FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File Number 1-13793
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NORTHEAST PENNSYLVANIA FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
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DELAWARE 06-1504091
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
12 E. BROAD STREET, HAZLETON, PENNSYLVANIA 18201-6591
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (570) 459-3700
Securities registered under Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $0.01 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by checkmark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant i.e., persons other than directors and
executive officers of the registrant is $69.7 million and is based on the last
sales price as quoted on the American Stock Exchange for December 28, 1998.
The number of shares of common stock outstanding as of December 28, 1998 was
6,170,256.
(1) Portions of the Annual Report to Shareholders for the year ended September
30, 1998 are incorporated by reference into Part I, Part II, Part III
and Part IV of this Form 10-K.
(2) Portions of the definitive proxy statement for the 1999 Annual Meeting of
Shareholders are incorporated by reference into Part I and Part III of this
Form 10-K.
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NORTHEAST PENNSYLVANIA FINANCIAL CORP.
FORM 10-K
TABLE OF CONTENTS
Part I Page
Item 1 Business 1-13
Item 2 Properties 14-15
Item 3 Legal Proceedings 15
Item 4 Submission of Matters to a Vote of Security Holders 15
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 16
Item 6 Selected Financial Data 16
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 7A Quantitative and Qualitative Disclosure About Market Risk 16
Item 8 Financial Statements and Supplementary Data 16
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 16
Part III
Item 10 Directors and Executive Officers of the Registrant 17
Item 11 Executive Compensation 17
Item 12 Security Ownership of Certain Beneficial Owners and
Management 17
Item 13 Certain Relationships and Related Transactions 17
Part IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 18-19
SIGNATURES 20
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Part I
Forward Looking Statements
In addition to historical information, our 10-K may include certain
forward-looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulation of
federal, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the Company's
loan and investment portfolios, changes in accounting principles, policies or
guidelines, avoidance of any adverse effect as a result of the Year 2000 issue,
and other economic, competitive, governmental and technological factors
affecting the Company's operations, markets, products, services and prices.
Item 1. Business
General
Northeast Pennsylvania Financial Corp. (the "Company") is a Delaware
Corporation and is the holding company for First Federal Bank (the "Bank"), a
federally chartered capital stock savings bank regulated by the Office of Thrift
Supervision ("OTS"). The Company's executive offices are located at 12 East
Broad Street, Hazleton, Pennsylvania 18201.
The Bank was organized in 1935 as a federally chartered savings and loan
association. On March 31, 1998, the Bank's predecessor converted from a
federally chartered savings and loan association to a federally chartered
capital stock savings bank and changed its name to First Federal Bank (the
"Conversion"). On March 31, 1998, the Company acquired the Bank as part of the
Conversion. The Bank serves the greater Hazleton area, Mountaintop, Bloomsburg,
Lehighton, and all of Schuylkill County, through ten office locations. At
September 30, 1998, the Bank had total assets of $522.2 million, deposits of
$324.0 million and stockholder's equity of $87.4 million.
The Company'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 multi-family and commercial loans. The Company 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 Company has a policy to limit its
retention of newly originated longer-term, fixed-rate one- to four-family loans
to 25% of total originations for a fiscal year, periodically the Company has had
to limit its origination of such loans. The Company has implemented 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 Company 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 Company 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 Company
also originates multi-family and commercial real estate loans and construction
loans. The Company also invests in mortgage-related securities and investment
securities, primarily U.S. government and agency and municipal obligations, and
other permissible investments.
The Company'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 Company'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 Company is a community-oriented banking institution offering a variety
of financial products and services to meet the needs of the communities it
serves. The Company's lending and deposit gathering is concentrated in its
market area consisting of Luzerne, Carbon, Columbia, Monroe and Schuylkill
counties in Northeast Pennsylvania. The Company invests primarily in loans
secured by first or second mortgages on properties located in areas surrounding
its offices.
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The Company maintains its headquarters in Hazleton and three other banking
offices in Luzerne County. The Company's four offices in Luzerne County,
including Hazleton, accounted for $169.3 million or 52.2% of the Company's total
deposits at September 30, 1998. 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 Company 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 Company 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 Mountaintop branch office which was
opened in January 1998.
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, Quebecor 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 Company'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 Company 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 Company faces significant competition both in generating loans and in
attracting deposits. The Company'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 Company. The Company'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.
In addition, the Company recognizes that its customer base increasingly
focuses on convenience and access to services. The Company 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 Company intends to continue to evaluate and
enhance its service delivery system.
LENDING ACTIVITIES
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 1998 and 1997, the
Bank originated $91.9 million and $72.1 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.
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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 25% 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 sold loans and has had to
limit its solicitation of longer-term one-to four-family loans to meet its
retention policy regarding such loans. However in January 1998, the Bank
implemented a program to sell longer-term fixed-rate one- to four-family
mortgage loans in the secondary market.
During fiscal years 1998 and 1997, the Bank originated $19.8 million and
$17.7 million, respectively, of one- to four-family mortgage loans. In addition,
during fiscal years 1998 and 1997, the Bank originated $12.0 million and $14.2
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 $6.5 million and $2.1 million,
respectively, of multi-family and commercial real estate loans during fiscal
1998 and 1997.
Also, during fiscal 1998 and 1997, respectively, the Bank originated $48.0
million and $30.8 million of consumer loans, consisting of $26.7 million and
$13.6 million, respectively, of home equity loans, $2.8 million and $3.1
million, respectively, of home equity lines of credit, $13.3 million and $8.9
million, respectively, of direct and indirect automobile loans, $1.7 million and
$1.7 million, respectively, of education loans, and $3.5 million and $3.5
million, respectively, of other consumer loans. The automobile loan increase
during fiscal 1998 includes the purchase of $6.5 million of indirect auto loans
from a local financial institution.
In addition, during fiscal 1998 and 1997, respectively, the Bank originated
$5.6 million and $7.4 million of commercial loans. These originations consisted
primarily of commercial business and municipal loans.
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The following table sets forth the Bank's loan originations, purchases, sales
and principal repayments for the periods indicated:
For the Fiscal Year Ended September 30,
1998 1997 1996
(In Thousands)
Loans at beginning of period $268,972 $250,142 $219,633
Originations:
Real estate:
One- to four-family 19,790 17,698 24,355
Multi-family and commercial 6,513 2,055 1,588
Construction 11,965 14,151 12,238
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Total real estate loans 38,268 33,904 38,181
Consumer:
Home equity loans and lines of credit 29,512 16,710 17,464
Automobile 13,274 8,912 8,107
Education 1,743 1,658 1,727
Unsecured lines of credit 741 837 711
Other 2,761 2,671 2,361
------- ------ ------
Total consumer loans 48,031 30,788 30,370
Commercial 5,602 7,426 6,614
------- ------ ------
Total loans originated 91,901 72,118 75,165
------- ------ ------
Deduct:
Principal loan repayments and prepayments 61,722 51,298 42,619
Loan sales 8,365 1,789 1,534
Transfers to REO 222 201 503
------- ------ ------
Sub-total 70,309 53,288 44,656
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Net loan activity 21,592 18,830 30,509
------- ------- -------
Loans at end of period (1) $290,564 $268,972 $250,142
======= ======= =======
(1) Loans at end of period include loans in process of $4,005, $4,734 and
$5,077 for fiscal years 1998, 1997 and 1996, 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. 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.
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 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"). 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.
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Multi-family and Commercial Real Estate Lending. The Bank originates
fixed-rate and adjustable-rate multi-family and commercial real estate loans
that generally are secured by properties used for business purposes or a
combination of residential and retail purposes.
Pursuant to the Bank's underwriting policies a multi-family mortgage and
commercial real estate 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 ranging from 15 to 25 years.
The factors considered by the Bank in granting these loans 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%.
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%.
Consumer Lending. The Bank offers consumer loans which 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). The indirect automobile loans are
originated by dealers in accordance with underwriting standards pre-established
by the Bank and are serviced by the Bank. The Bank also offers loans on
recreational vehicles and boats and other consumer loans including education
loans which are federally 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.
Commercial Lending. 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.
Loan Approval Procedures and Authority. The Board of Directors establishes
the lending policies and the levels of loan approvals 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 Chief Financial Officer and
at least one outside director.
Non-performing Assets, Impaired Loans, Real Estate Owned and Allowance for
Loan Losses. The information relating to the Bank's non-performing assets,
impaired loans, real estate owned and allowance for loan losses appears on pages
18, 19 and 20 of the Registrant's 1998 Annual Report to Shareholders and is
incorporated herein by reference.
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Investment Activities
The above captioned information appears in "Investment Activities" in the
Registrant's 1998 Annual Report to Shareholders on pages 16 and 17 and is
incorporated herein by reference.
Source of Funds
Information relating generally to the Bank's source of funds and a
description of the Bank's deposits appears under "Sources of Funds" in the
Registrant's 1998 Annual Report to Shareholders on pages 20 and 21 and is
incorporated herein by reference.
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, 1998, the Bank had
$106.5 million in outstanding FHLB advances, compared to $23.5 million at
September 30, 1997. 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,
------------------------------------------
1998 1997 1996
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances and other borrowings:
Average balance outstanding $52,531 $27,294 $14,971
Maximum amount outstanding at any month-end
during the period 107,323 42,191 25,534
Balance outstanding at end of period 107,323 23,608 25,534
Weighted average interest rate during the period 5.43% 5.48% 5.23%
Weighted average interest rate at end of period 5.31% 5.50% 5.38%
</TABLE>
Subsidiary Activities
The Company has two wholly-owned subsidiaries: the Bank, incorporated under
the laws of the United States, and Abstractors, Inc., incorporated under
Pennsylvania law. FIDACO, Inc. is an inactive subsidiary of First Federal Bank
with the only major asset being an investment by FIADCO, Inc. in Hazleton
Community Development Corporation. At September 30, 1998, total assets of
FIDACO, Inc were $30,000. Abstractors, Inc. is a title insurance agency with
total assets of $132,000 at September 30, 1998.
Personnel
As of September 30, 1998, the Company had 129 full-time and 23 authorized
part-time employees, none of whom were covered by a collective bargaining
agreement. Management believes that the Company has good relations with its
employees and there are no pending or threatened labor disputes with its
employees.
Regulation and Supervision
The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its chartering agency, and the Federal Deposit Insurance Corporation
(the "FDIC"), as the deposit insurer. The Bank is a member of the Federal Home
Loan Bank ("FHLB") System. The Bank's deposit accounts are insured up to
applicable limits by the Savings Association Insurance Fund ("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
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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.
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
form 10-K do not purport to be complete descriptions of such statutes and
regulations and their effects on the Bank and the Company is qualified in its
entirety by reference to such statutes and regulations.
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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, 1998, the Bank's general limit on
loans-to-one borrower was $9.0 million.
QTL Test. The HOLA requires savings institutions to meet a qualified thrift
lending ("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, 1998, the Bank maintained 86.89% 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."
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, 1998 was 18.70%, which exceeded the applicable
requirements. The Bank has never been subject to monetary penalties for failure
to meet its liquidity requirements.
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, 1998 totaled $94,000.
Branching. OTS regulations permit federally-chartered savings associations
to branch nationwide under certain conditions. Generally, federal savings
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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.
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.
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. Most recently, the agencies have adopted Guidelines concerning Year
2000 computer compliance. 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.
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 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.
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.
Page 9
<PAGE>
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 not be 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.
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% or a leverage ratio or a Tier 1 capital ratio that is less than 4% is
considered to be undercapitalized. A savings institution that has a total
risk-based capital less than 6%, a Tier 1 risk-based capital ratio of less than
3.0% or a leverage ratio that is less than 3% is considered to be "significantly
undercapitalized" and a savings institution that has a tangible capital to
assets ratio equal to or less than 2% 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.
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 0
basis points to 27 basis points. 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, 1998, 1997
and 1996 was .058%, .064% and .23% of assessable deposits.
Page 10
<PAGE>
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, 1998 of $5.3
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, 1998, the Bank had $106.5 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, 1998, 1997 and
1996, dividends from the FHLB to the Bank amounted to approximately $190,000,
$127,000 and $121,000, 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
$46.5 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement is 3%; and for accounts greater than $46.5 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 $46.5 million. The first $4.9 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 is a non-diversified unitary savings and loan holding company
within the meaning of the HOLA. As such, the Company is 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.
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<PAGE>
As a unitary savings and loan holding company, the Company is not
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. 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. Legislation adopted
by the House of Representatives in 1998, would have subjected unitary savings
and loan holding companies to the activities restrictions applicable to multiple
savings and loan holding companies, subject to certain grandfathering. That
legislation did not pass the Senate.
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 and 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.
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.
Page 12
<PAGE>
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 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 is 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
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). 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
Page 13
<PAGE>
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) over $2.0 million was 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 Bank's tax rate is 11.5%. The MTIT exempts the Bank
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 Bank. 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.
Additional Item. Executive Officers of the Registrant
The following table sets forth information regarding the executive officers
of the Company and the Bank who are not directors.
Name Age as of 9/30/98 Position
Gary M. Gatski 44 Senior Vice President,
Retail Division of the Bank
since 1993.
Bernard M. Miskin 47 Senior Vice President,
Operations/Compliance
Division of the Bank since 1995.
Joseph K. Osiecki 60 Senior Vice President, Loan
Division of the Bank since 1993.
Patrick J. Owens, Jr. 55 Senior Vice President,
Chief Financial Officer of the
Bank since 1993 and Chief
Financial Officer and Treasurer
of the Company since 1998.
Page 14
<PAGE>
Item 2. Properties
The Company currently conducts its business through 10 full service banking
offices located in Luzerne, Carbon, Columbia and Schuylkill counties, and one
loan origination office in Monroe County in Northeast Pennsylvania. Abstractors,
Inc. conducts its business from the downtown Hazleton area. The following table
sets forth the Company's offices as of September 30, 1998.
<TABLE>
<CAPTION>
Net Book Value
of Property or
Leasehold
Original Year Improvements Total Deposits
Leased Leased or Date of Lease at September at September
Location or Owned Acquired Expiration 30, 1998 30, 1998
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Administrative/Home Office:
12 E. Broad Street
Hazleton, PA 18201 Owned 1947 - $3,196 $88,596
2 E. Broad Street
Hazleton, PA 18201 Leased 1992 Month-to-month - -
Branch Offices:
Bloomsburg Office:
17 E. Main Street
Bloomsburg, PA 17815 Owned 1963 - 472 23,600
Shenandoah Office:
5-7 E. Main Street
Shenandoah, PA 17976 Owned 1968 - 415 48,837
Pottsville Office:
111 E. Norweigan Street
Pottsville, PA 17901 Owned 1968 - 627 26,563
Lehighton Office:
111 N. First Street
Lehighton, PA 18235 Owned 1977 - 129 23,619
Laurel Mall Office
240 Laurel Mall
Hazleton, PA 18201 Leased 1994 2003 213 56,252
Schuylkill Mall Office:
611 Schuylkill Mall
Frackville, PA 17976 Leased 1978 2001 38 22,043
Columbia Mall Office:
225 Columbia Mall Drive
Bloomsburg, PA 17815 Leased 1988 1999 8 10,047
Gould's IGA Office:
Route 93
Sugarloaf, PA 18249 Leased 1995 2000 31 9,738
Mountaintop Office:
360 S. Mountain Boulevard
Mountaintop, PA 18707 Owned 1997 - 842 14,710
Scott Township Office:
2691 New Berwick Highway
Route 11
Bloomsburg, PA 17815 Owned 1998 - 849 N/A
Loan Production Origination
Office:
Pocono L.P.O. Office
P.O. Box 1092
Pocono Pines, PA 18350 Leased 1997 1998 - -
Title Insurance Agency:
Abstractors, Inc.
101 S. Church Street
Hazleton, PA 18201 Leased 1998 2001 4 N/A
</TABLE>
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<PAGE>
Item 3. Legal Proceedings
The Company 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 operation.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Information relating to the market for Registrant's common equity and
related shareholder matters appears under "Market for Registrant's Common Equity
and Related Shareholder Matters" in the Registrant's 1998 Annual Report to
Shareholders on page 24 and is incorporated herein by reference. Information
relating to dividend restrictions for Registrant's common stock appears under
"Regulation and Supervision."
Item 6. Selected Financial Data
The above-captioned information appears under "Selected Consolidated
Financial and Other Data of the Company" in the Registrant's 1998 Annual Report
to Shareholders on page 8 and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The above-captioned information appears under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Registrant's
1998 Annual Report to Shareholders on pages 9 through 24 and is incorporated
herein by reference.
Item 7A. Quantitative and Qualitative Disclosure about Market Risks
The above-captioned information appears under the heading "Management of
Interest Rate Risk and Market Risk Analysis" in the Registrant's 1998 Annual
Report to Shareholders on pages 9 through 12 and is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of Northeast Pennsylvania Financial
Corp. and its subsidiaries, together with the report thereon by KPMG Peat
Marwick LLP appears in the Registrant's 1998 Annual Report to Shareholders on
pages 25 through 42 and are incorporated herein by reference.
Item 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
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<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Shareholders to held on January 27, 1999 at
pages 4 and 5.
Item 11. Executive Compensation
The information relating to executive compensation is incorporated herein
by reference to the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to held on January 27, 1999 at pages 7 through 13.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Shareholders to held on January 27, 1999 at
pages 3 through 5.
Item 13. Certain Relationships and Related Transactions
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Shareholders to held on January 27, 1999 at page 13.
Page 18
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Company are incorporated by
reference to the following indicated pages of the 1998 Annual Report
to Shareholders:
Page
Consolidated Statements of Financial Condition
as of September 30, 1998 and 1997............................25
Consolidated Statements of Operations
For the Years Ended September 30, 1998, 1997 and 1996.....26
Consolidated Statements of Changes in Equity
For the Years Ended September 30, 1998, 1997 and 1996........27
Consolidated Statements of Cash Flows
For the Years Ended September 30, 1998, 1997 and 1996..28-29
Notes to Consolidated Financial Statements..................30-41
Independent Auditor's Report...................................42
(2) All schedules are omitted because they are not required or applicable,
or the required information is shown in the consolidated financial
statements or the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report:
3.1 Certificate of Incorporation of Northeast Pennsylvania
Financial Corp.*
3.2 Bylaws of Northeast Pennsylvania Financial Corp.*
4.0 Form of Stock Certificate of Northeast Pennsylvania
Financial Corp.*
10.1 Employment Agreement between Northeast Pennsylvania
Financial Corp. and E. Lee Beard
10.2 Employment Agreement between Northeast Pennsylvania
Financial Corp. and Thomas L. Kennedy
10.3 Employment Agreement between First Federal Bank and E.
Lee Beard
10.4 Employment Agreement between First Federal Bank and
Thomas L. Kennedy
10.5 Change in Control Agreement between Northeast
Pennsylvania Financial Corp. and Patrick J. Owens, Jr.
10.6 Change in Control Agreement between First Federal Bank and
Patrick J. Owens, Jr.
10.7 Change in Control Agreement between First Federal Bank and
Gary M. Gatski
10.8 Change in Control Agreement between First Federal Bank and
Bernard M. Miskin
10.9 Change in Control Agreement between First Federal Bank and
Joseph K. Osiecki
10.10 Form of First Federal Bank Supplemental Executive
Retirement Plan*
10.11 Form of First Federal Bank Employee Severance Compensation
Plan*
10.12 Form of First Federal Bank Management Supplemental
Executive Retirement Plan*
10.13 Northeast Pennsylvania Financial Corp. 1998 Stock-Based
Incentive Plan**
11.0 Statement regarding Computation of Per Share Earnings
13.0 1998 Annual Report to Shareholders
21.0 Subsidiary information is incorporated by reference to
"Part I - Subsidiaries"
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<PAGE>
23.0 Consent of KPMG Peat Marwick LLP
23.1 Consent of Parente, Randolph, Orlando, Carey & Associates
27.0 Financial Data Schedule
99.0 Proxy Statement for 1999 Annual Meeting (previously filed on
December 28, 1998)
* Incorporated herein by reference into this document from the Exhibits to
the Form S-1 Registration Statement, and any amendments thereto,
Registration No. 333-43281
** Incorporated herein by reference into this document from the Proxy
Statement for the 1998 Special Meeting of Shareholders dated September 9,
1998
(b) Reports on Form 8-K
On July 24, 1998 the Company filed an 8-K to announce its earnings for the
quarter ended June 30, 1998. The press release announcing the Company's second
quarter earnings was filed by exhibit.
Page 20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
By /s/ E. Lee Beard December 29, 1998
- ---------------------------
E. Lee Beard
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ E. Lee Beard
- --------------------------- December 29, 1998
E. Lee Beard
President and Chief Executive Officer
/s/ Paul Conard
- --------------------------- December 29, 1998
Paul Conard
Director
/s/ Dr. William R. Davidson
- --------------------------- December 29, 1998
Dr. William R. Davidson
Director
/s/ Barbara Ecker
- --------------------------- December 29, 1998
Barbara Ecker
Director
/s/ R. Peter Haentjens, Jr.
- --------------------------- December 29, 1998
R. Peter Haentjens, Jr.
Director
/s/ Atty. Thomas L. Kennedy
- --------------------------- December 29, 1998
Atty. Thomas L. Kennedy
Chairman of the Board
/s/ Honorable John P. Lavelle
- --------------------------- December 29, 1998
Honorable John P. Lavelle
Director
/s/ Michael J. Leib
- --------------------------- December 29, 1998
Michael J. Leib
Director
/s/ William J. Spear
- --------------------------- December 29, 1998
William J. Spear
Director
/s/ Patrick J. Owens, Jr.
- --------------------------- December 29, 1998
Patrick J. Owens, Jr.
Chief Financial Officer and Treasurer
Page 21
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
EMPLOYMENT AGREEMENT
This AGREEMENT ("Agreement") is made effective as of March 31, 1998, 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 E. Lee Beard
(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 President and Chief Executive Officer 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 substantially all her
business time, attention, skill, and efforts to the faithful performance of her
duties hereunder including activities and services related to the organization,
operation and management of the Holding Company and its direct or indirect
subsidiaries ("Subsidiaries") and participation in community and civic
organizations; provided, however, that,
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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 her position with the Institution, Executive shall not
perform, in any respect, directly or indirectly, during the pendency of her
temporary or permanent suspension or termination from the Institution, duties
and responsibilities formerly performed at the Institution as part of her duties
and responsibilities as President and Chief Executive Officer 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 $182,000 per year ("Base Salary"). Base Salary
shall include any amounts of compensation deferred by Executive under any
qualified or nonqualified 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 and key management
employees, subject to and on a basis consistent with the terms, conditions and
overall administration of such
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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 President and Chief Executive Officer, 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
her 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 her subsequent death, her beneficiary or
beneficiaries, or her 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 she
had continued her 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 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
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<PAGE>
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 her 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 she 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 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
4
<PAGE>
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 her 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 her 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 her 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 her subsequent
death, her beneficiary or beneficiaries, or her 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 her
severance. Such coverage and payments shall cease upon the expiration of
thirty-six (36) months following the Change in Control.
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
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(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 her 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 her, 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 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.
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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 her full compensation in effect when the notice giving
rise to the dispute was given (including, but not limited to, Base Salary) and
continue her as a participant in all compensation, benefit and insurance plans
in which she 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.
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 AND NON-DISCLOSURE.
(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
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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 her 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 her 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 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).
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(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 March 31, 1998,
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 her 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.
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.
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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
without regard to the principles of conflicts of law of this State, 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 her 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.
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.
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20. INDEMNIFICATION.
(a) The Holding Company shall provide Executive (including her heirs,
executors and administrators) with coverage under a standard directors' and
officers' liability insurance policy at its expense, and shall indemnify
Executive (and her heirs, executors and administrators) to the fullest extent
permitted under Delaware law against all expenses and liabilities reasonably
incurred by her in connection with or arising out of any action, suit or
proceeding in which she may be involved by reason of her having been a director
or officer of the Holding Company (whether or not she 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 31st day of March, 1998.
ATTEST: NORTHEAST PENNSYLVANIA
FINANCIAL CORP.
/s/ Megan Kennedy By: /s/ Thomas L. Kennedy
Megan Kennedy Thomas L. Kennedy
Secretary Chairman of the Board
for the Entire Board of Directors
[SEAL]
By: /s/ E. Lee Beard
E. Lee Beard
Executive
12
Exhibit 10.2
Mr. Kennedy's Employment Agreement is the same as the Employment
Agreement in Exhibit 10.1, which is incorporated herein by reference except as
to: (i) the name of the signatory, which is Thomas L. Kennedy; (ii) the position
in Section 1, which is Chairman of the Board; (iii) the signatory for the
Company, which is E. Lee Beard; and (iv) the amount of the base salary in
Section 3(a), which is $118,000.
FIRST FEDERAL BANK
EMPLOYMENT AGREEMENT
This AGREEMENT is made effective as of March 31, 1998, 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 E. Lee Beard ("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 her employment hereunder, Executive agrees to
serve as President and Chief Executive Officer 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 substantially all her
business time, attention, skill, and efforts to the faithful performance of her
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,
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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 $182,000
per year ("Base Salary"). Base Salary shall include any amounts of compensation
deferred by Executive under any qualified or non-qualified 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.
(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.
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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 President and Chief Executive Officer, 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 her
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 her subsequent death, her beneficiary or
beneficiaries, or her 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
she had continued her 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
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
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Bank or the Holding Company for Executive prior to her 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 thoughshe 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 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 her 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 her 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 her 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 her subsequent death, her
beneficiary or beneficiaries, or her estate, as
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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 her 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.
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 her a Notice
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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 her, 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.
(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 her 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.
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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 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 AND NON-DISCLOSURE.
(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, 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 her 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.
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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 March 31, 1998,
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.
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 her 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
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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.
ss.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.
ss.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. ss.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 her 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. ss.1823(c); or (ii) by the Director of the OTS (or her
designee) at the time the Director (or her 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.
ss.1828(k) and 12 C.F.R. ss.545.121 and any rules and regulations promulgated
thereunder.
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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.
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 her 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
- 10 -
<PAGE>
cash compensation, fringe benefits and any compensation and benefits due
Executive under this Agreement.
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) Subject to the provisions of Section 15 hereof, the Bank shall
provide Executive (including her heirs, executors and administrators) with
coverage under a standard directors' and officers' liability insurance policy at
its expense, and shall indemnify Executive (and her heirs, executors and
administrators) to the fullest extent permitted under Pennsylvania law against
all expenses and liabilities reasonably incurred by her in connection with or
arising out of any action, suit or proceeding in which she may be involved by
reason of her having been a director or officer of the Bank (whether or not she
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.
- 11 -
<PAGE>
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 31 day of March, 1998.
ATTEST: FIRST FEDERAL BANK
/s/ Megan Kennedy By: /s/ Thomas L. Kennedy
Megan Kennedy Thomas L. Kennedy
Secretary Chairman of the Board of Directors
For the Entire Board of Directors
[SEAL]
ATTEST: NORTHEAST PENNSYLVANIA FINANCIAL
CORP.
(Guarantor)
/s/ Megan Kennedy By: /s/ Thomas L. Kennedy
Megan Kennedy Thomas L. Kennedy
Secretary Chairman of the Board of Directors
For the Entire Board of Directors
[SEAL]
/s/ E. Lee Beard
E. Lee Beard
Executive
- 12 -
Exhibit 10.4
Mr. Kennedy's Employment Agreement is the same as the Employment
Agreement in Exhibit 10.1, which is incorporated herein by reference except as
to: (i) the name of the signatory, which is Thomas L. Kennedy; (ii) the position
in Section 1, which is Chairman of the Board; (iii) the signatory for the
Company, which is E. Lee Beard; (iv) the guarantor for the Company, which is E.
Lee Beard; and (v) the amount of the base salary in Section 3(a), which is
$118,000.
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
TWO-YEAR CHANGE IN CONTROL AGREEMENT
This AGREEMENT is made effective as of March 31, 1998, 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, Pennsylvania, and Patrick J. Owens, Jr. ("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 4 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.
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<PAGE>
(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
2
<PAGE>
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 4 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.
3
<PAGE>
(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>
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 and assigns.
5
<PAGE>
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 March 31, 1998, (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.
6
<PAGE>
13. GOVERNING LAW.
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of Delaware without regard
to principles of conflicts of law of this state.
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.
7
<PAGE>
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.
8
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, Holding Company has caused this Agreement to be
executed by its duly authorized officer, and Executive has signed this
Agreement, on the 31st day of March, 1998.
ATTEST: NORTHEAST PENNSYLVANIA FINANCIAL
CORP.
/s/ Megan Kennedy By: /s/ E. Lee Beard
Megan Kennedy E. Lee Beard
Secretary President and Chief Executive Officer
For the Entire Board of Directors
/s/ Patrick J. Owens, Jr.
---------------------------------
Patrick J. Owens, Jr.
Executive
Seal
9
FIRST FEDERAL BANK
TWO-YEAR CHANGE IN CONTROL AGREEMENT
This AGREEMENT is made effective as of March 31,1998, 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,
Patrick J. Owens, Jr. ("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 4 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
3
<PAGE>
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.
4
<PAGE>
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(c) hereinabove.
5
<PAGE>
(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.
ss.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.
ss.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.
ss.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.
6
<PAGE>
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
7
<PAGE>
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.
8
<PAGE>
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 31st day
of March, 1998.
ATTEST: FIRST FEDERAL BANK
/s/ Megan Kennedy By: /s/ E. Lee Beard
Megan Kennedy E. Lee Beard
Secretary President and Chief Executive Officer
For the Entire Board of Directors
SEAL
ATTEST: NORTHEAST PENNSYLVANIA FINANCIAL
CORP.
(Guarantor)
/s/ Megan Kennedy By: /s/ E. Lee Beard
Megan Kennedy E. Lee Beard
Secretary President and Chief Executive Officer
For the Entire Board of Directors
SEAL
/s/ Patrick J. Owens, Jr.
---------------------------------
Patrick J. Owens, Jr.
Executive
9
Exhibit 10.7
Mr. Gatski's Change in Control Agreement is the same as the Exchange in
Control Agreement in Exhibit 10.6, which is incorporated herein by reference,
except as to the name of the signatory, which is Gary M. Gatski.
Exhibit 10.8
Mr. Miskin Change in Control Agreement is the same as the Exchange in
Control Agreement in Exhibit 10.6, which is incorporated herein by reference,
except as to the name of the signatory, which is Bernard M. Miskin.
Exhibit 10.9
Mr. Osiecki's Change in Control Agreement is the same as the Exchange
in Control Agreement in Exhibit 10.6, which is incorporated hererin by
reference, except as to the name of the signatory, which is Joseph K. Osiecki.
EXHIBIT 11.0
NORTHEST PENNSYLVANIA FINANCIAL CORP.
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
SIX MONTHS ENDED SEPTEMBER 30, 1998
(in thousands, except per share amounts)
Six Months Ended
September 30, 1998 September 30, 1997
Net Loss $(1,204) -
======= =======
Weighted average shares outstanding:
Weighted average shares outstanding 6,427,350 -
Less: Unallocated shares held by ESOP (514,188) -
Plus: ESOP shares released or
committed to be released during
the fiscal year. 8,570 -
--------- -------
5,921,732 -
========= =======
Earnings per share - basic
and diluted(1) $(0.20) N/A
(1) Earnings per share is calculated since March 31, 1998, the date of the
initial public offering. Had the weighted average shares been outstanding for
the entire fiscal year, proforma earnings per share would have been $(0.01).
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
The selected consolidated financial and other data of the Company set forth
below is derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Company and Notes thereto presented
elsewhere in this Annual Report.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Consolidated Financial Data:
Total assets $522,268 $369,242 $362,464 $318,931 $283,344
Cash and cash equivalents 3,053 13,214 4,045 3,681 4,137
Loans, net (1) 282,706 261,469 242,916 213,515 188,501
Securities held-to-maturity (2):
Mortgage-related securities, net - 9,965 13,386 51,868 51,045
Investment securities, net 31,770 28,960 30,100 26,355 27,661
Securities available-for-sale (2):
Mortgage-related securities, net 75,651 29,982 37,259 497 -
Investment securities, net 113,443 14,791 22,899 12,826 -
Deposits 324,005 314,123 306,806 280,010 257,161
FHLB advances 106,498 23,516 25,534 11,050 120
Total equity 87,434 28,538 26,127 25,550 23,183
Assets acquired through foreclosure 112 319 453 423 250
Nonperforming assets and
troubled debt restructurings 1,395 1,208 1,169 1,670 1,863
</TABLE>
<TABLE>
<CAPTION>
For the Fiscal Year Ended September 30,
----------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
----------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Total in Total interest income $30,542 $26,599 $24,323 $21,280 $19,578
Interest expense 15,566 14,194 13,007 10,845 8,827
------ ------ ------ ------ -----
Net interest income 14,976 12,405 11,316 10,435 10,751
Provision for loan losses 1,059 651 97 25 (54)
------ ------ ------- ------- ------
Net interest income after provision
for loan losses 13,917 11,754 11,219 10,410 10,805
Non-interest income:
Net gain (loss) on sale of securities 62 (563) -- (6) 153
Other(3) 845 430 508 605 460
Non-interest expense 15,230 9,492 10,774 (4) 8,360 7,924
------ ----- ------ ----- -----
(Loss) income before income taxes (406) 2,129 953 2,649 3,494
Income taxes (359) 748 12 899 743
----- ------- ------ ------ ---
Net (loss) income ($47) $ 1,381 $ 941 $ 1,750 $ 2,751
===== ======= ======== ======= =======
</TABLE>
(See footnotes on next page)
<PAGE>
<TABLE>
<CAPTION>
At or for the Fiscal Year Ended September 30,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Operating Ratios and Other Data (5):
Performance Ratios:
Average yield on interest-earning assets (6) 7.45% 7.51% 7.48% 7.38% 7.18%
Average rate paid on interest-bearing liabilities 4.35 4.31 4.29 3.98 3.44
Average interest rate spread (7) 3.10 3.20 3.19 3.40 3.74
Net interest margin (8) 3.74 3.53 3.49 3.60 4.06
Ratio of interest-earning assets to
interest-bearing liabilities 117.35 108.31 107.57 108.43 107.28
Net interest income after provision for loan
losses to noninterest expense 91.38 123.83 104.13 124.52 136.28
Non-interest expense as a percent of
average assets 3.53 2.58 3.19 2.78 2.80
Return on average assets (.01) 0.38 0.28 0.58 0.98
Return on average equity (.08) 4.98 3.59 7.06 12.64
Ratio of average equity to average assets 13.40 7.53 7.74 8.25 7.67
<FN>
(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, 1998, 1997, 1996, 1995 and
1994 was $2.3 million, $1.3 million, $730,000, $724,000 and $769,000,
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.
(4) Includes a one-time special assessment of $1.7 million in order to
recapitalize the Savings Association Insurance Fund (SAIF) 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 1998, 1997 and 1996 are presented on a taxable
equivalent basis using the combined Federal and state income tax rate of
40%. The Company 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.
</FN>
</TABLE>
Page 8
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
INTRODUCTION AND BUSINESS
The following discussion and analysis is presented on a consolidated basis and
focuses on the major components of Northeast Pennsylvania Financial Corp.(the
"Company") operations and significant changes in the results of operations for
the periods presented. The discussion should be read in conjunction with the
Company's consolidated financial statements and accompanying notes thereto
presented elsewhere in this Annual Report.
The Company is a business corporation formed at the direction of First Federal
Bank (the "Bank") under the laws of Delaware on December 16, 1997. On March 31,
1998,: (i) the Bank converted from a federally chartered mutual savings and loan
association to a federally chartered stock savings bank; (ii) the Bank issued
all of its outstanding capital stock to the Company; and (iii) the Company
consummated its initial public offering of common stock, par value $.01 per
share (the "Common Stock"), by selling at a price of $10.00 per share, 5,437,062
shares of Common Stock to certain eligible account holders of the Bank who had
subscribed for such shares (collectively, the "Conversion"), by selling 514,188
shares to the Bank's Employee Stock Ownership Plan and related trust ("ESOP")
and by contributing 476,100 shares of Common Stock to The First Federal
Charitable Foundation (the "Foundation"). Established in connection with the
Conversion, the Foundation is dedicated to the communities served by the Bank.
The Company became the holding company for First Federal Bank (the "Bank"), a
federally chartered capital stock savings bank regulated by the Office of Thrift
Supervision ("OTS"), upon the Bank's conversion to stock form on March 31, 1998.
The Company'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
Company's provision for loan losses, loan and security sales activities, service
charges and other fee income, and non-interest expense. The Company's
non-interest expense principally consists of compensation and employee benefits,
office occupancy and equipment expense, federal deposit insurance premiums, data
processing, and advertising and business promotion 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.
The Company serves Northeastern Pennsylvania through ten office locations in the
greater Hazleton Area, Mountaintop, Bloomsburg, Lehighton, and all of Schuylkill
County. The Company provides a wide range of banking services to individual and
corporate customers. The Company is subject to competition from other financial
institutions and other companies that provide financial services.
Forward Looking Statements
In addition to historical information, our Annual Report may include certain
forward-looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulation of
federal, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the Company's
loan and investment portfolios, changes in accounting principles, policies or
guidelines, avoidance of any adverse effect as a result of the Year 2000 issue,
and other economic, competitive, governmental and technological factors
affecting the Company's operations, markets, products, services and prices.
<PAGE>
Management Strategy
The Company's operating strategy is that of a community-based bank, offering a
wide variety of deposit 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 Company'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 Federal Home Loan
Bank of Pittsburgh ("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 Company 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 commercial lending, primarily to small businesses and municipalities. As a
result of its policy to limit its retention of newly originated longer-term,
fixed-rate one-to four-family loans to 25% of total loan originations during a
fiscal year, periodically the Company has had to limit its originations of such
loans. Additionally, the Company 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. The
Company 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 Company originates such loan products, it currently
intends to originate such loans for sale in the secondary market.
Management of Interest Rate Risk and Market Risk Analysis
The principal objective of the Company'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 Company'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 Company 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 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 Company's
net interest margin, the market value of the portfolio, and the effect the
changes in interest rates will have on the Company'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 Company.
Page 9
<PAGE>
In recent years, the Company 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 25% 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 Company for increases in market interest rates. During
1998 the Company continued to originate in excess of the 25% limitation, however
has commenced selling any excess, greater than 15 year fixed rate mortgages, in
the secondary market.
Management believes that reducing its exposure to interest rate risk
fluctuations will enhance long-term profitability. However, the Company'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 Company's interest rate risk management policies,
the Company 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 Company 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 Company in
estimating the anticipated life of such callable securities, the Company 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 the 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, 1998, the Company'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
7.8%. 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 positive gap position
would tend to have its interest bearing assets repricing upward at a faster rate
than its interest bearing liabilities which, consequently, may tend to
positively affect the growth of its net interest income. During a period of
falling interest rates, an institution with a negative gap position would tend
to have its interest bearing liabilities repricing downward at a faster rate
than its interest bearing assets which, consequently, may tend to positively
affect the growth of its net interest income.
Page 10
<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1998, which are
anticipated by the Company, 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, 1998, on the basis of contractual maturities, anticipated
prepayments, and scheduled rate adjustments within a series of time intervals.
Prepayment and decay rates can have a significant impact on the Company's
estimated gap. While the Company 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.
<TABLE>
<CAPTION>
At September 30, 1998
(Dollars in Thousands)
Over three Over six After one year
Zero to months to months to but within After five
three months six months one year five years years Total
------------- ---------- -------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits $1,865 $- $- $- $- $1,865
Investment securities 1,000 - - 2,000 132,298 135,298
Mortgage-related securities 18,044 7,657 9,297 32,964 6,891 74,853
Equity securities
(FHLB & FHLMC) 6,022 - - - - 6,022
Loans (1) 48,028 27,738 40,184 118,920 50,450 285,320
-------------------------------------------------------------------
Total interest-earning assets $74,959 $35,395 $49,481 $153,884 $189,639 $503,358
------- ------- ------- -------- -------- --------
Interest-bearing liabilities:
Money Market accounts $5,238 $3,601 $4,092 $3,437 $- $16,368
Savings accounts 3,184 3,039 5,669 30,508 27,556 69,956
NOW accounts 3,430 3,118 4,989 16,526 3,119 31,182
Certificate accounts 65,096 24,043 48,085 58,844 - 196,068
FHLB advances 26,000 - - 5,000 75,498 106,498
Other borrowings 825 - - - - 825
--------------------------------------------------------------------
Total interest-bearing
Liabilities $103,773 $33,801 $62,835 $114,315 $106,173 $420,897
-------- ------- ------- -------- -------- --------
Interest-earning assets less interest-
bearing liabilities ($28,814) $1,594 ($13,354) $39,569 $83,466 $82,461
Cumulative interest-rate
sensitivity gap ($28,814) ($27,220) ($40,574) ($1,005) $82,461
Cumulative interest rate gap
as a percentage of total assets (5.5%) (5.2%) (7.8%) (0.2%) 15.8%
<FN>
(1) Gross loans excluding nonaccrual loans
</FN>
</TABLE>
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.
Page 11
<PAGE>
Net Portfolio Value. The Company's interest rate sensitivity is
primarily monitored by management through the use of a model which internally
generates estimates of the change in the Company's net portfolio value ("NPV")
over a range of interest rate scenarios. Such analysis was prepared by a third
party for the Company. 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 Company's internal
model primarily due to differences in assumptions utilized, including estimated
loan prepayment rates, reinvestment rates and deposit decay rates.
The following table sets forth the Company's NPV as of September 30, 1998.
NPV as % of Portfolio
Net Portfolio Value Value of Assets
------------------------------- --------------------
Change in
Interest Rates
In Basis Points NPV
(Rate Shock) Amount $ Change % Change Ratio Change(1)
------------ ------ -------- -------- ----- ---------
(Dollars in Thousands)
400 $ 75,566 ($21,022) (21.76%) 15.48% (264)
300 82,130 (14,458) (14.97%) 16.42% (170)
200 87,824 (8,764) (9.07%) 17.16% (95)
100 92,778 (3,809) (3.94%) 17.75% (37)
Static 96,588 -- - % 18.12% --
(100) 98,411 1,823 1.89% 18.16% 4
(200) 100,076 3,489 3.61% 18.17% 5
(300) 102,699 6,111 6.33% 18.30% 18
(400) 105,097 8,509 8.81% 18.38% 26
(1) Expressed in basis points.
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 Company'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 Company'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 Company'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.
Average Balance Sheet. The following table sets forth certain
information relating to the Company for the fiscal years ended September 30,
1998, 1997 and 1996. 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.
Page 12
<PAGE>
<TABLE>
<CAPTION>
For the Fiscal Years Ended September 30,
1998 1997 1996
---- ---- ----
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans (1):
Real estate:
Taxable $190,264 $14,765 7.76% $183,902 $14,250 7.75% $169,532 $13,219 7.80%
Non-taxable(2) 186 19 10.22 - - - - - -
Commercial:
Taxable 6,634 632 9.53 8,739 785 8.98 6,986 618 8.85
Non-taxable(2) 4,231 335 7.92 1,143 84 7.35 - - -
Consumer 70,423 6,018 8.55 58,717 4,980 8.48 49,409 4,268 8.64
------ ----- ---- ------ ----- ---- ------ ----- ----
Total loans 271,738 21,769 8.01 252,501 20,099 7.96 225,927 18,105 8.01
Mortgage-related securities (3) 54,176 3,320 6.13 54,112 3,306 6.11 51,268 3,064 5.98
Investment securities (4):
Taxable 60,320 3,930 6.52 42,788 2,866 6.70 45,089 2,958 6.56
Non-taxable (2) 24,179 1,772 7.33 5,401 408 7.55 2,064 154 7.46
Interest-earning deposits 9,121 457 5.01 1,499 82 5.47 1,583 92 5.81
----- --- ---- ---- -------------- ---- ---- ---------------- ----
Total interest-earning assets 419,534 31,248 7.45 356,301 26,761 7.51 325,931 24,373 7.48
---- ----
Noninterest-earning assets 12,234 11,740 11,465
------ ------ ------
Total assets $431,768 $368,041 $337,396
======== ======== ========
Interest-bearing liabilities:
Deposits:
Money market and NOW accounts $44,563 $ 789 1.77% $42,109 $813 1.93% $39,747 $775 1.95%
Savings accounts 71,102 1,607 2.26 72,292 1,765 2.44 73,653 1,870 2.54
Certificates of deposit 189,306 10,319 5.45 187,270 10,120 5.40 174,617 9,579 5.49
------- ------ ---- -------- ------ ---- ------- ----- ----
Total deposits 304,971 12,715 4.17 301,671 12,698 4.21 288,017 12,224 4.24
FHLB advances and other borrowings 52,531 2,851 5.43 27,294 1,496 5.48 14,971 783 5.23
------ ----- ---- --------- ----- ---- --------- ----- ----
Total interest-bearing 357,502 15,566 4.35 328,965 14,194 4.31 302,988 13,007 4.29
liabilities ------ ---- ------ ----
Non-interest-bearing liabilities 16,423 11,363 8,261
------ ------- -----
Total liabilities 373,925 340,328 311,249
Equity 57,843 27,713 26,147
------ ------ ------
Total liabilities and equity $431,768 $368,041 $337,396
======== ======== ========
Net interest-earning assets $62,032 $ 27,336 $ 22,943
Net interest income/interest rate
spread (5) $15,682 3.10% $12,567 3.20% $11,366 3.19%
------- ----- ======= ----- ======= ====
Net interest margin as a percentage
of interest-earning assets (6) 3.74% 3.53% 3.49%
----- ----- =====
Ratio of interest-earning assets
to interest-bearing liabilities 117.35% 108.31% 107.57%
======= ======= =======
<FN>
(1) Balances are net of deferred loan origination costs, undisbursed proceeds
of construction loans in process, and includes nonperforming loans.
(2) Interest and Yield/Rate are presented on a taxable equivalent basis using
the combined Federal and state income tax marginal rate of 40% for 1998,
1997 and 1996.
(3) Includes mortgage-related securities available-for-sale and held-to-
maturity.
(4) Includes investment securities available-for-sale and held-to-maturity,
stock in the FHLB of Pittsburgh and FHLMC.
(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.
</FN>
</TABLE>
Page 13
<PAGE>
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 Company'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>
Year Ended September 30,
1998 vs 1997 1997 vs 1996
------------ ------------
Increase Total Increase Increase Total Increase
(Decrease) Due to (Decrease) (Decrease) Due to (Decrease)
(Dollars in Thousands)
Rate Volume Rate Volume
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans (1):
Real estate:
Taxable $21 $494 $515 $(82) $1,113 $1,031
Non-taxable(4) 10 9 19 -- -- --
Commercial:
Taxable 51 (204) (153) 10 157 167
Non-taxable(4) 7 244 251 42 42 84
Consumer 38 1,000 1,038 (76) 788 712
-- ------- ------- ------- ------- -------
Total loans 127 1,543 1,670 (106) 2,100 1,994
Mortgage-related securities (2) 10 4 14 69 173 242
Investment securities (3):
Taxable (76) 1,140 1,064 64 (156) (92)
Non-taxable (4) (12) 1,376 1,364 2 252 254
Interest-earning deposits (6) 381 375 (5) (5) (10)
------- ------- ------- ------- ------- -------
Total interest-earning assets 43 4,444 4,487 24 2,364 2,388
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Deposits:
Demand accounts (81) 57 (24) (8) 46 38
Savings accounts (129) (29) (158) (71) (34) (105)
Certificates of deposit 88 111 199 (140) 681 541
FHLB advances and other borrowings (15) 1,370 1,355 39 674 713
------- ------- ------- ------- ------- -------
Total interest-bearing (137) 1,509 1,372 (180) 1,367 1,187
liabilities ------- ------- ------- ------- ------- -------
Increase (decrease) in net interest
income $180 $2,935 $3,115 $204 $997 $1,201
======= ======= ======= ======= ======= =======
<FN>
(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 FHLB of Pittsburgh and FHLMC.
(4) Presented on taxable equivalent basis using the combined Federal and state
income tax marginal rate of 40%.
</FN>
</TABLE>
RESULTS OF OPERATIONS
General. The Company experienced a net loss of $47,000 for fiscal 1998,
as compared to $1.4 million net income for fiscal 1997. The decrease was
primarily attributable to the $4.8 million non-recurring pre-tax ($3.1 million
after-tax) expense relating to a charitable contribution to fund the First
Federal Charitable Foundation in connection with the Conversion, which was
offset by a $2.6 million increase in net interest income. If the after-tax
effect of the contribution were eliminated, the Company would have had net
income of $3.1 million for fiscal 1998.
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. This change 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 loss 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 $3.9 million, or
14.7%, to $30.5 million for fiscal 1998 from $26.6 million for fiscal 1997. This
change was primarily due to increases of $36.3 million and $19.2 million in the
average balances of investment securities and loans receivable, respectively.
Page 14
<PAGE>
Fiscal 1997 reflected a $2.3 million, or 9.4%, increase in interest income
primarily due to a $30.4 million increase in the average balance of interest
earning assets as well as a slight increase in the weighted average yield on
interest earning assets. This change was primarily due to increases of $14.4
million and $9.3 million in the average balance of real estate loans and
consumer loans. Contributing to the increase was a $2.8 million increase in the
average balance of mortgage-related securities.
Interest Expense. Interest expense increased $1.4 million, or 9.9%, to
$15.6 million for fiscal 1998. This change in interest expense was primarily the
result of a $25.3 million increase in the average balance of FHLB advances and
other borrowings, offset by a decrease of 5 basis points in the average rate of
these borrowings.
In fiscal 1997, interest expense increased $1.2 million, or 9.2%, to $14.2
million. The increase in interest expense was primarily the result of a $12.3
million increase in the average balance of FHLB advances and other borrowings,
as well as a $12.7 million increase in the average balance of certificate of
deposit accounts.
Provision for Loan Losses. The Company's provision for loan losses for
fiscal 1998 was $1.1 million compared to $651,000 for fiscal 1997. At the end of
fiscal 1996, the provision was $97,000, which increased $554,000 through fiscal
1997. These increases in the provision for loan losses reflected a change in
management's strategic direction. The change in strategic direction included a
change in the composition of the Company's loan portfolio by increasing the
levels of consumer, multi-family, commercial and construction loans. Such loans
generally bear a greater degree of credit risk than the one-to four-family
loans. The Company anticipates that, as a result of its increasing emphasis on
consumer, commercial, multi-family and commercial real estate and construction
lending it may need to maintain an allowance for loan losses at a higher level
than it has maintained in previous periods to offset any greater risk resulting
from the shifting composition of its loan portfolio.
Noninterest Income. In fiscal 1998, noninterest income was $907,000, as
compared to a negative $133,000 for the prior year. Contributing to this
increase was a $224,000 increase in service charges and other fees primarily due
to the implementation of surcharges on ATM transactions, as well as service
charges and fees generated in connection with increased loan origination and
deposit account activity. The 1997 negative balance was due primarily to losses
incurred on the sale of available-for-sale securities in connection with the
Company's restructuring of its securities portfolio in fiscal 1997, combined
with a $176,000 write down of fixed assets, in fiscal 1997, resulting from the
Company's decision to relocate its Columbia Mall office to an alternate site in
Columbia County.
Non-interest income decreased $641,000 from $508,000 in fiscal 1996 to a loss of
$133,000 in fiscal 1997, due to the sale of available-for-sale securities, which
created a $563,000 loss for the year ended September 30, 1997. The decrease was
also attributable to a writedown of $176,000 of assets in fiscal 1997 in
connection with the relocation of the Columbia Mall office, as compared to a
$14,000 gain for fiscal 1996.
Noninterest Expense. Total noninterest expense increased $5.7 million
for fiscal 1998 due primarily to a one-time $4.8 million non-recurring expense
relating to the funding of the Foundation. Compensation and employee benefits
expense increased $521,000 primarily due to ESOP accruals relating to shares to
be released, and staff additions relating to the opening of a new branch office
in Mountaintop, Pennsylvania in January 1998. Professional fees increased
$144,000 due to increased legal and accounting fees associated with being a
public company. FHLB service charges increased $123,000 due to increased
customer activity resulting from the greater promotion of various checking
account products.
For year ended September 30, 1997, compared to September 30, 1996, non-interest
expense decreased $1.3 million due primarily to a $2.0 million reduction in the
FDIC deposit insurance premiums resulting from the recapitalization of the SAIF
fund. These decreases were offset by a $406,000 increase in compensation and
employee benefit expenses in fiscal 1997 due to normal increases in salaries, as
well as increases in benefit costs.
Income Taxes. For fiscal 1998, the Company had an income tax benefit of
$359,000, as compared to an expense of $748,000, which reflects a 35.1%
effective tax rate, for fiscal 1997. The provision (benefit) for income taxes
includes federal and state income taxes currently payable and those deferred
because of temporary differences between the financial statement and tax basis
of assets and liabilities. The decrease in income tax expense was attributable
to a net operating loss relating to the one-time charitable contribution to the
Foundation, combined with a state tax credit of $55,000, granted under the
Neighborhood Assistance Act.
The provision for income taxes increased $736,000 to $748,000, reflecting a
35.1% effective tax rate, for fiscal 1997 from $12,000 for fiscal 1996. This
increase was due to higher pre-tax income in fiscal 1997, as well as the absence
of a $250,000 state tax credit in fiscal 1996, relating to the construction of
an addition to the Company's main office.
FINANCIAL CONDITION
Total assets increased by $153.0 million, or 41.4%, from $369.2 million at
September 30, 1997 to $522.2 million at September 30, 1998. The growth in assets
was primarily due to increases in investments and loans receivable, offset by a
decrease in cash and cash equivalents. This growth was primarily funded by the
Company's initial public offering, which raised $52.1 million in cash, as well
as an $83.0 million increase in FHLB advances.
Investment securities classified as available-for-sale increased $144.3 million,
while held-to-maturity securities decreased $7.2 million. These changes were
attributable to the reinvestment of the proceeds from the September 30, 1997
sale of securities, the stock offering relating to the Conversion, and
additional FHLB advances. Contributing to these changes was a transfer of $56.2
million in securities from held-to-maturity to available-for-sale upon initial
adoption, in the fourth fiscal quarter of 1998, of a special reassessment
provision contained within SFAS No. 133 as issued by the Financial Accounting
Standards Board ("FASB"). Cash and cash equivalents decreased $10.1 million from
September 30, 1997 due to the purchase of additional investment securities,
offset by an increase in deposits.
Net loans receivable increased $21.2 million to $282.7 million at September 30,
1998. This increase was primarily due to an $11.0 million increase in home
equity loans resulting from increased marketing efforts and competitive pricing
of such loans. Automobile loans increased $11.0 million due in part to the
purchase of $6.5 million of indirect auto loans from a local financial
institution. Multi-family and commercial real estate loans increased $5.2
million. These increases were offset by declines in mortgage loans, other
consumer loans and commercial loans of $2.2 million, $2.1 million, and $1.0
million, respectively. The allowance for loan loss increased $1.0 million from
$1.3 million at September 30, 1997 to $2.3 million at September 30, 1998. This
increase is due primarily to the increase in loan balances relating to the
changing composition of the Company's loan portfolio, as well as a change in
management's strategic direction and a decision to give greater consideration to
loan loss ratio levels of peer group institutions.
Total deposits increased $9.9 million to $324.0 million at September 30, 1998.
This increase in deposits was the result of an $8.2 million increase in checking
accounts, primarily NOW accounts, resulting from a more active solicitation of
such accounts. Certificate of deposit accounts increased $3.3 million, while
savings accounts decreased $1.8 million.
Page 15
<PAGE>
FHLB advances increased $83.0 million to $106.5 million at September 30, 1998.
This was a result of management's determination to place increased emphasis on
the utilization of FHLB borrowings to fund asset growth, particularly
investments in mortgage-related and investment securities, and consumer loans in
accordance with the Company's asset/liability management strategies.
Total equity increased $58.9 million to $87.4 million at September 30, 1998.
This change in equity resulted primarily from the addition of additional paid-in
capital of $62.0 million and common stock of $64,000, as a result of the
Conversion. These increases were offset by a $5.1 million contra-equity account
established for shares purchased by the ESOP during the Company's initial public
offering, of that amount, $343,000 of has been committed to be released through
September 30, 1998.
Investment Activities
The investment policy of the Company, 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 Company's lending activities. The Company 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
Company's investment policy is more restrictive than the OTS regulations allow
and, accordingly, the Company 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 Company has established an
investment portfolio of securities that are categorized as held-to-maturity,
available-for-sale or held for trading. The Company does not currently maintain
a portfolio of securities categorized as held for trading. At September 30,
1998, the available-for-sale securities portfolio totaled $189.1 million, or
35.2% of assets, and the held-to-maturity portfolio totaled $31.8 million, or
6.1% of assets.
On July 1, 1998, the Bank transferred certain held-to-maturity securities to the
available-for-sale investment portfolio. The amortized cost of the securities
was approximately $56,203,333 with an unrealized gain net of taxes of
approximately $597,053. This transfer was in accordance with a special
reassessment provision contained within Statement of Financial Accounting
Standard No. 133 "Accounting for Derivative Instruments and Hedging Activities."
The following table sets forth certain information regarding the amortized cost
and fair value of the Company's securities at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
1998 1997 1996
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
-----------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
Debt securities held-to-maturity:
Obligations of U.S. government agencies $31,770 $32,072 $19,997 $19,953 $25,995 $25,475
Other securities: -- -- 8,963 9,105 4,105 4,109
-------- -------- -------- -------- -------- --------
Total $31,770 $32,072 $28,960 $29,058 $30,100 $29,584
-------- -------- -------- -------- -------- --------
Debt securities available-for-sale:
Obligations of U.S. Treasury and U.S.
government agencies 55,661 56,260 10,984 11,045 19,935 19,769
Other securities 47,867 48,732 -- -- --
-------- -------- -------- -------- -------- --------
Total $103,528 $104,992 $10,984 $11,045 $19,935 $19,769
-------- -------- -------- -------- -------- --------
Equity securities available-for-sale:
FHLB stock $5,325 $5,325 $2,054 $2,054 $1,958 $1,958
FHLMC stock 697 3,126 47 1,692 47 1,172
-------- -------- -------- -------- -------- ------
Total equity securities
available-for- sale 6,022 8,451 2,101 3,746 2,005 3,130
-------- -------- -------- -------- -------- --------
Total debt and equity securities $141,320 $145,515 $42,045 $43,849 $52,040 $52,483
======== ======== ======== ======== ======== ========
Mortgage-related securities:
Mortgage-related securities
held-to-maturity:
FHLMC -- -- $5,772 $5,678 $6,833 $6,561
FNMA -- -- 3,948 3,891 4,576 4,403
GNMA -- -- -- -- -- --
Collateralized mortgage obligations -- -- 245 242 1,977 1,967
-------- -------- -------- -------- -------- --------
Total mortgage-related
securities held-to- maturity -- -- $9,965 $9,811 $13,386 $12,931
------- -------- -------- -------- -------- --------
Mortgage-related securities
available-for-sale:
FHLMC $10,798 $10,933 $5,690 $5,769 $11,548 $11,485
FNMA 14,337 14,604 2,168 2,188 11,768 11,666
GNMA 21,968 22,211 18,253 18,600 3,791 3,807
Collateralized mortgage obligations 24,708 24,861 3,380 3,425 10,678 10,301
Other securities 3,042 3,042 -- --
-------- -------- -------- -------- -------- --------
Total mortgage-related
securities available-for-sale 74,853 75,651 29,491 29,982 37,785 37,259
-------- -------- -------- -------- -------- --------
Total mortgage-related securities 74,853 75,651 39,456 39,793 51,171 50,190
======== ======== ======== ======== ======== --------
Total securities $216,173 $221,166 $81,501 $83,642 $103,211 $102,673
======== ======== ======== ======== ======== ========
</TABLE>
Page 16
<PAGE>
The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the Company's investment
securities and mortgage-related securities as of September 30, 1998.
<TABLE>
<CAPTION>
Maturing Maturing after Maturing after Maturing
within one one year but 5 years but after 10
year within 5 years within 10 years years Total
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Held-to-maturity securities:
Obligations of U.S. Government agencies $ 1,000 - - $ 30,770 $ 31,770
------------------------------------------------------------------------------------
Total securities at amortized cost $ 1,000 - - $ 30,770 $ 31,770
===== ======== ========== ====== ======
Total securities at fair value $ 1,001 - - $ 31,071 $ 32,072
====== ======== ========== ====== ======
Weighted Average Yield 5.26% - - 6.84% 6.79%
-----------------------------------------------------------------------------------
Available-for-sale securities:
Municipal Securities - - 9,757 38,110 47,867
Obligations of U.S. Government - 2,000 51,661 2,000 55,661
agencies
Mortgage-related securities 3,925 - 4,160 66,768 74,853
Equity securities 6,022 - - - 6,022
----------------------------------------------------------------------------------
Total securities at amortized cost $ 9,947 $ 2,000 $ 65,578 $ 106,878 $ 184,403
======= ======= ======== ========= =========
Total securities at fair value $ 12,384 $ 2,002 $ 66,472 $ 108,236 $ 189,094
======== ======= ======== ========= =========
Weighted Average Yield 7.01% 6.32% 6.19% 5.93% 6.09%
----------------------------------------------------------------------------------
</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.
<PAGE>
Loans
Net loans increased $21.2 million from fiscal 1997. The largest increase was in
consumer loans which increased $22.4 million to $84.2 million at September 30,
1998 due to increased marketing efforts and competitive pricing, as well as a
purchase of indirect auto loans from a local financial institution.
The following table sets forth the composition of the Company's loan portfolio
in dollar amounts and as a percentage of the portfolio at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Percent Percent Percent Percent of Percent
Amount of Total Amount of Total Amount of Total Amount Total Amount of Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-Four-
Family $176,924 61.74% $179,101 67.78% $170,773 69.68% $157,360 73.01% $138,506 72.70%
Multi family and
commercial 11,938 4.17 6,701 2.54 4,429 1.81 3,457 1.60 5,741 3.01
Construction 3,759 1.31 5,818 2.20 5,129 2.09 4,040 1.88 4,263 2.24
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Total real
estate loans 192,621 67.22 191,620 72.52 180,331 73.58 164,857 76.49 148,510 77.95
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Consumer loans:
Home equity
loans and lines
of credit $52,244 18.23 $41,278 15.62 $38,054 15.53 $33,275 15.44 $28,957 15.20
Automobile 24,589 8.58 13,678 5.18 10,594 4.32 6,705 3.11 4,842 2.54
Education 2,351 .82 2,348 0.89 2,538 1.04 2,432 1.13 2,505 1.31
Unsecured lines
of credit 1,589 .55 1,310 0.49 959 0.39 495 0.23 418 0.22
Other 3,423 1.20 3,229 1.22 3,309 1.35 3,241 1.50 3,585 1.88
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Total consumer
loans $84,196 29.38 $61,843 23.40 $55,454 22.63 $46,148 21.41 $40,307 21.15
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Commercial loans 9,742 3.40 10,775 4.08 9,280 3.79 4,523 2.10 1,707 0.90
----- ---- ------ ---- ----- ---- ----- ---- ----- ----
Total loans $286,559 100.00% $264,238 100.00% $245,065 100.00% $215,528 100.00% $190,524 100.00%
======= ======= ======= ======= =======
Less:
Deferred loan
origination
fees and $1,580 $1,497 $1,419 $1,289 $1,254
discounts
Allowance for
loan losses 2,273 1,272 730 724 769
----- ----- --- --- ---
Total loans, $282,706 $261,469 $242,916 $213,515 $188,501
net ======== ======== ======== ======== ========
</TABLE>
Page 17
<PAGE>
Loan Maturity. The following table shows the remaining contractual
maturity of the Company's total loans at September 30, 1998. The table does not
include the effect of future principal prepayments.
<TABLE>
<CAPTION>
At September 30, 1998
Multi-
One- to Family and
Four- Commercial Total
Family Real Estate Construction(1) Consumer Commercial Loans
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Amounts due in:
One year or less $8,435 $1,255 - $16,166 $2,440 $28,296
After one year:
More than one year to three years 17,720 1,341 - 23,568 889 43,518
More than three years to five
years 16,483 1,511 - 13,586 761 32,341
More than five years to 10 years 40,572 4,072 - 15,081 1,684 61,409
More than 10 years to 20 years 55,201 3,016 - 14,226 1,231 73,674
More than 20 years 38,513 743 3,759 1,569 2,737 47,321
------ --- ----- ----- ----- ------
Total amount due $176,924 $11,938 $3,759 $84,196 $9,742 $286,559
======== ======= ====== ======= ====== ========
<FN>
(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.
</FN>
</TABLE>
The following table sets forth, at September 30, 1998, the dollar amount of
loans contractually due after September 30, 1999, and whether such loans have
fixed interest rates or adjustable interest rates.
Due After September 30, 1999
----------------------------
Fixed Adjustable Total
(In Thousands)
Real estate loans:
One- to four-family $115,676 $52,813 $168,489
Multi-family and commercial real estate 4,184 6,499 10,683
Construction 3,753 6 3,759
-------- -------- --------
Total real estate loans 123,613 59,318 182,931
-------- -------- --------
Consumer loans 58,847 9,183 68,030
Commercial loans 2,043 5,259 7,302
-------- -------- --------
Total loans $184,503 $73,760 $258,263
======== ======== ========
<PAGE>
Non-Performing Assets and Impaired Loans. The following table sets forth
information regarding non-accrual loans and (REO). At September 30, 1998,
non-accrual loans totaled $1.2 million consisting of 54 loans, and REO totaled
$90,000 consisting of two, one-to four-family loans. It is the policy of the
Company 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, 1998, 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 $58,000. At September 30,
1998, the Company had a $1.4 million recorded investment in impaired loans, all
of which had specific allowances totaling $488,000. At September 30, 1997, there
were $477,000 of impaired loans, all of which had specific loan loss allowances
totaling $176,000.
<TABLE>
<CAPTION>
At September 30,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
--------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family real estate $509 $ 622 $ 562 $ 879 $1,173
Consumer 254 152 154 354 333
Commercial 476 - - 1 87
--- ----- ------ ------- ------
Total(1) 1,239 774 716 1,234 1,593
Real estate owned (REO)(2) 90 319 453 423 250
Other repossessed assets 66 3 - 13 20
-- ------ ------ ------ --
Total nonperforming assets(3) $1,395 $1,096 $1,169 $1,670 $1,863
====== ====== ====== ====== ======
Troubled debt restructurings - $112 - - -
Troubled debt restructurings and
total nonperforming assets $1,395 $1,208 $1,169 $1,670 $1,863
====== ====== ====== ====== ======
Total nonperforming loans and
troubled debt restructurings as a
percentage of total loans 0.44% 0.34% 0.29% 0.58% 0.85%
Total nonperforming assets and
troubled debt restructurings as a
percentage of total assets 0.27% 0.38% 0.38% 0.52% 0.66%
<FN>
(1) Total non-accruing loans equals total nonperforming 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.
</FN>
</TABLE>
Page 18
<PAGE>
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 Company's
allowance for loan losses. Such agencies may require the Company 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, 1998, the Company's allowance for loan losses was .80% of total loans
compared to .48% as of September 30, 1997. The Company had non-accrual loans of
$1,239,000 and $774,000 at September 30, 1998 and September 30, 1997,
respectively. Such increase in the allowance from September 30, 1997 to
September 30, 1998 was the result of a revision in the Company's method of
calculation given the shifting emphasis in the Company's loan portfolio towards
consumer, multi-family, commercial and construction loans, which involve
inherently greater risks than traditional one- to four-family mortgage loans.
The Company will continue to monitor and modify its allowances for loan losses
as conditions dictate. While management believes the Company'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 Company's level of allowance for loan
losses will be sufficient to cover future loan losses incurred by the Company 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
Company 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 Company's
total loan portfolio, the Company anticipates that its allowance for loan losses
as a percentage of total loans will increase in future periods.
The following table sets forth activity in the Company's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
At or for the Fiscal Year ended September 30,
1998 1997 1996 1995 1994
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses, beginning of year $1,272 $ 730 $ 724 $ 769 $ 979
Charged-off loans:
One- to four-family real estate 19 66 34 25 72
Consumer 57 66 60 70 88
-- -- -- -- --
Total charged-off loans 76 132 94 95 160
-- --- -- -- ---
Recoveries on loans previously charged off:
One- to four-family real estate - - - 10 -
Consumer 18 23 3 15 4
-- -- - -- -
Total recoveries 18 23 3 25 4
-- -- -- -- -
Net loans charged-off (58) (109) (91) (70) (156)
Provision for loan losses 1,059 651 97 25 (54)
----- --- -- -- ---
Allowance for loan losses, end of period $2,273 $1,272 $ 730 $ 724 $ 769
====== ====== ====== ====== ======
Net loans charged-off to average
interest-earning loans 0.02% 0.04% 0.04% 0.03% 0.08%
----- ----- ----- ----- -----
Allowance for loan losses to total loans 0.80% 0.48% 0.30% 0.33% 0.40%
----- ----- ----- ----- -----
Allowance for loan losses to nonperforming
loans and troubled debt restructuring 183.45% 143.57% 101.96% 58.67% 48.27%
------- ------- ------- ------ ------
Net loans charged-off to allowance for loan losses (2.55)% (8.57)% (12.47)% (9.67)% (20.29)%
------- ------- -------- ------- --------
Recoveries to charge-offs 23.68% 17.42% 3.19% 26.32% 2.50%
------ ------ ----- ------ -----
</TABLE>
Page 19
<PAGE>
The following table sets forth the Company'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. These allocations are no more
than estimates and are subject to revision as conditions change.
<TABLE>
<CAPTION>
At September 30,
1998 1997 1996
---- ---- ----
% of Allowance Percent of % Allowance Percent of % Allowance Percent of
in each Each in each Each in each Each
Category to Category Category to Category Category to Category
Total to Total Total to Total Total to Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate $748 32.91% 67.22% $607 47.72% 73.58% $427 58.49% 73.58%
Consumer 300 13.20 29.38 194 15.25 22.63 157 21.51 22.63
Commercial 546 24.02 3.40 141 11.09 3.79 146 20.00 3.79
Unallocated 679 29.87 - 330 25.94 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance
for loan losses $2,273 100.00% 100.00% $1,272 100.00% 100.00% $730 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
1995 1994
Percent of Percent of
% of Allowance Loans in % of Allowance Loans in
in each Each in each Each
Category to Category Category to Category
Total to Total Total to Total
Amount Allowance Loans Amount Allowance Loans
<S> <C> <C> <C> <C> <C> <C>
Real Estate $462 63.81% 76.90% $535 69.57% 78.20%
Consumer 170 23.48 21.00 157 20.42 20.90
Commercial 82 11.33 2.10 52 6.76 0.90
Unallocated 10 1.38 - 25 3.25 -
-- ---- ------ -- ---- -------
Total allowance
for loan losses $724 100.00% 100.00% $769 100.00% 100.00%
==== ======= ======= ==== ======= =======
</TABLE>
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 Company's funds for use in lending, investing and for other
general purposes.
Deposits. The Company offers a variety of deposit accounts with a range
of interest rates and terms. The Company's deposits consist of checking, money
market, savings, NOW, certificate accounts and Individual Retirement Accounts.
More than 62.1 % of the funds deposited in the Company are in certificate of
deposit accounts. At September 30, 1998, core deposits (savings, NOW and money
market accounts) represented 34.0 % 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 Company's deposits are
obtained predominantly from the areas in which its branch offices are located.
The Company 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 Company's ability to attract and retain
deposits. The Company uses traditional means of advertising its deposit
products, including radio and print media and generally does not solicit
deposits from outside its market area.
Page 20
<PAGE>
At September 30, 1998, the Company had $32.8 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
Maturity Period Amount
(In Thousands)
Three months or less $24,471
Over 3 through 6 months 4,748
Over 6 through 12 months 1,234
Over 12 months 2,297
-----
Total $32,750
========
The following table sets forth the distribution of the Company's average deposit
accounts for the periods indicated and the weighted average interest rates on
each category of deposits presented and such information during the last three
fiscal years. Averages for the periods presented utilize daily balances.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Percent Percent Percent
Total Total Total
Average Average Average Average Average Average Average Average Average
Balance Deposits Rate Paid Balance Deposits Rate Paid Balance Deposits Rate Paid
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Savings accounts $71,102 22.6% 2.26% $72,292 23.4% 2.44% $73,653 25.2% 2.54%
Money market accounts 14,509 4.6 2.91 14,238 4.6 2.81 12,920 4.4 2.78
NOW accounts 30,054 9.5 1.14 27,871 9.0 1.49 26,827 9.2 1.49
Certificates of deposit 189,306 60.1 5.45 187,270 60.5 5.40 174,617 59.6 5.49
Non-interest-bearing
deposits:
Demand deposits 10,003 3.2 7,614 2.5 -- 4,837 1.6 --
- ----------------------------- -------- -------- -------- -------- -------- ------- ------- ----- ----
Total average deposits $314,974 100.0% 4.04% $309,285 100.0% 4.11% $292,854 100.0% 4.17%
======== ======== ===== ======== ====== ===== ======== ====== ====
</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. At
September 30, 1998, the Bank had $106.5 million in outstanding FHLB advances,
compared to $23.5 million at September 30, 1997. Other borrowings consist of
overnight retail repurchase agreements and for the periods presented were
immaterial.
Page 21
<PAGE>
Liquidity and Capital Resources
The Company's primary sources of funds on a long-term and short-term basis are
deposits, principal and interest payments on loans, mortgage-backed and
investment securities and FHLB advances. The Company uses the funds generated to
support its lending and investment activities as well as any other demands for
liquidity such as deposit outflows. 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 current required liquidity
ratio is 4.0%. At September 30, 1998 and 1997, the Bank's liquidity ratios were
18.7% and 8.8%, respectively.
At September 30, 1998, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $55.0 million, or 11.2%, of total
adjusted assets, which is above the required level of $7.4 million, or 1.5%;
core capital of $55.0 million, or 11.2%, of total adjusted assets, which is
above the required level of $14.7million, or 3.0%; and risk-based capital of
$57.3 million, or 22.8%, of risk-weighted assets, which is above the required
level of $20.1 million, or 8.0%.
The Bank's most liquid assets are cash and cash equivalents and its investment
and mortgage-related securities available-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, 1998, cash and cash
equivalents and investment and mortgage-related securities available-for-sale
totaled $192.1 million, or 36.8%, of total assets.
The Bank has other sources of liquidity if a need for additional funds arises,
including FHLB advances. At September 30, 1998, the Bank had $106.5 million in
advances outstanding from the FHLB, and had an additional overall borrowing
capacity from the FHLB of $234.4 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, 1998, the Company had commitments to originate and purchase
loans and unused outstanding lines of credit and undisbursed proceeds of
construction mortgages totaling $27.2 million. The Company 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 scheduled to mature in less than one year
from September 30, 1998, totaled $121.9 million. The Company expects that
substantially all of the maturing certificate accounts will be retained by the
Company at maturity.
The initial impact of the Conversion on the liquidity and capital resources of
the Company was significant as it substantially increased the liquid assets of
the Company and the capital base on which the Company operates. Additionally,
the Company invested the substantial majority of conversion proceeds in readily
marketable investment grade securities which, if liquidity needs developed,
could be sold by the Bank to provide additional liquidity. Further, the
additional capital resulting from the offerings increased the capital base of
the Bank. At September 30, 1998, the Bank had total equity, determined in
accordance with GAAP, of $57.8 million, or 11.7% of total assets, which
approximated the Bank's regulatory tangible capital at that date of 11.2% of
assets. An institution with a ratio of tangible capital to total assets of
greater than or equal to 10.0% is considered to be "well-capitalized" pursuant
to OTS regulations.
Year 2000 Compliance
The following section contains forward-looking statements which involve risks
and uncertainties. The actual impact on the Company of the Year 2000 issue could
materially differ from that which is anticipated in the forward-looking
statements as a result of certain factors identified below.
<PAGE>
As the year 2000 approaches, an important business issue has emerged regarding
how existing application software programs and operating systems can accommodate
this date value. Year 2000 issues result from the inability of many computer
programs or computerized equipment to accurately calculate, store or use a date
after December 31, 1999. The erroneous date can be interpreted in a number of
different ways, the most common being Year 2000 represented as the year 1900.
Correctly identifying and processing Year 2000 as a leap year may also be an
issue. These misinterpretations of various dates in the Year 2000 could result
in a system failure or miscalculations causing disruptions of normal business
operation including, among other things, a temporary inability to process
transactions, track important customer account information, or provide
convenient access to this information. The Bank is subject to the regulation and
oversight of various banking regulators, whose oversight includes the provision
of specific timetables, programs and guidance regarding Year 2000 issues.
Regulatory examination of the Bank's Year 2000 programs are conducted on a
periodic basis and reports are submitted by the Bank to the banking regulators
on a periodic basis. In addition, reports are currently provided on a monthly
basis to the Board of Directors.
Company State of Readiness. The Company has completed an assessment of
its financial and operational software systems in accordance with the various
regulatory agency guidance documents. The Company is maintaining an inventory of
hardware and software systems, which ranges from mission critical software
systems and personal computers to security and video equipment backup
generators, and general office equipment. The Company has prioritized its
hardware and software systems to focus on the most critical systems first. For
most of its mission critical software systems, the Company relies on a major
data processing provider in the banking industry. The Company has received
representations and warranties from its vendor for mission critical software
systems that the system was compliant by June 30, 1998. The Company expects to
have testing substantially completed by December 31, 1998. If testing were to
present any system problems, the vendor will work to correct the problem and the
Company will test again until resolved. At the same time, the Company is
upgrading personal computers to meet both system and Year 2000 requirements. In
connection with the Company's assessment, a number of the less significant third
party vendors advised the Company that their software is Year 2000 compliant,
and the Company intends to fully test that software by March 31, 1999. The
Company has initiated communications with all of its significant vendors,
suppliers and large commercial customers to determine the extent to which the
Company is vulnerable to those third-parties' failure to remedy their own Year
2000 Problems. In the event that any of the Company's significant vendors,
suppliers and large commercial customers do not successfully achieve Year 2000
compliance in a timely manner, the Company's business or operations could be
adversely affected. If significant suppliers fail to meet Year 2000 operating
requirements, the Company intends to engage alternative suppliers. For
insignificant vendors, the Company will not necessarily validate that they are
Year 2000 compliant. However, for any insignificant vendor who responds that
they will not be compliant by March 1999, the Company will seek a new vendor or
system that is compliant. The Bank has surveyed its large commercial customers
as to their Y2K preparedness. Respondents have acknowledged their awareness of
Y2K issues and currently believe that these issues will not materially affect
their financial condition, liquidity, or results of operations. The extent to
which customers are Y2K compliant is considered in the bank's decision to extend
credit.
Contingency Plan. The Company is in the process of obtaining back-up
service providers, working up contingency plans and assessing the potential
adverse risks to the Company. The Company's contingency plans involve the use of
manual labor to compensate for the loss for
Page 22
<PAGE>
certain automated computer systems and inconveniences caused by disruption in
command systems. A contingency plan will be developed for mission-critical and
required mainframe and PC based applications, third-party relationships,
environmental systems, proprietary programs and non-computer related systems.
This contingency plan will identify scheduled completion dates, test dates and
trigger dates. Business continuation plans for critical business applications
are being developed. These plans include adequate staffing on site during the
year 2000 date change to quickly repair any errant applications. In addition, in
the event of any problems the Company would follow its current computer outage
business continuation plans until such problems are corrected.
Cost of Year 2000. Over the past several years, the Company's Technology
Plan has called for an aggressive schedule for installing new systems or
upgrading old systems in order to build a technology infrastructure which will
allow the Company to offer competitive products while providing for internal
efficiencies and customer service improvement. The Technology Plan has resulted
in positioning the Company to continue its technology improvements while
avoiding specific costly Year 2000 issues. The Company estimates its
expenditures specifically associated with Year 2000 at $75,000 during the fiscal
year ending September 1999. With assistance from its third party vendors the
Company is utilizing internal staff to perform Year 2000 compliance work,
including internal Information Systems staff. The Company believes that the
costs or the consequences of incomplete or untimely resolution of its Year 2000
issues do not represent a known material event or uncertainty that is reasonably
likely to affect its future financial results, or cause its reported financial
information not to be necessarily indicative of future operating results or
future financial condition. However, if compliance is not achieved in a timely
manner by the Company or any of its significant related third-parties, be it a
supplier of services or customer, the Y2K issue could possibly have a material
effect on the Company's operations and financial position. The cost of the
projects and the date on which the Company plans to complete both Year 2000
modifications and systems conversions are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third-party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
Risks of Year 2000. The Year 2000 issue presents potential risks of
uncertain magnitude. The risks arise both with regard to systems purchased by
the Company through third party vendors as well as those outside the control of
the Company, such as with ATM networks or credit card processors. These failures
may cause delays in the ability of customers to access their funds through
automated teller machines, point of sale terminals at retail locations, or other
shared networks. The Year 2000 issue also poses the potential risk for business
disruption due to a mission critical software system failure, which could result
in inaccurate interest payment calculations, credit transactions, or
record-keeping. The Company and the OTS are closely monitoring the progress of
the Company's major third party vendors and, to date, the Company is satisfied
with their progress. However, if the Company, its customers, or vendors are
unable to resolve year 2000 issues in a timely manner, it could result in a
material financial risk. Successful and timely completion of the Year 2000
project is based on management's best estimates derived from various assumptions
of future events, which are inherently uncertain, including the progress and
results of third party modification, testing plans and other factors.
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 Company's operations. Unlike industrial companies, nearly
all of the assets and liabilities of the Company are monetary in nature. As a
result, interest rates have a greater impact on the Company'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
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 Company will
make the appropriate disclosures in the applicable financial statements as
required.
<PAGE>
In September 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 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 customer. 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 Company.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures About
Pensions and Other Post Retirement Benefits." This Statement revises employers'
disclosures about pension and other post-retirement benefit plans. It does not
change the measurement or recognition of those plans. It standardizes the
disclosure requirements for pensions and other post-retirement benefits tot he
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful as they
were when "FASB Statements No. 87, Employers' Accounting for Pensions, No. 88,
Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plan and for Termination Benefits, and No. 106, Employers' Accounting
for Post-retirement Benefits Other Than Pensions," were issued. This statement
requires changes in disclosures and would not affect the financial condition,
equity or results of the Company. This Statement is effective for the fiscal
years beginning after December 15, 1997.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in
Page 23
<PAGE>
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of certain foreign currency exposures. This statement becomes effective for
fiscal years beginning after December 15, 1998. Earlier adoption is permitted.
The Company adopted SFAS 133 in its fiscal fourth quarter of 1998, including its
provision for the potential reclassification of investments, resulting in a
$56.2 million transfer of securities from held-to-maturity to
available-for-sale.
In October 1998, the FASB issued Statement No. 134, "Accounting for
Mortgage-backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise". This Statement requires that
after the securitization of a mortgage loan held for sale, an entity engaged in
mortgage banking activities classify any retained mortgage-backed securities
based on the ability and intent to sell or hold those investments, except that a
mortgage banking enterprise must classify as trading any retained
mortgage-backed securities that it commits to sell before or during the
securitization process. This Statement is effective for the first fiscal quarter
beginning after January 30, 1999 with earlier adoption permitted. This Statement
provides a one-time opportunity for an enterprise to reclassify, based on the
ability and intent on the date of adoption of this Statement, mortgage-backed
securities and other beneficial interests retained after securitization of
mortgage loans held for sale form the trading category, except for those with
commitments in place. The Company has not yet determined the impact, if any, of
this Statement, including, if applicable, its provisions for the potential
reclassifications of certain investment securities, on earning, financial
condition or equity.
<PAGE>
Market for Registrant's Common Equity And Related Stockholder Matters
Northeast Pennsylvania Financial Corporation's Common Stock is traded on The
American Stock Exchange under the symbol NEP. At September 30, 1998, the
Corporation had 1,643 registered common stockholders of record. The following
table sets forth the range of high and low sales prices for the Common Stock for
each full quarterly period within the most recent fiscal year since initial
trading began April 1, 1998. There have been no dividends declared or paid on
the Common Stock.
The closing market price of the common stock at September 30, 1998 was
11 1/4.
Stock Price Range
Low High
------- ---------
1998 3rd Quarter 13 3/4 16
4th Quarter 9 7/8 14 1/16
<TABLE>
<CAPTION>
Quarterly Financial Data (unaudited)
(In Thousands, Except Per Share Amount)
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
1998
Net Interest Income $3,205 $3,401 $4,167 $4,203
Provision for Loan Losses 268 219 292 280
Other Operating Income 160 174 199 423
Other Operating Expense 2,286 7,233 2,709 3,055
Net Income 558 (2,491) 991 895
- --------------------------------------- ----------------------- ----------------------- ---------------------- ---------------------
Earnings Per Share
Basic and Diluted N/A (.53) .17 .15
- --------------------------------------- ----------------------- ----------------------- ---------------------- ---------------------
1997
Net Interest Income $3,054 $3,057 $3,162 $3,132
Provision for Loan Losses 32 57 55 507
Other Operating Income 147 150 157 (587)
Other Operating Expense 2,239 2,223 2,369 2,406
Net Income 645 643 604 (511)
- --------------------------------------- ----------------------- ----------------------- ---------------------- ---------------------
Earnings Per Share
Basic and Diluted N/A N/A N/A N/A
</TABLE>
Page 24
<PAGE>
Consolidated Statements of Financial Condition September 30, 1998 and 1997 (in
thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
----------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $3,053 $13,214
Securities available-for-sale 189,094 44,773
Securities held-to-maturity (estimated fair value of $32,072
in 1998 and $38,869 in 1997) 31,770 38,925
Loans (less allowance for loan losses of $2,273 for 1998 and $1,272 for 1997) 282,706 261,469
Accrued interest receivable 3,998 2,169
Assets acquired through foreclosure 112 319
Property and equipment, net 8,648 6,762
Other assets 2,887 1,611
------------------------------
Total assets $522,268 $369,242
======== ========
Liabilities and Equity
Deposits $324,005 $314,123
Federal Home Loan Bank advances 106,498 23,516
Other borrowings 825 92
Advances from borrowers and insurance 717 477
Accrued interest payable 1,028 745
Other liabilities 1,761 1,751
-------------------------------
Total liabilities $434,834 $340,704
Preferred stock ($.01 par value; 2,000,000 authorized shares; 0 shares issued) - -
Common stock ($.01 par value; 16,000,000 authorized shares;
6,427,350 shares issued) 64 -
Additional paid-in capital 62,083 -
Unearned employee stock ownership plan shares (479,910 shares) (4,799) -
Retained earnings - substantially restricted 27,208 27,255
Unrealized gain on available-for-sale securities, net 2,878 1,283
-------------------------------
Total equity $87,434 $28,538
---------------------------------
Total liabilities and equity $522,268 $369,242
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
Page 25
<PAGE>
Consolidated Statements of Operations For the Years Ended September 30, 1998,
1997 and 1996 (In thousands, except share per share data)
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------
<S> <C> <C> <C>
Interest Income:
Loans $21,650 $20,071 $18,105
Mortgage-related securities 3,320 3,306 3,064
Investment securities:
Taxable 4,387 2,948 3,051
Non-taxable 1,185 274 103
-------------------------------------
Total interest income 30,542 26,599 24,323
====== ====== ======
Interest expense:
Deposits 12,715 12,699 12,195
Federal Home Loan Bank advances and other 2,851 1,495 812
-------------------------------------
Total interest expense 15,566 14,194 13,007
====== ====== ======
Net interest income 14,976 12,405 11,316
Provision for loan losses 1,059 651 97
-------------------------------------
Net interest income after provision for loan losses 13,917 11,754 11,219
--------------------------------------
Non-interest Income:
Service charges and other fees 874 650 522
Gain (loss) on sale of:
Real estate owned (86) (66) (46)
Loans 55 22 18
Available-for-sale securities 62 (563) -
Other 2 (176) 14
---------------------------------
Total non-interest income 907 (133) 508
Non-interest Expense:
Salaries and net employee benefits 5,916 5,395 4,989
Occupancy costs 1,581 1,421 1,809
Federal deposit insurance premiums 287 368 2,390
Data Processing 286 365 490
Professional fees 418 274 312
FHLB service charges 392 269 220
Charitable Contributions 4,934 82 106
Other 1,416 1,318 458
-------------------------------------
Total non-interest expense 15,230 9,492 10,774
(Loss) income before income taxes (406) 2,129 953
Income tax (benefit) expense (359) 748 12
-------------------------------------
Net (loss) income $(47) $1,381 $941
===== ====== ====
Earnings per share - basic and diluted (a) $(.20) N/A N/A
</TABLE>
(a)Earnings per share is calculated since March 31, 1998, the date of the
initial public offering. Had the weighted average shares been outstanding
for the entire fiscal year, proforma earnings per share would have been
$(.01).
See accompanying notes to consolidated financial statements
Page 26
<PAGE>
Consolidated Statements of Changes in Equity For the Years Ended September 30,
1998, 1997, and 1996 (in thousands)
<TABLE>
<CAPTION>
Additional Unearned Unrealized
Common Paid In ESOP Retained Gain on Total
Stock Capital Shares Earnings AFS Securities Equity
<S> <C> <C> <C> <C> <C> <C>
Balance September 30, 1995 $ -- $ -- $ -- $24,933 $617 $25,550
Net changes in gains (losses) on
securities available-for-sale, net of tax (364) (364)
Net Income -- -- 941 941
------- ------ -------- ------- ------- ------
Balance September 30, 1996 $ -- $ -- $ -- $25,874 $253 $26,127
Net changes in gains (losses) on
securities available-for-sale, net of tax $1,030 1,030
Net Income $1,381 $ 1,381
-------- -------- ------- ------ ----- -------
Balance September 30, 1997 $ -- $ -- $ -- $ 27,255 $1,283 $28,538
Issuance of Common Stock ($.01 par value;
16,000,000 authorized shares;
6,427,350 shares issued) 64 64
Additional paid-in Capital 61,959 61,959
Unearned employee stock ownership
plan (ESOP) shares (5,142) (5,142)
ESOP shares committed to be released 124 343 467
Net changes in gains (losses) on
securities available-for-sale, net of tax 1,595 1,595
Net loss (47) (47)
-------- ------- --------- -------- ------- --------
Balance September 30, 1998 $64 $62,083 $(4,799) $27,208 $2,878 $87,434
======== ======== ========= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
Page 27
<PAGE>
Consolidated Statements of Cash Flows For the years ended September 30, 1998,
1997 and 1996 (in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net Income (loss) $(47) $ 1,381 $ 941
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Provision (Recovery) for REO loss (4) 153 24
Provision for loan losses 1,059 651 97
Depreciation 621 645 698
Deferred income tax (benefit) provision (1,929) (441) 156
Funding of First Federal Charitable Foundation 4,761 - -
Reduction in unallocated ESOP shares 467 - -
Amortization and accretion on:
Held-to-maturity securities 77 22 87
Available-for-sale securities 222 111 76
Amortization of deferred loan fees (315) (201) (210)
(Gain) loss on sale of:
Real estate acquired thorough foreclosure 86 66 46
Loans (55) (22) (18)
Available-for-sale securities (62) 563 -
(Gain) loss on disposal of property and equipment (2) 176 65
Changes in assets and liabilities:
(Increase) decrease in Accrued interest receivable (1,829) 169 (347)
(Increase) decrease in Other assets (371) (40) 104
Increase in accrued interest payable 283 205 17
Increase (decrease) in accrued income taxes payable 604 649 (547)
Increase (decrease) in other liabilities (469) (1,406) 2,214
------------------------------------------
Net cash provided by operating activities $3,097 $2,681 $3,403
------------------------------------------
Investing Activities:
Loan origination and principal payments on loans $(30,513) $(21,230) $(22,002)
Proceeds from sale of:
Available-for-sale securities 6,855 26,530 -
Real estate acquired through foreclosure
and repossessed assets 347 266 420
Loans 8,365 1,811 1,578
Proceeds from repayments of held-to-maturity securities 23,041 10,406 16,845
Proceeds from repayments of available-for-sale securities 30,752 13,849 6,500
Proceeds from disposal of fixed assets 2 - 12
Purchase of:
Held-to-maturity securities (72,166) (5,867) (25,101)
Available-for-sale securities (120,120) (23,904) (20,286)
Office properties and equipment (2,507) (649) (2,104)
Federal Home Loan Bank stock (3,271) - (173)
--------------------------------------------
Net cash provided by (used in) investing activities $(159,215) $1,212 $(44,311)
---------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
Page 28
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
For the years ended September 30, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Financing Activities:
Net increase in deposit accounts $ 9,882 $ 7,317 $ 26,796
Net increase (decrease) in Federal Home
Loan Bank short-term advances 18,000 (17,000) 6,500
Borrowings of Federal Home Loan Bank
long-term advances 65,000 15,000 8,000
Repayments of Federal Home Loan Bank
long-term advances (18) (18) (16)
Net increase (decrease) in advances from
borrowers for taxes and insurance 240 (115) (8)
Net increase in other borrowings 733 92 -
Net proceeds from issuance of common stock 52,120 - -
--------- --------- ---------
Net cash provided by financing activities 145,957 5,276 41,272
--------- ---------
Increase (decrease) in cash and cash equivalents (10,161) 9,169 364
Cash equivalents, beginning of year 13,214 4,045 3,681
--------- --------- ---------
Cash and cash equivalents, end of year $ 3,053 $ 13,214 $ 4,045
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 15,284 $ 13,989 $ 12,990
========= ========= =========
Income taxes $ 665 $ 540 $ 816
========= ========= =========
Net change in unrealized gains (losses) on securities
available-for-sale, net of tax $ 1,595 $ 1,030 $ (364)
========= ========= =========
Supplemental disclosure - non-cash and financing information:
Transfer from loans to real estate owned $ 222 $ 285 $ 522
========= ========= =========
Shares purchased by ESOP, net of shares committed
to be released $ 343 N/A N/A
========= ========= =========
Transfer of held-to-maturity securities to
available-for-sale $ 56,203 N/A N/A
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
Page 29
<PAGE>
1. Summary of Significant Accounting Policies.
Business.
Northeast Pennsylvania Financial Corp. (the "Company")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 Company's principal subsidiary, First Federal Bank ("the Bank") serves its
loan customers through a loan production office located in Monroe County,
Pennsylvania. 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 Company is subject
to competition from other financial institutions and other companies that
provide financial services. The Company 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 Company include the accounts of
FIDACO, Inc., Abstractors, Inc., and First Federal Bank. First Federal Bank and
Abstractors, Inc. are wholly-owned subsidiaries of Northeast Pennsylvania
Financial Corp. Abstractor's, Inc. was purchased June 30, 1998 for a nominal
price. FIDACO, Inc. is an inactive subsidiary of First Federal Bank with the
only major asset being an investment in Hazleton Community Development
Corporation. All material inter-company balances and transactions have been
eliminated in consolidation. Prior period amounts are reclassified, when
necessary, to conform with the current year's presentation.
The Company 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 assumptions 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 Company
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 Company 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 Company's primary credit
risk is the risk of default on the Company's loan portfolio that results from
the borrowers inability or unwillingness to make contractually required
payments. The Company's lending activities are concentrated in Pennsylvania. The
largest concentration of the Company's loan portfolio is located in Northeastern
Pennsylvania. The ability of the Company'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 Company, 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 Company 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 Company believes it is acting prudently to assure year 2000
compliance, it is to some extent dependent upon vendor cooperation. The Company
is requiring its computer systems and software vendors to represent that the
products provided are or will be year 2000 compliant and has planned programs of
testing for compliance. It is recognized that any year 2000 compliance failures,
either internal or on the part of the Company's customers, could result in
additional expense or loss to the Company.
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 Company 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 the level yield method, based on the Company'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 Company 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 Company 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.
Allowance for Loan Losses. The allowance for loan losses is maintained at a
level that management considers adequate to provide for inherent 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
Page 30
<PAGE>
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 upon 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 Company'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 Company 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 contractual 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.
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.
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 Company 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, 1998 and 1997 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.
<PAGE>
Earnings per Share. Earnings per share, basic and diluted, were $(.20) for the
six months ended September 30, 1998. Proforma earnings per share would have been
$(.01) had the shares been outstanding for the entire twelve month period. Due
to the Bank's recent conversion and formation of the Company, earnings per share
figures for prior year periods are not applicable.
The following table presents the reconciliation of the numerators and
denominators of the basic and diluted EPS computations
Six Months Ended
September 30,
1998 1997
---- ----
Basic EPS Computation
Numerator: ($1,204,000) $ --
Denominator:
Weighted average common shares outstanding 5,921,732 ___-
----------- ----
Basic EPS $ (.20) N/A
=========== ====
Diluted EPS Computation
Numerator: ($1,204,000) $ --
Denominator:
Weighted average common shares outstanding 5,921,732 --
- ---------------------- ----------- ----
Diluted EPS $ (.20) N/A
=========== ====
Page 31
<PAGE>
2. Conversion to Stock Form of Ownership
The Company is a business corporation formed at the direction of the Bank under
the laws of Delaware on December 16, 1997. On March 31, 1998,: (i) the bank
converted from a federally chartered mutual savings and loan association to a
federally chartered stock savings bank; (ii) the Bank issued all of its
outstanding capital stock to the Company; and (iii) the Company consummated its
initial public offering of common stock, par value $.01 per share ( the "Common
Stock"), by selling at a price of $10.00 per share, 5,437,062 shares of Common
Stock to certain eligible account holders of the Bank who had subscribed for
such shares (collectively, the "Conversion"), by selling 514,188 shares to the
Bank's Employee Stock Ownership Plan and related trust ("ESOP") and by
contributing 476,100 shares of Common Stock to The First Federal Charitable
Foundation (the "Foundation"). The Conversion resulted in net proceeds of $52.1
million, after expenses of $2.2 million. Net proceeds of $25 million were
invested in the Bank to increase the Bank's tangible capital to 13.3% of the
Bank's total adjusted assets. The Company also established the Foundation,
dedicated to the communities served by the Bank. In connection with the
Conversion, the common stock contributed by the Company to the Foundation at a
value of $4.8 million was charged to expense.
Prior to the initial public offering and as a part of the subscription offering,
in order to grant priority to eligible depositors, the Bank established a
liquidation account at the time of the conversion in an amount equal to the
equity of the Bank as of the date of its latest balance sheet date, September
30, 1997, contained in the final Prospectus used in connection with the
Conversion. In the unlikely event of a complete liquidation of the Bank, (and
only in such an event), eligible depositors who continue to maintain accounts at
the Bank shall be entitled to receive a distribution from the liquidation
account. The total amount of the liquidation account, which decreases if the
balances of eligible deposits decreases at the annual determination dates,
approximated $15.3 million at September 30, 1998.
The Company may not declare nor pay dividends on its stock if such declaration
and payment would violate statutory or regulatory requirements.
In addition to the 16,000,000 authorized shares of common stock, the Company
authorized 2,000,000 shares of preferred stock with a par value of $.01 per
share (the "Preferred Stock"). The Board of Directors is authorized, subject to
any limitations by law, to provide for the issuance of the shares of preferred
stock in series, 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 restriction thereof. As of September 30, 1998, there were no shares of
preferred stock issued.
<PAGE>
3.Securities.
Securities are summarized as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Available-for-sale securities:
Municipal securities $ 47,867 $ 886 $ (21) $ 48,732
Obligations of U.S. Government agencies 55,661 606 (7) 56,260
Mortgage-related securities 74,853 829 (31) 75,651
---------------------------------------------------------------
Total debt securities 178,381 2,321 (59) 180,643
Federal Home Loan Bank of Pittsburgh Stock 5,325 - - 5,325
Federal Home Loan Mortgage Corporation Stock 697 2,429 - 3,126
------------------------------------------------------------
Total equity securities 6,022 2,429 - 8,451
Total $184,403 $4,750 $(59) $189,094
======== ====== ===== ========
Held-to-maturity securities:
Obligations of U.S. government agencies 31,770 317 (15) 32,072
---------------------------------------------------------------
Total $31,770 $317 $(15) $32,072
======= ==== ===== ======
Page 32
<PAGE>
SEPTEMBER 30, 1997
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
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
======= ======= ==== =======
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
======= ====== ======= =======
</TABLE>
<PAGE>
The amortized cost and estimated fair value of securities at September 30, 1998,
by contractual maturity, are shown below (dollars in thousands):
<TABLE>
<CAPTION>
Maturing Maturing after Maturing after Maturing
within one one year but 5 years but after 10
year within 5 years within 10 years years Total
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Available-for-sale securities:
Municipal Securities $- $- $9,757 $38,110 $47,867
Obligations of U.S. Government agencies - 2,000 51,661 2,000 55,661
Mortgage-related securities 3,925 - 4,160 66,768 74,853
Equity securities 6,022 - - - 6,022
---------------------------------------------------------------------
Total securities at amortized cost $ 9,947 $ 2,000 $ 65,578 $ 106,878 $ 184,403
======= ======= ======== ========= =========
Total securities at fair value $ 12,384 $ 2,002 $ 66,472 $ 108,236 $ 189,094
======== ======= ======== ========= =========
Weighted Average Yield 7.01% 6.32% 6.19% 5.93% 6.09%
-----------------------------------------------------------------------
Held-to-maturity securities:
Obligations of U.S. Government agencies $ 1,000 - - $ 30,770 $ 31,770
------------------------------------------------------------------
Total securities at amortized cost 1,000 - - 30,770 31,770
===== ======= ====== ====== ======
Total securities at fair value $ 1,001 - - $ 31,071 $ 32,072
====== ======= ====== ====== ======
Weighted Average Yield 5.26% - - 6.84% 6.79%
-------------------------------------------------------------------
</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, 1998 were $6,855,000 resulting in gross realized gains of $70,003
and gross realized losses of $7,680. Proceeds from sales of securities available
for sale during the year ended September 30, 1997 were $26,530,000 resulting in
gross realized gains of $63,251 and gross realized losses of $626,366. The Bank
did not sell any securities during the year ended September 30, 1996.
Securities, carried at approximately $43,869,093, at September 30, 1998, were
pledged to secure public deposits as required by law.
Accrued interest receivable on securities amounted to $2,566,602 and $821,363 at
September 30, 1998 and 1997, respectively.
On July 1, 1998, the Bank transferred certain held-to-maturity
Page 33
<PAGE>
securities to the available-for-sale investment portfolio. The amortized cost of
the securities was approximately $56,203,333 with an unrealized gain net of
taxes of approximately $597,053. This transfer was in accordance with a special
reassessment provision contained within Statement of Financial Accounting
Standard No. 133 "Accounting for Derivative Instruments and Hedging Activities,"
which was adopted by the Bank as of July 1, 1998.
The unamortized premiums on mortgage-related securities amounted to $584,978 and
$339,472 as of September 30, 1998 and 1997, respectively. The unearned discount
on mortgage-related securities amounted to $92,255 and $93,353 as of September
30, 1998 and 1997, respectively.
<PAGE>
4. Loans
Loans are summarized as follows:
At September 30,
1998 1997
Real Estate loans:
One-to four-family $ 176,924 $ 179,101
Multi-family and commercial 11,938 6,701
Construction 3,759 5,818
--------- ---------
Total real estate loans 192,621 191,620
--------- ---------
Consumer Loans:
Home equity loans and lines of credit 52,244 41,278
Automobile 24,589 13,678
Education 2,351 2,348
Unsecured lines of credit 1,589 1,310
Other 3,423 3,229
--------- ---------
Total consumer loans 84,196 61,843
--------- ---------
Commercial loans 9,742 10,775
--------- ---------
Total loans 286,559 264,238
Less:
Allowances for loan losses (2,273) (1,272)
Deferred loan origination fees (1,580) (1,497)
--------- ---------
Total loans, net $ 282,706 $ 261,469
========= =========
Accrued interest receivable on loans amounted to $1,431,055 and $ 1,347,982 at
September 30, 1998, and 1997, respectively.
Impaired loans and the related specific loan loss allowances were as follows (in
thousands):
<TABLE>
<CAPTION>
September 30,
1998 1997
-------------------------------------------------------- ----
Allowance Allowance
Recorded for Net Recorded for Net
Investments Losses Investments Investments Losses Investments
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans:
With specific allowances $1,095 $ 329 $ 766 $ 290 $ 68 $ 222
Other impaired loans:
With specific allowances $ 313 $ 159 $ 154 $ 187 $ 108 $ 79
---------------------------------------------------------------------------------------
$1,408 $ 488 $ 920 $ 477 $ 176 $ 301
===== ====== ====== ====== ====== ======
</TABLE>
The average net recorded investment in impaired loans for the years ended
September 30, 1998, 1997, and 1996, respectively, was $898,266 $577,951, and
$515,707. The related amount of interest income recognized on impaired loans was
$73,000, $39,000, and $19,000 for the years ended September 30, 1998, 1997, and
1996, respectively.
Non-accrual loans totaled $1,239,000, $774,000, and $716,000 at September 30,
1998, 1997, and 1996, respectively. Loans in non-accrual status as of September
30, 1998, 1997 and 1996 had interest due but not recognized of approximately
$58,000, $33,000, and $16,000, respectively. The amount of interest income on
these loans that was included in net income in fiscal year 1998, 1997 and 1996
was $55,000, $53,000 and $38,000, respectively. There were $0 and $112,000 in
troubled debt restructuring loans at September 30, 1998 and 1997, respectively.
The Bank has no commitments to lend additional funds to borrowers whose loans
were classified as non-performing or troubled debt restructuring.
Page 34
<PAGE>
The activity in the allowance for loan losses was as follows:
September 30,
1998 1997 1996
-------------------------------
Balance, beginning $ 1,272 $ 730 $ 724
Provision charged to income 1,059 651 97
Charge-offs (76) (132) (94)
Recoveries 18 23 3
------- ------- -------
Balance, ending $ 2,273 $ 1,272 $ 730
======= ======= =======
At September 30, 1998, 1997, and 1996, the Bank serviced loans for others of
$15,805,965, $14,197,000, and $16,186,000, respectively. Loans serviced by
others for the Bank as of September 30, 1998, 1997, and 1996 were: $5,960,235,
$7,721,000, and $9,968,000, respectively.
An analysis of the activity of loans to directors and executive officers is as
follows (in thousands):
September 30, 1998
Balance, beginning of year $ 724
New loans and line of credit advances 135
Repayments (54)
---
Balance, end of year $ 805
====
5. Office Properties and Equipment
Properties and equipment by major classification are summarized as follows (in
thousands):
1998 1997
-------------------------------
Land $ 854 $ 854
Buildings and improvements 8,174 6,550
Furniture, fixtures and equipment 4,928 3,695
Leasehold improvements 694 1,095
Renovations in progress -- 208
--------------------------------
Total 14,650 12,402
Less accumulated depreciation 6,002 5,640
--------------------------------
Net $8,648 $6,762
====== ======
The Bank has entered into operating leases for several of its branch facilities.
The minimum annual rental payments under these leases at September 30, 1998, are
as follows (in thousands):
Years ending September 30,
1999 $256
2000 199
2001 169
2002 97
2003 87
2004 and after 51
----
Total $859
====
Rent expense was $263,000, $261,000, and $263,000, for the years ended September
30, 1998, 1997, and 1996, respectively.
Page 35
<PAGE>
6. Deposits
Deposits consist of the following major classifications (in thousands):
<TABLE>
<CAPTION>
At September 30,
1998 1997
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) 2.26% $69,956 21.6% 2.43% $71,779 22.8%
Money market accounts 3.12% 16,368 5.0% 3.49% 13,821 4.4%
Certificates of deposit
less than $100,000 5.45% 163,318 50.5% 5.50% 161,844 51.5%
Certificates of deposit
greater than $100,000 (A) 5.45% 32,750 10.1% - 30,892 9.9%
NOW Accounts 1.24% 31,182 9.6% 1.49% 27,302 8.7%
Non-interest bearing deposits - 10,431 3.2% - 8,485 2.7%
--------------------------------------------------------------------------------------------------
Total deposits at end of period 4.05% $324,005 100% 4.20% $314,123 100%
===== ======= ==== ===== ======= ====
</TABLE>
(A) Deposit balances in excess of $100,000 are not federally insured.
The certificates of deposit frequently are renewed at maturity rather than paid
out; a summary of certificates by contractual maturity at September 30, 1998 is
as follows (in thousands):
Years ending September 30,
Amount
1999 $131,209
2000 50,826
2001 7,328
2002 2,268
2003 4,437
2004 and thereafter 0
--------
Total $196,068
========
Interest expense on deposits is comprised of the following:
<TABLE>
<CAPTION>
Years ended September 30,
1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Savings accounts $ 1,607 $ 1,765 $ 1,871
Money market accounts 417 399 371
Certificates less than $100,000 9,139 10,120* 9,549*
Certificates greater than $100,000 1,180
NOW Accounts 372 415 404
-----------------------------------------------
Total $12,715 $12,699 $12,195
====== ====== ======
</TABLE>
* Information regarding interest expense on certificates of deposit of $100,000
or greater was not available prior to June 1997.
<PAGE>
7. 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 Bank's FHLB stock is also pledged to secure these advances. At
September 30, 1998 and 1997, such advances mature as follows (in thousands):
<TABLE>
<CAPTION>
Due by September 30, Weighted Average Rate September 30, 1998
-----------------------------------------------------------------------------------------
<S> <C> <C>
1999 5.58% $ 26,000
2000 5.17% 5,000
2001 5.43% 5,000
2002 5.56% 25,000
2003 - -
Thereafter 5.03% 45,498
-----------------------------------------
Total FHLB advances 5.31% $106,498
===== =======
Page 36
<PAGE>
Due by September 30, Weighted Average Rate September 30, 1997
-----------------------------------------------------------------------------------------
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>
The Bank has included in the preceding table annually renewable lines of credit
totaling $72,426,000. The Bank, from time to time, has used the lines of credit
to meet liquidity needs. At September 30, 1998 and 1997, the balances
outstanding on the lines of credit were $26,000,000 and $0 respectively with
interest rates at the overnight FHLB borrowing rate which was 5.58% at September
30, 1998.
The Bank has utilized advances from the FHLB which have callable features. The
advances have a fixed rate for a specified period of time after which the FHLB
can, at its option, convert the advance to a variable rate. The Bank, at the
same time can repay the advance penalty free.
8. 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.
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, 1998, are
approximately $8.9 million, of which $8.3 million represents the base year
amount and $527,000 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 (in
thousands):
Year ended September 30,
1998 1997 1996
----------------------------------------
Current:
Federal $ 1,434 $ 1,105 $ 147
State 136 84 (291)
Deferred - Federal (1,929) (441) 156
------- ------- -------
Total $ (359) $ 748 $ 12
======= ======= =======
<PAGE>
The provision (benefit) for income taxes differs from the statutory rate due to
the following (in thousands):
Year ended September 30,
1998 1997 1996
---------------------------------------
Federal income tax (benefit) at
statutory rate $(138) $ 724 $ 324
Tax exempt interest, net (409) (102) (51)
State taxes, net of Federal benefit 90 56 (192)
Excess ESOP compensation expense 42 -- --
Other, net 56 70 (69)
----- ----- -----
Total $(359) $ 748 $ 12
===== ===== =====
The components of the net deferred tax liability (asset) are as follows (in
thousands):
September 30,
1998 1997
Deferred tax assets:
Loan fees and costs $ (201) $ (261)
ESOP funding difference (117) --
Deferred compensation (154) (127)
Foreclosed asset writedowns (15) (14)
Provision for abandoned assets (59) (59)
Depreciation -- (5)
Accrued hospitalization (40) (33)
Charitable contributions (1,532) (15)
Book bad debt reserves - loans (856) (516)
------- -------
$(2,974) $(1,030)
======= =======
Page 37
<PAGE>
Deferred tax liabilities:
Depreciation $ 36 --
Accretion 15 26
Unrealized holding gains on
available-for-sale securities 1,813 914
Tax bad debt reserves in excess of base year 179 215
Title Plant 26 -
------- -------
Gross deferred tax liabilities $ 2,069 $ 1,155
------- -------
Net deferred tax liability (asset) $ (905) $ 125
======= =======
9. Financial Instruments
The Company 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 $4.3 million as of September 30, 1998, of which $
1.74 million was for variable-rate loans. The balance of the commitments
represent fixed-rate loans with interest rates ranging from 6.125% to 8.75%. In
addition, September 30, 1998, the Company had undisbursed loans in process for
construction loans of $4.0 million and $18.5 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 Company has in particular classes of financial
instruments.
The Company'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 Company 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 requirements.
The Company evaluates each customer's credit-worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Company on
extensions of credit, is based on management's credit assessment of the
counterparty. At September 30, 1998, the Company expects all commitments to be
funded within 60 days.
<PAGE>
The Company 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 Company's entire holdings of
a particular financial instrument. For a substantial portion of the Company'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 Company'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, 1998 and
1997.
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 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 Company'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 Company'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 Company for debt with similar terms and
remaining maturities.
Page 38
<PAGE>
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 Company'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 Company or
the borrower, they only have value to the Company and the borrower. The fair
value of commitments to extend credit is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present credit worthiness of the counter
parties.
<PAGE>
The carrying amounts and estimated fair values of the Company's financial
instruments were as follows (in thousands):
<TABLE>
<CAPTION>
At September 30,
1998 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 3,053 $ 3,053 $13,214 $13,214
Securities available-for-sale 189,094 189,094 44,773 44,773
Securities held-to-maturity 31,770 32,072 38,925 38,869
Loans 282,706 292,220 261,469 261,445
Accrued interest receivable 3,998 3,998 2,169 2,169
Financial Liabilities:
Deposits with no stated maturity which
consist of savings, money market, NOW
and non-interest bearing deposits $127,937 $127,937 $121,386 $121,386
Certificates of deposit 196,068 196,534 192,736 191,328
Federal Home Loan Bank advances 106,498 109,373 23,516 23,431
Other borrowings 825 825 92 92
Accrued interest payable 1,028 1,028 745 745
Contractual Estimated Contractual Estimated
Amount Fair Value Amount Fair Value
Off balance sheet assets (liabilities):
Loan commitments $8,335 $12 $9,141 $137
Consumer lines of credit 14,189 - 13,028 -
Commercial lines of credit 4,313 8 3,240 6
</TABLE>
10. 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 possible 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. 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, 1998, that the Bank meets all capital adequacy requirements
to which it is subject. As of September 30, 1998, 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.
Page 39
<PAGE>
The Bank's actual capital amounts and ratios at September 30, 1998 and 1997 are
also presented in the following table (dollars in thousands):
<TABLE>
<CAPTION>
As of September 30, 1998
To be Well Capitalized
For Capital under prompt corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio(1) Amount Ratio(1) Amount Ratio(1)
<S> <C> <C> <C> <C> <C> <C>
Risk-based Capital
(Total Capital to risk weighted
assets) $57,293 22.8% $20,094 >8.0% $25,117 >10.0%
Tier I Capital
(to risk weighted assets) 55,020 21.9% 10,047 >4.0% 15,070 >6.0%
Core Capital
(Tier I Capital to total assets) 55,020 11.2% 14,736 >3.0% 24,560 >5.0%
Tangible Capital
(Tier I Capital to total assets) 55,020 11.2% 7,368 >1.5% N/A N/A
As of September 30, 1997
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
<FN>
(1)Tangible and core capital are completed as a percentage of total assets of
$491 million and $369 million at September 30, 1998 and 1997, respectively.
Risk-based capital and Tier I capital is computed as a percentage of total
risk-weighted assets of $251 million and $198 million at September 30, 1998
and 1997, respectively.
</FN>
</TABLE>
11. Federal Deposit Insurance Corporation
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 f 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. Employee Benefit Plans
Defined Benefit Plan
The Company participates in a multiple-employer defined benefit pension plan
covering all employees meeting eligibility requirements of being at least age 21
with one year of service with the Bank. Because of the multiple-employer nature
of the plan, information regarding the Company's portion of 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, 1998, 1997 and
1996.
401K Plan
Effective March 7, 1994, the Bank implemented a Section 401(k) defined
contribution plan which covers substantially all of its employees. The Company
made contributions to this plan of approximately $88,000, $83,000 and $77,000
for the years ended September 30, 1998, 1997 and 1996, respectively.
<PAGE>
Employee Stock Ownership Plan
Effective April 1, 1998, the Company adopted an Employee Stock Ownership Plan
("ESOP"). The Plan is designed to provide retirement benefits for eligible
employees. Because the Plan invests in the stock of the Company, it will also
give eligible employees an opportunity to acquire an ownership interest in the
Company. Employees are eligible to participate in the Plan after reaching age
twenty-one, and completing six months of service. Benefits become 100% vested
after five years, with a 20% vesting occuring each year.
The ESOP purchased 8% or 514,188 shares of the common stock issued in the
Conversion. The ESOP borrowed 100% of the aggregate purchase price of the Common
Stock, or $5,141,880, from the Company. The loan has a 10 year term, with an
annual interest rate of prime (8.50%, at September 30, 1998) and will be repaid
principally from the Company's contributions to the ESOP. The Company recognized
$476,000 in compensation and benefit expense related to the ESOP for the year
ended September 30, 1998.
Page 40
<PAGE>
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 fiscal 1998, a total of 34,278 shares have been committed to be released.
13. Related Party Transactions
The Company retains a law firm, in which the Chairman of the Company's Board of
Directors also is a partner, that provides general legal counsel to the Company.
The Company paid legal fees to this law firm of $29,173, $49,859, and $41,197
for the years ended September 30, 1998, 1997, and 1996, respectively.
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. Currently, the
comprehensive income of the Company would consist primarily of net income and
unrealized holding gains and losses on available-for-sale securities. The
Company will make the appropriate disclosures in the applicable 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 Company.
In February 1998, the FASB issued SFAS No. 132 "Employer's Disclosures About
Pensions and Other Post Retirement Benefits." This Statement revises employers'
disclosures about pension and other post-retirement benefit plans. It does not
change the measurement or recognition of those plans. It standardizes the
disclosure requirements for pensions and other post-retirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful as they
were when "FASB Statements No. 87, Employers' Accounting for Pensions, No. 88,
Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting
for Post-retirement Benefits Other Than Pensions," were issued. This statement
requires changes in disclosures and would not affect the financial condition,
equity or operating results of the Company. This Statement is effective for the
fiscal years beginning after December 15, 1997.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation. If
certain conditions are met, a derivative may be specifically designated as (a) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of certain
foreign currency exposures. This statement becomes effective for fiscal years
beginning after December 15, 1998. Earlier adoption is permitted. The Company
adopted SFAS 133 in its fourth fiscal quarter of 1998, including its provision
for the potential reclassification of investments, resulting in a $56.2 million
transfer of securities from held-to-maturity to available-for-sale and an
increase of $597,000 of unrealized gains, net of taxes, on securities
available-for-sale. The adoption of this statement did not affect operating
results of the Company.
<PAGE>
In October 1998, the FASB issued Statement No. 134, "Accounting for
Mortgage-backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise". This Statement requires that
after the securitization of a mortgage loan held for sale, an entity engaged in
mortgage banking activities classify any retained mortgage-backed securities
based on the ability and intent to sell or hold those investments, except that a
mortgage banking enterprise must classify as trading any retained
mortgage-backed securities that it commits to sell before or during the
securitization process. This Statement is effective for the first fiscal quarter
beginning after January 30, 1999 with earlier adoption permitted. This Statement
provides a one-time opportunity for an enterprise to reclassify, based on the
ability and intent on the date of adoption of this Statement, mortgage-backed
securities and other beneficial interests retained after securitization of
mortgage loans held for sale form the trading category, except for those with
commitments in place. The Company has not yet determined the impact, if any, of
this Statement, including, if applicable, its provisions for the potential
reclassifications of certain investment securities, on earning, financial
condition or equity.
15. Subsequent Events
On October 21, 1998, at a special meeting of the shareholders of the Company,
the shareholders approved stock-based incentive plans which grant up to 4%
(257,094) of total shares outstanding as stock awards, and up to 10% (642,735)
of total shares outstanding as stock options to eligible directors, officers and
employees.
Page 41
<PAGE>
Independent Auditors' Report
To The Board of Directors
Northeast Pennsylvania Financial Corp.
Hazleton, Pennsylvania:
We have audited the accompanying consolidated statements of financial
condition of Northeast Pennsylvania Financial Corp. and subsidiaries (the
"Company") as of September 30, 1998 and 1997, and the related consolidated
statements of operations, changes in equity, and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. The accompanying
consolidated financial statements of the Company for the year ended September
30, 1996, were audited by other auditors whose report thereon dated November 7,
1996, expressed an unqualified opinion on those statements.
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 1998 and 1997 consolidated financial statements referred
to above present fairly, in all material respects, the financial position of the
Company as of September 30, 1998 and 1997, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
As discussed in Notes 3 and 14 to the consolidated financial
statements, the Company adopted Statement of Financial Accounting Standard No.
133, Accounting for Derivative Instruments and Hedging Activities, as of July 1,
1998.
/s/ KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
October 21,1998
Page 42
Independent Auditors' Consent
We consent to the incorporation by reference in the Registration Statements
(nos. 333-58395 and 333-68219) on Form S-8 of Northeast Pennsylvania Financial
Corp. of our report dated October 21, 1998, relating to the consolidated
statements of financial condition of Northeast Pennsylvania Financial Corp. and
subsidiaries as of September 30, 1998 and 1997, and the related consolidated
statements of operations, changes in equity, and cash flows for the years then
ended, which report appears in the September 30, 1998 annual report on Form 10-K
of Northeast Pennsylvania Financial Corp.
KPMG Peat Marwick, LLP
/s/ KPMG Peat Marwick, LLP
Philadelphia, Pennsylvania
December 28, 1998
PARENTE RANDOLPH ORLANDO CAREY & ASSOCIATES
CONSULTANTS & ACCOUNTANTS
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements
(nos. 333-58395 and 333-68219) on Form S-8 of Northeast Pennsylvania Financial
Corp. of our report dated November 7, 1996, relating to the consolidated
statements of income, changes in equity and cash flows of First Federal Savings
and Loan Association of Hazleton and subsidiaries for the year ended September
30, 1996, which report is referred to in the September 30, 1998 annual report on
Form 10-K of Northeast Pennsylvania Financial Corp.
/s/ Parente, Randolph, Orlando, Carey & Associates
Hazleton, Pennsylvania
December 28, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the Annual
Report to Shareholders as incorporated by reference into this 10Kand is
qualified in its entirety by reference to the audited financial statements
contained herein.
</LEGEND>
<CIK> 0001050996
<NAME> Northeast Pennsylvania Financial Corp.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,188
<INT-BEARING-DEPOSITS> 1,865
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 189,094
<INVESTMENTS-CARRYING> 31,770
<INVESTMENTS-MARKET> 32,072
<LOANS> 282,706
<ALLOWANCE> 2,273
<TOTAL-ASSETS> 522,268
<DEPOSITS> 324,005
<SHORT-TERM> 825
<LIABILITIES-OTHER> 3,506
<LONG-TERM> 106,498
0
0
<COMMON> 64
<OTHER-SE> 87,370
<TOTAL-LIABILITIES-AND-EQUITY> 522,268
<INTEREST-LOAN> 21,650
<INTEREST-INVEST> 5,572
<INTEREST-OTHER> 3,320
<INTEREST-TOTAL> 30,542
<INTEREST-DEPOSIT> 12,715
<INTEREST-EXPENSE> 15,566
<INTEREST-INCOME-NET> 14,976
<LOAN-LOSSES> 1,059
<SECURITIES-GAINS> 62
<EXPENSE-OTHER> 15,230
<INCOME-PRETAX> (406)
<INCOME-PRE-EXTRAORDINARY> (406)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (47)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
<YIELD-ACTUAL> 7.45
<LOANS-NON> 1,239
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,272
<CHARGE-OFFS> 76
<RECOVERIES> 18
<ALLOWANCE-CLOSE> 2,273 <F1>
<ALLOWANCE-DOMESTIC> 1,594
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 679 <F2>
<FN>
1. Allowance for loan loss at end of period includes an increase in the
allowance through the provision for loan losses.
2. All unallocated is for domestic loans.
</FN>
</TABLE>
