FORM 10-K
UNITED STATES
SECURlTIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from__________to__________
Commission File Number 1-13793
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1504091
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(State or other jurisdiction of I.R.S. Employer
Incorporation or organization) Identification No.)
12 E. BROAD STREET, HAZLETON, PENNSYLVANIA 18201-6591
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (570) 459-3700
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Securities registered under Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $0.01 per share American Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
NONE
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes_X__ No ___
Indicate by a check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K
The aggregate market value of the voting and non-voting stock held by non
affiliates of the registrant i.e., persons other than directors and executive
officers of the registrant is $44.3 million and is based on the last sales price
as quoted on the American Stock Exchange for December 13, 2000.
The number of shares of common stock outstanding as of December 13, 2000 was
5,138,949.
(1) Portions of the Annual Report to Shareholders for the year ended September
30, 2000 are incorporated by reference into Part I, Part II, Part III and Part
IV of this Form 10-K.
(2) Portions of the definitive proxy statement for the 2001 Annual Meeting of
Shareholders are incorporated by reference into Part I and Part III of this Form
10-K.
<PAGE>
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
FORM 10-K
TABLE OF CONTENTS
Part I Page
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Item 1 Business 1
Item 2 Properties 13
Item 3 Legal Proceedings 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Part II
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Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 15
Item 6 Selected Financial Data 15
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 7A Quantitative and Qualitative Disclosures About Market Risk 15
Item 8 Financial Statements and Supplementary Data 15
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 15
Part III
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Item 10 Directors and Executive Officers of the Registrant 16
Item 11 Executive Compensation 16
Item 12 Security Ownership of Certain Beneficial Owners and Management 16
Item 13 Certain Relationships and Related Transactions 16
Part IV
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Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 17
SIGNATURES 19
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Part I
Forward Looking Statements
In addition to historical information, our 10-K may include certain
"forward-looking statements" within the meaning of the federal securities laws.
These forward-looking statements include, but are not limited to, estimates and
expectations of future performance based on current management expectations.
Northeast Pennsylvania Financial Corp.'s (the "Company") actual results could
differ materially from those management expectations. Factors that could cause
future results to vary from current management expectations include, but are not
limited to, general economic conditions, legislative and regulatory changes,
monetary and fiscal policies of the federal government, changes in tax policies,
rates and regulation of federal, state and local tax authorities, changes in
interest rates, deposit flows, the cost of funds, demand for loan products,
demand for financial services, competition, changes in the quality or
composition of the Company's loan and investment portfolios, changes in
accounting principles, policies or guidelines, and other economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products, services and prices. Because of the risks and uncertainties
inherent in forward-looking statements, readers are cautioned not to place undue
reliance on them, whether included in this report or made elsewhere from time to
time by the Company or on its behalf. The Company assumes no obligation to
update any forward-looking statements.
Item 1. Business
General
The Company is a Delaware Corporation and is the holding company for First
Federal Bank (the "Bank"), a federally chartered capital stock savings bank
regulated by the Office of Thrift Supervision ("OTS"). The Company's executive
offices are located at 12 East Broad Street, Hazleton, Pennsylvania 18201.
The Bank was organized in 1935 as a federally chartered savings and loan
association. On March 31, 1998, the Bank converted from a federally chartered
savings and loan association to a federally chartered capital stock savings bank
and changed its name to First Federal Bank (the "Conversion"). On March 31,
1998, the Company acquired the Bank as part of the Conversion. At September 30,
2000, the Company had total assets of $637.3 million, deposits of $419.7 million
and stockholder's equity of $73.0 million.
The Company's operations are primarily conducted through the Bank. These
operations have been and continue to be attracting retail deposits from the
general public in the areas surrounding its 15 banking offices and investing
those deposits, together with funds generated from operations and borrowings,
primarily in one- to four-family mortgage loans, consumer loans, and
multi-family and commercial loans. The Company currently originates, primarily
for investment, adjustable-rate and shorter-term (15 years or less) fixed rate
one- to four-family mortgage loans. Since the Company has a policy to limit its
retention of newly originated longer-term, fixed-rate one- to four-family loans
to 25% of total originations for a fiscal year, periodically the Company has had
to limit its origination of such loans. The Company's policy is to sell in the
secondary market longer-term fixed-rate one- to four-family mortgage loans
originated in excess of its retention limit. The Company also offers as
nonconforming or subprime, one- to four-family loans, a variety of consumer
loans, including home equity loans, home equity lines of credit, direct and
indirect automobile loans and education loans, and commercial loans. To a lesser
extent, the Company also originates multi-family and commercial real estate
loans and construction loans. The Company also invests in mortgage-related
securities and investment securities, primarily U.S.government and agency and
municipal obligations, and other permissible investments.
The Company's revenues are derived principally from interest on its loans,
and to a lesser extent, interest and dividends on its investment and
mortgage-related securities and other non-interest income. The Company's primary
sources of funds are deposits, principal and interest payments on loans and
mortgage related securities, FHLB advances and proceeds from the sale of loans.
In addition other business of the Company is conducted through its other
subsidiaries, Abstractors, Inc., which is a title insurance agency and Northeast
Pennsylvania Trust Co., which offers trust, estate and asset management services
and products.
Market Area and Competition
The Company is a community-oriented banking institution offering a variety
of financial products and services to meet the needs of the communities it
serves. The Company's lending and deposit gathering is concentrated in its
market area consisting of Luzerne, Carbon, Columbia, Monroe, Montour and
Schuylkill counties in Northeastern and Central Pennsylvania. The Company
invests primarily in loans secured by first or second mortgages on properties
located in areas surrounding its offices.
The Company maintains its headquarters in Hazleton with six other banking
offices in Luzerne County. The Company's seven offices in Luzerne County,
including Hazleton, accounted for $232.9 million or 55.5% of the Company's total
deposits at September 30, 2000. Hazleton is situated approximately 100 miles
from Philadelphia and New York City and approximately 50 miles from Allentown
and the WilkesBarre/Scranton area. The Company also maintains two banking branch
offices in Bloomsburg (Columbia County), one each in Lehighton and Weatherly
(both in Carbon County), one in Danville (Montour County), and one
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each in Frackville, Pottsville and Shenandoah (all in Schuylkill County). The
Company also operates a loan production office in Pocono Pines in Monroe County.
The economy of the greater Hazleton area is characterized by diversified
light manufacturing and is the site of production facilities for several major
manufacturers including Union Camp, Hershey-Cadbury Chocolates, Quebecor and
Hazleton Pumps, Inc. As a consequence, the manufacturing sector employs more
than one third of the area's work force. The Hazleton area has excellent access
to major highway transportation routes including Interstates 80 and 81 as well
as rail transportation. The population of Luzerne County has remained relatively
static and has one of the oldest average ages for all counties in the United
States. The overall population in the Company's market area is relatively small
and, in recent years, has grown slowly, and the unemployment rate in the area is
greater than the national average.
Monroe County, the location of the Pocono Pines loan production office, is
dominated by the Pocono Mountains, making the area one of the Mid-Atlantic's
most popular resort areas. The Company established its loan production office to
take advantage of the market for vacation properties existing in Monroe County
as well as to be involved in the growth in the number of permanent residents
relocating into the county.
The Company faces significant competition both in generating loans and in
attracting deposits. The Company's primary market area is highly competitive and
the Bank faces direct competition from a significant number of financial
institutions, many with a state wide or regional presence and, in some cases, a
national presence. Many of these financial institutions are significantly larger
and have greater financial resources than the Company. The Company's competition
for loans comes principally from commercial banks, savings banks, credit unions,
mortgage brokers, mortgage banking companies and insurance companies. Its most
direct competition for deposits has historically come from savings banks and
associations, commercial banks and credit unions. In addition, the Bank faces
increasing competition for deposits from non-bank institutions such as brokerage
firms and insurance companies in such instruments as short-term money market
funds, corporate and government securities funds, mutual funds and annuities.
Competition may also increase as a result of the lifting of restrictions on the
interstate operations of financial institutions. The Bank expects competition to
increase in the future as a result of legislative, regulatory and technological
changes and the continuing trend of consolidation in the financial services
industry. Technological advances, for example, have lowered barriers to market
entry, allowed banks to expand their geographic reach by providing services over
the Internet and made it possible for non-depository institutions to offer
products and services that traditionally have been provided by banks. The
Gramm-Leach-Bliley Act, which permits affiliation among banks, securities firms
and insurance companies also will change the competitive environment in which
the bank conducts business.
In addition, the Company recognizes that its customer base increasingly
focuses on convenience and access to services. The Company has addressed these
customer desires through the implementation of PC banking and voice response
capabilities, a computerized loan origination and document system and the
issuance of debit cards. The Company intends to continue to evaluate and enhance
its service delivery system.
LENDING ACTIVITIES
General. The information relating to the composition and maturity of the
Bank's loan portfolio appears in "Loans" on pages 10 and 11 of the Company's
2000 Annual Report to Shareholders and is incorporated herein by reference.
Origination and Sale of Loans. The Bank's mortgage lending activities are
conducted primarily by its loan personnel operating at its branch and loan
origination offices. All loans originated by the Bank are underwritten pursuant
to the Bank's policies and procedures. For fiscal 2000 and 1999, the Bank
originated $133.8 million and $180.9 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.
It currently is the policy of the Bank to retain for investment longer-term
(greater than 15 years to maturity at date of origination) fixed-rate one- to
four- family loans originated during a fiscal year only up to 25% of its total
loan originations during that year. In addition, the Bank generally retains the
adjustable rate and shorter-term (maturities of 15 years or less) fixed-rate
loans originated. The Company sells 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.
During fiscal years 2000 and 1999 the Bank originated or purchased $34.3
million and $65.5 million, respectively, of one- to four-family mortgage loans.
The reason for this decline is that less loans were purchased from other
financial institutions in fiscal 2000 as compared to fiscal 1999. In addition,
during fiscal years 2000 and l999, the Bank originated $10.3 million and $11.3
million, respectively, of construction loans. All 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 $5.4 million and $6.2 million, respectively, of multi-family
and commercial real estate loans during fiscal 2000 and l999.
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Also, during fiscal 2000 and 1999, the Bank originated or purchased $67.1
million and $54.8 million of consumer loans, respectively. These originations,
during fiscal 2000 and 1999, consisted of $16.5 million and $25.0 million,
respectively, of home equity loans, $4.0 million and $3.5 million, respectively,
of home equity lines of credit, $39.3 million and $21.5 million, respectively,
of direct and indirect automobile loans, $2.0 million and $1.9 million,
respectively, of education loans, and $5.2 million and $2.9 million,
respectively, of other consumer loans. The increase in automobile loans is a
direct result of more participating auto dealers in fiscal 2000. Commercial loan
originations decreased due to higher interest rates in fiscal 2000 as compared
to fiscal 1999, combined with a transitory local economy.
In addition, during fiscal 2000 and 1999 respectively, the Bank originated
$16.7 million and $43.1 million of commercial loans. These originations
consisted primarily of commercial business and municipal loans.
The following table sets forth the Bank's loan originations, purchases, sales
and principal repayments for the periods indicated:
<TABLE>
<S> <C> <C> <C>
For the Fiscal Years Ended September 30,
(In Thousands)
2000 1999 1998
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Loans at beginning of period $372,799 $290,564 $268,972
Originations or Purchases:
Real estate:
One- to four-family 34,316 65,456 19,790
Multi-family and commercial 5,357 6,190 6,513
Construction 10,274 11,334 11,965
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Total real estate loans 49,947 82,980 38,268
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Consumer:
Home equity loans and lines of credit 20,547 28,457 29,512
Automobile 39,300 21,527 13,274
Education 2,011 1,929 1,743
Unsecured lines of credit 484 507 741
Other 4,758 2,351 2,761
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Total consumer loans 67,100 54,771 48,031
Commercial 16,743 43,138 5,602
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Total loans orginated 133,790 180,889 91,901
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Deduct:
Principal loan repayments and prepayments 83,366 94,508 65,727
Loan sales 1,806 8,219 8,365
Transfers to REO 614 251 222
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Sub-total 85,786 102,978 74,314
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Net loan activity 48,004 77,911 17,587
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Loans at end of period (1) $420,803 $368,475 $286,559
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<FN>
(1) Loans at end of period include loans in process of $5,951, $4,324 and $4,005
for fiscal years 2000, 1999 and 1998, respectively.
</FN>
</TABLE>
One- to Four-Family Mortgage Lending. The Bank currently offers both
fixed-rate and adjustable-rate mortgage ("ARM") loans with maturities of up to
30 years secured by one- to four-family residences. One- to four-family mortgage
loan originations are generally obtained from the Bank's in-house loan
representatives, from existing or past customers, and through referrals from
members of the Bank's local communities.
The origination of ARM 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
Fannie Mae and Freddie Mac guidelines. In recent years, the Bank began offering
one- to four-family mortgage loans to borrowers whose credit does not fully meet
established Fannie Mae or
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Freddie Mac standards, for example, standard regarding income to debt ratios for
the borrower ("subprime loans"). Mortgage loans originated by the Bank generally
include due-on-sale clauses which provide the Bank with the contractual right to
deem the loan immediately due and payable in the event the borrower transfers
ownership of the property without the Bank's consent. Due-on-sale clauses are an
important means of adjusting the yields on the Bank's fixed-rate mortgage loan
portfolio and the Bank has generally exercised its rights under these clauses.
The Bank requires fire, casualty, title and, in certain cases, flood insurance
on all properties securing real estate loans made by the Bank.
Multi-Family and Commercial Real Estate Lending. The Bank originates
fixed-rate and adjustable- rate multi-family and commercial real estate loans
that generally are secured by properties used for business purposes or a
combination of residential and retail purposes.
Pursuant to the Bank's underwriting policies a multi-family mortgage and
commercial real estate loan may be made in an amount up to 80% of the lower of
the appraised value or sales price of the underlying property with terms
generally ranging from 15 to 25 years.
The factors considered by the Bank in granting these loans include: the net
operating income of the mortgaged premises before debt service and depreciation;
the debt coverage ratio (the ratio of net earnings to debt service); and the
ratio of loan amount to appraised value. The Bank has generally required that
the properties securing commercial real estate loans have debt service coverage
ratios of at least 125%.
Construction Lending. The Bank also offers residential construction loans.
Such loans have been for presold one- to four-family residences for the
construction phase and convert into permanent financing. The Bank generates
residential construction loans primarily through direct contact with the
borrower or home builders, and these loans involve properties located in the
Bank's market area. Such loans require that the Bank review plans,
specifications and cost estimates and that the contractor be known to the Bank
to be reputable. The amount of construction advances to be made, together with
the sum of previous disbursements, may not exceed the percentage of completion
of the construction. The maximum loan-to-value limit applicable to such loans is
80%.
Consumer Lending. The Bank offers consumer loans which include home equity
loans, home equity lines of credit, direct and indirect automobile loans,
education loans and other consumer loans. The Bank's home equity loans are
generated primarily through the Bank's retail offices. The Bank generally offers
home equity loans with a term of 180 months or less. The Bank also offers home
equity lines of credit with terms up to 20 years, the last 10 years of which
require full amortization of the principal balance. The maximum loan amount for
both home equity loans and home equity lines of credit, is subject to a combined
loans-to-value ratio of 80%.
The Bank also offers automobile loans, both on a direct and an indirect
basis (through new and used car dealers). The indirect automobile loans are
originated by dealers in accordance with underwriting standards pre-established
by the Bank and are serviced by the Bank. The Bank also offers loans on
recreational vehicles and boats and other consumer loans including education
loans which are federally guaranteed and originated under regulations of the
Pennsylvania Higher Education Assistance Agency, deposit-secured loans, and
other personal and unsecured loans. The Bank's policy is to sell its education
loans once the borrower has left school to Sallie Mae with servicing released.
Consumer loans tend to bear higher rates of interest and have shorter terms to
maturity than first lien residential mortgage loans. Nationally, consumer loans
have historically tended to have a higher rate of default.
Commercial Lending. The Bank makes commercial business loans primarily in
its market area to a variety of professionals, sole proprietorships and small
businesses. The Bank offers a variety of commercial lending products, including
term loans for fixed assets and working capital, revolving lines of credit,
letters of credit, and Small Business Administration guaranteed loans. Interest
rates charged generally are based on the prime rate as published in the Wall
Street Journal. Prior to making commercial business loans, the borrower is
required to provide the Bank with sufficient information to allow a prudent loan
decision to be made. Such information generally includes financial statements
and projected cash flows, and is reviewed to evaluate debt service capability.
Commercial business loans are generally secured by a variety of collateral,
primarily real estate, and frequently are supported by personal guarantees. In
addition, the Bank actively participates in industrial loans arranged through
and with the Greater Wilkes-Barre Industrial Fund and CanDo, Inc. a Hazleton
area industrial fund.
Commercial business loans generally involve higher credit risks than loans
secured by real estate. Unlike mortgage loans, which generally are made on the
basis of the borrowers ability to make repayment from his or her employment or
other income, and which are secured by real property whose value tends to be
more easily ascertainable, commercial loans are of higher risk and typically are
made on the basis of the borrower's ability to make repayment from the cash flow
of the borrower's business. As a result, the availability of funds for the
repayment of commercial loans may be substantially dependent on the success of
the business itself. Further, any collateral securing such loans may depreciate
over time, may be difficult to appraise and may fluctuate in value based on the
success of the business.
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Loan Approval Procedures and Authority. The Board of Directors establishes
the lending policies and the levels of loan approvals of the Bank and oversees
the Bank's lending activity. The Board of Directors has established a Loan
Committee comprised of the Bank's Chairman of the Board of Directors, President,
Senior Vice President Lending, Senior Vice President Chief Financial Officer and
at least one outside director.
Non-Performing Assets, Impaired Loans, Real Estate Owned and Allowance for
Loan Losses. The information relating to the Bank's non-performing assets,
impaired loans, real estate owned and allowance for loan losses appears on pages
11,12 and 13 of the Registrant's 2000 Annual Report to Shareholders and is
incorporated herein by reference.
Investment Activities
The above captioned information appears in "Investment Activities" in the
Registrant's 2000 Annual Report to Shareholders on pages 9 and 10 and is
incorporated herein by reference.
Source of Funds
Information relating generally to the Bank's source of funds and a
description of the Bank's deposits appears under "Sources of Funds" in the
Registrant's 2000 Annual Report to Shareholders on pages 13 and 14 and is
incorporated herein by reference.
Borrowings. The Bank utilizes advances from the FHLB of Pittsburgh as a
supplement 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, 2000, the Bank had
$137.5 million in outstanding FHLB advances, compared to $156.0 million at
September 30, 1999. 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>
<S> <C> <C> <C>
At or For the Fiscal Years Ended September 30,
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
FHLB advances and other borrowings:
Average balance outstanding $191,797 $120,600 $52,531
Maximum amount outstanding at any month-end
during the period 226,717 156,504 107,323
Balance outstanding at end of period 139,115 156,504 107,323
Weighted average interest rate during the period 5.85% 5.23% 5.43%
Weighted average interest rate at end of period 6.13% 5.34% 5.31%
</TABLE>
Subsidiary Activities
The Company has three wholly-owned subsidiaries: the Bank, incorporated
under the laws of the United States, Abstractors, Inc., and Northeast
Pennsylvania Trust Co. incorporated under Pennsylvania law. FIDACO, Inc. is an
inactive subsidiary of First Federal Bank with the only major asset being an
investment by FIDACO, Inc. in Hazleton Community Development Corporation.
Abstractors, Inc. is a title insurance agency with total assets of $184,000 at
September 30, 2000. Northeast Pennsylvania Trust Co., offers trust estate and
asset management services and products and has total assets of $775,000 and
$65.8 million of trust assets under management at September 30, 2000. At
September 30, 2000 total assets of FIDACO, Inc. were $30,000.
Personnel
As of September 30, 2000, the Company had 165 full-time and 29 authorized
part-time employees, none of whom were covered by a collective bargaining
agreement. Management believes that the Company has good relations with its
employees and there are no pending or threatened labor disputes with its
employees.
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Regulation and Supervision
The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its chartering agency, and the Federal Deposit Insurance Corporation
(the "FDIC"), as the deposit insurer. The Bank is a member of the Federal Home
Loan Bank ("FHLB") System. The Bank's deposit accounts are insured up to
applicable limits by the Savings Association Insurance Fund ("SAIF") managed by
the FDIC. The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other financial institutions. There are periodic examinations
by the OTS and the FDIC to test the Bank's compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or the Congress, could
have a material adverse impact on the Company, the Bank and their operations.
Certain of the regulatory requirements applicable to the Bank and to the
Company are referred to below or elsewhere herein. The description of statutory
provisions and regulations applicable to savings associations set forth in this
form 10-K do not purport to be complete descriptions of such statutes and
regulations and their effects on the Bank and the Company are qualified in its
entirety by reference to such statutes and regulations.
Federal Savings Institution and Regulations
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, 2000, the largest aggregate amount of loan-to-one
borrower was $8.8 million, which was less than the Bank's general limit on
loans-to-one borrower was $9.5 million.
QTL Test. The HOLA requires savings institutions to meet a qualified thrift
lending ("QTL") test. Under the QTL test, a savings association is required to
maintain at least 65% of its "portfolio assets" (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed and related securities) in at
least 9 months out of each 12-month period. A savings association that fails the
QTL test is subject certain restrictions and may be required to convert to a
bank charter. As of September 30, 2000 the Bank maintained 77.68% 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, including cash
dividends, payments to repurchase its shares and payments to shareholders of
another institution in a cash-out merger. Effective April 1, 1999, the OTS'
capital distribution regulation changed. Under the new regulation, an
application to and the prior approval of the OTS is required before any capital
distribution if the institution does not meet the criteria for "expedited
treatment" of applications under OTS regulations (generally, compliance with all
capital requirements and examination ratings in one of two top categories), the
total capital distributions for the calendar year exceed net income for that
year plus the amount of retained net income for the preceding two years, the
institution would be undercapitalized following the distribution or the
distribution would otherwise be contrary to a statute, regulation or agreement
with OTS. If an application is not required, the institution must still give
advance notice to OTS of the capital distribution. If the Bank's capital fell
below its regulatory requirements or if 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, which would otherwise be permitted by regulation
if the OTS determines that the distribution would be 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 year
ended September 30, 2000 was 6.7%, which exceeded the applicable requirements.
The Bank has never been subject to monetary penalties for failure to meet its
liquidity requirements.
Page 6
<PAGE>
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, 2000 totaled $116,000.
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 the federal savings associations.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Bank received a "Satisfactory" CRA rating
in its most recent examination.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries that the Company may establish) is
limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A
restricts the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B generally requires that certain transactions with
affiliates, including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including stockholders, and any
attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive or
cease and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1 million per
day in especially egregious cases. Under the FDI Act, the FDIC has the authority
to recommend to the Director of the OTS that enforcement action be taken with
respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances. Federal and state law also establishes criminal penalties for
certain violations.
Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted final regulations and Interagency
Guidelines Establishing Standards for Safety and Soundness ("Guidelines") to
implement these safety and soundness standards. The Guidelines set forth the
safety and soundness standards that the federal banking agencies use to identify
and address problems at insured depository institutions before capital becomes
impaired. The Guidelines address internal controls and information systems;
internal audit system; credit underwriting; loan documentation; interest rate
risk exposure; asset growth; asset quality; earnings; and compensation, fees and
benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3% leverage (core capital) ratio for institutions receiving the highest
examination rates (4% for others) 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.
Page 7
<PAGE>
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-weighted assets, all assets, including certain off
balance sheet assets, are multiplied by 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. Allowance for loan and lease losses includable in
supplemental capital is limited to a maximum of 1.25% of risk-weighted assets.
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 calculated in
accordance with guidelines set forth by the OTS. A savings association whose
measured interest rate risk exposure exceeds 2% would be required to deduct an
interest rate component in calculating its total risk-based capital. The
interest rate risk component would be an amount equal to one-half of the
difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the Bank's assets. That dollar
amount would be deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule as written,
there is a two quarter lag between the reporting date of an institution's
financial data and the effective date for the new capital requirement based on
that data. A savings association with assets of less than $300 million and
risk-based capital ratios in excess of 12% would not be subject to the interest
rate risk component, unless the OTS determined otherwise. The rule also provides
that the Director of the OTS may waive or defer an association's interest rate
risk component on a case-by-case basis. No prediction can be made when such
interest rate risk component requirement will be implemented, or if it ever will
be implemented.
Prompt Corrective Regulatory Action
Under the OTS prompt corrective action regulations, the OTS is required to take
certain supervisory actions against undercapitalized institutions, the severity
of which depends upon the institution's degree of capitalization. Generally, a
savings institution that has a total risk-based capital of less than 8% or a
leverage ratio or a Tier 1 capital ratio that is less than 4% is considered to
be undercapitalized. A savings institution that has a total risk-based capital
less than 6%, a Tier 1 risk-based capital ratio of less than 3.0% or a leverage
ratio that is less than 3% is considered to be "significantly undercapitalized"
and a savings institution that has a tangible capital to assets ratio equal to
or less than 2% is deemed to be "critically undercapitalized." Subject to a
narrow exception, the Banking regulator is required to appoint a receiver or
conservator for an institution that is critically undercapitalized. The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date an association receives notice that it is
"undercapitalized," significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions may become
immediately applicable to the institution depending upon its category,
including, but not limited to, increased monitoring by regulators, restrictions
on growth, and capital distributions and limitations on expansion. The OTS could
also take any one of a number of discretionary supervisory actions, including
the issuance of a capital directive and the replacement of senior executive
officers and directors.
Insurance of Deposit Accounts
The FDIC has adopted a risk-based insurance assessment system. The FDIC assigns
an institution to one of three capital categories based on the institution's
financial information, as of the reporting period ending seven months before the
assessment period, consisting of (1) well capitalized, (2) adequately
capitalized or (3) undercapitalized, and one of three supervisory subcategories
within each capital group. The supervisory subgroup to which an institution is
assigned is based on a supervisory evaluation provided to the FDIC by the
institution's primary federal regulator and information which the FDIC
determines to be relevant to the institution's financial condition and the risk
posed to the deposit insurance funds. An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned.
Assessment rates for SAIF member institutions currently range from 0 basis
points to 27 basis points. The FDIC is authorized to raise the assessment rates
in certain circumstances. The FDIC has exercised this authority several times in
the past and may raise insurance premiums in the future. If such action is taken
by the FDIC, it could have an adverse effect on
Page 8
<PAGE>
the earnings of the Bank. In addition to the assessment for deposit insurance,
institutions are required to pay on bonds issued in the late 1980's by the
Financing Corporation to recapitalize the predecessor to the Savings Association
Insurance Fund. During 1998, Financing Corporation payments for Savings
Association Insurance Fund members approximated 600 basis points, while Bank
Insurance Fund members paid 1.22 basis points. By law, there will be equal
sharing of Financing Corporation payments between the members of both insurance
funds on the earlier of January 1, 2000 or the date the two insurance funds are
merged. The Bank's assessment rate for the years ended September 30, 2000, 1999
and 1998 was .020%, .059% and .058% of assessable deposits.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital stock in the FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. The Bank was in compliance with this
requirement with an investment in FHLB stock at September 30, 2000, of $6.9
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, 2000, the Bank had $137.5 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, 2000, 1999 and 1998
dividends from the FHLB to the Bank amounted to approximately $687,000, $411,000
and $190,000, 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 FHLB's 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
$39.3 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement is 3%; and for accounts greater than $39.3 million, the
reserve requirement is $1.2 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 $39.3 million. The first $5.0 million of
otherwise reservable balances (subject to adjustment by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank is in compliance
with the foregoing requirements. Because required reserves must be maintained in
the form of either vault cash, a non-interest-bearing account at a Federal
Reserve Bank or a pass-through account as defined by the Federal Reserve Board,
the effect of this reserve requirement is to reduce the Bank's interest-earning
assets. FHLB system members are also authorized to borrow from the Federal
Reserve "discount window," but Federal Reserve Board regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal Reserve
Bank.
Holding Company Regulation
The Company is a non-diversified unitary savings and loan holding company
within the meaning of the HOLA. As such, the Company is subject to OTS
regulations, examinations, supervision and reporting requirements. In addition,
the OTS has enforcement authority over the Company and its non-savings
institution subsidiaries. Among other things, this authority permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings institution. The Bank must notify the OTS 30 days before
declaring any dividend to the Company.
As a unitary savings and loan holding company, the Company is not
restricted under existing laws as to the types of business activities in which
it may engage, provided that the Bank continues to be a QTL. Upon any
non-supervisory acquisition by the Company of another savings association, the
Company would become a multiple savings and loan holding company (if the
acquired institution is held as a separate subsidiary) and would be subject to
extensive limitations on the types of business activities in which it could
engage. The HOLA limits the activities of a multiple savings and loan holding
company and its non-insured institution subsidiaries primarily to activities
permissible for bank holding companies under Section 4(c)(8) of the Bank Holding
Company Act, as amended (the "BHC Act"), subject to the prior approval of the
OTS, and to other activities authorized by OTS regulation. Legislation enacted
in 1999 imposes limitations upon the activities of unitary savings and loan
holding companies. Under the legislation, such holding companies are restricted
Page 9
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to activities permitted by a "financial holding company," including insurance
and investment banking, and activities permitted by multiple holding companies
as discussed above. General commercial activities are not permissible. Unitary
savings and loan holding companies in existence prior to May 1999, such as the
Company, are grandfathered. However, the grandfather would not apply to any
company that acquired the Company.
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.
Financial Institution Modernization Legislation. Recently enacted federal
legislation designed to modernize the regulation of the financial services
industry expands the ability of bank holding companies to affiliate with other
types of financial services companies such as insurance companies and investment
banking companies. However, the legislation provides that companies that acquire
control of a single savings association after May 4, 1999 (or that filed an
application for that purpose after that date) are not entitled to the
unrestricted activities formerly allowed for a unitary savings and loan holding
company. Rather, these companies will have authority to engage in the activities
permitted "a financial holding company" under the new legislation, including
insurance and securities-related activities, and the activities currently
permitted for multiple savings and loan holding companies, but generally not in
commercial activities. The authority for unrestricted activities is
grandfathered for unitary savings and loan holding companies, such as the
Company, that existed before May 4, 1999. However, the authority for
unrestricted activities would not apply to any company that acquired the
Company.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank report their income on a September 30
fiscal year basis using the accrual method of accounting and are 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. Neither the Company nor the Bank has 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 eliminated 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 required 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 had 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 that began after December 31, 1995, the Bank's bad debt
deduction was equal to net charge-offs. The new rules allowed 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 was 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
were included and the institution could have elected to have the tax years with
the highest and lowest lending activity removed from the average calculation.
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If an institution was permitted to postpone the reserve recapture, it had to
begin its six year recapture no later than the 1998 tax year. The unrecaptured
base year reserves were not subject to recapture as long as the institution
continued to carry on the business of banking. In addition, the balance of the
pre-1988 bad debt reserves continued to be subject to a provision of present law
referred to below that required recapture in the case of certain excess
distributions to shareholders.
Distributions. To the extent that the Bank makes "non-dividend
distributions" to the Company that are considered as made: (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for such
losses exceeds the amount that would have been allowed under the experience
method, or (ii) from the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the Bank's taxable income. Non-dividend distributions include distributions
in excess of the Bank's current and accumulated earnings and profits,
distributions in redemption of stock, and distributions in partial or complete
liquidation. However, dividends paid out of the Bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not be
considered to result in a distribution from the Bank's bad debt reserve. Thus,
any dividends to the Company that would reduce amounts appropriated to the
Bank's bad debt reserve and deducted for federal income tax purposes would
create a tax liability for the Bank. The amount of additional taxable income
created from an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. Thus if
the Bank makes a "non-dividend distribution," then approximately one and
one-half times the amount so used would be includable in gross income for
federal income tax purposes, assuming a 34% corporate income tax rate (exclusive
of state and local taxes). The Bank does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the bad debt
reserve deduction claimed by the Bank over the deduction that would have been
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 owns more than 20% of the stock of a
corporation distributing a dividend then 80% of any dividends received may be
deducted.
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State and Local Taxation
The Company and its non-thrift Pennsylvania subsidiaries are subject to the
Pennsylvania Corporation Net Income Tax and Capital Stock and Franchise Tax. The
Corporate Net Income Tax rate for fiscal 1999 is 11.99% and is imposed on the
Company's and its non-thrift subsidiaries' unconsolidated taxable income for
federal purposes with certain adjustments. In general, the Capital Stock Tax is
a property tax imposed at the rate of 1.275% of a corporation's capital stock
value, which is determined in accordance with a fixed formula. The Company is
also required to file an annual report with and pay an annual Franchise tax to
the State of Delaware.
The Bank is taxed under the Pennsylvania Mutual Thrift Institutions Tax Act
(the "MTIT"), as amended, to include thrift institutions having capital stock.
Pursuant to the MTIT, the Bank's tax rate is 11.5%. The MTIT exempts the Bank
from all other taxes imposed by the Commonwealth of Pennsylvania for state
income tax purposes and from all local taxation imposed by political
subdivisions, except taxes on real estate and real estate transfers. The MTIT is
a tax upon net earnings, determined in accordance with generally accepted
accounting principals ("GAAP") with certain adjustments. The MTIT, in computing
GAAP income, allows for the deduction of interest earned on Pennsylvania and
federal securities, while disallowing a percentage of a thrift's interest
expense deduction in the proportion of interest income on those securities to
the overall interest income of the Bank. Net operating losses, if any,
thereafter can be carried forward three years for MTIT purposes. Neither the
Company nor the Bank has not been audited by the Commonwealth of Pennsylvania in
the last five years.
<TABLE>
<S> <C> <C>
Additional Item. Executive Officers of the Registrant
--------------- ------------------------------------
The following table sets forth information regarding the executive officers
of the Company and the Bank as of September 30, 2000 who are not directors.
Name Age as of 9/30/00 Position
---- ----------------- --------
Thomas C. Blass 55 Senior Vice President
and Trust Officer of the
Trust Company since June 1999.
Trust Officer for financial
institution in Bloomsburg, PA
prior to current position.
Bernard M. Miskin 49 Senior Vice President, Operations
Division of the Bank since 1995.
Joseph K. Osiecki 62 Senior Vice President,
Corporate Retail Division since 1999,
Loan Division from 1993
through November 2000,
when he retired.
Patrick J. Owens, Jr. 57 Senior Vice President,
Chief Financial
Officer of the Bank
since 1993 and Treasurer
and Chief Financial Officer
of the Company since 1998.
Thomas Burns 50 President and Trust
Officer of the Trust
Company since May 2000.
Trust Officer for
financial institution in
Hazleton, PA prior to
current position.
Allan Farias 53 Senior Vice President,Corporate Retail
Division since September 2000.
Page 12
</TABLE>
<PAGE>
Item 2. Properties
The Company currently conducts its business through 15 full service banking
offices located in Luzerne, Carbon, Columbia, Montour and Schuylkill counties,
and one loan origination office in Monroe County in Northeast Pennsylvania.
Abstractors, Inc. and Northeast Pennsylvania Trust Co. conduct their business
from the downtown Hazleton area. The following table sets forth the Company's
offices as of September 30, 2000.
<TABLE>
<S> <C> <C> <C> <C> <C>
Net Book Value
of Property or
Leasehold
Original Year Improvements Total Deposits
Leased or Leased or Date of Lease at September at September
Location Owned Acquired Expiration 30, 2000 30, 2000
-------- --------- ------------- ------------- -------------- --------------
(Dollars In Thousands)
Administrative/Home
Office:
12 E. Broad Street
Hazleton, PA 18201 Owned 1947 - 3,138 $131,024
2 E. Broad Street
Hazleton, PA 18201 Leased 1992 month-to-month
Branch Offices:
Bloomsburg Office:
17 E. Main Street
Bloomsburg, PA 17815 Owned 1963 - 441 $25,201
Shenandoah Office:
5-7 E. Main Street
Shenandoah, PA 17976 Owned 1968 - 394 $44,973
Pottsville Office:
111 E. Norweigan Street
Pottsville, PA 17901 Owned 1968 - 575 $24,360
Lehighton Office:
111 N. First Street
Lehighton, PA 18235 Owned 1977 - 111 $28,464
Laurel Mall Office:
240 Laurel Mall
Hazleton, PA 18201 Leased 1994 2003 208 $56,789
Mountaintop Office:
360 S. Mountain Boulevard
Mountaintop, PA 18707 Owned 1997 - 804 $25,394
Scott Township Office:
PO Box 518
2691 New Berwick Highway
Bloomsburg, PA 17815 Owned 1998 - 1,009 $27,900
Schuylkill Mall Office:
611 Schuylkill Mall
Frackville, PA 17976 Leased 1978 2001 35 $22,025
Page 13
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Gould's IGA Office:
Route 93
Sugarloaf, PA 18249 Leased 1995 2000 29 $13,623
Danville Branch:
1519 Bloom Road
Danville, PA 17821 Owned 1999 - 642 $13,830
Back Mountain Branch:
154 N. Memorial Highway
Shavertown, PA 18708 Leased 1999 2000 73 $2,833
Freeland Branch:
402 Front Street
Freeland, PA 18224 Leased 1999 2003 29 $3,255
Loan Production
Origination Office:
Pocono L.P.O. Office
P.O. Box 1092
Pocono Pines, PA 18350 Leased 1997 month-to-month - -
Title Insurance Agency:
Abstractors, Inc.
101 S. Church Street
Hazleton, PA 18201 Leased 1998 2001 13 N/A
Trust Company:
Northeast Pennsylvania Trust Co.
Hazleton Center
2 E. Broad Street
Hazleton, PA 18201 Leased 1999 2004 56 N/A
</TABLE>
Item 3.Legal Proceedings
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operation.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Page 14
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Information relating to the market for Registrant's common equity and
related shareholder matters appears under "Market for Registrant's Common Equity
and Related Shareholder Matters" in the Registrant's 2000 Annual Report to
Shareholders on page 16 and is incorporated herein by reference. Information
relating to dividend restrictions for Registrant's common stock appears under
"Regulation and Supervision."
Item 6. Selected Financial Data
The above-captioned information appears under "Selected Consolidated
Financial and Other Data of the Company" in the Registrant's 2000 Annual Report
to Shareholders on page 8 and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The above-captioned information appears under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Registrant's
2000 Annual Report to Shareholders on pages 3 through 16 and is incorporated
herein by reference.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
The above-captioned information appears under the heading "Management of
Interest Rate Risk and Market Risk Analysis" in the Registrant's 2000 Annual
Report to Shareholders on pages 3 through 5 and is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of Northeast Pennsylvania Financial
Corp. and its subsidiaries, together with the report thereon by KPMG LLP appears
in the Registrant's 2000 Annual Report to Shareholders on pages 17 through 40
and are incorporated herein by reference.
Item 9. Changes and Disagreements with Accountants on Accounting and Financial
Disclosure
Not Applicable.
Page 15
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on January 31, 2001
at pages 5 and 6.
Item 11. Executive Compensation
The information relating to executive compensation is incorporated herein
by reference to the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on January 31, 2001 at pages 8 through 16.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on January 31, 2001
at pages 3 and 4.
Item 13. Certain Relationships and Related Transactions
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Shareholders to be held on January 31, 2001 at page 17.
Page 16
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this report
(1)Consolidated Financial Statements of the Company are incorporated by
reference to the following indicated pages of the 1999 Annual Report to
Shareholders:
Consolidated Statements of Financial Condition
as of September 30, 2000 and 1999......................................17
Consolidated Statements of Operations
For the Years Ended September 30, 2000, 1999 and 1998..................18
Consolidated Statements of Comprehensive Income
For the Years Ended September 30, 2000, 1999, and 1998.................19
Consolidated Statements of Changes in Equity
For the Years Ended September 30, 2000, 1999 and 1998..................20
Consolidated Statements of Cash Flows
For the Years Ended September 30, 2000, 1999 and 1998..................21
Notes to Consolidated Financial Statements..............................23
Independent Auditor's Report............................................40
(2) All schedules are omitted because they are not required or applicable, or
the required information is shown in the consolidated financial statements or
the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of Northeast Pennsylvania Financial Corp.*
3.2 Bylaws of Northeast Pennsylvania Financial Corp.**
4.0 Form of Stock Certificate of Northeast Pennsylvania Financial Corp.*
10.1 Employment Agreement between Northeast Pennsylvania Financial Corp.
and E. Lee Beard***
10.2 Employment Agreement between Northeast Pennsylvania Financial Corp.
and Thomas L. Kennedy***
10.3 Employment Agreement between First Federal Bank and E. Lee Beard***
10.4 Employment Agreement between First Federal Bank and Thomas L.
Kennedy***
10.5 Change in Control Agreement between Northeast Pennsylvania Financial
Corp. and Patrick J. Owens, Jr.***
10.6 Change in Control Agreement between First Federal Bank and Patrick J.
Owens, Jr.***
10.7 Change in Control Agreement between First Federal Bank and Bernard M.
Miskin***
10.8 Change in Control Agreement between First Federal Bank and Joseph K.
Osiecki***
10.9 Form of First Federal Bank Supplemental Executive Retirement Plan*
10.10 Form of First Federal Bank Employee Severance Compensation Plan*
10.11 Form of First Federal Bank Management Supplemental Executive Retirement
Plan*
10.12 Northeast Pennsylvania Financial Corp. 1998 Stock-Based Incentive
Plan****
10.13 Northeast Pennsylvania Financial Corp. 2000 Stock Option Plan *****
11.0 Statement regarding Computation of Per Share Earnings
(See Notes to Consolidated Financial Statements)
13.0 2000 Annual Report to Shareholders
21.0 Subsidiary information is incorporated by reference to "Part I -
Subsidiaries"
Page 17
<PAGE>
23.0 Consent of KPMG LLP
27.0 Financial Data Schedule
* Incorporated herein by reference into this document from the Exhibits to the
Form S- 1 Registration Statement, and any amendments thereto, Registration No.
333-43281
** Bylaws were amended in last fiscal year and filed as an exhibit to the Form
10-Q for the quarter ended June 30, 2000 filed on August 14, 2000.
*** Incorporated herein by reference into this document the Exhibits to the
Company's Form 10-K for the year ended September 30, 1998.
**** Incorporated herein by reference into this document from the Proxy
Statement for the 1998 Special Meeting of Shareholders dated September 9, 1998
***** Incorporated herein by reference into this document from the proxy
statement for the 2000 annual meeting of stockholders dated December 20, 1999
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal year
covered by this report.
Page 18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Northeast Pennsylvania Financial Corp.
By /s/ E. Lee Beard December 21, 2000
E. Lee Beard
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ E. Lee Beard
E. Lee Beard December 21, 2000
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Paul Conard
Paul Conard December 21, 2000
Director
/s/ Dr. William R. Davidson
Dr. William R. Davidson December 21, 2000
Director
/s/ Barbara Ecker
Barbara Ecker December 21, 2000
Director
/s/ R. Peter Haentjens, Jr.
R. Peter Haentjens, Jr. December 21, 2000
Director
/s/ Thomas L. Kennedy
Atty. Thomas L. Kennedy December 21, 2000
Chairman of the Board
/s/ Honorable John P. Lavelle
Honorable John P. Lavelle December 21, 2000
Director
/s/ Michael J. Leib
Michael J. Leib December 21, 2000
Director
/s/ William J. Spear
William J. Spear December 21, 2000
Director
/s/ Patrick J. Owens Jr.
Patrick J. Owens, Jr. December 21, 2000
Treasurer, CFO
(Principal Accounting and Financial Officer)
December 21, 2000
Page 19
