<PAGE> 1
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-43281
PROSPECTUS
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 5,175,000 shares of its common stock, par value
$.01 per share (the "Common Stock"), in connection with the conversion of First
Federal Savings and Loan Association of Hazleton (the "Bank" or "First Federal")
from a federally-chartered mutual savings and loan association to a federally-
chartered capital stock savings bank, under the name First Federal Bank,
pursuant to the Bank's plan of conversion, 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 16.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), 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
SUBSCRIPTION COMMISSIONS AND OTHER FEES AND ESTIMATED
PRICE(1) 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 February 12, 1998.
<PAGE> 2
(continued from previous page)
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, AS DEFINED BY THE PLAN AND MORE
FULLY DESCRIBED HEREIN, OF THE BANK WHICH TOTALLED $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) HOLDERS OF DEPOSIT ACCOUNTS IN THE
BANK TOTALLED $50 OR MORE ON DECEMBER 31, 1997 ("SUPPLEMENTAL ELIGIBLE ACCOUNT
HOLDERS"); AND (4) MEMBERS OF THE BANK CONSISTING OF HOLDERS OF DEPOSIT ACCOUNTS
OF THE BANK AS OF FEBRUARY 6, 1998, 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 the 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 12:00 NOON, EASTERN TIME, ON
MARCH 16, 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 March 30, 2000. 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> 3
INSERT MAP PAGE HERE
3
<PAGE> 4
SUMMARY OF THE CONVERSION AND THE OFFERINGS
The following summary of the Conversion and the Offerings is qualified in
its entirety by the terms of the Plan of Conversion and 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
FINANCIAL CORP. ......... Northeast Pennsylvania Financial Corp. is a
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 ASSOCIATION OF
HAZLETON................. The Bank is a federally-chartered mutual 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 REASONS
FOR CONVERSION........... The Board of Directors of the Bank has adopted 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 estab-
4
<PAGE> 5
lishment 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 March 30,
1998 (the "Special Meeting"). The OTS issued an
approval letter on February 12, 1998. See "The
Conversion -- General."
FIRST FEDERAL CHARITABLE
FOUNDATION............... The Bank's Plan of Conversion provides for the
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, the
majority 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
OFFERING................. The shares of Common Stock to be sold in 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
12:00 Noon, Eastern time, on March 16, 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. Pursuant to the Plan and OTS
regulations, certain accounts do not qualify as
"savings accounts," including but not limited to
noninterest-bearing demand accounts (primarily
noninterest-bearing checking accounts) or mortgage
escrow accounts maintained at the Bank. See "The
Conversion -- Subscription Offering and
Subscription Rights" and "-- Community Offering."
PROCEDURE FOR ORDERING
SHARES AND PROSPECTUS
DELIVERY................. Forms to order Common Stock offered in the 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."
5
<PAGE> 6
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 Offering."
NONTRANSFERABILITY OF
SUBSCRIPTION RIGHTS...... The subscription rights of Eligible Account
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."
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
PURCHASE PRICE............. The Company is offering between 3,825,000 and
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
6
<PAGE> 7
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."
BENEFITS OF THE CONVERSION
TO MANAGEMENT.............. Among the benefits to the Bank and the Company
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
7
<PAGE> 8
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
AND DIRECTORS............ Directors and executive officers of the Bank 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 24.07% or
23.05% 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."
EXPIRATION DATE FOR THE
SUBSCRIPTION OFFERING.... The Expiration Date for the Subscription Offering
is 12:00 Noon, Eastern time on March 16, 1998
unless extended by the Bank and the Company and
subject to any applicable regulatory approval.
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) 459-6442 or
(888) 895-3331.
8
<PAGE> 9
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)
(UNAUDITED)
<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)
(UNAUDITED)
<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> 10
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS ENDED
DECEMBER 31,
--------------------------------
1997 1996
------------ -------------
(UNAUDITED)
<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> 11
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 5.4%, 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 $2.1 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.
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
11
<PAGE> 12
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 5.6%, 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."
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
12
<PAGE> 13
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 result of the
state income tax credits utilized in 1996.
13
<PAGE> 14
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 for
loan losses........................... 11,754 11,219 10,410 10,805 11,810
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)
14
<PAGE> 15
<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
interest-bearing liabilities............ 109.23 107.95 108.43 107.28 100.07
Net interest income after provision for
loan losses to noninterest expense...... 123.83 104.13 124.52 136.28 139.97
Noninterest expense as a percent of average
assets.................................. 2.58 3.19 2.78 2.80 2.99
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
restructurings as a percent of total
loans(10)............................... 0.34 0.29 0.58 0.85 1.03
Nonperforming assets and troubled debt
restructurings as a percent of total
assets(11).............................. 0.38 0.38 0.52 0.66 0.71
Allowance for loan losses as a percent of
total loans............................. 0.48 0.30 0.33 0.40 0.53
Allowance for loan losses as a percent of
nonperforming loans and troubled debt
restructurings(1)(10)................... 143.57 101.96 58.67 48.27 52.80
Net loans charged-off to average
interest-earning loans................ 0.04 0.04 0.03 0.08 0.35
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) 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."
(11) Nonperforming assets consist of nonperforming loans, other repossessed
assets and 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.
15
<PAGE> 16
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 and Market Risk Analysis."
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 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 and Market Risk Analysis."
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
16
<PAGE> 17
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 and Market Risk Analysis," "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.
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
totalled $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,
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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
totalled $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 totalled
$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 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
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expense. The Company has been advised by its independent accountants that the
contribution to the Foundation should 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." The independent
accountants' opinion further provides that the Company's contribution of its own
stock to the Foundation should 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 should 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 19.92x, 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
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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 19.81x, 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.
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 11.2%, 11.2% and
21.6%, 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 $0.50, 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
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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 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 March 30, 2000.
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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 and loan 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."
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)
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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."
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%.
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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 and the ESOP, which plans
may give directors, officers and employees the potential to control the voting
of an additional 20.0% 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 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.
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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 designed to
ensure that all software used in connection with the Company's business will
manage and manipulate data involving the transition with data from 1999 to 2000
without functional or data abnormality and without inaccurate results related to
such data. 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.
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 applied to the OTS for
approval to become a savings and loan holding company. The Company will acquire
the common stock of the Bank and sell its Common Stock in the Conversion only if
such approval is received. As a savings and loan holding company, the Company
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
"Prospectus -- 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 initially to utilize
the remaining proceeds for investments in mortgage-related securities and
federal agency
25
<PAGE> 26
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.
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 totalled $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 totalled $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
totalled $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.
26
<PAGE> 27
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
for Stock Awards 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
-------------------------------------------------------------------------------------
5,951,250 SHARES
3,825,000 SHARES 4,500,000 SHARES 5,175,000 SHARES (15% ABOVE
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF MAXIMUM OF
HISTORICAL AT ESTIMATED ESTIMATED ESTIMATED ESTIMATED
SEPTEMBER 30, 1997 PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(1)
------------------- ------------------- ------------------- ------------------- -------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
------- --------- ------- --------- ------- --------- ------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital (3)... $28,538 7.7% $42,111 11.0% $44,373 11.6% $47,034 12.1% $49,865 12.6%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
TANGIBLE CAPITAL:
Capital Level.... $27,255 7.4% $40,828 10.7% $43,290 11.2% $45,751 11.8% $48,582 12.4%
Requirement...... 5,539 1.5 5,742 1.5 5,779 1.5 5,816 1.5 5,859 1.5
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Excess........... $21,716 5.9% $35,086 9.2% $37,510 9.7% $39,935 10.3% $42,723 10.9%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
CORE CAPITAL:
Capital Level.... $27,255 7.4% $40,828 10.7% $43,290 11.2% $45,751 11.8% $48,582 12.4%
Requirement(4)... 11,077 3.0 11,484 3.0 11,558 3.0 11,632 3.0 11,717 3.0
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Excess........... $16,178 4.4% $29,344 7.7% $31,731 8.2% $34,119 8.8% $36,865 9.4%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
RISK-BASED CAPITAL:
Capital
Level(5)(6).... $28,527 14.4% $42,100 20.6% $44,562 21.6% $47,023 22.7% $49,854 23.9%
Requirement...... 15,845 8.0 16,388 8.0 16,486 8.0 16,585 8.0 16,698 8.0
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Excess........... $12,682 6.4% $25,712 12.6% $28,075 13.6% $30,438 14.7% $33,156 15.9%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
</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 Offering.
(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) Generally accepted accounting principles ("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 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).
27
<PAGE> 28
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 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
28
<PAGE> 29
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 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
29
<PAGE> 30
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.
30
<PAGE> 31
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
3,825,000 4,500,000 5,175,000 SHARES
SHARES SHARES SHARES (15% ABOVE
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF MAXIMUM
BANK ESTIMATED ESTIMATED ESTIMATED OF ESTIMATED
HISTORICAL PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(1)
---------- ------------ ------------ ------------ ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Borrowings:
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 Offering.
(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
5 to the table 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 table under "Pro Forma Data" and "Management of the Bank -- Other
Benefit Plans."
31
<PAGE> 32
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 table below and
"Management of the Bank -- Other Benefit Plans." No effect has been given in the
table 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 table 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.
32
<PAGE> 33
<TABLE>
<CAPTION>
AT OR FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
----------------------------------------------------------------------
5,951,500
SHARES
SOLD AT
$10.00
3,825,000 SHARES 4,500,000 SHARES 5,175,000 SHARES PER SHARE
SOLD AT $10.00 SOLD AT $10.00 SOLD AT $10.00 (15%
PER SHARE PER SHARE PER SHARE ABOVE MAXIMUM
(MINIMUM (MIDPOINT (MAXIMUM OF ESTIMATED
OF ESTIMATED OF ESTIMATED OF ESTIMATED PRICE
PRICE RANGE) PRICE RANGE) PRICE RANGE) 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 4,140 4,761
------- ------- ------- -------
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.............................................. $ 1,381 $ 1,381 $ 1,381 $ 1,381
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).... (202) (238) (274) (315)
------- ------- ------- -------
Pro forma net earnings................................ $ 2,128 $ 2,264 $ 2,401 $ 2,558
======= ======= ======= =======
Per share net earnings(1):
Historical.............................................. $ 0.36 $ 0.30 $ 0.26 $ 0.23
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 Plan adjustment(3).... (0.05) (0.05) (0.05) (0.05)
------- ------- ------- -------
Pro forma net earnings per share...................... $ 0.56 $ 0.50 $ 0.46 $ 0.43
======= ======= ======= =======
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(8)........................................... $ 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)(8).................................. $ 14.94 $ 13.93 $ 13.19 $ 12.54
======= ======= ======= =======
Offering price as a percentage of pro forma stockholders'
equity per share........................................ 66.93% 71.78% 75.84% 79.77%
Offering price to pro forma net earnings per share........ 18.02 19.92 21.60 23.32
(footnotes on next page)
</TABLE>
33
<PAGE> 34
- ---------------
(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 $0.55, $0.50, $0.46, and $0.43 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 $0.54, $0.49, $0.46, and
$0.42, 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 Offering.
(8) The number of shares of Common Stock assumed to be outstanding for purpose
of the calculation of stockholders' equity per share includes the shares
proposed to be issued to the Foundation.
34
<PAGE> 35
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 18.0%, 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 $13.92 and $0.50, respectively, at the midpoint of the estimate, assuming no
Foundation, and $13.93 and $0.50, respectively, with the Foundation. The pro
forma price to book ratio and the pro forma price to earnings ratio are 71.85%
and 19.81x, respectively, at the midpoint of the estimate, assuming no
Foundation and are 71.78% and 19.92x, 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 MAXIMUM
AT THE MINIMUM AT THE MIDPOINT AT THE MAXIMUM AS ADJUSTED
---------------------- ---------------------- ---------------------- ----------------------
WITH NO WITH NO WITH NO WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Estimated offering amount.... $ 38,250 $ 45,135 $ 45,000 $ 53,100 $ 51,750 $ 61,065 $ 59,513 $ 70,225
Pro forma market
capitalization............. 41,310 45,135 48,600 53,100 55,890 61,065 64,274 70,225
Total assets................. 402,419 407,689 408,407 414,607 414,394 421,524 421,280 429,480
Total liabilities............ 341,598 341,598 341,598 341,598 341,598 341,598 341,598 341,598
Pro forma stockholders'
equity..................... 61,715 66,985 67,703 73,903 73,690 80,820 80,576 88,775
Pro forma consolidated net
earnings................... 2,128 2,318 2,264 2,488 2,401 2,658 2,558 2,854
Pro forma stockholders'
equity per share........... 14.94 14.84 13.93 13.92 13.19 13.24 12.54 12.64
Pro forma consolidated net
earnings per share......... 0.56 0.55 0.50 0.50 0.46 0.47 0.43 0.44
Pro Forma Pricing Ratios:
Offering Price as a
percentage of pro forma
stockholders' equity per
share.................... 66.93% 67.38% 71.78% 71.85% 75.84% 75.56% 79.77% 79.10%
Offering price to pro forma
net earnings per share... 18.02x 18.07x 19.92x 19.81x 21.60x 21.32x 23.32x 22.84x
Offering price to assets... 10.27% 11.07% 11.90% 12.81% 13.49% 14.49% 15.26% 16.35%
Pro Forma Financial Ratios:
Return on Assets........... 0.53% 0.57% 0.55% 0.60% 0.58% 0.63% 0.61% 0.66%
Return on stockholders'
equity................... 3.45% 3.46% 3.34% 3.37% 3.26% 3.29% 3.17% 3.21%
Stockholders' equity to
assets................... 15.34% 16.43% 16.58% 17.82% 17.78% 19.17% 19.13% 20.67%
</TABLE>
35
<PAGE> 36
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND SUBSIDIARIES
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)
<S> <C> <C> <C>
Interest income:
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.
36
<PAGE> 37
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has only recently been formed and, accordingly, has no results
of operations. The Bank's results of operations are dependent primarily on net
interest income, which is the difference between the income earned on its loan
and investment portfolios and its cost of funds, consisting of the interest paid
on deposits and borrowings. Results of operations are also affected by the
Bank's provision for loan losses, loan and security sales activities, service
charges and other fee income, and noninterest expense. The Bank's noninterest
expense principally consists of compensation and employee benefits, office
occupancy and equipment expense, federal deposit insurance premiums, data
processing, advertising and business promotion and other expenses. Results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in interest rates, government policies and
actions of regulatory authorities.
MANAGEMENT STRATEGY
Since fiscal 1993, the Bank's operating strategy has been that of a
community-based bank, offering a wide variety of savings products to its retail
customers, while concentrating on residential and construction lending and, to a
lesser extent, consumer lending and small business and municipal commercial
lending. In order to promote long-term financial strength and profitability, the
Bank's operating strategy has focused on: (i) maintaining strong asset quality
by originating one- to four-family loans located in its market area; (ii)
increasing profitability by emphasizing higher yielding consumer and commercial
loans; (iii) managing its interest rate risk by emphasizing shorter-term,
fixed-rate, one-to four-family loans, in addition to consumer and commercial
loans; limiting its retention of newly originated longer-term fixed-rate one- to
four-family loans; soliciting longer-term deposits; utilizing longer-term
advances from the FHLB; and investing in investment and mortgage-related
securities having shorter estimated durations; (iv) meeting the banking needs of
its customers through expanded products and improved delivery systems by taking
advantage of technological advances; and (v) maintaining a strong regulatory
capital position.
The Bank has attempted to diversify and expand its loan products to better
serve its customer base by placing a greater emphasis on its consumer-lending
and its commercial lending, primarily to small businesses and municipalities.
Additionally, the Bank is in the process of implementing a program to sell in
the secondary market longer-term, fixed-rate one- to four-family loans which it
could originate in excess of its retention policy for such loans. As a result of
its policy to limit its retention of newly originated longer-term, fixed-rate
one- to four-family loans to 20% of total loan origination during a fiscal year,
periodically the Bank has had to limit its originations of such loans. The Bank
is also evaluating the offering of loan products which it has historically not
offered, such as nonconforming or subprime one- to four-family loans. In the
event the Bank originates such loan products, it currently intends to originate
such loans for sale in the secondary market.
MANAGEMENT OF INTEREST RATE RISK AND MARKET RISK ANALYSIS
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 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."
37
<PAGE> 38
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.
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
38
<PAGE> 39
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."
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
-------------------------------------------------------------------------------------------
MORE MORE MORE MORE
THAN THAN THAN THAN
ONE 1 YEAR 2 YEARS 3 YEARS 4 YEARS MORE
YEAR TO TO TO TO THAN TOTAL FAIR
OR LESS 2 YEARS 3 YEARS 4 YEARS 5 YEARS 5 YEARS AMOUNT VALUE
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing deposits... $ 11,689 $ -- $ -- $ -- $ -- $ -- $ 11,689 $ 11,689
Investment securities....... 1,991 3,000 3,994 -- 3,999 26,960 39,944 40,103
Mortgage-related
securities................ 2,628 1,628 -- -- -- 35,200 39,456 39,793
Equity securities (FHLB &
FHLMC).................... 2,101 -- -- -- -- -- 2,101 3,746
Loans(1).................... 113,854 29,680 33,377 18,958 16,144 52,225 264,238 264,214
--------- --------- --------- --------- --------- -------- -------- --------
Total interest-earning
assets................ $132,263 $ 34,308 $ 37,371 $ 18,958 $ 20,143 $114,385 $357,428 $359,545
--------- --------- --------- --------- --------- -------- -------- --------
INTEREST-BEARING LIABILITIES:
Money market accounts....... 10,919 2,293 482 101 21 6 13,821 13,821
Savings accounts............ 12,202 10,128 8,406 6,977 5,791 28,275 71,779 71,779
NOW accounts................ 10,102 6,408 4,037 2,543 1,602 2,610 27,302 27,302
Certificate accounts........ 127,375 37,223 21,563 4,697 1,878 -- 192,736 191,328
FHLB advances............... 8,000 -- -- 5,000 10,000 516 23,516 23,431
Other borrowings............ 92 -- -- -- -- -- 92 92
--------- --------- --------- --------- --------- -------- -------- --------
Total interest-bearing
liabilities........... $168,690 $ 56,052 $ 34,488 $ 19,318 $ 19,292 $ 31,407 $329,246 $327,753
--------- --------- --------- --------- --------- -------- -------- --------
Interest-earning assets less
interest-bearing
liabilities................... $(36,427) $(21,744) $ 2,883 $ (360) $ 851 $ 82,978 $ 28,182
Cumulative interest-rate
sensitivity gap............... $(36,427) $(58,171) $(55,288) $(55,648) $(54,797) $ 28,181
Cumulative interest-rate gap as
a percentage of total
assets........................ (9.9) (15.8)% (15.0)% (15.1)% 14.8% 7.6%
Cumulative interest-rate gap as
a percentage of total interest
earning assets................ (10.2)% (16.3)% (15.5)% (15.6)% (15.3)% 7.9%
Cumulative interest-earning
assets as a percentage of
cumulative interest-bearing
liabilities................... 78.4% 74.1% 78.7% 80.0% 81.6% 108.6%
Cumulative earning assets....... $132,263 $166,571 $203,942 $222,900 $243,043 $357,428
Cumulative interest-bearing
liabilities................... $168,690 $224,742 $259,230 $278,548 $297,840 $329,247
</TABLE>
- ---------------
(1) Excludes nonaccrual loans
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
39
<PAGE> 40
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 VALUE OF ASSETS
INTEREST RATES NET PORTFOLIO VALUE ------------------------
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.
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.
40
<PAGE> 41
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 1996
1997 --------------------------- --------
---------------- AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE RATE BALANCE INTEREST RATE BALANCE
-------- ------ -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <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
Consumer.............................................................. 61,843 8.52 58,717 4,980 8.48 49,409
Commercial............................................................ 17,476 7.49 15,151 1,235 8.15 11,182
-------- ---- -------- ------- ---- --------
Total loans:...................................................... 264,238 7.85 253,948 20,071 7.90 227,283
Mortgage-related securities(2).......................................... 39,947 6.45 54,112 3,306 6.11 51,268
Investment securities(3):
Taxable........................................................... 34,788 6.99 40,902 2,866 7.01 45,492
Non-taxable(4).................................................... 8,963 8.32 5,417 457 8.44 2,014
Interest-bearing deposits............................................... 11,689 8.31 1,516 82 5.41 1,583
-------- ---- -------- ------- ---- --------
Total interest-earning assets..................................... 359,625 7.57 355,895 26,782 7.53 327,640
---- ----
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
Savings accounts...................................................... 71,779 2.43 72,292 1,765 2.44 73,654
Certificates of deposit............................................... 192,736 5.50 187,270 10,120 5.40 174,617
-------- ---- -------- ------- ---- --------
Total deposits.................................................... 305,637 4.30 309,285 12,699 4.11 292,854
FHLB advances and other borrowings...................................... 23,608 5.73 27,264 1,495 5.48 14,971
-------- ---- -------- ------- ---- --------
Total interest-bearing liabilities................................ 329,246 4.40 336,583 14,194 4.22 307,825
---- ------- ----
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%
==== ======= ====
Net interest margin as a percentage of interest-earning assets(6)....... 3.49%
=======
Ratio of interest-earning assets to interest-bearing liabilities........ 109.23% 105.74% 106.44%
======== ======== ========
<CAPTION>
1995
---------------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/
INTEREST RATE BALANCE INTEREST RATE
-------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans(1):
Real estate........................................................... $ 12,925 7.75% $151,373 $ 11,801 7.80%
Consumer.............................................................. 4,268 8.64 43,206 3,752 8.68
Commercial............................................................ 912 8.16 7,582 596 7.86
------- ---- -------- ------- ----
Total loans:...................................................... 18,105 7.97 202,161 16,149 7.99
Mortgage-related securities(2).......................................... 3,064 5.98 53,281 3,121 5.86
Investment securities(3):
Taxable........................................................... 2,959 6.50 31,896 1,870 5.86
Non-taxable(4).................................................... 172 8.54 -- -- --
Interest-bearing deposits............................................... 92 5.81 2,206 140 6.35
------- ---- -------- ------- ----
Total interest-earning assets..................................... 24,392 7.44 289,544 21,380 7.38
---- ----
Noninterest-earning assets................................................ 10,760
--------
Total assets...................................................... 300,304
========
INTEREST-BEARING LIABILITIES:
Deposits:
Demand accounts....................................................... 775 1.74 43,898 960 2.19
Savings accounts...................................................... 1,871 2.54 78,478 2,079 2.65
Certificates of deposit............................................... 9,549 5.46 148,163 7,675 5.18
------- ---- -------- ------- ----
Total deposits.................................................... 12,195 4.16 270,539 10,714 3.96
FHLB advances and other borrowings...................................... 812 5.42 2,243 131 5.84
------- ---- -------- ------- ----
Total interest-bearing liabilities................................ 13,007 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)............................. $ 11,385 3.21% $ 10,535 3.40%
======= ==== ======= ====
Net interest margin as a percentage of interest-earning assets(6)....... 3.45% 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.
41
<PAGE> 42
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 INCREASE
(DECREASE) (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.............................. $ 114 $1,089 $1,203 $ 242 $ 708 $ 950
===== ====== ====== ===== ====== ======
</TABLE>
- ---------------
(1) Includes securities available-for-sale and held-to-maturity on a tax
equivalent basis.
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
42
<PAGE> 43
totalled $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 7.7%, 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.
Nonperforming 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. Nonperforming 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.
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.
43
<PAGE> 44
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 6.59% 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 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.
PROVISION 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
44
<PAGE> 45
$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 $255,000 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 totalled $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.
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 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
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<PAGE> 46
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 nonperforming 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 nonperforming loans and to total loans
was 58.7% and 0.33%, respectively, compared to 102% and 0.30% at September 30,
1996.
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 real estate owned totaling $62,000 for fiscal
1996.
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
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<PAGE> 47
and investing activities during any given period. At September 30, 1997, cash
and cash equivalents and investment and mortgage-related securities held for
sale totalled $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 scheduled to mature in less than one year
from September 30, 1997, totalled $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 designed to
ensure that all software used in connection with the Company's business will
manage and manipulate data involving the transition with data from 1999 to 2000
without functional or data abnormality and without inaccurate results related to
such data. 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
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<PAGE> 48
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.
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").
SFAS No. 121 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. SFAS No. 121 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. SFAS No. 121 became
effective for the Bank on September 30, 1996. Adoption of SFAS No. 121 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 No. 122"), which amends Statement of Financial
Accounting Standards No. 65, "Accounting for Certain Mortgage Banking
Activities." SFAS No. 122 is effective for fiscal years beginning after December
15, 1995. SFAS No. 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, SFAS No. 122 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
SFAS No. 122 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"). SFAS No. 123 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> 49
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). SFAS No. 123 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 SFAS No. 123 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"). SFAS
No. 125 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.
SFAS No. 125 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 SFAS No. 125 is not
permitted. Adoption of SFAS No. 125 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 ("SFAS No. 130"). SFAS No. 130
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. SFAS No. 130 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.
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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 in the second year of its application. 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.
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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.
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.
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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.
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 totalled $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 29.8% 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, 29.1% of shorter-term (15
years or less to maturity as of the date of origination) fixed-rate loans, and
41.1% 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 $4.7 million of commercial
business loans, $2.2 million of participations in loans originated by other
financial institutions, and $3.9 million 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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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 1994 1993
------------------- ------------------- ------------------- ------------------- -------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <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% $138,506 72.70% $137,951 75.68%
Multi-family and
commercial....... 6,701 2.54 4,429 1.81 3,457 1.60 5,741 3.01 6,781 3.72
Construction....... 5,818 2.20 5,129 2.09 4,040 1.87 4,263 2.24 2,763 1.52
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real
estate
loans...... 191,620 72.52 180,331 73.58 164,857 76.49 148,510 77.95 147,495 80.92
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer loans:
Home equity loans
and lines of
credit........... 41,278 15.62 38,054 15.53 33,275 15.44 28,957 15.20 25,687 14.09
Automobile......... 13,678 5.18 10,594 4.32 6,705 3.11 4,842 2.54 2,834 1.55
Education.......... 2,348 0.89 2,538 1.04 2,432 1.13 2,505 1.31 1,953 1.07
Unsecured lines of
credit........... 1,310 0.50 959 0.39 495 0.23 418 0.22 255 0.14
Other.............. 3,229 1.22 3,309 1.35 3,241 1.50 3,585 1.88 3,880 2.13
Total
consumer
loans...... 61,843 23.40 55,454 22.63 46,148 21.41 40,307 21.16 34,609 18.99
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial loans..... 10,775 4.08 9,280 3.79 4,523 2.10 1,707 0.90 179 0.10
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total
loans...... 264,238 100.00% 245,065 100.00% 215,528 100.00% 190,524 100.00% 182,283 100.00%
====== ====== ====== ====== ======
Less:
Deferred loan
origination fees
and discount..... 1,497 1,419 1,289 1,254 1,172
Allowance for loan
losses........... 1,272 730 724 769 979
-------- -------- -------- -------- --------
Total loans,
net........ $261,469 $242,916 $213,515 $188,501 $180,132
======== ======== ======== ======== ========
</TABLE>
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-
FAMILY AND
ONE- TO COMMERCIAL
FOUR- REAL TOTAL
FAMILY 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 $ 29,536
After one year:
More than one year to three
years...................... 17,869 830 -- 13,360 695 32,754
More than three years to five
years...................... 17,192 916 -- 15,071 565 33,744
More than five years to 10
years...................... 40,696 2,088 -- 9,947 1,132 53,863
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.
53
<PAGE> 54
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 totaling $571,302 at January 31,
1998. 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.
54
<PAGE> 55
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 totalled $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.
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
55
<PAGE> 56
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.
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.
56
<PAGE> 57
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 totalled $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 performed 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 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
57
<PAGE> 58
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 43.5% of its commercial
loan portfolio as of September 30, 1997, and the average outstanding balance of
such loans was $50,000.
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 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
58
<PAGE> 59
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.
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 $77,000
of assets classified as Doubtful consisting of one loan. As of September 30,
1997, the Bank also had a total of 49 loans, totaling $1.7 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> 60
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
------------------ ------------------ ------------------ ------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS 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 $ 565
Multi-family and commercial............ -- -- 1 47 -- -- -- --
Consumer Loans:
Home equity loans and lines of
credit............................... 8 81 9 108 9 112 8 117
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 $ 716
=== ==== === ==== === ==== === ======
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
------------------ ------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE
LOANS OF LOANS 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.............................................. 0.36% 0.56%
</TABLE>
60
<PAGE> 61
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 totalled $774,000, consisting of 37 loans, and REO totalled
$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
nonperforming 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 nonperforming loans.
(2) Real estate owned balances are shown net of related loss allowances.
(3) Nonperforming assets consist of nonperforming loans (and impaired loans),
other repossessed assets and REO.
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
61
<PAGE> 62
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.
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......... 32 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>
62
<PAGE> 63
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% 72.52% $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>
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, 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
conduct 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
63
<PAGE> 64
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 totalled $44.8 million, or 12.1% of
assets and the held-to-maturity portfolio totalled $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.
64
<PAGE> 65
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
--------- ------- --------- -------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
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 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>
65
<PAGE> 66
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.
66
<PAGE> 67
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 MORE THAN
ONE YEAR OR LESS TO FIVE YEARS TO 10 YEARS 10 YEARS TOTAL
------------------ ------------------ ------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-maturity
securities:
Investment securities:
Municipal
securities(1)........ $ -- --% $ -- --% $ 2,417 7.98% $ 6,546 8.45% $ 8,963 8.32%
Obligations of U.S.
Government
agencies............. -- -- 5,000 6.00 12,997 6.94 2,000 7.51 19,997 6.74
Mortgage-related
securities............. -- -- 244 4.96 -- -- 9,721 6.13 9,965 6.10
------ ---- ------ ---- ------ ---- ------- ---- ------- ----
Total securities at
amortized cost... $ -- --% $5,244 5.95% $15,414 7.10% $18,267 7.09% $38,925 6.94%
====== ==== ====== ==== ====== ==== ======= ==== ======= ====
Available-for-sale
securities:
Investment securities:
Obligations of the U.S.
Treasury............. $ 991 7.38 $ -- -- $ -- -- $ -- -- $ 991 7.38%
Obligations of U.S.
Government
agencies............. 1,000 7.75 5,993 7.55 3,000 7.29 -- -- 9,993 7.49
Equity securities...... 2,101 7.08 -- -- -- -- -- -- 2,101 7.08
Mortgage-related
securities............. 2,628 5.67 1,384 6.90 -- -- 25,479 6.64 29,491 6.57
------ ---- ------ ---- ------ ---- ------- ---- ------- ----
Total securities at
fair value....... $6,720 6.67% $7,377 7.43% $ 3,000 7.29% $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%.
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.
67
<PAGE> 68
The following table presents the deposit activity of the Bank for the
periods indicated:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1996
-------------------------------
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>
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,
-------------------------------------------------------------------------------------------
1997 1996 1995
AT SEPTEMBER 30, 1997 ----------------------------- ----------------------------- -----------------------------
------------------------ PERCENT PERCENT PERCENT
PERCENT OF TOTAL AVERAGE OF TOTAL AVERAGE OF TOTAL AVERAGE
OF TOTAL RATE AVERAGE AVERAGE RATE AVERAGE AVERAGE RATE AVERAGE AVERAGE RATE
BALANCE DEPOSITS PAID BALANCE DEPOSITS PAID BALANCE DEPOSITS PAID BALANCE DEPOSITS PAID
-------- -------- ---- -------- ---------- ------- -------- ---------- ------- -------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Savings
accounts... $ 71,779 22.8% 2.43% $72,292 23.4% 2.44% $73,634 25.2% 2.54% $78,478 29.0% 2.65%
Money
market
accounts... 13,821 4.4 2.86 14,238 4.6 2.81 14,746 5.0 2.78 17,392 6.4 2.82
NOW
accounts... 27,302 8.7 1.50 27,870 9.0 1.49 24,258 8.3 1.49 23,727 8.8 2.00
Certificates
of
deposit... 192,736 61.4 5.50 187,270 60.5 5.42 174,617 59.6 5.46 148,163 54.8 5.18
Noninterest-bearing
deposits:
Demand
deposits... 8,485 2.7 -- 7,615 2.5 -- 5,579 1.9 -- 2,779 1.0 --
------- ---- ---- ------ ----- ---- ------- ----- ---- ------- ----- ----
Total
average
deposits... $314,123 100.0% 4.18% $ 309,285 100.0% 4.11% $292,854 100.0% 4.16% $270,539 100.0% 3.96%
======== ==== ==== ======= ===== ==== ======= ===== ==== ======== ===== ====
</TABLE>
- ---------------
(1) Based on remaining maturity of certificates.
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 ONE TO TWO TO OVER
THAN ONE TWO THREE THREE
YEAR YEARS YEARS 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>
68
<PAGE> 69
BORROWINGS. The Bank utilizes advances from the FHLB of Pittsburgh as an
alternative to retail deposits to fund its operations as part of its operating
strategy. These FHLB advances are collateralized primarily by certain of the
Bank's mortgage loans and mortgage-related securities and secondarily by the
Bank's investment in capital stock of the FHLB of Pittsburgh. FHLB advances are
made pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. The maximum amount that the FHLB of
Pittsburgh will advance to member institutions, including the Bank, fluctuates
from time to time in accordance with the policies of the FHLB of Pittsburgh. See
"Regulation -- Federal Home Loan Bank System." At September 30, 1997, the Bank
had $23.5 million in outstanding FHLB advances, compared to $25.5 million at
September 30, 1996. Other borrowings consist of overnight retail repurchase
agreements and for the periods presented were immaterial.
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE FISCAL YEAR ENDED
SEPTEMBER 30,
-------------------------------
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances and other borrowings:
Average balance outstanding............................... $27,372 $14,971 $ 2,243
Maximum amount outstanding at any month-end during the
period................................................. 42,191 25,534 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>
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
ORIGINAL LEASEHOLD TOTAL
YEAR DATE OF IMPROVEMENTS AT DEPOSITS AT
LEASED OR LEASED OR LEASE 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
</TABLE>
69
<PAGE> 70
<TABLE>
<CAPTION>
NET BOOK VALUE
OF PROPERTY OR
ORIGINAL LEASEHOLD TOTAL
YEAR DATE OF IMPROVEMENTS AT DEPOSITS AT
LEASED OR LEASED OR LEASE SEPTEMBER 30, SEPTEMBER 30,
LOCATION OWNED ACQUIRED EXPIRATION 1997 1997
- --------------------------------- -------- ----------- ------------ ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
Mountaintop Office:(1) Owned
360 S. Mountain Boulevard (Under
Mountaintop, PA 18707............ Construction) 1997 -- 143 0
LOAN PRODUCT ORIGINATION OFFICES:
Pocono L.P.O. Office
P.O. Box 1092
Pocono Pines, PA 18350........... Leased 1997 1998
Mountaintop L.P.O. Office:(1)
129 N. Mountain Boulevard Month-to-
Mountaintop, PA 18707............ Leased N/A Month
</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.
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<PAGE> 71
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Bank will report their income on a September
30 fiscal year basis using the accrual method of accounting and will be subject
to federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to the Bank or the Company. The Bank has not been audited by the IRS in the past
five years.
BAD DEBT RESERVE. Historically, savings institutions such as the Bank
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrifts") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have been
deducted in arriving at their taxable income. The Bank's deductions with respect
to "qualifying real property loans," which are generally loans secured by
certain interest in real property, were computed using an amount based on the
Bank's actual loss experience, or a percentage equal to 8% of the Bank's taxable
income, computed with certain modifications and reduced by the amount of any
permitted addition to the non-qualifying reserve. Due to the Bank's loss
experience, the Bank generally recognized a bad debt deduction equal to 8% of
taxable income.
In August 1996, the provisions repealing the above thrift bad debt rules
were passed by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988. The Bank has previously
recorded a deferred tax liability equal to the bad debt recapture and as such,
the new rules will have no effect on net income or federal income tax expense.
For taxable years beginning after December 31, 1995, the Bank's bad debt
deduction 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
71
<PAGE> 72
"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) 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 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.
72
<PAGE> 73
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 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 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
73
<PAGE> 74
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."
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 totalled $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.
TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries that the Company may establish) is
limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A
restricts the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B generally requires that certain transactions with
affiliates, including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies.
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including stockholders, and any
attorneys, appraisers and accountants who knowingly or recklessly participate in
74
<PAGE> 75
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.
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
75
<PAGE> 76
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.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. Assessment rates for SAIF member institutions currently range from 0
basis points to 27 basis points. The FDIC is authorized to raise the assessment
rates in certain circumstances. The FDIC has exercised this authority several
times in the past and may raise insurance premiums in the future. If such action
is taken by the FDIC, it could have an adverse effect on the earnings of the
Bank. The Bank's assessment rate for the years ended September 30, 1997, 1996
and 1995 was .064%, .23% and .23% of assessable deposits.
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<PAGE> 77
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 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
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<PAGE> 78
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.
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.
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.
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<PAGE> 79
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 Ms. 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.
The following individuals are the executive officers of the Company and
hold the offices set forth below opposite their names.
<TABLE>
<CAPTION>
EXECUTIVE POSITION(S) HELD WITH COMPANY
----------------------------------------- -------------------------------------------------
<S> <C>
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
</TABLE>
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."
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<PAGE> 80
MANAGEMENT OF THE BANK
DIRECTORS
The following table sets forth certain information regarding the Board of
Directors of the Bank.
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME AGE(1) POSITION(S) HELD WITH THE BANK SINCE EXPIRES
- ------------------------------ ------ ------------------------------------- -------- -------
<S> <C> <C> <C> <C>
Thomas L. Kennedy............. 53 Chairman of the Board and General 1985 2001
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
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.
<TABLE>
<CAPTION>
NAME AGE(1) POSITION(S) HELD WITH BANK
- --------------------------------- ------ -------------------------------------------------------
<S> <C> <C>
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
</TABLE>
- ---------------
(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. Ms. Beard has served as President and Chief Executive
Officer since January 1993. Prior to 1993, Ms. 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.
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<PAGE> 81
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.).
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
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., John P. Lavelle and
William J. Spear. The Business Development/ Marketing Committee meets every
other month, if necessary, or as needed and is responsible for branch
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<PAGE> 82
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 "Other Benefit Plans -- Deferred Compensation Plan."
ADVISORY BOARDS
The Bank has three advisory boards serving Schuylkill, Bloomsburg and
Lehighton communities. 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.
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 $100,000
("Named Executive Officer").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
--------------------------------- ------------------------- -------
OTHER RESTRICTED SECURITIES
NAME AND FISCAL ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
- ---------------------- ------ -------- ------- ------------ ---------- ------------ ------- ------------
($) ($) ($)(2) ($) (#) ($) ($)(3)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
E. Lee Beard.......... 1997 $148,770 $31,242 -- -- -- -- $4,626
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> 83
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.
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
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<PAGE> 84
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 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.
OTHER BENEFIT PLANS
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
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<PAGE> 85
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.
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, 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 15% 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
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<PAGE> 86
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.
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 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
86
<PAGE> 87
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.
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 intends to 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 the 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-
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<PAGE> 88
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 such 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 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
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<PAGE> 89
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.
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.
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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,
11 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.
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> 91
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, without giving effect to 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
PERCENT OF AS A PERCENT
NUMBER OF SHARES NUMBER OF 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
Officers as a Group (13
persons)...................... $1,870,000 185,000 4.83% 187,000 3.61%
============ ======= ==== ======= ====
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.
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.
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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 March 30, 1998.
The Company has applied for and expects to receive the approval from 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.
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
then 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
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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 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.
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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, or
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, based upon the maximum of the Estimated Price Range as
adjusted by 15%. 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 will provide that the Foundation is organized exclusively for
charitable purposes as set forth in Section 501(c)(3) of the Code. The
Foundation's certificate of incorporation further will provide 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.
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 is 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) cause the Foundation to lose its tax-exempt
status or otherwise have a material and adverse tax consequence on the
Foundation; or (iii) 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. Further, 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
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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 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, 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
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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 KPMG
Peat Marwick LLP that the Foundation 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. KPMG Peat Marwick
LLP however, has 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."
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 a saving association's contributions
exceed the deductible 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 11.2%,
11.2% and 21.6%, 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
should not constitute an act of self-dealing, and that the Company should 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
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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 expects 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 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;
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(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
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 (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. 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
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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 $47.0 million or a ratio of GAAP capital to adjusted assets, on a pro forma
basis, of 12.1% 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 any required 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 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.
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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 from Muldoon, Murphy &
Faucette 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 income 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
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
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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 sell 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
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.
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
March 30, 2000.
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
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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, 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.
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 a 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 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 March 30, 2000. 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."
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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 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 (as defined by the Plan and described herein) 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 February 6, 1998, 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 and OTS regulations,
certain deposits do not qualify as "savings accounts," including but not limited
to noninterest-bearing demand accounts, (primarily noninterest-bearing checking
accounts) and mortgage escrow deposits, 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
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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 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 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
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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 March 16, 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
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 March 30, 2000.
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 in a
Community Offering. In the event a Community Offering is held, a preference will
be given to natural persons residing in Carbon, Columbia, Luzerne, Monroe and
Schuylkill counties, subject to the right of the Company to accept or reject any
such orders, in whole or in part, in their sole discretion. Persons purchasing
stock in the
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Community Offering, 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,
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.
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
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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.
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 March 30, 2000. See
"-- Stock Pricing" above for a discussion of rights of subscribers, if any, in
the event an extension is granted.
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
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. 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
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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.
PROCEDURE FOR PURCHASING SHARES
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 physically received by the Bank at any of its offices by 12:00
Noon, 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 (February 6, 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
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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 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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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%;
(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;
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(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.
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
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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.
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
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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 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 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,
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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.
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 subsidiaries) 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
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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 shares 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 ESOP
are aggregated with the shares purchased in the Conversion by management and
acquired for award 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.
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
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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."
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.
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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."
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.
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.
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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.
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
121
<PAGE> 122
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.
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,
122
<PAGE> 123
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, 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 SEC, 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 L.L.P.
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.
123
<PAGE> 124
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 Plan of Conversion including the Federal Stock Charter and
Bylaws of the Bank are attached as Exhibit A to the Proxy Statement.
A copy of the Certificate of Incorporation and the Bylaws of the Company
and the proposed Certificate of Incorporation and Bylaws of the Foundation are
available without charge upon request, by calling the Bank's Conversion Center
at (717) 459-6442 or (888) 895-3331.
124
<PAGE> 125
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF HAZLETON AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
Reports of Independent Auditors................................................. F-2 to F-3
Consolidated Balance Sheets as of September 30, 1997 and 1996................... F-4
Consolidated Statements of Income for the Years ended September 30, 1997, 1996
and 1995...................................................................... 36
Consolidated Statements of Changes in Equity for the Years ended September 30,
1997, 1996 and 1995........................................................... F-5
Consolidated Statements of Cash Flows for the Years ended September 30, 1997,
1996 and 1995................................................................. F-6 to F-7
Notes to Consolidated Financial Statements...................................... F-8 to F-24
</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. has not yet issued
any stock, has no assets and no liabilities, and has not conducted any business
other than of an organizational nature.
F-1
<PAGE> 126
KPMG Peat Marwick LLP Letterhead
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> 127
PARENTE, RANDOLPH, ORLANDO, CAREY & ASSOCIATES LOGO
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
Hazleton, Pennsylvania
November 7, 1996
F-3
<PAGE> 128
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
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
and $42,515 in 1996)................................................. 38,925 43,486
Securities available-for-sale.......................................... 44,773 60,158
Loans (less allowance for loan losses of $1,272 for 1997 and $730 for
1996)................................................................ 261,469 242,916
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 financial statements
F-4
<PAGE> 129
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-
SALE
RETAINED 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> 130
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>
Operating Activities:
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 through 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> 131
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> 132
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 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.
F-8
<PAGE> 133
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
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
F-9
<PAGE> 134
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
origination fees and certain direct origination costs are deferred and amortized
using the level yield method over the contractual life of the related loans as
an adjustment of the yield on the loans.
Uncollected interest receivable on loans is accrued to income as earned.
Non-accrual loans are loans on which the accrual of interest has ceased because
the collection of principal or interest payments is determined to be doubtful by
management. It is the policy of the Bank to discontinue the accrual of interest
when principal or interest payments are delinquent 90 days or more (unless the
loan principal and interest are determined by management to be fully secured and
in the process of collection), or earlier if the financial condition of the
borrower raises significant concern with regard to the ability of the borrower
to service the debt in accordance with the terms of the loan. Interest income on
such loans is not accrued until the financial condition and payment record of
the borrower demonstrates the ability to service the debt.
Loans Held for Sale. Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of cost or estimated fair value in
the aggregate. Net unrealized losses are recognized through a valuation
allowance by charges to income.
Real Estate Owned (REO). Real estate acquired through foreclosure or by
deed in lieu of foreclosure is classified as REO. REO is carried at the lower of
cost (lesser of carrying value of the loan or fair value of the property at the
date of acquisition, as determined by a certified appraiser) or fair value less
selling expenses. Costs relating to the development or improvement of the
property are capitalized; holding costs are charged to expense. 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-10
<PAGE> 135
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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(1)................. 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(1)................. 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>
- ---------------
(1) Insured or guaranteed by an agency or instrument of the United States
Government (FHLMC, FNMA, and GNMA).
F-11
<PAGE> 136
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS GAINS 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(1)................. 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(1)................. 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>
- ---------------
(1) Insured or guaranteed by an agency or instrument of the United States
Government (FHLMC, FNMA, and GNMA.)
F-12
<PAGE> 137
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 5
AFTER YEARS
ONE BUT
MATURING YEAR BUT WITHIN MATURING
WITHIN ONE 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.
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-13
<PAGE> 138
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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.
F-14
<PAGE> 139
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Non-accrual loans totalled $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 executive officers
follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
<S> <C>
BALANCE, BEGINNING OF YEAR.................................. $ 757
New loans and line of credit advances..................... 10
Repayments................................................ (43)
------
BALANCE, END OF YEAR........................................ $ 724
======
</TABLE>
4. OFFICE PROPERTIES AND EQUIPMENT
Properties and equipment by major classification are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
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>
F-15
<PAGE> 140
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
<S> <C>
YEARS ENDING SEPTEMBER 30:
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, 1996, 1996, and 1995, respectively.
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(1).......................... 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>
- ---------------
(1) 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>
1998...................................................... $127,375
1999...................................................... $ 37,223
2000...................................................... $ 21,563
2001...................................................... $ 4,697
2002...................................................... $ 1,878
2003 and thereafter....................................... 0
--------
Total..................................................... $192,736
========
</TABLE>
F-16
<PAGE> 141
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 Bank'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.
F-17
<PAGE> 142
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Code
which permitted it to deduct from taxable income an allowance for bad debts
based on 8% of taxable income.
Upon repeal, the Bank is required to recapture into income, over a six year
period, the portion of its tax bad debt reserves that exceed its base year
reserves (i.e., tax reserves for tax years beginning before 1988). The base year
tax reserves, which may be subject to recapture if the Bank ceases to qualify as
a bank for federal income tax purposes, are restricted with respect to certain
distributions. The Bank's total tax bad debt reserves at September 30, 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,
-------------------------
1997 1996 1995
------ ----- ----
<S> <C> <C> <C>
Current:
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-18
<PAGE> 143
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-19
<PAGE> 144
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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-20
<PAGE> 145
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 (ad 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 rations 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.
F-21
<PAGE> 146
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------ ------------------ ------------------
AMOUNT RATIO(1) AMOUNT RATIO(1) AMOUNT RATIO(1)
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
AS OF SEPTEMBER 30, 1997
Risk-based Capital (Total Capital to risk
weighted assets)......................... $28,527 14.4% $15,845 >8.0% $19,806 >10.0%
Tier I Capital (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 (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 computed 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.
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1997 1996
------- -------
<S> <C> <C>
REGULATORY CAPITAL RECONCILIATION (IN THOUSANDS):
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.
F-22
<PAGE> 147
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 established
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 in the second year of its application.
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
F-23
<PAGE> 148
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF HAZLETON AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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.
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-24
<PAGE> 149
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 (the "Conversion") of First
Federal Savings and Loan Association of Hazleton from a mutual savings and loan
association to a stock savings bank (the "Bank"), 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 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 February 12, 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."
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.
The date of this Prospectus Supplement is February 12, 1998.
<PAGE> 150
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE OFFERING........................................................................... 1
I. Securities Offered................................................................ 1
II. Election to Purchase Common Stock in the Conversion.............................. 1
III. Value of Participation Interests................................................ 1
IV. Method of Directing Transfer..................................................... 1
V. Time for Directing Transfer....................................................... 1
VI. Irrevocability of Transfer Direction............................................. 2
VII. Direction to Purchase Common Stock After the Conversion......................... 2
VIII. Purchase Price of Common Stock................................................. 2
IX. Nature of a Participant's Interest in the Common Stock........................... 2
X. Voting and Tender Rights of Common Stock.......................................... 2
DESCRIPTION OF THE PLAN................................................................ 3
I. Introduction...................................................................... 3
II. Eligibility and Participation.................................................... 3
III. Contributions Under the Plan.................................................... 4
IV. Limitations on Contributions..................................................... 4
V. Investment of Contributions....................................................... 6
VI. Benefits Under the Plan.......................................................... 8
VII. Withdrawals and Distributions From the Plan..................................... 8
VIII. Administration of the Plan..................................................... 9
IX. Reports to Plan Participants..................................................... 9
X. Plan Administrator................................................................ 9
XI. Amendment and Termination........................................................ 9
XII. Merger, Consolidation or Transfer............................................... 9
XIII. Federal Income Tax Consequences................................................ 9
XIV. ERISA and Other Qualification................................................... 11
XV. Restrictions on Resale........................................................... 11
XVI. SEC Reporting and Short-Swing Profit Liability.................................. 12
EXPERTS................................................................................ 12
LEGAL OPINION.......................................................................... 13
FINANCIAL STATEMENTS................................................................... F-1
INVESTMENT FORM
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE PROSPECTUS OR THIS PROSPECTUS
SUPPLEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE BANK OR THE PLAN. THIS
PROSPECTUS SUPPLEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE BANK OR THE PLAN SINCE THE DATE HEREOF, OR
THAT THE INFORMATION HEREIN CONTAINED OR INCORPORATED BY REFERENCE IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
<PAGE> 151
THE OFFERING
I. 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, 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.
II. ELECTION TO PURCHASE COMMON STOCK IN THE CONVERSION
In connection with the Bank's Conversion, the Plan has been amended to
permit each Participant to direct that all or part of the funds which represent
his or her beneficial interest in the assets of the Plan may be transferred to
an investment fund that will invest in Common Stock (the "Employer Stock Fund")
and, to the extent shares are available, to use such funds to purchase Common
Stock issued in connection with the Conversion, and to purchase Common Stock in
the open market. If there is not enough Common Stock in the Conversion to fill
all subscriptions, the Common Stock would be apportioned and the Plan may not be
able to purchase all of the Common Stock requested by the Participants. In such
case, the Trustee will purchase shares in the open market after the Conversion
to fulfill Participants' requests. Such purchases may be at prices higher than
the purchase price in the Conversion. The ability of each Participant to invest
in the Employer Stock Fund in the Conversion pursuant to directions to transfer
all or a portion of their beneficial assets in the Plan will be based on such
Participant's status as an Eligible Account Holder or Supplemental Eligible
Account Holder pursuant to the Plan of Conversion, the subscription priorities
set forth in the Plan of Conversion and the availability of Common Stock. The
Trustee of the Plan will follow the Participants' directions.
III. 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 through the receipt of his or her quarterly statement. This
value represented the past contributions to the Plan by the Employers and the
Participants and any earnings or losses thereon, less previous withdrawals.
IV. METHOD OF DIRECTING TRANSFER
The last page of this Prospectus Supplement is a form to direct a transfer
to the Employer Stock Fund (the "Investment Form"). If a Participant wishes to
transfer all or part of his or her beneficial interest in the assets of the Plan
to the Employer Stock Fund being established in connection with the Conversion,
he or she should indicate that decision in the Investment Form. If a Participant
does not wish to make such an election, he or she does not need to take any
action.
V. 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 March 16, 1998 (the "Expiration Date") of the
Offering. The Investment Form should be returned to the Bank's Human Resources
Department by 12:00 noon on such date.
1
<PAGE> 152
VI. 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.
VII. DIRECTION TO PURCHASE COMMON STOCK AFTER THE CONVERSION
After the Conversion, a Participant shall be able to direct that a
percentage of the net value of such Participant's interests in the trust fund
established for the Plan (the "Trust Fund") be transferred to the Employer Stock
Fund and invested in Common Stock, or to the other investment funds available
under the Plan. Alternatively, a Participant may direct that a percentage of
such Participant's interest in the Employer Stock Fund be transferred to the
Trust Fund to be invested in accordance with the terms of the Plan. Participants
will be permitted to direct that future contributions made to the Plan by or on
their behalf will be invested in Common Stock. Following the initial election,
the allocation of a Participant's interest in the Employer Stock Fund may be
changed on a daily basis. 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").
VIII. 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").
IX. 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.
X. 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
2
<PAGE> 153
Stock Fund will not be tendered. The Plan makes provision for Participants to
exercise their voting instruction rights and tender instruction rights on a
confidential basis.
DESCRIPTION OF THE PLAN
I. INTRODUCTION
The Plan was established effective January 1, 1994, as the First Federal
Savings and Loan Association of Hazleton 401(k) Plan. The Plan is a cash or
deferred arrangement established in accordance with the requirements under
Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986, as
amended (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, First Federal Bank,
12 East Broad Street, Hazleton, Pennsylvania 18201. The Plan Administrator's
telephone number is (717) 459-3700. Each employee is urged to read carefully the
full text of the Plan.
II. ELIGIBILITY AND PARTICIPATION
Employees, other than employees paid on an hourly basis, are eligible to
participate in the Plan upon completion of six months of service with the
Employer and the attainment of age 21. In order to commence participation, an
employee must submit an enrollment form in advance of the date he desires to
enter the Plan. A Participant may elect to commence 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 account balances under the
Plan.
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<PAGE> 154
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.
Employer Contributions. The Employer contributes to the Plan for each Plan
Year 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.
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 sec.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
sec.415 Compensation is the total compensation he or she receives from the
Employer. 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 attributable to
employee elective deferrals will be returned to the Participant;
(ii) Any remaining excess amounts in the Participant's Account will be
either reallocated to other Participants in the same manner as other
Employer contributions, but not to the extent that it would result in an
excess in the other Participant's accounts, or used to reduce future
Employer contributions;
(iii) If an excess amount still exists, such amount will be allocated
to a suspense account to be used at the Employer's option, to reduce
administrative expenses, to offset future Employer contributions, or to
allocate among Participants employed as of the end of the Plan year.
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 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
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excess deferral that is distributed not later than such date shall be treated,
for federal income tax purposes, as earned and received by the Participant in
the taxable year in which the excess deferral is made.
Limitation on Plan Contributions for Highly Compensated
Employees. Sections 401(k) and 401(m) of the Code limit the amount of deferred
compensation that may be made to the Plan in any Plan Year on behalf of Highly
Compensated Employees (defined below) in relation to the amount of deferred
compensation made by or on behalf of all other employees eligible to participate
in the Plan. Specifically, the actual deferral percentage (i.e., the average of
the ratios, calculated separately for each eligible employee in each group, by
dividing the amount of deferred compensation credited to the Elective
Contribution Account of such eligible employee by such eligible employee's
compensation for the Plan Year) of the Highly Compensated Employees may not
exceed the greater of (i) 125% of the actual deferral percentage of all other
eligible employees, or (ii) the lesser of (x) 200% of the actual deferral
percentage of all other eligible employees, or (y) the actual deferral
percentage of all other eligible employees plus two percentage points. In
addition, the actual contribution percentage for such Plan Years (i.e., the
average of the ratios calculated separately for each eligible employee in each
group, by dividing the amount of 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 5% 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 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 or average contribution 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, are distributed before the close of the first 2 1/2 months
following the Plan Year to which such excess contributions relate.
Top-Heavy Plan Requirements. If for any Plan Year the Plan is a Top-Heavy
Plan (as defined below), then (i) the Bank may be required to make certain
minimum contributions to the Plan on behalf of non-key employees (as defined
below), and (ii) certain additional restrictions would apply with respect to the
combination of annual additions to the Plan and projected annual benefits under
any defined benefit plan maintained by the Bank.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any Plan
Year if, as of the last day of the preceding Plan Year, the aggregate balance of
the Accounts of Participants who are Key Employees (as defined below) exceeds
60% of the aggregate balance of the Accounts of all Participants. Key Employees
generally include any employee who, at any time during the Plan Year or any of
the four preceding Plan Years, is (1) an officer of the Bank having annual
compensation in excess of $65,000 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.
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<PAGE> 156
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 February 12, 1998, 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.
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 Matching
Contribution Accounts may be invested in Employer Stock under the proposed terms
of the First Federal Bank Employee Stock Ownership Plan being implemented by the
Bank. Under the terms of the Plan, Participants may make these elections on a
daily basis. Any amounts credited to a Participant's
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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.
A. Previous Funds.
Prior to February 12, 1998 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>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
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 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.
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VI. BENEFITS UNDER THE PLAN
Vesting. A Participant, at all times, has a fully vested, nonforfeitable
interest in his Elective 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>
<CAPTION>
PERIOD OF SERVICE VESTED PERCENTAGE
----------------------------------------------------- -----------------
<S> <C>
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, (ii) Employee Rollover Contribution
Account and (iii) the vested interest in his or her Matching Contribution
Account. The hardship distribution requirements ensure that Participants have an
immediate and heavy 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 or in installment payments as soon as administratively feasible
after such termination of employment if the vested value of the Participant's
Account is $3,500 or less. If the vested portion of the Participant's Account
balance is greater than $3,500, 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, or (b) as of the date the
Participant attains normal retirement age. At the request of the Participant,
the distribution may include an in kind distribution of Common Stock of the
Holding Company equal to the number of shares that can be purchased with the
Participant's balance in the Employer Stock Fund. Benefit payments ordinarily
shall be made not later than 60 days following the end of the Plan Year in which
occurs the latest of the Participant's: (i) termination of employment; (ii) the
attainment of age 65 or (iii) 10th anniversary of commencement of participation
in the Plan; but in no event later than the later of April 1 following the
calendar year in which the Participant attains age 70 1/2 or retires. However,
if the vested portion of the Participant's Account balances exceeds or has ever
exceeded $3,500, 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 or in installment payments 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 or in installment payments 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 installment payments 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.
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VIII. ADMINISTRATION OF THE PLAN
The Trustee with respect to the Plan is the named fiduciary of the Plan for
purposes of Section 402 of ERISA.
Trustees. The Trustee(s) is appointed by the Board of Directors of the
Bank to serve at its pleasure. The Trustee(s) of the Plan are Gary M. Gatski,
Patricia J. Purvis and Patrick J. Owens, Jr.
The Trustees have the exclusive authority and discretion to manage and
control the assets of the Plan unless specifically directed by Plan Participants
or other named fiduciaries.
IX. 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).
X. 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 First Federal 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.
XI. 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.
XII. 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).
XIII. FEDERAL INCOME TAX CONSEQUENCES
The following is only a brief summary of certain federal income tax aspects
of the Plan which are of general application under the Code and is not intended
to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan. The
summary is necessarily general in nature and does not purport to be complete.
Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal
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<PAGE> 160
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), 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
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<PAGE> 161
disposition of such Common Stock, to the extent of the amount of net unrealized
appreciation at the time of distribution, will be considered long-term capital
gain regardless of the holding period of such Common Stock. Any gain on a
subsequent sale or other taxable disposition of the Common Stock in excess of
the amount of net unrealized appreciation at the time of distribution will be
considered either short-term, medium term or long-term capital gain depending
upon the length of the holding period of the Common Stock. The recipient of a
distribution may elect to include the amount of any net unrealized appreciation
in the total taxable amount of such distribution to the extent allowed by the
regulations to be issued by the IRS.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan or
to an IRA. Pursuant to a change in the law, effective January 1, 1993,
virtually all distributions from the Plan may be rolled over to another
qualified Plan or to an individual retirement account ("IRA") without regard to
whether the distribution is a Lump Sum Distribution or a Partial Distribution.
Effective January 1, 1993, Participants have the right to elect to have the
Trustee transfer all or any portion of an "eligible rollover distribution"
directly to another plan qualified under Section 401(a) of the Code or to an
IRA. If the Participant does not elect to have an "eligible rollover
distribution" transferred directly to another qualified plan or to an IRA, the
distribution will be subject to an mandatory federal withholding tax equal to
20% of the taxable distribution. An "eligible rollover distribution" means any
amount distributed from the Plan except: (1) a distribution that is (a) one of a
series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the Participant or the joint
lines of the Participant and his or her designated beneficiary, or (b) for a
specified period of ten years or more; (2) any amount that is required to be
distributed under the minimum distribution rules; and (3) any other
distributions excepted under applicable federal law. The tax law change
described above did not modify the special tax treatment of Lump Sum
Distributions, that are not rolled over or transferred i.e., forward averaging,
capital gains tax treatment and the nonrecognition of net unrealized
appreciation, discussed earlier.
XIV. 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.
XV. 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
11
<PAGE> 162
time of a proposed resale will be permitted to make public resales of the Bank's
Common Stock only pursuant to a "reoffer" Prospectus or in accordance with the
restrictions and conditions contained in Rule 144 under the Securities Act or
some other exemption from registration, and will not be permitted to use this
Prospectus in connection with any such resale. In general, the amount of the
Bank's Common Stock which any such affiliate may publicly resell pursuant to
Rule 144 in any three-month period may not exceed the greater of one percent of
the Bank's Common Stock then outstanding or the average weekly trading volume
reported on the National Association of Securities Dealers Automated Quotation
System during the four calendar weeks prior to the sale. Such sales may be made
only through brokers without solicitation and only at a time when the Bank is
current in filing the reports required of it under the 1934 Act.
XVI. 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.
LEGAL OPINION
The validity of the issuance of the Common Stock will be passed upon by
Muldoon, Murphy & Faucette, Washington, D.C., which firm is acting as special
counsel for the Bank in connection with the Bank's Conversion from a mutual
savings and loan association to a stock based organization.
12
<PAGE> 163
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(k) PLAN
FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.............................. F-2
FINANCIAL STATEMENTS:
Statement of Net Assets Available for Benefits, With Fund Information......... F-3 - F-6
Statement of Changes in Net Assets Available for Benefits, With Fund
Information................................................................ F-7 - F-10
Notes to Financial Statements................................................. F-11 - F-14
SUPPLEMENTAL SCHEDULES:
Item 27a -- Schedule of Assets Held for Investment Purposes................... F-15
Item 27d -- Schedule of Reportable Transactions............................... F-16
</TABLE>
------------------------
F-1
<PAGE> 164
PARENTE RANDOLPH ORLANDO CAREY & ASSOCIATES LETTERHEAD
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.
/s/ Parente, Randolph, Orlando, Carey
& Associates
Hazleton, Pennsylvania
August 29, 1997
F-2
<PAGE> 165
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
GUARANTEED SHORT-TERM BOND BOND BOND EQUITY
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
---------- ---------- ---------- ---------- ---------- -------
<S> <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............
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 25,061 10,559 6,618 2,003
LIABILITIES........................ -- -- -- -- -- --
------- ------ ------- ------- ------ ------
NET ASSETS AVAILABLE FOR
BENEFITS......................... $ 64,977 $1,734 $ 25,961 $ 10,559 $6,618 $ 2,003
======= ====== ======= ======= ====== ======
<CAPTION>
CORE LARGE MEDIUM SMALL INTERNATIONAL
EQUITY CAPITALIZATION CAPITALIZATION CAPITALIZATION EQUITY
ACCOUNT EQUITY ACCOUNT EQUITY ACCOUNT EQUITY 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............ $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...
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............... 162,547 149,865 12,530 2,123 9,250
LIABILITIES........................ -- -- -- -- --
-------- -------- ------- ------ ------
NET ASSETS AVAILABLE FOR
BENEFITS......................... $162,547 $149,865 $ 12,530 $2,123 $ 9,250
======== ======== ======= ====== ======
</TABLE>
See Notes to Financial Statements
F-3
<PAGE> 166
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
--------------------------------------------------------------------------------------------
DELAWARE FIDELITY
GLOBAL BALANCED CONSERVATIVE AGGRESSIVE ASSET FIDELITY
BOND EQUITY BALANCED BALANCED MANAGER JANUS CONTRAFUND
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
-------- -------- ------------ ---------- ------- ------- ----------
<S> <C> <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... $ 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.......
T. Rowe Price International
Equity Account...............
---- ------- ------ ------ ------ ------- ------
Total assets............... 39 93,817 5,866 2,476 8,149 31,917 7,137
LIABILITIES........................ -- -- -- -- -- -- --
---- ------- ------ ------ ------ ------- ------
NET ASSETS AVAILABLE FOR
BENEFITS......................... $ 39 $ 93,817 $5,866 $2,476 $8,149 $31,917 $7,137
==== ======= ====== ====== ====== ======= ======
<CAPTION>
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> 167
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/ LARGE MEDIUM
SHORT- GOVERNMENT CORPORATE VALUE CORE CAPITALIZATION CAPITALIZATION
GUARANTEED TERM BOND BOND EQUITY EQUITY EQUITY EQUITY
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
---------- ------ ---------- ---------- ------- ------- -------------- --------------
<S> <C> <C> <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.................. $ 87,356
Medium Capitalization
Equity Account........... $6,659
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 87,356 6,659
LIABILITIES.................... -- -- -- -- -- -- -- --
------ ------- ------- ---- ------- ------- ------ ----
NET ASSETS AVAILABLE FOR
BENEFITS..................... $ 41,005 $1,357 $ 20,467 $ 11,483 $ 596 $94,382 $ 87,356 $6,659
====== ======= ======= ======== ======= ======= ====== =====
<CAPTION>
SMALL
CAPITALIZATION INTERNATIONAL
EQUITY EQUITY
ACCOUNT ACCOUNT
-------------- -------------
<S> <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.................. $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........... 961 4,730
LIABILITIES.................... -- --
------- -----
NET ASSETS AVAILABLE FOR
BENEFITS..................... $961 $ 4,730
====== =====
</TABLE>
F-5
<PAGE> 168
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 STRONG
EQUITY BALANCED BALANCED MANAGER JANUS CONTRAFUND DISCOVERY
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
-------- ------------ ---------- ------- ------- ---------- ---------
<S> <C> <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........... $ 487
T. Rowe Price International Equity
Account..........................
Contributions receivable:
Employer...........................
Participants.......................
------ ------- ------- ---- ------- ------- ------
Total assets................... 60,376 2,208 1,094 3,059 10,097 2,172 487
LIABILITIES............................ -- -- -- -- -- -- --
------ ------- ------- ---- ------- ------- ------
NET ASSETS AVAILABLE FOR BENEFITS...... $ 60,376 $2,208 $1,094 $3,059 $10,097 $2,172 $ 487
====== ======= ======= ====== ======= ======= ======
<CAPTION>
T. ROWE PRICE
INTERNATIONAL
EQUITY
ACCOUNT OTHER TOTAL
------------- ------ --------
<S> <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
T. Rowe Price International Equity
Account.......................... $ 2,623 2,623
Contributions receivable:
Employer........................... $2,074 2,074
Participants....................... 4,858 4,858
---- ------ -------
Total assets................... 2,623 6,932 358,044
LIABILITIES............................ -- -- --
---- ------ -------
NET ASSETS AVAILABLE FOR BENEFITS...... $ 2,623 $6,932 $358,044
======= ====== =======
</TABLE>
F-6
<PAGE> 169
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 21,954
------- ------ ------- ------- ------ ------ --------
Contributions
Employer................... 9,064 2,980 381 485 19,394
Participants............... 15,665 326 6,426 4,083 1,023 736 33,609
------- ------ ------- ------- ------ ------ --------
Total contributions...... 24,729 325 6,428 6,073 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 $ 6,615 $ 2,003 $162,547
======= ====== ======= ======= ====== ====== ========
<CAPTION>
LARGE MEDIUM SMALL
CAPITALIZATION CAPITALIZATION CAPITALIZATION INTERNATIONAL
EQUITY EQUITY EQUITY EQUITY
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................. 16,447 1,211 60 546
-------- ------- ------ ------
Contributions
Employer................... 19,630 2,025 476 1,782
Participants............... 29,979 3,852 626 3,611
-------- ------- ------ ------
Total contributions...... 49,609 5,877 1,102 5,393
-------- ------- ------ ------
Total additions........ 68,256 7,088 1,152 5,939
-------- ------- ------ ------
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 5,334 1,162 4,520
INTERFUND TRANSFERS............ (4,170) 337
-------- ------- ------ ------
Net increase........... 62,509 5,871 1,162 4,520
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
======== ======= ====== ======
</TABLE>
See Notes to Financial Statements
F-7
<PAGE> 170
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
--------------------------------------------------------------------------------------------
DELAWARE FIDELITY
GLOBAL BALANCED CONSERVATIVE AGGRESSIVE ASSET FIDELITY
BOND EQUITY BALANCED BALANCED MANAGER JANUS CONTRAFUND
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
-------- -------- ------------ ---------- ------- ------- ----------
<S> <C> <C> <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 $ 918
Investment expenses.......... (693) (38) (16) (51) (190) (41) (14)
--- ------- ------ ------ ------ ------- ------
Total investment
income................. 6,650 234 178 658 3,204 877 97
--- ------- ------ ------ ------ ------- ------
Contributions
Employer................... $ 13 12,401 1,315 526 1,598 3,509 1,730
Participants............... 26 10,444 2,109 678 2,838 7,432 2,637
--- ------- ------ ------ ------ ------- ------
Total additions........ 39 22,845 3,424 1,204 4,434 10,941 4,367
--- ------- ------ ------ ------ ------- ------
39 29,495 3,658 1,382 5,090 14,145 5,244
--- ------- ------ ------ ------ ------- ------
DEDUCTIONS FROM NET ASSETS
ATTRIBUTED TO:
Benefits paid to
participants............... 4,691
Administrative fees..........
--- ------- ------ ------ ------ ------- ------
Total deductions......... -- 4,691 -- -- -- -- --
--- ------- ------ ------ ------ ------- ------
Net increase prior to
interfund
transfers............ 39 24,804 3,658 1,382 5,090 14,145 5,244
INTERFUND TRANSFERS............ 8,637 7,675 (279) 252
--- ------- ------ ------ ------ ------- ------
Net increase........... 39 33,441 3,658 1,382 5,090 21,820 4,965
NET ASSETS AVAILABLE FOR
BENEFITS:
Beginning of year............ -- 60,376 2,208 1,094 3,059 10,097 2,172
--- ------- ------ ------ ------ ------- ------
End of year.................. $ 39 $ 93,817 $5,866 $2,476 $8,149 $31,917 $7,137
=== ======= ====== ====== ====== ======= ======
<CAPTION>
T. ROWE PRICE
STRONG INTERNATIONAL
DISCOVERY EQUITY
ACCOUNT ACCOUNT OTHER TOTAL
--------- ------------- ------- --------
<S> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS
ATTRIBUTED TO:
Investment Income $ 2,993
Net appreciation in fair
value of investments....... $ 111 $ 364 59,976
Investment expenses.......... (21) (4,534)
------ ------ ------- --------
Total investment
income................. 343 58,435
------ ------ ------- --------
Contributions
Employer................... 851 561 78,929
Participants............... 1,338 1,170 129,609
------ ------ --------
Total additions........ 2,189 1,731 208,538
------ ------ --------
2,266 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............ 2,286 2,074 244,434
INTERFUND TRANSFERS............ (2,812) $(6,932) --
------ ------ ------- --------
Net increase........... 2,538 (738) (6,932) 244,434
NET ASSETS AVAILABLE FOR
BENEFITS:
Beginning of year............ 487 2,623 6,932 358,044
------ ------ ------- --------
End of year.................. $ 3,025 $ 1,885 $ -- $602,478
====== ====== ======= ========
</TABLE>
F-8
<PAGE> 171
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 58,642
------- ------ ------- ------- ---- ---- -------
DEDUCTIONS FROM NET ASSETS
ATTRIBUTED TO:
Benefits paid to
participants............... 2,203 681 2,928
Administrative fees.......... 266
------- ------ ------- ------- ---- ---- -------
Total deductions....... 2,469 -- 681 -- -- -- 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 8,283 -- 596 55,963
NET ASSETS AVAILABLE FOR
BENEFITS:
Beginning of year............ 15,707 152 7,403 3,220 36,399
------- ------ ------- ------- ---- ---- -------
End of year.................. $ 41,005 $ 1,357 $ 20,467 $11,483 $ -- $ 596 $94,382
======= ====== ======= ======= ==== ==== =======
<CAPTION>
LARGE MEDIUM SMALL
CAPITALIZATION CAPITALIZATION CAPITALIZATION INTERNATIONAL
EQUITY EQUITY EQUITY EQUITY
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................ $ 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.......... 51,458 3,420 1,716 5,482
INTERFUND TRANSFERS............ (1,310) 3,239 (755) (973)
------- ------ ------ -------
Net increase......... 50,148 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>
See Notes to Financial Statements
F-9
<PAGE> 172
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
-------------------------------------------------------------------------------
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>
ADDITIONS TO NET ASSETS ATTRIBUTED
TO:
Investment income..................
Net appreciation in fair value of
investments...................... $ 9,066 $ 152 $ 99 $ 260 $ 933 $ 367
Investment expenses................ (405) (7) (4) (12) (36) (9)
------- ------ ------ ------ ------- ------
Total investment income...... 8,661 145 95 248 897 358
------- ------ ------ ------ ------- ------
Contributions
Employer......................... 10,814 812 434 1,076 2,378 750
Participants..................... 16,908 1,251 565 1,735 4,717 1,064
------- ------ ------ ------ ------- ------
Total contributions.......... 27,722 2,063 999 2,811 7,095 1,814
------- ------ ------ ------ ------- ------
Total additions............ 36,403 2,208 1,094 3,059 7,992 2,172
------- ------ ------ ------ ------- ------
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 2,206 1,094 3,059 7,992 2,172
INTERFUND TRANSFERS.................. 126 2,105
------- ------ ------ ------ ------- ------
Net increase............... 35,105 2,208 1,094 3,059 10,097 2,172
NET ASSETS AVAILABLE FOR BENEFITS:
Beginning of year.................. 25,271
------- ------ ------ ------ ------- ------
End of year........................ $ 60,376 $2,208 $1,094 $3,059 $10,097 $2,172
======= ====== ====== ====== ======= ======
<CAPTION>
STRONG T. ROWE PRICE
DISCOVERY INTERNATIONAL
ACCOUNT EQUITY ACCOUNT OTHER TOTAL
--------- -------------- ------ --------
<S> <C> <C> <C> <C>
ADDITIONS TO NET ASSETS ATTRIBUTED
TO:
Investment income.................. $ 2,050
Net appreciation in fair value of
investments...................... $ 88 $ 297 49,824
Investment expenses................ (2) (18) (1,973)
---- ------ --------
Total investment income...... 86 279 49,901
---- ------ --------
Contributions
Employer......................... 159 1,227 $ 434 69,358
Participants..................... 242 2,690 834 113,455
---- ------ ------ --------
Total contributions.......... 401 3,817 1,268 182,813
---- ------ ------ --------
Total additions............ 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...... 487 4,196 1,268 223,876
INTERFUND TRANSFERS.................. (1,573) (921) --
---- ------ ------ --------
Net increase............... 487 2,623 347 223,876
NET ASSETS AVAILABLE FOR BENEFITS:
Beginning of year.................. 6,585 134,168
---- ------ ------ --------
End of year........................ $ 487 $2,623 $6,932 $358,044
==== ====== ====== ========
</TABLE>
See Notes to Financial Statements
F-10
<PAGE> 173
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 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.
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.
F-11
<PAGE> 174
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-12
<PAGE> 175
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
Benefit Payments
Benefit payments to participants are recorded when paid.
F-13
<PAGE> 176
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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-14
<PAGE> 177
FIRST FEDERAL SAVINGS & LOAN ASSOCIATION
OF HAZLETON 401(K) PLAN
ITEM 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
(b) (c) (d) (e)
CURRENT
(a) IDENTITY OF ISSUE DESCRIPTION OF INVESTMENT COST VALUE
- ---- ------------------------- ---------------------------------------------------- -------- --------
<S> <C> <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 units 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, 1,403.9 units 11,294 12,530
Small Capitalization Equity Account, 662.79 units 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-15
<PAGE> 178
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-16
<PAGE> 179
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 I
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.
<TABLE>
<S> <C>
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
</TABLE>
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
Corporation Stock Fund
- ----
100
- ---- % 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
Corporation Stock Fund
- ----
100
- ---- % 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
Corporation Stock Fund
- ----
100
<PAGE> 180
- ---- % 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
Corporation Stock Fund
- ----
100
- ---- % 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
Corporation Stock Fund
- ----
100
- ---- % 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
Corporation Stock 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
Corporation Stock Fund
- ----
100
- ---- % 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
Corporation Stock Fund
- ----
100
- ---- % FROM
GROWTH ASSET ALLOCATION FUND
- ---- % 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
Corporation Stock Fund
- ----
100
- ---- % 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 and Income Fund
- ---- % Growth Fund
100
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.
<PAGE> 181
MEMBER'S SIGNATURE
- --------------------------------------------------------------------------------
Signature of Member Date
PENTEGRA SERVICES IS HEREBY AUTHORIZED TO MAKE THE ABOVE LISTED CHANGE(S) TO
THIS MEMBER'S RECORD.
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Signature of First Federal Savings and Loan Association of Hazleton's Date
Authorized Representative
