NORTHEAST PENNSYLVANIA FINANCIAL CORP.
12 E. Broad Street
Hazleton, Pennsylvania 18201
(717) 459-3700
December 24, 1998
Fellow Shareholders:
You are cordially invited to attend the 1999 annual meeting of
shareholders (the "Annual Meeting") of Northeast Pennsylvania Financial Corp.
(the "Company"), the holding company for First Federal Bank (the "Bank"),
Hazleton, Pennsylvania, which will be held on January 27, 1999 at 11:00 a.m.,
Eastern Time, at the Ramada Inn, Route 309 North, Hazleton, Pennsylvania.
The attached Notice of the Annual Meeting and the Proxy Statement
describe the business to be transacted at the Annual Meeting. Directors and
officers of the Company as well as a representative of KPMG Peat Marwick LLP,
the Company's independent auditors, will be present at the Annual Meeting to
respond to any questions that you may have regarding the business to be
transacted.
The Board of Directors of the Company has determined that matters to be
considered at the Annual Meeting are in the best interests of the Company and
its shareholders. For the reasons set forth in the Proxy Statement, the Board of
Directors unanimously recommends that you vote "FOR" each of the nominees as
directors specified under Proposal 1, and that you vote "FOR" Proposal 2, the
ratification of the independent auditors.
Please sign and return the enclosed proxy card promptly. Your
cooperation is appreciated since a majority of the common stock must be
represented, either in person or by proxy, to constitute a quorum for the
conduct of business at the Annual Meeting.
On behalf of the Board of Directors and all of the employees of the
Company and the Bank, I thank you for your continued interest and support.
Sincerely yours,
/s/ Thomas L. Kennedy
Thomas L. Kennedy
Chairman of the Board
<PAGE>
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
12 E. Broad Street
Hazleton, Pennsylvania 18201
(717) 459-3700
----------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held on January 27, 1999
----------------------------------
NOTICE IS HEREBY GIVEN that the annual meeting of shareholders (the
"Annual Meeting") of Northeast Pennsylvania Financial Corp. (the "Company"), the
holding company for First Federal Bank (the "Bank"), will be held on January 27,
1999 at 11:00 a.m., Eastern Time, at the Ramada Inn, Route 309 North, Hazleton,
Pennsylvania.
The purpose of the Annual Meeting is to consider and vote upon the
following matters:
1. The election of three directors to a three-year term of office;
2. The ratification of the appointment of KPMG Peat Marwick LLP,
as independent auditors of the Company for the fiscal year
ending September 30, 1999; and
3. Such other matters as may properly come before the meeting and
at any adjournments thereof, including whether or not to
adjourn the meeting.
The Board of Directors has established December 4, 1998 as the record
date for the determination of shareholders entitled to receive notice of and to
vote at the Annual Meeting and at any adjournments thereof. Only record holders
of the common stock of the Company as of the close of business on such record
date will be entitled to vote at the Annual Meeting or any adjournments thereof.
In the event there are not sufficient votes for a quorum or to approve the
foregoing proposals at the time of the Annual Meeting, the Annual Meeting may be
adjourned in order to permit further solicitation of proxies by the Company. A
list of shareholders entitled to vote at the Annual Meeting will be available at
Northeast Pennsylvania Financial Corp., 12 E. Broad Street, Hazleton,
Pennsylvania 18201, for a period of ten days prior to the Annual Meeting and
will also be available at the Annual Meeting itself.
By Order of the Board of Directors
/s/ Megan Kennedy
Megan Kennedy
Corporate Secretary
Hazleton, Pennsylvania
December 24, 1998
<PAGE>
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
-----------------------
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
January 27, 1999
-----------------------
Solicitation and Voting of Proxies
This Proxy Statement is being furnished to shareholders of Northeast
Pennsylvania Financial Corp. (the "Company") in connection with the solicitation
by the Board of Directors ("Board of Directors" or "Board") of proxies to be
used at the annual meeting of shareholders (the "Annual Meeting"), to be held on
January 27, 1999, at 11:00 a.m., Eastern Time, at the Ramada Inn, Route 309
North, Hazleton, Pennsylvania, and at any adjournments thereof. The 1998 Annual
Report to Stockholders, including the consolidated financial statements of the
Company for the fiscal year ended September 30, 1998, accompanies this Proxy
Statement which is first being mailed to record holders on or about December 24,
1998.
Regardless of the number of shares of common stock owned, it is
necessary for a Quorum that record holders of a majority of the shares be
represented by proxy or in person at the Annual Meeting. Shareholders are
requested to vote by completing the enclosed proxy card and returning it signed
and dated in the enclosed postage-paid envelope. Shareholders are urged to
indicate their vote in the spaces provided on the proxy card. Proxies solicited
by the Board of Directors of the Company will be voted by the Board of Directors
in accordance with the directions given therein. Where no instructions are
indicated, signed proxy cards will be voted "FOR" the election of the nominees
for director named in this Proxy Statement and "FOR" the ratification of KPMG
Peat Marwick LLP as independent auditors of the Company for the fiscal year
ending September 30, 1999.
Other than the matters listed on the attached Notice of Annual Meeting
of Shareholders, the Board of Directors knows of no additional matters that will
be presented for consideration at the Annual Meeting. Execution of a proxy,
however, confers on the designated proxy holders discretionary authority to vote
the shares in accordance with their best judgment on such other business, if
any, that may properly come before the Annual Meeting and at any adjournments
thereof, including whether or not to adjourn the Annual Meeting.
A proxy may be revoked at any time prior to its exercise by filing a
written notice of revocation with the Corporate Secretary of the Company, by
delivering to the Company a duly executed proxy bearing a later date, or by
attending the Annual Meeting and voting in person. However, if you are a
shareholder whose shares are not registered in your own name, you will need
appropriate documentation from your record holder to attend the Annual Meeting
and vote personally at the Annual Meeting.
The cost of solicitation of proxies on behalf of management will be
borne by the Company. In addition to the solicitation of proxies by mail,
Kissel-Blake Inc., a proxy solicitation firm, will assist the Company in
soliciting proxies for the Annual Meeting and will be paid a fee of $3,000, plus
out-of-pocket expenses. Proxies may also be solicited personally or by telephone
by directors, officers and other employees of the Company and its subsidiary,
First Federal Bank (the "Bank"), without additional compensation therefor. The
Company will also request persons, firms and corporations holding shares in
their names, or in the name of their nominees, which are beneficially owned by
others, to send proxy material to, and obtain proxies from, such beneficial
owners, and will reimburse such holders for their reasonable expenses in doing
so.
1
<PAGE>
Voting Securities
The securities which may be voted at the Annual Meeting consist of
shares of common stock of the Company ("Common Stock"), with each share
entitling its owner to one vote on all matters to be voted on at the Annual
Meeting, except as described below.
The close of business on December 4, 1998, has been fixed by the Board
of Directors as the record date (the "Record Date") for the determination of
shareholders of record entitled to notice of and to vote at the Annual Meeting
and at any adjournments thereof. The total number of shares of Common Stock
outstanding on the Record Date was 6,170,256 shares.
As provided in the Company's Certificate of Incorporation, for voting
purposes, holders of Common Stock who beneficially own in excess of 10% of the
outstanding shares of Common Stock (the "Limit") are not entitled to any vote in
respect of the shares held in excess of the Limit and are not treated as
outstanding for voting purposes. A person or entity is deemed to beneficially
own shares owned by an affiliate of, as well as, by persons acting in concert
with, such person or entity. The Company's Certificate of Incorporation
authorizes the Board of Directors (i) to make all determinations necessary to
implement and apply the Limit, including determining whether persons or entities
are acting in concert, and (ii) to demand that any person who is reasonably
believed to beneficially own stock in excess of the Limit to supply information
to the Company to enable the Board of Directors to implement and apply the
Limit.
The presence, in person or by proxy, of the holders of at least a
majority of the total number of shares of Common Stock entitled to vote (after
subtracting any shares in excess of the Limit pursuant to the Company's
Certificate of Incorporation) is necessary to constitute a quorum at the Annual
Meeting. In the event that there are not sufficient votes for a quorum or to
approve or ratify any proposal at the time of the Annual Meeting, the Annual
Meeting may be adjourned in order to permit the further solicitation of proxies.
As to the election of directors (Proposal 1), the proxy card being
provided by the Board of Directors enables a shareholder to vote "FOR" the
election of the nominees proposed by the Board, or to "WITHHOLD" authority to
vote for one or more of the nominees being proposed. Under Delaware law and the
Company's Bylaws, directors are elected by a plurality of votes cast, without
regard to either (i) broker non-votes or (ii) proxies as to which authority to
vote for one or more of the nominees being proposed is withheld.
As to the ratification of KPMG Peat Marwick LLP as independent auditors
of the Company (Proposal 2) and all other matters that may properly come before
the Annual Meeting, by checking the appropriate box, a shareholder may (i) vote
"FOR" the item, (ii) vote "AGAINST" the item, or (iii) "ABSTAIN" from voting on
such item.
Proxies solicited hereby are to be returned to the Company's transfer
agent, Registrar and Transfer Company ("RTC"). The Board of Directors has
designated RTC to act as the inspector of election and to tabulate the votes at
the Annual Meeting. RTC is not otherwise employed by, or a director of, the
Company or any of its affiliates. After the final adjournment of the Annual
Meeting, the proxies will be returned to the Company.
2
<PAGE>
Security Ownership of Certain Beneficial Owners
The following table sets forth information as to those persons believed
by management to be beneficial owners of more than 5% of the Company's
outstanding shares of Common Stock on the Record Date or as disclosed in certain
reports received to date regarding such ownership filed by such persons with the
Company and with the Securities and Exchange Commission ("SEC"), in accordance
with Sections 13(d) and 13(g) of the Securities Exchange Act of 1934, as amended
("Exchange Act"). Other than those persons listed below, the Company is not
aware of any person, as such term is defined in the Exchange Act, that owns more
than 5% of the Company's Common Stock as of the Record Date.
<TABLE>
<CAPTION>
Name and Address of
Title of Class Beneficial Owner Number of Shares Percent of Class
- ------------------------ ----------------------------------------- ------------------ ------------------
<S> <C> <C> <C>
Common Stock First Federal Bank Employee Stock 514,188 (1) 8.3%
Ownership Plan and Trust (the "ESOP")
12 E. Broad Street
Hazleton, Pennsylvania 18201
Common Stock First Federal Charitable Foundation (the 476,100 (2) 7.7%
"Foundation")
12 E. Broad Street
Hazleton, Pennsylvania 18201
Common Stock Bay Pond Partners, L.P. (3) 339,300 5.5%
75 State Street
Boston, Massachusetts 02109
Common Stock Frederick J. Jaindl et al. (4) 325,889 5.3%
3150 Coffeetown Road
Orefield, Pennsylvania 18069
<FN>
(1) Shares of Common Stock were acquired by the ESOP in the Bank's Conversion.
The ESOP Committee administers the ESOP. First Bankers Trust, N.A. has been
appointed as the corporate trustee for the ESOP ("ESOP Trustee"). 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. As of
December 4, 1998, no shares had been allocated under the ESOP. Under the
ESOP, unallocated shares and allocated shares as to which voting
instructions are not given by participants are to be voted by the ESOP
Trustee in a manner calculated to most accurately reflect the instructions
received from participants regarding the allocated stock so long as such
vote is in accordance with the provisions of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").
(2) The Foundation was established and funded by the Company in connection with
the Bank's Conversion with an amount of the Company's Common Stock equal to
7.4% of the total amount of Common Stock issued in the Conversion. The
Foundation is a Delaware non-stock corporation and is dedicated to the
promotion of charitable purposes within the communities in which the Bank
operates. The Foundation is governed by a board of directors with five
members, four of whom are directors or officers of the Company or the Bank.
The fifth is an individual from the Bank's local community. Pursuant to the
terms of the contribution of Common Stock, as mandated by the Office of
Thrift Supervision ("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 shareholders of the
Company.
(3) Based on information filed in a Schedule 13G filed on April 15, 1998, Bay
Pond Partners, L.P. may be deemed the beneficial owner of 339,300 shares.
(4) Based on information filed in a Schedule 13D on September 16, 1998,
Frederick J. Jaindl et al. may be deemed beneficial owners of 325,889
shares.
</FN>
</TABLE>
3
<PAGE>
PROPOSALS TO BE VOTED ON AT THE ANNUAL MEETING
PROPOSAL 1. ELECTION OF DIRECTORS
The Board of Directors of the Company currently consists of nine (9)
directors and is divided into three classes. Each of the nine members of the
Board of Directors also presently serves as a director of the Bank. Directors
are elected for staggered terms of three years each, with the term of office of
only one of the three classes of directors expiring each year. Directors serve
until their successors are elected and qualified.
The three nominees proposed for election at the Annual Meeting are Barbara
M. Ecker, R. Peter Haentjens, Jr., and William J. Spear. No person being
nominated as a director is being proposed for election pursuant to any agreement
or understanding between any such person and the Company.
In the event that any such nominee is unable to serve or declines to
serve for any reason, it is intended that proxies will be voted for the election
of the balance of those nominees named and for such other persons as may be
designated by the present Board of Directors. The Board of Directors has no
reason to believe that any of the persons named will be unable or unwilling to
serve. Unless authority to vote for the directors is withheld, it is intended
that the shares represented by the enclosed proxy card will be voted "FOR" the
election of all nominees proposed by the Board of Directors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF ALL
NOMINEES NAMED IN THIS PROXY STATEMENT.
Information with Respect to Nominees and Continuing Directors
The following table sets forth, as of the Record Date, the names of
nominees and continuing directors, their ages, a brief description of their
recent business experience, including present occupations and employment, the
year in which each became a director and the year in which their terms (or, in
the case of nominees, their proposed terms) as director of the Company expire.
This table also sets forth the amount of Common Stock and the percent thereof
beneficially owned by each director and all directors and executive officers as
a group as of the Record Date.
<TABLE>
<CAPTION>
Amount and
Expiration Nature of Ownership
Name and Principal Occupation at Present Director of Term as Beneficial as a Percent
and for Past Five Years Age Since(1) Director Ownership(2) of Class
- ------------------------------------------- ------- ---------- ------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
NOMINEES
Barbara M. Ecker
Certified Public Accountant, Hazleton
St. Joseph Medical Center. 56 1987 2002 34,500(3)(5) *
R. Peter Haentjens, Jr.
Vice President and General Manager of
Hazleton Pumps, Inc. 53 1981 2002 29,500(3)(5) *
William J. Spear
Owner and President of Hazle Drugs,
Inc., a retail pharmacy. 62 1981 2002 23,500(3)(5) *
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Amount and
Expiration Nature of Ownership
Name and Principal Occupation at Present Director of Term as Beneficial as a Percent
and for Past Five Years Age Since(1) Director Ownership(2) of Class
- ------------------------------------------- ------- ---------- ------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
CONTINUING DIRECTORS
Thomas L. Kennedy
President, Kennedy and Lucadamo,
P.C. and Chairman of the Board of the
Company and the Bank. 54 1985 2001 88,947(4)(6) 1.44%
E. Lee Beard
President and Chief Executive Officer
of the Company and the Bank. 47 1993 2001 77,221(4)(6) 1.25%
Paul L. Conard
Retired Administrator from Bloomsburg
University. 65 1989 2000 12,000(3)(5) *
Dr. William R. Davidson
Adjunct faculty member at Widener
University and part-time instructor at
Penn State Schuylkill Campus. 62 1988 2001 19,500(3)(5) *
Hon. John P. Lavelle
President Judge for the Court of
Common Pleas of Carbon County. 67 1972 2000 27,000(3)(5) *
Michael J. Leib
President of Weatherly Casting &
Machine Company. 50 1989 2000 31,500(3)(5) *
All directors and executive officers -- -- -- 417,934(7) 6.77%
as a group (13 persons)..................
<FN>
* Does not exceed 1.0% of the Company's voting securities.
(1) Includes years of service as a director of the Bank.
(2) Each person effectively exercises sole (or shares with spouse or other
immediate family members) voting or dispositive power as to shares
reported.
(3) Includes 9,500 shares awarded to each outside director under the Northeast
Pennsylvania Financial Corp. 1998 Stock- Based Incentive Plan (the
"Incentive Plan"). Such awards commence vesting at a rate of 20% per year
beginning October 27, 1999.
(4) Includes 48,575 and 59,125 shares awarded to Mr. Kennedy and Ms. Beard,
respectively, under the Incentive Plan. Such awards commence vesting at a
rate of 20% per year beginning October 27, 1999 but will vest immediately
upon death or disability. Each participant presently has voting power as to
the shares awarded.
(5) Excludes 21,000 shares subject to options granted to each outside director
under the Incentive Plan. Shares subject to options granted under the
Incentive Plan vest at a rate of 20% per year commencing on October 27,
1999 but will vest immediately upon death or disability.
(6) Excludes 144,616 shares for Mr. Kennedy and 160,684 shares for Ms. Beard
subject to options granted to each of these named executive officers under
the Incentive Plan. Shares subject to options granted under the Incentive
Plan vest at a rate of 20% per year commencing on October 27, 1999 but will
vest immediately upon death or disability.
(7) Includes a total of 216,200 shares awarded under the Incentive Plan as to
which voting may be directed. Excludes a total of 452,400 shares subject to
options granted under the Incentive Plan.
</FN>
</TABLE>
5
<PAGE>
Meetings of the Board of Directors and Committees of the Board of Directors
The Board of Directors of the Company conducts its business through
meetings of the Board of Directors and through activities of its committees. The
Board of Directors of the Company generally meets on a monthly basis and may
have additional meetings as needed. During the fiscal year ended September 30,
1998, the Board of Directors of the Company, which was formed on December 16,
1997, held 13 meetings primarily related to organizational and other matters in
connection with the formation of the Company and the acquisition of the Bank
through the Conversion. All of the directors of the Company attended at least
75% of the total number of the Company's Board meetings held and committee
meetings on which such directors served during the fiscal year ended September
30, 1998. The Board of Directors of the Company maintain committees, the nature
and composition of which are described below:
Audit Committee. The Audit Committees of the Company and of the Bank
consist of Ms. Ecker and Messrs. Conard, Lavelle, Leib and Spear. These
committees are responsible for the review of audit reports and management's
actions regarding the implementation of audit findings and to review compliance
with all relevant laws and regulations. The Audit Committee of the Company and
the Bank, on occasion, will conduct joint meetings. Due to the timing of the
Conversion, the Audit Committee of the Company did not meet in fiscal 1998. The
Audit Committee of the Bank met five times in fiscal 1998.
Nominating Committee. The Company's Nominating Committee for the 1999
Annual Meeting consists of Ms. Beard and Messrs. Kennedy, Conard, Davidson,
Lavelle and Leib. The Company's Certificate of Incorporation and Bylaws provide
for shareholder nominations of directors. These provisions require such
nominations to be made pursuant to timely notice in writing to the Secretary of
the Company. The shareholder's notice of nomination must contain all information
relating to the nominee which is required to be disclosed by the Company's
Bylaws and by the Exchange Act. See "Additional Information--Notice of Business
to be Conducted at a Special or Annual Meeting." The Nominating Committee met on
October 27, 1998.
Personnel and Compensation Committee. The Personnel and Compensation
Committee of the Company consists of Ms. Beard and Messrs. Davidson, Kennedy,
Lavelle and Leib. The committee is responsible for all matters regarding
compensation and fringe benefits for officers and employees of the Company and
meets on an as needed basis. The Personnel and Compensation Committee of the
Company met one time in fiscal 1998.
Directors' Compensation
Directors' Fees. All directors of the Bank are currently paid an annual
retainer of $10,500, paid quarterly, and $325 for each Board meeting attended.
All non-employee directors of the Bank also receive $325 for each committee
meeting attended. All directors of the Company are paid an annual retainer fee
of $4,000.
Incentive Plan. Under the Incentive Plan which was adopted by the
Company's shareholders on October 21, 1998, each member of the Board of
Directors of the Company who is not an officer or employee of the Company or the
Bank received non-statutory stock options to purchase 21,000 shares of the
Common Stock at an exercise price of $11.75, the fair market value of the Common
Stock on October 27, 1998, the date the option was granted and stock awards for
9,500 shares (collectively "Directors' Awards"). The Directors' Awards initially
granted under the Incentive Plan will vest over a five-year period, at a rate of
20% each year commencing on the first anniversary of the date of the grant.
6
<PAGE>
Board Report on Executive Compensation
The report of the Board and the stock performance graph shall not be
deemed incorporated by reference by any general statement incorporating by
reference this proxy statement into any filing under the Securities Act of 1933
or the Exchange Act, except as to the extent that the Company specifically
incorporates this information by reference, and shall not otherwise be deemed
filed under such Acts.
Board Report on Executive Compensation. Under rules established by the
SEC, the Company is required to provide certain data and information in regard
to the compensation and benefits provided to the Company's Chief Executive
Officer and the other executive officers of the Company. The disclosure
requirements for these executive officers include the use of tables and a report
explaining the rationale and considerations that led to fundamental compensation
decisions affecting those individuals. In fulfillment of this requirement, the
Board of Directors has prepared the following report for inclusion in this proxy
statement.
Compensation Policies. The policies and objectives of the Board are
designed to assist the Company in attracting and retaining qualified executives,
to recognize individual contributions towards achieving strategic business
initiatives and reward them for their achievement and to closely align the
financial interests of the executive officers with those of its shareholders. In
furtherance of these objectives, the Company and the Bank maintain a
compensation program for executives officers which consists of both cash and
equity based compensation. Only disinterested members of the Board of Directors
recommend base salaries for the executive officers and the Chairman of the
Board.
The Board sets the level of annual salaries for the President and Chief
Executive Officer and Chairman of the Board, generally based upon a review of
the performance of the President and Chief Executive Officer, Chairman of the
Board and the Company during the prior year and competitive data for that
position. The President and Chief Executive Officer and the Chairman of the
Board are then responsible for determining the base salaries of the remaining
executive officers.
In addition, in order to align the interests and performance of its
executive officers with the long term interests of its stockholders, the Company
and the Bank adopted plans which reward the executives for delivering long-term
value to the Company and the Bank through stock ownership.
The compensation package available to executive officers is composed of
the following components:
(i) Base Salary;
(ii) Performance Incentive Plan; and
(iii) Long Term Incentive Compensation, including
Option and Stock Awards.
Ms. Beard and Mr. Kennedy have employment agreements which specify a base
salary and require an annual review of such salary. In addition, Ms. Beard and
Mr. Kennedy and all other executive officers of the Company and the Bank
participate in other benefit plans available to all employees including the
ESOP.
Base Salaries. The salary levels are intended to be consistent and
competitive with the practices of other comparable financial institutions and
each executive's level of responsibility. The Board consulted surveys of
compensation paid to executive officers performing similar duties for depository
institutions and their holding companies with particular focus on the level of
compensation paid by comparable institutions in Pennsylvania and the
Mid-Atlantic region. The surveys primarily used by the Committee were based on
the 1997 SNL Executive Compensation Review and the 1997 America's Community
Bankers Compensation Survey for Savings Institutions, which covers mutual and
stock owned thrifts.
Although no specific formula is used for decision making, salary
increases are aimed at reflecting the overall performance of the Company and the
performance of the individual executive officer.
7
<PAGE>
Performance Incentive Plan. The Bank maintains the First Federal Bank
Performance Incentive Plan ("Performance Incentive Plan"). The Performance
Incentive Plan was designed by senior officers and approved by the Board to give
all employees an incentive for effectively operating the Bank. The Performance
Incentive Plan provides all employees an opportunity to earn semi-annual 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 burden ratio; and
(ii) return on equity.
Long Term Incentive Compensation. The Company maintains the Incentive
Plan under which executive officers may receive grants and awards of Common
Stock and options to purchase Common Stock of the Company. The Board believes
that stock ownership is a significant incentive in building shareholder value
and aligning the interests of employees with shareholders. Following the
approval of the Incentive Plan by shareholders on October 21, 1998, all
executive officers received grants and awards of Common Stock and options to
purchase Common Stock which vest in five equal installments; the first of which
begins October 27, 1999. The Board granted awards to executive officers after
considering recommendations made by an independent compensation consultant. The
exercise price of options granted was the market value of the Common Stock on
the date of pricing of the grants. The value of this component of compensation
increases as the Common Stock of the Company appreciates in value.
Chief Executive Compensation. The Chief Executive Officer was evaluated
on her performance in managing the Company, including the effort related to
operating the Company in its first year as a public company, fiscal performance,
and stock appreciation. Certain quantitative and qualitative factors were
reviewed to determine the Chief Executive Officer's compensation. Following a
review of the Chief Executive's performance, it was determined that the total
cash compensation for the Chief Executive Officer would be established according
to an analysis of the Chief Executive Officer's base salary in comparison to
peer institutions with specific consideration given to the level of the Bank's
operations in comparison to peer institutions.
Board of Directors
Thomas L. Kennedy R. Peter Haentjens, Jr.
E. Lee Beard John P. Lavelle
Paul L. Conard Michael J. Leib
William R. Davidson William J. Spear
Barbara M. Ecker
8
<PAGE>
Stock Performance Graph. The following graph shows a comparison of
total stockholder return on the Company's Common Stock based on the market price
of Common Stock, with the cumulative total returns for the companies on The
American Stock Exchange Index and The American Stock Exchange Savings
Institutions Index for the period beginning on April 1, 1998, the day the
Company's Common Stock began trading, through October 31, 1998. The graph was
derived from a very limited period of time, and, as a result, may not be
indicative of possible future performance of the Company's Common Stock. The
data was supplied by the Center for Research in Security Prices, a data service
provider for publicly traded financial institutions.
Comparison of Cumulative
Total Return Among the Company, The American Stock
Exchange Index and The American Stock Exchange Savings Institutions Index
[GRAPH]
04/01/98 04/30/98 05/29/98 06/30/98
- -------------------------------------------------------------------------------
Northeast Pennsylvania
Financial Corp. 100.000 100.000 95.968 91.129
The American Stock Exchange 100.000 102.744 99.248 105.270
The American Stock Exchange
Savings Institution Index 100.000 95.692 94.636 94.416
07/30/98 08/28/98 09/30/98 10/30/98
- -------------------------------------------------------------------------------
Northeast Pennsylvania
Financial Corp. 88.306 65.726 72.581 73.387
The American Stock Exchange 104.115 85.110 78.048 88.397
The American Stock Exchange
Savings Institution Index 90.213 74.210 70.216 71.084
Notes:
A. The lines represent monthly index levels derived from compounded daily
returns that include all dividends.
B. The indexes are reweighed daily, using the market capitalization on the
previous trading day.
C. If the monthly interval, based on the fiscal year-end is not a trading day,
the preceding trading day is used.
D. The index level for all series was set to 100.000 on 04/01/98, the first day
of trading of Northeast Pennsylvania Financial Corp. Common Stock. For Northeast
Pennsylvania Financial Corp., the index commenced witht he closing on the first
day of trading for Northeast Pennsylvania Financial Corp. Common Stock of $15.50
per share.
9
<PAGE>
Summary Compensation Table. The following table sets forth the cash
compensation paid as well as other compensation paid or accrued for services
rendered in all capacities during fiscal years ended September 30, 1998 and 1997
to the Chief Executive Officer of the Company and the Bank.
<TABLE>
<CAPTION>
Long-Term Compensation
-------------------------------
Annual Compensation(1) Awards Payouts
-------------------------------- ---------------------- ------
Other Restricted Securities
Annual Stock Underlying LTIP All Other
Name and Fiscal Salary Bonus Compensation Awards Options/SARs Payouts Compensation
Principal Position Year (2) ($) ($) ($)(3) ($)(4) (#)(5) ($) (6) ($)(7)
- ----------------- -------- -------- -------- ------------ -------- ------------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
E. Lee Beard.......... 1998 $171,931 $23,558 -- -- -- -- $5,330
President and Chief 1997 148,770 23,059 -- -- -- -- 4,626
Executive Officer
<FN>
(1) Under Annual Compensation, the column titled "Salary" includes director's
fees for Ms. Beard.
(2) Neither the Company nor its predecessor, the Bank, was a
reporting company with respect to the 1996 fiscal year.
(3) For fiscal years 1998 and 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 years 1998 and 1997, the Bank had no
restricted stock or stock related plans in existence.
(4) No stock awards were granted or earned in fiscal years 1998 or 1997.
(5) No stock options or SARs were earned or granted in fiscal years 1998 or
1997.
(6)For fiscal years 1998 and 1997, there were no payouts or awards under any
long-term incentive plan.
(7) Other Compensation consists of the Bank's matching contribution under the
Bank's 401(k) Plan.
</FN>
</TABLE>
Employment Agreements. The Company and the Bank entered into employment
agreements with Ms. Beard and Mr. Kennedy, (individually, the "Executive")
(collectively, the "Employment Agreements") which became effective as of March
31, 1998. The Employment Agreements are intended to ensure that the Company and
the Bank will be able to maintain a stable and competent management base. The
continued success of the Company and the Bank depends to a significant degree on
the skills and competence of Ms. Beard and Mr. Kennedy.
The Employment Agreements provide for three-year terms for each
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
Directors. 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 Employment Agreements provide that the Executive's base salary will be
reviewed annually. The base salaries currently effective for such Employment
Agreements for Ms. Beard and Mr. Kennedy are $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 Company or the Bank for cause, as
defined in the Employment Agreements, at any time. In the event the Company and
the Bank choose to terminate the Executive's employment for reasons other than
for cause, or in the event of the Executive's resignation from the Company and
the Bank 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 Company or the Bank; or (v) a
breach of the Employment Agreement by the Company or the Bank, 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 Company and the Bank during the remaining term of
the Employment Agreement. The Company and the Bank would also continue and pay
for the Executive's life, health and disability coverage for the remaining term
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<PAGE>
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 Employment Agreements, if voluntary or involuntary
termination follows a change in control of the Company or the Bank, 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 Company and the Bank
would also continue the Executive's life, health, and disability coverage for
thirty-six months. Notwithstanding that both the Company and the Bank Employment
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.
Payment under the Company's Employment Agreement would be made by the
Company. Payments to the Executive under the Bank's Employment Agreement will be
guaranteed by the Company in the event that payments or benefits are not paid by
the Bank. 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 Company or the Bank, respectively, if the
Executive is successful on the merits pursuant to a legal judgment, arbitration
or settlement. The Employment Agreements also provide that the Company and the
Bank shall indemnify the Executive to the fullest extent allowable under federal
and Delaware law, respectively. In the event of a change in control of the
Company or the Bank, the total amount of payments due under both of the
Agreements, based solely on the current base salaries for Ms. Beard and Mr.
Kennedy and excluding any benefits under any employee benefit plan which may be
payable, would be approximately $900,000.
Employee Benefit Plans
Incentive Plan. The Company's shareholders adopted the Incentive Plan
on October 21, 1998. It provides discretionary awards of options to purchase
Common Stock and awards of Common Stock to officers, directors and key employees
as determined by a committee of the Board of Directors.
Retirement Plan. The Bank participates in the Financial Institutions
Retirement Fund (the "Retirement Fund") to provide retirement benefits for
eligible employees. Employees are generally eligible to participate in the
Retirement Plan after the completion of 12 consecutive months of employment with
the Bank and the attainment of age 21. Hourly paid employees are excluded from
participating in the Retirement Plan. Benefits payable to a participant under
the Retirement Plan are based on the participant's years of service and salary.
The formula for normal retirement benefits payable annually under the Retirement
Plan is 2% multiplied by years of benefit service multiplied by the average of
the participant's highest three years of salary paid by the Bank. A participant
may elect early retirement as early as age 45. However, such participant's
normal retirement benefits will be reduced by an early retirement factor based
on an age at early retirement. Participants generally have no vested interest in
Retirement Plan benefits prior to the completion of five years of service with
the Bank. Following the completion of five years of vesting service, or in the
event of a participant's attainment of age 65, death or termination of
employment due to disability, a participant will become 100% vested in the
accrued benefits under the Retirement Plan. The table below reflects the pension
benefit payable to a participant assuming various levels of earnings and years
of service.
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<PAGE>
The following table sets forth the estimated annual benefits payable
upon retirement at age 65 for the period ended September 30, 1998.
<TABLE>
<CAPTION>
Career Years of Benefit Service
Average
Compensation
- -------------------- ----------------------------------------------------------------------------
15 20 25 30 35
- -------------------- ----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$ 15,000 ...................... $ 4,500 $ 6,000 $ 7,500 $ 9,000 $10,500
$ 30,000 ...................... 9,000 12,000 15,000 18,000 21,000
$ 45,000 ...................... 13,500 18,000 22,500 27,000 31,500
$ 60,000 ...................... 18,000 24,000 30,000 36,000 42,000
$ 75,000 ...................... 22,500 30,000 37,500 45,000 52,500
$ 90,000 ...................... 27,000 36,000 45,000 54,000 63,000
$ 105,000 ...................... 31,500 42,000 52,500 63,000 73,500
$ 120,000 ...................... 36,000 48,000 60,000 72,000 84,000
$ 135,000 ...................... 40,500 54,000 67,500 81,000 94,500
$ 150,000 ...................... 45,000 60,000 75,000 90,000 105,000
$ 160,000 ...................... 48,000 64,000 82,500 96,000 112,000
</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, 1998, Ms. Beard had 4 years, 9 months of credited service.
Deferred Compensation Plan. The Bank maintains a deferred compensation
plan for selected employees and directors of the Bank who desire to defer a
portion of their compensation. This plan is 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 implemented 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 Internal Revenue Code of 1986, as amended. From time
to time, the Board will designate which employees may participate in this
additional supplemental executive retirement plan. This supplemental executive
retirement plan is 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. 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.
Management Supplemental Executive Retirement Plan. The Bank implemented
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
12
<PAGE>
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.
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, 1998,
the Bank had $1.2 million of loans to executive officers or directors. All of
the Bank's loans to executive officers and directors had balances of less than
$100,000 as of September 30, 1998 and were made by the Bank in the ordinary
course of business with no favorable terms and 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
arms 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.
13
<PAGE>
PROPOSAL 2. RATIFICATION OF APPOINTMENT
OF INDEPENDENT AUDITORS
The Company's independent auditors for the fiscal year ended September
30, 1998 were KPMG Peat Marwick LLP. The Company's Board of Directors has
reappointed KPMG Peat Marwick LLP to continue as the independent auditors for
the Bank and the Company for the fiscal year ending September 30, 1999, subject
to ratification of such appointment by the shareholders.
Representatives of KPMG Peat Marwick LLP will be present at the Annual
Meeting. They will be given an opportunity to make a statement if they desire to
do so and will be available to respond to appropriate questions from
shareholders present at the Annual Meeting.
Unless marked to the contrary, the shares represented by the enclosed
proxy card will be voted "FOR" ratification of the appointment of KPMG Peat
Marwick LLP as the independent auditors of the Company.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" RATIFICATION OF
THE APPOINTMENT OF KPMG PEAT MARWICK LLP AS THE INDEPENDENT AUDITORS OF THE
COMPANY.
ADDITIONAL INFORMATION
Shareholder Proposals
To be considered for inclusion in the Company's proxy statement and
form of proxy relating to the 2000 Annual Meeting of Shareholders, a shareholder
proposal must be received by the Secretary of the Company at the address set
forth on the Notice of Annual Meeting of Shareholders not later than August 26,
1999. Any such proposal will be subject to 17 C.F.R. ss. 240.14a-8 of the Rules
and Regulations under the Exchange Act.
Notice of Business to be Conducted at a Special or Annual Meeting
The Bylaws of the Company set forth the procedures by which a
shareholder may properly bring business before a meeting of shareholders.
Pursuant to the Bylaws, only business brought by or at the direction of the
Board of Directors may be conducted at a special meeting. The Bylaws of the
Company provide an advance notice procedure for a shareholder to properly bring
business before an annual meeting. The shareholder must give written advance
notice to the Secretary of the Company not less than ninety (90) days before the
date originally fixed for such meeting; provided, however, that in the event
that less than one hundred (100) days notice or prior public disclosure of the
date of the meeting is given or made to shareholders, notice by the shareholder
to be timely must be received not later than the close of business on the tenth
day following the date on which the Company's notice to shareholders of the
annual meeting date was mailed or such public disclosure was made. The advance
notice by shareholders must include the shareholder's name and address, as they
appear on the Company's record of shareholders, a brief description of the
proposed business, the reason for conducting such business at the annual
meeting, the class and number of shares of the Company's capital stock that are
beneficially owned by such shareholder and any material interest of such
shareholder in the proposed business. In the case of nominations to the Board of
Directors, certain information regarding the nominee must be provided. Nothing
in this paragraph shall be deemed to require the Company to include in its proxy
statement or the proxy relating to any Annual Meeting any shareholder proposal
which does not meet all of the requirements for inclusion established by the SEC
in effect at the time such proposal is received.
14
<PAGE>
Other Matters Which May Properly Come Before the Meeting
The Board of Directors knows of no business which will be presented for
consideration at the Annual Meeting other than as stated in the Notice of Annual
Meeting of Shareholders. If, however, other matters are properly brought before
the Annual Meeting, it is the intention of the persons named in the accompanying
proxy to vote the shares represented thereby on such matters in accordance with
their best judgment.
Whether or not you intend to be present at the Annual Meeting, you are
urged to return your proxy card promptly. If you are then present at the Annual
Meeting and wish to vote your shares in person, your original proxy may be
revoked by voting at the Annual Meeting. However, if you are a shareholder whose
shares are not registered in your own name, you will need appropriate
documentation from your recordholder to vote personally at the Annual Meeting.
A COPY OF THE FORM 10-K (WITHOUT EXHIBITS) FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1998, AS FILED WITH THE SEC, WILL BE FURNISHED WITHOUT CHARGE TO
SHAREHOLDERS OF RECORD UPON WRITTEN REQUEST TO MEGAN KENNEDY, NORTHEAST
PENNSYLVANIA FINANCIAL CORP., 12 E. BROAD STREET, HAZLETON, PENNSYLVANIA 18201.
By Order of the Board of Directors
/s/ Megan Kennedy
Megan Kennedy
Corporate Secretary
Hazleton, Pennsylvania
December 24, 1998
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING IN
PERSON. WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL
MEETING, YOU ARE REQUESTED TO SIGN, DATE AND PROMPTLY
RETURN THE ACCOMPANYING PROXY CARD IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
15
<PAGE>