange for their deposit accounts
and their related interest in the residual
<PAGE> 10
KPMG Peat Marwick LLP
The Board of Directors
First Federal Savings and Loan of Hazleton
December 22, 1997
Page 10
equity of the Bank, along with nontransferable subscription rights to purchase
shares of stock in the Holding Company.
Consistent with federal treatment, Pennsylvania affords similar tax-free
treatment with respect to tax-free reorganizations pursuant to Section
368(a)(1)(F) of the Internal Revenue Code (72 P.S. Section 7303(a)(3)).
Accordingly, the Conversion would not give rise to any income that would emanate
from any one of the above eight classes.
OPINION
Based solely on the STATEMENT OF FACTS, REPRESENTATIONS, AND DISCUSSIONS set
forth in this opinion letter, it is the opinion of KPMG that for Pennsylvania
Personal Income Tax purposes:
(1) No gain or loss will be recognized by Eligible Account Holders and
Supplemental Account Holders of the Bank on the issuance to them of
withdrawable deposit accounts in the Bank plus interests in the
liquidation account of the converted Bank in exchange for their deposit
accounts and their related interest in the residual equity of the Bank,
or to the other depositors on the issuance to them of withdrawable
deposit accounts.
(2) No gain or loss will be recognized by Eligible Account Holders and
Supplemental Eligible Account Holders of the Bank upon the distribution
to them of the nontransferable subscription rights to purchase shares
of stock in the Holding Company, provided that the amount paid for the
Holding Company common stock is equal to the fair market value of such
stock. Gain realized, if any, by the Eligible Account Holders and
Supplemental Eligible Account Holders of the Bank on the distribution
to them of nontransferable subscription rights to purchase the Holding
Company stock will be recognized but only in an amount not in excess of
the fair market value of such subscription rights. Eligible Account
Holders and Supplemental Eligible Account Holders of the Bank will not
realize any taxable income for state income tax purposes as a result of
the exercise by them of the nontransferable subscription rights.
Delaware Corporate Income Tax
STATEMENT OF FACTS, REPRESENTATIONS AND DISCUSSION - DELAWARE CORPORATE INCOME
TAX
The Bank is neither incorporated nor currently conducting business in the State
of Delaware. Accordingly, no Delaware corporate income tax will arise to the
Bank as a result of the Conversion.
The Holding Company is a domestic Delaware corporation, organized at the
direction of the Bank to become a savings and loan holding company and own all
of the Bank's capital stock to be issued upon its conversion from mutual form to
stock form. The Holding Company does not maintain any physical presence in nor
conduct any business in the State of Delaware.
<PAGE> 11
KPMG Peat Marwick LLP
The Board of Directors
First Federal Savings and Loan of Hazleton
December 22, 1997
Page 11
Delaware Tax Law Section 1901(b)(6) exempts an entity from Delaware corporation
income tax if the corporation maintains a statutory corporate office in Delaware
but is not doing business in Delaware. Thus, if a company has no physical
presence in Delaware and derives no income from Delaware activities, it should
be exempt from Delaware corporate income taxation.
OPINION
Based solely on the STATEMENT OF FACTS, REPRESENTATIONS, AND DISCUSSIONS set
forth in this opinion letter, it is the opinion of KPMG that the following
Delaware Corporate Income Tax consequences will occur as a result of the above
Conversion:
(1) The Bank will not be subject to Delaware taxation since it is not
organized under the laws of Delaware and it does not have any physical
presence or conduct any business in Delaware.
(2) Although the Holding Company will be organized in Delaware, it
should not be subject to Delaware corporation income tax if it does not
maintain any physical presence in Delaware nor conduct any business
within Delaware.
*************
The opinions expressed above are rendered with respect to the specific matters
discussed herein and we express no opinion with respect to any other federal or
state income tax, or other state and local taxes, or legal aspect of the merger.
Our opinions are based on the completeness and accuracy of the above-stated
facts and representations. If any of the foregoing are not entirely complete or
accurate, it is imperative that we be informed immediately in writing, as the
inaccuracy or incompleteness could have a material effect on our conclusions. We
are relying upon the relevant provisions of Article III, Article IV, and Article
XV of the Pennsylvania Tax Reform Code of 1971, Act of March 4, 1971, P.L.6;
Title 8, Chapter 1 of the Delaware General Corporation Law; the Internal Revenue
Code of 1986, as amended, the regulations thereunder, and judicial and
administrative interpretations thereof, which are subject to change or
modification by subsequent legislative, regulatory, administrative, or judicial
decisions. Any such changes could also have an effect on the validity of our
opinions. The opinions contained herein are not binding upon the Internal
Revenue Service, any other tax authority or any court, and no assurance can be
given that a position contrary to that expressed herein will not be asserted by
a tax authority and ultimately sustained by a court. Unless you specifically
request otherwise, we will not update these opinions for subsequent changes or
modifications to the law and regulations, or to the judicial and administrative
interpretations thereof.
/s/ KPMG PEAT MARWICK LLP
December 22, 1997
<PAGE> 1
EXHIBIT 10.1
FORM OF
FIRST FEDERAL BANK
EMPLOYEE STOCK OWNERSHIP PLAN
EFFECTIVE___________, 199__
<PAGE> 2
FORM OF
FIRST FEDERAL BANK
EMPLOYEE STOCK OWNERSHIP PLAN
CERTIFICATION
I, E. Lee Beard, President and Chief Executive Officer of First
Federal Bank, a federally-chartered stock savings bank (the "Bank"), hereby
certify that the attached First Federal Bank Employee Stock Ownership Plan,
effective ________, 199__ was adopted at a duly held meeting of the Board of
Directors of the Bank on [DATE].
ATTEST: FIRST FEDERAL BANK
By:
- ------------------------------ -------------------------------------
Adelaide Lazur E. Lee Beard
Secretary President and Chief Executive Officer
DATE:
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<PAGE> 3
C O N T E N T S
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Section 1. Plan Identity............................................................................................1
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1.1 Name........................................................................................1
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1.2 Purpose.....................................................................................1
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1.3 Effective Date..............................................................................1
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1.4 Fiscal Period...............................................................................1
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1.5 Single Plan for All Employers...............................................................1
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1.6 Interpretation of Provisions................................................................1
-----------------------------
Section 2. Definitions..............................................................................................1
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Section 3: Eligibility and Participation............................................................................9
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3.1 Initial Eligibility.........................................................................9
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3.2 Terminated Employees........................................................................9
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3.3 Certain Employees Ineligible................................................................9
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3.4 Participation and Reparticipation...........................................................9
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Section 4. Employer Contributions and Credits......................................................................10
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4.1 Discretionary Contributions................................................................10
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4.2 Contributions for Stock Obligations........................................................10
-----------------------------------
4.3 Definitions Related to Contributions.......................................................11
------------------------------------
4.4 Conditions as to Contributions.............................................................11
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4.5 Matching Employer Contributions............................................................12
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Section 5. Limitations on Contributions and Allocations............................................................12
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5.1 Limitation on Annual Additions.............................................................12
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5.2 Coordinated Limitation With Other Plans....................................................12
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5.3 Effect of Limitations......................................................................13
---------------------
5.4 Limitations as to Certain Section 1042 Transactions........................................14
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5.5 Limitations as to Certain Participants.....................................................14
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5.6 Nondiscrimination Test for Matching Employer Contributions.................................15
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Section 6. Trust Fund and Its Investment...........................................................................16
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6.1 Creation of Trust Fund.....................................................................16
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6.2 Stock Fund and Investment Fund.............................................................16
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6.3 Acquisition of Stock.......................................................................16
---------------------
6.4 Participants' Option to Diversify..........................................................17
----------------------------------
Section 7. Voting Rights and Dividends on Stock....................................................................17
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7.1 Voting and Tendering of Stock..............................................................17
-----------------------------
7.2 Dividends on Stock.........................................................................18
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<PAGE> 4
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Section 8. Adjustments to Accounts.................................................................................18
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8.1 Adjustments for Transactions...............................................................18
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8.2 Valuation of Investment Fund...............................................................19
-----------------------------
8.3 Adjustments for Investment Experience......................................................19
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8.4 Adjustments for Capital Changes............................................................19
-------------------------------
Section 9. Vesting of Participants' Interests......................................................................19
----------------------------------
9.1 Deferred Vesting in Accounts...............................................................19
-----------------------------
9.2 Computation of Vesting Years...............................................................20
-----------------------------
9.3 Full Vesting Upon Certain Events...........................................................20
---------------------------------
9.4 Full Vesting Upon Plan Termination.........................................................21
-----------------------------------
9.5 Forfeiture, Repayment, and Restoral........................................................21
------------------------------------
9.6 Accounting for Forfeitures.................................................................22
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9.7 Vesting and Nonforfeitability..............................................................22
------------------------------
Section 10. Payment of Benefits.....................................................................................22
--------------------
10.1 Benefits for Participants..................................................................22
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10.2 Benefits on a Participant's Death..........................................................23
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10.3 Marital Status.............................................................................23
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10.4 Delay in Benefit Determination.............................................................24
-------------------------------
10.5 Accounting for Benefit Payments............................................................24
--------------------------------
10.6 Options to Receive and Sell Stock..........................................................24
----------------------------------
10.7 Restrictions on Disposition of Stock.......................................................25
-------------------------------------
10.8 Direct Transfer of Eligible Plan Distributions.............................................25
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Section 11. Rules Governing Benefit Claims and Review of Appeals....................................................26
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11.1 Claim for Benefits.........................................................................26
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11.2 Notification by Committee..................................................................26
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11.3 Claims Review Procedure....................................................................27
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Section 12. The Committee and Its Functions.........................................................................27
--------------------------------
12.1 Authority of Committee.....................................................................27
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12.2 Identity of Committee......................................................................27
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12.3 Duties of Committee........................................................................27
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12.4 Valuation of Stock.........................................................................28
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12.5 Compliance with ERISA......................................................................28
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12.6 Action by Committee........................................................................28
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12.7 Execution of Documents.....................................................................28
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12.8 Adoption of Rules..........................................................................29
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12.9 Responsibilities to Participants...........................................................29
---------------------------------
12.10 Alternative Payees in Event of Incapacity..................................................29
------------------------------------------
12.11 Indemnification by Employers...............................................................29
-----------------------------
12.12 Nonparticipation by Interested Member......................................................29
--------------------------------------
Section 13. Adoption, Amendment, or Termination of the Plan.........................................................30
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13.1 Adoption of Plan by Other Employers........................................................30
-----------------------------------
13.2 Adoption of Plan by Successor..............................................................30
-----------------------------
13.3 Plan Adoption Subject to Qualification.....................................................30
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13.4 Right to Amend or Terminate................................................................30
---------------------------
Section 14. Miscellaneous Provisions................................................................................31
-------------------------
14.1 Plan Creates No Employment Rights..........................................................31
----------------------------------
14.2 Nonassignability of Benefits...............................................................31
-----------------------------
14.3 Limit of Employer Liability................................................................31
----------------------------
14.4 Treatment of Expenses......................................................................32
----------------------
14.5 Number and Gender..........................................................................32
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14.6 Nondiversion of Assets.....................................................................32
-----------------------
14.7 Separability of Provisions.................................................................32
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14.8 Service of Process.........................................................................32
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14.9 Governing State Law........................................................................32
--------------------
14.10 Special Rules for Persons Subject to Section 16(b) Requirements............................32
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Section 15. Top-Heavy Provisions....................................................................................32
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15.1 Determination of Top-Heavy Status..........................................................32
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15.2 Minimum Contributions......................................................................34
----------------------
15.3 Minimum Vesting............................................................................35
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<PAGE> 6
FORM OF
FIRST FEDERAL BANK
EMPLOYEE STOCK OWNERSHIP PLAN
Section 1. Plan Identity.
1.1 Name. The name of this Plan is " First Federal Bank
Employee Stock Ownership Plan."
1.2 Purpose. The purpose of this Plan is to describe the terms
and conditions under which contributions made pursuant to the Plan will be
credited and paid to the Participants and their Beneficiaries.
1.3 Effective Date. The Effective Date of this Plan is
________, 199__.
1.4 Fiscal Period. This Plan shall be operated on the basis of
a January 1-December 31 fiscal year for the purposes of keeping the Plan's books
and records and distributing or filing any reports or returns required by law.
1.5 Single Plan for All Employers. This Plan shall be treated
as a single plan with respect to all participating Employers for the purpose of
crediting contributions and forfeitures and distributing benefits, determining
whether there has been any termination of Service, and applying the limitations
set forth in Section 5.
1.6 Interpretation of Provisions. The Employers intend this
Plan and the Trust to be a qualified stock bonus plan under Section 401(a) of
the Code and an employee stock ownership plan within the meaning of Section
407(d)(6) of ERISA and Section 4975(e)(7) of the Code. The Plan is intended to
have its assets invested primarily in qualifying employer securities of one or
more Employers within the meaning of Section 407(d)(5) of ERISA and Section 4975
(e)(8) of the Code, and to satisfy any requirement under ERISA or the Code
applicable to such a plan. Accordingly, the Plan and Trust Agreement shall be
interpreted and applied in a manner consistent with this intent and shall be
administered at all times and in all respects in a nondiscriminatory manner.
Section 2. Definitions. The following capitalized words and phrases
shall have the meanings specified when used in this Plan and in the Trust
Agreement, unless the context clearly indicates otherwise:
"Account" means a Participant's interest in the assets accumulated
under this Plan, as expressed in terms of a separate account balance which is
periodically adjusted to reflect his Employer's contributions, the Plan's
investment experience, and distributions and forfeitures.
<PAGE> 7
"Active Participant" means any Employee who has satisfied the
eligibility requirements of Section 3 and who qualifies as an Active Participant
for a particular Plan Year under Section 4.3.
"Bank" means First Federal Bank, and any entity which succeeds to the
business of the Bank and adopts this Plan as its own pursuant to Section 13.2.
"Beneficiary" means the person or persons who are designated by a
Participant to receive benefits payable under the Plan on the Participant's
death. In the absence of any designation, or if all the designated Beneficiaries
shall die before the Participant dies or shall die before all benefits have been
paid, the Participant's Beneficiary shall be his surviving Spouse, if any, or
his estate if he is not survived by a Spouse. The Committee may rely upon the
advice of the Participant's executor or administrator as to the identity of the
Participant's Spouse.
"Break in Service" means any five or more consecutive 12-month
periods beginning January 1 in which an Employee has 500 or fewer Hours of
Service per period. Solely for this purpose, an Employee shall be considered
employed for his normal hours of paid employment during a Recognized Absence,
unless he does not resume his Service at the end of the Recognized Absence.
Further, if an Employee is absent for any period (i) by reason of the Employee's
pregnancy, (ii) by reason of the birth of the Employee's child, (iii) by reason
of the placement of a child with the Employee in connection with the Employee's
adoption of the child, or (iv) for purposes of caring for such child for a
period beginning immediately after such birth or placement, the Employee shall
be credited with the Hours of Service which would normally have been credited
but for such absence, up to a maximum of 501 Hours of Service, in the first
12-month period which would otherwise be counted toward a Break in Service.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the committee responsible for the administration of
this Plan in accordance with Section 12.
"Disability" means a condition which renders the Participant totally
and permanently disabled due to sickness or injury, such disability is likely to
be continuous and permanent, and such disability renders the Participant unable
to continue a like gainful occupation. In any event, the Committee's good faith
decision as to whether a Participant's Service has been terminated by Disability
shall be final and conclusive.
"Early Retirement" means retirement on or after a Participant's (i)
attainment of age 60 or the total of a Participant's age, when added to the
Participant's years of service recognized for purposes of vested service under
the Bank's defined benefit retirement plan, equals or exceeds 75 years, and (ii)
with regard to Participant's who were employed by the Employer on or after
September 11, 1972, the Participant's completion of ten consecutive years of
vesting service under the Bank's defined benefit retirement plan.
2
<PAGE> 8
"Effective Date" means _____________-, 199_.
"Employee" means any individual who is or has been employed by the
Bank. "Employee" also means an individual employed by a leasing organization
who, pursuant to an agreement between an Employer and the leasing organization,
has performed services for the Employer and any related persons (within the
meaning of Section 414(n)(6) of the Code) on a substantially full-time basis for
more than one year, if such services are of a type historically performed by
employees in the Employer's business field. However, such a "leased employee"
shall not be considered an Employee if (i) he participates in a money purchase
pension plan sponsored by the leasing organization which provides for immediate
participation, immediate full vesting, and an annual contribution of at least 10
percent of the Employee's Total Compensation, and (ii) leased employees do not
constitute more than 20 percent of the Employer's total work force (including
leased employees, but excluding Highly Paid Employees and any other employees
who have not performed services for the Employer on a substantially full-time
basis for at least one year).
"Employer" means the Bank or any affiliate within the purview of
Sections 414(b), (c) or (m) and 415(h) of the Code, any other corporation,
partnership, or proprietorship which adopts this Plan with the Bank's consent
pursuant to Section 13.1, and any entity which succeeds to the business of any
Employer and adopts the Plan pursuant to Section 13.2.
"Entry Date" means January 1 and July 1.
"ERISA" means the Employee Retirement Income Security Act of 1974
(P.L. 93-406, as amended).
"Highly Paid Employee" means an Employee who: (A) owned more than
five percent of the outstanding equity interest or the outstanding voting
interest in any Employer during the year or the preceding year, or (B) for the
preceding year (i) had Total Compensation exceeding $80,000 (as adjusted
pursuant to Section 415(d) of the Code), and, (ii) if the Employer elects with
respect to a preceding year, was among the most highly compensated one-fifth of
all Employees for such preceding year. For this purpose:
(a) "Total Compensation" shall include any amount
which is excludable from the Employee's gross income for tax
purposes pursuant to Sections 125, 402(e)(3), 402(h)(1)(B), or 403(b)
of the Code.
(b) The number of Employees in "the most highly
compensated one-fifth of all Employees" shall be determined by taking
into account all individuals working for all related employer
entities described in the definition of "Service", but excluding any
individual who has not completed six months of Service, who normally
works fewer than 17-1/2 hours per week or in fewer than six months
per year, who has not reached age 21, whose employment
3
<PAGE> 9
is covered by a collective bargaining agreement, or who is a
nonresident alien who receives no earned income from United States
sources.
(c) A former Employee shall be treated as a highly
compensated employee if such Employee was a highly paid Employee when
such Employee separated from service, or if such Employee was a
highly paid Employee at any time after attaining age 55.
(d) The determination of who is a highly compensated
Employee, including the determinations of the number and identity of
Employees in the top-paid group and the compensation that is
considered, will be made in accordance with Section 414(q) of the
Code and the regulations thereunder.
"Holding Company" means Northeast Pennsylvania Financial Corp., the
holding company of Richmond County Savings Bank, and any entity which succeeds
to the business of the Holding Company.
"Hours of Service" means hours to be credited to an Employee under
the following rules:
(a) Each hour for which an Employee is paid or is
entitled to be paid for services to an Employer is an Hour of
Service.
(b) Each hour for which an Employee is directly or
indirectly paid or is entitled to be paid for a period of vacation,
holidays, illness, disability, lay-off, jury duty, temporary military
duty, or leave of absence is an Hour of Service. However, except as
otherwise specifically provided, no more than 501 Hours of Service
shall be credited for any single continuous period in which an
Employee performs no duties. Further, no Hours of Service shall be
credited on account of payments made solely under a plan maintained
to comply with worker's compensation, unemployment compensation, or
disability insurance laws, or to reimburse an Employee for medical
expenses.
(c) Each hour for which back pay (ignoring any
mitigation of damages) is either awarded or agreed to by an Employer
is an Hour of Service. However, no more than 501 Hours of Service
shall be credited for any single continuous period during which an
Employee would not have performed any duties.
(d) Hours of Service shall be credited in any one
period only under one of the foregoing paragraphs (a), (b) and (c);
an Employee may not get double credit for the same period.
(e) If an Employer finds it impractical to count the
actual Hours of Service for any class or group of non-hourly
Employees, each Employee in that class or group shall be credited
with 45 Hours of Service for each weekly pay period in which he has
at least one
4
<PAGE> 10
Hour of Service. However, an Employee shall be credited only for his
normal working hours during a paid absence.
(f) Hours of Service to be credited on account of a
payment to an Employee (including back pay) shall be recorded in the
period of Service for which the payment was made. If the period
overlaps two or more Plan Years, the Hours of Service credit shall be
allocated in proportion to the respective portions of the period
included in the several Plan Years. However, in the case of periods
of 31 days or less, the Administrator may apply a uniform policy of
crediting the Hours of Service to either the first Plan Year or the
second.
(g) In all respects an Employee's Hours of Service
shall be counted as required by Section 2530.200b-2(b) and (c) of
the Department of Labor's regulations under Title I of ERISA.
"Investment Fund" means that portion of the Trust Fund consisting of
assets other than Stock.
"Matching Employer Contributions" means contributions made by the
Employer pursuant to Section 4.5 to a Participant's Matching Employer
Contributions Account.
"Normal Retirement Age" means a the later of the Participant's 65th
birthday or the fifth anniversary of the Participant's participation in the
Plan.
"Normal Retirement Date" means the first day of the month coincident
with or next following attainment of Normal Retirement Age.
"One Year of Service" [See 401(k) Plan - do we need to include this]
"Participant" means any Employee who is participating in the Plan, or
who has previously participated in the Plan and still has a balance credited to
his Account.
"Plan" means The Richmond County Savings Bank Employee Stock
Ownership Plan, as set forth herein, and as amended from time to time.
"Plan Year" means the 12 consecutive month period commencing January
1 and ending December 31 of each year.
"Recognized Absence" means a period for which --
(a) an Employer grants an Employee a leave of absence
for a limited period, but only if an Employer
grants such leaves on a nondiscriminatory basis;
or
5
<PAGE> 11
(b) an Employee is temporarily laid off by an
Employer because of a change in
business conditions; or
(c) an Employee is on active military duty, but only
to the extent that his employment rights are
protected by the Military Selective Service Act
of 1967 (38 U.S.C. sec. 2021).
"Service" means an Employee's period(s) of employment or
self-employment with an Employer, excluding for initial eligibility purposes any
period in which the individual was a nonresident alien and did not receive from
an Employer any earned income which constituted income from sources within the
United States. An Employee's Service shall include any service which constitutes
service with a predecessor employer within the meaning of Section 414(a) of the
Code. An Employee's Service shall also include any service with an entity which
is not an Employer, but only either (i) for a period after 1975 in which the
other entity is a member of a controlled group of corporations or is under
common control with other trades and businesses within the meaning of Sections
414(b) or 414(c) of the Code, and a member of the controlled group or one of the
trades and businesses is an Employer, or (ii) for a period after 1979 in which
the other entity is a member of an affiliated service group within the meaning
of Section 414(m) of the Code, and a member of the affiliated service group is
an Employer.
"Spouse" means the individual, if any, to whom a Participant is
lawfully married on the date benefit payments to the Participant are to begin,
or on the date of the Participant's death, if earlier.
"Stock" means shares of the voting common stock or preferred stock
meeting the requirements of Section 409(e)(3) of the Code issued by an Employer
or an affiliated corporation.
"Stock Fund" means that portion of the Trust Fund consisting of
Stock.
"Stock Obligation" means an indebtedness arising from any extension
of credit to the Plan or the Trust which was obtained for the purpose of buying
Stock and which satisfies the requirements set forth in Section 6.3.
"Total Compensation" means a Participant's wages, salary, overtime,
bonuses, commissions, and any other amounts received for personal services
rendered while in Service from any Employer or an affiliate (within the purview
of Section 414(b), (c), and (m) of the Code), plus his earned income from any
such entity as defined in Section 401(c)(2) of the Code if he is self-employed.
"Total Compensation" shall include (i) severance payments and amounts paid as a
result of termination, (ii) amounts excludable from gross income under Section
911 of the Code, (iii) amounts described in Sections 104(a)(3), 105(a), and
105(h) of the Code to the extent includable in gross income, (iv) amounts
received from an Employer for moving expenses which are not deductible under
Section 217 of the Code, (v) amounts includable in gross income in the year of,
and on account of, the grant of a nonqualified stock option, (vi) amounts
includable in gross income
6
<PAGE> 12
pursuant to Section 83(b) of the Code, and (vii) amounts includable in gross
income under an unfunded nonqualified plan of deferred compensation, but shall
exclude (viii) Employer contributions to or amounts received from a funded or
qualified plan of deferred compensation, (ix) Employer contributions to a
simplified employee pension account to the extent deductible under Section 219
of the Code, (x) Employer contributions to a Section 403(b) annuity contract,
and (xi) amounts includable in gross income pursuant to Section 83(a) of the
Code, (xii) amounts includable in gross income upon the exercise of nonqualified
stock option or upon the disposition of stock acquired under any stock option,
and (xiii) any other amounts expended by the Employer on the Participant's
behalf which are excludable from his income or which receive special tax
benefits. A Participant's Total Compensation shall exclude any compensation in
any limitation year in excess of the limit currently in effect under Section
401(a)(17) of the Code.
"Trust" or "Trust Fund" means the trust fund created under this Plan.
"Trust Agreement" means the agreement between the Bank and the
Trustee concerning the Trust Fund. If any assets of the Trust Fund are held in a
co-mingled Trust Fund with assets of other qualified retirement plans, "Trust
Agreement" shall be deemed to include the trust agreement governing that
co-mingled Trust Fund. With respect to the allocation of investment
responsibility for the assets of the Trust Fund, the provisions of Section 2 of
the Trust Agreement are incorporated herein by reference.
"Trustee" means one or more corporate persons and individuals
selected from time to time by the Bank to serve as trustee or co-trustees of the
Trust Fund.
"Unallocated Stock Fund" means that portion of the Stock Fund
consisting of the Plan's holding of Stock which has been acquired in exchange
for one or more Stock Obligations and which has not yet been allocated to the
Participant's Accounts in accordance with Section 4.2.
"Valuation Date" means the last day of the Plan Year and each other
date as of which the Committee shall determine the investment experience of the
Investment Fund and adjust the Participants' Accounts accordingly.
"Valuation Period" means the period following a Valuation Date and
ending with the next Valuation Date.
"Vesting Year" means a unit of Service credited to a Participant
pursuant to Section 9.2 for purposes of determining his vested interest in his
Account.
7
<PAGE> 13
Section 3: Eligibility and Participation
3.1 Initial Eligibility.
(a) All Employees in active Service with the
Employer as of the effective date of the Conversion shall
enter the Plan immediately.
(b) All Employees in active Service with the Employer
after the effective date of the Conversion shall enter the
Plan as of the Entry Date coinciding with or on the next
date an Employee completes an eligibility computation
period with the Employer, during which the Employee
completes One Year of Service and attains age 21.
However, if an Employee is not in active Service with an Employer on
the date he would otherwise first enter the Plan, his entry shall be deferred
until the next day he is in Service.
For purposes of Section 3.1(b) of this Plan, a Participant's initial
eligibility computation period shall be the twelve consecutive month period
beginning with the day a Participant first completes an Hour of Service. A
Participant's subsequent eligibility computation periods shall be the Plan Year,
commencing with the Plan Year which includes the first anniversary of the day
the Participant first completed an Hour of Service.
3.2 Terminated Employees. No Employee shall have any interest
or rights under this Plan if he is never in active Service with an Employer on
or after the Effective Date.
3.3 Certain Employees Ineligible. No Employee shall be
eligible to participate in the Plan while he is employed by a division or
subsidiary of the Holding Company, other than the Bank, unless such division or
subsidiary has, with the approval of the Bank, adopted the Plan for its
Employees. Additionally, no Employee shall participate in the Plan while his
Service is an hourly-paid Employee, or is covered by a collective bargaining
agreement between an Employer and the Employee's collective bargaining
representative if (i) retirement benefits have been the subject of good faith
bargaining between the Employer and the representative and (ii) the collective
bargaining agreement does not provide for the Employee's participation in the
Plan. No Employee shall participate in the Plan while he is actually employed by
a leasing organization rather than an Employer.
3.4 Participation and Reparticipation. Subject to the
satisfaction of the foregoing requirements, an Employee shall participate in the
Plan during each period of his Service from the date on which he first becomes
eligible until his termination. For this purpose, an Employee returning within
five years of his or her termination who previously satisfied the initial
eligibility requirements shall re-enter the Plan as of the date of his return to
Service with an Employer.
8
<PAGE> 14
Section 4. Employer Contributions and Credits.
4.1 Discretionary Contributions. Each Employer shall from
time to time contribute, with respect to a Plan Year, such amounts as it may
determine from time to time. An Employer shall have no obligation to contribute
any amount under this Plan except as so determined in its sole discretion. The
Employers' contributions and available forfeitures for a Plan Year shall be
credited as of the last day of the year to the Accounts of the Active
Participants in proportion to their amounts of Cash Compensation while a
Participant.
4.2 Contributions for Stock Obligations. If the Trustee, upon
instructions from the Committee, incurs any Stock Obligation upon the purchase
of Stock, the Employer shall, subject to the provisions of the Bank's plan of
conversion and any regulatory prohibitions, contribute for each Plan Year an
amount sufficient to cover all payments of principal and interest as they come
due under the terms of the Stock Obligation. If there is more than one Stock
Obligation, the Employers shall designate the one to which any contribution is
to be applied. The Employer's obligation to make contributions under this
Section 4.2 shall be reduced to the extent of any investment earnings realized
on such contributions and any dividends paid by the Employers on Stock held in
the Unallocated Stock Account, which earnings and dividends shall be applied to
the Stock Obligation related to that Stock.
In each Plan Year in which Employer contributions, earnings on
contributions, or dividends on unallocated Stock are used as payments under a
Stock Obligation, a certain number of shares of the Stock acquired with that
Stock Obligation which is then held in the Unallocated Stock Fund shall be
released for allocation among the Participants. The number of shares released
shall bear the same ratio to the total number of those shares then held in the
Unallocated Stock Fund (prior to the release) as (i) the principal and interest
payments made on the Stock Obligation in the current Plan Year bears to (ii) the
sum of (i) above, and the remaining principal and interest payments required (or
projected to be required on the basis of the interest rate in effect at the end
of the Plan Year) to satisfy the Stock Obligation.
At the direction of the Committee, the current and projected payments
of interest under a Stock Obligation may be ignored in calculating the number of
shares to be released in each year if (i) the Stock Obligation provides for
annual payments of principal and interest at a cumulative rate that is not less
rapid at any time than level annual payments of such amounts for 10 years, (ii)
the interest included in any payment is ignored only to the extent that it would
be determined to be interest under standard loan amortization tables, and (iii)
the term of the Stock Obligation, by reason of renewal, extension, or
refinancing, has not exceeded 10 years from the original acquisition of the
Stock.
For these purposes, each Stock Obligation, the Stock purchased with
it, and any dividends on such Stock, shall be considered separately. The Stock
released from the Unallocated Stock Fund in any Plan Year shall be credited as
of the last day of the year to the Accounts of the Active Participants in
proportion to their amounts of Cash Compensation earned while a Participant as
follows:
9
<PAGE> 15
(i) first, subject to the limitations of Section 5.5
hereof, the number of shares of Stock with a fair
market value (valued as of the time the Matching
Employer Contributions are accrued under the
First Federal Bank 401(k) Plan) equal to the
Matching Employer Contribution made on behalf of
an Active Participant shall be credited to the
Participant's Matching Employer Contributions
Account; and then
(ii) subject to the limitations of Section 5.5.
hereof, the number of shares of Stock that bears
the same ratio as the Active Participant's Cash
Compensation bears to the aggregate Cash
Compensation of all Active Participants for the
Plan Year shall be credited to such Participant's
Account.
4.3 Definitions Related to Contributions. For the purposes of
this Plan, the following terms have the meanings specified:
"Active Participant" means a Participant who has satisfied the
eligibility requirements under Section 3. However, a Participant shall not
qualify as an Active Participant unless (i) he is in active Service with an
Employer as of the last day of the Plan Year, or (ii) he is on a Recognized
Absence as of that date, or (iii) his Service terminated during the Plan Year by
reason of Normal Retirement, Early Retirement, Disability or death.
"Cash Compensation" means the Participant's base compensation
reportable on Form W-2. A Participant's Cash Compensation shall exclude any
compensation in excess of the limit currently in effect under Section 401(a)(17)
of the Code. In addition to other applicable limitations set forth in the Plan,
and notwithstanding any provision of the Plan to the contrary, the annual
compensation of each employee taken in to account under the Plan shall not
exceed the Omnibus Budget Reconciliation Act of 1993 ("OBRA 1993") annual
compensation limit. The OBRA 1993 annual compensation limit is $150,000, as
adjusted by the Commissioner of the Internal Revenue Service for increases in
the cost-of-living in accordance with Section 401(a)(17)(B) of the Code. The
cost-of-living adjustment in effect for a calendar year applies to any period,
not exceeding 12 months, over which compensation is determined (the
"Determination Period") beginning in such calendar year. If a Determination
Period consists of fewer than 12 months, the OBRA 1993 annual compensation
limitation will be multiplied by a fraction, the numerator of which is the
number of months in the Determination Period, and the denominator of which is
12.
4.4 Conditions as to Contributions. Employers' contributions
shall in any event be subject to the limitation set forth in Section 5.
Contributions may be made in the form of cash, or securities and other property
to the extent permissible under ERISA, including Stock, and shall be held by the
Trustee in accordance with the Trust Agreement. In addition to the provisions of
Section 13.3 for the return of an Employer's contributions in connection with a
failure of the Plan to qualify initially under the Code, any amount contributed
by an Employer due to a good faith mistake of fact,
10
<PAGE> 16
or based upon a good faith but erroneous determination of its deductibility
under Section 404 of the Code, shall be returned to the Employer within one year
after the date on which the contribution was originally made, or within one year
after its nondeductibility has been finally determined. However, the amount to
be returned shall be reduced to take account of any adverse investment
experience within the Trust Fund in order that the balance credited to each
Participant's Account is not less that it would have been if the contribution
had never been made.
4.5 Matching Employer Contributions. For each Plan Year
commencing with the ______ Plan Year, the Employer, in its sole discretion, may
make a contribution equal to a percentage of the Employee Basic Contributions
made for the Plan Year on behalf of each Participant under the terms of the
First Federal Bank 401(k) Savings Plan.
Section 5. Limitations on Contributions and Allocations.
5.1 Limitation on Annual Additions. Notwithstanding the
provisions of Section 4, the annual addition to a Participant's Accounts under
this and any other defined contribution plans maintained by the Employers or an
affiliate (within the purview of Sections 414(b), (c), and (m) and Section
415(h) of the Code, which affiliate shall be deemed an Employer for this
purpose) shall not exceed for any limitation year an amount equal to the lesser
of --
5.1-1 $30,000, or the one-fourth of the dollar limitation
currently in effect under Section 415(b)(1)(A) of the Code; or
5.1-2 25 percent of the Participant's Total Compensation
for such limitation year.
For purposes of this Section 5.1 and the following Section 5.2, the
"annual addition" to a Participant's Accounts means the sum of (i) the Employer
contributions and Employee forfeitures credited to a Participant's Accounts with
respect to a limitation year, plus (ii) the Participant's total voluntary
contributions for that year. The $30,000 and Section 415(b)(1)(A) limitations
referred to shall, for each limitation year, be automatically adjusted to the
new dollar limitations determined by the Commissioner of Internal Revenue for
the calendar year beginning in that limitation year. Notwithstanding the
foregoing, if the special limitations on annual additions described in Section
415(c)(6) of the Code applies, the limitations described in this section shall
be adjusted accordingly. A "limitation year" means each 12 consecutive month
period beginning January 1.
5.2 Coordinated Limitation With Other Plans. For Plan Years
commencing prior to December 31, 1999, aside from the limitation prescribed by
Section 5.1 with respect to the annual addition to a Participant's Accounts for
any single limitation year, if a Participant has ever participated in one or
more defined benefit plans maintained by an Employer or an affiliate, then the
benefits provided under the defined benefit plan on his account shall be limited
on a cumulative basis so that the sum of his defined contribution plan fraction
and his defined benefit plan fraction does not exceed one. For this purpose:
11
<PAGE> 17
5.2-1 A Participant's defined contribution plan fraction
with respect to a Plan Year shall be a fraction, (i) the numerator of
which is the sum of the annual additions to his accounts under all
defined contribution plans (whether or not terminated) maintained by
the Employer for the current year and all prior limitation years
(including annual additions of the Participant's nondeductible
employee contributions to all defined benefit plans, whether or not
terminated, maintained by an Employer, and the annual additions
attributable to all welfare benefit plans, individual medical
accounts, and simplified employee pensions maintained by the
Employer), and (ii) the denominator of which is the sum of the lesser
of the following amounts -A- and -B- determined for the current
limitation year and each prior limitation year of Service with an
Employer: -A- is 1.25 times the dollar limitation determined under
Section 415(c)(1)(A) of the Code, or 1.0 times such dollar limitation
if the Plan is top-heavy, and -B- is 35 percent of the Participant's
Total Compensation for such year. If the Employee was a Participant
as of the end of the first limitation year beginning after December
31, 1986 in one or more defined contribution plans maintained by an
Employer which plan(s) were in existence on May 6, 1986, and if the
sum of this fraction and the defined benefit fraction (described
below) would otherwise exceed 1.0 under the terms of this Plan, the
numerator of this fraction will be adjusted. To affect this
adjustment, an amount equal to the product of the excess of the sum
of the fractions over 1.0, multiplied by the denominator of this
fraction shall be permanently subtracted from the numerator of this
fraction. This adjustment shall be calculated using the fractions as
they would be computed as of the end of the last limitation year
beginning before January 1, 1987, and disregarding any changes in the
terms and conditions of the Plan made after May 5, 1986, but using
the limitation applicable under Section 415 of the Code for the first
limitation year beginning on or after January 1, 1987.
5.2-2 A Participant's defined benefit plan fraction with
respect to a limitation year shall be a fraction, (i) the numerator
of which is his projected annual benefit payable at normal retirement
under the Employers' defined benefit plans, and (ii) the denominator
of which is the lesser of (a) 1.25 times $90,000, or 1.0 times such
dollar limitation if the Plan is top-heavy, and (b) 1.4 times the
Participant's average Total Compensation during his highest-paid
three consecutive limitation years.
Notwithstanding the preceding, for Plan Years commencing after
December 31, 1999, this Section 5.2 shall no longer be applicable.
5.3 Effect of Limitations. The Committee shall take whatever
action may be necessary from time to time to assure compliance with the
limitations set forth in Sections 5.1 and 5.2. Specifically, the Committee shall
see that each Employer restrict its contributions for any Plan Year to an amount
which, taking into account the amount of available forfeitures, may be
completely allocated to the Participants consistent with those limitations.
Where the limitations would otherwise be exceeded by any Participant, further
allocations to the Participant shall be curtailed to the extent necessary to
satisfy the limitations. Where an excessive amount is contributed on account
12
<PAGE> 18
of a mistake as to one or more Participants' compensation, or there is an amount
of forfeitures which may not be credited in the Plan Year in which it becomes
available, the amount shall be held in a suspense account to be allocated in
lieu of any Employer contributions in future years until it is eliminated, and
to be returned to the Employer if it cannot be credited consistent with these
limitations before the termination of the Plan.
5.4 Limitations as to Certain Section 1042 Transactions.
Aside from the limitations set forth in Section 5.1 and 5.2, if the Plan
acquires any Stock in a transaction as to which a selling shareholder or the
estate of a deceased shareholder is claiming the benefit of Section 1042 of the
Code, the Committee shall see that none of such Stock, and no other assets in
lieu of such Stock, are allocated to the Accounts of certain Participants in
order to comply with Section 409(n) of the Code.
This restriction shall apply at all times to a Participant who owns
(taking into account the attribution rules under Section 318(a) of the Code,
without regard to the exception for employee plan trusts in Section
318(a)(2)(B)(i) more than 25 percent of any class of stock of a corporation
which issued the Stock acquired by the Plan, or another corporation within the
same controlled group, as defined in Section 409(l)(4) of the Code (any such
class of stock hereafter called a "Related Class"). For this purpose, a
Participant who owns more than 25 percent of any Related Class at any time
within the one year preceding the Plan's purchase of the Stock shall be subject
to the restriction as to all allocations of the Stock, but any other Participant
shall be subject to the restriction only as to allocations which occur at a time
when he owns more than 25 percent of any Related Class.
Further, this restriction shall apply to the selling shareholder
claiming the benefit of Section 1042 and any other Participant who is related to
such a shareholder within the meaning of Section 267(b) of the Code, during the
period beginning on the date on which the Plan purchases the Stock and ending 10
years after the later of (i) the date of such purchase, and (ii) the date of the
allocation under Section 4.2 attributable to the final payment on whatever Stock
Obligations were incurred with the purchase.
This restriction shall not apply to any Participant who is a lineal
descendant of a selling shareholder if the aggregate amounts allocated under the
Plan for the benefit of all such descendants do not exceed five percent of the
Stock acquired from the shareholder.
5.5 Limitations as to Certain Participants. Aside from the
limitations set forth in Section 5.1 and 5.2, in no event shall more than one
third of the Employer contributions to the Plan (including Matching Employer
Contributions) be allocated to the Accounts of highly compensated Participants
(within the meaning of Section 414(q) of the Code). The Committee shall take
whatever action may be necessary from time to time to assure compliance with the
limitations set forth in this Section 5.5. Specifically, the Committee shall,
beginning with the Participants whose Cash Compensation amounts are in excess of
the limit under Section 401(a)(17) of the Code, reduce the amount of Cash
Compensation of such highly compensated Participants on a pro-rata basis per
individual that would otherwise be taken into account for purposes of allocating
benefits under
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<PAGE> 19
Section 4.2 of this Plan. If, in order to satisfy this Section 5.5, such
Participants' Cash Compensation amount per individual must be reduced to an
amount that is lower than the Cash Compensation amount of the next most highly
compensated Participant (the "breakpoint amount"), then, for purposes of
allocating benefits under Section 4.2 of the Plan, the Cash Compensation amounts
of all Participants shall be reduced to an amount not to exceed such breakpoint
amount.
5.6 Nondiscrimination Test for Matching Employer Contributions.
Notwithstanding anything herein to the contrary the Plan shall meet the
nondiscrimination test of Section 401(m) of the Code (described in Section 5.6-1
and applicable regulations) for each Plan Year. In order to meet the
nondiscrimination test, any or all of the following steps may be taken:
(a) At any time during the Plan Year, the Committee
may limit the amount of Matching Employer
Contributions that may be made on behalf of
Highly Compensated Employees;
(b) The Committee may reduce the Matching Employer
Contributions made for the Plan Year to the
extent necessary to meet the requirements of
Section 401(m) of Code, in the manner described
in Section 5.7;
(c) The Committee may recommend to the Board that
the Employer make an additional Matching Employer
Contribution to the Plan for the benefit of
Participants who are not Highly Compensated
Employees. This additional allocation may be
made based on Participants' Total Compensation;
and
(d) The Committee may take any other steps that the
Committee deems appropriate.
5.6-1 For Plan Years beginning after to December 31, 1996,
the nondiscrimination requirements of Section 401(m) of the Code
require that, in each Plan Year, the Contribution Percentage (defined
below) of the eligible Highly Compensated Employees for such Plan
Year does not exceed the greater of:
(a) The Contribution Percentage of all other
eligible Employees for the preceding Plan Year
multiplied by 1.25; or
(b) The lesser of the Contribution Percentage of all
other eligible Employees for the preceding Plan
Year multiplied by 2, or the Contribution
Percentage of all other eligible Employees for
the preceding Plan Year plus 2 percentage points.
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<PAGE> 20
The Committee may elect to calculate the Contribution
Percentages using the Plan Year rather than the preceding Plan Year,
provided however that if the Committee so elects, the election may
only be changed as provided by the Secretary of the Treasury.
5.6-2 The Contribution Percentage for a group of Employees
is the average of the ratios, calculated separately for each Employee
in the group, of the amount of Matching Employer Contributions that
are credited under the Plan on behalf of each Employee for the Plan
Year, to the Employee's Compensation for the Plan Year. Use of the
alternative limitation shall be subject to the provisions of Treasury
Regulation Section 1.401(m)-2 regarding the multiple use of the
alternative deferral tests set forth in Sections 401(k) and 401(m) of
the Code.
5.6-3 Notwithstanding the foregoing, if the test described
in Section 56-1 is not satisfied for a Plan Year, the Committee may
use any other test permitted under Section 401(m) of the Code to
determine whether the Plan meets the nondiscrimination requirements
of Section 401(m) of the Code.
Section 6. Trust Fund and Its Investment.
6.1 Creation of Trust Fund. All amounts received under the
Plan from an Employer and investments shall be held as the Trust Fund pursuant
to the terms of this Plan and of the Trust Agreement between the Bank and the
Trustee. The benefits described in this Plan shall be payable only from the
assets of the Trust Fund, and none of the Bank, any other Employer, its board of
directors or trustees, its stockholders, its officers, its employees, the
Committee, and the Trustee shall be liable for payment of any benefit under this
Plan except from the Trust Fund.
6.2 Stock Fund and Investment Fund. The Trust Fund held by the
Trustee shall be divided into the Stock Fund, consisting entirely of Stock, and
the Investment Fund, consisting of all assets of the Trust other than Stock. The
Trustee shall have no investment responsibility for the Stock Fund, but shall
accept any Employer contributions made in the form of Stock, and shall acquire,
sell, exchange, distribute, and otherwise deal with and dispose of Stock in
accordance with the instructions of the Committee.
6.3 Acquisition of Stock. From time to time the Committee may,
in its sole discretion, direct the Trustee to acquire Stock from the issuing
Employer or from shareholders, including shareholders who are or have been
Employees, Participants, or fiduciaries with respect to the Plan. The Trustee
shall pay for such Stock no more than its fair market value, which shall be
determined conclusively by the Committee pursuant to Section 12.4. The Committee
may direct the Trustee to finance the acquisition of Stock by incurring or
assuming indebtedness to the seller or another party which indebtedness shall be
called a "Stock Obligation". Any Stock Obligation shall be subject to the
following conditions and limitations:
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<PAGE> 21
6.3-1 A Stock Obligation shall be for a specific term,
shall not be payable on demand except in the event of default, and
shall bear a reasonable rate of interest.
6.3-2 A Stock Obligation may, but need not, be secured by a
collateral pledge of either the Stock acquired in exchange for the
Stock Obligation, or the Stock previously pledged in connection with
a prior Stock Obligation which is being repaid with the proceeds of
the current Stock Obligation. No other assets of the Plan and Trust
may be used as collateral for a Stock Obligation, and no creditor
under a Stock Obligation shall have any right or recourse to any Plan
and Trust assets other than Stock remaining subject to a collateral
pledge.
6.3-3 Any pledge of Stock to secure a Stock Obligation must
provide for the release of pledged Stock in connection with payments
on the Stock Obligations in the ratio prescribed in Section 4.2.
6.3-4 Repayments of principal and interest on any Stock
Obligation generally shall be made by the Trustee from cash
contributions designated for such payments, from earnings on such
contributions, and from cash dividends received on Stock held in the
Unallocated Stock Fund.
6.4 Participants' Option to Diversify. The Committee shall
provide for a procedure under which each Participant may, during the first five
years of a certain six-year period, elect to have up to 25 percent of the value
of his Account committed to alternative investment options within the Investment
Fund. For the sixth year in this period, the Participant may elect to have up to
50 percent of the value of his Account committed to other investments. The
six-year period shall begin with the Plan Year following the first Plan Year in
which the Participant has both reached aged 55 and completed 10 years of
participation in the Plan; a Participant's election to diversify his Account
must be made within the 90-day period immediately following the last day of each
of the six Plan Years. The Committee shall see that the Investment Fund includes
a sufficient number of investment options to comply with Section 401(a)(28)(B)
of the Code. The Trustee shall comply with any investment directions received
from Participants in accordance with the procedures adopted from time to time by
the Committee under this Section 6.4.
Section 7. Voting Rights and Dividends on Stock.
7.1 Voting and Tendering of Stock. The Trustee generally
shall vote all shares of Stock held under the Plan. However, if any Employer has
registration-type class of securities within the meaning of Section 409(e)(4) of
the Code, or if a matter submitted to the holders of the Stock involves a
merger, consolidation, recapitalization, reclassification, liquidation,
dissolution, or sale of substantially all assets of an entity, then (i) the
shares of Stock which have been allocated to Participants' Accounts shall be
voted by the Trustee in accordance with the Participants' written instructions,
and (ii) the Trustee shall vote any shares of Stock which have been allocated to
16
<PAGE> 22
Participants' Accounts but for which no written instructions have been received
and any unallocated Stock in a manner calculated to most accurately reflect the
instructions it has received from Participants regarding the allocated Stock. In
the event no shares of Stock have been allocated to Participants' Accounts at
the time Stock is to be voted, each Participant shall be deemed to have one
share of Stock allocated to his or her account for the sole purpose of providing
the Trustee with voting instructions. Notwithstanding any provision hereunder to
the contrary, all shares of Stock which have been allocated to Participants'
Accounts and for which the Trustee has received no written instructions and all
unallocated shares of Stock must be voted by the Trustee in a manner determined
by the Trustee to be solely in the interest of the Participants and
Beneficiaries. Whenever such voting rights are to be exercised, the Employers,
the Committee, and the Trustee shall see that all Participants and Beneficiaries
are provided with the same notices and other materials as are provided to other
holders of the Stock, and are provided with adequate opportunity to deliver
their instructions to the Trustee regarding the voting of Stock allocated to
their Accounts. The instructions of the Participants with respect to the voting
of allocated shares hereunder shall be confidential.
7.1-1 In the event of a tender offer, Stock shall be
tendered by the Trustee in the same manner as set forth above with
respect to the voting of Stock. Notwithstanding any provision
hereunder to the contrary, Stock must be tendered by the Trustee in a
manner determined by the Trustee to be solely in the interest of the
Participants and Beneficiaries.
7.2 Dividends on Stock. Dividends on Stock which are received
by the Trustee in the form of additional Stock shall be retained in the Stock
Fund, and shall be allocated among the Participant's Accounts and the
Unallocated Stock Fund in accordance with their holdings of the Stock on which
the dividends have been paid. Dividends on Stock credited to Participants'
Accounts which are received by the Trustee in the form of cash shall, at the
direction of the Company paying the dividends, either (i) be credited to the
Accounts in accordance with Section 8.3 and invested as part of the Investment
Fund, (ii) be distributed immediately to the Participants in proportion with the
Participants' Account balance; (iii) be distributed to the Participants within
90 days of the close of the Plan Year in which paid in proportion with the
Participants' Account balance; or (iv) be used to repay principal and interest
on the Stock Obligation used to acquire Stock on which the dividends were paid.
Dividends on Stock held in the Unallocated Stock Fund which are received by the
Trustee in the form of cash shall be applied as soon as practicable to payments
of principal and interest under the Stock Obligation incurred with the purchase
of the Stock.
Section 8. Adjustments to Accounts.
8.1 Adjustments for Transactions. An Employer contribution
pursuant to Section 4.1 shall be credited to the Participants' Accounts as of
the last day of the Plan Year for which it is contributed. Stock released from
the Unallocated Stock Fund upon the Trust's repayment of a Stock Obligation
pursuant to Section 4.2 shall be credited to the Participants' Accounts as of
the last day of the Plan Year in which the repayment occurred. Any excess
amounts remaining from the use of,
17
<PAGE> 23
or the use of the proceeds of, a sale of Stock from the Unallocated Stock Fund
to repay a Stock Obligation shall be allocated as of the last day of the Plan
Year in which the repayment occurred among the Participants' Accounts as
earnings, in proportion to the opening balance in each Account and shall not be
deemed annual additions within the meaning of Section 415(c)(2) of the Code. Any
benefit which is paid to a Participant or Beneficiary pursuant to Section 10
shall be charged to the Participant's Account as of the first day of the
Valuation Period in which it is paid. Any forfeiture or restoral shall be
charged or credited to the Participant's Account as of the first day of the
Valuation Period in which the forfeiture or restoral occurs pursuant to Section
9.6.
8.2 Valuation of Investment Fund. As of each Valuation Date,
the Trustee shall prepare a balance sheet of the Investment Fund, recording each
asset (including any contribution receivable from an Employer) and liability at
its fair market value. Any liability with respect to short positions or options
and any item of accrued income or expense and unrealized appreciation or
depreciation shall be included; provided, however, that such an item may be
estimated or excluded if it is not readily ascertainable unless estimating or
excluding it would result in a material distortion. The Committee shall then
determine the net gain or loss of the Investment Fund since the preceding
Valuation Date, which shall mean the entire income of the Investment Fund,
including realized and unrealized capital gains and losses, net of any expenses
to be charged to the general Investment Fund and excluding any contributions by
the Employer. The determination of gain or loss shall be consistent with the
balance sheets of the Investment Fund for the current and preceding Valuation
Dates.
8.3 Adjustments for Investment Experience. Any net gain or
loss of the Investment Fund during a Valuation Period, as determined pursuant to
Section 8.2, shall be allocated as of the last day of the Valuation Period among
the Participants' Accounts in proportion to the opening balance in each Account,
as adjusted for benefit payments and forfeitures during the Valuation Period,
without regard to whatever Stock may be credited to an Account.
8.4 Adjustments for Capital Changes. In the event of any
change in the outstanding shares of Stock by reason of any stock dividend or
split, recapitalization, merger, consolidation, spin-off, reorganization,
combination or exchange of shares, or other similar corporate change, or other
increase or decrease in such shares effected without receipt or payment of
consideration by the bank issuing the Stock, the Committee shall adjust the
number of shares of Stock allocated to the Participants' Accounts to prevent
dilution or enlargement of such Accounts.
Section 9. Vesting of Participants' Interests.
9.1 Deferred Vesting in Accounts. A Participant's vested
interest in his Account shall be based on his Vesting Years in accordance with
the following table, subject to the balance of this Section 9:
18
<PAGE> 24
<TABLE>
<CAPTION>
Vesting Percentage of
Years Interest Vested
------- ---------------
<S> <C>
Less than 1 year 0%
1 year 20%
2 years 40%
3 years 60%
4 years 80%
5 years or more 100%
</TABLE>
9.2 Computation of Vesting Years. For purposes of this Plan, a
"Vesting Year" means each 12-month period beginning with his initial Service
with the Employer. However, a Participant's Vesting Years shall be computed
subject to the following conditions and qualifications:
(a) A Participant's vested interest in his Account
accumulated before a Break in Service shall be
determined without regard to any Service after
the Break. Notwithstanding the foregoing, in the
event a Participant has an eligibility
computation period (as defined in Section 3.1 of
the Plan) during which he performs 500 or fewer
Hours of Service (a "one year Break in Service"),
and then returns to Service prior to having a
Break in Service, his Service performed both
before and after his break in employment shall be
taken into account in determining his Vesting
Years. Generally, if a Participant has a Break in
Service before his interest in his Account has
become vested to some extent, he shall lose
credit for any Vesting Year before the Break in
Service. However, if a Participant separates
from Service before his interest in his Account
has become vested to some extent, and returns to
Service after a Break in Service, the
Participant's Vesting Years both prior to and
after the Break in Service will count as Vesting
Years for his Account accumulated after the Break
if the number of the Participant's consecutive
one year breaks in Service is less than the
number of years of Service prior to the Break in
Service.
(b) Unless otherwise specifically excluded, a
Participant's Vesting Years shall include any
period of active military duty to the extent
required by the Military Selective Service Act of
1967 (38 U.S.C. Section 2021).
9.3 Full Vesting Upon Certain Events. Notwithstanding Section
9.1, a Participant's interest in his Account shall fully vest on the
Participant's Normal Retirement Date, provided the Participant is in Service on
or after that date. The Participant's interest shall also fully vest in the
event that his Service is terminated by Early Retirement, Disability or by death
or upon the occurrence of a Change in Control of the Bank or the Holding
Company.
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<PAGE> 25
For purposes of this Section 9.3, a Change in Control of the Bank or
the Holding Company shall mean an event of a nature that: (i) would be required
to be reported in response to Item 1(a) of the current report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in
Control of the Bank or the Company within the meaning of the Change in Bank
Control Act and the Rules and Regulations promulgated by the Federal Deposit
Insurance Corporation ("FDIC") at 12 C.F.R. Section 303.4(a) with respect to the
Bank and the Board of Governors of the Federal Reserve System ("FRB") at 12
C.F.R. Section 225.41(b) with respect to the Holding Company, as in effect on
the date hereof; or (iii) results in a transaction requiring prior FRB approval
under the Bank Holding Company Act of 1956 and the regulations promulgated
thereunder by the FRB at 12 C.F.R. Section 225.11, as in effect on the date
hereof except for the Holding Company's acquisition of the Bank; or (iv) without
limitation such a Change in Control shall be deemed to have occurred at such
time as (A) any "person" (as the term is used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the Bank or
the Holding Company representing 20% or more of the Bank's or the Holding
Company's outstanding securities except for any securities of the Bank purchased
by the Holding Company in connection with the conversion of the Bank to the
stock form and any securities purchased by any tax qualified employee benefit
plan of the Bank; or (B) individuals who constitute the Board of Directors on
the date hereof (the "Incumbent Board") cease for any reason to constitute at
least a majority thereof, provided that any person becoming a director
subsequent to the date hereof whose election was approved by a vote of at least
three-quarters of the directors comprising the Incumbent Board, or whose
nomination for election by the Holding Company's stockholders was approved by
the same Nominating Committee serving under an Incumbent Board, shall be, for
purposes of this clause (B), considered as though he were a member of the
Incumbent Board; or (C) a plan of reorganization, merger, consolidation, sale of
all or substantially all the assets of the Bank or the Holding Company or
similar transaction occurs in which the Bank or Holding Company is not the
resulting entity; or (D) solicitations of shareholders of the Holding Company,
by someone other than the current management of the Holding Company, seeking
stockholder approval of a plan of reorganization, merger or consolidation of the
Holding Company or Bank or similar transaction with one or more corporations as
a result of which the outstanding shares of the class of securities then subject
to the plan or transaction are exchanged for or converted into cash or property
or securities not issued by the Bank or the Holding Company shall be
distributed; or (E) a tender offer is made for 20% or more of the voting
securities of the Bank or the Holding Company.
9.4 Full Vesting Upon Plan Termination. Notwithstanding
Section 9.1, a Participant's interest in his Account shall fully vest if he is
in active Service upon termination of this Plan or upon the permanent and
complete discontinuance of contributions by his Employer. In the event of a
partial termination, the interest of each Participant who is in Service shall
fully vest with respect to that part of the Plan which is terminated.
9.5 Forfeiture, Repayment, and Restoral. If a Participant's
Service terminates before his interest in his Account is fully vested, that
portion which has not vested shall be forfeited if he either
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<PAGE> 26
(i) receives a distribution of his entire vested benefit, or (ii) has a Break in
Service. If a Participant who has received his entire vested interest returns to
Service before he has a Break in Service, he may repay to the Trustee an amount
equal to the distribution. The Participant may repay such amount at any time
within five years after he has returned to Service. The amount shall be credited
to his Account as of the last day of the Plan Year in which it is repaid; an
additional amount equal to the portion of his Account which was previously
forfeited shall be restored to his Account at the same time from other
Employees' forfeitures and, if such forfeitures are insufficient, from a special
contribution by his Employer for that year. In the case of a terminated
Participant who does not receive a distribution of his entire vested interest
and whose Service resumes after a Break in Service, any undistributed balance
from his prior participation which was not forfeited shall be maintained as a
fully vested subaccount with his Account. If a portion of a Participant's
Account is forfeited, assets other that Stock must be forfeited before any Stock
may be forfeited. In the case of a Participant who has incurred a Break in
Service and then returns to Service, all years of Service after the Break in
Service will be disregarded for the purpose of vesting his Account accrued
before the Break in Service, but both pre-Break and post-Break Service will
count for the purpose of vesting the Participant's Account that accrues after
the Break in Service. If a Participant's Service terminates prior to his Account
having become vested, such Participant shall be deemed to have received a
distribution of his entire vested interest as of the Valuation Date next
following his termination of Service.
9.6 Accounting for Forfeitures. A forfeiture shall be charged
to the Participant's Account as of the first day of the first Valuation Period
in which the forfeiture becomes certain pursuant to Section 9.5. Except as
otherwise provided in that Section, a forfeiture shall be added to the
contributions of the terminated Participant's Employer which are to be credited
to other Participants pursuant to Section 4.1 as of the last day of the Plan
Year in which the forfeiture becomes certain.
9.7 Vesting and Nonforfeitability. A Participant's interest
in his Account which has become vested shall be nonforfeitable for any reason.
Section 10. Payment of Benefits.
10.1 Benefits for Participants. A Participant whose Service
ends for any reason shall receive the vested portion of his Account in a single
payment on a date selected by the Committee. That date shall be on or before the
60th day after the end of the Plan Year in which his Service ends.
Notwithstanding the foregoing, if the balance credited to his Account exceeds
$3,500, his benefits shall not be paid before the latest of his 65th birthday or
the tenth anniversary of the year in which he commenced participation in the
Plan, unless he elects an early payment date in a written election filed with
the Committee. A Participant may modify such an election at any time, provided
any new benefit payment date is at least 30 days after a modified election is
delivered to the Committee. Such an election is not valid unless it is made
after the Participant has received the required notice under Section
1.411(a)-11(c) of the Income Tax Regulations that provides a general description
of the material features of a lump sum distribution and the Participant's right
to defer receipt of his benefit. The Notice shall be provided no less than 30
days and no more than 90 days before the first
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day on which all events have occurred which entitle the Participant to such
benefit. Written consent of the Participant to the distribution generally may
not be made within 30 days of the date the Participant receives the notice and
shall not be made more than 90 days from the date the Participant receives the
notice. However, a distribution may be made less than 30 days after the notice
provided under Section 1.411(a)-11(c) of the Income Tax Regulations is given,
if:
(a) the Committee clearly informs the Participant
that he has a right to period of at least 30 days
after receiving the notice to consider the
decision of whether or not to elect a
distribution (and if applicable, a particular
distribution option), and
(b) the Participant, after receiving the notice,
affirmatively elects a distribution.
In all events, a Participant's benefits shall be paid by April 1st of the
calendar year in which he reaches age 71-1/2. A Participant's benefits from that
portion of his Account committed to the Investment Fund shall be calculated on
the basis of the most recent Valuation Date before the day of payment.
For Plan Years beginning after December 31, 1996, with respect to all
Participants other than those who are 5% owners within the meaning of Section
416 of the Code, such Participant's benefits shall be paid by April 1st of the
later of (i) the calendar year in which he reaches age 71-1/2, or (ii) the
calendar year in which he retires. With respect to all Participants who are 5%
owners within the meaning of Section 416 of the Code, such Participants benefits
shall be paid by April 1st of the calendar year in which he reaches age 71-1/2.
10.2 Benefits on a Participant's Death. If a Participant dies
before his benefits are paid pursuant to Section 10.1, the balance credited to
his Account shall be paid to his Beneficiary in a single distribution on or
before the 60th day after the end of the Plan Year in which he died. The
benefits from that portion of the Account committed to the Investment Fund shall
be calculated on the basis of the most recent Valuation Date before the date of
payment.
If a married Participant dies before his benefit payments begin, then
unless he has specifically elected otherwise the Committee shall cause the
balance in his Account to be paid to his Spouse. No election by a married
Participant of a different Beneficiary shall be valid unless the election is
accompanied by the Spouse's written consent, which (i) must acknowledge the
effect of the election, (ii) must explicitly provide either that the designated
Beneficiary may not subsequently be changed by the Participant without the
Spouse's further consent, or that it may be changed without such consent, and
(iii) must be witnessed by the Committee, its representative, or a notary
public. This requirement shall not apply if the Participant establishes to the
Committee's satisfaction that the Spouse may not be located.
10.3 Marital Status. The Committee shall from time to time take
whatever steps it deems appropriate to keep informed of each Participant's
marital status. Each Employer shall provide the Committee with the most reliable
information in the Employer's possession regarding its
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Participants' marital status, and the Committee may, in its discretion, require
a notarized affidavit from any Participant as to his marital status. The
Committee, the Plan, the Trustee, and the Employers shall be fully protected and
discharged from any liability to the extent of any benefit payments made as a
result of the Committee's good faith and reasonable reliance upon information
obtained from a Participant and his Employer as to his marital status.
10.4 Delay in Benefit Determination. If the Committee is
unable to determine the benefits payable to a Participant or Beneficiary on or
before the latest date prescribed for payment pursuant to Section 10.1 or 10.2,
the benefits shall in any event be paid within 60 days after they can first be
determined, with whatever makeup payments may be appropriate in view of the
delay.
10.5 Accounting for Benefit Payments. Any benefit payment
shall be charged to the Participant's Account as of the first day of the
Valuation Period in which the payment is made.
10.6 Options to Receive and Sell Stock. Unless ownership of
virtually all Stock is restricted to active Employees and qualified retirement
plans for the benefit of Employees pursuant to the certificates of incorporation
or by-laws of the Employers issuing Stock, a terminated Participant or the
Beneficiary of a deceased Participant may instruct the Committee to distribute
the Participant's entire vested interest in his Account in the form of Stock. In
that event, the Committee shall apply the Participant's vested interest in the
Investment Fund to purchase sufficient Stock from the Stock Fund or from any
owner of stock to make the required distribution. In all other cases, the
Participant's vested interest in the Stock Fund shall be distributed in shares
of Stock, and his vested interest in the Investment Fund shall be distributed in
cash.
Any Participant who receives Stock pursuant to Section 10.1, and any
person who has received Stock from the Plan or from such a Participant by reason
of the Participant's death or incompetency, by reason of divorce or separation
from the Participant, or by reason of a rollover contribution described in
Section 402(c) of the Code, shall have the right to require the Employer which
issued the Stock to purchase the Stock for its current fair market value
(hereinafter referred to as the "put right"). The put right shall be exercisable
by written notice to the Committee during the first 60 days after the Stock is
distributed by the Plan, and, if not exercised in that period, during the first
60 days in the following Plan Year after the Committee has communicated to the
Participant its determination as to the Stock's current fair market value.
However, the put right shall not apply to the extent that the Stock, at the time
the put right would otherwise be exercisable, may be sold on an established
market in accordance with federal and state securities laws and regulations. If
the put right is exercised, the Trustee may, if so directed by the Committee in
its sole discretion, assume the Employer's rights and obligations with respect
to purchasing the Stock.
The Employer or the Trustee, as the case may be, may elect to pay for
the Stock in equal periodic installments, not less frequently than annually,
over a period not longer than five years from the 30th day after the put right
is exercised, with adequate security and interest at a reasonable rate
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<PAGE> 29
on the unpaid balance, all such terms to be set forth in a promissory note
delivered to the seller with normal terms as to acceleration upon any uncured
default.
Nothing contained herein shall be deemed to obligate any Employer to
register any Stock under any federal or state securities law or to create or
maintain a public market to facilitate the transfer or disposition of any Stock.
The put right described herein may only be exercised by a person described in
the second preceding paragraph, and may not be transferred with any Stock to any
other person. As to all Stock purchased by the Plan in exchange for any Stock
Obligation, the put right be nonterminable. The put right for Stock acquired
through a Stock Obligation shall continue with respect to such Stock after the
Stock Obligation is repaid or the Plan ceases to be an employee stock ownership
plan. Except as provided above, in accordance with the provisions of Sections
54.4975-7(b)(4) of the Treasury Regulations, no Stock acquired with the proceeds
of a Stock Obligation may be subject to any put, call or other option or
buy-sell or similar arrangement while held by and when distributed from the
Plan, whether the Plan is then an employee stock ownership plan.
10.7 Restrictions on Disposition of Stock. Except in the case of
Stock which is traded on an established market, a Participant who receives Stock
pursuant to Section 10.1, and any person who has received Stock from the Plan or
from such a Participant by reason of the Participant's death or incompetency, by
reason of divorce or separation from the Participant, or by reason of a rollover
contribution described in Section 402(c) of the Code, shall, prior to any sale
or other transfer of the Stock to any other person, first offer the Stock to the
issuing Employer and to the Plan at its current fair market value. This
restriction shall apply to any transfer, whether voluntary, involuntary, or by
operation of law, and whether for consideration or gratuitous. Either the
Employer or the Trustee may accept the offer within 14 days after it is
delivered. Any Stock distributed by the Plan shall bear a conspicuous legend
describing the right of first refusal under this Section 10.7, as well as any
other restrictions upon the transfer of the Stock imposed by federal and state
securities laws and regulations.
10.8 Direct Transfer of Eligible Plan Distributions.
A Participant or Beneficiary may direct that an "eligible rollover distribution"
(as defined below) included in such payment be paid directly to an "eligible
retirement plan" (as defined below).
To effect such a direct transfer, the Participant or Beneficiary must
notify the Committee that a direct transfer is desired and provide to the
Committee the eligible retirement plan to which the payment is to be made. Such
notice shall be made in such form and at such time as the Committee may
prescribe. Upon receipt of such notice, the Committee shall direct the Trustee
to make a trustee-to-trustee transfer of the eligible rollover distribution to
the eligible retirement plan so specified.
For purposes of this Section 10.8, an "eligible rollover
distribution" shall have the meaning set forth in Section 402(c)(4) of the Code
and any regulations promulgated thereunder. To the extent
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<PAGE> 30
such meaning is not inconsistent with the above references, an eligible rollover
distribution shall mean any distribution of all or any portion of the
Participant's Account, except that such term shall not include any distribution
which is one of a series of substantially equal periodic payments (not less
frequently than annually) made (i) for the life (or life expectancy) of the
Participant or the joint lives (or joint life expectancies) of the Participant
and a designated Beneficiary, or (ii) for a period of ten years or more.
Further, the term "eligible rollover distribution shall not include any
distribution required to be made under Section 401(a)(9) of the Code.
For purposes of this Section 10.8, an "eligible retirement plan"
shall have the meaning set forth in Section 402(c)(8) of the Code and any
regulations promulgated thereunder. To the extent such meaning is not
inconsistent with the above references, an eligible retirement plan shall mean:
(i) an individual retirement account described in Section 408(a) of the Code;
(ii) an individual retirement annuity described in Section 408(b) of the Code
(other than an endowment contract), (iii) a qualified trust described in Section
401(a) of the Code and exempt under Section 501(a) of the Code, and (iv) an
annuity plan described in Section 403(a) of the Code.
Section 11. Rules Governing Benefit Claims and Review of Appeals.
11.1 Claim for Benefits. Any Participant or Beneficiary who
qualifies for the payment of benefits shall file a claim for his benefits with
the Committee on a form provided by the Committee. The claim, including any
election of an alternative benefit form, shall be filed at least 30 days before
the date on which the benefits are to begin. If a Participant or Beneficiary
fails to file a claim by the 30th day before the date on which benefits become
payable, he shall be presumed to have filed a claim for payment for the
Participant's benefits in the standard form prescribed by Sections 10.1 or 10.2
11.2 Notification by Committee. Within 90 days after receiving a
claim for benefits (or within 180 days, if special circumstances require an
extension of time and written notice of the extension is given to the
Participant or Beneficiary within 90 days after receiving the claim for
benefits), the Committee shall notify the Participant or Beneficiary whether the
claim has been approved or denied. If the Committee denies a claim in any
respect, the Committee shall set forth in a written notice to the Participant or
Beneficiary:
(i) each specific reason for the denial;
(ii) specific references to the pertinent Plan
provisions on which the denial is based;
(iii) a description of any additional material or
information which could be submitted by the
Participant or Beneficiary to support his claim,
with an explanation of the relevance of such
information; and
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(iv) an explanation of the claims review procedures
set forth in Section 11.3.
11.3 Claims Review Procedure. Within 60 days after a
Participant or Beneficiary receives notice from the Committee that his claim for
benefits has been denied in any respect, he may file with the Committee a
written notice of appeal setting forth his reasons for disputing the Committee's
determination. In connection with his appeal the Participant or Beneficiary or
his representative may inspect or purchase copies of pertinent documents and
records to the extent not inconsistent with other Participants' and
Beneficiaries' rights of privacy. Within 60 days after receiving a notice of
appeal from a prior determination (or within 120 days, if special circumstances
require an extension of time and written notice of the extension is given to the
Participant or Beneficiary and his representative within 60 days after receiving
the notice of appeal), the Committee shall furnish to the Participant or
Beneficiary and his representative, if any, a written statement of the
Committee's final decision with respect to his claim, including the reasons for
such decision and the particular Plan provisions upon which it is based.
Section 12. The Committee and Its Functions.
12.1 Authority of Committee. The Committee shall be the "plan
administrator" within the meaning of ERISA and shall have exclusive
responsibility and authority to control and manage the operation and
administration of the Plan, including the interpretation and application of its
provisions, except to the extent such responsibility and authority are otherwise
specifically (i) allocated to the Bank, the Employers, or the Trustee under the
Plan and Trust Agreement, (ii) delegated in writing to other persons by the
Bank, the Employers, the Committee, or the Trustee, or (iii) allocated to other
parties by operation of law. The Committee shall have exclusive responsibility
regarding decisions concerning the payment of benefits under the Plan. The
Committee shall have full investment responsibility with respect to the
Investment Fund except to the extent, if any, specifically provided in the Trust
Agreement. In the discharge of its duties, the Committee may employ accountants,
actuaries, legal counsel, and other agents (who also may be employed by an
Employer or the Trustee in the same or some other capacity) and may pay their
reasonable expenses and compensation.
12.2 Identity of Committee. The Committee shall consist of
three or more individuals selected by the Bank. Any individual, including a
director, trustee, shareholder, officer, or Employee of an Employer, shall be
eligible to serve as a member of the Committee. The Bank shall have the power to
remove any individual serving on the Committee at any time without cause upon 10
days written notice, and any individual may resign from the Committee at any
time upon 10 days written notice to the Bank. The Bank shall notify the Trustee
of any change in membership of the Committee.
12.3 Duties of Committee. The Committee shall keep whatever
records may be necessary to implement the Plan and shall furnish whatever
reports may be required from time to time by the Bank. The Committee shall
furnish to the Trustee whatever information may be necessary to
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properly administer the Trust. The Committee shall see to the filing with the
appropriate government agencies of all reports and returns required of the plan
Committee under ERISA and other laws.
Further, the Committee shall have exclusive responsibility and
authority with respect to the Plan's holdings of Stock and shall direct the
Trustee in all respects regarding the purchase, retention, sale, exchange, and
pledge of Stock and the creation and satisfaction of Stock Obligations. The
Committee shall at all times act consistently with the Bank's long-term
intention that the Plan, as an employee stock ownership plan, be invested
primarily in Stock. Subject to the direction of the Committee with respect to
Stock Obligations pursuant to the provision of Section 4.2, and subject to the
provisions of Sections 6.4 and 10.6 as to Participants' rights under certain
circumstances to have their Accounts invested in Stock or in assets other than
Stock, the Committee shall determine in its sole discretion the extent to which
assets of the Trust shall be used to repay Stock Obligations, to purchase Stock,
or to invest in other assets to be selected by the Committee or an investment
manager. No provision of the Plan relating to the allocation or vesting of any
interests in the Stock Fund or the Investment Fund shall restrict the Committee
from changing any holdings of the Trust, whether the changes involve an increase
or a decrease in the Stock or other assets credited to Participants' Accounts.
In determining the proper extent of the Trust's investment in Stock, the
Committee shall be authorized to employ investment counsel, legal counsel,
appraisers, and other agents to pay their reasonable expenses and compensation.
12.4 Valuation of Stock. If the valuation of any Stock is not
established by reported trading on a generally recognized public market, the
Committee shall have the exclusive authority and responsibility to determine its
value for all purposes under the Plan. Such value shall be determined as of each
Valuation Date, and on any other date as of which the Plan purchases or sells
such Stock. The Committee shall use generally accepted methods of valuing stock
of similar corporations for purposes of arm's length business and investment
transactions, and in this connection the Committee shall obtain, and shall be
protected in relying upon, the valuation of such Stock as determined by an
independent appraiser experienced in preparing valuations of similar businesses.
12.5 Compliance with ERISA. The Committee shall perform all acts
necessary to comply with ERISA. Each individual member or employee of the
Committee shall discharge his duties in good faith and in accordance with the
applicable requirements of ERISA.
12.6 Action by Committee. All actions of the Committee shall be
governed by the affirmative vote of a number of members which is a majority of
the total number of members currently appointed, including vacancies. The
members of the Committee may meet informally and may take any action without
meeting as a group.
12.7 Execution of Documents. Any instrument executed by the
Committee shall be signed by any member or employee of the Committee.
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12.8 Adoption of Rules. The Committee shall adopt such rules and
regulations of uniform applicability as it deems necessary or appropriate for
the proper administration and interpretation of the Plan.
12.9 Responsibilities to Participants. The Committee shall
determine which Employees qualify to enter the Plan. The Committee shall furnish
to each eligible Employee whatever summary plan descriptions, summary annual
reports, and other notices and information may be required under ERISA. The
Committee also shall determine when a Participant or his Beneficiary qualifies
for the payment of benefits under the Plan. The Committee shall furnish to each
such Participant or Beneficiary whatever information is required under ERISA (or
is otherwise appropriate) to enable the Participant or Beneficiary to make
whatever elections may be available pursuant to Sections 6 and 10, and the
Committee shall provide for the payment of benefits in the proper form and
amount from the assets of the Trust Fund. The Committee may decide in its sole
discretion to permit modifications of elections and to defer or accelerate
benefits to the extent consistent with applicable law and the best interests of
the individuals concerned.
12.10 Alternative Payees in Event of Incapacity. If the
Committee finds at any time that an individual qualifying for benefits under
this Plan is a minor or is incompetent, the Committee may direct the benefits to
be paid, in the case of a minor, to his parents, his legal guardian, a custodian
for him under the Uniform Transfers to Minors Act, or the person having actual
custody of him, or, in the case of an incompetent, to his Spouse, his legal
guardian, or the person having actual custody of him, the payments to be used
for the individual's benefit. The Committee and the Trustee shall not be
obligated to inquire as to the actual use of the funds by the person receiving
them under this Section 12.10, and any such payment shall completely discharge
the obligations of the Plan, the Trustee, the Committee, and the Employers to
the extent of the payment.
12.11 Indemnification by Employers. Except as separately agreed
in writing, the Committee, and any member or employee of the Committee, shall be
indemnified and held harmless by the Employers, jointly and severally, to the
fullest extent permitted by law against any and all costs, damages, expenses,
and liabilities reasonably incurred by or imposed upon it or him in connection
with any claim made against it or him or in which it or he may be involved by
reason of its or his being, or having been, the Committee, or a member or
employee of the Committee, to the extent such amounts are not paid by insurance.
12.12 Nonparticipation by Interested Member. Any member of the
Committee who also is a Participant in the Plan shall take no part in any
determination specifically relating to his own participation or benefits, unless
his abstention would leave the Committee incapable of acting on the matter.
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Section 13. Adoption, Amendment, or Termination of the Plan.
13.1 Adoption of Plan by Other Employers. With the consent of
the Bank, any entity may become a participating Employer under the Plan by (i)
taking such action as shall be necessary to adopt the Plan, (ii) becoming a
party to the Trust Agreement establishing the Trust Fund, and (iii) executing
and delivering such instruments and taking such other action as may be necessary
or desirable to put the Plan into effect with respect to the entity's Employees.
13.2 Adoption of Plan by Successor. In the event that any
Employer shall be reorganized by way of merger, consolidation, transfer of
assets or otherwise, so that an entity other than an Employer shall succeed to
all or substantially all of the Employer's business, the successor entity may be
substituted for the Employer under the Plan by adopting the Plan and becoming a
party to the Trust Agreement. Contributions by the Employer shall be
automatically suspended from the effective date of any such reorganization until
the date upon which the substitution of the successor entity for the Employer
under the Plan becomes effective. If, within 90 days following the effective
date of any such reorganization, the successor entity shall not have elected to
become a party to the Plan, or if the Employer shall adopt a plan of complete
liquidation other than in connection with a reorganization, the Plan shall be
automatically terminated with respect to Employees of the Employer as of the
close of business on the 90th day following the effective date of the
reorganization, or as of the close of business on the date of adoption of a plan
of complete liquidation, as the case may be.
13.3 Plan Adoption Subject to Qualification. Notwithstanding any
other provision of the Plan, the adoption of the Plan and the execution of the
Trust Agreement are conditioned upon their being determined initially by the
Internal Revenue Service to meet the qualification requirements of Section
401(a) of the Code, so that the Employers may deduct currently for federal
income tax purposes their contributions to the Trust and so that the
Participants may exclude the contributions from their gross income and recognize
income only when they receive benefits. In the event that this Plan is held by
the Internal Revenue Service not to qualify initially under Section 401(a), the
Plan, may be amended retroactively to the earliest date permitted by U.S.
Treasury Regulations in order to secure qualification under Section 401(a). If
this Plan is held by the Internal Revenue Service not to qualify initially under
Section 401(a) either as originally adopted or as amended, each Employer's
contributions to the Trust under this Plan (including any earnings thereon)
shall be returned to it and this Plan shall be terminated. In the event that
this Plan is amended after its initial qualification and the Plan as amended is
held by the Internal Revenue Service not to qualify under Section 401(a), the
amendment may be modified retroactively to the earliest date permitted by U.S.
Treasury Regulations in order to secure approval of the amendment under Section
401(a).
13.4 Right to Amend or Terminate. The Bank intends to continue
this Plan as a permanent program. However, each participating Employer
separately reserves the right to suspend, supersede, or terminate the Plan at
any time and for any reason, as it applies to that Employer's Employees, and the
Bank reserves the right to amend, suspend, supersede, merge, consolidate, or
terminate the Plan
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<PAGE> 35
at any time and for any reason, as it applies to the Employees of all Employers.
No amendment, suspension, supersession, merger, consolidation, or termination of
the Plan shall reduce any Participant's or Beneficiary's proportionate interest
in the Trust Fund, or shall divert any portion of the Trust Fund to purposes
other than the exclusive benefit of the Participants and their Beneficiaries
prior to the satisfaction of all liabilities under the Plan. Except as is
required for purposes of compliance with the Code or ERISA, each as amended from
time to time, neither the provisions of Section 4.1 and 4.2 relating to the
crediting of contributions, forfeitures and shares of Stock released from the
Unallocated Stock Fund, nor any other provision of the Plan relating to the
allocation of benefits to Participants, may be amended more frequently than once
every six months. Moreover, there shall not be any transfer of assets to a
successor plan or merger or consolidation with another plan unless, in the event
of the termination of the successor plan or the surviving plan immediately
following such transfer, merger, or consolidation, each participant or
beneficiary would be entitled to a benefit equal to or greater than the benefit
he would have been entitled to if the plan in which he was previously a
participant or beneficiary had terminated immediately prior to such transfer,
merger, or consolidation. Following a termination of this Plan by the Bank, the
Trustee shall continue to administer the Trust and pay benefits in accordance
with the Plan as amended from time to time and the Committee's instructions.
Section 14. Miscellaneous Provisions.
14.1 Plan Creates No Employment Rights. Nothing in this Plan
shall be interpreted as giving any Employee the right to be retained as an
Employee by an Employer, or as limiting or affecting the rights of an Employer
to control its Employees or to terminate the Service of any Employee at any time
and for any reason, subject to any applicable employment or collective
bargaining agreements.
14.2 Nonassignability of Benefits. No assignment, pledge, or
other anticipation of benefits from the Plan will be permitted or recognized by
the Employers, the Committee, or the Trustee. Moreover, benefits from the Plan
shall not be subject to attachment, garnishment, or other legal process for
debts or liabilities of any Participant or Beneficiary, to the extent permitted
by law. This prohibition on assignment or alienation shall apply to any
judgment, decree, or order (including approval of a property settlement
agreement) which relates to the provision of child support, alimony, or property
rights to a present or former Spouse, child or other dependent of a Participant
pursuant to a State domestic relations or community property law, unless the
judgment, decree, or order is determined by the Committee to be a qualified
domestic relations order within the meaning of Section 414(p) of the Code.
14.3 Limit of Employer Liability. The liability of the
Employers with respect to Participants under this Plan shall be limited to
making contributions to the Trust from time to time, in accordance with Section
4.
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14.4 Treatment of Expenses. All expenses incurred by the
Committee and the Trustee in connection with administering this Plan and Trust
Fund shall be paid by the Trustee from the Trust Fund to the extent the expenses
have not been paid or assumed by the Employers or by the Trustee.
14.5 Number and Gender. Any use of the singular shall be
interpreted to include the plural, and the plural the singular. Any use of the
masculine, feminine, or neuter shall be interpreted to include the masculine,
feminine, or neuter, as the context shall require.
14.6 Nondiversion of Assets. Except as provided in Sections
5.3 and 13.3, under no circumstances shall any portion of the Trust Fund be
diverted to or used for any purpose other than the exclusive benefit of the
Participants and their Beneficiaries prior to the satisfaction of all
liabilities under the Plan.
14.7 Separability of Provisions. If any provision of this Plan
is held to be invalid or unenforceable, the other provisions of the Plan shall
not be affected but shall be applied as if the invalid or unenforceable
provision had not been included in the Plan.
14.8 Service of Process. The agent for the service of process
upon the Plan shall be the president of the Bank, or such other person as may be
designated from time to time by the Bank.
14.9 Governing State Law. This Plan shall be interpreted in
accordance with the laws of the State of Pennsylvania to the extent those laws
are applicable under the provisions of ERISA.
14.10 Special Rules for Persons Subject to Section 16(b)
Requirements. Notwithstanding anything herein to the contrary, any former
Participant who is subject to the provisions of Section 16(b) of the Securities
Exchange Act of 1934, who becomes eligible to again participate in the Plan, may
not become a Participant prior to the date that is six months from the date such
former Participant terminated participation in the Plan.
In addition, any person subject to the provisions of Section 16(b)
of the 1934 Act receiving a distribution of Stock from the Plan must hold such
Stock for a period of six months commencing with the date of distribution.
However, this restriction will not apply to Stock distributions made in
connection with death, retirement, disability or termination of employment, or
made pursuant to the terms of a qualified domestic relations order.
Section 15. Top-Heavy Provisions.
15.1 Determination of Top-Heavy Status. The Committee shall
determine on a regular basis whether each Plan Year is or is not a "Top-Heavy
Year" for purposes of implementing the provisions of Sections 15.2, and 15.3,
which apply only to the extent the Plan is top-heavy or super top-heavy within
the meaning of Section 416 and the Treasury Regulations promulgated thereunder.
In making this determination, the Committee shall use the following definitions
and principles:
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15.1-1 The "Employer" includes all business entities which
are considered commonly controlled or affiliated within the meaning
of Sections 414(b), 414(c), and 414(m) of the Code.
15.1-2 The "plan aggregation group" includes each qualified
retirement plan maintained by the Employer (i) in which a Key
Employee is a Participant during the Plan Year, (ii) which enables
any plan described in clause (i) to satisfy the requirements of
Section 401(a)(4) or 410 of the Code, or (iii) which provides
contributions or benefits comparable to those of the plans described
in clauses (i) and (ii) and which is designated by the Committee as
part of the plan aggregation group.
15.1-3 The "determination date," with respect to the first
Plan Year of any plan, means the last day of that Plan Year, and with
respect to each subsequent Plan Year, means the last day of the
preceding Plan Year. If any other plan has a determination date which
differs from this Plan's determination date, the top-heaviness of
this Plan shall be determined on the basis of the other plan's
determination date falling within the same calendar years as this
Plan's determination date.
15.1-4 A "Key Employee," with respect to a Plan Year, means
an Employee who at any time during the five years ending on the
top-heavy determination date for the Plan Year has received
compensation from an Employer and has been (i) an officer of the
Employer having Total Compensation greater than 50 percent of the
limit then in effect under Section 415(b)(1)(A) of the Code, (ii) one
of the 10 Employees owning the largest interests in the Employer
having Total Compensation greater than the limit then in effect under
Section 415(c)(1)(A), (iii) an owner of more than five percent of the
outstanding equity interest or the outstanding voting interest in any
Employer, or (iv) an owner of more than one percent of the
outstanding equity interest or the outstanding voting interest in an
Employer whose Total Compensation exceeds $150,000. In determining
which individuals are Key Employees, the rules of Section 416(i) of
the Code and Treasury Regulations promulgated thereunder shall apply.
The Beneficiary of a Key Employee shall also be considered a Key
Employee.
15.1-5 A "Non-key Employee" means an Employee who at any
time during the five years ending on the top-heavy determination date
for the Plan Year has received compensation from an Employer and who
has never been a Key Employee, and the Beneficiary of any such
Employee.
15.1-6 The "aggregated benefits" for any Plan Year means
(i) the adjusted account balances in defined contribution plans on
the determination date, plus (ii) the adjusted value of accrued
benefits in defined benefit plans, calculated as of the annual
valuation date coinciding with or next preceding the determination
date, with respect to Key Employees and Non-key Employees under all
plans within the plan aggregation group which includes this
32
<PAGE> 38
Plan. For this purpose, the "adjusted account balance" for and the
"adjusted value of accrued benefit" for any Employee shall be
increased by all plan distributions made with respect to the Employee
during the five years ending on the determination date. Further, the
adjusted account balance under a plan shall not include any amount
attributable to a rollover contribution or similar transfer to the
plan initiated by an Employee and made after 1983, unless both plans
involved are maintained by the Employer, in which event the
transferred amount shall be counted in the transferee plan and
ignored for all purposes in the transferor plan. Finally, the
adjusted value of accrued benefits under any defined benefit plan
shall be determined by assuming whichever actuarial assumptions were
applied by the Pension Benefit Guaranty Corporation to determine the
sufficiency of plan assets for plans terminating on the valuation
date.
15.1-7 This Plan shall be "top-heavy" for any Plan Year in
which the aggregated benefits of the Key Employees exceed 60 percent
of the total aggregated benefits for both Key Employees and Non-key
Employees.
15.1-8 This Plan shall be "super top-heavy" for any Plan
Year in which the aggregated benefits of the Key Employees exceed 90
percent of the total aggregated benefits for both Key Employees and
Non-key Employees.
15.1-9 A "Top-Heavy Year" means a Plan Year in which the
Plan is top-heavy.
15.2 Minimum Contributions. For any Top-Heavy Year, each
Employer shall make a special contribution on behalf of each Participant to the
extent that the total allocations to his Account pursuant to Section 4 is less
than the lesser of (i) four percent of his Total Compensation for that year, or
(ii) the highest ratio of such allocation to Total Compensation received by any
Key Employee for that year. For purposes of the special contribution of this
Section 15.2, a Key Employee's Total Compensation shall include amounts the Key
Employee elected to defer under a qualified 401(k) arrangement. Such a special
contribution shall be made on behalf of each Participant who is employed by an
Employer on the last day of the Plan Year, regardless of the number of his Hours
of Service, and shall be allocated to his Account.
For any Plan Year when (1) the Plan is top-heavy and (2) a Non-key
Employee is a Participant in both this Plan and a defined benefit plan included
in the plan aggregation group which is top heavy, the sum of the Employer
contributions and forfeitures allocated to the Account of each such Non-key
Employee shall be equal to at least five percent (5%) of such Non-key Employee's
Total Compensation for that year.
33
<PAGE> 39
15.3 Minimum Vesting. If a Participant's vested interest in his
Account is to be determined in a Top-Heavy Year, it shall be based on the
following "top-heavy table":
<TABLE>
<CAPTION>
Vesting Percentage of
Years Interest Vested
------- ---------------
<S> <C>
fewer than 3 0
3 or more 100%
</TABLE>
34
<PAGE> 40
TRUST AGREEMENT
BETWEEN
FIRST FEDERAL BANK
AND
------------------------
FOR THE
FIRST FEDERAL BANK
EMPLOYEE STOCK OWNERSHIP TRUST
<PAGE> 41
CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
Section 1 Creation of Trust 1
Section 2 Investment of Trust Fund and
Administrative Powers of the
Trustee 2
Section 3 Compensation and Indemnification
of Trustee and Payment of Expenses
and Taxes 7
Section 4 Records and Valuation 8
Section 5 Instructions from Committee 8
Section 6 Change of Trustees 9
Section 7 Miscellaneous 9
</TABLE>
2
<PAGE> 42
This TRUST AGREEMENT dated_____________ BETWEEN First Federal Bank, a
federally chartered savings bank with its principal office at 12 E. Broad
Street, Hazleton, Pennsylvania 18201 (hereinafter called the "Company"), AND
________________, with offices at________________ (hereinafter called the
"Trustee"),
W I T N E S S E T H T H A T:
WHEREAS, effective____________, the Company approved and adopted an
employee stock ownership plan for the benefit of its employees, First Federal
Bank Employee Stock Ownership Plan, (hereinafter called the "Plan"); and
WHEREAS, the Company has authorized the execution of this Trust
Agreement and has appointed_________________ as Trustee of the Trust Fund
created pursuant to the Plan; and
WHEREAS,________________ has agreed to act as trustee and to hold and
administer the assets of the Plan in accordance with the terms of this Trust
Agreement;
NOW, THEREFORE, the Company and the Trustee agree as follows:
Section 1. Creation of Trust.
1.1 Trustee.________________ shall be trustee of the Trust Fund
created in accordance with and in furtherance of the Plan, and shall serve as
Trustee until its removal or resignation in accordance with Section 6.
1.2 Trust Fund. The Trustee hereby agrees to accept contributions
from the Employer as defined in the Plan and amounts transferred from other
qualified retirement plans from time to time in accordance with the terms of
the Plan. All such property and contributions, together with income thereon
and increments thereto, shall constitute the "Trust Fund" to be held in
accordance with the terms of the Trust Agreement.
1.3 Incorporation of Plan. An instrument entitled "First Federal
Bank Employee Stock Ownership Plan" is incorporated herein by reference, and
this Trust Agreement shall be interpreted consistently with that Plan. All
words and phrases defined in that Plan shall have the same meaning when used in
this Trust Agreement.
1.4 Name. The name of this trust shall be "First Federal Bank
Employee Stock Ownership Trust."
1.5 Nondiversion of Assets. In no event shall any part of the corpus
or income of the Trust Fund be used for, or diverted to, purposes other than
for the exclusive benefit of the Participants and their Beneficiaries prior to
the satisfaction of all liabilities under the Plan, except to the extent that
assets may be returned to the Employer in accordance with the Plan where the
Plan fails to qualify initially under Section 401(a) of the Internal Revenue
Code (the "Code"), or
<PAGE> 43
where they are attributable to contributions made by mistake of fact or in
excess of the deductibility allowed under the Code.
Section 2. Investment of Trust Fund and Administrative Powers of the
Trustee.
2.1 Stock and Other Investments. The basic investment policy of the
Plan shall be to invest primarily in Stock of the Employer for the exclusive
benefit of the Participants and their Beneficiaries. The Committee shall have
full and complete investment authority and responsibility with respect to the
purchase, retention, sale, exchange, and pledge of Stock and the payment of
Stock Obligations, and the Trustee shall not deal in any way with Stock except
in accordance with their obligations pursuant to this trust document and the
written instructions of the Committee. The Trustee shall invest, or keep
invested, all or a portion of the Trust Fund in Stock, and shall pay Stock
Obligations out of assets of the Trust Fund, as instructed from time to time by
the Committee. The Trustee shall invest any balance of the Trust Fund (the
"Investment Fund") in such other property as the Committee, in its sole
discretion, shall deem advisable, subject to any delegation of such investment
responsibility pursuant to Section 2.2. Nothing contained herein shall provide
investment discretion authority or any like kind responsibility in regard to
the assets of the Trust Fund.
In connection with instructions to acquire Stock, the Trustee may
purchase newly issued or outstanding Stock from the Employer or any other
holders of Stock, including Participants, Beneficiaries, and Plan fiduciaries.
All purchases and sales of Stock shall be made by the Trustee at fair market
value as determined by the Committee in good faith and in accordance with any
applicable requirements under the Employee Retirement Income Security Act of
1974, as amended ("ERISA"). Such purchases may be made with assets of the
Trust Fund, with funds borrowed for this purpose (with or without guarantees of
repayment to the lender by the Employer), or by any combination of the
foregoing.
Notwithstanding any other provision of this Trust Agreement or the
Plan, neither the Committee nor Trustee shall make any purchase, sale,
exchange, investment, pledge, valuation, or loan, or take any other action
involving those assets for which it is responsible which (i) is inconsistent
with the policy of the Plan and Trust, (ii) is inconsistent with the prudence
and diversification requirements set forth in Sections 404(a)(1)(B) and (C) of
ERISA (to the extent such requirements apply to an employee stock ownership
plan and trust), (iii) is prohibited by Section 406 or 407 of ERISA, or (iv)
would impair the qualification of the Plan or the exemption of the Trust under
Sections 401 and 501, respectively, of the Code.
2.2 Delegation of Investment Responsibility. The Committee may, by
written notice and in accordance with the Plan, direct the Trustee to segregate
any portion or all of the Investment Fund into one or more separate accounts
for each of which full investment responsibility will be delegated to an
investment manager appointed in such notice pursuant to Section 402(c)(3) of
ERISA (hereinafter a "Manager"). For any separate account where the Trustee is
to maintain custody of the assets, the Trustee and the Manager shall agree upon
procedures for the transmittal
2
<PAGE> 44
of investment instructions from the Manager to the Trustee, and the Trustee may
provide the Manager with such documents as may be necessary to authorize the
Manager to effect transactions directly on behalf of the segregated account.
Further, the Committee may, by written notice and in accordance with
the Plan, direct the Trustee to segregate any portion or all of the Investment
Fund into one or more separate accounts for each of which full investment
responsibility will be delegated to an insurance company through one or more
group annuity contracts, deposit administration contracts, or similar
contracts, which may provide for investments in any commingled separate
accounts established under such contracts. An insurance company shall be a
Manager with respect to any amounts held under such a contract except to the
extent the insurer's assets are not deemed assets of the Plan and Trust Fund
pursuant to Section 401(b)(2) of ERISA. The allocation of amounts held under
such a contract among the insurer's general account and one or more individual
or commingled separate accounts shall be determined by the Committee except as
otherwise agreed by the Committee and the insurer.
Any Manager shall have all of the powers given to the Trustee pursuant
to Section 2.3 with respect to the portion of the Trust Fund committed to its
investment discretion and control. The Trustee shall be responsible for the
safekeeping of any assets which remain in its custody, but in no event shall
the Trustee be under any duty to question or make any inquiry or suggestion
regarding the action or inaction of a Manager or an insurer or the advisability
of acquiring, retaining, or disposing of any asset of a segregated account.
The Employer shall indemnify and hold the Trustee harmless from any and all
costs, damages, expenses, and liabilities which the Trustee may incur by reason
of any action taken or omitted to be taken by the Trustee upon directions from
the Committee, a Manager, or an insurer pursuant to this Section 2.2.
2.3 Trustee Powers. In addition to and not by way of limitation upon
the fiduciary powers granted to it by law, the Trustee shall have the following
specific powers, subject to the limitations set forth in Section 2.1:
2.3-1 to receive, hold, manage, invest and reinvest the money or
other property which constitutes the Trust Fund, without distinction between
principal and income;
2.3-2 to hold funds uninvested temporarily, provided it is a period
of time that is not unreasonable, without liability for interest thereon, and
to deposit funds in one or more savings or similar accounts with any banks and
savings and loan associations which are insured by an instrumentality of the
federal government, including the Trustee if it is such an institution.
2.3-3 at the direction of the Committee, to invest or reinvest the
whole or any portion of the money or other property which constitutes the Trust
Fund in such common or preferred stocks, investment trust shares, mutual funds,
commingled trust funds, partnership interests, bonds, notes, or other evidences
of indebtedness, and real and personal property as the Trustee in its absolute
judgment and discretion may deem to be for the best interests of the Trust
Fund,
3
<PAGE> 45
regardless of nondiversification to the extent that such nondiversification is
clearly prudent, and regardless of whether any such investment or property is
authorized by law regarding the investment of trust funds, of a wasting asset
nature, temporarily nonincome producing, or within or without the United
States;
2.3-4 to invest in common and preferred stocks, bonds, notes, or
other obligations of any corporation or business enterprise in which an
Employer or its owners may own an interest;
2.3-5 at the direction of the Committee, to exchange any investment
or property, real or personal, for other investments or properties at such time
and upon such terms as the Trustee shall deem proper;
2.3-6 at the direction of the Committee, to sell, transfer, convey or
otherwise dispose of any investment or property, real or personal, for cash or
on credit, in such manner and upon such terms and conditions as the Trustee
shall deem advisable, and no person dealing with the Trustee shall be under any
duty to inquire as to the validity, expediency, or propriety of any such sale
or as to the application of the purchase money paid to the Trustee;
2.3-7 to hold any investment or property in the name of the Trustee,
with or without the designation of any fiduciary capacity, or in name of a
nominee, or unregistered, or in such other form that title may pass by
delivery; provided, however, that the Trustee's records always show that such
investment or property belongs to the Trust Fund and the Trustee shall not be
relieved hereby of its responsibility to maintain safe custody of such
investment or property;
2.3-8 to organize one or more corporations to hold, manage, or
liquidate any property, including real estate, owned or acquired by the Trust
Fund if in the sole discretion of the Trustee the organization of such
corporation or corporations is for the best interest of the Trust and the Plan
participants and beneficiaries;
2.3-9 to extend the time for payment of, to modify, to renew, or to
release security from any mortgage, note or other evidence of indebtedness, or
to take advantage of or waive any default; to foreclose mortgages and bid on
property under foreclosure or to take title to property by conveyance in lieu
of foreclosure, either with or without the payment of additional consideration;
2.3-10 to vote in person or by proxy all stocks and other securities
having voting privileges; to exercise or refrain from exercising any option or
privilege with respect to stocks and other securities, including any right or
privilege to subscribe for or otherwise to acquire stocks and other securities;
or to sell any such right or privilege; to assent to and join in any plan of
refinance, merger, consolidation, reorganization or liquidation of any
corporation or other enterprise in which this Trust may have an interest, to
deposit stocks and other securities with any committee formed to effectuate the
same, to pay any expense incidental thereto, to exchange stocks and other
securities for those which may be issued pursuant to any such plan, and to
retain
4
<PAGE> 46
as an investment the stocks and other securities received by the Trustee; and
to deposit any investment in a voting trust; notwithstanding the preceding,
participants and beneficiaries shall be entitled to direct the manner in which
stock allocated to their respective accounts are to be voted on all matters.
All stock which has been allocated to participant's accounts for which the
Trustee has received no written direction and all unallocated Employer
securities will be voted by the Trustee in direct proportion to any participant
directions received and solely in the interest of the participants and
beneficiaries. Whenever such voting rights are to be exercised, the Employer,
the Committee and the Trustee shall see that all participants and beneficiaries
are provided with adequate opportunity to deliver their instructions to the
Trustee regarding voting of stock allocated to their accounts. The
instructions of the participants with respect to the voting of allocated shares
hereunder shall be confidential;
2.3-11 to abandon any property, real or personal, which the Trustee
shall consider to be worthless or not of sufficient value to warrant its
keeping or protecting; to abstain from the payment of taxes, water rents,
assessments, repairs, maintenance, and upkeep of any such property; to permit
any such property to be lost by tax sale or other proceedings, and to convey
any such property for a nominal consideration or without consideration;
2.3-12 to borrow money from the Employer or from others (including
the Trustee), and to enter into installment contracts, for the purchase of
Stock upon such terms and conditions and at such reasonable rates of interest
as the Committee may deem to be advisable, to issue its promissory notes as
Trustee to evidence such debt, to secure the payment of such notes by pledging
any property of the Trust Fund, and to authorize the holders of any such notes
to pledge them to secure obligations of the holders and in connection therewith
to repledge any assets of the Trust as security therefor; provided that, with
respect to any extension of credit to the Trust involving, as a lender or
guarantor, the Employer or other "disqualified person" within the meaning of
Section 4975(e)(2) of the Code --
(a) each loan or installment contract is primarily for the benefit
of Participants and Beneficiaries of the Plan;
(b) any interest on a loan or installment contract does not exceed
a reasonable rate;
(c) the proceeds of any loan shall be used only to acquire Stock,
to repay the loan, or to repay a previous loan meeting these
conditions, and the subject of any installment contract shall
be only the Trust's purchase of Stock;
(d) any collateral pledged to a creditor by the Trustee shall
consist only of qualifying employer securities as that term is
defined under Section 4975(e)(8) of the Code and the creditor
shall have no recourse against the Trust Fund except with
respect to the collateral (although the creditor may have
recourse against an Employer as guarantor);
(e) payments with respect to a loan or installment contract shall
be made only from those amounts contributed by the Employer to
the Trust Fund, from amounts earned on such contributions, and
from cash dividends received on unallocated Stock held by the
Trust as collateral for such an obligation; and
5
<PAGE> 47
(f) upon the payment of any portion of balance due on a loan or
upon any installment payment, a proportionate part of any
qualified employer securities originally pledged as collateral
for such indebtedness shall be released from encumbrance in
accordance with Section 4.2 of the Plan and the Committee
shall at least annually advise the Trustee of the number of
shares of Stock so released and the proper allocation of such
shares under the terms of the Plan;
2.3-13 to manage and operate any real property which shall at any
time constitute an asset of the Trust Fund; to make repairs, alterations, and
improvements thereto; to insure such property against loss by fire or other
casualty; to lease or grant options for the sale of such property, which lease
or option may be for a period of time which may extend beyond the life of this
Trust; and to take any other action or enter into any other contract respecting
such property which is consistent with the best interests of the Trust;
2.3-14 to pay any and all reasonable and normal expenses incurred in
connection with the exercise of any power, right, authority or discretion
granted herein, and, upon prior notice to the Company, to employ and compensate
agents, investment counsel, custodians, actuaries, attorneys, and accountants
in such connection;
2.3-15 to employ and consult with any legal counsel, who also may be
counsel to an Employer or the Administrator, with respect to the meaning or
construction of this Trust Agreement, the extent of the Trustee's obligations
and duties hereunder, and whether the Trustee should take or decline to take a
particular action hereunder, and the Trustee shall be fully protected with
respect to any action taken or omitted by such Trustee in good faith pursuant
to such advice;
2.3-16 to defend any action or proceeding instituted against the
Trust Fund, to institute any action on behalf of the Trust Fund, and to
compromise or submit to arbitration any dispute concerning the Trust Fund;
2.3-17 to make, execute, acknowledge and deliver any and all
documents of transfer and conveyance and any and all other instruments that may
be necessary or appropriate to carry out the powers herein granted;
2.3-18 to commingle the Trust Fund created pursuant hereto, in whole
or in part, in a single trust with all or any portion of any other trust fund,
assigning an undivided interest to each such commingled trust fund, provided
that such commingled trust is itself exempt from taxation pursuant to Section
501(a) of the Code, or its successor Section; and provided further that the
trust agreement governing such commingled trust shall be deemed incorporated by
reference in the Plan;
2.3-19 where two or more trusts governed by this Trust Agreement have
an undivided interest in any property, to credit the income from such property
to such trusts in proportion to
6
<PAGE> 48
their undivided interests, and when non pro rata distributions of property or
money are made from such trusts, to make appropriate adjustments to the
undivided fractional interests of such trusts;
2.3-20 to invest all or any portion of the Trust Fund in one or more
group annuity contracts, deposit administration contracts, and other such
contracts with insurance companies, including any commingled separate accounts
established under such contracts;
2.3-21 generally, with respect to all cash, stocks and other
securities, and property, both real and personal, received or held in the Trust
Fund by the Trustee, to exercise all the same rights and powers as are or may
be lawfully exercised by persons owning cash, or stocks and other securities,
or such property in their own right; and to do all other acts, whether or not
expressly authorized, which it may deem necessary or proper for the protection
of the Trust Fund; and
2.3-22 whenever more than two persons shall qualify to act as
co-trustees, to exercise and perform every power (including discretionary
powers), authority or duty by the concurrence of a majority of them the same
effect as if all had joined therein, except that the unanimous vote of such
persons shall be necessary to determine the number (one or more) and identity
of persons who may sign checks, make withdrawals from financial institutions,
have access to safe deposit boxes, or direct the sale of trust assets and the
disposition of the proceeds.
2.4 Brokerage. If permitted in writing by the Committee the Trustee
shall have the power and authority, to be exercised in its sole discretion at
any time and from time to time, to issue and place orders for the purchase or
sale of securities with qualified brokers and dealers. Such orders may be
placed with such qualified brokers and/or dealers who also provide investment
information or other research or statistical services to the Trustee in its
capacity as a fiduciary or investment manager for other clients.
Section 3. Compensation and Indemnification of Trustee and Payment of
Expenses and Taxes.
3.1 Fees and Expenses from Fund. Compensation of Trustee. In
consideration for rendering services pursuant to this Trust Agreement the
Trustee shall be paid fees in accordance with the Trustee's fee schedule as in
effect from time to time. Fee changes resulting in fee increases shall be
effective upon not less than 30 days' notice to the Company. In addition, the
Trustee shall be reimbursed for any reasonable expenses, including reasonable
attorneys' fees, incurred in the administration of the Trust created hereby.
Fees and expenses shall be allocated to Participant Accounts, if any, unless
paid directly by the Employer. All compensation and expenses of the Trustee
shall be paid out of the Trust Fund or by the Employer as specified in the
Plan. If and to the extent the Trust Fund shall not be sufficient, such
compensation and expenses shall be paid by the Employer upon demand. If
payment is due but not paid by the Employer, such amount shall be paid from
the assets of the Trust Fund. The Trustee is hereby empowered
7
<PAGE> 49
to withdraw all such compensation and expenses which are 60 days past due from
the Trust Fund, and, in furtherance thereof, liquidate any assets of the Trust
Fund, without further authorization or direction from or by any person.
3.2 Indemnification. Notwithstanding any other provision of this
Trust Agreement, any individual designated as a trustee hereunder shall be
indemnified and held harmless by the Employer to the fullest extent permitted
by law against any and all costs, damages, expenses and liabilities including,
but not limited to attorneys' fees and disbursements reasonably incurred by or
imposed upon such individual in connection with any claim made against him or
in which he may be involved by reason of his being, or having been, a trustee
hereunder, to the extent such amounts are not satisfied by insurance maintained
by the Employer, except liability which is adjudicated to have resulted from
the gross negligence or willful misconduct of the Trustee by reason of any
action so taken. Further, any corporate trustee and its officers, directors
and agents may be indemnified and held harmless by the Employer to the fullest
extent permitted by law against any and all costs, damages, expenses and
liabilities including, but not limited to attorneys' fees and disbursements
reasonably incurred by or imposed upon such persons and/or corporation in
connection with any claim made against it or them or in which such persons
and/or corporation may be involved by reason of its being, or having been, a
trustee hereunder as may be agreed between the Employer and such trustee,
except liability which is adjudicated to have resulted from the gross
negligence or willful misconduct of the Trustee by reason of any action so
taken.
3.3 Expenses. All expenses of administering this Trust and the Plan,
whether incurred by the Trustee or the Committee, shall be paid by the Trustee
from the Trust Fund to the extent such expenses shall not have been assumed by
the Employer.
3.4 Taxes. All taxes that may be levied or assessed upon or in
respect of the Trust Fund shall be paid from the Trust Fund. The Trustee shall
notify the Committee of any proposed or final assessments of taxes and may
assume that any such taxes are lawfully levied or assessed unless the Committee
advises it in writing to the contrary within fifteen days after receiving the
above notice from the Trustee. In such case, the Trustee, if requested by the
Committee in writing, shall contest the validity of such taxes in any manner
deemed appropriate by the Committee; the Employer may itself contest the
validity of any such taxes, in which case the Committee shall so notify the
Trustee and the Trustee shall have no responsibility or liability respecting
such contest. If either party to this Agreement contests any such proposed
levy or assessments, the other party shall provide such information and
cooperation as the party conducting the contest shall reasonably request.
Section 4. Records and Valuation.
4.1 Records. The Trustee, and any investment manager appointed
pursuant to Section 2.2, shall maintain accurate and detailed records and
accounts of all investments, receipts, disbursements and other transactions
made by it with respect to the Trust Fund, and all accounts,
8
<PAGE> 50
books and records relating thereto shall be open at all reasonable time to
inspection and audit by the Committee and the Employer.
4.2 Valuation. From time to time upon the request of the Committee,
but at least annually as of the last day of each Plan Year, the Trustee shall
prepare a balance sheet of the Investment Fund in accordance with Section 8.2
of the Plan and shall deliver copies of the balance sheet to the Committee and
the Employer.
4.3 Discharge of Trustee. Ninety days after the filing of any
balance sheet under Section 4.2 or any accounting under Section 6, the Trustee
shall be forever released and discharged from any liability or accountability
other than for gross negligence or wilful misconduct on the part of the Trustee
to anyone with respect to the transactions shown or reflected in such balance
sheet or accounting, except with respect to any acts or transactions as to
which the Committee, within such ninety-day period, files written objections
with the Trustee. The written approval of the Committee of any balance sheet
or accounting so filed by the Trustee, or the Committee's failure to file
written objections within ninety days, shall be a settlement of such balance
sheet or accounting as against all persons, and shall forever release and
discharge the Trustee from any liability of accountability to anyone with
respect to the transactions shown or reflected in such balance sheet or
accounting other than liability arising out of the Trustee's gross negligence
or wilful misconduct. If a statement of objections is filed by the Committee
and the Committee is satisfied that its objections should be withdrawn or if
the balance sheet or accounting is adjusted to its satisfaction, the Committee
shall indicate its approval of the balance sheet or accounting in a written
statement filed with the Trustee and the Trustee shall be forever released and
discharged from any liability of accountability to anyone in accordance with
the immediately preceding sentence. If an objection is not settled by the
Committee and the Trustee, the Trustee may start a proceeding for a judicial
settlement of the balance sheet or accounting in any court of competent
jurisdictions; the only parties that need be joined in such a proceeding are
the Trustee, the Committee, the Employer and any other parties whose
participation is required by law.
4.4 Right to Judicial Settlement. Nothing in this Agreement shall
prevent the Trustee from having its account settled by a court of competent
jurisdiction at any time. The only parties that need be joined in any such
proceeding are the Employer, the Committee, the Trustee and any other parties
whose participation is required by law.
Section 5. Instructions from Committee.
5.1 Certification of Members of the Committee. From time to time the
Company shall certify to the Trustee in writing the names of the individuals
comprising the Committee and shall furnish to the Trustee specimens of their
signatures and the signatures of their agents, if any. The Trustee shall be
entitled to presume that the identities of such individuals and their agents
are unchanged until it receives a certification from the Company notifying it
of any changes.
5.2 Instructions to Trustee.
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<PAGE> 51
(a) The Trustee shall pay benefits and administrative expenses under
the Plan only when it receives (and in accordance with) written instructions of
the Committee indicating the amount of the payment and the name and address of
the recipient in accordance with the terms of the Plan. The Trustee need not
inquire into whether any payment the Committee instructs the Trustee to make is
consistent with the terms of the Plan or applicable law or otherwise proper.
Any payment made by the Trustee in accordance with such instructions shall be a
complete discharge and acquittance to the Trustee. If the Committee advises
the Trustee that benefits have become payable with respect to a Participant's
interest in the Trust Fund but does not instruct the Trustee as to the manner
of payment, the Trustee shall hold the Participant's interest in the Trust
until the Trustee receives written instructions from the Committee as to the
manner of payment. The Trustee shall not pay benefits from the Trust Fund
without such instructions, even though it may be informed from other sources,
including, without limitation, a Participant or Beneficiary, that benefits are
payable under the Plan. The Trustee shall have no responsibility to determine
when, to whom or in what amount benefits and expenses are payable under the
Plan. Further, the Trustee shall have no power, authority or duty to interpret
the Plan or inquire into the decisions or determinations of the Committee, or
to question the instructions given to it by the Committee. If the Committee so
directs, the Trustee shall segregate amounts payable with respect to the
interest in the Plan of any Participant and administer them separately from the
rest of the Trust Fund in accordance with the Committee's instructions.
(b) The Trustee may require the Committee to certify in writing that
any payment of benefits or expenses it instructs the Trustee to make pursuant
to Section 5.2(a) above is: (i) in accordance with the terms of the Plan
and/or (ii) one which the Committee is authorized by the Plan and any other
applicable instruments to direct and/or (iii) made for the exclusive purpose of
providing benefits to Participants and Beneficiaries, or defraying reasonable
expenses of Plan administration and/or (iv) not made to a party in interest
(within the meaning of ERISA Section 3(14)), and/or (v) not a prohibited
transaction (within the meaning of Code Section 4975 and ERISA Section 406).
If the Trustee requests, instructions to pay benefits shall be made by the
Committee on forms prepared by the Trustee to include any or all of the above
representations. The Trustee shall be fully protected in relying on the truth
of any such representation by the Committee and shall have no duty to
investigate whether such representations are correct or to see to the
application of any amounts paid to and received by the recipient.
5.3 Plan Change. In the event of an amendment, merger, division, or
termination of the Plan, the Trustee shall continue to disburse funds and to
take other proper actions in accordance with the instructions of the Committee.
10
<PAGE> 52
Section 6. Change of Trustees.
The Company may at any time remove any person or entity serving as
Trustee hereunder by giving to such person or entity written notice of removal
and, if applicable, the name and address of the successor trustee. Any person
or entity serving as Trustee hereunder may resign at any time by giving written
notice to the Company. Any such removal or resignation shall take effect
within 30 days after notice has been given by the Trustee or by the Company, as
the case may be. Within those 30 days, the removed or resigned Trustee shall
transfer, pay over and deliver any portion of the Trust Fund in its possession
or control (less an appropriate reserve for any unpaid fees, expenses, and
liabilities) and all pertinent records to the successor or remaining trustee;
provided, however, that any assets which are invested in a collective fund or
in some other manner which prevents their immediate transfer shall be
transferred and delivered to the successor trustee as soon as may be
practicable. Thereafter, the removed or resigned Trustee shall have no
liability for the Trust Fund or for its administration by the successor or
remaining trustee, but shall render an accounting to the Committee of its
administration of the Trust Fund through the date on which its trusteeship
shall have been terminated. The Company may also, upon 30 days' notice to each
person currently serving as a Trustee, appoint one or more persons to serve as
co-trustees hereunder.
Section 7. Miscellaneous.
7.1 Right to Amend. This Trust Agreement may be amended from time to
time by an instrument executed by the Company; provided, however, that any
amendment affecting the powers, duties or liabilities of the Trustee must be
approved by the Trustee, and provided, further, that no amendment may divert
any portion of the Trust Fund to purposes other than the exclusive benefit of
the Participants and their Beneficiaries prior to the satisfaction of all
liabilities for benefits. Any amendment shall apply to the Trust Fund as
constituted at the time of the amendment as well as to that portion of the
Trust Fund which is subsequently acquired.
7.2 Compliance with ERISA. In the exercise of its powers and the
performance of its duties, the Trustee shall act in good faith and in
accordance with the applicable requirements under ERISA. Except as may be
otherwise required by ERISA, the Trustee shall not be required to furnish any
bond in any jurisdiction for the performance of its duties and, if a bond is
required despite this provision, no surety shall be required on it.
7.3 Nonresponsibility for Funding. The Trustee shall be under no
duty to enforce the payment of any contributions and shall not be responsible
for the adequacy of the Trust Fund to satisfy any obligations for benefits,
expenses, and liabilities under the Plan.
7.4 Reports. The Trustee shall file any report which it is required
by law to file with any governmental authority with respect to this Trust, and
the Committee shall furnish to the Trustee whatever information is necessary to
prepare the report.
11
<PAGE> 53
7.5 Dealings with Trustee. Persons dealing with the Trustee,
including but not limited to banks, brokers, dealers, and insurers, shall be
under no obligation to inquire concerning the validity of anything which the
Trustee purports to do, nor need any person see to the proper application of
any money paid or any property transferred upon the order of the Trustee or to
inquire into the Trustee's authority as to any transaction.
7.6 Limitation Upon Responsibilities. The Trustee shall have no
responsibilities with respect to the Plan or Trust other than those
specifically enumerated or explicitly allocated to it under this Trust
Agreement or the provisions of ERISA. All other responsibilities are retained
and shall be performed by one or more of the Employer, the Committee, and such
advisors or agents as they choose to engage.
The Trustee may execute any of the trusts or powers hereof and perform
any of its duties by or through attorneys, agents, receivers or employees and
shall not be answerable for the conduct of the same if chosen with reasonable
care and shall be entitled to advice of counsel concerning all matters of trust
hereof and the duties hereunder, and may in all cases pay such reasonable
compensation to all such attorneys, agents, receivers and employees as may
reasonably be employed in connection with the trusts hereof. The Trustee may
act upon the opinion or advice of any attorney (who may be the attorney for the
trustee or attorney for the Committee), approved by the Trustee in the exercise
of reasonable care. The Trustee shall not be responsible for any loss or
damage resulting from any action or non-action in good faith in reliance upon
such opinion or advice.
The Trustee shall be protected in acting upon any notice, request,
consent, certificate, order, affidavit, letter, telegram or other paper or
document believed to be genuine and correct and to have been signed or sent by
the proper person or persons, and the Trustee shall be under no duty to make
any investigation or inquiry as to any statement contained in any such writing
but may accept the same as conclusive evidence of the truth and accuracy of the
statements therein contained.
The Trustee shall not be liable for other than its gross negligence
or willful misconduct. Except in the case of gross negligence or wilful
misconduct on the part of the Trustee, the Trustee in its corporate capacity
shall not be liable for claims of any persons in any manner regarding the Plan;
such claims shall be limited to the Trust Fund. Unless the Trustee
participates knowingly in, or knowingly undertakes to conceal, an act or
omission of the Committee or any other fiduciary, knowing such act or omission
to be a breach of fiduciary responsibility, the Trustee shall be under no
liability for any loss of any kind which may result by reason of such act or
omission.
Before taking any action hereunder at the request or direction of the
Committee, the Trustee may require that indemnity in form and amount
satisfactory to the Trustee be furnished for the reimbursement of any and all
costs and expenses to which it may be put including, without limitation,
reasonable attorneys' fees and to protect it against all liability, except
liability
12
<PAGE> 54
which is adjudicated to have resulted from the gross negligence or willful
misconduct of the Trustee by reason of any action so taken.
No provision of this Agreement shall require the Trustee to expend or
risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder, or in the exercise of any of its
rights or powers, if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it.
7.7 Qualification of Plan and Trust. The Trustee shall be fully
protected in assuming that the Plan and Trust meet the requirements of Code
Section 401 and 501, respectively, and all the applicable provisions of ERISA
unless it is advised to the contrary in writing by the Committee or a
governmental agency.
7.8 Party in Interest Information. The Employer shall provide the
Trustee with such information concerning the relationship between any person or
organization and the Plan as the Trustee reasonably requests in order to
determine whether such person or organization is a party in interest with
respect to the Plan within the meaning of ERISA Section 3(14).
7.9 Disputes. If a dispute arises as to the payment of any funds or
delivery of any assets by the Trustee, the Trustee may withhold such payment or
delivery until the dispute is determined by a court of competent jurisdiction
or finally settled in writing by the parties concerned.
7.10 Successor Trustees. This Trust Agreement shall apply to any
person who shall be appointed to succeed the person currently appointed as the
Trustee; and any reference herein to the Trustee shall be deemed to include any
one or more individuals or corporations or any combination thereof who or which
have at any time acted as a co-trustee or as the sole trustee.
7.11 Governing State Law. This Trust Agreement shall be interpreted
in accordance with the laws of the State of Pennsylvania to the extent those
laws may be applicable under the provisions of ERISA.
13
<PAGE> 55
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
ATTEST: FIRST FEDERAL BANK
By:
- ------------------------- -------------------------
Corporate Secretary Chief Executive Officer
ATTEST: --------------------------
as TRUSTEE
By:
- ------------------------- -------------------------
14
<PAGE> 1
EXHIBIT 10.2
[NORTHEAST PENNSYLVANIA FINANCIAL CORP. LETTERHEAD]
______________, 1997
Northeast Pennsylvania Financial Corp.
12 E. Broad Street
Hazleton, Pennsylvania 18201
Dear _____________:
This letter confirms Northeast Pennsylvania Financial Corp.'s
commitment to fund a leveraged ESOP in an amount up to $________. The commitment
is subject to the following terms and conditions:
1. Lender: Northeast Pennsylvania Financial Corp. (the
"Company").
2. Borrower: First Federal Bank Employee Stock Ownership Plan.
3. Trustee: ______________________________.
4. Security: Unallocated shares of stock of the Company held in
the First Federal Bank Employee Stock Ownership Plan.
5. Maturity: Up to 10 years from takedown.
6. Amortization: Equal annual principal and interest payments
7. Pricing:
a. [____%] or [the Prime Rate as published in the
Wall Street Journal on the date of the loan
transaction].
8. Interest Payments:
a. Annual on a 360 day basis.
<PAGE> 2
9. Funding: In full by _______________, unless such date is
waived by the Company.
10. Prepayment: Voluntary prepayments are permitted at any time.
11. Conditions Precedent to Closing: Receipt by the Company of
all supporting loan documents in a form and with terms and
conditions satisfactory to the Company and its counsel.
Consummation of the transaction will also be contingent
upon no material adverse change occurring in the condition
of First Federal Bank or the Company.
12. Closing Date: Not later than _____________, unless such date
is waived by the Company.
If the terms and conditions are agreeable to you, please indicate your
acceptance by signing the enclosed copy and returning it to my attention.
Sincerely,
Lending Officer
Accepted on Behalf of
First Federal Bank
By: Date:
------------------------------------ ------------------
President and Chief Executive Officer
<PAGE> 3
FIRST FEDERAL BANK
EMPLOYEE STOCK OWNERSHIP TRUST
LOAN AND SECURITY AGREEMENT
First Federal Bank
12 E. Broad Street
Hazleton, Pennsylvania 18201
_______________ , 1998
Gentlemen:
The undersigned Trustee,________________________ ("Borrower"), not
individually but solely as Trustee under the First Federal Bank Employee Stock
Ownership Trust (the "Trust") effective ____________ applies to you, Northeast
Pennsylvania Financial Corp., (hereinafter referred to as the "Lender"), for
your commitment, subject to all of the terms and conditions hereof and on the
basis of the representations hereinafter set forth, to make a loan available to
the Borrower as hereinafter set forth. The term "Bank" as used herein refers to
First Federal Bank, the sponsoring employer of the First Federal Bank Employee
Stock Ownership Plan (the "ESOP").
SECTION ONE. THE TERM LOAN.
1.1 AMOUNT AND TERMS. Subject to and upon the terms and conditions
herein set forth, the Lender agrees to lend amounts to the Borrower, (the
"Loan"), from time to time during the period of this agreement up to but not
including the maturity date of _________in an aggregate principal amount ("Loan
Amount") sufficient to permit the Borrower to acquire a number of shares
("Shares") of common stock, par value $0.01 ("Common Stock") of Northeast
Pennsylvania Financial Corp., a Delaware corporation, and the Holding Company of
the Bank, equal to 8% of the Shares issued in connection with the conversion of
the Bank from the mutual to stock form.
The Loan is intended to be an "exempt loan" as described in Section
4975(d)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), as
defined in Section 54.4975-7(b) of the Treasury Regulations (the "Regulations"),
as described in Section 408(b)(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA") and as described in Department of Labor
Regulations Section 2550.408b-3 (collectively, the "Exempt Loan Rules").
1.2 THE NOTE. The disbursement of the Loan pursuant to Section 1.1
hereof shall be made against and evidenced by a promissory note of the Borrower
in the form annexed hereto as Exhibit A (the "Note"), such Note is to bear
interest as hereinafter provided, and to mature in ten
<PAGE> 4
(10) equal annual installments consisting of both principal and interest
amortized over a ten (10) year period in an amount sufficient to repay all
borrowed amounts plus interest, commencing on __________________ and on the last
day of each and every ___________ each year thereafter, except that the final
installment in the amount of all principal and interest not sooner paid shall be
due on________________, the final maturity thereof.
Without regard to the principal amount of the Note stated on its face,
the actual principal amount at any time outstanding and owed by the Borrower on
account of the Note shall be the amount of the disbursement of the Loan made by
the Lender under Section 1.1 hereof less all payments of principal actually
received by the Lender. The amount of such disbursement made by the Lender and
any repayments of principal thereof shall be recorded by the Lender on its books
or records or, at its option, endorsed on the reverse side of the Note by the
Lender and the unpaid principal balance at any time so recorded or endorsed by
the Lender shall be prima facie evidence in any court or other proceedings
brought to enforce the Note of the principal amount remaining unpaid thereon.
1.3 EXEMPT LOAN RULES. Notwithstanding anything to the contrary
contained in this Loan and Security Agreement (the "Agreement") or in the Note,
the Borrower shall be obligated to make repayments of the Loan only to the
extent that such repayments when added to the repayments theretofore made during
the applicable plan year would not exceed an amount which would cause the
limitations of Section 415 of the Code to be exceeded for any ESOP participant.
Except as set forth in the next succeeding sentence and to the extent
permitted by applicable law, including, without limitation, the Exempt Loan
Rules, the principal amount of the Loan and any interest thereon shall be
payable solely from contributions (other than contributions of employer
securities) made to the Trust in accordance with the ESOP, and cash dividends
received on the Shares, to enable the Borrower to pay its obligations under the
Loan and from earnings attributable to the Shares and the investment of such
contributions and dividends.
The Lender acknowledges and agrees that it shall have no other recourse
against the Borrower for repayment of the Loan and that it shall have no
recourse against assets of the ESOP included in the Trust other than pursuant to
Sections 3 and 8 hereof.
SECTION TWO. INTEREST AND FEES.
2.1 INTEREST RATE. The Loan shall bear interest (which the
Borrower hereby promises to pay) prior to maturity (whether by lapse of time,
acceleration or otherwise) at a rate per annum equal at all times to the
Interest Rate as defined in Section 10.3 hereof.
The term "Interest Rate" shall mean the prime rate as published in the
Wall Street Journal on ___________________.
2
<PAGE> 5
2.2 BASIS AND PAYMENT DATES. All interest accruing on the Note
prior to maturity shall be due and payable on a annual basis on the last day of
each year (commencing ____________) and at maturity (unless prepaid in whole
prior to such date, then on the date of such prepayment in whole) and interest
accruing after maturity shall be due and payable upon demand. All interest on
the Note shall be computed on the basis of a year of 360 days.
SECTION THREE. COLLATERAL.
3.1 GRANT OF SECURITY INTEREST-PLEDGED SHARES. The Borrower hereby
grants, pledges and assigns to the Lender all Shares of the issued and
outstanding common stock, par value $.01 per share all of which were either (i)
purchased by the Borrower from the proceeds of the disbursement of the Loan;
(ii) acquired by the Borrower with the proceeds of a prior exempt loan within
the meaning of Section 54.4975-7(b) of the Regulations, and pledged as
collateral for such prior exempt loan, where the balance of such prior exempt
loan has been repaid with the proceeds of the disbursement of the Loan (the
"Pledged Shares" being hereinafter referred to as the "Collateral"). The Pledged
Shares shall be evidenced by a stock certificate. The assignment and pledge
herein granted and provided for is made and given to secure and shall secure the
prompt payment of principal of and interest on the Note as and when the same
becomes due and payable and the payment, observance and performance of any and
all obligations and liabilities arising under or provided for in this Agreement
or the Note or any of them in each instance as the same may be amended or
modified and whether now existing or hereafter arising.
3.2 FURTHER ASSURANCES. The Borrower covenants and agrees that it
will at any time and from time to time as requested by the Lender execute and
deliver such further instruments and perform such other acts as the Lender may
reasonably deem necessary or desirable to provide for or perfect the lien of the
Lender in the Collateral hereunder.
3.3 VOTING. Upon the occurrence of a Default, as defined in
Section Nine hereunder, the Lender shall have the right to transfer the
Collateral or any part thereof into its name or into the name of its nominee.
The Lender shall not be entitled to vote the Pledged Shares unless and until a
Default has occurred and so long as the same shall not have been waived by the
Lender.
3.4 PARTIAL RELEASES. The Lender agrees, provided always that no
Default shall have occurred and be continuing, as promptly as is practicable
after__________ in each year (the period commencing_____________ and
ending______________ and each subsequent 12-month period ending
on_______________ being hereinafter referred to as a "Plan Year"), to release
that number of Pledged Shares then being held to secure the Loan which is equal
to the number of such Pledged Shares held as of the last day of the Plan Year
multiplied by a fraction, the numerator of which is the aggregate amount of all
principal and interest payments made on the Note during the Plan Year and the
denominator of which is the sum of the numerator plus the unpaid principal and
interest of the Note as of the last day of such Plan Year.
3
<PAGE> 6
SECTION FOUR. PAYMENTS.
4.1 PLACE AND APPLICATION. All payments of principal, interest,
fees and all other amounts payable hereunder shall be made to the Lender
at_____________________________________ for the account of the Lender (or at
such other place for the account of the Lender as the Lender may from time to
time in writing specify to the Borrower) in immediately available and freely
transferable funds. All payments shall be paid in full without setoff or
counterclaim and without reduction for and free from any and all taxes, levies,
duties, fees, charges, deductions, withholdings, restrictions or conditions of
any nature imposed by any government or any political subdivision or taxing
authority thereof.
4.2 PREPAYMENTS. The Borrower shall have the privilege of
prepaying in whole or in part the Note at any time upon giving three (3)
Business Days' prior notice to the Lender, each such prepayment to be made by
the payment of the principal amount to be prepaid and accrued interest thereon
to the date fixed for prepayment. The term "Business Day" shall mean any day on
which savings institutions are generally open for business in Pennsylvania,
other than Saturday and Sunday. All such prepayments shall be made without
premium or penalty. Prepayments shall first be applied to the several
installments of the Note in the inverse order of their respective maturities.
SECTION FIVE. REPRESENTATIONS AND WARRANTIES.
The Borrower represents and warrants to the Lender as follows:
5.1 The Trust is a duly organized, validly existing employee stock
ownership trust.
5.2 The proceeds of the disbursement of the Loan shall be applied
in their entirety to the payment of the purchase price for the Pledged Shares.
5.3 The Borrower has full right, power and authority to enter into
this Agreement, to make the borrowings hereunder provided for, to issue the Note
in evidence thereof and to perform each and all of the matters and things herein
and therein provided for and this Agreement does not, and the Note when issued
will not, nor will the performance or observance by the Borrower of any of the
matters or things herein or therein provided, contravene any provision of law or
the Trust or any other covenant or agreement affecting the Trust or any of its
assets. As of the date of the disbursement of the Loan, the Pledged Shares will
be fully paid and non-assessable and the Pledged Shares will be owned by the
Borrower free and clear of all liens, charges and encumbrances whatsoever,
except for any lien of Lender provided for herein.
5.4 Except as disclosed to the Lender in writing, there is no
litigation or governmental proceeding pending, nor to the knowledge of the
Borrower threatened, against the ESOP and Trust.
4
<PAGE> 7
5.5 The ESOP and Trust have no material liabilities, whether
absolute or contingent, except for those heretofore disclosed to the Lender.
SECTION SIX. REPRESENTATIONS AND WARRANTIES OF THE LENDER
The Lender represents and warrants that:
6.1 The Lender is a corporation duly organized under the laws of
the State of Delaware, and is validly existing and in good standing under the
laws of the State of Delaware. The Lender has full power and authority and legal
right to make and perform this Agreement.
6.2 The execution, delivery and performance by the Lender of this
Agreement have been duly authorized by all necessary action by the Lender and is
not and will not violate any provisions of law applicable to the Lender, any
rules, regulations or orders applicable to the Lender or any judgments or
decrees binding upon the Lender. This Agreement is a valid and legally binding
obligation of the Lender enforceable against the Lender in accordance with its
terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting credits' rights generally
and the general principles of equity (regardless of whether considered in a
proceeding at law or in equity).
6.3 No authorizations, approvals or consents of, and no filings or
registrations with, any governmental regulatory authority or agency are required
for the execution, delivery or performance by the Lender of this Agreement, or
any transaction contemplated hereby, or for the validity or enforceability
against the Lender hereof except as have already been received or accomplished.
6.4 The execution, delivery and performance of the Agreement and
the consummation of the transactions contemplated hereby will not violate,
conflict with or constitute a default under (i) any of the provisions of the
Lender's Certificate of Incorporation or Bylaws, (ii) any provision of any
agreement, instrument, order, arbitration award, judgment or decree to which the
Lender is a party or by which it is or its assets are bound (iii) any statute,
rule or regulation of any federal, state or local government or agency
applicable to the Lender, except in any such case (i), (ii), (iii) above, for
any such conflicts, violations, defaults which either individually or in the
aggregate do not have a material adverse effect on the business properties of
the Lender and its subsidiaries, taken as a whole.
6.5 The Bank has taken such actions as are required by applicable
law to be taken by it to establish the ESOP and the Trust.
6.6 There is no action, suit, investigation or proceeding pending,
or to the best knowledge of the Bank, threatened against or affecting the ESOP
before any court or governmental department, agency or instrumentality.
5
<PAGE> 8
6.7 The Loan will be an "exempt loan" as that term is defined
under Section 54.4975-7(b)(1)(iii) of the Regulations, provided the ESOP
Committee determines that the interest rate is not more than reasonable; and the
transactions contemplated by this Agreement are not "prohibited transactions"
within the meaning of Section 4975 of the Code or Section 406(a) of ERISA.
6.8 Except as otherwise provided in this Agreement, the Shares are
not subject to any restriction on transfer under applicable Federal securities
law and may be freely traded over-the-counter.
SECTION SEVEN. CONDITIONS PRECEDENT.
The obligation of the Lender to make the Loan shall be subject to
satisfaction of the following conditions precedent:
7.1 The Lender shall have received executed originals of this
Agreement and the Note duly signed and properly completed.
7.2 The Lender shall have received either (i) the certificate
evidencing all the Pledged Shares together with duly executed blank stock power
therefore or (ii) if such Pledged Shares are not yet available, a duly executed
agreement to pledge such stock in the form attached hereto as Exhibit B (in
which event such certificate and stock power will be delivered within 6 days of
the date of the Lender makes the Loan).
7.3 The Lender shall have received copies (executed or certified,
as may be appropriate) of all legal documents or proceedings taken in connection
with the execution and delivery of this Agreement and the Note.
SECTION EIGHT. COVENANTS.
Borrower covenants and agrees that so long as any amount remains unpaid
on the Note or the Commitment is outstanding, except to the extent compliance in
any case or cases is waived in writing by the Lender:
8.1 COMPLIANCE. The Borrower will comply with all requirements of
the Code, ERISA and any other law, rule or regulation applicable to it as such
laws, rules or regulations affect the ESOP or the Trust.
6
<PAGE> 9
8.2 REPORTS.
(a) The Borrower will maintain a system of accounting for the
ESOP and the Trust in accordance with sound accounting practice and
will, from time to time, furnish to the Lender and its duly authorized
representatives, such information and data with respect to the
financial condition of the ESOP and the Trust as the Lender may
reasonably request.
(b) Without any request the Borrower will furnish to the
Lender promptly after knowledge thereof shall have come to the
attention of the Borrower, written notice of the occurrence of any
Default hereunder or of any threatened or pending litigation or
governmental proceeding against the Plan or the Trust.
8.3 DETERMINATION LETTER. The Bank shall apply for a determination
letter from the Internal Revenue Service that the Plan and the Trust, taken
together, qualify as an employee stock ownership plan for purposes of Section
4975(e)(7) of the Code and the rules and regulations thereunder.
SECTION NINE. DEFAULT AND REMEDIES.
9.1 DEFAULT. Any one or more of the following events shall
constitute a Default hereunder:
(a) As of the date when due, the Borrower fails to make
payment of principal and/or interest with respect to the Note or any
other amounts payable under this Agreement when due;
(b) As of the date proven false, the Borrower makes any
representation, warranty or statement herein or in connection with the
making of the Loan which proves to be incorrect in any material
respect;
(c) As of the date the Borrower fails to perform or observe
any term, covenant or agreement (other than those referred to in
subparts (a) and (b), inclusive, of this Section 9.1) contained in this
Agreement and such failure continues unremedied for a period of 30 days
after notice to the Borrower by the Lender or any other holder of the
Note;
(d) As of the date of termination of the ESOP if such
termination is prior to the expiration of the term of this Agreement.
9.2 LIMITATIONS ON USE OF TRUST ASSETS. When any Default described
in subsections (a) to (c), of Section 9.1 has occurred and is continuing, the
Lender or the holder of the Note shall have no rights to assets of the Trust
other than (i) contributions (other than contributions of employer securities)
that are made by the Lender to enable the Borrower to meet its obligations
7
<PAGE> 10
pursuant to the Loan, cash dividends received by the Borrower on the Shares and
earnings attributable to the investment of such contributions and dividends and
(ii) the Pledged Shares; provided further, however, that the value of Trust
assets transferred to the Lender as a result of a Default shall not exceed the
amount of the repayment then in default, and, provided further, that so long as
the Lender is a "party in interest" within the meaning of ERISA Section 3(14) or
a "disqualified person" within the meaning of Section 4975(e)(2) of the Code, a
transfer of Trust assets upon Default shall be made only if, and to the extent
of, the Borrower's failure to meet the loan's payment schedule.
9.3 RIGHTS UPON DEFAULT. When any Default has occurred and is
continuing the Lender may, in addition to such other rights or remedies as it
may have, then or at any time or times thereafter exercise with respect to the
Collateral any and all of the rights, options and remedies of a secured party
under the Uniform Commercial Code of Pennsylvania (the "UCC") including without
limitation the sale of all or any part of the Collateral at any brokers' board
or any public or private sale, provided, however that the Lender shall only be
able to exercise such rights and remedies to the extent of all interest and
principal payments which are due and payable as of the date of the Default and
provided further that prior to such exercise the Lender shall release from the
Collateral so much thereof as it would have been required to release under
Section 3.4 hereof if the period from the previous December 31 to the date of
such release constituted a Plan Year and no Default had occurred. The net
proceeds of any such sale, after deducting all costs and expenses incurred in
the collection, protection, sale and delivery of the Collateral (which expenses
Borrower promises to pay) shall be applied first to the payment of any costs and
expenses incurred by the Lender in selling or otherwise disposing of the
Collateral, second, to the payment of the principal of and the interest on the
Note, and, third, ratably as among any other items of the indebtedness hereby
secured. Any surplus remaining after the full payment and satisfaction of the
foregoing shall be returned to the Borrower or to whomsoever a court of
competent jurisdiction shall determine to be entitled thereto. Any requirement
of said UCC as to reasonable notice shall be met by the Lender personally
delivering or mailing notice (by certified mail - return receipt requested) to
the Borrower at its address as provided in Section 10.6 hereof at least ten (10)
days prior to the event giving rise to the requirement of such notice. In
connection with any offer, solicitation or sale of the Collateral, the Lender
may restrict bidders and otherwise proceed in whatever manner it reasonably
believes appropriate in order to comply or assure compliance with applicable
legal requirements pertaining to the offer and sale of securities of the same
type as the Collateral.
9.4 ERISA RESTRICTIONS. The number of Pledged Shares as to which
the Lender may exercise the rights set forth in this Section 9 may not exceed
that number of shares (then remaining subject to pledge hereunder) which is then
equal in current value to the amount in default under the Note. The remedies set
forth in this Section 9 may only be exercised to the extent consistent with the
restrictions on remedies set forth in Section 408(b)(3) of ERISA and the
regulations thereunder and Section 4975(d)(3) of the Code and the regulations
thereunder.
8
<PAGE> 11
SECTION TEN. MISCELLANEOUS.
10.1 HOLIDAYS. If any principal of the Note shall fall due on
Saturday, Sunday or on another day which is a legal holiday for savings
institutions in the State of Pennsylvania interest at the rate the Note bears
for the period prior to maturity shall continue to accrue on such principal from
the stated due date thereof to and including the next succeeding Business Day on
which the same is payable.
10.2 NO WAIVER, CUMULATIVE REMEDIES. No delay or failure on the
part of the Lender or the part of the holder of the Note in the exercise of any
power or right shall preclude any other or further exercise thereof, or the
exercise of any other power or right, and the rights and remedies hereunder of
the Lender and of any holder of the Note are cumulative to, and not exclusive
of, any rights or remedies which any of them would otherwise have.
10.3 AMENDMENTS, ETC. No amendment, modification, termination or
waiver of any provision of this Agreement or of the Note nor consent to any
departure by the Borrower therefrom, shall in any event be effective unless the
same shall be in writing and signed by the Lender, and then such consent,
modification or waiver shall be effective only in the specific instance and for
the specific purpose for which given. No notice to or demand on the Borrower in
any case shall entitle the Borrower to any other further notice or demand in
similar or other circumstances.
10.4. SURVIVAL OF REPRESENTATIONS. All representations and
warranties made herein or in certificates given in connection with the Loan
shall survive the execution and delivery of this Agreement and of the Note, and
shall continue in full force and effect with respect to the date as of which
they were made as long as any credit is in use or available hereunder.
10.5 PAYMENTS. So long as the Lender is the holder of the Note, the
Borrower will promptly and punctually pay the principal of and interest on the
Note without presentment of the Note.
10.6 ADDRESSES FOR NOTICES. All communications provided for herein
shall be in writing and shall be deemed to have been given or made when served
personally or when deposited in the United States mail addressed, if to the
Borrower at_____________________________________ Trust Officer; if to the Lender
at______________________________, or at such other address as shall be
designated by any party hereto in a written notice to each other party pursuant
to this Section 10.6.
10.7 HEADINGS. Article and Section headings used in this Agreement
are for convenience or reference only and are not a part of this Agreement for
any other purpose.
10.8 SEVERABILITY OF PROVISIONS. Any provision of this Agreement
which is unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such
9
<PAGE> 12
unenforceability without impairing the enforceability of the remaining
provisions hereof affecting the enforceability of such provision in any other
jurisdiction.
10.9 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, and by different parties hereto on separate counterparts, and all
such counterparts taken together shall be deemed to constitute one and the same
instrument.
10.10 BINDING NATURE, GOVERNING LAW, ETC. This Agreement shall be
binding upon the Borrower and its successors and assigns and shall inure to the
benefit of the Lender and the benefit of its successors and assigns, including
any subsequent holder of the Note. To the extent not preempted by Federal law,
this Agreement and the rights and duties of the parties hereto shall be
construed and determined in accordance with the laws of the State of New York
without regard to principles of conflicts of laws. This Agreement constitutes
the entire understanding of the parties with respect to the subject matter
hereof and any prior agreements, whether written or oral, with respect thereto
are superseded hereby.
10.11 CONCERNING THE BORROWER. The term "Borrower" as used herein
shall mean and include the undersigned as Trustee of the Trust and its
successors in trust not individually but solely as Trustee under that certain
First Federal Bank Employee Stock Ownership Trust effective___________________,
by and between the undersigned and Richmond County Savings Bank and this
Agreement shall be binding upon the undersigned and its successors and assigns
and upon the trust estate. The undersigned assumes no personal or individual
liability or responsibility for payment of the indebtedness evidenced by the
Note or for observance or performance of the covenants and agreements herein
contained or for the truthfulness of the representations and warranties herein
contained, the undersigned having executed this Agreement and the Note solely in
its capacity as Trustee as aforesaid to bind the undersigned, its successors in
trust and the trust estates.
10.12 LIMITED LIABILITY. Anything contained herein or in the Note to
the contrary notwithstanding, the sole and only recourse of the Lender and any
other holder of the Note for payment of the obligations hereunder and under the
Note, as against the Borrower for the payment of the obligations hereunder and
under the Note shall be to (i) the Collateral, (ii) contributions, other than
employer securities not constituting Collateral hereunder, made to the ESOP and
the Trust by sponsoring employers to enable the Borrower to meet its obligations
hereunder and under the Note, and (iii) earnings attributable to the Pledged
Shares and to the investment of such employer contributions, but only to the
extent of the failure of the Borrower to meet the payment schedule of the Loan
provided for herein. The Trust assets may be transferred to Lender upon the
occurrence of a Default or an Event of Default hereunder only upon and to the
extent of the failure of the Plan to meet the payment schedule of the Loan. In
no event may the value of the Trust assets so transferred exceed the amount of
the default.
10.13 LENDER'S DUTY OF CARE. It is agreed and understood that the
Lender's duty with respect to the Collateral shall be solely to use reasonable
care in the custody and preservation of
10
<PAGE> 13
the Collateral in the Lender's possession, which shall not include any steps
necessary to preserve rights against prior parties.
All provisions in this Agreement shall be construed so as to maintain
(i) the ESOP as a qualified leveraged employee stock ownership plan under
Sections 401(a) and 4975(e)(7) of the Code, (ii) the Trust as exempt from
taxation under Section 501(a) of the Code, and (iii) the Loan as an "exempt
loan" under the Exempt Loan Rules.
[Remainder of this page intentionally left blank]
11
<PAGE> 14
Upon your acceptance hereof in the manner hereinafter set forth, this
Agreement shall constitute a contract between us for the uses and purposes
hereinabove set forth.
Dated as of this ___ day of__________________
_________________, and its
successors in trust, as Trustee
under that certain First Federal
Bank Employee Stock Ownership Trust
effective ______________ by and
between the undersigned and First
Federal Bank.
By
----------------------------------
Accepted and agreed to at Hazleton, Pennsylvania as of the date last
above written.
By
----------------------------------
12
<PAGE> 15
EXHIBIT A
PROMISSORY NOTE
Amount sufficient to satisfy the Loan Amount _________, 199__
Hazleton, Pennsylvania
For VALUE RECEIVED, the undersigned,_______________, not individually
but solely as Trustee under that certain First Federal Bank Employee Stock
Ownership Trust effective ______________ by and between the undersigned
("Borrower") and First Federal Bank promises to pay to the order of Northeast
Pennsylvania Financial Corp. (the "Lender") at its office
at_________________________, the aggregate unpaid principal amount of all loan
amounts or advances under the loan made to the Borrower under Section 1.1 of the
Loan and Security Agreement hereinafter referred to in ten (10) consecutive
annual equal installments, consisting of both principal and interest, amortized
over a ten (10) year period in an amount sufficient to repay all borrowed
amounts plus interest, payable annually on ________________, and on the last
business day of each and every_________ in each year thereafter, except that the
final installment in the amount of all principal and interest not sooner paid
shall be due on ______________, the final maturity hereof.
The Borrower promises to pay interest (computed on the basis of a year
of 360 days) on the balance of principal from time to time remaining outstanding
and unpaid hereon at the rate per annum equal at all times to the Interest Rate
as defined in Section 10.3 of the Loan and Security Agreement (as defined below)
on the last business day of each and every January, commencing ______________,
and in each year thereafter and on the final maturity date of this Note. On
demand, the Borrower promises to pay interest on any overdue principal hereof
(whether by lapse of time, acceleration, or otherwise) until paid at the stated
rate.
This Note is issued under the terms and provisions of that certain
First Federal Bank Employee Stock Ownership Trust Loan and Security Agreement
bearing even date herewith by and between the Borrower and the Lender (the "Loan
and Security Agreement") and this Note and the holder hereof are entitled to all
the benefits and security provided for by or referred to in such Loan and
Security Agreement.
This Note may be declared due prior to its express maturity and
voluntary prepayments may be made hereon, all in the events, on the terms and in
the manner as provided in such Loan and Security Agreement.
Recourse for the payment of this Note has been limited by the
provisions of the Loan and Security Agreement and this Note is expressly made
subject to such provisions. This Note shall be governed by and construed in
accordance with the laws of Pennsylvania without regard to
<PAGE> 16
principles of conflicts of laws. The Borrower hereby waives presentment for
payment and demand.
Upon the occurrence of a Default as such term is defined in the Loan
and Security Agreement at the option of the Lender, all amounts payable by the
Borrower to the Lender under the terms of this Note may immediately become due
and payable by the Borrower to the Lender pursuant to the provisions of Section
9.3 of the Loan and Security Agreement, and the Lender shall have all of the
rights, powers, and remedies available under the terms of this Note, any of the
other documents evidencing and securing this Loan and all applicable laws. The
Borrower and all endorsers, guarantors, and other parties who may now or in the
future be primarily or secondarily liable for the payment of the indebtedness
evidenced by this Note hereby severally waive presentment, protest and demand,
notice of protest, notice of demand and of dishonor and non-payment of this Note
and expressly agree that this Note any payment hereunder may be extended from
time to time without in any way affecting the liability of the Borrower,
guarantors and endorsers.
________________and its successors in
trust, as Trustee under that certain
First Federal Bank Employee Stock
Ownership Trust effective
_____________ by and between the
undersigned and First Federal Bank.
By:
---------------------------
<PAGE> 17
EXHIBIT B
SECURITY AGREEMENT
INSTRUMENTS OR NEGOTIABLE DOCUMENTS TO BE DEPOSITED
For new value contemporaneously given by Northeast Pennsylvania
Financial Corp., ("Lender") to the undersigned ("Borrower"), the receipt whereof
is hereby acknowledged, the Borrower does hereby grant a security interest to
said Lender in the instruments or negotiable documents hereafter described
("Collateral"), in all of which Collateral the Borrower warrants that the
Borrower has good, valid and effective rights to the ownership and possession
thereof and to the grant of the security interest hereby made:
All Shares of the common stock, par value $.01 per share, of
Northeast Pennsylvania Financial Corp., a Delaware corporation,
acquired with the proceeds of the Loan Amount.
Borrower agrees to deliver said collateral to said Lender not later than
the close of business on ________________, said date being within____
days from the date hereof.
Said security interest secures the payment of all indebtedness and
liabilities as undertaken in the Loan and Security Agreement to which this is a
part, now existing or hereafter arising, and the Lender has all the rights with
respect to said Collateral and said security interest as more fully set forth in
the form of secured note or notes executed and delivered by the undersigned to
said Lender prior hereto or contemporaneously herewith.
This agreement, including matters of interpretation and construction,
and the rights of the Lender and the duties and obligations of the debt
hereunder are to be determined in accordance with the laws of the State of
Pennsylvania, particularly the Uniform Commercial Code, except where preempted
by federal law.
Dated at Hazleton, Pennsylvania the ____ day of ____________.
____________________, and its
successors in trust, as Trustee under
that certain First Federal Bank
Employee Stock Ownership Trust
effective _____________ by and
between the undersigned and First
Federal Bank.
By:
---------------------------------
<PAGE> 1
EXHIBIT 10.3
FORM OF
FIRST FEDERAL BANK
EMPLOYMENT AGREEMENT
This AGREEMENT is made effective as of ____________, 1997 by and among
First Federal Bank (the "Bank"), a federally chartered financial institution,
with its principal administrative office at 12 Broad Street, Hazleton, PA 18201,
Northeast Pennsylvania Financial Corp., a corporation organized under the laws
of the State of Delaware, the holding company for the Bank (the "Holding
Company"), and ____________________ ("Executive").
WHEREAS, the Bank wishes to assure itself of the services of Executive
for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Bank for
said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive agrees to
serve as ____________________________ of the Bank. Executive shall render
administrative and management services to the Bank such as are customarily
performed by persons situated in a similar executive capacity. During said
period, Executive also agrees to serve, if elected, as an officer and director
of the Holding Company or any subsidiary of the Bank.
2. TERMS AND DUTIES.
(a) The period of Executive's employment under this Agreement
shall be deemed to have commenced as of the date first above written and shall
continue for a period of thirty-six (36) full calendar months thereafter.
Commencing on the first anniversary date of this Agreement, and continuing on
each anniversary thereafter, the disinterested members of the board of directors
of the Bank ("Board") may extend the Agreement an additional year such that the
remaining term of the Agreement shall be three (3) years unless the Executive
elects not to extend the term of this Agreement by giving written notice in
accordance with Section 8 of this Agreement. The Board will review the Agreement
and Executive's performance annually for purposes of determining whether to
extend the Agreement and the rationale and results thereof shall be included in
the minutes of the Board's meeting. The Board shall give notice to the Executive
as soon as possible after such review as to whether the Agreement is to be
extended.
(b) During the period of Executive's employment hereunder, except
for periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantial business time,
attention, skill, and efforts to the faithful
<PAGE> 2
performance of his duties hereunder including activities and services related to
the organization, operation and management of the Bank and participation in
community and civic organizations; provided, however, that, with the approval of
the Board, as evidenced by a resolution of such Board, from time to time,
Executive may serve, or continue to serve, on the boards of directors of, and
hold any other offices or positions in, companies or organizations, which, in
such Board's judgment, will not present any conflict of interest with the Bank,
or materially affect the performance of Executive's duties pursuant to this
Agreement.
(c) Notwithstanding anything herein to the contrary, Executive's
employment with the Bank may be terminated by the Bank or the Executive during
the term of this Agreement, subject to the terms and conditions of this
Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Bank shall pay Executive as compensation a salary of
$_______ per year ("Base Salary"). Base Salary shall include any amounts of
compensation deferred by Executive under any qualified or unqualified plan
maintained by the Bank. Such Base Salary shall be payable bi-weekly. During the
period of this Agreement, Executive's Base Salary shall be reviewed at least
annually; the first such review will be made no later than one year from the
date of this Agreement. Such review shall be conducted by the Board or by a
Committee of the Board, delegated such responsibility by the Board. The
Committee or the Board may increase Executive's Base Salary. Any increase in
Base Salary shall become the "Base Salary" for purposes of this Agreement. In
addition to the Base Salary provided in this Section 3(a), the Bank shall also
provide Executive, at no premium cost to Executive, with all such other benefits
as are provided uniformly to permanent full-time employees of the Bank.
(b) The Executive shall be entitled to participate in any employee
benefit plans, arrangements and perquisites substantially equivalent to those in
which Executive was participating or otherwise deriving benefit from immediately
prior to the beginning of the term of this Agreement, and the Bank will not,
without Executive's prior written consent, make any changes in such plans,
arrangements or perquisites which would materially adversely affect Executive's
rights or benefits thereunder; except to the extent such changes are made
applicable to all Bank employees on a non-discriminatory basis. Without limiting
the generality of the foregoing provisions of this Subsection (b), Executive
shall be entitled to participate in or receive benefits under any employee
benefit plans including but not limited to, retirement plans, supplemental
retirement plans, pension plans, profit-sharing plans, health-and-accident
plans, medical coverage or any other employee benefit plan or arrangement made
available by the Bank in the future to its senior executives and key management
employees, subject to and on a basis consistent with the terms, conditions and
overall administration of such plans and arrangements. Executive shall be
entitled to incentive compensation and bonuses as provided in any plan of the
Bank in which Executive is eligible to participate. Nothing paid to the
Executive under any such plan or arrangement will be deemed to be in lieu of
other compensation to which the Executive is entitled under this Agreement.
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<PAGE> 3
(c) In addition to the Base Salary provided for by paragraph (a)
of this Section 3 and other compensation provided for by paragraph (b) of this
Section 3, the Bank shall pay or reimburse Executive for all reasonable travel
and other reasonable expenses incurred in the performance of Executive's
obligations under this Agreement and may provide such additional compensation in
such form and such amounts as the Board may from time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein
defined) during the Executive's term of employment under this Agreement, the
provisions of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Bank of Executive's full-time employment hereunder for any
reason other than a termination governed by Section 5(a) hereof, or Termination
for Cause, as defined in Section 7 hereof; (ii) Executive's resignation from the
Bank's employ upon any (A) failure to elect or reelect or to appoint or
reappoint Executive as ___________________________________, unless consented to
by the Executive, (B) a material change in Executive's function, duties, or
responsibilities, which change would cause Executive's position to become one of
lesser responsibility, importance, or scope from the position and attributes
thereof described in Section 1, above, unless consented to by Executive, (C) a
relocation of Executive's principal place of employment by more than 25 miles
from its location at the effective date of this Agreement, unless consented to
by the Executive, (D) a material reduction in the benefits and perquisites to
the Executive from those being provided as of the effective date of this
Agreement, unless consented to by the Executive, or (E) a liquidation or
dissolution of the Bank or Holding Company, or (F) breach of this Agreement by
the Bank. Upon the occurrence of any event described in clauses (A), (B), (C),
(D), (E) or (F), above, Executive shall have the right to elect to terminate his
employment under this Agreement by resignation upon not less than sixty (60)
days prior written notice given within six full months after the event giving
rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Bank shall be obligated to pay
Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be an amount equal to the sum of:
(i) the amount of the remaining payments that the Executive would have earned if
he had continued his employment with the Bank during the remaining term of this
Agreement at the Executive's Base Salary at the Date of Termination; and (ii)
the amount equal to the annual contributions that would have been made on
Executive's behalf to any employee benefit plans of the Bank or the Holding
Company during the remaining term of this Agreement based on contributions made
(on an annualized basis) at the Date of Termination; provided, however, that any
payments pursuant to this subsection and subsection 4(c) below, shall not, in
the aggregate, exceed three times Executive's average annual compensation for
the five most recent taxable years that Executive has been employed by the Bank
or such lesser number of years in the event that Executive shall have been
employed by the Bank for less than five years. In the event the Bank is not in
compliance with its minimum capital requirements or if such payments pursuant to
this subsection (b) would cause the Bank's capital to be reduced below its
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<PAGE> 4
minimum regulatory capital requirements, such payments shall be deferred until
such time as the Bank or successor thereto is in capital compliance. At the
election of the Executive, which election is to be made prior to an Event of
Termination, such payments shall be made in a lump sum as of the Executive's
Date of Termination. In the event that no election is made, payment to Executive
will be made on a monthly basis in approximately equal installments during the
remaining term of the Agreement. Such payments shall not be reduced in the event
the Executive obtains other employment following termination of employment.
(c) Upon the occurrence of an Event of Termination, the Bank will
cause to be continued life, medical, dental and disability coverage
substantially identical to the coverage maintained by the Bank or the Holding
Company for Executive prior to his termination at no premium cost to the
Executive, except to the extent such coverage may be changed in its application
to all Bank or Holding Company employees. Such coverage shall cease upon the
expiration of the remaining term of this Agreement.
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" of the
Bank or Holding Company shall mean an event of a nature that: (i) would be
required to be reported in response to Item 1 of the current report on Form 8-K,
as in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); or (ii)
results in a Change in Control of the Bank or the Holding Company within the
meaning of the Home Owners' Loan Act of 1933, as amended, the Federal Deposit
Insurance Act or the Rules and Regulations promulgated by the Office of Thrift
Supervision ("OTS") (or its predecessor agency), as in effect on the date hereof
(provided, that in applying the definition of change in control as set forth
under the rules and regulations of the OTS, the Board shall substitute its
judgment for that of the OTS); or (iii) without limitation such a Change in
Control shall be deemed to have occurred at such time as (A) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of voting securities of the Bank or the Holding Company
representing 25% or more of the Bank's or the Holding Company's outstanding
voting securities or right to acquire such securities except for any voting
securities of the Bank purchased by the Holding Company and any voting
securities purchased by any employee benefit plan of the Bank or the Holding
Company, or (B) individuals who constitute the Board on the date hereof (the
"Incumbent Board") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to the date
hereof whose election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose nomination for election by
the Holding Company's stockholders was approved by the same Nominating Committee
serving under an Incumbent Board, shall be, for purposes of this clause (B),
considered as though he were a member of the Incumbent Board, or (C) a plan of
reorganization, merger, consolidation, sale of all or substantially all the
assets of the Bank or the Holding Company or similar transaction occurs in which
the Bank or Holding Company is not the resulting entity; provided, however, that
such an event listed above will be
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<PAGE> 5
deemed to have occurred or to have been effectuated upon the receipt of all
required regulatory approvals not including the lapse of any statutory waiting
periods.
(b) If a Change in Control has occurred pursuant to Section 5(a)
or the Board has determined that a Change in Control has occurred, Executive
shall be entitled to the benefits provided in paragraphs (c), and (d) of this
Section 5 upon his subsequent termination of employment at any time during the
term of this Agreement due to: (1) Executive's dismissal or (2) Executive's
voluntary resignation following any demotion, loss of title, office or
significant authority or responsibility, material reduction in annual
compensation or benefits or relocation of his principal place of employment by
more than 25 miles from its location immediately prior to the Change in Control,
unless such termination is because of his death or termination for Cause.
(c) Upon Executive's entitlement to benefits pursuant to Section
5(b), the Bank shall pay Executive, or in the event of his subsequent death, his
beneficiary or beneficiaries, or his estate, as the case may be, a sum equal to
the greater of: (1) the payments due for the remaining term of the Agreement; or
(2) three (3) times Executive's average annual compensation for the five (5)
most recent taxable years that Executive has been employed by the Bank or such
lesser number of years in the event that Executive shall have been employed by
the Bank for less than five (5) years. Such average annual compensation shall
include Base Salary, commissions, bonuses, contributions on Executive's behalf
to any pension and/or profit sharing plan, severance payments, retirement
payments, directors or committee fees, fringe benefits paid or to be paid to the
Executive in any such year, and payment of expense items without accountability
or business purpose or that do not meet the IRS requirements for deductibility
by the Institution; provided however, that any payment under this provision and
subsection 5(d) below shall not exceed three (3) times the Executive's average
annual compensation. In the event the Bank is not in compliance with its minimum
capital requirements or if such payments would cause the Bank's capital to be
reduced below its minimum regulatory capital requirements, such payments shall
be deferred until such time as the Bank or successor thereto is in capital
compliance. At the election of the Executive, which election is to be made prior
to a Change in Control, such payment shall be made in a lump sum as of the
Executive's Date of Termination. In the event that no election is made, payment
to the Executive will be made in approximately equal installments on a monthly
basis over a period of thirty-six (36) months following the Executive's
termination. Such payments shall not be reduced in the event Executive obtains
other employment following termination of employment.
(d) Upon the Executive's entitlement to benefits pursuant to
Section 5(b), the Bank will cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
Bank for Executive prior to his severance at no premium cost to the Executive,
except to the extent that such coverage may be changed in its application for
all Bank employees on a non-discriminatory basis. Such coverage and payments
shall cease upon the expiration of thirty-six (36) months following the Date of
Termination.
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<PAGE> 6
6. CHANGE OF CONTROL RELATED PROVISIONS
Notwithstanding the provisions of Section 5, in no event shall the
aggregate payments or benefits to be made or afforded to Executive under said
paragraphs (the "Termination Benefits") constitute an "excess parachute payment"
under Section 280G of the Code or any successor thereto, and in order to avoid
such a result, Termination Benefits will be reduced, if necessary, to an amount
(the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less
than an amount equal to three (3) times Executive's "base amount", as determined
in accordance with said Section 280G. The allocation of the reduction required
hereby among the Termination Benefits provided by Section 5 shall be determined
by Executive.
7. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order or material
breach of any provision of this Agreement. Notwithstanding the foregoing,
Executive shall not be deemed to have been Terminated for Cause unless and until
there shall have been delivered to him a Notice of Termination which shall
include a copy of a resolution duly adopted by the affirmative vote of not less
than a majority of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, Executive's conduct justified a finding of
Termination for Cause and specifying the particulars thereof in detail.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause. During the period beginning on the date
of the Notice of Termination for Cause pursuant to Section 8 hereof through the
Date of Termination for Cause, stock options and related limited rights granted
to Executive under any stock option plan shall not be exercisable, nor shall any
unvested awards granted to Executive under any stock benefit plan of the Bank,
the Holding Company or any subsidiary or affiliate thereof, vest. At the Date of
Termination for Cause, such stock options and related limited rights and such
unvested awards shall become null and void and shall not be exercisable by or
delivered to Executive at any time subsequent to such Termination for Cause.
8. NOTICE.
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
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<PAGE> 7
(b) "Date of Termination" shall mean the date specified in the
Notice of Termination (which, in the case of a Termination for Cause, shall not
be less than thirty days from the date such Notice of Termination is given.).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of Termination shall
be the date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, in the event the Executive is
terminated for reasons other than Termination for Cause the Bank will continue
to pay Executive his Base Salary in effect when the notice giving rise to the
dispute was given until the earlier of: 1) the resolution of the dispute in
accordance with this Agreement or 2) the expiration of the remaining term of
this Agreement as determined as of the Date of Termination. Amounts paid under
this Section are in addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts due under this
Agreement.
9. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Bank. Executive shall, upon reasonable notice,
furnish such information and assistance to the Bank as may reasonably be
required by the Bank in connection with any litigation in which it or any of its
subsidiaries or affiliates is, or may become, a party.
10. NON-COMPETITION.
(a) Upon any termination of Executive's employment hereunder
pursuant to Section 4 hereof, Executive agrees not to compete with the Bank for
a period of one (1) year following such termination in any city, town or county
in which the Executive's normal business office is located and the Bank has an
office or has filed an application for regulatory approval to establish an
office and any county adjacent to such city, town or county, determined as of
the effective date of such termination, except as agreed to pursuant to a
resolution duly adopted by the Board. Executive agrees that during such period
and within said cities, towns and counties, Executive shall not work for or
advise, consult or otherwise serve with, directly or indirectly, any entity
whose business materially competes with the depository, lending or other
business activities of the Bank. The parties hereto, recognizing that
irreparable injury will result to the Bank, its business and property in the
event of Executive's breach of this Subsection 10(a) agree that in the event of
any such breach by Executive, the Bank will be entitled, in addition to any
other remedies and damages available, to an injunction to restrain the violation
hereof by Executive,
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<PAGE> 8
Executive's partners, agents, servants, employees and all persons acting for or
under the direction of Executive. Nothing herein will be construed as
prohibiting the Bank from pursuing any other remedies available to the Bank for
such breach or threatened breach, including the recovery of damages from
Executive.
(b) Executive recognizes and acknowledges that the knowledge of
the business activities and plans for business activities of the Bank and
affiliates thereof, as it may exist from time to time, is a valuable, special
and unique asset of the business of the Bank. Executive will not, during or
after the term of his employment, disclose any knowledge of the past, present,
planned or considered business activities of the Bank or affiliates thereof to
any person, firm, corporation, or other entity for any reason or purpose
whatsoever. Notwithstanding the foregoing, Executive may disclose any knowledge
of banking, financial and/or economic principles, concepts or ideas which are
not solely and exclusively derived from the business plans and activities of the
Bank. Further, Executive may disclose information regarding the business
activities of the Bank to the OTS and the Federal Deposit Insurance Corporation
("FDIC") pursuant to a formal regulatory request. In the event of a breach or
threatened breach by Executive of the provisions of this Section, the Bank will
be entitled to an injunction restraining Executive from disclosing, in whole or
in part, the knowledge of the past, present, planned or considered business
activities of the Bank or affiliates thereof, or from rendering any services to
any person, firm, corporation, other entity to whom such knowledge, in whole or
in part, has been disclosed or is threatened to be disclosed. Nothing herein
will be construed as prohibiting the Bank from pursuing any other remedies
available to the Bank for such breach or threatened breach, including the
recovery of damages from Executive.
11. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid
in cash or check from the general funds of the Bank. The Holding Company,
however, unconditionally guarantees payment and provision of all amounts and
benefits due hereunder to Executive and, if such amounts and benefits due from
the Bank are not timely paid or provided by the Bank, such amounts and benefits
shall be paid or provided by the Holding Company.
(b) Notwithstanding any provision herein to the contrary, to the
extent that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated _____________, 1997,
between Executive and the Holding Company, such compensation payments and
benefits paid by the Holding Company will be subtracted from any amounts due
simultaneously to Executive under similar provisions of this Agreement. Payments
pursuant to this Agreement and the Holding Company Agreement shall be allocated
in proportion to the services rendered and time expended on such activities by
Executive as determined by the Holding Company and the Bank on a quarterly
basis.
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<PAGE> 9
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Bank or any
predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to Executive of
a kind elsewhere provided. No provision of this Agreement shall be interpreted
to mean that Executive is subject to receiving fewer benefits than those
available to him without reference to this Agreement.
13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under
this Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit
of, Executive and the Bank and their respective successors, heirs, and assigns.
14. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have
been waived, nor shall there be any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each such waiver shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future as to any act other
than that specifically waived.
15. REQUIRED PROVISIONS.
(a) The Bank may terminate Executive's employment at any time, but
any termination by the Bank, other than Termination for Cause, shall not
prejudice Executive's right to compensation or other benefits under this
Agreement. Executive shall not have the right to receive compensation or other
benefits for any period after Termination for Cause as defined in Section 7
hereinabove.
(b) If Executive is suspended from office and/or temporarily
prohibited from participating in the conduct of the Bank's affairs by a notice
served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12
U.S.C. Section 1818(e)(3) or (g)(1); the Bank's obligations under this contract
shall be suspended as of the date of service, unless stayed by
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<PAGE> 10
appropriate proceedings. If the charges in the notice are dismissed, the Bank
may in its discretion: (i) pay Executive all or part of the compensation
withheld while their contract obligations were suspended; and (ii) reinstate (in
whole or in part) any of the obligations which were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
Section 1818(e)(4) or (g)(1), all obligations of the Bank under this contract
shall terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act, 12 U.S.C. Section 1813(x)(1) all obligations of
the Bank under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations of the Bank under this contract shall be
terminated, except to the extent determined that continuation of the contract is
necessary for the continued operation of the institution: (i) by the Director of
the OTS (or his designee), the FDIC or the Resolution Trust Corporation, at the
time the FDIC enters into an agreement to provide assistance to or on behalf of
the Bank under the authority contained in Section 13(c) of the Federal Deposit
Insurance Act, 12 U.S.C. Section 1823(c); or (ii) by the Director of the OTS (or
his designee) at the time the Director (or his designee) approves a supervisory
merger to resolve problems related to the operations of the Bank or when the
Bank is determined by the Director to be in an unsafe or unsound condition. Any
rights of the parties that have already vested, however, shall not be affected
by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
Section 1828(k) and 12 C.F.R. Section 545.121 and any rules and regulations
promulgated thereunder.
16. REINSTATEMENT OF BENEFITS UNDER SECTION 15(b).
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice described in
Section 15(b) hereof (the "Notice") during the term of this Agreement and a
Change in Control, as defined herein, occurs, the Bank will assume its
obligation to pay and Executive will be entitled to receive all of the
termination benefits provided for under Section 5 of this Agreement upon the
Bank's receipt of a dismissal of charges in the Notice.
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<PAGE> 11
17. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
18. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
Wherever any words are used herein in the masculine, feminine or neutor
gender, they shall be construed as though they were also used in another gender
in all cases where they would so apply.
19. GOVERNING LAW.
The validity, interpretation, performance and enforcement of this
Agreement shall be governed by the laws of the State of Pennsylvania, but only
to the extent not superseded by federal law.
20. ARBITRATION.
Notwithstanding any right to enforcement under Section 10(a), any
dispute or controversy arising under or in connection with this Agreement shall
be settled exclusively by arbitration, conducted before a panel of three
arbitrators sitting in a location selected by Executive within fifty (50) miles
from the location of the Bank, in accordance with the rules of the American
Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement, other than in the case of a
Termination for Cause.
In the event any dispute or controversy arising under or in connection
with Executive's termination is resolved in favor of Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses and any other cash compensation,
fringe benefits and any compensation and benefits due Executive under this
Agreement.
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<PAGE> 12
21. PAYMENT OF COSTS AND LEGAL FEES.
All reasonable costs and legal fees paid or incurred by Executive
pursuant to any dispute or question of interpretation relating to this Agreement
shall be paid or reimbursed by the Bank if Executive is successful on the merits
pursuant to a legal judgment, arbitration or settlement.
22. INDEMNIFICATION.
(a) The Bank shall provide Executive (including his heirs,
executors and administrators) with coverage under a standard directors' and
officers' liability insurance policy at its expense, and shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under Pennsylvania law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the Bank (whether or not he continues to be a director or officer
at the time of incurring such expenses or liabilities), such expenses and
liabilities to include, but not be limited to, judgments, court costs and
attorneys' fees and the cost of reasonable settlements.
23. SUCCESSOR TO THE BANK.
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Holding Company,
expressly and unconditionally to assume and agree to perform the Bank's
obligations under this Agreement, in the same manner and to the same extent that
the Bank would be required to perform if no such succession or assignment had
taken place.
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<PAGE> 13
SIGNATURES
IN WITNESS WHEREOF, First Federal Bank and Northeast Pennsylvania
Financial Corp. have caused this Agreement to be executed and their seals to be
affixed hereunto by their duly authorized officers and directors, and Executive
has signed this Agreement, on the _____ day of _________, 1997.
ATTEST: FIRST FEDERAL BANK
By:
- -------------------------- --------------------------
Secretary Entire Board of Directors
[SEAL]
ATTEST: NORTHEAST PENNSYLVANIA FINANCIAL
CORP.
(Guarantor)
By:
- -------------------------- --------------------------
Secretary Entire Board of Directors
[SEAL]
WITNESS:
- -------------------------- -------------------------------
Executive
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<PAGE> 1
EXHIBIT 10.4
FORM OF
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
EMPLOYMENT AGREEMENT
This AGREEMENT ("Agreement") is made effective as of _____________,
1997, by and between Northeast Pennsylvania Financial Corp. (the "Holding
Company"), a corporation organized under the laws of Delaware, with its
principal administrative office at 12 Broad Street, Hazleton, PA 18201 and
_______________ (the "Executive"). Any reference to "Institution" herein shall
mean First Federal Bank or any successor thereto.
WHEREAS, the Holding Company wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, the Executive is willing to serve in the employ of the Holding
Company for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of Executive's employment hereunder, Executive agrees
to serve as __________________________ of the Holding Company. The Executive
shall render administrative and management services to the Holding Company such
as are customarily performed by persons in a similar executive capacity. During
said period, Executive also agrees to serve, if elected, as an officer and
director of any subsidiary of the Holding Company.
2. TERMS.
(a) The period of Executive's employment under this Agreement
shall be deemed to have commenced as of the date first above written and shall
continue for a period of thirty-six (36) full calendar months thereafter.
Commencing on the date of the execution of this Agreement, the term of this
Agreement shall be extended for one day each day until such time as the board of
directors of the Holding Company (the "Board") or Executive elects not to extend
the term of the Agreement by giving written notice to the other party in
accordance with Section 8 of this Agreement, in which case the term of this
Agreement shall be fixed and shall end on the third anniversary of the date of
such written notice.
(b) During the period of Executive's employment hereunder, except
for periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantial his business
time, attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the Holding Company and its direct or indirect
subsidiaries
<PAGE> 2
("Subsidiaries") and participation in community and civic organizations;
provided, however, that, with the approval of the Board, as evidenced by a
resolution of such Board, from time to time, Executive may serve, or continue to
serve, on the boards of directors of, and hold any other offices or positions
in, companies or organizations, which, in such Board's judgment, will not
present any conflict of interest with the Holding Company or its Subsidiaries,
or materially affect the performance of Executive's duties pursuant to this
Agreement.
(c) Notwithstanding anything herein contained to the contrary,
Executive's employment with the Holding Company may be terminated by the Holding
Company or Executive during the term of this Agreement, subject to the terms and
conditions of this Agreement. Moreover, in the event the Executive is terminated
or suspended from his position with the Institution, Executive shall not
perform, in any respect, directly or indirectly, during the pendency of his
temporary or permanent suspension or termination from the Institution, duties
and responsibilities formerly performed at the Institution as part of his duties
and responsibilities as ________________________ of the Holding Company.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Executive shall be entitled to a salary from the Holding
Company or its Subsidiaries of $________ per year ("Base Salary"). Base Salary
shall include any amounts of compensation deferred by Executive under any
qualified or unqualified plan maintained by the Holding Company and its
Subsidiaries. Such Base Salary shall be payable bi-weekly. During the period of
this Agreement, Executive's Base Salary shall be reviewed at least annually; the
first such review will be made no later than one year from the date of this
Agreement. Such review shall be conducted by the Board or by a Committee of the
Board delegated such responsibility by the Board. The Committee or the Board may
increase Executive's Base Salary. Any increase in Base Salary shall become the
"Base Salary" for purposes of this Agreement. In addition to the Base Salary
provided in this Section 3(a), the Holding Company shall also provide Executive,
at no premium cost to Executive, with all such other benefits as provided
uniformly to permanent full-time employees of the Holding Company and its
Subsidiaries.
(b) The Executive shall be entitled to participate in any employee
benefit plans, arrangements and perquisites substantially equivalent to those in
which Executive was participating or otherwise deriving benefit from immediately
prior to the beginning of the term of this Agreement, and the Holding Company
and its Subsidiaries will not, without Executive's prior written consent, make
any changes in such plans, arrangements or perquisites which would materially
adversely affect Executive's rights or benefits thereunder, except to the extent
that such changes are made applicable to all Holding Company and Institution
employees eligible to participate in such plans, arrangements and perquisites on
a non-discriminatory basis. Without limiting the generality of the foregoing
provisions of this Subsection (b), Executive shall be entitled to participate in
or receive benefits under any employee benefit plans including, but not limited
to, retirement plans, supplemental retirement plans, pension plans,
profit-sharing plans, health-and-accident plans, medical coverage or any other
employee benefit plan or arrangement made available by the Holding Company and
its Subsidiaries in the future to its senior executives
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<PAGE> 3
and key management employees, subject to and on a basis consistent with the
terms, conditions and overall administration of such plans and arrangements.
Executive shall be entitled to incentive compensation and bonuses as provided in
any plan of the Holding Company and its Subsidiaries in which Executive is
eligible to participate. Nothing paid to the Executive under any such plan or
arrangement will be deemed to be in lieu of other compensation to which the
Executive is entitled under this Agreement.
(c) In addition to the Base Salary provided for by paragraph (a)
of this Section 3 and other compensation provided for by paragraph (b) of this
Section 3, the Holding Company shall pay or reimburse Executive for all
reasonable travel, including reasonable expenses for spouses travel, and other
reasonable expenses incurred in the performance of Executive's obligations under
this Agreement and may provide such additional compensation in such form and
such amounts as the Board may from time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein
defined) during the Executive's term of employment under this Agreement, the
provisions of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Holding Company of Executive's full-time employment hereunder
for any reason other than termination governed by Section 5(a) hereof, or for
Cause, as defined in Section 7 hereof; (ii) Executive's resignation from the
Holding Company's employ, upon, any (A) failure to elect or reelect or to
appoint or reappoint Executive as _____________________________, unless
consented to by the Executive, (B) a material change in Executive's function,
duties, or responsibilities with the Holding Company or its Subsidiaries, which
change would cause Executive's position to become one of lesser responsibility,
importance, or scope from the position and attributes thereof described in
Section 1, above, unless consented to by the Executive, (C) a relocation of
Executive's principal place of employment by more than 25 miles from its
location at the effective date of this Agreement, unless consented to by the
Executive, (D) a material reduction in the benefits and perquisites to the
Executive from those being provided as of the effective date of this Agreement,
unless consented to by the Executive, (E) a liquidation or dissolution of the
Holding Company or the Institution, or (F) breach of this Agreement by the
Holding Company. Upon the occurrence of any event described in clauses (A), (B),
(C), (D) (E) or (F), above, Executive shall have the right to elect to terminate
his employment under this Agreement by resignation upon not less than sixty (60)
days prior written notice given within six full calendar months after the event
giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Holding Company shall be obligated to
pay Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, a sum equal to the sum of: (i)
the amount of the remaining payments that the Executive would have earned if he
had continued his employment with the Institution during the remaining term of
this Agreement at the Executive's Base Salary at the Date of Termination; and
(ii) the amount equal
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<PAGE> 4
to the annual contributions that would have been made on Executive's behalf to
any employee benefit plans of the Institution or the Holding Company during the
remaining term of this Agreement based on contributions made (on an annualized
basis) at the Date of Termination. At the election of the Executive, which
election is to be made prior to an Event of Termination, such payments shall be
made in a lump sum. In the event that no election is made, payment to the
Executive will be made on a monthly basis in approximately equal installments
during the remaining term of the Agreement. Such payments shall not be reduced
in the event the Executive obtains other employment following termination of
employment.
(c) Upon the occurrence of an Event of Termination, the Holding
Company will cause to be continued life, medical, dental and disability coverage
substantially equivalent to the coverage maintained by the Holding Company or
its Subsidiaries for Executive prior to his termination at no premium cost to
the Executive. Such coverage shall cease upon the expiration of the remaining
term of this Agreement.
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" of the
Holding Company or the Institution shall mean an event of a nature that; (i)
would be required to be reported in response to Item 1(a) of the current report
on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a
Change in Control of the Institution or the Holding Company within the meaning
of the Home Owners' Loan Act of 1933, as amended, the Federal Deposit Insurance
Act, or the Rules and Regulations promulgated by the Office of Thrift
Supervision (or its predecessor agency), as in effect on the date hereof
(provided, that in applying the definition of change in control as set forth
under the rules and regulations of the OTS, the Board shall substitute its
judgment for that of the OTS); or (iii) without limitation such a Change in
Control shall be deemed to have occurred at such time as (A) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of voting securities of the Institution or the Holding
Company representing 20% or more of the Institution's or the Holding Company's
outstanding voting securities or right to acquire such securities except for any
voting securities of the Institution purchased by the Holding Company and any
voting securities purchased by any employee benefit plan of the Holding Company
or its Subsidiaries; or (B) individuals who constitute the Board on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least three-quarters of
the directors comprising the Incumbent Board, or whose nomination for election
by the Company's stockholders was approved by a Nominating Committee solely
composed of members which are Incumbent Board members, shall be, for purposes of
this clause (B), considered as though he were a member of the Incumbent Board;
or (C) a plan of reorganization, merger, consolidation, sale of all or
substantially all the assets of the Institution or the Holding Company or
similar transaction occurs or is effectuated in which the Institution or Holding
Company is not the resulting entity; provided, however, that such an event
listed above will be deemed to have
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<PAGE> 5
occurred or to have been effectuated upon the receipt of all required federal
regulatory approvals not including the lapse of any statutory waiting periods;
or (D) a proxy statement has been distributed soliciting proxies from
stockholders of the Holding Company, by someone other than the current
management of the Holding Company, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Holding Company or Institution
with one or more corporations as a result of which the outstanding shares of the
class of securities then subject to such plan or transaction are exchanged for
or converted into cash or property or securities not issued by the Institution
or the Holding Company shall be distributed; or (E) a tender offer is made for
20% or more of the voting securities of the Institution or Holding Company then
outstanding.
(b) If a Change in Control has occurred pursuant to Section 5(a)
or the Board has determined that a Change in Control has occurred, Executive
shall be entitled to the benefits provided in paragraphs (c) and, (d), of this
Section 5 upon his subsequent termination of employment at any time during the
term of this Agreement due to (i) Executive's dismissal, or (ii) Executive's
voluntary resignation following any demotion, loss of title, office or
significant authority or responsibility, reduction in the annual compensation or
material reduction in benefits or relocation of his principal place of
employment by more than 25 miles from its location immediately prior to the
change in control, unless such termination is because of his death or
termination for Cause.
(c) Upon the Executive's entitlement to benefits pursuant to
Section 5(b), the Holding Company shall pay Executive, or in the event of his
subsequent death, his beneficiary or beneficiaries, or his estate, as the case
may be, as severance pay or liquidated damages, or both, a sum equal to the
greater of: (i) the payments due for the remaining term of the Agreement; or
(ii) three (3) times Executive's average annual compensation for the five (5)
preceding taxable years. Such annual compensation shall include Base Salary,
commissions, bonuses, contributions on behalf of Executive to any pension and
profit sharing plan, severance payments, directors or committee fees and fringe
benefits paid or to be paid to the Executive during such years. At the election
of the Executive, which election is to be made prior to a Change in Control,
such payment shall be made in a lump sum. In the event that no election is made,
payment to the Executive will be made on a monthly basis in approximately equal
installments during the remaining term of the Agreement. Such payments shall not
be reduced in the event Executive obtains other employment following termination
of employment.
(d) Upon the Executive's entitlement to benefits pursuant to
Section 5(b), the Company will cause to be continued life, medical, dental and
disability coverage substantially equivalent to the coverage maintained by the
Institution for Executive at no premium cost to Executive prior to his
severance. Such coverage and payments shall cease upon the expiration of
thirty-six (36) months following the Change in Control.
5
<PAGE> 6
6. CHANGE OF CONTROL RELATED PROVISIONS.
(a) Notwithstanding the provisions of Section 5, in the event
that:
(i) the aggregate payments or benefits to be made or
afforded to Executive, which are deemed to be
parachute payments as defined in Section 280G of the
Internal Revenue Code of 1986, as amended (the
"Code") or any successor thereof, (the "Termination
Benefits") would be deemed to include an "excess
parachute payment" under Section 280G of the Code;
and
(ii) if such Termination Benefits were reduced to an
amount (the "Non-Triggering Amount"), the value of
which is one dollar ($1.00) less than an amount equal
to three (3) times Executive's "base amount," as
determined in accordance with said Section 280G and
the Non-Triggering Amount less the product of the
marginal rate of any applicable state and federal
income tax and the Non Triggering Amount would be
greater than the aggregate value of the Termination
Benefits (without such reduction) minus (i) the
amount of tax required to be paid by the Executive
thereon by Section 4999 of the Code and further minus
(ii) the product of the Termination Benefits and the
marginal rate of any applicable state and federal
income tax,
then the Termination Benefits shall be reduced to the Non-Triggering Amount. The
allocation of the reduction required hereby among the Termination Benefits shall
be determined by the Executive.
7. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of a
material loss to the Holding Company or one of its Subsidiaries caused by the
Executive's intentional failure to perform stated duties, personal dishonesty,
willful violation of any law, rule, regulation (other than traffic violations or
similar offenses), final cease and desist order or material breach of any
provision of this Agreement. For purposes of this Section, no act, or the
failure to act, on Executive's part shall be "willful" unless done, or omitted
to be done, not in good faith and without reasonable belief that the action or
omission was in the best interest of the Holding Company or its Subsidiaries.
Notwithstanding the foregoing, Executive shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him a
Notice of Termination which shall include a copy of a resolution duly adopted by
the affirmative vote of not less than three-fourths of the members of the Board
at a meeting of the Board called and held for that purpose (after reasonable
notice to Executive and an opportunity for him, together with counsel, to be
heard before the Board), finding that in the good faith opinion of the Board,
Executive was guilty of conduct justifying Termination for Cause and specifying
the particulars thereof in detail. The Executive shall not have the right to
receive compensation or other
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benefits for any period after Termination for Cause. During the period beginning
on the date of the Notice of Termination for Cause pursuant to Section 8 hereof
through the Date of Termination, stock options and related limited rights
granted to Executive under any stock option plan shall not be exercisable nor
shall any unvested awards granted to Executive under any stock benefit plan of
the Holding Company or its Subsidiaries vest. At the Date of Termination, such
stock options and related limited rights and such unvested awards shall become
null and void and shall not be exercisable by or delivered to Executive at any
time subsequent to such Date of Termination for Cause.
8. NOTICE.
(a) Any purported termination by the Holding Company or by
Executive shall be communicated by Notice of Termination to the other party
hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a
written notice which shall indicate the specific termination provision in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in the
Notice of Termination (which, in the case of a Termination for Cause, shall not
be less than thirty (30) days from the date such Notice of Termination is
given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, except upon the occurrence of
a Change in Control and voluntary termination by the Executive in which case the
Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Holding Company will
continue to pay Executive his full compensation in effect when the notice giving
rise to the dispute was given (including, but not limited to, Base Salary) and
continue him as a participant in all compensation, benefit and insurance plans
in which he was participating when the notice of dispute was given, until the
dispute is finally resolved in accordance with this Agreement. Amounts paid
under this Section are in addition to all other amounts due under this Agreement
and shall not be offset against or reduce any other amounts due under this
Agreement.
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9. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Holding Company. Executive shall, upon
reasonable notice, furnish such information and assistance to the Holding
Company as may reasonably be required by the Holding Company in connection with
any litigation in which it or any of its subsidiaries or affiliates is, or may
become, a party.
10. NON-COMPETITION.
(a) Upon any termination of Executive's employment hereunder
pursuant to Section 4 hereof, Executive agrees not to compete with the Holding
Company or its Subsidiaries for a period of one (1) year following such
termination in any city, town or county in which the Executive's normal business
office is located and the Holding Company or any of its Subsidiaries has an
office or has filed an application for regulatory approval to establish an
office and any county adjacent to such city, town or county, determined as of
the effective date of such termination, except as agreed to pursuant to a
resolution duly adopted by the Board. Executive agrees that during such period
and within said cities, towns and counties, Executive shall not work for or
advise, consult or otherwise serve with, directly or indirectly, any entity
whose business materially competes with the depository, lending or other
business activities of the Holding Company or its Subsidiaries. The parties
hereto, recognizing that irreparable injury will result to the Holding Company
or its Subsidiaries, its business and property in the event of Executive's
breach of this Subsection 10(a) agree that in the event of any such breach by
Executive, the Holding Company or its Subsidiaries will be entitled, in addition
to any other remedies and damages available, to an injunction to restrain the
violation hereof by Executive, Executive's partners, agents, servants, employees
and all persons acting for or under the direction of Executive. Executive
represents and admits that in the event of the termination of his employment
pursuant to Section 7 hereof, Executive's experience and capabilities are such
that Executive can obtain employment in a business engaged in other lines and/or
of a different nature than the Holding Company or its Subsidiaries, and that the
enforcement of a remedy by way of injunction will not prevent Executive from
earning a livelihood. Nothing herein will be construed as prohibiting the
Holding Company or its Subsidiaries from pursuing any other remedies available
to the Holding Company or its Subsidiaries for such breach or threatened breach,
including the recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of
the business activities and plans for business activities of the Holding Company
and its Subsidiaries as it may exist from time to time, is a valuable, special
and unique asset of the business of the Holding Company and its Subsidiaries.
Executive will not, during or after the term of his employment, disclose any
knowledge of the past, present, planned or considered business activities of the
Holding Company and its Subsidiaries thereof to any person, firm, corporation,
or other entity for any reason or purpose whatsoever unless expressly authorized
by the Board of Directors or required by law. Notwithstanding the foregoing,
Executive may disclose any knowledge of
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banking, financial and/or economic principles, concepts or ideas which are not
solely and exclusively derived from the business plans and activities of the
Holding Company. In the event of a breach or threatened breach by the Executive
of the provisions of this Section, the Holding Company will be entitled to an
injunction restraining Executive from disclosing, in whole or in part, the
knowledge of the past, present, planned or considered business activities of the
Holding Company or its Subsidiaries or from rendering any services to any
person, firm, corporation, other entity to whom such knowledge, in whole or in
part, has been disclosed or is threatened to be disclosed. Nothing herein will
be construed as prohibiting the Holding Company from pursuing any other remedies
available to the Holding Company for such breach or threatened breach, including
the recovery of damages from Executive.
11. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid
in cash or check from the general funds of the Holding Company subject to this
Section 11(b).
(b) Notwithstanding any provision herein to the contrary, to the
extent that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated ___________, 1997,
between Executive and the Institution, such compensation payments and benefits
paid by the Institution will be subtracted from any amount due simultaneously to
Executive under similar provisions of this Agreement. Payments pursuant to this
Agreement and the Institution Agreement shall be allocated in proportion to the
level of activity and the time expended on such activities by the Executive as
determined by the Holding Company and the Institution on a quarterly basis.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Holding Company
or any predecessor of the Holding Company and Executive, except that this
Agreement shall not affect or operate to reduce any benefit or compensation
inuring to the Executive of a kind elsewhere provided. No provision of this
Agreement shall be interpreted to mean that Executive is subject to receiving
fewer benefits than those available to him without reference to this Agreement.
13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under
this Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit
of, Executive and the Holding Company and their respective successors, heirs and
assigns.
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14. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have
been waived, nor shall there be any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each such waiver shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future as to any act other
than that specifically waived.
15. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
16. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
Wherever any words are used herein in the masculine, feminine or neuter
gender, they shall be construed as though they were also used in another gender
in all cases where they would so apply.
17. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Delaware,
unless otherwise specified herein.
18. ARBITRATION.
Notwithstanding any right to enforcement under Section 10(a), any
dispute or controversy arising under or in connection with this Agreement shall
be settled exclusively by arbitration, conducted before a panel of three
arbitrators sitting in a location selected by the Executive within fifty (50)
miles from the location of the Institution, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
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In the event any dispute or controversy arising under or in connection
with Executive's termination is resolved in favor of the Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses and any other cash compensation,
fringe benefits and any compensation and benefits due Executive under this
Agreement.
19. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Holding Company, if Executive is successful pursuant to a
legal judgment, arbitration or settlement.
20. INDEMNIFICATION.
(a) The Holding Company shall provide Executive (including his
heirs, executors and administrators) with coverage under a standard directors'
and officers' liability insurance policy at its expense, and shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under Delaware law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the Holding Company (whether or not he continues to be a director
or officer at the time of incurring such expenses or liabilities), such expenses
and liabilities to include, but not be limited to, judgments, court costs and
attorneys' fees and the cost of reasonable settlements.
(b) Any payments made to Executive pursuant to this Section are
subject to and conditioned upon compliance with 12 U.S.C. Section 1828(k) and 12
C.F.R. Part 359 and any rules or regulations promulgated thereunder.
21. SUCCESSOR TO THE HOLDING COMPANY.
The Holding Company shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Institution or the Holding
Company, expressly and unconditionally to assume and agree to perform the
Holding Company's obligations under this Agreement, in the same manner and to
the same extent that the Holding Company would be required to perform if no such
succession or assignment had taken place.
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SIGNATURES
IN WITNESS WHEREOF, Northeast Pennsylvania Financial Corp. has caused
this Agreement to be executed and its seal to be affixed hereunto by its duly
authorized officer and its directors, and Executive has signed this Agreement,
on the _____ day of _____, 1997.
ATTEST: NORTHEAST PENNSYLVANIA
FINANCIAL CORP.
By:
- ----------------------------- -----------------------------
Secretary Entire Board of Directors
[SEAL]
WITNESS:
By:
- ----------------------------- -----------------------------
Executive
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EXHIBIT 10.5
FORM OF
FIRST FEDERAL BANK
TWO-YEAR CHANGE IN CONTROL AGREEMENT
This AGREEMENT is made effective as of _____________, 1997 by and
between First Federal Bank (the "Bank"), a federally chartered savings
institution, with its principal administrative office at 12 East Broad Street,
Hazleton, PA 18201 ("Executive"), and Northeast Pennsylvania Financial Corp.
(the "Holding Company"), a corporation organized under the laws of the State of
Delaware which is the holding company of the Bank.
WHEREAS, the Bank recognizes the substantial contribution Executive
has made to the Bank and wishes to protect Executive's position therewith for
the period provided in this Agreement; and
WHEREAS, Executive has agreed to serve in the employ of the Bank.
NOW, THEREFORE, in consideration of the contribution and
responsibilities of Executive, and upon the other terms and conditions
hereinafter provided, the parties hereto agree as follows:
1. TERM OF AGREEMENT.
The term of the First Federal Bank Two-Year Change in Control
Agreement (the "Agreement") shall be deemed to have commenced as of the date
first above written and shall continue for a period of twenty-four (24) full
calendar months thereafter. Commencing on the first anniversary date of this
Agreement and continuing at each anniversary date thereafter, the Board of
Directors of the Bank ("Board") may extend the Agreement for an additional
year. The Board will review the Agreement and Executive's performance annually
for purposes of determining whether to extend the Agreement, and the results
thereof shall be included in the minutes of the Board's meeting.
2. CHANGE IN CONTROL.
(a) If a Change in Control (as defined herein) has occurred or the
Board has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in Section 3 upon his subsequent termination
of employment at any time during the term of this Agreement due to (i)
Executive's dismissal, or (ii) Executive's voluntary resignation following any
demotion, loss of title, office or significant authority or responsibility,
reduction in the annual compensation or material reduction in benefits or
relocation of his principal place of employment by more than 25 miles from its
location immediately prior to the change in control, unless such termination is
because of his death or termination for Cause.
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(b) For purposes of this Plan, a "Change in Control" of the Bank
or Holding Company shall mean an event of a nature that: (i) would be required
to be reported in response to Item 1 of the Current Report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in
Control of the Bank or the Holding Company within the meaning of the Home
Owners' Loan Act of 1933, as amended, the Federal Deposit Insurance Act, or the
Rules and Regulations promulgated by the Office of Thrift Supervision ("OTS")
(or its predecessor agency), as in effect on the date hereof (provided, that in
applying the definition of change in control as set forth under the Rules and
Regulations of the OTS, the Board shall substitute its judgment for that of the
OTS); or (iii) without limitation such a Change in Control shall be deemed to
have occurred at such time as (A) any "person" (as the term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Bank or the Holding Company representing 25% or more of the
Bank's or the Holding Company's outstanding voting securities or right to
acquire such securities except for any voting securities of the Bank purchased
by the Holding Company in connection with the conversion of the Bank to the
stock form and any voting securities purchased by any employee benefit plan of
the Bank or the Holding Company, or (B) individuals who constitute the Board on
the date hereof (the "Incumbent Board") cease for any reason to constitute at
least a majority thereof, provided that any person becoming a director
subsequent to the date hereof whose election was approved by a vote of at least
three-quarters of the directors comprising the Incumbent Board, or whose
nomination for election by the Holding Company's stockholders was approved by
the same Nominating Committee serving under an Incumbent Board, shall be, for
purposes of this clause (B), considered as though he were a member of the
Incumbent Board, or (C) a plan of reorganization, merger, consolidation, sale
of all or substantially all the assets of the Bank or the Holding Company or
similar transaction occurs in which the Bank or Holding Company is not the
resulting entity; provided, however, that such an event listed above will be
deemed to have occurred or to have been effectuated upon the receipt of all
required regulatory approvals not including the lapse of any statutory periods.
(c) Executive shall not have the right to receive termination
benefits pursuant to Section 3 hereof upon Termination for Cause. The term
"Termination for Cause" shall mean termination because of Executive's personal
dishonesty, incompetence, willful misconduct, any breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule, or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order, or material breach of any
provision of this Agreement. Notwithstanding the foregoing, Executive shall not
be deemed to have been Terminated for Cause unless and until there shall have
been delivered to him a Notice of Termination which shall include a copy of a
resolution duly adopted by the affirmative vote of not less than a majority of
the Board of Directors of the Bank at a meeting of the Board called and held for
that purpose (after reasonable notice to Executive and an opportunity for him,
together with counsel, to be heard before the Board), finding that in the good
faith opinion of the Board, Executive's conduct justified a finding of
Termination for Cause and specifying the particulars thereof in detail.
Executive shall not have the right to receive compensation or other benefits for
any period after the Date of Termination for Cause. During the period beginning
on the date of the
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Notice of Termination for Cause pursuant to Section 8 hereof through the Date
of Termination for Cause, stock options and related limited rights granted to
Executive under any stock option plan shall not be exercisable nor shall any
unvested awards granted to Executive under any stock benefit plan of the Bank,
the Company or any subsidiary or affiliate thereof, vest. At the Date of
Termination for Cause, such stock options and related limited rights and any
such unvested awards shall become null and void and shall not be exercisable by
or delivered to Executive at any time subsequent to such Termination for Cause.
3. TERMINATION BENEFITS.
(a) Upon the occurrence of a Change in Control, followed at any
time during the term of this Agreement by termination of the Executive's
employment due to: (1) Executive's dismissal or (2) Executive's voluntary
termination pursuant to Section 2(a), unless such termination is due to
Termination for Cause, the Bank and the Holding Company shall pay Executive, or
in the event of his subsequent death, his beneficiary or beneficiaries, or his
estate, as the case may be, a sum equal to three (3) times Executive's average
annual compensation for the five most recent taxable years that Executive has
been employed by the Bank or such lesser number of years in the event that
Executive shall have been employed by the Bank for less than five years. Such
average annual compensation shall include Base Salary, commissions, bonuses,
contributions on Executive's behalf to any pension and/or profit sharing plan,
severance payments, retirement payments, directors or committee fees, fringe
benefits paid or to be paid to the Executive in any such year and payment of
any expense items without accountability or business purpose or that do not
meet the Internal Revenue Service requirements for deductibility by the Bank;
provided however, that any payment under this provision and subsection 3(b)
below shall not exceed three (3) times the Executive's average annual
compensation. At the election of Executive, which election is to be made prior
to a Change in Control, such payment shall be made in a lump sum. In the event
that no election is made, payment to Executive will be made on a monthly basis
in approximately equal installments during the remaining term of this Agreement.
(b) Upon the occurrence of a Change in Control of the Bank or the
Holding Company followed at any time during the term of this Agreement by
Executive's voluntary or involuntary termination of employment, other than for
Termination for Cause, the Bank shall cause to be continued life, medical and
disability coverage substantially identical to the coverage maintained by the
Bank or Holding Company for Executive prior to his severance, except to the
extent such coverage may be changed in its application to all Bank or Holding
Company employees on a nondiscriminatory basis. Such coverage and payments
shall cease upon the expiration of twenty-four (24) full calendar months from
the Date of Termination.
(c) Notwithstanding the preceding paragraphs of this Section 3, in
no event shall the aggregate payments or benefits to be made or afforded to
Executive under said paragraphs (the "Termination Benefits") constitute an
"excess parachute payment" under Section 280G of the Code or any successor
thereto, and in order to avoid such a result Termination Benefits will be
reduced, if necessary, to an amount (the "Non-Triggering Amount"), the value of
which is one
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dollar ($1.00) less than an amount equal to three (3) times Executive's "base
amount," as determined in accordance with said Section 280G. The allocation of
the reduction required hereby among the Termination Benefits provided by the
preceding paragraphs of this Section 3 shall be determined by Executive.
4. NOTICE OF TERMINATION.
(a) Any purported termination by the Bank or by Executive in
connection with a Change in Control shall be communicated by Notice of
Termination to the other party hereto. For purposes of this Agreement, a
"Notice of Termination" shall mean a written notice which shall indicate the
specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the
Notice of Termination (which, in the instance of Termination for Cause, shall
not be less than thirty (30) days from the date such Notice of Termination is
given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of Termination shall
be the date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute in connection with a Change in
Control, in the event the Executive is terminated for reasons other than
Termination for Cause, the Bank will continue to pay Executive his full
compensation in effect when the notice giving rise to the dispute was given
(including, but not limited to his annual salary) and continue him as a
participant in all compensation, benefit and insurance plans in which he was
participating when the notice of dispute was given, until the earlier of: (1)
the resolution of the dispute in accordance with this Agreement or (2) the
expiration of the remaining term of this Agreement as determined as of the Date
of Termination.
5. SOURCE OF PAYMENTS.
It is intended by the parties hereto that all payments provided in
this Agreement shall be paid in cash or check from the general funds of the
Bank. Further, the Holding Company guarantees such payment and provision of
all amounts and benefits due hereunder to Executive and, if such amounts and
benefits due from the Bank are not timely paid or provided by the Bank, such
amounts and benefits shall be paid or provided by the Holding Company.
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6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior agreement between the Bank and Executive,
except that this Agreement shall not affect or operate to reduce any benefit or
compensation inuring to Executive of a kind elsewhere provided. No provision
of this Agreement shall be interpreted to mean that Executive is subject to
receiving fewer benefits than those available to him without reference to this
Agreement.
Nothing in this Agreement shall confer upon Executive the right to
continue in the employ of Bank or shall impose on the Bank any obligation to
employ or retain Executive in its employ for any period.
7. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under
this Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit
of, Executive, the Bank and their respective successors, heirs and assigns.
8. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have
been waived, nor shall there be any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each such waiver
shall operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.
9. REQUIRED REGULATORY PROVISIONS.
(a) The board of directors may terminate Executive's employment at
any time, but any termination by the board of directors, other than Termination
for Cause, shall not prejudice Executive's right to compensation or other
benefits under this Agreement. Executive shall not have the right to receive
compensation or other benefits for any period after Termination for Cause as
defined in Section 2 hereinabove.
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(b) If Executive is suspended from office and/or temporarily
prohibited from participating in the conduct of the Bank's affairs by a notice
served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. Section 1818(e)(3) or (g)(1)), the Bank's obligations under this
contract shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Bank
may in its discretion (i) pay Executive all or part of the compensation
withheld while their contract obligations were suspended and (ii) reinstate (in
whole or in part) any of the obligations which were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C.
Section 1818(c)(4) or (g)(1)), all obligations of the Bank under this contract
shall terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act, all obligations of the Bank under this contract
shall terminate as of the date of default, but this paragraph shall not affect
any vested rights of the contracting parties.
(e) All obligations under this contract shall be terminated,
except to the extent determined that continuation of the contract is necessary
for the continued operation of the institution: (i) by the Director of the
Office of Thrift Supervision (or his or her designee) at the time the Federal
Deposit Insurance Corporation enters into an agreement to provide assistance to
or on behalf of the Bank under the authority contained in Section 13(c) of the
Federal Deposit Insurance Act; or (ii) by the Director of the Office of Thrift
Supervision (or his or her designee) at the time the Director (or his or her
designee) approves a supervisory merger to resolve problems related to
operation of the Bank or when the Bank is determined by the Director to be in
an unsafe or unsound condition. Any rights of the parties that have already
vested, however, shall not be affected by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
Section 1828(k) and any rules and regulations promulgated thereunder.
10. REINSTATEMENT OF BENEFITS UNDER SECTION 9(b).
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice described in
Section 9(b) hereof (the "Notice") during the term of this Agreement and a
Change in Control, as defined herein, occurs, the Bank will assume its
obligation to pay and Executive will be entitled to receive all of the
termination benefits provided for under Section 3 of this Agreement upon the
Bank's receipt of a dismissal of charges in the Notice.
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11. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of
any provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so invalid,
and each such other provision and part thereof shall to the full extent
consistent with law continue in full force and effect.
12. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement. In addition, references to the
masculine shall apply equally to the feminine.
13. GOVERNING LAW.
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of Pennsylvania but only
to the extent not preempted by Federal law.
14. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Bank's main office, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement,
other than in the case of a Termination for Cause.
15. PAYMENT OF COSTS AND LEGAL FEES.
All reasonable costs and legal fees paid or incurred by Executive
pursuant to any dispute or question of interpretation relating to this
Agreement shall be paid or reimbursed by the Bank (which payments are
guaranteed by the Holding Company pursuant to Section 5 hereof) if Executive is
successful on the merits pursuant to a legal judgment, arbitration or
settlement.
16. INDEMNIFICATION.
(a) The Bank shall provide Executive (including his
heirs, executors and administrators) with coverage under a standard directors'
and officers' liability insurance policy at its expense, and shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under Pennsylvania law against all expenses and liabilities
reasonably incurred by him in connection with or arising out of any action,
suit or proceeding in which he
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<PAGE> 8
may be involved by reason of his having been a director or officer of the Bank
(whether or not he continues to be a director or officer at the time of
incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgments, court costs and attorneys' fees and
the cost of reasonable settlements.
17. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank, expressly and
unconditionally to assume and agree to perform the Bank's obligations under
this Agreement, in the same manner and to the same extent that the Bank would
be required to perform if no such succession or assignment had taken place.
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<PAGE> 9
SIGNATURES
IN WITNESS WHEREOF, First Federal Bank and Northeast Pennsylvania
Financial Corp. have caused this Agreement to be executed by their duly
authorized officers, and Executive has signed this Agreement, on the _____ day
of __________, 1997.
ATTEST: FIRST FEDERAL BANK
By:
- ------------------------------- ---------------------------
Secretary
Officer
SEAL
ATTEST: NORTHEAST PENNSYLVANIA FINANCIAL
CORP.
(Guarantor)
By:
- ------------------------------- ---------------------------
Secretary Officer
SEAL
WITNESS:
- ------------------------------- ---------------------------
Executive
9
<PAGE> 1
EXHIBIT 10.6
FORM OF
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
TWO-YEAR CHANGE IN CONTROL AGREEMENT
This AGREEMENT is made effective as of _____________, 1997, by and
between Northeast Pennsylvania Financial Corp. (the "Holding Company"), a
corporation organized under the laws of the State of Delaware, with its office
at 12 East Broad Street, Hazleton, PA 18201, and___________________
("Executive"). The term "Bank" refers to First Federal Bank, the wholly-owned
subsidiary of the Holding Company or any successor thereto.
WHEREAS, the Holding Company recognizes the substantial contribution
Executive has made to the Holding Company and wishes to protect his position
therewith for the period provided in this Agreement; and
WHEREAS, Executive has agreed to serve in the employ of the Holding
Company or an affiliate thereof.
NOW, THEREFORE, in consideration of the contribution and
responsibilities of Executive, and upon the other terms and conditions
hereinafter provided, the parties hereto agree as follows:
1. TERM OF AGREEMENT.
The period of this Agreement shall be deemed to have commenced as of
the date first above written and shall continue for a period of twenty-four
(24) full calendar months thereafter. Commencing on the date of the execution
of this Agreement, the term of this Agreement shall be extended for one day
each day until such time as the board of directors of the Holding Company (the
"Board") or Executive elects not to extend the term of the Agreement by giving
written notice to the other party in accordance with Section 8 of this
Agreement, in which case the term of this Agreement shall be fixed and shall
end on the second anniversary of the date of such written notice.
2. CHANGE IN CONTROL.
(a) Upon the occurrence of a Change in Control of the Holding
Company (as herein defined) followed at any time during the term of this
Agreement by the termination of Executive's employment, the provisions of
Section 3 shall apply. Upon the occurrence of a Change in Control, Executive
shall have the right to elect to voluntarily terminate his employment at any
time during the term of this Agreement following any demotion, loss of title,
office or significant authority, reduction in annual compensation or material
reduction in benefits, or relocation of his principal place of employment by
more than 25 miles from its location immediately prior to the Change in Control,
unless such termination is because of death or termination for cause.
<PAGE> 2
(b) For purposes of this Agreement, a "Change in Control" of the
Bank or Holding Company shall mean an event of a nature that: (i) would be
required to be reported in response to Item 1(a) of the Current Report on Form
8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a
Change in Control of the Bank or the Holding Company within the meaning of the
Home Owners' Loan Act of 1933, as amended, the Federal Deposit Insurance Act,
or the Rules and Regulations promulgated by the Office of Thrift Supervision
("OTS") (or its predecessor agency), as in effect on the date hereof (provided,
that in applying the definition of change in control as set forth under the
rules and regulations of the OTS, the Board shall substitute its judgment for
that of the OTS); or (iii) without limitation such a Change in Control shall be
deemed to have occurred at such time as (A) any "person" (as the term is used
in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of voting securities of the Bank or the Holding Company
representing 20% or more of the Bank's or the Holding Company's outstanding
voting securities except for any voting securities of the Bank purchased by the
Holding Company in connection with the conversion of the Bank to the stock form
and any voting securities purchased by any employee benefit plan of the Bank,
or (B) individuals who constitute the Board on the date hereof (the "Incumbent
Board") cease for any reason to constitute at least a majority thereof,
provided that any person becoming a director subsequent to the date hereof
whose election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose nomination for election by
the Holding Company's stockholders was approved by the same Nominating
Committee serving under an Incumbent Board, shall be, for purposes of this
clause (B), considered as though he were a member of the Incumbent Board, or
(C) a plan of reorganization, merger, consolidation, sale of all or
substantially all the assets of the Bank or the Holding Company or similar
transaction occurs in which the Bank or Holding Company is not the resulting
entity; provided, however, that such an event listed above will be deemed to
have occurred or to have been effectuated upon the receipt of all required
federal regulatory approvals not including the lapse of any statutory waiting
periods, or (D) a proxy statement is distributed soliciting proxies from
stockholders of the Holding Company, by someone other than the current
management of the Holding Company, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Holding Company or Bank with one
or more corporations as a result of which the outstanding shares of the class of
securities then subject to such plan or transaction are exchanged for or
converted into cash or property or securities not issued by the Bank or the
Holding Company shall be distributed, or (E) a tender offer is made for 20% or
more of the voting securities of the Bank or Holding Company then outstanding.
(c) Executive shall not have the right to receive termination
benefits pursuant to Section 3 hereof upon Termination for Cause. The term
"Termination for Cause" shall mean termination because of a material loss to
the Holding Company or one of its Subsidiaries caused by Executive's
intentional failure to perform stated duties, personal dishonesty, willful
violation of any law, rule, regulation (other than traffic violations or
similar offenses), final cease and desist order, or any material breach of this
Agreement. Notwithstanding the foregoing, Executive shall not be deemed to
have been Terminated for Cause unless and until there shall have been delivered
to him a copy of a resolution duly adopted by the affirmative vote of not less
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<PAGE> 3
than three-fourths of the members of the Board at a meeting of the Board called
and held for that purpose (after reasonable notice to Executive and an
opportunity for him, together with counsel, to be heard before the Board),
finding that in the good faith opinion of the Board, Executive was guilty of
conduct justifying Termination for Cause and specifying the particulars thereof
in detail. Executive shall not have the right to receive compensation or other
benefits for any period after Termination for Cause. During the period
beginning on the date of the Notice of Termination for Cause pursuant to
Section 8 hereof through the Date of Termination, stock options and related
limited rights granted to Executive under any stock option plan shall not be
exercisable nor shall any unvested awards granted to Executive under any stock
benefit plan of the Bank, the Holding Company or any subsidiary or affiliate
thereof, vest. At the Date of Termination, such stock options and related
limited rights and any such unvested awards, shall become null and void and
shall not be exercisable by or delivered to Executive at any time subsequent to
such Termination For Cause.
3. TERMINATION BENEFITS.
(a) Upon the occurrence of a Change in Control, followed at any
time during the term of this Agreement by the voluntary or involuntary
termination of Executive's employment, other than for Termination for Cause,
the Holding Company shall be obligated to pay Executive, or in the event of his
subsequent death, his beneficiary or beneficiaries, or his estate, as the case
may be, a sum equal to three (3) times Executive's average annual compensation
for the five most recent taxable years that Executive has been employed by the
Bank or such lesser number of years in the event that Executive shall have been
employed by the Bank for less than five years. Such annual compensation shall
include Base Salary, commissions, bonuses, contributions on behalf of Executive
to any pension and profit sharing plan, severance payments, director or
committee fees and fringe benefits paid or to be paid to the Executive during
such years. At the election of Executive which election is to be made prior to a
Change in Control, such payment shall be made in a lump sum. In the event that
no election is made, payment to Executive will be made on a monthly basis in
approximately equal installments during the remaining term of this Agreement.
Such payments shall not be reduced in the event Executive obtains other
employment following termination of employment.
(b) Upon the occurrence of a Change in Control of the Bank or the
Holding Company followed at any time during the term of this Agreement by
Executive's termination of employment, other than for Termination for Cause,
the Holding Company shall cause to be continued life, medical and disability
coverage substantially identical to the coverage maintained by the Bank for
Executive prior to his severance, except to the extent such coverage may be
changed in its application to all Bank employees. Such coverage and payments
shall cease upon expiration of twenty-four (24) full calendar months following
the Date of Termination.
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<PAGE> 4
(c) Notwithstanding the preceding paragraphs of this Section 3, in the
event that:
(i) the aggregate payments or benefits to be made or
afforded to Executive, which are deemed to be
parachute payments as defined in Section 280G of the
Internal Revenue Code of 1986, as amended (the
"Code") or any successor thereof, (the "Termination
Benefits") would be deemed to include an "excess
parachute payment" under Section 280G of the Code;
and
(ii) if such Termination Benefits were reduced to an
amount (the "Non-Triggering Amount"), the value of
which is one dollar ($1.00) less than an amount equal
to three (3) times Executive's "base amount," as
determined in accordance with said Section 280G and
the Non-Triggering Amount less the product of the
marginal rate of any applicable state and federal
income tax and the Non-Triggering Amount would be
greater than the aggregate value of the Termination
Benefits (without such reduction) minus (i) the
amount of tax required to be paid by the Executive
thereon by Section 4999 of the Code and further minus
(ii) the product of the Termination Benefits and the
marginal rate of any applicable state and federal
income tax,
then the Termination Benefits shall be reduced to the Non-Triggering
Amount. The allocation of the reduction required hereby among the Termination
Benefits shall be determined by the Executive.
4. NOTICE OF TERMINATION.
(a) Any purported termination by the Holding Company, or by
Executive shall be communicated by Notice of Termination to the other party
hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a
written notice which shall indicate the specific termination provision in this
Agreement relied upon and shall set forth in detail the facts and circumstances
claimed to provide a basis for termination of Executive's employment under the
provision so indicated.
(b) "Date of Termination" shall mean the date specified in the
Notice of Termination (which, in the case of Termination for Cause, shall not
be less than thirty (30) days from the date such Notice of Termination is
given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of Termination shall
be the date on which the dispute is finally determined, either by mutual
written agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of
4
<PAGE> 5
Termination shall be extended by a notice of dispute only if such notice is
given in good faith and the party giving such notice pursues the resolution of
such dispute with reasonable diligence. Notwithstanding the pendency of any such
dispute, the Holding Company will continue to pay Executive his full
compensation in effect when the notice giving rise to the dispute was given
(including, but not limited to his current annual salary) and continue him as a
participant in all compensation, benefit and insurance plans in which he was
participating when the notice of dispute was given, until the dispute is finally
resolved in accordance with this Agreement. Amounts paid under this Section 4(c)
are in addition to all other amounts due under this Agreement and shall not be
offset against or reduce any other amounts due under this Agreement.
5. SOURCE OF PAYMENTS.
It is intended by the parties hereto that all payments provided in
this Agreement shall be paid in cash or check from the general funds of the
Holding Company. Further, the Holding Company guarantees such payment and
provision of all amounts and benefits due hereunder to Executive and, if such
amount and benefits due from the Bank are not timely paid or provided by the
Bank, such amounts and benefits shall be paid and provided by the Holding
Company.
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior agreement between the Holding Company and
Executive, except that this Agreement shall not affect or operate to reduce any
benefit or compensation inuring to Executive of a kind elsewhere provided. No
provision of this Agreement shall be interpreted to mean that Executive is
subject to receiving fewer benefits than those available to him without
reference to this Agreement.
Nothing in this Agreement shall confer upon Executive the right to
continue in the employ of the Holding Company or shall impose on the Holding
Company any obligation to employ or retain Executive in its employ for any
period.
7. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under
this Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit
of, Executive, the Holding Company and their respective successors, heirs and
assigns.
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<PAGE> 6
8. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have
been waived, nor shall there be any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each such waiver
shall operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.
9. REINSTATEMENT OF BENEFITS UNDER BANK AGREEMENT.
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice described in
Section 9(b) of the Change-in-Control Agreement between Executive and the Bank
dated _____________, 1997 (the "Bank Agreement") during the term of this
Agreement and a Change in Control, as defined herein, occurs the Holding
Company will assume its obligation to pay and Executive will be entitled to
receive all of the termination benefits provided for under Section 3 of the
Bank Agreement upon the notification of the Holding Company of the Bank's
receipt of a dismissal of charges in the Notice.
10. EFFECT OF ACTION UNDER BANK AGREEMENT.
Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits are paid to or received by Executive under the Bank
Agreement between Executive and Bank, the amount of such payments and benefits
paid by the Bank will be subtracted from any amount due simultaneously to
Executive under similar provisions of this Agreement.
11. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of
any provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so invalid,
and each such other provision and part thereof shall to the full extent
consistent with law continue in full force and effect.
12. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement. In addition, references herein to the
masculine shall apply to both the masculine and the feminine.
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<PAGE> 7
13. GOVERNING LAW.
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of Delaware.
14. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Holding Company, in accordance with the
rules of the American Arbitration Association then in effect. Judgment
may be entered on the arbitrator's award in any court having jurisdiction;
provided, however, that Executive shall be entitled to seek specific
performance of his right to be paid until the Date of Termination during the
pendency of any dispute or controversy arising under or in connection with this
Agreement.
15. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to
any dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by the Holding Company if Executive is successful pursuant
to a legal judgment, arbitration or settlement.
16. INDEMNIFICATION.
(a) The Holding Company shall provide Executive (including his
heirs, executors and administrators) with coverage under a standard directors'
and officers' liability insurance policy at its expense, and shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under Delaware law and as provided in the Holding Company's
certificate of incorporation against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the Holding Company (whether or not he continues to be a director
or officer at the time of incurring such expenses or liabilities), such
expenses and liabilities to include, but not be limited to, judgments, court
costs and attorneys' fees and the cost of reasonable settlements.
(b) Any payments made to Executive pursuant to this Section are
subject to and conditioned upon compliance with 12 U.S.C. Section 1828(k) and
12 C.F.R. Part 359 and any rules or regulations promulgated thereunder.
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<PAGE> 8
17. SUCCESSOR TO THE HOLDING COMPANY.
The Holding Company shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Holding Company,
expressly and unconditionally to assume and agree to perform the Holding
Company's obligations under this Agreement, in the same manner and to the same
extent that the Holding Company would be required to perform if no such
succession or assignment had taken place.
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<PAGE> 9
SIGNATURES
IN WITNESS WHEREOF, Northeast Pennsylvania Financial Corp. has caused
this Agreement to be executed by its duly authorized officer, and Executive has
signed this Agreement, on the _____ day of _________________, 1997.
ATTEST: NORTHEAST PENNSYLVANIA
FINANCIAL CORP.
By:
- ------------------------------ -----------------------------
Secretary Officer
WITNESS:
- ------------------------------ -----------------------------
Seal
9
<PAGE> 1
EXHIBIT 10.7
FORM OF
FIRST FEDERAL BANK
EMPLOYEE SEVERANCE COMPENSATION PLAN
PLAN PURPOSE
The purpose of the First Federal Bank Employee Severance Compensation
Plan is to assure for First Federal Bank (the "Bank") the services of Employees
of the Bank in the event of a Change in Control (capitalized terms are defined
in section 2.1) of the Northeast Pennsylvania Financial Corp. (the "Holding
Company") or the Bank. The benefits contemplated by the Plan recognize the
value to the Bank of the services and contributions of the Employees of the
Bank and the effect upon the Bank resulting from the uncertainties of continued
employment, reduced Employee benefits, management changes and relocations that
may arise in the event of a Change in Control of the Bank or the Holding
Company. The Bank's and the Holding Company's Boards of Directors believe that
it is in the best interests of the Bank and the Holding Company to provide
Employees of the Bank who have been with the Bank for a minimum of six months
with such benefits in order to defray the costs and changes in Employee status
that could follow a Change in Control. The Board of Directors believes that the
Plan will also aid the Bank in attracting and retaining highly qualified
individuals who are essential to its success and the Plan's assurance of fair
treatment of the Bank's Employees will reduce the distractions and other
adverse effects on Employees' performance in the event of a Change in Control.
ARTICLE I
ESTABLISHMENT OF PLAN
1.1 Establishment of Plan
As of the Effective Date of the Plan as defined herein, the Bank hereby
establishes an employee severance compensation plan to be known as the "First
Federal Bank Employee Severance Compensation Plan." The purposes of the Plan
are as set forth above.
1.2 Applicability of Plan
The benefits provided by this Plan shall be available to all Employees
of the Bank, who, at or after the Effective Date, meet the eligibility
requirements of Article III, except for those executive officers who have
entered into, or who enter into in the future, and continue to be subject to an
employment or change in control agreement with the Employer.
1.3 Contractual Right to Benefits
This Plan establishes and vests in each Participant a contractual right
to the benefits to which each Participant is entitled hereunder, enforceable by
the Participant against the Employer, Bank, or both.
<PAGE> 2
ARTICLE II
DEFINITIONS AND CONSTRUCTION
2.1 Definitions
Whenever used in the Plan, the following terms shall have the meanings
set forth below.
(a) "Annual Compensation" of a Participant means and includes all
wages, salary, bonus, and cash compensation, if any, paid (including accrued
amounts) by an Employer as consideration for the Participant's service during
the 12 months ended the date as of which Annual Compensation is to be
determined, which are or would be includable in the gross income of the
Participant receiving the same for federal income tax purposes.
(b) "Bank" means First Federal Bank or any successor as provided for
in Article VII hereof.
(c) "Change in Control" shall mean an event of a nature that: (i)
would be required to be reported in response to Item 1(a) of the current report
on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in
a Change in Control of the Bank or the Holding Company within the meaning of
the Change in Bank Control Act and the Rules and Regulations promulgated by the
Federal Deposit Insurance Corporation ("FDIC") at 12 C.F.R. Section 303.4(a)
with respect to the Bank and the Board of Governors of the Federal Reserve
System ("FRB") at 12 C.F.R. Section 225.41(b) with respect to the Holding
Company, as in effect on the date hereof; or (iii) results in a transaction
requiring prior FRB approval under the Bank Holding Company Act of 1956 and the
regulations promulgated thereunder by the FRB at 12 C.F.R. Section 225.11, as
in effect on the date hereof except for the Holding Company's acquisition of
the Bank; or (iv) without limitation such a Change in Control shall be deemed
to have occurred at such time as (A) any "person" (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Bank or the Holding Company representing 20%
or more of the Bank's or the Holding Company's outstanding securities except
for any securities of the Bank purchased by the Holding Company in connection
with the conversion of the Bank to the stock form and any securities purchased
by any tax qualified employee benefit plan of the Bank; or (B) individuals who
constitute the Board of Directors on the date hereof (the "Incumbent Board")
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by the Holding Company's
stockholders was approved by the same Nominating Committee serving under an
Incumbent Board, shall be, for purposes of this clause (B), considered as
though he were a member of the Incumbent Board; or (C) a plan of
reorganization, merger, consolidation, sale of all or substantially all the
assets of the Bank or the Holding Company or similar transaction occurs in
which the Bank or Holding Company is not the resulting entity; or (D)
solicitations of shareholders of the Holding Company, by someone other than the
current management of the Holding Company, seeking stockholder approval of a
plan of reorganization, merger or
2
<PAGE> 3
consolidation of the Holding Company or Bank or similar transaction with one or
more corporations as a result of which the outstanding shares of the class of
securities then subject to the plan or transaction are exchanged for or
converted into cash or property or securities not issued by the Bank or the
Holding Company shall be distributed; or (E) a tender offer is made for 20% or
more of the voting securities of the Bank or the Holding Company.
(d) "Disability" means the permanent and total inability by reason
of mental or physical infirmity, or both, of an employee to perform the work
customarily assigned to him . Additionally, a medical doctor selected or
approved by the Board of Directors must advise the Board that it is either not
possible to determine if or when such Disability will terminate or that it
appears probable that such Disability will be permanent during the remainder of
said employees lifetime.
(e) "Effective Date" means the date the Plan is approved by the
Board of Directors of the Bank, or such other date as the Board shall designate
in its resolution approving the Plan.
(f) "Employee" means any Employee of the Bank or any subsidiary
thereof who has completed at least one year of service with the Bank, or any
subsidiary thereof, provided, however, that any Employee who is covered or
hereinafter becomes covered by an employment contract or change in control
agreement with the Employer shall not be considered to be an Employee for
purposes of this Plan.
(g) "Expiration Date" means a date ten (10) years from the Effective
Date unless earlier terminated pursuant to Section 8.2 or extended pursuant to
Section 8.1.
(h) "Employer" means the Bank or a subsidiary of the Bank or a
parent of the Bank which has adopted the Plan pursuant to Article VI hereof.
(i) "Just Cause" shall mean termination because of Participant's
personal dishonesty, incompetence, willful misconduct, any breach of fiduciary
duty involving personal profit, intentional failure or unjustified neglect to
perform stated duties, conviction of or pleading guilty or nolo contendere to
any crime or offense punishable as a felony or to any crime or offense
involving moral turpitude, or violation of any final cease-and desist order. In
determining incompetence, the acts or omissions shall be measured against
standards generally prevailing in the savings institutions industry.
(j) "Leave of Absence" and "LOA" mean (i) the taking of an
authorized or approved leave of absence under the provisions of the federal
Family and Medical Leave Act ("FMLA"), (ii) any state law providing
qualitatively similar benefits as the FMLA, or (iii) a leave of absence
authorized under the policies of the Bank. "Leave of Absence" and "LOA" are
defined in this paragraph for the exclusive purposes of this Plan.
(k) "Payment" means the payment of severance compensation as
provided in Article IV hereof.
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<PAGE> 4
(l) "Participant" means an Employee who meets the eligibility
requirements of Article III.
(m) "Plan" means First Federal Bank Employee Severance Compensation
Plan.
(n) "Six Months of Service" means each consecutive 6 month period,
beginning with an Employee's date of hire and running without a termination of
employment in which an Employee is credited with at least one hour of service
in each of the 6 calendar months in such period. The taking of a LOA shall not
eliminate a period of time from the calculation of Six Month of Service if such
period of time otherwise qualifies as such. Further if a particular 6 month
period of time would not otherwise qualify under the Plan as Six Months of
Service because one hour of service is not credited during each month of such
period due to the taking of a LOA, then such period of time shall be deemed to
be Six Months of Service for all other sections of this Plan.
2.2 Applicable Law
The laws of the State of Pennsylvania shall be the controlling law in
all matters relating to the Plan to the extent not preempted by Federal law.
2.3 Severability
If a provision of this Plan shall be held illegal or invalid, the
illegality or invalidity shall not affect the remaining parts of the Plan and
the Plan shall be construed and enforced as if the illegal or invalid provision
had not been included.
ARTICLE III
ELIGIBILITY
3.1 Participation
The term Participant shall include all Employees of the Bank who have
completed Six Months of Service with the Bank at the time of any termination
pursuant to Section 4.2 herein. Notwithstanding the foregoing, persons who have
entered into and continue to be covered by an employment contract or change in
control agreement with the Employer shall not be entitled to participate in
this Plan.
3.2 Duration of Participation
A Participant shall cease to be a Participant in the Plan when the
Participant ceases to be an Employee of an Employer, unless such Participant is
entitled to a Payment as provided in the Plan. A Participant entitled to
receipt of a Payment shall remain a Participant in this Plan until the full
amount of such Payment has been paid to the Participant.
4
<PAGE> 5
ARTICLE IV
PAYMENTS
4.1 Right to Payment
A Participant shall be entitled to receive from its respective Employer
a Payment in the amount provided in Section 4.3 if there has been a Change in
Control of the Bank or the Holding Company and if, within one (1) year
thereafter, the Participant's employment by an Employer shall terminate for any
reason specified in Section 4.2, whether the termination is voluntary or
involuntary. A Participant shall not be entitled to a Payment if termination
occurs by reason of death, voluntary retirement, voluntary termination other
than for reasons specified in Section 4.2, Disability, or for Just Cause.
4.2 Reasons for Termination
Following a Change in Control, a Participant shall be entitled to a
Payment if employment by an Employer is terminated, voluntarily or
involuntarily, for any one or more of the following reasons:
(a) The Employer reduces the Participant's base salary or rate
of compensation as in effect immediately prior to the Change in Control.
(b) The Employer materially changes Participant's function,
duties or responsibilities which would cause Participant's position to be one
of lesser responsibility, importance or scope with the Employer than
immediately prior to the change in control.
(c) The Employer requires the Participant to change the
location of the Participant's job or office, so that such Participant will be
based at a location more than thirty (30) miles from the location of the
Participant's job or office immediately prior to the Change in Control provided
that such new location is not closer to Participant's home.
(d) The Employer materially reduces the benefits and
perquisites available to the Participant immediately prior to the Change in
Control, provided, however, that a material reduction in benefits and
perquisites generally provided to all Employees of the Bank on a
nondiscriminatory basis would not trigger a payment pursuant to this Plan.
(e) A successor to the Bank fails or refuses to assume the
Bank's obligations under this Plan, as required by Article VII.
(f) The Bank or any successor to the Bank breaches any other
provisions of this Plan.
(g) The Employer terminates the employment of a Participant at
or after a Change in Control other than for Just Cause.
5
<PAGE> 6
4.3 Amount of Payment
(a) Each Participant entitled to a Payment under this Plan
shall receive from the Bank, a lump sum cash payment equal to one-twelfth of
Annual Compensation for each year of service up to a maximum of 199% of Annual
Compensation.
(b) Notwithstanding the provisions of (a) above, if a Payment
to a Participant who is a Disqualified Individual shall be in an amount which
includes an Excess Parachute Payment, the Payment hereunder to that Participant
shall be reduced to the maximum amount which does not include an Excess
Parachute Payment. The terms "Disqualified Individual" and "Excess Parachute
Payment" shall have the same meaning as defined in Section 280G of the Internal
Revenue Code of 1986, as amended, or any successor section thereof.
The Participant shall not be required to mitigate damages on the amount
of the Payment by seeking other employment or otherwise, nor shall the amount
of such Payment be reduced by any compensation earned by the Participant as a
result of employment after termination of employment hereunder.
4.4 Time of Payment
The Payment to which a Participant is entitled shall be paid to the
Participant by the Employer or the successor to the Employer, in cash and in
full, not later than twenty (20) business days after the termination of the
Participant's employment. If any Participant should die after termination of
the employment but before all amounts have been paid, such unpaid amounts shall
be paid to the Participant's named beneficiary, if living, otherwise to the
personal representative on behalf of or for the benefit of the Participant's
estate.
ARTICLE V
OTHER RIGHTS AND BENEFITS NOT AFFECTED
5.1 Other Benefits
Neither the provisions of this Plan nor the Payment provided for
hereunder shall reduce any amounts otherwise payable, or in any way diminish
the Participant's rights as an Employee of an Employer, whether existing now or
hereafter, under any benefit, incentive, retirement, stock option, stock bonus,
stock ownership or any employment agreement or other plan or arrangement.
5.2 Employment Status
This Plan does not constitute a contract of employment or impose on the
Participant or the Participant's Employer any obligation to retain the
Participant as an Employee, to change the status of the Participant's
employment, or to change the Employer's policies regarding termination of
employment.
6
<PAGE> 7
ARTICLE VI
PARTICIPATING EMPLOYERS
6.1 Upon approval by the Board of Directors of the Bank, this Plan
may be adopted by any Subsidiary or Parent of the Bank. Upon such adoption, the
Subsidiary or Parent shall become an Employer hereunder and the provisions of
the Plan shall be fully applicable to the Employees of that Subsidiary or
Parent. The term "Subsidiary" means any corporation in which the Bank, directly
or indirectly, holds a majority of the voting power of its outstanding shares
of capital stock. The term "Parent" means any corporation which holds a
majority of the voting power of the Bank's outstanding shares of capital stock.
ARTICLE VII
SUCCESSOR TO THE BANK
7.1 The Bank shall require any successor or assignee, whether direct
or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank, expressly and
unconditionally to assume and agree to perform the Bank's obligations under
this plan, in the same manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had taken place.
ARTICLE VIII
DURATION, AMENDMENT AND TERMINATION
8.1 Duration
If a Change in Control has not occurred, this Plan shall expire as of
the Expiration Date, unless sooner terminated as provided in Section 8.2, or
unless extended for an additional period or periods by resolution adopted by
the Board of Directors of the Bank.
Notwithstanding the foregoing, if a Change in Control occurs this Plan
shall continue in full force and effect, and shall not terminate or expire
until such date as all Participants who become entitled to Payments hereunder
shall have received such Payments in full.
8.2 Amendment and Termination
The Plan may be terminated or amended in any respect by resolution
adopted by a majority of the Board of Directors of the Bank, unless a Change in
Control has previously occurred. If a Change in Control occurs, the Plan no
longer shall be subject to amendment, change, substitution, deletion,
revocation or termination in any respect whatsoever.
7
<PAGE> 8
8.3 Form of Amendment
The form of any proper amendment or termination of the Plan shall be a
written instrument signed by a duly authorized officer or officers of the Bank,
certifying that the amendment or termination has been approved by the Board of
Directors. A proper amendment of the Plan automatically shall effect a
corresponding amendment to each Participant's rights hereunder. A proper
termination of the Plan automatically shall effect a termination of all
Participants' rights and benefits hereunder.
8.4 No Attachment
(a) Except as required by law, no right to receive payments
under this Plan shall be subject to anticipation, commutation, alienation,
sale, assignment, encumbrance, charge, pledge, or hypothecation, or to
execution, attachment, levy, or similar process or assignment by operation of
law, and any attempt, voluntary or involuntary, to affect such action shall be
null, void, and of no effect.
(b) This Plan shall be binding upon, and inure to the benefit
of, Employee and the Bank and their respective successors and assigns.
ARTICLE IX
LEGAL FEES AND EXPENSES
9.1 All reasonable legal fees and other expenses paid or incurred by
a party hereto pursuant to any dispute or question of interpretation relating
to this Plan shall be paid or reimbursed by the prevailing party in any legal
judgment, arbitration or settlement.
ARTICLE X
REQUIRED PROVISIONS
10.1 The Bank may terminate the Employee's employment at any time,
but any termination by the Bank, other than Termination for Cause, shall not
prejudice Employee's right to compensation or other benefits under this
Agreement. Employee shall not have the right to receive compensation or other
benefits for any period after termination for Just Cause as defined in Section
2.1 hereinabove.
10.2 If the Employee is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
Section 1818(e)(3) or (g)(1), the Bank's obligations under this contract shall
be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (i) pay the Employee all or part of the compensation withheld while
their contract obligations were suspended and (ii) reinstate (in whole or in
part) any of the obligations which were suspended.
8
<PAGE> 9
10.3 If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
Section 1818(e)(4) or (g)(1), all obligations of the Bank under this contract
shall terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
10.4 If the Bank is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act, 12 U.S.C. Section 1813(x)(1), all obligations of
the Bank under this contract shall terminate as of the date of default, but
this paragraph shall not affect any vested rights of the contracting parties.
ARTICLE XI
ADMINISTRATIVE PROVISIONS
11.1 Plan Administrator. The administrator of the Plan shall be under
the supervision of the Board of Directors of the Bank or a Committee appointed
by the Board (the "Board"). It shall be a principal duty of the Board to see
that the Plan is carried out in accordance with its terms, for the exclusive
benefit of persons entitled to participate in the Plan without discrimination
among them. The Board will have full power to administer the Plan in all of its
details subject, however, to the requirements of ERISA. For this purpose, the
Board's powers will include, but will not be limited to, the following
authority, in addition to all other powers provided by this Plan: (a) to make
and enforce such rules and regulations as it deems necessary or proper for the
efficient administration of the Plan; (b) to interpret the Plan, its
interpretation thereof in good faith to be final and conclusive on all persons
claiming benefits under the Plan; (c) to decide all questions concerning the
Plan and the eligibility of any person to participate in the Plan; (d) to
compute the amount of Payment that will be payable to any Participant or other
person in accordance with the provisions of the Plan, and to determine the
person or persons to whom such benefits will be paid; (e) to authorize
Payments; (f) to appoint such agents, counsel, accountants, consultants and
actuaries as may be required to assist in administering the Plan; and (g) to
allocate and delegate its responsibilities under the Plan and to designate
other persons to carry out any of its responsibilities under the Plan, any such
allocation, delegation or designation to be by written instrument and in
accordance with Section 405 of ERISA.
11.2 Named fiduciary. The Board will be a "named fiduciary" for
purposes of Section 402(a)(1) of ERISA with authority to control and manage the
operation and administration of the Plan, and will be responsible for complying
with all of the reporting and disclosure requirements of Part 1 of Subtitle B
of Title I of ERISA.
11.3 Claims and review procedures.
(a) Claims procedure. If any person believes he is being
denied any rights or benefits under the Plan, such person may file a
claim in writing with the Board. If any such claim is wholly or
partially denied, the Board will notify such person of its decision in
writing. Such notification will be written in a manner calculated to be
understood by such person and will contain (i) specific reasons for the
denial, (ii) specific reference to
9
<PAGE> 10
pertinent Plan provisions, (iii) a description of any additional
material or information necessary for such person to perfect such claim
and an explanation of why such material or information is necessary and
(iv) information as to the steps to be taken if the person wishes to
submit a request for review. Such notification will be given within 90
days after the claim is received by the Board (or within 180 days, if
special circumstances require an extension of time for processing the
claim, and if written notice of such extension and circumstances is
given to such person within the initial 90 day period). If such
notification is not given within such period, the claim will be
considered denied as of the last day of such period and such person may
request a review of his claim.
(b) Review procedure. Within 60 days after the date on which a
person receives a written notice of a denied claim (or, if applicable,
within 60 days after the date on which such denial is considered to
have occurred) such person (or his duly authorized representative) may
(i) file a written request with the Board for a review of his denied
claim and of pertinent documents and (ii) submit written issues and
comments to the Board. The Board will notify such person of its
decision in writing. Such notification will be written in a manner
calculated to be understood by such person and will contain specific
reasons for the decision as well as specific references to pertinent
Plan provisions. The decision on review will be made within 60 days
after the request for review is received by the Board (or within 120
days, if special circumstances require an extension of time for
processing the requests such as an election by the Board to hold a
hearing, and if written notice of such extension and circumstances is
given to such person within the initial 60 day period). If the decision
on review is not made within such period, the claim will be considered
denied.
11.4 Nondiscriminatory exercise of authority. Whenever, in the
administration of the Plan, any discretionary action by the Board is required,
the Board shall exercise its authority in a nondiscriminatory manner so that
all persons similarly situated will receive substantially the same treatment.
11.5 Indemnification of Board. The Bank will indemnify and defend to
the fullest extent permitted by law any person serving on the Board or as a
member of a committee designated as Board (including any person who formerly
served as a Board member or as a member of such committee) against all
liabilities, damages, costs and expenses (including attorneys fees and amounts
paid in settlement of any claims approved by the Bank) occasioned by any act or
omission to act in connection with the Plan, if such act or omission is in good
faith.
11.6 "Plan Year" means the period beginning on the Effective Date and
ending on _____________ and the 12 consecutive-month period ending each year
thereafter.
11.7 Benefits solely from general assets. The benefits provided
hereunder will be paid solely from the general assets of the Bank. Nothing
herein will be construed to require the Bank or the Board to maintain any fund
or segregate any amount for the benefit of any Participant, and no Participant
or other person shall have any claim against, right to, or security or other
interest in, any fund, account or asset of the Bank from which any payment
under the Plan may be made.
10
<PAGE> 11
Having been adopted by its Board of Directors on __________________, this Plan
is executed by its duly authorized officers this __th day of __________, 199__.
Attest FIRST FEDERAL BANK
By:
- ------------------------------ ---------------------------
Secretary
11
<PAGE> 1
EXHIBIT 10.8
FORM OF
FIRST FEDERAL BANK
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Purpose of the Plan . . . . . . . . . . . . . . . . . . . . 2
ARTICLE II. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.1 Bank . . . . . . . . . . . . . . . . . . . . . . 2
----
2.2 Board . . . . . . . . . . . . . . . . . . . . . . 2
-----
2.3 Code . . . . . . . . . . . . . . . . . . . . . . 2
----
2.4 Discretionary Contribution . . . . . . . . . . . 2
--------------------------
2.5 Eligible Employee . . . . . . . . . . . . . . . . 2
-----------------
2.6 Employee . . . . . . . . . . . . . . . . . . . . 2
---------
2.7 ERISA . . . . . . . . . . . . . . . . . . . . . . 2
-----
2.8 ESOP . . . . . . . . . . . . . . . . . . . . . . 2
----
2.9 Former Participant. . . . . . . . . . . . . . . . 3
------------------
2.10 401(k) Plan . . . . . . . . . . . . . . . . . . 3
------------
2.11 Matching Contribution . . . . . . . . . . . . . . 3
---------------------
2.12 Nonqualified Plan . . . . . . . . . . . . . . . . 3
-----------------
2.13 Participant . . . . . . . . . . . . . . . . . . . 3
-----------
2.14 Period of Participation . . . . . . . . . . . . . 3
-----------------------
2.15 SERP . . . . . . . . . . . . . . . . . . . . . . 3
----
2.16 Supplemental ESOP Benefit . . . . . . . . . . . . 3
-------------------------
2.17 Supplemental 401(k) Plan Benefit . . . . . . . . 3
--------------------------------
2.18 Termination of Service . . . . . . . . . . . . . 3
----------------------
ARTICLE III . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Participation . . . . . . . . . . . . . . . . . . . . . . . 4
3.1 Eligibility for Participation. . . . . . . . . . 4
------------------------------
3.2 Supplemental 401(k) Plan Benefit Account . . . . 4
----------------------------------------
3.3 Commencement of Participation . . . . . . . . . . 5
-----------------------------
3.4 Termination of Participation. . . . . . . . . . . 5
----------------------------
ARTICLE IV . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Benefits to Participants . . . . . . . . . . . . . . . . . . 5
4.1 Supplemental Benefits. . . . . . . . . . . . . . 5
---------------------
4.2 Benefits Under Previous Benefit Formulas . . . . 6
----------------------------------------
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE V . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Administration . . . . . . . . . . . . . . . . . . . . . . . 6
5.1 Duties of the Board. . . . . . . . . . . . . . . 6
-------------------
5.2 Liabilities of the Board. . . . . . . . . . . . 7
-------------------------
5.3 Expenses. . . . . . . . . . . . . . . . . . . . 7
--------
5.4 Unfunded Character of Plan. . . . . . . . . . . 7
--------------------------
ARTICLE VI. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Amendment and Termination . . . . . . . . . . . . . . . . . 7
6.1 Amendment and Termination. . . . . . . . . . . . 7
--------------------------
6.2 Vesting and Payment Upon Termination. . . . . . . 7
------------------------------------
6.3 Preservation of Benefits on Amendment. . . . . . 8
-------------------------------------
ARTICLE VII . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Miscellaneous Provisions . . . . . . . . . . . . . . . . . . 8
7.1 Governing Law. . . . . . . . . . . . . . . . . . 8
-------------
7.2 No Right to Continued Employment. . . . . . . . . 8
--------------------------------
7.3 Construction of Language. . . . . . . . . . . . . 8
------------------------
7.4 Non-alienation of Benefits. . . . . . . . . . . . 8
--------------------------
7.5 Operation as Unfunded Nonqualified Plan. . . . . 9
---------------------------------------
7.6 Reliance Upon Information. . . . . . . . . . . . 9
-------------------------
7.5 Effective Date. . . . . . . . . . . . . . . . . . 9
--------------
</TABLE>
ii
<PAGE> 4
WHEREAS, the Board of Directors of First Federal Bank ("Bank") has adopted
the First Federal Bank 401(k) Plan ("401(k) Plan") and the First Federal Bank
Employee Stock Ownership Plan ("ESOP") to provide benefits to the employees of
the Bank; and
WHEREAS, the Internal Revenue Code of 1986, as amended ("Code") imposes
limitations on the amounts that may be contributed by Participants to the
401(k) Plan, the amount of contributions that may be made to the 401(k) Plan
and the ESOP by the Bank on the behalf of Participants, and limits the amount
of compensation which may be considered in determining benefits under both of
these plans; and
WHEREAS, the Board of Directors of the Bank desires to implement a plan to
provide certain employees with benefits to replace benefits to which they would
be entitled under the 401(k) Plan and the ESOP but for the application of the
limitations imposed by the Code;
THEREFORE, by resolution of the Board of Directors, the Supplemental
Executive Retirement Plan has been adopted.
1
<PAGE> 5
ARTICLE I
Purpose of the Plan
The purpose of the First Federal Bank Supplemental Executive Retirement
Plan ("SERP") is to provide designated executives of the Bank with deferred
benefits to which they would otherwise be entitled under the terms of the
401(k) Plan and the ESOP, but for limitations on benefits and includible
compensation imposed by the Code. This plan is intended to benefit only a
select group of highly compensated employees. The benefits under this SERP
will be paid out of the Bank's general assets exclusively.
ARTICLE II
Definitions
Wherever appropriate to the purposes of the SERP, capitalized terms shall
have the meanings assigned to them under the 401(k) Plan and the ESOP.
Notwithstanding the preceding, the following definitions shall apply for the
purposes of this SERP unless a different meaning is clearly indicated by the
context.
2.1 Bank means First Federal Bank having its principal office at 12 East
Broad Street, Hazleton, PA and its successors or assigns.
2.2 Board means the Board of Directors of the Bank.
2.3 Code means the Internal Revenue Code of 1986, as amended from time to
time (including the corresponding provisions of any succeeding law).
2.4 Discretionary Contribution means an amount equal to the discretionary
profit sharing contribution, if any, that would have been allocated to the
Participant's account under the 401(k) Plan but for the application of the
limitations imposed by Section 401(a)(17) and/or 415 of the Code.
2.5 Eligible Employee means an Employee who is eligible for participation
in the SERP in accordance with the provisions of Article III.
2.6 Employee means any person, including an officer, who is employed by the
Bank.
2.7 ERISA means the Employee Retirement Income Security Act of 1974, as
amended from time to time (including the corresponding provisions of any
succeeding law).
2.8 ESOP means the First Federal Bank Employee Stock Ownership Plan.
2
<PAGE> 6
2.9 Former Participant means a person whose participation in the SERP has
terminated as provided under Section 3.4.
2.10 401(k) Plan means the First Federal Bank 401(k) Plan, as the same may
be amended from time to time (including the corresponding provisions of any
successor qualified 401(k) plan adopted by the Bank).
2.11 Matching Contribution means an amount equal to the product of (i) the
amount such Participant is contributing to the SERP under Section 3.2
subject to any limitation on Employer Matching Contributions under the
401(k) Plan and (ii) the percentage of the Employer Match being made under
the 401(k) Plan during the same period.
2.12 Nonqualified Plan means a plan of deferred compensation which does not
meet the requirements of Section 401(a) of the Code.
2.13 Participant means any person who is participating in the SERP in
accordance with its terms.
2.14 Period of Participation means the period during which a person is a
Participant.
2.15 SERP means this First Federal Bank Supplemental Executive Retirement
Plan, as amended from time to time.
2.16 Supplemental ESOP Benefit means the benefit provided by this SERP
based on limitations, imposed by Sections 401(a)(17) and/or 415 of the
Code, on the benefits of a Participant under the ESOP.
2.17 Supplemental 401(k) Plan Benefit means the benefit provided by this
SERP based on limitations, imposed by the Code, on the level of savings
which may be contributed by Participants under the 401(k) Plan. In
particular, the Supplemental 401(k) Plan Benefit shall be a benefit equal
to the amount contributed to the Bank by the Participants, and earnings
thereon, both in accordance with Section 3.2 of this SERP.
2.18 Termination of Service means an Employee's separation from the service
of the Bank, whether by resignation, discharge, death, disability,
retirement or otherwise.
3
<PAGE> 7
ARTICLE III
Participation
3.1 Eligibility for Participation.
Only Eligible Employees may be or may become Participants.
(a) An Employee shall become an Eligible Employee for Supplemental 401(k)
Plan Benefits if:
(1) The Board, in its sole discretion, designates him as an Eligible
Employee; and
(2) He is a participant in the 401(k) Plan and his benefits thereunder
would be limited by Sections 401(m), 401(a)(17) and/or 415 of the Code
if maximum contributions were made; and
(3) He defers compensation, in the amount defined in Section 3.2.
(b) An Employee shall become an Eligible Employee for Supplemental ESOP
Benefits if:
(1) The Board, in its sole discretion, designates him as an Eligible
Employee; and
(2) He is a Participant in the ESOP and his benefits thereunder are
limited by the application of Sections 401(a)(17) and/or 415 of the
Code.
3.2 Supplemental 401(k) Plan Benefit Account
The Bank will accept deferrals of compensation from each Participant who is
an Eligible Employee pursuant to Section 3.1(b) and who elects to participate
in the SERP. Each such Eligible Employee may make annual deferrals of
compensation in an amount up to the amount equal to the difference between (i)
the maximum amount the Participant would be permitted to contribute to the
401(k) Plan for the given year but for the limitations of Sections 401(m),
401(a)(17), 415, or any other Section of the Code and (ii) deferrals actually
made to the 401(k) Plan. Amounts returned from the 401(k) Plan because of any
discrimination testing or other limitations on contributions will be deferred
into this SERP without further action on the Participant being required, to the
extent such deferral is permitted under applicable law. If such deferral is
not permitted, Participant's election will be effective with respect to other
compensation of such Participant in an amount equal to such returned monies.
The Bank will establish a memorandum account, maintained as a Supplemental
401(k) Plan Benefit Account for such Participant on the Bank's books, which
will be credited with the amount of such contributions. The Supplemental
401(k) Plan Benefit Accounts are not insured by the Federal
4
<PAGE> 8
Deposit Insurance Corporation and shall be considered an asset of the Bank
subject to the claims of general creditors.
On the first business day of each month, the Bank will credit the
Participant's Supplemental 401(k) Plan Benefits Account with the Matching
Contribution due since the last Matching Contribution. As of the last day of
each Plan Year, the Bank will credit the Participant's Supplemental 401(k)
Account with the Discretionary Contribution due, if any, for such year. All
amounts credited to a Participant's Supplemental 401(k) Plan Benefit Account
shall be credited with interest at a rate equal to the aggregate weighted
return provided to the Participant's Account under the 401(k) Plan. Such
interest shall be credited monthly.
3.3 Commencement of Participation.
An Eligible Employee shall become a Participant on the date determined by
the Board. However, in no event will an Employee become a Participant prior to
___________, 1998.
3.4 Termination of Participation.
Participation in the Plan shall cease on the: (a) date of the
Participant's Termination of Service; or (b) date on which he ceases to be an
Eligible Employee.
ARTICLE IV
Benefits to Participants
4.1 Supplemental Benefits.
(a) A Participant who satisfies Section 3.1(a) shall be entitled to an
unfunded, unsecured promise from the Bank of Supplemental 401(k) Plan
Benefits.
(b) A Participant who satisfies Section 3.1(b) of the SERP shall be
entitled to an unfunded, unsecured promise from the Bank of Supplemental
ESOP Benefits.
(c) The Supplemental 401(k) Plan Benefit provided for in Section 3.1(a)
shall be paid commencing upon Termination of Service to the Participant or
his designated beneficiary in the manner and for the period as the
Participant shall have elected with respect to his benefit under the 401(k)
Plan.
(d) Participants shall be vested in the benefits payable under Section
3.1(a), in the same percentage that they are vested in benefits payable
under the 401(k) Plan.
5
<PAGE> 9
(e) A Participant shall be vested in benefits payable under Section 3.1(b)
of this SERP in the same percentage that such Participant has a vested
interest in his account under the ESOP.
(f) The Supplemental ESOP Benefit provided for in Section 3.1(b) shall be
paid commencing upon Termination of Service to the Participant or his
designated beneficiary in the manner and for the period as the Participant
shall have elected with respect to his benefit under the ESOP.
4.2 Payment to Missing Person.
If the Bank is unable to effect delivery of any amount payable hereunder to
the person entitled thereto, or upon his death, to his personal representative,
it shall so advise the Board and the Board shall give written notice to such
person at his last known address as shown in such Participant's record of
employment. If such person or his personal representative does not present
himself to the Board after ninety days from the date of mailing such notice,
then the Board shall direct such amount, including any amount thereafter
becoming due to such person or his personal representative to be distributed in
the manner provided herein with respect to the death of a Participant. If
there is no valid designation of Beneficiary on file; or, if there can be no
distribution under the foregoing provision, benefit shall be paid over to the
estate of the Participant.
4.3 Release from Liability.
Payment to any Participant, legal representative or Beneficiary, in
accordance with the provisions of this Plan, is deemed to be in full
satisfaction of all claims by the Participant, representative or Beneficiary
against this SERP, the Board, and the Bank. The Board may require such
Participant, legal representative, or Beneficiary as a condition precedent to
payment to execute a receipt and release in such form as shall be determined by
the Board.
ARTICLE V
Administration
5.1 Duties of the Board.
The Board shall have full responsibility for the management, operation,
interpretation and administration of the Plan in accordance with its terms, and
shall have such authority as is necessary or appropriate in carrying out its
responsibilities. Actions taken by the Board pursuant to this Section 5.1
shall be conclusive and binding upon the Bank, Participants, Former
Participants, Beneficiaries, and other interested parties.
6
<PAGE> 10
5.2 Liabilities of the Board.
Neither the Board nor its individual members shall be deemed to be a
fiduciary with respect to this Plan; nor shall any of the foregoing individuals
or entities be liable to any Participants, Former Participants or Beneficiaries
in connection with the management, operation, interpretation or administration
of the Plan, any such liability being solely that of the Bank.
5.3 Expenses.
Any expenses incurred in the management, operation, interpretation or
administration of the Plan shall be paid by the Bank. In no event shall the
benefits otherwise payable under this Plan be reduced to offset the expenses
incurred in managing, operating, interpreting or administering the Plan.
5.4 Unfunded Character of Plan.
The SERP shall be unfunded. Neither the Bank nor the Board nor its
individual members shall segregate or otherwise identify specific assets to be
applied to the purposes of the Plan, nor shall any of them be deemed to be a
trustee of any amounts to be paid under the Plan. Any liability of the Bank to
any person with respect to benefits payable under the Plan shall be based
solely upon such contractual obligations, if any, as shall be created by the
Plan, and shall give rise only to a claim against the general assets of the
Bank. No such liability shall he deemed to be secured by any pledge or any
other encumbrance on any specific property of the Bank.
ARTICLE VI
Amendment and Termination
6.1 Amendment and Termination.
Subject to the provisions of Sections 6.2 and 6.3, the Board shall have the
right to amend or terminate the Plan, in whole or in part.
6.2 Vesting and Payment Upon Termination.
(a) In the event of the termination or partial termination of this
SERP, the rights of all affected parties, if any, to any benefits
accrued to the date of such termination or partial termination, shall
become nonforfeitable.
(b) In the event of the termination of this SERP all benefit shall be
immediately payable to the Participant by the Bank in whatever form
the SERP otherwise
7
<PAGE> 11
provides, or in the discretion of the Board may be paid in a lump sum
payment of the present value as determined by the Board in accordance
with the assumptions and methodology of Section 7520 of the Code.
6.3 Preservation of Benefits on Amendment.
No amendment of this SERP shall reduce the vested and accrued benefits, if
any, of a Participant under this SERP.
ARTICLE VII
Miscellaneous Provisions
7.1 Governing Law.
The SERP shall be construed, administered, and enforced according to laws
of the State of Pennsylvania, except to the extent that such laws are
pre-empted by the federal laws of the United States of America.
7.2 No Right to Continued Employment.
Neither the establishment of the SERP nor any provisions of the SERP, nor
any action of the Board shall be held or construed to confer upon any Employee
the right to a continuation of employment by the Bank. Subject to any
employment contract, the Bank reserves the right to dismiss any Employee or
otherwise deal with any Employee to the same extent as though the SERP had not
been adopted.
7.3 Construction of Language.
Wherever appropriate in the SERP, words used in the singular may be read in
the plural, words in the plural may be read in the singular, and words
importing the masculine gender shall be deemed equally to refer to the feminine
and the neuter. Any reference to any Article or Section shall be to an Article
or Section of this SERP, unless otherwise indicated.
7.4 Non-alienation of Benefits.
The right to receive a benefit under the SERP shall not be subject in any
manner to anticipation, alienation, or assignment, nor shall such right be
liable for or subject to debts, contracts, liabilities. Should any
Participants, Former Participants, Beneficiaries or other person attempt to
anticipate, alienate or assign his interest in or right to a benefit, or should
any person claiming against him seem to subject such interest or right to legal
or equitable process, all the interest or right of such Participants or Former
Participants, Beneficiaries or ocher person entitled
8
<PAGE> 12
to benefits under the SERP shall cease, and in that event, such interest or
right shall be held or applied, at the direction of the Board, for or to the
benefit of such Participants, Former Participants, Beneficiaries or other
person or his spouse, children or other dependents in such manner and in such
proportions as the Board may deem proper.
7.5 Operation as Unfunded Nonqualified Plan.
The SERP is intended to be an unfunded, Nonqualified Plan maintained
primarily for the purpose of providing deferred compensation for a select group
of management or highly compensated employees. The SERP is not intended to
comply with the requirements of Section 401(a) of the Code. The SERP shall be
administered and construed so as to effectuate this intent.
7.6 Reliance Upon Information
The Board shall not be liable for any decision or action taken in good
faith in connection with the administration of the SERP. Without limiting the
generality of the foregoing, any such decision or action taken by the Board in
reliance upon any information supplied to them by an officer of the Bank, the
Bank's legal counsel, or the Bank's independent accountants in connection with
the administration of the SERP shall be deemed to have been taken in good
faith.
7.7 Effective Date
The SERP shall become effective ___________, 1998.
9
<PAGE> 1
EXHIBIT 10.9
FORM OF
FIRST FEDERAL BANK
MANAGEMENT SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
PURPOSE OF THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.1 Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
----
2.2 Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
------------------
2.3 Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
-----------------
2.4 Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
----
2.5 Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
---------
2.6 Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
-------
2.7 Company Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
-------------
2.8 Eligible Employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
-----------------
2.9 Employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
--------
2.10 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
-----
2.11 ESOP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
----
2.12 Nonqualified Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
-----------------
2.13 Participant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
-----------
2.14 SERP Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
------------
2.15 SERP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
----
2.16 Termination for Cause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
---------------------
2.17 Termination of Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
----------------------
ARTICLE III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.1 Eligibility for Participation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
------------------------------
3.2 Commencement of Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
-----------------------------
3.3 Vesting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
-------
3.4 Termination of Participation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
----------------------------
ARTICLE IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
BENEFITS TO PARTICIPANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4.1 SERP Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
-------------
4.2 Form of Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
----------------
ARTICLE V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5.1 The Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
-------------
5.2 Duties of the Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
-----------------------
5.3 Liability of the Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
--------------------------
5.4 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
--------
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE VI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
AMENDMENT AND TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.1 Amendment and Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
--------------------------
ARTICLE VII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
7.1 No Right to Continual Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
--------------------------------
7.2 Non-Alienation of Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
--------------------------
7.3 Payment if Participant is Incompetent . . . . . . . . . . . . . . . . . . . . . . . . . 9
-------------------------------------
7.4 Termination for Cause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
---------------------
7.5 The Bank Sole Source of Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
--------------------------------
7.6 Lost Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
-----------------
7.7 Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
-----------
7.8 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
-------------
7.9 Operation as Unfunded Nonqualified Plan . . . . . . . . . . . . . . . . . . . . . . . . 10
---------------------------------------
</TABLE>
(iii)
<PAGE> 4
FORM OF
FIRST FEDERAL BANK
MANAGEMENT SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
EFFECTIVE _________, ____
WHEREAS, effective ____________, ____, the First Federal Bank (the
"Bank") adopted the First Federal Bank Employee Stock Ownership Plan (the
"ESOP"), a tax-qualified employee stock ownership plan; and
WHEREAS, the ESOP is leveraged with a ________-year exempt loan used
to acquire shares of Company Stock; and
WHEREAS, the final payment with respect to the ESOP loan is scheduled
to be made by the ESOP trustee on _______________; and
WHEREAS, the Bank expects that certain key management employees will
retire from the employ of the Bank prior to final payment of the ESOP loan and
the final allocation of Company Stock acquired with the proceeds of the ESOP
loan; and
WHEREAS, the Board of Directors of the Bank (the "Board of Directors")
desires to implement a plan to provide certain key management employees with
benefits to replace the benefits to which they would have otherwise been
entitled under the ESOP had they remained in the employ of the Bank until the
complete repayment of the ESOP loan and the final allocation of Company Stock
acquired with the proceeds of the ESOP loan;
NOW, THEREFORE, by resolution of the Board of Directors of the Bank,
the First Federal Bank Management Supplemental Executive Retirement Plan (the
"SERP") has been established.
ARTICLE I
PURPOSE OF THE PLAN
The purpose of the SERP is to provide certain key management employees
of the Bank who retire prior to complete repayment of the ESOP loan and the
final allocation of Company Stock acquired with the proceeds of the ESOP loan
with benefits to make up lost benefits to which they would otherwise have been
entitled under the terms of the ESOP had they continued their employment with
the Bank until complete repayment of the ESOP loan.
<PAGE> 5
ARTICLE II
DEFINITIONS
The following definitions shall apply for the purposes of this SERP
unless a different meaning is clearly indicated by the context.
2.1 Bank means First Federal Bank, having its principal office at
12 E. Broad Street, Hazleton, PA and its successors or assigns.
2.2 Board of Directors means the Board of Directors of the Bank,
as duly constituted from time to time.
2.3 Change in Control of the Company or the Bank means an event of
a nature that: (i) would be required to be reported in response to Item 1(a) of
the current report on Form 8-K, as in effect on the date hereof, pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange
Act"); or (ii) results in a Change in Control of the Bank or the Company within
the meaning of the Change in Bank Control Act and the Rules and Regulations
promulgated by the Federal Deposit Insurance Corporation ("FDIC") at 12 C.F.R.
Section 303.4(a) with respect to the Bank and the Board of Governors of the
Federal Reserve System ("FRB") at 12 C.F.R. Section 225.41(b) with respect to
the Company, as in effect on the date hereof; or (iii) results in a transaction
requiring prior FRB approval under the Bank Holding Company Act of 1956 and the
regulations promulgated thereunder by the FRB at 12 C.F.R. Section 225.11, as
in effect on the date hereof except for the Company's acquisition of the Bank;
or (iv) without limitation such a Change in Control shall be deemed to have
occurred at such time as (A) any "person" (as the term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Bank or the Company representing 20% or more of the Bank's or
the Company's outstanding securities except for any securities of the Bank
purchased by the Company in connection with the conversion of the Bank to the
stock form and any securities purchased by any tax-qualified employee benefit
plan of the Bank; or (B) individuals who constitute the Board of Directors of
the Company on the date hereof (the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided that any person becoming a
director subsequent to the date hereof whose election was approved by a vote of
at least three-quarters of the directors comprising the Incumbent Board, or
whose nomination for election by the Company's stockholders was approved by the
same Nominating Committee serving under an Incumbent Board, shall be, for
purposes of this clause (B), considered as though he were a member of the
Incumbent Board; or (C) a plan of reorganization, merger, consolidation, sale
of all or substantially all the assets of the Bank or the Company or similar
transaction occurs in which the Bank or Company is not the resulting entity; or
(D) solicitations of shareholders of the Company, by someone other than the
current management of the Company, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Company or Bank or similar
transaction with one or more corporations as a result of which the outstanding
shares of the class of securities then subject to the plan or transaction are
exchanged for or converted into cash or
2
<PAGE> 6
property or securities not issued by the Bank or the Company shall be
distributed; or (E) a tender offer is made for 20% or more of the voting
securities of the Bank or the Company.
2.4 Code means the Internal Revenue Code of 1986, as amended from
time to time (including the corresponding provisions of any succeeding law).
2.5 Committee means the administrative committee appointed by the
Board to administer the SERP pursuant to the terms of Article V hereof.
2.6 Company means Northeast Pennsylvania Financial Corp., the
holding company of the Bank.
2.7 Company Stock means the common stock of Northeast Pennsylvania
Financial Corp.
2.8 Eligible Employee means an Employee who is eligible for
participation in the SERP pursuant to the provisions of Article III hereof.
2.9 Employee means any person, including an officer, who is
employed by the Bank.
2.10 ERISA means the Employee Retirement Income Security Act of
1974, as amended from time to time (including the corresponding provisions of
any succeeding law).
2.11 ESOP means First Federal Bank Employee Stock Ownership Plan.
2.12 Nonqualified Plan means a plan of deferred compensation which
does not meet the requirements of Section 401(a) of the Code.
2.13 Participant means any person who participates in the SERP in
accordance with its terms.
2.14 SERP Benefit means the benefit payable to a Participant
pursuant to the terms of the SERP.
2.15 SERP means First Federal Bank Management Supplemental
Executive Retirement Plan, as set forth herein, and as amended from time to
time.
2.16 Termination for Cause means termination of employment because
of the Employee's personal dishonesty, incompetence, willful misconduct, breach
of fiduciary duty involving personal profit, intentional failure to perform
stated duties, or willful violation of any law, rule or regulation (other than
traffic violations or similar offenses). The basis for any Employee's
Termination for Cause shall be determined by the Board of Directors in its sole
discretion.
3
<PAGE> 7
2.17 Termination of Service means an Employee's separation from the
service of the Bank, whether by resignation, discharge, death, disability,
retirement or otherwise.
ARTICLE III
PARTICIPATION
3.1 Eligibility for Participation.
Only Eligible Employees may be or become Participants. An Employee
shall become an Eligible Employee for SERP Benefits if:
(a) He is a participant in the ESOP, and
(b) The Board of Directors, in its sole discretion,
designates him as an Eligible Employee.
3.2 Commencement of Participation.
An Eligible Employee shall become a Participant in the SERP on the
date determined by the Board. However, in no event will an Employee become a
Participant prior to January 1, 1997.
3.3 Vesting.
A Participant shall vest in his SERP Benefit according to the
following schedule:
<TABLE>
<CAPTION>
Anniversary of SERP Participation Vested Percentage
- ---------------------------------------------------- --------------------------------------
<S> <C>
1st 25%
2nd 50%
3rd 75%
4th 100%
</TABLE>
Notwithstanding the preceding, a Participant shall vest immediately in his SERP
Benefit upon the occurrence of a Change in Control of the Bank or the Company.
4
<PAGE> 8
3.4 Termination of Participation.
A Participant's participation in the SERP shall cease on the earlier
of
(a) the date of the Participant's Termination of Service, or
(b) the date on which the Participant ceases to be an
Eligible Employee.
ARTICLE IV
BENEFITS TO PARTICIPANTS
4.1 SERP Benefits.
(a) An individual who satisfies the eligibility requirements of
Section 3.1 and becomes a Participant pursuant to Section 3.2 shall be entitled
to an unfunded, unsecured promise from the Bank to receive a SERP Benefit upon
Termination of Service as a result of his attainment of "Normal Retirement Age"
or satisfaction of the requirements for an "Early Retirement Benefit" (as those
terms are defined in the ESOP) under the terms of ESOP.
(b) The SERP Benefit shall be determined by:
(i) projecting the total number of shares of Company Stock
that would have been allocated to the Participant's account
under the ESOP had the Participant continued in the employ of
the Bank, measured from the date the Participant was first
eligible to participate in the ESOP until the ESOP loan would
have been repaid in full and the final allocation of shares of
Company Stock acquired with the ESOP loan would have been
made; and then
(ii) reducing the number of shares projected in (i), above,
by the actual number of shares of Company Stock allocated to
the Participant's account under the terms of the ESOP as of
the last day of the final Plan Year in which the Participant
was an "Active Participant" (as defined in the ESOP) in the
ESOP; and then
(iii) multiplying the number of shares of Company Stock
determined after application of (ii), above, by the average
fair market value of the Company Stock for the five-year
period immediately preceding the Participant's Termination of
Service (or the number of years the Participant has
participated in the SERP if such number is fewer than five).
The projection of shares required by (i), above, shall be performed by a public
accountant based on assumptions which the Board of Directors has approved as
reasonable at the time the calculation for the SERP Benefit is performed.
5
<PAGE> 9
4.2 Form of Benefits.
(a) SERP Benefits shall be payable in a lump sum payment as soon
as practicable after the Participant's Termination of Service. However, the
Committee reserves the right to make payments in a series of periodic payments.
(b) SERP Benefits, at the discretion of the Committee, shall be
paid in cash, Company Stock or some combination thereof.
ARTICLE V
ADMINISTRATION
5.1 The Committee.
Except for the functions reserved to the Bank or the Board of
Directors, the administration of the SERP shall be the responsibility of the
Committee. The Committee shall consist of three (3) or more persons designated
by the Board of Directors. Members of the Committee shall serve for such terms
as the Board of Directors shall determine and until their successors are
designated and qualified. Any member of the Committee may resign upon at least
sixty (60) days written notice to the Board, or may be removed from office by
the Board of Directors for failure or inability to carry out his
responsibilities in an effective manner.
5.2 Duties of the Committee.
The Committee shall have the power and the duty to take all actions
and to make all decisions necessary or proper to carry out the purpose of the
SERP. The determination of the Committee as to any question involving the
general administration and interpretation of the SERP shall be final,
conclusive and binding. Any discretionary actions to be taken under the SERP
by the Committee shall be uniform in their nature and applicable to all persons
similarly situated. Without limiting the generality of the foregoing, the
Committee shall have the following powers and duties:
(a) the duty to furnish to all Participants, upon request,
copies of the SERP and to require any person to furnish such information as it
may request for the purpose of the proper administration of the SERP as a
condition to receiving any benefits under the SERP;
(b) the duty to make and enforce such rules and regulations
and prescribe the use of such forms as it shall deem necessary for the
efficient administration of the SERP;
(c) the duty to interpret the SERP, and to resolve
ambiguities, inconsistencies and omissions, which findings shall be binding,
final and conclusive;
6
<PAGE> 10
(d) the duty to decide on questions concerning the SERP in
accordance with the provisions of the SERP;
(e) the duty to determine the amount of benefits which shall
be payable to any person in accordance with the provisions of the SERP and to
provide a full and fair review to any Participant whose claim for benefits has
been denied in whole or in part;
(f) the power to designate a person who may or may not be a
member of the Committee as SERP "Administrator." If the Committee does not so
designate an Administrator, the Bank shall be the SERP Administrator;
(g) the power to allocate any such powers and duties to or
among individual members of the Committee; and
(h) the power to designate persons other than Committee
members to carry out any duty or power which would otherwise be a
responsibility of the Committee or Administrator, under the terms of the SERP.
5.3 Liability of the Committee.
To the extent permitted by law, the Committee and any person to whom
it may delegate any duty or power in connection with administering the SERP,
the Bank, any Employer, and the officers and directors thereof, shall be
entitled to rely conclusively upon, and shall be fully protected in any action
taken or suffered by them in good faith in the reliance upon, any actuary,
counsel, accountant, other specialist, or other person selected by the
Committee, or in reliance upon any tables, valuations, certificates, opinions
or reports which shall be furnished by any of them. Further, to the extent
permitted by law, no member of the Committee, nor the Bank, any Employer, nor
the officers or directors thereof, shall be liable for any neglect, omission or
wrongdoing of any other members of the Committee, agent, officer or employee of
the Bank or any Employer. Any person claiming benefits under the SERP shall
look solely to the Bank for redress.
5.4 Expenses.
All expenses incurred prior to the termination of the SERP that shall
arise in connection with the administration of the SERP (including, but not
limited to administrative expenses, proper charges and disbursements,
compensation and other expenses and charges of any actuary, counsel,
accountant, specialist, or other person who shall be retained or employed by
the Committee in connection with the administration of the SERP), shall be paid
by the Bank.
7
<PAGE> 11
ARTICLE VI
AMENDMENT AND TERMINATION
6.1 Amendment and Termination.
The Board of Directors shall have the power to suspend or terminate
the SERP in whole or in part at any time, and from time to time to extend,
modify, amend or revise the SERP in such respects as the Board of Directors, by
resolution, may deem advisable; provided, however, that no such extension,
modification, amendment, revision, or termination shall deprive a Participant
or any beneficiary of any benefit payable under the SERP at the time of such
extension, modification, amendment, revision, or termination.
ARTICLE VII
MISCELLANEOUS PROVISIONS
7.1 No Right to Continual Employment.
The SERP shall not be deemed to constitute a contract of employment
between the Bank and any Employee or other person, whether or not in the employ
of the Bank, nor shall anything herein contained be deemed to give any Employee
or other person, whether or not in the employ of the Bank, any right to be
retained in the employ of the Bank, or to interfere with the right of the Bank
to discharge any Employee at any time and to treat such Employee without any
regard to the effect which such treatment might have upon such Employee as a
Participant of the SERP.
7.2 Non-Alienation of Benefits.
Except as may otherwise be required by law, no distribution or payment
under the SERP to any Participant or beneficiary shall be subject in any manner
to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or
charge, whether voluntary or involuntary, and any attempt to so anticipate,
alienate, sell, transfer, assign, pledge, encumber or charge the same shall be
void; nor shall any such distribution or payment be in any way liable for or
subject to the debts, contracts, liabilities, engagements or torts of any
person entitled to such distribution or payment. If any Participant or
beneficiary is adjudicated bankrupt or purports to anticipate, alienate, sell,
transfer, assign, pledge, encumber or charge any such distribution or payment,
voluntarily or involuntarily, the Committee, in its sole discretion, may cancel
such distribution or payment or may hold or cause to be held or applied such
distribution or payment, or any part thereof, to or for the benefit of such
Participant or beneficiary, in such manner as the Committee shall direct.
8
<PAGE> 12
7.3 Payment if Participant is Incompetent.
If the Bank determines that any person entitled to payments under the
SERP is incompetent by reason of physical or mental disability, it may cause
all payments thereafter becoming due to such person to be made to any other
person for the benefit of the incompetent person, without responsibility to
follow application of amounts so paid. Payments made pursuant to this
provision shall completely discharge the SERP, the Bank and the Committee.
7.4 Termination for Cause.
If any Participant entitled to payments under the SERP separates from
service as a result of Termination for Cause, the Bank may cause all payments
thereafter becoming due to such Participant to be forfeited under the SERP.
7.5 The Bank Sole Source of Benefits.
The Bank shall be the sole source of benefits under the SERP, and each
Employee, Participant, beneficiary, or any other person who shall claim the
right to any payment or benefit under the SERP shall be entitled to look solely
to the Bank for payment of benefits.
7.6 Lost Participants.
If the Bank is unable to make payment to any Participant, beneficiary,
or any other person to whom a payment is due under the SERP, because it cannot
ascertain the identity or whereabouts of such Participant, beneficiary, or
other person after reasonable efforts have been made to identify or locate such
person (including a notice of the payment so due mailed to the last known
address of such Participant, beneficiary, or other person shown on the records
of the Bank), such payment and all subsequent payments otherwise due to such
Participant, beneficiary or other person shall be forfeited twenty-four (24)
months after the date such payment first became due; provided, however, that
such payment and any subsequent payments shall be reinstated, retroactively, no
later than sixty (60) days after the date on which the Participant,
beneficiary, or other person is identified or located.
7.7 Withholding.
If upon the payment of any benefits under the SERP, the Bank shall be
required to withhold any amounts with respect to such payment by reason of any
federal, state or local tax laws, rules or regulations, then the Bank shall be
entitled to deduct and withhold such amounts from any such payments. In any
event, such person shall make available to the Bank, promptly when requested by
the Bank, sufficient funds or other property to meet the requirements of such
withholding. Furthermore, the Bank shall be entitled to take and authorize such
steps as it may deem advisable in order to have the amounts required to be
withheld made available to the Bank
9
<PAGE> 13
out of any funds or property due to become due to such person, whether under
the SERP or otherwise.
7.8 Governing Law.
The provisions of the SERP shall be construed, administered and
governed under applicable federal laws and the laws of the State of
Pennsylvania.
7.9 Operation as Unfunded Nonqualified Plan.
The SERP is intended to be an unfunded, Nonqualified Plan maintained
"primarily for the purpose of providing deferred compensation for a select
group of management or highly compensated employees" as that phrase is used for
purposes of Sections 201, 301 and 401 of ERISA. The SERP is not intended to
comply with the requirements of section 401(a) of the Code. The SERP shall be
administered and construed so as to effectuate this intent.
10
<PAGE> 14
First Federal Bank has adopted this Plan, to be executed by a designee of the
Board and duly attested, on this the ___________ day of _______, 199__.
ATTEST: FIRST FEDERAL BANK
By
- ------------------------------ ---------------------------
11
<PAGE> 1
EXHIBIT 16.1
[PARENTE - RANDOLPH - ORLANDO - CAREY & ASSOCIATES LETTERHEAD]
December 22, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Prospectus of Northeast Pennsylvania Financial Corp., which is
part of the Registration Statement on Form S-1 for Northeast
Pennsylvania Financial Corp. and a part of Form AC for First
Federal Savings and Loan Association of Hazleton
Ladies and Gentlemen:
We have read the two paragraphs under the caption "Change in
Accountants" in the Prospectus relating to the change of independent auditors
made in 1997. With respect to the comments made in such paragraphs, we agree
with the statements contained therein.
Very truly yours,
/s/ PARENTE, RANDOLPH, ORLANDO,
CAREY & ASSOCIATES
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
of First Federal Savings and Loan
Association of Hazleton
We consent to the incorporation by reference in the prospectus of Northeast
Pennsylvania Financial Corp., which is a part of the Registration Statement on
Form S-1 for Northeast Pennsylvania Financial Corp. and a part of Form AC for
First Federal Savings and Loan Association of Hazleton, of our report dated
November 13, 1997, except as to footnote 15 which is as of November 18, 1997,
relating to the consolidated balance sheet of First Federal Saving and Loan
Association of Hazleton and subsidiaries as of September 30, 1997 and the
related consolidated statements of income, changes in equity, and cash flows for
the year then ended. In addition, we consent to the reference to our firm under
the headings "experts", "legal and tax opinions", "the conversion-establishment
of the charitable foundation" and "risk factors-establishment of the charitable
foundation" in the prospectus.
We also consent to the inclusion herein of our tax opinion dated December 22,
1997 relating to the state income tax implications of the conversion transaction
and our tax opinion dated December 18, 1997 relating to the federal income tax
implications of the establishment of the private foundation.
KPMG PEAT MARWICK, LLP
/s/ KPMG PEAT MARWICK, LLP
Philadelphia, Pennsylvania
December 22, 1997
<PAGE> 1
EXHIBIT 23.2
[PARENTE - RANDOLPH - ORLANDO - CAREY & ASSOCIATES LETTERHEAD]
The Board of Directors
of First Federal Savings and Loan
Association of Hazleton
Hazleton, Pennsylvania:
We consent to the incorporation by reference in the prospectus of
Northeast Pennsylvania Financial Corp., which is a part of the Registration
Statement on Form S-1 for Northeast Pennsylvania Financial Corp. and a part of
Form AC for First Federal Savings and Loan Association of Hazleton of our report
dated November 7, 1996, relating to the consolidated balance sheet of First
Federal Savings and Loan Association of Hazleton and subsidiaries as of
September 30, 1996 and the related consolidated statements of income, changes in
equity, and cash flows for the years ended September 30, 1996 and 1995. In
addition, we consent to the reference to our Firm under the headings "experts"
and "change in accountants" in the aforementioned prospectus.
We also consent to the use of our report on the financial statements of
the First Federal Savings & Loan Association of Hazleton 401(k) Plan included in
the 401(k) plan prospectus supplement.
/s/ PARENTE, RANDOLPH, ORLANDO, CAREY & ASSOCIATES
Hazleton, Pennsylvania
December 22, 1997
<PAGE> 1
CONSENT
We hereby consent to the references to this firm and our opinions in: the
Registration Statement on Form S-1 filed by Northeast Pennsylvania Financial
Corp., Hazleton, Pennsylvania, and all amendments thereto; in the Form H-(e)1
for Northeast Pennsylvania Financial Corp., and all amendments thereto; and in
the Application for Conversion on Form AC filed by First Federal Savings and
Loan Association of Hazleton (the "Bank"), and all amendments thereto, relating
to the conversion of the Bank from a federally-chartered mutual savings bank to
a federally-chartered stock savings bank, the concurrent issuance of the Bank's
outstanding capital stock to Northeast Pennsylvania Financial Corp., a holding
company formed for such purpose, and the offering of Northeast Pennsylvania
Financial Corp.'s common stock.
/s/ Muldoon, Murphy & Faucette
MULDOON, MURPHY & FAUCETTE
Dated this 23rd day of
December, 1997
<PAGE> 1
[MORRIS, NICHOLS, ARSHT & TUNNELL LETTERHEAD]
December 22, 1997
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, DC 20016
Ladies and Gentlemen:
We hereby consent to the filing of our opinion to you
concerning certain matters of Delaware law in connection with the subscription
and community offering (the "Offering") by Northeast Pennsylvania Financial
Corp., a Delaware corporation (the "Company"), of shares of its common stock,
par value $.01 per share, in draft or final form, as an exhibit to (i) the
Registration Statement filed with the Securities and Exchange Commission by the
Company in connection with the Offering, and all amendments thereto, and (ii)
the Application for Conversion filed with the Office of Thrift Supervision in
connection with the conversion of First Federal Savings & Loan Association of
Hazelton, a federally chartered savings and loan association, from the mutual
form of ownership to stock form of ownership, and all amendments thereto, and to
the reference to this firm in the "Legal Matters" section of the Prospectus
relating to the Offering.
Very truly yours,
/s/ Morris, Nichols, Arsht & Tunnell
------------------------------------
Morris, Nichols, Arsht & Tunnell
<PAGE> 1
EXHIBIT 23.5
[KELLER & COMPANY, INC. LETTERHEAD]
December 22, 1997
The Board of Directors
First Federal Savings and Loan Association
of Hazleton
12 E. Broad Street
Hazleton, Pennsylvania 18201-0950
Re: Subscription Rights - Conversion of First Federal Savings and Loan
Association of Hazleton
Hazleton, Pennsylvania
Gentlemen:
The purpose of this letter is to provide an opinion of the value of the
subscription rights of the "to be issued" common stock of Northeast Pennsylvania
Financial Corp. (the "Corporation"), Hazleton, Pennsylvania in regard to the
conversion of First Federal Savings and Loan Association of Hazleton ("First
Federal" or the "Bank") from a federal-chartered mutual savings and loan
association to a federal-chartered stock savings bank with the name First
Federal Bank.
Because the Subscription Rights to purchase shares of Common Stock in Northeast
Pennsylvania Financial Corp., which are to be issued to the depositors of First
Federal Savings and Loan Association of Hazleton and the other members of the
Bank and will be acquired by such recipients without cost, will be
nontransferable and of short duration and will afford the recipients the right
only to purchase shares of Common Stock at the same price as will be paid by
members of the general public in a Direct Community Offering, we are of the
opinion that:
(1) The Subscription Rights will have no ascertainable fair
market value, and;
(2) The price at which the Subscription Rights are exercisable
will not be more or less than the fair market value of the
shares on the date of the exercise.
Further, it is our opinion that the Subscription Rights will have no economic
value on the date of distribution or at the time of exercise, whether or not a
community offering takes place.
Sincerely,
KELLER & COMPANY, INC.
/s/ MICHAEL R. KELLER
Michael R. Keller
President
<PAGE> 1
EXHIBIT 24.1
CONFORMED
POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that each person whose signature
appears below constitutes and appoints Thomas L. Kennedy and E. Lee Beard, and
each of them, as true and lawful attorneys-in-fact and agents with full power
of substitution and resubstitution, for them and in their name, place and
stead, in any and all capacities to sign any or all amendments to the
Application for Conversion by First Federal Savings and Loan Association of
Hazleton and the Form S-1 Registration Statement by Northeast Pennsylvania
Financial Corp., and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Office of Thrift Supervision of the
Department of the Treasury (the "OTS") or the U.S. Securities and Exchange
Commission, respectively, granting unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing requisite
and necessary to be done as fully to all intents and purposes as they might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or their substitute or substitutes may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of Part 563b of the OTS Rules and
Regulations and the Securities Act of 1933, as amended, and any rules and
regulations promulgated thereunder, the foregoing Power of Attorney prepared in
conjunction with the Application for Conversion and the Registration Statement
has been duly signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
NAME DATE
---- ----
<S> <C>
/s/ E. Lee Beard December 24, 1997
- ------------------------------------------------------
E. Lee Beard
President, Chief Executive Officer
and Director
(principal executive officer)
Northeast Pennsylvania Financial Corp.
President, Chief Executive Officer and Director
(principal executive officer)
First Federal Savings and Loan Association of Hazleton
/s/ Patrick J. Owens, Jr. December 24, 1997
- ------------------------------------------------------
Patrick J. Owens, Jr.
Chief Financial Officer, Treasurer and
Secretary
(principal accounting and financial officer)
Northeast Pennsylvania Financial Corp.
Senior Vice President, Chief Financial Officer
(principal accounting and financial officer)
First Federal Savings and Loan Association of Hazleton
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
/s/ Thomas L. Kennedy December 24, 1997
- ------------------------------------------------------
Thomas L. Kennedy
Chairman of the Board
Northeast Pennsylvania Financial Corp.
Chairman of the Board and General Counsel
First Federal Savings and Loan Association of Hazleton
/s/ Paul L. Conard December 24, 1997
- ------------------------------------------------------
Paul L. Conard
Director
Northeast Pennsylvania Financial Corp.
Director
First Federal Savings and Loan Association of Hazleton
/s/ William R. Davidson December 24, 1997
- ------------------------------------------------------
William R. Davidson
Director
Northeast Pennsylvania Financial Corp.
Director
First Federal Savings and Loan Association of Hazleton
/s/ Barbara M. Ecker December 24, 1997
- ------------------------------------------------------
Barbara M. Ecker
Director
Northeast Pennsylvania Financial Corp.
Director
First Federal Savings and Loan Association of Hazleton
/s/ R. Peter Haentjens, Jr. December 24, 1997
- ------------------------------------------------------
R. Peter Haentjens, Jr.
Director
Northeast Pennsylvania Financial Corp.
Director
First Federal Savings and Loan Association of Hazleton
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
/s/ John P. Lavelle December 24, 1997
- ------------------------------------------------------
John P. Lavelle
Director
Northeast Pennsylvania Financial Corp.
Director
First Federal Savings and Loan Association of Hazleton
/s/ Michael J. Leib December 24, 1997
- ------------------------------------------------------
Michael J. Leib
Director
Northeast Pennsylvania Financial Corp.
Director
First Federal Savings and Loan Association of Hazleton
/s/ William J. Spear December 24, 1997
- ------------------------------------------------------
William J. Spear
Director
Northeast Pennsylvania Financial Corp.
Director
First Federal Savings and Loan Association of Hazleton
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,525
<INT-BEARING-DEPOSITS> 11,689
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 44,773
<INVESTMENTS-CARRYING> 38,925
<INVESTMENTS-MARKET> 88,869<F1>
<LOANS> 261,469
<ALLOWANCE> 1,272
<TOTAL-ASSETS> 369,242
<DEPOSITS> 314,123
<SHORT-TERM> 8,092
<LIABILITIES-OTHER> 2,973
<LONG-TERM> 15,516
0
0
<COMMON> 0
<OTHER-SE> 28,538
<TOTAL-LIABILITIES-AND-EQUITY> 369,242
<INTEREST-LOAN> 20,071
<INTEREST-INVEST> 6,528
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 26,599
<INTEREST-DEPOSIT> 12,699
<INTEREST-EXPENSE> 14,194
<INTEREST-INCOME-NET> 12,405
<LOAN-LOSSES> (651)
<SECURITIES-GAINS> 563
<EXPENSE-OTHER> 9,492
<INCOME-PRETAX> 2,129
<INCOME-PRE-EXTRAORDINARY> 2,129
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,129
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.57
<LOANS-NON> 774
<LOANS-PAST> 0
<LOANS-TROUBLED> 112
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 730
<CHARGE-OFFS> 132
<RECOVERIES> 23
<ALLOWANCE-CLOSE> 1,272<F2>
<ALLOWANCE-DOMESTIC> 942
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 330<F3>
<FN>
<F1>NET BROKEN OUT IN 10-QSB.
<F2>ALLOWANCE FOR LOAN LOSS AT END OF PERIOD INCLUDES A REDUCTION IN THE ALLOWANCE
THROUGH THE PROVISION FOR LOAN LOSSES.
<F3>ALL UNALLOCATED IS FOR DOMESTIC LOANS.
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99.1
[KELLER & COMPANY, INC. LETTERHEAD]
December 22, 1997
Re: Valuation Appraisal of Northeast Pennsylvania Financial Corp.
First Federal Savings and Loan Association of Hazleton
Hazleton, Pennsylvania
We hereby consent to the use of our firm's name, Keller & Company, Inc.
("Keller"), and the reference to our firm as experts in the Application for
Conversion on Form AC to be filed by first Federal Savings and Loan Association
of Hazleton and any amendments thereto and references to our opinion regarding
subscription rights filed as an exhibit to the applications referred to
hereafter. We also consent to the use of our firm's name in the Form S-1 to be
filed by Northeast Pennsylvania Financial Corp. with the Securities and Exchange
Commission and any amendments thereto, and to the statements with respect to us
and the references to our Valuation Appraisal Report and in the said Form AC and
any amendments thereto and in the notice and Application for Conversion filed by
First Federal Savings and Loan Association of Hazleton, Hazleton, Pennsylvania.
Very truly yours,
KELLER & COMPANY, INC.
by: /s/ MICHAEL R. KELLER
-------------------------
Michael R. Keller
President
