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As filed with the Securities and Exchange Commission on February 6, 1998
Registration No. 333-43281
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO.1 TO THE
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF HAZLETON
401(k) EMPLOYEE BENEFIT PLAN
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 6036 06-1504091
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer Identification No.)
Incorporation or Organization) Classification Code Number)
</TABLE>
12 E. BROAD STREET
HAZLETON, PENNSYLVANIA 18201
(717) 459-3700
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
E. LEE BEARD
PRESIDENT AND CHIEF EXECUTIVE OFFICER
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF HAZLETON
12 E. BROAD STREET
HAZLETON, PENNSYLVANIA 18201
(717) 459-3700
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
Copies to:
DOUGLAS P. FAUCETTE, ESQUIRE
LAWRENCE M. F. SPACCASI, ESQUIRE
MULDOON, MURPHY & FAUCETTE
5101 WISCONSIN AVENUE, N.W.
WASHINGTON, D.C. 20016
(202) 362-0840
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. / X /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
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<CAPTION>
Proposed Maximum Proposed Maximum Amount of
Title of each Class of Amount to Offering Price Aggregate Offering Registration
Securities to be Registered be Registered Per Unit Price (2) Fee
<S> <C> <C> <C> <C>
Common Stock 6,427,350
$.01 par value(1) Shares $10.00 $64,273,500 (3)
Participation (3) _______ $835,931 (4)
Interests
</TABLE>
(1) Includes shares of Common Stock to be issued to the First Federal
Charitable Foundation, a private foundation.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) The registration fee of $18,961 was previously paid upon the initial
filing of the Form S-1.
(4) In addition, pursuant to Rule 416(c) under the Securities Act, this
registration statement also covers an indeterminate amount of interests to
be offered or sold pursuant to the employee benefit plan described herein.
(5) The securities of Northeast Pennsylvania Financial Corp. to be purchased
by First Federal Savings and Loan Association of Hazleton 401(k) Savings
Plan are included in the amount shown for Common Stock. Accordingly, no
separate fee is required for the participation interests. In accordance
with Rule 457(h) of the Securities Act, as amended, the registration fee
has been calculated on the basis of the number of shares of Common Stock
that may be purchased with the current assets of such Plan.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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[To be used in connection with sales to Participants in the FIRST FEDERAL
SAVINGS AND LOAN ASSOCIATION 401(K) PLAN]
PROSPECTUS SUPPLEMENT
- ---------------------
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
FIRST FEDERAL BANK
PARTICIPATION INTERESTS
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF HAZLETON
401(K) PLAN
This Prospectus Supplement relates to the offer and sale to participants
(the "Participants") in the First Federal Savings and Loan Association of
Hazleton 401(k) Plan (the "Plan") of participation interests and shares of
common stock, par value $.01 per share of Northeast Pennsylvania Financial
Corp. (the "Common Stock"), as set forth herein.
In connection with the proposed conversion of First Federal Savings and
Loan Association of Hazleton from a federally-chartered mutual savings and loan
association to a federally-chartered capital stock savings bank, under the name
First Federal Bank (the "Bank"), and the issuance of the Bank's stock to the
Holding Company and the offer and sale of the Common Stock by the Holding
Company (the "Conversion"), the Plan has been amended to permit the investment
of Plan assets in Common Stock of Northeast Pennsylvania Financial Corp. (the
"Holding Company"). The amended Plan will permits Participants to direct the
trustee of the Plan (the "Trustee") to invest in Common Stock with amounts in
the Plan attributable to such Participants. Such investments in Common Stock
would be made by means of the Northeast Pennsylvania Financial Corp. Stock Fund
(the "Employer Stock Fund"). Based upon the value of the Plan assets at
September 30, 1997, 83,593 shares of Common Stock could be purchased with Plan
assets (assuming a purchase price of $10.00 per share). This Prospectus
Supplement relates to the initial election of Participants to direct that all or
a portion of their accounts be invested in the Employer Stock Fund in connection
with the Conversion and also to elections by Participants to direct that all or
a portion of their accounts be invested in the Employer Stock Fund after the
Conversion.
The prospectus dated , 1998 of the Holding
Company (the "Prospectus"), which is attached to this Prospectus Supplement,
includes detailed information with respect to the Conversion, the Common Stock
and the financial condition, results of operations and business of the Bank.
This Prospectus Supplement, which provides detailed information with respect to
the Plan, should be read only in conjunction with the Prospectus and should be
retained for future reference.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PARTICIPANT, SEE "RISK FACTORS" PAGES ___ TO ____ OF THE PROSPECTUS.
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THE DATE OF THIS PROSPECTUS SUPPLEMENT IS , 1998.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY OTHER STATE
OR FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS SUCH COMMISSION
OR OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT FEDERALLY INSURED OR GUARANTEED, NOR ARE THE SHARES OF
COMMON STOCK GUARANTEED BY THE COMPANY OR THE BANK. THE ENTIRE AMOUNT OF A
PURCHASER'S PRINCIPAL IS SUBJECT TO LOSS.
No person has been authorized to give any information or to make any
representations other than those contained in the Prospectus or this Prospectus
Supplement, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Bank or the Plan. This
Prospectus Supplement does not constitute an offer to sell or solicitation of
an offer to buy any securities in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction. Neither the
delivery of this Prospectus Supplement and the Prospectus nor any sale made
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Bank or the Plan since the date hereof, or
that the information herein contained or incorporated by reference is correct
as of any time subsequent to the date hereof.
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TABLE OF CONTENTS
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THE OFFERING 1
Securities Offered 1
Election to Purchase Common Stock in the Conversion 1
Value of Participation Interests 1
Method of Directing Transfer 2
Time for Directing Transfer 2
Irrevocability of Transfer Direction 2
Direction to Purchase Common Stock After the Conversion 2
Purchase Price of Common Stock 2
Nature of a Participant's Interest in the Common Stock 3
Voting and Tender Rights of Common Stock 3
DESCRIPTION OF THE PLAN 3
Introduction 3
Eligibility and Participation 4
Contributions Under the Plan 5
Limitations on Contributions 5
Investment of Contributions 7
Benefits Under the Plan 10
Withdrawals and Distributions From the Plan 10
Administration of the Plan 11
Reports to Plan Participants 11
Plan Administrator 11
Amendment and Termination 12
Merger, Consolidation or Transfer 12
Federal Income Tax Consequences 12
ERISA and Other Qualification 14
Restrictions on Resale 15
SEC Reporting and Short-Swing Profit Liability 15
EXPERTS 16
LEGAL OPINIONS 16
TRANSFER FORM
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THE OFFERING
SECURITIES OFFERED
The securities offered hereby are participation interests in the Plan. Up
to 83,593 shares (assuming the actual purchase price is $10.00 per share) of
Common Stock may be acquired by the Plan to be held in the Employer Stock Fund.
The Holding Company is the issuer of the Common Stock. Employees of the Bank
(hereinafter referred to as the "Employer") who have attained age 21 and
completed six months of service with the Employer, other than employees paid on
an hourly basis, may participate in the Plan. The Common Stock to be issued
hereby is conditioned on the consummation of the Conversion. A Participant's
investment in units in the Employer Stock Fund in the Conversion is subject to
the priority set forth in the Plan of Conversion.
Information with regard to the Plan is contained in this Prospectus
Supplement and information with regard to the Conversion and the financial
condition, results of operations and business of the Bank is contained in the
attached Prospectus. The address of the principal executive office of the Bank
is 12 East Broad Street, Hazleton, Pennsylvania 18201. The Bank's telephone
number is (717) 459-3700.
ELECTION TO PURCHASE COMMON STOCK IN THE CONVERSION
In connection with the Conversion, the Plan has been amended to permit each
Participant to direct that all or part of the funds which represent his or her
beneficial interest in the assets of the Plan may be transferred to an
investment fund that will invest in Common Stock (the "Employer Stock Fund")
and, to the extent shares are available, to use such funds to purchase Common
Stock issued in connection with the Conversion, and to purchase Common Stock in
the open market. If there is not enough Common Stock in the Conversion to fill
all subscriptions, the Common Stock would be apportioned and the Plan may not be
able to purchase all of the Common Stock requested by the Participants. In such
case, the Trustee will purchase shares in the open market after the Conversion
to fulfill Participants' requests. Such purchases may be at prices higher than
the purchase price in the Conversion. The ability of each Participant to invest
in the Employer Stock Fund in the Conversion pursuant to directions to transfer
all or a portion of their beneficial assets in the Plan will be based on such
Participant's status as an Eligible Account Holder or Supplemental Eligible
Account Holder pursuant to the Plan of Conversion, the subscription priorities
set forth in the Plan of Conversion and the availability of Common Stock. The
Trustee of the Plan will follow the Participants' directions.
VALUE OF PARTICIPATION INTERESTS
The market value of the assets of the Plan, as of September 30, 1997, was
$835,931 and each Participant was informed of the value of his or her
beneficial interest in the Plan. This value represented the past contributions
to the Plan by the Employers and the Participants and any earnings or losses
thereon, less previous withdrawals.
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METHOD OF DIRECTING TRANSFER
The last page of this Prospectus Supplement is a form to direct a transfer
to the Employer Stock Fund (the "Transfer Form"). If a Participant wishes to
transfer all or part of his or her beneficial interest in the assets of the Plan
to the Employer Stock Fund being established in connection with the Conversion,
he or she should indicate that decision in Part 2 of the Transfer Form. If a
Participant does not wish to make such an election, he or she does not need to
take any action.
TIME FOR DIRECTING TRANSFER
The deadline for submitting a direction to transfer amounts to the Employer
Stock Fund which will purchase Common Stock issued in connection with the
Conversion is ten days prior to ____________________(the "Expiration Date") of
the Offering. The Transfer Form should be returned to the Bank's Human
Resources Department by _:__ p.m. on such date.
IRREVOCABILITY OF TRANSFER DIRECTION
A Participant's direction to transfer amounts credited to such
Participant's account in the Plan to the Employer Stock Fund in connection
with the Conversion shall be irrevocable. Participants, however, will be able
to direct the investment of their accounts ("Accounts") after the Conversion
under the Plan as explained below.
DIRECTION TO PURCHASE COMMON STOCK AFTER THE CONVERSION
After the Conversion, a Participant shall be able to direct that a
percentage (in multiples of not less then 1%) of the net value of such
Participant's interests in the trust fund established for the Plan (the "Trust
Fund") be transferred to the Employer Stock Fund and invested in Common Stock,
or to the other investment funds available under the Plan. Alternatively, a
Participant may direct that a percentage (in multiples of not less then 1%) of
such Participant's interest in the Employer Stock Fund be transferred to the
Trust Fund to be invested in accordance with the terms of the Plan. Participants
will be permitted to direct that future contributions made to the Plan by or on
their behalf will be invested in Common Stock. Following the initial election,
the allocation of a Participant's interest in the Employer Stock Fund may be
changed on a daily basis. In order to change investment directions,
Participants can request a Change of Investment Allocation Form from the Plan
Administrator or utilize the Voice Response Unit telephone system. Changes made
by use of the Change of Investment Allocation Form are processed on the day in
which the form is received by Pentegra Services Inc. Special restrictions apply
to transfers directed by those Participants who are officers, directors and
principal shareholders of the Bank who are subject to the provisions of Section
16(b) of the Securities Exchange Act of 1934, as amended (the "1934 Act").
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PURCHASE PRICE OF COMMON STOCK
The funds transferred to the Employer Stock Fund for the purchase of
Common Stock in connection with the Conversion will be used by the Trustee to
purchase shares of Common Stock. The price to be paid by the Trust Fund for
such shares of Common Stock will be the same price as is paid by all persons
who purchase shares of Common Stock in the Conversion.
Common Stock purchased by the Trustee after the Conversion will be
acquired in open market transactions. The prices paid by the Trustee for
shares of Common Stock will not exceed "adequate consideration" as defined in
Section 3(18) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA").
NATURE OF A PARTICIPANT'S INTEREST IN THE COMMON STOCK
The Common Stock will be held in the name of the Trustee for the Plan, as
trustee. Each Participant has an allocable interest in the investment funds of
the Plan but not in any particular assets of the Plan. Accordingly, a specific
number of shares of Common Stock will not be directly attributable to the
account of any Participant. Earnings, e.g., gains and losses, are allocated to
the Account of a Participant based on units in the Employer Stock Fund held by
the Participants. Therefore, earnings with respect to a Participant's Account
should not be affected by the investment designations (including investments in
Common Stock) of other Participants.
VOTING AND TENDER RIGHTS OF COMMON STOCK
The Trustee generally will exercise voting and tender rights attributable
to all Common Stock held by the Trust Fund as directed by Participants with
interests in the Employer Stock Fund. With respect to each matter as to which
holders of Common Stock have a right to vote, each Participant will be
allocated a number of voting instruction rights reflecting such Participant's
proportionate interest in the Employer Stock Fund. The number of shares of
Common Stock held in the Employer Stock Fund that are voted in the affirmative
and negative on each matter shall be proportionate to the number of voting
instruction rights exercised in the affirmative and negative, respectively. In
the event of a tender offer for Common Stock, the Plan provides that each
Participant will be allotted a number of tender instruction rights reflecting
such Participant's proportionate interest in the Employer Stock Fund. The
percentage of shares of Common Stock held in the Employer Stock Fund that will
be tendered will be the same as the percentage of the total number of tender
instruction rights that are exercised in favor of tendering. The remaining
shares of Common Stock held in the Employer Stock Fund will not be tendered.
The Plan makes provision for Participants to exercise their voting instruction
rights and tender instruction rights on a confidential basis.
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DESCRIPTION OF THE PLAN
I. INTRODUCTION
The Plan was established effective January 1, 1994, as the First Federal
Savings and Loan Association of Hazleton 401(k) Plan. The Plan is a cash or
deferred arrangement established in accordance with the requirements under
Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986 (the
"Code"). The Plan was amended effective February 1, 1998 to provide for the
investment in Common Stock. The amended Plan will be submitted to the Internal
Revenue Service (the "IRS") in a timely manner for a determination that the
Plan, as amended, is qualified under Section 401(a) of the Code, and that its
related trust(s) are qualified under Section 501(a) of the Code.
The Bank intends that the Plan, in operation, will comply with the
requirements under Section 401(a) and Section 401(k) of the Code. The Bank
will adopt any amendments to the Plan that may be necessary to ensure the
qualified status of the Plan under the Code and applicable Treasury
Regulations.
Employee Retirement Income Security Act. The Plan is an "individual
account plan" other than a "money purchase pension plan" within the meaning of
ERISA. As such, the Plan is subject to all of the provisions of Title I
(Protection of Employee Benefit Rights) and Title II (Amendments to the
Internal Revenue Code Relating to Retirement Plans) of ERISA, except the
funding requirements contained in Part 3 of Title I of ERISA which by their
terms do not apply to an individual account plan (other than a money purchase
pension plan). The Plan is not subject to Title IV (Plan Termination
Insurance) of ERISA. Neither the funding requirements contained in Part 3 of
Title I of ERISA nor the plan termination insurance provisions contained in
Title IV of ERISA will be extended to Participants (as defined below) or
beneficiaries under the Plan.
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL
RESTRICTIONS ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR
HIS BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF EMPLOYMENT
WITH THE BANK. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON
WITHDRAWALS MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59-1/2,
REGARDLESS OF WHETHER SUCH A WITHDRAWAL OCCURS DURING HIS EMPLOYMENT WITH THE
BANK OR AFTER TERMINATION OF EMPLOYMENT.
Reference to Full Text of Plan. The following statements are summaries of
certain provisions of the Plan. They are not complete and are qualified in
their entirety by the full text of the Plan. Copies of the Plan are available
to all employees by filing a request with the Plan Administrator, Patricia
Purvis, First Federal Bank, 12 East Broad Street, Hazleton, Pennsylvania
18201. The Plan Administrator's telephone number is (717) 459-3700. Each
employee is urged to read carefully the full text of the Plan.
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II. ELIGIBILITY AND PARTICIPATION
Employees, other than employees paid on an hourly basis, are eligible to
participate in the Plan on the first day of the month following completion of
six months of continuous full-time employment (during which at least 500 hours
of service have been completed) and the attainment of age 21. In order to
commence participation, an employee must submit an enrollment form and
beneficiary designation form to the Plan Administrator at least 30 days prior to
the date he or she desires to enter the Plan. A Participant may elect to
commence salary reductions pre-tax elective deferrals as of the first day of
each month. A Participant may modify the amount of pre-tax elective deferrals
one time per calendar quarter.
As of September 30, 1997, there were approximately 112 employees eligible
to participate in the Plan, and 101 employees had elected to participate in the
Plan.
III. CONTRIBUTIONS UNDER THE PLAN
401(k) Plan Contributions. Subject to certain limitations on
contributions, each Participant in the Plan is permitted to elect to reduce such
Participant's Compensation (as defined below) pursuant to a "Salary Reduction
Arrangement" by an amount not more than 15% and have that amount contributed to
the Plan on such Participant's behalf. Such amounts are credited to the
Participant's "Elective Contribution Account." See "Section IV Limitations on
Contributions" below. For purposes of the Plan, "Compensation" means total
taxable compensation as reported on Form W-2 (exclusive of any compensation
deferred from a prior year). Compensation shall also include compensation which
is not currently includible in the Participant's gross income by reason of the
application of Code Sections 125, 402(e)(3), 402(h) or 457. As of January 1,
1998, the annual compensation of each Participant taken into account under the
Plan is limited to $160,000 (adjusted for increases in the cost of living as
permitted by the Code). Generally, a Participant may elect to modify the amount
contributed to the Plan under such participant's Salary Reduction Arrangement
not more often than once in any calendar quarter by providing notice to the Plan
Administrator. However, special restrictions apply to persons subject to
Section 16 of the 1934 Act. Pre-tax elective contributions are transferred by
the Employer to the Trustee of the Plan.
Notwithstanding the preceding, a Participant who receives a hardship
distribution under the terms of the Plan may not be eligible to make additional
contributions under a Compensation Reduction Agreement or have matching
contributions made on his behalf for a period of twelve (12) months after the
receipt of the hardship distribution.
Employer Contributions. The Employer currently contributes a discretionary
match to the Plan for each Plan Year equal to 100% of the Participant's first 2%
of pre-tax elective contributions and 50% of any additional percentage up to 4%
of Compensation deferred by the Participant for the Plan Year. Such amounts are
credited to the Participant's "Matching Contribution Account." After the
Conversion, at the discretion of the Bank, the Employer contributions may be
credited to the Participant's Account in the First Federal Bank Employee Stock
Ownership Plan.
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IV. LIMITATIONS ON CONTRIBUTIONS
Limitations on Annual Additions and Benefits. Pursuant to the
requirements of the Code, the Plan provides that the amount of contributions
allocated to each Participant's Elective Contribution Account and Matching
Contribution Account during any Plan Year may not exceed the lesser of 25% of
the Participant's Section 415 Compensation for the Plan Year or $30,000
(adjusted for increases in the cost of living as permitted by the Code). A
Participant's Section 415 Compensation is a Participant's Compensation,
excluding any Employer contribution to the Plan or to any other plan of
deferred compensation or any distributions from a plan of deferred
compensation. In addition, annual additions shall be limited to the extent
necessary to prevent the limitations set forth in the Code for all of the
qualified defined benefit plans and defined contribution plans maintained by
the Bank from being exceeded. To the extent that these limitations would be
exceeded by reason of excess annual additions with respect to a Participant,
such excess will be disposed of as follows:
(i) Any excess amount in the Participant's Account will be used to reduce
the Employer's contributions for such Participant in the next Limitation Year,
and each succeeding Limitation Year if necessary;
(ii) If, an excess amount still exists, and the Participant is not covered
by the Plan at the end of the Limitation Year, the excess amount will be held
unallocated in a suspense account which will then be applied to reduce future
Employer contributions for all remaining Participants in the next Limitation
Year, and each succeeding Limitation Year if necessary;
(iii) If a suspense account is in existence at any time during the
Limitation Year, it will not participate in the allocation of investment gains
and losses.
Limitation on 401(k) Plan Contributions. The annual amount of deferred
Compensation under a Salary Reduction Arrangement of a Participant (when
aggregated with any elective deferrals of the Participant under a simplified
employee pension plan or a tax-deferred annuity) may not exceed $7,000 adjusted
for increases in the cost of living as permitted by the Code (the limitation
for 1998 is $10,000). Contributions in excess of this limitation ("excess
deferrals") will be included in the Participant's gross income for federal
income tax purposes in the year they are made. In addition, any such excess
deferral will again be subject to federal income tax when distributed by the
Plan to the Participant, unless the excess deferral (together with any income
allocable thereto) is distributed to the Participant not later than the first
April 15th following the close of the taxable year in which the excess deferral
is made. Any income on the excess deferral that is distributed not later than
such date shall be treated, for federal income tax purposes, as earned and
received by the Participant in the taxable year in which the excess deferral is
made.
Limitation on Plan Contributions for Highly Compensated Employees.
Sections 401(k) and 401(m) of the Code limit the amount of deferred
compensation that may be made to the Plan in any Plan Year on behalf of Highly
Compensated Employees (defined below) in relation to the amount of deferred
compensation made by or on behalf of all other employees eligible to
participate in the Plan. Specifically, the actual deferral percentage (i.e.,
the average of the ratios, calculated separately
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for each eligible employee in each group, by dividing the amount of deferred
compensation credited to the Elective Contribution Account of such eligible
employee by such eligible employee's compensation for the Plan Year) of the
Highly Compensated Employees may not exceed the greater of (i) 125% of the
actual deferral percentage of all other eligible employees, or (ii) the lesser
of (x) 200% of the actual deferral percentage of all other eligible employees,
or (y) the actual deferral percentage of all other eligible employees plus two
percentage points. In addition, the actual contribution percentage for such
Plan Years (i.e., the average of the ratios calculated separately for each
eligible employee in each group, by dividing the amount of voluntary employee
and employer matching contributions credited to the Matching Contribution
Account of such eligible employee by such eligible employee's compensation for
the Plan Year) of the Highly Compensated Employees may not exceed the greater
of (i) 125% of the actual contribution percentage of all other eligible
employees, or (ii) the lesser of (x) 200% of the actual contribution percentage
of all other eligible employees, or (y) the actual contribution percentage of
all other eligible employees plus two percentage points.
In general, a Highly Compensated Employee includes any employee who, (1)
was a five percent owner of the Employer at any time during the year or
preceding year; or (2) had compensation for the preceding year in excess of
$80,000 and, if the Employer so elects, was in the top 20% of employees by
compensation for such year. The dollar amounts in the foregoing sentence are
for 1998. Such amounts are adjusted annually to reflect increases in the cost
of living.
In addition, the compensation of an employee who is a family member of a
5% owner, or one of the ten most highly compensated employees during the
relevant period is aggregated with that of the Highly Compensated Employee.
All such family members are treated as a single employee with respect to the
application of the limitations on Highly Compensated Employees.
In order to prevent the disqualification of the Plan, any amount
contributed by Highly Compensated Employees that exceed the average deferral
limitation in any Plan Year ("excess contributions"), together with any income
allocable thereto, must be distributed to such Highly Compensated Employees
before the close of the following Plan Year. However, the Employer will be
subject to a 10% excise tax on any excess contributions unless such excess
contributions, together with any income allocable thereto, either are
recharacterized or are distributed before the close of the first 2 1/2 months
following the Plan Year to which such excess contributions relate.
Top-Heavy Plan Requirements. If for any Plan Year the Plan is a Top-Heavy
Plan (as defined below), then (i) the Bank may be required to make certain
minimum contributions to the Plan on behalf of non-key employees (as defined
below), and (ii) certain additional restrictions would apply with respect to
the combination of annual additions to the Plan and projected annual benefits
under any defined benefit plan maintained by the Bank.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any Plan
Year if, as of the last day of the preceding Plan Year, the aggregate balance
of the Accounts of Participants who are Key Employees (as defined below)
exceeds 60% of the aggregate balance of the Accounts of all Participants. Key
Employees generally include any employee who, at any time during the Plan Year
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or any of the four preceding Plan Years, is (1) an officer of the Bank having
annual compensation in excess of $60,000 who is in an administrative or
policy-making capacity, (2) one of the ten employees having annual compensation
in excess of $30,000 and owning, directly or indirectly, the largest interests
in the Bank, (3) a 5% owner of the Bank, (i.e., owns directly or indirectly
more than 5% of the stock of the Bank, or stock possessing more than 5% of the
total combined voting power of all stock of the Bank) or (4) a 1% owner of the
Bank having annual compensation in excess of $160,000. The dollar amounts in
the foregoing sentence are for 1998.
V. INVESTMENT OF CONTRIBUTIONS
All amounts credited to Participants' Accounts under the Plan are held in
the Plan Trust (the "Trust") which is administered by the Trustee appointed by
the Bank's Board of Directors.
Prior to [insert date of Prospectus here], the Accounts of a Participant
held in the Trust have been invested by the Trustee at the direction of the
Participant in the following funds:
S&P 500 STOCK FUND. This stock fund invests in the stocks of a broad
array of established U.S. companies. Its objective is long-term: to earn higher
returns by investing in the largest companies in the U.S. economy.
STABLE VALUE FUND. This fund invests primarily in Guaranteed Investment
Contracts ("GICs") and Synthetic Guaranteed Investment Contracts ("SGICs").
These contracts pay a steady rate of interest over a certain period of time
(usually between three and five years). Its objective is short to intermediate
term: to achieve a stable return over short to intermediate periods of time
while preserving the value of your investment.
S&P MIDCAP STOCK FUND. This stock fund invests in the stocks of mid-sized
U.S. companies, which are expected to grow faster than larger, more established
companies. Its objective is long-term; to earn higher returns which reflect
the growth potential of mid-sized companies.
MONEY MARKET FUND. This fund invests in a broad range of high-quality,
short-term instruments issued by banks, corporations and the U.S. Government
and its agencies. These instruments include certificates of deposit and U.S.
Treasury bills. Its objective is short-term: to achieve competitive,
short-term rates of return while preserving the value of your principal.
GOVERNMENT BOND FUND. This bond fund invests in U.S. Treasury bonds with
a maturity of 20 years or more. Its objective is long-term: to earn a higher
level of income along with the potential for capital appreciation.
INTERNATIONAL STOCK FUND. This fund invests in over 1,000 foreign stocks
in 20 countries, based in Europe, Australia, and the Far East. Its objective
is long-term: to offer the potential return of investing in the stocks of
established non-U.S. companies, as well as the potential risk-reduction of
broad diversification.
8
<PAGE> 13
INCOME PLUS ASSET ALLOCATION FUND. This fund diversifies among a broad
range of stable value securities to reduce short-term risk and among a broad
range of large U.S. and international companies to capture growth potential.
The Fund is structured to take advantage of market opportunities with a small
flexible component. Its objective is intermediate-term: to preserve the value
of your investment over short periods of time and to offer some potential for
growth.
GROWTH AND INCOME ASSET ALLOCATION FUND. This fund diversifies among U.S.
and international stocks, U.S. bonds, and stable value investments to pursue
long-term appreciation and short-term stability and takes advantage of market
opportunities with a small flexible component. Its objective is
intermediate-term: to provide a balance between the pursuit of growth and
protection from risk.
GROWTH ASSET ALLOCATION FUND. This fund diversifies among a broad range
of domestic and international stocks and takes advantage of market
opportunities with a large flexible component. Its objective is long-term: to
pursue high growth of your investment over time.
The Plan, as amended effective February 1, 1998, now provides that in
addition to the Funds specified above, a Participant who is employed by the
Bank may direct the Trustee to invest all or a portion of his or her accounts
under the Plan in the Employer Stock Fund.
Participants may elect to have both past and future contributions and
additions to the Participant's Elective Contribution Account invested either in
the Employer Stock Fund or among such other Funds. Participants may make these
elections in writing or by phone. After the Conversion, and at the discretion of
the Bank, the "Matching Contribution" portion of Participants' Accounts may be
invested in Employer Stock under the proposed terms of the First Federal Bank
Employee Stock Ownership Plan being implemented by the Bank. Any amounts
credited to a Participant's Account for which investment directions are not
given will be invested in the Money Market Fund in accordance with the terms of
the Plan.
The Participants interest in the Employer Stock Fund consists of units
whose value is related to a pro rata portion of the net asset value ("NAV") of
the Employer Stock Fund. The NAV is determined daily and all realized and
unrealized gains, dividends, and expenses are used to calculate the NAV. For
purposes of such valuation, all assets of the Trust are valued at their fair
market value.
9
<PAGE> 14
A. Previous Funds.
Prior to , contributions under the Plan were
invested in the Funds listed below. The annual percentage return on these
funds for the prior three years was:
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
---- ---- ----
S&P 500 Stock Fund................... 5.3% 5.9% 3.9%
Stable Value Fund.................... 6.5 6.8 7.1
S&P MidCap Stock Fund................ 18.5 30.1 (3.8)
Money Market Fund.................... 5.3 5.9 3.9
Government Bond Fund................. 1.9 18.1 (3.0)
International Stock Fund............. 10.6 15.0 4.2
Income Plus Asset Allocation Fund.... 8.3 12.9 2.3
Growth & Income Asset Allocation Fund 12.3 20.5 1.6
Growth Asset Allocation Fund......... 18.0 31.4 0.8
</TABLE>
B. The Employer Stock Fund.
The Employer Stock Fund will consist of investments in Common Stock made
on and after the effective date of the Conversion. Each Participant's
proportionate undivided beneficial interest in the Employer Stock Fund is
measured by units. Each day a unit value will be calculated by determining the
market value of the Common Stock actually held and adding to that any cash held
by the Trustee. This total will be divided by the number of units outstanding
to determine the unit value of the Employer Stock Fund.
On the occasion of the payment of a cash dividend, the unit value will be
determined before the dividend is distributed. The Trustee may use the
dividend to purchase additional shares of Common Stock, thereby increasing the
total value of the Employer Stock Fund, and the value of each unit. The Board
of Directors of the Holding Company may consider a policy of paying cash
dividends on the Common Stock in the future; however, no decision as to the
amount or timing of cash dividends, if any, has been made. The Trustee will,
to the extent practicable, use all amounts held by it in the Employer Stock
Fund to purchase shares of Common Stock of the Bank. It is expected that all
purchases will be made at prevailing market prices. Under certain
circumstances, the Trustee may be required to limit the daily volume of shares
purchased. Pending investment in Common Stock, assets held in the Employer
Stock Fund will be placed in bank deposits and other short-term investments.
Any brokerage commissions, transfer fees and other expenses incurred in
the sale and purchase of Common Stock for the Employer Stock Fund will be paid
out of a cash account
10
<PAGE> 15
managed by the trustee. Therefore, although Participants' accounts will not be
directly adjusted for such fees, the market value of their accounts will be
reduced.
As of the date of this Prospectus Supplement, none of the shares of Common
Stock have been issued or are outstanding and there is no established market
for the Common Stock. Accordingly, there is no record of the historical
performance of the Employer Stock Fund. Performance will be dependent upon a
number of factors, including the financial condition and profitability of the
Holding Company and the Bank and market conditions for the Common Stock
generally. See "Market for the Common Stock" in the Prospectus.
INVESTMENTS IN THE EMPLOYER STOCK FUND MAY INVOLVE CERTAIN SPECIAL RISKS
IN INVESTMENTS IN COMMON STOCK OF THE COMPANY. FOR A DISCUSSION OF THESE RISK
FACTORS, SEE "RISK FACTORS" IN THE PROSPECTUS.
VI. BENEFITS UNDER THE PLAN
Vesting. A Participant, at all times, has a fully vested, nonforfeitable
interest in his Basic Contribution Account and the earnings thereon under the
Plan. A Participant vests in his Matching Contribution Account under the Plan
according to the following schedule:
<TABLE>
<S> <C>
PERIOD OF SERVICE VESTED PERCENTAGE
----------------- -----------------
1 year 25
2 years 50
3 years 75
4 years 100
</TABLE>
VII. WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN
Withdrawals Prior to Termination of Employment. Subject to the hardship
distribution rules under the Plan, a Participant may withdraw all or a portion
of his (i) Elective Contribution Account, and (ii) the vested interest in his
or her Matching Contribution Account. The hardship distribution requirements
ensure that Participants have a true financial need before a withdrawal may be
made.
Distribution Upon Retirement, Disability or Termination of Employment.
Payment of benefits to a Participant who retires, incurs a disability, or
otherwise terminates employment generally shall be made in a lump sum cash
payment as soon as administratively feasible after such termination of
employment if the vested value of the Participant's Account is $1,000 or less.
If the vested portion of the Participant's Account balance is greater than
$1,000, the Participant may request a distribution (subject to the minimum
distribution rules) in a lump sum payment: (a) as soon as administratively
possible after termination, (b) as of any valuation date up to 13 months after
termination or (c) as of the date the Participant attains normal retirement age.
At the request of the Participant, the distribution may include an in kind
distribution of Common Stock of the Holding
11
<PAGE> 16
Company equal to the number of shares that can be purchased with the
Participant's balance in the Employer Stock Fund. Benefit payments ordinarily
shall be made not later than 60 days following the end of the Plan Year in which
occurs the latest of the Participant's: (i) termination of employment; (ii) the
attainment of age 65 or (iii) 10th anniversary of commencement of participation
in the Plan; but in no event later than the April 1 following the calendar year
in which the Participant attains age 70 1/2. However, if the vested portion of
the Participant's Account balances exceeds or has ever exceeded $1,000, no
distribution shall be made from the Plan prior to the Participant's attaining
age 65 unless the Participant elects to receive an earlier distribution.
Distribution upon Death. A Participant who dies prior to the benefit
commencement date for retirement, disability or termination of employment, and
who has a surviving spouse shall have his benefits paid to the surviving spouse
in a lump sum as soon as administratively possible following the date of his
death, unless the Participant elected prior to his death or the beneficiary so
elects within 90 days of the Participant's death, to receive such distribution
in a lump sum payment as of any Valuation Date which occurs within one year of
the Participant's death. With respect to an unmarried Participant, and in the
case of a married Participant with spousal consent to the designation of
another beneficiary, payment of benefits to the beneficiary of a deceased
Participant shall be made in the form of a lump-sum payment in cash or in
Common Stock in the same manner described above as to a Participant with a
surviving spouse.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations
order (as defined in the Code), benefits payable under the Plan shall not be
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, charge, garnishment, execution, or levy of any kind,
either voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any rights
to benefits payable under the Plan shall be void.
ADMINISTRATION OF THE PLAN
The Trustees with respect to the Plan are the named fiduciaries of the
Plan for purposes of Section 402 of ERISA.
Trustees. The Trustees are appointed by the Board of Directors of the Bank
to serve at its pleasure. The current Trustees of the Plan with respect to the
Employer Stock Fund are Gary Gatski, Patricia Purvis and Patrick Owens, Jr. The
Trustee with respect to the investment funds other than the Employer Stock Fund
is The Bank of New York. Effective 30 days after the Conversion, it is expected
that The Bank of New York will also be the Trustee with respect to the Employer
Stock Fund.
The Trustee receives, holds and invests the contributions to the Plan in
trust and distributes them to Participants and beneficiaries in accordance with
the terms of the Plan and the directions of the Plan Administrator. The
Trustees is responsible for investment of the assets of the Trust.
12
<PAGE> 17
REPORTS TO PLAN PARTICIPANTS
The Plan Administrator will furnish to each Participant a statement
showing (i) the balance in the Participant's Account as of the end of that
period, (ii) the amount of contributions allocated to such participant's
Account for that period, and (iii) the adjustments to such participant's
Account to reflect earnings or losses (if any).
PLAN ADMINISTRATOR
Pursuant to the terms of the Plan, the Plan is administered by one or more
persons who are appointed by and who serve at the pleasure of the Bank.
Currently, the Plan Administrator is Patricia Purvis, of the Bank. The address
of the Plan Administrator is c/o 12 East Broad Street, Hazleton, Pennsylvania
and telephone number is (717) 459-3700. The Plan Administrator is responsible
for the administration of the Plan, interpretation of the provisions of the
Plan, prescribing procedures for filing applications for benefits, preparation
and distribution of information explaining the Plan, maintenance of Plan
records, books of account and all other data necessary for the proper
administration of the Plan, and preparation and filing of all returns and
reports relating to the Plan which are required to be filed with the U.S.
Department of Labor and the IRS, and for all disclosures required to be made to
Participants, Beneficiaries and others under Sections 104 and 105 of ERISA.
AMENDMENT AND TERMINATION
It is the intention of the Bank to continue the Plan indefinitely.
Nevertheless, the Bank may terminate the Plan at any time. If the Plan is
terminated in whole or in part, then regardless of other provisions in the
Plan, each employee affected by such termination shall have a fully vested
interest in his Accounts. The Bank reserves the right to make, from time to
time, any amendment or amendments to the Plan which do not cause any part of
the Trust to be used for, or diverted to, any purpose other than the exclusive
benefit of Participants or their beneficiaries; provided, however, that the
Bank may make any amendment it determines necessary or desirable, with or
without retroactive effect, to comply with ERISA.
MERGER, CONSOLIDATION OR TRANSFER
In the event of the merger or consolidation of the Plan with another plan,
or the transfer of the Trust assets to another plan, the Plan requires that
each Participant would (if either the Plan or the other plan then terminated)
receive a benefit immediately after the merger, consolidation or transfer which
is equal to or greater than the benefit he would have been entitled to receive
immediately before the merger, consolidation or transfer (if the Plan had then
terminated).
FEDERAL INCOME TAX CONSEQUENCES
The following is only a brief summary of certain federal income tax
aspects of the Plan which are of general application under the Code and is not
intended to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from
13
<PAGE> 18
the Plan. The summary is necessarily general in nature and does not purport to
be complete. Moreover, statutory provisions are subject to change, as are
their interpretations, and their application may vary in individual
circumstances. Finally, the consequences under applicable state and local
income tax laws may not be the same as under the federal income tax laws.
PARTICIPANTS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO ANY
DISTRIBUTION FROM THE PLAN AND TRANSACTIONS INVOLVING THE PLAN.
The Plan will be submitted to the IRS in a timely manner for a
determination that it is qualified under Section 401(a) and 401(k) of the Code,
and that the related Trust is exempt from tax under Section 501(a) of the Code.
A plan that is "qualified" under these sections of the Code is afforded
special tax treatment which include the following: (1) The sponsoring employer
is allowed an immediate tax deduction for the amount contributed to the Plan
each year; (2) Participants pay no current income tax on amounts contributed by
the employer on their behalf; and (3) earnings of the plan are tax-deferred
thereby permitting the tax-free accumulation of income and gains on
investments. The Plan will be administered to comply in operation with the
requirements of the Code as of the applicable effective date of any change in
the law. The Bank expects to timely adopt any amendments to the Plan that may
be necessary to maintain the qualified status of the Plan under the Code.
Following such an amendment, the Bank will submit the Plan to the IRS for a
determination that the Plan, as amended, continues to qualify under Sections
401(a) and 501(a) of the Code and that it continues to satisfy the requirements
for a qualified cash or deferred arrangement under Section 401(k) of the Code.
Should the Plan receive from the IRS an adverse determination letter regarding
its tax exempt status, all participants would generally recognize income equal
to their vested interest in the Plan, the participants would not be permitted
to transfer amounts distributed from the Plan to an IRA or to another qualified
retirement plan, and the Bank may be denied certain deductions taken with
respect to the Plan.
Lump Sum Distribution. A distribution from the Plan to a Participant or
the beneficiary of a Participant will qualify as a Lump Sum Distribution if it
is made: (i) within one taxable year of the Participant or beneficiary; (ii)
on account of the Participant's death, disability or separation from service,
or after the Participant attains age 59 1/2; and (iii) consists of the balance
to the credit of the Participant under this Plan and all other profit sharing
plans, if any, maintained by the Bank. The portion of any Lump Sum
Distribution that is required to be included in the Participant's or
beneficiary's taxable income for federal income tax purposes (the "total
taxable amount") consists of the entire amount of such Lump Sum Distribution
less the amount of after-tax contributions, if any, made by the Participant to
any other profit sharing plans maintained by the Bank which is included in such
distribution.
Averaging Rules. The portion of the total taxable amount of a Lump Sum
Distribution that is attributable to participation after 1973 in this Plan or
in any other profit-sharing plan maintained by the Bank (the "ordinary income
portion") will be taxable generally as ordinary income for federal income tax
purposes. However, a Participant who has completed at least five years of
participation in this Plan before the taxable year in which the distribution is
made, or a beneficiary who receives a Lump Sum Distribution on account of the
Participant's death (regardless of the period of the Participant's
participation in this Plan or any other profit-sharing plan maintained by the
Employers),
14
<PAGE> 19
may elect to have the ordinary income portion of such Lump Sum Distribution
taxed according to a special averaging rule ("five-year averaging"). The
election of the special averaging rules may apply only to one Lump Sum
Distribution received by the Participant or beneficiary, provided such amount
is received on or after the Participant turns 59-1/2 and the recipient elects
to have any other Lump Sum Distribution from a qualified plan received in the
same taxable year taxed under the special averaging rule. Under a special
grandfather rule, individuals who turned 50 by 1986 may elect to have their
Lump Sum Distribution taxed under either the five-year averaging rule or under
the prior law ten-year averaging rule. Such individuals also may elect to have
that portion of the Lump Sum Distribution attributable to the participant's
pre-1974 participation in the Plan taxed at a flat 20% rate as gain from the
sale of a capital asset.
Common Stock Included in Lump Sum Distribution. If a Lump Sum
Distribution includes Common Stock, the distribution generally will be taxed in
the manner described above, except that the total taxable amount will be
reduced by the amount of any net unrealized appreciation with respect to such
Common Stock, i.e., the excess of the value of such Common Stock at the time of
the distribution over its cost or other basis of the securities to the Trust.
The tax basis of such Common Stock to the Participant or beneficiary for
purposes of computing gain or loss on its subsequent sale will be the value of
the Common Stock at the time of distribution less the amount of net unrealized
appreciation. Any gain on a subsequent sale or other taxable disposition of
such Common Stock, to the extent of the amount of net unrealized appreciation
at the time of distribution, will be considered long-term capital gain
regardless of the holding period of such Common Stock. Any gain on a
subsequent sale or other taxable disposition of the Common Stock in excess of
the amount of net unrealized appreciation at the time of distribution will be
considered either short-term, medium term or long-term capital gain depending
upon the length of the holding period of the Common Stock. The recipient of a
distribution may elect to include the amount of any net unrealized appreciation
in the total taxable amount of such distribution to the extent allowed by the
regulations to be issued by the IRS.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan
or to an IRA. Pursuant to a change in the law, effective January 1, 1993,
virtually all distributions from the Plan may be rolled over to another
qualified Plan or to an individual retirement account ("IRA") without regard to
whether the distribution is a Lump Sum Distribution or a Partial Distribution.
Effective January 1, 1993, Participants have the right to elect to have the
Trustee transfer all or any portion of an "eligible rollover distribution"
directly to another plan qualified under Section 401(a) of the Code or to an
IRA. If the Participant does not elect to have an "eligible rollover
distribution" transferred directly to another qualified plan or to an IRA, the
distribution will be subject to an mandatory federal withholding tax equal to
20% of the taxable distribution. An "eligible rollover distribution" means any
amount distributed from the Plan except: (1) a distribution that is (a) one of
a series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the Participant or the
joint lines of the Participant and his or her designated beneficiary, or (b)
for a specified period of ten years or more; (2) any amount that is required
to be distributed under the minimum distribution rules; and (3) any other
distributions excepted under applicable federal law. The tax law change
described above did not modify the special tax treatment of Lump Sum
Distributions, that are not rolled over or transferred i.e., forward
15
<PAGE> 20
averaging, capital gains tax treatment and the nonrecognition of net unrealized
appreciation, discussed earlier.
ERISA AND OTHER QUALIFICATION
As noted above, the Plan is subject to certain provisions of ERISA and
will be submitted to the IRS for a determination that it is qualified under
Section 401(a) of the Code.
THE FOREGOING IS ONLY A BRIEF SUMMARY OF CERTAIN FEDERAL INCOME TAX
ASPECTS OF THE PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND IS NOT
INTENDED TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME TAX
CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN.
ACCORDINGLY, EACH PARTICIPANT IS URGED TO CONSULT A TAX ADVISOR CONCERNING THE
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND RECEIVING
DISTRIBUTIONS FROM THE PLAN.
RESTRICTIONS ON RESALE
Any person receiving a distribution of shares of Common Stock under the
Plan who is an "affiliate" of the Bank as the term "affiliate" is used in Rules
144 and 405 under the Securities Act of 1933, as amended (the "Securities Act")
(e.g., directors, officers and substantial shareholders of the Bank) may reoffer
or resell such shares only pursuant to a registration statement filed under the
Securities Act. Assuming the availability thereof, pursuant to Rule 144 or some
other exemption of the registration requirements of the Securities Act any
person who may be an "affiliate" of the Bank may wish to consult with counsel
before transferring any Common Stock owned by him. In addition, Participants
are advised to consult with counsel as to the applicability of Section 16 of the
1934 Act which may restrict the sale of Common Stock where acquired under the
Plan, or other sales of Common Stock.
Persons who are not deemed to be "affiliates" of the Bank at the time of
resale will be free to resell any shares of Common Stock to them under the
Plan, either publicly or privately, without regard to the Registration and
Prospectus delivery requirements of the Securities Act or compliance with the
restrictions and conditions contained in the exemptive rules thereunder. An
"affiliate" of the Bank is someone who directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under common control,
with the Bank. Normally, a director, principal officer or major shareholder of
a corporation may be deemed to be an "affiliate" of that corporation. A person
who may be deemed an "affiliate" of the Bank at the time of a proposed resale
will be permitted to make public resales of the Bank's Common Stock only
pursuant to a "reoffer" Prospectus or in accordance with the restrictions and
conditions contained in Rule 144 under the Securities Act or some other
exemption from registration, and will not be permitted to use this Prospectus
in connection with any such resale. In general, the amount of the Bank's
Common Stock which any such affiliate may publicly resell pursuant to Rule 144
in any three-month period may not exceed the greater of one percent of the
Bank's Common Stock then outstanding or the average weekly trading volume
reported on the National Association of Securities Dealers Automated Quotation
System during the four calendar weeks prior to the sale. Such sales may be
made only
16
<PAGE> 21
through brokers without solicitation and only at a time when the Bank is
current in filing the reports required of it under the 1934 Act.
SEC REPORTING AND SHORT-SWING PROFIT LIABILITY
Section 16 of the 1934 Act imposes reporting and liability requirements on
officers, directors and persons beneficially owning more than ten percent of
public companies such as the Holding Company. Section 16(a) of the 1934 Act
requires the filing of reports of beneficial ownership. Within ten days of
becoming a person subject to the reporting requirements of Section 16(a), a
Form 3 reporting initial beneficial ownership must be filed with the Securities
and Exchange Commission. Certain changes in beneficial ownership, such as
purchases, sales, gifts and participation in savings and retirement plans must
be reported periodically, either on a Form 4 within ten days after the end of
the month in which a change occurs, or annually on a Form 5 within 45 days
after the close of the Bank's fiscal year. Participation in the Employer Stock
Fund of the Plan by officers, directors and persons beneficially owning more
than ten percent of Common Stock of the Holding Company must be reported to the
SEC annually on a Form 5 by such individuals.
In addition to the reporting requirements described above, Section 16(b)
of the 1934 Act provides for the recovery by the Holding Company of profits
realized by any officer, director or any person beneficially owning more than
ten percent of the Holding Company's Common Stock ("Section 16(b) Persons")
resulting from the purchase and sale or sale and purchase of the Holding
Company's Common Stock within any six-month period.
The SEC has adopted rules that provide exemption from the profit recovery
provisions of Section 16(b) for participant-directed employer security
transactions within an employee benefit plan, such as the Plan, provided
certain requirements are met. These requirements generally involve
restrictions upon the timing of elections to acquire or dispose of employer
securities for the accounts of Section 16(b) Persons.
Except for distributions of Common Stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order, Section 16(b) Persons are required to hold shares of Common Stock
distributed from the Plan for six months following such distribution.
EXPERTS
The financial statements and schedules of the Plan as of December 31, 1996
and 1995 and for the years then ended have been included herein in reliance
upon the report of Parente, Randolph, Orlando, Carey & Associates, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in auditing and accounting.
17
<PAGE> 22
LEGAL OPINIONS
The validity of the issuance of the Common Stock will be passed upon by
Muldoon, Murphy & Faucette, Washington, D.C., which firm acted as special
counsel for the Bank in connection with the Bank's Conversion from a mutual
savings bank to a stock based organization.
18
<PAGE> 23
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1995
AND
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
AND
SUPPLEMENTAL SCHEDULES
<PAGE> 24
TABLE OF CONTENTS
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS:
Statement of Net Assets Available for Benefits,
With Fund Information F3-F6
Statement of Changes in Net Assets Available
for Benefits, With Fund Information F7-F10
Notes to Financial Statements F11-F15
SUPPLEMENTAL SCHEDULES:
Item 27a - Schedule of Assets Held for Investment Purposes F-16
Item 27d - Schedule of Reportable Transactions F-17
F-1
<PAGE> 25
[PARENTE-RANDOLPH-ORLANDO-
CAREY & ASSOCIATES - LOGO]
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
First Federal Savings & Loan Association
of Hazleton 401(k) Plan:
We were engaged to audit the financial statements and supplemental
schedules of First Federal Savings & Loan Association of Hazleton 401(k) Plan as
of December 31, 1996 and 1995, and for the years then ended, as listed in the
accompanying table of contents. These financial statements and schedules are the
responsibility of the Plan's management.
As permitted by 29 CFR 2520.103-8 of the Department of Labor's Rules and
Regulations for Reporting and Disclosure under the Employee Retirement Income
Security Act of 1974, the plan administrator instructed us not to perform, and
we did not perform, any auditing procedures with respect to the information
discussed in Note 2, which was certified by Lincoln National Life Insurance Co.
the custodian of the Plan, except for comparing such information with the
related information included in the financial statements and supplemental
schedules. We have been informed by the plan administrator that the custodian
holds the Plan's investment assets and executes investment transactions. The
plan administrator has obtained a certification from the custodian as of and for
the years ended December 31, 1996 and 1995, that the information provided to the
plan administrator by the custodian is complete and accurate.
Because of the significance of the information that we did not audit, we
are unable to, and do not, express an opinion on the accompanying financial
statements and schedules taken as a whole. The form and content of the
information included in the financial statements and schedules, other than that
derived from the information certified by the custodian, have been audited by us
in accordance with generally accepted auditing standards and, in our opinion,
are presented in compliance with the Department of Labor's Rules and Regulations
for Reporting and Disclosure under the Employee Retirement Income Security Act
of 1974.
Parente, Randolph, Orlando, Carey
& Associates
Hazleton, Pennsylvania
August 29, 1997
F-2
<PAGE> 26
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS,
WITH FUND INFORMATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
GOVERNMENT/
GOVERNMENT CORPORATE HIGH YIELD VALUE CORE
GUARANTEED SHORT-TERM BOND BOND BOND EQUITY EQUITY
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
---------- ---------- ---------- --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments:
Guaranteed Account $64,977
Short-Term Account $1,734
Government Bond Account $25,961
Government/Corporate Bond Account $10,559
High Yield Bond Account $6,618
Value Equity Account $2,003
Core Equity Account $162,547
Large Capitalization Equity Account
Medium Capitalization Equity Account
Small Capitalization Equity Account
International Equity Account
Delaware Global Bond Account
Balanced Equity Account
Conservative Balanced Account
Aggressive Balanced Account
Fidelity Asset Manager Account
Janus Account
Fidelity Contrafund Account
Strong Discovery Account
T. Rowe Price International Equity Account
------ ----- ------ ------ ----- ----- -------
Total assets 64,977 1,734 25,961 10,559 6,618 2,003 162,547
LIABILITIES -- -- -- -- -- -- --
------ ----- ------ ------ ----- ----- -------
NET ASSETS AVAILABLE FOR BENEFITS $64,977 $1,734 $25,961 $10,559 $6,618 $2,003 $162,547
======= ====== ======= ======= ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
LARGE MEDIUM SMALL DELAWARE
CAPITALIZATION CAPITALIZATION CAPITALIZATION INTERNATIONAL GLOBAL
EQUITY EQUITY EQUITY EQUITY BOND
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
-------------- -------------- -------------- ------------- -------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments:
Guaranteed Account
Short-Term Account
Government Bond Account
Government/Corporate Bond Account
High Yield Bond Account
Value Equity Account
Core Equity Account
Large Capitalization Equity Account $149,865
Medium Capitalization Equity Account $12,530
Small Capitalization Equity Account $2,123
International Equity Account $9,250
Delaware Global Bond Account $39
Balanced Equity Account
Conservative Balanced Account
Aggressive Balanced Account
Fidelity Asset Manager Account
Janus Account
Fidelity Contrafund Account
Strong Discovery Account
T. Rowe Price International Equity Account
------- ------ ----- ----- ---
Total assets 149,865 12,530 2,123 9,250 39
LIABILITIES -- -- -- -- --
------- ------ ----- ----- ---
NET ASSETS AVAILABLE FOR BENEFITS $149,865 $12,530 $2,123 $9,250 $39
======== ======= ====== ====== ===
</TABLE>
F-3
<PAGE> 27
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS,
WITH FUND INFORMATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
FIDELITY
BALANCED CONSERVATIVE AGGRESSIVE ASSET FIDELITY
EQUITY BALANCED BALANCED MANAGER JANUS CONTRAFUND
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments:
Guaranteed Account
Short-Term Account
Government Bond Account
Government/Corporate Bond Account
High Yield Bond Account
Value Equity Account
Core Equity Account
Large Capitalization Equity Account
Medium Capitalization Equity Account
Small Capitalization Equity Account
International Equity Account
Delaware Global Bond Account
Balanced Equity Account $93,817
Conservative Balanced Account $5,866
Aggressive Balanced Account $2,476
Fidelity Asset Manager Account $8,149
Janus Account $31,917
Fidelity Contrafund Account $7,137
Strong Discovery Account
T. Rowe Price International Equity Account
------- ------ ------ ------ ------- ------
Total assets 93,817 5,866 2,476 8,149 31,917 7,137
LIABILITIES -- -- -- -- -- --
------- ------ ------ ------ ------- ------
NET ASSETS AVAILABLE FOR BENEFITS $93,817 $5,866 $2,476 $8,149 $31,917 $7,137
======= ====== ====== ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
T. ROWE PRICE
STRONG INTERNATIONAL
DISCOVERY EQUITY
ACCOUNT ACCOUNT TOTAL
------- ------- -----
<S> <C> <C> <C>
ASSETS:
Investments:
Guaranteed Account $64,977
Short-Term Account 1,734
Government Bond Account 25,961
Government/Corporate Bond Account 10,559
High Yield Bond Account 6,618
Value Equity Account 2,003
Core Equity Account 162,547
Large Capitalization Equity Account 149,865
Medium Capitalization Equity Account 12,530
Small Capitalization Equity Account 2,123
International Equity Account 9,250
Delaware Global Bond Account 39
Balanced Equity Account 93,817
Conservative Balanced Account 5,866
Aggressive Balanced Account 2,476
Fidelity Asset Manager Account 8,149
Janus Account 31,917
Fidelity Contrafund Account 7,137
Strong Discovery Account $3,025 3,025
T. Rowe Price International Equity Account $1,885 1,885
------ ------ --------
Total assets 3,025 1,885 602,478
LIABILITIES -- -- --
------ ------ --------
NET ASSETS AVAILABLE FOR BENEFITS $3,025 $1,885 $602,478
====== ====== ========
</TABLE>
See Notes to Financial Statements
F-4
<PAGE> 28
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS,
WITH FUND INFORMATION
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
GOVERNMENT/
GOVERNMENT CORPORATE VALUE CORE
GUARANTEED SHORT-TERM BOND BOND EQUITY EQUITY
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments:
Guaranteed Account $41,005
Short-Term Account $1,357
Government Bond Account $20,467
Government/Corporate Bond Account $11,483
Value Equity Account $596
Core Equity Account $94,382
Large Capitalization Equity Account
Medium Capitalization Equity Account
Small Capitalization Equity Account
International Equity Account
Balanced Equity Account
Conservative Balanced Account
Aggressive Balanced Account
Fidelity Asset Manager Account
Janus Account
Fidelity Contrafund Account
Strong Discovery Account
T. Rowe Price International Equity Account
Contributions receivable:
Employer
Participants
------- ------ ------- ------- ---- -------
Total assets 41,005 1,357 20,467 11,483 596 94,382
LIABILITIES -- -- -- -- -- --
------- ------ ------- ------- ---- -------
NET ASSETS AVAILABLE FOR BENEFITS $41,005 $1,357 $20,467 $11,483 $596 $94,382
======= ====== ======= ======= ==== =======
</TABLE>
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
LARGE MEDIUM SMALL
CAPITALIZATION CAPITALIZATION CAPITALIZATION INTERNATIONAL
EQUITY EQUITY EQUITY EQUITY
ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- -------
<S> <C> <C> <C> <C>
ASSETS:
Investments:
Guaranteed Account
Short-Term Account
Government Bond Account
Government/Corporate Bond Account
Value Equity Account
Core Equity Account
Large Capitalization Equity Account $87,356
Medium Capitalization Equity Account $6,659
Small Capitalization Equity Account $961
International Equity Account $4,730
Balanced Equity Account
Conservative Balanced Account
Aggressive Balanced Account
Fidelity Asset Manager Account
Janus Account
Fidelity Contrafund Account
Strong Discovery Account
T. Rowe Price International Equity Account
Contributions receivable:
Employer
Participants
------- ------ ---- ------
Total assets 87,356 6,659 961 4,730
LIABILITIES -- -- -- --
------- ------ ---- ------
NET ASSETS AVAILABLE FOR BENEFITS $87,356 $6,659 $961 $4,730
======= ====== ==== ======
</TABLE>
F-5
<PAGE> 29
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS,
WITH FUND INFORMATION
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
FIDELITY
BALANCED CONSERVATIVE AGGRESSIVE ASSET FIDELITY
EQUITY BALANCED BALANCED MANAGER JANUS CONTRAFUND
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments:
Guaranteed Account
Short-Term Account
Government Bond Account
Government/Corporate Bond Account
Value Equity Account
Core Equity Account
Large Capitalization Equity Account
Medium Capitalization Equity Account
Small Capitalization Equity Account
International Equity Account
Balanced Equity Account $60,376
Conservative Balanced Account $2,208
Aggressive Balanced Account $1,094
Fidelity Asset Manager Account $3,059
Janus Account $10,097
Fidelity Contrafund Account $2,172
Strong Discovery Account
T. Rowe Price International Equity Account
Contributions receivable:
Employer
Participant
------- ------ ------ ------ ------- ------
Total assets 60,376 2,208 1,094 3,059 10,097 2,172
LIABILITIES -- -- -- -- -- --
------- ------ ------ ------ ------- ------
NET ASSETS AVAILABLE FOR BENEFITS $60,376 $2,208 $1,094 $3,059 $10,097 $2,172
======= ====== ====== ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
T. ROWE PRICE
STRONG INTERNATIONAL
DISCOVERY EQUITY
ACCOUNT ACCOUNT OTHER TOTAL
------- ------- ----- -----
<S> <C> <C> <C> <C>
ASSETS:
Investments:
Guaranteed Account $41,005
Short-Term Account 1,357
Government Bond Account 20,467
Government/Corporate Bond Account 11,483
Value Equity Account 596
Core Equity Account 94,382
Large Capitalization Equity Account 87,356
Medium Capitalization Equity Account 6,659
Small Capitalization Equity Account 961
International Equity Account 4,730
Balanced Equity Account 60,376
Conservative Balanced Account 2,208
Aggressive Balanced Account 1,094
Fidelity Asset Manager Account 3,059
Janus Account 10,097
Fidelity Contrafund Account 2,172
Strong Discovery Account $487 487
T. Rowe Price International Equity Account $2,623 2,623
Contributions receivable:
Employer $2,074 2,074
Participant 4,858 4,858
---- ------ ------ --------
Total assets 487 2,623 6,932 358,044
LIABILITIES -- -- -- --
---- ------ ------ --------
NET ASSETS AVAILABLE FOR BENEFITS $487 $2,623 $6,932 $358,044
==== ====== ====== ========
</TABLE>
See Notes to Financial Statements
F-6
<PAGE> 30
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS,
WITH FUND INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
GOVERNMENT/ HIGH
SHORT- GOVERNMENT CORPORATE YIELD VALUE CORE
GUARANTEED TERM BOND BOND BOND EQUITY EQUITY
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS ATTRIBUTED TO:
Investment income $2,993
Net appreciation in fair value of investments $64 $985 $233 $521 $197 $23,134
Investment expenses (642) (12) (221) (116) (23) (11) (1,170)
------- ------ ------- ------- ------ ------ --------
Total investment income 2,351 52 764 117 498 186 21,964
------- ------ ------- ------- ------ ------ --------
Contributions:
Employer 9,064 2,990 381 485 19,394
Participants 15,665 325 6,428 5,083 1,023 736 33,609
------- ------ ------- ------- ------ ------ --------
Total contributions 24,729 325 6,428 8,073 1,404 1,221 53,003
------- ------ ------- ------- ------ ------ --------
Total additions 27,080 377 7,192 8,190 1,902 1,407 74,967
------- ------ ------- ------- ------ ------ --------
DEDUCTIONS FROM NET ASSETS ATTRIBUTED TO:
Benefits paid to participants 2,854 84 10,360
Administrative fees
------- ------ ------- ------- ------ ------ --------
Total deductions 2,854 -- -- -- 84 -- 10,360
------- ------ ------- ------- ------ ------ --------
Net increase prior to interfund
transfers 24,226 377 7,192 8,190 1,818 1,407 64,607
INTERFUND TRANSFERS (254) (1,698) (9,114) 4,800 3,558
------- ------ ------- ------- ------ ------ --------
Net increase 23,972 377 5,494 (924) 6,618 1,407 68,165
NET ASSETS AVAILABLE FOR BENEFITS:
Beginning of year 41,005 1,357 20,467 11,483 -- 596 94,382
------- ------ ------- ------- ------ ------ --------
End of year $64,977 $1,734 $25,961 $10,559 $6,618 $2,003 $162,547
======= ====== ======= ======= ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
LARGE MEDIUM SMALL DELAWARE
CAPITALIZATION CAPITALIZATION CAPITALIZATION INTERNATIONAL GLOBAL
EQUITY EQUITY EQUITY EQUITY BOND
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS ATTRIBUTED TO:
Investment income
Net appreciation in fair value of investments $19,551 $1,303 $74 $611
Investment expenses (1,104) (92) (14) (65)
-------- ------- ------ ------
Total investment income 18,447 1,211 60 546
-------- ------- ------ ------
Contributions:
Employer 19,830 2,025 476 1,782 $13
Participants 29,979 3,852 626 3,611 26
-------- ------- ------ ------ ---
Total contributions 49,809 5,877 1,102 5,393 39
-------- ------- ------ ------ ---
Total additions 68,256 7,088 1,162 5,939 39
-------- ------- ------ ------ ---
DEDUCTIONS FROM NET ASSETS ATTRIBUTED TO:
Benefits paid to participants 1,577 1,554 1,419
Administrative fees
-------- ------- ------ ------ ---
Total deductions 1,577 1,554 -- 1,419 --
-------- ------- ------ ------ ---
Net increase prior to interfund
transfers 66,679 5,534 1,162 4,520 39
INTERFUND TRANSFERS (4,170) 337
-------- ------- ------ ------ ---
Net increase 62,509 5,871 1,162 4,520 39
NET ASSETS AVAILABLE FOR BENEFITS:
Beginning of year 87,356 6,659 961 4,730 --
-------- ------- ------ ------ ---
End of year $149,865 $12,530 $2,123 $9,250 $39
======== ======= ====== ====== ===
</TABLE>
F-7
<PAGE> 31
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
STATEMENT OF CHANGES NET ASSETS AVAILABLE FOR BENEFITS,
WITH FUND INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
FIDELITY
BALANCED CONSERVATIVE AGGRESSIVE ASSET
EQUITY BALANCED BALANCED MANAGER JANUS
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS ATTRIBUTED TO:
Investment income
Net appreciation in fair value of investments $7,343 $272 $194 $707 $3,394
Investment expenses (693) (38) (16) (51) (190)
------- ------ ------ ------ -------
Total investment income 6,650 234 178 656 3,204
------- ------ ------ ------ -------
Contributions:
Employer 12,401 1,315 526 1,596 3,509
Participants 10,444 2,109 678 2,838 7,432
------- ------ ------ ------ -------
Total contributions 22,845 3,424 1,204 4,434 10,941
------- ------ ------ ------ -------
Total additions 29,495 3,658 1,382 5,090 14,145
------- ------ ------ ------ -------
DEDUCTIONS FROM NET ASSETS ATTRIBUTED TO:
Benefits paid to participants 4,691
Administrative fees
------- ------ ------ ------ -------
Total deductions 4,691 -- -- -- --
------- ------ ------ ------ -------
Net increase prior to interfund
transfers 24,804 3,658 1,382 5,090 14,145
INTERFUND TRANSFERS 8,637 7,675
------- ------ ------ ------ -------
Net increase 33,441 3,658 1,382 5,090 21,820
NET ASSETS AVAILABLE FOR BENEFITS:
Beginning of year 60,376 2,208 1,094 3,059 10,097
------- ------ ------ ------ -------
End of year $93,817 $5,866 $2,476 $8,149 $31,917
======= ====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
T. ROWE PRICE
FIDELITY STRONG INTERNATIONAL
CONTRAFUND DISCOVERY EQUITY
ACCOUNT ACCOUNT ACCOUNT OTHER TOTAL
------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS ATTRIBUTED TO:
Investment income $2,993
Net appreciation in fair value of investments $918 $111 $364 59,976
Investment expenses (41) (14) (21) (4,534)
------ ------ ------ --------
Total investment income 877 97 343 58,435
------ ------ ------ --------
Contributions:
Employer 1,730 851 561 78,929
Participants 2,637 1,338 1,170 129,609
------ ------ ------ --------
Total contributions 4,367 2,189 1,731 208,538
------ ------ ------ --------
Total additions 5,244 2,286 2,074 266,973
------ ------ ------ --------
DEDUCTIONS FROM NET ASSETS ATTRIBUTED TO:
Benefits paid to participants 22,539
Administrative fees
------ ------ ------ --------
Total deductions -- -- -- 22,539
------ ------ ------ --------
Net increase prior to interfund
transfers 5,244 2,286 2,074 244,434
INTERFUND TRANSFERS (279) 252 (2,812) ($6,932) --
------ ------ ------ ------- --------
Net increase 4,965 2,538 (738) (6,932) 244,434
NET ASSETS AVAILABLE FOR BENEFITS:
Beginning of year 2,172 487 2,623 6,932 358,044
------ ------ ------ ----- --------
End of year $7,137 $3,025 $1,885 $ -- $602,478
====== ====== ====== ====== ========
</TABLE>
See Notes to Financial Statements
F-8
<PAGE> 32
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS,
WITH FUND INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
GOVERNMENT/ HIGH
SHORT- GOVERNMENT CORPORATE YIELD VALUE CORE
GUARANTEED TERM BOND BOND BOND EQUITY EQUITY
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS ATTRIBUTED TO:
Investment income $2,006 $44
Net appreciation in fair value of investments $1,722 $1,272 $10 $74 $19,994
Investment expenses (7) (148) (66) (1) (2) (622)
------- ------ ------- ------- --- ---- -------
Total investment income 2,006 37 1,574 1,206 9 72 19,372
------- ------ ------- ------- --- ---- -------
Contributions:
Employer 9,637 106 5,208 2,653 77 199 14,486
Participants 16,290 141 7,685 4,404 154 325 24,984
------- ------ ------- ------- --- ---- -------
Total contributions 25,927 247 12,893 7,057 231 524 39,470
------- ------ ------- ------- --- ---- -------
Total additions 27,933 284 14,467 8,263 240 596 58,842
------- ------ ------- ------- --- ---- -------
DEDUCTIONS FROM NET ASSETS ATTRIBUTED TO:
Benefits paid to participants 2,203 881 2,928
Administrative fees 266
------- ------ ------- ------- ---- ---- -------
Total deductions 2,469 -- 881 -- -- -- 2,928
------- ------ ------- ------- ---- ---- -------
Net increase prior to interfund
transfers 25,464 284 13,586 8,263 240 596 55,914
INTERFUND TRANSFERS (166) 921 (522) (240) 69
------- ------ ------- ------- ---- ---- -------
Net increase 25,298 1,205 13,064 8,263 -- 596 55,983
NET ASSETS AVAILABLE FOR BENEFITS:
Beginning of year 15,707 152 7,403 3,220 38,399
------- ------ ------- ------- ---- ---- -------
End of year $41,005 $1,357 $20,467 $11,483 $ -- $596 $94,382
======= ====== ======= ======= ==== ==== =======
</TABLE>
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
LARGE MEDIUM SMALL
CAPITALIZATION CAPITALIZATION CAPITALIZATION INTERNATIONAL
EQUITY EQUITY EQUITY EQUITY
ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- -------
<S> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS ATTRIBUTED TO:
Investment income
Net appreciation in fair value of investments $14,679 $344 $92 $355
Investment expenses (585) (16) (8) (25)
------- ------ ---- ------
Total investment income 14,094 328 84 330
------- ------ ---- ------
Contributions:
Employer 15,521 1,034 662 1,691
Participants 22,977 2,058 970 3,461
------- ------ ----- ------
Total contributions 38,498 3,092 1,632 5,152
------- ------ ----- ------
Total additions 52,592 3,420 1,716 5,482
------- ------ ----- ------
DEDUCTIONS FROM NET ASSETS ATTRIBUTED TO:
Benefits paid to participants 1,136
Administrative fees
------- ------ ---- ------
Total deductions 1,136 -- -- --
------- ------ ---- ------
Net increase prior to interfund
transfers 51,456 3,420 1,716 5,482
INTERFUND TRANSFERS (1,310) 3,239 (755) (973)
------- ------ ----- ------
Net increase 50,146 6,659 961 4,509
NET ASSETS AVAILABLE FOR BENEFITS:
Beginning of year 37,210 221
------- ------ --- ------
End of year $87,356 $6,659 $961 $4,730
======= ====== ==== ======
</TABLE>
F-9
<PAGE> 33
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
STATEMENT OF CHANGES NET ASSETS AVAILABLE FOR BENEFITS,
WITH FUND INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
FIDELITY
BALANCED CONSERVATIVE AGGRESSIVE ASSET
EQUITY BALANCED BALANCED MANAGER JANUS
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS ATTRIBUTED TO:
Investment income
Net appreciation in fair value of investments $9,086 $152 $99 $260 $933
Investment expenses (405) (7) (4) (12) (36)
------- ------ ------ ------ -------
Total investment income 8,681 145 95 248 897
------- ------ ------ ------ -------
Contributions:
Employer 10,814 812 434 1,076 2,378
Participants 16,908 1,251 565 1,735 4,717
------- ------ ------ ------ -------
Total contributions 27,722 2,063 999 2,811 7,095
------- ------ ------ ------ -------
Total additions 36,403 2,208 1,094 3,059 7,992
------- ------ ------ ------ -------
DEDUCTIONS FROM NET ASSETS ATTRIBUTED TO:
Benefits paid to participants 1,424
Administrative fees
------- ------ ------ ------ -------
Total deductions 1,424 -- -- -- --
------- ------ ------ ------ -------
Net increase prior to interfund
transfers 34,979 2,208 1,094 3,059 7,992
INTERFUND TRANSFERS 126 2,105
------- ------ ------ ------ -------
Net increase 35,105 2,208 1,094 3,059 10,097
NET ASSETS AVAILABLE FOR BENEFITS:
Beginning of year 25,271
------- ------ ------ ------ -------
End of year $60,376 $2,208 $1,094 $3,059 $10,097
======= ====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
PARTICIPANT DIRECTED
T. ROWE PRICE
FIDELITY STRONG INTERNATIONAL
CONTRAFUND DISCOVERY EQUITY
ACCOUNT ACCOUNT ACCOUNT OTHER TOTAL
------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS ATTRIBUTED TO:
Investment income $2,050
Net appreciation in fair value of investments $367 $88 $297 49,824
Investment expenses (9) (2) (18) (1,973)
------ ---- ------ --------
Total investment income 358 86 279 49,901
------ ---- ------ --------
Contributions:
Employer 750 159 1,227 $434 69,358
Participants 1,064 242 2,690 834 113,455
------ ---- ------ ------ --------
Total contributions 1,814 401 3,917 1,268 182,813
------ ---- ------ ------ --------
Total additions 2,172 487 4,196 1,268 232,714
------ ---- ------ ------ --------
DEDUCTIONS FROM NET ASSETS ATTRIBUTED TO:
Benefits paid to participants 8,572
Administrative fees 266
------ ---- ------ ------ --------
Total deductions -- -- -- -- 8,838
------ ---- ------ ------ --------
Net increase prior to interfund
transfers 2,172 487 4,196 1,268 223,876
INTERFUND TRANSFERS (1,573) (921) --
------ ---- ------ ------ --------
Net increase 2,172 487 2,623 347 223,876
NET ASSETS AVAILABLE FOR BENEFITS:
Beginning of year 6,585 134,168
------ ---- ------ ------ --------
End of year $2,172 $487 $2,623 $6,932 $358,044
====== ==== ====== ====== ========
</TABLE>
See Notes to Financial Statements
F-10
<PAGE> 34
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF PLAN
The following description of the First Federal Savings & Loan Association of
Hazleton 401(k) Plan (the "Plan") provides only general information. The
participants should refer to the Plan document for a more complete
description of the Plan's provisions.
GENERAL
The Plan is a contributory, defined contribution plan covering
substantially all salaried employees of the First Federal Savings & Loan
Association of Hazleton (the "Association"). The Plan was established on
January 1, 1994 and is subject to the provisions of the Employee
Retirement Income Security Act of 1974 (ERISA).
ELIGIBILITY
Employees of the Association are eligible to participate in the Plan if
the employee has completed six months of service and attained the age of
twenty-one, provided he is a salaried employee.
CONTRIBUTIONS
Participants in the Plan may elect to have a portion of their annual
compensation reduced and paid into the Plan. The salary deferral
percentage can be changed semiannually. The Association also contributes
to the Plan on behalf of each participant. The Association's contribution
for each participant is based on a "floating" match. For the years ended
December 31, 1996 and 1995, the Association matched 100% of the
participants' annual compensation on the first 2% and fifty percent on the
next 2% contributed.
PARTICIPANT ACCOUNTS
Each participant's account is credited with the participant's contribution
and an allocation of the Association's contributions and Plan earnings.
Plan earnings are allocated based upon participant's account balances as
defined.
VESTING
Participants vest in their employee contribution account balances 100%
immediately upon entering the Plan. Participants vest in their employer's
contribution account balances according to the vesting schedule outlined
in the Plan agreement which provides that participants are 100% vested
after 4 years of service.
F-11
<PAGE> 35
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
INVESTMENT OPTIONS
Participants may direct employee contributions in the following
investments administered by Lincoln National Life Insurance Co.
Guaranteed Account - Account consists primarily of high-quality bonds
and mortgages. The assets of the account are backed by the general
assets of Lincoln National Life Insurance Co.
Short-Term Account- Account consists of high-quality money market
securities that include commercial paper, bankers acceptances,
certificates of deposit, loan participation and short-term U.S.
government debt.
Government Bond Account - Account consists primarily of bonds backed by
the United States government that will mature in 3 to 5 years.
Government/Corporate Bond Account - Account consists primarily of
government and high-quality mortgage-backed corporate bonds.
High Yield Bond Account - Account consists primarily of below
investment-grade bonds.
Value Equity Account - Account consists of stocks of conservative
companies that are leaders in their industries.
Core Equity Account - Account consists of large capitalization stocks
of well-established companies.
Large Capitalization Equity Account - Account consists of stocks of
large companies that have the potential to grow 50% within 18 months
from the date of purchase.
Medium Capitalization Equity Account - Account consists of stocks of
medium-sized companies that have strong financial characteristics.
Small Capitalization Equity Account - Account consists of stocks of
small companies having the potential to grow rapidly and produce
superior returns.
International Equity Account - Account consists of stocks of non-United
States companies.
Delaware Global Bond Account - Account invests primarily in fixed
income securities that may also provide the potential for capital
appreciation.
F-12
<PAGE> 36
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
Balanced Equity Account - Account consists of holdings in three
different asset classes: stocks, bonds and money market instruments.
Conservative Balanced Account - Account consists of holdings in three
different asset classes: stocks, bonds and money market instruments.
The account places an emphasis on a bond portfolio.
Aggressive Balanced Account - Account consists of holdings in three
different asset classes: stocks, bonds and money market instruments.
The account places an emphasis on common stocks, both domestic and
international.
Fidelity Asset Manager Account - Account consists of shares from a
mutual fund, Fidelity Asset Manager, that invests in three different
asset classes: stocks, bonds and short-term, fixed-income instruments.
Janus Account - Account consists of shares of The Janus Fund, a mutual
fund which invests primarily in common stocks of companies experiencing
favorable demand for their products and services.
Fidelity Contrafund Account - Account consists of shares exclusively
from a mutual fund, Fidelity Contrafund, that invests in undervalued
stocks of medium-sized and smaller companies not currently favored by
the public, but which show a potential for capital appreciation.
Strong Discovery Account - Account consists of shares of the Strong
Discovery Fund, a mutual fund. The fund invests primarily in common
stocks, emphasizing smaller companies with favorable prospects for
earnings growth.
T. Rowe Price International Equity Account - Account consists of shares
exclusively in the T. Rowe Price International Stock Fund, a mutual
fund. This fund invests primarily in common stocks of established
non-U.S. companies having the potential for growth of capital.
Participants may transfer amounts among investment funds daily.
PLAN BENEFITS
Participants are eligible for distribution of their account balances at
the earlier of the participant's termination, disability or death.
Participants may also receive distributions in the event of financial
hardship. Distributions are made in single sum amounts or installment
payments or in the form of an annuity.
F-13
<PAGE> 37
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
The Plan's investments include the Guaranteed Account and the Short-Term
Account which are valued at contract value, which approximates fair value.
Contract value represents contributions made under the contract plus
earnings, less withdrawals. The remaining investments are valued at fair
value based upon market prices provided to the Plan by Lincoln National
Life Insurance Co.
Lincoln National Life Insurance Co. has provided the plan administrator
with a certification as to the completeness and accuracy of substantially
all investment information presented in the accompanying statement of net
assets available for benefits, with fund information as of December 31,
1996 and 1995 and in the statement of changes in net assets available for
benefits for the years then ended.
A summary of the Plan's total units and unit values of investments by
account type as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
TOTAL UNIT TOTAL UNIT
UNITS VALUES UNITS VALUES
----- ------ ----- ------
<S> <C> <C> <C> <C>
Short-Term Account 628.67 $2.758008 518.02 $2.620501
Government Bond Account 17,245.33 1.505387 14,138.59 1.447598
Government/Corporate Bond Account 2,158.51 4.905633 2,390.16 4.804281
Value Equity Account 1,268.67 1.579151 439.55 1.355926
Core Equity Account 19,736.20 8.236001 13,735.07 6.871594
Large Capitalization Equity
Account 26,492.41 5.656885 18,239.90 4.789281
Medium Capitalization Equity
Account 1,403.92 8.924848 850.65 7.828105
Small Capitalization Equity
Account 662.79 3.203282 313.18 3.068546
International Equity Account 1,844.52 5.014649 1,031.62 4.585028
Balanced Equity Account 21,399.95 4.383997 15,147.84 3.985784
Conservative Balanced Account 4,728.18 1.244969 1,874.69 1.177797
Aggressive Balanced Account 1,816.33 1.363246 891.87 1.226633
Fidelity Asset Manager Account 6,255.75 1.302662 2,638.17 1.159514
Janus Account 20,221.38 1.578357 7,640.35 1.321536
Fidelity Contra Fund Account 4,201.00 1.698761 1,553.89 1.397784
Strong Discovery Account 2,087.83 1.449088 339.84 1.433009
T. Rowe Price International
Equity Account 1,464.68 1.287258 2,355.84 1.113401
High Yield Bond Account 3,176.10 2.083805 -- --
Delaware Global Bond Account 34.93 1.106640 -- --
</TABLE>
F-14
<PAGE> 38
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
BENEFIT PAYMENTS
Benefit payments to participants are recorded when paid.
ESTIMATES
The preparation of financial statements requires the plan administrator to
make estimates and assumptions that affect certain reported amounts and
disclosures. Actual results could differ from those estimates.
3. PLAN TERMINATION
Although it has not expressed any intent to do so, the Association have the
right under the Plan to discontinue contributions at any time and to
terminate the Plan subject to the provisions of ERISA. In the event of plan
termination, participants will become one hundred percent vested in their
accounts.
4. INCOME TAX STATUS
The trust established under the Plan to hold the Plan's assets is qualified
pursuant to the appropriate sections of the Internal Revenue Code, and
accordingly, the trust's net investment income is exempt from income taxes.
The Plan has obtained a favorable tax determination letter from the Internal
Revenue Service, and in the opinion of the Plan's sponsor, the Plan, as
amended, continues to operate in a manner that qualifies its tax-exempt
status.
5. RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500
The following is a reconciliation of benefits paid to participants reported
in the accompanying financial statements to the Form 5500 for the years
ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Benefits paid to participants reported in
financial statements $23,435 $8,572
Deduct refund of salary deferral (896) (972)
------- ------
Benefits paid to participants reported in Form 5500 $22,539 $7,600
======= ======
</TABLE>
F-15
<PAGE> 39
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
ITEM 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
CURRENT
IDENTITY OF ISSUE DESCRIPTION OF INVESTMENT COST VALUE
----------------- ------------------------- ---- -----
<S> <C> <C> <C>
GROUP ANNUITY CONTRACT
ADMINISTERED BY LINCOLN
NATIONAL LIFE INSURANCE
COMPANY: SEPARATE ACCOUNTS:
Guaranteed Fixed Income Account $60,191 $64,977
Short-Term Account, 628.67 units 1,677 1,734
Government Bond Account, 17,245.33 units 24,106 25,961
Government/Corporate Bond Account, 2,158.51 unit 9,809 10,559
High Yield Bond Account, 3,176.10 units 6,124 6,618
Value Equity Account, 1,268.67 units 1,747 2,003
Core Equity Account, 19,736.20 units 124,173 162,547
Large Capitalization Equity Account, 26,492.41 units 118,620 149,865
Medium Capitalization Equity Account, 1,403.92 units 11,294 12,530
Small Capitalization Equity Account, 662.79 unit 2,202 2,123
International Equity Account, 1,844.52 units 8,609 9,250
Delaware Global Bond Account, 34.93 units -- 39
Balanced Equity Account, 21,399.95 units 80,321 93,817
Conservative Balanced Account, 4,728.18 units 5,509 5,866
Aggressive Balanced Account, 1,816.33 units 2,089 2,476
Fidelity Asset Manager Account, 6,255.75 units 7,283 8,149
Janus Account, 20,221.38 units 27,875 31,917
Fidelity Contrafund Account, 4,201 units 6,115 7,137
Strong Discovery Account, 2,087.83 units 2,883 3,025
T. Rowe Price International Equity Account, 1,464.68 units 1,694 1,885
-------- --------
TOTAL ASSETS HELD FOR INVESTMENT PURPOSES $502,321 $602,478
======== ========
</TABLE>
See Notes to Financial Statements
F-16
<PAGE> 40
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
ITEM 27d - SCHEDULE OF REPORTABLE TRANSACTIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f) (g) (h) (I)
PURCHASE SELLING LEASE CURRENT NET GAIN
IDENTITY OF PARTY DESCRIPTION OF ASSET PRICE PRICE RENTAL EXPENSES COST VALUE (LOSS)
- ----------------- -------------------- ----- ----- ------ -------- ---- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LINCOLN NATIONAL LIFE
INSURANCE COMPANY GUARANTEED FIXED ACCOUNT
Purchases $24,145 $24,145
Sales $3,151 $3,151 3,151
CORE EQUITY ACCOUNT
Purchases 58,650 58,650
Sales 12,964 12,964 12,964
BALANCED ACCOUNT
Purchases 41,332 41,332
Sales 14,555 14,555 14,555
LARGE CAPITALIZATION EQUITY ACCOUNT
Purchases 50,234 50,234
Sales 6,203 6,203 6,203
JANUS EQUITY ACCOUNT
Purchases 18,616 18,616
</TABLE>
See Notes to Financial Statements
F-17
<PAGE> 41
PSI FORM 7 (97)-A10
CHANGE OF INVESTMENT ALLOCATION
MEMBER DATA (PLEASE TYPE OR PRINT CLEARLY):
1. Soc. Sec. Number: ___ ___ ___-- ___ ___-- ___ ___ ___ ___
2. Name___________________________________________________________________
Last First Middle Initial
3. Current Address________________________________________________________
Street City State Zip Code
SECTION 1
NEW INVESTMENT DIRECTIONS (APPLICABLE TO FUTURE CONTRIBUTIONS ONLY):
I hereby revoke any previous investment instructions and now direct that any
future contributions and/or loan repayments, if any, made by me or on behalf of
my Employer, including those contributions and/or repayments received by the
First Federal Savings and Loan Association of Hazleton Employees' Savings and
Profit Sharing Plan and Trust during the same reporting as this form, be
invested in the following whole percentages.
S&P 500 Stock Fund ______%
Stable Value Fund ______%
S&P MidCap Stock Fund ______%
Money Market Fund ______%
Government Bond Fund ______%
International Stock Fund ______%
Income Plus Asset Allocation Fund ______%
Growth & Income Asset Allocation Fund ______%
Growth Asset Allocation Fund ______%
Northeast Pennsylvania Financial Corporation Stock Fund %
======
100
SECTION II
NEW INVESTMENT DIRECTIONS (APPLICABLE TO ACCUMULATED BALANCES ONLY)
I hereby revoke any previous investment direction and now direct that the market
value of the units that I have invested in the following Funds, to the extent
permissible, be transferred out of the specified Fund and invested in the
selected Funds in whole percentages. THE TOTAL OF YOUR FUND TO FUND PERCENTAGES
MUST TOTAL 100%.
______% FROM
S&P 500 STOCK FUND TO:
______% Stable Value Fund
______% S&P MidCap Stock Fund
______% Money Market Fund
______% Government Bond Fund
______% International Stock Fund
______% Income Plus Fund
______% Growth and Income Fund
______% Growth Fund
% Northeast Pennsylvania Financial
======
100 Corporation Stock Fund
______% FROM
MONEY MARKET FUND TO:
______% S&P 500 Stock Fund
______% Stable Value Fund
______% S&P MidCap Stock Fund
______% Government Bond Fund
______% International Stock Fund
______% Income Plus Fund
______% Growth and Income Fund
______% Growth Fund
% Northeast Pennsylvania Financial
======
100 Corporation Stock Fund
______% FROM
STABLE VALUE FUND TO:
______% S&P 500 Stock Fund
______% S&P MidCap Stock Fund
______% Government Bond Fund
______% International Stock Fund
______% Income Plus Fund
______% Growth and Income Fund
______% Growth Fund
% Northeast Pennsylvania Financial
======
100 Corporation Stock Fund
______% FROM
GOVERNMENT BOND FUND TO:
______% S&P 500 Stock Fund
______% Stable Value Fund
______% S&P MidCap Stock Fund
______% Money Market Fund
______% International Stock Fund
______% Income Plus Fund
______% Growth and Income Fund
______% Growth Fund
% Northeast Pennsylvania Financial
======
100 Corporation Stock Fund
______% FROM
S&P MIDCAP STOCK FUND TO:
______% S&P 500 Stock Fund
______% Stable Value Fund
______% Money Market Fund
______% Government Bond Fund
______% International Stock Fund
______% Income Plus Fund
______% Growth and Income Fund
______% Growth Fund
% Northeast Pennsylvania Financial
======
100 Corporation Stock Fund
______% FROM
INTERNATIONAL STOCK FUND TO:
______% S&P 500 Stock Fund
______% Stable Value Fund
______% S&P MidCap Stock Fund
______% Money Market Fund
______% Government Bond Fund
______% Growth and Income Fund
______% Income Plus Fund
______% Growth Fund
% Northeast Pennsylvania Financial
======
100 Corporation Stock Fund
(CONTINUED ON REVERSE SIDE)
<PAGE> 42
______% FROM
INCOME PLUS ASSET ALLOCATION FUND TO:
______% S&P 500 Stock Fund
______% Stable Value Fund
______% S&P MidCap Stock Fund
______% Money Market Fund
______% Government Bond Fund
______% International Stock Fund
______% Growth and Income Fund
______% Growth Fund
% Northeast Pennsylvania Financial
======
100 Corporation Stock Fund
______% FROM NORTHEAST PENNSYLVANIA
FINANCIAL CORPORATION STOCK
FUND TO:
______% S&P 500 Stock Fund
______% Stable Value Fund
______% S&P MidCap Stock Fund
______% Money Market Fund
______% Government Bond Fund
______% International Stock Fund
______% Income Plus Fund
______% Growth & Income Fund
% Growth Fund
======
100
______% FROM
GROWTH AND INCOME ASSET ALLOCATION FUND TO:
______% S&P 500 Stock Fund
______% Stable Value Fund
______% S&P MidCap Stock Fund
______% Money Market Fund
______% Government Bond Fund
______% International Stock Fund
______% Income Plus Fund
______% Growth Fund
% Northeast Pennsylvania Financial
======
100 Corporation Stock Fund
______% FROM:
GROWTH ASSET ALLOCATION FUND TO:
______% S&P 500 Stock Fund
______% Stable Value Fund
______% S&P MidCap Stock Fund
______% Money Market Fund
______% Government Bond Fund
______% International Stock Fund
______% Income Plus Fund
______% Growth & Income Fund
% Northeast Pennsylvania Financial
======
100 Corporation Stock Fund
NOTE: ALL PERCENTAGES ELECTED IN SECTION II WILL BE SUBTRACTED FROM CURRENT FUND
VALUE PRIOR TO ANY REALLOCATION NOTED ON THIS FORM.
Notes:
- ------
No amounts invested in the Stable Value Fund may be transferred directly to the
Money Market Fund. Stable Value Fund amounts invested in the S&P 500 Stock Fund,
S&P Midcap Stock Fund, Government Bond Fund, International Stock Fund, Income
Plus Asset Allocation Fund, Growth and Income Asset Allocation Fund, Growth
Asset Allocation Fund, and/or Northeast Pennsylvania Financial Corporation Stock
Fund, for a period of three months may be transferred to the Money Market Fund
upon the submission of a separate Change of Investment Allocation form.
The percentage that can be transferred to the Money Market Fund may be limited
by any amounts previously transferred from the Stable Value Fund that have not
satisfied the equity wash requirement. Such amounts will remain in either the
S&P 500 Stock Fund, S&P MidCap Stock Fund, Government Bond Fund, International
Stock Fund, Income Plus Asset Allocation Fund, Growth and Income Asset
Allocation Fund, Growth Asset Allocation Fund, and/or Northeast Pennsylvania
Financial Corporation Stock Fund and a separate direction to transfer them to
the Money Market Fund will be required when they become available.
MEMBER'S SIGNATURE
_________________________________________ _________________________
Signature of Member Date
PENTEGRA SERVICES IS HEREBY AUTHORIZED TO MAKE THE ABOVE LISTED CHANGE(S) TO
THIS MEMBER'S RECORD.
__________________________________________________________ ____________
Signature of First Federal Savings and Loan Association of Date
Hazleton's Authorized Representative
<PAGE> 43
[To be used in connection with the Syndicated Community Offering only]
SYNDICATED PROSPECTUS SUPPLEMENT
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
(PROPOSED HOLDING COMPANY FOR FIRST FEDERAL
SAVINGS AND LOAN ASSOCIATION OF HAZLETON)
__________ SHARES OF COMMON STOCK
Northeast Pennsylvania Financial Corp. (the "Company"), a Delaware
corporation, is offering for sale in a syndicated community offering (the
"Syndicated Community Offering") __________ shares, at a per share price of
$10.00, of its common stock, par value $.01 per share (the "Common Stock"), to
be sold upon the conversion (the "Conversion") of First Federal Savings and Loan
Association of Hazleton, Hazleton, Pennsylvania (the "Bank") from a federally
chartered mutual savings bank to a federally chartered stock savings bank and
the issuance of the Bank's outstanding capital stock to the Company pursuant to
a plan of conversion, (the "Plan of Conversion"). The remaining __________
shares of the Common Stock to be sold in the Conversion have been subscribed for
in subscription and community offerings (the "Subscription and Community
Offerings") by holders of deposit accounts with the Bank with a balance of $50
or more as of September 30, 1996, by the First Federal Bank Employee Stock
Ownership Plan, a tax-qualified employee benefit plan, and related trust (the
"ESOP"), by holders of deposit accounts with the Bank with a balance of $50 or
more as of ______________, 1997, by certain other account holders and borrowers
of the Bank and, then, by certain members of the general public. See "The
Conversion General." Contained herein is the Prospectus in the form used in the
Subscription and Community Offerings. The purchase price for all shares sold in
the Syndicated Community Offering will be the same as the price paid by
subscribers in the Subscription and Community Offerings (the "Purchase Price").
The Purchase Price of $10.00 per share is the amount to be paid for each share
at the time a purchase order is submitted. See the cover page of the Prospectus
and the table below for information as to the method by which the range within
which the number of shares offered may vary and the method of subscribing for
shares of the Common Stock.
Funds submitted to the Bank with purchase orders will earn interest at
the Bank's passbook rate of interest from the date of receipt until completion
or termination of the Conversion. The Syndicated Community Offering will expire
no later than _______________, 199_, unless extended by the Bank and the Company
with the approval of the Office of Thrift Supervision (the "OTS"). Such
extensions may not go beyond _______________, 199_. If an extension of time has
been granted, all subscribers will be notified of such extension, and of their
rights to confirm their subscriptions, or to modify or rescind their
subscriptions and have their funds returned promptly with interest, and of the
time period within which the subscriber must notify the Bank of his intention to
confirm, modify or rescind his subscription. If an affirmative response to any
resolicitation is not received by the Bank and the Company from subscribers,
such orders will be rescinded and all funds
<PAGE> 44
will be returned promptly with interest. The minimum number of shares which may
be purchased is 25 shares. Except for the ESOP, which may purchase up to 10% of
the total number of shares of Common Stock issued in the Conversion, no person,
together with associates of and persons acting in concert with such person, may
purchase more than the total number of shares offered in the Community Offering
and the Syndicated Community Offering that could be purchased for $175,000 at
the Purchase Price and no person, together with associates of and persons acting
in concert with such person, may purchase more than 1% of the total number of
shares sold in the Conversion. See "Plan of Conversion - Subscription Rights and
Limitations on Common Stock Purchases." The Company reserves the right, in its
absolute discretion, to accept or reject, in whole or in part, any or all
subscriptions in the Syndicated Community Offering.
The Company and the Bank have engaged Sandler, O'Neill & Partners, L.P.
("Sandler O'Neill") as financial advisors to assist them in the sale of the
Common Stock in the Syndicated Community Offering. It is anticipated that
Sandler O'Neill will use the services of other registered broker-dealers
("Selected Dealers") and that fees to Sandler O'Neill and such Selected Dealers
will not exceed ____% of the aggregate Purchase Price of the shares sold in the
Syndicated Community Offering. Neither Sandler O'Neill nor any Selected Dealer
shall have any obligation to take or purchase any shares of Common Stock in the
Syndicated Community Offering.
The Company has received conditional approval to have its Common Stock
listed on the American Stock Exchange ("AMEX") under the symbol "NEP." Prior to
this offering, there has not been a public market for the Common Stock, and
there can be no assurance that an active and liquid trading market for the
Common Stock will develop. The absence or discontinuance of a market may have an
adverse impact on both the price and liquidity of the stock.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PARTICIPANT, SEE "RISK FACTORS" ON PAGES ____ TO ____ OF THE PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, DEPARTMENT OF THE
TREASURY, OR ANY OTHER FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR
HAS SUCH COMMISSION, OFFICE, OTHER AGENCY OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED.
2
<PAGE> 45
<TABLE>
<CAPTION>
Estimated Estimated Net Pro-
Underwriting Estimated Net ceeds of Subscrip-
Commissions Proceeds of tion, Community
Syndicated and Other Syndicated and Syndicated
Community Fees and Community Community
Offering Price Expenses(1) Offering Offerings(2)(3)
<S> <C> <C> <C> <C>
Minimum Per Share $10.00 $ $ $
Midpoint Per Share $10.00 $ $ $
Maximum Per Share $10.00 $ $ $
Total Minimum(4) $ $ $ $
Total Midpoint $ $ $ $
Total Maximum(4) $ $ $ $
Total Maximum, As Adjusted(5) $ $ $ $
</TABLE>
- ------------------------------
(1) Consists of a pro rata allocation of estimated expenses of the Bank and the
Company in connection with the Conversion (other than estimated fees to be
paid to Sandler O'Neill for services in connection with the Subscription
and Community Offerings) and estimated compensation of Sandler O'Neill and
Selected Dealers in connection with the sale of the remaining shares in the
Syndicated Community Offering which fees are estimated to be $__________
and $__________ at the minimum and the maximum of the estimated price range
and may be deemed to be underwriting fees. The information under "Pro Forma
Data" in the Prospectus was based on the assumptions stated therein, which
may differ from the estimates used for this table. See "The Conversion -
Marketing and Underwriting Arrangements" for a more detailed discussion of
fee arrangements.
(2) The Company applied to retain up to 50% of the net proceeds. The balance of
the net proceeds will be transferred to the Bank in exchange for all of the
capital stock of the Bank to be issued in connection with the Conversion.
(3) The net proceeds of the Subscription and Community Offerings (based upon
the sale of the __________ shares subscribed for at a price of $_____ per
share and after allocation of a pro rata portion of the estimated expenses
relating to the Conversion) are estimated to be $___________.
(4) Based on an estimated price range of $__________ to $__________ at $10.00
per share (the "Estimated Price Range"). The Total Minimum reflects the
sale of __________ shares at a per share price of $_____, leaving a total
of __________ shares to be sold in the Syndicated Community Offering.
(5) Gives effect to an increase in the number of shares which could occur due
to an increase in the Estimated Price Range of up to 15% to reflect changes
in market and financial conditions following commencement of the offerings.
See "The Conversion - Stock Pricing." For a discussion of the distribution
and allocation of the additional shares, see "The Conversion - Subscription
Rights and Limitations on Common Stock Purchases."
SANDLER O'NEILL & PARTNERS, L.P.
---------------------------------
The date of this Prospectus Supplement is _______________, 1997.
62297
3
<PAGE> 46
PROSPECTUS [SUBJECT TO COMPLETION]
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
(Proposed Holding Company for
First Federal Savings and Loan Association of Hazleton)
UP TO 5,951,250 SHARES OF COMMON STOCK
Northeast Pennsylvania Financial Corp. (the "Company"), a Delaware
corporation, is offering up to 5,951,250 shares of its common stock, par value
$.01 per share (the "Common Stock"), in connection with the conversion of First
Federal Savings and Loan Association of Hazleton (the "Bank" or "First Federal")
from a federally-chartered mutual savings and loan association to a
federally-chartered capital stock savings bank, under the name First Federal
Bank, pursuant to the Bank's plan of conversion, as amended (the "Plan" or "Plan
of Conversion"). The simultaneous conversion of the Bank to stock form, the
issuance of the Bank's stock to the Company and the offer and sale of the Common
Stock by the Company are herein referred to as the "Conversion." In certain
circumstances, the Company may increase the amount of Common Stock offered
hereby to 5,951,250 shares. See Footnote 4 to the table below. (continued on
following page)
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE __.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION
("OTS"), OR ANY OTHER FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION,
NOR HAS SUCH COMMISSION, OFFICE OR OTHER AGENCY OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS
OR DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION ("FDIC"), THE BANK INSURANCE FUND ("BIF"),
THE SAVINGS ASSOCIATION INSURANCE FUND ("SAIF") OR ANY OTHER GOVERNMENT
AGENCY NOR ARE THEY INSURED OR GUARANTEED BY THE BANK OR THE COMPANY. THE
COMMON STOCK IS SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL INVESTED.
<TABLE>
<CAPTION>
ESTIMATED UNDERWRITING
COMMISSIONS AND OTHER FEES ESTIMATED
SUBSCRIPTION PRICE(1) AND EXPENSES(2) NET PROCEEDS(3)
--------------------- -------------------------- ---------------
<S> <C> <C> <C>
Minimum Per Share .................. $ 10.00 $ 0.31 $ 9.69
Midpoint Per Share ................. $ 10.00 $ 0.28 $ 9.72
Maximum Per Share .................. $ 10.00 $ 0.26 $ 9.74
Total Minimum(1) ................... $38,250,000 $1,189,500 $37,060,500
Total Midpoint(1) .................. $45,000,000 $1,266,600 $43,733,400
Total Maximum(1) ................... $51,750,000 $1,343,700 $50,406,300
Total Maximum, as adjusted(4) ...... $59,512,500 $1,432,306 $58,080,194
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by Keller
& Company, Inc. ("Keller") dated November 28 1997 which states that the
aggregate estimated pro forma market value of the Common Stock being
offered for sale ranged from $38.3 million to $51.8 million, with a
midpoint of $45.0 million (the "Valuation Range"). Based on the Valuation
Range, the Board of Directors (the "Board of Directors") established the
estimated price range of $38.3 million to $51.8 million (the "Estimated
Price Range"), or between 3,825,000 and 5,175,000 shares of Common Stock
at the $10.00 per share (the "Purchase Price") to be paid for each share
of Common Stock subscribed for or purchased in the Offerings (as described
herein). The independent appraisal of Keller is based upon estimates and
projections that are subject to change and the valuation must not be
construed as a recommendation as to the advisability of purchasing such
shares nor an assurance that a purchaser will thereafter be able to sell
such shares at the Purchase Price. See "The Conversion -- Stock Pricing"
and " -- Number of Shares to be Issued."
(2) Consists of the estimated costs to the Bank and the Company arising from
the Conversion, including estimated fixed expenses of $775,000 and
marketing fees to be paid to Sandler O'Neill & Partners, L.P. ("Sandler
O'Neill") estimated to be $414,000 and $568,000 at the minimum and the
maximum of the Estimated Price Range, respectively. See "The Conversion --
Marketing and Underwriting Arrangements." See "Pro Forma Data" for the
assumptions used to arrive at these estimates. The actual fees and
expenses may vary from the estimates.
(3) Actual net proceeds may vary substantially from estimated amounts
depending on the number of shares sold in each of the offerings and other
factors. Includes the purchase of shares of Common Stock by the First
Federal Bank Employee Stock Ownership Plan and related trust (the "ESOP")
and funded by a loan to the ESOP, by the Company or from a third party,
which will be deducted from the Company's stockholders' equity. See "Use
of Proceeds" and "Pro Forma Data."
(4) As adjusted to reflect the sale of up to an additional 15% of the Common
Stock which may be offered at the Purchase Price, without resolicitation
of subscribers or any right of cancellation, due to regulatory
considerations, changes in market conditions or general financial and
economic conditions. See "Pro Forma Data" and "The Conversion -- Stock
Pricing." For a discussion of the distribution and allocation of the
additional shares, if any, see "The Conversion -- Subscription Offering
and Subscription Rights," " -- Community Offering" and " --Limitations on
Common Stock Purchases."
SANDLER O'NEILL & PARTNERS, L.P.
The date of this Prospectus is ___________________, 1998.
<PAGE> 47
AS SET FORTH IN THE PLAN OF CONVERSION AND PURSUANT TO OTS REGULATIONS,
NON-TRANSFERABLE RIGHTS TO SUBSCRIBE FOR THE COMMON STOCK IN A SUBSCRIPTION
OFFERING (THE "SUBSCRIPTION OFFERING") HAVE BEEN GRANTED IN THE FOLLOWING ORDER
OF PRIORITY: (1) HOLDERS OF DEPOSIT ACCOUNTS, SO DEFINED BY THE PLAN AND MORE
FULLY DESCRIBED HEREIN, OF THE BANK WHICH TOTALED $50 OR MORE ON SEPTEMBER 30,
1996 ("ELIGIBLE ACCOUNT HOLDERS"); (2) THE EMPLOYEE PLANS, CONSISTING OF THE
ESOP WHICH INTENDS TO SUBSCRIBE FOR UP TO 8% OF THE COMMON STOCK ISSUED IN
CONNECTION WITH THE CONVERSION (INCLUDING SHARES ISSUED TO FIRST FEDERAL
CHARITABLE FOUNDATION (THE "FOUNDATION")); (3) DEPOSITORS WHOSE ACCOUNTS IN THE
BANK TOTALED $50 OR MORE ON DECEMBER 31, 1997 ("SUPPLEMENTAL ELIGIBLE ACCOUNT
HOLDERS"); AND (4) MEMBERS OF THE BANK CONSISTING OF DEPOSITORS OF THE BANK AS
OF __________, 1997, THE VOTING RECORD DATE ("VOTING RECORD DATE") FOR THE
SPECIAL MEETING (AS DEFINED HEREIN), AND BORROWERS WITH LOANS OUTSTANDING AS OF
DECEMBER 16, 1997 WHICH CONTINUE TO BE OUTSTANDING AS OF THE VOTING RECORD DATE,
OTHER THAN THOSE MEMBERS WHO OTHERWISE QUALIFY AS ELIGIBLE ACCOUNT HOLDERS OR
SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS ("OTHER MEMBERS"). SUBSCRIPTION RIGHTS ARE
NON-TRANSFERABLE. PERSONS FOUND TO BE TRANSFERRING SUBSCRIPTION RIGHTS WILL BE
SUBJECT TO THE FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER SANCTIONS AND
PENALTIES IMPOSED BY THE OTS. Subsequent to the Subscription Offering, and
subject to the prior rights of holders of subscription rights, the Company will
offer any shares of Common Stock not subscribed for in the Subscription Offering
for sale in a community offering to certain members of the general public (the
"Community Offering"). Shares not subscribed for in the Subscription and
Community Offerings will be offered to certain members of the general public in
a syndicated community offering (the "Syndicated Community Offering") (the
Subscription Offering, Community Offering, and the Syndicated Community Offering
are referred to collectively as the "Offerings").
Except for the ESOP, which intends to subscribe for up to 8% of the Common
Stock issued in connection with the Conversion, including shares issued to the
Foundation, no Eligible Account Holder or Supplemental Eligible Account Holder
or Other Member may, in their respective capacities as such, purchase in the
Subscription Offering more than $175,000 of Common Stock; no person, together
with associates or persons acting in concert with such person, may purchase in
the Community Offering and Syndicated Community Offering more than $175,000 of
Common Stock; and no person, together with associates of or persons acting in
concert with such person, may purchase in the aggregate more than the overall
maximum purchase limitation of 1% of the total number of shares of Common Stock
offered in the Conversion; provided, however, that the overall maximum purchase
limitations may be increased and the amount that may be subscribed for may be
increased or decreased at the sole discretion of the Bank or the Company without
further approval of the Bank's members. See "The Conversion - Subscription
Offering and Subscription Rights," " -- Community Offering" and " -- Limitations
on Common Stock Purchases." The minimum purchase is 25 shares.
Pursuant to the Plan, the Company intends to establish a charitable
foundation in connection with the Conversion. The Plan provides that the Company
and the Bank will create the Foundation, which will be incorporated under
Delaware law as a non-stock corporation, and will be funded with shares of
Common Stock contributed by the Company in an amount equal to 8% of the number
of shares of Common Stock sold in the Conversion. The Foundation will be
dedicated to charitable purposes within the communities in which the Bank
operates. The establishment of the Foundation is subject to the approval of the
Bank's members at the special meeting being held to consider the Plan of
Conversion. For a discussion of the Foundation and the effects on the
Conversion, including if the members do not approve the establishment of the
Foundation, see "Risk Factors -- Establishment of the Charitable Foundation,"
"Pro Forma Data," and "The Conversion -- Establishment of the Charitable
Foundation."
THE SUBSCRIPTION OFFERING WILL TERMINATE AT __________, EASTERN TIME, ON
________, 1998 (THE "EXPIRATION DATE") UNLESS EXTENDED BY THE BANK AND THE
COMPANY, WITH THE APPROVAL OF THE OTS, IF NECESSARY. Orders submitted are
irrevocable until the completion of the Conversion; provided, that, if the
Conversion is not completed within 45 days after the close of the Subscription
Offering, unless such period has been extended with the consent of the OTS, if
necessary, all subscribers will have their funds returned promptly with
interest, and all withdrawal authorizations will be canceled. Such extensions
may not go beyond __________, 1998. See "The Conversion -- Subscription Offering
and Subscription Rights," " -- Procedure for Purchasing Shares in Subscription
Offering."
The Company has received conditional approval to have its Common Stock
listed on the American Stock Exchange ("AMEX") under the symbol "NEP" upon
completion of the Conversion. Prior to this offering there has not been a public
market for the Common Stock, and there can be no assurance that an active and
liquid trading market for the Common Stock will develop or that the Common Stock
will trade at or above the Purchase Price. The absence or discontinuance of a
market may have an adverse impact on both the price and liquidity of the Common
Stock. See "Risk Factors -- Absence of Market for Common Stock."
2
<PAGE> 48
INSERT MAP PAGE HERE
3
<PAGE> 49
SUMMARY OF THE CONVERSION AND THE OFFERINGS
The following summary of the Conversion and the Offerings is qualified in
its entirety by the more detailed information appearing elsewhere in this
Prospectus.
Risk Factors.................. A purchase of the Common Stock involves a
substantial degree of risk. Eligible Account
Holders, Supplemental Eligible Account Holders,
Other Members and other prospective investors
should carefully consider the matters set forth
under "Risk Factors." THE SHARES OF COMMON
STOCK OFFERED HEREBY ARE NOT INSURED OR
GUARANTEED BY THE FDIC, BIF OR SAIF OR ANY
OTHER GOVERNMENT AGENCY AND ARE NOT GUARANTEED
BY THE COMPANY OR BANK.
Northeast Pennsylvania Northeast Pennsylvania Financial Corp. is a
Financial Corp. .............. Delaware corporation organized at the
direction of the Bank to become a savings
and loan holding company and own all of the
Bank's capital stock to be issued upon its
conversion from mutual form to stock form.
To date, the Company has not engaged in
any business. Its executive office is
located at 12 E. Broad Street, Hazleton,
Pennsylvania 18201 and its telephone number
is (717) 459-3700.
First Federal Savings and Loan The Bank is a federally-chartered mutual
Association of Hazleton ........ savings and loan association. At September 30,
1997, the Bank had total assets of $369.2
million, total deposits of $314.1 million and
total equity of $28.5 million. Concurrent with
the Conversion, the Bank will change its name
to First Federal Bank. The Bank is located at
12 E. Broad Street, Hazleton, Pennsylvania
18201, and its telephone number is (717)
459-3700. The Bank currently operates 10
banking offices in Luzerne, Carbon, Columbia
and Schuylkill Counties in Northeast
Pennsylvania and a loan production office in
Monroe County, also in Northeast Pennsylvania.
The Bank has historically operated as a
community-oriented savings institution
primarily providing one- to four-family
residential mortgage loans and a variety of
retail deposit products to consumers. The Bank
considers that its market area consists of the
five counties in Northeast Pennsylvania in
which it has a banking office or a loan
production office. Since 1993, the Bank has
implemented a strategy to operate as a
consumer-oriented community bank by placing
greater emphasis on the origination of
adjustable-rate and shorter-term fixed-rate
one- to four-family loans and short-term
consumer loans and commercial loans, limiting
the origination of longer-term fixed-rate
mortgage loans and increasing investment in
other short-term and adjustable-rate loans and
securities investments.
The Conversion and The Board of Directors of the Bank has adopted
Reasons for Conversion ....... a Plan of Conversion pursuant to which the
Bank intends to convert to a
federally-chartered capital stock savings
bank, under the name First Federal Bank, and
issue all of its stock to the Company. The
Company is offering shares of its Common Stock
in the Offerings in connection with the Bank's
Conversion. Management believes the Conversion
offers a number of advantages, including: (i)
providing a larger capital base with which to
operate; (ii) providing enhanced future access
to capital markets; (iii) providing enhanced
ability to diversify into other financial
services related activities; and (iv)
providing enhanced ability to increase its
presence in the communities it serves through
the acquisition or establishment of branch
offices or the acquisition of other financial
institutions. The Conversion and the Offerings
are subject to approval by the OTS, and
approval of members of the Bank eligible to
vote at a special meeting to be held on
__________, 1998 (the "Special Meeting"). The
OTS issued an approval letter on _______,
1998. See "The Conversion -- General."
4
<PAGE> 50
First Federal Charitable The Bank's Plan of Conversion provides for the
Foundation ..................... establishment of a charitable foundation in
connection with the Conversion. The
Foundation, which will be incorporated under
Delaware law as a non-stock corporation, will
be funded with a contribution by the Company
equal to 8% of the Common Stock sold in the
Conversion. The authority for the affairs of
the Foundation will be vested in the Board of
Directors of the Foundation, all of whom are
existing Directors of the Company or the Bank
or officers of the Company or the Bank. See
"The Conversion - Establishment of the
Charitable Foundation."
Terms of the Subscription The shares of Common Stock to be sold in
Offering ....................... connection with the Conversion are being
offered at a fixed price of $10.00 per share in
the Subscription Offering pursuant to
subscription rights in the following order of
priority to: (i) Eligible Account Holders; (ii)
the ESOP; (iii) Supplemental Eligible Account
Holders; and (iv) Other Members. Subject to the
prior rights of holders of subscription rights,
any shares of Common Stock not subscribed for
in the Subscription Offering will be offered in
the Community Offering at $10.00 per share to
certain members of the general public.
Subscription rights will expire if not
exercised by _______, Eastern time, on
__________, 1998, unless extended by the Bank
and the Company, with the approval of the OTS,
if necessary. Deposit accounts which will
provide subscription rights to holders thereof
consist of any "savings account," as defined
by the Plan of Conversion consistent with OTS
regulations. Such accounts do not include any
noninterest-bearing demand accounts, primarily
noninterest-bearing checking accounts,
maintained at the Bank. See "The Conversion -
Subscription Offering and Subscription Rights"
and " - Community Offering."
Procedure for Ordering Shares Forms to order Common Stock offered in the
and Prospectus Delivery ......... Subscription Offering and the Community
Offering will be preceded or accompanied by a
Prospectus. Any person receiving a stock order
and certification form who desires to
subscribe for shares must do so prior to the
Expiration Date by delivering to the Bank a
properly executed stock order and
certification form together with full payment.
ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT BE
REVOKED OR MODIFIED WITHOUT THE CONSENT OF THE
BANK. To ensure that each purchaser receives a
prospectus at least 48 hours prior to the
Expiration Date in accordance with Rule 15c2-8
of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), no prospectus
will be mailed any later than five days prior
to the Expiration Date or hand delivered any
later than two days prior to such date. The
Bank is not obligated to accept subscriptions
not submitted on an original stock order form.
See "The Conversion - Procedure for Purchasing
Shares in Subscription Offerings."
Form of Payment for Shares ...... Payment for subscriptions may be made: (i) in
cash (if delivered in person); (ii) by check,
bank draft or money order; or (iii) by
authorization of withdrawal from deposit
accounts maintained at the Bank. Orders for
Common Stock submitted by subscribers in the
Subscription Offering which aggregate $50,000
or more must be paid by official bank or
certified check or by withdrawal authorization
from a deposit account of the Bank. No wire
transfers will be accepted. See "The
Conversion - Procedure for Purchasing Shares
in Subscription Offerings."
Nontransferability of The subscription rights of Eligible Account
Subscription Rights ........... Holders, Supplemental Eligible Account
Holders, Other Members and the Employee Plans,
including the ESOP, are nontransferable. See
"The Conversion - Restrictions on Transfer of
Subscription Rights and Shares."
5
<PAGE> 51
Purchase Limitations........... No Eligible Account Holder, Supplemental
Eligible Account Holder or Other Voting Member
may purchase in the Subscription Offering more
than $175,000 of Common Stock. No person,
together with associates or persons acting in
concert with such person, may purchase in the
Community Offering and the Syndicated
Community Offering more than $175,000 of
Common Stock. No person, together with
associates or persons acting in concert with
such person, may purchase in the aggregate
more than 1% of the Common Stock offered.
However, the ESOP, may purchase up to 10% of
the Common Stock issued, including shares
issued to the Foundation. Pursuant to the Plan
of Conversion, it is intended that the ESOP
will purchase 8% of the Common Stock issued,
including shares issued to the Foundation. The
minimum purchase is 25 shares of Common Stock.
At any time during the Conversion and without
approval of the Bank's depositors or a
resolicitation of subscribers, the Bank and
the Company may, in their sole discretion,
decrease the maximum purchase limitation below
$175,000 of Common Stock; however, such amount
may not be reduced to less than 0.10% of the
Common Stock offered. Additionally, at any
time during the Conversion, the Bank and the
Company may, in their sole discretion,
increase the maximum purchase limitation in
the Subscription and Community Offerings to an
amount in excess of $175,000 up to a maximum
of 5% of the shares to be issued in the
Conversion. Similarly, the 1% overall maximum
purchase limitation may be increased up to 5%
of the total shares of Common Stock offered in
the Conversion.
Securities Offered and The Company is offering between 3,825,000 and
Purchase Price............... 5,175,000 shares of Common Stock at a Purchase
Price of $10.00 per share. The maximum of the
Estimated Price Range may be increased by up
to 15% and the maximum number of shares of
Common Stock to be issued may be increased up
to 5,951,250 shares due to regulatory
considerations and changes in market or
general financial or economic conditions. See
"The Conversion - Stock Pricing" and " -
Number of Shares to be Issued."
Appraisal...................... The Purchase Price per share has been fixed at
$10.00. The total number of shares to be
issued in the Conversion is based upon an
independent appraisal prepared by Keller,
dated as of November 28, 1997, which states
that the estimated pro forma market value of
the Common Stock ranged from $38.3 million to
$51.8 million, taking into account shares
issued to the Foundation. Establishing the
Foundation in connection with the Conversion
will result in a lower aggregate market
valuation than if the Conversion was completed
without the Foundation. See "Comparison of
Valuation and Pro Forma Information With No
Foundation." The final aggregate value will be
determined at the time of closing of the
Offerings and is subject to change due to
changing market conditions and other factors.
See "The Conversion - Stock Pricing."
Use of Proceeds................ The Company will use 50% of the net proceeds
of the Offerings to purchase all of the
outstanding common stock of the Bank to be
issued in the Conversion. The portion of net
proceeds retained by the Company will be used
for general business activities, including the
loan of funds to the ESOP (to the extent such
loan is not funded by a third party) to enable
the ESOP to purchase up to 8% of the stock
issued in connection with the Conversion,
including shares issued to the Foundation. The
Company intends initially to invest the
remaining net proceeds in federal funds and
securities, primarily mortgage-related
securities and federal agency obligations. The
Bank intends to utilize the net proceeds from
the sale of its stock to the Company for
general business purposes, including
investment in loans, mortgage-related
securities and, under appropriate market
conditions, the possible repayment of advances
from the Federal Home Loan Bank ("FHLB") of
Pittsburgh. See "Use of Proceeds."
Dividend Policy............... Upon Conversion, the Board of Directors of the
Company will have the authority to declare
dividends on the Common Stock, subject to
statutory and regulatory requirements. In the
future, the Board of Directors of the Company
may consider a policy of paying cash dividends
on the Common Stock. However, no decision has
been made with respect to such dividends, if
any. Additionally, in connection with the
Conversion, the Company and Bank have
committed to the OTS that during the one-year
period following the consummation of the
Conversion, the Company will not make any
distribution to stockholders that, for federal
tax purposes, would be treated as a return of
capital without prior approval of the OTS. See
"Dividend Policy."
6
<PAGE> 52
Benefits of the Conversion to Among the benefits to the Bank and the Company
Management..................... anticipated from the Conversion is the ability
to attract and retain personnel through the
use of stock options and other stock related
benefit programs. Subsequent to the
Conversion, the Company intends to adopt a
Stock-Based Incentive Plan (as defined herein)
for the benefit of directors, officers and
employees of the Company and Bank. If the
Stock-Based Incentive Plan is adopted within
one year after the Conversion, the plan will
be subject to stockholders' approval at a
meeting of stockholders which may not be held
earlier than six months after the Conversion.
The Stock-Based Incentive Plan would provide
for the granting of stock-based benefits,
including Common Stock in an amount equal to
4% of the Common Stock issued in the
Conversion, including shares issued to the
Foundation, and options to purchase Common
Stock in an amount equal to 10% of the Common
Stock issued in the Conversion, including
shares issued to the Foundation. Any Common
Stock awarded under the Stock-Based Incentive
Plan will be awarded at no cost to the
recipients.
Additionally, certain officers of the Company
and the Bank will be provided with employment
agreements or change in control agreements
which provide such officers with employment
rights and/or payments upon their termination
of service following a change in control. The
Stock-Based Incentive Plan may also provide
participants with benefits upon a change in
control of the Company or the Bank. For a
further description of the Stock-Based
Incentive Plan and employment and change in
control agreements, see "Risk Factors - Stock
Based Benefits to Management and Directors,
Employment Contracts and Change in Control
Payments" and "Management of the Bank - Other
Benefit Plans." See "Management of the Bank -
Subscriptions by Executive Officers and
Directors," "Restrictions on Acquisition of
the Company and the Bank - Restrictions in the
Company's Certificate of Incorporation and
Bylaws," and "The Conversion - Establishment
of the Charitable Foundation."
Voting Control of Officers Directors and executive officers of the Bank
and Directors.................. and the Company expect to purchase
approximately 4.48% or 3.35% of shares of
Common Stock outstanding, based upon the
minimum and the maximum of the Estimated Price
Range, including shares issued to the
Foundation, respectively. Additionally,
assuming the implementation of the ESOP and
Stock-Based Incentive Plan, directors,
executive officers and employees have the
potential to control the voting of
approximately 23.89% or 22.75% of the Common
Stock at the minimum and the maximum of the
Estimated Price Range, including shares issued
to the Foundation, respectively. See
"Management of the Bank - Subscriptions by
Executive Officers and Directors," and
"Restrictions on Acquisition of the Company
and the Bank - Restrictions in the Company's
Certificate of Incorporation and Bylaws."
Market for Stock............... As a mutual institution, the Bank has never
issued capital stock and, consequently, there
is no existing market for the Common Stock.
The Company has received conditional approval
to have its Common Stock listed on the
American Stock Exchange under the symbol "NEP"
subject to the completion of the Conversion
and compliance with certain conditions. See
"Market for the Common Stock."
No Board Recommendations........ The Bank's Board of Directors and the
Company's Board of Directors are not making
any recommendations to depositors or other
potential investors regarding whether such
persons should purchase the Common Stock. An
investment in the Common Stock must be made
pursuant to each investor's evaluation of his
or her best interests.
Conversion Center.............. If you have any questions regarding
Conversion, call the Conversion Center at
(717) ____________.
7
<PAGE> 53
RECENT DEVELOPMENTS
The selected financial and other data presented below at December 31, 1997
and for the three month periods ended December 31, 1997 and 1996 are derived
from unaudited financial data, but, in the opinion of management, reflect all
adjustments (consisting only of normal recurring adjustments) which are
necessary to present fairly the results for such interim periods. The results of
operations for the three months ended December 31, 1997 are not necessarily
indicative of the results of operations that may be expected for the fiscal year
ending September 30, 1998.
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, SEPTEMBER 30,
1997 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
SELECTED CONSOLIDATED FINANCIAL DATA:
Total assets .......................................... $386,532 $369,242
Cash and cash equivalents ............................. 4,537 13,214
Loans, net (1) ........................................ 264,509 261,469
Securities held-to-maturity:
Mortgage-related securities, net ................... 10,495 9,965
Investment securities, net ......................... 38,045 28,960
Securities available-for-sale:
Mortgage-related securities, net ................... 34,867 29,982
Investment securities, net ......................... 22,687 14,791
Real estate-owned ..................................... 301 319
Deposits .............................................. 304,119 314,123
FHLB advances ......................................... 49,512 23,516
Total equity .......................................... 29,494 28,538
Nonperforming assets and troubled debt restructuring... 1,110 1,208
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED DECEMBER 31,
--------------------
1997 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
SELECTED CONSOLIDATED OPERATING DATA:
Total interest income ................. $6,914 $6,566
Interest expense ...................... 3,709 3,513
------ ------
Net interest income ................ 3,205 3,053
Provision for loan losses ............. 246 32
------ ------
Net interest income after
provision for loan losses ......... 2,959 3,021
Noninterest income .................... 160 148
Noninterest expense ................... 2,286 2,240
------ ------
Income before income taxes ......... 833 929
Income taxes .......................... 276 285
------ ------
Net income ......................... $ 557 $ 644
====== ======
</TABLE>
9
<PAGE> 54
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS
ENDED DECEMBER 31,
--------------------------
1997 1996
----------- ----------
<S> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA(2):
PERFORMANCE RATIOS:
Average interest rate spread(3) .......................... 3.22% 3.39%
Net interest margin(4) ................................... 3.60 3.55
Ratio of average interest-earning assets to average
interest-bearing liabilities ............................ 105.33 104.98
Total noninterest expense as a percent of average assets.. 2.40 2.49
Return on average assets ................................. 0.59 0.72
Return on average equity ................................. 7.98 9.76
Ratio of average retained equity to average assets ....... 7.31 7.28
Retained earnings to total assets at end of period ....... 7.20 7.42
REGULATORY CAPITAL RATIOS (5):
Tangible capital ratio ................................... 7.20 7.42
Core capital ratio ....................................... 7.20 7.42
Risk-based capital ratio ................................. 14.80 14.61
ASSET QUALITY RATIOS :
Nonperforming loans and troubled debt restructurings
as a percent of total loans(6) ....................... 0.28 0.30
Nonperforming assets and troubled debt restructurings
as a percent of total assets (7) ..................... 0.29 0.37
Allowance for loan losses as a percent of total loans .... 0.56 0.30
Allowance for loan losses as a percent of non-
performing loans and troubled debt restructurings ...... 200.40 56.94
FULL-SERVICE BANKING FACILITIES (8) .......................... 9 9
</TABLE>
- -----------------
(1) Loans, net, represent gross loans receivable net of the Bank's allowance
for loan losses, loans in process and deferred loan origination fees. The
allowance for loan losses at December 31, 1997 and 1996 was $1.5 million
and $742,000, respectively.
(2) 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 monthly balances during the indicated periods and are
annualized where appropriate.
(3) 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. See "Business of the
Bank -- Sources of Funds."
(4) The net interest margin represents net interest income as a percent of
average interest-earning assets. See "Business of the Bank -- Sources of
Funds."
(5) For definitions and further information relating to the Bank's regulatory
capital, see "Regulation and Supervision -- FDIC Regulations - Capital
Requirements." See "Regulatory Capital Compliance" for the Bank's pro
forma capital levels as a result of the Offerings.
(6) Nonperforming loans consist of all non-accrual loans and all other loans
90 days or more past due. It is the policy of the Bank to cease accruing
interest on loans 90 days or more past due (unless the loan principal and
interest are determined by management to be fully secured and in the
process of collection) and to charge off all accrued interest. See
"Business of the Bank -- Delinquent Loans, Classified Assets and Real
Estate Owned."
(7) Nonperforming assets consist of nonperforming loans, real estate-owned,
net ("REO"), and other repossessed assets.
(8) In January 1998, the Bank opened an additional branch office and combined
one of its previous two separate loan production offices with that branch
office.
10
<PAGE> 55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND SEPTEMBER 30, 1997
Total assets increased by $17.3 million, or 4.7%, from $369.2 million at
September 30, 1997 to $386.5 million at December 31, 1997. The growth in assets
was due to increases in investments, which were funded primarily through FHLB
advances and a reduction in cash and cash equivalents.
At the end of its fiscal year ended September 30, 1997, the Bank
restructured its available-for-sale securities portfolio in order to increase
its yield on such portfolio. This restructuring involved the sale of its
lower-yielding shorter-term available-for-sale securities in order to reinvest
the proceeds in higher-yielding mortgage-related securities and federal agency
and municipal obligations with stated or estimated lives of three to five years.
Pending reinvestment, some of such proceeds were used to repay FHLB advances and
held as cash and cash equivalents. The Bank completed the reinvestment of such
proceeds during October and November 1997. As a result, cash and cash
equivalents decreased $8.7 million from $13.2 million at September 30, 1997 to
$4.5 million at December 31, 1997. The Bank's portfolio of securities available
for sale increased by $12.8 million, or 28.6%, from $44.8 million at September
30, 1997 to $57.6 million at December 31, 1997, and its portfolio of securities
held to maturity increased by $9.6 million, or 24.7% from $38.9 million to $48.5
million. Such increases in the securities portfolios were funded by FHLB
advances in addition to the reinvestment of amounts held as cash and cash
equivalents.
Loans receivable, net, remained relatively constant for the period,
growing $3.0 million from $261.5 million to $264.5 million, an increase of 1.2%.
Nonperforming loans remained relatively stable, decreasing $132,000 from
$774,000 at September 30, 1997 to $642,000 at December 31, 1997, representing
0.30% and 0.24%, respectively, of total loans at such dates. Nonperforming
assets and troubled debt restructurings also remained stable, decreasing from
$1.2 million at September 30, 1997 to $1.1 million at December 31, 1997,
representing 0.32% and 0.29%, respectively, of total assets at such dates.
Total deposits decreased by $10.0 million, or 3.2%, from $314.1 million at
September 30, 1997 to $304.1 million at December 31, 1997. The decrease was
primarily due to a $10.4 million, or 5.7%, decrease in certificates of deposit
from $192.7 million at September 30, 1997 to $182.3 million at December 31,
1997, primarily as a result of maturities of $9.7 million in jumbo certificates
of deposit which were not renewed. Management determined there were
opportunities to obtain FHLB advances at a lower effective rate than required to
retain the jumbo certificates of deposit. There was also a $1.6 million, or
2.2%, decrease in savings deposits, from $71.8 million at September 30, 1997 to
$70.2 million at December 31, 1997. The decrease in deposits was slightly offset
by an increase of $2.0 million, or 4.0%, in checking account deposits from $49.6
million at September 30, 1997 to $51.7 million at December 31, 1997.
FHLB advances and other borrowings increased by $26.1 million, from $23.6
million at September 30, 1997 to $49.7 million at December 31, 1997. The
increase in FHLB advances and other borrowings was primarily due to the
utilization of advances to fund purchases of investment securities, as part of
the Bank's restructuring of the available-for-sale securities portfolio that the
Bank commenced in September 1997, as well as to offset the withdrawals of the
jumbo certificates of deposits.
Total equity increased by $956,000, or 3.4%, from $28.5 million at
September 30, 1997 to $29.5 million at December 31, 1997. The increase in equity
was a result of retained earnings of $557,000 and a $399,000 increase in net
unrealized gain on available-for-sale securities, net of taxes.
11
<PAGE> 56
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996
GENERAL
Net income for the three months ended December 31, 1997 was $557,000, a
decrease of $87,000, or 13.5%, from $644,000 for the three months ended December
31, 1996. The $87,000 decrease was primarily attributable to an increase of
$214,000 in the provision for loan losses. This increase in provision for loan
losses was offset by an increase in net interest income of $152,000 from $3.05
million for the three months ended December 31, 1996 to $3.21 million for the
three months ended December 31, 1997 and an increase in noninterest income of
$12,000, from $148,000 for the three months ended December 31, 1996 to $160,000
for the three months ended December 31, 1997, an increase of 8.1%. Also,
contributing to the decrease in net income for the December 31, 1997 period was
an increase of $50,000 in noninterest expenses, from $2.24 million for the three
months ended December 31, 1996 to $2.29 million for the three months ended
December 31, 1997, a 2.2% increase.
INTEREST INCOME
Interest income for the three months ended December 31, 1997 was $6.9
million, compared to $6.6 million for the three months ended December 31, 1996,
an increase of $348,000, or 5.3%. The increase in interest income was primarily
the result of a $18.2 million increase in the average balance of loans from
$247.8 million at December 31, 1996 to $266.0 million average balance at
December 31, 1997.
INTEREST EXPENSE
Interest expense increased $196,000, or 72.2%, in the three months ended
December 31, 1996 compared to the three months ended December 31, 1997, as a
result of an increase of $200,000 in interest expense on FHLB advances, from
$277,000 to $477,000 for the same respective periods. This increase was a result
of an increase of $13.2 million in the average balance in FHLB advances, from
$20.5 million at December 31, 1996 to $33.7 million at December 31, 1997. In
addition, the cost of FHLB advances increased by 24 basis points, from 5.34% for
the three months ended December 31, 1996 to 5.58% for the three months ended
December 31, 1997. The average balance in deposits increased $2.2 million from
$311.3 million for the three months ended December 31, 1996 to $313.5 million
for the three months ended December 31, 1997. Offsetting the increase in the
average deposits was a reduction during the period in the cost of funds for
savings and checking of 24 basis points and 21 basis points, respectively. This
was partially offset by a 10 basis point increase in the cost of funds for
certificates of deposit.
PROVISION/ALLOWANCE FOR LOAN LOSSES
The Bank's provision for loan losses totalled $246,000 for the three
months ended December 31, 1997, compared to $32,000 for the three months ended
December 31, 1996, an increase of $214,000. The allowance for loan losses
increased from $742,000 at December 31, 1996 to $1.5 million at December 31,
1997. The increase in the provision for loan losses and corresponding increase
in the allowance for loan losses reflected the changing loan portfolio
composition caused by a change in management's strategic lending direction, as
well as a decision to give a greater consideration to the allowance for loan
loss ratio levels of peer group institutions. The Bank continues to anticipate,
that as a result of its increasing emphasis on consumer, commercial,
multi-family, and commercial real estate and construction lending, in the
future, it may need to maintain an allowance for loan losses at a higher level
than it has maintained in previous periods to offset any greater risk resulting
from the shifting composition of its loan portfolio. See "Business of the Bank
- -- Delinquent Loans, Classified Assets, and Real Estate Owned" and "Allowance
for Loan Losses."
12
<PAGE> 57
NONINTEREST INCOME
Noninterest income increased $12,000 to $160,000 for the three months
ended December 31, 1997, from $148,000 for the three months ended December 31,
1996. Noninterest income improved primarily due to additional loan fee and other
service charge income, particularly the implementation in fiscal 1997 of ATM
fees for non-bank customers.
NONINTEREST EXPENSE
Noninterest expense increased by $46,000, or 2.1% from $2.24 million for
the three months ended December 31, 1996, to $2.29 million for the three months
ended December 31, 1997, primarily due to a contribution of $110,000 to a low
and moderate income housing project. The Company expects that such contribution
will result in $55,000 of Commonwealth of Pennsylvania tax credits under
Pennsylvania's Neighborhood Assistance Program. This increase in noninterest
expense was partially offset by a $32,000 reduction in compensation from $1.16
million for the three months ended December 31, 1996 to $1.13 million for the
three months ended December 31, 1997, a reduction of 2.76%. As a result of
becoming a publicly held company and implementing various stock-based incentive
plans, the Company expects its future noninterest expense will be higher than in
prior periods primarily due to higher compensation costs, and professional fees
and costs related to satisfying regulatory reporting requirements. In addition,
establishment of the Foundation will have an adverse effect on the Company's and
the Bank's earnings in the year in which the contribution is made. The
contribution expense will, however, be partially offset by the tax deductibility
of the expense. See "Risk Factors - Establishment of the Charitable Foundation -
Negative Impact on Earnings" and "- Stock-Based Benefits to Management and
Directors, Employment Contracts and Change in Control Payments."
INCOME TAXES
Income tax expense was $276,000 for the three months ended December 31,
1997, compared to $285,000 for the three months ended December 31, 1996. The
decline in income tax expense for 1997 is attributable to lower pretax earnings,
offset by a reduction of 1996 state income tax credits not available for 1997.
The effective tax rate for the three months ended December 31, 1997 was 33.1%,
as compared to 30.7% for the same period in 1996, as a result of the state
income tax credits utilized in 1996.
13
<PAGE> 58
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE BANK
The selected consolidated financial and other data of the Bank
set forth below is derived in part from, and should be read in
conjunction with, the Consolidated Financial Statements of the Bank
and Notes thereto presented elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- --------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED FINANCIAL DATA:
Total assets ........................ $369,242 $362,464 $318,931 $283,344 $280,237
Cash and cash equivalents............ 13,214 4,045 3,681 4,137 21,732
Loans, net (1) ...................... 261,469 242,916 213,515 188,501 180,132
Securities held-to-maturity (2):
Mortgage-related securities, net .. 9,965 13,386 51,868 51,045 28,434
Investment securities, net ........ 28,960 30,100 26,355 27,661 23,316
Securities available-for-sale (2):
Mortgage-related securities, net .. 29,982 37,259 497 -- 14,950
Investment securities, net ........ 14,791 22,899 12,826 -- 2,166
Deposits ............................ 314,123 306,806 280,010 257,161 257,598
FHLB advances ....................... 23,516 25,534 11,050 120 123
Total equity ........................ 28,538 26,127 25,550 23,183 20,432
Real estate owned, net .............. 319 453 423 250 119
Nonperforming assets and
troubled debt restructurings ...... 1,208 1,169 1,670 1,863 1,982
</TABLE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income ................. $ 26,599 $24,323 $ 21,280 $ 19,578 $22,054
Interest expense ...................... 14,194 13,007 10,845 8,827 10,244
-------- ------- -------- -------- -------
Net interest income ................. 12,405 11,316 10,435 10,751 11,810
Provision for loan losses ............. 651 97 25 (54) --
-------- ------- -------- -------- -------
Net interest income after provision 11,754 11,219 10,410 10,805 11,810
for loan losses ...................
Noninterest income:
Net gain (loss) on sale of securities (563) -- (6) 153 234
Other(3) ............................ 430 508 605 460 1,800
Noninterest expense ................... 9,492 10,774(4) 8,360 7,924 8,456
-------- ------- -------- -------- -------
Income before income taxes ............ 2,129 953 2,649 3,494 5,388
Income taxes .......................... 748 12 899 743 2,143
-------- ------- -------- -------- -------
Net income .......................... $ 1,381 $ 941 $ 1,750 $ 2,751 $ 3,245
======== ======= ======== ======== =======
</TABLE>
(See footnotes on next page)
8
<PAGE> 59
<TABLE>
<CAPTION>
AT OR FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------
1997 1996 1995 1994 1993
----------- --------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING RATIOS AND OTHER DATA (5):
PERFORMANCE RATIOS:
Average yield on interest-earning assets(6) ...... 7.53% 7.44% 7.38% 7.18% 8.16%
Average rate paid on interest-bearing liabilities 4.22 4.23 3.98 3.44 4.01
Average interest rate spread (7) ................. 3.31 3.21 3.40 3.74 4.15
Net interest margin (8) .......................... 3.49 3.45 3.60 4.06 4.21
Ratio of interest-earning assets to 109.23 107.95 108.43 107.28 100.07
interest-bearing liabilities ...................
Net interest income after provision for loan 123.83 104.13 124.52 136.28 139.97
losses to noninterest expense ..................
Noninterest expense as a percent of 2.58 3.19 2.78 2.80 2.99
average assets .................................
Return on average assets ......................... 0.38 0.28 0.58 0.98 1.15
Return on average equity ......................... 4.98 3.59 7.06 12.64 19.60
Ratio of average equity to average assets ........ 7.53 7.74 8.25 7.67 7.54
REGULATORY CAPITAL RATIOS:(9) .......................
Tangible capital ratio ........................... 7.39 7.15 7.82 8.20 7.29
Core capital ratio ............................... 7.39 7.15 7.82 8.20 7.29
Risk-based capital ratio ......................... 14.40 14.23 14.70 16.20 16.20
ASSET QUALITY RATIOS:
Nonperforming loans and troubled debt ............ 0.34 0.29 0.58 0.85 1.03
restructurings as a percent of total loans (10)
Nonperforming assets and troubled debt 0.38 0.38 0.52 0.66 0.71
restructurings as a percent of total assets(11)
Allowance for loan losses as a percent 0.48 0.30 0.33 0.40 0.53
of total loans .................................
Allowance for loan losses as a percent of 143.57 101.96 58.67 48.27 52.80
nonperforming loans and troubled debt ..........
restructurings(1)(10) ..........................
Net loans charged-off to average interest- 0.04 0.04 0.03 0.08 0.35
earning loans ..................................
FULL SERVICE OFFICES AT END OF PERIOD(12) ........... 9 9 9 8 8
</TABLE>
- ---------------
(1) Loans, net, represents gross loans receivable net of the allowance for
loan losses, loans in process and deferred loan origination fees. The
allowance for loan losses at September 30, 1997, 1996 , 1995, 1994 and
1993 was $1.3 million, $730,000, $724,000, $769,000 and $979,000,
respectively.
(2) The Bank adopted Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," during fiscal 1994.
(3) Includes $176,000 net loss for disposition of branch equipment in
connection with a branch relocation in fiscal 1998 and $1.2 million net
gain on sale of real estate loans in fiscal 1993.
(4) Includes a one-time special assessment of $1.7 million in order to
recapitalize the SAIF fund in fiscal 1996.
(5) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based
on average daily balances during the indicated periods.
(6) Calculations of yield for 1997 and 1996 are presented on a taxable
equivalent basis using the combined Federal and state income tax rate of
40% for 1997 and 1996. The Bank did not have securities exempt from
Federal or state income taxes in previous years.
(7) The average interest rate spread represents the difference between the
weighted average yield on average interest-earning assets and the
weighted average cost of average interest-bearing liabilities.
(8) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(9) For definitions and further information relating to the Bank's
regulatory capital requirements, see "Regulation - Capital
Requirements." See "Regulatory Capital Compliance" for the Bank's pro
forma capital levels as a result of the Offerings.
(10) Non-performing loans consist of all non-accrual loans and all other
loans 90 days or more past due. It is the policy of the Bank to cease
accruing interest on loans 90 days or more past due (unless the loan
principal and interest are determined by management to be fully secured
and in the process of collections) and to charge off all accrued
interest. See "Business of the Bank - Delinquent Loans, Classified
Assets, and Real Estate Owned."
(11) Non-performing assets consist of non-performing loans, other repossessed
assets and real estate owned, net ("REO").
(12) In January 1998, the Bank opened an additional branch office and
combined one of its previous two separate loan production offices with
that branch office.
9
<PAGE> 60
RISK FACTORS
The following risk factors, in addition to those discussed elsewhere in
this Prospectus, should be considered by investors in deciding whether to
purchase the Common Stock offered hereby.
SENSITIVITY TO CHANGES IN INTEREST RATES
The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as loans
and investments, and its interest expense on interest-bearing liabilities, such
as deposits and borrowings. Accordingly, the Bank's results of operations and
financial condition are largely dependent on movements in market interest rates
and its ability to manage its assets in response to such movements.
The Bank anticipates that an increase in interest rates could have an
adverse effect on the Bank. The Bank primarily monitors its interest rate
sensitivity through the use of a model which estimates the change in the Bank's
net portfolio value ("NPV") over a range of interest rate scenarios. NPV is the
present value of expected cash flows from assets, liabilities and off-balance
sheet contracts. As of September 30, 1997, based on assumptions utilized by the
Bank, it is estimated that a 200 basis point increase in market interest rates
would result in a 25% decrease in NPV, compared to a 10% estimated increase in
NPV as a result of a 200 basis point decrease in market interest rates. Such
estimates are not intended and do not provide a precise forecast of the effect
of changes in market interest rates on the Bank's net interest income. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Management of Interest Rate Risk."
Another measurement of interest rate sensitivity is a comparison of
interest-bearing assets and interest-bearing liabilities maturing or repricing
during a period. At September 30, 1997, the Bank's total interest-bearing
liabilities maturing or repricing within one year exceeded its total
interest-earning assets maturing or repricing in the same time period by $36.4
million, representing a cumulative one-year interest sensitivity gap as a
percentage of total assets of negative 9.9%. However, that interest sensitivity
gap reflected the temporary use of proceeds from the sale of investment and
mortgage-related securities at the end of fiscal 1997, which significantly
increased interest-bearing deposits and reduced FHLB advances as of September
30, 1997 compared to their levels immediately prior to the sale of securities.
The Bank believes that, after giving effect to the subsequent reinvestment of
such proceeds, its cumulative one-year interest rate sensitivity gap as a
percent of total assets would have approximated a negative 15% as of September
30, 1997. Such a negative interest rate gap indicates that, in a rapidly rising
interest rate environment, the cost of the Bank's interest-bearing liabilities
will generally increase at a rate faster than the yield on its interest-earning
assets, thereby adversely affecting the Bank's net interest income. Increases in
interest rates also could adversely affect the type (fixed-rate or
adjustable-rate) and amount of loans originated by the Bank and the average life
of loans and securities which, in turn, could adversely impact the yields earned
on the Bank's loan and securities portfolios as well as the amount of secondary
market activity in which the Bank engages.
The Bank attempts to manage its interest rate risk primarily by
emphasizing the origination and retention of adjustable-rate and shorter-term
fixed-rate loans, limiting its retention of longer-term, fixed-rate one- to
four-family loans to 20% of loan originations during a year and investing in
securities with shorter stated or estimated maturities. Although the interest
rate gap analysis presents the stated maturity of the Bank's investment
securities, the Bank also evaluates the estimated life of such securities.
Therefore, the
10
<PAGE> 61
Bank could be subject to an increased interest rate risk or reinvestment risk
compared to its evaluation of that risk if changes in interest rates exceed
ranges anticipated by the Bank in estimating the anticipated life of callable
investment securities in which it has invested and/or if such changes result in
changes in prepayments on loans and mortgage-related securities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Management of Interest Rate Risk."
Increases in market interest rates would result in an increase in the
interest rates on the Bank's adjustable-rate loans, thereby causing higher loan
payment amounts by the borrowers which, in turn, may result in elevated
delinquencies on such loans. Increases in the level of interest rates may also
adversely affect the value of the Bank's investment and mortgage-related
securities and other interest-earning assets and, in turn, its results of
operations or retained earnings. At September 30, 1997, the Bank's investment
securities available-for-sale had an estimated fair value of $44.8 million,
which was greater than the amortized cost of $42.6 million. At the same date,
the Bank's investment securities, including mortgage-related securities,
held-to-maturity had an estimated fair value of $38.9 million, which was $56,000
less than their amortized cost. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Management of Interest Rate
Risk," "Business of Bank - Lending Activities - One- to Four-Family Mortgage
Lending" and " - Investment Activities."
POTENTIAL LOW RETURN ON EQUITY FOLLOWING THE CONVERSION
At September 30, 1997, the Bank's ratio of equity to total assets was
7.7%. The Company's equity position will be significantly increased as a result
of the Conversion. On a pro forma basis as of September 30, 1997, assuming the
sale of Common Stock at the midpoint of the Estimated Price Range, the Company's
ratio of equity to assets would exceed 17.2%. The Company's ability to deploy
this new capital through investments in interest-earning assets, such as loans
and securities which bear rates of return comparable to its current loans and
securities investments, will be significantly affected by industry competition.
The Company currently anticipates that it will take time to prudently deploy
such capital. As a result, the Company's return on equity initially is expected
to be below its historical return on equity and may be below peer group
institutions after the Conversion. No assurances can be made as to when or if
the Company will achieve returns on its equity that are comparable to industry
peers or industry averages. Additionally, due to the implementation of
stock-based benefit plans such as the ESOP and Stock-Based Incentive Plan, the
Company's future compensation expense will be increased, thereby, adversely
affecting its net income and return on equity.
WEAKNESS OF REGIONAL AND LOCAL ECONOMY
Economic conditions at the local and national levels, as well as
government policies and regulations concerning, among other things, monetary and
fiscal affairs, significantly affect the operations of financial institutions
such as the Bank. The population of the market in which the Bank operates is
relatively small and in recent years has grown slowly, or in the case of Luzerne
County in which the Bank is headquartered, remained relatively static. In
addition, the population of Luzerne County has one of the oldest average ages of
all counties in the United States and the unemployment rate in the Bank's market
area is greater than the national average. Further, because of the number of
financial institutions competing for funds in the market, the Bank has
experienced increased competition for loan and deposit customers. Accordingly,
the Bank could be exposed to a higher cost of funds and/or a decreased net
interest margin in the future.
11
<PAGE> 62
INCREASED LENDING RISK ASSOCIATED WITH THE BANK'S CONSUMER, COMMERCIAL,
MULTI-FAMILY AND COMMERCIAL REAL ESTATE, AND CONSTRUCTION LENDING.
The Bank's aggregate portfolio of consumer, commercial, multi-family and
commercial real estate, and construction loans aggregated $85.1 million, or
32.2% of its total loan portfolio as of September 30, 1997. These types of loans
are generally considered to involve a higher degree of risk compared to first
mortgage loans on one- to four-family real property. The Bank's increased
emphasis on such types of loans has contributed to the Bank increasing its
provision for loan losses in recent periods in order to increase the overall
level of its loan loss allowance. As a result, the Bank's loan loss allowance
at September 30, 1996 was $730,000, or 0.30%, of total loans compared to $1.3
million, or 0.48%, at September 30, 1997. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Comparison of
Operating Results for the Fiscal Years ended September 30, 1997 and September
30, 1996 -- Provision for Loan Losses," "Recent Developments" and "Business of
the Bank -- Lending Activities."
Consumer Loans. At September 30, 1997, the Bank's consumer loan
portfolio totaled $61.8 million, or 23.4% of total loans. These consumer loans
include home equity loans and home equity lines of credit, which although
secured by one- to four-family real property, generally are secured by a second
lien rather than a first mortgage on such property. The consumer loans also
include automobile and other loans for the purchase of recreational vehicles and
boats, the collateral for which depreciates rapidly and, if the loan is
defaulted upon, may not provide an adequate source of repayment. In addition,
consumer loans generally are dependent on the borrower's continuing financial
stability and, therefore, are more likely to be adversely affected by
unemployment, divorce, illness or personal bankruptcy.
Commercial Loans. The Bank's commercial loans at September 30, 1997
totaled $10.8 million, or 4.1% of total loans. Risk of loss on commercial
business lending is dependent in significant part on the business success of the
borrower and on general economic conditions in the region or industry in which
the borrower operates. Commercial business loans also require continued review
and evaluation regarding the performance of the borrower.
Multi-family and Commercial Real Estate Loans. The Bank's multi-family
and commercial real estate loans aggregated $6.7 million or 2.5% of total loans
at September 30, 1997. Multi-family and commercial real estate loans generally
involve larger principal amounts than one- to four-family mortgage loans. In
addition, because multi-family and commercial real estate loans often are
dependent on successful operation and management of the properties, repayment of
such loans may be subject to adverse conditions in the real estate market or the
economy to a greater extent than one- to four-family loans.
Construction Loans. At September 30, 1997, construction loans totaled
$5.8 million, or 2.2% of total loans, and during fiscal year 1997 the Bank
originated $14.2 million of construction loans for one- to four-family
properties, or 19.7% of total loan originations for that year. The Bank has
primarily originated construction loans for the construction of one- to
four-family properties but offers such loans for the development of multi-family
and commercial properties. Construction loans are generally considered to
involve a higher degree of credit risk than long-term financing on improved,
owner-occupied real estate because the risk of loss on such loans is dependent
largely upon the accuracy of the initial estimate of the property's value at
completion of construction or development compared to the estimated cost
(including interest) of construction. If the estimate of value proves to be
inaccurate, the property securing the loan, when completed, may have a value
which is insufficient to assure full repayment of the loan.
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
Pursuant to the Plan, the Company intends to establish a charitable
foundation in connection with the Conversion. The Plan provides that the Bank
and the Company will establish the Foundation, which will be incorporated under
Delaware law as a non-stock corporation and will be funded with shares of Common
Stock contributed by the Company. Establishment of the Foundation is subject to
the approval of the Bank's
12
<PAGE> 63
members at the Special Meeting. If approved by members, the establishment of the
Foundation will be dilutive to the voting and ownership interests of
stockholders and will have an adverse impact on the operating results of the
Company in fiscal 1998, possibly resulting in an operating loss in fiscal 1998,
the fiscal year in which the Foundation is established.
Dilution of Stockholders' Interests. The Company proposes to establish
the Foundation with Company Common Stock in an amount equal to 8% of the Common
Stock sold in the Conversion. At the minimum, midpoint and maximum of the
Estimated Price Range, the contribution to the Foundation would be 306,000,
360,000, and 414,000 shares, with a value of $3.1 million, $3.6 million and $4.1
million, respectively, based on the Purchase Price of $10.00 per share. Upon
completion of the Conversion and establishment of the Foundation, the Company
will have 5,589,000 shares issued and outstanding at the maximum of the
Estimated Price Range, of which the Foundation will own 414,000 shares, or 7.4%.
AS A RESULT, PERSONS PURCHASING SHARES IN THE CONVERSION WILL HAVE THEIR
OWNERSHIP AND VOTING INTERESTS IN THE COMPANY DILUTED BY 7.4%. SEE "PRO FORMA
DATA."
Negative Impact on Earnings. Assuming receipt of approval of the Bank's
members, establishment of the Foundation will have an adverse impact on the
Company's and the Bank's earnings in the year in which the contribution is made.
The Company will recognize an expense in the amount of the contribution to the
Foundation in the quarter in which it occurs, which is expected to be the third
quarter of fiscal 1998. Such expense will reduce earnings and have a material
adverse impact on the Company's earnings for the year. The amount of the
contribution will range from $3.1 million to $4.1 million, depending on the
amount of Common Stock sold in the Conversion. The contribution expense will be
partially offset by the tax deductibility of the expense. The Company has been
advised by its independent accountants that the contribution to the Foundation
will be deductible for federal income tax purposes, subject to a limitation
based on 10% of the Company's annual taxable income. Assuming a contribution of
$4.1 million in Common Stock, based on the maximum of the Estimated Price Range,
the Company estimates a net tax effected expense of $2.7 million. If the
Foundation had been established at September 30, 1997, the Bank would have
reported a net loss of $1.3 million for fiscal 1997 rather than reporting net
income of $1.4 million. In addition to the contribution to the Foundation, the
Bank expects in the future to continue making ordinary charitable contributions
within its community.
Possible Nondeductibility of the Contribution. The Company and the Bank
have been advised by their independent accountants that an organization created
for charitable purposes will qualify as a Section 501(c)(3) exempt organization
under the Code, and will be classified as a private foundation. In this regard,
the Foundation will submit a request to the Internal Revenue Service ("IRS") to
be recognized as a tax-exempt organization. The Company and the Bank have
received an opinion of their independent accountants that the Foundation will
qualify as a Section 501(c)(3) exempt organization under the Code, except that
such opinion does not consider the impact of the regulatory condition on the
gift imposed by the OTS which requires the shares of Common Stock of the Company
held by the Foundation to be voted in the same ratio as all other shares of the
Company's Common Stock on all proposals considered by stockholders of the
Company. See "The Conversion -- Establishment of the Charitable Foundation
- --Regulatory Conditions Imposed on the Foundation." In the event that the
Company or the Foundation receives an opinion of their tax counsel satisfactory
to OTS that compliance with the voting restriction would have the effect of
causing the Foundation to lose its tax exempt status, otherwise have material
adverse tax consequences on the Foundation or subject the Foundation to an
excise tax under Section 4941 of the Code, the OTS will waive such voting
restriction upon submission of such opinion(s) by the Company or the Foundation.
The independent accountants' opinion further provides that the Company's
contribution of its own stock to the
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<PAGE> 64
Foundation will not constitute an act of self-dealing, and that the Company will
be entitled to a deduction in the amount of the fair market value of the stock
at the time of the contribution less the nominal par value that the Foundation
is required to pay to the Company for such stock, subject to an annual
limitation based on 10% of the Company's annual taxable income. The Company,
however, would be able to carry forward any unused portion of the deduction for
five years following the year in which the contribution is initially made for
federal tax purposes, subject to the 10% annual limitation. Thus, while the
Company expects, based on the maximum of the Estimated Price Range, to be able
to utilize for federal income tax purposes a charitable contribution deduction
of approximately $450,000 in fiscal year 1998, the Company is permitted under
the Code to carryover the excess of the total contribution over such 1998
deduction over a five-year period for federal tax purposes. For Commonwealth of
Pennsylvania income tax purposes, the Company also will be able to deduct its
contributions and to carry forward the unused portion of the deduction for a
five-year period following the year in which the contribution is initially made,
subject to limitations based on 10% of the Company's unconsolidated annual
taxable income, and provided the Company generates sufficient state taxable
income on an unconsolidated basis. Assuming the sale of Common Stock at the
maximum of the Estimated Price Range, the Company estimates that substantially
all of the contribution should be deductible for federal tax purposes over the
combined six-year period. However, no assurances can be made that the Company
will have sufficient pre-tax income over the five-year period following the year
in which the contribution is initially made to fully utilize the carryover
related to the excess contribution. Although the Company and the Bank have
received an opinion of their independent accountants that the Company will be
entitled to the deduction for the charitable contribution, there can be no
assurances that the IRS will recognize the Foundation as a Section 501(c)(3)
exempt organization or that the deduction will be permitted. In such event,
there would be no tax benefit related to the Foundation.
Comparison of Valuation and Other Factors Assuming the Foundation is
Not Established as Part of the Conversion. The establishment of the Foundation
was taken into account by Keller in determining the estimated pro forma market
value of the Company. The aggregate price of the shares of Common Stock being
offered in the Subscription and Community Offerings is based upon the
independent appraisal conducted by Keller of the estimated pro forma market
value of the Company. The pro forma aggregate price of the shares being offered
for sale in the Conversion is currently estimated to be between $38.3 million
and $51.8 million, with a midpoint of $45.0 million. Based on the appraisal, the
pro forma market capitalization of the Bank at the midpoint, including shares
contributed to the Foundation, is $48.6 million. The pro forma price to book
ratio and the pro forma price to earnings ratio are 71.78% and 15.15x,
respectively, at the midpoint of the Estimated Price Range. In the event that
the Conversion did not include the Foundation, Keller has estimated that the
estimated pro forma market capitalization of the Bank would be approximately
$53.1 million at the midpoint based on the pro forma price to book ratio and the
pro forma price to earnings ratio that are approximately the same as the
independent appraisal at 71.85% and 15.40x, respectively. If the Foundation was
not part of the Conversion, the pro forma market value of the shares being
offered is estimated to be between $45.1 million and $61.1 million. See
"Comparison of Valuation and Pro Forma Information with No Foundation." This
estimate by Keller was prepared at the request of the OTS and is solely for
purposes of providing depositors with sufficient information with which to make
an informed decision on the Foundation. There is no assurance that if the
Foundation is not approved the appraisal prepared at that time would conclude
that the pro forma market value of the Company would be the same as the amount
estimated herein. Any appraisal prepared at that time would be based on the
facts and circumstances existing at that time, including, among other things,
market and economic conditions.
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<PAGE> 65
The Bank believes that the establishment of the Foundation is in the
best interests of the Bank, its depositors, its prospective stockholders and the
communities in which it operates. The Foundation is integrally tied to the
Bank's business of operating a community banking institution and the Bank
believes that, based upon the additional goodwill and visibility expected to be
generated by the Foundation and the expected benefits it will provide the
communities in which the Bank's customers reside, the Foundation will have a
positive impact on the Bank's long-term franchise value. The amount of Common
Stock being offered in the Conversion at the midpoint of the Estimated Price
Range is approximately $8.1 million less than the estimated amount of Common
Stock that would be offered in the Conversion without the Foundation based on
the estimate provided by Keller. Accordingly, certain depositors of the Bank who
subscribe to purchase Common Stock in the Subscription Offering may receive
fewer shares depending on the appraisal valuation at that time, the number of
shares sold based on that appraisal, the size of a depositor's stock order, the
amount of his or her qualifying deposits in the Bank and the overall level of
subscriptions. The decrease in the amount of Common Stock being offered will not
have a significant effect on the Company or the Bank's capital position. The
Bank's regulatory capital is significantly in excess of its regulatory capital
requirements and will further exceed such requirements following the Conversion.
The Bank's tangible, leverage and risk-based capital ratios at September 30,
1997 were 7.4%, 7.4% and 14.4%, respectively. Assuming the sale of shares at the
midpoint of the Estimated Price Range, the Bank's pro forma tangible, leverage
and risk-based capital ratios at September 30, 1997 would be 12.6%, 12.6% and
24.1%, respectively. On a consolidated basis, the Company's pro forma
stockholders' equity would be $67.7 million or approximately 16.5% of pro forma
consolidated assets, assuming the sale of shares at the midpoint of the
Estimated Price Range. Pro forma stockholders' equity per share and pro forma
net earnings per share would be $13.93 and $0.66, respectively. If the
Foundation was not being established in the Conversion, based on the Keller
estimate, the Company's pro forma stockholders' equity would be approximately
$73.9 million or approximately 17.8% of pro forma consolidated assets at the
midpoint of the estimate and pro forma stockholders' equity per share and pro
forma net earnings per share would be approximately the same with the Foundation
as without the establishment of the Foundation. See "Comparison of Valuation and
Pro Forma Information with No Foundation."
Potential Anti-Takeover Effect. If approved by the Bank's members, upon
completion of the Conversion, the Foundation will own 7.4% of the total shares
of the Company's Common Stock outstanding. Such shares will be owned solely by
the Foundation; however, pursuant to the terms of the contribution as mandated
by the OTS, the shares of Common Stock held by the Foundation must be voted in
the same ratio as all other shares of the Company's Common Stock on all
proposals considered by the stockholders of the Company. See "The Conversion --
Establishment of the Charitable Foundation -- Regulatory Conditions Imposed on
the Foundation." The Company and the Foundation will take the necessary steps to
provide such requirement in the Foundation's corporate governance documents. As
such, the Company does not believe the Foundation will have an anti-takeover
effect on the Company. In the event that the OTS were to waive this voting
restriction, the Foundation's board of directors would exercise sole voting
power over such shares and would no longer be subject to the restriction.
However, the OTS could impose additional conditions at that time on the
composition of the board of directors of the Foundation or which otherwise
related to control of the Common Stock of the Company held by the Foundation.
See "The Conversion -- Establishment of the Charitable Foundation -- Regulatory
Conditions Imposed on the Foundation." If a waiver of the voting restriction
were granted by the OTS and no further conditions were imposed on the Foundation
at that time, management of the Company and the Bank may benefit to the extent
that the board of directors of the Foundation determines to vote the shares of
Common Stock held by the Foundation in favor of proposals supported by the
Company and the Bank. In such event, when the Foundation's shares are combined
with shares purchased directly by officers and directors of the Company, shares
held by proposed stock benefit plans, if approved by stockholders, and shares
held in the Bank's ESOP, the aggregate of such shares could exceed 20% of the
Company's outstanding Common Stock, which could enable management to defeat
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<PAGE> 66
stockholder proposals requiring 80% approval. Consequently, in the event the
voting restriction was waived, this potential voting control might preclude
takeover attempts that certain stockholders deem to be in their best interest,
and might tend to perpetuate management. Since the ESOP shares are allocated to
all eligible employees of the Bank, and any unallocated shares will be voted by
an independent trustee, and because awards under the proposed stock benefit
plans may be granted to employees other than executive officers and directors,
management of the Company does not expect to have voting control of all shares
held or allocated by the ESOP or other stock benefit plans. See " -- Certain
Anti-Takeover Provisions Which May Discourage Takeover Attempts -- Voting
Control of Officers and Directors."
Further, there will be no agreements or understandings, written or
tacit, with respect to the exercise of either direct or indirect control over
the management or policies of the Company by the Foundation which may discourage
takeover attempts, including agreements related to voting, acquisition or
disposition of the Company's Common Stock. Finally, as the Foundation sells its
shares of Common Stock over time, its ownership interest and voting power in the
Company are expected to decrease.
Potential Challenges. The establishment and funding of a charitable
foundation as part of a conversion is innovative and has been done in a limited
number of instances in connection with a conversion. As such, the Foundation may
be subject to potential challenges notwithstanding that the Boards of Directors
of the Company and the Bank have carefully considered the various factors
involved in the establishment of the Foundation in reaching its determination to
establish the Foundation as part of the Conversion. See "The Conversion --
Establishment of the Charitable Foundation -- Purpose of the Foundation." In
conjunction with its approval of the Conversion, the Bank determined to submit
the Foundation for a vote of members so that members have a right to vote on
whether the Foundation should be established as part of the Conversion. If
certain parties were to institute an action seeking to require the Bank to
eliminate establishment of the Foundation in connection with the Conversion, no
assurances can be made that the resolution of such action would not result in a
delay in the consummation of the Conversion or that any objecting persons would
not be ultimately successful in obtaining such removal or other equitable relief
or monetary damages against the Company or the Bank. Additionally, if the
Company and the Bank are forced to eliminate the Foundation, the Company may be
required to resolicit subscribers in the Offerings.
Approval of Members. Establishment of the Foundation is subject to the
approval of a majority of the total outstanding votes of the Bank's members
eligible to be cast at the Special Meeting. The Foundation will be considered as
a separate matter from approval of the Plan of Conversion. If the Bank's members
approve the Plan of Conversion, but not the establishment of the Foundation, the
Bank intends to complete the Conversion without the establishment of the
Foundation. Failure to approve the Foundation may materially increase the pro
forma market value of the Common Stock being offered for sale in the Offerings
since the Valuation Range, as set forth herein, takes into account the dilutive
impact of the issuance of shares to the Foundation. If the pro forma market
value of the Common Stock without the Foundation is either greater than $59.5
million or less than $38.2 million, the Bank will establish a new Estimated
Price Range and commence a resolicitation of subscribers (i.e., subscribers will
be permitted to continue their orders, in which case they will need to
affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their subscriptions funds will be promptly refunded
with interest at the Bank's passbook rate of interest, or be permitted to
increase, decrease, or cancel their subscriptions). Any change in the Estimated
Price Range must be approved by the OTS. See "The Conversion -- Stock Pricing."
A resolicitation, if any, following the conclusion of the Subscription and
Community Offerings would not exceed 45 days unless further extended by the OTS
for periods of up to 90 days not to extend beyond _______________, 199_.
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<PAGE> 67
HIGHLY COMPETITIVE INDUSTRY
The Bank faces significant competition in its market area both in
attracting deposits and in originating loans. The Bank's market area is a highly
competitive market. The population of the market is relatively small and
population growth is moderate and is static in the county in which the Bank is
headquartered. The Bank faces direct competition from a significant number of
financial service providers operating in its market area, many with a state-wide
or regional presence, and, in some cases, a national presence. This competition
arises from commercial banks, savings banks, mortgage brokers, mortgage banking
companies, credit unions, and other providers of financial services, many of
which are significantly larger than the Bank and, therefore, have greater
financial and marketing resources than those of the Bank. The Bank's competitive
environment raises the possibility of increasing its cost of funds and lowering
the yields the Bank may achieve on its loans. See "Business of the Bank --
Market Area and Competition."
FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION
The Bank is subject to extensive regulation and supervision as a federal
savings association. In addition, the Company, as a savings and loan holding
company, is subject to extensive regulation and supervision. Such regulations,
which affect the Bank on a daily basis, may be changed at any time, and the
interpretation of the relevant law and regulations is also subject to change by
the authorities who examine the Bank and interpret those laws and regulations.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the OTS, the FDIC or the Congress, could have a material
impact on the Company, the Bank, its operations or the Bank's Conversion. See
"Regulation."
STOCK-BASED BENEFITS TO MANAGEMENT AND DIRECTORS, EMPLOYMENT CONTRACTS AND
CHANGE IN CONTROL PAYMENTS
Stock-Based Incentive Plan. The Company intends to adopt a Stock-Based
Incentive Plan which would provide for the granting of options to purchase
common stock ("Stock Options"), awards of common stock ("Stock Awards"), and
certain related rights to eligible officers, employees and directors of the
Company and Bank. While the Company currently anticipates granting Stock Options
and Stock Awards under a single plan, it may establish separate plans to provide
for such awards. In the event such plan is adopted within one year after
conversion, OTS regulations require the plan to be approved by stockholders at a
meeting of stockholders which may be held no earlier than six months after
completion of the Conversion. It is anticipated the Stock-Based Incentive Plan
will provide for the granting of options to purchase shares of Common Stock
equal to 10% of the shares of Common Stock issued in the Conversion, including
shares issued to the Foundation (413,100 shares and 558,900 shares at the
minimum and maximum of the Estimated Price Range, respectively) and the granting
of Stock Awards in an amount equal to 4% of the shares of Common Stock issued in
the Conversion, including shares issued to the Foundation (165,240 shares and
233,560 shares at the minimum and maximum of the Estimated Price Range,
respectively). Shares of common stock used to satisfy such awards will be
acquired by the Plan or a trust established for the Plan either through open
market purchases or from authorized but unissued Common Stock. See " -- Possible
Dilutive Effect of Stock-Based Incentive Plan."
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<PAGE> 68
Under the Stock-Based Incentive Plan, Stock Awards would be granted in
the form of non-transferable, non-assignable shares of Common Stock. The Board
of Directors intends to appoint an independent trustee who will vote unallocated
stock awards in the same proportion as it receives instructions from recipients
with respect to allocated shares which have not been earned and distributed. The
trustee will not vote allocated shares which have not been distributed if it
does not receive instructions from the recipient.
It is anticipated that the exercise price of Stock Options granted under
the Stock-Based Incentive Plan will be equal to the fair market value of the
underlying Common Stock on the date of grant. Such options will permit such
officers and directors to benefit from any increase in the market value of the
shares in excess of the exercise price at the time of exercise. Officers and
directors receiving Stock Options will not be required to pay for the shares
until the date of exercise. The granting of Stock Awards and the exercise of
non-statutory stock options (and disqualifying dispositions of stock acquired
through the exercise of incentive stock options) will result in additional
compensation expense to the Company and, accordingly, may result in an increase
in the overall compensation expense in future periods. See "Management of the
Bank -- Other Benefit Plans."
Although no specific award determinations have been made, the Company
anticipates that it will provide Stock Awards and/or Stock Options to directors,
officers and employees to the extent permitted by applicable regulations.
Current OTS regulations provide that, with respect to any non-tax qualified
stock benefit plan such as the Stock-Based Incentive Plan, which is implemented
within one year after consummation of the Conversion, no individual may receive
more than 25% of the shares or options of any such plan and non-employee
directors may not receive more than 5% individually, or 30% in the aggregate, of
the shares or options awarded under any such plan. Such regulations also provide
that any awards granted under such a Plan may not vest at a rate greater than
20% per year except in limited circumstances. It is also anticipated that the
Stock-Based Incentive Plan will provide for cash payments to participants in the
event of a change in control of the Company or Bank.
The Board of Directors, in determining specific allocations and grants
of Stock Awards and Stock Options, will consider various factors, including but
not limited to, the financial condition of the Company, current and past
performance of plan participants and tax and securities law and regulation
requirements.
Employment Contracts and Change in Control Provisions. Employment and
change in control agreements with certain officers and the employee severance
compensation plan provide for benefits and cash payments in the event of a
change in control of the Company or the Bank. The provisions in such agreements
and plan would provide the recipient with a change in control payment in the
event of the recipient's involuntary or, in certain circumstances, voluntary
termination of employment subsequent to a change in control of the Company or
the Bank. In addition to any payments which may be made under the Stock-Based
Incentive Plan upon a change in control, these provisions may have the effect of
increasing the cost of acquiring the Company, thereby discouraging future
attempts to take over the Company or the Bank. Based on current salaries, cash
payments to be paid in the event of a change in control pursuant to the terms of
the employment agreements, change in control agreements and an employee
severance compensation plan would be approximately $3.7 million. However, the
actual amount to be paid in the event of a change in control of the Company or
Bank cannot be estimated at this time because the actual amount is based on the
average salary of the employee and other factors existing at the time of the
change in control. See "Restrictions on Acquisition of the Company and the Bank
- -- Restrictions in the Company's Certificate of Incorporation and Bylaws,"
"Management of the Bank -- Employment Agreements," " -- Change in Control
Agreements," " -- Employee Severance Compensation Plan" and " -Other Benefit
Plans."
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<PAGE> 69
POSSIBLE DILUTIVE EFFECT OF STOCK-BASED INCENTIVE PLAN
Following the Conversion, the Stock-Based Incentive Plan will acquire an
amount of shares equal to 4% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation, either through open
market purchases or the issuance of authorized but unissued shares of Common
Stock from the Company. If the Stock-Based Incentive Plan is funded by the
issuance of authorized but unissued shares, the voting interests of existing
stockholders at that time will be diluted by 3.8%. Also following the
Conversion, directors, officers and employees will be granted stock options
under the Stock-Based Incentive Plan in an amount equal to 10% of the Common
Stock issued in the Conversion, including shares issued to the Foundation. The
exercise of such stock options may be satisfied by the issuance of authorized
but unissued shares. Under certain circumstances, such options may be exercised
and sold on the same day, thereby eliminating any risk to officers and directors
in exercising options in the event that the market price exceeds the exercise
price. If all of the stock options were to be exercised using authorized but
unissued Common Stock and the stock awards granted under the Stock-Based
Incentive Plan were funded with authorized but unissued shares, the voting
interests of existing stockholders at that time would be diluted at that time by
12.3%.
CERTAIN ANTI-TAKEOVER PROVISIONS WHICH MAY DISCOURAGE TAKEOVER ATTEMPTS
Provisions in the Company's and the Bank's Governing Instruments.
Certain provisions of the Company's Certificate of Incorporation and Bylaws,
particularly a provision limiting voting rights, and the Bank's Stock Charter
and Bylaws, as well as certain federal regulations, assist the Company in
maintaining its status as an independent publicly owned corporation. These
provisions provide for, among other things, supermajority voting on certain
matters, staggered boards of directors, non-cumulative voting for directors,
limits on the calling of special meetings, limits on voting shares in excess of
10% of outstanding shares, and certain uniform price provisions for certain
business combinations. The Bank's Stock Charter also prohibits, for five years,
the acquisition or offer to acquire, directly or indirectly, the beneficial
ownership of more than 10% of the Bank's equity securities. Any person violating
this restriction may not vote the Bank's securities in excess of 10%. These
provisions in the Bank's and the Company's governing instruments may discourage
potential proxy contests and other potential takeover attempts, particularly
those which have not been negotiated with the Board of Directors, and thus,
generally may serve to perpetuate existing management. For a more detailed
discussion of these provisions, see "Restrictions on Acquisitions of the Company
and the Bank."
Voting Control of Officers and Directors. Directors and officers of the
Bank and the Company expect to purchase approximately 4.48% or 3.35% of the
shares of Common Stock to be issued in the Conversion, including shares issued
to the Foundation based upon the minimum and the maximum of the Estimated Price
Range, respectively, exclusive of shares that may be attributable to directors
and officers through the Stock-Based Incentive Plan (exclusive of shares to be
issued upon the exercise of options) and the ESOP, which plans may give
directors, officers and employees the potential to control the voting of an
additional 12.0% of the Company's Common Stock assuming such plans were funded
with authorized but unissued shares. In addition, the Foundation will be funded
with a contribution by the Company equal to 8% of the Common Stock sold in the
Conversion, which if a waiver of the voting restriction imposed on such Common
Stock is obtained from the OTS, may be voted as determined by the directors of
the Foundation who also will be directors or officers of the Company and Bank.
Management's potential voting control could, together with additional
stockholder support, defeat stockholder proposals requiring 80% approval of
stockholders. As a result, this potential voting control may preclude takeover
attempts that certain stockholders deem to be in their best interest and may
tend to perpetuate existing
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<PAGE> 70
management. See "Restrictions on Acquisition of the Company and the Bank
- --Restrictions in the Company's Certificate of Incorporation and Bylaws."
ABSENCE OF MARKET FOR COMMON STOCK
The Company and the Bank have never issued capital stock. The Company
has received conditional approval to have its Common Stock listed on the AMEX
under the symbol "NEP" upon completion of the Conversion. However, there can be
no assurance that an active and liquid trading market for the Common Stock will
develop or, once developed, will continue, nor can there be any assurances that
purchasers of the Common Stock will be able to sell their shares at or above the
Purchase Price. The absence or discontinuance of a market for the Common Stock
would have an adverse impact on both the price and liquidity of the Common
Stock. See "Market for the Common Stock."
POSSIBLE INCREASE IN ESTIMATED PRICE RANGE AND NUMBER OF SHARES ISSUED
The number of shares to be issued in the Conversion, including shares
issued to the Foundation may be increased as a result of an increase in the
Estimated Price Range of up to 15% to reflect changes in market and financial
conditions following the commencement of the Subscription and Community
Offerings. In the event that the Estimated Price Range is so increased, it is
expected that the Company will issue up to 5,951,250 shares of Common Stock at
the Purchase Price for an aggregate purchase price of up to $59.5 million. An
increase in the number of shares issued will decrease a subscriber's pro forma
net earnings per share and stockholders' equity per share and will increase the
Company's pro forma consolidated stockholders' equity and net earnings. Such an
increase will also increase the Purchase Price as a percentage of pro forma
stockholders' equity per share and net earnings per share.
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
The Bank has received an opinion of Keller that, pursuant to Keller's
Valuation, subscription rights granted to Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members have no value. However, such
valuation is not binding on the IRS. If the subscription rights granted to
Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members are deemed to have an ascertainable value, receipt of such rights could
result in taxable gain to those Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members who receive and/or exercise the subscription
rights in an amount equal to such value. Additionally, the Bank could recognize
a gain for tax purposes on such distribution. Whether subscription rights are
considered to have ascertainable value is an inherently factual determination.
See "The Conversion -- Effects of Conversion" and " -- Tax Aspects."
YEAR 2000 COMPLIANCE
As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Many existing application software products were
designed to accommodate only two-digits. For example, "96" is stored on the
system and represents 1996. The Company has been identifying potential problems
associated with the "Year 2000" issue and has implemented a plan designated to
ensure that all software used in connection with the Company's business will
manage and manipulate data involving the transition with data from 1999 to 2000
without functional or data abnormality and without inaccurate results related to
such data. The Bank has prepared a critical issues schedule with a timeline and
assigned responsibilities. In addition, the Bank recognizes that its ability to
be Year 2000 compliant is dependent upon the cooperation of its vendors. The
Bank is requiring its computer systems and software vendors to represent that
the products provided are or will be Year 2000 compliant and has planned a
program of testing for compliance. The Bank has received representations from
its primary third party vendors that they will have resolved any Year 2000
problems in their software by December 31, 1998 and anticipates that all of its
vendors also will have resolved any Year 2000 problems in their software by that
same date. All Year 2000 issues for the Bank, including testing, are expected to
be addressed by December 31, 1998 and any problems would be remedied by March
31, 1999. The Bank will also prepare contingency plans in the event there are
any system interruptions. The Bank believes that its costs related to Year 2000
will be approximately $100,000. There can be no assurances, however, that such
plan or the performance by the Bank's vendors will be effective to remedy all
potential problems. To the extent the Company's systems are not fully Year 2000
compliant, there can be no assurance that potential systems interruptions or the
cost necessary to update software would not have a materially adverse effect on
the Company's business, financial condition, results of operations and business
prospects. Further, any Year 2000 failure on the part of the Bank's customers
could result in additional expense or loss to the Bank. The Bank plans also to
work with its customers to address any potential Year 2000 problems.
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<PAGE> 71
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
The Company was organized in Delaware at the direction of the Board of
Directors of the Bank for the purpose of acquiring all of the capital stock to
be issued by the Bank in the Conversion. The Company has received approval from
the OTS to become a savings and loan holding company and, as such, will be
subject to regulation by the OTS. See "The Conversion -- General." Upon
consummation of the Conversion, the Company will conduct business initially as a
unitary savings and loan holding company. See "Regulation -- Holding Company
Regulation." After completion of the Conversion, the Company's assets will
consist of all of the outstanding shares of the Bank's capital stock issued to
the Company in the Conversion and that portion of the net proceeds of the
Offerings retained by the Company. The Company intends to use part of the net
proceeds it retains to loan funds to the ESOP to enable the ESOP to purchase 8%
of the Common Stock issued in the Conversion, including shares issued to the
Foundation. The Company and Bank may, however, alternatively choose to fund the
ESOP through a loan to the ESOP trust by a third-party financial institution.
The Company intends to initially utilize the remaining proceeds for investments
in mortgage-related securities and federal agency obligations. See "Use of
Proceeds." Immediately after the Conversion, the Company will have no
significant liabilities. The management of the Company is set forth under
"Management of the Company." Initially, the Company will neither own nor lease
any property, but will instead use the premises, equipment and furniture of the
Bank. At the present time, the Company does not intend to employ any persons
other than officers of the Company who are also officers of the Bank, but will
utilize the support staff of the Bank from time to time. Additional employees
will be hired as appropriate to the extent the Company expands its business in
the future.
Management believes that the holding company structure will provide the
Company with additional flexibility to diversify, should it decide to do so, its
business activities through existing or newly-formed subsidiaries, or through
acquisitions of other financial institutions and financial services related
companies. In addition, management believes that the Company will be in a
position after the Conversion, subject to regulatory limitations and the
Company's financial position, to take advantage of any acquisition and expansion
opportunities that may arise. There are no current arrangements, understandings
or agreements, written or oral, regarding any such opportunities or
transactions. The initial activities of the Company are anticipated to be funded
by the net proceeds retained by the Company and earnings thereon or,
alternatively, through dividends from the Bank.
The Company's executive offices are located at 12 E. Broad Street,
Hazleton, Pennsylvania 18201 and its telephone number is (717) 459-3700.
21
<PAGE> 72
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF HAZLETON
The Bank was organized in 1935 as a federally chartered savings and loan
association. The Bank operates as a community bank and its corporate philosophy
has traditionally been focused on providing a competitive array of financial
products and services to consumers within its market area. The Bank's business
primarily consists of accepting deposits from customers and investing those
funds primarily in mortgage loans secured by one- to four-family residences,
consumer loans and, to a lesser extent, other types of loans and securities. At
September 30, 1997, the Bank had $264.2 million, or 71.6% of total assets, of
loans, consisting of: $179.1 million, or 48.5% of total assets, of one- to
four-family mortgage loans, $61.8 million, or 16.7% of total assets, of consumer
loans (consisting primarily of home equity loans, home equity lines of credit,
automobile loans and education loans); $10.8 million, or 2.9% of total assets,
of commercial loans; $6.7 million, or 1.8% of total assets, of multi-family and
commercial real estate loans, and $5.8 million, or 1.6% of total assets, of
construction loans. Securities at September 30, 1997 totaled $83.7 million, or
22.7% of total assets, consisting of: $43.8 million, or 11.9% of total assets of
investment securities (consisting primarily of U.S. Government agency and
municipal obligations) and $39.9 million, or 10.8% of total assets, of
mortgage-related securities (consisting primarily of those issued by government
agencies such as Fannie Mae ("FNMA"), Freddie Mac ("FHLMC"), and Ginnie Mae
("GNMA"). At September 30, 1997, the Bank's deposit accounts totaled $314.1
million, or 92.2% of total liabilities. The Bank also utilizes advances from the
FHLB of Pittsburgh as a source of funds. At September 30, 1997, such advances
totaled $23.5 million, or 6.9% of total liabilities.
The Bank is subject to extensive regulation, supervision and examination
by the OTS, its primary regulator, and the FDIC, which insures its deposits. As
of September 30, 1997, the Bank exceeded all regulatory capital requirements
with tangible, core and risk-based capital of $27.3 million, $27.3 million and
$28.5 million, respectively. Additionally, the Bank's regulatory capital was in
excess of the amount necessary for the Bank to be deemed "well capitalized"
under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"). See "Regulatory Capital Compliance" and "Regulation." The Bank is a
member of the FHLB of Pittsburgh which is one of the twelve regional banks which
comprise the FHLB system. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business of the Bank."
The Bank's executive offices are located at 12 E. Broad Street,
Hazleton, Pennsylvania 18201 and its telephone number is (717) 459-3700.
22
<PAGE> 73
REGULATORY CAPITAL COMPLIANCE
At September 30, 1997, the Bank exceeded all regulatory capital
requirements. See "Regulation -- Federal Savings Institution Regulation --
Capital Requirements." Set forth below is a summary of the Bank's compliance
with the regulatory capital standards as of September 30, 1997, on a historical
and pro forma basis assuming that the indicated number of shares were sold as of
such date and receipt by the Bank of 50% of the net proceeds. For purposes of
the table below, the amount expected to be borrowed by the ESOP and the cost of
the shares expected to be acquired by the Stock-Based Incentive Plan are
deducted from pro forma regulatory capital.
<TABLE>
<CAPTION>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF HAZLETON
PRO FORMA AT SEPTEMBER 30, 1997 BASED UPON THE SALE AT $10.00 PER SHARE
-----------------------------------------------------------------------
3,825,000 SHARES 4,500,000 SHARES 5,175,000 SHARES
HISTORICAL AT (MINIMUM OF ESTIMATED (MIDPOINT OF ESTIMATED (MAXIMUM OF ESTIMATED
SEPTEMBER 30, 1997 PRICE RANGE) PRICE RANGE) PRICE RANGE)
------------------ ------------ ------------ ------------
PERCENT PERCENT PERCENT PERCENT
OF OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
------ --------- ------ --------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital(3) ............ $28,538 7.7% $47,068 12.1% $50,405 12.9% $53,741 13.6%
======= ==== ======= ==== ======= ==== ======= ====
Tangible Capital:
Capital Level ..... $27,255 7.4% $45,785 11.8% $49,122 12.6% $52,458 13.8%
Requirement ....... 5,539 1.5 5,826 1.5 5,867 1.5 5,927 1.5
------- ---- ------- ---- ------- ---- ------- ----
Excess ............ $21,716 5.9% $39,950 10.3% 43,255 11.1% $48,531 11.8%
======= ==== ======= ==== ======= ==== ======= ====
Core Capital:
Capital Level ..... $27,255 7.4% $45,785 11.8% $49,122 12.6% $52,458 13.3%
Requirement(4) .... 11,077 3.0 11,651 3.0 11,733 3.0 11,854 3.0
------- ---- ------- ---- ------- ---- ------- ----
Excess ............ $16,178 4.4% $34,134 8.8% $37,388 9.6% $40,605 10.3%
======= ==== ======= ==== ======= ==== ======= ====
Risk-Based Capital:
Capital Level(5)(6) $28,527 14.4% $47,057 22.7% $50,394 24.1% $53,730 25.5%
Requirement ....... 15,845 8.0 16,610 8.0 $16,720 8.0 16,853 8.0
------- ---- ------- ---- ------- ---- ------- ----
Excess ............ $12,682 6.4% $30,447 14.7% $33,674 16.1% $36,877 17.5%
======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
<TABLE>
<CAPTION>
FIRST FEDERAL SAVINGS AND
LOAN ASSOCIATION OF HAZLETON
PRO FORMA AT
SEPTEMBER 30, 1997
BASED UPON THE SALE
AT $10.00 PER SHARE
-----------------------------
5,951,250 SHARES
(15% ABOVE
MAXIMUM OF
ESTIMATED
PRICE RANGE)(1)
---------------
PERCENT
OF
AMOUNT ASSETS(2)
--------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
GAAP Capital(3) .................... $57,578 14.5%
======= ====
Tangible Capital:
Capital Level ............. $56,295 14.1%
Requirement ............... 5,974 1.5
------- ----
Excess .................... $50,321 12.6%
======= ====
Core Capital:
Capital Level ............. $56,295 14.1%
Requirement(4) ............ 11,948 3.0
------- ----
Excess .................... $44,347 11.1%
======= ====
Risk-Based Capital:
Capital Level(5)(6) ....... $57,567 27.1%
Requirement ............... 17,007 8.0
------- ----
Excess .................... $40,580 19.1%
======= ====
</TABLE>
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to
15% as a result of regulatory considerations or changes in market or
general financial and economic conditions following the commencement of
the Subscription and Community Offerings.
(2) Tangible capital levels are shown as a percentage of tangible assets.
Core capital levels are shown as a percentage of total adjusted assets.
Risk-based capital levels are shown as a percentage of risk-weighed
assets.
(3) GAAP Capital includes unrealized gain on available-for-sale securities,
net, which is not included as regulatory capital.
(4) The current OTS core capital requirement for savings associations is 3%
of total adjusted assets. The OTS has proposed core capital
requirements which would require a core capital ratio of 3% of total
adjusted assets for thrifts that receive the highest supervisory rating
for safety and soundness and a 4% to 5% core capital ratio requirement
for all other thrifts. See "Regulation -- Federal Savings Institution
Regulation -- Capital Requirements."
(5) Assumes net proceeds are invested in assets that carry a 50%
risk-weighting.
(6) The difference between equity under generally accepted accounting
principles ("GAAP") and regulatory risk-based capital is attributable
to the addition of the general valuation allowance of $1.3 million at
September 30, 1997 (in addition to the exclusion of unrealized gain on
available-for-sale securities, net).
23
<PAGE> 74
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock
cannot be determined until the Conversion is completed, it is presently
anticipated that the net proceeds from the sale of the Common Stock will be
between $37.1 million and $50.4 million (or $58.1 million if the Estimated Price
Range is increased by 15%). See "Pro Forma Data" and "The Conversion-- Stock
Pricing" as to the assumptions used to arrive at such amounts. The Company will
be unable to utilize any of the net proceeds of the Offerings until the
consummation of the Conversion.
The Company will purchase all of the outstanding capital stock of the
Bank to be issued upon Conversion in exchange for 50% of the net proceeds, with
the remaining net proceeds to be retained by the Company. Based on the midpoint
of the Estimated Price Range, the Company expects to utilize the $21.9 million
of net proceeds to purchase the common stock of the Bank. Such portion of net
proceeds will be added to the Bank's general funds which the Bank currently
intends to utilize for general corporate purposes, including investments in
loans, mortgage-related and investment securities, the possible repayment of
FHLB advances under appropriate market conditions, and the funding of
stock-based benefit plans. The Bank may also use such funds for the expansion of
its facilities, and to expand operations through acquisitions of other financial
institutions, branch offices or other financial services companies. The Bank has
not yet determined the approximate amount of net proceeds to be used for any of
the purposes mentioned above.
The Company intends to use a portion of the net proceeds to make a loan
directly to the ESOP to enable the ESOP to purchase 8% of the Common Stock
issued in the Conversion, including shares issued to the Foundation. The Company
and Bank may alternatively choose to fund the ESOP's stock purchases through a
loan by a third-party financial institution. The remaining net proceeds retained
by the Company will initially be invested in mortgage-related securities and
federal agency obligations. Based upon the sale of 3,825,000 shares or 5,175,000
shares at the minimum and maximum of the Estimated Price Range, and the issuance
of shares to the Foundation, the amount of the loan to the ESOP would be $3.3
million or $4.5 million, respectively (or $5.1 million if the Estimated Price
Range is increased by 15%) to be repaid over a 10-year period at the prevailing
prime rate of interest, which currently is 8.5%. See "Management of the Bank --
Other Benefit Plans -- Employee Stock Ownership Plan."
The net proceeds retained by the Company may also be used to support
the future expansion of operations through branch acquisitions, the
establishment of branch offices and the acquisition of other financial
institutions or their assets, including those located within the Bank's market
area or diversification into other banking related businesses. The Company has
no current arrangements, understandings or agreements regarding any such
opportunities or transactions. The Company, upon the Conversion, will be a
unitary savings and loan holding company, which under existing laws would
generally not be restricted as to the types of business activities in which it
may engage, provided that the Bank continues to be a qualified thrift lender
("QTL"). See "Regulation -- Holding Company Regulation" for a description of
certain regulations applicable to the Company.
Upon completion of the Conversion, the Board of Directors of the
Company will have the authority to adopt stock repurchase plans, subject to
statutory and regulatory requirements. Unless approved by the OTS, the Company,
pursuant to OTS regulations, will be prohibited from repurchasing any shares of
the Common Stock for three years except (i) for an offer to all stockholders on
a pro rata basis, or (ii) for the repurchase of qualifying shares of a director.
Notwithstanding the foregoing and except as provided below, beginning one year
following completion of the Conversion, the OTS regulations permit the Company
to
24
<PAGE> 75
repurchase its Common Stock so long as: (i) the repurchases within the following
two years are part of an open-market program not involving greater than 5% of
its outstanding capital stock during a 12-month period; (ii) the repurchases do
not cause the Bank to become "undercapitalized" within the meaning of the OTS
prompt corrective action regulation; and (iii) the Company provides to the
Regional Director of the OTS no later than 10 days prior to the commencement of
a repurchase program written notice containing a full description of the program
to be undertaken and such program is not disapproved by the Regional Director.
See "Regulation -- Prompt Corrective Regulatory Action." In addition, under
current OTS policies, repurchases may be allowed in the first year following
Conversion and in amounts greater than 5% in the second and third years
following Conversion provided there are valid and compelling business reasons
for such repurchases and the OTS does not object to such repurchases.
Based upon facts and circumstances following Conversion and subject to
applicable regulatory requirements, the Board of Directors may determine to
repurchase stock in the future. Such facts and circumstances may include but are
not limited to: (i) market and economic factors such as the price at which the
stock is trading in the market, the volume of trading, the attractiveness of
other investment alternatives in terms of the rate of return and risk involved
in the investment, the ability to increase the book value and/or earnings per
share of the remaining outstanding shares, and the opportunity to improve the
Company's return on equity; (ii) the avoidance of dilution to stockholders by
not having to issue additional shares to cover the exercise of stock options or
to fund employee stock benefit plans; and (iii) any other circumstances in which
repurchases would be in the best interests of the Company and its shareholders.
Although the Company has no current plans to repurchase its stock, in the event
the Company does determine to repurchase stock, such repurchases may be made at
market prices which may be in excess of the Purchase Price in the Conversion.
Any stock repurchases will be subject to the determination of the Board
of Directors that both the Company and the Bank will be capitalized in excess of
all applicable regulatory requirements after any such repurchases and that such
capital will be adequate, taking into account, among other things, the level of
non-performing and other risk assets, the Company's and the Bank's current and
projected results of operations and asset/liability structure, the economic
environment, tax and other considerations. See "The Conversion-- Certain
Restrictions on Purchase or Transfer of Shares After Conversion."
Additionally, in connection with the Conversion, the Company and Bank
have committed to the OTS that during the one-year period following the
consummation of the Conversion, the Company will not make any distribution to
stockholders that, for federal tax purposes, would be treated as a return of
capital without prior approval of the OTS.
DIVIDEND POLICY
Upon Conversion, the Board of Directors of the Company will have the
authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. In the future, the Board of Directors intends to
consider a policy of paying cash or stock dividends on the Common Stock.
However, no decision has been made with respect to the payment of dividends.
Declarations of dividends by the Board of Directors, if any, will depend upon a
number of factors, including the amount of net proceeds retained by the Company
in the Conversion, investment opportunities available to the Company or the
Bank, capital requirements, regulatory limitations, the Company's and the Bank's
financial condition and results of operations, tax considerations and general
economic conditions. No assurances can be given, however, that any dividends
will be paid or, if commenced, will continue to be paid.
The Bank will not be permitted to pay dividends to the Company on its
capital stock if its stockholders' equity would be reduced below the amount
required for the liquidation account. See "The Conversion-- Liquidation Rights."
For information concerning federal regulations which apply to the Bank in
determining the amount of proceeds which may be retained by the Company and
regarding a savings
25
<PAGE> 76
institution's ability to make capital distributions, including payment of
dividends to its holding company, see "Federal and State Taxation -- Federal
Taxation -- Distributions" and "Regulation -- Federal Savings Institution
Regulation -- Limitation on Capital Distributions."
Unlike the Bank, the Company is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders, although the
source of such dividends will be dependent on the net proceeds retained by the
Company and earnings thereon and may be dependent, in part, upon dividends from
the Bank. The Company is subject, however, to the requirements of Delaware law,
which generally limits dividends to an amount equal to the excess of the net
assets of the Company (the amount by which total assets exceed total
liabilities) over its statutory capital (generally defined as the aggregate par
value of the outstanding shares of the Company's capital stock having a par
value plus the amount of the consideration paid for shares of the Company's
capital stock without par value) or, if there is no such excess, to its net
profits for the current and/or immediately preceding fiscal year.
Additionally, in connection with the Conversion, the Company and Bank
have committed to the OTS that during the one-year period following the
consummation of the Conversion, the Company will not make any distribution to
stockholders that, for federal tax purposes, would be treated as a return of
capital without prior approval of the OTS.
MARKET FOR THE COMMON STOCK
The Company and Bank have not previously issued capital stock and,
consequently, there is no established market for the Common Stock. The Company
has received conditional approval to have its Common Stock listed on the AMEX
under the symbol "NEP" upon completion of the Conversion. Such approval is
subject to various conditions, including completion of the Conversion and the
satisfaction of applicable listing criteria. There can be no assurance that the
Common Stock will be able to meet the applicable listing criteria in order to
maintain its listing on the AMEX or that an active and liquid trading market
will develop or, if developed, will be maintained. A public market having the
desirable characteristics of depth, liquidity and orderliness, however, depends
upon the presence in the marketplace of both willing buyers and sellers of
Common Stock at any given time, which is not within the control of the Company.
No assurance can be given that an investor will be able to resell the Common
Stock at or above the purchase price of the Common Stock after the Conversion.
26
<PAGE> 77
CAPITALIZATION
The following table presents the unaudited historical consolidated
capitalization of the Bank at September 30, 1997, and the pro forma consolidated
capitalization of the Company after giving effect to the Conversion, including
the issuance of shares to the Foundation, based upon the sale of the number of
shares indicated in the table and the other assumptions set forth under "Pro
Forma Data."
<TABLE>
<CAPTION>
COMPANY PRO FORMA BASED UPON SALE AT $10.00 PER SHARE
------------------------------------------------------
5,951,250
SHARES
3,825,000 4,500,000 5,175,000 (15% ABOVE
SHARES SHARES SHARES MAXIMUM OF
(MINIMUM (MIDPOINT OF (MAXIMUM ESTIMATED
BANK OF ESTIMATED ESTIMATED OF ESTIMATED PRICE
HISTORICAL PRICE RANGE) PRICE RANGE) PRICE RANGE) RANGE)(1)
---------- ------------ ------------ ------------ ---------
(IN THOUSANDS)
Borrowings:
<S> <C> <C> <C> <C> <C>
Deposits(2) ......................................... $314,123 $ 314,123 $ 314,123 $ 314,123 $ 314,123
FHLB advances and other borrowings .................. 23,608 23,608 23,608 23,608 23,608
-------- --------- --------- --------- ---------
Total ...................................... $337,731 $ 337,731 $ 337,731 $ 337,731 $ 337,731
======== ========= ========= ========= =========
Stockholders' equity:
Preferred Stock, $.01 par value, 2,000,000 shares
authorized; none to be issued...................... $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par value, 16,000,000 shares
authorized; shares to be issued as reflected....... -- 41 49 56 64
Additional paid-in capital(3) ....................... -- 37,019 43,684 50,350 58,016
Retained earnings(4) ................................ 27,255 27,255 27,255 27,255 27,255
Unrealized gain on available-for-sale securities, net 1,283 1,283 1,283 1,283 1,283
Less: Expense of contribution to the Foundation,
net of taxes(5).................................... -- (1,986) (2,336) (2,687) (3,090)
Plus: Shares issued to the Foundation .............. -- 3,060 3,600 4,140 4,761
Less: Common Stock acquired by the ESOP(6) ......... -- (3,305) (3,888) (4,471) (5,142)
Less: Common Stock acquired by the Stock-Based
Incentive Plan (7)................................. -- (1,652) (1,944) (2,236) (2,571)
-------- --------- --------- --------- ---------
Total stockholders' equity ........ $ 28,538 $ 61,715 $ 67,703 $ 73,690 $ 80,576
======== ========= ========= ========= =========
</TABLE>
- --------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to
15% as a result of regulatory considerations or changes in market or
general financial and economic conditions following the commencement of
the Subscription and Community Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) No effect has been given to the issuance of additional shares of Common
Stock to the Foundation at a value of $10.00 per share or to the
issuance of additional shares for option grants under the Company's
Stock-Based Incentive Plan intended to be adopted by the Company. An
amount equal to 10% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation, will be reserved
for issuance upon the exercise of options to be granted under the
Stock-Based Incentive Plan. See "Risk Factors -- Possible Dilutive
Effect of Stock-Based Incentive Plan," Footnote 4 to the tables under
"Pro Forma Data" and "Management of the Bank -- Other Benefit Plans."
(4) The retained earnings of the Bank will be substantially restricted
after the Conversion. See "The Conversion -- Liquidation Rights" and
"Regulation -- Federal Savings Institution Regulation -- Limitations on
Capital Distributions."
(5) Represents the value of the contribution of Common Stock to the
Foundation at $10.00 per share reduced by the associated tax benefit of
$1.1 million, $1.3 million, $1.5 million and $1.7 million at the
minimum, midpoint, maximum and 15% above the maximum of the range,
respectively. The realization of the federal tax benefit is limited
annually to 10% of the Company's annual taxable income, subject to the
ability of the Company to carry forward any unused portion of the
deduction for five years following the year in which the contribution
is made. For state income tax purposes, the Company will be able to
deduct the contribution and to carry forward any unused portion of the
deduction for a five-year period following the year in which the
contribution is initially made. Such deductions by the Company for
Pennsylvania income tax purposes can be utilized only if the Company
generates sufficient state taxable income on an unconsolidated basis,
and also are subject to the limitation of 10% of unconsolidated
income of the Company.
(6) Assumes that 8% of the shares issued in connection with the Conversion,
including shares issued to the Foundation, will be purchased by the
ESOP and that the funds used to acquire such shares will be borrowed
from the Company. The Common Stock acquired by the ESOP is reflected as
a reduction of stockholders' equity. See "Management of the Bank --
Other Benefit Plans -- Employee Stock Ownership Plan."
(7) Assumes an amount equal to 4% of the shares of Common Stock sold in the
Conversion and issued to the Foundation, is purchased by the
Stock-Based Incentive Plan through open market purchases at the
offering price of $10.00 per share. The Common Stock purchased by the
Stock-Based Incentive Plan is reflected as a reduction of stockholders'
equity. See "Risk Factors -- Possible Dilutive Effect of Stock-Based
Incentive Plan," Footnote 3 to the tables under "Pro Forma Data" and
"Management of the Bank -- Other Benefit Plans."
27
<PAGE> 78
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $37.1 million and $50.4 million (or $58.1
million in the event the Estimated Price Range is increased by 15%) based upon
the following assumptions: (i) 100% of the shares of Common Stock will be sold
in the Subscription Offering to Eligible Account Holders, the ESOP and
Supplemental Eligible Account Holders; (ii) directors, officers and employees of
the Bank and members of their immediate families (collectively, "Insiders") will
purchase an aggregate of $1.8 million of Common Stock and the ESOP will purchase
8% of the Common Stock issued in connection with the Conversion, including
shares issued to the Foundation; (iii) Sandler O'Neill will receive a fee equal
to 1.25% of the aggregate Purchase Price of shares sold in the Subscription and
Community Offerings, excluding shares purchased by directors, officers,
employees and any immediate family member thereof and the ESOP for which Sandler
O'Neill will not receive a fee; and (iv) Conversion expenses, excluding the
marketing fees paid to Sandler O'Neill, will be approximately $775,000. Actual
Conversion expenses may vary from those estimated.
Pro forma consolidated net income of the Company for the fiscal year
ended September 30, 1997, has been calculated as if the Common Stock had been
sold at the beginning of the fiscal year and the net proceeds had been invested
at 5.85%, which is the arithmetic average of the weighted average yield earned
by the Bank on its interest-earning assets and the weighted average rate paid on
its deposits during such period (as required by OTS regulations). The tables
below do not reflect the effect of withdrawals from deposit accounts for the
purchase of Common Stock or the effect of any possible use of the net Conversion
proceeds. The pro forma after-tax yield for the Company and the Bank is assumed
to be 3.59% for the fiscal year ended September 30, 1997, based on an effective
tax rate of 38.65%. Historical and pro forma net earnings per share amounts have
been calculated by dividing historical and pro forma amounts by the indicated
number of shares of Common Stock issued, as adjusted to give effect to the
purchase of shares by the ESOP and the issuance of shares to the Foundation.
Historical and pro forma stockholders' equity per share amounts have been
calculated by dividing historical and pro forma amounts by the indicated number
of shares of Common Stock issued.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company. The pro forma stockholders' equity is not intended to represent the
fair market value of the Common Stock and may be stated in an amount greater
than amounts that would be available for distribution to stockholders in the
event of liquidation.
The following tables summarize historical data of the Bank and pro
forma data of the Company at or for the fiscal year ended September 30, 1997,
based on the assumptions set forth above and in the table and should not be used
as a basis for projections of market value of the Common Stock following the
Conversion. The tables below give effect to Stock Awards reserved for grant
under the Stock-Based Incentive Plan, which is expected to be adopted by the
Company following the Conversion. See Footnote 3 to the tables and "Management
of the Bank--Other Benefit Plans." No effect has been given in the tables to
the possible issuance of additional shares of Common Stock upon the exercise of
stock options to be granted under the Stock-Based Incentive Plan, nor does book
value give any effect to the liquidation account to be established for the
benefit of Eligible Account Holders and Supplemental Eligible Account Holders
or, in the event of liquidation of the Bank, to the tax effect of the bad debt
reserve and other factors. See Footnote 5 to the tables below, "The
Conversion-- Liquidation Rights" and "Management of the Bank--Other Benefit
Plans." THE FOLLOWING TABLE ASSUMES THAT THE FOUNDATION IS APPROVED AS PART OF
THE CONVERSION AND THEREFORE GIVES EFFECT TO THE ISSUANCE OF AUTHORIZED BUT
UNISSUED SHARES OF THE COMPANY'S COMMON STOCK TO THE FOUNDATION CONCURRENTLY
WITH THE COMPLETION OF THE CONVERSION. THE VALUATION RANGE, AS SET FORTH HEREIN
AND IN THE TABLE BELOW, TAKES INTO ACCOUNT THE DILUTIVE IMPACT OF THE ISSUANCE
OF SHARES TO THE FOUNDATION.
28
<PAGE> 79
<TABLE>
<CAPTION>
AT OR FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
------------------------------------------------------------
5,951,250
3,825,000 4,500,000 5,175,000 SHARES SOLD
SHARES SOLD SHARES SOLD SHARES SOLD AT $10.00
AT $10.00 AT $10.00 AT $10.00 PER SHARE
PER SHARE PER SHARE PER SHARE (15% ABOVE
(MINIMUM (MIDPOINT (MAXIMUM MAXIMUM
OF ESTIMATED OF ESTIMATED OF ESTIMATED OF ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(7)
------------ ------------ ------------ ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross Proceeds .................................................... $ 38,250 $ 45,000 $ 51,750 $ 59,512
Plus: Shares issued to Foundation (equal to 8% of
the stock sold in the Conversion)............. 3,060 3,600 4140 4761
-------- -------- -------- --------
Pro forma market capitalization ................................... $ 41,310 $ 48,600 $ 55,890 $ 64,273
======== ======== ======== ========
Gross proceeds .................................................... $ 38,250 $ 45,000 $ 51,750 $ 59,512
Less: Offering expenses and commissions .......................... (1,190) (1,267) (1,344) (1,432)
Estimated net proceeds ............................................ 37,060 43,733 50,406 58,080
Less: Common Stock purchased by ESOP ............................. (3,305) (3,888) (4,471) (5,142)
Common Stock purchased by Stock-Based ..........
Incentive Plan (1,652) (1,944) (2,236) (2,571)
------ ------ ------ ------
Estimated net proceeds, as adjusted ...................... $ 32,103 $ 37,901 $ 43,699 $ 50,367
======== ======== ======== ========
Consolidated net earnings(1):
Historical ............................................... $ 2,093 $ 2,093 $ 2,093 $ 2,093
Pro forma earnings on net proceeds ....................... 1,152 1,360 1,568 1,808
Less: Pro forma ESOP adjustment(2)........................ (203) (239) (274) (316)
Pro forma Stock-Based Incentive Plan
adjustment(3).................................. (203) (238) (274) (315)
---- ---- ---- ----
Pro forma net earnings .......................... $ 2,839 $ 2,976 $ 3,113 $ 3,270
======== ======== ======== ========
Per share net earnings(1):
Historical ............................................... $ 0.55 $ 0.46 $ 0.40 $ 0.35
Pro forma earnings on net proceeds ....................... 0.30 0.30 0.30 0.30
Less: Pro forma ESOP adjustment(2) ...................... 0.05 0.05 0.05 0.05
Pro forma Stock-Based Incentive 0.05 0.05 0.05 0.05
Plan adjustment(3)............................... ---- ---- ---- ----
Pro forma net earnings per share .................. $ 0.74 $ 0.66 $ 0.60 $ 0.55
======== ======== ======== ======
Stockholders' equity:
Historical ............................................... $ 28,538 $ 28,538 $ 28,538 $ 28,538
Estimated net proceeds ................................... 37,060 43,733 50,406 58,080
Plus: Shares issued to Foundation ....................... 3,060 3,600 4,140 4,761
Less: After tax cost of Foundation(4).................... (1,986) (2,336) (2,687) (3,090)
Common Stock acquired by ESOP(2) ...... (3,305) (3,888) (4,471) (5,142)
Common Stock acquired by Stock-Based
Incentive Plan (3).................. (1,652) (1,944) (2,236) (2,571)
-------- -------- -------- --------
Pro forma stockholders' equity(3)(4)(5)(6) $ 61,175 $ 67,703 $ 73,690 $ 80,576
======== ======== ======== ========
Stockholders' equity per share:
Historical ............................................... $ 6.91 $ 5.87 $ 5.11 $ 4.44
Estimated net proceeds ................................... 8.97 9.00 9.02 9.04
Plus: Shares issued to the Foundation ................... 0.74 0.74 0.74 0.74
Less: After tax cost of Foundation(4).................... (0.48) (0.48) (0.48) (0.48)
Common Stock acquired by ESOP(2) ...... (0.80) (0.80) (0.80) (0.80)
Common Stock acquired by Stock-Based ..
Incentive Plan (3).................. (0.40) (0.40) (0.40) (0.40)
----- ----- ----- -----
Pro forma stockholders' equity per
share(3)(4)(5)(6).................... $ 14.94 $ 13.93 $ 13.19 $12.54
======== ======== ======== ======
Offering price as a percentage of pro forma stockholders'
equity per share................................................. 66.94% 71.78% 75.84% 79.77%
Offering price to pro forma net earnings per share ................ 13.50 15.15 16.66 18.24
</TABLE>
(Footnotes on next page)
29
<PAGE> 80
- ---------------
(1) Does not give effect to the non-recurring expense that is expected to
be recognized in the third quarter of fiscal 1998 if the
establishment of the Foundation is approved. In that event, the
Company will recognize an after-tax expense for the amount of the
contribution to the Foundation which is expected to be $2.0 million,
$2.3 million, $2.7 million, and $3.1 million at the minimum,
midpoint, maximum, and maximum as adjusted, of the Estimated Price
Range, respectively.
(2) It is assumed that 8% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation, will be
purchased by the ESOP. For purposes of this table, the funds used to
acquire such shares are assumed to have been borrowed by the ESOP
from the Company. The amount to be borrowed is reflected as a
reduction of stockholders' equity. The Bank intends to make annual
contributions to the ESOP in an amount at least equal to the
principal and interest requirement of the debt. The Bank's total
annual payment of the ESOP debt is based upon 10 equal annual
installments of principal, with an assumed interest rate at 8.5%. The
pro forma net earnings assume: (i) that the Bank's contribution to
the ESOP is equivalent to the debt service requirement for the year
ended September 30, 1997, and was made at the end of the period; (ii)
that 33,048, 38,880, 44,712 and 51,419 shares at the minimum,
midpoint, maximum and 15% above the maximum of the range,
respectively, were committed to be released during the year ended
September 30, 1997 at an average fair value of $10.00 per share in
accordance with Statement of Position ("SOP") 93-6; and (iii) only
the ESOP shares committed to be released were considered outstanding
for purposes of the net earnings per share calculations. See
"Management of the Bank --Other Benefit Plans --Employee Stock
Ownership Plan."
(3) Gives effect to the Stock Awards available for grant under the
Stock-Based Incentive Plan expected to be adopted by the Company
following the Conversion and presented for approval at a meeting of
stockholders. The Stock-Based Incentive Plan intends to acquire an
amount of Common Stock equal to 4% of the shares of Common Stock sold
in the Conversion and issued to the Foundation, or 165,240, 194,400,
233,560 and 257,095 shares of Common Stock at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range,
respectively, either through open market purchases, if permissible,
or from authorized but unissued shares of Common Stock or treasury
stock of the Company, if any. Funds used by the Stock-Based Incentive
Plan to purchase the shares will be contributed to the Stock-Based
Incentive Plan by the Bank. In calculating the pro forma effect of
the Stock-Based Incentive Plan, it is assumed that the shares were
acquired by the Stock-Based Incentive Plan at the beginning of the
period presented in open market purchases at the Purchase Price and
that 20% of the amount contributed was an amortized expense during
such period. The issuance of authorized but unissued shares of the
Company's Common Stock to the Stock-Based Incentive Plan instead of
open market purchases would dilute the voting interests of existing
stockholders by approximately 3.8% and pro forma net earnings per
share would be $0.73, $0.65, $0.59, and $0.54 at the minimum,
midpoint, maximum, and 15% above the maximum of the range,
respectively, and pro forma stockholders' equity per share would be
$14.75, $13.78, $13.06 and $12.44 at the minimum, midpoint, maximum,
and 15% above the maximum of the range, respectively. There can be no
assurance that stockholder approval of the Stock-Based Incentive Plan
will be obtained, or that the actual purchase price of the shares
will be equal to the Purchase Price. See "Management of the
Bank--Other Benefit Plans."
(4) Assumes a combined federal and state effective income tax rate of
35.1%
(5) No effect has been given to the issuance of additional shares of
Common Stock upon the exercise of options to be granted under the
Stock-Based Incentive Plan. An amount equal to 10% of the Common
Stock issued in the Conversion, including shares issued to the
Foundation, or 413,100, 486,000, 558,900 and 642,738 shares at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Price Range, respectively, will be reserved for future issuance upon
the exercise of options to be granted under the Stock-Based Incentive
Plan. The issuance of Common Stock pursuant to the exercise of
options under the Stock-Based Incentive Plan will result in the
dilution of existing stockholders' interests. Assuming all options
were exercised at the end of the period at an exercise price of
$10.00 per share, the pro forma net earnings per share would be
$0.70, $0.63, $0.58, and $0.53, respectively, and the pro forma
stockholders' equity per share would be $14.49, $13.57, $12.90 and
$12.31, respectively. See "Management of the Bank--Other Benefit
Plans."
(6) The retained earnings of the Bank will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The
Conversion--Liquidation Rights" and "Regulation --Federal Savings
Institution Regulation --Limitation on Capital Distributions."
(7) As adjusted to give effect to an increase in the number of shares
which could occur due to an increase in the Estimated Price Range of
up to 15% as a result of regulatory considerations or changes in
market or general financial and economic conditions following the
commencement of the Subscription and Community Offerings.
30
<PAGE> 81
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO FOUNDATION
In the event that the Foundation was not being established as part of
the Conversion, Keller has estimated that the pro forma market capitalization of
the Bank would be approximately $53.1 million, at the midpoint, which is
approximately $4.5 million greater than the pro forma market capitalization of
the Bank if the Foundation is approved by members of the Bank and would result
in approximately a $8.1 million increase, or 9.3%, in the amount of Common Stock
offered for sale in the Conversion. The pro forma price to book ratio and pro
forma price to earnings ratio would be approximately the same under both the
current appraisal and the estimate of the value of the Company without the
Foundation. Further, assuming the midpoint of the Estimated Price Range, pro
forma stockholders' equity per share and pro forma earnings per share would be
substantially the same with the Foundation as without the Foundation. In this
regard, pro forma stockholders' equity and pro forma net income per share would
be $13.93 and $0.66, respectively, at the midpoint of the estimate, assuming no
Foundation, and $13.96 and $0.66, respectively, with the Foundation. The pro
forma price to book ratio and the pro forma price to earnings ratio are 71.85%
and 15.40x, respectively, at the midpoint of the estimate, assuming no
Foundation and are 71.78% and 15.15x, respectively, with the Foundation. This
estimate by Keller was prepared at the request of the OTS and is solely for
purposes of providing members with sufficient information with which to make an
informed decision on the Foundation. There is no assurance that in the event the
Foundation is not approved at the Special Meeting of members that the appraisal
prepared at that time would conclude that the pro forma market value of the
Company would be the same as that estimated herein. Any appraisal prepared at
that time would be based on the facts and circumstances existing at that time,
including, among other things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing
ratios and financial data and ratios, at the minimum, midpoint, maximum and
maximum, as adjusted, of the Estimated Price Range, assuming the Conversion was
completed at September 30, 1997.
<TABLE>
<CAPTION>
AT THE MINIMUM AT THE MIDPOINT
-------------- ---------------
WITH NO WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Estimated offering amount ................ $ 38,250 $ 45,135 $ 45,000 $ 53,100
Pro forma market capitalization .......... 41,310 45,135 48,600 53,100
Total assets ............................. 403,313 408,583 409,301 415,501
Total liabilities ........................ 341,598 341,598 341,598 341,598
Pro forma stockholders' equity ........... 61,715 66,985 67,703 73,903
Pro forma consolidated net earnings ...... 2,839 3,030 2,976 3,200
Pro forma stockholders' equity per share.. 14.94 14.84 13.93 13.92
Pro forma consolidated net earnings
per share............................... 0.74 0.72 0.66 0.65
Pro Forma Pricing Ratios:
Offering Price as a percentage of
pro forma stockholders' equity
per share...................... 66.94% 67.38% 71.78% 71.85%
Offering price to pro forma net
earnings per share............. 13.50x 13.82x 15.15x 15.40x
Offering price to assets ........ 10.24% 11.05% 11.87% 12.78%
Pro Forma Financial Ratios:
Return on Assets ................ 0.70% 0.74% 0.73% 0.77%
Return on stockholders' equity .. 4.60% 4.52% 4.40% 4.33%
Stockholders' equity to assets .. 15.30% 16.39% 16.54% 17.79%
</TABLE>
<TABLE>
<CAPTION>
AT THE MAXIMUM,
AT THE MAXIMUM AS ADJUSTED
-------------- -----------
WITH NO WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Estimated offering amount ................ $ 51,750 $ 61,065 $ 59,513 $ 70,225
Pro forma market capitalization .......... 55,890 61,065 64,274 70,225
Total assets ............................. 415,289 422,418 422,174 430,373
Total liabilities ........................ 341,598 341,598 341,598 341,598
Pro forma stockholders' equity ........... 73,690 80,820 80,576 88,775
Pro forma consolidated net earnings ...... 3,173 3,370 3,270 3,566
Pro forma stockholders' equity per share . 13.19 13.24 12.54 12.64
Pro forma consolidated net earnings per .. 0.60 0.59 0.55 0.55
share
Pro Forma Pricing Ratios:
Offering Price as a percentage of
pro forma stockholders'
equity per share............... 75.84% 75.56% 79.77% 79.10%
Offering price to pro forma net
earnings per share............. 16.66x 16.82x 18.24x 18.28x
Offering price to assets ........ 13.45% 14.46% 15.22% 16.32%
Pro Forma Financial Ratios:
Return on Assets ................ 0.75% 0.80% 0.77% 0.83%
Return on stockholders' equity .. 4.22% 4.17% 4.06% 4.02%
Stockholders' equity to assets .. 17.74% 19.13% 19.09% 20.63%
</TABLE>
31
<PAGE> 82
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statement of Income of the Bank and
Subsidiaries for the fiscal year ended September 30, 1997 has been audited by
KPMG Peat Marwick LLP, independent certified public accountants, whose report
thereon is included elsewhere in this Prospectus. The Consolidated Statements of
Income of the Bank and Subsidiaries for the fiscal years ended September 30,
1996 and 1995 have been audited by Parente, Randolph, Orlando, Carey &
Associates, independent certified public accountants, whose report thereon is
included elsewhere in this Prospectus. These Consolidated Statements of Income
should be read in conjunction with the Consolidated Financial Statements and
notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
---------------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
Interest income:
<S> <C> <C> <C>
Loans ...................................... $ 20,071 $ 18,105 $ 16,149
Mortgage-related securities ................ 3,306 3,064 3,121
Investment securities:
Taxable ........................... 2,948 3,051 2,010
Non-taxable ....................... 274 103 --
-------- -------- --------
Total interest income .... $ 26,599 $ 24,323 $ 21,280
-------- -------- --------
Interest expense:
Deposits ................................... 12,699 12,195 10,714
FHLB advances and other .................... 1,495 812 131
-------- -------- --------
Total interest expense .................. 14,194 13,007 10,845
-------- -------- --------
Net interest income ................................. 12,405 11,316 10,435
Provision for loan losses ........................... 651 97 25
-------- -------- --------
Net interest income after provision
for loan losses.................................... 11,754 11,219 10,410
-------- -------- --------
Noninterest Income:
Service charges and other fees ................... 650 522 498
Gain (loss) on sale of:
Real estate owned ............................. (66) (46) (8)
Loans ......................................... 22 18 10
Available-for-sale securities ................. (563) -- (6)
Other ......................................... (176) 14 105
-------- -------- --------
Total noninterest income (133) 508 599
-------- -------- --------
Noninterest expense:
Salaries and net employee benefits ............... 5,395 4,989 4,203
Occupancy costs .................................. 1,421 1,326 1,416
Federal deposit insurance premiums ............... 368 2,390 596
Data Processing .................................. 365 490 566
Professional fees ................................ 274 312 317
FHLB service charges ............................. 269 220 172
Other ............................................ 1,400 1,047 1,090
-------- -------- --------
Total noninterest expense ............... 9,492 10,774 8,360
-------- -------- --------
Income before income taxes .......................... 2,129 953 2,649
Income taxes ........................................ 748 12 899
-------- -------- --------
Net income .......................................... $ 1,381 $ 941 $ 1,750
======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
32
<PAGE> 83
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has only recently been formed and, accordingly, has no
results of operations. The Bank's results of operations are dependent primarily
on net interest income, which is the difference between the income earned on its
loan and investment portfolios and its cost of funds, consisting of the interest
paid on deposits and borrowings. Results of operations are also affected by the
Bank's provision for loan losses, loan and security sales activities, service
charges and other fee income, and noninterest expense. The Bank's noninterest
expense principally consists of compensation and employee benefits, office
occupancy and equipment expense, federal deposit insurance premiums, data
processing, advertising and business promotion and other expenses. Results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in interest rates, government policies and
actions of regulatory authorities.
MANAGEMENT STRATEGY
Since fiscal 1993, the Bank's operating strategy has been that of a
community-based bank, offering a wide variety of savings products to its retail
customers, while concentrating on residential and construction lending and, to a
lesser extent, consumer lending and small business and municipal commercial
lending. In order to promote long-term financial strength and profitability, the
Bank's operating strategy has focused on: (i) maintaining strong asset quality
by originating one- to four-family loans located in its market area; (ii)
increasing profitability by emphasizing higher yielding consumer and commercial
loans; (iii) managing its interest rate risk by emphasizing shorter-term,
fixed-rate, one- to four-family loans, in addition to consumer and commercial
loans; limiting its retention of newly originated longer-term fixed-rate one- to
four-family loans; soliciting longer-term deposits; utilizing longer-term
advances from the FHLB; and investing in investment and mortgage-related
securities having shorter estimated durations; (iv) meeting the banking needs of
its customers through expanded products and improved delivery systems by taking
advantage of technological advances; and (v) maintaining a strong regulatory
capital position.
The Bank has attempted to diversify and expand its loan products to
better serve its customer base by placing a greater emphasis on its
consumer-lending and its commercial lending, primarily to small businesses and
municipalities. Additionally, the Bank is in the process of implementing a
program to sell in the secondary market longer-term, fixed-rate one- to
four-family loans which it could originate in excess of its retention policy for
such loans. As a result of its policy to limit its retention of newly originated
longer-term, fixed-rate one- to four-family loans to 20% of total loan
origination during a fiscal year, periodically the Bank has had to limit its
originations of such loans. The Bank is also evaluating the offering of loan
products which it has historically not offered, such as nonconforming or
subprime one-to -four family loans. In the event the Bank originates such loan
products, it currently intends to originate such loans for sale in the secondary
market.
MARKET RISK ANALYSIS
Management of Interest Rate Risk. The principal objective of the
Bank's interest rate risk management is to evaluate the interest rate risk
included in certain balance sheet accounts, determine the level of risk
appropriate given the Bank's business strategy, operating environment, capital
and liquidity requirements and performance objectives, and manage the risk
consistent with the Board of Directors' approved guidelines. Through such
management, the Bank seeks to reduce the vulnerability of its operations to
changes in interest rates. The Board of Directors has established an Asset
Liability Committee ("ALCO"), which is responsible for reviewing
asset/liability policies and interest rate risk position. The ALCO meets at
least on a quarterly basis, reports
33
<PAGE> 84
trends and interest rate risk position to the Board of Directors and reviews
with the Board its activities and strategies, the effect of those strategies on
the Bank's net interest margin, the market value of the portfolio, and the
effect the changes in interest rates will have on the Bank's portfolio and
exposure limits. The extent of the movement of interest rates is an uncertainty
that could have a negative impact on the earnings of the Bank. See "Risk Factors
- -- Sensitivity to Changes in Interest Rates."
In recent years, the Bank has utilized the following strategies to
manage interest rate risk: (i) emphasizing the origination and retention of
fixed-rate mortgages having terms to maturity of not more than fifteen years,
adjustable-rate and shorter-term loans, commercial loans, and consumer loans;
(ii) limiting the origination of all greater than 15-year fixed-rate mortgage
loans to no more than 20% of the total originations in a given year; and (iii)
investing in shorter-term and, to a lesser extent, adjustable-rate securities
which generally bear lower yields, compared to longer-term investments, but
which better position the Bank for increases in market interest rates.
Management believes that reducing its exposure to interest rate risk
fluctuations will enhance long-term profitability. However, the Bank's
strategies may adversely impact net interest income due to lower initial yields
on some of these investments in comparison to longer-term fixed-rate investments
and whole loans. To promote a higher yield on its investment securities while at
the same time addressing the Bank's interest rate risk management policies, the
Bank has invested a significant portion of its portfolio of investment
securities in longer-term (more than five years) federal agency obligations
which have call features. Given the rates of such securities in comparison to
current market interest rates, the Bank anticipates the substantial majority of
such securities will be called prior to their contractual maturity. However, if
changes in interest rates exceed ranges anticipated by the Bank in estimating
the anticipated life of such callable securities, the Bank would be subject to
increased interest rate or reinvestment risk, depending on the direction of the
change in market interest rates.
Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a bank's interest rate sensitivity "gap." An asset
or liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
same time period. At September 30, 1997, the Bank's cumulative interest rate gap
(which is the difference between the amount of interest-earning assets maturing
or repricing within one year and interest-bearing liabilities maturing or
repricing within one year) as a percentage of total assets, was a negative 9.9%.
However, this interest sensitivity gap reflected the temporary use of proceeds
from the sale of investment and mortgage-related securities at the end of fiscal
1997, which significantly increased interest-bearing deposits and reduced FHLB
advances as of September 30, 1997 compared to their levels immediately prior to
the sale of securities. The Bank believes that, after giving effect to the
subsequent reinvestment of such proceeds, its cumulative one-year interest rate
gap as a percentage of total assets would have been approximately a negative 15%
as of September 30, 1997. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
Accordingly, during a period of rising interest rates, an institution with a
negative gap position would be in a worse position to invest in higher yielding
assets as compared to an institution with a positive gap position which,
consequently, may result in the cost of its interest-bearing liabilities
increasing at a rate faster than its yield on interest-earning assets than if it
had a positive gap. During a period of falling interest rates, an institution
with a negative gap position would tend to have its interest-earning liabilities
repricing downward at a faster rate than its interest-earning assets as compared
to an institution with a positive gap which, consequently, may tend to
positively affect the growth of its net interest income.
34
<PAGE> 85
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at September 30, 1997, which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature in
each of the future time periods shown (the "GAP Table"). Except as stated below,
the amount of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of term to
repricing or the contractual maturity of the asset or liability. The table sets
forth an approximation of the projected repricing of assets and liabilities at
September 30, 1997, on the basis of contractual maturities, anticipated
prepayments, and scheduled rate adjustments within a series of time intervals.
For loans on residential mortgages, adjustable-rate loans, and fixed-rate loans,
prepayment rates were assumed to range from 8% to 28% annually. Mortgage-related
securities were assumed to prepay at rates between 8% and 65% annually.
Investment securities, which include callable federal agency obligations, are
presented based on their stated maturities. Savings accounts, negotiable order
of withdrawal ("NOW") accounts and Money Market Cash accounts were assumed to
decay at 17%, 37%, and 79%, respectively, for each of the following periods: one
year, one to two years, two to three years, three to four years, four to five
years and over five years. Prepayment of deposit rates can have a significant
impact on the Bank's estimated gap. While the Bank believes such assumptions to
be reasonable, there can be no assurance that assumed prepayment rates and decay
rates will approximate actual loan prepayment and deposit/withdrawal activity.
See "Business of the Bank -- Lending Activities," "-- Investment Activities" and
"-- Sources of Funds."
35
<PAGE> 86
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
--------------------------------------------------------------------------------
MORE MORE
THAN MORE MORE THAN
ONE 1 YEAR THAN THAN 4 YEARS
YEAR TO 2 YEARS TO 3 YEARS TO TO
OR LESS 2 YEARS 3 YEARS 4 YEARS 5 YEARS
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C>
Interest-bearing deposits ......... $ 11,689 -- -- -- --
Investment securities ............. 1,991 3,000 3,994 -- 3,999
Mortgage-related securities ....... 2,628 1,628 -- -- --
Equity securities (FHLB & FHLMC)... 2,101 -- -- -- --
Loans(1) .......................... 113,854 29,680 33,377 18,958 16,144
------- ------ ------ ------ ------
Total interest
earning assets.......... $ 132,263 $ 34,308 $ 37,371 $ 18,958 $ 20,143
--------- --------- --------- --------- ---------
INTEREST-BEARING LIABILITIES:
Money market accounts ............. 10,919 2,293 482 101 21
Savings accounts .................. 12,202 10,128 8,406 6,977 5,791
NOW accounts ...................... 10,102 6,408 4,037 2,543 1,602
Certificate accounts .............. 127,375 37,223 21,563 4,697 1,878
FHLB advances ..................... 8,000 -- -- 5,000 10,000
Other borrowings .................. 92 -- -- -- --
--------- --------- --------- --------- ---------
Total interest-
bearing liabilities..... $ 168,690 $ 56,052 $ 34,488 $ 19,318 $ 19,292
--------- --------- --------- --------- ---------
Interest-earning assets less
interest-bearing liabilities ...... $ (36,427) $ (21,744) $ 2,883 $ (360) $ 851
Cumulative interest-rate
sensitivity gap ................... $ (36,427) $ (58,171) $ (55,288) $ (55,648) $ (54,797)
Cumulative interest-rate gap as
a percentage of total assets ...... (9.9)% (15.8)% (15.0)% (15.1)% 14.8%
Cumulative interest-rate gap as
a percentage of total interest
earning assets .................... (10.2)% (16.3)% (15.5)% (15.6)% (15.3)%
Cumulative interest-earning assets
as a percentage of cumulative
interest-bearing liabilities ........... 78.4% 74.1% 78.7% 80.0% 81.6%
Cumulative earning assets ............... $ 132,263 $ 166,571 $ 203,942 $ 222,900 $ 243,043
Cumulative interest-bearing liabilities.. $ 168,690 $ 224,742 $ 259,230 $ 278,548 $ 297,840
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
---------------------------------------
MORE
THAN TOTAL FAIR
5 YEARS AMOUNT VALUE
------- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing deposits ......... -- $ 11,689 $ 11,689
Investment securities ............. 26,960 39,944 40,103
Mortgage-related securities ....... 35,200 39,456 39,793
Equity securities (FHLB & FHLMC)... -- 2,101 3,746
Loans(1) .......................... 52,225 264,238 264,214
------ ------- -------
Total interest-
earning assets.......... $114,385 $357,428 $359,545
-------- -------- --------
INTEREST-BEARING LIABILITIES:
Money market accounts ............. 6 13,821 13,821
Savings accounts .................. 28,275 71,779 71,779
NOW accounts ...................... 2,610 27,302 27,302
Certificate accounts .............. -- 192,736 191,328
FHLB advances ..................... 516 23,516 23,431
Other borrowings .................. -- 92 92
-------- -------- --------
Total interest-
bearing liabilities........ $ 31,407 $329,246 $327,753
-------- -------- --------
Interest-earning assets less
interest-bearing liabilities ...... $ 82,978 $ 28,182
Cumulative interest-rate
sensitivity gap ................... $28,181
Cumulative interest-rate gap as
a percentage of total assets ...... 7.6%
Cumulative interest-rate gap as
a percentage of total interest
earning assets .................... 7.9%
Cumulative interest-earning assets
as a percentage of cumulative
interest-bearing liabilities ........... 108.6%
Cumulative earning assets ............... $357,428
Cumulative interest-bearing liabilities.. $329,247
</TABLE>
- -----------------
(1) Excludes nonaccrual loans
36
<PAGE> 87
Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable rate loans, have
features which restrict changes in interest rates both on a short-term basis and
over the life of the asset. Further, in the event of changes in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their adjustable-rate loans may decrease in the event of an interest
rate increase.
Net Portfolio Value. The Bank's interest rate sensitivity is primarily
monitored by management through the use of a model which internally generates
estimates of the change in the Bank's net portfolio value ("NPV") over a range
of interest rate scenarios. Such analysis was prepared by a third party for the
Bank. NPV is the present value of expected cash flows from assets, liabilities,
and off-balance sheet contracts. The NPV ratio, under any interest rate
scenario, is defined as the NPV in that scenario divided by the market value of
assets in the same scenario. The model assumes estimated loan prepayment rates,
reinvestment rates, and deposit decay rates similar to the assumptions utilized
for the gap table. The OTS also produces a similar analysis using its own model,
based upon data submitted on the Bank's quarterly Thrift Financial Reports, the
results of which may vary from the Bank's internal model primarily due to
differences in assumptions utilized, including estimated loan prepayment rates,
reinvestment rates and deposit decay rates. See "Regulation -- Federal Savings
Institution Regulation." The following table sets forth the Bank's NPV as of
September 30, 1997.
<TABLE>
<CAPTION>
NPV AS % OF PORTFOLIO
CHANGE IN NET PORTFOLIO VALUE VALUE OF ASSETS
INTEREST RATES ------------------------------------ ----------------------------
IN BASIS POINTS % NPV
(RATE SHOCK) AMOUNT $ CHANGE CHANGE RATIO CHANGE(1)
------------ ------ -------- ------ ----- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
400 17,578 (21,673) (55.22%) 5.04% (530)
300 23,425 (15,826) (40.32%) 6.57% (377)
200 29,338 (9,913) (25.26%) 8.04% (230)
100 34,668 (4,583) (11.68%) 9.31% (104)
Static 39,251 0 0.00% 10.34% 0
-100 41,661 2,410 6.14% 10.84% 50
-200 43,249 3,998 10.19% 11.13% 79
-300 45,135 5,884 14.99% 11.48% 114
-400 48,789 9,538 24.30% 12.22% 187
</TABLE>
----------
(1) Expressed in basis points.
37
<PAGE> 88
As is the case with the GAP Table, certain shortcomings are inherent in
the methodology used in the above interest rate risk measurements. Modeling
changes in NPV require the making of certain assumptions which may or may not
reflect the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV model presented assumes that the
composition of the Bank's interest sensitive assets and liabilities existing at
the beginning of a period remains constant over the period being measured and
also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV table provides an
indication of the Bank's interest rate risk exposure at a particular point in
time, such measurements are not intended to and do not provide a precise
forecast of the effect of changes in market interest rates on the Bank's net
interest income and will differ from actual results.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income also depends upon the relative amounts of interest-earning
assets and interest-bearing liabilities and the interest rate earned or paid on
them.
38
<PAGE> 89
Average Balance Sheet. The following table sets forth certain
information relating to the Bank at and for the fiscal years ended September 30,
1997, 1996 and 1995. The average yields and costs are derived by dividing income
or expense by the average balance of interest-earning assets or interest-bearing
liabilities, respectively, for the periods shown, except where noted, otherwise
and reflect annualized yields and costs. Average balances are derived from
average daily balances. The yields and costs include fees which are considered
adjustments to yields.
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------
AT SEPTEMBER 30, 1997 1997 1996
--------------------- ------------------------------ ---------------------
AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE RATE BALANCE INTEREST RATE BALANCE INTEREST
-------- -------- ------- ----------- ------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans (1):
Real estate ...................................... $184,919 7.66% $180,080 $ 13,856 7.69% $166,692 $12,925
Consumer ......................................... 61,843 8.52 58,717 4,980 8.48 49,409 4,268
Commercial ....................................... 17,476 7.49 15,151 1,235 8.15 11,182 912
-------- ---- -------- -------- ---- -------- -------
Total loans: ................................... 264,238 7.85 253,948 20,071 7.90 227,283 18,105
Mortgage-related securities (2) .................... 39,947 6.45 54,112 3,306 6.11 51,268 3,064
Investment securities (3):
Taxable ......................................... 34,788 6.99 40,902 2,866 7.01 45,492 2,959
Non-taxable (4) ................................. 8,963 8.32 5,417 457 8.44 2,014 172
Interest-bearing deposits .......................... 11,689 8.31 1,516 82 5.41 1,583 92
------- ---- -------- -------- ---- -------- -------
Total interest-earning assets .................. 359,625 7.57 355,895 26,782 7.53 327,640 24,392
Noninterest-earning assets ......................... 9,617 ---- 12,284 ---- 9,968
------- -------- --------
Total assets ................................... 369,242 368,179 337,608
======= ======= =======
INTEREST-BEARING LIABILITIES:
Deposits:
Demand accounts ............................... 41,123 1.96 49,723 814 1.64 44,583 775
Savings accounts .............................. 71,779 2.43 72,292 1,765 2.44 73,654 1,871
Certificates of deposit ....................... 192,736 5.50 187,270 10,120 5.40 174,617 9,549
------- ---- ------- ------ ---- ------- -----
Total deposits ............................. 305,637 4.30 309,285 12,699 4.11 292,854 12,195
FHLB advances and other borrowings ................. 23,608 5.73 27,264 1,495 5.48 14,971 812
------- ---- ------- ------ ---- ------- -----
Total interest-bearing liabilities ......... 329,246 4.40 336,583 14,194 4.22 307,825 13,007
---- ------ ---- ------
Noninterest-bearing liabilities .................... 11,458 3,883 3,636
------- ------- --------
Total liabilities .......................... 340,704 340,466 311,461
Equity.............................................. 28,538 27,713 26,147
-------- -------- --------
Total liabilities and equity ............... $369,242 $368,179 $337,608
======== ======== ========
Net interest-earning assets ................ $ 19,312 $ 19,815
Net interest income/interest rate spread(5). 3.17% $ 12,588 3.31% $11,385
==== ======== ==== =======
Net interest margin as a percentage
of interest-earning assets(6) ............ 3.49% 3.45%
======== =======
Ratio of interest-earning assets to interest-
bearing liabilities ...................... 109.23% 105.74% 106.44%
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
----------------------------------------
1996 1995
--------- ------------------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/
RATE BALANCE INTEREST RATE
-------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INTEREST EARNING ASSETS: Loans (1):
Real estate ........................................ 7.75% $151,373 $ 11,801 7.80%
Consumer ........................................... 8.64 43,206 3,752 8.68
Commercial ......................................... 8.16 7,582 596 7.86
---- -------- ------ ----
Total loans: ..................................... 7.97 202,161 16,149 7.99
Mortgage-related securities (2) ...................... 5.98 53,281 3,121 5.86
Investment securities (3): ...........................
Taxable ........................................... 6.50 31,896 1,870 5.86
Non-taxable (4) ................................... 8.54 -- -- --
Interest-bearing deposits ............................ 5.81 2,206 140 6.35
---- ------- ----- ----
Total interest-earning assets .................... 7.44 289,544 21,380 7.38
---- ----
Noninterest-earning assets ........................... 10,760
-------
Total assets ..................................... 300,304
=======
INTEREST-BEARING LIABILITIES:
Deposits:
Demand accounts ................................. 1.74 43,898 960 2.19
Savings accounts ................................ 2.54 78,478 2,079 2.65
Certificates of deposit ......................... 5.46 148,163 7,675 5.18
---- ------- ----- ----
Total deposits ............................... 4.16 270,539 10,714 3.96
FHLB advances and other borrowings ................... 5.42 2,243 131 5.84
---- ------- --- ----
Total interest-bearing liabilities ........... 4.23 272,782 10,845 3.98
---- ------ ----
Noninterest-bearing liabilities ...................... 2,751
-----
Total liabilities ............................ 275,533
Equity ................................................ 24,771
------
Total liabilities and equity ................. $300,304
========
Net interest-earning assets .................. $ 16,762
Net interest income/interest rate spread(5) .. 3.22% $ 10,535 3.40%
==== ======== ====
Net interest margin as a percentage
of interest-earning assets(6) .............. 3.60%
====
Ratio of interest-earning assets to interest-
bearing liabilities ........................ 106.14%
======
</TABLE>
- --------------------
(1) Balances are net of deferred loan origination costs, undisbursed
proceeds of construction loans in process, and includes nonperforming
loans.
(2) Includes mortgage-related securities available-for-sale and
held-to-maturity.
(3) Includes investment securities available-for-sale and held-to-maturity,
stock in the FHLB of Pittsburgh and FHLMC.
(4) Interest and Yield/Rate are presented on a taxable equivalent basis
using the combined Federal and state income tax marginal rate of 40% for
1997 and 1996. The Bank did not have securities exempt from federal or
state income taxes in 1995.
(5) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost
of interest-bearing liabilities.
(6) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
39
<PAGE> 90
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Bank's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate); (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume); and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated on a proportional basis between changes in rate and volume.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
COMPARED TO COMPARED TO
FISCAL YEAR ENDED FISCAL YEAR ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
---------------------------------- -----------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
----------------------- ----------------------
RATE VOLUME NET RATE VOLUME NET
---------- ---------- --------- --------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans:
Real estate loans $ (98) $ 1,029 $ 931 $ (63) $ 1,187 $ 1,124
Consumer loans (76) 788 712 (20) 536 516
Commercial loans (1) 324 323 (23) 293 316
---- ----- ----- --- ----- -----
Total loans (175) 2,141 1,966 (60) 2,016 1,956
---- ----- ----- --- ----- -----
Mortgage-related securities(1) 69 173 242 66 (123) (57)
Investment securities(1) 128 64 192 400 861 1,261
Interest-earning deposits (6) (4) (10) (11) (37) (48)
---- ----- ----- --- ----- -----
Total interest-earning assets 16 2,374 2,390 395 2,717 3,112
---- ----- ----- --- ----- -----
INTEREST-BEARING LIABILITIES:
Deposits:
Demand accounts (77) (38) 39 (200) (15) (185)
Savings accounts (72) (34) (106) (83) (125) (208)
Certificates of deposit (111) 682 571 445 1,429 1,874
FHLB advances and other
borrowings 8 675 683 (9) 690 681
---- ----- ----- --- ----- -----
Total interest-bearing liabilities (98) 1,285 1,187 153 2,009 2,162
---- ----- ----- --- ----- -----
Increase(decrease) in net interest income $ 100 $ 1,103 $ 1,203 $ 242 $ 708 $ 950
===== ======= ======= ===== ======= =======
</TABLE>
- --------------------
(1) Includes securities available-for-sale and held-to-maturity on a tax
equivalent basis.
40
<PAGE> 91
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996.
Total assets increased by $6.7 million, or 1.8%, from $362.5 million at
September 30, 1996 to $369.2 million at September 30, 1997. The growth in assets
was primarily due to one- to -four family loan growth which was funded primarily
through deposit inflows and retained earnings.
At the end of fiscal 1997, the Bank restructured its available-for-sale
securities portfolio in an effort to increase its yield on such portfolio.
This restructuring involved the sale of its lower yielding shorter-term
available-for-sale securities in order to reinvest the proceeds in higher
yielding mortgage-related securities and federal agency and municipal
obligations with stated or estimated lives of three to five years. A
substantial portion of the proceeds from such security sales was held as
interest-bearing deposits included under cash and cash equivalents at September
30, 1997, pending such reinvestment. As a result, cash and cash equivalents
totaled $4.0 million at September 30, 1996 increased to $13.2 million at
September 30, 1997. Proceeds from the sale of the available-for-sale investment
portfolio also were used on an interim basis to repay FHLB advances. The Bank's
portfolio of securities available-for-sale decreased by $15.4 million, or 25.6%
from $60.2 million at September 30, 1996 to $44.8 million at September 30,
1997. The Bank's portfolio of securities held-to-maturity decreased by $4.6
million, or 10.6% from $43.5 million at September 30, 1996 to $38.9 million.
The Bank's outstanding loans, net, increased $18.6 million, or 7.1%,
from $242.9 million at September 30, 1996 to $261.5 million at September 30,
1997. Real estate loans, increased by $11.3 million, or 6.3%, from $180.3
million at September 30, 1996, to $191.6 million at September 30, 1997 primarily
due to increases in the origination of one- to four-family loans, including the
conversion of construction loans to permanent financing, and multi-family loans
exceeding repayments on such loans. One-to four-family loans increased by $8.3
million or 4.9% and multi-family and commercial real estate loans increased by
$2.3 million, or 51.3%. Commercial loans increased from $9.3 million at
September 30, 1996 to $10.8 million at September 30, 1997, a 16.1% increase,
primarily due to the Bank's more competitive pricing of local municipal loans as
well as increased business development efforts. Consumer loans increased by $6.3
million, or 11.4%, from $55.5 million at September 30, 1996 to $61.8 million at
September 30, 1997, primarily due to an increase in home equity loans and lines
of credit and automobile loans due to increased marketing efforts and
competitive pricing of such loans.
Non-performing loans remained relatively stable, increasing from
$716,000 at September 30, 1996 to $774,000 at September 30, 1997, representing
0.29% and 0.30%, respectively, of total loans at such dates. Non-performing
assets and troubled debt restructurings also remained stable, at September 30,
1996 and 1997, representing 0.33% of total assets at such dates.
Total deposits increased by $7.3 million, or 2.4%, from $306.8
million at September 30, 1996 to $314.1 million at September 30, 1997. The
increase was primarily due to an increase of $6.0 million, or 3.2%, in
certificates of deposit from $186.7 million at September 30, 1996 to $192.7
million at September 30, 1997. The increase in certificates of deposit was
primarily due to the Bank's strategy of offering more competitive rates on such
deposits and expanding the number of certificate products offered in order to
attract deposits. The increase in certificate accounts was offset, in part, by a
slight decrease in core deposits (savings, money market and NOW accounts) which
declined slightly from $113.3 million at September 30, 1996 to $112.9 million at
September 30, 1997. Noninterest-bearing demand accounts increased by $1.7
million, or 25.2%, due primarily to an increase in the Bank's business checking
accounts resulting from its more active solicitation of such accounts.
41
<PAGE> 92
FHLB advances and other borrowings decreased by $1.9 million, or 7.5%,
from $25.5 million at September 30, 1996 to $23.6 million at September 30, 1997.
The decrease in FHLB advances and other borrowings was primarily due to the
utilization of proceeds from the sale of securities in accordance with the
Bank's restructuring of its securities portfolio to repay a portion of the
Bank's outstanding FHLB advances.
Total equity increased by $2.4 million, or 9.2%, from $26.1 million at
September 30, 1996 to $28.5 million at September 30, 1997. The increase in
equity was a result of retained earnings of $1.4 million, and a $1.0 million
increase in net unrealized gain, net of taxes, related to available-for-sale
securities.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1997
AND SEPTEMBER 30, 1996.
General. Net income for fiscal 1997 increased by $440,000, or 46.8%,
from $941,000 for fiscal 1996 to $1.4 million for fiscal 1997. The increase was
primarily due to a decrease in noninterest expense resulting from the absence of
the one time special assessment of $1.7 million to recapitalize the SAIF which
occurred in the fourth quarter of fiscal 1996. Net income also increased due to
an increase in net interest income. These items were substantially offset by an
increase in the provision for loan losses and a decrease in noninterest income
due to losses on the sale of securities and a writedown of fixed assets
resulting from the proposed relocation of a branch office.
Interest Income. Total interest income increased by $2.3 million, or
9.5%, from $24.3 million for fiscal 1996 to $26.6 for fiscal 1997 primarily due
to a $28.3 million, or 8.7%, increase in the average balance of interest earning
assets and a slight increase in the weighted average yield on interest earning
assets, which increased from 7.44% for fiscal 1996 to 7.53% for fiscal 1997.
Interest income on real estate loans increased $1.0 million, or 7.8%, from $12.9
million for fiscal 1996 to $13.9 million for fiscal 1997, primarily due to a
$13.3 million increase in the average balance of real estate loans
notwithstanding a 6 basis point decrease in the weighted average yield from an
7.75% for fiscal 1996 to 7.69% for fiscal 1997. The increase in the average
balance of real estate loans was primarily due to an increase in the average
balance of one- to four-family loans. Interest income on consumer loans
increased $700,000, from $4.3 million for fiscal 1996 to $5.0 million for fiscal
1997. This was principally due to increases in the average balance of consumer
loans from $49.4 million in 1996 to $58.7 million in 1997, offset by a 16 basis
point decrease in the yield on such loans. Interest income on securities
increased by $300,000, or 4.8%, to $6.5 million for 1997 from $6.2 million for
1996. This increase was a result of a $200,000 increase in interest income on
mortgage-related securities, attributable to a $2.9 million increase in the
average balance of such securities to $54.1 million, and an increase in weighted
average yield of 13 basis points. Interest income on investment securities
remained stable at $3.2 million for fiscal 1997 and fiscal 1996 due to the lower
average balance of such securities being offset by an increase in the weighted
average yield of such portfolio from 6.60% for fiscal 1996 to 7.17% for fiscal
1997.
Interest Expense. Interest expense increased by $1.2 million, or 9.2%,
from $13.0 million for fiscal 1996 to $14.2 million for fiscal 1997. The
increase in interest expense was primarily the result of a $12.3 million
increase in the average balance of FHLB advances and other borrowings, which
increased from $15 million for fiscal 1996 to $27.3 million for fiscal 1997,
and a slight increase in the weighted average rate paid on such borrowings from
5.42% for fiscal 1996 to 5.48% for fiscal 1997. The increase in FHLB advances
reflects management's determination to more heavily utilize FHLB advances to
fund asset growth. The increase in interest expense also resulted from
increased interest expense on certificates of deposit, which was a result of a
$12.7 million, or 7.3%, increase in the average balance of such accounts from
$174.6 million for fiscal 1996 to $187.3 million for fiscal 1997. This increase
was offset in part by a 6 basis point decrease in the rate paid on such accounts
for fiscal 1997. These net increases were partially offset by a decrease in
interest expense on
42
<PAGE> 93
savings accounts of $106,000 due to the combined effect of a decline in the
average balance of such accounts, which declined from an average balance of
$73.7 million for fiscal 1996 to $72.3 million for fiscal 1997, and a 10 basis
point decrease in the average rate paid on such accounts from 2.54% at September
30, 1996 for fiscal 1996 to 2.44%. The increase in the average balance of
certificates of deposit and the decrease in the average balance of savings
accounts was due primarily to the Bank's efforts to solicit certificate accounts
by more competitively pricing such accounts, expanding the number of certificate
products it offers and by customers shifting funds from lower-yielding savings
accounts to higher-yielding certificates of deposit.
Provisions for Loan Losses. The Bank's provision for loan losses for
fiscal 1997 was $651,000, compared to $97,000 for fiscal 1996. The increase in
the provision for loan losses and corresponding increase in the Bank's
allowance for loan losses reflected a change in management's strategic
direction and a decision to give a greater consideration to the allowance for
loan loss ratio levels of peer group institutions. The change in strategic
direction changed the composition of the Bank's loan portfolio by increasing
the levels of consumer, commercial and construction loans. Such loans generally
bear a greater degree of credit risk than the one-to four family loans which
represented 69.7% of the loan portfolio at September 30, 1996 compared to 67.8%
of the loan portfolio at September 30, 1997. As a result, at September 30,
1997, the allowance for loan losses was 0.48% of total loans, compared to 0.30%
at September 30, 1996. The Bank anticipates that, as a result of its increasing
emphasis on consumer, commercial, multi-family and commercial real estate and
construction lending, in the future, it may need to maintain an allowance for
loan losses at a higher level than it has maintained in previous periods to
offset any greater risk resulting from the shifting composition of its loan
portfolio. See "Business of the Bank - Delinquent Loans, Classified Assets and
Real Estate Owned" and "Allowance for Loan Losses."
Noninterest Income. In fiscal 1997, the Bank experienced a $641,000
decrease in noninterest income from $508,000 in fiscal 1996 to a loss of
$133,000 for fiscal 1997 due primarily to losses on sale of securities
available-for-sale in connection with the Bank's restructuring of its securities
portfolio. Security sales totaling $26.8 million and resulted in net losses of
$563,000. The decrease in noninterest income also was caused by a $176,000 write
down of fixed assets resulting from the Bank's decision to relocate its Columbia
Mall office to an alternate site in Columbia County. These decreases in
noninterest income were offset by an increase in loan fees and other income from
$522,000 in fiscal 1996 to $650,000 in fiscal 1997, primarily due to the
implementation of surcharges on ATM transactions.
Noninterest Expense. Total noninterest expense decreased from $10.8
million for fiscal 1996 to $9.5 million for fiscal 1997 due primarily to a
reduction in the FDIC deposit insurance premiums in fiscal 1997 and the absence
of a one-time charge of $1.7 million in order to recapitalize the SAIF fund
which occurred in the last quarter of fiscal 1996. As a result of the FDIC
premium reduction and absence of the SAIF assessment in fiscal 1997, FDIC
insurance assessments and premiums decreased from $2.4 million for fiscal 1996
to $368,000 for fiscal 1997. Noninterest expense other than FDIC premiums and
the SAIF special assessment increased approximately $700,000 for fiscal 1997
compared to fiscal 1996. Compensation and employee benefits expense increased
$400,000, or 8.0%, from $5.0 million for fiscal 1996 to $5.4 million for fiscal
1997, primarily due to normal increases in salaries as well as increases in
benefit costs. Other noninterest expense increased $353,000 primarily as a
result of an increase of $253,000 in reserves for losses on real estate owned
and repossessed and other assets and increases in various general business
expenses.
Income Taxes. Income tax expense totaled $748,000 for fiscal 1997,
compared to $12,000 for fiscal 1996, resulting in an effective tax rate of
35.1% for fiscal 1997 compared to 1.3% for fiscal 1996. The increase in income
tax expense in fiscal 1997 was attributable to higher pre-tax income, which
increased from $953,000 in 1996 to $2.1 million in 1997, and to the fact that
for fiscal 1996 the Bank had a $250,000 state tax credit relating to the
construction of an addition to its main office.
43
<PAGE> 94
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1996
AND SEPTEMBER 30, 1995.
General. Net income decreased $800,000, or 4.6%, from $1.7 million for
fiscal 1995, to $900,000 for fiscal 1996. The decrease was primarily
attributable to a one-time special assessment of $1.7 million from the FDIC in
order to recapitalize the SAIF, which was offset, in part, by a $900,000
increase in net interest income and a reduction in taxes due to a state tax
credit of $250,000.
Interest Income. Interest income increased by $3.0 million, or 14.1%,
from $21.3 million in 1995, to $24.3 million in 1996, due primarily to a $38.1
million, or 13.2%, increase in the average balance of interest earning assets
from $289.5 million for fiscal 1995 to $327.6 million for fiscal 1996 and a 6
basis point increase in the weighted average yield on such assets. The increase
in the average balance of interest earning assets was due to a $25.1 million, or
12.4%, increase in the average balance of loans and a $13.6 million, or 42.6%,
increase in the average balance of securities. The average balance in investment
securities increased from $31.9 million for fiscal 1995 to $47.4 million for
fiscal 1996, an increase of $15.5 million, or 48.6%. Combined with an increase
in the average yield on investment securities of 105 basis points, this increase
caused the tax equivalent interest income from investment securities to increase
by $1.2 million, or 63.2%, from $1.9 million in 1995 to $3.1 million for 1996.
The increase in interest on loans was attributable to an increase of $1.1
million, or 9.3%, on real estate loans from $11.8 million for fiscal 1995 to
$12.9 million for fiscal 1996, resulting from the average balance of real estate
loans increasing from $151.4 million for 1995 to $166.7 million for 1996.
Commercial loan income increased $316,000 from $596,000 for 1995 to $912,000 for
1996, an increase of 53.0%, primarily due to the increase in the average balance
of commercial loans from $7.6 million in 1995 to $11.2 million for 1996, an
increase of $3.6 million, or 47.4%. Interest on consumer loans increased from
$3.8 million for 1995 to $4.3 million for 1996, an increase of $500,000, or
13.2%, resulting from the average balance on consumer loans increasing from
$43.2 million for 1995 to $49.4 million for 1996.
Interest Expense. Interest expense increased by $2.2 million, or 20.4%,
from $10.8 million for fiscal 1995 to $13.0 million for fiscal 1996 primarily
due to a $35.0 million increase in the average balance of interest-bearing
liabilities, and an increase in the weighted average cost of such liabilities
from 3.98% for 1995 to 4.23% for 1996 due to higher average balances of deposits
and FHLB advances. Interest expense on savings accounts decreased by $200,000,
or 9.6%, from $2.1 million for 1995 to $1.9 million for 1996, due primarily to
the Bank's decision to reduce the rate paid on such accounts during 1996. The
average rate paid on savings accounts for 1996 was 2.54% compared to 2.65% for
1995. Despite the effect of the lower interest rate environment and the
decreased cost of savings accounts, interest expense increased, primarily due to
higher rates paid on certificate of deposit accounts. The average rate paid on
certificate of deposit accounts increased from 5.18% for the year ended
September 30, 1995 to 5.46% for the year ended September 30, 1996, due primarily
to the Bank's deposit pricing strategy, whereby it offered more competitive
rates on certificate of deposit accounts than on savings accounts in an effort
to extend the maturity of its deposit accounts, resulting in an increase in the
average balance of such accounts from $148.2 million for 1995 to $174.6 million
for 1996. The increase in interest expense for certificate of deposit accounts
of $1.9 million more than offset the decrease in interest expense on savings
accounts.
Provision for Loan Losses. During 1996, the provision for loan losses
was increased to $97,000 from the prior year's level of $25,000. The higher
provision was based on management's evaluation of existing real estate market
conditions, the level of charge-offs and non-performing loans, as well as an
evaluation of the general economic conditions in the Bank's market areas. In
particular, the Bank experienced increased net charge-offs, which increased from
$70,000 for fiscal 1995 to $91,000 for fiscal 1996. At September 30, 1995, the
Bank's allowance for loan losses to total non-performing loans and to total
loans was 58.7% and 0.33%, respectively, compared to 102% and 0.30% at September
30, 1996.
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<PAGE> 95
Noninterest Income. Noninterest income decreased by $91,000, or 15.2%,
from $599,000 in 1995 to $508,000 in 1996. The decrease was primarily
attributable to the writedown of fixed assets totaling $75,000 for fiscal 1996
due to the phase out of obsolete assets.
Noninterest Expense. Noninterest expense increased $2.4 million, or
28.6%, in 1996 to $10.8 million compared to $8.4 million in 1995. The increase
primarily relates to the special assessment by the FDIC for the SAIF
recapitalization of $1.7 million and the increase in compensation and employee
benefits, which increased by $700,000, or 18%, from $4.2 million in 1995 to $4.9
million in 1996, primarily as a result of normal salary increases, staff
additions, and an increase in the Bank's benefit expenses.
Income Taxes. Income tax expense decreased by $887,000, or 98.7%, from
$899,000 in fiscal 1995 to $12,000 in fiscal 1996, resulting in an effective
tax rate of 1.3% for fiscal 1996 compared to 33.9% for fiscal 1995. The
decrease in income tax expense in fiscal 1996 was primarily attributable to a
decrease in the Bank's pre-tax earnings for fiscal 1996 and a $250,000 state
tax credit in fiscal 1996 related to construction of an addition to its main
office.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds 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 Bank 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 currently required
liquidity ratio is 4.0%. At September 30, 1997, 1996, 1995, 1994, and 1993, the
Bank's liquidity ratios were 8.8%, 11.9%, 18.0%, 12.2% and 19.4%, respectively.
At September 30, 1997, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $27.3 million, or 7.4%, of total
adjusted assets, which is above the required level of $5.5 million, or 1.5%;
core capital of $27.3 million, or 7.4%, of total adjusted assets, which is above
the required level of $11.1 million, or 3%; and risk-based capital of $28.5
million, or 14.4%, of risk-weighted assets, which is above the required level of
$15.8 million, or 8%. See "Regulatory Capital Compliance."
The Bank's most liquid assets are cash and cash equivalents and its
investment and mortgage-related securities held for sale. The levels of these
assets are dependent on the Bank's operating, financing, lending and investing
activities during any given period. At September 30, 1997, cash and cash
equivalents and investment and mortgage-related securities held for sale totaled
$58.0 million, or 15.7% of total assets.
The Bank has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At September 30, 1997, the Bank had $23.5
million in advances outstanding from the FHLB, and at September 30, 1997, had an
additional overall borrowing capacity from the FHLB of $214.5 million. Depending
on market conditions, the pricing of deposit products and FHLB advances, the
Bank may continue to rely on FHLB borrowing to fund asset growth.
At September 30, 1997, the Bank had commitments to originate and
purchase loans and unused outstanding lines of credit and undisbursed proceeds
of construction mortgages totaling $25.4 million. The Bank anticipates that it
will have sufficient funds available to meet its current loan origination
commitments. Certificate accounts, including Individual Retirement Account
("IRA") and KEOGH accounts, which are
45
<PAGE> 96
scheduled to mature in less than one year from September 30, 1997, totaled
$127.4 million. The Bank expects that substantially all of the maturing
certificate accounts will be retained by the Bank at maturity.
In accordance with the Bank's plans to improve its customer delivery
systems and expand the services it offers, the Bank anticipates that it will be
investing in new computer hardware and software during fiscal 1998 and may
expand branch facilities. The Bank anticipates that during fiscal 1998 it will
incur capital expenditures of approximately $1.5 million to fund such plans.
These anticipated capital expenditures will be funded from the Bank's general
corporate funds, including proceeds from the conversion and its FHLB advances.
The initial impact of the Conversion on the liquidity and capital
resources of the Company will be significant as it will substantially increase
the liquid assets of the Company and the capital base on which the Company
operates. Additionally, the Company expects the substantial majority of
conversion proceeds will initially be invested in readily marketable investment
grade securities which, if liquidity needs developed, could be sold by the
Company to provide additional liquidity. Further, the additional capital
resulting from the offerings is expected to increase the capital base of the
Company. At September 30, 1997, the Bank had total equity, determined in
accordance with GAAP, of $28.5 million, or 7.7% of total assets, which
approximated the Bank's regulatory tangible capital at that date of 7.4% of
assets. An institution with a ratio of tangible capital to total assets of
greater than or equal to 5.0% is considered to be "well-capitalized" pursuant
to OTS regulations. Assuming that the Company uses 50% of the net proceeds at
the maximum of the Estimated Price Range to purchase the stock of the Bank, the
Bank's GAAP capital will increase to $53.7 million or a ratio of GAAP capital
to adjusted assets, on a pro forma basis, of 13.6% after the Conversion. In the
event that the holding company form of organization is not utilized and all of
the net Conversion proceeds, at the midpoint of the Estimated Price Range, are
retained by the Bank, the Bank's ratios of tangible and core capital to
adjusted assets, on a pro forma basis, will both increase to 17.2% after
Conversion. The investment of the net proceeds from the sale of the Common
Stock is expected to provide the Bank with additional income to increase
further its capital position. The additional capital may also assist the Bank
in offering new programs and expanded services to its customers. See "Use of
Proceeds."
YEAR 2000 COMPLIANCE
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. Many existing application software products were
designed to accommodate only two-digits. For example, "96" is stored on the
system and represents 1996. The Company has been identifying potential problems
associated with the "Year 2000" issue and has implemented a plan designated to
ensure that all software used in connection with the Company's business will
manage and manipulate data involving the transition with data from 1999 to 2000
without functional or data abnormality and without inaccurate results related to
such data. The Bank has prepared a critical issues schedule with a timeline and
assigned responsibilities. In addition, the Bank recognizes that its ability to
be Year 2000 compliant is dependent upon the cooperation of its vendors. The
Bank is requiring its computer systems and software vendors to represent that
the products provided are or will be Year 2000 compliant and has planned a
program of testing for compliance. The Bank has received representations from
its primary third party vendors that they will have resolved any Year 2000
problems on their software by December 31, 1998 and anticipates that all of its
vendors also will have resolved any Year 2000 problems in their software by that
same date. All Year 2000 issues for the Bank, including testing, are expected to
be addressed by December 31, 1998 and any problems would be remedied by March
31, 1999. The Bank will also prepare contingency plans in the event there are
any system interruptions. The Bank believes that its costs related to Year 2000
will be approximately $100,000. There can be no assurances, however, that such
plan or the performance by the Bank's vendors will be effective to remedy all
potential problems. To the extent the Company's systems are not fully Year 2000
compliant, there can be no assurance that potential systems interruptions or the
cost necessary to update software would not have a materially adverse effect on
the Company's business, financial condition, results of operations and business
prospects. Further, any Year 2000 failure on the part of the Bank's customers
could result in additional expense or loss to the Bank. The Bank plans also to
work with its customers to address any potential Year 2000 problems.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which require the measurement of
financial position and operating results generally in terms of historical dollar
amounts without considering the changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased cost of the Bank's operations. Unlike industrial companies, nearly all
of the assets and liabilities of the Bank are monetary in nature. As a result,
interest rates have a greater impact on the Bank's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the prices of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
Accounting for Long Lived Assets. In March 1995, the FASB issued
Statement of Financial Accounting Standards No. 121, "Accounting for Impairment
of Long-Lived Assets and for Long Lived Assets to be Disposed of" ("SFAS No.
121"). This Statement establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. The Statement requires that
long-lived assets and certain identifiable intangibles to be held and used by an
institution be reviewed for impairment whenever events change and circumstances
indicate the carrying amount of the asset may not be recoverable. If impaired,
such assets are written down to fair value. Long-lived assets to be disposed of
are carried at the lower of cost or fair value, less cost to dispose. This
Statement became effective for the Bank on September 30, 1996. Adoption of this
Statement did not have a material impact on the earnings, equity, or financial
position of the Bank.
Accounting for Mortgage Servicing Rights. In May 1995, the FASB issued
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights" ("SFAS 122"), which amends Statement of Financial Accounting
Standards No. 65, "Accounting for Certain Mortgage Banking Activities." SFAS 122
is effective for fiscal years beginning after December 15, 1995. SFAS 122
requires that a mortgage banking enterprise recognize, as separate assets,
rights to service mortgage loans for others regardless of how those servicing
rights are acquired. Additionally, the Statement requires that the capitalized
mortgage servicing rights be assessed for impairment based on the fair value of
those rights, and the impairment be recognized through a valuation allowance.
These requirements will accelerate the income recognition associated with
mortgage banking activities, increase future operating expense due to the
amortization of servicing rights and will also result in greater earnings
volatility for those institutions involved in mortgage banking activities. SFAS
No. 122 was adopted by the Bank in fiscal 1997. Adoption of this statement did
not have a material impact on the earnings, equity, or financial position of the
Bank.
Accounting for Stock-Based Compensation. In November 1995, the FASB
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock Based Compensation" ("SFAS No. 123"). This statement establishes financial
accounting standards for stock-based employee compensation plans. SFAS No. 123
permits the Bank to choose either a new fair value based method or the current
Accounting
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<PAGE> 97
Principles Board ("APB") Opinion 25 intrinsic value based method of accounting
for its stock-based compensation arrangements. For companies that continue to
follow current practice in accounting for such arrangements under APB Opinion
25, SFAS No. 123 requires pro forma disclosures of net earnings and earnings per
share computed as if the fair value based method had been applied. SFAS No. 123
applies to all stock-based employee compensation plans in which an employer
grants shares of its stock or other equity instruments to employees except for
employee stock ownership plans. SFAS No. 123 also applies to plans in which the
employer incurs liabilities to employees in amounts based on the price of the
employer's stock, (e.g., Stock Option Plan, stock purchase plans, restricted
stock plans, and stock appreciation rights). The statement also specifies the
accounting for transactions in which a company issues stock options or other
equity instruments for services provided by nonemployees or to acquire goods or
services from outside suppliers or vendors. The recognition provisions of SFAS
No. 123 for companies choosing to adopt the new fair value based method of
accounting for stock-based compensation arrangements apply to all transactions
entered into in fiscal years that begin after December 15, 1995, however,
disclosure of the pro forma net earnings and earnings per share, as if the fair
value method of accounting for stock-based compensation had been elected, is
required for all awards granted in fiscal years beginning after December 31,
1994. Any effect that this statement will have on the Bank will be applicable
upon the consummation of the Conversion. The Bank has elected to continue to
follow the APB Opinion 25 method upon adoption, and will provide the required
pro forma disclosure as if the fair value method had been applied.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In June 1996 the FASB issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 125"). This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under the financial-components approach,
after a transfer of financial assets, an entity recognizes all financial and
servicing assets it controls and liabilities it has incurred and derecognizes
financial assets it no longer controls and liabilities that have been
extinguished. The financial-components approach focuses on the assets and
liabilities that exist after the transfer. If a transfer does not meet the
criteria for a sale, the transfer is accounted for as a secured borrowing with a
pledge of collateral. The Statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996, and is to be applied prospectively. Earlier or retroactive application of
this Statement is not permitted. Adoption of this Statement did not have a
material impact on the net income, equity, or financial position of the Bank.
Accounting for Earnings Per Share. In February 1997 the FASB issued SFAS
No. 128, "Earnings Per Share." This statement establishes standards for
computing and presenting earnings per share ("EPS") and applies to entities with
publicly-held common stock or potential common stock. This statement simplifies
the standards for computing earnings per share previously found in APB Opinion
No. 15, "Earnings per Share," and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
This statement is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted.
Reporting Comprehensive Income. In September 1997, the FASB issued SFAS
No. 130, "Reporting Comprehensive Income." This statement establishes standards
for the reporting and display of comprehensive income and its components in a
full set of general purpose financial statements. SFAS No. 130 requires that all
items that are required to be recognized as components of comprehensive income
47
<PAGE> 98
be reported in a financial statement that is displayed with the same prominence
as other financial statements. The statement does not require a specific format
for that financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. The Bank will make the appropriate disclosures in the applicable
consolidated financial statements, as required.
Disclosure About Segments of an Enterprise and Related Information. In
September 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS No. 131
is effective for financial statements for periods beginning after December 15,
1997. Management has not yet determined the impact, if any, of this statement on
the Bank.
BUSINESS OF THE BANK
GENERAL
The Bank's principal business has been and continues to be attracting
retail deposits from the general public in the areas surrounding its 10 banking
offices and investing those deposits, together with funds generated from
operations and borrowings, primarily in one- to four-family mortgage loans,
consumer loans and commercial loans. The Bank currently originates, primarily
for investment, adjustable-rate and shorter-term (15 years or less) one- to
four-family mortgage loans and longer-term, fixed-rate one- to four-family
mortgage loans. Since the Bank has a policy to limit its retention of newly
originated longer-term, fixed-rate one- to four-family loans to 20% of total
originations for a fiscal year, periodically the Bank has had to limit its
origination of such loans. The Bank 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 Bank is currently
considering the origination for sale of subprime one- to four-family mortgage
loans, if the origination of such loans were warranted under market conditions.
The Bank also originates a variety of consumer loans, including home equity
loans, home equity lines of credit, direct and indirect automobile loans and
education loans, and commercial loans. To a lesser extent, the Bank also
originates multi-family and commercial real estate loans and construction
loans. The Bank also invests in mortgage-related securities and investment
securities, primarily U.S. government and agency and municipal obligations, and
other permissible investments. The Bank's revenues are derived principally from
interest on its loans, and to a lesser extent, interest and dividends on its
investment and mortgage-related securities and other noninterest income. The
Bank's primary sources of funds are deposits, principal and interest payments
on loans and mortgage-related securities, FHLB advances and proceeds from the
sale of loans.
MARKET AREA AND COMPETITION
The Bank is a community-oriented banking institution offering a variety
of financial products and services to meet the needs of the communities it
serves. The Bank's lending and deposit gathering is concentrated in its market
area consisting of Luzerne, Carbon, Columbia, Monroe and Schuylkill counties in
Northeast Pennsylvania. The Bank invests primarily in loans secured by first or
second mortgages on properties located in areas surrounding its offices.
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<PAGE> 99
The Bank maintains its headquarters in Hazleton and three other banking
offices in Luzerne County, although one of those offices only opened in January
1998. The Bank's three offices in Luzerne County, including Hazleton, which were
open during fiscal 1997 accounted for $152.2 million or 48.5% of the Bank's
total deposits at September 30, 1997. Hazleton is situated approximately 100
miles from Philadelphia and New York City and approximately 50 miles from
Allentown and the Wilkes-Barre/Scranton area. The Bank also maintains two
banking branch offices in Bloomsburg (Columbia County), one in Lehighton (Carbon
County), and one each in Frackville, Pottsville and Shenandoah (all in
Schuylkill County). The Bank also operates, separate from its branch office
locations, a loan production office in Pocono Pines in Monroe County. A second
loan production office was combined with the branch office which was opened in
January 1998. The Bank's two loan production offices existing in fiscal 1997,
together with a separate loan production facility at one of its branch offices,
were the source of 29.7% of the Bank's one- to four-family mortgage loans
originated in fiscal 1997.
The economy of the greater Hazleton area is characterized by diversified
light manufacturing and is the site of production facilities for several major
manufacturers including Union Camp, Hershey-Cadbury Chocolates, Quebacor and
Hazleton Pumps, Inc. As a consequence, the manufacturing sector employs more
than one third of the area's work force. The Hazleton area has excellent access
to major highway transportation routes including Interstates 80 and 81 as well
as rail transportation. The population of Luzerne County has remained relatively
static and has one of the oldest average ages for all counties in the United
States. The overall population in the Bank's market area is relatively small
and, in recent years, has grown slowly, and the unemployment rate in the area is
greater than the national average.
Monroe County, the location of the Pocono Pines loan production office,
is dominated by the Pocono Mountains, making the area one of the
Middle-Atlantic's most popular resort areas. The Pocono Mountains, with their
ski areas and other recreational facilities, draw vacationers primarily from
Eastern Pennsylvania, New Jersey, Maryland, and New York. The Bank established
its loan production office to take advantage of the market for vacation
properties existing in Monroe County as well as to be involved in the growth in
the number of permanent residents relocating into the County.
The Bank faces significant competition both in generating loans and in
attracting deposits. The Bank's primary market area is highly competitive and
the Bank faces direct competition from a significant number of financial
institutions, many with a state wide or regional presence and, in some cases, a
national presence. Many of these financial institutions are significantly larger
and have greater financial resources than the Bank. The Bank's competition for
loans comes principally from commercial banks, savings banks, credit unions,
mortgage brokers, mortgage banking companies and insurance companies. Its most
direct competition for deposits has historically come from savings banks and
associations, commercial banks and credit unions. In addition, the Bank faces
increasing competition for deposits from non-bank institutions such as brokerage
firms and insurance companies in such instruments as short-term money market
funds, corporate and government securities funds, mutual funds and annuities.
Competition may also increase as a result of the lifting of restrictions on the
interstate operations of financial institutions. See "Risk Factors -- Highly
Competitive Industry and Geographic Area."
In addition, the Bank recognizes that its customer base increasingly
focuses on convenience and access to services. The Bank has addressed these
customer desires recently through the implementation of PC banking and voice
response capabilities, a computerized loan origination and document system and
the issuance of debit cards. The Bank intends to continue to evaluate and
enhance its service delivery system.
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<PAGE> 100
LENDING ACTIVITIES
Loan Portfolio Composition. The Bank's loan portfolio consists primarily
of mortgage loans secured by one- to four-family residential real estate. In
addition, the Bank has a significant amount of consumer loans and commercial
loans. At September 30, 1997, the Bank's loans totaled $264.2 million, of which
$179.1 million, or 67.8%, were one- to four-family residential mortgage loans.
Such residential mortgage loans consisted of 34.8% of adjustable-rate loans,
which are indexed to various indexes, primarily a Federal Housing Finance Board
average, a National Average Monthly Median Cost of Funds Ratio, or a one-year
U.S. Treasury Constant Maturity Yield ("CMT") index, 29.4% of shorter-term (15
years or less to maturity as of the date of origination) fixed-rate loans, and
35.8% of longer-term fixed-rate loans. At September 30, 1997, the Bank also had
$12.5 million, or 4.7% of total loans, in multi-family and commercial real
estate loans and construction loans.
The Bank's consumer loans at September 30, 1997 aggregated $61.8
million, or 23.4% of total loans. Such consumer loans included $32.8 million of
home equity loans, $8.5 million of home equity lines of credit, $13.7 million of
direct and indirect automobile loans, $2.3 million of education loans and $4.5
million of other consumer loans.
The Bank's commercial loan portfolio at September 30, 1997,
aggregating $10.8 million, or 4.1% of total loans, consisted of $5.7 million of
commercial business loans, $3.9 million of participations in loans originated by
other financial institutions, and $928,000 of municipal, tax-advantaged loans.
The commercial business loans generally are secured by real estate.
The types of loans that the Bank may originate are subject to federal
and state laws and regulations. Interest rates charged by the Bank on loans are
affected by the demand for such loans and the supply of money available for
lending purposes and the rates offered by competitors. These factors are, in
turn, affected by, among other things, economic conditions, monetary policies of
the federal government, including the Federal Reserve Board, and legislative tax
policies.
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<PAGE> 101
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------------------------------------------------------
1997 1996 1995
--------------------- -------------------- ---------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- --------- --------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family ............... $179,101 67.78% $170,773 69.68% $157,360 73.01%
Multi-family and commercial ....... 6,701 2.54 4,429 1.81 3,457 1.60
Construction ...................... 5,818 2.20 5,129 2.09 4,040 1.87
-------- ------- -------- ------- -------- --------
Total real estate loans ... 191,620 72.52 180,331 73.58 164,857 76.49
-------- ------- -------- ------- -------- --------
Consumer loans:
Home equity loans and
lines of credit ................. 41,278 15.62 38,054 15.53 33,275 15.44
Automobile ........................ 13,678 5.18 10,594 4.32 6,705 3.11
Education ......................... 2,348 0.89 2,538 1.04 2,432 1.13
Unsecured lines of credit ......... 1,310 0.50 959 0.39 495 0.23
Other ............................. 3,229 1.22 3,309 1.35 3,241 1.50
Total consumer loans ...... 61,843 23.40 55,454 22.63 46,148 21.41
-------- ------- -------- ------- -------- -------
Commercial loans ...................... 10,775 4.08 9,280 3.79 4,523 2.10
-------- ------- -------- ------- -------- -------
Total loans ................... 264,238 100.00% 245,065 100.00% 215,528 100.00%
======= ======= =======
Less:
Deferred loan origination fees
and discounts ................... 1,497 1,419 1,289
Allowance for loan losses ......... 1,272 730 724
-------- -------- --------
Total loans, net .............. $261,469 $242,916 $213,515
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------
1994 1993
--------------------- ---------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- --------
Dollars in Thousands
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family ............... $138,506 72.70% $137,951 75.68%
Multi-family and commercial ....... 5,741 3.01 6,781 3.72
Construction ...................... 4,263 2.24 2,763 1.52
-------- ------- -------- -------
Total real estate loans ... 148,510 77.95 147,495 80.92
-------- ------- -------- -------
Consumer loans:
Home equity loans and
lines of credit.................. 28,957 15.20 25,687 14.09
Automobile ........................ 4,842 2.54 2,834 1.55
Education ......................... 2,505 1.31 1,953 1.07
Unsecured lines of credit ......... 418 0.22 255 0.14
Other ............................. 3,585 1.88 3,880 2.13
Total consumer loans ...... 40,307 21.16 34,609 18.99
-------- ------- -------- -------
Commercial loans ...................... 1,707 0.90 179 0.10
-------- ------- -------- -------
Total loans ................... 190,524 100.00% 182,283 100.00%
======= =======
Less:
Deferred loan origination fee
and discounts.................... 1,254 1,172
Allowance for loan losses.......... 769 979
-------- --------
Total loans, net $188,501 $180,132
======== ========
</TABLE>
51
<PAGE> 102
Loan Maturity. The following table shows the remaining contractual
maturity of the Bank's total loans at September 30, 1997. The table does not
include the effect of future principal prepayments.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
--------------------------------------------------------------------------
MULTI-
ONE-TO FAMILY AND
FOUR- COMMERCIAL TOTAL
FAMILY REAL ESTATE CONSTRUCTION CONSUMER COMMERCIAL LOANS
--------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Amounts due in:
One year or less ............................... $ 8,551 $ 435 $ -- $ 18,608 $ 1,942 $ 31,049
After one year:
More than one year to three years .......... 17,869 830 -- 13,360 695 34,096
More than three years to five years ........ 17,192 916 -- 15,071 565 31,515
More than five years to 10 years ........... 40,696 2,088 -- 9,947 1,132 53,237
More than 10 years to 20 years ............. 55,207 1,780 -- 3,612 37 60,636
More than 20 years ........................ 39,586 652 5,818(1) 1,245 6,404 53,705
-------- -------- -------- -------- -------- --------
Total amount due ................... $179,101 $ 6,701 $ 5,818 $ 61,843 $ 10,775 $264,238
======== ======== ======== ======== ======== ========
</TABLE>
- --------------------
(1) Construction loans, which consist of loans to the owner for the
construction of one- to four-family residences, automatically convert to
permanent financing upon completion of the construction phase.
52
<PAGE> 103
The following table sets forth, at September 30, 1997, the dollar amount
of loans contractually due after September 30, 1998, and whether such loans have
fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER SEPTEMBER 30, 1998
--------------------------------
FIXED ADJUSTABLE TOTAL
-------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans:
One- to four-family ................... $110,277 $ 60,273 $170,550
Multi-family and commercial real estate 850 5,416 6,266
Construction .......................... 5,818 -- 5,818
Total real estate loans ............ 121,514 61,120 182,634
Consumer loans ............................ 43,235 -- 43,235
Commercial loans .......................... 3,462 5,371 8,833
-------- -------- --------
Total loans ....................... $163,642 $ 71,060 $234,702
======== ======== ========
</TABLE>
Origination and Sale of Loans. The Bank's mortgage lending activities are
conducted primarily by its loan personnel operating at its branch offices and
loan origination office. All loans originated by the Bank are underwritten
pursuant to the Bank's policies and procedures. For fiscal 1997 and 1996, the
Bank originated $72.1 million and $75.2 million in loans, respectively. The Bank
originates both adjustable-rate and longer-term and shorter-term fixed-rate
loans. The Bank's ability to originate fixed- or adjustable-rate loans is
dependent upon the relative customer demand for such loans, which is affected by
the current and expected future level of interest rates.
In recent years, all real estate loans originated by the Bank have been
originated for investment, although, in the past, the Bank has sold loans. It
currently is the policy of the Bank to retain for investment longer-term
(greater than 15 years to maturity at date of origination) fixed-rate one- to
four-family loans originated during a fiscal year only up to 20% of its total
loan originations during that year. In addition, the Bank generally retains the
adjustable rate and shorter-term (maturities of 15 years or less) fixed-rate
loans originated. In recent years, the Bank has not resold loans and has had to
limit its solicitation of longer-term one- to four-family loans to meet its
retention policy regarding such loans. In January 1998, the Bank implemented a
program to sell longer-term fixed-rate one-to four-family mortgage loans. The
Bank has sold or has commitments to sell loans totalling $571,302. The Bank
intends to retain servicing rights on mortgage loans sold.
During fiscal years 1997 and 1996, the Bank originated $17.7 million and
$24.4 million, respectively, of one- to four-family mortgage loans, of which
$10.1 million and $8.2 million, respectively, were adjustable-rate loans, $5.6
million and $10.7 million, respectively, were shorter-term fixed-rate loans, and
$2.0 million and $5.5 million, respectively, were longer-term fixed-rate loans.
In addition, during fiscal years 1997 and 1996, the Bank originated $14.2
million and $12.2 million, respectively of construction loans. Approximately
100% of such construction loans were for owner financing of single family
properties, which, upon completion of the construction phase, generally would
convert to permanent financing. Also, the Bank originated $2.1 million and $1.6
million, respectively, of multi-family and commercial real estate loans during
fiscal 1997 and 1996.
Also, during fiscal 1997 and 1996, respectively, the Bank originated $30.8
million and $30.4 million of consumer loans, consisting of $13.6 million and
$14.5 million, respectively, of home equity loans, $3.1 million and $3.0
million, respectively, of home equity lines of credit, $8.9 million and $8.1
million, respectively, of direct and indirect automobile loans, $1.7 million and
$1.7 million, respectively, of education loans, and $3.5 million and $3.1
million, respectively, of other consumer loans. In addition, during fiscal 1997
and 1996, the Bank originated $7.4 million and $6.6 million, respectively, of
commercial loans, of which 0% and 6%, respectively, were participation interests
in commercial loans originated by other financial institutions, and 54.7% and
19.2%, respectively, were municipal loans.
53
<PAGE> 104
The following table sets forth the Bank's loan originations, purchases,
sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
---------------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Loans at beginning of period ............................... $250,142 $219,633 $193,909
Originations:
Real estate:
One- to four-family ............................ 17,698 24,355 24,554
Multi-family and commercial .................... 2,055 1,588 312
Construction ................................... 14,151 12,238 11,368
-------- -------- --------
Total real estate loans .................... 33,904 38,181 36,234
Consumer:
Home equity loans and lines of credit .......... 16,710 17,464 14,597
Automobile ..................................... 8,912 8,107 4,782
Education ...................................... 1,658 1,727 1,766
Unsecured lines of credit ...................... 837 711 315
Other .......................................... 2,671 2,361 1,936
-------- -------- --------
Total consumer loans ....................... 30,788 30,370 23,396
Commercial ......................................... 7,426 6,614 4,513
-------- -------- --------
Total loans originated ..................... 72,118 75,165 64,143
Deduct:
Principal loan repayments and prepayments .............. 51,298 42,619 37,265
Loan sales ......................................... 1,789 1,534 793
Transfers to REO ................................... 201 503 361
Sub-total .................................. 53,288 44,656 38,419
Net loan activity .......................................... 18,830 30,509 25,724
-------- -------- --------
Loans at end of period(1) .......................... $268,972 $250,142 $219,633
======== ======== ========
</TABLE>
- ------------------
(1) Loans at end of period include loans in process of $4,734, $5,077 and
$4,105 for fiscal years 1997, 1996 and 1995, respectively.
One- to Four-Family Mortgage Lending. The Bank currently offers both
fixed-rate and adjustable-rate mortgage ("ARM") loans with maturities of up to
30 years secured by one- to four-family residences. In excess of 85% of such
loans are located in the Bank's market area. One- to four-family mortgage loan
originations are generally obtained from the Bank's in-house loan
representatives, from existing or past customers, and through referrals from
members of the Bank's local communities. At September 30, 1997, the Bank's one-
to four-family mortgage loans totaled $179.1 million, or 67.8% of total loans.
Of the one- to four-family mortgage loans outstanding at that date, 41.1% were
longer-term fixed-rate mortgage loans, 29.1% were shorter-term fixed-rate loans
and 29.8% were ARM loans.
54
<PAGE> 105
The Bank currently offers a variety of fixed-rate mortgage loans,
including 30-year and 15-year mortgage loans and five and seven year balloon
loans. The Bank retains for its portfolio shorter-term, fixed-rate loans and
adjustable-rate one- to four-family loans. In addition, in July 1994, the Bank
adopted a policy to limit its retention of newly-originated longer-term
fixed-rate loans to 20% of loan originations during a fiscal year. In January
1998, the Bank implemented a program to sell in the secondary market
longer-term fixed-rate one- to four-family mortgage loans originated in excess
of the Bank's retention policy.
The Bank currently offers a number of ARM loans with terms of up to 30
years and interest rates which adjust initially one, three or seven years from
the outset of the loan and thereafter annually, or in the case of the three year
ARM, every three years, for the duration of the loan. The interest rates for the
Bank's ARM loans are indexed to various indexes, particularly a Federal Housing
Finance Board average, a National Average Monthly Cost of Funds Ratio, or a CMT
Index. The Bank originates ARM loans with initially discounted rates, often
known as "teaser rates." The Bank's ARM loans generally provide for periodic
(not more than 2%) caps on the increase or decrease in the interest rate at any
adjustment date. Currently, the Bank has a contractual rate ceiling for the life
of the loan of 5%.
The origination of adjustable-rate mortgage loans, as opposed to
fixed-rate residential mortgage loans, helps reduce the Bank's exposure to
increases in interest rates. However, adjustable-rate loans generally pose
credit risks not inherent in fixed-rate loans, primarily because as interest
rates rise, the underlying payments of the borrower rise, thereby increasing the
potential for default. Periodic and lifetime caps on interest rate increases
help to reduce the credit risks associated with adjustable-rate loans but also
limit the interest rate sensitivity of such loans.
Most one- to four-family mortgage loans are underwritten according to FNMA
and FHLMC guidelines. However, the Bank is evaluating whether to offer solely
for resale one- to four-family mortgage loans to borrowers whose credit does not
fully meet established FNMA or FHLMC standards, for example, income to debt
ratios for the borrower ("subprime loans"). Generally, the Bank originates one-
to four-family residential mortgage loans in amounts up to 80% of the lower of
the appraised value or the selling price of the property securing the loan and
up to 95% of the appraised value or selling price if private mortgage insurance
("PMI") is obtained. Mortgage loans originated by the Bank generally include
due-on-sale clauses which provide the Bank with the contractual right to deem
the loan immediately due and payable in the event the borrower transfers
ownership of the property without the Bank's consent. Due-on-sale clauses are an
important means of adjusting the yields on the Bank's fixed-rate mortgage loan
portfolio and the Bank has generally exercised its rights under these clauses.
The Bank requires fire, casualty, title and, in certain cases, flood insurance
on all properties securing real estate loans made by the Bank.
Multi-family and Commercial Real Estate Lending. The Bank originates
fixed-rate and adjustable-rate multi-family loans and commercial real estate
loans that generally are secured by properties used for business purposes or a
combination of residential and retail purposes. At September 30, 1997, the Bank
had $6.7 million of multi-family and commercial real estate loans. At that date,
the Bank's largest multi-family or commercial real estate loan was a commercial
real estate loan for $575,159 secured by a restaurant located in Hazleton,
Pennsylvania.
Pursuant to the Bank's underwriting policies, a multi-family mortgage loan
may be made in an amount up to 80% of the lower of the appraised value or sales
price of the underlying property with terms generally of 15 years, with an
amortization period up to 20 years. The Bank's adjustable-rate multi-family
loans generally have rates that adjust every three years. In addition, the Bank
generally requires a debt service coverage ratio of a minimum of 125% and the
personal guarantee of principals, if appropriate. The Bank also generally
requires an appraisal on the property conducted by an independent appraiser and
title insurance.
55
<PAGE> 106
The Bank's underwriting procedures provide that commercial real estate
loans generally may be made in amounts up to 80% of the lower of the appraised
value or sales value of the property. These loans may be made with terms up to
25 years and are generally offered at interest rates which adjust in accordance
with an index based on prime rate or an appropriate certificate of deposit rate.
The factors considered by the Bank include: the net operating income of the
mortgaged premises before debt service and depreciation; the debt coverage ratio
(the ratio of net earnings to debt service); and the ratio of loan amount to
appraised value. The Bank has generally required that the properties securing
commercial real estate loans have debt service coverage ratios of at least 125%.
Multi-family and commercial real estate loans generally are considered to
involve a higher degree of credit risk than financing on improved,
owner-occupied real estate. Multi-family and commercial real estate loans
generally involve larger principal amounts than one- to four-family residential
mortgage loans. In addition, because multi-family and commercial real estate
loans often are dependent on successful operation and management of the
properties, repayment of such loans may be subject to adverse conditions in the
real estate market or the economy to a greater extent than one- to four-family
residential loans.
Construction Lending. The Bank also offers residential construction loans.
Such loans primarily have been for presold one- to four-family residences for
the construction phase and convert into permanent financing. The Bank generates
residential construction loans primarily through direct contact with the
borrower or home builders, and these loans involve properties located in the
Bank's market area. Such loans require that the Bank review plans,
specifications and cost estimates and that the contractor be known to the Bank
to be reputable. The amount of construction advances to be made, together with
the sum of previous disbursements, may not exceed the percentage of completion
of the construction. The maximum loan-to-value limit applicable to such loans is
80%. At September 30, 1997, the Bank's largest construction loan was a
performing loan with an aggregate commitment of $489,000, secured by a
single-family residence located in Luzerne County. At that date, construction
loans totaled $5.8 million (net), or 2.2% of the Bank's total loans. Risk of
loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction or
development.
Consumer Lending. Consumer loans at September 30, 1997 amounted to $61.8
million or 23.4% of the Bank's total loans. These loans include home equity
loans, home equity lines of credit, direct and indirect automobile loans,
education loans and other consumer loans. The Bank's home equity loans are
generated primarily through the Bank's retail offices. The Bank generally offers
home equity loans with a term of 180 months or less. The Bank also offers home
equity lines of credit with terms up to 20 years, the last 10 years of which
require full amortization of the principal balance. The maximum loan amount for
both home equity loans and home equity lines of credit is subject to a combined
loans-to-value ratio of 80%.
The Bank also offers automobile loans, both on a direct and an indirect
basis (through new and used car dealers) in amounts up to $35,000 with 60 month
terms and loan-to-value ratios of 100% for new cars. The Bank also finances new
cars with prices in excess of $35,000 for up to 72 months. For used cars, the
maximum loan-to-value ratio is the lesser of the retail value shown in the NADA
Used Car Guide or the contract price, and the terms for such loans range between
60 months for automobiles up to 3 years old to 30 months for older vehicles. The
indirect automobile loans were originated by dealers through an independent
contractor with the Bank in accordance with underwriting standards
pre-established by the Bank and are serviced by the independent contractor.
While the contractual arrangements would permit the making of such a loan prior
to review by the Bank, in practice, all such indirect loans have been made only
after an underwriting review and acceptance by the Bank. During fiscal 1998,
the Bank intends to assume the duties previously preformed by its independent
contractor and to terminate its relationship with that independent contractor.
The Bank also offers loans on recreational vehicles and boats with terms up to
84 months for new and 60 months for used vehicles and boats and loan-to-value
ratios of 90% of the retail price for new recreational vehicles and boats. Used
recreational vehicles and boats can be financed up to 85% of the estimated
retail value plus taxes and fees and new options. Other consumer loans include
education loans which are federally
56
<PAGE> 107
guaranteed and originated under regulations of the Pennsylvania Higher Education
Assistance Agency, deposit-secured loans, and other personal and unsecured
loans. The Bank's policy is to sell its education loans once the borrower has
left school to Sallie Mae with servicing released.
Loans secured by rapidly depreciable assets such as automobiles or that
are unsecured entail greater risks than one- to four-family mortgage loans. In
such cases, repossessed collateral for a defaulted loan may not provide an
adequate source of repayment of the outstanding loan balance, since there is a
greater likelihood of damage, loss or depreciation of the underlying collateral.
Further, consumer loan collections on these loans are dependent on the
borrower's continuing financial stability and, therefore, are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Finally, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans in the event of a default.
Commercial Lending. At September 30, 1997, the Bank had $10.8 million in
commercial loans which amounted to 4.1% of total loans. The Bank makes
commercial business loans primarily in its market area to a variety of
professionals, sole proprietorships and small businesses. The Bank offers a
variety of commercial lending products, including term loans for fixed assets
and working capital, revolving lines of credit, letters of credit, and Small
Business Administration guaranteed loans. Interest rates charged generally float
based on the prime rate as published in the Wall Street Journal. Prior to making
commercial business loans, the borrower is required to provide the Bank with
sufficient information to allow a prudent loan decision to be made. Such
information generally includes financial statements and projected cash flows,
and is reviewed to evaluate debt service capability. Commercial business loans
are generally secured by a variety of collateral, primarily real estate, and
frequently are supported by personal guarantees. In addition, the Bank actively
participates in industrial loans arranged through and with the Greater
Wilkes-Barre Industrial Fund and CanDo, Inc. a Hazleton area industrial fund. At
September 30, 1997, $2.2 million or 20.4% of the commercial loan portfolio were
participation loans of this nature. In addition, the Bank makes loans to various
political subdivisions in its lending area, primarily tax and revenue
anticipation loans, five year capital improvement loans and general obligation
loans. At September 30, 1997, the Bank had $3.9 million, or 36.1% of the
commercial loan portfolio in these municipal loans. The interest income on such
municipal loans is exempt from state and/or federal income taxes. The average
tax equivalent rate on these municipal loans at September 30, 1997 was 7.74%.
The Bank's commercial business loans, other than the participation loans
and the municipal loans, aggregated $4.7 million, or 42.6% of its commercial
loan portfolio as of September 30, 1997, and the average outstanding balance of
such loans was $65,000.
Commercial lending is generally considered to involve a higher degree of
credit risk than long-term financing on improved, owner-occupied real estate.
Risk of loss on commercial business lending is dependent in significant part to
the business success of the borrower and on general economic conditions in the
region. Also, commercial business loans require continued review and evaluation
regarding the performance of the borrower. At September 30, 1997, the Bank's
largest commercial loan was $1.5 million to a local municipality for capital
improvements.
Loan Approval Procedures and Authority. The Board of Directors establishes
the lending policies of the Bank and oversees the Bank's lending activity. The
Board of Directors has established a Loan Committee comprised of the Bank's
Chairman of the Board of Directors, President, Senior Vice President Lending,
Senior Vice President Retail, Senior Vice President Chief Financial Officer and
at least one outside director. Loans in excess of $500,000 must be submitted to
the Loan Committee for its consideration and thereafter presented to the Board,
with a recommendation from the Loan Committee. The Loan Committee has been
granted authority to approve all loans of $500,000 or less. In addition,
individual officers have been
57
<PAGE> 108
granted specific loan approval authority. For example, the Chief Executive
Officer has authority to approve mortgage and commercial loans up to $300,000,
unsecured consumer loans up to $75,000 and secured consumer loans up to
$150,000. Various other senior and subordinate lending officers have been
granted more limited loan approval authority. All approved loans are reported
monthly to the Board of Directors.
DELINQUENT LOANS, CLASSIFIED ASSETS AND REAL ESTATE OWNED
Delinquencies and Classified Assets. Reports listing all delinquent
accounts are generated and reviewed by management on a monthly basis and the
Board of Directors performs a monthly review of all loans or lending
relationships delinquent 30 days or more and all REO. The procedures taken by
the Bank with respect to delinquencies vary depending on the nature of the loan,
period and cause of delinquency and whether the borrower has been habitually
delinquent. When a borrower fails to make a required payment on a loan, the Bank
takes a number of steps to have the borrower cure the delinquency and restore
the loan to current status. The Bank generally sends the borrower a written
notice of non-payment after the loan is first past due. The Bank's guidelines
provide that telephone, written correspondence and/or face-to-face contact will
be attempted to ascertain the reasons for delinquency and the prospects of
repayment. When contact is made with the borrower at any time prior to
foreclosure, the Bank will attempt to obtain full payment, work out a repayment
schedule with the borrower to avoid foreclosure or, in some instances, accept a
deed in lieu of foreclosure. In the event payment is not then received or the
loan not otherwise satisfied, additional letters and telephone calls generally
are made. If the loan is still not brought current or satisfied and it becomes
necessary for the Bank to take legal action, which typically occurs after a loan
is 90 days or more delinquent, the Bank will commence foreclosure proceedings
against any real or personal property that secures the loan. If a foreclosure
action is instituted and the loan is not brought current, paid in full, or
refinanced before the foreclosure sale, the property securing the loan generally
is sold at foreclosure and, if purchased by the Bank, becomes real estate owned.
Federal regulations and the Bank's Asset Classification Policy require
that the Bank utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Bank has incorporated the
OTS internal asset classifications as a part of its credit monitoring system.
The Bank currently classifies problem and potential problem assets as
"Substandard," "Doubtful" or "Loss" assets. An asset is considered "substandard"
if it is inadequately protected by the current net worth and paying capacity of
the obligor or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the insured institution
will sustain "some loss" if the deficiencies are not corrected. Assets
classified as "Doubtful" have all of the weaknesses inherent in those classified
"Substandard" with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets classified
as "Loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted. Assets which do not currently expose the insured institution
to sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are required to be designated "Special
Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When an insured institution classifies one or more assets, or
portions thereof, as "Loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the asset so classified or
to charge off such amount.
58
<PAGE> 109
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
Although management believes that, based on information currently available to
it at this time, its allowance for loan losses is adequate, actual losses are
dependent upon future events and, as such, further additions to the level of
allowances for loan losses may become necessary. In addition, the OTS or other
federal banking agencies may require the Bank to recognize additions to the
allowance, based on their judgments about information available to them at the
time of their examination.
The Bank's Classification of Assets Committee reviews and classifies the
Bank's assets on a quarterly basis and the Board of Directors reviews the
results of the reports on a quarterly basis. The Bank classifies assets in
accordance with the management guidelines described above. At September 30,
1997, the Bank had $598,000 of assets designated as Substandard which consisted
of REO and mortgage and consumer loans. At that same date the Bank had $229,000
of assets classified as Loss consisting of $129,000 of five loans and a $100,000
equity investment in a community development corporation. All assets designated
Loss by the Bank are fully reserved. At September 30, 1997, the Bank had $44,000
of assets classified as Doubtful consisting of one loan. As of September 30,
1997, the Bank also had a total of 49 loans, totaling $1.5 million, designated
as Special Mention. At September 30, 1997, the largest loan designated as
Special Mention was a commercial loan with a carrying balance of $208,000, and
was secured by real estate. At September 30, 1997, the largest adversely (other
than Special Mention) classified loan was $81,000.
59
<PAGE> 110
The following table sets forth the delinquencies in the Bank's loan
portfolio as of the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
-------------------------------------------- -----------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
-------------------------------------------- -----------------------------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family ............. 8 $ 137 22 $ 575 8 $ 265 15 $ 562
Multi-family and commercial...... -- -- 1 47 -- -- -- --
Consumer Loans:
Home equity loans and lines .........
of credit.......................... 8 81 9 108 9 112 8 114
Automobile .......................... 1 6 2 22 2 7 5 23
Unsecured lines of credit ........... -- -- -- -- -- -- 1 2
Other ............................... 9 57 3 22 7 24 4 9
Commercial Loans ........................ 1 59 -- -- 1 300 -- --
------ ------ ------ ------ ------ ------ ------ ------
Total ....................... 27 $ 340 37 $ 774 27 $ 708 33 $ 713
====== ====== ====== ====== ====== ====== ====== ======
Delinquent loans to total loans ......... 0.13% 0.30% 0.29% 0.29%
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
-------------------------------------------
60-89 DAYS 90 DAYS OR MORE
-------------------------------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family ............. 12 $ 519 22 $ 879
Multi-family and commercial...... 1 16 -- --
Consumer Loans:
Home equity loans and lines
of credit........................ 13 212 11 320
Automobile .......................... 1 9 -- --
Unsecured lines of credit ........... -- -- 1 9
Other ............................... 11 30 8 25
Commercial Loans ........................ -- -- 1 1
------ ------ ------ ------
Total ....................... 38 $ 786 43 $1,234
====== ====== ====== ======
Delinquent loans to total loans ......... 0.37% 0.58%
</TABLE>
60
<PAGE> 111
Non-Performing Assets and Impaired Loans. The following table sets forth
information regarding non-accrual loans and REO. At September 30, 1997,
non-accrual loans totaled $774,000, consisting of 37 loans, and REO totaled
$319,000 consisting of five one- to four-family loans. It is the policy of the
Bank to cease accruing interest on loans 90 days or more past due (unless the
loan principal and interest are determined by management to be fully secured and
in the process of collection) and to charge off all accrued interest. For the
year ended September 30, 1997, the amount of additional interest income that
would have been recognized on non-accrual loans if such loans had continued to
perform in accordance with their contractual terms was $86,000. On September 30,
1995, the Bank adopted Statement of Financial Accounting Standards No. 114
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118.
At September 30, 1996, the Bank had a $491,000 recorded investment in impaired
loans which had specific allowances of $69,000. At September 30, 1997, there
were $477,000 of impaired loans with specific loan loss allowances of $176,000.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family
real estate................... $ 622 $ 562 $ 879 $1,173 $1,292
Consumer ....................... 152 154 354 333 433
Commercial ..................... -- -- 1 87 129
------ ------ ------ ------ ------
Total(1) .................... 774 716 1,234 1,593 1,854
Real estate owned (REO)(2) ........ 319 453 423 250 119
Other repossessed assets .......... 3 -- 13 20 9
------ ------ ------ ------ ------
Total nonperforming assets(3) $1,096 $1,169 $1,670 $1,863 $1,982
====== ====== ====== ====== ======
Troubled debt restructurings ...... $ 112 -- -- -- --
Troubled debt restructurings and
total non-performing assets .... $1,208 $1,169 $1,670 $1,863 $1,982
====== ====== ====== ====== ======
Total nonperforming loans and
troubled debt restructurings as a
percentage of total loans ....... 0.34% 0.29% 0.58% 0.85% 1.03%
Total nonperforming assets and
troubled debt restructurings as a
percentage of total assets ...... 0.38% 0.38% 0.52% 0.66% 0.71%
</TABLE>
- ---------------
(1) Total non-accruing loans equals total non-performing loans.
(2) Real estate owned balances are shown net of related loss allowances.
(3) Nonperforming assets consist of nonperforming loans (and impaired loans),
other repossessed assets and REO.
61
<PAGE> 112
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance for
loan losses is maintained at an amount management considers adequate to cover
estimated losses in loans receivable which are deemed probable and estimable
based on information currently known to management. The allowance is based upon
a number of factors, including current economic conditions, actual loss
experience and industry trends. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to make additional
provisions for estimated loan losses based upon their judgments about
information available to them at the time of their examination. As of September
30, 1997, the Bank's allowance for loan losses was 0.48% of total loans compared
to 0.30% as of September 30, 1996. The Bank had non-accrual loans of $774,000
and $716,000 at September 30, 1997 and September 30, 1996, respectively. Such
increase in the allowance from September 30, 1996 to September 30, 1997 was the
result of a revision in the Bank's method of calculation to give greater
consideration to allowance for loan loss ratio levels of peer group institutions
and to the shifting emphasis in the Bank's loan portfolio towards consumer,
commercial and construction loans, which involves inherently greater risks than
traditional one- to four-family mortgage loans. The Bank will continue to
monitor and modify its allowances for loan losses as conditions dictate. While
management believes the Bank's allowance for loan losses is sufficient to cover
losses inherent in its loan portfolio at this time, no assurances can be given
that the Bank's level of allowance for loan losses will be sufficient to cover
future loan losses incurred by the Bank or that future adjustments to the
allowance for loan losses will not be necessary if economic and other conditions
differ substantially from the economic and other conditions used by management
to determine the current level of the allowance for loan losses. In light of the
increased lending focus of the Bank on loans involving greater risk than one- to
four-family mortgage loans, and the anticipated future growth in such loans as a
percentage of the Bank's total loan portfolio, the Bank anticipates that its
allowance for loan losses as a percentage of total loans will increase in future
periods.
62
<PAGE> 113
The following table sets forth activity in the Bank's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
AT OR FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses, beginning
of year ................................................. $ 730 $ 724 $ 769 $ 979 $ 1,488
Charged-off loans:
One- to four-family real estate ......................... 66 34 25 72 149
Multi-family and commercial real estate ................. -- -- -- -- 321
Consumer ................................................ 66 60 70 88 75
------- ------- ------- ------- -------
Total charged-off loans ............................. 132 94 95 160 545
------- ------- ------- ------- -------
Recoveries on loans previously charged off:
One- to four-family real estate ......................... -- -- 10 -- 18
Consumer ................................................ 23 3 15 4 18
------- ------- ------- ------- -------
Total recoveries .................................... 23 3 25 4 36
------- ------- ------- ------- -------
Net loans charged-off ....................................... (109) (91) (70) (156) (509)
Provision for loan losses ................................... 651 97 25 (54)
------- ------- ------- ------- -------
Allowance for loan losses, end of period .................... $ 1,272 $ 730 $ 724 $ 769 $ 979
======= ======= ======= ======= =======
Net loans charged-off to average
interest-earning loans .................................. 0.04% 0.04% 0.03% 0.08% 0.35%
------- ------- ------- ------- -------
Allowance for loan losses to total loans .................... 0.48% 0.30% 0.33% 0.40% 0.53%
------- ------- ------- ------- -------
Allowance for loan losses to nonperforming
loans and troubled debt restructuring ................... 143.57% 101.96% 58.67% 48.27% 52.80%
------- ------- ------- ------- -------
Net loans charged-off to allowance for
loan losses ............................................. (8.57)% (12.47)% (9.67)% (20.29)% (51.99)%
------- ------- ------- ------- -------
Recoveries to charge-offs ................................... 17.42% 3.19% 26.32% 2.50% 6.61%
------- ------- ------- ------- -------
</TABLE>
63
<PAGE> 114
The following table set forth the Bank's allowance for loan losses in each
of the categories listed at the dates indicated and the percentage of such
amounts to the total allowance and to total loans.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------- ----------------------------- --------------------------------
% OF PERCENT % OF PERCENT % OF PERCENT
ALLOWANCE OF LOANS ALLOWANCE OF LOANS ALLOWANCE OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
-------------------------------- ------------------------------ --------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate .......... $ 607 47.72% 75.52% $ 427 58.50% 73.58% $ 462 63.81% 76.90%
Consumer ............. 194 15.25 23.40 157 21.51 22.63 170 23.48 21.00
Commercial ........... 141 11.08 4.08 146 20.00 3.79 82 11.33 2.10
Unallocated .......... 330 25.94 -- -- -- -- 10 1.38 --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance
for loan losses. $1,272 100.00% 100.00% $ 730 100.00% 100.00% $ 724 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------------------------
1994 1993
----------------------------- ------------------------------
% OF PERCENT % OF PERCENT
ALLOWANCE OF LOANS ALLOWANCE OF LOANS
IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
----------------------------- ------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate .......... $ 535 69.57% 78.20% $ 688 70.28% 81.10%
Consumer ............. 157 20.42 20.90 156 15.93 18.80
Commercial ........... 52 6.76 0.90 3 0.31 0.10
Unallocated .......... 25 3.25 -- 132 13.48 --
------ ------ ------ ----- ------ ------
Total allowance
for loan losses. $ 769 100.00% 100.00% $ 979 100.00% 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
64
<PAGE> 115
Real Estate Owned. At September 30, 1997, the Bank had $319,000 of real
estate owned consisting of five one- to four-family properties. When the Bank
acquires property through foreclosure or deed in lieu of foreclosure, it is
initially recorded at the lesser of carrying value of the loan or fair value of
the property at the date of acquisition less costs to sell. Thereafter, if there
is a further deterioration in value, the Bank provides for a specific valuation
allowance and charges operations for the diminution in value. It is the policy
of the Bank to have obtained an appraisal or broker's price opinion on all real
estate subject to foreclosure proceedings prior to the time of foreclosure. It
is the Bank's policy to require appraisals on a periodic basis on foreclosed
properties and conducts inspections on foreclosed properties.
INVESTMENT ACTIVITIES
Federally-chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certificates of deposit of insured banks
and savings institutions, bankers' acceptances, repurchase agreements and
federal funds. Subject to various restrictions, federally-chartered savings
institutions may also invest their assets in commercial paper, investment-grade
corporate debt securities and mutual funds whose assets conform to the
investments that a federally-chartered savings institution is otherwise
authorized to make directly. Additionally, the Bank must maintain minimum levels
of investments that qualify as liquid assets under OTS regulations. See
"Regulation-- Federal Savings Institution Regulation-- Liquidity." Historically,
the Bank has maintained liquid assets above the minimum OTS requirements and at
a level considered to be adequate to meet its normal daily activities.
The investment policy of the Bank, as approved by the Board of Directors,
requires management to maintain adequate liquidity, generate a favorable return
on investments without incurring undue interest rate and credit risk and to
complement the Bank's lending activities. The Bank primarily utilizes
investments in securities for liquidity management and as a method of deploying
excess funding not utilized for loan originations or sales. Generally, the
Bank's investment policy is more restrictive than the OTS regulations allow and,
accordingly, the Bank has invested primarily in U.S. Government and agency
securities, which qualify as liquid assets under the OTS regulations, federal
funds and U.S. Government sponsored agency issued mortgage-backed securities. As
required by SFAS No. 115, the Bank has established an investment portfolio of
securities that are categorized as held-to-maturity, available-for-sale or held
for trading. The Bank generally invests in securities as a method of utilizing
funds not utilized for loan origination activity and as a method of maintaining
liquidity at levels deemed appropriate by management. The Bank does not
currently maintain a portfolio of securities categorized as held for trading. At
September 30, 1997, the available-for-sale securities portfolio totaled $44.8
million, or 12.1% of assets and the held-to-maturity portfolio totaled $38.9
million, or 10.5% of assets. As of September 30, 1997, $20 million, of the
Bank's investment securities held-to-maturity consisted of U.S. Government and
related obligations with a weighted average maturity of 85 months.
At September 30, 1997, the Bank had invested $39.9 million in FNMA, FHLMC
and GNMA mortgage-related securities, or 10.8% of total assets, of which 25%
were classified as held-to-maturity. Of the $39.9 million, $20.5 million were
adjustable-rate with maximum interest rate adjustments of 2% at any adjustment
or 6% over the life of the security. In addition, $29.0 million, or 34.7%, of
the Bank's securities, were debt obligations issued by federal agencies which
generally have stated maturities from 3 to 15 years but which also have call
features. Such callable securities allow the issuer, after a certain time
period, to repay the security prior to its stated maturity. Based on interest
rate ranges anticipated by the Bank, the Bank estimates that the substantial
majority of such securities would be called prior to their stated maturities.
The Bank is subject to additional interest rate risk and reinvestment risk
compared to its evaluation of that risk if changes in interest rates exceed
ranges anticipated by the Bank in estimating the anticipated life of such
callable investment securities. Investments in mortgage-related securities
involve a risk that actual prepayments will be greater than estimated
prepayments over the life of the security, which may require adjustments to the
amortization of any premium or accretion of any discount relating to such
instruments thereby changing the net yield on such securities. There is also
reinvestment risk associated with the cash flows from such securities or in the
event such securities are redeemed by the issuer. In addition, the market value
of such securities may be adversely affected by changes in interest rates. Of
the Bank's investment in mortgage-related securities at September 30, 1997, 25%
were being held-to-maturity.
65
<PAGE> 116
The following table sets forth certain information regarding the amortized
cost and fair value of the Bank's securities at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- -------- --------- -------- --------- --------
Investment securities: (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Debt securities held-to-maturity:
Obligations of U.S. government
agencies ................................ $ 19,997 $ 19,953 $ 25,995 $ 25,475 $ 25,655 $ 25,523
Other securities ......................... 8,963 9,105 4,105 4,109 700 700
-------- -------- -------- -------- -------- --------
Total ................................. $ 28,960 $ 29,058 $ 30,100 $ 29,584 $ 26,355 $ 26,223
======== ======== ======== ======== ======== ========
Debt securities available-for-sale:
Obligations of U.S. Treasury and
U.S. government agencies ............... 10,984 11,045 19,935 19,769 9,940 10,211
Other securities ......................... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total ................................. $ 10,984 $ 11,045 $ 19,935 $ 19,769 $ 9,940 $ 10,211
======== ======== ======== ======== ======== ========
Equity securities available-for-sale:
FHLB stock ............................... $ 2,054 $ 2,054 $ 1,958 $ 1,958 $ 1,785 $ 1,785
FHLMC stock .............................. 47 1,692 47 1,172 47 830
-------- -------- -------- -------- -------- --------
Total equity securities available-
for-sale ............................. 2,101 3,746 2,005 3,130 1,832 2,615
-------- -------- -------- -------- -------- --------
Total debt and equity securities ...... $ 42,045 $ 43,849 $ 52,040 $ 52,483 $ 38,127 $ 39,049
======== ======== ======== ======== ======== ========
Mortgage-related securities:
Mortgage-related securities
held-to-maturity:
FHLMC .................................... $ 5,772 $ 5,678 $ 6,833 $ 6,561 $ 18,667 $ 18,346
FNMA ..................................... 3,948 3,891 4,576 4,403 16,996 16,719
GNMA ..................................... -- -- -- -- 918 907
Collateralized mortgage obligations ...... 245 242 1,977 1,967 15,287 14,867
-------- -------- -------- -------- -------- --------
Total mortgage-related securities
held-to-maturity ..................... $ 9,965 $ 9,811 $ 13,386 $ 12,931 $ 51,868 $ 50,839
======== ======== ======== ======== ======== ========
Mortgage-related securities available-
for-sale:
FHLMC .................................... $ 5,690 $ 5,769 $ 11,548 $ 11,485 $ 494 $ 497
FNMA ..................................... 2,168 2,188 11,768 11,666 -- --
GNMA ..................................... 18,253 18,600 3,791 3,807 -- --
Collateralized mortgage obligations ...... 3,380 3,425 10,678 10,301 -- --
-------- -------- -------- -------- -------- --------
Total mortgage-related securities
available-for-sale ................... 29,491 29,982 37,785 37,259 494 497
-------- -------- -------- -------- -------- --------
Total mortgage-related securities ..... 39,456 39,793 51,171 50,190 52,362 51,336
-------- -------- -------- -------- -------- --------
Net unrealized (losses) gains on
available-for-sale securities ........ 1,283 -- 253 -- 617 --
-------- -------- -------- -------- -------- --------
Total securities ...................... $ 82,784 $ 83,642 $103,464 $102,673 $ 91,106 $ 90,385
======== ======== ======== ======== ======== ========
</TABLE>
66
<PAGE> 117
The following table sets forth the Bank's securities activities for the
periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
MORTGAGE-RELATED SECURITIES:
Mortgage-related securities, beginning of period(1).. $ 50,645 $ 52,365 $ 51,045
======== ======== ========
Purchases:
Mortgage-related securities - held-to-maturity.. $ -- $ -- $ 6,295
Mortgage-related securities - available-for-sale.. 16,805 8,231 491
Sales:
Mortgage-related securities - available-for-sale.. (19,069) -- --
Repayments and prepayments:
Mortgage-related securities .................... (9,385) (9,330) (5,286)
Increase (decrease) in net premium ................ (110) (93) (182)
Increase (decrease) in unrealized gain ............ 1,061 (528) 2
Net increase in mortgage-related securities . (10,698) (1,720) 1,320
-------- -------- --------
Mortgage-related securities, end of period ........ $ 39,947 $ 50,645 $ 52,365
======== ======== ========
INVESTMENT SECURITIES:
Investment securities, beginning of period(2) ..... $ 51,181 $ 37,796 $ 28,065
======== ======== ========
Purchases:
Investment securities - held-to-maturity ....... $ 6,880 $ 25,115 $ 12,570
Investment securities - available-for-sale ..... 6,000 12,000 10,000
Sales:
Investment securities - held-to-maturity ....... -- -- --
Investment securities - available-for-sale ..... (8,000) -- (3,000)
Calls:
Investment securities - held-to-maturity ....... (8,000) (11,645) (4,000)
Investment securities - available-for-sale ..... (7,000) (4,000) --
Maturities:
Investment securities - held-to-maturity ....... -- (5,200) (6,775)
Investment securities - available-for-sale ..... -- (2,500) --
Increase (decrease) in net premium ................ 29 (29) (82)
Increase (decrease) in unrealized gain ............ 640 (356) 1,018
-------- -------- --------
Net increase in investment securities ....... (9,451) 13,385 9,731
-------- -------- --------
Investment securities, end of period .............. $ 41,730 $ 51,181 $ 37,796
======== ======== ========
</TABLE>
- -------------------
(1) Includes mortgage-related securities available-for-sale.
(2) Includes investment securities available-for-sale.
67
<PAGE> 118
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Bank's
investment securities and mortgage-related securities as of September 30, 1997.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
---------------------------------------------------------------------------
MORE THAN ONE YEAR MORE THAN 5 YEARS
ONE YEAR OR LESS TO FIVE YEARS TO 10 YEARS
--------------------- -------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Held-to-maturity securities:
Investment securities:
Municipal securities(1) ............... $ -- --% $ -- --% $ 2,417 7.98%
Obligations of U.S. Government agencies -- -- 5,000 6.00 12,997 6.94
Mortgage-related securities ............. -- -- 244 4.96 -- --
------- ---- ------- ---- ------- -------
Total securities at amortized cost .. $ -- --% $ 5,244 5.95% $15,414 7.10%
======= ==== ======= ==== ======= =======
Available-for-sale securities:
Investment securities: .................. $ 991 7.38 $ -- -- $ -- --
Obligations of the U.S. Treasury
Obligations of U.S. Government agencies 1,000 7.75 5,993 7.55 3,000 7.29
Equity securities ..................... 2,101 7.08 -- -- -- --
Mortgage-related securities ............. 2,628 5.67 1,384 6.90 -- --
------- ---- ------- ---- ------- -------
Total securities at fair value ...... $ 6,720 6.67% $ 7,377 7.43% $ 3,000 7.29%
======= ==== ======= ==== ======= =======
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1997
------------------------------------------
MORE THAN 10 YEARS TOTAL
-------------------- ------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
-------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Held-to-maturity securities:
Investment securities:
Municipal securities(1) ................ $ 6,546 8.45% $ 8,963 8.32%
Obligations of U.S. Government agencies. 2,000 7.51 19,997 6.74
Mortgage-related securities .............. 9,721 6.13 9,965 6.10
------- ------- ------- ----
Total securities at amortized cost ... $18,267 7.09% $38,925 6.94%
======= ======= ======= ====
Available-for-sale securities:
Investment securities:
Obligations of the U.S. Treasury ....... $ -- -- $ 991 7.38%
Obligations of U.S. Government agencies. -- -- 9,993 7.49
Equity securities ...................... -- -- 2,101 7.08
Mortgage-related securities .............. 25,479 6.64 29,491 6.57
------- ------- ------- ----
Total securities at fair value ....... $25,479 6.64% $42,576 6.83%
======= ======= ======= ====
</TABLE>
--------------------
(1) Weighted Average Yield data for municipal securities is presented on a tax
equivalent basis based on an assumed tax rate of 40%.
68
<PAGE> 119
SOURCES OF FUNDS
General. Deposits, loan repayments and prepayments, proceeds from sales of
loans, cash flows generated from operations and FHLB advances are the primary
sources of the Bank's funds for use in lending, investing and for other general
purposes.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposits consist of checking, money market,
savings, NOW, certificate accounts and Individual Retirement Accounts. More than
61.4% of the funds deposited in the Bank are in certificate of deposit accounts.
At September 30, 1997, core deposits (savings, NOW and money market accounts)
represented 35.9% of total deposits. The flow of deposits is influenced
significantly by general economic conditions, changes in money market rates,
prevailing interest rates and competition. The Bank's deposits are obtained
predominantly from the areas in which its branch offices are located. The Bank
has historically relied primarily on customer service and long-standing
relationships with customers to attract and retain these deposits; however,
market interest rates and rates offered by competing financial institutions
significantly affect the Bank's ability to attract and retain deposits. The Bank
uses traditional means of advertising its deposit products, including radio and
print media and generally does not solicit deposits from outside its market
area. The Bank does not actively solicit certificate accounts in excess of
$100,000 or use brokers to obtain deposits. At September 30, 1997, the weighted
average remaining maturity of the Bank's certificate of deposit accounts was
10.8 months. Further increases in short-term certificate of deposit accounts,
which tend to be more sensitive to movements in market interest rates than core
deposits, may result in the Bank's deposit base being less stable than if it had
a large amount of core deposits which, in turn, may result in further increases
in the Bank's cost of deposits.
The following table presents the deposit activity of the Bank for the
periods indicated:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
SEPTEMBER 30,
--------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Increase (decrease) before interest
credited ............................... $(2,625) $16,664 $13,721
Interest credited ...................... 9,942 10,132 9,128
------- ------- -------
Net increase ........................... $ 7,317 $26,796 $22,849
======= ======= =======
</TABLE>
At September 30, 1997, the Bank had $30.9 million in certificate accounts
in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
MATURITY PERIOD AMOUNT
- ------------------------ --------------
(IN THOUSANDS)
<S> <C>
Three months or less ................. $22,309
Over 3 through 6 months .............. 3,519
Over 6 through 12 months.............. 2,032
Over 12 months ....................... 3,032
-------
Total ........................ $30,892
=======
</TABLE>
69
<PAGE> 120
The following table sets forth the distribution of the Bank's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented and such information at September
30, 1997. Averages for the periods presented utilize month-end balances.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------
AT SEPTEMBER 30, 1997 1997 1996
-------------------------------- ------------------------------ ------------------------------
PERCENT PERCENT
PERCENT OF TOTAL AVERAGE OF TOTAL
OF TOTAL AVERAGE AVERAGE RATE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE PAID BALANCE DEPOSITS PAID BALANCE DEPOSITS RATE PAID
------- -------- --------- ------- -------- ---- ------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Savings account ............. $ 71,779 22.8% 2.43% $ 72,292 23.4% 2.45% $ 73,654 25.2% 2.54%
Money market accounts ....... 13,821 4.4 2.86 14,238 4.6 2.81 14,746 5.0 2.78
NOW accounts ................ 27,302 8.7 1.50 27,870 9.0 1.49 24,258 8.3 1.49
Certificates of deposit ..... 192,736 61.4 5.50 187,270 60.5 5.42 174,617 59.6 5.49
Noninterest-bearing deposits:
Demand deposits ........... 8,485 2.7 -- 7,615 2.5 -- 5,579 1.9 --
-------- ----- ---- -------- ----- ---- -------- ----- ----
Total average deposits .. $314,123 100.0% 4.18% $309,285 100.0% 4.11% $292,854 100.0% 4.16%
======== ===== ==== ======== ===== ==== ======== ===== ====
</TABLE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
SEPTEMBER 30,
-----------------------------
1995
---------------------------
PERCENT
OF TOTAL AVERAGE
AVERAGE AVERAGE RATE
BALANCE DEPOSITS PAID
------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Savings account ............. $ 78,478 29.0% 2.65%
Money market accounts ....... 17,392 6.4 2.82
NOW accounts ................ 23,727 8.8 2.00
Certificates of deposit ..... 148,163 54.8 5.22
Noninterest-bearing deposits:
Demand deposits ........... 2,779 1.0 --
-------- ----- ----
Total average deposits .. $270,539 100.0% 3.96%
======== ===== ====
</TABLE>
- --------------------
(1) Based on remaining maturity of certificates.
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<PAGE> 121
The following table presents by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at September 30, 1997.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM SEPTEMBER 30, 1997
-----------------------------------------------------------
LESS THAN ONE TO TWO TO OVER
ONE YEAR TWO YEARS THREE YEARS THREE YEARS TOTAL
--------- --------- ----------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CERTIFICATE ACCOUNTS:
4.01 to 6.00% ................... $123,629 $35,630 $11,614 $6,575 $177,448
6.01 to 8.00% ................... 3,746 819 9,949 -- 14,514
8.01 to 10.00% .................. -- 774 -- -- 774
-------- ------- ------- ------ --------
Total certificate accounts.... $127,375 $37,223 $21,563 $6,575 $192,736
======== ======= ======= ====== ========
</TABLE>
Borrowings. The Bank utilizes advances from the FHLB of Pittsburgh as an
alternative to retail deposits to fund its operations as part of its operating
strategy. These FHLB advances are collateralized primarily by certain of the
Bank's mortgage loans and mortgage-related securities and secondarily by the
Bank's investment in capital stock of the FHLB of Pittsburgh. FHLB advances are
made pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. The maximum amount that the FHLB of
Pittsburgh will advance to member institutions, including the Bank, fluctuates
from time to time in accordance with the policies of the FHLB of Pittsburgh. See
"Regulation-- Federal Home Loan Bank System." At September 30, 1997, the Bank
had $23.5 million in outstanding FHLB advances, compared to $25.5 million at
fSeptember 30, 1996. Other borrowings consist of overnight retail repurchase
agreements and for the periods presented were immaterial.
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE FISCAL YEAR ENDED
SEPTEMBER 30,
-------------------------------
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances and other borrowings:
Average balance outstanding ........ $27,372 $14,971 $ 2,243
Maximum amount outstanding at any
month-end during the period ...... 42,191 25,534 11,050
Balance outstanding at end of period 23,608 25,534 11,050
Weighted average interest rate
during the period ................ 5.45% 5.42% 5.80%
Weighted average interest rate at
end of period .................... 5.73% 5.90% 7.12%
</TABLE>
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<PAGE> 122
SUBSIDIARY ACTIVITIES
The Bank owns 100% of FIDACO, Inc. which was incorporated in Pennsylvania
in August 1978. Currently, FIDACO, Inc.'s sole activity is to act as a conduit
for the Bank's $100,000 investment in the Hazleton Community Development
Corporation, of which FIDACO is a 25% owner. Its total assets as of September
30, 1997 were $131,000. The Bank has no other active subsidiaries.
PROPERTIES
The Bank currently conducts its business through 10 full service banking
offices located in Luzerne, Carbon, Columbia and Schuylkill counties in
Northeast Pennsylvania and one loan origination office in Monroe County in
Northeast Pennsylvania. The following table sets forth the Bank's offices as of
September 30, 1997.
<TABLE>
<CAPTION>
NET BOOK VALUE
OF PROPERTY OR
LEASEHOLD TOTAL
ORIGINAL YEAR IMPROVEMENTS DEPOSITS AT
LEASED OR LEASED OR DATE OF LEASE AT SEPTEMBER 30, SEPTEMBER 30,
LOCATION OWNED ACQUIRED EXPIRATION 1997 1997
- --------------------------- --------- ------------- ------------- ---------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ADMINISTRATIVE/HOME OFFICE:
12 E. Broad Street
Hazleton, PA 18201 Owned 1947 -- $3,243 $88,892
2 E. Broad Street
Hazleton, PA 18201 Leased 1992 1998 -- --
BRANCH OFFICES:
Bloomsburg Office:
17 E. Main Street
Bloomsburg, PA 17815 Owned 1963 -- 489 22,904
Shenandoah Office:
5 -7 N. Main Street
Shenandoah, PA 17976 Owned 1968 -- 432 50,612
Pottsville Office:
111 E. Norwegian Street
Pottsville, PA 17901 Owned 1968 -- 653 30,283
Lehighton Office:
111 N. First Street
Lehighton, PA 18235 Owned 1977 -- 144 26,408
Laurel Mall Office:
240 Laurel Mall
Hazleton, PA 18201 Leased 1994 2003 219 55,638
Schuylkill Mall Office:
611 Schuylkill Mall
Frackville, PA 17976 Leased 1978 1998 39 21,674
Columbia Mall Office:
225 Columbia Mall Drive
Bloomsburg, PA 17815 Leased 1988 1998 204 10,001
Gould's Office:
Route 93
Sugarloaf, PA 18249 Leased 1995 2000 31 7,712
</TABLE>
72
<PAGE> 123
<TABLE>
<CAPTION>
NET BOOK VALUE
OF PROPERTY OR
LEASEHOLD TOTAL
ORIGINAL YEAR IMPROVEMENTS DEPOSITS AT
LEASED OR LEASED OR DATE OF LEASE AT SEPTEMBER 30, SEPTEMBER 30,
LOCATION OWNED ACQUIRED EXPIRATION 1997 1997
- ---------------------------------- ------------- ------------- ------------- ---------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mountaintop Office:(1) Owned 1997 -- 143 0
360 S. Mountain Boulevard (Under
Mountaintop, PA 18707 Construction)
LOAN PRODUCT ORIGINATION OFFICES:
Pocono L.P.O. Office Leased 1997 1998
P.O. Box 1092
Pocono Pines. PA 18350
Mountaintop L.P.O. Office:(1) Leased N/A [Month to
129 N. Mountain Boulevard Month]
Mountaintop, PA 18707
</TABLE>
- ---------------
(1) In January 1998, the Mountaintop branch office was opened and the
Mountaintop loan production office was closed (its lease terminated)
and combined into the new branch office.
LEGAL PROCEEDINGS
The Bank is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operations.
PERSONNEL
As of September 30, 1997, the Bank had 121 authorized full-time
employee positions and 19 authorized part-time employee positions. The employees
are not represented by a collective bargaining unit and the Bank considers its
relationship with its employees to be good. See "Management of the Bank--Other
Benefit Plans" for a description of certain compensation and benefit programs
offered to the Bank's employees.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Company and the Bank will report their income on a
September 30 fiscal year basis using the accrual method of accounting and will
be subject to federal income taxation in the same manner as other corporations
with some exceptions, including particularly the Bank's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Company. The Bank has not been audited by the IRS
in the past five years.
Bad Debt Reserve. Historically, savings institutions such as the Bank
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrifts") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have been
deducted in arriving at their taxable income. The Bank's deductions with respect
to "qualifying real property loans," which are generally loans secured by
certain interest in real property, were computed using an amount based on the
Bank's actual loss experience, or a percentage equal to 8% of the Bank's taxable
income, computed
73
<PAGE> 124
with certain modifications and reduced by the amount of any permitted addition
to the non-qualifying reserve. Due to the Bank's loss experience, the Bank
generally recognized a bad debt deduction equal to 8% of taxable income.
In August 1996, the provisions repealing the above thrift bad debt
rules were passed by Congress as part of "The Small Business Job Protection Act
of 1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988. The Bank has previously
recorded a deferred tax liability equal to the bad debt recapture and as such,
the new rules will have no effect on net income or federal income tax expense.
For taxable years beginning after December 31, 1995, the Bank's bad debt
deduction will be equal to net charge-offs. The new rules allow an institution
to suspend the bad debt reserve recapture for the 1996 and 1997 tax years if the
institution's lending activity for those years is equal to or greater than the
institution's average mortgage lending activity for the six taxable years
preceding 1996. For this purpose, only home purchase and home improvement loans
are included and the institution can elect to have the tax years with the
highest and lowest lending activity removed from the average calculation. If an
institution is permitted to postpone the reserve recapture, it must begin its
six year recapture no later than the 1998 tax year. The unrecaptured base year
reserves will not be subject to recapture as long as the institution continues
to carry on the business of banking. In addition, the balance of the pre-1988
bad debt reserves continue to be subject to a provision of present law referred
to below that require recapture in the case of certain excess distributions to
shareholders.
Distributions. To the extent that the Bank makes "non-dividend
distributions" to the Company that are considered as made (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for such
losses exceeds the amount that would have been allowed under the experience
method, or (ii) from the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the Bank's taxable income. Non-dividend distributions include distributions
in excess of the Bank's current and accumulated earnings and profits,
distributions in redemption of stock, and distributions in partial or complete
liquidation. However, dividends paid out of the Bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not be
considered to result in a distribution from the Bank's bad debt reserve. Thus,
any dividends to the Company that would reduce amounts appropriated to the
Bank's bad debt reserve and deducted for federal income tax purposes would
create a tax liability for the Bank. The amount of additional taxable income
created from an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. Thus,
if, after the Conversion, the Bank makes a "non-dividend distribution," then
approximately one and one-half times the amount so used would be includable in
gross income for federal income tax purposes, assuming a 34% corporate income
tax rate (exclusive of state and local taxes). See "Regulation" and "Dividend
Policy" for limits on the payment of dividends of the Bank. The Bank does not
intend to pay dividends that would result in a recapture of any portion of its
bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the
bad debt reserve deduction claimed by the Bank over the deduction that would
have been allowable under the experience method is treated as a preference item
for purposes of computing the AMTI. Only 90% of AMTI can be offset by net
operating loss carryovers of which the Bank currently has none. AMTI is
increased by an amount equal to 75% of the amount by which the Bank's adjusted
current earnings exceeds its AMTI (determined without regard to this preference
and prior to reduction for net operating losses). In addition, for taxable years
beginning after June 30, 1986 and before January 1, 1996, an environmental tax
of 0.12% of the excess of AMTI (with certain modifications)
74
<PAGE> 125
over $2.0 million is imposed on corporations, including the Bank, whether or not
an Alternative Minimum Tax ("AMT") is paid. The Bank does not expect to be
subject to the AMT.
Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company or the Bank own more than 20% of the stock of a
corporation distributing a dividend then 80% of any dividends received may be
deducted.
STATE AND LOCAL TAXATION
The Company and its non-thrift Pennsylvania subsidiaries are subject to
the Pennsylvania Corporate Net Income Tax and Capital Stock and Franchise Tax.
The Corporate Net Income Tax rate for 1998 is 9.99% and is imposed on the
Company's and its non-thrift subsidiaries' unconsolidated taxable income for
federal purposes with certain adjustments. In general, the Capital Stock Tax is
a property tax imposed at the rate of 1.275% of a corporation's capital stock
value, which is determined in accordance with a fixed formula. The Company is
also required to file an annual report with and pay an annual Franchise tax to
the State of Delaware.
The Bank is taxed under the Pennsylvania Mutual Thrift Institutions Tax
Act (the "MTIT"), as amended, to include thrift institutions having capital
stock. Pursuant to the MTIT, the Company's tax rate is 11.5%. The MTIT exempts
the Company from all other taxes imposed by the Commonwealth of Pennsylvania for
state income tax purposes and from all local taxation imposed by political
subdivisions, except taxes on real estate and real estate transfers. The MTIT is
a tax upon net earnings, determined in accordance with generally accepted
accounting principals ("GAAP") with certain adjustments. The MTIT, in computing
GAAP income, allows for the deduction of interest earned on Pennsylvania and
federal securities, while disallowing a percentage of a thrift's interest
expense deduction in the proportion of interest income on those securities to
the overall interest income of the Company. Net operating losses, if any,
thereafter can be carried forward three years for MTIT purposes. The Bank has
not been audited by the Commonwealth of Pennsylvania in the last five years.
REGULATION
GENERAL
The Bank is subject to extensive regulation, examination and
supervision by the OTS, as its chartering agency, and the FDIC, as the deposit
insurer. The Bank is a member of the FHLB System. The Bank's deposit accounts
are insured up to applicable limits by the SAIF managed by the FDIC. The Bank
must file reports with the OTS and the FDIC concerning its activities and
financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other financial institutions. There are periodic examinations by the OTS and the
FDIC to test the Bank's compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such policies, whether by
the OTS, the FDIC or the Congress, could have a material adverse impact on the
Company, the Bank and their operations. Assuming
75
<PAGE> 126
that the holding company form of organization is utilized, the Company, as a
savings and loan holding company, will also be required to file certain reports
with, and otherwise comply with the rules and regulations of the OTS and of the
Securities and Exchange Commission (the "SEC") under the federal securities
laws.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the OTS, the FDIC or the Congress, could have a material
impact on the Company, the Bank, their operations or the Bank's Conversion.
Congress is expected to consider in 1998 the elimination of the federal thrift
charter and abolishment of the OTS. The results of such consideration, including
possible enactment of legislation is uncertain. Therefore, the Bank is unable to
determine the extent to which the results of consideration or possible
legislation, if enacted, would affect its business. See "Risk Factors
- --Financial Institution Regulation and Possible Legislation."
Certain of the regulatory requirements applicable to the Bank and to
the Company are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to savings associations set
forth in this Prospectus do not purport to be complete descriptions of such
statutes and regulations and their effects on the Bank and the Company and is
qualified in its entirety by reference to such statutes and regulations.
FEDERAL SAVINGS INSTITUTION REGULATION
Business Activities. The activities of federal savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDI Act") and the regulations
issued by the agencies to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which federal associations
may engage. In particular, many types of lending authority for federal
associations, e.g., commercial, non-residential real property loans and consumer
loans, are limited to a specified percentage of the institution's capital or
assets.
Loans-to-One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans-to-one borrower.
Generally, this limit is 15% of the Bank's unimpaired capital and surplus, plus
an additional 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. At September 30, 1997, the Bank's general limit on
loans-to-one borrower was $4.5 million. At September 30, 1997, the Bank's
largest aggregate amount of loans-to-one borrower consisted of a $1.5 million
commercial loan to a local municipality.
QTL Test. The HOLA requires savings institutions to meet a QTL test.
Under the QTL test, a savings association is required to maintain at least 65%
of its "portfolio assets" (total assets less: (i) specified liquid assets up to
20% of total assets; (ii) intangibles, including goodwill; and (iii) the value
of property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed and related securities) in at least 9 months out of each
12-month period. A savings association that fails the QTL test must either
convert to a bank charter or operate under certain restrictions. As of September
30, 1997, the Bank maintained 90.05% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test. Recent legislation has expanded
the extent to which education loans, credit card loans and small business loans
may be considered as "qualified thrift investments."
76
<PAGE> 127
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in regulatory capital requirements before and after a proposed
capital distribution ("Tier 1 Bank") and has not been advised by the OTS that it
is in need of more than normal supervision, could, after prior notice to, but
without the approval of the OTS, make capital distributions during a calendar
year equal to the greater of: (i) 100% of its net earnings to date during the
calendar year plus the amount that would reduce by one-half its "surplus capital
ratio" (the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year; or (ii) 75% of its net earnings for the previous
four quarters. Any additional capital distributions would require prior OTS
approval. In the event the Bank's capital fell below its capital requirements or
the OTS notified it that it was in need of more than normal supervision, the
Bank's ability to make capital distributions could be restricted. In addition,
the OTS could prohibit a proposed capital distribution by any institution, which
would otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable deposit accounts plus
short-term borrowings. Monetary penalties may be imposed for failure to meet
these liquidity requirements. The Bank's average liquidity ratio for the three
months ended September 30, 1997 was 8.8%, which exceeded the applicable
requirements. The Bank has never been subject to monetary penalties for failure
to meet its liquidity requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Assessments. Savings institutions are required by regulation to pay
assessments to the OTS to fund the agency's operations. The general assessment,
paid on a semi-annual basis, is based upon the savings institution's total
assets, including consolidated subsidiaries, as reported in the Bank's latest
quarterly Thrift Financial Report. The assessments paid by the Bank for the year
ended September 30, 1997 totaled $90,714.
Branching. OTS regulations permit federally-chartered savings
associations to branch nationwide under certain conditions. Generally, federal
savings associations may establish interstate networks and geographically
diversify their loan portfolios and lines of business. The OTS authority
preempts any state law purporting to regulate branching by federal savings
associations. For a discussion of the impact of proposed legislation, see "Risk
Factors --Financial Institution Regulation and Possible Legislation."
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries that the Company may establish) is
limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A
restricts the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B generally requires that certain transactions with
affiliates, including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies.
77
<PAGE> 128
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including stockholders, and any
attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive or
cease and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1 million per
day in especially egregious cases. Under the FDI Act, the FDIC has the authority
to recommend to the Director of the OTS that enforcement action be taken with
respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances. Federal and state law also establishes criminal penalties for
certain violations.
Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted final regulations and Interagency
Guidelines Establishing Standards for Safety and Soundness ("Guidelines") to
implement these safety and soundness standards. The Guidelines set forth the
safety and soundness standards that the federal banking agencies use to identify
and address problems at insured depository institutions before capital becomes
impaired. The Guidelines address internal controls and information systems;
internal audit system; credit underwriting; loan documentation; interest rate
risk exposure; asset growth; asset quality; earnings; and compensation, fees and
benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3% leverage (core capital) ratio and an 8% risk based capital standard. Core
capital is defined as common stockholder's equity (including retained earnings),
certain non-cumulative perpetual preferred stock and related surplus, minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain mortgage servicing rights ("MSRs") and credit card relationships.
The OTS regulations require that, in meeting the leverage ratio, tangible and
risk-based capital standards institutions generally must deduct investments in
and loans to subsidiaries engaged in activities not permissible for a national
bank. In addition, the OTS prompt corrective action regulation provides that a
savings institution that has a leverage capital ratio of less than 4% (3% for
institutions receiving the highest CAMEL examination rating) will be deemed to
be "undercapitalized" and may be subject to certain restrictions. See "-- Prompt
Corrective Regulatory Action."
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8%. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet assets,
are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed earlier under
the 3% leverage standard. The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate preferred
stock and, within specified limits, the allowance for loan and lease losses.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
78
<PAGE> 129
The OTS has adopted an interest rate risk component into its regulatory
capital requirements; however, the OTS has postponed indefinitely any adjustment
to capital which would be required by such interest rate risk component. The OTS
interest rate risk rule as written would also adjust the risk-weighting for
certain mortgage derivative securities. Under the rule as written, savings
associations with "above normal" interest rate risk exposure would be subject to
a deduction from total capital for purposes of calculating their risk-based
capital requirements. A savings association's interest rate risk would be
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the Bank's assets, as calculated in
accordance with guidelines set forth by the OTS. A savings association whose
measured interest rate risk exposure exceeds 2% would be required to deduct an
interest rate component in calculating its total risk-based capital. The
interest rate risk component would be an amount equal to one-half of the
difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the Bank's assets. That dollar
amount would be deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule as written,
there is a two quarter lag between the reporting date of an institution's
financial data and the effective date for the new capital requirement based on
that data. A savings association with assets of less than $300 million and
risk-based capital ratios in excess of 12% would be not subject to the interest
rate risk component, unless the OTS determined otherwise. The rule also provides
that the Director of the OTS may waive or defer an association's interest rate
risk component on a case-by-case basis. No prediction can be made when such
interest rate risk component requirement will be implemented, or if it ever will
be implemented.
At September 30, 1997, the Bank met each of its capital requirements,
in each case on a fully phased-in basis. See "Regulatory Capital Compliance" for
a table which sets forth in terms of dollars and percentages the OTS tangible,
leverage and risk-based capital requirements, the Bank's historical amounts and
percentages at September 30, 1997, and pro forma amounts and percentages based
upon the issuance of the shares within the Estimated Price Range and assuming
that a portion of the net proceeds are retained by the Company.
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS prompt corrective action regulations, the OTS is required
to take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has a total risk-based capital of less
than 8.0% or a leverage ratio or a Tier 1 capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has a total
risk-based capital less than 6.0%, a Tier 1 risk-based capital ratio of less
than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the Banking regulator is
required to appoint a receiver or conservator for an institution that is
critically undercapitalized. The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
association receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions may become immediately applicable to the
institution depending upon its category, including, but not limited to,
increased monitoring by regulators, restrictions on growth, and capital
distributions and limitations on expansion. The OTS could also take any one of a
number of discretionary supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and directors.
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INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. [Assessment rates for SAIF member institutions currently range from 23
basis points to 31 basis points. However, the FDIC has recently proposed to
lower assessment rates for SAIF member institutions to 0 to 27 basis points
effective January 1, 1997.] The FDIC is authorized to raise the assessment rates
in certain circumstances. The FDIC has exercised this authority several times in
the past and may raise insurance premiums in the future. If such action is taken
by the FDIC, it could have an adverse effect on the earnings of the Bank. The
Bank's assessment rate for the years ended September 30, 1997, 1996 and 1995 was
.064%, .23% and .23% of assessable deposits.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital stock in the FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. The Bank was in compliance with this
requirement with an investment in FHLB stock at September 30, 1997 of $2.1
million. FHLB advances must be secured by specified types of collateral and all
long-term advances may only be obtained for the purpose of providing funds for
residential housing finance. At September 30, 1997, the Bank had $23.5 million
in FHLB advances.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended September 30, 1997, 1996 and
1995, dividends from the FHLB to the Bank amounted to approximately $127,000,
$121,000 and $114,000, respectively. If dividends were reduced, the Bank's net
interest income would likely also be reduced. Further, there can be no assurance
that the impact of recent or future legislation on the FHLBs will not also cause
a decrease in the value of the FHLB stock held by the Bank.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts. The
Federal Reserve Board regulations generally require that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$47.8 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement is 3%; and for accounts greater than $47.8
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million, the reserve requirement is $1.4 million plus 10% (subject to adjustment
by the Federal Reserve Board between 8% and 14%) against that portion of total
transaction accounts in excess of $47.8 million. The first $4.7 million of
otherwise reservable balances (subject to adjustment by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank is in compliance
with the foregoing requirements. Because required reserves must be maintained in
the form of either vault cash, a non-interest-bearing account at a Federal
Reserve Bank or a pass-through account as defined by the Federal Reserve Board,
the effect of this reserve requirement is to reduce the Bank's interest-earning
assets. FHLB System members are also authorized to borrow from the Federal
Reserve "discount window," but Federal Reserve Board regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal Reserve
Bank.
HOLDING COMPANY REGULATION
The Company, if utilized, will be a non-diversified unitary savings and
loan holding company within the meaning of the HOLA. As such, the Company will
be required to register with the OTS and will be subject to OTS regulations,
examinations, supervision and reporting requirements. In addition, the OTS has
enforcement authority over the Company and its non-savings institution
subsidiaries. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings institution. The Bank must notify the OTS 30 days before declaring any
dividend to the Company.
As a unitary savings and loan holding company, the Company generally
will not be restricted under existing laws as to the types of business
activities in which it may engage, provided that the Bank continues to be a QTL.
See "-- Federal Savings Institution Regulation-- QTL Test" for a discussion of
the QTL requirements. Upon any non-supervisory acquisition by the Company of
another savings association, the Company would become a multiple savings and
loan holding company (if the acquired institution is held as a separate
subsidiary) and would be subject to extensive limitations on the types of
business activities in which it could engage. The HOLA limits the activities of
a multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act, as amended (the "BHC
Act"), subject to the prior approval of the OTS, and to other activities
authorized by OTS regulation. Previously proposed legislation would have treated
all savings and loan holding companies as bank holding companies and limit the
activities of such companies to those permissible for bank holding companies.
See "Risk Factors -- Financial Institution Regulation and Possible Legislation."
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution, or holding company thereof,
without prior written approval of the OTS; from acquiring or retaining, with
certain exceptions, more than 5% of a non-subsidiary holding company or savings
association. The HOLA also prohibits a savings and loan holding company from
acquiring more than 5% of a company engaged in activities other than those
authorized for savings and loan holding companies by the HOLA; or acquiring or
retaining control of a depository institution that is not insured by the FDIC.
In evaluating applications by holding companies to acquire savings institutions,
the OTS must consider the financial and managerial resources and future
prospects of the company and institution involved, the effect of the acquisition
on the risk to the insurance funds, the convenience and needs of the community
and competitive factors.
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The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, except: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition of
a savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act for the registration of the Common Stock to be issued pursuant to
the Conversion. Upon completion of the Conversion, the Company's Common Stock
will be registered with the SEC under the Exchange Act. The Company will then be
subject to the information, proxy solicitation, insider trading restrictions and
other requirements under the Exchange Act.
The registration under the Securities Act of shares of the Common Stock
to be issued in the Conversion does not cover the resale of such shares. Shares
of the Common Stock purchased by persons who are not affiliates of the Company
may be resold without registration. Shares purchased by an affiliate of the
Company will be subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information requirements
of Rule 144 under the Securities Act, each affiliate of the Company who complies
with the other conditions of Rule 144 (including those that require the
affiliate's sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of the Company or (ii) the average weekly volume of trading in such
shares during the preceding four calendar weeks. Provision may be made in the
future by the Company to permit affiliates to have their shares registered for
sale under the Securities Act under certain circumstances.
MANAGEMENT OF THE COMPANY
The Board of Directors' of the Company is divided into three classes,
each of which contains approximately one-third of the Board. The directors shall
be elected by the stockholders of the Company for staggered three year terms, or
until their successors are elected and qualified. One class of directors,
consisting of Mrs. Barbara M. Ecker and Messrs. R. Peter Haentjens, Jr. and
William J. Spear, has a term of office expiring at the first annual meeting of
stockholders, a second class, consisting of Messrs. Paul L. Conard, John P.
Lavelle and Michael J. Leib, has a term of office expiring at the second annual
meeting of stockholders, and a third class, consisting of Mrs. E. Lee Beard and
Messrs. William R. Davidson and Thomas L. Kennedy, has a term of office expiring
at the third annual meeting of stockholders. Information concerning the
principal occupations, employment and other information concerning the directors
and officers of the Company during the past five years is set forth under
"Management of the Bank -- Biographical Information."
The Company has established an Audit Committee of the Board of
Directors, consisting of the following members: Barbara M. Ecker (Chair), Paul
L. Conard, John P. Lavelle, Michael J. Leib and William J. Spear. The Company
has also established a Personnel and Compensation Committee of the Board of
Directors, consisting of the following members: John P. Lavelle (Chair), E. Lee
Beard, William R. Davidson, Thomas L. Kennedy and Michael J. Leib.
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The following individuals are the executive officers of the Company and
hold the offices set forth below opposite their names.
NAME POSITION(S) HELD WITH COMPANY
---- -----------------------------
Thomas L. Kennedy Chairman of the Board
E. Lee Beard Director, President and Chief Executive Officer
Patrick J. Owens, Jr. Chief Financial Officer, Treasurer and Secretary
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal at the discretion of the Board of Directors.
DIRECTOR COMPENSATION
Since the formation of the Company, none of the executive officers,
directors or other personnel has received remuneration from the Company.
Directors of the Company will receive an annual retainer of $4,000 but will not
receive additional fees for meetings of the Board of Directors of the Company.
For information regarding fees paid to the Bank's Board of Directors see
"Management of the Bank - Director Compensation."
MANAGEMENT OF THE BANK
DIRECTORS
The following table sets forth certain information regarding the Board
of Directors of the Bank.
<TABLE>
<CAPTION>
POSITION(S) HELD WITH THE DIRECTOR TERM
NAME AGE(1) BANK SINCE EXPIRES
- ------------------------- ------ ------------------------------- -------- -------
<S> <C> <C> <C> <C>
Thomas L. Kennedy 53 Chairman of the Board and 1985 2001
General Counsel
E. Lee Beard 46 Director, President and Chief 1993 2001
Executive Officer
Paul L. Conard 64 Director 1989 2000
William R. Davidson 61 Director 1988 2001
Barbara M. Ecker 55 Director 1987 1999
R. Peter Haentjens, Jr. 52 Director 1981 1999
John P. Lavelle 66 Director 1972 2000
Michael J. Leib 49 Director 1989 2000
William J. Spear 61 Director 1981 1999
</TABLE>
- ----------------
(1) As of September 30, 1997
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EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth certain information regarding the
executive officers of the Bank who are not also directors.
NAME AGE (1) POSITION(S) HELD WITH BANK
- ------------------------- ------- --------------------------------------
Patrick J. Owens, Jr. 54 Senior Vice President, Chief
Financial Officer
Joseph K. Osiecki 59 Senior Vice President, Loan Division
Gary M. Gatski 43 Senior Vice President, Retail Division
Bernard M. Miskin 46 Senior Vice President, Operations
Division/Compliance
- ---------------
(1) As of September 30, 1997
Each of the executive officers of the Bank will retain his/her office
in the converted Bank until their re-election at the annual meeting of the Board
of Directors of the Bank, held immediately after the first annual meeting of
stockholders subsequent to the Conversion, and until their successors are
elected and qualified or until they are removed or replaced. Officers are
subject to re-election by the Board of Directors annually.
BIOGRAPHICAL INFORMATION
DIRECTORS
Thomas L. Kennedy. Mr. Kennedy has been a practicing attorney for the past 28
years. He is a shareholder in the law firm of Kennedy and Lucadamo, P.C. On
November 18, 1997, Mr. Kennedy became the General Counsel of the Bank, although
he also remains a shareholder in his law firm.
E. Lee Beard. Mrs. Beard has served as President and Chief Executive Officer
since January 1993. Prior to 1993, Mrs. Beard spent 15 years in the thrift
industry in the Washington, D.C. area. She served as an Executive Vice President
of Citizens Savings Bank in Silver Spring, Maryland, Senior Vice
President/Treasurer for Perpetual Savings Bank and is a Certified Public
Accountant.
Paul L. Conard. Mr. Conard is a retired university Administrator from Bloomsburg
University, Bloomsburg, Pennsylvania where he had been Assistant Vice President
of Administration since 1964.
William R. Davidson, Ph.D. Mr. Davidson is a retired Superintendent from the
Pottsville City School District, Pottsville, Pennsylvania where he had been a
Superintendent from 1973-1993. He is currently an adjunct faculty member at
Widener University and part-time instructor at Penn State Schuylkill Campus.
Barbara M. Ecker. Mrs. Ecker has been employed as an Accountant at Hazleton St.
Joseph Medical Center, Hazleton, Pennsylvania since 1993. Prior to 1993, Mrs.
Ecker served as a Tax Accountant and Tax Department Administrator with Parente,
Randolph, Orlando, Carey & Associates, Hazleton, Pennsylvania and is a Certified
Public Accountant. Prior to 1989, she worked in the banking industry and was an
Adjunct Professor of banking and accounting.
R. Peter Haentjens, Jr. Mr. Haentjens is employed as a Vice President, General
Manager of Hazleton Pumps, Inc., Hazleton, Pennsylvania (former Barrett,
Haentjens, & Co.).
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The Honorable John P. Lavelle. Judge Lavelle was a general practitioner of law
for 18 years before election to the bench. He was elected President Judge for
the Court of Common Pleas of Carbon County, Pennsylvania in 1977 and has served
continuously since that time.
Michael J. Leib. Mr. Leib has been president of Weatherly Casting & Machine
Company, Weatherly, Pennsylvania since November 1989.
William J. Spear. Mr. Spear has been owner and President of Hazle Drugs, Inc.,
Hazleton, Pennsylvania, a retail pharmacy, since 1969.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Patrick J. Owens, Jr. Mr. Owens joined the Bank as a Chief Financial Officer in
1992. In 1993, Mr. Owens was promoted to his current position of Senior Vice
President and Chief Financial Officer. Prior to 1992, Mr. Owens was employed in
the thrift industry for twenty-eight (28) years in the Philadelphia,
Pennsylvania area.
Gary M. Gatski. Mr. Gatski joined the Bank as a loan officer in 1973 and became
Assistant Vice President of Loan Administration in September 1984. He was
promoted to Vice President of Loan Administration in January 1985 and in 1993
was promoted to his current position of Senior Vice President of the Retail
Division.
Joseph K. Osiecki. Mr. Osiecki joined the Bank as a Senior Vice President-Chief
Lending Officer in July 1993. Prior to 1993, Mr. Osiecki served as a Commercial
Lender with various commercial banks and thrifts in Luzerne County,
Pennsylvania.
Bernard M. Miskin. Mr. Miskin joined the Bank as an Internal Auditor in 1992. He
was promoted to Senior Vice President Operations Division/Compliance in 1995.
Prior to joining First Federal, Mr. Miskin worked in the thrift and commercial
bank industry in Northeast Pennsylvania.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE BANK AND COMPANY
The Bank's Board of Directors meets once per month and may have
additional special meetings called in the manner specified in the Bylaws.
The Board of Directors of the Bank has established the following
committees:
The Audit Committee consists of Barbara M. Ecker (Chair), Paul L.
Conard, John P. Lavelle, Michael J. Leib and William J. Spear. The purpose of
this committee is to oversee both internal and external audit activities. The
Audit Committee generally meets at least six times a year and met six times
during the fiscal year ended September 30, 1997.
The Business Development/Marketing Committee consists of William R.
Davidson (Chair), Paul L. Conard, R. Peter Haentjens, Jr., William R. Davidson,
John P. Lavelle and William J. Spear. The Business Development/Marketing
Committee meets every other month, if necessary, or as
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needed and is responsible for branch locations and physical properties,
marketing and business development plans of the Bank. The Business
Development/Marketing Committee met six times during the fiscal year ended
September 30, 1997.
The Finance Committee consists of Michael J. Leib (Chair), Paul L.
Conard, William R. Davidson, Barbara M. Ecker and R. Peter Haentjens, Jr. The
Finance Committee meets every other month, if necessary, or as needed and is
responsible for ALCO, interest rate risk management, budget reviews and
personnel matters. The Finance Committee met eight times during the fiscal year
ended September 30, 1997.
The Loan Committee consists of William J. Spear (Chair), Thomas L.
Kennedy, Barbara M. Ecker and E. Lee Beard. The Loan Committee meets twice a
month, if necessary, or as needed and met 19 times during the fiscal year ended
September 30, 1997.
The Personnel and Compensation Committee consists of John P. Lavelle
(Chair), E. Lee Beard, William R. Davidson, Thomas L. Kennedy and Michael J.
Leib.
DIRECTOR COMPENSATION
All directors receive an annual retainer of $10,500 a year, paid
quarterly, and $325 for each Board meeting attended. All non-employee directors
of the Bank also receive $325 for each committee meeting attended. Directors may
defer receipt of fees under the Deferred Compensation Plan for key employees of
the Bank. See "Executive Compensation--Deferred Compensation Plan."
ADVISORY BOARDS
The Bank has three advisory boards serving Schuylkill, Bloomsburg and
Lehighton Counties. Each advisory board meets four times per year. Such Advisory
Boards, which are composed of members of the Bank's Board of Directors, officers
of the Bank and other members of the communities that the Bank serves are
designed to provide the Bank with a forum for exchanging ideas with members of
its local communities so that the Bank may better serve the needs of its
customers and communities it serves. Each director of the Bank and the other
non-employees of the Bank who serve on the Advisory Boards receive $150 for each
meeting attended.
DIRECTOR EMERITUS
Effective January 1, 1998, the Bank entered into a consulting agreement
with a director emeritus. The consulting agreement provides for a one-year term
and a $10,000 annual consulting fee. The Director Emeritus is required to attend
six (6) Advisory Board meetings and to be available for advice and counsel at
the request of the Board of Directors. The Director Emeritus will not receive
Advisory Board meeting fees.
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EXECUTIVE COMPENSATION
Cash Compensation. The following table sets forth the cash compensation
paid by the Bank for services rendered in all capacities during the fiscal year
ended September 30, 1997, to the Chief Executive Officer and to executive
officers of the Bank who received cash compensation in excess of $100,000
("Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
ANNUAL COMPENSATION (1) AWARDS PAYOUTS
---------------------------------------------------------------------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL FISCAL COMPENSATION STOCK AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
POSITIONS (1) YEAR SALARY($) BONUS($) ($)(2) ($) ($) ($) ($)(3)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
E. Lee Beard ....................... 1997 $148,770.18 $31,241.74 -- -- -- -- $4,409.16
President and Chief Executive Officer
</TABLE>
- ---------------
(1) Under Annual Compensation, the column titled "Salary" and "Bonus"
includes amounts deferred by the Named Executive Officer.
(2) For fiscal year 1997, there were no (a) perquisites over the lesser of
$50,000 or 10% of the individual's total salary and bonus for the year;
(b) payments of above-market preferential earnings on deferred
compensation; (c) payments of earnings with respect to long-term
incentive plans prior to settlement or maturation; (d) tax payment
reimbursements; or (e) preferential discounts on stock. For fiscal year
1997, the Bank had no restricted stock or stock related plans in
existence.
(3) Other compensation consists of the Bank's matching contribution under
the Bank's 401(k) Plan.
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<PAGE> 138
EMPLOYMENT AGREEMENTS
Upon consummation of the Conversion, the Bank and the Company intend to
enter into employment agreements (collectively, the "Employment Agreements")
with E. Lee Beard and Thomas L. Kennedy (individually, the "Executive"). The
Employment Agreements are subject to the review and approval of the OTS and may
be amended as a result of such OTS review. Review of compensation arrangements
by the OTS does not indicate, and should not be construed to indicate, that the
OTS has passed upon the merits of such arrangements. The Employment Agreements
are intended to ensure that the Bank and the Company will be able to maintain a
stable and competent management base after the Conversion. The continued success
of the Bank and the Company depends to a significant degree on the skills and
competence of Ms. Beard and Mr. Kennedy.
The Employment Agreements provide for a three-year term. The Bank
Employment Agreements provide that, commencing on the first anniversary date and
continuing each anniversary date thereafter, the Board of Directors may extend
the agreement for an additional year so that the remaining term shall be three
years, unless written notice of non-renewal is given by the Board of Directors
after conducting a performance evaluation of the Executive. The terms of the
Company Employment Agreements shall be extended on a daily basis, unless written
notice of non-renewal is given by the Board of the Company. The Bank and Company
Employment Agreements provide that the Executive's base salary will be reviewed
annually. The base salaries which will be effective for such Employment
Agreements for Ms. Beard and Mr. Kennedy will be $182,000, and $118,000,
respectively. In addition to the base salary, the Employment Agreements provide
for, among other things, participation in stock benefits plans and other fringe
benefits applicable to similarly situated executive personnel. The Employment
Agreements provide for termination by the Bank or the Company for cause as
defined in the agreements at any time. In the event the Bank or the Company
chooses to terminate the Executive's employment for reasons other than for
cause, or in the event of the Executive's resignation from the Bank and the
Company upon: (i) failure to re-elect the Executive to his current offices; (ii)
a material change in the Executive's functions, duties or responsibilities;
(iii) a relocation of the Executive's principal place of employment by more than
25 miles; (iv) liquidation or dissolution of the Bank or the Company; or (v) a
breach of the Employment Agreements by the Bank or the Company, the Executive
or, in the event of death, his beneficiary would be entitled to receive an
amount equal to the remaining base salary payments due to the Executive and the
contributions that would have been made on the Executive's behalf to any
employee benefit plans of the Bank or the Company during the remaining term of
the Employment Agreements. The Bank and the Company would also continue and pay
for the Executive's life, health and disability coverage for the remaining term
of the Employment Agreement. Upon any termination of the Executive, the
Executive is subject to a covenant not to compete with the Company or the Bank
for one year.
Under the agreements, if involuntary termination or under certain
circumstances, voluntary termination follows a change in control of the Bank or
the Company, the Executive or, in the event of the Executive's death, his
beneficiary, would be entitled to a severance payment equal to the greater of:
(i) the payments due for the remaining terms of the agreement; or (ii) three
times the average of the five preceding taxable years' annual compensation. The
Bank and the Company would also continue the Executive's life, health, and
disability coverage for thirty-six months. Notwithstanding that both agreements
provide for a severance payment in the event of a change in control, the
Executive would only be entitled to receive a severance payment under one
agreement.
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<PAGE> 139
Payments to the Executive under the Bank employment agreement will be
guaranteed by the Company in the event that payments or benefits are not paid by
the Bank. Payment under the Company Employment Agreements would be made by the
Company. All reasonable costs and legal fees paid or incurred by the Executive
pursuant to any dispute or question of interpretation relating to the Employment
Agreements shall be paid by the Bank or Company, respectively, if the Executive
is successful on the merits pursuant to a legal judgment, arbitration or
settlement. The Employment Agreements also provide that the Bank and Company
shall indemnify the Executive to the fullest extent allowable under federal and
Pennsylvania law, respectively. In the event of a change in control of the Bank
or Company, the total amount of payments due under the Agreements, based solely
on the base salaries to be paid to Ms. Beard and Mr. Kennedy effective upon the
consummation of the Conversion and excluding any benefits under any employee
benefit plan which may be payable, would be approximately $900,000.
CHANGE IN CONTROL AGREEMENTS
Upon Conversion, the Bank intends to enter into two-year Change in
Control Agreements (the "Bank CIC Agreements") with four senior vice presidents,
none of whom will be covered by an Employment Agreement. The Company also
intends to enter into a two-year Change in Control Agreement with Patrick J.
Owens, Jr. Commencing on the first anniversary date and continuing on each
anniversary thereafter, the Bank CIC Agreements may be renewed by the Board of
Directors of the Bank for an additional year. The Company Change in Control
Agreement shall be extended on a daily basis unless written notice of
non-renewal is given by the Board of Directors. The Bank and Company CIC
Agreements will provide that in the event involuntary termination or, under
certain circumstances, voluntary termination follows a change in control of the
Bank or the Company, the officer would be entitled to receive a severance
payment equal to three times the officer's average annual compensation for the
five most recent taxable years preceding termination. The Company and Bank would
also continue and pay for the officer's life, health and disability coverage for
24 months following termination. Payments to the officer under the Bank's CIC
Agreements will be guaranteed by the Company in the event that payments or
benefits are not paid by the Bank. In the event of a change in control of the
Bank or Company, the total payments that would be due under the Change in
Control agreements, based solely on the current annual compensation paid to the
four senior vice presidents covered by the Change in Control Agreements and
excluding any benefits under any employee benefit plan which may be payable,
would be approximately $945,000.
EMPLOYEE SEVERANCE COMPENSATION PLAN
The Bank's Board of Directors, upon consummation of the Conversion,
intends to establish the First Federal Bank Employee Severance Compensation Plan
("Severance Plan") which will provide eligible employees with severance pay
benefits in the event of a change in control of the Bank or the Company.
Management personnel with employment or CIC agreements are not eligible to
participate in the Severance Plan. Generally, all employees are eligible to
participate in the Severance Plan if they have completed at least six months of
service with the Bank. The Severance Plan vests in each participant a
contractual right to the benefits such participant is entitled to thereunder.
Under the Severance Plan, in the event of a change in control of the Bank or the
Company, eligible employees who are terminated from or terminate their
employment within one year (for reasons specified under the Severance Plan),
will be entitled to receive a severance payment. If the participant, whose
employment has terminated, has completed at least six months of service, the
participant will be entitled to a cash severance payment equal to one-twelfth of
annual compensation for each year of service up to a maximum of 199% of annual
compensation. Such payments may tend to discourage takeover attempts by
increasing costs to be incurred by the Bank in the event of a
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<PAGE> 140
takeover. In the event the provisions of the Severance Plan were triggered, the
total amount of payments that would be due thereunder, based solely upon current
salary levels, would be approximately $1.9 million. However, it is management's
belief that substantially all of the Bank's employees would be retained in their
current positions in the event of a change in control, and that any amount
payable under the Severance Plan would be considerably less than the total
amount that could possibly be paid under the Severance Plan.
INSURANCE PLANS
All full-time employees of the Bank, upon completion of the applicable
introductory period, are covered as a group for comprehensive hospitalization,
including major medical and long-term disability insurance. Life insurance is
also provided to employees and directors.
BENEFITS
PERFORMANCE INCENTIVE PLAN. The Bank maintains the First Federal
Savings and Loan Association of Hazleton Performance Incentive Plan
("Performance Incentive Plan"). The Performance Incentive Plan was designed by
senior officers and approved by the Board to give all employees an incentive for
effectively operating the Bank. The Performance Incentive Plan provides all
employees an opportunity to earn quarterly cash payments, equal to a certain
percentage of their base salaries upon the attainment of specific performance
goals. In establishing the performance goals the Bank considers the following
financial criteria: (i) net income before taxes; (ii) net burden ratio; and
(iii) earnings on assets.
RETIREMENT PLAN. The Bank participates in the Financial Institutions
Retirement Fund (the "Retirement Fund") to provide retirement benefits for
eligible employees. Employees are eligible to participate in the Retirement Plan
after the completion of 12 consecutive months of employment with the Bank and
the attainment of age 21. Hourly paid employees are excluded from participating
in the Retirement Plan. Benefits payable to a participant under the Retirement
Plan are based on the participant's years of service and salary. The formula for
normal retirement benefits payable annually under the Retirement Plan is 2%
multiplied by years of benefit service multiplied by the average of the
participant's highest three years of salary paid by the Bank. A participant may
elect early retirement as early as age 45. However, such participant's normal
retirement benefits will be reduced by an early retirement factor based on an
age at early retirement. Participants generally have no vested interest in
Retirement Plan benefits prior to the completion of five years of service with
the Bank. Following the completion of five years of vesting service, or in the
event of a participant's attainment of age 65, death or termination of
employment due to disability, a participant will become 100% vested in the
accrued benefits under the Retirement Plan. The table below reflects the pension
benefit payable to a participant assuming various levels of earnings and years
of service.
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The following table sets forth the estimated annual benefits payable
upon retirement at age 65 for the period ended September 30, 1997.
<TABLE>
<CAPTION>
YEARS OF BENEFIT SERVICE
--------------------------------------------------------
FIVE YEAR
AVERAGE
COMPENSATION 15 20 25 30 35
- ----------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 15,000 $ 5,000 $ 6,000 $ 8,000 $ 9,000 $ 11,000
30,000 9,000 12,000 15,000 18,000 21,000
45,000 14,000 18,000 23,000 27,000 32,000
60,000 18,000 24,000 30,000 36,000 42,000
75,000 23,000 30,000 38,000 45,000 53,000
90,000 27,000 36,000 45,000 54,000 63,000
105,000 32,000 42,000 53,000 63,000 74,000
120,000 36,000 48,000 60,000 72,000 84,000
135,000 41,000 54,000 68,000 81,000 95,000
150,000 $ 45,000 $ 60,000 $ 75,000 $ 90,000 $105,000
</TABLE>
The benefits listed in the table above for the Retirement Plan are not
subject to a deduction for Social Security benefits or any other offset amount.
As of September 30, 1997, E. Lee Beard had three years and nine months of
credited service.
SAVINGS PLAN. The Bank maintains the First Federal Savings and Loan
Association of Hazleton Savings Plan (the "401(k) Plan"), a tax-qualified plan
under Section 401(a) of the Code with a cash or deferred arrangement under
Section 401(k) of the Code. Employees, other than employees paid on an hourly
basis, become eligible to participate in the 401(k) Plan upon the completion of
six months of service and the attainment of age 21. An employee's first service
period is the six-month period beginning on the employee's date of hire.
Subsequent service periods begin on January 1 and end on December 31.
Under the 401(k) Plan, participants may elect to have the Bank
contribute up to 10% of their compensation to the 401(k) Plan, subject to
certain limitations imposed by the Code. The Bank currently makes matching
contributions to the 401(k) Plan equal to 100% of the first 2% and 50% of any
additional percentage up to 4% of compensation deferred by a participant. The
Board periodically reviews the level of matching contributions under the 401(k)
Plan and has the discretion to change the match from time to time.
Currently, participants in the 401(k) Plan may direct the investment of
their accounts in several types of investment funds. In connection with the
Conversion, the Bank intends to amend the 401(k) Plan to permit plan
participants to invest their account balances in Company Common Stock through an
Employer Stock Fund. Participants may utilize their subscription rights to
purchase stock in the Conversion but may not purchase more than $175,000 in
aggregate value of the Common Stock in the Conversion (subject to the overall
purchase limitations). A participant's ability to direct all or some of his
vested account to purchase Common Stock in the Offering will be dependent upon
such individual being an Eligible Account Holder or Supplemental Eligible
Account Holder. A participant may directly vote shares of Common Stock held in
his or her 401(k) Plan account.
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<PAGE> 142
Participants are always 100% vested in their elective deferrals and
related earnings under the 401(k) Plan. Participants become fully vested in
matching contributions and related earnings upon the completion of four years of
vesting service. Participants also become 100% vested in matching contributions
and related earnings upon the earlier of attainment of normal retirement age
(age 65), death or disability. Participants may receive distributions from the
401(k) Plan in the form of a lump sum cash payment.
DEFERRED COMPENSATION PLAN. The Bank maintains the Deferred
Compensation Plan for Key Employees of First Federal Savings and Loan
Association of Hazleton, a non-qualified deferred compensation plan which
provides key employees and directors an opportunity to defer receipt of a
portion of their compensation, including any bonuses, payable to them by the
Bank until a separation from service or death. Upon a participant's separation
from service the participant shall receive his or her account balance in a lump
sum cash payment unless the participant elects to receive installment payments
over a period of time not to exceed ten years. In the event of a participant's
death, the value of the participant's account balance shall be paid to a
designated beneficiary or, if none, by the participant's surviving spouse or
estate in a single sum cash payment. If a participant owes any amounts to the
Bank at the time of his or her distribution, the Bank has the right to offset
such amounts against the participant's account balance.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Bank intends to implement a
supplemental executive retirement plan to provide for supplemental benefits to
employees whose benefits under the ESOP and/or 401(k) Plan are reduced by
limitations imposed by the Code. From time to time, the Board will designate
which employees may participate in this additional supplemental executive
retirement plan. This supplemental executive retirement plan will be an
"unfunded" promise to pay supplemental benefits in the future and the benefits
under the plan remain subject to the claims of the Bank's general creditors
until they are paid to plan participants. The Bank may establish a grantor trust
in connection with the plan to satisfy the obligations of the Bank under the
plan. The grantor trust would be permitted to invest in a wide-variety of
investments, including Company Common Stock.
EMPLOYEE STOCK OWNERSHIP PLAN. The Bank intends to establish an
Employee Stock Ownership Plan and related trust in connection with the
Conversion. Employees, other than hourly paid employees employed with the Bank
as of the effective date of the conversion and attainment of age 21 shall become
participants in the ESOP immediately. Eligible employees employed after the
effective date of the Conversion, shall become participants in the ESOP upon the
attainment of age 21 and the completion of six months of service. An employee's
first eligibility computation period will be the six-month period beginning of
the employee's date of hire. Subsequent eligibility computation periods will
begin on January 1 and end on December 31. Participants will become fully vested
in their benefits under the ESOP upon the completion of four years of service
(with credit for prior service). Participants will also become 100% vested in
their benefits upon the attainment of normal retirement age (age 65), death,
disability, or upon a change in control of the Bank or Company. Benefits become
payable in a lump sum upon death, retirement, disability or separation from
service.
The ESOP intends to purchase 8% of the Common Stock issued in the
Conversion, including the issuance of shares to the Foundation. As part of the
Conversion and in order to fund the ESOP's purchase of the Common Stock issued
in the Conversion, the ESOP intends to borrow 100% of the aggregate purchase
price of the Common Stock either from the Company or a third party lender. In
either case, the loan will have a 10 year term and be repaid principally from
the Bank's contribution's to the ESOP. Subject to receipt
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<PAGE> 143
of any necessary regulatory approvals or opinions, the Bank may make
contributions to the ESOP for repayment of the loan since the participants are
all employees of the Bank or to reimburse the Company for contributions made by
it. Contributions to the ESOP will be discretionary; however, the Company or the
Bank intend to make annual contributions to the ESOP in an aggregate amount at
least equal to the principal and interest requirement on the debt. The interest
rate for the loan is expected to be the prime rate. The contributions to the
ESOP are not fixed, so benefits payable under the ESOP cannot be estimated.
Shares purchased by the ESOP will initially be pledged as collateral
for the loan and will be held in a suspense account until released for
allocation among participants as the loan is repaid. The pledged shares will be
released annually from the suspense account in an amount proportional to the
repayment of the ESOP loan for each plan year. The released shares will be
allocated among the accounts of participants on the basis of the participant's
compensation for the year of allocation.
In connection with the establishment of the ESOP, a Committee of the
Board of Directors was appointed to administer the ESOP (the "ESOP Committee").
An unrelated corporate trustee for the ESOP will be appointed prior to the
Conversion and continuing thereafter. The ESOP Committee may instruct the
trustee regarding investment of funds contributed to the ESOP. The ESOP trustee,
subject to its fiduciary duty, must vote all allocated shares held in the ESOP
in accordance with the instructions of the participants. The trustee will vote
the unallocated shares (i.e., those held in the suspense account) and allocated
shares for which the trustee receives no instructions in a manner calculated to
most accurately reflect the instructions the Trustee has received from
participants regarding the allocated stock, provided that such vote is in
accordance with the provisions of the Employee Retirement Income Security Act of
1974, as amended ("ERISA").
MANAGEMENT SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Bank intends to
implement a non-qualified Management Supplemental Executive Retirement Plan
("MSERP") to provide certain officers and highly compensated employees of the
Bank and its affiliates, including the Company, with additional retirement
benefits. The MSERP benefit is intended to make up benefits lost under the ESOP
allocation procedures to participants who retire prior to the complete repayment
of the ESOP loan. At the retirement of a participant, the benefits under the
MSERP are determined by first: (i) projecting the number of shares that would
have been allocated to the participant under the ESOP if they had been employed
throughout the period of the ESOP loan (measured from the participant's first
date of ESOP participation); and (ii) first reducing the number determined by
(i) above by the number of shares actually allocated to the Participant's
account under the ESOP; and second, by multiplying the number of shares that
represent the difference between such figures by the average fair market value
of the Common Stock over the preceding five years. Benefits under the MSERP vest
in 20% annual increments over a five year period commencing as of the date of a
Participant's participation in the MSERP. The vested portion of the MSERP
Participant's benefits are payable to the Participant upon Retirement (as
defined in the ESOP) or to the Participant's beneficiary in the event of the
Participant's death.
STOCK-BASED INCENTIVE PLAN. Following the Conversion, the Board of
Directors of the Company intends to adopt the Stock-Based Incentive Plan which
will provide for the granting of options to purchase Common Stock ("Stock
Options"), Common Stock ("Stock Awards"), Limited Option Rights and Limited
Stock Rights to eligible officers, employees, and directors of the Company and
Bank. The Company may provide such stock based benefits under the Stock-Based
Incentive Plan or may establish one or more separate plans which would provide
for the benefits described herein.
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<PAGE> 144
In the event the Stock-Based Incentive Plan (or any separate plan(s))
is adopted within one year after conversion, OTS regulations require such plan
to be approved by a majority of the Company's stockholders at a meeting of
stockholders to be held no earlier than six months after the completion of the
Conversion. Under the Stock-Based Incentive Plan, the Company may grant Stock
Options in an amount equal to 10% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation (558,900 shares based upon
the maximum of the Estimated Price Range), and intends to grant Stock Awards in
an amount equal to 4% of the shares of Common Stock issued in the Conversion,
including shares issued to the Foundation (223,560 shares based upon the maximum
of the Estimated Price Range) any Common Stock awarded under the Stock-Based
Incentive Plan will be awarded at no cost to the recipients. The plan may be
funded through a purchase of Common Stock by a trust established in connection
with the Stock-Based Incentive Plan (or any separate plan(s)) or from
authorized but unissued shares. The Board intends to appoint an independent
fiduciary to serve as trustee of a trust to be established in connection with
the Stock-Based Incentive Plan. In the event that additional authorized but
unissued shares are acquired by the Stock-Based Incentive Plan after the
Conversion, the interests of existing shareholders would be diluted. See "Pro
Forma Data."
The grants of Stock Options and Stock Awards will be designed to
attract and retain qualified personnel in key positions, provide officers and
key employees with a propriety interest in the Company as an incentive to
contribute to the success of the Company and reward key employees for
outstanding performance. All employees of the Company and its subsidiaries,
including the Bank, will be eligible to participate in the Stock-Based Incentive
Plan. It is expected that the committee administering the plan will determine
the terms of awards granted to officers and employees. The committee will also
determine whether Stock Options will be Incentive or Non-Statutory Stock
Options, as defined below, the number of shares subject to each stock option and
Stock Award, the exercise price of each Non-Statutory Stock Option, whether
Stock Options may be exercised by delivering other shares of Common Stock, and
when Stock Options become exercisable or Stock Awards vest. Only employees may
receive grants of Incentive Stock Options. Therefore, under the Stock-Based
Incentive Plan directors may receive only grants of Non-Statutory Stock Options.
If the plan is adopted within one year after conversion, OTS regulations provide
that no individual officer or employee of the Bank may receive more than 25% of
the stock options available under the Stock-Based Incentive Plan (or any
separate plan for officers and employees) and non-employee directors may not
receive more than 5% individually, or 30% in the aggregate, of the stock options
available under the Stock-Based Incentive Plan (or any separate plan for
directors). OTS regulations also provide that no individual officer or employee
of the Bank may receive more than 25% of the restricted stock awards available
under the Stock-Based Incentive Plan (or any separate plan for officers and
employees) and non-employee directors may not receive more than 5% individually,
or 30% in the aggregate, of the restricted stock awards available under the
Stock-Based Incentive Plan (or any separate plan for directors).
The Stock-Based Incentive Plan will provide for the grant of: (i)
Stock Options intended to qualify as incentive Stock Options under Section 422
of the Code ("Incentive Stock Options"); (ii) Stock Options that do not so
qualify ("Non-Statutory Stock Options"); and (iii) limited option rights
("Limited Option Rights"). Limited Option Rights are exercisable only upon a
change in control of the Bank or the Company. Subject to OTS regulations, upon
exercise of Limited Option Rights, the recipient will be entitled to receive a
lump sum cash payment equal to the difference between the exercise price of any
unexercised Stock Option, whether exercisable or unexercisable at such time, and
the fair market value of the shares of Common Stock subject to the Stock Option
on the date of
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<PAGE> 145
exercise of the right in lieu of purchasing the Common Stock underlying the
Stock Option. It is anticipated that all Stock Options granted contemporaneously
with stockholder approval of the Stock-Based Incentive Plan will qualify as
Incentive Stock Options to the extent permitted under Section 422 of the Code.
Unless sooner terminated, the Stock-Based Incentive Plan will be in effect for a
period of ten years from the earlier of adoption by the Board of Directors or
approval by the Company's Stockholders. Subject to stockholder approval, the
Company intends to grant Stock Options with Limited Option Rights under the plan
at an exercise price equal to at least the fair market value of the underlying
Common Stock on the date of grant.
An individual will not be deemed to have received taxable income upon
the grant or exercise of any Incentive Stock Option, provided that such shares
received through the exercise of such option are not disposed of by the employee
for at least one year after the date the stock is received in connection with
the stock option exercise and two years after the date of grant of the stock
option (a "disqualifying disposition"). No compensation deduction will be
available to the Company as a result of the grant or exercise of Incentive Stock
Options unless there has been a disqualifying disposition. In the case of a
Non-Statutory Stock Option and in the case of a disqualifying disposition of an
Incentive Stock Option, an individual will realize ordinary income upon exercise
of the stock option (or upon the disqualifying disposition) in an amount equal
to the amount by which the exercise price exceeds the fair market value of the
Common Stock purchased by exercising the stock option on the date of exercise.
The amount of any ordinary income realized by an optionee upon the exercise of a
Non-Statutory Stock Option or due to a disqualifying disposition of an Incentive
Stock Option will be a deductible expense to the Company for tax purposes. In
the case of Limited Rights, the option holder will have to include the amount
paid to him or her upon exercise in his gross income for federal income tax
purposes in the year in which the payment is made and the Company will be
entitled to a deduction for federal income tax purposes of the amount paid.
The Stock-Based Incentive Plan will provide for the granting of Stock
Awards and Limited Stock Rights. Limited Stock Rights would be exercisable by
participants upon a change in control of the Company or Bank as described in the
plan. Subject to OTS regulations, upon the exercise of a Limited Stock Right,
the recipient will be entitled to receive a cash payment equal to the fair
market value of all unvested Stock Awards in exchange for any rights to such
unvested Stock Awards. Grants of Stock Awards, and Limited Stock Rights, to
officers and employees may be made in the form of base grants and/or performance
grants (the vesting of which would be contingent upon performance goals
established by the committee administering the plan). In establishing any
performance goals, the committee may utilize the annual financial results of the
Bank, actual performance of the Bank as compared to targeted goals such as the
ratio of the Bank's net worth to total assets, the Bank's return on average
assets, or such other performance standards as determined by the committee with
the approval of the Board of Directors.
When a participant becomes vested with respect to Stock Award, the
participant will realize ordinary income equal to the fair market value of the
Common Stock at the time of vesting (unless the participant made an election
pursuant to Section 83(b) of the Code). The amount of income recognized by the
participants will be a deductible expense for tax purposes for the Bank. When
restricted Stock Awards become vested and shares of Common Stock are actually
distributed to participants, the participants would receive amounts equal to any
accrued dividends with respect thereto. Prior to vesting, recipients of Stock
Awards may direct the voting of the shares awarded to them. Shares not subject
to grants and shares allocated subject to the achievement of performance goals
will be voted by the trustee in proportion to the directions provided with
respect to shares subject to grants. Vested shares will be distributed to
recipients as soon as practicable following the day on which they vest.
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The vesting periods for awards under the Stock-Based Incentive Plan
will be determined by the Committee administering the Plan. If the Stock-Based
Incentive Plan (or any separate plans for employees and directors) is adopted
within one year after conversion, awards would become vested and exercisable
subject to applicable OTS regulations, which such regulations require that any
awards begin vesting no earlier than one year from the date of shareholder
approval of the plan and thereafter vest at a rate of no more than 20% per year
and may not be accelerated except in the case of death or disability. Stock
Options could be exercisable for three months following the date on which the
employee or director ceases to perform services for the Bank or the Company,
except that in the event of death or disability, options accelerate and become
fully vested and could be exercisable for up to one year thereafter or such
longer period as determined by the Company. In the case of death or disability,
Stock Options may be exercised for a period of 12 months. However, any Incentive
Stock Options exercised more than three months following the date the employee
ceases to perform services as an employee would be treated as a Non-Statutory
Stock Option. In the event of retirement, if the optionee continues to perform
services as a director or consultant on behalf of the Bank, the Company or an
affiliate, unvested options would continue to vest in accordance with their
original vesting schedule until the optionee ceases to serve as a consultant or
director. In the event of death, disability or normal retirement, the Company,
if requested by the optionee, or the optionee's beneficiary, could elect, in
exchange for vested options, to pay the optionee, or the optionee's beneficiary
in the event of death, the amount by which the fair market value of the Common
Stock exceeds the exercise price of the options on the date of the employee's
termination of employment.
Subject to any applicable regulatory requirements, the Stock-Based
Incentive Plan (or any separate plans for employees and directors) may be
amended subsequent to the expiration of the one-year period to provide for
accelerated vesting of previously granted Stock Options or Stock Awards in the
event of a change in control of the Company or the Bank. A change in control
would generally be considered to occur when a person or group of persons acting
in concert acquires beneficial ownership of 20% or more of any class of equity
security of the Company or the Bank or in the event of a tender or exchange
offer, merger or other form of business combination, sale of all or
substantially all of the assets of the Company or the Bank or contested election
of directors which resulted in the replacement of a majority of the Board of
Directors by persons not nominated by the directors in office prior to the
contested election.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
Federal regulations require that all loans or extensions of credit to
executive officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with the general public and must not involve more than
the normal risk of repayment or present other unfavorable features. In addition,
loans made to a director or executive officer in excess of the greater of
$25,000 or 5% of the Bank's capital and surplus (up to a maximum of $500,000)
must be approved in advance by a majority of the disinterested members of the
Board of Directors.
The Bank currently makes loans to its executive officers and directors
on the same terms and conditions offered to the general public. The Bank's
policy provides that all loans made by the Bank to its executive officers and
directors be made in the ordinary course of business, on substantially the same
terms, including collateral, as those prevailing at the time for comparable
transactions with other persons and may not involve more than the normal risk of
collectibility or present other unfavorable features. As of September 30, 1997,
39 of the Bank's executive officers or directors had loans with outstanding
balances totaling $724,000 in the aggregate. All such loans were made by the
Bank in the ordinary course of business, with no favorable terms and such loans
do not involve more than the normal risk of collectibility or present
unfavorable features.
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The Company intends that all transactions in the future between the
Company and its executive officers, directors, holders of 10% or more of the
shares of any class of its common stock and affiliates thereof, will contain
terms no less favorable to the Company than could have been obtained by it in
arm's length negotiations with unaffiliated persons and will be approved by a
majority of independent outside directors of the Company not having any interest
in the transaction.
OTHER TRANSACTIONS WITH AFFILIATES
The Bank utilizes the services of the law firm of Kennedy and Lucadamo,
P.C., of which Mr. Kennedy, the Chairman of the Board and general counsel of the
Bank is a member, for a variety of legal work relating to the ordinary course of
the Bank's business. For each of fiscal years 1996 and 1997, the Bank paid less
than $60,000 per year to such law firm.
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<PAGE> 148
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the number of shares of Common Stock the
Bank's officers and directors and their associates propose to purchase, assuming
shares of Common Stock are issued at the minimum and maximum of the Estimated
Price Range, including the effect of shares issued to the Foundation, and that
sufficient shares will be available to satisfy their subscriptions. The table
also sets forth the total expected beneficial ownership of Common Stock as to
all directors and officers as a group.
<TABLE>
<CAPTION>
AT THE MINIMUM OF THE AT THE MAXIMUM OF THE
ESTIMATED PRICE RANGE ESTIMATED PRICE RANGE
------------------------------ -----------------------------
AS A AS A
PERCENT OF PERCENT OF
NUMBER OF SHARES NUMBER OF SHARES
NAME AMOUNT(1) SHARES SOLD SHARES SOLD
- ------------------------------------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Thomas L. Kennedy ................... $ 400,000 38,000 (2) 1.00% 40,000 0.77%
E. Lee Beard ........................ 175,000 17,500 0.46 17,500 0.34
Paul L. Conard ...................... 25,000 2,500 0.07 2,500 0.05
William R. Davidson ................. 90,000 9,000 0.24 9,000 0.17
Barbara M. Ecker .................... 250,000 25,000 0.65 25,000 0.48
R. Peter Haentjens, Jr. ............. 175,000 17,500 0.46 17,500 0.34
John P. Lavelle ..................... 175,000 17,500 0.46 17,500 0.34
Michael J. Leib ..................... 200,000 20,000 0.52 20,000 0.39
William J. Spear .................... 100,000 10,000 0.26 10,000 0.19
Patrick J. Owens, Jr. ............... 35,000 3,500 0.09 3,500 0.07
Joseph K. Osiecki ................... 75,000 7,500 0.20 7,500 0.14
Gary M. Gatski ...................... 150,000 15,000 0.39 15,000 0.29
Bernard M. Miskin ................... 20,000 2,000 0.05 2,000 0.04
---------- ------- ---- ------- ----
All Directors and Executive .... $1,870,000 185,000 4.83% 187,000 3.61%
========== ======= ==== ======= ====
Officers as a Group (13 persons)
Other officers (6 persons) .......... $ 98,500 9,850 0.26% 9,850 0.19%
All Directors and Officers as a Group
(19 persons) ........................ $1,968,500 194,850 5.09% 196,850 3.80%
========== ======= ==== ======= ====
</TABLE>
- ------------
(1) Includes proposed subscriptions, if any, by associates. Also includes
funds from the Bank's 401(k) Plan which may be used to purchase
shares of Common Stock under such plan's new employer stock fund
investment option. See " -- Benefits -- Savings Plan." Does not
include subscription orders by the ESOP. Intended purchases by the
ESOP are expected to be 8% of the shares issued in the Conversion,
including shares issued to the Foundation.
(2) Represents the maximum amount of shares that may be purchased at the
minimum of the Estimated Price Range, by a person, together with
associates or persons acting in concert with such person, which,
pursuant to the Plan of Conversion, is 1% of the Common Stock offered.
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<PAGE> 149
THE CONVERSION
THE BOARD OF DIRECTORS OF THE BANK AND THE OTS HAVE APPROVED THE PLAN
OF CONVERSION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE BANK ENTITLED TO VOTE
ON THE MATTER AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS. SUCH OTS
APPROVAL, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE
PLAN BY SUCH AGENCY. THE OTS NEITHER APPROVED NOR DISAPPROVED THE ESTABLISHMENT
OF THE FOUNDATION.
GENERAL
The Bank's Board of Directors, on November 18, 1997, unanimously
adopted, subject to approval by the OTS, the Plan pursuant to which the Bank
will be converted from a federally-chartered mutual savings bank to a
federally-chartered capital stock savings bank and subsequently amended the Plan
on February 10, 1998. It is currently intended that all of the outstanding
capital stock of the Bank will be held by the Company, which is incorporated
under Delaware law. The Plan was approved by the OTS, subject to, among other
things, approval of the Plan by the Bank's members. A special meeting of
members has been called for this purpose to be held on _______________, 1997.
The Company has received the approval of the OTS to become a savings
and loan holding company and to acquire all of the Common Stock of the Bank to
be issued in the Conversion. The Company plans to purchase the shares of issued
and outstanding capital stock of the Bank in exchange for 50% of the net
proceeds and retain the remaining net proceeds. The Conversion will be effected
only upon completion of the sale of all of the shares of Common Stock of the
Company or the Bank, if the holding company form of organization is not
utilized, to be issued pursuant to the Plan.
The Plan provides that the Board of Directors of the Bank may, at any
time prior to the issuance of the Common Stock and for any reason, decide not to
use a holding company form. Such reasons may include possible delays resulting
from overlapping regulatory processing or policies which could adversely affect
the Bank's or the Company's ability to consummate the Conversion and transact
its business as contemplated herein and in accordance with the Bank's operating
policies. In the event such a decision is made, the Bank will withdraw the
Company's registration statement from the SEC and take steps necessary to
complete the Conversion without the Company, including filing any necessary
documents with the OTS. In such event, and provided there is no regulatory
action, directive or other consideration upon which basis the Bank determines
not to complete the Conversion, if permitted by the OTS, the Bank will issue and
sell the Common Stock of the Bank and subscribers will be notified of the
elimination of a holding company and resolicited (i.e., be permitted to affirm
their orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
funds will be promptly refunded with interest at the Bank's passbook rate of
interest; or be permitted to modify or rescind their subscriptions), and
notified of the time period within which the subscriber must affirmatively
notify the Bank of his intention to affirm, modify or rescind his subscription.
The following description of the Plan assumes that a holding company form of
organization will be used in the Conversion. In the event that a holding company
form of organization is not used, all other pertinent terms of the Plan as
described below will apply to the conversion of the Bank from the mutual to
stock form of organization and the sale of the Bank's common stock.
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The Plan provides generally that (i) the Bank will convert from a
mutual savings bank to a capital stock savings bank and (ii) the Company will
offer shares of Common Stock for sale in the Subscription Offering to the Bank's
Eligible Account Holders, the ESOP, Supplemental Eligible Account Holders, and
Other Members. Subsequent to the Subscription Offering, any remaining shares
will be offered in a Community Offering with preference given to natural persons
residing in the Bank's Local Community. It is anticipated that all shares not
subscribed for in the Subscription and Community Offerings will be offered for
sale by the Company to the general public in a Syndicated Community Offering.
The Bank has the right to accept or reject, in whole or in part, any orders to
purchase shares of the Common Stock received in the Community Offering or in the
Syndicated Community Offering. See " -- Community Offering" and " -- Syndicated
Community Offering."
The aggregate price of the shares of Common Stock to be sold in the
Conversion within the Estimated Price Range, currently estimated to be between
$38.3 million and $51.8 million, will be determined based upon an independent
appraisal, prepared by Keller of the estimated pro forma market value of the
Common Stock of the Company. All shares of Common Stock to be issued and sold in
the Conversion, will be sold at the same price. The independent appraisal will
be affirmed or, if necessary, updated at the completion of the Subscription and
Community Offerings, if all shares are subscribed for, or at the completion of
the Syndicated Community Offering. The appraisal has been performed by Keller, a
consulting firm experienced in the valuation and appraisal of savings
institutions. See " -- Stock Pricing" for additional information as to the
determination of the estimated pro forma market value of the Common Stock.
The following is a brief summary of the material aspects of the
Conversion. The summary is qualified in its entirety by reference to the
provisions of the Plan. A copy of the Plan is available for inspection at each
branch of the Bank and at the Northeast Region and Washington, D.C. offices of
the OTS.
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
General. In furtherance of the Bank's long-standing commitment to its
local community, the Bank's Plan of Conversion provides for the establishment of
a charitable foundation in connection with the Bank's Conversion. The Plan
provides that the Bank and the Company will establish the Foundation, which will
be incorporated under Delaware law as a non-stock corporation, and will fund the
Foundation with Common Stock of the Company, as further described below. The
Company and the Bank believe that the funding of the Foundation with Common
Stock of the Company is a means of establishing a common bond between the Bank
and the communities in which the Bank operates and thereby enables such
communities to share in the potential growth and success of the Company and the
Bank over the long term. By further enhancing the Bank's visibility and
reputation in the communities in which it operates, the Bank believes that the
Foundation will enhance the long-term value of the Bank's community banking
franchise.
The Foundation would be dedicated to the promotion of charitable
purposes within the communities in which the Bank operates, including, but not
limited to, providing grants or donations to support housing assistance,
not-for-profit medical facilities, community groups and other types of
organizations or projects. Establishment of the Foundation is subject to the
approval of a majority of the total outstanding votes of the Bank's members
eligible to be cast at the Special Meeting. The Foundation will be considered as
a separate matter from approval of the Plan of Conversion. If the Bank's members
approve the Plan of Conversion, but not the Foundation, the Bank intends to
complete the Conversion without the establishment of the Foundation. Failure to
approve the establishment of the Foundation may materially affect the pro forma
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market value of the Common Stock. In such an event, the Bank may establish a new
Estimated Price Range and commence a resolicitation of subscribers. In the event
of a resolicitation, unless an affirmative response is received within a
specified period of time, all funds will be promptly returned to investors, as
described elsewhere herein. See " -- Stock Pricing."
Purpose of the Foundation. The purpose of the Foundation is to provide
funding to support charitable purposes within the communities in which the Bank
operates. The Bank has long emphasized community lending and community
development activities and currently has a "satisfactory" Community Reinvestment
Act ("CRA") rating. The Foundation is being formed as a complement to the Bank's
existing community activities, not as a replacement for such activities. Indeed,
the Bank intends to continue to emphasize community lending and community
development activities following the Conversion. However, such activities are
not the Bank's sole corporate purpose. The Foundation, conversely, will be
completely dedicated to community activities and the promotion of charitable
causes, and may be able to support such activities in ways that are not
presently available to the Bank. Since the Bank already engages in community
development activities, the Bank believes that the Foundation will enable the
Company and the Bank to assist their local community in areas beyond community
development and lending. In this regard, the Board of Directors believes the
establishment of a charitable foundation is consistent with the Bank's
commitment to community service. The Boards of Directors of the Bank and Company
also believe that the funding of the Foundation with Common Stock of the Company
is a means of enabling the communities in which the Bank operates to share in
the potential growth and success of the Company long after completion of the
Conversion. The Foundation accomplishes that goal by providing for continued
ties between the Foundation and Bank, thereby forming a partnership with the
Bank's community. The establishment of the Foundation would also enable the
Company and the Bank to develop a unified charitable donation strategy and would
centralize the responsibility for administration and allocation of corporate
charitable funds. The Bank, however, does not expect the contribution to the
Foundation to take the place of the Bank's traditional community lending and
charitable activities. The Bank expects in future periods to continue making
charitable contributions within its communities.
Structure of the Foundation. The Foundation will be incorporated under
Delaware law as a non-stock corporation. It is currently anticipated that the
Foundation's board of directors will be comprised of five members, four of whom
will be individuals elected from existing directors and officers of the Bank.
It is also anticipated that the fifth director will be an individual selected
from the Bank's community. As a result, it is expected that less than a
majority of the Bank's directors will also serve as directors of the
Foundation. The officers and directors of the Bank and Company that are
expected to serve on the Board of Directors of the Foundation consist of Ms.
Beard and Messrs. Kennedy, Gatski and Anthony N. Cusatis (Vice President,
Marketing, Public Relations and Business Development for the Bank), who intend
to purchase 17,500, 40,000, 15,000 and 5,000 shares of Common Stock in the
Conversion, respectively. At the supermaximum of the Estimated Price Range,
such purchases equal 0.29%, 0.67%, 0.25% and 0.08%, respectively, or 1.29% in
the aggregate of the total number of shares to be issued in the Conversion
including shares issued to the Foundation. On an on-going basis, a Nominating
Committee of the board of directors of the Foundation, will nominate
individuals eligible for election to the board of directors of the Foundation.
The members of the Foundation, who are comprised of its board members, will
elect the directors at the annual meeting of the Foundation from those
nominated by the Nominating Committee. Only persons serving as directors of the
Foundation qualify as members of the Foundation with voting authority.
Directors will be divided into three classes with each class appointed for
three-year terms. The certificate of incorporation of the Foundation provides
that the corporation is organized exclusively for charitable purposes as set
forth in Section 501(c)(3) of the Code. The Foundation's certificate of
incorporation further provides that no part of the net earnings of the
Foundation will inure to the benefit of, or be distributable to its directors,
officers or members. A person who is a director, officer or employee of the
Bank, or has the power to direct its management or policies, or otherwise owes
a fiduciary duty to the Bank, and who will also serve as a director or
employee of the Foundation would be subject to the requirements of OTS
Conflicts of Interest Regulations.
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The authority for the affairs of the Foundation will be vested in the
board of directors of the Foundation. The directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the stated purposes for
which the Foundation was established. Although no formal policy governing
Foundation grants exists at this time, the Foundation's board of directors will
adopt such a policy upon establishment of the Foundation. The directors will
also be responsible for directing the assets of the Foundation. Pursuant to the
terms of the contribution as mandated by the OTS, all shares of Common Stock
held by the Foundation must be voted in the same ratio as all other shares of
the Company's Common Stock on all proposals considered by stockholders of the
Company; provided, however, that the OTS will waive this voting restriction
under certain circumstances if compliance with the restriction would: (i) cause
a violation of the law of the State of Delaware and the OTS determines that
federal law would not preempt the application of the laws of the State of
Delaware to the Foundation; (ii) would cause the Foundation to lose its
tax-exempt status or otherwise have a material and adverse tax consequence on
the Foundation; or (iii) would cause the Foundation to be subject to an excise
tax under Section 4941 of the Code. In order for the OTS to waive such voting
restriction, the Company's or the Foundation's legal counsel must render an
opinion satisfactory to OTS that compliance with the voting restriction would
have the effect described in clauses (i), (ii) or (iii) above. Under those
circumstances, the OTS will grant a waiver of the voting restriction upon
submission of such legal opinion(s) by the Company or the Foundation. In the
event that the OTS waived the voting restriction, the directors would direct the
voting of the Common Stock held by the Foundation. However, a condition to the
OTS approval of the Conversion provides that in the event such voting
restriction is waived or becomes unenforceable, the Director of the OTS, or his
designees, at that time may impose conditions on the composition of the board of
directors of the Foundation or such other conditions or restrictions relating to
the control of the Common Stock held by the Foundation, any of which could limit
the ability of the board of directors of the Foundation to control the voting of
the Common Stock held by the Foundation. There will be no agreements or
understandings with directors of the Foundation regarding the exercise of
control, directly or indirectly, over the management or policies of the Company
or the Bank, including agreements related to voting, acquisition or disposition
of the Company's stock. As directors of a nonprofit corporation, directors of
the Foundation will at all times be bound by their fiduciary duty to advance the
Foundation's charitable goals, to protect the assets of the Foundation and to
act in a manner consistent with the charitable purpose for which the Foundation
is established.
The Company will provide office space and administrative support
services to the Foundation. Initially, the Foundation is expected to have no
employees. The board of directors of the Foundation will appoint such officers
as may be necessary to manage the operations of the Foundation. It is
anticipated that initially such officers will be selected from the board of
directors of the Foundation. Any transaction between the Bank and the Foundation
will comply with the affiliate transaction restrictions set forth in Sections
23A and 23B of the Federal Reserve Act, as amended.
The Company proposes to capitalize the Foundation with Company Common
Stock in an amount equal to 8% of the total amount of Common Stock to be sold in
connection with the Conversion. At the minimum, midpoint and maximum of the
Estimated Price Range, the contribution to the Foundation would equal 306,000,
360,000 and 414,000 shares, which would have a market value of $3.1 million,
$3.6 million and $4.1 million, respectively, based on the Purchase Price of
$10.00 per share. Such contribution, once made, will not be recoverable by the
Company or the Bank. The Company and the Bank determined to fund the Foundation
with Common Stock rather than cash because it desired to form a bond with its
community in a manner that would allow the community to share in the potential
growth and success of the Company and the Bank over the long term. The funding
of the Foundation with stock also provides the Foundation
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with a potentially larger endowment than if the Company contributed cash to the
Foundation since, as a shareholder, the Foundation will share in the potential
growth and success of the Company. As such, the contribution of stock to the
Foundation has the potential to provide a self-sustaining funding mechanism
which reduces the amount of cash that the Company, if it were not making the
stock contribution, would have to contribute to the Foundation in future years
in order to maintain a level amount of charitable grants and donations.
The Foundation would receive working capital from any dividends that
may be paid on the Common Stock in the future, and subject to applicable federal
and state laws, loans collateralized by the Common Stock or from the proceeds of
the sale of any of the Common Stock in the open market from time to time as may
be permitted to provide the Foundation with additional liquidity. As a private
foundation under Section 501(c)(3) of the Code, the Foundation will be required
to distribute annually in grants or donations, a minimum of 5% of the average
fair market value of its net investment assets. One of the conditions imposed on
the gift of Common Stock by the Company is that the amount of Common Stock that
may be sold by the Foundation in any one year shall not exceed 5% of the average
market value of the assets held by the Foundation, except where the board of
directors of the Foundation, by three-fourths vote, determines that the failure
to sell an amount of common stock greater than such amount would result in a
long-term reduction of the value of the Foundation's assets or would otherwise
jeopardize the Foundation's capacity to carry out its charitable purposes. While
there may be a greater risk associated with a one-stock portfolio in comparison
to a diversified portfolio, the Company believes any such risk is mitigated by
the ability of the Foundation's directors to sell more than 5% of its stock in
such circumstances. Upon completion of the Conversion and the contribution of
shares to the Foundation immediately following the Conversion, the Company would
have 4,130,100, 4,860,000 and 5,589,000 shares issued and outstanding at the
minimum, midpoint and maximum of the Estimated Price Range. Because the Company
will have an increased number of shares outstanding, the voting and ownership
interests of shareholders in the Company's common stock would be diluted by
7.4%, as compared to their interests in the Company if the Foundation was not
established. For additional discussion of the dilutive effect, see "Comparison
of Valuation and Pro Forma Information With No Foundation" and "Pro Forma Data."
Comparison of Valuation and Other Factors Assuming the Foundation is
Not Established as Part of the Conversion. The Company proposes to capitalize
the Foundation with Common Stock in an amount equal to 8% of the total amount of
Common Stock sold in connection with the Conversion. At the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range, the contribution
to the Foundation would equal 306,000, 360,000, 414,000 and 476,100 shares,
respectively, which would have a market value of $3.1 million, $3.6 million,
$4.1 million and $4.8 million, respectively, based on the Purchase Price of
$10.00 per share. Such contribution, once made, will not be recoverable by the
Company or the Bank. As a result of the establishment of the Foundation, the
Estimated Price Range, as estimated by Keller, has decreased and the amount of
stock available for sale in the Offerings has also correspondingly decreased.
The amount of the decrease is 688,500, 810,000, 931,500 and 1,071,200 shares,
or $6.9 million, $8.1 million, $9.3 million and $10.7 million at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Price Range,
respectively. See "Pro Forma Data" and "Comparison of Valuation and Pro Forma
Data Information with No Foundation."
Tax Considerations. The Company and the Bank have been advised by their
independent accountants that an organization created for the above purposes will
qualify as a 501(c)(3) exempt organization under the Code, and will be
classified as a private foundation rather than a public charity. A private
foundation typically receives its support from one person or one corporation
whereas a public charity receives its support from the public. The Foundation
will submit a request to the IRS to be recognized as an exempt organization
after approval of the Foundation by the Bank's members at the Special Meeting
being held to consider the Conversion. As long as the Foundation files its
application for tax-exempt status within 15 months from the date of its
organization, and provided the IRS approves the application, the effective date
of the Foundation's status as a Section 501(c)(3) organization will be the date
of its organization. The Company's independent accountants, however, have not
rendered any advice on the condition of the gift which requires that all shares
of Common Stock of the Company held by the Foundation must be voted in the same
ratio as all other shares of the Company's Common Stock, on all proposals
considered by stockholders of the Company. In the event that the Company or the
Foundation receives an opinion of their tax counsel satisfactory to the OTS that
compliance with the voting restriction would cause the Foundation to lose its
tax-exempt status, otherwise have a material adverse tax consequence on the
Foundation or subject the Foundation to an excise tax under Section 4941 of the
Code, the OTS will waive such condition upon submission of such opinion(s) by
the Company or the Foundation. See " --Regulatory Conditions Imposed on the
Foundation."
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A legal opinion of the OTS which addresses the establishment of
charitable foundations by savings associations opines that as a general rule
funds contributed to a charitable foundation should not exceed the deductible
limitations set forth in the Code, and if an association's contributions exceed
the deductible limit, such action must be justified by the board of directors.
In addition, under Delaware law, the Company is authorized by statute to make
charitable contributions and case law has recognized the benefits of such
contributions to a Delaware corporation. In this regard, Delaware case law
provides that a charitable gift must merely be within reasonable limits as to
amount and purpose to be valid. Under the Code, the Company may deduct up to 10%
of its taxable income in any one year and any contributions made by the Company
in excess of the deductible amount will be deductible for federal tax purposes
over each of the five succeeding taxable years. The Company and the Bank believe
that the Conversion presents a unique opportunity to establish and fund a
charitable foundation given the substantial amount of additional capital being
raised in the Conversion. In making such a determination, the Company and the
Bank considered the dilutive impact of the Foundation on the amount of Common
Stock available to be offered for sale in the Conversion. See "Comparison of
Valuation and Pro Forma Information with No Foundation." Based on such
consideration, the Company and Bank believe that the contribution to the
Foundation in excess of the 10% annual limitation is justified given the Bank's
capital position and its earnings, the substantial additional capital being
raised in the Conversion and the potential benefits of the Foundation to the
Bank's community. In this regard, assuming the sale of the Common Stock at the
midpoint of the Estimated Price Range, the Company would have pro forma
consolidated capital of $67.8 million, or 16.6% of consolidated assets and the
Bank's pro forma tangible, core and risk-based capital ratios would be 12.6%,
12.6% and 24.1%, respectively. See "Regulatory Capital Compliance,"
"Capitalization," and "Comparison of Valuation and Pro Forma Information with No
Foundation." Thus, the amount of the contribution will not adversely impact the
financial condition of the Company and the Bank and the Company and the Bank
therefore believe that the amount of the charitable contribution is reasonable
given the Company and the Bank's pro forma capital positions. As such, the
Company and the Bank believe that the contribution does not raise safety and
soundness concerns.
The Company and the Bank have received an opinion of their independent
accountants that the Company's contribution of its own stock to the Foundation
will not constitute an act of self-dealing, and that the Company will be
entitled to a deduction in the amount of the fair market value of the stock at
the time of the contribution less the nominal par value that the Foundation is
required to pay to the Company for such stock, subject to a limitation based on
10% of the Company's annual taxable income. The Company, however, would be able
to carry forward any unused portion of the deduction for five years following
the year in which the contribution is made for federal tax purposes. Thus, while
the Company expects, based on the maximum of the Estimated Price Range, to be
able to utilize for federal income tax purposes a charitable contribution
deduction of approximately $450,000 in fiscal year 1998, the Company is
permitted under the Code to carryover the excess of the total contribution over
such 1998 deduction over a five-year period for federal income tax purposes. For
Commonwealth of Pennsylvania state income tax purposes, the Company also would
be able to deduct its contribution to the Foundation and to carry forward any
unused portion over a five-year period, subject to the limitation based on 10%
of the Company's unconsolidated annual taxable income, and provided the Company
generates sufficient state taxable income on an unconsolidated basis. Assuming
the close of the Offerings at the midpoint of the Estimated Price Range, the
Company estimates that all of the federal tax deduction should be deductible
over the six-year period. However, no assurances can be made that the Company
will have sufficient pre-tax income over the five year period following the year
in which the contribution was made to fully utilize the carryover related to the
excess contribution. Neither the Company nor the Bank expect to make any further
contributions to the Foundation within the first five years following the
initial contribution. After that time, the Company and the Bank may consider
future contributions to the Foundation. Any such decisions would be based on an
assessment of, among other
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factors, the financial condition of the Company and the Bank at that time, the
interests of shareholders and depositors of the Company and the Bank, and the
financial condition and operations of the Foundation.
Although the Company and the Bank have received an opinion of their
independent accountants that the Company is entitled to a deduction for the
charitable contribution, there can be no assurances that the IRS will recognize
the Foundation as a Section 501(c)(3) exempt organization or that the deduction
will be permitted. In such event, the Company's contribution to the Foundation
would be expensed without tax benefit, resulting in a reduction in earnings in
the year in which the IRS makes such a determination. The Bank has agreed to a
limitation on the liability of its independent accountants to it solely as a
result of, and to indemnify its independent accountants solely in connection
with, certain claims or liabilities relating to the above-discussed federal
income tax opinion except to the extent determined to have resulted from
professional negligence or intentional or deliberate misconduct. See "Risk
Factors -- Establishment of the Charitable Foundation." In cases of willful,
flagrant or repeated acts or failures to act which result in violations of the
IRS rules governing private foundations, a private foundation's status as a
private foundation may be involuntarily terminated by the IRS. In such event,
the managers of a private foundation could be liable for excise taxes based on
such violations and the private foundation could be liable for a termination tax
under the Code. The Foundation's certificate of incorporation provides that it
shall have a perpetual existence. In the event, however, the Foundation were
subsequently dissolved as a result of a loss of its tax exempt status, the
Foundation would be required under the Code and its certificate of incorporation
to distribute any assets remaining in the Foundation at that time for one or
more exempt purposes within the meaning of Section 501(c)(3) of the Code, or to
distribute such assets to the federal government, or to a state or local
government, for a public purpose.
As a private foundation, earnings and gains, if any, from the sale of
Common Stock or other assets are exempt from federal and state corporate
taxation. However, investment income, such as interest, dividends and capital
gains, will be subject to a federal excise tax of 2.0%. The Foundation will be
required to make an annual filing with the IRS within four and one-half months
after the close of the Foundation's fiscal year to maintain its tax-exempt
status. The Foundation will be required to publish a notice that the annual
information return will be available for public inspection for a period of 180
days after the date of such public notice. The information return for a private
foundation must include, among other things, an itemized list of all grants made
or approved, showing the amount of each grant, the recipient, any relationship
between a grant recipient and the Foundation's managers and a concise statement
of the purpose of each grant.
Regulatory Conditions Imposed on the Foundation. Establishment of the
Foundation is subject to the following conditions imposed by the OTS: (i) the
Foundation will be subject to examination by the OTS, at the Foundation's own
expense; (ii) the Foundation must comply with supervisory directives imposed by
the OTS; (iii) the Foundation will provide annual reports to the OTS describing
grants made and grant recipients; (iv) the Foundation will operate in accordance
with written policies adopted by the board of directors, including a conflict of
interest policy; (v) the Foundation will not engage in self-dealing and will
comply with all laws necessary to maintain its tax-exempt status; (vi) any
purchases of Common Stock by the Foundation following that Conversion will be
subject to OTS regulations on stock repurchases; and (vii) any shares of Common
Stock of the Company held by the Foundation must be voted in the same ratio as
all other shares of the Company's Common Stock on all proposals considered by
stockholders of the Company; provided, however, that the OTS will waive this
voting restriction under certain circumstances if compliance with the voting
restriction would: (a) cause a violation of the law of the State of Delaware and
the OTS determines the federal law does not preempt the application of the laws
of the State of Delaware to the Foundation; (b) cause the Foundation to lose its
tax-exempt status or otherwise have a material and adverse tax consequence on
the Foundation; or (c) cause the Foundation to be subject to an excise tax under
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4941 of the Code. In order for the OTS to waive such voting restriction, the
Company's or the Foundation's legal counsel must render an opinion satisfactory
to OTS that compliance with the voting restriction would have the effect
described in clauses (a), (b) or (c) above. Under those circumstances, the OTS
will grant a waiver of the voting restriction upon submission of such opinion(s)
by the Company or the Foundation. There can be no assurances that either a legal
or tax opinion addressing these issues will be rendered, or if rendered, that
the OTS will grant an unconditional waiver of the voting restriction. In this
regard, a condition to the OTS approval of the Conversion provides that in the
event such voting restriction is waived or becomes unenforceable, the Director
of the OTS, or his designees, at that time may impose conditions on the
composition of the board of directors of the Foundation or such other conditions
or restrictions relating to the control of the Common Stock held by the
Foundation, any of which could limit the ability of the board of directors of
the Foundation to control the voting of Common Stock held by the Foundation. In
no event will the voting restriction survive the sale of shares of the Common
Stock held by the Foundation.
In addition, establishment of the Foundation is subject to the approval
of a majority of the total outstanding votes of the Bank's members eligible to
be cast at the special meeting being held to consider the Conversion. The
Foundation will be considered as a separate matter from approval of the Plan of
Conversion. If the Bank's members approve the Plan of Conversion, but not the
Foundation, the Bank intends to complete the Conversion without the
establishment of the Foundation. Failure to approve the Foundation may
materially increase the pro forma market value of the Common Stock being offered
for sale in the Offering since the Valuation Range, as set forth herein, takes
into account the dilutive impact of the issuance of shares to the Foundation.
See "Comparison of Valuation and Pro Forma Information With No Foundation."
PURPOSES OF CONVERSION
The Bank, as a federally-chartered mutual savings and loan association,
does not have shareholders and has no authority to issue capital stock. By
converting to the capital stock form of organization, the Bank will be
structured in the form used by commercial banks, other business entities and a
growing number of savings institutions. The Conversion will enhance the Bank's
ability to access capital markets, expand its current operations, acquire other
financial institutions or branch offices, provide affordable home financing
opportunities to the communities it serves or diversify into other financial
services to the extent allowable by applicable law and regulation. The
Conversion would also position the Bank for a conversion to a commercial bank
charter if the Board of the Bank chooses to do so in the future.
The holding company form of organization, if used, would provide
additional flexibility to diversify the Bank's business activities through
existing or newly formed subsidiaries, or through acquisitions of or mergers
with both mutual and stock institutions, as well as other companies. Although
there are no current arrangements, understandings or agreements regarding any
such opportunities, the Company will be in a position after the Conversion,
subject to regulatory limitations and the Company's financial position, to take
advantage of any such opportunities that may arise.
The potential impact of the Conversion upon the Bank's capital base is
significant. The Conversion will significantly increase the Bank's capital
position to a level whereby the Bank will be better positioned to take advantage
of business opportunities and engage in activities which, prior to Conversion,
would have been more difficult for the Bank to engage in and still continue to
meet its status as a "well capitalized" institution. At September 30, 1997, the
Bank had total equity, determined in accordance with
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GAAP, of $28.5 million, or 7.7% of total assets, which approximated the Bank's
regulatory tangible capital at that date of 7.4% of assets. An institution with
a ratio of tangible capital to total assets of greater than or equal to 5.0% is
considered to be "well-capitalized" pursuant to OTS regulations. Assuming that
the Company uses 50% of the net proceeds at the maximum of the Estimated Price
Range to purchase the stock of the Bank, the Bank's GAAP capital will increase
to $53.7 million or a ratio of GAAP capital to adjusted assets, on a pro forma
basis, of 13.6% after the Conversion. In the event that the holding company form
of organization is not utilized and all of the net Conversion proceeds, at the
midpoint of the Estimated Price Range, are retained by the Bank, the Bank's
ratios of tangible and core capital to adjusted assets, on a pro forma basis,
will both increase to 17.2% after Conversion. The investment of the net proceeds
from the sale of the Common Stock is expected to provide the Bank with
additional income to increase further its capital position. The additional
capital may also assist the Bank in offering new programs and expanded services
to its customers. See "Use of Proceeds."
After completion of the Conversion, the unissued common and preferred
stock authorized by the Company's Certificate of Incorporation will permit the
Company, subject to market conditions and regulatory approval of an offering, to
raise additional equity capital through further sales of securities, and to
issue securities in connection with possible acquisitions. At the present time,
the Company has no plans with respect to additional offerings of securities,
other than the possible issuance of additional shares upon exercise of Stock
Options under the Stock-Based Incentive Plan or the possible issuance of
authorized but unissued shares to the Stock-Based Incentive Plan for Stock
Awards. Following the Conversion, the Company will also be able to use
stock-related incentive plans to attract and retain executive and other
personnel for itself and its subsidiaries. See "Management of the Bank --
Executive Compensation."
EFFECTS OF CONVERSION
General. Each depositor in a mutual savings institution has both a
deposit account in the institution and a pro rata ownership interest in the net
worth of the institution based upon the balance in his or her account, which
interest may only be realized in the event of a liquidation of the institution
or in the event the institution declares a capital distribution to depositors,
subject to applicable regulations of the OTS. However, this ownership interest
is tied to the depositor's account and has no tangible market value separate
from such deposit account. Any depositor who opens a deposit account obtains a
pro rata ownership interest in the net worth of the institution without any
additional payment beyond the amount of the deposit. A depositor who reduces or
closes his account receives a portion or all of the balance in the account but
nothing for his ownership interest in the net worth of the institution, which is
lost to the extent that the balance in the account is reduced.
Consequently, mutual savings institution depositors normally have no
way to realize the value of their ownership interest, which has realizable value
only in the unlikely event that the mutual savings institution is liquidated or
in the event the institution declares a capital distribution to depositors,
subject to applicable regulations of the OTS. In such event, the depositors of
record at that time, as owners, would share pro rata in any residual surplus and
reserves after other claims, including claims of depositors to the amounts of
their deposits, are paid.
When a mutual savings institution converts to stock form, permanent
nonwithdrawable capital stock is created to represent the ownership of the
institution's net worth. THE COMMON STOCK IS SEPARATE AND APART FROM DEPOSIT
ACCOUNTS AND CANNOT BE AND IS NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENTAL
AGENCY. Certificates are issued to evidence ownership of the capital stock. The
stock certificates are
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transferable and, therefore, the stock may be sold or traded if a purchaser is
available with no effect on any account the seller may hold in the institution.
Continuity. While the Conversion is being accomplished, the normal
business of the Bank of accepting deposits and making loans will continue
without interruption. The Bank will continue to be subject to regulation by the
OTS and the FDIC. After the Conversion, the Bank will continue to provide
services for depositors and borrowers under current policies by its present
management and staff.
The Directors serving the Bank at the time of Conversion will serve
initially as Directors of the Bank after the Conversion. The Directors of the
Company will consist initially of individuals currently serving on the Board of
Directors of the Bank. All officers of the Bank at the time of Conversion will
retain their positions immediately after Conversion.
Effect on Deposit Accounts. Under the Plan, each depositor in the Bank
at the time of Conversion will automatically continue as a depositor after the
Conversion, and each such deposit account will remain the same with respect to
deposit balance, interest rate and other terms. Each such account will be
insured by the FDIC to the same extent as before the Conversion (i.e., up to
$100,000 per depositor). Depositors will continue to hold their existing
certificates, passbooks and other evidences of their accounts.
Effect on Loans. No loan outstanding from the Bank will be affected by
the Conversion, and the amount, interest rate, maturity and security for each
loan will remain as they were contractually fixed prior to the Conversion.
Effect on Voting Rights of Members. At present, all depositors and
certain borrowers of the Bank are members of, and have voting rights in, the
Bank as to all matters requiring membership action. Upon Conversion, depositors
and borrowers will cease to be members and will no longer be entitled to vote at
meetings of the Bank. Upon Conversion, all voting rights in the Bank will be
vested in the Company as the sole stockholder of the Bank. Exclusive voting
rights with respect to the Company will be vested in the holders of Common
Stock. Depositors and borrowers of the Bank will not have voting rights after
the Conversion except to the extent that they become stockholders of the Company
through the purchase of Common Stock.
Tax Effects. The Bank has received an opinion of counsel with regard to
federal income taxation and an opinion from KPMG Peat Marwick LLP with regard to
Pennsylvania income taxation which provide that the adoption and implementation
of the Plan of Conversion set forth herein will not be taxable for federal or
Pennsylvania tax purposes to the Bank, its Eligible Account Holders, or its
Supplemental Eligible Account Holders or the Company, except as discussed below.
See " -- Tax Aspects."
Effect on Liquidation Rights. If a mutual savings institution were to
liquidate, all claims of creditors (including those of depositors, to the extent
of deposit balances) would be paid first. Thereafter, if there were any assets
remaining, depositors would be entitled to such remaining assets, pro rata,
based upon the deposit balances in their deposit accounts immediately prior to
liquidation. In the unlikely event that the Bank were to liquidate after
Conversion, all claims of creditors (including those of depositors, to the
extent of their deposit balances) would also be paid first, followed by
distribution of the "liquidation account" to certain depositors (see " --
Liquidation Rights"), with any assets remaining thereafter distributed to the
Company as the holder of the Bank's capital stock. Pursuant to the rules and
regulations of the OTS, a post-Conversion merger, consolidation, sale of bulk
assets or similar combination or transaction with another insured savings
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institution would not be considered a liquidation and, in such a transaction,
the liquidation account would be assumed by the surviving institution.
STOCK PRICING
The Plan of Conversion requires that the aggregate purchase price of
the Common Stock must be based on the appraised pro forma market value of the
Common Stock, as determined on the basis of an independent valuation. The Bank
and the Company have retained Keller to make such valuation. For its services in
making such appraisal, Keller will receive a fee of $21,000, plus reasonable
expenses not to exceed $500. The Bank and the Company have agreed to indemnify
Keller and its employees and affiliates against certain losses (including any
losses in connection with claims under the federal securities laws) arising out
of its services as appraiser, except where Keller's liability results from its
negligence, willful misconduct or bad faith.
An appraisal has been made by Keller in reliance upon the information
contained in this Prospectus, including the Consolidated Financial Statements.
Keller also considered the following factors, among others: the present and
projected operating results and financial condition of the Company and the Bank
and the economic and demographic conditions in the Bank's existing marketing
area; certain historical, financial and other information relating to the Bank;
a comparative evaluation of the operating and financial statistics of the Bank
with those of other similarly situated publicly-traded savings banks and savings
institutions located in the Bank's market area and the Midwest and the
midatlantic areas of the United States; the aggregate size of the offering of
the Common Stock; the impact of Conversion on the Bank's net worth and earnings
potential; the proposed dividend policy of the Company and the Bank; and the
trading market for securities of comparable institutions and general conditions
in the market for such securities.
On the basis of the foregoing, Keller has advised the Company and the
Bank that, in its opinion, dated November 28, 1997, the estimated pro forma
market value of the Common Stock, being offered for sale ranged from a minimum
of $38.3 million to a maximum of $51.8 million with a midpoint of $45.0 million.
Based upon the Valuation Range and the Purchase Price of $10.00 per share for
the Common Stock established by the Board of Directors, the Board of Directors
has established the Estimated Price Range of $38.3 million to $51.8 million,
with a midpoint of $45.0 million, and the Company expects to issue between
3,825,000 and 5,175,000 shares of Common Stock. The Board of Directors of the
Company and the Bank have reviewed the appraisal of Keller and in determining
the reasonableness and adequacy of such appraisal consistent with OTS
regulations and policies, have reviewed the methodology and reasonableness of
the assumptions utilized by Keller in the preparation of such appraisal. The
Estimated Price Range may be amended with the approval of the OTS (if required),
if necessitated by subsequent developments in the financial condition of the
Company or the Bank or market conditions generally. The $10.00 per share price
for the Common Stock was based on the consideration of a number of factors,
including the potential after market liquidity of the stock, stock exchange or
AMEX listing requirements and other marketing conditions.
SUCH APPRAISAL, HOWEVER, IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS
A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING COMMON STOCK
IN THE OFFERINGS. KELLER DID NOT INDEPENDENTLY VERIFY THE CONSOLIDATED FINANCIAL
STATEMENTS AND OTHER INFORMATION PROVIDED BY THE BANK, NOR DID KELLER VALUE
INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE BANK. THE APPRAISAL CONSIDERS THE
BANK AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE
LIQUIDATION VALUE OF THE BANK. MOREOVER, BECAUSE SUCH APPRAISAL IS NECESSARILY
BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH ARE
SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS
PURCHASING COMMON STOCK IN THE CONVERSION WILL THEREAFTER BE ABLE TO SELL COMMON
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STOCK AT PRICES AT OR ABOVE THE PURCHASE PRICE OR IN THE RANGE OF THE FOREGOING
VALUATION OF THE PRO FORMA MARKET VALUE THEREOF. SEE "RISK FACTORS -- ABSENCE OF
MARKET FOR COMMON STOCK."
Following commencement of the Subscription Offering, the maximum of the
Estimated Price Range may be increased up to 15% and the number of shares of
Common Stock to be issued in the Conversion may be increased to 5,951,250 shares
due to regulatory considerations, changes in the market and general financial
and economic conditions, without the resolicitation of subscribers. See " --
Limitations on Common Stock Purchases" as to the method of distribution and
allocation of additional shares that may be issued in the event of an increase
in the Estimated Price Range to fill unfilled orders in the Subscription
Offering.
No sale of shares of Common Stock may be consummated unless, prior to
such consummation, Keller confirms to the Bank and the OTS that, to the best of
its knowledge, nothing of a material nature has occurred which, taking into
account all relevant factors, would cause Keller to conclude that the value of
the Common Stock at the price so determined is incompatible with its estimate of
the pro forma market value of the Common Stock at the conclusion of the
Subscription Offering.
If the pro forma market value of the Common Stock is either more than
15% above the maximum of the Estimated Price Range or less than the minimum of
the Estimated Price Range, the Bank and the Company, after consulting with the
OTS, may terminate the Plan and return all funds promptly with interest at the
Bank's passbook rate of interest on payments made by check, bank draft or money
order, extend or hold a new Subscription Offering and/or Community Offering,
establish a new Estimated Price Range, commence a resolicitation of subscribers
or take such other actions as permitted by the OTS in order to complete the
Conversion. In the event that a resolicitation is commenced, unless an
affirmative response is received within a reasonable period of time, all funds
will be promptly returned to investors as described above. A resolicitation, if
any, following the conclusion of the Subscription Offering would not exceed 45
days unless further extended by the OTS for periods of up to 90 days not to
extend beyond _______________, 1998.
If all shares of Common Stock are not sold through the Subscription
Offering or Community Offering, then the Bank and the Company expect to offer
the remaining shares in a Syndicated Community Offering which would occur as
soon as practicable following the close of the Subscription Offering but may
commence during the Subscription Offering subject to prior rights of
subscribers. All shares of Common Stock will be sold at the same price per share
in the Syndicated Community Offering as in the Subscription Offering and
Community Offering. See " -- Syndicated Community Offering."
No sale of shares of Common Stock may be consummated unless, prior to
such consummation, Keller confirms to the Bank, the Company and the OTS that, to
the best of its knowledge, nothing of a material nature has occurred which,
taking into account all relevant factors, including those which would be
involved in a cancellation of the Syndicated Community Offering, would cause
Keller to conclude that the aggregate value of the Common Stock at the Purchase
Price is incompatible with its estimate of the pro forma market value of the
Common Stock of the Company at the time of the Syndicated Community Offering.
Any change which would result in an aggregate purchase price which is below or
more than 15% above the Estimated Price Range would be subject to OTS approval.
If such confirmation is not received, the Bank may extend the Conversion,
extend, reopen or commence new Subscription Offering, Community Offering or
Syndicated Community Offering, establish a new Estimated Price Range and
commence a resolicitation of all subscribers with the approval of the OTS or
take such other actions as permitted by the OTS in order to complete the
Conversion, or terminate the Plan and cancel the Subscription and Community
Offerings
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and/or the Syndicated Community Offering. In the event market or financial
conditions change so as to cause the aggregate purchase price of the shares to
be below the minimum of the Estimated Price Range or more than 15% above the
maximum of such range, and the Company and the Bank determine to continue the
Conversion, subscribers will be resolicited (i.e., be permitted to continue
their orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
subscription funds will be promptly refunded with interest at the Bank's
passbook rate of interest, or be permitted to decrease or cancel their
subscriptions). Any change in the Estimated Price Range must be approved by the
OTS. A resolicitation, if any, following the conclusion of the Subscription
Offering would not exceed 45 days unless further extended by the OTS for periods
up to 90 days not to extend beyond _______________, 1998. If such resolicitation
is not effected, the Bank will return all funds promptly with interest at the
Bank's passbook rate of interest on payments made by check, bank draft or money
order.
Copies of the appraisal report of Keller, including any amendments
thereto, and the detailed memorandum of the appraiser setting forth the method
and assumptions for such appraisal are available for inspection at the main
office of the Bank and the other locations specified under "Additional
Information."
NUMBER OF SHARES TO BE ISSUED
Depending upon market or financial conditions following the
commencement of the Subscription Offering, the total number of shares to be
issued in the Conversion may be increased or decreased without a resolicitation
of subscribers, provided that the product of the total number of shares times
the price per share is not below the minimum of the Estimated Price Range or
more than 15% above the maximum of the Estimated Price Range. Based on a fixed
purchase price of $10.00 per share and Keller's estimate of the pro forma market
value of the Common Stock ranging from a minimum of $38.3 million to a maximum,
as increased by 15%, of $59.5 million, the number of shares of Common Stock
expected to be sold in the Conversion is between a minimum of 3,825,000 shares
and a maximum, as adjusted by 15%, of 5,951,250 shares. The actual number of
shares sold between this range will depend on a number of factors and shall be
determined by the Bank and Company subject to OTS approval, if necessary.
In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the Estimated
Price Range or more than 15% above the maximum of the Estimated Price Range, if
the Plan is not terminated by the Company and the Bank after consultation with
the OTS, purchasers will be resolicited (i.e., permitted to continue their
orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
subscription funds will be promptly refunded, or be permitted to modify or
rescind their subscriptions). Any change in the Estimated Price Range must be
approved by the OTS. If the number of shares issued in the Conversion is
increased due to an increase of up to 15% in the Estimated Price Range to
reflect changes in market or financial condition, persons who subscribed for the
maximum number of shares will not be given the opportunity to subscribe for an
adjusted maximum number of shares, except for the ESOP which will be able to
subscribe for such adjusted amount. See " -- Limitations on Common Stock
Purchases."
In the event the members of the Bank approve the establishment of the
Foundation, the number of shares to be issued and outstanding following the
Conversion will be increased by a number of shares equal to 8.0% of the Common
Stock sold in the Conversion. Assuming the sale of shares in the Offerings at
the maximum of the Estimated Price Range, the Company will issue 414,000 shares
of its Common Stock from authorized but unissued shares to the Foundation
immediately following the completion of the Conversion. In that event, the
Company will have total shares of Common Stock outstanding of 5,589,000 shares.
Of that
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amount, the Foundation will own 7.4%. Funding the Foundation with authorized but
unissued shares will have the effect of diluting the ownership and voting
interests of persons purchasing shares in the Conversion by 7.4% since a greater
number of shares will be outstanding upon completion of the Conversion than
would be if the Foundation were not established. See "Pro Forma Data."
An increase in the number of shares to be issued in the Conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and the Company's pro forma net earnings
and stockholders' equity on a per share basis while increasing pro forma net
earnings and stockholders' equity on an aggregate basis. A decrease in the
number of shares to be issued in the Conversion would increase both a
subscriber's ownership interest and the Company's pro forma net earnings and
stockholders' equity on a per share basis while decreasing pro forma net
earnings and stockholder's equity on an aggregate basis. For a presentation of
the effects of such changes, see "Pro Forma Data."
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock have been granted under the Plan of Conversion to the
following persons in the following order of descending priority: (1) holders of
deposit accounts with a balance of $50 or more as of September 30, 1996
("Eligible Account Holders"); (2) the ESOP; (3) holders of deposit accounts with
a balance of $50 or more as of December 31, 1997 ("Supplemental Eligible Account
Holders"); and (4) members of the Bank, consisting of depositors of the Bank as
of __________, 199_, the Voting Record Date, and borrowers with loans
outstanding as of December 16, 1997, which continue to be outstanding as of the
Voting Record Date other than Eligible Account Holders and Supplemental Eligible
Account Holders ("Other Members"). All subscriptions received will be subject to
the availability of Common Stock after satisfaction of all subscriptions of all
persons having prior rights in the Subscription Offering and to the maximum and
minimum purchase limitations set forth in the Plan of Conversion and as
described below under " -- Limitations on Common Stock Purchases."
Deposit accounts which will provide subscription rights to holders
thereof consist of any "savings account," as defined by the Plan of Conversion
consistent with OTS regulations. Pursuant to the Plan, savings accounts do not
include any noninterest-bearing demand accounts, primarily noninterest-bearing
checking accounts, maintained at the Bank.
Priority 1: Eligible Account Holders. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable subscription
rights to subscribe for in the Subscription Offering up to the greater of (1)
the amount permitted to be purchased in the Community Offering, currently
$175,000 of Common Stock; (2) one-tenth of one percent (.10%) of the total
offering of shares of Common Stock; or (3) fifteen times the product (rounded
down to the next whole number) obtained by multiplying the total number of
shares of Common Stock to be issued by a fraction of which the numerator is the
amount of the Eligible Account Holder's Qualifying Deposit (defined by the Plan
as any deposit account in the Bank with a balance of $50 or more as of September
30, 1996) and the denominator is the total amount of Qualifying Deposits of all
Eligible Account Holders, in each case on the Eligibility Record Date, subject
to the overall purchase limitation and exclusive of an increase in the shares
issued pursuant to an increase in the Estimated Price Range of up to 15%. See "
- -- Limitations on Common Stock Purchases."
In the event that Eligible Account Holders exercise subscription rights
for a number of shares of Conversion Stock in excess of the total number of such
shares eligible for subscription, the shares of Conversion Stock shall be
allocated among the subscribing Eligible Account Holders so as to permit each
subscribing Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation of Conversion
Stock equal to the lesser of 100 shares or the number of shares subscribed for
by the Eligible Account Holder. Any shares remaining after that allocation will
be allocated among the subscribing Eligible Account Holders whose subscriptions
remain unsatisfied in the proportion
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that the amount of the Qualifying Deposit of each Eligible Account Holder whose
subscription remains unsatisfied bears to the total amount of the Qualifying
Deposits of all Eligible Account Holders whose subscriptions remain unsatisfied.
If the amount so allocated exceeds the amount subscribed for by any one or more
Eligible Account Holders, the excess shall be reallocated (one or more times as
necessary) among those Eligible Account Holders whose subscriptions are still
not fully satisfied on the same principle until all available shares have been
allocated or all subscriptions satisfied..
To ensure proper allocation of stock, each Eligible Account Holder must
list on his subscription order form all accounts in which he has an ownership
interest. Failure to list an account could result in less shares being allocated
than if all accounts had been disclosed. The subscription rights of Eligible
Account Holders who are also Directors or Officers of the Bank or their
associates will be subordinated to the subscription rights of other Eligible
Account Holders to the extent attributable to increased deposits in the 12
months preceding September 30, 1996.
Priority 2: Employee Stock Ownership Plan. To the extent that there
are sufficient shares remaining after satisfaction of the subscriptions by
Eligible Account Holders, the ESOP will receive, without payment therefor,
second priority, nontransferable subscription rights to purchase, in the
aggregate, up to 10% of Common Stock issued in the Conversion, including shares
issued to the Foundation, and any increase in the number of shares of Common
Stock to be issued in the Conversion after the date hereof as a result of an
increase of up to 15% in the maximum of the Estimated Price Range. The ESOP
intends to purchase 8% of the shares to be issued in the Conversion, including
shares issued to the Foundation, or 330,480 shares and 447,120 shares, based on
the minimum and maximum of the Estimated Price Range, respectively.
Subscriptions by the ESOP will not be aggregated with shares of Common Stock
purchased directly by or which are otherwise attributable to any other
participants in the Subscription Offering, including subscriptions of any of the
Bank's directors, officers, employees or associates thereof. See "Management of
the Bank -- Other Benefit Plans -- Employee Stock Ownership Plan."
Priority 3: Supplemental Eligible Account Holders. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third priority,
nontransferable subscription rights to subscribe for in the Subscription
Offering up to the greater of the amount permitted to be purchased in the
Community Offering, currently $175,000 of Common Stock, one-tenth of one percent
(.10%) of the total offering of shares of Common Stock or fifteen times the
product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Common Stock to be issued by a fraction of which the
numerator is the amount of the Supplemental Eligible Account Holder's Qualifying
Deposit and the denominator is the total amount of Qualifying Deposits of all
Supplemental Eligible Account Holders, in each case on the Supplemental
Eligibility Record Date, subject to the overall purchase limitation and
exclusive of an increase in the shares issued pursuant to an increase in the
Estimated Price Range of up to 15%. See " -- Limitations on Common Stock
Purchases."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Conversion Stock in excess of the
total number of such shares eligible for subscription, the shares of Conversion
Stock shall be allocated among the subscribing Supplemental Eligible Account
Holders so as to permit each subscribing Supplemental Eligible Account Holder,
to the extent possible, to purchase a number of shares sufficient to make his or
her total allocation of Conversion Stock equal to the lesser of 100 shares or
the number of shares subscribed for by the Supplemental Eligible Account Holder.
Any shares remaining after that allocation will be allocated among the
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied in the proportion that the amount of the Qualifying Deposit
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of each Supplemental Eligible Account Holder whose subscription remains
unsatisfied bears to the total amount of the Qualifying Deposits of all
Supplemental Eligible Account Holders whose subscriptions remain unsatisfied. If
the amount so allocated exceeds the amount subscribed for by any one or more
Supplemental Eligible Account Holders, the excess shall be reallocated (one or
more times as necessary) among those Supplemental Eligible Account Holders whose
subscriptions are still not fully satisfied on the same principle until all
available shares have been allocated or all subscriptions satisfied.
To ensure proper allocation of stock, each Supplemental Eligible
Account Holder must list on his subscription order form all accounts in which he
has an ownership interest. Failure to list an account could result in less
shares being allocated than if all accounts had been disclosed. The subscription
rights received by Eligible Account Holders will be applied in partial
satisfaction to the subscription rights to be received as a Supplemental
Eligible Account Holder.
Priority 4: Other Members. To the extent that there are sufficient
shares remaining after satisfaction of subscriptions by the Eligible Account
Holders, the ESOP and the Supplemental Eligible Account Holders, each Other
Member will receive, without payment therefor, fourth priority nontransferable
subscription rights to subscribe for Common Stock in the Subscription Offering
up to the greater of the amount permitted to be purchased in the Community
Offering, currently $175,000 of Common Stock, or one-tenth of one percent (.10%)
of the total offering of shares of Common Stock, subject to the overall purchase
limitation and exclusive of an increase in shares issued pursuant to an increase
in the Estimated Price Range of up to 15%.
In the event that Other Members subscribe for a number of shares of
Conversion Stock which, when added to the shares of Conversion Stock subscribed
for by the Eligible Account Holders, the Employee Plans and the Supplemental
Eligible Account Holders is in excess of the total number of shares of
Conversion Stock being issued, the subscriptions of such Other Members will be
allocated among the subscribing Other Members so as to permit each subscribing
Other Member, to the extent possible, to purchase a number of shares sufficient
to make his or her total allocation of Conversion Stock equal to the lesser of
100 shares or the number of shares subscribed for by the Other Member. Any
shares remaining after that allocation will be allocated among the subscribing
Other Members whose subscriptions remain unsatisfied pro rata in the same
proportion that the number of votes of a subscribing Other Member on the Voting
Record Date bears to the total votes on the Voting Record Date of all
subscribing Other Members whose subscriptions remain unsatisfied. If the amount
so allocated exceeds the amount subscribed for by any one or more remaining
Other Members, the excess shall be reallocated (one or more times as necessary)
among those remaining Other Members whose subscriptions are still not fully
satisfied on the same principle until all available shares have been allocated
or all subscriptions satisfied.
Expiration Date for the Subscription Offering. The Subscription
Offering will expire on _______________, 1998, unless extended for up to 45 days
by the Bank or such additional periods with the approval of the OTS.
Subscription rights which have not been exercised prior to the Expiration Date
will become void.
The Bank will not execute orders until all shares of Common Stock have
been subscribed for or otherwise sold. If all shares have not been subscribed
for or sold within 45 days after the Expiration Date, unless such period is
extended with the consent of the OTS, all funds delivered to the Bank pursuant
to the Subscription Offering will be returned promptly to the subscribers with
interest and all withdrawal authorizations will be canceled. If an extension
beyond the 45 day period following the Expiration Date is granted, the Bank will
notify subscribers of the extension of time and of any rights of subscribers to
modify
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or rescind their subscriptions and have their funds returned promptly with
interest, and of the time period within which subscribers must affirmatively
notify the Bank of their intention to confirm, modify, or rescind their
subscription. If an affirmative response to any resolicitation is not received
by the Company from a subscriber, such order will be rescinded and all
subscription funds will be promptly returned with interest. Such extensions may
not go beyond _______________, 1998.
COMMUNITY OFFERING
To the extent that shares remain available for purchase after
satisfaction of all subscriptions of the Eligible Account Holders, the ESOP, the
Supplemental Eligible Account Holders and Other Members, the Bank has determined
to offer shares pursuant to the Plan to certain members of the general public
and may reserve a number of shares equal to the lesser of 25% of the Common
Stock offered or the Common Stock not subscribed for in the Subscription
Offering for institutional investors. Any excess of shares available will be
available for purchase by the general public, subject to the right of the
Company to accept or reject any such orders, in whole or in part, in their sole
discretion. Such persons, together with associates of and persons acting in
concert with such persons, may purchase up to $175,000 of Common Stock subject
to the maximum purchase limitation and exclusive of shares issued pursuant to an
increase in the Estimated Price Range by up to 15%. See " --Limitations on
Common Stock Purchases." This amount may be increased to up to a maximum of 5%
or decreased to less than $175,000 at the sole discretion of the Company and the
Bank. THE OPPORTUNITY TO SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE COMMUNITY
OFFERING CATEGORY IS SUBJECT TO THE RIGHT OF THE BANK AND THE COMPANY, IN ITS
SOLE DISCRETION, TO ACCEPT OR REJECT ANY SUCH ORDERS IN WHOLE OR IN PART EITHER
AT THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING THE
EXPIRATION DATE.
Subject to the foregoing, if the amount of stock remaining is
insufficient to fill the orders of subscribers after completion of the
Subscription Offering and the filling of institutional orders, such stock will
be allocated first to each subscriber whose order is accepted by the Bank, in an
amount equal to the lesser of 100 shares or the number of shares subscribed for
by each such subscriber, if possible. Thereafter, unallocated shares will be
allocated among the subscribers whose order remains unsatisfied on a 100 shares
per order basis until all such orders have been filled or the remaining shares
have been allocated.
PERSONS IN NONQUALIFIED STATES OR FOREIGN COUNTRIES
The Company and the Bank will make reasonable efforts to comply with
the securities laws of all states in the United States in which persons entitled
to subscribe for stock pursuant to the Plan reside. However, the Plan provides
that the Bank and the Company are not required to offer stock in the
Subscription Offering to any person who resides in a foreign country or resides
in a state of the United States with respect to which both of the following
apply: (i) a small number of persons otherwise eligible to subscribe for shares
of Common Stock reside in such state; and (ii) the Company or the Bank
determines that compliance with the securities laws of such state would be
impracticable for reasons of cost or otherwise, including but not limited to a
request that the Company and the Bank or their officers, directors or trustees
register as a broker, dealer, salesman or selling agent, under the securities
laws of such state, or a request to register or otherwise qualify the
subscription rights or Common Stock for sale or submit any filing with respect
thereto in such state. Where the number of persons eligible to subscribe for
shares in one state is small, the Bank and the Company will base their decision
as to whether or not to offer the Common Stock in such state on a number of
factors, including the size of accounts held by account holders in the state,
the cost of registering or
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qualifying the shares or the need to register the Company, its officers,
directors or employees as brokers, dealers or salesmen.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Bank and the Company have engaged Sandler O'Neill as a consultant
and financial advisor in connection with the offering of the Common Stock, and
Sandler O'Neill has agreed to use its best efforts to solicit subscriptions and
purchase orders for shares of Common Stock in the Offerings. Based upon
negotiations between the Bank and the Company concerning fee structure, Sandler
O'Neill will receive a fee equal to 1.25% of the aggregate Purchase Price of the
shares sold in the Subscription and Community Offerings, excluding shares
purchased by directors, officers, employees, and any immediate family member
thereof, and any employee benefit plan of the Company or Bank, including the
ESOP for which Sandler O'Neill will not receive a fee. In the event that a
selected dealers agreement is entered into in connection with a Syndicated
Community Offering, the Bank will pay a fee (to be negotiated at such time under
such agreement) to such selected dealers, any sponsoring dealers fees, and a
management fee to Sandler O'Neill of 1.25% for shares sold by a National
Association of Securities Dealers, Inc. member firms pursuant to a selected
dealers agreement; provided, however, that any fees payable to Sandler O'Neill
for Common Stock sold by them pursuant to such a selected dealers agreement
shall not exceed 1.25% of the Purchase Price and provided, further, however,
that the aggregate fees payable to Sandler O'Neill and the selected dealers will
not exceed 7% of the aggregate purchase price of the Common Stock sold by
selected dealers. Fees to Sandler O'Neill and to any other broker-dealer may be
deemed to be underwriting fees, and Sandler O'Neill and such broker-dealers may
be deemed to be underwriters. Notwithstanding the foregoing, in the event the
Offerings are not consummated or Sandler O'Neill ceases, under certain
circumstances after the subscription solicitation activities are commenced, to
provide assistance to the Company, Sandler O'Neill will be entitled to a fee for
its management advisory services in an amount to be agreed upon by the Bank and
Sandler O'Neill, and based upon the amount of services performed by Sandler
O'Neill. The Company and the Bank have agreed to indemnify Sandler O'Neill for
reasonable costs and expenses in connection with certain claims or liabilities,
including certain liabilities under the Securities Act. Sandler O'Neill has
received advances towards its fees totaling $50,000. Total marketing fees to
Sandler O'Neill are expected to be $414,500 and $568,700 at the minimum and the
maximum of the Estimated Price Range, respectively. See "Pro Forma Data" for the
assumptions used to arrive at these estimates.
Sandler O'Neill will perform proxy solicitation services, conversion
agent services and records management services for the Bank in the Conversion
and will receive a fee for these services of $20,000. Reasonable out-of-pocket
expenses shall not exceed $50,000.
Directors and executive officers of the Company and Bank may
participate in the solicitation of offers to purchase Common Stock. Questions of
prospective purchasers will be directed to executive officers or registered
representatives. Other employees of the Bank may participate in the Offering in
ministerial capacities or providing clerical work in effecting a sales
transaction. Such other employees have been instructed not to solicit offers to
purchase Common Stock or provide advice regarding the purchase of Common Stock.
The Company will rely on Rule 3a4-1 under the Exchange Act, and sales of Common
Stock will be conducted within the requirements of Rule 3a4-1, so as to permit
officers, directors and employees to participate in the sale of Common Stock. No
officer, director or employee of the Company or the Bank will be compensated in
connection with his participation by the payment of commissions or other
remuneration based either directly or indirectly on the transactions in the
Common Stock.
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PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION OFFERING
To ensure that each purchaser receives a prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the stock
order form and certification form will confirm receipt or delivery in accordance
with Rule 15c2-8. Stock order and certification forms will only be distributed
with a prospectus.
To purchase shares in the Offerings, an executed stock order form and
certification form with the required payment for each share subscribed for, or
with appropriate authorization for withdrawal from the Bank's deposit account
(which may be given by completing the appropriate blanks in the stock order
form), must be received by the Bank at any of its offices by ____ p.m., Eastern
time, on the Expiration Date. Stock order forms which are not received by such
time or are executed defectively or are received without full payment (or
appropriate withdrawal instructions) are not required to be accepted. In
addition, the Bank and Company are not obligated to accept orders submitted on
photocopied or facsimilied stock order forms and will not accept stock order
forms unaccompanied by an executed certification form. Notwithstanding the
foregoing, the Company shall have the right, in its sole discretion, to permit
institutional investors to submit irrevocable orders together with a legally
binding commitment for payment and to thereafter pay for the shares of Common
Stock for which they subscribe in the Community Offering at any time prior to 48
hours before the completion of the Conversion. The Company and the Bank have the
right to waive or permit the correction of incomplete or improperly executed
forms, but do not represent that they will do so. Once received, an executed
stock order form may not be modified, amended or rescinded without the consent
of the Bank unless the Conversion has not been completed within 45 days after
the end of the Subscription Offering, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (September 30,
1996) and/or the Supplemental Eligibility Record Date (December 31, 1997) and/or
the Voting Record Date (_______, 1998) must list all accounts on the stock order
form giving all names in each account and the account number.
Payment for subscriptions may be made (i) in cash if delivered in
person at any branch office of the Bank, (ii) by check, bank draft or money
order, or (iii) by authorization of withdrawal from deposit accounts maintained
with the Bank. No wire transfers will be accepted. Interest will be paid on
payments made by cash, check, bank draft or money order at the Bank's passbook
rate of interest from the date payment is received until the completion or
termination of the Conversion. Orders for Common Stock submitted by subscribers
in the Subscription Offering which aggregate $50,000 or more must be paid by
official or certified check or by withdrawal authorization from a deposit
account of the Bank. If payment is made by authorization of withdrawal from
deposit accounts, the funds authorized to be withdrawn from a deposit account
will continue to accrue interest at the contractual rates until completion or
termination of the Conversion, but a hold will be placed on such funds, thereby
making them unavailable to the depositor until completion or termination of the
Conversion.
If a subscriber authorizes the Bank to withdraw the amount of the
purchase price from his deposit account, the Bank will do so as of the effective
date of the Conversion. The Bank will waive any applicable penalties for early
withdrawal from certificate accounts. If the remaining balance in a certificate
account is reduced below the applicable minimum balance requirement at the time
that the funds actually are transferred
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under the authorization, the certificate will be canceled at the time of the
withdrawal, without penalty, and the remaining balance will earn interest at the
Bank's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the
ESOP will not be required to pay for the shares subscribed for at the time it
subscribes, but rather, may pay for such shares of Common Stock subscribed for
at the Purchase Price upon consummation of the Subscription Offering, if all
shares are sold, or upon consummation of the Community Offering or Syndicated
Community Offering if shares remain to be sold in such offerings; provided, that
there is in force from the time of its subscription until such time, a loan
commitment from an unrelated financial institution or the Company to lend to the
ESOP, at such time, the aggregate Purchase Price of the shares for which it
subscribed.
Owners of self-directed Individual Retirement Accounts ("IRAs") and
Qualified Plans may use the assets of such IRAs and Qualified Plans to purchase
shares of Common Stock in the Subscription Offering and/or Community Offering,
provided that such IRAs are not maintained at the Bank. Persons with
self-directed IRAs and Qualified Plans maintained at the Bank must have their
accounts transferred to an unaffiliated institution or broker to purchase shares
of Common Stock in the Subscription Offering and/or Community Offering. In
addition, the provisions of ERISA and IRS regulations require that officers,
directors and ten percent shareholders who use self-directed IRA funds and
Qualified Plans to purchase shares of Common Stock in the Subscription Offering
and/or Community Offering, make such purchases for the exclusive benefit of the
IRAs and Qualified Plans.
Certificates representing shares of Common Stock purchased will be
mailed to purchasers at the address specified in properly completed stock order
forms, as soon as practicable following consummation of the sale of all shares
of Common Stock. Any certificates returned as undeliverable will be disposed of
in accordance with applicable law.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the completion of the Conversion, the OTS conversion
regulations prohibit any person with subscription rights, including the Eligible
Account Holders, the ESOP, the Supplemental Eligible Account Holders and Other
Members of the Bank, from transferring or entering into any agreement or
understanding to transfer the legal or beneficial ownership of the subscription
rights issued under the Plan or the shares of Common Stock to be issued upon
their exercise. Such rights may be exercised only by the person to whom they are
granted and only for his account. Each person exercising such subscription
rights will be required to certify that he is purchasing shares solely for his
own account and that he has no agreement or understanding regarding the sale or
transfer of such shares. The regulations also prohibit any person from offering
or making an announcement of an offer or intent to make an offer to purchase
such subscription rights or shares of Common Stock prior to the completion of
the Conversion.
THE BANK AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES (INCLUDING FORFEITURE) IN THE EVENT THEY BECOME AWARE OF THE TRANSFER
OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE
TRANSFER OF SUCH RIGHTS.
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SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion, the Plan provides that, if feasible,
all shares of Common Stock not purchased in the Subscription and Community
Offerings, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed and managed by Sandler O'Neill acting as agent of the Company to
assist the Company and the Bank in the sale of the Common Stock. The Company and
the Bank have the right to reject orders in whole or in part in their sole
discretion in the Syndicated Community Offering. Neither Sandler O'Neill nor any
registered broker-dealer shall have any obligation to take or purchase any
shares of the Common Stock in the Syndicated Community Offering, however,
Sandler O'Neill has agreed to use its best efforts in the sale of shares in the
Syndicated Community Offering.
The price at which Common Stock is sold in the Syndicated Community
Offering will be determined as described above under " -- Stock Pricing."
Subject to overall purchase limitations, no person, together with any associate
or group of persons acting in concert, will be permitted to subscribe in the
Syndicated Community Offering for more than $175,000 of the Common Stock,
exclusive of an increase in shares issued pursuant to an increase in the
Estimated Price Range of up to 15%; provided, however, that shares of Common
Stock purchased in the Community Offering by any persons, together with
associates of or persons acting in concert with such persons, will be aggregated
with purchases in the Syndicated Community Offering and be subject to an overall
maximum purchase limitation of 1.0% of the shares offered, exclusive of an
increase in shares issued pursuant to an increase in the Estimated Price Range
by up to 15%.
Payments made in the form of a check, bank draft, money order or in
cash will earn interest at the Bank's passbook rate of interest from the date
such payment is actually received by the Bank until completion or termination of
the Conversion.
In addition to the foregoing, if a syndicate of broker-dealers
("selected dealers") is formed to assist in the Syndicated Community Offering, a
purchaser may pay for his shares with funds held by or deposited with a selected
dealer. If an order form is executed and forwarded to the selected dealer or if
the selected dealer is authorized to execute the order form on behalf of a
purchaser, the selected dealer is required to forward the order form and funds
to the Bank for deposit in a segregated account on or before noon of the
business day following receipt of the order form or execution of the order form
by the selected dealer. Alternatively, selected dealers may solicit indications
of interest from their customers to place orders for shares. Such selected
dealers shall subsequently contact their customers who indicated an interest and
seek their confirmation as to their intent to purchase. Those indicating an
intent to purchase shall execute order forms and forward them to their selected
dealer or authorize the selected dealer to execute such forms. The selected
dealer will acknowledge receipt of the order to its customer in writing on the
following business day and will debit such customer's account on the third
business day after the customer has confirmed his intent to purchase (the "debit
date") and on or before noon of the next business day following the debit date
will send order forms and funds to the Bank for deposit in a segregated account.
Although purchasers' funds are not required to be in their accounts with
selected dealers until the debit date in the event that such alternative
procedure is employed once a confirmation of an intent to purchase has been
received by the selected dealer, the purchaser has no right to rescind his
order.
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Certificates representing shares of Common Stock purchased, together
with any refund due, will be mailed to purchasers at the address specified in
the order form, as soon as practicable following consummation of the sale of the
Common Stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
The Syndicated Community Offering will terminate no more than 45 days
following the Subscription Expiration Date, unless extended by the Company with
the approval of the OTS. Such extensions may not be beyond _______________,
1998. See " -- Stock Pricing" above for a discussion of rights of subscribers,
if any, in the event an extension is granted.
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased during the Conversion:
(1) No less than 25 shares;
(2) Each Eligible Account Holder may subscribe for and purchase in
the Subscription Offering up to the greater of: 1) the amount
permitted to be purchased in the Community Offering, currently
$175,000 of Common Stock; 2) one-tenth of one percent (.10%) of
the total offering of shares of Common Stock; or 3) fifteen times
the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be
issued by a fraction of which the numerator is the amount of the
Qualifying Deposit of the Eligible Account Holder and the
denominator is the total amount of Qualifying Deposits of all
Eligible Account Holders, in each case on the Eligibility Record
Date subject to the overall maximum purchase limitation in (8)
below and exclusive of an increase in the total number of shares
issued due to an increase in the Estimated Price Range of up to
15%;
(3) The ESOP is permitted to purchase in the aggregate up to 10% of
the shares of Common Stock issued in the Conversion, including
shares issued to the Foundation, including shares issued in the
event of an increase in the Estimated Price Range of 15%, and
intends to purchase 8% of the shares of Common Stock issued in
the Conversion, including shares issued to the Foundation;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of: 1)
the amount permitted to be purchased in the Community Offering,
currently $175,000 of Common Stock; 2) one-tenth of one percent
(.10%) of the total offering of shares of Common Stock; or 3)
fifteen times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Common
Stock to be issued by a fraction of which the numerator is the
amount of the Qualifying Deposit of the Supplemental Eligible
Account Holder and the denominator is the total amount of
Qualifying Deposits of all Supplemental Eligible Account Holders,
in such case on the Supplemental Eligibility Record Date subject
to the overall maximum purchase limitation in (8) below and
exclusive of an increase in the total number of shares issued due
to an increase in the Estimated Price Range of up to 15%;
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(5) Each Other Member may subscribe for and purchase in the
Subscription Offering up to the greater of: 1) the amount
permitted to be purchased in the Community Offering, currently
$175,000 of Common Stock; or 2) one-tenth of one percent (.10%)
of the total offering of shares of Common Stock, in each case
subject to the overall maximum purchase limitation in (8) below
and exclusive of an increase in the total number of shares issued
due to an increase in the Estimated Price Range of up to 15%;
(6) Persons purchasing shares of Common Stock in the Community
Offering, together with associates of and groups of persons
acting in concert with such persons, may purchase in the
Community Offering up to $175,000 of Common Stock, subject to the
overall maximum purchase limitation in (8) below and exclusive of
an increase in the total number of shares issued due to an
increase in the Estimated Price Range of up to 15%;
(7) Persons purchasing shares of Common Stock in the Syndicated
Community Offering, together with associates of and persons
acting in concert with such persons, may purchase in the
Syndicated Offering up to $175,000 of Common Stock, subject to
the overall maximum purchase limitation in (8) below and
exclusive of an increase in the total number of shares issued due
to an increase in the Estimated Price Range of up to 15% and,
provided further that shares of Common Stock purchased in the
Community Offering by any persons, together with associates of or
persons acting in concert with such persons, will be aggregated
with purchases in the Syndicated Community Offering in applying
the $175,000 purchase limitation;
(8) Except for the ESOP, the overall maximum number of shares of
Common Stock subscribed for or purchased in all categories of the
Conversion by any person, together with associates of or persons
acting in concert with such persons, shall not exceed 1.0% of the
shares of Common Stock offered in the Conversion and exclusive of
an increase in the total number of shares issued due to an
increase in the Estimated Price Range of up to 15%; and
(9) No more than 30% of the total number of shares offered for sale
in the Conversion may be purchased by directors and officers of
the Bank and their associates in the aggregate, excluding
purchases by the ESOP.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
the Bank, both the individual amount permitted to be subscribed for and the
overall maximum purchase limitation may be increased to up to a maximum of 5% at
the sole discretion of the Company and the Bank. If such amount is increased,
subscribers for the maximum amount will be, and certain other large subscribers
in the sole discretion of the Bank may be, given the opportunity to increase
their subscriptions up to the then applicable limit. In addition, the Boards of
Directors of the Company and the Bank may, in their sole discretion, increase
the maximum purchase limitation referred to above up to 9.99%, provided that
orders for shares exceeding 5% of the shares being offering in the Subscription
and Community Offerings shall not exceed, in the aggregate, 10% of the shares
being offered in the Subscription and Community Offerings. Requests to purchase
additional shares of Common Stock under this provision will be determined by the
Boards of Directors and, if approved, allocated on a pro rata basis giving
priority in accordance with the priority rights set forth herein.
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The overall maximum purchase limitation may not be reduced to less than
1% but the individual amount permitted to be subscribed for may be reduced by
the Bank to less than $175,000, subject to paragraphs (2), (4) and (5) above
without the further approval of members or resolicitation of subscribers. An
individual Eligible Account Holder, Supplemental Eligible Account Holder or
Other Member may not purchase individually in the Subscription Offering the
overall maximum purchase limit of 1.0% of the shares offered, but may make such
purchase, together with associates of and persons acting in concert with such
person, by also purchasing in other available categories of the Conversion,
subject to availability of shares and the overall maximum purchase limit for
purchases in the Conversion.
In the event of an increase in the total number of shares offered in
the Conversion due to an increase in the Estimated Price Range of up to 15% (the
"Adjusted Maximum"), the additional shares will be allocated in the following
order or priority in accordance with the Plan: (i) to fill the ESOP's
subscription of 8% of the amount of Common Stock issued in the Conversion,
including shares issued to the Foundation, at the Adjusted Maximum number of
shares; (ii) in the event that there is an oversubscription by Eligible Account
Holders, to fill unsatisfied subscriptions of Eligible Account Holders,
exclusive of the Adjusted Maximum; (iii) in the event that there is an
oversubscription by Supplemental Eligible Account Holders, to fill unsatisfied
subscriptions of Supplemental Eligible Account Holders, exclusive of the
Adjusted Maximum; (iv) in the event that there is an oversubscription by Other
Members, to fill unsatisfied subscriptions of Other Members exclusive of the
Adjusted Maximum; and (v) to fill unsatisfied subscriptions in the Community
Offering to the extent possible, exclusive of the Adjusted Maximum, with
preference to institutional investors.
The term "associate" of a person is defined to mean: (i) any
corporation, partnership (other than the Bank or a majority-owned subsidiary of
the Bank) of which such person is an officer, partner or 10% stockholder; (ii)
any trust or other estate in which such person has a substantial beneficial
interest or serves as a trustee or in a similar fiduciary capacity; provided,
however, such term shall not include any employee stock benefit plan of the Bank
in which such person has a substantial beneficial interest or serves as a
trustee or in a similar fiduciary capacity; and (iii) any relative or spouse of
such person, or any relative of such spouse, who either has the same home as
such person or who is a director or officer of the Bank. Directors are not
treated as associates of each other solely because of their Board membership.
For a further discussion of limitations on purchases of a converting
institution's stock at the time of Conversion and subsequent to Conversion, see
"Management of the Bank -- Subscriptions by Executive Officers and Directors," "
- -- Certain Restrictions on Purchase or Transfer of Shares After Conversion" and
"Restrictions on Acquisition of the Company and the Bank."
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Bank in its
present mutual form, each depositor would receive his pro rata share of any
assets of the Bank remaining after payment of claims of all creditors (including
the claims of all depositors to the withdrawal value of their accounts). Each
depositor's pro rata share of such remaining assets would be in the same
proportion as the value of his deposit account was to the total value of all
deposit accounts in the Bank at the time of liquidation. After the Conversion,
each depositor, in the event of a complete liquidation, would have a claim as a
creditor of the same general priority as the claims of all other general
creditors of the Bank. However, except as described below, his claim would be
solely in the amount of the balance in his deposit account plus accrued
interest. He would not have an interest in the value or assets of the Bank above
that amount.
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The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the surplus and reserves of the Bank as of the date of its latest balance sheet
contained in the final Prospectus used in connection with the Conversion. Each
Eligible Account Holder and Supplemental Eligible Account Holder, if he were to
continue to maintain his deposit account at the Bank, would be entitled, on a
complete liquidation of the Bank after the Conversion, to an interest in the
liquidation account prior to any payment to the stockholders of the Bank. Each
Eligible Account Holder and Supplemental Eligible Account Holder would have an
initial interest in such liquidation account for each deposit account, including
regular accounts, transaction accounts such as NOW accounts, money market
deposit accounts, and certificates of deposit, with a balance of $50 or more
held in the Bank on September 30, 1996 and December 31, 1997, respectively. Each
Eligible Account Holder and Supplemental Eligible Account Holder will have a pro
rata interest in the total liquidation account based on the proportion that the
balance of his Qualifying Deposits on the Eligibility Record Date or
Supplemental Eligibility Record Date, respectively, bore to the total amount of
all Qualifying Deposits of all Eligible Account Holders and Supplemental
Eligible Account Holders in the Bank. For deposit accounts in existence at both
dates separate subaccounts shall be determined on the basis of the Qualifying
Deposits in such deposit accounts on such respective record dates.
If, however, on any annual closing date subsequent to the Eligibility
Record Date or Supplemental Eligibility Record Date, the amount of the
Qualifying Deposit of an Eligible Account Holder or Supplemental Eligible
Account Holder is less than the amount of the Qualifying Deposit of such
Eligible Account Holder or Supplemental Eligible Account Holder as of the
Eligibility Record Date or Supplemental Eligibility Record Date, respectively,
or less than the amount of the Qualifying Deposits as of the previous annual
closing date, then the interest in the liquidation account relating to such
Qualifying Deposit would be reduced from time to time by the proportion of any
such reduction, and such interest will cease to exist if such Qualifying Deposit
accounts are closed. In addition, no interest in the liquidation account would
ever be increased despite any subsequent increase in the related Qualifying
Deposit. Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders are satisfied would be
distributed to the Company as the sole stockholder of the Bank.
TAX ASPECTS
Consummation of the Conversion is expressly conditioned upon the
receipt by the Bank of either a favorable ruling from the IRS or an opinion with
respect to federal income taxation, and an opinion with respect to Pennsylvania
income taxation, to the effect that the Conversion will not be a taxable
transaction to the Company, the Bank, Eligible Account Holders, or Supplemental
Eligible Account Holders except as noted below. The federal and Pennsylvania
income tax consequences will remain unchanged in the event that a holding
company form of organization is not utilized.
No private ruling will be received from the IRS with respect to the
proposed Conversion. Instead, the Bank has received an opinion of its counsel,
Muldoon, Murphy & Faucette, to the effect that for federal income tax purposes,
among other matters: (i) the Bank's change in form from mutual to stock
ownership will constitute a reorganization under section 368(a)(1)(F) of the
Code and neither the Bank nor the Company will recognize any gain or loss as a
result of the Conversion; (ii) no gain or loss will be recognized to the Bank or
the Company upon the purchase of the Bank's capital stock by the Company or to
the Company upon the purchase of its Common Stock in the Conversion; (iii) no
gain or loss will be recognized by Eligible Account Holders or Supplemental
Eligible Account Holders upon the issuance to them of Deposit Accounts
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in the Bank in its stock form plus their interests in the liquidation account in
exchange for their deposit accounts in the Bank; (iv) the tax basis of the
depositors' accounts in the Bank immediately after the Conversion will be the
same as the basis of their deposit accounts immediately prior to the Conversion;
(v) the tax basis of each Eligible Account Holder's and Supplemental Eligible
Account Holder's interest in the liquidation account will be zero; (vi) no gain
or loss will be recognized by Eligible Account Holders or Supplemental Eligible
Account Holders upon the distribution to them of nontransferable subscription
rights to purchase shares of the Common Stock, provided that the amount to be
paid for the Common Stock is equal to the fair market value of such stock; and
(vii) the tax basis to the stockholders of the Common Stock of the Company
purchased in the Conversion will be the amount paid therefor and the holding
period for the shares of Common Stock purchased by such persons will begin on
the date on which their subscription rights are exercised. KPMG Peat Marwick LLP
has opined that the Conversion will not be a taxable transaction to the Company,
the Bank, Eligible Account Holders or Supplemental Eligible Account Holders for
Pennsylvania income tax purposes. Certain portions of both the federal and the
state income tax opinions are based upon the assumption that the subscription
rights issued in connection with the Conversion will have no value.
Unlike private rulings, an opinion of counsel or an opinion of an
independent accountant is not binding on the IRS and the IRS could disagree with
conclusions reached therein. In the event of such disagreement, there can be no
assurance that the IRS would not prevail in a judicial or administrative
proceeding. The Bank has agreed to a limitation on the liability of KPMG Peat
Marwick LLP to it solely as a result of, and to indemnify KPMG Peat Marwick LLP
solely in connection with, certain claims or liabilities relating to its
Pennsylvania income tax opinion, except to the extent determined to have
resulted from professional negligence or intentional or deliberate misconduct.
Keller has issued an opinion stating that, pursuant to its valuation,
Keller is of the opinion that the subscription rights do not have any value,
based on the fact that such rights are acquired by the recipients without cost,
are nontransferable and of short duration, and afford the recipients the right
only to purchase the Common Stock at a price equal to its estimated fair market
value, which will be the same price as the Purchase Price for the shares of
Common Stock sold in the Community Offering. Such valuation is not binding on
the IRS. If the subscription rights granted to Eligible Account Holders or
Supplemental Eligible Account Holders are deemed to have an ascertainable value,
receipt of such rights could be taxable to those Eligible Account Holders or
Supplemental Eligible Account Holders who receive and/or exercise the
subscription rights in an amount equal to such value and the Bank could
recognize gain on such distribution. Eligible Account Holders and Supplemental
Eligible Account Holders are encouraged to consult with their own tax advisor as
to the tax consequences in the event that such subscription rights are deemed to
have an ascertainable value.
INTERPRETATION AND AMENDMENT OF THE PLAN OF CONVERSION
To the extent permitted by law, all interpretations of the Plan by the
Board of Directors of the Bank will be final. The Plan provides that the Bank's
Board of Directors shall have the discretion to interpret and apply the
provisions of the Plan to particular circumstances and that such interpretation
or application shall be final. This includes any and all interpretations,
applications and determinations made by the Board of Directors on the basis of
such information and assistance as was then reasonably available for such
purpose.
The Plan provides that, if deemed necessary or desirable by the Board
of Directors, the Plan may be substantively amended at any time prior to
solicitation of proxies from members to vote on the Plan by a two-thirds vote of
the Bank's Board of Directors. After submission of the proxy materials to the
members, the Plan may be amended by a two-thirds vote of the Bank's Board of
Directors at any time prior to the Special Meeting with the concurrence of the
OTS. The Plan may be amended at any time after the approval of
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members with the approval of the OTS and no further approval of the members will
be necessary unless otherwise required by the OTS. By adoption of the Plan, the
Bank's members will be deemed to have authorized amendment of the Plan under the
circumstances described above.
The establishment of the Foundation will be considered as a separate
matter from approval of the Plan of Conversion. If the Bank's members approve
the Plan of Conversion, but not the creation of the Foundation, the Bank intends
to complete the Conversion without the Foundation. Failure to approve the
establishment of the Foundation may materially increase the pro forma market
value of the Common Stock since the Valuation Range, as set forth herein, takes
into account the dilutive impact of the issuance of shares to the Foundation. In
such an event, the Bank may establish a new Estimated Price Range and commence a
resolicitation of subscribers. In the event of a resolicitation, unless an
affirmative response is received within a specified period of time, all funds
will be promptly returned to investors, as described elsewhere herein. See " --
Stock Pricing."
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION
All shares of Common Stock purchased in connection with the Conversion
by a director or an officer of the Bank will be subject to a restriction that
the shares not be sold for a period of one year following the Conversion, except
in the event of the death of such director or officer. Each certificate for
restricted shares will bear a legend giving notice of this restriction on
transfer, and instructions will be issued to the effect that any transfer within
such time period of any certificate or record ownership of such shares other
than as provided above is a violation of the restriction. Any shares of Common
Stock issued at a later date as a stock dividend, stock split, or otherwise,
with respect to such restricted stock will be subject to the same restrictions.
The directors and officers of the Bank will also be subject to the insider
trading rules promulgated pursuant to the Exchange Act and any other applicable
requirements of the federal securities laws.
Purchases of outstanding shares of Common Stock of the Company by
directors, officers (or any person who was an officer or director of the Bank
after adoption of the Plan of Conversion) and their associates during the
three-year period following Conversion may be made only through a broker or
dealer registered with the SEC, except with the prior written approval of the
OTS. This restriction does not apply, however, to negotiated transactions
involving more than 1.0% of the Company's outstanding Common Stock or to the
purchase of stock pursuant to any stock option plan to be established after the
Conversion.
Unless approved by the OTS, the Company, pursuant to OTS regulations,
will be prohibited from repurchasing any shares of the Common Stock for three
years after the Conversion except: (i) for an offer to all stockholders on a pro
rata basis; or (ii) for the repurchase of qualifying shares of a director.
Notwithstanding the foregoing, beginning one year following completion of the
Conversion the Company may repurchase its Common Stock so long as: (i) the
repurchases within the following two years are part of an open-market program
not involving greater than 5% of its outstanding capital stock during a
twelve-month period; (ii) the repurchases do not cause the Company to become
undercapitalized; and (iii) the Company provides to the Regional Director of the
OTS no later than 10 days prior to the commencement of a repurchase program
written notice containing a full description of the program to be undertaken and
such program is not disapproved by the Regional Director. In addition, under
current OTS policies, repurchases may be allowed in the first year following
Conversion and in amounts greater than 5% in the second and third years
following Conversion, provided there are valid and compelling business reasons
for such repurchases and the OTS approves such repurchases.
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RESTRICTIONS ON ACQUISITION OF THE COMPANY
AND THE BANK
GENERAL
The Bank's Plan of Conversion provides for the Conversion of the Bank
from the mutual to the stock form of organization and, in connection therewith,
a new Federal Stock Charter and Bylaws to be adopted by members of the Bank. The
Plan also provides for the concurrent formation of a holding company, which form
of organization may or may not be utilized at the option of the Board of
Directors of the Bank. See "The Conversion --General." In the event that the
holding company form of organization is utilized, as described below, certain
provisions in the Company's Certificate of Incorporation and Bylaws and in its
management remuneration entered into in connection with the Conversion, together
with provisions of Delaware corporate law, may have anti-takeover effects. In
the event that the holding company form of organization is not utilized, the
Bank's Stock Charter and Bylaws and management remuneration entered into in
connection with the Conversion may have anti-takeover effects as described
below. In addition, regulatory restrictions may make it difficult for persons or
companies to acquire control of either the Company or the Bank.
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
A number of provisions of the Company's Certificate of Incorporation
and Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of the material
provisions of the Company's Certificate of Incorporation and Bylaws and certain
other statutory and regulatory provisions relating to stock ownership and
transfers, the Board of Directors and business combinations, which might be
deemed to have a potential "anti-takeover" effect. These provisions may have the
effect of discouraging a future takeover attempt which is not approved by the
Board of Directors but which individual Company stockholders may deem to be in
their best interests or in which shareholders may receive a substantial premium
for their shares over then current market prices. As a result, stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so. Such provisions will also render the removal of the current Board of
Directors or management of the Company more difficult. The following description
of certain of the provisions of the Certificate of Incorporation and Bylaws of
the Company is necessarily general and reference should be made in each case to
such Certificate of Incorporation and Bylaws, which are incorporated herein by
reference. See "Additional Information" as to how to obtain a copy of these
documents.
Limitation on Voting Rights. The Certificate of Incorporation of the
Company provides that in no event shall any record owner of any outstanding
Common Stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. Beneficial ownership is determined pursuant
to Rule 13d-3 of the General Rules and Regulations promulgated pursuant to the
Exchange Act, and includes shares beneficially owned by such person or any of
his affiliates (as defined in the Certificate of Incorporation), shares which
such person or his affiliates have the right to acquire upon the exercise of
conversion rights or options and shares as to which such person and his
affiliates have or share investment or voting power, but shall not include
shares beneficially owned by the ESOP or directors, officers and employees of
the Bank or Company or shares that are subject to a revocable proxy and that are
not otherwise beneficially owned, or deemed by the Company to be beneficially
owned, by such person and his affiliates. The Certificate of Incorporation of
the Company further provides
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that this provision limiting voting rights may only be amended upon the vote of
80% of the outstanding shares of voting stock (after giving effect to the
limitation on voting rights).
Board of Directors. The Board of Directors of the Company is divided
into three classes, each of which shall contain approximately one-third of the
whole number of members of the Board. Each class shall serve a staggered term,
with approximately one-third of the total number of directors being elected each
year. The Company's Certificate of Incorporation and Bylaws provide that the
size of the Board shall be determined by a majority of the directors. The
Certificate of Incorporation and the Bylaws provide that any vacancy occurring
in the Board, including a vacancy created by an increase in the number of
directors or resulting from death, resignation, retirement, disqualification,
removal from office or other cause, shall be filled for the remainder of the
unexpired term exclusively by a majority vote of the directors then in office.
The classified Board is intended to provide for continuity of the Board of
Directors and to make it more difficult and time consuming for a stockholder
group to fully use its voting power to gain control of the Board of Directors
without the consent of the incumbent Board of Directors of the Company. The
Certificate of Incorporation of the Company provides that a director may be
removed from the Board of Directors prior to the expiration of his term only for
cause, upon the vote of 80% of the outstanding shares of voting stock.
In the absence of these provisions, the vote of the holders of a
majority of the shares could remove the entire Board, with or without cause, and
replace it with persons of such holders' choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Company may be called
only by the Board of Directors of the Company. The Certificate of Incorporation
also provides that any action required or permitted to be taken by the
stockholders of the Company may be taken only at an annual or special meeting
and prohibits stockholder action by written consent in lieu of a meeting.
Authorized Shares. The Certificate of Incorporation authorizes the
issuance of 16,000,000 shares of Common Stock and 2,000,000 shares of Preferred
Stock. The shares of Common Stock and Preferred Stock were authorized in an
amount greater than that to be issued in the Conversion to provide the Company's
Board of Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and
employee Stock Options. However, these additional authorized shares may also be
used by the Board of Directors consistent with its fiduciary duty to deter
future attempts to gain control of the Company. The Board of Directors also has
sole authority to determine the terms of any one or more series of Preferred
Stock, including voting rights, conversion rates, and liquidation preferences.
As a result of the ability to fix voting rights for a series of Preferred Stock,
the Board has the power, to the extent consistent with its fiduciary duty, to
issue a series of Preferred Stock to persons friendly to management in order to
attempt to block a post-tender offer merger or other transaction by which a
third party seeks control, and thereby assist management to retain its position.
The Company's Board of Directors currently has no plans for the issuance of
additional shares, other than the issuance of additional shares pursuant to the
terms of the Stock Program and upon exercise of Stock Options to be issued
pursuant to the terms of the Stock Option Plan or Master Stock-Based Benefit
Plan, all of which are to be established and presented to stockholders at the
first annual meeting after the Conversion.
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Stockholder Vote Required to Approve Business Combinations with
Principal Stockholders. The Certificate of Incorporation requires the approval
of the holders of at least 80% of the Company's outstanding shares of voting
stock to approve certain "Business Combinations," as defined therein, and
related transactions. Under Delaware law, absent this provision, Business
Combinations, including mergers, consolidations and sales of all or
substantially all of the assets of a corporation must, subject to certain
exceptions, be approved by the vote of the holders of only a majority of the
outstanding shares of Common Stock of the Company and any other affected class
of stock. Under the Certificate of Incorporation, at least 80% approval of
shareholders is required in connection with any transaction involving an
Interested Stockholder (as defined below) except (i) in cases where the proposed
transaction has been approved in advance by a majority of those members of the
Company's Board of Directors who are unaffiliated with the Interested
Stockholder and were directors prior to the time when the Interested Stockholder
became an Interested Stockholder or (ii) if the proposed transaction meets
certain conditions set forth therein which are designed to afford the
shareholders a fair price in consideration for their shares in which case, if a
stockholder vote is required, approval of only a majority of the outstanding
shares of voting stock would be sufficient. The term "Interested Stockholder" is
defined to include any individual, corporation, partnership or other entity
(other than the Company or its subsidiary) which owns beneficially or controls,
directly or indirectly, 10% or more of the outstanding shares of voting stock of
the Company. This provision of the Certificate of Incorporation applies to any
"Business Combination," which is defined to include (i) any merger or
consolidation of the Company or any of its subsidiaries with or into any
Interested Stockholder or Affiliate (as defined in the Certificate of
Incorporation) of an Interested Stockholder; (ii) any sale, lease, exchange,
mortgage, pledge, transfer, or other disposition to or with any Interested
Stockholder or Affiliate of 25% or more of the assets of the Company or combined
assets of the Company and its subsidiary; (iii) the issuance or transfer to any
Interested Stockholder or its Affiliate by the Company (or any subsidiary) of
any securities of the Company in exchange for any assets, cash or securities the
value of which equals or exceeds 25% of the fair market value of the Common
Stock of the Company; (iv) the adoption of any plan for the liquidation or
dissolution of the Company proposed by or on behalf of any Interested
Stockholder or Affiliate thereof; and (v) any reclassification of securities,
recapitalization, merger or consolidation of the Company which has the effect of
increasing the proportionate share of Common Stock or any class of equity or
convertible securities of the Company owned directly or indirectly by an
Interested Stockholder or Affiliate thereof. The directors and executive
officers of the Bank are purchasing in the aggregate approximately 3.35% of the
shares of the Common Stock to be issued in the Conversion, including share to be
issued to the Foundation, at the maximum of the Estimated Price Range. In
addition, the ESOP intends to purchase 8% of the Common Stock issued in
connection with the Conversion including shares issued to the Foundation.
Additionally, if at a meeting of stockholders following the Conversion
stockholder approval of the proposed Stock-Based Incentive Plan is received, the
Company expects to acquire 4% of the Common Stock issued in connection with the
Conversion, including shares issued to the Foundation, on behalf of the
Stock-Based Incentive Plan and expects to issue options to purchase up to 10% of
the Common Stock issued in connection with the Conversion, including shares
issued to the Foundation, under the Stock-Based Incentive Plan to directors and
executive officers. As a result, at the maximum of the Estimated Price Range,
assuming the Stock-Based Incentive Plan is approved by Stockholders, directors,
executive officers and employees have the potential to control the voting of
approximately 23% of the Company's Common Stock, if the shares held by the
Foundation and the ESOP are aggregated with the shares purchased in the
Conversion by management and acquired for award under the Stock-Based Incentive
Plan (without giving effect to any exercise of options granted under the
Stock-Based Incentive Plan), thereby enabling them to prevent the approval of
the transactions requiring the approval of at least 80% of the Company's
outstanding shares of voting stock described hereinabove.
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Evaluation of Offers. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating any
offer of another "Person" (as defined therein) to (i) make a tender or exchange
offer for any equity security of the Company, (ii) merge or consolidate the
Company with another corporation or entity, or (iii) purchase or otherwise
acquire all or substantially all of the properties and assets of the Company,
may, in connection with the exercise of its judgment in determining what is in
the best interest of the Company, the Bank and the stockholders of the Company,
give due consideration to all relevant factors, including, without limitation,
the social and economic effects of acceptance of such offer on the Company's
customers and the Bank's present and future account holders, borrowers and
employees; on the communities in which the Company and the Bank operate or are
located; and on the ability of the Company to fulfill its corporate objectives
as a savings and loan holding company and on the ability of the Bank to fulfill
the objectives of a federally-chartered stock savings bank under applicable
statutes and regulations. By having these standards in the Certificate of
Incorporation of the Company, the Board of Directors may be in a stronger
position to oppose such a transaction if the Board concludes that the
transaction would not be in the best interest of the Company, even if the price
offered is significantly greater than the then market price of any equity
security of the Company.
Amendment of Certificate of Incorporation and Bylaws. Amendments to the
Company's Certificate of Incorporation must be approved by a majority vote of
its Board of Directors and also by a majority of the outstanding shares of its
voting stock; provided, however, that an affirmative vote of at least 80% of the
outstanding voting stock entitled to vote (after giving effect to the provision
limiting voting rights) is required to amend or repeal certain provisions of the
Certificate of Incorporation, including the provision limiting voting rights,
the provisions relating to approval of certain business combinations, calling
special meetings, the number and classification of directors, director and
officer indemnification by the Company and amendment of the Company's Bylaws and
Certificate of Incorporation. The Company's Bylaws may be amended by its Board
of Directors, or by a vote of 80% of the total votes eligible to be voted at a
duly constituted meeting of stockholders.
Certain Bylaw Provisions. The Bylaws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a stockholder meeting to give at least 90
days advance notice to the Secretary of the Company. The notice provision
requires a stockholder who desires to raise new business to provide certain
information to the Company concerning the nature of the new business, the
stockholder and the stockholder's interest in the business matter. Similarly, a
stockholder wishing to nominate any person for election as a director must
provide the Company with certain information concerning the nominee and the
proposing stockholder.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AND MANAGEMENT REMUNERATION ADOPTED IN CONVERSION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its Board of Directors. The
provisions of the Employment Agreements, CIC Agreements, Employee Severance
Compensation Plan, Stock Program, Stock Option Plan or Master Stock-Based
Benefit Plan to be established may also discourage takeover attempts by
increasing the costs to be incurred by the Bank and the Company in the event of
a takeover. See "Management of the Bank -- Employment Agreements."
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The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation, Bylaws and management remuneration plans to be
established are in the best interest of the Company and its stockholders. An
unsolicited non-negotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of the Company and its
stockholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts. It is also the Board of Directors'
view that these provisions should not discourage persons from proposing a merger
or other transaction at a price that reflects the true value of the Company and
that otherwise is in the best interest of all stockholders.
DELAWARE CORPORATE LAW
The state of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Section 203 of the Delaware General Corporate Law
("Section 203"), is intended to discourage certain takeover practices by
impeding the ability of a hostile acquiror to engage in certain transactions
with the target company.
In general, Section 203 provides that a "Person" (as defined therein)
who owns 15% or more of the outstanding voting stock of a Delaware corporation
(an "Interested Stockholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such "Person" became an Interested Stockholder. The
term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
an Interested Stockholder, the Board of Directors approved either the business
combination or the transaction which resulted in the stockholder becoming an
Interested Stockholder; (ii) any business combination involving a person who
acquired at least 85% of the outstanding voting stock in the transaction in
which he became an Interested Stockholder, with the number of shares outstanding
calculated without regard to those shares owned by the corporation's directors
who are also officers and by certain employee stock plans; (iii) any business
combination with an Interested Stockholder that is approved by the Board of
Directors and by a two-thirds vote of the outstanding voting stock not owned by
the Interested Stockholder; and (iv) certain business combinations that are
proposed after the corporation had received other acquisition proposals and
which are approved or not opposed by a majority of certain continuing members of
the Board of Directors. A corporation may exempt itself from the requirements of
the statute by adopting an amendment to its Certificate of Incorporation or
Bylaws electing not to be governed by Section 203. At the present time, the
Board of Directors does not intend to propose any such amendment.
RESTRICTIONS IN THE BANK'S NEW CHARTER AND BYLAWS
Although the Board of Directors of the Bank is not aware of any effort
that might be made to obtain control of the Bank after the Conversion, the Board
of Directors believes that it is appropriate to adopt certain provisions
permitted by federal regulations to protect the interests of the converted Bank
and its stockholders from any hostile takeover. Such provisions may, indirectly,
inhibit a change in control of the Company, as the Bank's sole stockholder. See
"Risk Factors -- Certain Anti-Takeover Provisions."
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The Bank's Federal Stock Charter will contain a provision whereby the
acquisition of or offer to acquire beneficial ownership of more than 10% of the
issued and outstanding shares of any class of equity securities of the Bank by
any person (i.e., any individual, corporation, group acting in concert, trust,
partnership, joint stock company or similar organization), either directly or
through an affiliate thereof, will be prohibited for a period of five years
following the date of completion of the Conversion. Any stock in excess of 10%
acquired in violation of the Federal Stock Charter provision will not be counted
as outstanding for voting purposes. This limitation shall not apply to any
transaction in which the Bank forms a holding company without a change in the
respective beneficial ownership interests of its stockholders other than
pursuant to the exercise of any dissenter or appraisal rights. In the event that
holders of revocable proxies for more than 10% of the shares of the Common Stock
of the Company seek, among other things, to elect one-third or more of the
Company's Board of Directors, to cause the Company's stockholders to approve the
acquisition or corporate reorganization of the Company or to exert a continuing
influence on a material aspect of the business operations of the Company, which
actions could indirectly result in a change in control of the Bank, the Board of
Directors of the Bank will be able to assert this provision of the Bank's
Federal Stock Charter against such holders. Although the Board of Directors of
the Bank is not currently able to determine when and if it would assert this
provision of the Bank's Federal Stock Charter, the Board of Directors, in
exercising its fiduciary duty, may assert this provision if it were deemed to be
in the best interests of the Bank, the Company and its stockholders. It is
unclear, however, whether this provision, if asserted, would be successful
against such persons in a proxy contest which could result in a change in
control of the Bank indirectly through a change in control of the Company.
Finally, for five years, stockholders will not be permitted to call a special
meeting of stockholders relating to a change of control of the Bank or a charter
amendment or to cumulate their votes in the election of directors. Furthermore,
the staggered terms of the Board of Directors could have an anti-takeover effect
by making it more difficult for a majority of shares to force an immediate
change in the Board of Directors since only one-third of the Board is elected
each year. The purpose of these provisions is to assure stability and continuity
of management of the Bank in the years immediately following the Conversion.
Although the Bank has no arrangements, understandings or plans at the
present time, except as described in "Description of Capital Stock of the
Company -- Preferred Stock," for the issuance or use of the shares of
undesignated Preferred Stock proposed to be authorized, the Board of Directors
believes that the availability of such shares will provide the Bank with
increased flexibility in structuring possible future financings and acquisitions
and in meeting other corporate needs which may arise. In the event of a proposed
merger, tender offer or other attempt to gain control of the Bank of which
management does not approve, it might be possible for the Board of Directors to
authorize the issuance of one or more series of Preferred Stock with rights and
preferences which could impede the completion of such a transaction. An effect
of the possible issuance of such Preferred Stock, therefore, may be to deter a
future takeover attempt. The Board of Directors does not intend to issue any
Preferred Stock except on terms which the Board deems to be in the best interest
of the Bank and its then existing stockholders.
REGULATORY RESTRICTIONS
The Plan of Conversion prohibits any person, prior to the completion of
the Conversion, from transferring, or from entering into any agreement or
understanding to transfer, to the account of another, legal or beneficial
ownership of the subscription rights issued under the Plan or the Common Stock
to be issued upon their exercise. The Plan also prohibits any person, prior to
the completion of the Conversion, from offering, or making an announcement of an
offer or intent to make an offer, to purchase such subscription rights or Common
Stock.
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For three years following the Conversion, OTS regulations prohibit any
person from acquiring or making an offer to acquire more than 10% of the stock
of any converted savings institution, except for: (i) offers that, if
consummated, would not result in the acquisition by such person during the
preceding 12-month period of more than 1% of such stock; (ii) offers for up to
25% in the aggregate by the ESOP or other tax qualified plans of the Bank or the
Company; or (iii) offers which are not opposed by the Board of Directors of the
Bank and which receive the prior approval of the OTS. Such prohibition is also
applicable to the acquisition of the stock of the Company. Such acquisition may
be disapproved by the OTS if it is found, among other things, that the proposed
acquisition (a) would frustrate the purposes of the provisions of the
regulations regarding conversions; (b) would be manipulative or deceptive; (c)
would subvert the fairness of the conversion; (d) would be likely to result in
injury to the savings institution; (e) would not be consistent with economical
home financing; (f) would otherwise violate law or regulation; or (g) would not
contribute to the prudent deployment of the savings institution's conversion
proceeds. In the event that any person, directly or indirectly, violates this
regulation, the securities beneficially owned by such person in excess of 10%
shall not be counted as shares entitled to vote and shall not be voted by any
person or counted as voting shares in connection with any matters submitted to a
vote of stockholders. The definition of beneficial ownership for this regulation
extends to persons holding revocable or irrevocable proxies for the Company's
stock under circumstances that give rise to a conclusive or rebuttable
determination of control under the OTS regulations.
In addition, any proposal to acquire 10% of any class of equity
security of the Company generally would be subject to approval by the OTS under
the Change in Bank Control Act. The OTS requires all persons seeking control of
a savings institution and, therefore, indirectly its holding company, to obtain
regulatory approval prior to offering to obtain control. Federal law generally
provides that no "person," acting directly or indirectly or through or in
concert with one or more other persons, may acquire directly or indirectly
"control," as that term is defined in OTS regulations, of a federally-insured
savings institution without giving at least 60 days' written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person. Such change in control restrictions on the acquisition
of holding company stock are not limited to three years after conversion but
will apply for as long as the regulations are in effect. Persons holding
revocable or irrevocable proxies may be deemed to be beneficial owners of such
securities under OTS regulations and therefore prohibited from voting all or the
portion of such proxies in excess of the 10% aggregate beneficial ownership
limit. Such regulatory restrictions may prevent or inhibit proxy contests for
control of the Company or the Bank which have not received prior regulatory
approval.
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DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 16,000,000 shares of Common Stock
having a par value of $0.01 per share and 2,000,000 shares of preferred stock
having a par value of $0.01 per share (the "Preferred Stock"). Based on the sale
of Common Stock in connection with the Conversion and issuance of authorized but
unissued Common Stock in an amount equal to 8.0% of the Common stock sold in the
Conversion, the Company currently expects to issue up to 5,589,000 shares of
Common Stock (or 6,427,350 in the event of an increase of 15% in the Estimated
Price Range) and no shares of Preferred Stock in the Conversion. Except as
discussed above in "Restriction on Acquisition of the Company and the Bank,"
each share of the Company's Common Stock will have the same relative rights as,
and will be identical in all respects with, each other share of Common Stock.
Upon payment of the Purchase Price for the Common Stock, in accordance with the
Plan, all such stock will be duly authorized, fully paid and non-assessable.
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NON-WITHDRAWABLE
CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY
THE FDIC.
COMMON STOCK
Dividends. The Company can pay dividends out of statutory surplus or
from certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to limitations which are imposed
by law and applicable regulation. See "Dividend Policy" and "Regulation." The
holders of Common Stock of the Company will be entitled to receive and share
equally in such dividends as may be declared by the Board of Directors of the
Company out of funds legally available therefor. If the Company issues Preferred
Stock, the holders thereof may have a priority over the holders of the Common
Stock with respect to dividends.
Voting Rights. Upon Conversion, the holders of Common Stock of the
Company will possess exclusive voting rights in the Company. They will elect the
Company's Board of Directors and act on such other matters as are required to be
presented to them under Delaware law or the Company's Certificate of
Incorporation or as are otherwise presented to them by the Board of Directors.
Except as discussed in "Restrictions on Acquisition of the Company and the
Bank," each holder of Common Stock will be entitled to one vote per share and
will not have any right to cumulate votes in the election of directors. If the
Company issues Preferred Stock, holders of the Preferred Stock may also possess
voting rights. Certain matters require an 80% shareholder vote. See
"Restrictions on Acquisition of the Company and the Bank."
As a federal mutual savings and loan association, corporate powers and
control of the Bank are vested in its Board of Directors, who elect the officers
of the Bank and who fill any vacancies on the Board of Directors as it exists
upon Conversion. Subsequent to Conversion, voting rights will be vested
exclusively in the owners of the shares of capital stock of the Bank, which will
be the Company, and voted at the direction of the Company's Board of Directors.
Consequently, the holders of the Common Stock will not have direct control of
the Bank.
133
<PAGE> 184
Liquidation. In the event of any liquidation, dissolution or winding up
of the Bank, the Company, as holder of the Bank's capital stock, would be
entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the special liquidation
account to Eligible Account Holders and Supplemental Eligible Account Holders
(see "The Conversion -- Liquidation Rights"), all assets of the Bank available
for distribution. In the event of liquidation, dissolution or winding up of the
Company, the holders of its Common Stock would be entitled to receive, after
payment or provision for payment of all its debts and liabilities, all of the
assets of the Company available for distribution. If Preferred Stock is issued,
the holders thereof may have a priority over the holders of the Common Stock in
the event of liquidation or dissolution.
Preemptive Rights. Holders of the Common Stock of the Company will not
be entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without stockholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights which could dilute the
voting strength of the holders of the Common Stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
DESCRIPTION OF CAPITAL STOCK OF THE BANK
GENERAL
The Federal Stock Charter of the Bank, to be effective upon the
Conversion, authorizes the issuance of capital stock consisting of 16,000,000
shares of common stock, par value $1.00 per share, and 2,000,000 shares of
preferred stock, par value $1.00 per share, which preferred stock may be issued
in series and classes having such rights, preferences, privileges and
restrictions as the Board of Directors may determine. Each share of Common Stock
of the Bank will have the same relative rights as, and will be identical in all
respects with, each other share of common stock. After the Conversion, the Board
of Directors will be authorized to approve the issuance of Common Stock up to
the amount authorized by the Federal Stock Charter without the approval of the
Bank's stockholders. Assuming that the holding company form of organization is
utilized, all of the issued and outstanding common stock of the Bank will be
held by the Company as the Bank's sole stockholder. THE CAPITAL STOCK OF THE
BANK WILL REPRESENT NON-WITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF AN
INSURABLE TYPE, AND WILL NOT BE INSURED BY THE FDIC.
COMMON STOCK
Dividends. The holders of the Bank's common stock will be entitled to
receive and to share equally in such dividends as may be declared by the Board
of Directors of the Bank out of funds legally available therefor. See "Dividend
Policy" for certain restrictions on the payment of dividends and "Federal and
State Taxation --Federal Taxation" for a discussion of the consequences of the
payment of cash dividends from income appropriated to bad debt reserves.
134
<PAGE> 185
Voting Rights. Immediately after the Conversion, the holders of the
Bank's common stock will possess exclusive voting rights in the Bank. Each
holder of shares of common stock will be entitled to one vote for each share
held, subject to the right of shareholders to cumulate their votes for the
election of directors. During the five-year period after the effective date of
the Conversion, cumulation of votes will not be permitted. See "Restrictions on
Acquisition of the Company and the Bank -- Anti-Takeover Effects of the
Company's Certificate of Incorporation and Bylaws and Management Remuneration
Adopted in Conversion."
Liquidation. In the event of any liquidation, dissolution, or winding
up of the Bank, the holders of common stock will be entitled to receive, after
payment of all debts and liabilities of the Bank (including all deposit accounts
and accrued interest thereon), and distribution of the balance in the special
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders, all assets of the Bank available for distribution in cash or in
kind. If preferred stock is issued subsequent to the Conversion, the holders
thereof may also have priority over the holders of common stock in the event of
liquidation or dissolution.
Preemptive Rights; Redemption. Holders of the common stock of the Bank
will not be entitled to preemptive rights with respect to any shares of the Bank
which may be issued. The common stock will not be subject to redemption. Upon
receipt by the Bank of the full specified purchase price therefor, the common
stock will be fully paid and non-assessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Registrar &
Transfer Company.
CHANGES IN ACCOUNTANTS
Prior to the year ended September 30, 1997, the Bank's financial
statements were audited by Parente, Randolph, Orlando, Carey & Associates.
Parente, Randolph, Orlando, Carey & Associates was replaced as of September 30,
1997, and KPMG Peat Marwick LLP was engaged and continues as the independent
auditors of the Bank. The decision to change auditors was recommended by the
Audit Committee and was approved by the Board of Directors. Accordingly, the
statement of financial condition as of September 30, 1997 and related statements
of operations, stockholders' equity and cash flows for each of the years in the
two-year period ended September 30, 1996, and included in this Prospectus, were
audited by Parente, Randolph, Orlando, Carey & Associates.
For the years ended September 30, 1996 and September 30, 1995 and up to
the date of replacement of Parente, Randolph, Orlando, Carey & Associates, there
were no disagreements with Parente, Randolph, Orlando, Carey & Associates on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure which, if not resolved to the satisfaction of
Parente, Randolph, Orlando, Carey & Associates, would have caused it to make
reference to the subject matter of the disagreement in connection with its
report. The independent auditors' report on the financial statements for the
year ended September 30, 1996 did not contain an adverse opinion or a disclaimer
of opinions, and was not qualified or modified as to uncertainty, audit scope or
accounting principles. In addition, during the Company's 1996 and 1995 fiscal
years and up to the date of the replacement of Parente, Randolph, Orlando,
135
<PAGE> 186
Carey & Associates, none of the kinds of events occurred which would require
disclosure under paragraph (a)(i)(v) of Item 304 of Regulation S-K adopted by
the Securities and Exchange Commission, 12 C.F.R. 229.304(a)(1)(v).
EXPERTS
The consolidated financial statements of the Bank and its subsidiaries
as of September 30, 1997 and for the year then ended have been included in this
Prospectus in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing. The consolidated financial
statements of the Bank and its subsidiaries as of September 30, 1996 and for the
years ended September 30, 1996 and 1995 have been included in this Prospectus in
reliance upon the report of Parente, Randolph, Orlando, Carey & Associates,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
Keller has consented to the publication herein of the summary of its
report to the Bank and Company setting forth its opinion as to the estimated pro
forma market value of the Common Stock upon Conversion and its valuation with
respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal income tax
consequences of the Conversion will be passed upon for the Bank and the Company
by Muldoon, Murphy & Faucette, Washington, D.C., special counsel to the Bank and
the Company. Muldoon, Murphy & Faucette will rely as to certain matters of
Delaware law on the opinion of Morris, Nichols, Arsht & Tunnel. The Commonwealth
of Pennsylvania income tax consequences of the Conversion and certain matters
related to the Foundation will be passed upon for the Bank and the Company by
KPMG Peat Marwick LLP. Certain legal matters will be passed upon for Sandler
O'Neill by Elias, Matz, Tiernan & Herrick, LLP.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the registration statement. Such information can be
examined without charge at the public reference facilities of the SEC located at
450 Fifth Street, N.W., Washington, D.C. 20549, and copies of such material can
be obtained from the SEC at prescribed rates. In addition, the SEC maintains a
web site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC including the Company. This Prospectus contains a description of
the material terms and features of all material contracts, reports or exhibits
to the Registration Statement required to be described. The statements contained
in this Prospectus as to the contents of any contract or other document filed as
an exhibit to the registration statement are, of necessity, brief descriptions
thereof and are not necessarily complete; each such statement is qualified by
reference to such contract or document.
The Bank has filed an application for conversion with the OTS with
respect to the Conversion. Pursuant to the rules and regulations of the OTS,
this Prospectus omits certain information contained in that application. The
application may be examined at the principal office of the OTS, 1700 G Street,
N.W., Washington, D.C. 20552 and at the Office of the Regional Director of the
OTS located at 10 Exchange Place, 18th Floor, Jersey City, New Jersey 07302.
136
<PAGE> 187
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(b) of the Exchange Act and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the Exchange
Act. Under the Plan, the Company has undertaken that it will not terminate such
registration for a period of at least three years following the Conversion. In
the event that the Bank amends the Plan to eliminate the concurrent formation of
the Company as part of the Conversion, the Bank will register its stock with the
OTS under Section 12(b) of the Exchange Act and, upon such registration, the
Bank and the holders of its stock will become subject to the same obligations
and restrictions.
A copy of the Certificate of Incorporation and the Bylaws of the
Company and the Federal Stock Charter and Bylaws of the Bank and the Certificate
of Incorporation and Bylaws of the Foundation are available without charge from
the Bank.
137
<PAGE> 188
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORTS OF INDEPENDENT CERTIFIED PUBLIC AUDITORS............................. F-2 TO F-3
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheet.............................................................. F-4
Statement of Income........................................................ 38
Statement of Changes in Equity............................................. F-5
Statement of Cash Flows.................................................... F-6 to F-7
Notes to Financial Statements.............................................. F-8 to F-29
</TABLE>
All schedules are omitted because they are not required or applicable,
or the required information is shown in the financial statements or notes
thereto.
The financial statements of Northeast Pennsylvania Financial Corp. have
been omitted because Northeast Pennsylvania Financial Corp. not yet issued any
stock, has no assets and no liabilities, and has not conducted any business
other than of an organizational nature.
<PAGE> 189
INDEPENDENT AUDITORS' REPORT
To The Board of Directors
First Federal Savings and Loan
Association of Hazleton
Hazleton, Pennsylvania:
We have audited the accompanying consolidated balance sheet of First Federal
Savings and Loan Association of Hazleton and subsidiaries (the "Bank") as of
September 30, 1997, and the related consolidated statements of income, changes
in equity, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these 1997 consolidated financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Bank as
of September 30, 1997, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
November 13, 1997,
except as to note 15,
which is as of November 18, 1997
F-2
<PAGE> 190
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
First Federal Savings and Loan
Association of Hazleton
Hazleton, Pennsylvania:
We have audited the accompanying consolidated balance sheet of First
Federal Savings and Loan Association of Hazleton and subsidiaries (the "Bank")
as of September 30, 1996, and the related consolidated statements of income,
changes in equity, and cash flows for the years ended September 30, 1996 and
1995. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Federal Savings and Loan Association of Hazleton and subsidiaries as of
September 30, 1996, and the results of its operations and its cash flows for
the years ended September 30, 1996 and 1995 in conformity with generally
accepted accounting principles.
/s/ Parente, Randolph, Orlando, Carey & Associates
--------------------------------------------------
Parente, Randolph, Orlando, Carey & Associates
Hazleton, Pennsylvania
November 7, 1996
F-3
<PAGE> 191
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
Assets 1997 1996
-------- --------
<S> <C> <C>
Cash and cash equivalents:
Cash on hand $ 1,355 $ 1,118
Interest bearing deposits 11,689 2,728
Non-interest bearing deposits 170 199
-------- --------
13,214 4,045
Securities held-to-maturity (estimated fair value of $38,869 in 1997 38,925 43,486
and $42,515 in 1996)
Securities available-for-sale 44,773 60,158
Loans (less allowance for loan losses of $1,272 for 1997 and 261,469 242,916
$730 for 1996)
Accrued interest receivable 2,169 2,338
Real estate owned, net 319 453
Property and equipment, net 6,762 6,763
Other assets 1,611 2,305
-------- --------
Total assets $369,242 $362,464
======== ========
Liabilities and Equity
Deposits $314,123 $306,806
Federal Home Loan Bank advances 23,516 25,534
Other borrowings 92 --
Advances from borrowers and insurance 477 592
Accrued interest payable 745 540
Other liabilities 1,751 2,865
Commitments and contingencies - -
-------- --------
Total liabilities $340,704 $336,337
Retained earnings - substantially restricted 27,255 25,874
Net unrealized gain on available-for-sale securities, net of taxes 1,283 253
-------- --------
Total equity 28,538 26,127
-------- --------
Total liabilities and equity $369,242 $362,464
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 192
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
Consolidated Statements of Changes in Equity
For the Years Ended September 30, 1997, 1996, and 1995
(in thousands)
<TABLE>
<CAPTION>
Net unrealized
gain on
available-for-
Retained sale securities,
earnings net of taxes Total
------- ---------------- --------
<S> <C> <C> <C>
Balance, September 30, 1994 $23,183 -- $ 23,183
Implementation of SFAS No. 115 -- $ 364 364
Increase in net unrealized gains, net of taxes -- 253 253
Net income 1,750 -- 1,750
------- ------- --------
Balance, September 30, 1995 24,933 617 25,550
Decrease in net unrealized gains, net of taxes -- (364) (364)
Net income 941 -- 941
------- ------- --------
Balance, September 30, 1996 25,874 253 26,127
------- ------- --------
Increase in net unrealized gains, net of taxes -- 1,030 1,030
Net income 1,381 -- 1,381
------- ------- --------
Balance, September 30, 1997 $27,255 $ 1,283 $ 28,538
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 193
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
Consolidated Statements of Cash Flows
for the years ended September 30, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
Operating Activities: 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net Income $ 1,381 $ 941 $ 1,750
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 651 97 25
Depreciation 645 698 810
Deferred income tax (benefit) provision (441) 156 (29)
Amortization and accretion on:
Held-to-maturity securities 22 87 168
Available-for-sale securities 111 76 (13)
Amortization of deferred loan fees (201) (210) (192)
(Gain) loss on sale of:
Real estate acquired thorough foreclosure 66 46 (8)
Loans (22) (18) (10)
Available-for-sale securities 563 -- 6
Loss on disposal of property and equipment 176 65 75
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable 169 (347) (373)
(Increase) decrease in other assets (40) 104 174
Increase in accrued interest payable 205 17 205
Increase (decrease) in accrued income taxes payable 649 (547) (698)
Increase (decrease) in other liabilities (1,406) 2,214 (180)
-------- -------- --------
Net cash provided by operating activities 2,528 3,379 1,710
-------- -------- --------
Investing Activities:
Loan origination and principal payments on loans (21,077) (21,978) (21,599)
Proceeds from sale of:
Available-for-sale securities 26,530 -- 2,995
Real estate acquired through foreclosure 266 420 184
Loans 1,811 1,578 1,745
Proceeds from repayments of held-to-maturity securities 10,406 16,845 10,775
Proceeds from repayments of available-for-sale securities 13,849 6,500 --
Proceeds from disposal of fixed assets -- 12 --
Purchase of:
Held-to-maturity securities (5,867) (25,101) (18,823)
Available-for-sale securities (23,904) (20,286) (10,424)
Office properties and equipment (649) (2,104) (833)
Federal Home Loan Bank stock -- (173) (79)
-------- -------- --------
Net cash provided by (used in) investing activities 1,365 (44,287) (36,059)
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 194
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
Consolidated Statements of Cash Flows
for the years ended September 30, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Financing Activities:
Net increase in deposit accounts $ 7,317 $ 26,796 $ 22,849
Net increase (decrease) in Federal Home Loan Bank
advances (2,018) 14,484 10,930
Net increase (decrease) in advances from borrowers
for taxes and insurance (115) (8) 114
Net increase in other borrowings 92 -- --
-------- -------- --------
Net cash provided by financing activities 5,276 41,272 33,893
-------- -------- --------
Increase (decrease) in cash and cash equivalents 9,169 364 (456)
Cash equivalents, beginning of year 4,045 3,681 4,137
-------- -------- --------
Cash and cash equivalents, end of year $ 13,214 $ 4,045 $ 3,681
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 13,989 $ 12,990 $ 10,640
======== ======== ========
Income taxes $ 540 $ 816 $ 954
======== ======== ========
Supplemental disclosure - non-cash information:
Transfer from loans to real estate owned $ 285 $ 522 $ 386
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE> 195
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies.
Business. First Federal Savings and Loan Association of Hazleton and
subsidiaries ("the Bank") provides a wide range of banking services to
individual and corporate customers through its branch network in
Hazleton, Bloomsburg, Lehighton, and Schuylkill County, Pennsylvania.
The Bank also serves its loan customers through three mortgage loan
production offices located in the Pennsylvania communities of Monroe
County, Central Susquehanna County, and Mountaintop. All of the
branches are full-service and offer commercial and retail products.
These products include checking accounts (interest and non-interest
bearing), savings accounts, certificates of deposit, commercial and
consumer loans, real estate loans, and home equity loans. The Bank is
subject to competition from other financial institutions and other
companies that provide financial services. The Bank is subject to the
regulations of certain federal agencies and undergoes periodic
examinations by those regulatory authorities.
Principles of Consolidation and Presentation. The accompanying
financial statements of the Bank include the accounts of Hazleton
Bancorp, Inc., and Fidaco, Inc., wholly-owned subsidiaries of First
Federal Savings and Loan Association of Hazleton. Both Hazleton
Bancorp, Inc. and FIDACO, Inc. are inactive subsidiaries with the only
major asset being an investment by FIDACO, Inc. in Hazleton Community
Development Corporation. All material inter-Bank balances and
transactions have been eliminated in consolidation. Prior period
amounts are reclassified, when necessary, to conform with the current
year's presentation.
The Bank follows accounting principles and reporting practices which
are in accordance with generally accepted accounting principles. The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumption that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
significantly from those estimates. Material estimates that are
particularly susceptible to significant change in the near-term relate
to determination of the allowance for loan losses. Management believes
that the allowance for loan losses is adequate.
Risks and Uncertainties. In the normal course of its business, the
Bank encounters two significant types of risk: economic and
regulatory. There are three main components of economic risk: interest
rate risk, credit risk, and market risk. The Bank is subject to
interest rate risk to the degree that its interest-bearing liabilities
mature or reprice at different speeds, or on different bases from its
interest-earning assets. The Bank's primary credit risk is the risk of
default on the Bank's loan portfolio that results from the borrowers
inability or unwillingness to make contractually required payments.
The
F-8
<PAGE> 196
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
Bank's lending activities are concentrated in Pennsylvania. The
largest concentration of the Bank's loan portfolio is located in
Northeastern Pennsylvania. The ability of the Bank's borrowers to
repay amounts owed is dependent on several factors, including the
economic conditions in the borrower's geographic region and the
borrower's financial condition. Market risk reflects changes in the
value of collateral underlying loans, the valuation of real estate
held by the Bank, and the valuation of loans held for sale,
Mortgage-related securities available for sale and mortgage servicing
assets.
The Bank is subject to the regulations of various government agencies.
These regulations can and do change significantly from period to
period. The Bank also undergoes periodic examinations by the
regulatory agencies which may subject it to further changes with
respect to asset valuations, amounts of required loss allowances, and
operating restrictions resulting from the regulators' judgements based
on information available to them at the time of their examination.
The Bank has an ongoing program designed to ensure that its
operational and financial systems will not be adversely affected by
year 2000 software failures due to processing errors arising from
calculations using the year 2000 date. While the Bank believes it is
acting prudently to assure year 2000 compliance, it is to some extent
dependent upon vendor cooperation. The Bank is requiring its computer
systems and software vendors to represent that the products provided
are or will be year 2000 compliant and has planned a program of
testing for compliance. It is recognized that any year 2000 compliance
failures, either internal or on the part of the Bank's customers,
could result in additional expense or loss to the Bank.
Cash and Cash Equivalents. For the purpose of the consolidated
statement of cash flows, cash and cash equivalents include cash and
interest bearing deposits with an original maturity of three months or
less.
Securities. The Bank divides its securities portfolio into two
segments: (a) held to maturity and (b) available for sale. Securities
in the held to maturity category are accounted for at cost, adjusted
for amortization of premiums and accretion of discounts, using the
level yield method, based on the Bank's intent and ability to hold the
securities until maturity. All other securities are included in the
available for sale category and are accounted for at fair value, with
unrealized gains or losses, net of taxes, being reflected as
adjustments to equity.
At the time of purchase, the Bank makes a determination of whether or
not it will hold the securities to maturity, based upon an evaluation
of the probability of future events. Securities, which the Bank
believes may be involved in interest rate risk, liquidity, or other
asset/liability management decisions, which might reasonably result in
such securities not being held to maturity, are classified as
available for sale. If securities are sold, a gain or loss is
determined by specific identification and reflected in the operating
results in the period the trade occurs.
F-9
<PAGE> 197
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
Allowance for Loan Losses. The allowance for loan losses is maintained
at a level that management considers adequate to provide for 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
allowance for losses on loans. Such agencies may require the Bank to
recognize additions to the allowance, based on their judgements about
information available to them at the time of their examination. The
allowance is increased by the provision for loan losses, which is
charged to operations. Loan losses are charged directly against the
allowance and recoveries on previously charged-off loans are added to
the allowance.
Loans are deemed to be "impaired" if management's assessment of the
relevant facts and circumstances, it is probable that the bank will be
unable to collect all proceeds due according to the contractual terms
of the loan agreement. For purposes of applying the measurement
criteria for impaired loans, the Bank excludes large groups of smaller
balance homogeneous loans, primarily consisting of residential real
estate and consumer loans, as well as commercial loans with balances
of less than $100,000.
The Bank's policy for the recognition of interest income on impaired
loans is the same as for non-accrual loans discussed below. Impaired
loans are charged off when the Bank determines that foreclosure is
probable, and the fair value of the collateral is less than the
recorded investment of the impaired loan.
Loans, Loan Origination Fees, and Uncollected Interest. Loans are
recorded at cost net of unearned discounts, deferred fees, and
allowances. Discounts or premiums on purchased loans are amortized
using the interest method over the remaining contractual life of the
portfolio, adjusted for actual prepayments. Loan origination fees and
certain direct origination costs are deferred and amortized using the
level yield method over the 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.
F-10
<PAGE> 198
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
Loans Held for Sale. Mortgage loans originated and intended for sale
in the secondary market are carried at the lower of cost or estimated
fair value in the aggregate. Net unrealized losses are recognized
through a valuation allowance by charges to income.
Real Estate Owned (REO). Real estate acquired through foreclosure or
by deed in lieu of foreclosure is classified as REO. REO is carried at
the lower of cost (lesser of carrying value of the loan or fair value
of the property at the date of acquisition, as determined by a
certified appraiser) or fair value less selling expenses. Costs
relating to the development or improvement of the property are
capitalized; holding costs are charged to expense. At September 30,
1997, the Bank has provided a reserve of $87,000 for REO. In prior
years, no reserves were necessary.
Property and Equipment. Property and equipment are stated at cost,
less accumulated depreciation. Depreciation for each class of
depreciable asset is computed using the straight-line method over the
estimated useful lives of the assets (39 years for buildings and 3 to
7 years for furniture and equipment). When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts. The cost of maintenance and repairs is
charged to expense as incurred and renewals and betterments are
capitalized.
Income Taxes. The Bank accounts for income taxes under the
asset/liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, as well as, operating
loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled.
Retained earnings at September 30, 1997 and 1996 include approximately
$8.3 million, for which no provision for Federal income tax has been
made. These amounts represent allocations of earnings to bad debt
reserves for tax purposes and are a restriction upon retained
earnings. If, in the future, this portion of retained earnings is
reduced for any purpose other than tax bad debt losses, Federal income
taxes may be imposed at the then applicable rates.
F-11
<PAGE> 199
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
2. Securities.
Securities are summarized as follows (in thousands):
<TABLE>
<CAPTION>
....................... SEPTEMBER 30, 1997.....................
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Held-to-maturity securities:
Municipal securities $ 8,963 $ 142 $ -- $ 9,105
Obligations of U.S. government agencies 19,997 17 (61) 19,953
Mortgage-related securities (A) 9,965 -- (154) 9,811
------- ------ ----- -------
Total $38,925 $ 159 $(215) $38,869
======= ====== ===== =======
Available-for-sale securities:
Obligations of the U.S. Treasury $ 991 $ 8 $ -- $ 999
Obligations of U.S. Government agencies 9,993 53 -- 10,046
Mortgage-related securities (A) 29,491 492 (1) 29,982
------- ------ ----- -------
Total debt securities 40,475 553 (1) 41,027
Federal Home Loan Bank of Pittsburgh Stock 2,054 -- -- 2,054
Federal Home Loan Mortgage Corporation
Stock 47 1,645 -- 1,692
------- ------ ----- -------
Total equity securities 2,101 1,645 -- 3,746
Total $42,576 $2,198 $ (1) $44,773
======= ====== ===== =======
</TABLE>
(A) Insured or guaranteed by an agency or instrument of the United States
Government (FHLMC, FNMA, and GNMA.)
F-12
<PAGE> 200
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
<TABLE>
<CAPTION>
....................... SEPTEMBER 30, 1996.....................
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- --------- -------
<S> <C> <C> <C> <C>
Held-to-maturity securities:
Municipal securities $ 4,105 $ 4 $ -- $ 4,109
Obligations of U.S. government agencies 25,995 -- (520) 25,475
Mortgage-related securities (A) 13,386 -- (455) 12,931
Total $43,486 $ 4 $ (975) $42,515
======= ====== ======= =======
Available-for-sale securities:
Obligations of the U.S. Treasury $ 2,974 $ -- $ (11) $ 2,963
Obligations of U.S. Government agencies 16,961 -- (155) 16,806
Mortgage-related securities (A) 37,785 -- (526) 37,259
------- ------ ------- -------
Total debt securities 57,720 -- (692) 57,028
Federal Home Loan Bank of Pittsburgh
Stock 1,958 -- -- 1,958
Federal Home Loan Mortgage Corporation
Stock 47 1,125 -- 1,172
------- ------ ------- -------
2,005 1,125 -- 3,130
Total $59,725 $1,125 $ (692) $60,158
======= ====== ======= =======
</TABLE>
(A) Insured or guaranteed by an agency or instrument of the United States
Government (FHLMC, FNMA, and GNMA.)
F-13
<PAGE> 201
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
The amortized cost and estimated fair value of securities at September 30, 1997,
by contractual maturity, are shown below (dollars in thousands).
<TABLE>
<CAPTION>
MATURING MATURING
AFTER ONE AFTER 5
MATURING YEAR BUT YEARS BUT MATURING
WITHIN ONE WITHIN WITHIN 10 AFTER 10
YEAR 5 YEARS YEARS YEARS TOTAL
------ ------- --------- -------- -------
<S> <C> <C> <C> <C> <C>
Held-to-maturity securities:
Municipal securities $ -- $ -- $ 2,417 $ 6,546 $ 8,963
Obligations of U.S. Government
agencies -- 5,000 12,997 2,000 19,997
Mortgage-related securities -- 244 -- 9,721 9,965
Total securities at amortized
cost $ 0 $5,244 $15,414 $18,267 $38,925
====== ====== ======= ======= =======
Total securities at fair value $ 0 $5,247 $15,393 $18,229 $38,869
====== ====== ======= ======= =======
Weighted Average Yield -- 5.95% 6.60% 5.88% 6.17%
------ ------ ------- ------- -------
Available-for-sale securities:
Obligations of the U.S. Treasury $ 991 $ -- $ -- $ -- $ 991
Obligations of U.S. Government
agencies 1,000 5,993 3,000 -- 9,993
Mortgage-related securities 2,628 1,384 -- 25,479 29,491
Equity securities 2,101 -- -- -- 2,101
------ ------ ------- ------- -------
Total securities at amortized
cost $6,720 $7,377 $ 3,000 $25,479 $42,576
====== ====== ======= ======= =======
Total securities at fair value 8,380 7,412 3,026 25,955 44,773
====== ====== ======= ======= =======
Weighted Average Yield 6.67% 7.43% 7.29% 6.64% 6.83%
------ ------ ------- ------- -------
</TABLE>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. Weighted average yields are based on amortized cost
including municipal securities which are not reported on a tax-equivalent basis.
Proceeds from sales of securities available for sale during the year ended
September 30, 1997 were $26,804,480 resulting in gross realized gains of $63,251
and gross realized losses of $626,366.
F-14
<PAGE> 202
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
The Bank did not sell any securities during the year ended September 30, 1996.
The proceeds from sales of securities available for sale during the year ended
September 30, 1995 were $2,994,844, resulting in gross realized losses of
$5,914.
Accrued interest receivable on securities amounted to $821,363 and $1,051,488 at
September 30, 1997 and 1996, respectively.
Securities, carried at approximately $30,514,940 at September 30, 1997, were
pledged to secure public deposits as required by law.
On December 31, 1995, the Bank transferred certain held-to-maturity securities
to the available-for-sale investment portfolio. The amortized cost of the
securities was approximately $37,785,000 with an unrealized loss net of taxes of
approximately $377,000. This transfer was in accordance with a special
reassessment provision contained within a Special Report issued by the Financial
Accounting Standards Board ("FASB").
The unamortized premiums on mortgage-related securities amounted to $339,472 and
$425,355 as of September 30, 1997 and 1996, respectively. The unearned discount
on mortgage-related securities amounted to $93,353 and $69,149 as of September
30, 1997 and 1996, respectively.
F-15
<PAGE> 203
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
3. Loans
Loans are summarized as follows:
<TABLE>
<CAPTION>
At September 30
---------------
1997 1996
--------- ---------
<S> <C> <C>
Real Estate loans:
One-to-four family $ 179,101 $ 170,773
Multiple family and commercial 6,701 4,429
Construction 5,818 5,129
--------- ---------
Total real estate loans 191,620 180,331
--------- ---------
Consumer Loans:
Home equity loans and lines of credit 41,278 38,054
Automobile 13,678 10,594
Education 2,348 2,538
Unsecured lines of credit 1,310 959
Other 3,229 3,309
--------- ---------
Total consumer loans 61,843 55,454
--------- ---------
Commercial loans 10,775 9,280
--------- ---------
Total loans 264,238 245,065
--------- ---------
Less:
Allowances for loan losses (1,272) (730)
Deferred loan origination fees (1,497) (1,419)
--------- ---------
Total loans, net $ 261,469 $ 242,916
========= =========
</TABLE>
Accrued interest receivable on loans amounted to $1,347,982 and $ 1,286,374 at
September 30, 1997, and 1996, respectively.
Impaired loans and the related specific loan loss allowances were as follows (in
thousands):
<TABLE>
<CAPTION>
September 30,
-------------
1997 1996
----------------------------------------- ----------------------------------------
Allowance Allowance
Recorded for Net Recorded for Net
Investments Losses Investment Investment Losses Investment
----------- ------ ---------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans:
With specific allowances $290 $ 68 $222 $292 $ 55 $237
Other impaired loans:
With specific allowances $187 $108 $ 79 $199 $ 14 $185
---- ---- ---- ---- ---- ----
$477 $176 $301 $491 $ 69 $422
==== ==== ==== ==== ==== ====
</TABLE>
F-16
<PAGE> 204
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
The average net recorded investment in impaired loans for the years ended
September 30, 1997, 1996, and 1995, respectively, was $577,951, $515,707, and
$1,334,100. The related amount of interest income recognized on impaired loans
was $39,000, $19,000, and $66,000 for the years ended September 30, 1997, 1996,
and 1995, respectively.
Non-accrual loans totaled $774,000, $716,000, and $1,234,000 at September
30, 1997, 1996, and 1995, respectively. Loans in non-accrual status as of
September 30, 1997, 1996 and 1995 had interest due but not recognized of
approximately $86,000, $54,000, and $150,000, respectively. The amount of
interest income on these loans that was included in net income in fiscal year
1997, 1996 and 1995 was $53,000, $38,000 and $ 110,000, respectively. The
aggregate recorded investment in troubled debt restructuring was $112,000 at
September 30, 1997. The gross interest income that would have been recorded if
this loan had been current in accordance with the original terms is $16,605. The
amount of interest income on the loan that was included in net income for the
period was $8,443. The Bank has no commitments to lend additional funds to
borrowers whose loans were classified as non-performing or troubled debt
restructuring.
The activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
September 30,
-------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Balance, beginning $ 730 $ 724 $ 769
Provision charged to income 651 97 25
Charge-offs (132) (94) (95)
Recoveries 23 3 25
------- ------- -------
Balance, ending $ 1,272 $ 730 $ 724
======= ======= =======
</TABLE>
At September 30, 1997, 1996, and 1995, the Bank serviced loans for others of
$14,197,000, $16,186,000, and $18,785,000, respectively. Loans serviced by
others for the Bank as of September 30, 1997, 1996, and 1995 were; $7,721,000,
$9,968,000, and $11,812,000, respectively.
An analysis of the activity of loans to directors and officers follows (in
thousands):
<TABLE>
<CAPTION>
September 30,1997
-----------------
<S> <C>
Balance, beginning of year $ 1,205
New loans and line of credit advances 14
Repayments (39)
-------
Balance, end of year $ 1,180
=======
</TABLE>
F-17
<PAGE> 205
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
4. Office Properties and Equipment
Properties and equipment by major classification are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Land $ 854 $ 710
Buildings and improvements 6,550 6,496
Furniture, fixtures and equipment 3,695 3,462
Leasehold improvements 1,095 1,094
Renovations in progress 208 2
------- -------
Total 12,402 11,764
Less accumulated depreciation 5,640 5,001
------- -------
Net $ 6,762 $ 6,763
======= =======
</TABLE>
The Bank has entered into operating leases for several of its branch facilities.
The minimum annual rental payments under these leases at September 30, 1997, are
as follows (in thousands):
<TABLE>
<CAPTION>
Years ending September 30:
--------------------------
<S> <C>
1998 $213
1999 98
2000 89
2001 83
2002 and after 214
----
Total $697
====
</TABLE>
Rent expense was $261,000, $263,000, and $262,000, for the years ended September
30, 1997, 1996, and 1995, respectively.
F-18
<PAGE> 206
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
5. Deposits
Deposits consist of the following major classifications (in thousands):
<TABLE>
<CAPTION>
At September 30,
----------------
1997 1996
---- ----
Weighted Percent Weighted Percent
Average of Average of
Rate Amount Total Rate Amount Total
--------- -------- --------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Savings accounts (passbook, statement, clubs) 2.45% $ 71,779 22.8% 2.52% $ 73,415 24.0%
Money market accounts 2.81% 13,821 4.4% 2.82% 14,520 4.73%
Certificates of deposit less than $100,000 5.42% 161,844 51.5% 5.47% 164,701 53.7%
Certificates of deposit greater than $100,000 (A) 30,892 9.9% 22,043 7.1%
NOW Accounts 1.49% 27,302 8.7% 1.50% 25,349 8.3%
Non-interest bearing deposits -- 8,485 2.7% -- 6,778 2.2%
--------- -------- --------- ------- -------- -------
Total deposits at end of period 4.12% $314,123 $ 100% 4.15% $306,806 $ 100%
========= ======== ========= ======= ======== =======
</TABLE>
(A) Deposit balances in excess of $100,000 are not federally insured.
While the certificates frequently are renewed at maturity rather than paid out,
a summary of certificates by contractual maturity at September 30, 1997 is as
follows (in thousands):
<TABLE>
<CAPTION>
Years ending September 30, Amount
-------------------------- --------
<S> <C> <C>
1998 $127,375
1999 $ 37,223
2000 $21,563
2001 $ 4,697
2002 $ 1,878
2003 and thereafter 0
--------
Total $192,736
========
</TABLE>
Interest expense on deposits is comprised of the following:
<TABLE>
<CAPTION>
Year ended September 30,
------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Savings accounts $ 1,765 $ 1,871 $ 2,079
Money market accounts 399 371
Certificates 10,120** 9,549** 7,675**
NOW Accounts 415 404 960*
------- ------- -------
Total $12,699 $12,195 $10,714
======= ======= =======
</TABLE>
* Information regarding interest expense on money market accounts was not
available prior to the year ended September 1995.
** Information regarding interest expense on certificates of deposit of $100,000
or greater was not available prior to June 1997.
F-19
<PAGE> 207
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
6. Federal Home Loan Bank Advances
Under terms of its collateral agreement with the Federal Home Loan Bank of
Pittsburgh ("FHLB"), the Bank maintains otherwise unencumbered qualifying assets
(principally 1-4 family residential mortgage loans and U.S. Government and
Agency notes and bonds) in the amount of at least as much as its advances from
the FHLB. The Banks's FHLB stock is also pledged to secure these advances. At
September 30, 1997 and 1996, such advances mature as follows (in thousands):
<TABLE>
<CAPTION>
Due by September 30, Weighted Average Rate September 30, 1997
-------------------- --------------------- ------------------
<S> <C> <C>
1998 5.45% $8,000
1999 - -
2000 - -
2001 5.49% 5,000
2002 5.69% 10,000
Thereafter 2.53% 516
---- -------
Total FHLB advances 5.50% $23,516
==== =======
</TABLE>
<TABLE>
<CAPTION>
Due by September 30, Weighted Average Rate September 30, 1996
-------------------- --------------------- ------------------
<S> <C> <C>
1998 5.44% $25,000
1999 - -
2000 - -
2001 - -
2002 - -
Thereafter 2.53% 534
---- -------
Total FHLB advances 5.38% $25,534
==== =======
</TABLE>
The Bank has included in the preceding table annually renewable lines of credit
totalling $41,307,000. The Bank, from time to time, has used the lines of credit
to meet liquidity needs. At September 30, 1997 and 1996, the balances
outstanding on the lines of credit were $0 and $ 17,000,000 respectively.
7. Income Taxes
The Small Business Job Protection Act of 1996, enacted August 20, 1996, provides
for the repeal of the tax bad debt deduction computed under the percentage of
taxable income method. The repeal of the use of this method is effective for tax
years beginning after December 31, 1995. Prior to the change in law, the Bank
had qualified under the provisions of the Internal Revenue Service Code which
permitted it to deduct from taxable income an allowance for bad debts based on
8% of taxable income.
F-20
<PAGE> 208
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
Upon repeal, the Bank is required to recapture into income, over a six year
period, the portion of its tax bad debt reserves that exceed its base year
reserves (i.e., tax reserves for tax years beginning before 1988). The base year
tax reserves, which may be subject to recapture if the Bank ceases to qualify as
a bank for federal income tax purposes, are restricted with respect to certain
distributions. The Bank's total tax bad debt reserves at September 30, 1997, are
approximately $8.9 million, of which $8.3 million represents the base year
amount and $600,000 is subject to recapture. The Bank has previously recorded a
deferred tax liability for the amount to be recaptured; therefore, this
recapture will not impact the statement of income.
The provision (benefit) for income taxes is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
Year ended September 30,
------------------------
<S> <C> <C> <C>
Current: 1997 1996 1995
------- ----- -----
Federal $ 1,105 $ 147 $ 827
State 84 (291) 101
Deferred - Federal (441) 156 (29)
------- ----- -----
Total $ 748 $ 12 $ 899
======= ===== =====
</TABLE>
The provision for income taxes differs from the statutory rate due to the
following (in thousands):
<TABLE>
<CAPTION>
Year ended September 30,
------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Federal income taxes at statutory rate (34%) $ 724 $ 324 $ 901
Tax exempt interest, net (102) (51) (11)
State taxes, net of Federal benefit 56 (192) 67
Other, net 70 (69) (58)
----- ----- -----
Total $ 748 $ 12 $ 899
===== ===== =====
Effective Tax Rate 35% 1% 34%
</TABLE>
F-21
<PAGE> 209
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
The components of the net deferred tax liability (asset) are as follows (in
thousands):
<TABLE>
<CAPTION>
September 30,
-------------
1997 1996
------- -----
<S> <C> <C>
Deferred tax assets:
Loan fees and costs $ (261) $(464)
Deferred compensation (127) (107)
Foreclosed asset writedowns (14) (6)
Provision for abandoned assets (59) 0
Depreciation (5) (25)
Accrued hospitalization (33) 10
Charitable contributions (15) 0
Book bad debt reserves - loans (516) 0
------- -----
$(1,030) $(592)
Deferred tax liabilities:
Accretion $ 26 $ 29
Unrealized holding gains on available-for-sale securities 914 180
Tax bad debt reserves in excess of base year 215 215
------- -----
Gross deferred tax liabilities $ 1,155 $ 424
------- -----
Net deferred tax liability (asset) $ 125 $(168)
======= =====
</TABLE>
8. Financial Instruments
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. Commitments to
originate loans amounted to $ 4.4 million as of September 30, 1997, of which
$1.39 million was for variable-rate loans. The balance of the commitments
represent fixed-rate loans with interest rates ranging from 5.385% to 9.5%. At
September 30, 1997, the Bank had undisbursed loans in process for construction
loans of $ 4.7 million and $16.3 million in undisbursed lines of credit. These
instruments involve, to varying degrees, elements of credit, interest rate or
liquidity risk in excess of the amount recognized in the balance sheet. The
contract or notional amounts of these commitments reflect the extent of
involvement the Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss from nonperformance by the other party to the
financial instruments for commitments to extend credit is represented by the
contractual amount of those instruments. The Bank uses the same credit policies
in making commitments as it does for on-balance-sheet instruments.
Commitments to extend credit are legally binding agreements to lend to
customers. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future liquidity
F-22
<PAGE> 210
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
requirements. The Bank evaluates each customer's credit-worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank on extension of credit, is based on management's credit assessment of
the counterparty. At September 30, 1997, the Bank expects all commitments to be
funded within 60 days.
The Bank is required to disclose estimated fair values for its financial
instruments. The following describes various limitations and assumptions related
to such fair value disclosures.
Limitations. Estimates of fair value are made at a specific point in time, based
upon, where available, relevant market prices and information about the
financial instrument. Such estimates do not include any premium or discount that
could result from offering for sale at one time the Bank's entire holdings of a
particular financial instrument. For a substantial portion of the Bank's
financial instruments, no quoted market exists. Therefore, estimates of fair
value are necessarily based on a number of significant assumptions (many of
which involve events outside the control of management). Such assumptions
include assessments of current economic conditions, perceived risks associated
with these financial instruments and their counterparties, future expected loss
experience, and other factors. Given the uncertainties surrounding these
assumptions, the reported fair values represent estimates only, and therefore
cannot be compared to the historical accounting model. Use of different
assumptions or methodologies are likely to result in significantly different
fair value estimates.
The estimated fair values presented neither include nor give effect to the
values associated with the Bank's banking, or other businesses, existing
customer relationships, extensive branch banking network, property, equipment,
goodwill, or certain tax implications related to the realization of unrealized
gains or losses. Also, the fair value of non-interest bearing demand deposits,
savings, and NOW accounts and money market deposit accounts is equal to the
carrying amount because these deposits have no stated maturity. Obviously, this
approach to estimating fair value excludes the significant benefit that results
from the low-cost funding provided by such deposit liabilities, as compared to
alternative sources of funding. As a consequence, the fair value of individual
assets and liabilities may not be reflective of the fair value of a banking
organization that is a going concern.
The following methods and assumptions were used to estimate the fair value of
each major classification of financial instruments at September 30, 1997 and
1996.
Cash and cash equivalents. Current carrying amounts approximate estimated fair
value.
Securities. Current quoted market prices were used to determine fair value.
Loans. Fair values were estimated for portfolios of loans with similar financial
characteristics. Loans were segregated by type, and each loan category was
further segmented by fixed and adjustable-rate interest terms. The estimated
fair value of the segregated portfolios was calculated by discounting cash flows
through the estimated maturity
F-23
<PAGE> 211
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
using estimated prepayment speeds while using estimated market discount rates
that reflect credit and interest rate risk inherent in the loans. The estimate
of the maturities and prepayment speeds was based on the Bank's historical
experience. Cash flows were discounted using market rates adjusted for portfolio
differences.
Accrued interest receivable. Current carrying amounts approximate estimated fair
value.
Deposits with no stated maturity. Current carrying amounts approximate estimated
fair value.
Certificates of deposit. Fair values were estimated by discounting the
contractual cash flows using current market rates offered in the Bank's market
area for deposits with comparable terms and maturities.
Federal Home Loan Bank Advances. The fair value of borrowings was estimated
using rates currently available to the Bank for debt with similar terms and
remaining maturities.
Other borrowings. Current carrying amounts approximate estimated fair value.
Accrued interest payable. Current carrying amounts approximate estimated fair
value.
Commitments to extend credit. The majority of the Bank's commitments to extend
credit carry current market interest rates if converted to loans. Because
commitments to extend credit are generally unassignable by either the Bank or
the borrower, they only have value to Bank and the borrower. The estimated fair
value approximates the recorded deferred fee amounts.
F-24
<PAGE> 212
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
The carrying amounts and estimated fair values of the Bank's financial
instruments were as follows (in thousands):
<TABLE>
<CAPTION>
At September 30,
----------------
1997 1996
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 13,214 $ 13,214 $ 4,045 $ 4,045
Securities available-for-sale 44,773 44,773 60,158 60,158
Securities held-to-maturity 38,925 38,869 43,486 42,515
Loans 261,469 261,445 242,916 242,350
Accrued interest receivable 2,169 2,169 2,338 2,338
Financial Liabilities:
Deposits with no stated maturity which
consist of savings, money market, NOW and
non-interest bearing deposits 121,386 121,386 120,062 120,062
Certificates of deposit 192,736 191,328 186,744 184,924
Federal Home Loan Bank advances 23,516 23,431 25,534 25,317
Other borrowings
Accrued interest payable 745 745 540 540
Off balance sheet assets (liabilities):
Loan commitments -- 9,141 -- 8,027
Consumer lines of credit -- 13,028 -- 11,806
Commercial lines of credit -- 3,240 -- 1,765
</TABLE>
9. Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
F-25
<PAGE> 213
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital and tangible capital
(as defined) to total assets (as defined). Management believes, as of September
30, 1997, that the Bank meets all capital adequacy requirements to which it is
subject.
As of September 30, 1997, the most recent notification from the Office of Thrift
Supervision categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum ratios as set forth in the table below. There are
no conditions or events since that notification that management believes have
changed the institution's category.
The Bank's actual capital amounts and ratios at September 30, 1997 and 1996 are
also presented in the following table (dollars in thousands).
<TABLE>
<CAPTION>
To be Well Capitalized
For Capital under prompt corrective
Actual Adequacy Purposes Action Provisions
------ -------------------- -----------------------
Amount Ratio(1) Amount Ratio(1) Amount Ratio(1)
As of September 30, 1997
- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Risk-based Capital (Total Capital
to risk weighted assets) $28,527 14.4% $15,845 >8.0% $19,806 >10.0%
Tier I Capital (to risk weighted
assets) 27,255 13.8% 7,922 >4.0% 11,883 >6.0%
Core Capital (Tier I Capital to
total assets) 27,255 7.4% 11,077 >3.0% 18,462 >5.0%
Tangible Capital (Tier I Capital to
total assets) 27,255 7.4% 5,539 >1.5% n/a n/a
As of September 30, 1996
- ------------------------
Risk-based Capital (Total Capital
to risk weighted assets) $26,604 14.3% $14,930 >8.0% $18,662 >10.0%
Tier I Capital (to risk weighted
assets) 25,874 13.9% 7,465 >4.0% 11,197 >6.0%
Core Capital (Tier I Capital to
total assets) 25,874 7.1% 10,874 >3.0% 18,123 >5.0%
Tangible Capital (Tier I Capital to
total assets) 25,874 7.1% 5,437 >1.5% n/a n/a
</TABLE>
(1) Tangible and core capital are completed as a percentage of total assets of
$369 million and $362 million at September 30, 1997 and 1996, respectively.
Risk-based capital and Tier I capital is computed as a percentage of total
risk-weighted assets of $198 million and $187 million at September 30, 1997 and
1996, respectively.
F-26
<PAGE> 214
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
Regulatory capital reconciliation (in thousands):
<TABLE>
<CAPTION>
September 30,
-------------
1997 1996
-------- --------
<S> <C> <C>
Total equity $ 28,538 $ 26,127
Unrealized gains on certain available-for-sale securities, net of
taxes (1,283) (253)
-------- --------
Tangible and core capital 27,255 25,874
Allowances for loan and lease losses 1,272 730
-------- --------
Risk based capital $ 28,527 $ 26,604
======== ========
</TABLE>
10. Employee Benefit Plans
The Bank 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 Bank'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, 1997, 1996 and
1995.
Effective March 7, 1994, the Bank implemented a Section 401(k) defined
contribution plan which covers substantially all of its employees. The Bank made
contributions to this plan of approximately $ $83,000, $77,000 and $73,000 for
the years ended September 30, 1997, 1996 and 1995, respectively.
11. Federal Deposit Insurance Corporation (FDIC) Special Assessment
On September 30, 1996, legislation was enacted to bring the funding level of the
Savings Association Insurance Fund (of which the Bank is a member) of the FDIC
to the same level as the Bank Insurance Fund of the FDIC. As a result of that
legislation, the Bank accrued a single premium payment of $1,744,291 as of
September 30, 1996. The impact of this single premium payment, net of estimated
federal and state taxes on 1996 net income was approximately $1,047,000. The
single premium payment was assessed at 65.7 basis points of the March 31, 1995
deposit base of the Bank. With the enactment of the legislation, the regular
assessment rate for the fourth quarter, October 1 to December 31, 1996, was
lowered retroactively from 23 to 18 basis points. Beginning January 1, 1997,
annual premium assessments further decreased to an annual premium level of 6.4
basis points.
12. Related Party Transactions
The Bank retains a law firm, in which the Chairman of the Bank's Board of
Directors also is a member, that provides general legal counsel to the Bank. The
Bank paid $49,859, $41,197, and $39,501 for the years ended September 30, 1997,
1996, and 1995, respectively.
13. Service Corporation
FIDACO, Inc., a wholly owned subsidiary of the Bank, was originally formed for
the purpose of owning stock in the Bank's service bureau, Financial Accounting
Services, Inc.
Assets of FIDACO, Inc. total approximately $ 32,000, $140,000 and $400,000 at
September 30, 1997, 1996, and 1995, respectively. Such assets primarily consist
of cash and investments in the stock of Hazleton Community Development
Corporation. FIDACO, Inc. has no liabilities and results of operations are not
significant.
F-27
<PAGE> 215
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
14. Recent Accounting Pronouncements
In September 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 requires that all items that are required to
be recognized as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The statement does not require a specific format for that financial
statement but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. The Bank will make
the appropriate disclosures in the applicable consolidated financial statements,
as required.
In September 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. Management has not yet determined the impact, if any, of this
statement on the Bank.
15. Subsequent Event
On November 18, 1997, the Board of Directors of the Bank adopted the Plan of
Conversion (the "Plan") pursuant to which the Bank will convert from a federally
chartered mutual savings bank to a federally chartered stock savings bank. All
of the outstanding common stock of the Bank will be acquired in exchange for a
portion of the net conversion proceeds (the "Conversion") by a holding company
formed expressly for such purpose (the "Company") All of the stock to be issued
in the Conversion is being offered to eligible account holders as of September
30, 1996.
The Bank plans to establish an ESOP for the benefit of eligible employees, to
become effective upon the Conversion. The ESOP intends to purchase up to 8% of
the Common Stock issued in the Conversion utilizing proceeds of a loan from a
wholly-owned subsidiary of the Company or a third party lender. The loan will be
repaid over a period of 10 years and the collateral for the loan will be the
common stock purchased by the ESOP.
Pursuant to the Plan, the Company intends to establish a Charitable Foundation
("Foundation") in connection with the Conversion. The Plan provides that the
Bank and the Company will create the Foundation and donate an amount of the
Company's common stock equal to 8% of the common stock to be sold in the
Conversion. The Foundation will be dedicated to charitable purposes within the
communities in which the Bank operates and to complement the Bank's existing
community activities. Establishment of the Foundation is subject to the approval
of the Bank's members at the special meeting being held to vote upon the
Conversion.
F-28
<PAGE> 216
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
The Foundation will submit a request to the Internal Revenue Service to be
recognized as a tax-exempt organization and would likely be classified as a
private foundation. A contribution of common stock to the Foundation by the
Company would be tax deductible, subject to a limitation based on 10 percent of
the Company's taxable income. The Company, however, would be able to carry
forward any unused portion of the deduction for five years following the
contribution. Upon funding the Foundation, the Company will recognize an expense
in the full amount of the contribution, offset in part by the corresponding
benefit for the tax deduction, during the quarter in which the contribution is
made.
The Bank may provide support services to the Foundation including, but not
limited to, employee time, office space and accounting support. The Bank expects
to provide these services without compensation, however, expenses incurred on
behalf of the Foundation are not expected to be significant to the operations of
the Bank.
At the time of Conversion, the Bank will establish a liquidation account in an
amount equal to its equity as reflected in the latest balance sheet used in the
final conversion prospectus. The liquidation account will be maintained for the
benefit of eligible account holders and supplemental eligible account holders
who continue to maintain their accounts at the Bank after the Conversion. The
liquidation account will be reduced annually to the extent that eligible account
holders and supplemental eligible account holders have reduced their qualifying
deposits as of each anniversary date. Subsequent increases will not restore an
eligible account holder's or supplemental account holder's interest in the
liquidation account. In the event of a complete liquidation of the Bank, each
eligible account holder and supplemental eligible account holder will be
entitled to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held.
The costs associated with Conversion will be deferred and will be deducted from
the proceeds upon the sale and issuance of stock. In the event the Conversion is
not consummated, costs incurred will be charged to expense. At September 30,
1997, there were no deferred conversion costs.
After the conversion, the Bank may not declare or pay dividends on its stock if
such declaration and payment would violate statutory or regulatory requirements.
F-29
<PAGE> 217
===============================================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY NORTHEAST PENNSYLVANIA FINANCIAL CORP., THE BANK OR SANDLER
O'NEILL & PARTNERS, L.P. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION
IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF NORTHEAST PENNSYLVANIA FINANCIAL CORP. OR THE
BANK SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE
THE DATE HEREOF.
______________________________
TABLE OF CONTENTS
Page
Summary .....................................................................
Recent Development ..........................................................
Selected Consolidated Financial and
Other Data of the Bank .................................................
Risk Factors ................................................................
Northeast Pennsylvania Financial Corp. ......................................
First Federal Savings and Loan Association of Hazleton ......................
Regulatory Capital Compliance ...............................................
Use of Proceeds .............................................................
Dividend Policy .............................................................
Market for the Common Stock .................................................
Capitalization ..............................................................
Pro Forma Data ..............................................................
Comparison of Valuation and Pro Forma Information With No Foundation ........
First Federal Savings and Loan Association of Hazleton and
its Subsidiaries Consolidated Statements of Income .....................
Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................................
Business of the Bank ........................................................
Federal and State Taxation ..................................................
Regulation ..................................................................
Management of the Company ...................................................
Management of the Bank ......................................................
The Conversion ..............................................................
Restrictions on Acquisition of the Company
and the Bank ...........................................................
Description of Capital Stock of the Company .................................
Description of Capital Stock of the Bank ....................................
Transfer Agent and Registrar ................................................
Experts .....................................................................
Legal and Tax Opinions ......................................................
Additional Information ......................................................
Index of Consolidated Financial Statements ..................................
------------------------------
UNTIL __________, 1998 OR 25 DAYS AFTER COMMENCEMENT OF THE SYNDICATED
COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
===============================================================================
===============================================================================
5,175,000 Shares
NORTHEAST PENNSYLVANIA
FINANCIAL CORP.
(Proposed Holding Company for
First Federal Savings and
Loan Association of Hazleton)
COMMON STOCK
______________
PROSPECTUS
______________
__________ __, 1998
Sandler O'Neill & Partners, L.P.
===============================================================================
139
<PAGE> 218
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
SEC filing(1).................................................. $ 18,961
OTS filing fee................................................. 14,400
NASD filing fee(1)............................................. 6,928
AMEX listing fee(1)............................................ 30,000
Printing, postage and mailing.................................. 200,000
Legal fees and expenses (including underwriter's
counsel).................................................. 240,000
Accounting fees and expenses................................... 150,000
Appraisers' fees and expenses (including
business plan)............................................ 29,500
Marketing fees and selling commissions(1)...................... 657,300
Underwriter's expenses......................................... 10,000
Conversion agent fees and expenses............................. 20,000
Transfer agent fees and expenses............................... 10,000
Certificate printing........................................... 5,000
Telephone, temporary help and other equipment.................. 10,000
Miscellaneous.................................................. 30,211
TOTAL.......................................................... $1,432,300
==========
- ----------------------
(1) Unless otherwise noted, based upon the registration and issuance of
6,427,350 shares at $10.00 per share.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with the General Corporation Law of the State of Delaware (being
Chapter 1 of Title 8 of the Delaware Code), Articles 10 and 11 of the
registrant's Certificate of Incorporation provide as follows:
TENTH:
A. Each person who was or is made a party or is threatened to be made a party to
or is otherwise involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent, or in any other capacity while serving as a Director,
Officer, employee or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the Delaware General Corporation
Law, as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the Corporation
to provide broader indemnification rights than such law permitted the
Corporation to provide prior to such amendment), against all expense, liability
and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid in settlement) reasonably incurred or suffered by
such indemnitee in connection therewith; provided, however, that, except as
provided in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
<PAGE> 219
B. The right to indemnification conferred in Section A of this Article TENTH
shall include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition (hereinafter
an "advancement of expenses"); provided, however, that, if the Delaware General
Corporation Law requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a Director or Officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including, without
limitation, services to an employee benefit plan) shall be made only upon
delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by
or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal (hereinafter a "final adjudication") that such
indemnitee is not entitled to be indemnified for such expenses under this
Section or otherwise. The rights to indemnification and to the advancement of
expenses conferred in Sections A and B of this Article TENTH shall be contract
rights and such rights shall continue as to an indemnitee who has ceased to be a
Director, Officer, employee or agent and shall inure to the benefit of the
indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in full by
the Corporation within sixty days after a written claim has been received by the
Corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be twenty days, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall be entitled to be paid also the
expenses of prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by the indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that, and (ii) in any suit by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking the Corporation
shall be entitled to recover such expenses upon a final adjudication that, the
indemnitee has not met any applicable standard for indemnification set forth in
the Delaware General Corporation Law. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to such advancement of expenses, under this
Article TENTH or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses conferred in
this Article TENTH shall not be exclusive of any other right which any person
may have or hereafter acquire under any statute, the Corporation's Certificate
of Incorporation, Bylaws, agreement, vote of stockholders or Disinterested
Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect itself and
any Director, Officer, employee or agent of the Corporation or subsidiary or
Affiliate or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by the Board
of Directors, grant rights to indemnification and to the advancement of expenses
to any employee or agent of the Corporation to the fullest extent of the
provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
<PAGE> 220
ELEVENTH:
A Director of this Corporation shall not be personally liable to the Corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
Director, except for liability: (i) for any breach of the Director's duty of
loyalty to the Corporation or its stockholders; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) under Section 174 of the Delaware General Corporation Law; or (iv)
for any transaction from which the Director derived an improper personal
benefit. If the Delaware General Corporation Law is amended to authorize
corporate action further eliminating or limiting the personal liability of
Directors, then the liability of a Director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders of the
Corporation shall not adversely affect any right or protection of a Director of
the Corporation existing at the time of such repeal or modification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
<PAGE> 221
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits and financial statement schedules filed as a part of this
registration statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
1.1 Engagement Letter between First Federal Savings and Loan Association of
Hazleton and Sandler O'Neill & Partners, L.P.*
1.2 Draft Form of Agency Agreement between First Federal Savings and Loan
Association of Hazleton and Sandler O'Neill & Partners, L.P.
2.1 Amended Plan of Conversion (including the Amended and Restated Federal
Stock Charter and Stock Bylaws of First Federal Savings Bank)
3.1 Certificate of Incorporation of Northeast Pennsylvania Financial Corp.*
3.2 Bylaws of Northeast Pennsylvania Financial Corp.*
3.3 Amended and Restated Federal Stock Charter and Stock Bylaws of First
Federal Bank (See Exhibit 2.1 hereto)*
4.0 Draft Stock Certificate of Northeast Pennsylvania Financial Corp.*
5.0 Opinion of Muldoon, Murphy & Faucette re: legality
5.1 Opinion of Morris, Nichols, Arsht & Tunnell re: legality
8.0 Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters
8.1 Opinion of KPMG Peat Marwick LLP re: State Tax Matters*
10.1 Form of First Federal Bank Employee Stock Ownership Plan and Trust*
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan Documents*
10.3 Form of Proposed Employment Agreement between First Federal Bank and
certain executive officers*
10.4 Form of Proposed Employment Agreement between Northeast Pennsylvania
Financial Corp. and certain executive officers*
10.5 Form of Proposed Change in Control Agreement between First Bank and
certain executive officers*
10.6 Form of Proposed Change in Control Agreement between Northeast
Pennsylvania Financial Corp. and certain executive officers*
10.7 Form of Proposed First Federal Bank Employee Severance Compensation
Plan*
10.8 Form of First Federal Bank Supplemental Executive Retirement Plan*
10.9 Form of First Federal Bank Management Supplemental Executive Retirement
Plan*
16.1 Letter from Parente, Randolph, Orlando, Carey & Associates regarding
change in certifying accountant*
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Parente, Randolph, Orlando, Carey & Associates
23.3 Consent of Muldoon, Murphy & Faucette*
23.4 Consent of Morris, Nichols, Arsht & Tunnell*
23.5 Consent and Subscription Rights Opinion of Keller & Company, Inc.*
24.1 Powers of Attorney*
27.0 Financial Data Schedule*
99.1 Appraisal Report of Keller & Company, Inc. (P)
99.2 Draft of First Federal Charitable Foundation Gift Instrument
- ----------
* Previously filed
(P) Previously filed pursuant to Rule 202 of Regulation S-T.
<PAGE> 222
(b) Financial Statement Schedules
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
<PAGE> 223
CONFORMED
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Hazleton, Commonwealth of Pennsylvania, on February 6, 1998.
Northeast Pennsylvania Financial Corp.
By: /s/ E. Lee Beard
--------------------------
E. Lee Beard
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ E. Lee Beard President, Chief Executive Officer February 6, 1998
- ------------------------------ and Director
E. Lee Beard (principal executive officer)
/s/ Patrick J. Owens, Jr. Chief Financial Officer, Treasurer February 6, 1998
- ------------------------------ and Secretary
Patrick J. Owens, Jr. (principal accounting
and financial officer)
/s/ Thomas L. Kennedy Chairman of the Board February 6, 1998
- ------------------------------
Thomas L. Kennedy
* Director
- ------------------------------
Paul L. Conard
* Director
- ------------------------------
William R. Davidson
* Director
- ------------------------------
Barbara M. Ecker
* Director
- ------------------------------
R. Peter Haentjens, Jr.
* Director
- ------------------------------
John P. Lavelle
* Director
- ------------------------------
Michael J. Leib
* Director
- ------------------------------
William J. Spear
</TABLE>
- ----------------
* Pursuant to a Power of Attorney dated December 24, 1997 and filed as Exhibit
24.1 to the Registration Statement on Form S-1 of Northeast Pennsylvania
Financial Corp. on December 24, 1997.
<PAGE> 224
As filed with the Securities and Exchange Commission on February 6, 1998
Registration No. 333-43281
=======================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
EXHIBITS
TO THE
PRE-EFFECTIVE AMENDMENT NO. 1 TO THE
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
=======================================
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TABLE OF CONTENTS
LIST OF EXHIBITS (FILED HEREWITH UNLESS OTHERWISE NOTED)
1.1 Engagement Letter between First Federal Savings and Loan Association of
Hazleton and Sandler O'Neill & Partners, L.P.*
1.2 Draft Form of Agency Agreement between First Federal Savings and Loan
Association of Hazleton and Sandler O'Neill & Partners, L.P.
2.1 Amended Plan of Conversion (including the Amended and Restated Federal
Stock Charter and Stock Bylaws of First Federal Bank)
3.1 Certificate of Incorporation of Northeast Pennsylvania Financial Corp.*
3.2 Bylaws of Northeast Pennsylvania Financial Corp.*
3.3 Amended and Restated Federal Stock Charter and Stock Bylaws of First
Federal Bank (See Exhibit 2.1 hereto)*
4.0 Draft Stock Certificate of Northeast Pennsylvania Financial Corp.*
5.0 Opinion of Muldoon, Murphy & Faucette re: legality
5.1 Opinion of Morris, Nichols, Arsht & Tunnell re: legality
8.0 Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters
8.1 Opinion of KPMG Peat Marwick LLP re: State Tax Matters*
10.1 Form of First Federal Bank Employee Stock Ownership Plan and Trust*
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan Documents*
10.3 Form of Proposed Employment Agreement between First Federal Bank and
certain executive officers*
10.4 Form of Proposed Employment Agreement between Northeast Pennsylvania
Financial Corp. and certain executive officers*
10.5 Form of Proposed Change in Control Agreement between First Bank and
certain executive officers*
10.6 Form of Proposed Change in Control Agreement between Northeast
Pennsylvania Financial Corp. and certain executive officers*
10.7 Form of Proposed First Federal Bank Employee Severance Compensation
Plan*
10.8 Form of First Federal Bank Supplemental Executive Retirement Plan*
10.9 Form of First Federal Bank Management Supplemental Executive Retirement
Plan*
16.1 Letter from Parente, Randolph, Orlando, Carey & Associates regarding
change in certifying accountant*
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Parente, Randolph, Orlando, Carey & Associates
23.3 Consent of Muldoon, Murphy & Faucette*
23.4 Consent of Morris, Nichols, Arsht & Tunnell*
23.5 Consent and Subscription Rights Opinion of Keller & Company, Inc.*
24.1 Powers of Attorney*
27.0 Financial Data Schedule*
99.1 Appraisal Report of Keller & Company, Inc. (P)
99.2 Draft of First Federal Charitable Foundation Gift Instrument
- ----------
* Previously filed
(P) Previously pursuant to Rule 202 of Regulation S-T.
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5,175,000 Shares
(subject to increase up to 5,951,250 shares
in the event of an oversubscription)
Northeast Pennsylvania Financial Corp.
(a Delaware corporation)
Common Stock
(par value $.01 per share)
AGENCY AGREEMENT
______________ __, 1998
Sandler O'Neill & Partners, L.P.
Two World Trade Center, 104th Floor
New York, New York 10048
Ladies and Gentlemen:
Northeast Pennsylvania Financial Corp., a Delaware corporation (the
"Company"), and First Federal Savings and Loan Association of Hazleton, (the
"Bank" or "First Federal"), currently a federally chartered mutual savings and
loan association which will be converted to a federally chartered capital stock
savings bank, under the name First Federal Bank hereby confirm their agreement
with Sandler O'Neill & Partners, L.P. ("Sandler O'Neill" or the "Agent") with
respect to the offer and sale by the Company of 5,175,000 shares (subject to
increase up to 5,951,250 shares in the event of an oversubscription) of the
Company's common stock, par value $.01 per share (the "Common Stock"). The
shares of Common Stock to be sold by the Company in the Offerings are
hereinafter called the "Securities." In addition, as described herein, the
Company expects to contribute shares of Common Stock in an amount equal to 8%
of the shares of Common Stock sold in the Offerings (as hereinafter defined) to
the First Federal Charitable Foundation (the "Foundation"), such shares
hereinafter being referred to as the "Foundation Shares."
The Securities are being offered for sale and the Foundation Shares
are being contributed in accordance with the plan of conversion (the "Plan")
adopted by the Board of Directors of the Bank pursuant to which the Bank
intends to convert from a federally chartered mutual savings and loan
association to a federally chartered stock savings bank
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and issue all of its stock to the Company. Pursuant to the Plan, the Company
is offering to certain of the Bank's depositors and borrowers and its
tax-qualified employee benefit plans (the "Employee Plans") rights to subscribe
for the Securities in a subscription offering (the "Subscription Offering").
To the extent Securities are not subscribed for in the Subscription Offering,
such Securities may be offered to certain members of the general public in a
community offering (the "Community Offering"). It is currently anticipated by
the Bank and the Company that any Securities not subscribed for in the
Subscription and Community Offerings will be offered, subject to Section 2
hereof, in a syndicated community offering (the "Syndicated Community
Offering"). The Subscription Offering, the Community Offering and the
Syndicated Community Offering hereinafter are referred to collectively as the
"Offerings," and the conversion of the Bank from mutual to stock form, the
acquisition of all of the capital stock of the Bank by the Company and the
Offerings hereinafter are referred to collectively as the "Conversion." It is
acknowledged that the number of Securities to be sold in the Conversion may be
increased or decreased as described in the Prospectus (as hereinafter defined).
If the number of Securities is increased or decreased in accordance with the
Plan, the term "Securities" shall mean such greater or lesser number, where
applicable. In the event that a holding company form of organization is not
utilized, all pertinent terms of this Agreement will apply to the conversion of
the Bank from the mutual to stock form of organization and the sale of the
Bank's common stock.
In connection with the Conversion and pursuant to the terms of the
Plan as described in the Prospectus, the Company has established the
Foundation. Immediately following the consummation of the Conversion, subject
to the approval of the establishment of the Foundation by the members of Bank
and compliance with certain conditions as may be imposed by regulatory
authorities, the Company will contribute to the Foundation newly issued shares
of Common Stock in an amount equal to 8% of the Securities sold in the
Conversion. At the minimum, mid-point and maximum of the Estimated Price Range
(as that term is defined in the Prospectus), the contribution to the Foundation
would equal 306,000, 360,000 and 414,000 shares.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-43281), including a
related prospectus, for the registration of the Securities and the Foundation
Shares under the Securities Act of 1933, as amended (the "Securities Act"), has
filed such amendments thereto, if any, and such amended prospectuses as may
have been required to the date hereof by the Commission in order to declare
such registration statement effective, and will file such additional amendments
thereto and such amended prospectuses and prospectus supplements as hereafter
may be required. Such registration statement (as amended to date, if
applicable, and as from time to time amended or supplemented hereafter) and the
prospectuses constituting a part thereof (including in each case all documents
incorporated or deemed to be incorporated by reference therein and the
information, if any, deemed to be part thereof pursuant to the rules and
regulations of the Commission under the Securities Act, as from time to time
amended or supplemented pursuant to the Securities Act or otherwise (the
"Securities Act Regulations")), hereinafter are referred to as the
"Registration
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Statement" and the "Prospectus," respectively, except that if any revised
prospectus shall be used by the Company in connection with the Subscription
Offering, the Community Offering or the Syndicated Community Offering which
differs from the Prospectus on file at the Commission at the time the
Registration Statement becomes effective (whether or not such revised
prospectus is required to be filed by the Company pursuant to Rule 424(b) of
the Securities Act Regulations), then the term "Prospectus" shall refer to such
revised prospectus from and after the time it is first provided to the Agent
for such use.
Concurrently with the execution of this Agreement, the Company is
delivering to the Agent copies of the Prospectus of the Company to be used in
the Subscription Offering and the Community Offering. Such Prospectus contains
information with respect to the Bank, the Company and the Common Stock.
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) The Company and the Bank jointly and severally represent and
warrant to the Agent as of the date hereof as follows:
(i) The Registration Statement has been declared
effective by the Commission, no stop order has been issued with respect thereto
and no proceedings therefor have been initiated or, to the knowledge of the
Company and the Bank, threatened by the Commission. At the time the
Registration Statement became effective and at the Closing Time referred to in
Section 2 hereof, the Registration Statement complied and will comply in all
material respects with the requirements of the Securities Act and the
Securities Act Regulations and did not and will not contain an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading. The
Prospectus, at the date hereof does not and at the Closing Time referred to in
Section 2 hereof will not, include an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that the representations and warranties in this
subsection shall not apply to statements in or omissions from the Registration
Statement or Prospectus made in reliance upon and in conformity with
information with respect to the Agent furnished to the Company in writing by
the Agent expressly for use in the Registration Statement or Prospectus (the
"Agent Information," which the Company and the Bank acknowledge appears only in
the sections captioned "Market for Common Stock" and "The Conversion -
Marketing and Underwriting Arrangements" and "Syndicated Community Offering" of
the Prospectus).
(ii) The Company has filed with the Department of the
Treasury, Office of Thrift Supervision (the "OTS") the Company's application on
Form H-(e)1-S for approval of its acquisition of the Bank (the "Holding
Company Application") under the savings and loan holding company provisions of
the Home Owners' Loan Act, as amended ("HOLA") and the regulations promulgated
thereunder. The Company has received written notice
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dated __________ __, 1998 from the OTS of its approval of the acquisition of
the Bank, such approval remains in full force and effect and no order has been
issued by the OTS suspending or revoking such approval and no proceedings
therefor have been initiated or, to the knowledge of the Company or the Bank,
threatened by the OTS. At the date of such approval, the Holding Company
Application complied in all material respects with the applicable provisions of
HOLA and the regulations promulgated thereunder.
(iii) Pursuant to the rules and regulations of the OTS
governing the conversion of federally chartered mutual savings and loan
institutions to stock form (the "Conversion Regulations"), the Bank has filed
with the OTS an application for conversion on Form AC, and has filed such
amendments thereto and supplementary materials as may have been required to the
date hereof (such application, as amended to date, if applicable, and as from
time to time amended or supplemented hereafter, is hereinafter referred to as
the "Conversion Application"), including copies of the Bank's Proxy Statement,
dated _____________ __, 1998, relating to the Conversion (the "Proxy
Statement"), and the Prospectus. The OTS has, by order dated ____________ __,
1998 (the "Order"), approved the Conversion Application (which Application
includes the Plan) including the waiver of certain provisions of the Conversion
Regulations specified in such Order with respect to the establishment of and
contribution to the Foundation, such approval remains in full force and effect
and no order has been issued by the OTS suspending or revoking such approval
and no proceedings therefor have been initiated or, to the knowledge of the
Company or the Bank, threatened by the OTS. At the date of such approval, the
Conversion Application complied in all material respects with the applicable
provisions of the Conversion Regulations except for those provisions
specifically waived by the OTS in the Order.
(iv) At the time of their use, the Proxy Statement and any
other proxy solicitation materials will comply in all material respects with
the applicable provisions of the Conversion Regulations and will not contain an
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. The Company and the Bank will
promptly file the Prospectus and any supplemental sales literature with the
Commission and the OTS. The Prospectus and all supplemental sales literature,
as of the date the Registration Statement became effective and at the Closing
Time referred to in Section 2, complied and will comply in all material
respects with the applicable requirements of the Conversion Regulations and, at
or prior to the time of their first use, will have received all required
authorizations of the OTS for use in final form.
(v) Neither the SEC nor the OTS has not, by order or
otherwise, prevented or suspended the use of the Prospectus or any supplemental
sales literature authorized by the Company or the Bank for use in connection
with the Offerings.
(vi) At the Closing Time referred to in Section 2, the
Company and the Bank will have completed the conditions precedent to the
Conversion and the establishment of the Foundation in accordance with the Plan,
the applicable Conversion Regulations and
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all other applicable laws, regulations, decisions and orders, including all
material terms, conditions, requirements and provisions precedent to the
Conversion imposed upon the Company or the Bank by the OTS or any other
regulatory authority, other than those which the regulatory authority permits
to be completed after the Conversion.
(vii) Keller & Company, Inc. ("Keller"), which prepared
the valuation of the Bank as part of the Conversion, has advised the Company
and the Bank in writing that it satisfies all requirements for an appraiser set
forth in the Conversion Regulations and any interpretations or guidelines
issued by the OTS with respect thereto. Keller, which prepared the opinion
filed as Exhibit __ of the Conversion Application as required by the Conversion
Regulations, satisfies all requirements for an "independent executive
compensation expert" within the meaning of the Conversion Regulations.
(viii) The accountants who certified the consolidated
financial statements and supporting schedules of the Bank included in the
Registration Statement have advised the Company and the Bank in writing that
they are independent public accountants within the meaning of the Code of
Ethics of the American Institute of Certified Public Accountants ("the AICPA"),
and such accountants are, with respect to the Company, the Bank and the
Subsidiary of the Bank (as hereinafter defined), independent certified public
accountants as required by the Securities Act and the Securities Act
Regulations.
(ix) The only subsidiary of the Bank is FIDACO, Inc. (the
"Subsidiary").
(x) The consolidated financial statements and the related
notes thereto included in the Registration Statement and the Prospectus present
fairly the financial position of the Company, the Bank and the Subsidiary as of
and at the dates indicated and the results of operations, retained earnings and
cash flows for the periods specified, and comply as to form in all material
respects with the applicable accounting requirements of the Securities Act
Regulations and the Conversion Regulations; except as otherwise stated in the
Registration Statement, said consolidated financial statements have been
prepared in conformity with generally accepted accounting principles applied on
a consistent basis; and the supporting schedules and tables included in the
Registration Statement present fairly the information required to be stated
therein.
(xi) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as otherwise
stated therein, (A) there has been no material adverse change in the financial
condition, results of operations or business affairs of the Company, the Bank
and the Subsidiary considered as one enterprise, whether or not arising in the
ordinary course of business, and (B) except for transactions specifically
referred to or contemplated in the Prospectus, there have been no transactions
entered into by the Company, the Bank or the Subsidiary, other than those in
the ordinary course of business, which are material with respect to the
Company, the Bank and the Subsidiary considered as one enterprise.
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(xii) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware with corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus and to
enter into and perform its obligations under this Agreement; and the Company is
duly qualified as a foreign corporation to transact business and is in good
standing in the Commonwealth of Pennsylvania and in each jurisdiction in which
such qualification is required, whether by reason of the ownership or leasing
of property or the conduct of business, except where the failure to so qualify
would not have a material adverse effect on the financial condition, results of
operations or business affairs of the Company, the Bank and the Subsidiary
considered as one enterprise.
(xiii) Upon consummation of the Conversion and the
contribution of the Foundation Shares as described in the Prospectus, the
authorized, issued and outstanding capital stock of the Company will be as set
forth in the Prospectus under "Capitalization" (except for subsequent
issuances, if any, pursuant to reservations, agreements or employee benefit
plans referred to in the Prospectus); except for shares issued in connection
with the initial capitalization of the Company, which shares will be canceled
upon consummation of the Conversion, no shares of Common Stock have been or
will be issued and outstanding prior to the Closing Time referred to in Section
2; at the time of Conversion, the Securities and the Foundation Shares will
have been duly authorized for issuance and, when issued and delivered by the
Company pursuant to the Plan against payment of the consideration calculated as
set forth in the Plan and stated on the cover page of the Prospectus, will be
duly and validly issued and fully paid and non-assessable; the terms and
provisions of the Common Stock and the capital stock of the Company conform and
will conform to all statements relating thereto contained in the Prospectus;
the certificates representing the shares of Common Stock conform to the
requirements of applicable law and regulation and the issuance of the
Securities and the Foundation Shares is not and will not be subject to
preemptive or other similar rights.
(xiv) The Bank, as of the date hereof, is a federally
chartered savings and loan association in mutual form and upon consummation of
the Conversion will be a federally chartered savings bank in stock form, in
both instances with full corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus; the Company, the Bank and the Subsidiary have obtained all
licenses, permits and other governmental authorizations currently required for
the conduct of their respective businesses or required for the conduct of their
respective businesses as contemplated by the Holding Company Application and
the Conversion Application, except where the failure to obtain such licenses,
permits or other governmental authorizations would not have a material adverse
effect on the financial condition, results of operations or business affairs of
the Company, the Bank and the Subsidiary considered as one enterprise; all such
licenses, permits and other governmental authorizations are in full force and
effect and the Company, the Bank and the Subsidiary are in all material
respects in compliance therewith; neither the Company, the Bank nor the
Subsidiary has received notice of any proceeding or action relating to the
revocation or modification of any such license, permit
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or other governmental authorization which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, might have a material
adverse effect on the financial condition, results of operations or business
affairs of the Company, the Bank and the Subsidiary, considered as one
enterprise; and the Bank is in good standing under the laws of the United
States and is qualified as a foreign corporation in any jurisdiction in which
the failure to so qualify would have a material adverse effect on the financial
condition, results of operations or business affairs of the Company, the Bank
and the Subsidiary considered as one enterprise.
(xv) The deposit accounts of the Bank are insured by the
Federal Deposit Insurance Corporation ("FDIC") up to applicable limits and upon
consummation of the Conversion, the liquidation account for the benefit of
eligible account holders and supplemental eligible account holders will be duly
established in accordance with the requirements of the Conversion Regulations.
The Bank is a "qualified thrift lender" within the meaning of 12 U.S.C. Section
1467a(m).
(xvi) Upon consummation of the Conversion, the authorized
capital stock of the Bank will be ________ shares of common stock, par value
$___ per share (the "Bank Common Stock") and ________ shares of preferred
stock, par value $____ per share (the "Bank Preferred Stock"), and the issued
and outstanding capital stock of the Bank will be 1,000 shares of Bank Common
Stock and no shares of the Bank Preferred Stock, and no shares of Bank Common
Stock or Bank Preferred Stock have been or will be issued prior to the Closing
Time referred to in Section 2; and as of Closing Time referred to in Section 2,
all of the issued and outstanding capital stock of the Bank will be duly
authorized, validly issued and fully paid and nonassessable. The shares of
Bank Common Stock to be issued to the Company will have been duly authorized
for issuance and, when issued and delivered by the Bank pursuant to the Plan
against payment of the consideration calculated as set forth in the Plan and as
described in the Prospectus, will be duly and validly issued and fully paid and
nonassessable, and all such Bank Common Stock will be owned beneficially and of
record by the Company free and clear of any security interest, mortgage,
pledge, lien, encumbrance or legal or equitable claim; the terms and provisions
of the Bank Common Stock and the Bank Preferred Stock conform to all statements
relating thereto contained in the Prospectus, and the certificates representing
the shares of the Bank Common Stock will conform with the requirements of
applicable laws and regulations; and the issuance of the Bank Common Stock is
not subject to preemptive or similar rights.
(xvii) The Foundation has been duly incorporated and is
validly existing as a non-stock corporation in good standing under the laws of
the State of Delaware with corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus; the Foundation will not be a savings and loan holding company
within the meaning of 12 C.F.R. Section 574.2(q) as a result of the issuance of
shares of Common Stock to it in accordance with the terms of the Plan and in
the amounts as described in the Prospectus; no approvals are required to
establish the Foundation and to contribute the shares of Common Stock thereto
as described in the
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Prospectus other than those set forth in the OTS approval of the Conversion
Application; except as specifically disclosed in the Prospectus and the Proxy
Statement, there are no agreements and/or understandings, written or oral,
between the Company and/or the Bank and the Foundation with respect to the
control, directly or indirectly, over the voting and the acquisition or
disposition of the Foundation Shares; at the time of the Conversion, the
Foundation Shares will have been duly authorized for issuance and, when issued
and contributed by the Company pursuant to the Plan, will be duly and validly
issued and fully paid and non-assessable and the issuance of the Foundation
Shares is not subject to preemption or similar rights.
(xviii) Each direct and indirect subsidiary of the Bank has
been duly incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation, has full
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and Prospectus,
and is duly qualified to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business except where the
failure to so qualify would not have a material adverse effect on the financial
condition, results of operations or business affairs of the Company, the Bank
and the Subsidiary considered as one enterprise; the activities of the
Subsidiary are permitted to subsidiaries of a federally chartered savings
association by the rules, regulations, resolutions and practices of the OTS;
all of the issued and outstanding capital stock of the Subsidiary has been duly
authorized and validly issued, is fully paid and nonassessable and is owned by
the Bank directly, free and clear of any security interest, mortgage, pledge,
lien, encumbrance or legal or equitable claim.
(xix) The Company and the Bank have taken all corporate
action necessary for them to execute, deliver and perform this Agreement, and
this Agreement has been duly executed and delivered by, and is the valid and
binding agreement of, the Company and the Bank, enforceable in accordance with
its terms, except as may be limited by bankruptcy, insolvency or other laws
affecting the enforceability of the rights of creditors generally or the rights
of creditors of a federally insured depository institution and judicial
limitations on the right of specific performance and except as the
enforceability of indemnification and contribution provisions may be limited by
applicable securities laws.
(xx) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus and prior
to the Closing Time, except as otherwise may be specifically described,
indicated or contemplated therein, neither the Company, the Bank nor the
Subsidiary will have (A) issued any securities or incurred any material
liability or obligation, direct or contingent, or borrowed money, except
borrowings in the ordinary course of business from the same or similar sources
and in similar amounts as indicated in the Prospectus, or (B) entered into any
transaction or series of transactions that is material in light of the business
of the Company, the Bank and the Subsidiary, taken as a whole, excluding the
origination, purchase and sale of loans or the purchase or sale of investment
securities or mortgage-related securities in the ordinary course of business.
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(xxi) No approval of any regulatory or supervisory or other
public authority is required in connection with the execution and delivery of
this Agreement or the issuance of the Securities and the Foundation Shares that
has not has not been obtained and a copy of which has been delivered to the
Agent, except as may be required under the securities laws of various
jurisdictions.
(xxii) Neither the Company, the Bank nor the Subsidiary is
in violation of its certificate of incorporation, organization certificate,
articles of incorporation or charter, as the case may be, or bylaws (and the
Bank will not be in violation of its charter or bylaws in stock form upon
consummation of the Conversion); and neither the Company, the Bank nor the
Subsidiary is in default (nor has any event occurred which, with notice or
lapse of time or both, would constitute a default) in the performance or
observance of any obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, loan agreement, note, lease or other instrument
to which the Company, the Bank or the Subsidiary is a party or by which it or
any of them may be bound, or to which any of the property or assets of the
Company, the Bank or the Subsidiary is subject, except for such defaults that
would not, individually or in the aggregate, have a material adverse effect on
the financial condition, results of operations or business of the Company, the
Bank and the Subsidiary considered as one enterprise; and there are no
contracts or documents of the Company, the Bank or the Subsidiary which are
required to be filed as exhibits to the Registration Statement or the
Conversion Application which have not been so filed.
(xxiii) The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated herein have
been duly authorized by all necessary corporate action and do not and will not
conflict with or constitute a breach of, or default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company, the Bank or the Subsidiary pursuant to, any contract,
indenture, mortgage, loan agreement, note, lease or other instrument to which
the Company, the Bank or the Subsidiary is a party or by which it or any of
them may be bound, or to which any of the property or assets of the Company,
the Bank or the Subsidiary is subject, except for such defaults that would not,
individually or in the aggregate, have a material adverse effect on the
financial condition, results of operations or business affairs of the Company,
the Bank and the Subsidiary considered as one enterprise; nor will such action
result in any violation of the provisions of the certificate of incorporation,
organization certificate, articles of incorporation or charter, as the case may
be, or bylaws of the Company, the Bank or the Subsidiary; nor will such action
result in any violation of any applicable law, administrative regulation or
administrative or court decree except for immaterial violations that would not
impair the ability of the Company and the Bank to execute, deliver and perform
under this Agreement or consummate the transactions contemplated herein.
(xxiv) No labor dispute with the employees of the Company,
the Bank or the Subsidiary exists or, to the knowledge of the Company, the Bank
or the Subsidiary, is imminent or threatened; and the Company is not aware of
any existing, imminent or
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threatened labor disturbance by the employees of any of its principal suppliers
or contractors which might be expected to result in any material adverse change
in the financial condition, results of operations or business affairs of the
Company, the Bank and the Subsidiary considered as one enterprise.
(xxv) Each of the Company, the Bank and the Subsidiary has
good and marketable title to all properties and assets for which ownership is
material to the business of the Company, the Bank and/or the Subsidiary and to
those properties and assets described in the Prospectus as owned by them, free
and clear of all liens, charges, encumbrances or restrictions, except such as
are described in the Prospectus or are not material in relation to the business
of the Company, the Bank and the Subsidiary considered as one enterprise; and
all of the leases and subleases material to the business of the Company, the
Bank and the Subsidiary under which the Company, the Bank or the Subsidiary
hold properties, including those described in the Prospectus, are valid and
binding agreements of the Company, the Bank and the Subsidiary, enforceable in
accordance with their terms.
(xxvi) None of the Company, the Bank and the Subsidiary is
in violation of any directive from the OTS or the FDIC to make any material
change in the method of conducting their respective businesses; the Bank and
the Subsidiary have conducted and are conducting their business so as to comply
in all material respects with all applicable statutes, regulations and
administrative and court decrees (including, without limitation, all
regulations, decisions, directives and orders of the OTS or the FDIC).
(xxvii) There is no action, suit or proceeding before or by
any court or governmental agency or body, domestic or foreign, now pending, or,
to the knowledge of the Company, the Bank or the Subsidiary, threatened,
against or affecting the Company, the Bank or the Subsidiary that is required
to be disclosed in the Registration Statement (other than as disclosed
therein), or that might result in any material adverse change in the financial
condition, results of operations or business affairs of the Company, the Bank
and the Subsidiary considered as one enterprise, or that might materially and
adversely affect the properties or assets thereof or that might materially and
adversely affect the consummation of the Conversion; all pending legal or
governmental proceedings to which the Company, the Bank or the Subsidiary is a
party or of which any of their respective property or assets is the subject
that are not described in the Registration Statement, including ordinary
routine litigation incidental to the business, are considered in the aggregate
not material; and there are no contracts or documents of the Company, the Bank
or the Subsidiary that are required to be filed as exhibits to the Registration
Statement or the Conversion Application that have not been so filed.
(xxviii) The Bank has obtained an opinion of its
counsel, Muldoon, Murphy & Faucette, with respect to the legality of the
Securities and the Foundation Shares to be issued and the federal, Pennsylvania
and local income tax consequences of the Conversion (including franchise tax,
sales or use tax, license fee in foreign corporations stock
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<PAGE> 11
transfer tax, real property transfer gain tax and real estate transfer tax),
copies of which are filed as exhibits to the Registration Statement; all
material aspects of the aforesaid opinions are accurately summarized in the
Prospectus; the facts and representations upon which such opinions are based
are truthful, accurate and complete in all material respects; and neither the
Bank nor the Company has taken or will take any action inconsistent therewith.
(xxix) The Company is not required to be registered under
the Investment Company Act of 1940, as amended.
(xxx) All of the loans represented as assets on the most
recent consolidated financial statements or consolidated selected financial
information of the Bank included in the Prospectus meet or are exempt from all
requirements of federal, state or local law pertaining to lending, including
without limitation truth in lending (including the requirements of Regulations
Z and 12 C.F.R. Part 226 and Section 563.99), real estate settlement
procedures, consumer credit protection, equal credit opportunity and all
disclosure laws applicable to such loans, except for violations that, if
asserted, would not result in a material adverse effect on the financial
condition, results of operations or business of the Company, the Bank and the
Subsidiary considered as one enterprise.
(xxxi) To the knowledge of the Company and the Bank, with
the exception of the intended loan to the Bank's ESOP by the Company to enable
the ESOP to purchase shares of Common Stock in an amount of up to ___% of the
Common Stock issued in the Conversion, none of the Company, the Bank or
employees of the Bank has made any payment of funds of the Company or the Bank
as a loan for the purchase of the Common Stock or made any other payment of
funds prohibited by law, and no funds have been set aside to be used for any
payment prohibited by law.
(xxxii) The Company, the Bank and the Subsidiary are in
compliance in all material respects with the applicable financial recordkeeping
and reporting requirements of the Currency and Foreign Transaction Reporting
Act of 1970, as amended, and the rules and regulations thereunder.
(xxxiii) Neither the Company, the Bank, or the
Subsidiary, nor any properties owned or operated by the Company, the Bank or
the Subsidiary is in violation of or liable under any Environmental Law (as
defined below), except for such violations or liabilities that, individually or
in the aggregate, would not have a material adverse effect on the financial
condition, results of operations or business affairs of the Company, the Bank
and the Subsidiary considered as one enterprise. There are no actions, suits
or proceedings, or demands, claims, notices or investigations (including,
without limitation, notices, demand letters or requests for information from
any environmental agency) instituted or pending, or to the knowledge of the
Company, the Bank or the Subsidiary, threatened, relating to the liability of
any property owned or operated by the Company, the Bank or the Subsidiary
thereof, under any Environmental Law. For purposes of this subsection, the
term "Environmental Law" means any federal, state, local or foreign law,
statute, ordinance, rule,
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<PAGE> 12
regulation, code, license, permit, authorization, approval, consent, order,
judgment, decree, injunction or agreement with any regulatory authority
relating to (i) the protection, preservation or restoration of the environment
(including, without limitation, air, water, vapor, surface water, groundwater,
drinking water supply, surface soil, subsurface soil, plant and animal life or
any other natural resource), and/or (ii) the use, storage, recycling,
treatment, generation, transportation, processing, handling, labeling,
production, release or disposal of any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, whether by type or by quantity, including any material
containing any such substance as a component.
(xxxiv) The Company, the Bank and the Subsidiary have filed
all federal income and state and local franchise tax returns required to be
filed and have made timely payments of all taxes shown as due and payable in
respect of such returns, and no deficiency has been asserted with respect
thereto by any taxing authority.
(xxxv) The Company has received approval, subject to
regulatory approval to consummate the Offerings and issuance, to have the
Common Stock quoted on the American Stock Exchange ("AMEX") effective as of the
Closing Time referred to in Section 2 hereof.
(xxxvi) The Company has filed a registration statement for
the Common Stock under Section 12(g) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and has requested that such registration statement
be effective concurrent with the effectiveness of the Registration Statement.
(b) Any certificate signed by any officer of the Company or the
Bank and delivered to either of the Agent or counsel for the Agent shall be
deemed a representation and warranty by the Company or the Bank to each Agent
as to the matters covered thereby.
SECTION 2. APPOINTMENT OF SANDLER O'NEILL; SALE AND DELIVERY OF THE
SECURITIES; CLOSING.
On the basis of the representations and warranties herein contained
and subject to the terms and conditions herein set forth, the Company hereby
appoints Sandler O'Neill as its Agent to consult with and advise the Company,
and to assist the Company with the solicitation of subscriptions and purchase
orders for Securities, in connection with the Company's sale of Common Stock in
the Offerings. On the basis of the representations and warranties herein
contained, and subject to the terms and conditions herein set forth, Sandler
O'Neill hereby accepts such appointment and agrees to use its best efforts to
assist the Company with the solicitation of subscriptions and purchase orders
for Securities in accordance with this Agreement; provided, however, that the
Agent shall not be obligated to take any action that is inconsistent with any
applicable laws, regulations, decisions or orders. The services to be rendered
by Sandler O'Neill pursuant to this appointment include the following: (i)
consulting as to the securities marketing implications of any aspect of the
Plan of Conversion or related corporate documents; (ii) reviewing with the
Board of Directors the independent appraiser's appraisal of the Common Stock;
(iii) reviewing all
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<PAGE> 13
offering documents, including the Prospectus, stock order form and related
offering materials (it being understood that preparation and filing of such
documents is the sole responsibility of the Company and the Bank and their
counsel); (iv) assisting in the design and implementation of a marketing
strategy for the Offerings; (v) providing support to the Company and the Bank
in obtaining all requisite regulatory approvals; (vi) assisting Bank management
in preparing for meetings with potential investors and broker-dealers; and
(vii) providing such other general advice and assistance as may be requested to
promote the successful completion of the Offerings.
The appointment of the Agent hereunder shall terminate upon the
earlier to occur of (a) forty-five (45) days after the last day of the
Community Offering, unless the Company and the Agent agree in writing to extend
such period and the OTS agrees to extend the period of time in which the
Securities may be sold, (b) the receipt and acceptance of subscriptions and
purchase orders for all of the Securities or (c) the completion of the
Syndicated Community Offering.
The Company agrees to offer Sandler O'Neill the first right to
act as lead managing underwriter for the Public Offering. The terms of the
Public Offering will be set forth in a separate definitive purchase agreement
in a form satisfactory to Sandler O'Neill and containing customary
representations, warranties, conditions, agreements and indemnities, which
purchase agreement, when executed, will supersede and replace this Agreement
with respect to Securities sold thereunder (the "Purchase Agreement"). This
Agreement is not intended to constitute, and should not be construed as, an
agreement or commitment between the Company, the Bank and Sandler O'Neill
relating to the firm commitment underwriting of any securities, and Sandler
O'Neill may, in its sole judgment and discretion, determine at any time not to
proceed with the proposed firm commitment underwriting. Such proposed
underwriting will be subject, among other things, to: (i) satisfactory
completion by Sandler O'Neill of such due diligence investigation or inquiries
as it may deem appropriate, (ii) approval of the proposed underwriting by
Sandler O'Neill's commitment committee or such other authorization as may be
required by its internal procedures, (iii) market conditions, which, in the
sole judgment of Sandler O'Neill, shall be satisfactory, and (iv) the execution
and delivery of a definitive Purchase Agreement.
or
If any of the Securities remain available after the expiration of the
Subscription Offering and the Community Offering, then, at the request of the
Company, the Bank and the Subsidiary, the Agent will seek to form a syndicate
of registered broker or dealers ("Selected Dealers") to assist in the
solicitation of purchase orders of such Securities on a best-efforts basis,
subject to the terms and conditions set forth in a selected dealers' agreement
(the "Selected Dealers' Agreement"), substantially in the form set forth in
Exhibit A to this Agreement. Sandler O'Neill will endeavor to limit the
aggregate fees to be paid by the Company and the Bank under any such Selected
Dealers' Agreement to an amount competitive with gross underwriting discounts
charged at such time for underwritings of comparable amounts of stock sold at a
comparable price per share in a similar market
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<PAGE> 14
environment; provided, however, that the aggregate fees payable to the Agent
and Selected Dealers shall not exceed 7% of the aggregate Actual Purchase Price
(as defined in the Prospectus) of the Securities sold by such Selected Dealers.
The Agent will endeavor to distribute the Securities among the Selected Dealers
in a fashion that best meets the distribution objective of the Company and the
requirements of the Plan, which may result in limiting the allocation of stock
to certain Selected Dealers. It is understood that in no event shall the Agent
be obligated to act as a Selected Dealer or to take or purchase any Securities.
In the event the Company is unable to sell at least the total minimum
of the Securities, as set forth on the cover page of the Prospectus, within the
period herein provided, this Agreement shall terminate and the Company shall
refund to any persons who have subscribed for any of the Securities the full
amount that it may have received from them, together with interest as provided
in the Prospectus, and no party to this Agreement shall have any obligation to
the others hereunder, except for the obligations of the Company and the Bank as
set forth in Sections 4, 6(a) and 7 hereof and the obligations of the Agent as
provided in Sections 6(b) and 7 hereof. Appropriate arrangements for placing
the funds received from subscriptions for Securities or other offers to
purchase Securities in special interest-bearing accounts with the Bank until
all Securities are sold and paid for were made prior to the commencement of the
Subscription Offering, with provision for refund to the purchasers as set forth
above, or for delivery to the Company if all Securities are sold.
If at least the total minimum of Securities, as set forth on the cover
page of the Prospectus, is sold, then the Company agrees to issue or have
issued the Securities sold and to release for delivery certificates for such
Securities at the Closing Time against payment therefor by release of funds
from the special interest-bearing accounts referred to above. The closing
shall be held at the offices of Muldoon, Murphy & Faucette, at 10:00 a.m.,
local time, or at such other place and time as shall be agreed upon by the
parties hereto, on a business day to be agreed upon by the parties hereto. The
Company shall notify the Agent by telephone, confirmed in writing, when funds
shall have been received for all the Securities. Certificates for Securities
shall be delivered directly to the purchasers thereof in accordance with their
directions. Notwithstanding the foregoing, certificates for Securities
purchased through Selected Dealers shall be made available to the Agent for
inspection at least 48 hours prior to the Closing Time at such office as the
Agent shall designate. The hour and date upon which the Company shall release
for delivery all of the Securities, in accordance with the terms hereof, is
herein called the "Closing Time."
The Company will pay any stock issue and transfer taxes that may be
payable with respect to the sale of the Securities.
In addition to reimbursement of the expenses specified in Section 4
hereof, the Agent will receive the following compensation for its services
hereunder:
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<PAGE> 15
(a) One and one-quarter percent (1.25%) of the aggregate
Actual Purchase Price (as defined in the Prospectus) of the
Securities sold in the Subscription Offering to certain
eligible account holders and borrowers and in the Direct
Community Offering, excluding in each case shares purchased by
(i) any employee benefit plan of the Bank or Company
established for the benefit of their respective directors,
officers and employees, (ii) in any foundation or charitable
organization established by the Bank in connection with the
Conversion and (iii) any director, officer or employee of the
Bank or the Company or members of their immediate families
which term shall mean parents, grandparents, spouse, siblings,
children and grandchildren; and
(b) with respect to any Securities sold by a National
Association of Securities Dealers, Inc. ("NASD") member firm
(other than Sandler O'Neill) under the Selected Dealers'
Agreement in the Syndicated Community Offering, (i) the
compensation payable to Selected Dealers under any Selected
Dealers' Agreement, (ii) any sponsoring dealer's fees; and
(iii) a management fee to Sandler O'Neill of one and
one-quarter percent (1.25%). Any fees payable to Sandler
O'Neill for Securities sold by Sandler O'Neill under any such
agreement shall be limited to an aggregate of one and one
quarter percent (1.25%) of the Purchase Price of such
Securities.
If this Agreement is terminated by the Agent in accordance with the
provisions of Section 9(a) hereof or the Conversion is terminated by the
Company, no fee shall be payable by the Company to Sandler O'Neill; however,
the Company shall reimburse the Agent for all of its reasonable out-of-pocket
expenses incurred prior to termination, including the reasonable fees and
disbursements of counsel for the Agent in accordance with the provisions of
Section 4 hereof.
All fees payable to the Agent hereunder shall be payable in immediate
available funds at Closing Time, or upon the termination of this Agreement, as
the case may be. In recognition of the long lead times involved in the
conversion process, the Bank agrees to make advance payments to the Agent in
the aggregate amount of $50,000, $25,000 of which previously has been paid and
the remaining $25,000 of which shall be payable upon execution hereof, which
shall be credited against any fees or reimbursement of expenses payable
hereunder.
SECTION 3. COVENANTS OF THE COMPANY AND THE BANK.
The Company and the Bank covenant with the Agent as follows:
(a) The Company and the Bank will prepare and file such amendments
or supplements to the Registration Statement, the Prospectus, the Conversion
Application and the Proxy Statement as may hereafter be required by the
Securities Act Regulations or the Conversion Regulations or as may hereafter be
requested by the Agent. Following
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<PAGE> 16
completion of the Subscription and Community Offerings, in the event of a
Syndicated Community Offering, the Company and the Bank will (i) promptly
prepare and file with the Commission a post-effective amendment to the
Registration Statement relating to the results of the Subscription and
Community Offerings, any additional information with respect to the proposed
plan of distribution and any revised pricing information or (ii) if no such
post-effective amendment is required, will file with, or mail for filing to,
the Commission a prospectus or prospectus supplement containing information
relating to the results of the Subscription and Community Offerings and pricing
information pursuant to Rule 424(c) of the Securities Act Regulations, in
either case in a form acceptable to the Agent. The Company and the Bank will
notify the Agent immediately, and confirm the notice in writing, (i) of the
effectiveness of any post-effective amendment of the Registration Statement,
the filing of any supplement to the Prospectus and the filing of any amendment
to the Conversion Application, (ii) of the receipt of any comments from the OTS
or the Commission with respect to the transactions contemplated by this
Agreement or the Plan, (iii) of any request by the Commission or the OTS for
any amendment to the Registration Statement, the Conversion Application or the
Holding Company Application or any amendment or supplement to the Prospectus or
for additional information, (iv) of the issuance by the OTS of any order
suspending the Offerings or the use of the Prospectus or the initiation of any
proceedings for that purpose, (v) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose, and (vi) of the receipt of any
notice with respect to the suspension of any qualification of the Securities
for offering or sale in any jurisdiction. The Company and the Bank will make
every reasonable effort to prevent the issuance of any stop order and, if any
stop order is issued, to obtain the lifting thereof at the earliest possible
moment.
(b) The Company and the Bank will (i) give the Agent notice of
their intention to file or prepare any amendment to the Conversion Application,
the Holding Company Application or the Registration Statement (including any
post-effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use in
connection with the Syndicated Community Offering of the Securities which
differs from the prospectus on file at the Commission at the time the
Registration Statement becomes effective, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) of the Securities
Act Regulations); (ii) furnish the Agent with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed filing or use, as
the case may be; and (iii) not file any such amendment or supplement or use any
such prospectus to which the Agent or counsel for the Agent may object.
(c) The Company and the Bank will deliver to the Agent as many
signed copies and as many conformed copies of the Conversion Application and
the Registration Statement as originally filed and of each amendment thereto
(including exhibits filed therewith or incorporated by reference therein) as
the Agent may reasonably request, and
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<PAGE> 17
from time to time such number of copies of the Prospectus as the Agent may
reasonably request.
(d) During the period when the Prospectus is required to be
delivered, the Company and the Bank will comply, at their own expense, with all
requirements imposed upon them by the OTS, by the applicable Conversion
Regulations, as from time to time in force, and by the Securities Act, the
Securities Act Regulations, the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and the rules and regulations of the Commission
promulgated thereunder, including, without limitation, Regulation M under the
Exchange Act, so far as necessary to permit the continuance of sales or dealing
in shares of Common Stock during such period in accordance with the provisions
hereof and the Prospectus.
(e) If any event or circumstance shall occur as a result of which
it is necessary, in the reasonable opinion of counsel for the Agent, to amend
or supplement the Prospectus in order to make the Prospectus not misleading in
the light of the circumstances existing at the time it is delivered to a
purchaser, then the Company and the Bank will forthwith amend or supplement the
Prospectus (in form and substance satisfactory to counsel for the Agent) so
that, as so amended or supplemented, the Prospectus will not include an untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances
existing at the time it is delivered to a purchaser, not misleading, and the
Company and the Bank will furnish to the Agent a reasonable number of copies of
such amendment or supplement. For the purpose of this subsection, the Company
and the Bank each will furnish such information with respect to itself as the
Agent may from time to time reasonably request.
(f) The Company and the Bank will take all necessary action, in
cooperation with the Agent, to qualify the Securities for offering and sale
under the applicable securities laws of such states of the United States and
other jurisdictions as the Conversion Regulations may require and as the Agent
and the Company have agreed; provided, however, that the Company and the Bank
shall not be obligated to file any general consent to service of process or to
qualify as a foreign corporation in any jurisdiction in which it is not so
qualified. In each jurisdiction in which the Securities have been so
qualified, the Company and the Bank will file such statements and reports as
may be required by the laws of such jurisdiction to continue such qualification
in effect for a period of not less than one year from the effective date of the
Registration Statement.
(g) The Company authorizes Sandler O'Neill and any Selected
Dealers to act as agent of the Company in distributing the Prospectus to
persons entitled to receive subscription rights and other persons to be offered
Securities having record addresses in the states or jurisdictions set forth in
a survey of the securities or "blue sky" laws of the various jurisdictions in
which the Offerings will be made (the "Blue Sky Survey").
(h) The Company will make generally available to its security
holders as soon as practicable, but not later than 60 days after the close of
the period covered thereby, an
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<PAGE> 18
earnings statement (in form complying with the provisions of Rule 158 of the
Securities Act Regulations) covering a twelve month period beginning not later
than the first day of the Company's fiscal quarter next following the
"effective date" (as defined in said Rule 158) of the Registration Statement.
(i) During the period ending on the third anniversary of the
expiration of the fiscal year during which the closing of the transactions
contemplated hereby occurs, the Company will furnish to its stockholders as
soon as practicable after the end of each such fiscal year an annual report
(including consolidated statements of financial condition and consolidated
statements of income, stockholders' equity and cash flows, certified by
independent public accountants) and, as soon as practicable after the end of
each of the first three quarters of each fiscal year (beginning with the fiscal
quarter ending after the effective date of the Registration Statement),
consolidated summary financial information of the Company, the Bank and the
Subsidiary for such quarter in reasonable detail. In addition, such annual
report and quarterly consolidated summary financial information shall be made
public through the issuance of appropriate press releases at the same time or
prior to the time of the furnishing thereof to stockholders of the Company.
(j) During the period ending on the third anniversary of the
expiration of the fiscal year during which the closing of the transactions
contemplated hereby occurs, the Company will furnish to the Agent (i) as soon
as publicly available, a copy of each report or other document of the Company
furnished generally to stockholders of the Company or furnished to or filed
with the Commission under the Exchange Act or any national securities exchange
or system on which any class of securities of the Company is listed, and (ii)
from time to time, such other information concerning the Company as the Agent
may reasonably request.
(k) The Company and the Bank will conduct the Conversion
(including the formation and operation of the Foundation) in all material
respects in accordance with the Plan, the Conversion Regulations (to the extent
not waived by the provisions of the Order) and all other applicable
regulations, decisions and orders, including all applicable terms, requirements
and conditions precedent to the Conversion imposed upon the Company or the Bank
by the OTS.
(l) The Company and the Bank will use the net proceeds received by
them from the sale of the Securities in the manner specified in the Prospectus
under "Use of Proceeds."
(m) The Company will file with the Commission such reports on Form
SR as may be required pursuant to Rule 463 of the Securities Act Regulations,
if such report or substantially similar report is required by the SEC.
(n) The Company will maintain the effectiveness of the Exchange
Act Registration Statement for not less than three years. The Company will
file with the AMEX all
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<PAGE> 19
documents and notices required by it of companies that have issued securities
that are traded in the over-the-counter market and quotations for which are
reported by AMEX.
(o) The Company and the Bank will take such actions and furnish
such information as are reasonably requested by the Agent in order for the
Agent to ensure compliance with the NASD's "Interpretation Relating to
Free-Riding and Withholding."
(p) Other than in connection with any employee benefit plan or
arrangement described in the Prospectus, the Company will not, without the
prior written consent of the Agent, sell or issue, contract to sell or
otherwise dispose of, any shares of Common Stock other than the Securities or
the Foundation Shares for a period of 180 days following the Closing Time.
(q) During the period beginning on the date hereof and ending on
the later of the third anniversary of the Closing Time or the date on which the
Agent receives full payment in satisfaction of any claim for indemnification or
contribution to which it may be entitled pursuant to Sections 6 or 7 hereof,
respectively, neither the Company nor the Bank shall, without the prior written
consent of the Agent, which consent shall not be unreasonably withheld, take or
permit to be taken any action that could result in the Bank Common Stock
becoming subject to any security interest, mortgage, pledge, lien or
encumbrance; provided, however, that this covenant shall be null and void if
the Board of Governors of the Federal Reserve System, by regulation, policy
statement or interpretive release, or by written order or written advice
addressed to the Bank or the Agent specifically addressing the provisions of
Section 6(a) hereof, permits indemnification of the Agent by the Bank as
contemplated by such provisions.
(r) The Company and the Bank will comply with the conditions
imposed by or agreed to with the OTS in connection with its approval of the
Holding Company Application and the Conversion Application including those
conditions relating to the establishment and the operation of the Foundation;
the Company and the Bank shall use their best efforts to ensure that the
Foundation submits within the time frames required by applicable law a request
to the Internal Revenue Service to be recognized as a tax-exempt organization
under Section 503(c) of the Internal Revenue Code of 1986, as amended ("Code");
the Company and the Bank will take no action which will result in the possible
loss of the Foundation's tax-exempt status; and neither the Company nor the
Bank will contribute any additional assets to the Foundation until such time
that such additional contributions will be deductible for federal and state
income tax purposes.
(s) During the period ending on the first anniversary of the
Closing Time, the Bank will comply with all applicable law and regulation
necessary for the Bank to continue to be a "qualified thrift lender" within the
meaning of 12 U.S.C. Section 1467a(m).
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<PAGE> 20
(t) The Company shall not deliver the Securities until the Company
and the Bank have satisfied each condition set forth in Section 5 hereof,
unless such condition is waived by the Agent.
(u) The Company or the Bank will furnish to Sandler O'Neill as
early as practicable prior to the Closing Date, but no later than two (2) full
business days prior thereto, a copy of the latest available unaudited interim
consolidated financial statements of the Bank and the Subsidiaries which have
been read by KPMG Peat Marwick, LLP, as stated in their letters to be furnished
pursuant to subsections (e) and (f) of Section 5 hereof.
SECTION 4. PAYMENT OF EXPENSES.
The Company and the Bank jointly and severally agree to pay all
expenses incident to the performance of their obligations under this Agreement,
including but not limited to (i) the cost of obtaining all securities and bank
regulatory approvals, (ii) the printing and filing of the Registration
Statement as originally filed and of each amendment thereto, (iii) the
preparation, issuance and delivery of the certificates for the Securities to
the purchasers in the Offerings, (iv) the fees and disbursements of the
Company's and the Bank's counsel, accountants, conversion agent, appraiser and
other advisors, (v) the qualification of the Securities under securities laws
in accordance with the provisions of Section 3(f) hereof, including filing fees
and the fees and disbursements of counsel in connection therewith and in
connection with the preparation of the Blue Sky Survey, (vi) the printing and
delivery to the Agent of copies of the Registration Statement as originally
filed and of each amendment thereto and the printing and delivery of the
Prospectus and any amendments or supplements thereto to the purchasers in the
Offerings and the Agent, (vii) the printing and delivery to the Agent of copies
of a Blue Sky Survey (including fees and expenses of blue sky counsel), and
(viii) the fees and expenses incurred in connection with the listing of the
Common Stock on AMEX. In the event the Agent incurs any such fees and expenses
on behalf of the Bank or the Company, the Bank will reimburse the Agent for
such fees and expenses whether or not the Conversion is consummated; provided,
however, that the Agent shall not incur any substantial expenses on behalf of
the Bank or the Company pursuant to this Section without the prior approval of
the Bank.
The Company and the Bank jointly and severally agree to pay certain
expenses incident to the performance of the Agent's obligations under this
Agreement, regardless whether the Conversion is consummated, including (i) the
filing fees paid or incurred by the Agent in connection with all filings with
the NASD, and (ii) all reasonable out-of-pocket expenses incurred by the Agent
relating to the Offerings, including, without limitation, legal fees,
advertising, promotional, syndication and travel expenses and fees and expenses
of the Agent's counsel. All fees and expenses to which the Agent is entitled
to reimbursement under this paragraph of this Section 4 shall be due and
payable upon receipt by the Company or the Bank of a written accounting
therefor setting forth in reasonable detail the expenses incurred by the Agent.
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<PAGE> 21
SECTION 5. CONDITIONS OF AGENT'S OBLIGATIONS.
The Company, the Bank and the Agent agree that the issuance and the
sale of Securities and all obligations of the Agent hereunder are subject to
the accuracy of the representations and warranties of the Company and the Bank
herein contained as of the date hereof and the Closing Time, to the accuracy of
the statements of officers and directors of the Company and the Bank made
pursuant to the provisions hereof, to the performance by the Company and the
Bank of their obligations hereunder, and to the following further conditions:
(a) No stop order suspending the effectiveness of the Registration
Statement shall have been issued under the Securities Act or proceedings
therefor initiated or threatened by the Commission, no order suspending the
Offerings or authorization for final use of the Prospectus shall have been
issued or proceedings therefor initiated or threatened by the OTS and no order
suspending the sale of the Securities in any jurisdiction shall have been
issued.
(b) At Closing Time, the Agent shall have received:
(1) The favorable opinion, dated as of Closing Time, of
Muldoon, Murphy & Faucette, special counsel for the Company and the Bank, in
form and substance satisfactory to counsel for the Agent, to the effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good
standing under the laws of the State of
Delaware.
(ii) The Company has full corporate power and
authority to own, lease and operate its
properties and to conduct its business as
described in the Registration Statement and
Prospectus and to enter into and perform its
obligations under this Agreement.
(iii) The Company is duly qualified as a foreign
corporation to transact business and is in
good standing in the Commonwealth of
Pennsylvania and in each other jurisdiction
in which such qualification is required
whether by reason of the ownership or leasing
of property or the conduct of business,
except where the failure to so qualify would
not have a material adverse effect upon the
financial condition, results of operations or
business affairs of the Company, the Bank and
the Subsidiary taken as a whole.
(iv) Upon consummation of the Conversion and the
issuance of Foundation Shares to the
Foundation immediately upon
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<PAGE> 22
completion thereof, the authorized, issued
and outstanding capital stock of the Company
will be as set forth in the Prospectus under
"Capitalization" and, except for shares
issued upon incorporation of the Company,
which shares shall be canceled prior to or
concurrently with the Closing Time, no shares
of Common Stock have been or will have been
issued and outstanding prior to the Closing
Time.
(v) The Securities and the Foundation Shares have
been duly and validly authorized for issuance
and sale and, when issued and delivered by
the Company pursuant to the Plan against
payment of the consideration calculated as
set forth in the Plan, will be duly and
validly issued and fully paid and
non-assessable.
(vi) The issuance of the Securities and the
Foundation Shares is not subject to
preemptive or other similar rights arising by
operation of law or, to the knowledge of such
counsel, otherwise.
(vii) The Bank has been at all times since the date
hereof and prior to the Closing Time duly
organized and is validly existing and in good
standing under the laws of the United States
of America as a federally chartered savings
bank of mutual form, and, at Closing Time,
has become duly organized, validly existing
and in good standing under the laws of the
United States of America as a federally
chartered savings bank in stock form, in both
instances with full corporate power and
authority to own, lease and operate its
properties and to conduct its business as
described in the Registration Statement and
the Prospectus; and the Bank is duly
qualified as a foreign corporation in each
jurisdiction in which the failure to so
qualify would have a material adverse effect
upon the financial condition, results of
operations or business affairs of the Bank.
(viii) The Bank is a member in good standing of the
Federal Home Loan Bank of Pittsburgh and the
deposit accounts of the Bank are insured by
the FDIC up to the applicable limits.
(ix) The Subsidiary has been duly incorporated and
is validly existing as a corporation in good
standing under the laws of the jurisdiction
of its incorporation, has full corporate
power and authority to own, lease and operate
its properties and to conduct its business as
described in the Registration Statement and
is duly qualified as a foreign corporation to
transact
22
<PAGE> 23
business and is in good standing in each
jurisdiction in which the failure to so
qualify would have a material adverse effect
upon the financial condition, results of
operations or business of the Bank and the
Subsidiary, taken as a whole; the activities
of the Subsidiary are permitted to a
subsidiary of a savings association holding
company and of a federally chartered savings
association by the rules, regulations,
resolutions and practices of the OTS; all of
the issued and outstanding capital stock of
the Subsidiary has been duly authorized and
validly issued, is fully paid and
non-assessable and, to the best of such
counsel's knowledge, is owned by the Bank
directly or through the Subsidiary, free and
clear of any security interest, mortgage,
pledge, lien, encumbrance or claim, legal,
equitable or otherwise.
(x) The Foundation has been duly incorporated and
is validly existing as a non-stock
corporation in good standing under the laws
of the State of Delaware with corporate power
and authority to own, lease and operate its
properties and to conduct its business as
described in the Prospectus; the Foundation
is not a savings and loan holding company
within the meaning of 12 C.F.R. Section
574.2(q) as a result of the issuance of
shares of Common Stock to it in accordance
with the terms of the Plan and in the amounts
as described in the Prospectus; no approvals
are required to establish the Foundation and
to contribute the shares of Common Stock
thereto as described in the Prospectus other
than those set forth in any written notice or
order of approval or non-objection of the
Conversion, the Conversion Application or the
Holding Company Application, copies of which
were provided to the Agent prior to the
Closing Time.
(xi) Upon consummation of the Conversion, all of
the issued and outstanding capital stock of
the Bank when issued and delivered pursuant
to the Plan against payment of consideration
calculated as set forth in the Plan set forth
in the Prospectus, will be duly authorized
and validly issued and fully paid and
nonassessable, and all such capital stock
will be owned beneficially and of record by
the Company free and clear of any security
interest, mortgage, pledge, lien, encumbrance
or claim, legal, equitable or otherwise.
(xii) The OTS has duly approved the Holding Company
Application and the Conversion Application
and no action is pending, or to
23
<PAGE> 24
the best of such counsel's knowledge,
threatened with respect to the Holding
Company Application or the Conversion
Application (including therewith, the
establishment of the Foundation and the
contribution of shares of Common Stock
thereto) or the acquisition by the Company of
all of the Bank's issued and outstanding
capital stock; the Holding Company
Application and the Conversion Application
comply with the applicable requirements of
the OTS except as compliance therewith is
specifically waived by the provisions of the
Order, includes all documents required to be
filed as exhibits thereto and is to the best
of such counsel's knowledge and information,
truthful, accurate and complete; and the
Company is duly authorized to become a
savings association holding company and to
establish the Foundation and is duly
authorized to own all of the issued and
outstanding capital stock of the Bank to be
issued pursuant to the Plan.
(xiii) The execution and delivery of this Agreement
and the consummation of the transactions
contemplated hereby, including the
establishment of the Foundation and the
contribution thereto of shares of Common
Stock, have been duly and validly authorized
by all necessary action on the part of each
of the Company and the Bank, and this
Agreement constitutes the legal, valid and
binding agreement of each of the Company and
the Bank, enforceable in accordance with its
terms, except as rights to indemnity and
contribution hereunder may be limited under
applicable law (it being understood that such
counsel may avail itself of customary
exceptions concerning the effect of
bankruptcy, insolvency or similar laws and
the availability of equitable remedies); the
execution and delivery of this Agreement, the
incurrence of the obligations herein set
forth and the consummation of the
transactions contemplated herein will not
result in any violation of the provisions of
the certificate of incorporation, articles of
incorporation or charter, as the case may be,
or bylaws of the Company, the Bank or the
Subsidiary; and, to the best of such
counsel's knowledge, the execution and
delivery of this Agreement, the incurrence of
the obligations herein set forth and the
consummation of the transactions contemplated
herein will not conflict with or constitute a
breach of, or default under, and no default
exists, and no event has occurred which, with
notice or lapse of time or both, would
constitute a default under, or result in the
creation or imposition of any lien, charge or
encumbrance that, individually or in the
aggregate, would have a material adverse
24
<PAGE> 25
effect on the financial condition, results of
operations or business affairs of the
Company, the Bank and the Subsidiary
considered as one enterprise upon any
property or assets of the Company, the Bank
or the Subsidiary pursuant to any contract,
indenture, mortgage, loan agreement, note,
lease or other instrument to which the
Company, the Bank or the Subsidiary is a
party or by which any of them may be bound,
or to which any of the property or assets of
the Company, the Bank or the Subsidiary is
subject.
(xiv) The Prospectus has been duly authorized by
the OTS for final use pursuant to the
Conversion Regulations and the Order and no
action is pending or, to the best of such
counsel's knowledge, is threatened, by the
OTS to revoke such authorization.
(xv) The Registration Statement is effective under
the Securities Act and no stop order
suspending the effectiveness of the
Registration Statement has been issued under
the Securities Act or to the best of such
counsel's knowledge and information,
proceedings therefor initiated or threatened
by the Commission.
(xvi) No further approval, authorization, consent
or other order of any federal or state board
or body is required in connection with the
execution and delivery of this Agreement, the
issuance of the Securities and the Foundation
Shares and the consummation of the
Conversion, except as may be required under
the securities or Blue Sky laws of various
jurisdictions as to which no opinion need be
rendered.
(xvii) At the time the Registration Statement became
effective, the Registration Statement (other
than the financial statements and appraisal,
financial and statistical data included
therein, as to which no opinion need be
rendered) complied as to form in all material
respects with the requirements of the
Securities Act, the Securities Act
Regulations and the Conversion Regulations.
(xviii) The Common Stock conforms to the description
thereof contained in the Prospectus, and the
form of certificate used to evidence the
Common Stock is in due and proper form and
complies with all applicable statutory
requirements.
(xix) To the best of such counsel's knowledge,
there are no legal or governmental
proceedings pending or threatened against or
affecting the Company, the Bank, the
Subsidiary or the
25
<PAGE> 26
Foundation that are required individually or
in the aggregate to be disclosed in the
Registration Statement and Prospectus, other
than those that are disclosed therein, and
all pending legal or governmental proceedings
to which the Company, the Bank, the
Subsidiary or the Foundation is a party or to
which any of their property is subject that
are not described in the Registration
Statement, including ordinary routine
litigation incidental to the business, are,
considered in the aggregate, not material.
(xx) The information in the Prospectus under
"Dividend Policy," "Federal and State
Taxation," "Regulation," "The Conversion -
Establishment of the Charitable Foundation,"
"The Conversion - Tax Aspects," "Restrictions
on Acquisition of the Company and the Bank,"
"Description of Capital Stock of the Company"
and "Description of Capital Stock of the
Bank," to the extent that it constitutes
matters of law, summaries of legal matters,
documents or proceedings, or legal
conclusions, has been reviewed by such
counsel and is complete and accurate in all
material respects.
(xxi) To the best of such counsel's knowledge,
there are no contracts, indentures,
mortgages, loan agreements, notes, leases or
other instruments required to be described or
referred to in the Registration Statement or
to be filed as exhibits thereto other than
those that are described or referred to
therein or filed as exhibits thereto the
descriptions thereof or references thereto
are correct and no default exists, and no
event has occurred which, with notice or
lapse of time or both, would constitute a
default, in the due performance or observance
of any material obligation, agreement,
covenant or condition contained in any
contract, indenture, mortgage, loan
agreement, note, lease or other instrument so
described, referred to or filed.
(xxii) The Plan and the establishment and funding of
the Foundation have been duly authorized by
the Board of Directors of the Company and the
Board of Directors of the Bank and, to the
best of such counsel's knowledge, the OTS's
approval of the Plan remains in full force
and effect; the Bank's charter has been
amended, effective upon consummation of the
Conversion and the filing of such amended
charter with the OTS, to authorize the
issuance of permanent capital stock; to such
counsel's knowledge, the Company and the Bank
have conducted the Conversion and the
establishment and funding of
26
<PAGE> 27
the Foundation in all material respects in
accordance with applicable requirements of
the Conversion Regulations (except to the
extent that the requirement to comply
therewith was waived specifically by the
terms of the Order), the Plan and all other
applicable regulations, decisions and orders
thereunder, including all material applicable
terms, conditions, requirements and
conditions precedent to the Conversion and
the establishment and funding of the
Foundation imposed upon the Company, the Bank
or the Subsidiary by the OTS and no order has
been issued by the OTS to suspend the
Offerings and no action for such purpose has
been instituted or, to the best of such
counsel's knowledge, threatened by the OTS;
and, to such counsel's knowledge, no person
has sought to obtain review of the final
action of the OTS in approving the Conversion
Application (which includes the Plan that
provides for the establishment of the
Foundation) and the Holding Company
Application.
(xxiii) To the best of such counsel's knowledge, the
Company, the Bank and the Subsidiary have
obtained all material licenses, permits and
other governmental authorizations currently
required for the conduct of their respective
businesses as described in the Registration
Statement and Prospectus, and all such
licenses, permits and other governmental
authorizations are in full force and effect,
and the Company, the Bank and the Subsidiary
are in all material respects complying
therewith.
(xxiv) Neither the Company, the Bank nor the
Subsidiary is in violation of its certificate
of incorporation, articles of incorporation
or charter, as the case may be (and the Bank
will not be in violation of its charter in
stock form upon consummation of the
Conversion); to such counsel's knowledge, the
Company, the Bank and the Subsidiary are not
in default (nor has any event occurred which,
with notice or lapse of time or both, would
constitute a default) in the performance or
observance of any obligation, agreement,
covenant or condition contained in any
contract, indenture, mortgage, loan
agreement, note, lease or other instrument to
which the Company, the Bank or the Subsidiary
is a party or by which the Company, the Bank
or the Subsidiary or any of their property
may be bound.
(xxv) The Company is not required to be registered
as an investment company under the Investment
Company Act of 1940.
27
<PAGE> 28
(2) The favorable opinion, dated as of Closing Time, of
Elias, Matz, Tiernan & Herrick L.L.P., counsel for the Agent, with respect to
the matters set forth in Sections 5(b)(1)(i), (iv), (v), (vi) (solely as to
preemptive rights arising by operation of law), (xiii), (xvii) and (xviii) and
such other matters as the Agent may reasonably require.
(3) In giving their opinions required by subsections
(b)(l) and (b)(2), respectively, of this Section 5, Muldoon, Murphy & Faucette
and Elias, Matz, Tiernan & Herrick L.L.P. shall each additionally state that
nothing has come to their attention that would lead them to believe that the
Registration Statement (except for financial statements, the notes thereto and
other financial, statistical and appraisal data included therein, as to which
counsel need make no statement), at the time it became effective, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus (except for financial statements and
schedules and other financial, statistical or appraisal data included therein,
as to which counsel need make no statement), at the time the Registration
Statement became effective or at Closing Time, included an untrue statement of
a material fact or omitted to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading. In giving their opinions, Muldoon, Murphy & Faucette and
Elias, Matz, Tiernan & Herrick L.L.P. may rely as to matters of fact on
certificates of officers and directors of the Company and the Bank and
certificates of public officials, and as to certain matters of Delaware law
upon the opinion of Morris, Nichols, Arsht & Tunnell, and as to certain matters
of Pennsylvania law, upon the opinion of [___________________, GENERAL COUNSEL
OF THE COMPANY AND THE BANK], which opinions shall be in form and substance
satisfactory to counsel for the Agent, and Elias, Matz, Tiernan & Herrick
L.L.P. also may rely upon the opinions of Muldoon, Murphy & Faucette and
Morris, Nichols, Arsht & Tunnell [AND ___________________, GENERAL COUNSEL OF
THE COMPANY AND THE BANK,] except as to paragraph (xvii) hereof. The opinions
of Muldoon, Murphy & Faucette and Elias, Matz, Tiernan & Herrick L.L.P. shall
be governed by the provisions of the Legal Opinion Accord ("Accord") of the
American Bar Association Section of Business Law (1991) and the term
"knowledge" as used herein shall have the meaning set forth in the Accord for
the term "Actual Knowledge."
(c) At Closing Time, there shall not have been, since the date
hereof or since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change in the
financial condition, results of operations or business affairs of the Company,
the Bank and the Subsidiary considered as one enterprise, whether or not
arising in the ordinary course of business, and the Agent shall have received a
certificate of the President and Chief Executive Officer of the Company and of
the Bank and the chief financial or chief accounting officer of the Company and
of the Bank, dated as of Closing Time, to the effect that (i) there has been no
such material adverse change, (ii) there shall have been no material
transaction entered into by the Company or the Bank from the latest date as of
which the financial condition of the Company or the Bank as set forth in the
Registration Statement and the Prospectus other than transactions referred to
28
<PAGE> 29
or contemplated therein and transactions in the ordinary cause of business,
(iii) neither the Company nor the Bank shall have received from the OTS any
direction (oral or written) to make any material change in the method of
conducting its business with which it has not complied (which direction, if
any, shall have been disclosed to the Agent) or which materially and adversely
would affect the business, financial condition or results of operations of the
Company or the Bank, (iv) the representations and warranties in Section 1
hereof are true and correct with the same force and effect as though expressly
made at and as of the Closing Time, (v) the Company and the Bank have complied
with all agreements and satisfied all conditions on their part to be performed
or satisfied at or prior to Closing Time, (vi) no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been initiated or threatened by the Commission and (vii)
no order suspending the Offerings or the authorization for final use of the
Prospectus has been issued and no proceedings for that purpose have been
initiated or threatened by the OTS and no person has sought to obtain
regulatory or judicial review of the action of the OTS in approving the Plan in
accordance with the Conversion Regulations or the OTS approval of the Holding
Company Application.
(d) At the time of the execution of this Agreement, the Agent
shall have received from KPMG Peat Marwick LLP a letter dated such date, in
form and substance satisfactory to the Agent, to the effect that (i) they are
independent public accountants with respect to the Company, the Bank and the
Subsidiary within the meaning of the Code of Ethics of the AICPA, the
Securities Act and the Securities Act Regulations and the Conversion
Regulations; (ii) it is their opinion that the consolidated financial
statements and supporting schedules included in the Registration Statement and
covered by their opinion therein comply as to form in all material respects
with the applicable accounting requirements of the Securities Act and the
Securities Act Regulations; (iii) based upon limited procedures set forth in
detail in such letter, nothing has come to their attention which causes them to
believe that (A) the unaudited financial statements and supporting schedules of
the Bank and the Subsidiary included in the Registration Statement do not
comply as to form in all material respects with the applicable accounting
requirements of the Securities Act and the Securities Act Regulations and the
Conversion Regulations or are not presented in conformity with generally
accepted accounting principles applied on a basis substantially consistent with
that of the audited financial statements included in the Registration Statement
and the Prospectus, (B) the unaudited amounts of net interest income and net
income set forth under "Selected Consolidated Financial and Other Data of the
Bank" in the Prospectus do not agree with the amounts set forth in the
consolidated financial statements as of and for the dates and periods presented
under such captions or such amounts were not determined on a basis
substantially consistent with that used in determining the corresponding
amounts in the audited financial statements included in the Registration
Statement, (C) as of the date of the most recent financial statements available
prior to the date of this Agreement, there has been any increase in the
consolidated long-term or short-term debt of the Bank or any decrease in
consolidated total assets, the allowance for loan losses, total deposits or net
worth of the Bank and the Subsidiary, in each case as compared with the amounts
shown in the December 31, 1996 balance sheet included
29
<PAGE> 30
in the Registration Statement or, (D) during the period from December 31, 1996
to the date of the most recent financial statements available prior to the date
of this Agreement, there were any decreases, as compared with the corresponding
period in the preceding year, in total interest income, net interest income,
net interest income after provision for loan losses, income before income tax
expense or net income of the Bank and the Subsidiary, except in all instances
for increases or decreases which the Registration Statement and the Prospectus
disclose have occurred or may occur; and (iv) in addition to the examination
referred to in their opinion and the limited procedures referred to in clause
(iii) above, they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information which are included in the Registration Statement and
Prospectus and which are specified by the Agent, and have found such amounts,
percentages and financial information to be in agreement with the relevant
accounting, financial and other records of the Company, the Bank and the
Subsidiary identified in such letter.
(e) At Closing Time, the Agent shall have received from KPMG Peat
Marwick LLP a letter, dated as of Closing Time, to the effect that they
reaffirm the statements made in the letter furnished pursuant to subsection (d)
of this Section, except that the specified date referred to shall be a date not
more than five days prior to Closing Time.
(f) At Closing Time, the Securities shall have been approved for
listing on the AMEX upon notice of issuance.
(g) At Closing Time, the Agent shall have received a letter from
Keller & Company, Inc., dated as of the Closing Time, confirming its appraisal.
(h) At Closing Time, counsel for the Agent shall have been
furnished with such documents and opinions as they may require for the purpose
of enabling them to pass upon the issuance and sale of the Securities and the
Foundation Shares as herein contemplated and related proceedings, or in order
to evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the Securities
and the Foundation Shares as herein contemplated shall be satisfactory in form
and substance to the Agent and counsel for the Agent.
(i) At any time prior to Closing Time, (i) there shall not have
occurred any material adverse change in the financial markets in the United
States or elsewhere or any outbreak of hostilities or escalation thereof or
other calamity or crisis the effect of which it, in the judgment of the Agent,
are so material and adverse as to make it impracticable to market the
Securities or to enforce contracts, including subscriptions or orders, for the
sale of the Securities, and (ii) trading generally on either the American Stock
Exchange or the New York Stock Exchange shall not have been suspended, and
minimum or maximum prices for trading shall not have been fixed, or maximum
ranges for prices for securities have been required, by either of said
Exchanges or by order of the Commission or any other
30
<PAGE> 31
governmental authority, and a banking moratorium shall not have been declared
by Federal authorities.
SECTION 6. INDEMNIFICATION.
(a) The Company and the Bank, jointly and severally, agree to
indemnify and hold harmless the Agent and its affiliates and their respective
partners, directors, officers and employees agents and controlling persons
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act as follows:
(i) from and against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, related to or arising out of the
Conversion (including the establishment of the Foundation and the contribution
of the Foundation Shares thereto by the Company) or any action taken by the
Agent where acting as agent of the Company or the Bank or otherwise as
described in Section 2 hereof; provided, however, that this indemnity agreement
shall not apply to any loss, liability, claim, damage or expense found in a
final judgment by a court of competent jurisdiction to have resulted primarily
from the bad faith, willful misconduct or gross negligence of the Agent seeking
indemnification hereunder;
(ii) from and against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, based upon or arising out of any
untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement (or any amendment thereto), or the omission or
alleged omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out of any
untrue statement or alleged untrue statement of a material fact contained in
the Prospectus (or any amendment or supplement thereto) or the omission or
alleged omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading;
(iii) from and against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, to the extent of the aggregate
amount paid in settlement of any litigation, or any investigation or proceeding
by any governmental agency or body, commenced or threatened, or of any claim
whatsoever described in clauses (i) or (ii) above, if such settlement is
effected with the written consent of the Company or the Bank, which consent
shall not be unreasonably withheld; and
(iv) from and against any and all expense whatsoever, as
incurred (including, subject to Section 6(c) hereof, the fees and disbursements
of counsel chosen by the Agent), reasonably incurred in investigating,
preparing for or defending against any litigation, or any investigation,
proceeding or inquiry by any governmental agency or body, commenced or
threatened, or any claim whatsoever described in clauses (i) or (ii) above, to
the extent that any such expense is not paid under (i), (ii) or (iii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage
31
<PAGE> 32
or expense to the extent arising out of any untrue statement or alleged untrue
statement of a material fact contained in the Prospectus (or any amendment or
supplement thereto) or omission or alleged omission therefrom of a material
fact necessary in order to make the statements therein, in light of the
circumstance under which they were made, not misleading which was made in
reliance upon and in conformity with written information relating to the Agent
furnished to the Company or the Bank by the Agent expressly for use in the
Registration Statement (or any amendment or supplement thereto) or the
Prospectus (or any amendment or supplement thereto), which information the
Company and the Bank acknowledge is included only in the sections captioned
"Market for the Common Stock," "The Conversion - Marketing and Underwriting
Arrangements" and "Syndicated Community Offering" of the Prospectus ("Agent's
Information"). Notwithstanding the foregoing, the indemnification provided for
in this paragraph (a) shall not apply to the Bank in the event that it is found
in a final judgement by a court of competent jurisdiction to constitute an
impermissible covered transaction under Section 23A of the Federal Reserve Act.
(b) The Agent agrees to indemnify and hold harmless the Company,
the Bank, their directors and trustees, each of their officers who signed the
Registration Statement, and each person, if any, who controls the Company
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act against any and all loss, liability, claim, damage and expense
described in the indemnity contained in subsection (a) of this Section, as
incurred, but only with respect to untrue statements or omissions, or alleged
untrue statements or omissions, of a material fact made in the Registration
Statement (or any amendment or supplement thereto) in the Prospectus (or any
amendment or supplement thereto) in reliance upon and in conformity with the
Agent's Information.
(c) Each indemnified party shall give notice as promptly as
reasonably practicable to each indemnifying party of any action commenced
against it in respect of which indemnity may be sought hereunder, but failure
to so notify an indemnifying party shall not relieve such indemnifying party
from any liability which it may have otherwise than on account of this
indemnity agreement. An indemnifying party may participate at its own expense
in the defense of any such action. In no event shall the indemnifying parties
be liable for fees and expenses of more than one counsel (in addition to no
more than one local counsel in each separate jurisdiction in which any action
or proceeding is commenced) separate from their own counsel for all indemnified
parties in connection with any one action or separate but similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances.
(d) The Company and the Bank also agree that the Agent shall not
have any liability (whether direct or indirect, in contract or tort or
otherwise) to the Bank, the Company, its security holders or the Bank's or the
Company's creditors relating to or arising out of the engagement of the Agent
pursuant to, or the performance by the Agent of the services contemplated by,
this Agreement, except to the extent that any loss, claim, damage or liability
is found in a final judgment by a court of competent jurisdiction to have
resulted primarily from the Agent's bad faith, willful misconduct or gross
negligence.
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<PAGE> 33
(e) In addition to, and without limiting, the provisions of
Section 6(a)(iv) hereof, in the event that any Agent, any person, if any, who
controls the Agent within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act or any of its partners, directors, officers and
employees is requested or required to appear as a witness or otherwise gives
testimony in any action, proceeding, investigation or inquiry brought by or on
behalf of or against the Company, the Bank, the Agent or any of their
respective affiliates or any participant in the transactions contemplated
hereby in which the Agent or such person or agent is not named as a defendant,
the Company and the Bank jointly and severally agree to reimburse the Agent for
all reasonable and necessary out-of-pocket expenses incurred by it in
connection with preparing or appearing as a witness or otherwise giving
testimony and to compensate the Agent in an amount to be mutually agreed upon.
SECTION 7. CONTRIBUTION.
In order to provide for just and equitable contribution in
circumstances in which the indemnity agreement provided for in Section 6 hereof
is for any reason held to be unenforceable by the indemnified parties although
applicable in accordance with its terms, the Company, the Bank and the Agent
shall contribute to the aggregate losses, liabilities, claims, damages and
expenses of the nature contemplated by said indemnity agreement incurred by the
Company or the Bank and the Agent, as incurred, in such proportions (i) that
the Agent is responsible for that portion represented by the percentage that
the maximum aggregate marketing fees appearing on the cover page of the
Prospectus bears to the maximum aggregate gross proceeds appearing thereon and
the Company, the Bank and the Subsidiary are jointly and severally responsible
for the balance or (ii) if, but only if, the allocation provided for in clause
(i) is for any reason held unenforceable, in such proportion as is appropriate
to reflect not only the relative benefits to the Company and the Bank on the
one hand and the Agent on the other, as reflected in clause (i), but also the
relative fault of the Company and the Bank on the one hand and the Agent on the
other, as well as any other relevant equitable considerations; provided,
however, that no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section, each person, if any, who
controls the Agent within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act shall have the same rights to contribution as
the Agent, and each director of the Company, each trustee of the Bank, each
officer of the Company who signed the Registration Statement, and each person,
if any, who controls the Company or the Bank within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act shall have the same
rights to contribution as the Company and the Bank. Notwithstanding anything
to the contrary set forth herein, to the extent permitted by applicable law, in
no event shall the Agent be required to contribute an aggregate amount in
excess of the aggregate marketing fees to which the Agent is entitled and
actually paid pursuant to this Agreement.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY.
33
<PAGE> 34
All representations, warranties and agreements contained in this
Agreement, or contained in certificates of officers of the Company or the Bank
submitted pursuant hereto, shall remain operative and in full force and effect,
regardless of any investigation made by or on behalf of any Agent or
controlling person, or by or on behalf of the Company, and shall survive
delivery of the Securities.
SECTION 9. TERMINATION OF AGREEMENT.
(a) The Agent may terminate this Agreement, by notice to the
Company, at any time at or prior to Closing Time (i) if there has been, since
the date of this Agreement or since the respective dates as of which
information is given in the Registration Statement, any material adverse change
in the financial condition, results of operations or business affairs of the
Company or the Bank, or the Company, the Bank or the Subsidiary considered as
one enterprise, whether or not arising in the ordinary course of business, or
(ii) if there has occurred any material adverse change in the financial markets
in the United States or elsewhere or any outbreak of hostilities or escalation
thereof or other calamity or crisis the effect of which it, in the judgment of
the Agent, are so material and adverse as to make it impracticable to market
the Securities or to enforce contracts, including subscriptions or orders, for
the sale of the Securities, (iii) or if trading generally on either the
American Stock Exchange or the New York Stock Exchange has been suspended, or
minimum or maximum prices for trading have been fixed, or maximum ranges for
prices for securities have been required, by either of said Exchanges or by
order of the Commission or any other governmental authority, or if a banking
moratorium has been declared by either Federal or New York authorities, (iv) if
any condition specified in Section 5 shall not have been fulfilled when and as
required to be fulfilled; (v) if there shall have been such material adverse
change in the condition or prospects of the Company or the Bank or the
prospective market for the Company's securities as in the Agent's good faith
opinion would make it inadvisable to proceed with the offering, sale or
delivery of the Securities; (vi) if in the Agent's good faith opinion, the
price for the Securities established by the Company is not reasonable or
equitable under then prevailing market conditions; or (vii) if the Conversion
is not consummated on or prior to June 30, 1998.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party except
as provided in Section 4 hereof relating to the reimbursement of expenses and
except that the provisions of Sections 6 and 7 hereof shall survive any
termination of this Agreement.
SECTION 10. NOTICES.
All notices and other communications hereunder shall be in writing and
shall be deemed to have been duly given if mailed or transmitted by any
standard form of telecommunication. Notices to the Agent shall be directed to
the Agent at 747 Middle Neck Road, Great Neck, New York 10024, attention of
Mark B. Cohen, with a copy to Philip Ross Bevan, Esq., Elias, Matz, Tiernan &
Herrick L.L.P., 734 15th Street N.W., Washington,
34
<PAGE> 35
D.C. 20005; notices to the Company and the Bank shall be directed to either of
them at First Federal Savings & Loan Association of Hazleton, 12 E. Broad
Street, Hazleton, Pennsylvania 18201, attention of E. Lee Beard, President and
Chief Executive Officer, with a copy to Thomas J. Haggerty, Esq., Muldoon,
Murphy & Faucette, 5101 Wisconsin Avenue, N.W., Washington, D.C. 20016.
SECTION 11. PARTIES.
This Agreement shall inure to the benefit of and be binding upon the
Agent, the Company and the Bank and their respective successors. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person, firm or corporation, other than the Agent, the Company and the
Bank and their respective successors and the controlling persons and officers
and directors referred to in Sections 6 and 7 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein or therein contained. This
Agreement and all conditions and provisions hereof and thereof are intended to
be for the sole and exclusive benefit of the Agent, the Company and the Bank
and their respective successors, and said controlling persons and officers and
directors and their heirs and legal representatives, and for the benefit of no
other person, firm or corporation.
SECTION 12. ENTIRE AGREEMENT; AMENDMENT.
This Agreement represents the entire understanding of the parties
hereto with reference to the transactions contemplated hereby and supersedes
any and all other oral or written agreements heretofore made. No waiver,
amendment or other modification of this Agreement shall be effective unless in
writing and signed by the parties hereto.
SECTION 13. GOVERNING LAW AND TIME.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York applicable to agreements made and to be
performed in said State without regard to the conflicts of laws provisions
thereof. Unless otherwise noted, specified times of day refer to Eastern time.
SECTION 14. SEVERABILITY.
Any term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
35
<PAGE> 36
SECTION 15. HEADINGS.
Sections headings are not to be considered part of this Agreement, are
for convenience and reference only, and are not to be deemed to be full or
accurate descriptions of the contents of any paragraph or subparagraph.
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<PAGE> 37
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement among the Agent, the Company and the Bank in accordance with its
terms.
Very truly yours,
NORTHEAST PENNSYLVANIA
FINANCIAL CORP.
By:
-------------------------------------
E. Lee Beard
President and Chief Executive Officer
FIRST FEDERAL SAVINGS & LOAN
ASSOCIATION OF HAZLETON
By:
-------------------------------------
E. Lee Beard
President and Chief Executive Officer
CONFIRMED AND ACCEPTED,
as of the date first above written:
SANDLER O'NEILL & PARTNERS, L.P.
By: Sandler O'Neill & Partners Corp.,
the sole general partner
By:
---------------------------------------
Mark B. Cohen
Principal
37
<PAGE> 1
EXHIBIT 2.1
AMENDED
PLAN OF CONVERSION
FOR
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON
<PAGE> 2
AMENDED
PLAN OF CONVERSION
FOR
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON
1. INTRODUCTION
This Amended Plan of Conversion ("Plan") provides for the conversion
of First Federal Savings and Loan Association of Hazleton ("BANK") from a
federally-chartered mutual savings and loan association to a
federally-chartered capital stock savings bank to be named First Federal Bank.
The Board of Directors of the BANK currently contemplates that all of the stock
of the BANK shall be held by a corporation (the "Holding Company"). The Board
of Directors has carefully considered the alternatives available to the BANK
with respect to its corporate structure and has determined that a mutual to
stock conversion as described in this Plan is in the best interests of the
BANK, its depositors and the community served by the BANK. The Board of
Directors believes that the decline in mutuality is placing mutual savings
associations, such as the BANK, at a disadvantage to the increasing base of
stock thrift and commercial bank institutions. The restructuring of the BANK
into the capital stock form of organization will enable the BANK to compete
more effectively with commercial banks and other financial institutions for new
business opportunities, and as a stock institution, to increase its equity
capital base and access the capital markets when needed and to enhance the
BANK'S ability to expand its franchise and the products it offers. The use of
the Holding Company, if so utilized, would also provide greater
<PAGE> 3
organizational and operating flexibility. Shares of capital stock of the BANK
will be sold to the Holding Company and the Holding Company will offer the
Conversion Stock upon the terms and conditions set forth herein to the Eligible
Account Holders, the Employee Plans established by the BANK or Holding Company,
Supplemental Eligible Account Holders and Other Members in the respective
priorities set forth in this Plan. Any shares of Conversion Stock not subscribed
for by the foregoing classes of persons will be offered for sale to certain
members of the public either directly by the BANK and the Holding Company
through a Community Offering or a Syndicated Community Offering or through an
underwritten firm commitment public offering or through a combination thereof.
In the event that the BANK decides not to utilize the Holding Company in the
conversion, Conversion Stock of the BANK, in lieu of the Holding Company, will
be sold as set forth above and in the respective priorities set forth in this
Plan. In addition to the foregoing, the BANK and the Holding Company, as part of
this Plan, intend to implement stock option plans and other stock benefit plans
and will provide employment or severance agreements to certain management
employees and certain other compensation to the directors, officers and
employees of the BANK as described in the prospectus for the Conversion Stock.
In furtherance of the BANK's long term commitment to its community,
this Plan provides for the establishment of a foundation (the "Foundation") as
part of the Conversion. The Foundation is intended to complement the BANK's
existing community reinvestment activities in a manner that will allow the
communities in which the BANK operates to share in the potential growth and
profitability of the Holding Company and the BANK over the long term. Consistent
with the BANK's goal, the Holding Company intends to donate to the Foundation
from its authorized but unissued common stock up to 8% of the number of shares
sold in the
2
<PAGE> 4
Conversion. The establishment of the Foundation is subject to the approval of
the Voting Members of the BANK. In the event the Foundation is not approved, the
BANK may determine to complete the Conversion without the Foundation.
This Plan, which has been unanimously approved by the Board of
Directors of the BANK, must also be approved by the affirmative vote of a
majority of the total number of outstanding votes entitled to be cast by Voting
Members of the BANK at a special meeting to be called for that purpose. Prior to
the submission of this Plan to the Voting Members for consideration, the Plan
must be approved by the Office of Thrift Supervision (the "OTS").
2. DEFINITIONS
For the purposes of this Plan, the following terms have the following
meanings:
Account Holder - The term Account Holder means any Person holding a
Savings Account in the BANK.
Acting in Concert - The term "Acting in Concert" means (i) knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement; (ii) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise; or
(iii) a person or company which acts in concert with another person or company
("other party") shall also be deemed to be acting in concert with any person or
company who is also acting in concert with that other party, except that any
Tax-Qualified Employee Stock Benefit Plan will not be deemed to be acting in
concert with its trustee or a person who serves in a similar capacity solely for
the
3
<PAGE> 5
purpose of determining whether stock held by the trustee and stock held by the
plan will be aggregated.
Actual Purchase Price - The term Actual Purchase Price means the per
share price at which the Conversion Stock is ultimately sold in accordance with
the terms hereof.
Associate - The term Associate when used to indicate a relationship
with any person, means (i) any corporation or organization (other than the BANK
or a majority-owned subsidiary of the BANK) of which such person is an officer
or partner or is, directly or indirectly, the beneficial owner of 10 percent or
more of any class of equity securities, (ii) any trust or other estate in which
such person has a substantial beneficial interest or as to which such person
serves as trustee or in a similar fiduciary capacity except that for the
purposes of Sections 9 and 14 hereof, the term "Associate" does not include any
Non-Tax-Qualified Employee Stock Benefit Plan or any Tax-Qualified Employee
Stock Benefit Plan in which a person has a substantial beneficial interest or
serves as a trustee or in a similar fiduciary capacity, and except that, for
purposes of aggregating total shares that may be held by Officers and Directors
the term "Associate" does not include any Tax-Qualified Employee Stock Benefit
Plan, and (iii) any relative or spouse of such person, or any relative of such
spouse, who has the same home as such person or who is a Director or Officer of
the BANK or the Holding Company, if utilized, or any of its parents or
subsidiaries.
Bank - The term BANK means First Federal Savings and Loan Association
of Hazleton, Hazleton, Pennsylvania, and after its conversion to stock form,
First Federal Bank.
4
<PAGE> 6
Community Offering - The term Community Offering means the offering
for sale to certain members of the general public directly by the BANK or the
Holding Company, if utilized, of any shares of Conversion Stock not subscribed
for in the Subscription Offering.
Conversion Stock - The term Conversion Stock means the common stock
offered and issued by the Holding Company or the $1.00 par value Common Stock
offered and issued by the BANK, if the Holding Company form of organization is
not utilized, upon conversion.
Director - The term Director means a member of the Board of Directors
of the BANK and, where applicable, a member of the Board of Directors of the
Holding Company.
Eligible Account Holder - The term Eligible Account Holder means any
person holding a Qualifying Deposit on the Eligibility Record Date.
Eligibility Record Date - The term Eligibility Record Date means the
date for determining Eligible Account Holders in the BANK and is September 30,
1996.
Employees - The term Employees means all Persons who are employed by
the BANK but does not include an Officer or Director.
Employee Plans - The term Employee Plans means the Tax Qualified
Employee Stock Benefit Plans approved by the Board of Directors of the BANK.
Estimated Price Range - The term Estimated Price Range means the
range of minimum and maximum aggregate values determined by the Board of
Directors of the BANK within which the aggregate amount of Common Stock sold in
the Conversion will fall. The Estimated Price Range will be within the estimated
pro forma market value of the Conversion Stock as determined by the Independent
Appraiser prior to the Subscription Offering and as it may be amended from time
to time thereafter.
5
<PAGE> 7
FDIC - The term FDIC means the Federal Deposit Insurance Corporation.
Holding Company - The term Holding Company means the corporation
formed for the purpose of acquiring all of the shares of capital stock of the
BANK to be issued upon its conversion to stock form unless the Holding Company
form of organization is not utilized. Shares of common stock of the Holding
Company will be issued in the conversion to Participants and others in a
Subscription, Community, Syndicated Community, or underwritten firm commitment
public offering, or through a combination thereof.
Independent Appraiser - The term Independent Appraiser means an
appraiser retained by the BANK to prepare an appraisal of the pro forma market
value of the Conversion Stock.
Local Community - The term Local Community means all counties in
which the Bank has its home office or a branch office.
Member - The term Member means any Person or entity who qualifies as
a member of the BANK pursuant to its charter and bylaws.
OTS - The term OTS means Office of Thrift Supervision of the
Department of the Treasury and its successors.
Officer - The term Officer means an executive officer of the BANK
which includes the Chief Executive Officer, President, Executive Vice President,
Senior Vice Presidents, Vice Presidents in charge of principal business
functions, Secretary, Treasurer and Controller and any person performing
functions similar to those performed by the foregoing persons.
Order Form - The term Order Form means any form together with
attached cover letter, sent by the BANK to any Participant or Person containing
among other things a description of the alternatives available to such Person
under the Plan and by which any such Person may make elections regarding
subscriptions for Conversion Stock in the Subscription and Community Offerings.
6
<PAGE> 8
Other Member - The term Other Member means any person who is a Member
of the BANK (other than an Eligible Account Holder or Supplemental Eligible
Account Holder) at the close of business on the Voting Record Date.
Participants - The term Participants means the Eligible Account
Holders, Employee Plans, Supplemental Eligible Account Holders and Other
Members.
Person - The term Person means an individual, a corporation, a
partnership, an association, a joint-stock company, a trust (including
Individual Retirement Accounts and KEOGH Accounts), any unincorporated
organization, a government or political subdivision thereof or any other entity.
Plan - The term Plan means this Plan of Conversion of the BANK as it
exists on the date hereof and as it may hereafter be amended in accordance with
its terms.
Preferred Subscribers - The term Preferred Subscribers means those
member of the general public which are natural persons residing in the Bank's
Local Community.
Qualifying Deposit - The term Qualifying Deposit means the balance of
each Savings Account of $50 or more in the BANK at the close of business on the
Eligibility Record Date or the Supplemental Eligibility Record Date, whichever
may be the case. Savings Accounts with total deposit balances of less than $50
shall not constitute a Qualifying Deposit.
SEC - The term SEC refers to the United States Securities and
Exchange Commission.
Savings Account - The term Savings Account has the same meaning as in
Section 561.42 of the Rules and Regulations of the OTS and includes certificates
of deposit.
Special Meeting of Members - The term Special Meeting of Members
means the special meeting and any adjournments thereof held to consider and vote
upon this Plan.
Subscription Offering - The term Subscription Offering means the
offering of Conversion Stock for purchase through Order Forms to Participants.
7
<PAGE> 9
Subscription Price - The term Subscription Price means the amount per
share of Conversion Stock to be paid initially by Participants in the
Subscription Offering and persons in the Community Offering.
Supplemental Eligibility Record Date - The term Supplemental
Eligibility Record Date means the supplemental record date for determining
Supplemental Eligible Account Holders of the BANK. The Supplemental Eligibility
Record Date shall be the last day of the calendar quarter preceding the OTS'
approval of the application for conversion.
Supplemental Eligible Account Holder - The term Supplemental Eligible
Account Holder means any person (other than an Eligible Account Holder) holding
a Qualifying Deposit, except officers, directors and their associates, as of the
Supplemental Eligibility Record Date.
Syndicated Community Offering - The term Syndicated Community
Offering means the offering of Conversion Stock following the Subscription and
Community Offerings through a syndicate of broker-dealers.
Tax-Qualified Employee Stock Benefit Plan - The term Tax-Qualified
Employee Stock Benefit Plan means any defined benefit plan or defined
contribution plan, such as an employee stock ownership plan, stock bonus plan,
profit-sharing plan or other plan, which, with its related trust, meets the
requirements to be "qualified" under Section 401 of the Internal Revenue Code. A
"Non-Tax-Qualified Employee Stock Benefit Plan" is any defined benefit plan or
defined contribution plan which is not so qualified.
Voting Members - The term Voting Members means those persons
qualifying as voting members of the BANK pursuant to its charter and bylaws.
8
<PAGE> 10
Voting Record Date - The term Voting Record Date means the date fixed
by the Directors in accordance with OTS regulations for determining eligibility
to vote at the Special Meeting of Members.
3. PROCEDURE FOR CONVERSION
After approval of the Plan by a vote of not less than two-thirds
(2/3) of the Board of Directors of the BANK, the Plan shall be submitted
together with all other requisite material to the OTS for its approval. Notice
of the adoption of the Plan by the Board of Directors of the BANK and the
submission of the Plan to the OTS for its approval will be published in a
newspaper having general circulation in each community in which an office of the
BANK is located and copies of the Plan will be made available at each office of
the BANK for inspection by the Members. Upon receipt of notice from the OTS to
do so, the BANK also will cause to be published a notice of the filing with the
OTS of an application to convert in accordance with the provisions of the Plan.
Following approval by the OTS, the Plan will be submitted to a vote of the
Voting Members at the Special Meeting of Members called for that purpose. Upon
approval of the Plan by a majority of the total outstanding votes of the Voting
Members, the BANK will take all other necessary steps pursuant to applicable
laws and regulations to convert the BANK to stock form. The conversion must be
completed within 24 months of the approval of the Plan by the Voting Members,
unless a longer time period is permitted by governing laws and regulations.
The Board of Directors of the BANK intends to take all necessary
steps to form the Holding Company, including the filing of an Application on
Form H-(e)1 or H-(e)1-S, if available to the Holding Company, with the OTS. In
the event that the Holding Company is
9
<PAGE> 11
utilized, upon conversion the BANK will issue capital stock to the Holding
Company and the Holding Company will issue and sell the Conversion Stock in
accordance with this Plan.
The Board of Directors of the BANK may determine for any reason at
any time prior to the issuance of the Conversion Stock not to utilize a holding
company form of organization in the Conversion, in which case, the Holding
Company's registration statement on Form S-1 will be withdrawn from the SEC, the
BANK will take all steps necessary to complete the conversion from the mutual to
the stock form of organization, including filing any necessary documents with
the OTS, and will issue and sell the Conversion Stock in accordance with this
Plan. In such event, any subscriptions or orders received for Conversion Stock
of the Holding Company shall be deemed to be subscriptions or orders for
Conversion Stock of the BANK without any further action by the BANK or the
subscribers for the Conversion Stock, unless any such further action is required
by the SEC or the OTS, in which case the BANK shall take such necessary action
to complete the Conversion. Any references to the Holding Company in this Plan
shall mean the BANK in the event the Holding Company is eliminated in the
Conversion.
The Board of Directors of the BANK also intend to take all necessary
steps to establish the Foundation, and to fund such Foundation in the manner set
forth in Section 7A hereof, subject to the approval of the Voting Members.
The Conversion Stock will not be insured by the FDIC. The BANK will
not knowingly lend funds or otherwise extend credit to any Person to purchase
shares of the Conversion Stock.
10
<PAGE> 12
4. HOLDING COMPANY APPLICATIONS AND APPROVALS
The Holding Company shall make timely applications for any requisite
regulatory approvals, including an Application on Form H-(e)1 or an H-(e)1-S, if
available to the Holding Company, to be filed with the OTS and a Registration
Statement on Form S-1 to be filed with the SEC. The BANK shall be a wholly-owned
subsidiary of the Holding Company unless the Holding Company is eliminated in
the Conversion.
5. SALE OF CONVERSION STOCK
The Conversion Stock will be offered simultaneously in the
Subscription Offering to the Eligible Account Holders, Employee Plans,
Supplemental Eligible Account Holders and Other Members in the respective
priorities set forth in Sections 8 through 11 of this Plan. The Subscription
Offering may be commenced as early as the mailing of the Proxy Statement for the
Special Meeting of Members and must be commenced in time to complete the
Conversion within the time period specified in Section 3.
Any shares of Conversion Stock not subscribed for in the Subscription
Offering will be offered for sale in the Community Offering as provided in
Section 12 of this Plan. The Subscription Offering may be commenced prior to the
Special Meeting of Members and, in that event, the Community Offering may also
be commenced prior to the Special Meeting of Members. The offer and sale of
Conversion Stock prior to the Special Meeting of Members shall, however, be
conditioned upon approval of the Plan by the Voting Members.
If feasible, any shares of Conversion Stock remaining after the
Subscription and Community Offerings may be sold in a Syndicated Community
Offering, as provided in Section
11
<PAGE> 13
13 of this Plan in a manner that will achieve the widest distribution of the
Conversion Stock as determined by the BANK. The sale of all Conversion Stock
subscribed for in the Subscription and Community Offerings will be consummated
simultaneously on the date the sale of Conversion Stock in the Syndicated
Community Offering is consummated and only if all unsubscribed for Conversion
Stock is sold.
The BANK may elect to offer to pay fees on a per share basis to
brokers who assist Persons in determining to purchase shares in the Subscription
and Community Offerings.
6. NUMBER OF SHARES AND PURCHASE PRICE OF CONVERSION STOCK
The total number of shares (or a range thereof) of Conversion Stock
to be issued and offered for sale will be determined jointly by the Board of
Directors of the BANK and the Board of Directors of the Holding Company, if the
holding company form of organization is utilized, immediately prior to the
commencement of the Subscription and Community Offerings, subject to adjustment
thereafter if necessitated by market or financial conditions, with the approval
of the OTS, if necessary. In particular, the total number of shares may be
increased by up to 15% of the number of shares offered in the Subscription and
Community Offering if the Estimated Price Range is increased subsequent to the
commencement of the Subscription and Community Offering to reflect changes in
market and financial conditions.
All shares sold in the Conversion will be sold at a uniform price per
share referred to in this Plan as the Actual Purchase Price. The aggregate
purchase price for all shares of Conversion Stock will not be inconsistent with
the estimated consolidated pro forma market value of the BANK or the Holding
Company, if utilized. The estimated consolidated pro forma market value
12
<PAGE> 14
of the BANK or the Holding Company, if utilized, will be determined for such
purpose by the Independent Appraiser. Prior to the commencement of the
Subscription and Community Offerings, an Estimated Price Range will be
established, which range will vary within 15% above to 15% below the midpoint of
such range. The number of shares of Conversion Stock to be issued and the
purchase price per share may be increased or decreased by the BANK. In the event
that the aggregate purchase price of the Conversion Stock is below the minimum
of the Estimated Price Range, or materially above the maximum of the Estimated
Price Range, resolicitation of purchasers may be required provided that up to a
15% increase above the maximum of the Estimated Price Range will not be deemed
material so as to require a resolicitation. Up to a 15% increase in the number
of shares to be issued which is supported by an appropriate change in the
estimated pro forma market value of the BANK or the Holding Company, if
utilized, will not be deemed to be material so as to require a resolicitation of
subscriptions. In the event that the aggregate purchase price of the Conversion
Stock is below the minimum of the Estimated Price Range or in excess of 15%
above the maximum of the Estimated Price Range, and a resolicitation is
required, such resolicitation shall be effected in such manner and within such
time as the BANK shall establish, with the approval of the OTS, if required.
Based upon the independent valuation as updated prior to the
commencement of the Subscription and Community Offerings, the Board of Directors
of the Holding Company, (if a holding company form of organization is utilized)
and the Board of Directors of the BANK will fix the Subscription Price and the
range of the number of shares to be offered. If upon completion of the
Subscription and Community Offerings all of the Conversion Stock is
13
<PAGE> 15
subscribed for, or if because of a limited number of unsubscribed shares or
otherwise a Syndicated Community Offering cannot be effected, the total number
of shares of Conversion Stock to be issued and sold will be jointly determined
by the BANK and Holding Company (if a holding company form of organization is
utilized) as follows: (a) the estimated aggregate pro forma market value of the
BANK or the Holding Company, as the case may be, immediately after conversion as
determined by the Independent Appraiser, expressed in terms of a specific
aggregate dollar amount rather than as a range, upon completion of the
Subscription and Community Offerings or other sale of all of the Conversion
Stock shall be divided by (b) the Actual Purchase Price.
If there is a Syndicated Community Offering of shares of Conversion
Stock not subscribed for in the Subscription and Community Offerings, the price
per share at which the Conversion Stock is sold in such Syndicated Community
Offering shall be the Subscription Price.
Notwithstanding the foregoing, no sale of Conversion Stock may be
consummated unless, prior to such consummation, the Independent Appraiser
confirms to the BANK and Holding Company, if utilized, and to the OTS that, to
the best knowledge of the Independent Appraiser, nothing of a material nature
has occurred which, taking into account all relevant factors, would cause the
Independent Appraiser to conclude that the aggregate value of the Conversion
Stock at the Actual Purchase Price is incompatible with its estimate of the
aggregate consolidated pro forma market value of the Holding Company or the BANK
if no Holding Company is utilized. If such confirmation is not received, the
BANK may cancel the Subscription and Community Offerings and/or the Syndicated
Community Offering, extend the Conversion, establish a new
14
<PAGE> 16
Subscription Price Range and/or Estimated Price Range, extend, reopen or hold
new Subscription and Community Offerings and/or Syndicated Community Offering or
take such other action as the OTS may permit.
The Conversion Stock to be issued in the Conversion shall be fully
paid and nonassessable.
7. PURCHASE BY THE HOLDING COMPANY OF THE STOCK OF THE BANK
Upon the consummation of the sale of all of the Conversion Stock, and
in the event that a holding company form of organization is utilized, the
Holding Company will purchase from the BANK all of the capital stock of the BANK
to be issued by the BANK in the Conversion in exchange for the Conversion
proceeds that are not permitted to be retained by the Holding Company.
The Holding Company will apply to the OTS to retain up to 50% of the
proceeds of the Conversion. Assuming the Holding Company is not eliminated, a
lesser percentage may be acceptable. The BANK believes that the Conversion
proceeds will provide economic strength to the Holding Company and the BANK for
the future in a highly competitive and regulated environment and would
facilitate expansion through acquisitions, diversification into other related
businesses and for other business and investment purposes, including the payment
of dividends and future repurchases of Conversion Stock as permitted by the OTS.
If during the Conversion process the Board of Directors of the BANK determines
not to complete the Conversion utilizing a holding company form of organization,
capital stock of the BANK will be
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issued and sold in accordance with the Plan. The above activities may also be
engaged in by the BANK if the Holding Company is eliminated.
7A. ESTABLISHMENT AND FUNDING OF FOUNDATION
As part of the Conversion, the Holding Company and the BANK intend to
establish a Foundation that will qualify as an exempt organization under Section
501(c)(3) of the Internal Revenue Code and to donate to the Foundation up to 8%
of the number of shares of Common Stock sold in the Conversion. The Foundation
is being formed in connection with the Conversion in order to complement the
BANK's existing community reinvestment activities and to share with the
communities in which the BANK operates a part of the BANK's financial success as
a community-minded, financial services institution. The funding of the
Foundation with Common Stock of the Holding Company accomplishes this goal as it
enables such communities to share in the potential growth and profitability of
the Holding Company and the BANK over the long-term.
The Foundation will be dedicated to the promotion of charitable
purposes within the communities in which the BANK operates, including, but not
limited to, grants or donations to support housing assistance, scholarships,
local education, not-for-profit medical facilities, not-for-profit community
groups and other types of organizations or civic minded projects. The board of
directors of the Foundation will be responsible for establishing the polices of
the Foundation with respect to grants or donations, consistent with the stated
purposes of the Foundation. The Foundation will annually distribute total grants
to assist charitable organizations or to fund projects within its local
community of not less than 5% of the average
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fair value of Foundation assets each year. In order to serve the purposes for
which it was formed and maintain its 501(c)(3) qualification, the Foundation may
sell, on an annual basis, a limited portion of the Common Stock contributed to
it by the Holding Company.
The establishment and funding of the Foundation as part of the
Conversion is subject to the approval of the Voting Members by an affirmative
vote of a majority of the votes eligible to be cast by Voting Members in person
or by proxy at the Special Meeting. In the event that the BANK's Members approve
this Plan, but not the Foundation, the BANK may determine to complete the
Conversion without the establishment of the Foundation and may do so without
amending this Plan or obtaining any further vote of the BANK's Members. Failure
of the Voting Members to approve the Foundation may materially affect the pro
forma market value of the BANK. In such an event, the BANK may establish a new
Estimated Price Range and commence a resolicitation of subscribers. For
comparison purposes, Voting Members will be provided with a projection of the
pro forma market value of the Conversion Stock, an Estimated Price Range and
certain selected pro forma financial data that would result if the Conversion
were consummated without establishment of the Foundation.
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8. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS
(FIRST PRIORITY)
A. Each Eligible Account Holder shall receive, as first priority and
without payment, nontransferable subscription rights to subscribe for shares of
Conversion Stock equal to an amount up to the greater of: the amount permitted
to be subscribed for in the Community Offering which amount, pursuant to Section
12, currently is $175,000 of the Conversion Stock offered, but which may be
increased to 5% or decreased to less than $175,000 without the further approval
of members or resolicitation of subscribers; one-tenth of one percent (.10%) of
the total offering of shares of Conversion Stock; or fifteen times the product
(rounded down to the next whole number) obtained by multiplying the total number
of shares of Conversion Stock to be issued by a fraction of which the numerator
is the amount of the Qualifying Deposit of the Eligible Account Holder and the
denominator is the total amount of Qualifying Deposits of all Eligible Account
Holders, in each case on the Eligibility Record Date, subject to the maximum
purchase limitation specified in Section 14A and the minimum purchase limitation
specified in Section 14C and exclusive of an increase in the total number of
shares issued due to an increase in the Estimated Price Range of up to 15%.
B. In the event that Eligible Account Holders exercise subscription
rights for a number of shares of Conversion Stock in excess of the total number
of shares eligible for subscription, the shares of Conversion Stock shall be
allocated among the subscribing Eligible Account Holders so as to permit each
subscribing Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation of Conversion
Stock equal to the lesser of 100 shares or the number of shares subscribed for
by the
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Eligible Account Holders. Any shares remaining after that allocation will be
allocated among the subscribing Eligible Account Holders whose subscriptions
remain unsatisfied in the proportion that the amount of the Qualifying Deposit
of each Eligible Account Holder whose subscription remains unsatisfied bears to
the total amount of the Qualifying Deposits of all Eligible Account Holders
whose subscriptions remain unsatisfied. If the amount so allocated exceeds the
amount subscribed for by any one or more Eligible Account Holders, the excess
shall be reallocated (one or more times as necessary) among those Eligible
Account Holders whose subscriptions are still not fully satisfied on the same
principle until all available shares have been allocated or all subscriptions
satisfied.
C. Subscription rights as Eligible Account Holders received by
Directors and Officers and their Associates which are based on deposits made by
such persons during the twelve (12) months preceding the Eligibility Record Date
shall be subordinated to the Subscription Rights of all other Eligible Account
Holders.
9. SUBSCRIPTION RIGHTS OF THE EMPLOYEE PLANS (SECOND PRIORITY)
The Employee Plans shall receive, without payment, as a second
priority after the filling of subscriptions of Eligible Account Holders,
nontransferable subscription rights to purchase in the Subscription Offering the
number of shares of Conversion Stock requested by such Employee Plans. If, after
the filling of subscriptions of Eligible Account Holders, a sufficient number of
shares are not available to fill the subscriptions by such Employee Plans, the
subscription by such Employee Plans shall be filled to the maximum extent
possible; provided, however, that in the event of an increase in the total
number of shares issued due to an increase in the Estimated
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Price Range of up to 15%, the additional shares may be sold to the Employee
Plans subject to the provisions of Section 14.
The Employee Plans shall not be deemed to be an associate or
affiliate of or Person Acting in Concert with any Director or Officer of the
Holding Company or the BANK.
10. SUBSCRIPTION RIGHTS OF SUPPLEMENTAL ELIGIBLE ACCOUNT
HOLDERS (THIRD PRIORITY)
A. Each Supplemental Eligible Account Holder shall receive, as third
priority and without payment, nontransferable subscription rights to subscribe
for shares of Conversion Stock equal to an amount up to the greater of: the
amount permitted to be subscribed for in the Community Offering which amount,
pursuant to Section 12, currently is $175,000 of the Conversion Stock offered,
but which may be increased to 5% or decreased to less than $175,000 without the
further approval of members or resolicitation of subscribers; one-tenth of one
percent (.10%) of the total offering of Conversion Stock; or fifteen times the
product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Conversion Stock to be issued by a fraction of which
the numerator is the amount of the Qualifying Deposit of the Supplemental
Eligible Account Holder and the denominator is the total amount of the
Qualifying Deposits of all Supplemental Eligible Account Holders in the BANK on
the Supplemental Eligibility Record Date, subject to the maximum purchase
limitation specified in Section 14A and the minimum purchase limitation
specified in Section 14C and exclusive of an increase in the total number of
shares issued due to an increase in the Estimated Price Range of up to 15%.
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B. In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Conversion Stock in excess of the
total number of shares eligible for subscription, the remaining shares of
Conversion Stock shall be allocated among the subscribing Supplemental Eligible
Account Holders so as to permit each subscribing Supplemental Eligible Account
Holder, to the extent possible, to purchase a number of shares sufficient to
make his or her total allocation of Conversion Stock equal to the lesser of 100
shares or the number of shares subscribed for by the Supplemental Eligible
Account Holder. Any shares remaining after that allocation will be allocated
among the subscribing Supplemental Eligible Account Holders whose subscriptions
remain unsatisfied in the proportion that the amount of the Qualifying Deposit
of each Supplemental Eligible Account Holder whose subscription remains
unsatisfied bears to the total amount of the Qualifying Deposits of all
Supplemental Eligible Account Holders whose subscriptions remain unsatisfied. If
the amount so allocated exceeds the amount subscribed for by any one or more
Supplemental Eligible Account Holders, the excess shall be reallocated (one or
more times as necessary) among those Supplemental Eligible Account Holders whose
subscriptions are still not fully satisfied on the same principle until all
available shares have been allocated or all subscriptions satisfied.
C. Subscription rights received by an Eligible Account Holder
pursuant to Section 8 shall be applied in partial satisfaction of the
subscription rights to be received as a Supplemental Eligible Account Holder
pursuant to this Section 10.
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11. SUBSCRIPTION RIGHTS OF OTHER MEMBERS (FOURTH PRIORITY)
A. Each Other Member shall receive, without payment, as a fourth
priority after the filling of subscriptions of the Eligible Account Holders, the
Employee Plans, and the Supplemental Eligible Account Holders, nontransferable
subscription rights to subscribe for shares of Conversion Stock equal to an
amount up to the greater of: the amount permitted to be subscribed for in the
Community Offering which amount, pursuant to Section 12, currently is $175,000
of the Conversion Stock offered, but which may be increased to 5% or decreased
to less than $175,000 without the further approval of members or resolicitation
of subscribers; or one-tenth of one percent (.10%) of the total offering of
shares of Conversion Stock, subject to the maximum purchase limitation specified
in Section 14A and the minimum purchase limitation specified in Section 14C and
exclusive of an increase in the total number of shares issued due to an increase
in the Estimated Price Range of up to 15%.
B. In the event that Other Members exercise subscription rights for a
number of shares of Conversion Stock in excess of the total number of shares
eligible for subscription, the remaining shares of Conversion Stock shall be
allocated among the subscribing Other Members so as to permit each subscribing
Other Member, to the extent possible, to purchase a number of shares sufficient
to make his or her total allocation of Conversion Stock equal to the lesser of
100 shares or the number of shares subscribed for by the Other Member. Any
shares remaining after that allocation will be allocated among the subscribing
Other Members whose subscriptions remain unsatisfied pro rata in the same
proportion that the number of votes of a subscribing Other Member on the Voting
Record Date bears to the total votes on the Voting Record Date of all
subscribing Other Members. If the amount so allocated exceeds the amount
subscribed for
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by any one or more remaining Other Members, the excess shall be reallocated (one
or more times as necessary) among those remaining Other Members whose
subscriptions are still not fully satisfied on the same principle until all
available shares have been allocated or all subscriptions satisfied.
12. COMMUNITY OFFERING (FIFTH PRIORITY)
If less than the total number of shares of Conversion Stock to be
subscribed for in the Conversion are sold in the Subscription Offering, it is
expected that shares remaining unsubscribed for will be made available for
purchase in the Community Offering to certain members of the general public,
which may subscribe together with any Associate or group of persons Acting in
Concert for up to $175,000 of the shares of Conversion Stock offered subject to
the Maximum Overall Purchase Limitation as specified in Section 14A and the
minimum purchase limitation specified in Section 14C and exclusive of an
increase in the total number of shares issued due to an increase in the
Estimated Price Range of up to 15%; provided, however, that the amount
permitted to be purchased in the Community Offering may be increased to 5% of
the Conversion Stock; or decreased to less than $175,000 without the further
approval of members or resolicitation of subscribers. The shares may be made
available in the Community Offering through a direct community marketing
program which may provide for utilization of a broker, dealer, consultant or
investment banking firm, experienced and expert in the sale of savings
institution securities. Such entities may be compensated on a fixed fee basis
or on a commission basis, or a combination thereof. Any excess of shares will
be available for purchase by the general public with preference given to the
Preferred Subscribers. The BANK shall make distribution of the Conversion
Stock to be sold in the Community Offering in such a manner as to promote the
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widest distribution of Conversion Stock. The BANK reserves the right to reject
any or all orders, in whole or in part, which are received in the Community
Offering.
If the subscribers in the Community Offering, whose orders would
otherwise be accepted, subscribe for more shares than are available for
purchase, the shares available to them will be allocated among the subscribers
in the manner which permits each such person to the extent possible, to purchase
the number of shares necessary to make his total allocation of Conversion Stock
equal to the lesser of 100 shares or the number of shares subscribed for by such
persons. Thereafter, unallocated shares will be allocated among the subscribers
whose subscriptions remain unsatisfied on a 100 shares per order basis until all
such orders have been filled or the remaining shares have been allocated. The
BANK may establish all other terms and conditions of such offer. It is expected
that the Community Offering will commence concurrently with the Subscription
Offering. The Community Offering must be completed within 45 days after the
completion of the Subscription Offering unless otherwise extended by the OTS.
13. SYNDICATED COMMUNITY OFFERING
If feasible, all shares of Conversion Stock not subscribed for in the
Subscription and Community Offerings may be sold in a Syndicated Community
Offering, subject to such terms, conditions and procedures as may be determined
by the BANK, in a manner that will achieve the widest distribution of the
Conversion Stock subject to the right of the BANK to accept or reject in whole
or in part all subscriptions in the Syndicated Community Offering. In the
Syndicated Community Offering, any person together with any Associate or group
of persons Acting in Concert may purchase up to $175,000 of the total number of
shares of Conversion Stock offered
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subject to the maximum purchase limitation specified in Section 14A and the
minimum purchase limitation specified in Section 14C and exclusive of an
increase in the total number of shares issued due to an increase in the
Estimated Price Range of up to 15%; provided, however, that this amount may be
increased to 5% or decreased to less than $175,000 without the further approval
of members or resolicitation of subscribers. The shares purchased by any Person
together with any Associate or group of persons Acting in Concert pursuant to
Section 12 shall be counted toward meeting the maximum percentage of shares
permitted to be purchased pursuant to this Section. Provided that the
Subscription Offering has commenced, the BANK may commence the Syndicated
Community Offering at any time after the mailing to the Members of the Proxy
Statement to be used in connection with the Special Meeting of Members, provided
that the completion of the offer and sale of the Conversion Stock shall be
conditioned upon the approval of this Plan by the Voting Members. If the
Syndicated Community Offering is not sooner commenced pursuant to the provisions
of the preceding sentence, the Syndicated Community Offering will be commenced
as soon as practicable following the date upon which the Subscription and
Community Offerings terminate.
Alternatively, if a Syndicated Community Offering is not held, the
BANK shall have the right to sell any shares of Conversion Stock remaining
following the Subscription and Community Offerings in an underwritten firm
commitment public offering. The provisions of Section 14 hereof shall not be
applicable to sales to underwriters for purposes of such an offering but shall
be applicable to the sales by the underwriters to the public. The price to be
paid by the underwriters in such an offering shall be equal to the Actual
Purchase Price less an underwriting
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discount to be negotiated among such underwriters and the BANK, which will in no
event exceed an amount deemed to be acceptable by the OTS.
If for any reason a Syndicated Community Offering or an underwritten
firm commitment public offering of shares of Conversion Stock not sold in the
Subscription and Community Offerings can not be effected, or in the event that
any insignificant residue of shares of Conversion Stock is not sold in the
Subscription and Community Offerings or in the Syndicated Community Offering or
an underwritten firm commitment public offering, other purchase arrangements
will be made for the sale of unsubscribed shares by the BANK, if possible. Such
other purchase arrangements will be subject to the approval of the OTS.
14. LIMITATION ON PURCHASES
In addition to the maximum amount of Conversion Stock that may be
subscribed for as set forth in Sections 8, 10, 11, 12 and 13, the following
limitations shall apply to all purchases of shares of Conversion Stock:
A. The maximum number of shares of Conversion Stock which may be
subscribed for or purchased in all categories in the conversion by any Person or
Participant together with any Associate or group or persons Acting in Concert
shall not exceed 1.0% of the Conversion Stock offered (the "Maximum Overall
Purchase Limitation"), except for the Employee Plans which may subscribe for up
to 10% of the Conversion Stock issued and except for certain Eligible Account
Holders and Supplemental Eligible Account Holders which may subscribe for or
purchase shares in accordance with Sections 8 and 10 herein, respectively;
provided, however, in the event that the Maximum Overall Purchase Limitation is
increased to more than 2.0% of the
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shares of Conversion Stock offered, orders for Conversion Stock in the Community
Offering and in the Syndicated Community Offering (or, alternatively an
underwritten firm commitment public offering), if any, shall, as determined by
the BANK, first be filled to a maximum of 2.0% of the total number of shares of
Conversion Stock offered and thereafter remaining shares shall be allocated on
an equal number of shares basis per order until all orders have been filled.
B. The maximum number of shares of Conversion Stock which may be
purchased in all categories in the Conversion by Officers and Directors of the
BANK and their Associates in the aggregate shall not exceed 25% of the total
number of shares of Conversion Stock issued.
C. A minimum of 25 shares of Conversion Stock must be purchased by
each Person purchasing shares in the Conversion to the extent those shares are
available; provided, however, that in the event the minimum number of shares of
Conversion Stock purchased times the price per share exceeds $500, then such
minimum purchase requirement shall be reduced to such number of shares of
Conversion Stock which when multiplied by the price per share shall not exceed
$500, as determined by the Board.
If the number of shares of Conversion Stock otherwise allocable
pursuant to Sections 8, 10, 11, 12 and 13, to any Person or that Person's
Associates would be in excess of the maximum number of shares permitted as set
forth above, the number of shares of Conversion Stock allocated to each such
person shall be reduced to the lowest limitation applicable to that Person, and
then the number of shares allocated to each group consisting of a Person and
that Person's Associates shall be reduced so that the aggregate allocation to
that Person and his or her Associates complies with the above maximums, and such
maximum number of shares shall be reallocated among that Person and his or her
Associates as they may agree, or in the absence of
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an agreement, in proportion to the shares subscribed by each (after first
applying the maximums applicable to each Person, separately).
Depending upon market or financial conditions, the Board of Directors
of the BANK and the Holding Company, without further approval of the Members,
may decrease or increase the purchase limitations in this Plan, provided that
the maximum purchase limitations may not be increased to a percentage in excess
of 5%. Notwithstanding the foregoing, the Maximum Overall Purchase Limitation
may be increased up to 9.99% provided that orders for Conversion Stock exceeding
5% of the shares being offered shall not exceed, in the aggregate, 10% of the
total offering. If the BANK or the Holding Company, as the case may be,
increases the maximum purchase limitations, the BANK or the Holding Company, as
the case may be, is only required to resolicit Persons who subscribed for the
maximum purchase amount and may, in the sole discretion of the BANK or the
Holding Company, as the case may be, resolicit certain other large subscribers.
In the event shares of Conversion stock are sold in excess of the
maximum of the Estimated Price Range, (the "Adjusted Maximum") such shares will
be allocated in the following order of priority: (i) to fill the Employee Plans'
subscription to the Adjusted Maximum; (ii) in the event that there is an over
subscription at the Eligible Account Holder level, to fill unfulfilled
subscriptions of Eligible Account Holders exclusive of the Adjusted Maximum in
accordance with Section 8; (iii) in the event there is an over subscription at
the Supplemental Eligible Account Holder level, to fill unfulfilled
subscriptions of Supplemental Eligible Account Holders exclusive of the Adjusted
Maximum in accordance with Section 10; (iv) in the event that there is an over
subscription at the Other Member level, to fill unfulfilled subscriptions of
Other
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Members exclusive of the Adjusted Maximum in accordance with Section 11; and (v)
to fill unfulfilled Subscriptions in the Community Offering exclusive of the
Adjusted Maximum in accordance with Section 12.
For purposes of this Section 14, the Directors and Officers of the
BANK and the Holding Company shall not be deemed to be Associates or a group
affiliated with each other or otherwise Acting in Concert solely as a result of
their being Directors or Officers of the BANK or the Holding Company.
Each Person purchasing Conversion Stock in the Conversion shall be
deemed to confirm that such purchase does not conflict with the above purchase
limitations contained in this Plan.
For a period of three years following the Conversion, no Officer,
Director or their Associates shall purchase, without the prior written approval
of the OTS, any outstanding shares of common stock of the BANK or the Holding
Company, as the case may be, except from a broker-dealer registered with the
SEC. This provision shall not apply to negotiated transactions involving more
than one percent of the outstanding shares of common stock of the BANK or the
Holding Company, as the case may be, the exercise of any options pursuant to a
stock option plan or purchases of common stock of the BANK or the Holding
Company, as the case may be, made by or held by any Tax-Qualified Employee Stock
Benefit Plan or Non-Tax-Qualified Employee Stock Benefit Plan of the BANK or the
Holding Company (including the Employee Plans) which may be attributable to any
Officer or Director. As used herein, the term "negotiated transaction" means a
transaction in which the securities are offered and the terms and arrangements
relating to any sale are arrived at through direct communications between the
seller or any person acting on its behalf and the purchaser or his investment
representative. The term
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"investment representative" shall mean a professional investment advisor acting
as agent for the purchaser and independent of the seller and not acting on
behalf of the seller in connection with the transaction.
15. PAYMENT FOR CONVERSION STOCK
All payments for Conversion Stock subscribed for in the Subscription,
Community and Syndicated Community Offerings must be delivered in full to the
BANK, together with a properly completed and executed Order Form, or purchase
order in the case of the Syndicated Community Offering, on or prior to the
expiration date specified on the Order Form or purchase order, as the case may
be, unless such date is extended by the BANK; provided, however, that if the
Employee Plans subscribe for shares during the Subscription Offering, such plans
will not be required to pay for the shares at the time they subscribe but rather
may pay for such shares of Conversion Stock subscribed for by such plans at the
Actual Purchase Price upon consummation of the Conversion, provided that, in the
case of the employee stock ownership plan ("ESOP") there is in force from the
time of its subscription until the consummation of the Conversion, a loan
commitment from the Holding Company or an unrelated financial institution to
lend to the ESOP, at such time, the aggregate Subscription Price of the shares
for which it subscribed. The BANK may make scheduled discretionary contributions
to an Employee Plan provided such contributions do not cause the BANK to fail to
meet its regulatory capital requirement.
Notwithstanding the foregoing, the BANK and the Holding Company, if
utilized, shall have the right, in their sole discretion, to permit
institutional investors to submit contractually irrevocable orders in the
Community Offering and to thereafter submit payment for the
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Conversion Stock for which they are subscribing in the Community Offering at any
time prior to 48 hours before the completion of the Conversion, unless such 48
hour period is waived by the BANK and the Holding Company, in their sole
discretion.
Payment for Conversion Stock subscribed for shall be made either in
cash (if delivered in person), check or money order. Alternatively, subscribers
in the Subscription and Community Offerings may pay for the shares subscribed
for by authorizing the BANK on the Order Form to make a withdrawal from the
subscriber's Savings Account at the BANK in an amount equal to the purchase
price of such shares. Such authorized withdrawal, whether from a savings
passbook or certificate account, shall be without penalty as to premature
withdrawal. If the authorized withdrawal is from a certificate account, and the
remaining balance does not meet the applicable minimum balance requirement, the
certificate shall be cancelled at the time of withdrawal, without penalty, and
the remaining balance will earn interest at the passbook rate. Funds for which a
withdrawal is authorized will remain in the subscriber's Savings Account but may
not be used by the subscriber until the Conversion Stock has been sold or the
45-day period (or such longer period as may be approved by the OTS) following
the Subscription and Community Offering has expired, whichever occurs first.
Thereafter, the withdrawal will be given effect only to the extent necessary to
satisfy the subscription (to the extent it can be filled) at the purchase price
per share. Interest will continue to be earned on any amounts authorized for
withdrawal until such withdrawal is given effect. Interest will be paid by the
BANK at not less than the passbook annual rate on payments for Conversion Stock
received in cash or by check or money order. Such interest will be paid from the
date payment is received by the BANK until consummation or termination of the
Conversion. If for any reason the Conversion is not
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consummated, all payments made by subscribers in the Subscription, Community and
Syndicated Community Offerings will be refunded to them with interest. In case
of amounts authorized for withdrawal from Savings Accounts, refunds will be made
by cancelling the authorization for withdrawal. The BANK is prohibited by
regulation from knowingly making any loans or granting any lines of credit for
the purchase of stock in the Conversion, and therefore, will not do so.
16. MANNER OF EXERCISING SUBSCRIPTION RIGHTS THROUGH ORDER FORMS
As soon as practicable after the Prospectus prepared by the Holding
Company and BANK has been declared effective by the OTS and the SEC, if the
holding company form of organization is utilized, Order Forms will be
distributed to all Eligible Account Holders, the Employee Plans, the
Supplemental Eligible Account Holders and Other Members at their last known
addresses appearing on the records of the BANK for the purpose of subscribing to
shares of Conversion Stock in the Subscription Offering and will be made
available for use by those Persons entitled to purchase in the Community
Offering. Notwithstanding the foregoing, the BANK may elect to send Order Forms
only to those Persons who request them after such notice as is approved by the
OTS and is adequate to apprise all Eligible Account Holders, the Employee Plans,
Supplemental Eligible Account Holders and Other Members of the pendency of the
Subscription Offering has been given. Such notice may be included with the proxy
statement for the Special Meeting of Members and may also be included in a
notice of the pendency of the
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Conversion and the Special Meeting of Members sent to all Eligible Account
Holders and Supplemental Eligible Account Holders in accordance with regulations
of the OTS.
Each Order Form will be preceded or accompanied by the Prospectus (if
a holding company form of organization is utilized) or the Offering Circular (if
the holding company form of organization is not utilized) describing the Holding
Company, if utilized, the BANK, the Conversion Stock and the Subscription and
Community Offerings. Each Order Form will contain, among other things, the
following:
A. A specified date by which all Order Forms must be received by the
BANK, which date shall be not less than twenty (20), nor more than forty-five
(45) days, following the date on which the Order Forms are mailed by the BANK,
and which date will constitute the termination of the Subscription Offering;
B. The Subscription Price per share for shares of Conversion Stock to
be sold in the Subscription and Community Offerings;
C. A description of the minimum and maximum number of shares of
Conversion Stock which may be subscribed for pursuant to the exercise of
subscription rights or otherwise purchased in the Community Offering;
D. Instructions as to how the recipient of the Order Form is to
indicate thereon the number of shares of Conversion Stock for which such person
elects to subscribe and the available alternative methods of payment therefor;
E. An acknowledgment that the recipient of the Order Form has
received a final copy of the Prospectus or Offering Circular, as the case may
be, prior to execution of the Order Form;
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F. A statement to the effect that all subscription rights are
nontransferable, will be void at the end of the Subscription Offering, and can
only be exercised by delivering within the subscription period such properly
completed and executed Order Form, together with cash (if delivered in person),
check or money order in the full amount of the purchase price as specified in
the Order Form for the shares of Conversion Stock for which the recipient elects
to subscribe in the Subscription Offering (or by authorizing on the Order Form
that the BANK withdraw said amount from the subscriber's Savings Account at the
BANK) to the BANK; and
G. A statement to the effect that the executed Order Form, once
received by the BANK, may not be modified or amended by the subscriber without
the consent of the BANK.
Notwithstanding the above, the BANK and the Holding Company will not
accept orders received on photocopied or facsimilied order forms.
17. UNDELIVERED, DEFECTIVE OR LATE ORDER FORMS: INSUFFICIENT PAYMENT
In the event Order Forms (a) are not delivered and are returned to
the BANK by the United States Postal Service or the BANK is unable to locate the
addressee, (b) are not received back by the BANK or are received by the BANK
after the expiration date specified thereon, (c) are defectively filled out or
executed, (d) are not accompanied by the full required payment, except in the
case of institutional investors in the Community Offering, by delivering
irrevocable orders together with a legally binding commitment to pay in cash,
check, money order or wire transfer the full amount of the purchase price prior
to 48 hours before the completion of the Conversion for the shares of Conversion
Stock subscribed for (including cases in which savings
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accounts from which withdrawals are authorized are insufficient to cover the
amount of the required payment), or (e) are not mailed pursuant to a "no mail"
order placed in effect by the account holder, the subscription rights of the
person to whom such rights have been granted will lapse as though such person
failed to return the contemplated Order Form within the time period specified
thereon; provided, however, that the BANK may, but will not be required to,
waive any immaterial irregularity on any Order Form or require the submission of
corrected Order Forms or the remittance of full payment for subscribed shares by
such date as the BANK may specify. The interpretation of the BANK of terms and
conditions of the Plan and of the Order Forms will be final, subject to the
authority of the OTS.
18. RESTRICTIONS ON RESALE OR SUBSEQUENT DISPOSITION
A. All shares of Conversion Stock purchased by Directors or Officers
of the BANK or the Holding Company in the Conversion shall be subject to the
restriction that, except as provided in Section 18B, below, or as may be
approved by the OTS, no interest in such shares may be sold or otherwise
disposed of for value for a period of one (l) year following the date of
purchase.
B. The restriction on disposition of shares of Conversion Stock set
forth in Section 18A above shall not apply to the following:
(i) Any exchange of such shares in connection with a merger or
acquisition involving the BANK or the Holding Company, as the case may be, which
has been approved by the OTS; and
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<PAGE> 37
(ii) Any disposition of such shares following the death of the
person to whom such shares were initially sold under the terms of the Plan.
C. With respect to all shares of Conversion Stock subject to
restrictions on resale or subsequent disposition, each of the following
provisions shall apply:
(i) Each certificate representing shares restricted within the
meaning of Section 18A, above, shall bear a legend prominently stamped on its
face giving notice of the restriction;
(ii) Instructions shall be issued to the stock transfer
agent for the BANK or the Holding Company, as the case may be, not to recognize
or effect any transfer of any certificate or record of ownership of any such
shares in violation of the restriction on transfer; and
(iii) Any shares of capital stock of the BANK or the Holding
Company, as the case may be, issued with respect to a stock dividend, stock
split, or otherwise with respect to ownership of outstanding shares of
Conversion Stock subject to the restriction on transfer hereunder shall be
subject to the same restriction as is applicable to such Conversion Stock.
19. VOTING RIGHTS OF STOCKHOLDERS
Upon conversion, the holders of the capital stock of the BANK shall
have the exclusive voting rights with respect to the BANK as specified in its
charter. The holders of the common stock of the Holding Company (if a holding
company form of organization is utilized) shall have the exclusive voting rights
with respect to the Holding Company.
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<PAGE> 38
20. ESTABLISHMENT OF LIQUIDATION ACCOUNT
The BANK shall establish at the time of conversion a liquidation
account in an amount equal to its net worth as of the latest practicable date
prior to conversion ("Liquidation Account"). The liquidation account will be
maintained by the BANK for the benefit of the Eligible Account Holders and
Supplemental Eligible Account Holders who continue to maintain their Savings
Accounts at the BANK. Each Eligible Account Holder and Supplemental Eligible
Account Holder shall, with respect to his Savings Account, hold a related
inchoate interest in a portion of the Liquidation Account balance, in relation
to his Savings Account balance at the Eligibility Record Date and/or
Supplemental Eligibility Record Date or to such balance as it may be
subsequently reduced, as hereinafter provided.
In the unlikely event of a complete liquidation of the BANK (and only
in such event), following all liquidation payments to creditors (including those
to Account Holders to the extent of their Savings Accounts) each Eligible
Account Holder and Supplemental Eligible Account Holder shall be entitled to
receive a liquidating distribution from the Liquidation Account, in the amount
of the then adjusted subaccount balance for his Savings Account then held,
before any liquidation distribution may be made to any holders of the BANK's
capital stock. No merger, consolidation, bulk purchase of assets with assumption
of Savings Accounts and other liabilities, or similar transactions with an
FDIC-insured institution, in which the BANK is not the surviving institution,
shall be deemed to be a complete liquidation for this purpose. In such
transactions, the Liquidation Account shall be assumed by the surviving
institution.
The initial subaccount balance for a Savings Account held by an
Eligible Account Holder and Supplemental Eligible Account Holder shall be
determined by multiplying the opening
37
<PAGE> 39
balance in the Liquidation Account by a fraction, the numerator of which is the
amount of such Eligible Account Holder's and/or Supplemental Eligible Account
Holder's Qualifying Deposit and the denominator of which is the total amount of
all Qualifying Deposits of all Eligible Account Holders and Supplemental
Eligible Account Holders in the BANK. Such initial subaccount balance shall not
be increased, but shall be subject to downward adjustment as described below.
For Savings Accounts in existence at both dates, separate subaccounts shall be
determined on the basis of the Qualifying Deposits in such Savings Account on
such record dates. Such initial subaccount balances shall not be increased but
shall be subject to downward adjustment as described below.
If, at the close of business on any annual closing date, commencing
on or after the effective date of Conversion, the deposit balance in the Savings
Account of an Eligible Account Holder or Supplemental Eligible Account Holder is
less than the lesser of (i) the balance in the Savings Account at the close of
business on any other annual closing date subsequent to the Eligibility Record
Date or Supplemental Eligibility Record Date, or (ii) the amount of the
Qualifying Deposit in such Savings Account, the subaccount balance for such
Savings Account shall be adjusted by reducing such subaccount balance in an
amount proportionate to the reduction in such deposit balance. In the event of
such downward adjustment, the subaccount balance shall not be subsequently
increased, notwithstanding any subsequent increase in the deposit balance of the
related Savings Account. If any such Savings Account is closed, the related
subaccount shall be reduced to zero.
The creation and maintenance of the Liquidation Account shall not
operate to restrict the use or application of any of the net worth accounts of
the BANK.
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21. TRANSFER OF SAVINGS ACCOUNTS AND CONTINUITY OF THE BANK
Upon Conversion, each Savings Account Holder having a Savings Account
at the BANK prior to the Conversion will continue to have a Savings Account,
without payment therefor, in the same amount and subject to the same terms and
conditions (except for voting and liquidation rights) as in effect prior to the
Conversion.
After the Conversion, the BANK will succeed to all the rights,
interests, duties and obligations of the BANK before the Conversion, including
but not limited to all rights and interests of the BANK in and to its assets and
properties, whether real, personal or mixed. The BANK will continue to be a
member of the Federal Home Loan Bank System and all its insured savings deposits
will continue to be insured by the FDIC to the extent provided by applicable
law.
22. RESTRICTIONS ON ACQUISITION OF THE BANK AND HOLDING
COMPANY
A. In accordance with OTS regulations, for a period of three years
from the date of consummation of the Conversion, no Person, other than the
Holding Company (if a holding company form of organization is utilized), shall
directly or indirectly offer to acquire or acquire the beneficial ownership of
more than 10% of any class of an equity security of the BANK without the prior
written consent of the OTS.
B. 1. The charter of the BANK contains a provision stipulating that
no person, except the Holding Company (if a holding company form of organization
is utilized), for a period of five years following the date of the Conversion
shall directly or indirectly offer to acquire or
39
<PAGE> 41
acquire the beneficial ownership of more than 10% of any class of an equity
security of the BANK, without the prior written approval of the OTS. In
addition, such charter may also provide that for a period of five years
following the Conversion, shares beneficially owned in violation of the
above-described charter provision shall not be entitled to vote and shall not be
voted by any person or counted as voting stock in connection with any matter
submitted to stockholders for a vote. In addition, special meetings of the
stockholders relating to changes in control or amendment of the charter may only
be called by the Board of Directors, and shareholders shall not be permitted to
cumulate their votes for the election of directors.
2. The Certificate of Incorporation of the Holding Company, if a
holding company form of organization is utilized, will contain a provision
stipulating that in no event shall any record owner of any outstanding shares of
the Holding Company's common stock who beneficially owns in excess of 10% of
such outstanding shares be entitled or permitted to any vote in respect to any
shares held in excess of 10%. In addition, the Certificate of Incorporation and
Bylaws of the Holding Company provide for staggered terms of the directors,
noncumulative voting for directors, limitations on the calling of special
meetings, a fair price provision for certain business combinations and certain
notice requirements.
C. For the purposes of this Section 22:
(i) The term "person" includes an individual, a group acting in
concert, a corporation, a partnership, an association, a joint stock company, a
trust, an unincorporated organization or similar company, a syndicate or any
other group formed for the purpose of acquiring, holding or disposing of
securities of an insured institution;
40
<PAGE> 42
(ii) The term "offer" includes every offer to buy or acquire,
solicitation of an offer to sell, tender offer for, or request or invitation for
tenders of, a security or interest in a security for value;
(iii) The term "acquire" includes every type of acquisition,
whether effected by purchase, exchange, operation of law or otherwise; and
(iv) The term "security" includes non-transferable subscription
rights issued pursuant to a plan of conversion as well as a "security" as
defined in 15 U.S.C. Section 78c(a)(10).
23. PAYMENT OF DIVIDENDS AND REPURCHASE OF STOCK
The BANK shall not declare or pay a cash dividend on, or repurchase
any of, its capital stock if the effect thereof would cause its regulatory
capital to be reduced below (i) the amount required for the Liquidation Account
or (ii) the federal regulatory capital requirement in Section 567.2 of the Rules
and Regulations of the OTS. Otherwise, the BANK may declare dividends, make
capital distributions or repurchase its capital stock in accordance with
applicable law and regulations.
24. AMENDMENT OF PLAN
If deemed necessary or desirable, the Plan may be substantively
amended at any time prior to solicitation of proxies from Members to vote on the
Plan by a two-thirds vote of the BANK's Board of Directors, and at any time
thereafter by such vote of such Board of Directors with the concurrence of the
OTS. Any amendment to the Plan made after approval by the Members with the
approval of the OTS shall not necessitate further approval by the Members unless
otherwise required by the OTS. The Plan may be terminated by majority vote of
the
41
<PAGE> 43
BANK's Board of Directors at any time prior to the Special Meeting of Members to
vote on the Plan, and at any time thereafter with the concurrence of the OTS.
By adoption of the Plan, the Members of the BANK authorize the Board
of Directors to amend or terminate the Plan under the circumstances set forth
in this Section.
25. CHARTER AND BYLAWS
By voting to adopt the Plan, members of the BANK will be voting to
adopt a Federal Stock Savings Bank Charter and Bylaws for a Federal Stock
Savings Bank attached as Exhibits I and II to this Plan. The effective date of
the BANK's stock charter and bylaws shall be the date of issuance and sale of
the Conversion Stock as specified by the OTS.
26. CONSUMMATION OF CONVERSION
The Conversion of the BANK shall be deemed to take place and be
effective upon the completion of all requisite organizational procedures for
obtaining a Federal Stock Savings Bank Charter for the BANK and sale of all
Conversion Stock.
27. REGISTRATION AND MARKETING
Within the time period required by applicable laws and regulations,
the BANK or the Holding Company, as the case may be, will register the
securities issued in connection with the Conversion pursuant to the Securities
Exchange Act of 1934 and will not deregister such securities for a period of at
least three years thereafter, except that the maintenance of registration for
three years requirement may be fulfilled by any successor to the BANK or any
holding company of the BANK. In addition, the BANK or Holding Company, as the
case may be, will
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<PAGE> 44
use its best efforts to encourage and assist a market-maker to establish and
maintain a market for the Conversion Stock and to list those securities on a
national or regional securities exchange or the NASDAQ system.
28. RESIDENTS OF FOREIGN COUNTRIES AND CERTAIN STATES
The BANK will make reasonable efforts to comply with the securities
laws of all States in the United States in which Persons entitled to subscribe
for shares of Conversion Stock pursuant to the Plan reside. However, no such
Person will be issued subscription rights or be permitted to purchase shares of
Conversion Stock in the Subscription Offering if such Person resides in a
foreign country or in a state of the United States with respect to which both of
the following apply: A. a small number of Persons otherwise eligible to
subscribe for shares under the Plan reside in such state and; B. the issuance of
subscription rights or the offer or sale of shares of Conversion Stock to such
Persons would require the BANK or the Holding Company, as the case may be, under
the securities laws of such state, to register as a broker, dealer, salesman or
agent or to register or otherwise qualify its securities for sale in such state
and such registration or qualification would be impracticable for reasons of
cost or otherwise.
29. EXPENSES OF CONVERSION
The BANK shall use its best efforts to assure that expenses incurred
by it in connection with the Conversion shall be reasonable.
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<PAGE> 45
30. CONDITIONS TO CONVERSION
The Conversion of the BANK pursuant to this Plan is expressly
conditioned upon the following:
(a) Prior receipt by the BANK of rulings of the United States
Internal Revenue Service and any applicable state taxing authority, or opinions
of counsel, substantially to the effect that the Conversion will not result in
any adverse federal or state tax consequences to Eligible Account Holders or to
the BANK and the Holding Company before or after the Conversion;
(b) The sale of all of the Conversion Stock offered in the
Conversion; and
(c) The completion of the Conversion within the time period specified
in Section 3 of this Plan.
31. INTERPRETATION
All interpretations of this Plan and application of its provisions to
particular circumstances by a majority of the Board of Directors of the BANK
shall be final, subject to the authority of the OTS.
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<PAGE> 46
EXHIBIT I
FEDERAL STOCK CHARTER
FOR
FIRST FEDERAL BANK
Section 1. Corporate Title.
The full corporate title of the savings bank is First Federal Bank
(the "BANK").
Section 2. Office.
The home office shall be located in the City of Hazleton, in the
County of Luzerne, Commonwealth of Pennsylvania.
Section 3. Duration.
The duration of the BANK is perpetual.
Section 4. Purpose and Powers.
The purpose of the BANK is to pursue any or all of the lawful
objectives of a Federal savings bank chartered under Section 5 of the Home
Owners' Loan Act and to exercise all the express, implied, and incidental powers
conferred thereby and by all acts amendatory thereof and supplemental thereto,
subject to the Constitution and laws of the United States as they are now in
effect, or as they may hereafter be amended, and subject to all lawful and
applicable rules, regulations, and orders of the Office of Thrift Supervision
("Office").
Section 5. Capital Stock.
The total number of shares of all classes of the capital stock which
the BANK has authority to issue is eighteen million (18,000,000), all of which
sixteen million (16,000,000) shall be common stock, par value $1.00 per share
and of which two million (2,000,000) shall be preferred stock, par value $1.00
per share. The shares may be issued from time to time as authorized by the
Board of Directors without further approval of shareholders except as otherwise
provided in this Section 5 or to the extent that such approval is required by
governing law, rule, or regulation. The consideration for the issuance of the
shares shall be paid in full before their issuance and shall not be less than
the par value. Neither promissory notes nor future services shall constitute
payment or part payment for the issuance of shares of the BANK. The
consideration for the shares shall be cash, tangible or intangible property (to
the extent direct investment in such
<PAGE> 47
property would be permitted), labor or services actually performed for the BANK,
or any combination of the foregoing. In the absence of actual fraud in the
transaction, the value of such property, labor, or services, as determined by
the Board of Directors of the BANK, shall be conclusive. In the case of
a stock dividend, that part of the retained earnings of the BANK that is
transferred to common stock or paid-in capital accounts upon the issuance of
shares as a stock dividend shall be deemed to be the consideration for their
issuance.
Except for shares issued in the initial organization of the Bank or
in connection with the conversion of the BANK from the mutual to the stock
form of capitalization, no shares of capital stock (including shares issuable
upon conversion, exchange, or exercise of other securities) shall be issued,
directly or indirectly, to officers, directors, or controlling persons of the
BANK other than as part of a general public offering or as qualifying shares to
a director, unless their issuance or the plan under which they would be issued
has been approved by a majority of the total votes eligible to be cast at a
legal meeting.
Nothing contained in this Section 5 (or in any supplementary sections
hereto) shall entitle the holders of any class or series of capital stock to
vote as a separate class or series or to more than one vote per share, except as
to the cumulation of votes for the election of directors, unless the charter
otherwise provides that there shall be no such cumulative voting: Provided, That
this restriction on voting separately by class or series shall not apply:
(i) To any provision which would authorize the holders of
preferred stock, voting as a class or series, to elect
some members of the Board of Directors, less than a
majority thereof, in the event of default in the payment
of dividends on any class or series of preferred stock;
(ii) To any provision that would require the holders of
preferred stock, voting as a class or series, to approve
the merger or consolidation of the BANK with another
corporation or the sale, lease, or conveyance (other than
by mortgage or pledge) of properties or business in
exchange for securities of a corporation other than the
BANK if the preferred stock is exchanged for securities of
such other corporation: Provided, That no provision may
require such approval for transactions undertaken with the
assistance or pursuant to the direction of the Office or
the Federal Deposit Insurance Corporation;
(iii) To any amendment which would adversely change the specific
terms of any class or series of capital stock as set forth
in this Section 5 (or in any supplementary sections
hereto), including any amendment which would create or
enlarge any class or series ranking prior thereto in
rights and preferences. An amendment which increases the
number of authorized shares of any class or series of
capital stock, or substitutes the surviving BANK in a
merger or consolidation for the BANK, shall not be
considered to be such an adverse change.
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A description of the different classes and series (if any) of the
BANK's capital stock and a statement of the designations, and the relative
rights, preferences, and limitations of the shares of each class of and series
(if any) of capital stock are as follows:
A. Common Stock. Except as provided in this Section 5 (or in
any supplementary sections hereto) the holders of the
common stock shall exclusively possess all voting power.
Each holder of shares of common stock shall be entitled to
one vote for each share held by each holder, except as to
the cumulation of votes for the election of directors,
unless the charter otherwise provides that there shall be
no such cumulative voting.
Whenever there shall have been paid, or declared and set
aside for payment, to the holders of the outstanding
shares of any class of stock having preference over the
common stock as to the payment of dividends, the full
amount of dividends and of sinking fund, or retirement
fund, or other retirement payments, if any, to which such
holders are respectively entitled in preference to the
common stock, then dividends may be paid on the common
stock and on any class or series of stock entitled to
participate therewith as to dividends out of any assets
legally available for the payment of dividends.
In the event of any liquidation, dissolution, or winding
up of the BANK, the holders of the common stock (and the
holders of any class or series of stock entitled to
participate with the common stock in the distribution of
assets) shall be entitled to receive, in cash or in kind,
the assets of the BANK available for distribution
remaining after: (i) payment or provision for payment of
the BANK's debts and liabilities; (ii) distributions or
provision for distributions in settlement of its
liquidation account; and (iii) distributions or provision
for distributions to holders of any class or series of
stock having preference over the common stock in the
liquidation, dissolution, or winding up of the BANK. Each
share of common stock shall have the same relative rights
as and be identical in all respects with all the other
shares of common stock.
B. Preferred Stock. The BANK may provide in supplementary
sections to its charter for one or more classes of
preferred stock, which shall be separately identified. The
shares of any class may be divided into and issued in
series, with each series separately designated so as to
distinguish the shares thereof from the shares of all
other series and classes. The terms of each series shall
be set forth in a supplementary section to the charter.
All shares of the same class shall be identical except as
to the following relative rights and preferences, as to
which there may be variations between different series:
(a) The distinctive serial designation and the
number of shares constituting such series;
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<PAGE> 49
(b) The dividend rate or the amount of dividends to
be paid on the shares of such series, whether
dividends shall be cumulative and, if so, from
which date(s), the payment date(s) for
dividends, and the participating or other
special rights, if any, with respect to
dividends;
(c) The voting powers, full or limited, if any, of
the shares of such series;
(d) Whether the shares of such series shall be
redeemable and, if so, the price(s) at which,
and the terms and conditions on which, such
shares may be redeemed;
(e) The amount(s) payable upon the shares of such
series in the event of voluntary or involuntary
liquidation, dissolution, or winding up of the
BANK;
(f) Whether the shares of such series shall be
entitled to the benefit of a sinking or
retirement fund to be applied to the purchase
or redemption of such shares, and if so
entitled, the amount of such fund and the
manner of its application, including the
price(s) at which such shares may be redeemed
or purchased through the application of such
fund;
(g) Whether the shares of such series shall be
convertible into, or exchangeable for, shares
of any other class or classes of stock of the
BANK and, if so, the conversion price(s) or the
rate(s) of exchange, and the adjustments
thereof, if any, at which such conversion or
exchange may be made, and any other terms and
conditions of such conversion or exchange;
(h) The price or other consideration for which the
shares of such series shall be issued; and
(i) Whether the shares of such series which are
redeemed or converted shall have the status of
authorized but unissued shares of serial
preferred stock and whether such shares may be
reissued as shares of the same or any other
series of serial preferred stock.
Each share of each series of serial preferred stock shall have the
same relative rights as and be identical in all respects with all the other
shares of the same series.
The Board of Directors shall have authority to divide, by the
adoption of supplementary charter sections, any authorized class of preferred
stock into series, and, within the limitations set forth in this section and the
remainder of this charter, fix and determine the relative rights and preferences
of the shares of any series so established.
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<PAGE> 50
Prior to the issuance of any preferred shares of a series established
by a supplementary charter section adopted by the Board of Directors, the BANK
shall file with the Secretary of the Office a dated copy of that supplementary
section of this charter establishing and designating the series and fixing and
determining the relative rights and preferences thereof.
Section 6. Preemptive Rights.
Holders of the capital stock of the BANK shall not be entitled to
preemptive rights with respect to any shares of the BANK which may be issued.
Section 7. Liquidation Account.
Pursuant to the requirements of the Office's regulations (12 C.F.R.
563b.3), the BANK shall establish and maintain a liquidation account for the
benefit of its savings account holders as of September 30, 1996 and
[_________________] ("eligible savers"). In the event of a complete liquidation
of the BANK, it shall comply with such regulations with respect to the amount
and the priorities on liquidation of each of the BANK's eligible saver's
inchoate interest in the liquidation account, to the extent it is still in
existence: provided, that an eligible saver's inchoate interest in the
liquidation account shall not entitle such eligible saver to any voting rights
at meetings of the BANK's shareholders.
Section 8. Certain Provisions Applicable for Five Years.
Notwithstanding anything contained in the BANK's charter or bylaws to
the contrary, for a period of five years from the date of completion of the
conversion of the BANK from mutual to stock form, the following provisions shall
apply:
A. Beneficial Ownership Limitation. No person shall directly
or indirectly offer to acquire or acquire the beneficial
ownership of more than 10 percent of any class of any
equity security of the BANK. This limitation shall not
apply to a transaction in which the BANK forms a holding
company without change in the respective beneficial
ownership interests of the BANK's shareholders other
than pursuant to the exercise of any dissenter and
appraisal rights, the purchase of shares by underwriters
in connection with a public offering, or the purchase of
shares by a tax-qualified employee stock benefit plan
which is exempt from the approval requirements under
Section 574.3(c)(1)(vi) of the Office Regulations.
In the event shares are acquired in violation of this
Section 8, all shares beneficially owned by any person in
excess of 10 percent shall be considered "excess shares"
and shall not be counted as shares entitled to vote and
shall not be
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<PAGE> 51
voted by any person or counted as voting shares in
connection with any matters submitted to the shareholders
for a vote.
For the purposes of this Section 8, the following definitions apply:
(i) The term "person" includes an individual, a
group acting in concert, a corporation, a
partnership, an association, a joint stock
company, a trust, any unincorporated
organization or similar company, a syndicate or
any other group formed for the purpose of
acquiring, holding or disposing of the equity
securities of the BANK.
(ii) The term "offer" includes every offer to buy or
otherwise acquire, solicitation of an offer to
sell, tender offer for, or request or
invitation for tenders of, a security or
interest in a security for value.
(iii) The term "acquire" includes every type of
acquisition, whether effected by purchase,
exchange, operation of law or otherwise.
(iv) The term "acting in concert" means (a) knowing
participation in a joint activity or conscious
parallel action towards a common goal whether
or not pursuant to an express agreement, or (b)
a combination or pooling of voting or other
interests in the securities of an issuer for a
common purpose pursuant to any contract,
understanding, relationship, agreement or other
arrangement, whether written or otherwise.
B. Cumulative Voting Limitation. Shareholders shall not be
permitted to cumulate their votes for the election of
directors.
C. Call for Special Meetings. Special meetings of
shareholders relating to changes in control of the BANK or
amendments to its charter shall be called only at the
direction of the Board of Directors.
Section 9. Directors.
The BANK shall be under the direction of a Board of Directors. The
authorized number of directors, as stated in the BANK's bylaws, shall be not be
less than five nor more than 15 except when a greater number or lesser number
is approved by the Office or his or her delegate.
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Section 10. Amendment of Charter.
Except as provided in Section 5, no amendment, addition, alteration,
change, or repeal of this charter shall be made, unless such is proposed by the
Board of Directors of the BANK, approved by the shareholders by a majority of
the votes eligible to be cast at a legal meeting unless a higher vote is
otherwise required, and approved or preapproved by the Office.
FIRST FEDERAL BANK
Attest: By:
----------------------------- -----------------------------
Adelia Lazur E. Lee Beard
Secretary President and Chief Executive
Officer
OFFICE OF THRIFT SUPERVISION
Attest: By:
----------------------------- -----------------------------
Secretary to the Office Director
Declared effective on
the _____ day of __________, 199_
7
<PAGE> 53
EXHIBIT II
FEDERAL STOCK BYLAWS
FOR
FIRST FEDERAL BANK
ARTICLE I - HOME OFFICE
The home office of First Federal Bank ("Bank") shall be at 12 E.
Broad Street, Hazleton in the County of Luzerne, in the Commonwealth of
Pennsylvania.
ARTICLE II - SHAREHOLDERS
Section 1. Place of Meetings. All annual and special meetings of
shareholders shall be held at the home office of the Bank or at such other
convenient place as the board of directors may determine.
Section 2. Annual Meeting. A meeting of the shareholders of the Bank
for the election of directors and for the transaction of any other business of
the Bank shall be held annually within 150 days after the end of the Bank's
fiscal year on the thirtieth day of September if not a legal holiday, and if a
legal holiday, then on the next day following which is not a legal holiday, at
or at such other date and time within such 150-day period as the board of
directors may determine.
Section 3. Special Meetings. Special meetings of the shareholders
for any purpose or purposes, unless otherwise prescribed by the regulations of
the Office of Thrift Supervision ("Office"), may be called at any time by the
chairman of the board, the president, or a majority of the board of directors,
and shall be called by the chairman of the board, the president, or the
secretary upon the written request of the holders of not less than one-tenth of
all of the outstanding capital stock of the Bank entitled to vote at the
meeting. Such written request shall state the purpose or purposes of the
meeting and shall be delivered to the home office of the Bank addressed to the
chairman of the board, the president, or the secretary.
Section 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with the most current edition of Robert's Rules of
Order unless otherwise prescribed by regulations of the Office or these bylaws
or the board of directors adopts another written procedure for the conduct of
meetings. The board of directors shall designate, when present, either the
chairman of the board or president to preside at such meetings.
Section 5. Notice of Meetings. Written notice stating the place,
day, and hour of the meeting and the purpose(s) for which the meeting is called
shall be delivered not fewer than 20 nor more than 50 days before the date of
the meeting, either personally or by mail, by or at the direction of the
chairman of the board, the president, or the secretary, or the directors
calling the meeting, to each
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<PAGE> 54
shareholder of record entitled to vote at such meeting. If mailed, such notice
shall be deemed to be delivered when deposited in the mail, addressed to the
shareholder at the address as it appears on the stock transfer books or records
of the Bank as of the record date prescribed in section 6 of this article II
with postage prepaid. When any shareholders' meeting, either annual or special,
is adjourned for 30 days or more, notice of the adjourned meeting shall be
given as in the case of an original meeting. It shall not be necessary to give
any notice of the time and place of any meeting adjourned for less than 30 days
or of the business to be transacted at the meeting, other than an announcement
at the meeting at which such adjournment is taken.
Section 6. Fixing of Record Date. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment, or shareholders entitled to receive payment of any dividend,
or in order to make a determination of shareholders for any other proper
purpose, the board of directors shall fix in advance a date as the record date
for any such determination of shareholders. Such date in any case shall be not
more than 60 days and, in case of a meeting of shareholders, not fewer than 10
days prior to the date on which the particular action, requiring such
determination of shareholders, is to be taken. When a determination of
shareholders entitled to vote at any meeting of shareholders has been made as
provided in this section, such determination shall apply to any adjournment.
Section 7. Voting Lists. At least 20 days before each meeting of the
shareholders, the officer or agent having charge of the stock transfer books
for shares of the Bank shall make a complete list of the shareholders of record
entitled to vote at such meeting, or any adjournment thereof, arranged in
alphabetical order, with the address and the number of shares held by each.
This list of shareholders shall be kept on file at the home office of the Bank
and shall be subject to inspection by any shareholder of record or the
shareholder's agent at any time during usual business hours for a period of 20
days prior to such meeting. Such list shall also be produced and kept open at
the time and place of the meeting and shall be subject to inspection by any
shareholder of record or any shareholder's agent during the entire time of the
meeting. The original stock transfer book shall constitute prima facie evidence
of the shareholders entitled to examine such list or transfer books or to vote
at any meeting of shareholders. In lieu of making the shareholder list
available for inspection by shareholders as provided in the preceding
paragraph, the board of directors may elect to follow the procedures prescribed
in Section 552.6(d) of the Office's regulations as now or hereafter in effect.
Section 8. Quorum. A majority of the outstanding shares of the Bank
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of shareholders. If less than a majority of the outstanding shares
is represented at a meeting, a majority of the shares so represented may
adjourn the meeting from time to time without further notice. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. The shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to constitute less than a quorum. If a quorum is present, the
affirmative vote of the majority of the shares represented at the meeting and
entitled to vote on the
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<PAGE> 55
subject matter shall be the act of the shareholders, unless the vote of a
greater number of shareholders voting together or voting by classes is required
by law or the charter. Directors, however, are elected by a plurality of the
votes cast at an election of directors.
Section 9. Proxies. At all meetings of shareholders, a shareholder
may vote by proxy executed in writing by the shareholder or by his or her duly
authorized attorney in fact. Proxies may be given telephonically or
electronically as long as the holder uses a procedure for verifying the
identity of the shareholder. Proxies solicited on behalf of the management
shall be voted as directed by the shareholder or, in the absence of such
direction, as determined by a majority of the board of directors. No proxy
shall be valid more than eleven months from the date of its execution except
for a proxy coupled with an interest.
Section 10. Voting of Shares in the Name of Two or More Persons.
When ownership stands in the name of two or more persons, in the absence of
written directions to the Bank to the contrary, at any meeting of the
shareholders of the Bank any one or more of such shareholders may cast, in
person or by proxy, all votes to which such ownership is entitled. In the event
an attempt is made to cast conflicting votes, in person or by proxy, by the
several persons in whose names shares of stock stand, the vote or votes to
which those persons are entitled shall be cast as directed by a majority of
those holding such and present in person or by proxy at such meeting, but no
votes shall be cast for such stock if a majority cannot agree.
Section 11. Voting of Shares by Certain Holders. Shares standing in
the name of another corporation may be voted by any officer, agent, or proxy as
the bylaws of such corporation may prescribe, or, in the absence of such
provision, as the board of directors of such corporation may determine. Shares
held by an administrator, executor, guardian, or conservator may be voted by
him or her, either in person or by proxy, without a transfer of such shares
into his or her name. Shares outstanding in the name of a trustee may be voted
by him or her, either in person or by proxy, but no trustee shall be entitled
to vote shares held by him or her without a transfer of such shares into his or
her name. Shares held in trust in an IRA or Keogh Account, however, may by
voted by the Bank if no other instructions are received. Shares outstanding in
the name of a receiver may be voted by such receiver, and shares held by or
under control of a receiver may be voted by such receiver without the transfer
into his or her name if authority to do so is consigned in an appropriate order
of the court or other public authority by which such receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote
such shares until the shares have been transferred into the name of the
pledgee, and thereafter the pledgee shall be entitled to vote the shares so
transferred.
Neither treasury shares of its own stock held by the Bank nor shares
held by another Corporation, if a majority of the shares entitled to vote for
the election of directors of such other corporation are held by the Bank, shall
be voted at any meeting or counted in determining the total number of
outstanding shares at any given time for purposes of any meeting.
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Section 12. Inspectors of Election. In advance of any meeting of
shareholders, the board of directors may appoint any person other than nominees
for office as inspectors of election to act at such meeting or any adjournment.
The number of inspectors shall be either one or three. Any such appointment
shall not be altered at the meeting. If inspectors of election are not so
appointed the chairman of the board or the president may, or on the request of
not fewer than 10 percent of the votes represented at the meeting shall, make
such appointment at the meeting. If appointed at the meeting, the majority of
the votes present shall determine whether one or three inspectors are to be
appointed. In case any person appointed as inspector fails to appear or fails
or refuses to act, the vacancy may be filled by appointment by the board of
directors in advance of the meeting or at the meeting by the chairman of the
board or the president.
Unless otherwise prescribed by regulations of the Office, the duties
of such inspectors shall include: determining the number of shares and the
voting power of each share, the shares represented at the meeting, the
existence of a quorum, and the authenticity, validity and effect of proxies;
receiving votes, ballots, or consents; hearing and determining all challenges
and questions in any way arising in connection with the rights to vote;
counting and tabulating all votes or consents; determining the result; and such
acts as may be proper for conduct the election or vote with fairness to all
shareholders.
Section 13. Nominating Committee. The board of directors shall act
as a nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the death
or other incapacity of a management nominee, the nominating committee shall
deliver written nominations to the secretary at least 20 days prior to the date
of the annual meeting. Upon delivery, such nominations shall be posted in a
conspicuous place in each office of the Bank. No nominations for directors
except those made by the nominating committee shall be voted upon at the annual
meeting unless other nominations by shareholders are made in writing and
delivered to the secretary of the Bank at least five days prior to the date of
the annual meeting. Upon delivery, such nominations shall be posted in a
conspicuous place in each office of the Bank. Ballots bearing the names of all
persons nominated by the nominating committee and by shareholders shall be
provided for use at the annual meeting. However, if the nominating committee
shall fail or refuse to act at least 20 days prior to the annual meeting,
nominations for directors may be made at the annual meeting by any shareholder
entitled to vote and shall be voted upon.
Section 14. New Business. Any new business to be taken up at the
annual meeting shall be stated in writing and filed with the secretary of the
Bank at least five days before the date of the annual meeting, and all business
so stated, proposed, and filed shall be considered at the annual meeting; but
no other proposal shall be acted upon at the annual meeting. Any shareholder
may make any other proposal at the annual meeting and the same may be discussed
and considered, but unless stated in writing and filed with the secretary at
least five days before the meeting, such proposal shall be laid over for action
at an adjourned, special, or annual meeting of the shareholders taking place 30
days or more thereafter. This provision shall not prevent the consideration and
approval or disapproval at the annual meeting of reports of officers,
directors, and committees; but
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in connection with such reports, no new business shall be acted upon at such
annual meeting unless stated and filed as herein provided.
Section 15. Informal Action by Shareholders. Any action required to
be taken at a meeting of the shareholders, or any other action which may be
taken at a meeting of shareholders, may be taken without a meeting if consent
in writing, setting forth the action so taken, shall be given by all of the
shareholders entitled to vote with respect to the subject matter.
ARTICLE III - BOARD OF DIRECTORS
Section 1. General Powers. The business and affairs of the Bank
shall be under the direction of its board of directors. The board of directors
shall annually elect a chairman of the board and a president from among its
members and shall designate, when present, either the chairman of the board or
the president to preside at its meetings.
Section 2. Number and Term. The board of directors shall consist of
nine (9) and shall be divided into three classes as nearly equal in number as
possible. The members of each class shall be elected for a term of three years
and until their successors are elected and qualified. One class shall be
elected by ballot annually.
Section 3. Regular Meetings. A regular meeting of the board of
directors shall be held without other notice than this bylaw following the
annual meeting of shareholders. The board of directors may provide, by
resolution, the time and place, for the holding of additional regular meetings
without other notice than such resolution. Directors may participate in a
meeting by means of a conference telephone or similar communications device
through which all persons participating can hear each other at the same time.
Participation by such means shall constitute presence in person for all
purposes.
Section 4. Qualification. Each director shall at all times be the
beneficial owner of not less than 100 shares of capital stock of the Bank
unless the Bank is a wholly owned subsidiary of a holding company.
Section 5. Special Meetings. Special meetings of the board of
directors may be called by or at the request of the chairman of the board, the
president, or one-third of the directors. The persons authorized to call
special meetings of the board of directors may fix any place, within the Bank's
normal lending territory, as the place for holding any special meeting of the
board of directors called by such persons.
Members of the board of directors may participate in special
meetings by the making use of conference telephone or similar communications
equipment by which all persons participating in the meeting can hear each
other. Such participation shall constitute presence in person for all purposes.
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Section 6. Notice. Written notice of any special meeting shall be
given to each director at least 24 hours prior thereto when delivered
personally or by telegram or at least five days prior thereto when delivered by
mail at the address at which the director is most likely to be reached. Such
notice shall be deemed to be delivered when deposited in the mail so addressed,
with postage prepaid if mailed, when delivered to the telegraph company if sent
by telegram, or when the Bank receives notice of delivery if electronically
transmitted. Any director may waive notice of any meeting by a writing filed
with the secretary. The attendance of a director at a meeting shall constitute
a waiver of notice of such meeting, except where a director attends a meeting
for the express purpose of objecting to the transaction of any business because
the meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any meeting of the board of directors need
be specified in the notice of waiver of notice of such meeting.
Section 7. Quorum. A majority of the number of directors fixed by
section 2 of this article III shall constitute a quorum for the transaction of
business at any meeting of the board of directors; but if less than such
majority is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time. Notice of any adjourned meeting shall be
given in the same manner as prescribed by section 5 of this article III.
Section 8. Manner of Acting. The act of the majority of the
directors present at a meeting at which a quorum is present shall be the act of
the board of directors, unless a greater number is prescribed by regulation of
the Office or by these bylaws.
Section 9. Action Without a Meeting. Any action required or
permitted to be taken by the board of directors at a meeting may be taken
without a meeting if a consent in writing, setting forth the action so taken,
shall be signed by all of the directors.
Section 10. Resignation. Any director may resign at any time by
sending a written notice of such resignation to the home office of the Bank
addressed to the chairman of the board or the president. Unless otherwise
specified, such resignation shall take effect upon receipt by the chairman of
the board or the president. More than three consecutive absences from regular
meetings of the board of directors, unless excused by resolution of the board
of directors, shall automatically constitute a resignation, effective when such
resignation is accepted by the board of directors.
Section 11. Vacancies. Any vacancy occurring on the board of
directors may be filled by the affirmative vote of a majority of the remaining
directors although less than a quorum of the board of directors. A director
elected to fill a vacancy shall be elected to serve only until the next
election of directors by the shareholders. Any directorship to be filled by
reason of an increase in the number of directors may be filled by election by
the board of directors for a term of office continuing only until the next
election of directors by the shareholders.
Section 12. Compensation. Directors, as such, may receive a stated
salary for their services. By resolution of the board of directors, a
reasonable fixed sum, and reasonable expenses of attendance, if any, may be
allowed for attendance at each regular or special meeting of the board of
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<PAGE> 59
directors. Members of either standing or special committees may be allowed such
compensation for attendance at committee meetings as the board of directors may
determine.
Section 13. Presumption of Assent. A director of the Bank who is
present at a meeting of the board of directors at which action on any bank
matter is taken shall be presumed to have assented to the action taken unless
his or her dissent or abstention shall be entered in the minutes of the meeting
or unless he or she shall file a written dissent to such action with the person
acting as the secretary of the meeting before the adjournment thereof or shall
forward such dissent by registered mail to the secretary of the Bank within
five days after the date a copy of the minutes of the meeting is received. Such
right to dissent shall not apply to a director who voted in favor of such
action.
Section 14. Removal of Directors. At a meeting of shareholders
called expressly for that purpose, any director may be removed only for cause
by a vote of the holders of a majority of the shares then entitled to vote at
an election of directors. Whenever the holders of the shares of any class are
entitled to elect one or more directors by the provisions of the charter or
supplemental sections thereto, the provisions of this section shall apply, in
respect to the removal of a director or directors so elected, to the vote of
the holders of the outstanding shares of that class and not to the vote of the
outstanding shares as a whole.
ARTICLE IV - EXECUTIVE AND OTHER COMMITTEES
Section 1. Appointment. The board of directors, by resolution
adopted by a majority of the full board, may designate the chief executive
officer and two or more of the other directors to constitute an executive
committee. The designation of any committee pursuant to this Article IV and the
delegation of authority shall not operate to relieve the board of directors, or
any director, of any responsibility imposed by law or regulation.
Section 2. Authority. The executive committee, when the board of
directors is not in session, shall have and may exercise all of the authority
of the board of directors except to the extent, if any, that such authority
shall be limited by the resolution appointing the executive committee; and
except also that the executive committee shall not have the authority of the
board of directors with reference to: the declaration of dividends; the
amendment of the charter or bylaws of the Bank, or recommending to the
shareholders a plan of merger, consolidation, or conversion; the sale, lease,
or other disposition of all or substantially all of the property and assets of
the Bank otherwise than in the usual and regular course of its business; a
voluntary dissolution of the Bank; a revocation of any of the foregoing; or the
approval of a transaction in which any member of the executive committee,
directly or indirectly, has any material beneficial interest.
Section 3. Tenure. Subject to the provisions of section 8 of this
article IV, each member of the executive committee shall hold office until the
next regular annual meeting of the board of directors following his or her
designation and until a successor is designated as a member of the executive
committee.
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Section 4. Meetings. Regular meetings of the executive committee may
be held without notice at such times and places as the executive committee may
fix from time to time by resolution. Special meetings of the executive
committee may be called by any member thereof upon not less than one day's
notice stating the place, date, and hour of the meeting, which notice may be
written or oral. Any member of the executive committee may waive notice of any
meeting and no notice of any meeting need be given to any member thereof who
attends in person. The notice of a meeting of the executive committee need not
state the business proposed to be transacted at the meeting.
Section 5. Quorum. A majority of the members of the executive
committee shall constitute a quorum for the transaction of business at any
meeting thereof, and action of the executive committee must be authorized by
the affirmative vote of a majority of the members present at a meeting at which
a quorum is present.
Section 6. Action Without a Meeting. Any action required or
permitted to be taken by the executive committee at a meeting may be taken
without a meeting if a consent in writing, setting forth the action so taken,
shall be signed by all of the members of the executive committee.
Section 7. Vacancies. Any vacancy in the executive committee may be
filled by a resolution adopted by a majority of the full board of directors.
Section 8. Resignations and Removal. Any member of the executive
committee may be removed at any time with or without cause by resolution
adopted by a majority of the full board of directors. Any member of the
executive committee may resign from the executive committee at any time by
giving written notice to the president or secretary of the Bank. Unless
otherwise specified, such resignation shall take effect upon its receipt; the
acceptance of such resignation shall not be necessary to make it effective.
Section 9 Procedure. The executive committee shall elect a presiding
officer from its members and may fix its own rules of procedure which shall not
be inconsistent with these bylaws. It shall keep regular minutes of its
proceedings and report the same to the board of directors for its information
at the meeting held next after the proceedings shall have occurred.
Section 10. Other Committees. The board of directors may by
resolution establish an audit, loan, or other committee composed of directors
as they may determine to be necessary or appropriate for the conduct of the
business of the Bank and may prescribe the duties, constitution, and procedures
thereof.
ARTICLE V - OFFICERS
Section l . Positions. The officers of the Bank shall be a
president, one or more vice presidents, a secretary, and a treasurer or
comptroller, each of whom shall be elected by the board of directors. The
board of directors may also designate the chairman of the board as an officer.
The offices of the secretary and treasurer or comptroller may be held by the
same person and a vice
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president may also be either the secretary or the treasurer or comptroller. The
board of directors may designate one or more vice presidents as executive vice
president or senior vice president. The board of directors may also elect or
authorize the appointment of such other officers as the business of the Bank
may require. The officers shall have such authority and perform such duties as
the board of directors may from time to time authorize or determine. In the
absence of action by the board of directors, the officers shall have such
powers and duties as generally pertain to their respective offices.
Section 2. Election and Term of Office. The officers of the Bank
shall be elected annually at the first meeting of the board of directors held
after each annual meeting of the shareholders. If the election of officers is
not held at such meeting, such election shall be held as soon thereafter as
possible. Each officer shall hold office until a successor has been duly
elected and qualified or until the officer's death, resignation or removal in
the manner hereinafter provided. Election or appointment of an officer,
employee, or agent shall not of itself create contractual rights. The board of
directors may authorize the Bank to enter into an employment contract with any
officer in accordance with regulations of the Office; but no such contract
shall impair the right of the board of directors to remove any officer at any
time in accordance with section 3 of this Article V.
Section 3. Removal. Any officer may be removed by the board of
directors whenever in its judgment the best interests of the Bank will be
served thereby, but such removal, other than for cause, shall be without
prejudice to the contractual rights, if any, of the person so removed.
Section 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification, or otherwise may be filled by the board
of directors for the unexpired portion of the term.
Section 5. Remuneration. The remuneration of the officers shall be
fixed from time to time by the board of directors.
ARTICLE VI - CONTRACTS, LOANS, CHECKS, AND DEPOSITS
Section 1. Contracts. To the extent permitted by regulations of the
Office, and except as otherwise prescribed by these bylaws with respect to
certificates for shares, the board of directors may authorize any officer,
employee, or agent of the Bank to enter into any contract or execute and
deliver any instrument in the name of and on behalf of the Bank. Such authority
may be general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the
Bank and no evidence of indebtedness shall be issued in its name unless
authorized by the board of directors. Such authority may be general or
confined to specific instances.
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Section 3. Checks; Drafts. etc. All checks, drafts, or other orders
for the payment of money, notes, or other evidences of indebtedness issued in
the name of the Bank shall be signed by one or more officers, employees or
agents of the Bank in such manner as shall from time to time be determined by
the board of directors.
Section 4. Deposits. All funds of the Bank not otherwise employed
shall be deposited from time to time to the credit of the Bank in any duly
authorized depositories as the board of directors may select.
ARTICLE VII - CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 1. Certificates for Shares. Certificates representing shares
of capital stock of the Bank shall be in such form as shall be determined by
the board of directors and approved by the Office. Such certificates shall be
signed by the chief executive officer or by any other officer of the Bank
authorized by the board of directors, attested by the secretary or an assistant
secretary, and sealed with the corporate seal or a facsimile thereof. The
signatures of such officers upon a certificate may be facsimiles if the
certificate is manually signed on behalf of a transfer agent or a registrar
other than the Bank itself or one of its employees. Each certificate for shares
of capital stock shall be consecutively numbered or otherwise identified. The
name and address of the person to whom the shares are issued, with the owner of
shares and date of issue, shall be entered on the stock transfer books of the
Bank. All certificates surrendered to the Bank for transfer shall be cancelled
and no new certificate shall be issued until the former certificate for a like
number of shares has been surrendered and cancelled, except that in the case of
a lost or destroyed certificate, a new certificate may be issued upon such
terms and indemnity to the Bank as the board of directors may prescribe.
Section 2. Transfer of Shares. Transfer of shares of capital stock
of the Bank shall be made only on its stock transfer books. Authority for such
transfer shall be given only by the holder of record or by his or her legal
representative, who shall furnish proper evidence of such authority, or by his
or her attorney authorized by a duly executed power of attorney and filed with
the Bank. Such transfer shall be made only on surrender for cancellation of the
certificate for such shares. The person in whose name shares of capital stock
stand on the books of the Bank shall be deemed by the Bank to be the owner for
all purposes.
ARTICLE VIII - FISCAL YEAR
The fiscal year of the Bank shall end on the thirtieth day of
September of each year. The appointment of accountants shall be subject to
annual ratification by the shareholders.
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ARTICLE IX - DIVIDENDS
Subject to the terms of the Bank's charter and the regulations and
orders of the Office, the board of directors may, from time to time, declare,
and the Bank may pay, dividends on its outstanding shares of capital stock.
ARTICLE X - CORPORATE SEAL
The board of directors shall provide the Bank seal which shall be
two concentric circles between which shall be the name of the Bank. The year of
incorporation or an emblem may appear in the center.
ARTICLE XI - AMENDMENTS
These bylaws may be amended in a manner consistent with regulations
of the Office and shall be effective after: (i) approval of the amendment by a
majority vote of the authorized board of directors, or by a majority vote of
the votes cast by the shareholders of the Bank at any legal meeting, and (ii)
receipt of any applicable regulatory approval. When the Bank fails to meet its
quorum requirements, solely due to vacancies on the board, then the affirmative
vote of a majority of the sitting board will be required to amend the bylaws.
11
<PAGE> 1
Exhibit 5.0
February 6, 1998
Board of Directors
Northeast Pennsylvania Financial Corp.
12 E. Broad Street
Hazleton, Pennsylvania 18201
Re: The offering of up to 5,951,250 shares of
Northeast Pennsylvania Financial Corp. Common Stock
Ladies and Gentlemen:
You have requested our opinion concerning certain matters of Delaware
law in connection with the conversion of First Federal Savings and Loan
Association of Hazleton (the "Bank"), a federally-chartered savings and loan
association, from the mutual form of ownership to a federally-chartered capital
stock savings bank to be named First Federal Bank (the "Conversion"), and the
related subscription offering, community offering and syndicated community
offering (the "Offerings") by Northeast Pennsylvania Financial Corp., a Delaware
corporation (the "Company"), of up to 5,175,000 shares of its common stock, par
value $.01 per share ("Common Stock"), (5,951,250 shares if the Estimated
Valuation Range is increased up to 15% to reflect changes in market and
financial conditions following commencement of the Offerings).
In connection with your request for our opinion, you have provided to
us and we have reviewed the Company's certificate of incorporation filed with
the Delaware Secretary of State on December 16, 1997 (the "Certificate of
Incorporation"); the Company's Bylaws; the Company's Registration Statement on
Form S-1, as filed with the Securities and Exchange Commission initially on
December 24, 1997 and as amended on February 6, 1998 (the "Registration
Statement"); a consent of the sole incorporator of the Company; resolutions of
the Board of Directors of the Company (the "Board") concerning the organization
of the Company, the Offerings and designation of a Pricing Committee of the
Board, and the form of stock certificate approved by the Board to represent
shares of Common Stock. We have also been furnished a
<PAGE> 2
Board of Directors
First Federal Savings and Loan Association
of Hazleton
February 6, 1998
Page 2
certificate of the Delaware Secretary of State certifying the Company's good
standing as a Delaware corporation. Capitalized terms used but not defined
herein shall have the meaning given them in the Certificate of Incorporation.
In rendering this opinion, we have relied upon the opinion of Morris,
Nichols, Arsht & Tunnell as to matters of Delaware law upon which opinion we
believe we are justified in relying. We have examined the opinion of Morris,
Nichols, Arsht & Tunnell which opinion is in form satisfactory to us.
We understand that the Company will loan to the trust for the Bank's
Employee Stock Ownership Plan (the "ESOP") the funds the ESOP Trust will use to
purchase shares of Common Stock for which the ESOP Trust subscribes pursuant to
the Offerings and for purposes of rendering the opinion set forth in paragraph 2
below, we assume that: (a) the Board of Directors of the Company has duly
authorized the loan to the ESOP Trust (the "Loan"); (b) the ESOP serves a valid
corporate purpose for the Company; (c) the Loan will be made at an interest rate
and on other terms that are fair to the Subsidiary; (d) the terms of the Loan
will be set forth in customary and appropriate documents including, without
limitation, a promissory note representing the indebtedness of the ESOP Trust to
the Company as a result of the Loan; and (e) the closing for the Loan and for
the sale of Common Stock to the ESOP Trust will be held after the closing for
the sale of the other shares of Common Stock sold in the Offerings and the
receipt by the Company of the proceeds thereof.
Based upon and subject to the foregoing, and limited in all respects to
matters of Delaware law, it is our opinion that:
1. The Company has been duly organized and is validly existing in good
standing as a corporation under the laws of the State of Delaware.
2. Upon the due adoption by the Pricing Committee of a resolution
fixing the number of shares of Common Stock to be sold in the Offerings, the
Common Stock to be issued in the Offerings (including the shares to be issued to
the ESOP Trust and the shares to be granted to a charitable foundation to be
established by the Company in connection with the Conversion) will be duly
authorized and, when such shares are sold and paid for in accordance with the
terms set forth in the Prospectus and such resolution of the Pricing Committee,
and certificates representing such shares in the form provided to us are duly
and properly issued, will be validly issued, fully paid and nonassessable.
<PAGE> 3
Board of Directors
First Federal Savings and Loan Association
of Hazleton
February 6, 1998
Page 3
The following provisions of the Certificate of Incorporation may not be
given effect by a court applying Delaware law, but in our opinion the failure to
give effect to such provisions will not affect the duly authorized, validly
issued, fully paid and nonassessable status of the Common Stock:
1. (a) Subsections C.3 and C.6 of Article FOURTH and Section
D of Article EIGHTH, which grant the Board the
authority to construe and apply the provisions of
those Articles, subsection C.4 of Article FOURTH, to
the extent that subsection obligates any person to
provide to the Board the information such subsection
authorizes the Board to demand, and the provision of
Subsection C.7 of Article EIGHTH empowering the Board
to determine the Fair Market Value of property
offered or paid for the Company's stock by an
Interested Stockholder, in each case to the extent,
if any, that a court applying Delaware law were to
impose equitable limitations upon such authority; and
(b) Article NINTH, which authorizes the Board to consider
the effect of any offer to acquire the Company on
constituencies other than stockholders in evaluating
any such offer.
We consent to the filing of this opinion as an exhibit to the
Registration Statement on Form S-1 and the Form AC and to the use of the name of
our firm where it appears in the Registration Statement, Form AC and Prospectus.
Very truly yours,
/s/ MULDOON, MURPHY & FAUCETTE
<PAGE> 1
[Morris, Nichols, Arsht & Tunnell Letterhead]
February 4, 1998
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, DC 20016
Ladies and Gentlemen:
You have requested our opinion concerning certain matters of
Delaware law in connection with the conversion of First Federal Savings &
Loan Association of Hazelton, a federally chartered savings and loan association
(the "Association"), from the mutual form of ownership to stock form of
ownership (the "Conversion"), the subscription and community offering (the
"Offering"), in connection with the Conversion, by Northeast Pennsylvania
Financial Corp., a Delaware corporation (the "Company"), of up to 5,951,250
shares of its common stock, par value $.01 per share (the "Common Stock").
In connection with your request for our opinion, you have
provided to us, and we have reviewed, the Company's certificate of
<PAGE> 2
Muldoon, Murphy & Faucette
February 4, 1998
Page 2
incorporation (the "Certificate of Incorporation"), its by-laws, the
Registration Statement filed with the Securities and Exchange Commission in
connection with the Offering (the "Registration Statement"), including the
prospectus constituting a part thereof (the "Prospectus"), a consent of the sole
incorporator of the Company, resolutions of the Board of Directors of the
Company (the "Board") concerning, inter alia, the organization of the Company,
the Offering and the designation of a Pricing Committee of the Board (the
"Pricing Committee") and the form of stock certificate approved by the Board to
represent shares of Common Stock.
We understand that the Company will loan to the Association's
Employee Stock Ownership Plan (the "ESOP") the funds the ESOP will use to
purchase the shares of Common Stock for which the ESOP has subscribed as part of
the Offering. In this regard, we have assumed, for purposes of rendering the
opinion set forth in paragraph 2 below, that: (a) the Board has duly authorized
the loan to the ESOP (the "Loan"); (b) the Loan serves a valid corporate
<PAGE> 3
Muldoon, Murphy & Faucette
February 4, 1998
Page 3
purpose; (c) the Loan will be made at an interest rate and on other terms that
are fair to the Company; (d) the terms of the Loan will be set forth in
customary and appropriate documents including, without limitation, a promissory
note representing the indebtedness of the ESOP to the Company as a result of the
Loan; and (e) the closing for the Loan and for the sale of Common Stock to the
ESOP will be held after the closing for the sale of the other shares of Common
Stock sold in the Offering and the receipt by the Company of the proceeds
thereof.
We call your attention to the fact that the opinions expressed
herein are limited in all respects to matters of Delaware corporate law. We
express no opinion concerning the requirements of any other law, rule or
regulation, state or federal, applicable to the Association, the Company, the
Offering or the Conversion, including, without limitation, those applicable to
federally chartered savings and loan associations or their holding companies.
Based upon and subject to the foregoing, it is our opinion
that:
1. The Company has been duly organized and is validly existing
in good standing as a corporation under the laws of the State of Delaware, with
the corporate power and authority to own its property and conduct its business
as now conducted as described in the Prospectus.
<PAGE> 4
Muldoon, Murphy & Faucette
February 4, 1998
Page 4
2. Upon the due adoption by the Pricing Committee of a
resolution fixing the number of shares of Common Stock to be sold in the
Offering, the Common Stock to be issued in the Offering (including the shares to
be issued to the ESOP) will be duly authorized and, when such shares are sold
and paid for in accordance with the terms set forth in the Prospectus and such
resolution of the Pricing Committee, and certificates representing such shares
in the form provided to us are duly and properly issued, will be validly issued,
fully paid and nonassessable, with no personal liability for the payment of the
Company's debts arising solely by virtue of the ownership thereof; such issuance
and sale will not be in violation of or subject to any preemptive rights
provided for by Delaware law or by the Certificate of Incorporation.
<PAGE> 5
Muldoon, Murphy & Faucette
February 4, 1998
Page 5
The following provisions of the Certificate of Incorporation
may not be given effect by a court applying Delaware law, but in our opinion the
failure to give effect to such provisions will not affect the duly authorized,
validly issued, fully paid and nonassessable status of the Common Stock:
(a) Subsections C.3 and C.6 of Article FOURTH and Section D of
Article EIGHTH, which grant the Board the authority to construe and apply the
provisions of those Articles, subsection C.4 of Article FOURTH, to the extent
that provision obligates any person to provide to the Board the information such
subsection authorizes the Board to demand, and the provision of Section C.7 of
Article EIGHTH empowering the Board to determine the Fair Market
<PAGE> 6
Muldoon, Murphy & Faucette
February 4, 1998
Page 6
Value of property offered or paid for the Company's stock by an Interested
Stockholder, to the extent, if any, that a court applying Delaware law were to
impose equitable limitations upon the authority of the directors of the Company
under such provisions.
(b) Article NINTH of the Certificate of Incorporation, which
purports to permit the Board to consider the effect of any offer to acquire the
Company on constituencies other than stockholders in evaluating any such offer.
Very truly yours,
/s/ MORRIS, NICHOLS, ARSHT, & TUNNELL
<PAGE> 1
Exhibit 8.0
February 5, 1998
Board of Directors
First Federal Savings and Loan Association of Hazleton
12 E. Broad Street
Hazleton, Pennsylvania 18201
Board of Directors
Northeast Pennsylvania Financial Corp.
12 E. Broad Street
Hazleton, Pennsylvania 18201
Re: Certain Federal Tax Consequences of the Conversion of First
Savings and Loan Association of Hazleton from a
Federally-chartered Mutual Savings and Loan Association to a
Federally-chartered Capital Stock Savings Bank and the Offer
and Sale of Common Stock of Northeast Pennsylvania Financial
Corp. (the "Conversion")
Ladies and Gentlemen:
You have requested an opinion on certain federal income tax
consequences of the proposed conversion of First Federal Savings and Loan
Association of Hazleton (the "Bank") from a federally-chartered mutual savings
and loan association to a federally-chartered capital stock savings bank and the
acquisition of the Bank's capital stock by Northeast Pennsylvania Financial
Corp., a Delaware corporation (the "Holding Company"), pursuant to the plan of
conversion adopted by the Board of Directors on November 18, 1997 (the "Plan of
Conversion").
The proposed transaction is described in the Prospectus and the Plan of
Conversion, and the tax consequences of the proposed transaction will be as set
forth in the section of this letter entitled "FEDERAL TAX OPINION."
<PAGE> 2
Board of Directors
February 5, 1998
Page 2
We have made such inquiries and have examined such documents and
records as we have deemed appropriate for the purpose of this opinion. In
rendering this opinion, we have received certain standard representations of the
Holding Company and the Bank concerning the Holding Company and the Bank as well
as the transaction ("Representations"). These Representations are required to be
furnished prior to the execution of this letter and again prior to the closing
of the Conversion. We will rely upon the accuracy of the Representations of the
Holding Company and the Bank and the statements of facts contained in the
examined documents, particularly the Plan of Conversion. We have also assumed
the authenticity of all signatures, the legal capacity of all natural persons
and the conformity to the originals of all documents submitted to us as copies.
Each capitalized term used herein, unless otherwise defined, has the meaning set
forth in the Plan of Conversion. We have assumed that the Conversion will be
consummated strictly in accordance with the terms of the Plan of Conversion.
The Plan of Conversion and the Prospectus contain a detailed
description of the Conversion. These documents as well as the Representations to
be provided by the Holding Company and the Bank are incorporated in this letter
as part of the statement of the facts.
First Federal Savings and Loan Association of Hazleton, with its
headquarters office in Hazleton, Pennsylvania, is a federally-chartered mutual
savings and loan association. As a mutual savings and loan associatin, the Bank
has never been authorized to issue stock. Instead, the proprietary interest in
the reserves and undivided profits of the Bank belong to the deposit account
holders of the Bank, hereinafter sometimes referred to as "depositors." A
depositor of the Bank has a right to share, pro rata, with respect to the
withdrawal value of his respective deposit account in any liquidation proceeds
distributed in the event the Bank is ever liquidated. In addition, a depositor
of the Bank is entitled to interest on his account balance as fixed and paid by
the Bank.
In order to provide organizational and economic strength to the Bank,
the Board of Directors has adopted the Plan of Conversion whereby the Bank will
convert itself into a federally-chartered capital stock savings bank (the
"Converted Bank"), the stock of which will be held entirely by the Holding
Company. Assuming that the Holding Company form of organization is utilized, the
Holding Company will acquire the stock of the Bank by purchase, in exchange for
the Conversion proceeds that are not permitted to be retained by the Holding
Company. The Holding Company will apply to the Office of Thrift Supervision
("OTS") to retain up to 50% of the proceeds received from the Conversion. The
aggregate sales price of the Common Stock issued in the Conversion will be based
on an independent appraiser's valuation of the estimated pro forma market value
of the Common Stock of the Converted Bank. The
<PAGE> 3
Board of Directors
February 5, 1998
Page 3
Conversion and sale of the Common Stock will be subject to approval by the OTS
and the approval of the Voting Members.
ESTABLISHMENT OF LIQUIDATION ACCOUNT. The Bank shall establish at the
time of Conversion a liquidation account in an amount equal to its net worth as
of the latest practicable date prior to Conversion. The liquidation account will
be maintained by the Bank for the benefit of the Eligible Account Holders and
Supplemental Eligible Account Holders who continue to maintain their Savings
Accounts at the Bank. Each Eligible Account Holder and Supplemental Eligible
Account Holder shall, with respect to his Savings Account, hold a related
inchoate interest in a portion of the liquidation account balance, in relation
to his Savings Account balance on the Eligibility Record Date and/or
Supplemental Eligibility Record Date or to such balance as it may be
subsequently reduced, as provided in the Plan of Conversion.
In the unlikely event of a complete liquidation of the Bank (and only
in such event), following all liquidation payments to creditors (including those
to Account Holders to the extent of their Savings Accounts) each Eligible
Account Holder and Supplemental Eligible Account Holder shall be entitled to
receive a liquidating distribution from the liquidation account, in the amount
of the then adjusted subaccount balance for his Savings Account then held,
before any liquidation distribution may be made to any holders of the Bank's
capital stock. No merger, consolidation, purchase of bulk assets with assumption
of Savings Accounts and other liabilities, or similar transaction with an FDIC
institution, in which the Bank is not the surviving institution, shall be deemed
to be a complete liquidation for this purpose. In such transactions, the
liquidation account shall be assumed by the surviving institution.
ESTABLISHMENT OF FOUNDATION. As part of the Conversion, the Company and
the Bank intend to establish a charitable foundation (the "Foundation") that
will qualify as an exempt organization under Section 501(c)(3) of the Internal
Revenue Code of 1986, as amended (the "Code") and to donate to the Foundation up
to 8.0% of the number of shares of Common Stock sold in the Conversion. The
establishment and funding of the Foundation as part of the Conversion is subject
to the approval of the Voting Members of the Bank at the Special Meeting of
Members. In the event that the Foundation does not receive the prerequisite
approval, the Bank may determine to complete the Conversion without the
Foundation.
The Plan of Conversion provides that the Foundation is being formed to
further the Converted Bank's long term commitment to its community. The Plan of
Conversion states that the Foundation is intended to complement the Bank's
existing community reinvestment activities so as to allow the local community to
share in the growth and profitability of the Holding Company and the Converted
Bank over the long term.
<PAGE> 4
Board of Directors
February 5, 1998
Page 4
The Foundation will be dedicated to the promotion of charitable and
educational purposes within the Bank's Local Community, including, but not
limited to, grants or donations to support housing assistance, scholarships,
local education, not-for-profit medical facilities, not-for-profit community
groups and other types of organizations or civic minded projects. The Foundation
will annually distribute total grants and donations to assist charitable
organizations or to fund projects within its local community of not less than 5%
of the average fair value of the Foundation assets each year.
* * *
You have provided the following representations concerning this
transaction:
(a) The fair market value of the withdrawable deposit accounts
plus interests in the liquidation account of the Converted
Bank to be constructively received under the Plan of
Conversion will, in each instance, be equal to the fair market
value of the withdrawable deposit accounts (plus the related
interest in the residual equity of the Bank) deemed to be
surrendered in exchange therefor.
(b) If an individual's total deposits in the Bank equal or exceed
$50 as of the Eligibility Record Date or the Supplemental
Eligibility Record Date, then no amount of that individual's
total deposits will be excluded from participating in the
liquidation account. The fair market value of the deposit
accounts of the Bank which have a balance of less than $50 on
the Eligibility Record Date or the Supplemental Eligibility
Record Date will be less than 1% of the total fair market
value of all deposit accounts of the Bank.
(c) Immediately following the Conversion, the Eligible Account
Holders and the Supplemental Eligible Account Holders of the
Bank will own all of the outstanding interests in the
liquidation account and will own such interest solely by
reason of their ownership of deposits in the Bank immediately
before the Conversion.
<PAGE> 5
Board of Directors
February 5, 1998
Page 5
(d) After the Conversion, the Converted Bank will continue the
business of the Bank in the same manner as prior to the
Conversion. The Converted Bank has no plan or intention and
the Holding Company has no plan or intention to cause the
Converted Bank to sell its assets other than in the ordinary
course of business.
(e) The Holding Company has no plan or intention to sell,
liquidate or otherwise dispose of the stock of the Converted
Bank other than in the ordinary course of business.
(f) The Holding Company and the Converted Bank have no current
plan or intention to redeem or otherwise acquire any of the
Common Stock issued in the Conversion transaction.
(g) Immediately after the Conversion, the assets and liabilities
of the Converted Bank will be identical to the assets and
liabilities of the Bank immediately prior to the Conversion,
plus the net proceeds from the sale of the Converted Bank's
common stock to the Holding Company and any liability
associated with indebtedness incurred by the Employee Plans in
the acquisition of Common Stock by the Employee Plans.
(h) The Bank, Converted Bank and the Holding Company are
corporations within the meaning of section 7701(a)(3) of the
Internal Revenue Code.
(i) None of the shares of the Common Stock to be purchased by the
depositor-employees of the Bank in the Conversion will be
issued or acquired at a discount. However, shares may be given
to certain Directors and employees as compensation by means of
the Employee Plans. Compensation to be paid to such Directors
and depositor-employees will be commensurate with amounts paid
to third parties bargaining at arm's length for similar
services.
(j) The fair market value of the assets of the Bank, which will be
transferred to the Converted Bank in the Conversion, will
equal or exceed the sum of the liabilities of the Bank which
will be assumed by the Converted Bank and any liabilities to
which the transferred assets are subject.
(k) The Bank is not under the jurisdiction of a bankruptcy or
similar court in any Title 11 or similar case within the
meaning of section 368(a)(3)(A) of the Code.
<PAGE> 6
Board of Directors
February 5, 1998
Page 6
(l) Upon the completion of the Conversion, the Holding Company
will own and hold 100% of the issued and outstanding capital
stock of the Converted Bank and no other shares of capital
stock of the Converted Bank will be issued and/or outstanding.
At the time of the Conversion, the Converted Bank does not
have any plan or intention to issue additional shares of its
stock following the transaction. Further, no shares of
preferred stock of the Converted Bank will be issued and/or
outstanding.
(m) Upon the completion of the Conversion, there will be no
rights, warrants, contracts, agreements, commitments or
understandings with respect to the capital stock of the
Converted Bank, nor will there be any securities outstanding
which are convertible into the capital stock of the Converted
Bank.
(n) No cash or property will be given to Eligible Account Holders,
Supplemental Eligible Account Holders, or others in lieu of
(a) nontransferable subscription rights, or (b) an interest in
the liquidation account of the Converted Bank.
(o) The Bank has utilized a reserve for bad debts in accordance
with section 593 and, following the Conversion, to the extent
allowed under the Code, the Converted Bank shall maintain a
reserve for bad debts in accordance with the applicable
provisions of the Code.
(p) The Bank currently satisfies the 60% "qualified assets" test
of section 7701(a)(19) of the Code. Management expects the
Converted Bank to be able to continue to satisfy the test in
the future. The Converted Bank will also satisfy the
"qualified thrift lender" tests set out in sections 301 and
303 of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989.
(q) Depositors will pay the expenses of the Conversion solely
applicable to them, if any. The Holding Company and the Bank
will each pay expenses of the transaction attributable to them
and will not pay any expenses solely attributable to the
depositors or to the Holding Company shareholders.
(r) The exercise price of the subscription rights received by the
Bank's Eligible Account Holders, Supplemental Eligible Account
Holders, and other holders of subscription rights to purchase
Holding Company Common Stock will be equal to the fair market
value of the stock of the Holding Company at the time of the
completion of the Conversion as determined by an independent
appraisal.
<PAGE> 7
Board of Directors
February 5, 1998
Page 7
(s) The proprietary interests of the Eligible Account Holders and
the Supplemental Eligible Account Holders in the Bank arise
solely by virtue of the fact that they are account holders in
the Bank.
(t) There is no plan or intention for the Converted Bank to be
liquidated or merged with another corporation following this
proposed transaction.
(u) The liabilities of the Bank assumed by the Converted Bank plus
the liabilities, if any, to which the transferred assets are
subject were incurred by the Bank in the ordinary course of
its business and are associated with the assets transferred.
(v) The Bank currently has no net operating losses for federal tax
purposes, and has no such losses available for carryover to
future tax years. The Bank has neither generated nor carried
forward a net operating loss for federal tax purposes in the
past ten tax years.
LIMITATIONS ON OPINION
Our opinions expressed herein are based solely upon current provisions
of the Internal Revenue Code of 1986, as amended, including applicable
regulations thereunder and current judicial and administrative authority. Any
future amendments to the Code or applicable regulations, or new judicial
decisions or administrative interpretations, any of which could be retroactive
in effect, could cause us to modify our opinion. No opinion is expressed herein
with regard to the federal, state, or city tax consequences of the Conversion
under any section of the Code except if and to the extent specifically
addressed.
FEDERAL TAX OPINION
Based solely upon the foregoing representations and information and
assuming the transaction occurs in accordance with the Plan of Conversion, and
taking into consideration the limitations noted throughout this opinion, it is
our opinion that under current federal income tax law:
(1) Pursuant to the Conversion, the changes at the corporate level
other than changes in the form of organization will be
insubstantial. Based upon that fact and the fact that the
equity interest of a depositor in a mutual savings and loan
association is
<PAGE> 8
Board of Directors
February 5, 1998
Page 8
more nominal than real, unlike that of a shareholder of a
corporation, the Conversion of the Bank from a mutual savings
and loan association to a stock savings bank is a tax-free
reorganization since it is a mere change in identity, form or
place of organization within the meaning of section
368(a)(1)(F) of the Code (see Rev. Rul. 80-105, 1980-1 C.B.
78). Neither the Bank nor the Converted Bank shall recognize
gain or loss as a result of the Conversion. The Bank and the
Converted Bank shall each be "a party to a reorganization"
within the meaning of section 368(b) of the Code.
(2) No gain or loss shall be recognized by the Converted Bank or
the Holding Company on the receipt by the Converted Bank of
money from the Holding Company in exchange for shares of the
Converted Bank's capital stock or by the Holding Company upon
the receipt of money from the sale of its Common Stock
(Section 1032(a) of the Code).
(3) The basis of the assets of the Bank in the hands of the
Converted Bank shall be the same as the basis of such assets
in the hands of the Bank immediately prior to the Conversion
(Section 362(b) of the Code).
(4) The holding period of the assets of the Bank in the hands of
the Converted Bank shall include the period during which the
Bank held the assets (Section 1223(2) of the Code).
(5) No gain or loss shall be recognized by the Eligible Account
Holders and the Supplemental Eligible Account Holders of the
Bank on the issuance to them of withdrawable deposit accounts
in the Converted Bank plus interests in the liquidation
account of the Converted Bank in exchange for their deposit
accounts in the Bank or to the other depositors on the
issuance to them of withdrawable deposit accounts (Section
354(a) of the Code).
(6) Provided that the amount to be paid for such stock pursuant to
the subscription rights is equal to the fair market value of
the stock, no gain or loss will be recognized by Eligible
Account Holders and Supplemental Eligible Account Holders upon
the distribution to them of the nontransferable subscription
rights to purchase shares of stock in the Holding Company
(Section 356(a)). Gain realized, if any, by the Eligible
Account Holders and Supplemental Eligible Account Holders on
the distribution to them of nontransferable subscription
rights to purchase shares of Common Stock will be recognized
but only in an amount not
<PAGE> 9
Board of Directors
February 5, 1998
Page 9
in excess of the fair market value of such subscription rights
(Section 356(a)). Eligible Account Holders and Supplemental
Eligible Account Holders will not realize any taxable income
as a result of the exercise by them of the nontransferable
subscription rights (Rev. Rul. 56-572, 1956-2 C.B. 182).
(7) The basis of the deposit accounts in the Converted Bank to be
received by the Eligible Account Holders, Supplemental
Eligible Account Holders and other depositors of the Bank will
be the same as the basis of their deposit accounts in the Bank
surrendered in exchange therefor (Section 358(a)(1) of the
Code). The basis of the interests in the liquidation account
of the Converted Bank to be received by the Eligible Account
Holders of the Bank shall be zero (Rev. Rul. 71-233, 1971-1
C.B. 113). The basis of the Holding Company Common Stock to
its stockholders will be the purchase price thereof plus the
basis, if any, of nontransferable subscription rights (Section
1012 of the Code). Accordingly, assuming the nontransferable
subscription rights have no value, the basis of the Common
Stock to the Eligible Account Holders and Supplemental
Eligible Account Holders will be the amount paid therefor. The
holding period of the Common Stock purchased pursuant to the
exercise of subscription rights shall commence on the date on
which the right to acquire such stock was exercised (Section
1223(6) of the Code).
Our opinion under paragraph (6) above is predicated on the
representation that no person shall receive any payment, whether in money or
property, in lieu of the issuance of subscription rights. Our opinion under
paragraphs (6) and (7) above assumes that the subscription rights to purchase
shares of Common Stock received by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members have a fair market value of zero. We
understand that you have received a letter from Keller & Company, Inc. that the
subscription rights do not have any value. We express no view regarding the
valuation of the subscription rights.
If the subscription rights are subsequently found to have a fair market
value, income may be recognized by various recipients of the subscription rights
(in certain cases, whether or not the rights are exercised) and Holding Company
and/or the Converted Bank may be taxable on the distribution of the subscription
rights.
<PAGE> 10
Board of Directors
February 5, 1998
Page 10
* * *
Since this letter is rendered in advance of the closing of this
transaction, we have assumed that the transaction will be consummated in
accordance with the Plan of Conversion as well as all the information and
Representations referred to herein. Any change in the transaction could cause us
to modify our opinion.
We consent to the inclusion of this opinion as an exhibit to the Form
AC and Form S-1 Registration Statement of Northeast Pennsylvania Financial Corp.
and the references to and summary of this opinion in such Form AC and Form S-1
Registration Statement.
Sincerely,
MULDOON, MURPHY & FAUCETTE
/s/ MULDOON, MURPHY & FAUCETTE
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
of First Federal Savings and Loan
Association of Hazleton
We consent to the incorporation by reference in the prospectus of Northeast
Pennsylvania Financial Corp., which is a part of the Registration Statement on
Pre-Effective Amendment No. 1 to Form S-1 for Northeast Pennsylvania Financial
Corp. and a part of Pre-Effective Amendment No. 1 to Form AC for First Federal
Savings and Loan Association of Hazleton, of our report dated November 13, 1997,
except as to footnote 15 which is as of November 18, 1997, relating to the
consolidated balance sheet of First Federal Saving and Loan Association of
Hazleton and subsidiaries as of September 30, 1997 and the related consolidated
statements of income, changes in equity, and cash flows for the year then ended.
In addition, we consent to the reference to our firm under the headings
"experts", "legal and tax opinions", "the conversion-establishment of the
charitable foundation" and "risk factors-establishment of the charitable
foundation" in the prospectus.
We also consent to the inclusion herein of our tax opinion dated December 22,
1997 relating to the state income tax implications of the conversion transaction
and our tax opinion dated December 18, 1997 relating to the federal income tax
implications of the establishment of the private foundation.
KPMG PEAT MARWICK, LLP
/s/ KPMG PEAT MARWICK, LLP
Philadelphia, Pennsylvania
February 5, 1998
<PAGE> 1
EXHIBIT 23.2
[PARENTE - RANDOLPH - ORLANDO - CAREY & ASSOCIATES LETTERHEAD]
The Board of Directors
of First Federal Savings and Loan
Association of Hazleton
Hazleton, Pennsylvania:
We consent to the incorporation by reference in the prospectus of
Northeast Pennsylvania Financial Corp., which is a part of the Pre-Effective
Amendment No. 1 to the Registration Statement on Form S-1 for Northeast
Pennsylvania Financial Corp. and a part of the Pre-Effective Amendment No. 1 to
the Form AC for First Federal Savings and Loan Association of Hazleton of our
report dated November 7, 1996, relating to the consolidated balance sheet of
First Federal Savings and Loan Association of Hazleton and subsidiaries as of
September 30, 1996 and the related consolidated statements of income, changes
in equity, and cash flows for the years ended September 30, 1996 and 1995. In
addition, we consent to the reference to our Firm under the headings "experts"
and "change in accountants" in the aforementioned prospectus.
We also consent to the use of our report on the financial statements of
the First Federal Savings & Loan Association of Hazleton 401(k) Plan included in
the 401(k) plan prospectus supplement.
/s/ PARENTE, RANDOLPH, ORLANDO, CAREY & ASSOCIATES
Hazleton, Pennsylvania
February 5, 1998
<PAGE> 1
GIFT INSTRUMENT
CHARITABLE GIFT TO
FIRST FEDERAL CHARITABLE FOUNDATION
Northeast Pennsylvania Financial Corp., Hazleton, Pennsylvania (the
"Company"), desires to make a gift of its common stock, par value $.01 per
share to First Federal Charitable Foundation (the "Foundation"), a nonprofit
corporation organized under the laws of the State of Delaware. The purpose of
the donation is to establish a bond between Northeast Pennsylvania Financial
Corp. and the community in which it and its affiliates operate to enable the
community to share in the potential growth and success of the Company and its
affiliates over the long term. To that end, Northeast Pennsylvania Financial
Corp. now gives, transfers, and delivers to the Foundation
_________________________ shares of its common stock, par value $.01 per share,
or total consideration of $__________, subject to the following conditions:
1. The Foundation shall use the donation solely for charitable purposes,
including community development, in the communities in which the Company and
its affiliates operate in accordance with the provisions of the Foundation's
Certificate of Incorporation; and
2. Consistent with the Company's intent to form a long-term bond between
the Company and the community, the amount of Common Stock that may be sold by
the Foundation in any one year shall not exceed 5% of the market value of the
assets held by the Foundation, except that this restriction shall not prohibit
the board of directors of the Foundation from selling a greater amount of Common
Stock in any one year if the board of directors of the Foundation determines
that the failure to sell a greater amount of the Common Stock held by the
Foundation would: (a) result in a long-term reduction of the value of the
Foundation's assets relative to their then current value that would jeopardize
the Foundation's capacity to carry out its charitable purposes; or (b) otherwise
jeopardize the Foundation's tax-exempt status.
3. The Common Stock contributed to the Foundation by the Company shall,
for so long as such shares are held by the Foundation, be considered by the
Company to be voted in the same ratio as all other shares of Common Stock of
the Company which are voted on each and every proposal considered by
stockholders of the Company, provided, however, that if this Condition No. 3 is
waived by the Office of Thrift Supervision pursuant to Office of Thrift
Supervision Order No. ______, dated ___________, 1998 (a copy of which is
attached hereto), then this Condition No. 3 shall become void and of no effect.
Dated:_________, 1998 NORTHEAST PENNSYLVANIA
FINANCIAL CORP.
By:________________________________
E. Lee Beard
President and Chief Executive Officer
