PROSPECTUS THISTLE GROUP HOLDINGS, CO.
(Proposed Holding Company for Roxborough-Manayunk Federal Savings Bank)
11,902,500 Shares of Common Stock
Thistle Group Holdings, Co. (the "Company"), a Pennsylvania
corporation, is offering up to 10,350,000 shares (which may be increased to
11,902,500 shares under certain circumstances described below) of its common
stock, par value $.10 per share (the "Common Stock"), in connection with the
conversion of FJF Financial, M.H.C. (the "Mutual Holding Company"), from a
federally chartered mutual holding company to a Pennsylvania stock corporation
pursuant to a Plan of Conversion and Reorganization and related Plans of Merger
(collectively, the "Plan" or "Plan of Conversion"). As of March 31, 1998, the
Mutual Holding Company had no material assets other than 87.29% of the common
stock ("Mid-Tier Common Stock") of Thistle Group Holdings, Inc. (the "Mid-Tier
Holding Company"), a Pennsylvania corporation which owns 100% of
Roxborough-Manayunk Federal Savings Bank (the "Bank"), a federal stock savings
bank. The remaining 12.71% of the Mid-Tier Common Stock (the "Public Mid-Tier
Shares") were publicly owned by stockholders, including the Bank's employees,
directors, and stock benefit plans (together, the "Public Stockholders"). After
the Conversion and Reorganization, the Mutual Holding Company and Mid-Tier
Holding Company will cease to exist, the Company will be the sole stockholder of
the Bank, and the Bank will change its name to "Roxborough- Manayunk Bank."
FOR INFORMATION ON HOW TO SUBSCRIBE,
CALL THE STOCK CENTER AT 215-483-4212
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FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 1.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY OTHER FEDERAL
AGENCY OR STATE SECURITIES COMMISSION, NOR HAS SUCH COMMISSION, OFFICE OR
OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=============================================================================================================================
Estimated
Underwriting
Commissions and Estimated
Other Fees and Net Cash
Subscription Price(1) Expenses(2) Proceeds(3)
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<S> <C> <C> <C>
Minimum Per Share........................... $10.00 $.17 $9.83
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Midpoint Per Share.......................... $10.00 $.16 $9.84
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Maximum Per Share........................... $10.00 $.16 $9.84
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Maximum Per Share, as adjusted(4)........... $10.00 $.15 $9.85
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Minimum Total............................... $66,779,270 $1,163,000 $65,616,270
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Midpoint Total.............................. $78,563,700 $1,299,000 $77,264,700
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Maximum Total............................... $90,348,340 $1,435,000 $88,913,340
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Maximum Total, as adjusted(4)............... $103,900,480 $1,590,000 $102,310,480
=============================================================================================================================
</TABLE>
SANDLER O'NEILL & PARTNERS, L.P.
The Date of this Prospectus is May 14, 1998
<PAGE>
(1) Based on (i) the independent appraisal prepared by FinPro, Inc.
("FinPro") dated March 25, 1998, which states that the estimated pro
forma market value of the Common Stock ranged from $76.5 million to
$103.5 million (subject to adjustment to $119.0 million), and (ii) the
Adjusted Majority Ownership Percentage (as defined herein), pursuant to
which 87.29% of the to-be-outstanding shares of Common Stock will be
offered as Conversion Stock in the Offering. See "THE CONVERSION AND
REORGANIZATION Shares Exchange Ratio," and "-Stock Pricing and Number
of Shares to be Issued."
(2) Consists of the estimated costs of the Conversion and Reorganization,
including estimated fixed expenses of $395,000 and market fees to be
paid to Sandler O'Neill & Partners, L.P. Actual expenses may vary from
these estimates. See "PRO FORMA DATA" for the assumptions used in
arriving at these estimates.
(3) Includes proceeds from the sale of shares of Common Stock in the
Offerings to the Bank's employee stock ownership plan and trust (the
"ESOP"). The ESOP intends to purchase 8.0% of the shares sold in the
Offerings. Funds to purchase such shares will be loaned to the ESOP by
the Company. See "THE CONVERSION AND REORGANIZATION-Plan of
Distribution and Selling Commissions" and "MANAGEMENT OF THE
BANK-Benefit Plans."
(4) As adjusted to give effect to the sale of up to an additional 15% of
the shares that may be offered without a resolicitation of subscribers
or any right of cancellation. See "THE CONVERSION-Stock Pricing and
Number of Shares to be Issued."
Of the shares of Common Stock offered hereby, (i) between 6,677,927 and
9,034,834 shares (subject to adjustment to up to 10,390,048 shares) of Common
Stock (the "Conversion Stock") are being offered ("Offering Price Range") for a
subscription price of $10.00 per share (the "Subscription Price") in a
subscription and community offering as described below, and (ii) up to 1,315,166
shares (subject to adjustment to up to 1,512,452 shares) of Common Stock (the
"Exchange Shares") will be issued to Public Stockholders pursuant to an
Agreement of Merger, whereby Public Mid-Tier Shares shall automatically, without
further action by the holder thereof, be converted into and become a right to
receive shares of Common Stock (the "Share Exchange"). See "THE CONVERSION AND
REORGANIZATION - The Exchange Ratio." The simultaneous conversion of the Mutual
Holding Company to stock form pursuant to the Plan of Conversion, the exchange
of all of the Public Mid-Tier Shares for Common Stock, and the offer and sale of
Conversion Stock pursuant to the Plan of Conversion are herein referred to
collectively as the "Conversion and Reorganization."
Non-transferable rights to subscribe for Common Stock in a subscription
offering (the "Subscription Offering") have been granted, in order of priority,
to the following: (i) depositors of the Bank with account balances of $50 or
more as of December 31, 1996 (the "Eligibility Record Date," and such account
holders "Eligible Account Holders"); (ii) the Bank's ESOP in an amount up to 8%
of the shares sold in the Offering; (iii) depositors with aggregate account
balances of $50 or more as of March 31, 1998 (the "Supplemental Eligibility
Record Date") who are not Eligible Account Holders ("Supplemental Eligible
Account Holders"); and (iv) depositors and certain borrowers of the Bank as of
May 6, 1998 (the "Voting Record Date") who are not Eligible Account Holders or
Supplemental Eligible Account Holders ("Other Members"). Subscription rights are
nontransferable; persons found to be transferring subscription rights will be
subject to the forfeiture of such rights and possible further sanctions and
penalties imposed by the OTS. Subject to the prior rights of holders of
subscription rights, the Company is offering the shares of Common Stock not
subscribed for in the Subscription Offering for sale in a concurrent community
offering (the "Community Offering") to certain members of the general public
with preference given to Public Mid-Tier Stockholders and then to natural
persons residing in the Pennsylvania Counties of Philadelphia and Delaware (the
"Local Community"). The Company retains the right, in its discretion, to accept
or reject any order in the Community Offering. The Subscription Offering and
Community Offering are referred to collectively as the "Offerings." Unless
otherwise specifically provided, the term "Offerings" does not include the
shares of Common Stock that will be issued in the Share Exchange.
The minimum number of shares that may be purchased is 25 shares. Except
for the ESOP, no Eligible Account Holder, Supplemental Eligible Account Holder
or Other Member may in their capacities as such purchase in the Subscription
Offering more than 30,000 shares of Conversion Stock; no person, together with
associates of and persons acting in concert with such person, may purchase in
the Offerings
<PAGE>
more than 30,000 shares of Conversion Stock; and no person together with
associates of and persons acting in concert with such person may purchase in the
aggregate more than the number of Conversion Stock that when combined with
Exchange Shares received by such person together with associates of and persons
acting in concert with such person exceeds 90,400 shares of Common Stock,
provided, however, that the maximum purchase limitation may be increased or
decreased at the sole discretion of the Company and the Bank. See "THE
CONVERSION AND REORGANIZATION-The Offerings" and "-Limitations on Conversion
Stock Purchases and Ownership."
The Subscription Offering and Community Offering will terminate at
12:00 noon Philadelphia time, on June 15, 1998 (the "Expiration Date") unless
either or both are extended by the Bank and the Company, with the approval of
the OTS, if necessary. The Bank and the Company may determine to extend the
Community Offering for any reason, whether or not subscriptions have been
received for shares at the minimum, midpoint, or maximum of the Offering Price
Range, as defined herein, and are not required to give subscribers notice of any
such extension. The Community Offering must be completed within 45 days after
the expiration of the Subscription Offering unless extended by the Bank and the
Company with the approval of the OTS, if necessary. Such extensions may not go
beyond June 26, 2000. Orders submitted are irrevocable until the completion or
termination of the Conversion; provided that all subscribers will have their
funds returned promptly, with interest, and all withdrawal authorizations will
be canceled if the Conversion and Reorganization is not completed within 45 days
after the expiration of the Subscription Offering, unless such period has been
extended with the consent of the OTS, if necessary. See "THE CONVERSION AND
REORGANIZATION-The Offerings-Procedure for Purchasing Shares in the Offerings."
The Mid-Tier Common Stock is not currently quoted on any stock
exchange. After the Conversion and Reorganization, shares of the Common Stock
will trade on the Nasdaq National Market under the symbol ("THTL"). See "MARKET
FOR COMMON STOCK."
This Prospectus contains forward-looking statements which reflect the
views of the Company, the Mid-Tier Holding Company, the Bank and the Mutual
Holding Company (the "Primary Parties") regarding future events and financial
performance. Actual results could differ materially from those projected in the
forward-looking statements as a result of risks and uncertainties including, but
not limited to, those found in the "RISK FACTORS" section. The words "believe,"
"expect," and "anticipate" and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of their dates. The Primary
Parties undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise
unless such update is deemed material. The Risk Factors discussion begins on
page 1 of the Prospectus.
<PAGE>
[MAP]
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE
BANK INSURANCE FUND ("BIF"), THE SAVINGS ASSOCIATION INSURANCE FUND ("SAIF") OR
ANY OTHER GOVERNMENT AGENCY.
<PAGE>
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SUMMARY
This summary is qualified in its entirety by the more detailed
information regarding the Company, the Mid-Tier Holding Company, the Bank, and
the Mutual Holding Company, and the Consolidated Financial Statements of the
Mid-Tier Holding Company and the Notes thereto, appearing elsewhere in this
Prospectus.
The Company
Thistle Group Holdings, Co. is a newly created Pennsylvania
corporation, organized in March of 1998. It was organized at the direction of
the Board of Directors of the Bank to acquire and hold all of the common stock
of the Bank ("Bank Common Stock") and to facilitate the Conversion and
Reorganization. The Company has not engaged in any significant business to date.
The Company has applied to the OTS for authority to acquire 100% of the Bank
Common Stock and become a savings and loan holding company. That application has
been approved by the OTS subject to certain conditions. After the Conversion and
Reorganization, the Company will be 100% publicly owned and serve as a holding
company of the Bank. The Common Stock will be registered with the Securities and
Exchange Commission (the "SEC") under Section 12(g) of the Securities and
Exchange Act of 1934, as amended (the "Exchange Act").
The Mid-Tier Holding Company
Thistle Group Holdings, Inc. is a Pennsylvania corporation organized in
May of 1997. It is currently the mid-tier holding company (the "Mid-Tier Holding
Company") for the Bank. At present, 87.29% of the Mid-Tier Common Stock is held
by the Mutual Holding Company. The other 12.71% of the Mid-Tier Common Stock is
held by the Public Stockholders. The Mid-Tier Holding Company has no other
material business or activities other than acting as the holding company of
Roxborough- Manayunk Federal Savings Bank and holding certain equity securities.
Pursuant to the Conversion and Reorganization, the Mid-Tier Holding Company
will, after a series of transactions, merge with the Bank, with the Bank as the
survivor, and the Mid-Tier Holding Company will cease to exist and its
successor, the Company, will be 100% publicly owned. The Company will own 100%
of the Bank.
As of December 31, 1997, the Mid-Tier Holding Company had $276.7
million of total assets, $248.2 million of total liabilities (including $230.6
million of deposits) and $28.5 million of stockholders' equity.
Roxborough-Manayunk Federal Savings Bank
Roxborough-Manayunk Federal Savings Bank is a federally chartered stock
savings bank that was organized on December 31, 1992, as a subsidiary of the
Mutual Holding Company. In connection with the organization of the Mutual
Holding Company (the "MHC Reorganization"), Roxborough-Manayunk Federal Savings
& Loan Association transferred substantially all of its assets and liabilities
to the Bank in exchange for 1,415,000 shares of Bank Common Stock and converted
its charter to that of a federal mutual holding company known as FJF Financial,
M.H.C. As part of the MHC Reorganization, the Bank sold an additional 200,000
shares of Bank Common Stock to certain members of the general public (including
the ESOP and the Management Stock Bonus Plan). Furthermore, 6,000 shares were
subsequently issued pursuant to a second restricted stock plan and there are a
total of 40,000 options to purchase shares of Mid-Tier Common Stock granted
pursuant to the Bank's stock option plans.
On December 31, 1997, pursuant to a reorganization, all Bank Common
Stock was exchanged on a one-for-one basis for Mid-Tier Common Stock. This
resulted in the Bank becoming the 100% owned subsidiary of the Mid-Tier Holding
Company.
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(i)
<PAGE>
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Upon completion of the Conversion and Reorganization, the Bank will
change its name to Roxborough-Manayunk Bank.
FJF Financial, M.H.C.
FJF Financial, M.H.C. is a federally chartered mutual holding company
chartered on December 31, 1992, in connection with the MHC Reorganization. The
Mutual Holding Company's primary asset is 1,415,000 shares of Mid-Tier Common
Stock, which represents 87.29% of the shares of Mid-Tier Common Stock
outstanding as of December 31, 1997. As part of the Conversion and
Reorganization, the Mutual Holding Company will convert from mutual form to a
federal interim stock savings institution and, after a series of transactions,
merge into the Bank with the Bank being the surviving entity. A special
liquidation account for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders of the Bank will also be established by the Bank. The
Bank will then be acquired by the Company and become a wholly owned subsidiary
of the Company. See "THE CONVERSION AND REORGANIZATION - Liquidation Rights" and
" - Effect of the Conversion and Reorganization - Effect on Liquidation Rights."
Purposes of the Conversion and Reorganization
In their decision to pursue the Conversion and Reorganization, the
Primary Parties considered various regulatory uncertainties associated with the
mutual holding company structure including the ability to waive dividends in the
future as well as the general uncertainty regarding a possible elimination of
the federal savings association charter including the potential loss of unitary
thrift holding company powers. See "RISK FACTORS - Potential Elimination of
Thrift Center." In addition, the Primary Parties considered the various
advantages of a fully converted stock holding company form of organization
including: (1) the larger capital base of a fully converted stock holding
company; (2) the enhancement of the Mid-Tier Holding Company's future access to
the capital markets; (3) the increase in the number of outstanding shares of
publicly traded stock (which will increase the liquidity of the Common Stock);
(4) a stock holding company's ability to repurchase shares of its common stock
without increasing the Mutual Holding Company's percentage interest in the
Mid-Tier Holding Company; and (5) recent consolidations in the Pennsylvania
market and the greater ability to acquire other financial institutions or
branches of other financial institutions. For additional information see "THE
CONVERSION AND REORGANIZATION - Purposes of the Conversion and Reorganization."
Description of the Conversion and Reorganization
On February 18, 1998, the Board of Directors of the Mid-Tier Holding
Company, the Bank and the Mutual Holding Company adopted the Plan which has
subsequently been amended and adopted by the Company. Pursuant to the Plan, the
Mid-Tier Holding Company, through a series of transactions, will cease to exist
and the Bank will be acquired by the Company, and become a wholly owned
subsidiary of the Company. The outstanding Public Mid-Tier Shares, which
amounted to 206,000 shares or 12.71% of the outstanding Mid-Tier Common Stock at
December 31, 1997, will, subject to any dissenters' rights, be converted into
the Exchange Shares pursuant to the Exchange Ratio, which will result in the
holders of such shares owning in the aggregate approximately 12.71% of the
Common Stock to be outstanding upon the completion of
the Conversion and Reorganization. The remaining shares, or approximately 87.29%
of the Common Stock to be outstanding following the completion of the Conversion
and Reorganization shall be sold in the Offerings. For a detailed discussion of
the Conversion and Reorganization, see "THE CONVERSION AND REORGANIZATION."
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(ii)
<PAGE>
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The following diagrams outline (i) the current organization structure
of the Mutual Holding Company, the Mid-Tier Holding Company, and the Bank and
(ii) the organizational structure of the Company and the Bank following the
Conversion and Reorganization.
Current organizational structure:
-------------------------------- --------------------------
| | | |
| Mutual Holding Company | | Minority Stockholders |
| | | |
-------------------------------- -------------------------
| |
| 87.29% 12.71% |
| |
-----------------------------------
| Mid-Tier |
| Holding Company |
-----------------------------------
| 100%
-----------------------------------
| |
| Bank |
| |
-----------------------------------
Organizational structure following the Conversion and Reorganization:
-----------------------------------
| Public Stockholders |
-----------------------------------
| 100%
-----------------------------------
| Company |
-----------------------------------
| 100%
-----------------------------------
| Bank |
-----------------------------------
Conditions to the Conversion and Reorganization
Pursuant to OTS regulations, consummation of the Conversion and
Reorganization is conditioned upon the approval of the Plan by the OTS, as well
as (1) the approval of the holders of at least a majority of the total number of
votes eligible to be cast by the members of the Mutual Holding Company (which
consist of qualifying depositors and borrowers of the Bank) ("Members") as of
the close of business on
May 6, 1998 (the "Voting Record Date"), at a special meeting of Members called
for the purpose of submitting the Plan for approval (the "Members' Meeting"),
and (2) the approval of the holders of at least two-thirds of the shares of the
outstanding Mid-Tier Common Stock held by the Mutual Holding Company and the
Public Stockholders (collectively, the "Stockholders"), as of the Voting Record
Date, at a special meeting of stockholders called for the purpose of considering
the Plan (the "Stockholders' Meeting"). In addition, the Primary Parties have
conditioned the consummation of the Conversion and Reorganization on the
approval of the Plan by at least a majority of the votes cast, in person or by
proxy, by the Public Stockholders at the Stockholders' Meeting. As of December
31, 1997, directors and executive officers of the Mid-Tier Holding Company and
the Bank as a group (ten persons) beneficially
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(iii)
<PAGE>
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owned 99,200 shares (excluding options to purchase 40,000 shares) or 48.15% of
the outstanding Public Mid-Tier Shares, which shares can also be expected to be
voted in favor of the Plan at the Stockholders' Meeting. Because a significant
portion of such shares is held by executive officers or directors of the
Mid-Tier Holding Company, the Plan should be approved at the Stockholders'
Meeting. The Conversion and Reorganization is also contingent on obtaining
various approvals from the OTS. The Mutual Holding Company intends to vote its
shares of Mid-Tier Common Stock, which amounts to 87.29% of the outstanding
shares, in favor of the Plan at the Stockholders' Meeting.
The Offerings
Pursuant to the Plan and in connection with the Conversion and
Reorganization, the Company is offering up to 9,034,834 shares (subject to
adjustment of up to 10,390,048 shares) of Conversion Stock in the Offerings.
Conversion Stock is first being offered in the Subscription Offering, with
nontransferable subscription rights being granted, in the following order of
priority: (i) First Priority, to depositors of the Bank with account balances of
$50.00 or more as of the close of business on December 31, 1996 ("Eligible
Account Holders"); (ii) Second Priority, to the ESOP; (iii) Third Priority, to
depositors of the Bank with account balances of $50.00 or more as of the close
of business on March 31, 1998 ("Supplemental Eligible Account Holders"); and
(iv) Fourth Priority, depositors of the Bank as of the Voting Record Date (other
than Eligible Account Holders and Supplemental Eligible Account Holders) and
certain borrowers as of December 31, 1992 ("Other Members"). Subscription rights
will expire if not exercised by Noon, Philadelphia time, on June 15, 1998,
unless extended.
Subject to the prior rights of holders of subscription rights,
Conversion Stock not subscribed for in the Subscription Offering is being
offered first to Public Stockholders and then to certain members of the general
public to whom a copy of this Prospectus and order form is delivered in the
Community Offering with preference given to Public Mid-Tier Stockholders and
then to natural persons residing in the Local Community. The Primary Parties
reserve the absolute right to reject or accept any orders in the Community
Offering, in whole or in part, either at the time of receipt of an order or as
soon as practicable following the Expiration Date. The closing of all shares
sold in the Offerings will occur simultaneously, and all shares of Conversion
Stock will be sold at a uniform price of $10.00 per share.
Purchase Limitations
The Plan sets forth various purchase limitations which are applicable
in the Offerings. The minimum purchase is 25 shares. With the exception of the
ESOP, the maximum number of shares of Conversion Stock which may be purchased by
any person (or persons through a single account) shall not exceed, when combined
with Exchange Shares, $300,000 (or 30,000 shares). Further, the Plan provides
that, except for the Tax Qualified Employee Stock Benefit Plans, the maximum
number of shares of
Conversion Stock which may be purchased in all categories in the Conversion and
Reorganization by any person (or persons through a single account), together
with any associate or group of persons acting in concert, when combined with
Exchange Shares, equals $904,000 (or 90,400 shares). Directors and officers may
not purchase in the aggregate, when combined with Exchange Shares, more than 29%
of the total number of shares of Conversion Stock sold in the Offerings,
including any shares which may be issued in the event of an increase in the
maximum of the Offering Price Range to reflect changes in market, financial, or
economic conditions after the commencement of the Subscription Offering and
prior to the completion of the Offerings. Notwithstanding anything to the
contrary, except as otherwise required by the OTS, Public Stockholders will not
have to sell Common Stock or be limited in receiving Exchange Shares even if
their ownership of Common Stock, when converted pursuant to the Exchange Ratio
(as defined herein), would exceed the above limitation.
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(iv)
<PAGE>
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Stock Pricing and Number of Shares to be Issued in the Conversion and
Reorganization
The Plan of Conversion requires that the aggregate purchase price of
the Conversion Stock be based on the appraisal of the pro forma market value of
the Mid-Tier Holding Company and the Bank on a consolidated basis, as determined
on the basis of an independent valuation. The Primary Parties have retained
FinPro to prepare such independent valuation (the "Independent Valuation"). The
Independent Valuation was prepared based on the assumption that the aggregate
amount of Conversion Stock sold in the Offerings would be equal to the estimated
pro forma market value of the Mid-Tier Holding Company and the Bank, on a
consolidated basis, multiplied by the percentage of the outstanding shares of
Mid-Tier Common Stock held by the Mutual Holding Company as of the date of the
appraisal, subject to certain adjustments described in "THE CONVERSION AND
REORGANIZATION - The Exchange Ratio." The Independent Valuation states that as
of March 16, 1998, the estimated pro forma market value of the Company ranged
from a minimum of $76.5 million to a maximum of $103.5 million with a midpoint
of $90.0 million. Based on the percentage of the outstanding shares of Mid-Tier
Common Stock held by the Mutual Holding Company as of the date of the appraisal,
and the adjustments described herein, the estimated pro forma market value of
the Mutual Holding Company was multiplied by 87.29% to determine the dollar
amount of Conversion Stock to be offered in the Offerings, which ranges from a
minimum of $66,779,270 (i.e., 6,677,927 shares of Conversion Stock) to a maximum
of $90,348,340 (i.e., 9,034,834 shares of Conversion Stock), with a midpoint of
$78,563,700 (i.e., 7,856,370 shares of Conversion Stock). The range of the
aggregate dollar amount and number of shares of Conversion Stock offered in the
Offerings is referred to herein as the "Offering Price Range."
The full text of the Independent Valuation describes the procedures
followed, the assumptions made, limitations on the review undertaken and matters
considered, which included the lack of a trading market for Mid-Tier Common
Stock, but was not dependent thereon. The Appraisal has been filed as an exhibit
to the Independent Valuation Registration Statement and Application for
Conversion of which this Prospectus is a part, and is available in the manner
set forth under "ADDITIONAL INFORMATION." The Independent Valuation is not
intended and should not be construed as a recommendation of any kind as to the
advisability of purchasing such stock.
Depending upon market or financial conditions following the
commencement of the Subscription Offering, the total number of shares of
Conversion Stock to be sold in the Offerings may be increased by up to 15%, to
10,390,048 shares, without a resolicitation of subscribers. In the event market
or financial conditions change so as to cause the aggregate purchase price of
the shares to be below the minimum of the Offering Price Range (i.e.
$66,779,270) or more than 15% above the maximum of such range (i.e.
$103,900,480) purchasers will be resolicited (i.e., permitted to continue their
orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
subscription funds will be promptly refunded with interest at the Bank's
passbook rate of interest, or be permitted to modify or rescind their
subscriptions). Based upon current market and financial conditions and recent
practices and policies of the OTS, in the event the Company receives orders for
Conversion Stock in excess of $90,348,340 (the maximum of the Offering Price
Range) and up to $103,900,480 (the maximum of the Offering Price Range, as
adjusted by 15%) the Company may be required by the OTS to accept all such
orders. No assurances, however, can be made that the Company will receive orders
for Conversion Stock in excess of the maximum of the Offering Price Range or
that, if such orders are received that all such orders will be accepted.
The Exchange Ratio
OTS regulations and policies provide that in a conversion of a mutual
holding company to stock form, stockholders other than the mutual holding
company will be entitled to exchange their shares of subsidiary savings bank (or
mid-tier holding company) common stock for common stock of the converted holding
company, provided that the bank and the mutual holding company demonstrate to
the satisfaction
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(v)
<PAGE>
- --------------------------------------------------------------------------------
of the OTS that the basis for the exchange is fair and reasonable. The Boards of
Directors of the Primary Parties have determined that each Public Mid-Tier Share
will on the effective date be automatically converted into and become the right
to receive a number of Exchange Shares determined pursuant an exchange ratio
(the "Exchange Ratio") which was established as the ratio that ensures that
after the Conversion and Reorganization, subject to certain adjustments
described in "THE CONVERSION AND REORGANIZATION - The Exchange Ratio," the
percentage of the to-be outstanding shares of Common Stock issued to Public
Stockholders in exchange for their Public Mid-Tier Holding Company shares will
be approximately equal to the percentage of the outstanding shares of Mid-Tier
Common Stock held by Public Stockholders immediately prior to the Conversion and
Reorganization, with any fractional shares being paid in cash. The total number
of shares held by Public Stockholders after the Conversion and Reorganization
would also be affected by any purchases by such persons in the Offerings.
Based on the Independent Valuation, the percentage of the outstanding
shares of Mid-Tier Common Stock held by Mutual Holding Company as of the date of
the Independent Valuation, and adjustments described herein, the following table
sets forth, based upon the minimum, midpoint, maximum and 15% above the maximum
of the Offering Price Range, the following: (i) the total number of shares of
Conversion Stock and Exchange Shares to be issued in the Conversion and
Reorganization, (ii) the percentage of the total Common Stock represented by the
Conversion Stock and the Exchange Shares, and (iii) the Exchange Ratio. The
table assumes there is no cash paid in lieu of issuing fractional Exchange
Shares.
<TABLE>
<CAPTION>
Total Shares of
Common Stock
Conversion Stock Exchange Shares to be Exchange
to be Issued to be Issued Outstanding Ratio
------------ ------------ ----------- -----
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Minimum................. 6,677,927 87.29% 972,073 12.71% 7,650,000 4.7188
Midpoint................ 7,856,370 87.29% 1,143,630 12.71% 9,000,000 5.5516
Maximum................. 9,034,834 87.29% 1,315,166 12.71% 10,350,000 6.3843
Adjusted maximum........ 10,390,048 87.29% 1,512,452 12.71% 11,902,500 7.3420
</TABLE>
Options to purchase Public Mid-Tier Shares will also be converted into
and become options to purchase Common Stock. As of the date of this Prospectus
there were outstanding options to purchase 40,000 shares of Mid-Tier Common
Stock at an average exercise price of $10.75 per share. The number of shares of
Common Stock to be received upon exercise of such options will be determined
pursuant to the Exchange Ratio. The aggregate exercise price, duration, and
vesting schedule of such options will not be affected. If such options are
exercised prior to the effective date of the Conversion and Reorganization, then
there will be an increase in the number of shares of Common Stock issued to
Public Stockholders in the Share Exchange, and an increase in the Exchange
Ratio. The Mid-Tier Holding Company has no plans to grant additional stock
options prior to the Effective Date.
Delivery and Exchange of Certificates
Upon consummation of the Conversion and Reorganization, holders of
Public Mid-Tier Shares in certificate form (other than the Mutual Holding
Company) will receive a transmittal letter with instruction on delivery of
certificates for exchange. See "THE CONVERSION AND REORGANIZATION - Delivery and
Exchange of Certificates." Upon surrender of such certificates to an agent
appointed by the Company (the "Exchange Agent"), the Public Stockholder will be
entitled to receive in exchange therefore a certificate or certificates
representing the number of full shares of Common Stock to which he or she is
entitled based on the Exchange Ratio. The Exchange Agent will provide each
stockholder of record a letter of transmittal with instructions for the exchange
of shares.
- --------------------------------------------------------------------------------
(vi)
<PAGE>
- --------------------------------------------------------------------------------
Holders of Public Mid-Tier Shares should not forward shares to anyone until they
have received instructions from the Exchange Agent.
Comparison Of Stockholder Rights.
Pursuant to the Plan, the Company will become the stock holding company
for the Bank. The Mid-Tier Holding Company will cease to exist. Therefore, the
Articles of Incorporation and Bylaws of the Company and Pennsylvania corporate
law will govern stockholder rights after the Conversion and Reorganization. Both
the Company and the Mid-Tier Holding Company are Pennsylvania corporations. The
Articles of Incorporation of the Company, however, vary from those of the
Mid-Tier Holding Company. Differences in the Articles of Incorporation are
related primarily to indemnification, limitation of liability and anti-takeover
provisions. See "COMPARISON OF STOCKHOLDERS' RIGHTS" and "RESTRICTIONS ON
ACQUISITIONS OF THE COMPANY."
Benefits of Conversion and Reorganization to Directors, Officers and Employees
The Company does not intend to enter into any new employment
agreements. John F. McGill, Sr., Chairman of the Board, John F. McGill, Jr.,
President and Chief Executive Officer, and Jerry Naessens, Chief Financial
Officer, all have three-year employment agreements with the Bank. See
"MANAGEMENT OF THE BANK - Employment Agreements." The Company currently intends
to adopt certain stock benefit plans for the benefit of directors and employees
of the Company and the Bank. The proposed benefit plans are as follows: (i) a
Stock Option Plan (the "Stock Option Plan"), pursuant to which a number of
authorized but unissued shares of Common Stock equal to 10% of the Conversion
Stock to be sold in the Offerings (903,348 shares at the maximum of the Offering
Price Range) may be reserved for issuance pursuant to stock options and stock
appreciation rights to directors, officers and employees; and (ii) a Management
Recognition and Retention Plan (the "Recognition Plan" or "RSP"), which may
purchase a number of shares of Common Stock, with funds contributed by the
Company, either from the Company or in the open market, equal to an amount which
will equal 4.0% of the total Conversion Stock issued in the Conversion and
Reorganization (361,393 shares at the maximum of the Offering Price Range) for
distribution to directors, officers and employees. These options will be issued
at no risk to the grantees and the restricted shares will be issued at no cost
to the recipients. Recipients will, however, be required to pay both federal and
applicable state taxes on the value of Common Stock received pursuant to the
Recognition Plan. The Company has not determined when it will implement the
Stock Option Plan and the Recognition Plan. Assuming the purchase by the
Recognition Plan of 361,393 restricted shares (4% at the maximum of the Offering
Price Range) at $10.00 per share, the total cost to the Company would be
$3,613,930, amortized over a five-year period. If the plans are implemented
prior to one year following the consummation of the Conversion and
Reorganization, the Company will submit such plans to stockholders for approval
at an annual or special meeting held at least six months following the
consummation of the Conversion and Reorganization. In such event, OTS
regulations permit individual members of management to receive up to 25% of the
shares reserved pursuant to any stock option or non-tax qualified stock benefit
plan, and directors who are not employees to receive up to 5% of such stock (or
stock options) reserved individually and up to 30% in the aggregate under any
such plan. Furthermore, any plans adopted within one year of the Conversion and
Reorganization will require a downward adjustment to reflect the number of
shares and options issued pursuant to the Bank's 1994 stock plans. See
"MANAGEMENT OF THE BANK - Proposed Future Stock Benefit Plans."
In the event that the Recognition Plan purchases shares of Common Stock
in the open market with funds contributed by the Company, the cost of such
shares initially will be deducted from the stockholders' equity of the Company,
but the number of outstanding shares of Common Stock will not increase and
stockholders accordingly will not experience dilution of their ownership
interest. In the event that the Recognition Plan purchases shares of Common
Stock from the Company with funds contributed by the Company, total
stockholders' equity would neither increase or decrease, but under such
- --------------------------------------------------------------------------------
(vii)
<PAGE>
- --------------------------------------------------------------------------------
circumstances stockholders would experience dilution of their ownership
interests (by approximately 3.4% at the maximum of the Offering Price Range) and
per share stockholders' equity and per share net earnings would decrease as a
result of an increase in the number of outstanding shares of Common Stock. In
either case, the Company will incur operating expense and increases in
stockholders' equity as the shares held by the Recognition Plan are granted and
issued in accordance with the terms thereof. For a presentation of the effects
of anticipated purchases of Common Stock by the Recognition Plan, see "PRO FORMA
DATA."
In addition, the ESOP intends to purchase up to 8.0% of the Conversion
Stock issued in the Conversion and Reorganization (e.g., 722,788 shares or $7.2
million of Conversion Stock at the maximum of the Offering Price Range) with a
loan from the Company. See "USE OF PROCEEDS." In the event that there are
insufficient shares available to fill the ESOP's order due to an
oversubscription by Eligible Account Holders, the offering range will be
increased above the maximum and the ESOP shall have a priority right to purchase
any shares exceeding the maximum of the Offering Valuation Range, up to an
aggregate of 8% of the Conversion Stock. See "MANAGEMENT OF THE BANK - Employee
Stock Ownership Plan" and "RISK FACTORS - Possible Dilutive Effective of
Issuance of Additional Shares."
The foregoing plans are in addition to stock option and restricted
stock plans which were adopted by the Bank in 1992 and 1994. After the creation
of the Mid-Tier Holding Company as the Mid-Tier Holding Company of the Bank,
these plans remained as benefit plans of the Bank. The stock options and
restricted stock awards made pursuant to these plans are currently for Mid-Tier
Common Stock. These plans will continue in existence after the Conversion and
Reorganization as plans of the Company. See "MANAGEMENT OF THE BANK - Benefit
Plans" and "THE CONVERSION AND REORGANIZATION - Effects of the Conversion and
Reorganization - Effect on Existing Option Plans."
Use of Proceeds
Net proceeds from the sale of the Conversion Stock are estimated to be
between $65.6 million and $88.9 million, depending on the number of shares sold
and the expenses of the Conversion and Reorganization. See "PRO FORMA DATA." The
Company plans to contribute to the Bank 50% of the net proceeds from the
Offerings and retain the remainder of the net proceeds. The Company intends to
use a portion of the net proceeds retained by it to make a loan directly to the
ESOP to enable the ESOP to purchase 8.0% of the Conversion Stock to be issued in
the Conversion and Reorganization. The amount of the loan is expected to be
between $5.3 million and $7.2 million at the minimum and maximum of the Offering
Price Range, respectively. It is anticipated that the loan to the ESOP will have
a term of not less than 15 years and a fixed rate of interest at the prime rate
as of the date of the loan. See "MANAGEMENT OF THE BANK - Benefit Plans -
Employee Stock Ownership Plan." The remaining net proceeds will initially be
lent by the Company to the Bank and be used by the Bank to invest primarily in
short-term interest-bearing deposits and short and intermediate term marketable
securities. The funds retained by the Company may be used to support the future
expansion of operations or diversification into other banking-related businesses
and for other business or investment purposes, including the acquisition of
other financial institutions and/or branch offices, although there are no
current plans, arrangements, understandings or agreements regarding such
expansion, diversification or acquisitions. In addition, subject to applicable
limitations, such funds also may be used in the future to repurchase shares of
Common Stock. See "THE CONVERSION AND REORGANIZATION - Certain Restrictions on
Purchases or Transfers of Shares after the Conversion and Reorganization." Funds
contributed to the Bank from the Company will be used for general business
purposes. The proceeds will be used to support the Bank's lending and investment
activities and thereby enhance the Bank's capabilities to serve the borrowing
and other financial needs of the communities it serves. The Bank plans to
initially use the proceeds to invest primarily in short-term interest-bearing
deposits and short and intermediate term marketable securities. See "USE OF
PROCEEDS."
- --------------------------------------------------------------------------------
(viii)
<PAGE>
- --------------------------------------------------------------------------------
Dividend Policy
Since the completion of the first full quarter after the MHC
Reorganization (i.e. March 31, 1993), until the adoption of the Plan, the
Mid-Tier Holding Company or the Bank has paid a regular quarterly cash dividend.
For the fiscal year ending December 31, 1997, that dividend was $0.20 per
quarter, and $0.80 per year. Following the consummation of the Conversion and
Reorganization, the Board of Directors of the Company will consider whether to
pay cash dividends on the Common Stock. However, no assurance can be given as to
the amount of a dividend or that a dividend will be paid or if paid that the
dividend will not be reduced or eliminated in future periods. Pending the
completion of the Conversion and Reorganization, the Mid-Tier Holding Company
intends to continue paying its regular quarterly cash dividend. For a period of
one year following the completion of the Conversion and Reorganization, the
Company will not pay any dividends that would be treated for tax purposes as a
return of capital nor take any actions or propose such dividends. See "DIVIDEND
POLICY."
Market For Common Stock
The Company has received conditional approval to have the Common Stock
listed on the Nasdaq National Market under the symbol "THTL". See "MARKET FOR
COMMON STOCK."
Dissenters' Rights and Rights of Appraisal
In connection with the Conversion and Reorganization, pursuant to
Pennsylvania Business Corporation Law ("PBCL"), Public Stockholders have a right
to dissent and obtain fair value of their shares as determined by a court by
complying with the terms of Subchapter D of the PBCL. See "THE CONVERSION AND
REORGANIZATION - Dissenters' Rights."
Prospectus Delivery and Procedure for Purchasing Shares
To ensure that each purchaser receives a prospectus at least 48 hours
prior to the Expiration Date in accordance with Rule 15c2-8 under the Exchange
Act, no prospectus will be mailed any later than five days prior to such date or
hand delivered any later than two days prior to such date. Execution of the
order form will confirm receipt or delivery in accordance with Rule 15c2-8.
Order forms will be distributed only with a prospectus. The Primary Parties will
accept for processing orders submitted on original order forms with an executed
certification. In their discretion, the Primary Parties may accept photocopies
or facsimile copies of order forms or the form of certification. Payment by
cash, check, money order, bank draft or debit authorization to an existing
account at the bank must accompany the order form. See "THE CONVERSION AND
REORGANIZATION - Procedures for Purchasing Shares in the Offerings."
The Primary Parties have retained Sandler O'Neill & Partners, L.P.
("Sandler O'Neill") as consultant and advisor in connection with the Offerings
and to assist in soliciting subscriptions in the Offerings on a best efforts
basis. See "THE CONVERSION AND REORGANIZATION - The Offerings" " - Subscription
Offering," "- Community Offering," and " - Marketing Arrangements."
Risk Factors
See "RISK FACTORS" for a discussion of certain factors that should be
considered by prospective investors.
- --------------------------------------------------------------------------------
(ix)
<PAGE>
- --------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth selected consolidated historical
financial and other data of the Mid- Tier Holding Company (including its
subsidiaries) for the periods and at the dates indicated. The information is
derived in part from and should be read in conjunction with the Consolidated
Financial Statements and Notes thereto of the Mid-Tier Holding Company contained
elsewhere herein.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(In Thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total Amount of:
Assets ..................................... $ 276,650 $ 294,332 $ 288,199 $ 273,571 $ 277,304
Loans receivable, net ...................... 96,280 98,626 100,271 95,524 98,622
Loans held for sale (1) .................... 1,155 2,147 1,613 1,199 --
Mortgage-backed securities:
Available for sale (1) ................... 111,486 93,410 98,315 98,476 108,532
Investment securities:
Held to maturity ......................... 34,529 46,464 44,024 49,325 29,137
Available for sale (1) ................... 3,698 2,631 1,566 755 750
Deposits ................................... 230,558 256,546 250,179 241,230 244,306
FHLB advances .............................. 7,884 7,884 7,884 7,884 7,884
Stockholders' equity ....................... 28,470 24,581 25,148 20,477 21,217
Book value per share (2) ................... 17.56 15.16 15.51 12.68 13.14
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(In Thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Interest income .............................. $ 20,582 $ 20,264 $ 19,790 $ 18,096 $ 18,067
Interest expense ............................. 11,002 11,069 10,646 8,791 9,087
--------- --------- --------- --------- ---------
Net interest income ........................ 9,580 9,195 9,144 9,305 8,980
Provision for loan losses .................... 120 139 135 60 94
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses ................. 9,460 9,056 9,009 9,245 8,886
Non-interest income .......................... 2,808 583 544 475 1,230
Non-interest expense ......................... 6,824 9,890(3) 7,234 6,625 6,406
Income (loss) before income taxes and
change in accounting method ................ 5,444 (251) 2,319 3,095 3,710
Income tax expense ........................... 2,090 112 887 1,190 1,189
--------- --------- --------- --------- ---------
Income (loss) before change in accounting
method ..................................... 3,354 (363) 1,432 1,905 2,521
--------- --------- --------- --------- ---------
Cumulative effect on prior years of change
in accounting method for income tax ........ -- -- -- -- 407(4)
--------- --------- --------- --------- ---------
Net income (loss) ............................ $ 3,354 $ (363) $ 1,432 $ 1,905 $ 2,928
========= ========= ========= ========= =========
Basic earnings (loss) per share .............. $ 2.07 $ (.22) $ .88 $ 1.18 $ 1.81
========= ========= ========= ========= =========
Diluted earnings (loss) per share ............ $ 2.04 $ (.22) $ .88 $ 1.18 $ 1.81
========= ========= ========= ========= =========
Cash dividends per share ..................... $ .80 $ .80 $ .80 $ .80 $ .70
========= ========= ========= ========= =========
</TABLE>
(footnotes on following page)
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(x)
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At or For the Year Ended December 31, (5)
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ----------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets (net income (loss))
divided by average total assets)........................ 1.18% (.13)%(3) .51% .69% 1.11%
Return on average equity (net income (loss))
divided by average equity).............................. 12.41 (1.45)(3) 5.98 9.02 14.99
Stockholders' equity to assets............................ 10.27 8.35 8.72 7.48 7.65
Net interest margin (6)................................... 3.50 3.29 3.37 3.84 3.34
Interest rate spread (6).................................. 3.14 2.99 3.06 3.65 3.16
Asset Quality Ratios:
Non-performing loans to total loans (7)................... .74 3.04 2.13 1.31 2.29
Non-performing assets to total assets (7)................. .30 1.08 .82 .49 .88
Allowance for loan losses as a percent of non-performing
loans at end of period ................................... 109.36 21.24 17.43 33.36 19.96
Allowance for loan losses as a percent
of total average loans at end of period................. .77 .63 .46 .43 .53
Net charge-offs (recoveries) as a percent of average loans (.08) .02 .09 .10 .03
Other Data:
Number of:
Real estate loans outstanding........................... 2,218 2,338 2,547 2,263 2,444
Deposit accounts........................................ 30,832 36,038 35,718 34,495 34,265
Full service offices.................................... 6 8 8 8 8
</TABLE>
- -----------------------
(1) Loans classified as held for sale and investment securities and
mortgage-backed securities classified as available for sale are carried at
fair value.
(2) Book value per share represents stockholders' equity divided by the number
of shares of Mid-Tier Common Stock or Bank Common Stock (as applicable)
issued and outstanding.
(3) Includes a special assessment of $1,533,000 to recapitalize the Savings
Association Insurance Fund ("SAIF") and a $1,181,000 write-down of lease
receivables.
(4) Represents the adoption of Statement of Financial Accounting Standards
("SFAS") No. 109.
(5) With the exception of end of period ratios, all ratios are based on average
monthly balances during the indicated periods.
(6) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities (which do not include non-interest-bearing accounts), and net
interest margin represents net interest income as a percent of average
interest-earnings assets.
(7) Non-performing loans consist of non-accrual loans and accruing loans 90
days or more overdue; and non-performing assets consist of non-performing
loans and real estate owned, in each case net of related reserves.
- --------------------------------------------------------------------------------
(xi)
<PAGE>
- --------------------------------------------------------------------------------
RECENT DEVELOPMENTS
Selected Consolidated Financial and Other Data
Set forth below are the summaries of historical financial and other
data. Financial data as of March 31, 1998 and for the three months ended March
31, 1998 and 1997, are unaudited. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
have been included. The summary of operations and other data for the three
months ended March 31, 1998 are not necessarily indicative of the results of
operations for the fiscal year ending December 31, 1998 or any other period.
This information should be read in conjunction with the Consolidated Financial
Statements and Notes thereto presented elsewhere in this Prospectus.
At At
March 31, December 31,
--------- ------------
1998 1997
--------- ------------
(In Thousands, except per share
data)
Total Amount of:
Assets............................ $281,439 $276,650
Loans receivable, net ............ 95,262 96,280
Loans held for sale (1)........... 2,761 1,155
Mortgage-backed securities:
Available for sale (1).......... 108,206 111,486
Investment securities:
Held to maturity................ 32,870 34,529
Available for sale (1).......... 4,822 3,698
Deposits.......................... 238,229 230,558
FHLB advances..................... 7,884 7,884
Stockholders' equity.............. 29,302 28,470
Book value per share (2).......... 18.07 17.56
Three Months Ended March 31,
-----------------------------
1998 1997
-------- -------
(In Thousands, except per share
data)
Interest income..................... $4,827 $5,438
Interest expense.................... 2,627 2,898
------ ------
Net interest income............... 2,200 2,540
Provision for loan losses........... 15 30
------ ------
Net interest income after
provision for loan losses........ 2,185 2,510
Non-interest income................. 121 132
Non-interest expense................ 1,644 1,716
Income before income taxes.......... 663 925
Income tax expense.................. 243 321
------ ------
Net income.......................... $ 420 $ 604
====== ======
Basic earnings per share............ $ .26 $ .37
====== ======
Cash dividends per share............ $ .20 $ .20
====== ======
(footnotes on following page)
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(xii)
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At or For the
Three Months Ended
March 31, (3)
----------------------------
1998 1997
------------ -----------
<S> <C> <C>
Performance Ratios:
Return on average assets (net income divided by average total assets)........... .60% .80%
Return on average equity (net income divided by average equity)................. 6.04 9.56
Stockholders' equity to assets.................................................. 10.41 10.29
Net interest margin (4)......................................................... 3.33 3.47
Interest rate spread (4)........................................................ 2.98 3.19
Asset Quality Ratios:
Non-performing loans to total loans (5)......................................... .59 1.21
Non-performing assets to total assets (5)....................................... .27 .46
Allowance for loan losses as a percent of non-performing loans at end of period 133.00 53.00
Allowance for loan losses as a percent of total average loans at end of period.. .76 .66
Net charge-offs (recoveries) as a percent of average loans (no chargeoffs)...... -- --
Other Data:
Number of:
Real estate loans outstanding................................................. 1,761 1,804
Deposit accounts.............................................................. 31,303 36,281
Full service offices.......................................................... 6 8
</TABLE>
- ---------------------
(1) Loans classified as held for sale are carried at the lower of aggregate
cost or fair value while investment securities and mortgage-backed
securities classified as available for sale are carried at fair value.
(2) Book value per share represents stockholders' equity divided by the
number of shares of Bank Common Stock issued and outstanding.
(3) With the exception of end of period ratios, all ratios are based on
average monthly balances during the indicated periods and are
annualized where appropriate.
(4) Interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of
interest-bearing liabilities (which do not include non-interest-bearing
accounts), and net interest margin represents net interest income as a
percent of average interest-earnings assets.
(5) Non-performing loans consist of non-accrual loans and accruing loans 90
days or more overdue; and non-performing assets consist of
non-performing loans and real estate owned, in each case net of related
reserves.
- --------------------------------------------------------------------------------
(xiii)
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
Comparison of Financial Condition at March 31, 1998 and December 31, 1997
Total assets increased by $4.8 million or 1.7% from December 31, 1997
to March 31, 1998 primarily due to an increase of cash of $8.8 million, or 4.4%.
Cash increased due to increased deposits and decreased investment securities
held to maturity and mortgage-backed securities. Mortgage-backed securities
available for sale and investment securities held to maturity decreased $3.3
million or 3.0% and $1.7 million or 4.8%, respectively, due to maturities.
Deposits increased $7.6 million primarily due to increases in certificates of
deposit. Total stockholders' equity increased $832,000 as a result of net income
of $420,000 and an increase in the unrealized gain on securities available for
sale of $453,000, less cash dividends paid of $41,200.
Non-Performing Assets and Delinquencies
Loans accounted for on a non-accrual basis decreased $150,000 from
$716,000 to $565,000. $76,000 of this represents three foreclosures transferred
to real estate owned. The remaining decrease involved three loans reclassified
as performing. Nonperforming assets decreased from $832,000 at December 31, 1997
to $758,000 at March 31, 1998 due to the above mentioned loans reclassified as
performing.
Comparison of the Results of Operations for the Three Months Ended March 31,
1998 and 1997
General. Net income decreased $184,000 or 30.5% from $604,000 for the
three months ended March 31, 1997 to $420,000 for the three months ended March
31, 1998. The annualized return on average assets decreased from .80% to .60%
for the three months ended March 31, 1997 and 1998, respectfully.
Net Interest Income. Net interest income decreased $340,000 or 13.3%
from $2,540,000 for the three months ended March 31, 1997 to $2.2 million for
the three months ended March 31, 1998. The decrease was primarily due to a
decrease in the average balances of loans and mortgage-backed and investment
securities, offset somewhat by a decrease in interest expense due to a decrease
in the average balance of savings deposits as a result of the sale of two branch
offices. The average balance of loans decreased due to repayment, while the
average balance of mortgage-backed securities and investment securities
decreased due primarily to the Bank's decision to accumulate liquid assets in
anticipation of the Branch Sale. In May 1997, the Bank sold $37,237,000 of
deposits to a local financial institution and two branch offices ("Branch
Sale"). See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Changes in Financial Condition."
Interest Income. Interest income decreased $611,000 for the three
months ended March 31, 1998 compared to the same period ended March 31, 1997.
The decrease can be attributed to the average balance of earning assets
decreasing $25.4 million due to the Branch Sale and average yield on
interest-earning assets decreasing from 7.43% to 7.30% due to generally
declining market rates of interest.
Interest Expense. Interest expense decreased $271,000 from March 31,
1997 to March 31, 1998 due to a decrease in the average balance of
interest-bearing liabilities by $28,938,000 as previously discussed, offset
somewhat by an increase of cost of funds from 4.24% to 4.32%.
Provision for Losses on Loans. The provision for loan losses decreased
$15,000 due to a decrease in nonperforming loans. See also "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
Comparison of Operating Results for Years Ended December 31, 1997 and December
31, 1996 - Provision for Loan Losses."
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(xiv)
<PAGE>
- --------------------------------------------------------------------------------
Other Income. Other income decreased $10,000 primarily due to a gain
on the sale of real estate owned in 1997 not repeated in 1998.
Other Expense. Other expenses decreased $73,000 primarily due to a
decrease in compensation and various branch expenses accrued due to the Branch
Sale.
Income Tax Expenses. Income tax expense decreased to $243,000 for the
three months ended March 31, 1998 compared to $321,000 for the three months
ended March 31, 1997 due to decreased earnings.
Liquidity and Capital Resources
Management monitors its risk-based capital and leverage capital ratios
in order to assess compliance with regulatory guidelines. At March 31, 1998, the
Bank had tangible capital, leverage, and total risk-based capital of 9.38%,
9.38%, and 27.85%, respectively, which exceeded the OTS's minimum requirements
of 1.50, 3.00% and 8.00%, respectively.
- --------------------------------------------------------------------------------
(xv)
<PAGE>
RISK FACTORS
The following factors, in addition to those discussed elsewhere in this
Prospectus, should be considered by investors before deciding whether to
purchase the Common Stock offered hereby.
Vulnerability to Changes in Interest Rates
The Bank's profitability, like that of many financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as loans
and investments, and its interest expense on interest-bearing liabilities, such
as deposits. When interest-bearing liabilities mature or reprice more quickly
than interest-earning assets in a given period, a significant increase in market
rates of interest could adversely affect net interest income. Similarly, when
interest-earning assets mature or reprice more quickly than interest-bearing
liabilities, falling interest rates could result in a decrease in net interest
income. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Market Risk Analysis."
Intent to Remain Independent; Unsuitability as a Short-term Investment
The Bank and its predecessors have operated as independent
community-oriented savings associations since 1939. Following the Conversion and
Reorganization, it is the Company's intent to continue to operate as an
independent financial institution. Accordingly, the Common Stock may not be a
suitable investment for individuals anticipating a rapid sale of the Company to
a third party.
Also due to the Company's intention to remain independent, certain
provisions in the Company's Articles of Incorporation and Bylaws may assist the
Company in maintaining its status as an independent publicly owned corporation.
These provisions, as well as the Pennsylvania General Corporation law and
certain federal banking regulations, may have certain anti-takeover effects.
These provisions include: restriction on the acquisition of the Company's equity
securities and limitations on voting rights, the classification of the terms of
the members of the Board of Directors, certain provisions relating to meetings
of stockholders, prohibition of cumulative voting by stockholders in the
election of directors, the issuance of preferred stock and additional shares of
Common Stock without stockholder approval, and supermajority provisions for the
approval of certain business combinations. See "RESTRICTIONS ON ACQUISITION OF
THE COMPANY." As a result, stockholders who might wish to participate in a
change of control transaction may not have the opportunity to do so.
Price of Common Stock Following the Conversion and Reorganization
Since the MHC Reorganization and public stock issuance on December 31,
1992, the book value of the Mid-Tier Common Stock and its predecessor the Bank
Common Stock has increased in value. The Shares of Bank Common Stock (which were
exchanged for the Mid-Tier Common Stock) were initially sold to the public at
$10 per share with a book value of $10.17. On December 31, 1997, the book value
of the Public Mid-Tier Shares was $17.56. Since the MHC Reorganization, there
have been only two known trades in the common stock of the Bank or the Mid-Tier
Holding Company (per share trades of $10.00 and $15.00 in 1993 and 1996,
respectively). There can be no assurance that the Conversion Stock will
appreciate in value as have the Public Mid-Tier Shares. Based on a Subscription
Price of $10.00 per shares, Public Stockholders will receive $47.19 and $63.84
of Common Stock for each share of Mid- Tier Common Stock exchanged pursuant to
the Exchange Ratio at the minimum and maximum of the Offering Price Range,
respectively. See "THE CONVERSION AND REORGANIZATION - The Exchange Ratio." The
Boards of Directors of the Primary Parties have set an offering price for the
Conversion Stock of $10 a share. However, the pricing of this stock should in no
way be seen as an indication or assurance that the Conversion Stock or the
Common Stock will remain at the Subscription
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Price or will appreciate after the Conversion and Reorganization in the same
manner as the Public Mid- Tier Shares which were also initially sold at $10 per
share as shares of the Bank.
Competition
The Bank is headquartered in the City of Philadelphia, and has six
branch offices located within Philadelphia and Delaware counties in the
Philadelphia metropolitan area. The Bank operates in a highly competitive market
and experiences strong competition in its local market area in both originating
loans and attracting deposits.
Most of the Bank's mortgages are secured by properties located within
its primary market area, with the predominance of its lending in one to four
family residential mortgages. The Commonwealth of Pennsylvania has a substantial
number of financial institutions, many of which have a state-wide or regional
presence, and in some cases, a national presence. All of these institutions are
competitors of the Bank, to varying degrees. The Bank's competition for loans
comes principally from commercial banks, savings banks, savings and loan
associations, credit unions, mortgage banking companies and insurance companies.
Its most direct competition for deposits has historically come from commercial
banks, savings banks, savings and loan associations and credit unions, many of
which are significantly larger than the Bank and, therefore, have greater
financial and marketing resources than the Bank. The Bank also faces additional
competition for deposits from short-term money market funds, other corporate and
government securities funds and from other financial institutions such as
brokerage firms and insurance companies. In order to deal with the various
competitive factors, the Bank recognizes its need to monitor competition and
modify its products and services as necessary and possible, taking into
consideration the financial impact of such actions.
As a result of the level of competition in its market, the Company's
growth and profitability in the future may be adversely affected. See "BUSINESS
- - Market Area" and " - Competition."
Geographical Concentration of Loans; Non-Mortgage Loans
At December 31, 1997, substantially all of the Bank's real estate
mortgage loans were secured by properties located in the Bank's primary market
area. While the Bank currently believes that its loans are adequately secured or
reserved for, in the event that real estate prices in the Bank's market area
substantially weaken or economic conditions in its market area deteriorate,
reducing the value of properties securing the Bank's loans, some borrowers may
default and the value of the real estate collateral may be insufficient to fully
secure the loans. In either event, the Bank may experience increased levels of
delinquencies and related losses having an adverse impact on net income and
liquidity. Additionally, certain of the real estate securing loans
(approximately 17% of the loan portfolio) are multi-family and commercial real
estate properties. As such, these loans have a higher level of risk than loans
secured by residential properties. The Bank has a large multi-family loan, which
has occasionally experienced delinquencies. See "BUSINESS OF THE BANK - Lending
Activities - Multi-Family and Commercial Real Estate Loans."
Certain Anti-Takeover Provisions
General. Certain provisions of the Company's Articles of Incorporation
and Bylaws, including a provision limiting voting rights of beneficial owners of
more than 10% of the Common Stock, and the Bank's stock charter and bylaws, as
well as certain Pennsylvania laws and regulations, will assist the Company in
maintaining its status as an independent publicly owned corporation and may have
certain anti-takeover effects.
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Articles of Incorporation and Bylaws of the Company. The Company's
Articles of Incorporation and Bylaws provide for, among other things, a limit on
voting and, in certain cases, acquiring, more than 10% of the Common Stock
described above, staggered terms for members of its Board of Directors, prohibit
cumulative voting for directors, limits on the calling of special meetings of
stockholders and director nominations, a prohibition on action by consent, a
fair price or super majority stockholder approval requirement for certain
business combinations and certain stockholder proposal notice requirements.
These provisions are similar to those currently in the Articles of Incorporation
and Bylaws of the Mid-Tier Holding Company.
Federal Stock Charter of the Bank. Provisions in the Bank's federal
stock charter that have an anti-takeover effect could also be applicable to
changes in control of the Company as the sole stockholder of the Bank. The
Bank's federal stock charter includes a provision applicable for five years
which prohibits the acquisition or offer to acquire directly or indirectly the
beneficial ownership of more than 10% of the Bank's securities by any person or
entity other than the Company. Any person violating this restriction may not
vote the Bank's securities in excess of 10%.
These provisions in the Company's and the Bank's governing instruments
may discourage potential proxy contests and other takeover attempts by making
the Company less attractive to a potential acquiror, particularly those takeover
attempts which have not been negotiated with the Board of Directors of the
Company and/or the Bank, as the case may be. These provisions may also have the
effect of discouraging a future takeover attempt which would not be approved by
the Company's Board, but pursuant to which stockholders may receive a
substantial premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have any opportunity to do so. In addition, certain of these provisions that
limit the ability of persons (including management or others) owning more than
10% of the shares to vote their shares will be enforced by the Board of
Directors of the Company or the Bank, as the case may be, to limit the voting
rights of 10% or greater stockholders and thus could have the effect in a proxy
contest or other solicitation to defeat a proposal that is desired by the
holders of a majority of the shares of Common Stock.
Federal Law and Regulations. Federal law also requires OTS approval
prior to the acquisition of "control" (as defined in OTS regulations) of an
insured institution, including a holding company thereof. In the event any
person or group of persons acquires shares in violation of these limitations,
such person or group may be restricted from voting his or their shares in excess
of 10% of the outstanding Common Stock. Such laws and regulations may also limit
a person's ability without regulatory approval to solicit proxies enabling him
to elect one third or more of the Company's Board of Directors or exert a
controlling influence on the operations of the Bank or the Company.
In addition, certain of these provisions may limit the ability of
persons (including management or others) owning more than 10% of the shares to
vote their shares (by proxy or otherwise) for proposals that they believe to be
in the best interests of stockholders. See "MANAGEMENT OF THE BANK Benefit
Plans," and " - Description of Capital Stock."
Voting Power of Directors and Executive Officers
Directors and executive officers of the Company and the Bank (ten
persons) expect to beneficially own approximately 817,464 shares or 8.38% of the
shares of Common Stock outstanding (on a fully diluted basis) upon consummation
of the Conversion and Reorganization based upon the midpoint of the Offering
Price Range. See "BENEFICIAL OWNERSHIP OF COMMON STOCK."
In addition, the Company may acquire Common Stock on behalf of the
Recognition Plan in an amount which will equal 4.0% of the Conversion Stock
issued in the Offerings (314,255 shares based
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on the midpoint of the Offering Price Range). Under the terms of the Recognition
Plan, individuals to whom shares of Common Stock are awarded will be able to
vote the Common Stock immediately after it is awarded. The Company also may
reserve for future issuance pursuant to the Stock Option Plan (which will be
subject to stockholder approval if implemented prior to one year following the
Conversion and Reorganization), a number of authorized shares of Common Stock
equal to an aggregate of 10.0% of the Conversion Stock issued in the Offerings
(785,637 shares, based on the maximum of the Offering Price Range). These
options are in addition to the options for 40,000 shares of Mid-Tier Common
Stock which were previously granted to directors and executive officers and
remain unexercised under the option plans adopted by the Bank in connection with
the MHC Reorganization. In addition, the ESOP intends to purchase up to 8% of
the shares of Common Stock to be issued by the Company in the Conversion and
Reorganization. See "MANAGEMENT OF THE BANK - Benefits - Stock Option Plans," "-
Management Stock Bonus Plans" and "- Proposed Future Stock Benefit Plans."
Management's potential voting power could, together with additional
stockholder support, preclude or make more difficult takeover attempts which do
not have the support of the Company's Board of Directors and may tend to
perpetuate existing management.
Low Return on Equity Following the Conversion and Reorganization
As a result of the Bank's high capital levels and the additional
capital that will be raised by the Company in the Conversion and Reorganization,
the Company's ability to leverage the net proceeds from the Conversion and
Reorganization may be limited in the near future. Accordingly, return on equity
is initially expected to be lower than it has been in recent years.
Compensation Expense for Stock Benefit Plans Adopted for Directors,
Officers and Employees in Connection with the Conversion and Reorganization
Following the Conversion and Reorganization, the Company intends to
seek stockholder approval of the Recognition Plan and the Option Plan at a
meeting of stockholders which, under current OTS regulations, may be held no
earlier than six months after completion of the Conversion and Reorganization.
If the Recognition Plan is approved by stockholders of the Company, it will
acquire an amount of Common Stock equal to 4% of the shares of Conversion Stock
sold in the Offerings. Such shares would be granted to officers and directors of
the Bank at no cost to these recipients. If such shares were to be acquired at a
per share price equal to the Subscription Price, the cost of such shares to the
Company would be between $2.8 million and $3.6 million, assuming the Conversion
Stock is sold in the Offerings at the minimum and maximum of the Offering Range,
respectively. If the Option Plan is approved by stockholders of the Company, the
Company intends to reserve for future issuance pursuant to such plan a number of
shares of Common Stock equal to 10% of the Common Stock sold in the Offerings
(667,793 and 903,348 shares, based on the sale at the minimum and maximum of the
Offering Price Range, respectively). Options to purchase these shares of Common
Stock will be granted to officers and directors of the Bank and the Company at
no cost to them. See "MANAGEMENT OF THE BANK-Proposed Future Stock Benefit
Plans."
In addition, the ESOP expects to purchase between 534,234 and 722,786
shares of Common Stock in the Offerings at an initial cost of between $5.3
million and $7.2 million with funds received through a loan from the Company. An
employer must record compensation expense in an amount equal to the fair value
of shares committed to be released to employees from an employee stock ownership
plan and restricted stock plan. Assuming shares of Common Stock appreciate in
value over time, compensation expenses relating to the ESOP to be established in
connection with the Conversion and Reorganization and Recognition Plan to be
established after the Conversion will increase.
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It is impossible to determine at this time the extent of such impact on
future net income, however, the Restricted Stock Plan and ESOP will increase
compensation expense to the Company. See "PRO FORMA DATA."
Potential Elimination of Thrift Charter
A bill, H.R. 10, has been passed by the U.S. House of Representatives,
that would curtail the powers of unitary thrift holding companies. Furthermore,
other legislation has been considered that would eliminate the federal thrift
charter under which the Bank currently operates. If this legislation becomes
law, the Bank will be forced to become a state chartered bank or a national
commercial bank. If the Bank becomes a commercial bank, its investment authority
and the ability of the Company to engage in diversified activities would be more
limited and could affect the Bank's profitability. See also "REGULATION."
Possible Dilutive Effect of Issuance of Additional Shares
Various possible and planned issuances of Common Stock could dilute the
interests of prospective stockholders of the Company or existing stockholders of
the Company following consummation of the Conversion and Reorganization, as
noted below.
The number of shares to be sold in the Conversion and Reorganization
may be increased as a result of an increase in the Offering Price Range of up to
15% to reflect changes in market and financial conditions following the
commencement of the Offerings. In the event that the Offering Price Range is so
increased, it is expected that the Company will issue up to 10,390,048 shares of
Conversion Stock at the Purchase Price for an aggregate price of up to
$103,900,480. An increase in the number of shares will decrease net earnings per
share and stockholders' equity per share on a pro forma basis and will increase
the Company's consolidated stockholders' equity and net earnings. See
"CAPITALIZATION" and "PRO FORMA DATA."
The ESOP intends to purchase an amount of Common Stock equal to up to
8.0% of the Conversion Stock issued in the Conversion and Reorganization. In the
event that there are insufficient shares available to fill the ESOP's order due
to an oversubscription by Eligible Account Holders and the total number of
shares of Conversion Stock issued in the Conversion and Reorganization is
increased by up to 15%, the additional shares will first be allocated to fill
the ESOP's subscription and thereafter in accordance with the terms of the Plan
of Conversion. See "MANAGEMENT OF THE BANK - Benefit Plans - Employee Stock
Ownership Plan," and "THE CONVERSION AND REORGANIZATION - The Offerings" " -
Subscription Offering," and " - Priority 2: ESOP."
If the Recognition Plan is implemented, the Recognition Plan may
acquire an amount of Common Stock which will equal 4.0% of the shares of
Conversion Stock issued in the Conversion and Reorganization (361,393 shares,
based on the maximum of the Offering Price Range). Such shares of Common Stock
may be acquired in the open market with funds provided by the Company, if
permissible, or from authorized but unissued shares of Common Stock. In the
event that additional shares of Common Stock are issued to the Recognition Plan
out of authorized but unissued shares, stockholders would experience dilution of
their ownership interests by approximately 3.4% and per share stockholders'
equity and per share net earnings would decrease as a result of an increase in
the number of outstanding shares of Common Stock. See "PRO FORMA DATA" and
"MANAGEMENT OF THE BANK - Potential Stock Benefit Plans - Recognition Plan."
If the Company's Stock Option Plan is implemented, the Company may
reserve for future issuance pursuant to such plan a number of authorized shares
of Common Stock equal to an aggregate of 10% of the Conversion Stock issued in
the Offerings (903,483 shares, based on the maximum of the
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Offering Price Range). In the event that authorized but unissued shares of
Common Stock are utilized upon the exercise of options, stockholders would
experience dilution of their ownership interests by approximately 9.3%. See "PRO
FORMA DATA" and "MANAGEMENT OF THE BANK - Potential Stock Benefit Plans - Stock
Option Plan."
In 1992 and 1994 the Bank adopted, and continues to maintain, stock
option plans (the "Option Plans") and restricted stock plans ("Restricted Stock
Plans"). Upon consummation of the Conversion and Reorganization, these plans
will remain plans of the Bank. See "MANAGEMENT OF THE BANK Benefit Plans."
The OTS has required that the purchase limitations contained in the
Plan of Conversion include Exchange Shares to be issued to Public Stockholders
for their Public Mid-Tier Shares. As a result, certain holders of Public
Mid-Tier Shares may be limited in their ability to purchase Conversion Stock in
the Offerings. For example, a Public Stockholder which acquires Exchange Shares
in an amount equal to $300,000 or a Public Stockholder and his Associates or a
group acting in concert which acquires Exchange Shares in an amount equal to
$904,000 of Conversion Stock, will not be able to purchase any shares of
Conversion Stock in the Offerings, although such a stockholder will be able to
purchase shares of Common Stock in the market during the Offerings and
thereafter. No stockholder, except as otherwise required by the OTS, will be
required to sell shares if, as a result of receiving Exchange Shares, his
ownership percentage would exceed a purchase limitation. See "THE CONVERSION AND
REORGANIZATION - Limitations on Conversion Stock Purchases and Ownership."
Year 2000 Compliance
As the year 2000 approaches, an issue has emerged regarding how
existing application software programs and operating systems can accommodate
this date value. Many existing application software products were designed to
accommodate only two-digits. For example, "96" is stored on the system and
represents 1996. The Mid-Tier Holding Company and the Bank have been identifying
potential problems associated with the "Year 2000" issue and have implemented a
plan designed to manage data involving the transition with data from 1999 to
2000 without functional or data abnormality and without inaccurate results
related to such data. In addition, the Bank recognizes that its ability to be
Year 2000 compliant is dependent upon the cooperation of its vendors. The Bank
is requiring its computer systems and software vendors to represent that the
products provided are or will be Year 2000 compliant and has planned a program
of testing for compliance. The Bank is obtaining representations from its
primary third party vendors that they will have resolved any Year 2000 problems
and anticipates that its vendors also will have resolved any Year 2000 problems.
There can be no assurances, however, that the Bank's plan or the performance by
the Bank's vendors will be effective to remedy all potential problems. To the
extent the Mid-Tier Holding Company's systems are not fully Year 2000 compliant,
there can be no assurance that potential systems interruptions or the cost
necessary to update software would not have a materially adverse effect on the
Company's business, financial condition, results of operations, cash flows, and
business prospects. Further, any Year 2000 failure on the part of the Bank's
customers could result in additional expense or loss to the Bank.
Risk of Delay
The Offerings will expire at Noon, Philadelphia Time, on June 15, 1998,
unless extended by the Primary Parties. However, unless waived by the Primary
Parties, all orders will be irrevocable unless the Conversion and Reorganization
is not completed by July 30, 1998. In the event the Conversion and
Reorganization is not completed by July 30, 1998, subscribers will have the
right to modify or rescind their subscriptions and to have their subscription
funds returned with interest.
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Dissenters' Rights
Pursuant to Pennsylvania Business Corporation Law, Public Stockholders
will have dissenters' rights or rights of appraisal in connection with the
Conversion and Reorganization. See "THE CONVERSION AND REORGANIZATION-Dissenters
Rights."
THISTLE GROUP HOLDINGS, CO.
The Company was organized in March of 1998 at the direction of the
Board of Directors of the Bank for the purpose of holding all of the capital
stock of the Bank in order to facilitate the Conversion and Reorganization. The
Mutual Holding Company and the Mid-Tier Holding Company are presently subject to
regulation by the OTS. After the Conversion and Reorganization, the Company will
be subject to OTS regulations. The Company has applied to the OTS for authority
to acquire 100% of the Bank Common Stock and become the savings and loan holding
company of the Bank. This application has been approved subject to certain
conditions. The Conversion and Reorganization is contingent upon various
approvals from the OTS. See "REGULATION - Company Regulation." Upon consummation
of the Conversion and Reorganization, the Company will have no significant
assets other than all of the outstanding shares of Bank Common Stock, an
outstanding loan to the ESOP, a portion of the net proceeds of the Offering
retained by the Company and various investments previously held by the Mutual
Holding Company and the Mid-Tier Holding Company. The Company will have no
significant liabilities. See "USE OF PROCEEDS." Initially, the management of the
Company and the Bank will be substantially similar. The Company will neither own
nor lease any property but will instead use the premises, equipment and
furniture of the Bank. At present time the Company does not intend to employ any
persons other than executive officers who are also executive officers of the
Bank. The Company will utilize the support staff of the Bank from time to time.
Additional employees will be hired as appropriate to the extent that the Company
expands or changes its future business activities.
Management believes that the holding company structure will provide the
Company with additional flexibility to diversify its business activities through
existing or newly formed subsidiaries or through acquisitions of or mergers with
other financial institutions and financial services related companies. Although
there are no current arrangements, understandings or agreements regarding such
opportunities or transactions, the Company will be in a position after the
Conversion and Reorganization subject to regulatory limitations and the
Company's financial position to take advantage of any such acquisition and
expansion opportunities that may arise. The initial activities of the Company
are anticipated to be funded by the proceeds to be retained by the Company from
the Conversion and Reorganization and earnings thereon as well as dividends from
the Bank. See "USE OF PROCEEDS" and "DIVIDEND POLICY."
After the completion of the Conversion and Reorganization, the Company
is expected to conduct business initially as a unitary thrift holding company.
See "BUSINESS OF THE COMPANY." The Company's executive office is located at the
home office of the Bank at 6060 Ridge Avenue, Philadelphia, Pennsylvania 19128
and its telephone number is (215) 483-2800.
THISTLE GROUP HOLDINGS, INC.
The Mid-Tier Holding Company was organized in March 1997 at the
direction of the Board of Directors of the Bank for the purpose of holding all
of the capital stock of the Bank. The Mid-Tier Holding Company acquired all of
the outstanding stock of the Bank in a one-for-one stock exchange consummated on
September 30, 1997. The Mid-Tier Holding Company has received the approval of
the OTS to become, and is currently, a thrift holding company, and as such is
subject to regulation by the
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OTS. After the Conversion and Reorganization the Mid-Tier Holding Company will
cease to exist and the Company will become the holding company for the Bank.
The Mid-Tier Holding Company's executive office is located at the home
office of the Bank at 6060 Ridge Avenue, Pennsylvania 19128, and its telephone
number is (215) 483-2800.
ROXBOROUGH-MANAYUNK FEDERAL SAVINGS BANK
General
The Bank is a federally-chartered stock savings association, which was
originally chartered as a mutual savings association through the combination of
11 building and loan associations as Roxborough-Manayunk Federal Savings and
Loan Association (the "Association") on May 3, 1939, at which time the
Association's accounts were insured by the Federal Savings and Loan Insurance
Corporation ("FSLIC") and currently the Savings Association Insurance Fund
("SAIF"). In 1939, the Association became a member of the FHLB System. On
December 31, 1992, the Association reorganized from a mutual savings association
into a mutual holding company named FJF Financial, M.H.C. and chartered a new
stock savings bank named Roxborough-Manayunk Federal Savings Bank. Effective as
of the close of business September 30, 1997, the Bank completed the formation of
a middle- tier stock holding company whereby the Bank became a wholly-owned
subsidiary of the Mid-Tier Holding Company, which in turn is over 80% owned by
the Mutual Holding Company. The Bank serves the Pennsylvania counties of
Philadelphia and Delaware through a network of six offices, providing a full
range of retail banking services, with emphasis on the origination of
one-to-four family residential mortgages.
The Bank is primarily engaged in attracting deposits from the general
public through its offices and using those and other available sources of funds
to originate loans secured by one to four-family residences. One- to four-family
residential loans amounted to $71.4 million, or 72.4%, of the Bank's total loan
portfolio at December 31, 1997. In addition, the Bank originates consumer loans,
such as home equity loans, and multi-family and nonresidential real estate
loans. Such loans generally provide for higher interest rates and shorter terms
than single-family residential real estate loans. At December 31, 1997, the
Bank's net consumer loans amounted to $8.2 million or 8.3% of the Mid-Tier
Holding Company's total assets. To a lesser extent, the Bank originates loans
secured by existing multi-family residential and nonresidential real estate,
which amounted to $6.3 million or 6.4%, and $10.3 million or 10.4%,
respectively, of the total loan portfolio at December 31, 1997. At December 31,
1997, the Bank also held $26,327,000 of U.S. Government and federal agency
obligations and $111,486,000 of mortgage-backed securities which are insured by
federal agencies.
Upon completion of the Conversion and Reorganization, the Bank will
change its name to "Roxborough-Manayunk Bank."
Regulation
The Bank is subject to examination and comprehensive regulation by the
OTS, which is the Bank's chartering authority and primary regulator, and by the
Federal Deposit Insurance Corporation ("FDIC"), which, as administrator of the
SAIF, insures the Bank's deposits up to applicable limits. The Bank also is
subject to certain reserve requirements established by the Board of Governors of
the Federal Reserve System ("Federal Reserve Board") and is a member of the
Federal Home Loan Bank ("FHLB") of Pittsburgh, which is one of the 12 regional
banks comprising the FHLB System. See "REGULATION."
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Office
The Bank's principal executive office is located at 6060 Ridge Avenue,
Philadelphia, Pennsylvania 19128 and its telephone number is (215) 483-2800.
FJF FINANCIAL, M.H.C.
The Mutual Holding Company is a federally chartered mutual holding
company which was chartered on December 31, 1992, in connection with the MHC
Reorganization. The Mutual Holding Company's primary asset is 1,415,000 shares
of Mid-Tier Common Stock, which represent 87.29% of the shares of Mid-Tier
Common Stock outstanding as of December 31, 1997. Prior to the Conversion and
Reorganization, each depositor in the Bank has both a deposit account in the
institution and a pro rata ownership interest in the net worth of the Mutual
Holding Company based upon the value in his account, which interest may only be
realized in the event of a liquidation of the Mutual Holding Company. As part of
the Conversion and Reorganization, the Mutual Holding Company will convert from
mutual form to a federal interim stock savings institution and simultaneously
merge with and into the Bank, with the Bank being the surviving entity.
USE OF PROCEEDS
Net proceeds from the sale of the Conversion Stock are estimated to be
between $65.6 million and $89.0 million ($102.4 million assuming an increase in
the Offering Price Range by 15%). See "Pro Forma Data" as to the assumptions
used to arrive at such amounts.
The Company plans to contribute to the Bank 50% of the net proceeds
from the Offerings and retain the remainder of the net proceeds. The Company
anticipates that after the loan to the ESOP and after contributing 50% of the
funds raised in the Conversion and Reorganization to the Bank, it will have
approximately $38.6 million (based upon the sale of 9,034,834 shares of Common
Stock) which it intends to loan to the Bank. The Bank will invest these funds,
initially in short interest-bearing deposits and short and intermediate term
securities. The Company intends to use a portion of the net proceeds to make a
loan directly to the ESOP to enable the ESOP to purchase 8.0% of the Conversion
Stock. Based upon the issuance of 6,677,927 shares and 9,034,834 shares of
Conversion Stock at the minimum and maximum of the Offering Price Range,
respectively, the loan to the ESOP would be $5.3 million and $7.2 million,
respectively. It is anticipated that the loan to the ESOP will have a term of
not less than 15 years and a fixed rate of interest at the prime rate as of the
date of the loan. See "MANAGEMENT OF THE BANK - Employee Stock Ownership Plan."
The net proceeds retained by the Company also may be used to support the future
expansion of operations or diversification into other banking-related businesses
and for other business or investment purposes, including the acquisition of
other financial institutions and/or branch offices, although there are no
current plans, arrangements, understandings or agreements regarding such
expansion, diversification or acquisitions. The Bank does, however, continually
evaluate additional branching opportunities that will complement existing
operations or support expansion into growth markets. No assurance can be given,
however, that such expansion will occur during 1998. In addition, subject to
applicable regulatory limitations, the net proceeds also may be used to
repurchase shares of Common Stock. See "THE CONVERSION AND REORGANIZATION -
Certain Restrictions on Purchase or Transfer of Shares after the Conversion and
Reorganization." The portion of the net proceeds contributed to the Bank will be
used for general corporate purposes, primarily investment in residential real
estate loans and will be initially used to invest primarily in short-term
interest-bearing deposits and marketable securities.
In addition, a portion of the proceeds may be used to fund open market
purchases of Common Stock for the Recognition Plan if such plan is approved by
stockholders. The estimated cost of such plans is dependent upon the price paid
for the shares in the open market. If Common Stock equal to 4% at the
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maximum of the Offering Range, or 361,393 shares, was purchased for the
Recognition Plan at $10 per share, the cost would be $3.6 million. See
"MANAGEMENT OF ROXBOROUGH-MANAYUNK FEDERAL SAVINGS BANK - Recognition Plan."
DIVIDEND POLICY
Upon completion of the Conversion and Reorganization, the Board of
Directors of the Company will have the authority to declare dividends on the
Common Stock, subject to statutory and regulatory requirements. Following
consummation of the Conversion and Reorganization, the Board of Directors of the
Company will consider the payment of cash dividends on the Common Stock.
Declarations of dividends by the Board of Directors will depend upon a number of
factors, including the amount of the net proceeds from the Offerings retained by
the Company, investment opportunities available to the Company or the Bank,
capital requirements, regulatory limitations, the Company's and the Bank's
financial condition, results of operations, cash flows, tax considerations and
general economic conditions. Consequently, there can be no assurance that
dividends will in fact be paid on the Common Stock or that, if paid, such
dividends will not be reduced or eliminated in future periods. The Company
intends to continue to pay regular quarterly dividends through either the date
of consummation of the Conversion and Reorganization (on a pro rata basis) or
the end of the fiscal quarter during which the consummation of the Conversion
and Reorganization occurs.
Dividends from the Company after the Conversion and Reorganization will
depend, in part, upon receipt of dividends from the Bank, because the Company
initially will have no source of income other than dividends from the Bank,
earnings from the investment of proceeds from the sale of Conversion Stock
retained by the Company, and interest on the ESOP loan. OTS regulations limit
"capital distributions" by savings institutions, including cash dividends,
payments by a savings institution to repurchase or otherwise acquire its stock,
payments to stockholders of another savings institution in a cash-out merger and
other distributions charged against capital. The regulation establishes a
three-tiered system, with the greatest flexibility being afforded to
well-capitalized or Tier 1 savings institutions and the least flexibility being
afforded to under-capitalized or Tier 3 savings institutions. As of December 31,
1997, the Bank was a Tier 1 savings institution and is expected to continue to
so qualify immediately following the consummation of the Conversion and
Reorganization. However, for a period of one year following the completion of
the Conversion and Reorganization, the Company will not pay any dividends that
would be treated for tax purposes as a return of capital nor take any actions to
pursue or propose such dividends.
Any payment of dividends by the Bank to the Company which would be
deemed to be a distribution from the Bank's pre-1988 bad debt reserves for
federal income tax purposes would require a payment of taxes at the then-current
tax rate by the Bank on the amount of earnings deemed to be removed from the
reserves for such distribution. The Bank has no current intention of making any
distribution that would create such a federal tax liability either before or
after the Conversion and Reorganization. See "TAXATION."
Unlike the Bank, the Company is not subject to the aforementioned
regulatory restrictions on the payment of dividends to its stockholders,
although the source of such dividends will be, in part, dependent upon dividends
from the Bank in addition to the net proceeds retained by the Company and
earnings thereon. The Company is subject, however, to the requirements of
Pennsylvania law.
-10-
<PAGE>
MARKET FOR COMMON STOCK
There is no established market for the Mid-Tier Common Stock. The
Common Stock, which will be received after the Conversion and Reorganization in
the form of Exchange Shares, will be sold in the Offering and more liquid after
the Conversion and Reorganization than the Mid-Tier Common Stock because there
will be significantly more outstanding shares owned by the public. However,
there can be no assurance that an active and liquid trading market for the
Common Stock will be maintained.
The Company has received conditional approval to have the Common Stock
listed on the Nasdaq National Market under the symbol "THTL." There are various
requirements for qualification and continued quotation of the Common Stock on
the Nasdaq National Market including a minimum number of market makers for the
Common Stock. The Company will seek to encourage and assist market makers to
make a market in its Common Stock, and, based upon the number of market makers
for the Public Mid-Tier Shares, believes that enough market makers will make a
market in the Common Stock in order to continue listing the Common Stock on the
Nasdaq National Market. Making a market involves maintaining bid and ask
quotations and being able, as principal, to effect transactions in reasonable
quantities at those quoted prices, subject to various securities laws and other
regulatory requirements.
Sandler O'Neill has advised the Company that it will assist the Company
in obtaining additional market makers, if necessary, but there can be no
assurance that additional market makers will be identified. Making a market
involves maintaining bid and ask quotations and being able, as principal, to
effect transactions in reasonable quantities at those quoted prices, subject to
various securities laws and other regulatory requirements. Additionally, the
development of a public market having the desirable characteristics of depth,
liquidity and orderliness depends on the existence of willing buyers and
sellers, the presence of which is not within the control of the Company, the
Bank or any market maker. In the event that institutional investors buy a
relatively large proportion of the Offering, the number of active buyers and
sellers of the Common Stock at any particular time may be limited. There can be
no assurance that persons purchasing Common Stock will be able to sell their
shares at or above the Subscription Price.
At December 31, 1997, there were 1,621,000 shares of Mid-Tier Common
Stock outstanding, including 206,000 Public Mid-Tier Shares, which were held of
record by approximately 32 stockholders (including the ESOP). There is no liquid
market for Public Mid-Tier Shares. Public Mid-Tier Shares will automatically,
without further action by such holders thereof, be converted into and become a
right to receive a number of shares of Common Stock that is determined pursuant
to the Exchange Ratio. See "THE CONVERSION AND REORGANIZATION - THE EXCHANGE
RATIO."
-11-
<PAGE>
CAPITALIZATION
The following table presents, as of December 31, 1997, the unaudited
historical capitalization of the Mid-Tier Holding Company and its consolidated
subsidiaries, including the Bank, and the pro forma consolidated capitalization
of the Company after giving effect to the Conversion and Reorganization, and
other assumptions set forth below and under "Pro Forma Data."
<TABLE>
<CAPTION>
Company Pro Forma Based Upon Sale at $10.00 Per share
--------------------------------------------------------
Historical 6,677,927 7,856,370 9,034,834 10,390,048
Capitalization Shares Shares Shares Shares(1)
-------------- ------ ------ ------ ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits(2).................................... $230,558 $230,558 $230,558 $230,558 $230,558
Borrowed funds................................. 7,884 7,884 7,884 7,884 7,884
------- ------- ------- ------- -------
Total Deposits and borrowed funds.............. $238,442 $238,442 $238,442 $238,442 $238,442
======= ======= ======= ======= =======
Stockholders' equity:
Preferred stock, no par value,
10,000,000 shares authorized;
none to be issued(3)....................... -- -- -- -- --
Common stock, $0.10 par value,
40,000,000 authorized; shares
to be issued as reflected(3)............... 162 765 900 1,035 1,190
Additional paid-in capital(4)................ 18,455 83,468 94,983 106,496 119,737
Retained Earnings(5)......................... 8,463 8,463 8,463 8,463 8,463
Plus:
Net unrealized gain on securities
available for sale, net.................... 1,390 1,390 1,390 1,390 1,390
Add:
Assets consolidated from the Mutual
Holding Company.......................... -- 90 90 90 90
Less:
Common Stock acquired by ESOP(6)............. -- 5,342 6,285 7,228 8,312
Common Stock acquired by
Recognition Plan(6)........................ -- 2,671 3,143 3,614 4,156
------- ------ ------ ------- -------
Total Stockholders' equity..................... $28,470 $86,163 $96,398 $106,632 $118,402
====== ====== ====== ======= =======
Pro forma equity as a percent of pro
forma assets................................. 10.44% 26.09% 28.31% 30.40% 32.66%
</TABLE>
- ---------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Offering Price Range of up to 15% to
reflect changes in market and financial conditions following the
commencement of the Offering Price or to fill the order of the ESOP.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Conversion Stock in the Offerings. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) The Mid-Tier Holding Company has 8,000,000 shares of common stock
authorized with a par value of $0.10 per share and 2,000,000 authorized
shares of preferred stock.
(4) Assumes that (i) the 206,000 Public Mid-Tier Shares outstanding at
December 31, 1997 are exchanged for 4.7188, 5.5516, 6.3843, and 7.3420
shares at the minimum midpoint maximum and 15% above the maximum of the
Offering Price Range, respectively; and (ii) that no cash in lieu of
fractional Exchange Shares will be issued by the Company. Does not include
proceeds from the Offerings that the Company intends to lend to the ESOP
to enable it to purchase shares of Common Stock in the Offerings. No
effect has been given to the
-12-
<PAGE>
issuance of additional shares of Common Stock pursuan to existing and
proposed stock option plans as opposed to purchases in the open market.
See "PRO FORMA DATA."
(5) The pro forma retained earnings include $3,053,000 of assets of the Mutual
Holding Company. The retained earnings of the Company will be
substantially restricted after the Conversion and Reorganization by virtue
of the liquidation account to be established by the Bank in connection
with the Conversion and Reorganization. See "THE CONVERSION AND
REORGANIZATION - Liquidation Rights." In addition, certain distributions
of the Bank's retained earnings may be treated as being from its pre-1988
accumulated bad debt reserve for tax purposes which would cause the Bank
to have additional taxable income and financial statement expense. See
TAXATION."
(6) Assumes that 8% and 4% of the shares sold in the Offering will be
purchased by the ESOP and the Recognition Plan, respectively. No shares
will be purchased by the Recognition Plan in the Conversion and
Reorganization. It is assumed on a pro forma basis that the Recognition
Plan will be adopted by the Board of Directors, approved by the
stockholders at a special or annual meeting no earlier than six months
after completion of the Conversion and Reorganization and reviewed by the
OTS. It is assumed that the Recognition Plan will purchase Common Stock in
the open market in order to give an indication of its effects on
capitalization. The pro forma presentation does not show the impact of:
(i) results of operations after the Conversion and Reorganization; (ii)
changes in market prices of shares of the Common Stock after the
Conversion and Reorganization; or (iii) a smaller than 4% purchase by the
Recognition Plan. Assumes that the funds used to acquire the ESOP shares
will be borrowed from the Company for a 15 year term. For an estimate of
impact of the ESOP on earnings, see "PRO FORMA DATA." The Bank intends to
make contributions to the ESOP sufficient to service and ultimately retire
its debt. The amount to be acquired by the ESOP and the Recognition Plan
is reflected as a reduction in stockholder equity. The issuance of
authorized but unissued shares for the Recognition Plan in an amount equal
to 4% of the amount of Conversion Stock in the Offering will have the
effect of diluting existing stockholders' interests by 3.4%. There can be
no assurance that approval of the Recognition Plan will be obtained.
Furthermore, any plans adopted within one year of the completion of the
Conversion and Reorganization will have specific limitations and require a
downward adjustment in the percentage granted. See "MANAGEMENT OF THE BANK
- Potential Stock Benefit Plans."
-13-
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents the historical regulatory capital of the
Bank at December 31, 1997, and the pro forma regulatory capital of the Bank as
of that date, after giving effect to the Conversion and the Reorganization,
based upon the minimum, midpoint, maximum and 15% above the maximum of the
Offering Range, respectively. For a discussion of the assumptions underlying the
pro forma capital calculations presented below, see "USE OF PROCEEDS,"
"CAPITALIZATION" and "PRO FORMA DATA." The definitions of the terms used in the
table are those provided in the capital regulations issued by the OTS. For a
discussion of the capital standards applicable to the Bank, see "REGULATION -
Savings Institution Regulation - Regulatory Capital Requirements."
<TABLE>
<CAPTION>
Pro Forma as of December 31, 1997 - Based on the Sale of
----------------------------------------------------------------------------------------
Historical, as of 6,677,927 7,856,370 9,034,834 10,390,048
December 31, 1997 Shares Shares Shares Shares
--------------------- ------------------- ------------------------ -------------------- -------------------
Percent Percent Percent Percent Percent
Amount of Assets Amount of Assets Amount of Assets Amount of Assets Amount of Assets
(Dollars in Thousands)
GAAP
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital...........$28,470 10.44% $53,265 17.91% $57,675 19.10% $62,085 20.27% $67,157 21.57%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Tangible
Capital(1)(2).....$25,828 9.51% $50,623 17.08 $55,033 18.30 $59,443 19.48 $64,515 20.79
Tangible
Capital
Requirement....... 4,074 1.50 4,446 1.50 4,512 1.50 4,578 1.50 4,654 1.50
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
Excess..............$21,754 8.01% $46,177 15.58% $50,521 16.80% $54,865 17.98% $59,861 19.29%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Core
Capital(1)(2)(3)..$25,828 9.51% $50,623 17.08% $55,033 18.30% $59,443 19.48% $64,515 20.79%
Core
Capital
Requirement....... 8,148 3.00 8,892 3.00 9,024 3.00 9,156 3.00 9,309 3.00
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
Excess..............$17,680 6.51% $41,731 14.08% $46,009 15.30% $50,287 16.48% $55,206 17.79%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Total
Risk-Based
Capital
(1)(2)(4)(5)......$26,611 28.62% $51,406 50.71% $55,816 54.26% $60,226 57.71% $65,298 61.55%
Risk-Based
Capital
Requirement....... 7,438 8.00 8,110 8.00 8,229 8.00 8,349 8.00 8,487 8.00
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
Excess..............$19,173 20.62% $43,296 42.71% $47,587 46.26% $51,877 49.71% $56,811 53.55%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
- -----------------
(1) Net unrealized gains or losses on securities classified as available for
sale are excluded from regulatory capital when computing core and
risk-based capital. The net unrealized gain on securities classified as
available for sale amounted to $2,058,000 as of December 31, 1997. Assumes
one-half of the net proceeds (after adjustment for ESOP and Recognition
Plan), or $24,795,000, $29,205,000, $33,615,000, and $38,687,000, at the
minimum, midpoint, maximum, and maximum, as adjusted, respectively, is
contributed to the Bank.
(2) Tangible capital is computed as a percentage of adjusted total assets of
$271,600,000 prior to the consummation of the Offerings and $296,395,000,
$300,805,000, $305,215,000 and $310,287,000 following the issuance of
7,650,000, 9,000,000, 10,350,000 and 11,902,500 shares of Common Stock in
the Conversion and Reorganization, respectively. Core capital is computed
as a percentage of adjusted total assets of $271,600,000 prior to the
consummation of the Offerings and $296,395,000, $300,805,000, $305,215,000
and $310,287,000 following the issuance of 7,650,000, 9,000,000,
10,350,000 and 11,920,500 shares of Common Stock in the Conversion and
Reorganization, respectively. Risk-based capital is computed as a
percentage of adjusted risk-weighted assets of $92,980,000 prior to the
consummation of the Offerings and $101,371,000, $102,869,000, $104,367,000
and $106,090,000 following the issuance of 7,650,000, 9,000,000,
10,350,000 and 11,920,500 shares of Common Stock in the Conversion and
Reorganization, respectively.
(3) Does not reflect proposed amendments to regulatory capital requirements
or, in the case of the core capital requirement, the 4.0% requirement to
be met in order for an institution to be "adequately capitalized" under
applicable laws and regulations. See "REGULATION - Savings Institution
Regulation - Regulatory Capital Requirements."
(4) The pro forma risked-based capital ratios (i) reflect the receipt by the
Bank of the assets held by the Mutual Holding Company and of 50% of the
estimated net proceeds from the Offerings, and a reduction due to the
Restricted Stock Plan purchase and the ESOP purchase, (ii) assume no
repayment of FHLB advances, and (iii) assume the investment of the net
remaining proceeds received by the Bank in assets that have a 20%
risk-weighting, as if such net proceeds had been received and so applied
at December 31, 1997.
(5) Risk-weighted assets on a pro forma basis are calculated based on the
percentage of risk-weighted assets to leveraged assets at December 31,
1997. Includes the $382,000 of general allowance for loan losses that was
included in risk-based capital as of December 31, 1997.
-14-
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Conversion Stock cannot be
determined until the Conversion and Reorganization is completed. However, net
proceeds are currently estimated to be between $65.6 million and $89.0 million
(or $102.4 million in the event the Offering Price Range is increased by 15%)
based upon the following assumptions: (i) Sandler will receive a fee equal to
1.25% of the aggregate Purchase Price for sales in the Subscription and
Community Offering (excluding the sale of shares by the ESOP and to officers,
directors or employees or members of their immediate families); and (ii) total
expenses, excluding the marketing fees to be paid to Sandler, will be
approximately $395,000. Actual expenses may vary from those estimated.
Pro forma net earnings have been calculated for the year ended December
31, 1997 as if the Conversion Stock to be issued in the Offerings had been sold
(and the Exchange Shares issued) at the beginning of the respective periods and
the net proceeds had been invested at the one year Treasury Bill Rate which was
5.55% as of December 31, 1997. The Treasury Bill Rate was used as an alternative
to the arithmetic average because Management believes it more nearly reflects
the actual and anticipated yields available on invested funds. The effect of
withdrawals from deposit accounts for the purchase of Conversion Stock has not
been reflected. An effective combined federal and state tax rate of 42.0% has
been assumed for the periods, resulting in an after-tax yield of 3.22% for the
year ended December 31, 1997. Historical and pro forma per share amounts have
been calculated by dividing historical and pro forma amounts by the indicated
number of shares of Common Stock, as adjusted to give effect to the shares
purchased by the ESOP and Recognition Plan. See Notes 1 and 2 to the tables
below. No effect has been given in the pro forma stockholders' equity
calculations for the assumed earnings on the net proceeds. As discussed under
"USE OF PROCEEDS," the Company intends to retain 50% of the net proceeds from
the Offerings. The Company intends to make a loan to fund the purchase by the
ESOP an amount of Conversion Stock equal to up to 8% of the Common Stock sold in
the Offerings.
At the consummation of the Conversion and Reorganization, 972,073,
1,143,630, 1,315,166, and 1,512,452 of Common Stock, at the minimum, midpoint,
maximum and 15% above the maximum, respectively, will be issued to Public
Stockholders pursuant to the Exchange. See "THE CONVERSION AND REORGANIZATION -
The Exchange Ratio."
No effect has been given in the tables to the issuance of additional
shares of Common Stock pursuant to existing and proposed stock option plans as
opposed to purchases in the open market. See "MANAGEMENT OF THE BANK - Benefit
Plans" and "- Proposed Future Stock Benefit Plans." The tables below give effect
to the Recognition Plan, which is expected to be adopted by the Company
following the Conversion and Reorganization and presented (together with the
Stock Option Plan) to stockholders for approval at an annual or special meeting
of stockholders to be held at least six months following the consummation of the
Conversion and Reorganization. If the Recognition Plan is approved by
stockholders, the Recognition Plan intends to acquire an amount of Common Stock
equal to 4.0% of the shares of Conversion Stock issued in the Offerings, either
through open market purchases or from authorized but unissued shares of Common
Stock. No effect has been given to (i) the Company's results of operations after
the Conversion and Reorganization, or (ii) the market price of the Common Stock
after the Conversion and Reorganization.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as being indicative of
future results of operations. Pro forma stockholders' equity represents the
difference between the stated amount of pro forma assets and liabilities of the
Company computed in accordance with generally accepted accounting principles
("GAAP"). The pro forma stockholders' equity is not intended to represent the
fair market value of the Common Stock and may be different than amounts that
would be available for distribution to stockholders in the event of liquidation.
-15-
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1997
----------------------------------------------------------------
Maximum,
Minimum Midpoint Maximum as adjusted
6,677,927 7,856,370 9,034,834 10,390,048
Shares at Shares at Shares at Shares at
$10.00 $10.00 $10.00 $10.00
Per Share Per Share Per Share Per Share(1)
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Gross proceeds ........................................ $ 66,779 $ 78,564 $ 90,348 $ 103,900
Less expenses ......................................... 1,163 1,298 1,434 1,590
------------ ------------ ------------ ------------
Estimated net proceeds .............................. 65,616 77,266 88,914 102,310
Less: Common Stock purchased by ESOP(2) ............ (5,342) (6,285) (7,228) (8,312)
Less: Common Stock purchased by Recognition Plan(3) (2,671) (3,143) (3,614) (4,156)
------------ ------------ ------------ ------------
Estimated net proceeds, as adjusted ............... $ 57,603 $ 67,838 $ 78,072 $ 89,842
============ ============ ============ ============
Consolidated net income
Historical(4) ....................................... $ 3,354 $ 3,354 $ 3,354 $ 3,354
Pro forma income on net proceeds .................... 1,855 2,184 2,514 2,893
Pro forma ESOP adjustment(2) ........................ (207) (243) (279) (321)
Pro forma Recognition Plan adjustment(3) ............ (310) (365) (419) (482)
------------ ------------ ------------ ------------
Pro forma net income .............................. $ 4,692 $ 4,930 $ 5,170 $ 5,444
============ ============ ============ ============
Per share net income (reflects SOP 93-6)(5)(6)(7):
Historical .......................................... $ 0.47 $ 0.40 $ 0.35 $ 0.30
Pro forma income on net proceeds .................... 0.26 0.26 0.26 0.26
Pro forma ESOP adjustment(2) ........................ (0.03) (0.03) (0.03) (0.03)
Pro forma Recognition Plan adjustment(3) ............ (0.04) (0.04) (0.04) (0.04)
------------ ------------ ------------ ------------
Pro forma net income per share(5) ................. $ 0.66 $ 0.59 $ 0.54 $ 0.49
============ ============ ============ ============
Purchase Price as a multiple of pro forma earnings(4) . 15.15x 16.95x 18.52x 20.41x
============ ============ ============ ============
Number of shares used in earnings per share
calculations ........................................ 7,419,000 8,727,000 10,036,000 11,542,000
============ ============ ============ ============
Stockholders' equity(8):
Historical .......................................... $ 28,470 $ 28,470 $ 28,470 $ 28,470
Estimated net proceeds .............................. 65,616 77,266 88,914 102,310
Add: Assets consolidated from Mutual Holding Company 90 90 90 90
Less: Common Stock acquired by ESOP(2) ............. (5,342) (6,285) (7,228) (8,312)
Less: Common Stock acquired by Recognition Plan (3) (2,671) (3,143) (3,614) (4,156)
------------ ------------ ------------ ------------
Pro forma stockholders' equity .................... $ 86,163 $ 96,398 $ 106,632 $ 118,402
============ ============ ============ ============
Book value per share(5)(6)(7):
Historical combined ................................. $ 3.72 $ 3.16 $ 2.75 $ 2.39
Estimated net proceeds .............................. 8.58 8.59 8.59 8.60
Add: Assets consolidated from Mutual Holding Company 0.01 0.01 0.01 0.01
Less: Common Stock acquired by ESOP(2) ............. (0.70) (0.70) (0.70) (0.70)
Less: Common Stock acquired by Recognition Plan (3) (0.35) (0.35) (0.35) (0.35)
------------ ------------ ------------ ------------
Pro forma stockholders' equity per share(4) ....... $ 11.26 $ 10.71 $ 10.30 $ 9.95
============ ============ ============ ============
Purchase Price as a percent of pro forma equity ....... 88.81% 93.37% 97.09% 100.50%
============ ============ ============ ============
Number of shares used in book value per share
calculations ........................................ 7,650,000 9,000,000 10,350,000 11,902,500
</TABLE>
(footnotes on following page)
-16-
<PAGE>
- --------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the Offering Range to reflect changes
in market and financial conditions following the commencement of the
Offerings.
(2) Assumes that 8% of shares of Conversion Stock sold in the Offerings will be
purchased by the ESOP. For purposes of this table, the funds used to
acquire such shares are assumed to have been borrowed by the ESOP from the
net proceeds of the Offerings retained by the Company. The Bank intends to
make annual contributions to the ESOP in an amount at least equal to the
principal of the debt and interest due. The ESOP debt is payable over 15
years. Statement of Position ("SOP") 93-6 requires that an employer record
compensation expense in an amount equal to the fair value of the shares
committed to be released to employees. The pro forma adjustments assume
that the ESOP shares are allocated in fifteen equal annual installments and
the fair value of the Common Stock remains at the Purchase Price and the
effective tax rates are assumed to be 42%. The unallocated ESOP shares are
reflected as a reduction of stockholders' equity. No reinvestment is
assumed on proceeds contributed to fund the ESOP. The pro forma net income
further assumes (i) that 36,000, 42,000, 48,000 and 54,000 shares were
committed to be released during the fiscal year ended December 31, 1997, in
each case at the minimum, midpoint, maximum, and 15% above maximum,
respectively, and (ii) in accordance with SOP 93-6, only the ESOP shares
committed to be released during the respective periods were considered
outstanding for purposes of net income per share calculations. See
"MANAGEMENT OF THE BANK -Benefit Plans - Employee Stock Ownership Plan."
(3) Subject to the approval of the Company's stockholders, the Recognition Plan
intends to purchase an aggregate number of shares of Common Stock equal to
4% of the shares of Conversion Stock to be sold in the Offerings. The
shares may be acquired directly from the Company, or through open market
purchases. The funds to be used by the Recognition Plan to purchase the
shares will be provided by the Bank or the Company. See "MANAGEMENT OF THE
BANK - Proposed Future Stock Benefit Plans - Recognition Plan."
Furthermore, any plans adopted within one year of the completion of the
Conversion and Reorganization will have specific limitations and require a
downward adjustment in the percentage granted. See "MANAGEMENT OF THE BANK
- Proposed Future Stock Benefit Plans -Restrictions on Stock Benefit
Plans." Assumes that the Recognition Plan acquires the shares through open
market purchases at the Purchase Price with funds contributed by the Bank,
and that 20% of the amount contributed to the Recognition Plan is amortized
as an expense during the fiscal year ended December 31, 1997. If the
Recognition Plan purchases authorized but unissued shares instead of making
open market purchases, (i) the voting interests of then existing
stockholders would be diluted by approximately 3.4%, (ii) the pro forma net
income per share for the fiscal year ended December 31, 1997 would be
$0.64, $0.58, $0.53 and $0.48 and pro forma stockholders' equity at
December 31, 1997 would be $10.88, $10.35, $9.96 and $9.61 in each case at
the minimum, midpoint, maximum, and 15% above maximum of the Offering Price
Range, respectively.
(4) Historical net income includes $1,296,000 gain on sale of deposit
liabilities (tax imputed at 42%). Absent such $1,296,000, the adjusted
purchase price as a multiple of pro forma earnings would be 20.83x, 22.73x,
24.39x and 27.03x, at the minimum, midpoint, maximum, and maximum, as
adjusted, of the Offering Price Range respectively.
(5) Per share figures include Exchange Shares that will be exchanged for Public
Mid-Tier Shares. Net income per share computations are determined by taking
the number of shares of Common Stock assumed to be issued in the Conversion
and Reorganization and, in accordance with SOP 93-6, subtracting the ESOP
shares that have not been committed for release during the respective
period. See Note 2 above. The number of Exchange Shares to be issued were
then added to such amounts. The number of shares of Conversion Stock
actually sold and the corresponding number of Exchange Shares may be more
or less than the assumed amounts.
(6) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Option Plan, which is expected to be adopted by the
Company following the Offerings and presented to stockholders for approval
no less than six months following the Conversion and Reorganization. An
amount equal to 10% of the Conversion Stock sold in the Offerings will be
reserved for future issuance upon the exercise of options to be granted
under the Option Plan, if approved by stockholders. Furthermore, any plans
adopted within one year of the completion of the Conversion and
Reorganization will have specific limitations and require a downward
adjustment in the percentage granted. See "MANAGEMENT OF THE BANK -
Proposed Future Stock Benefit Plans - Restrictions on Stock Benefit Plans."
The issuance of authorized but previously unissued shares of Common Stock
pursuant to the
-17-
<PAGE>
exercise of options under such plan would dilute existing stockholders'
interests by approximately 9.3%. Assuming stockholder approval of the
Option Plan, that all the options were exercised at the end of the period
at an exercise price equal to the Purchase Price per share shown for each
column, and that the Recognition Plan purchases shares in the open market
at such purchase price per share, (i) pro forma net income per share for
the year ended December 31, 1997 would be $0.60, $0.54, $0.49 and $0.45 and
pro forma stockholders' equity per share at December 31, 1997 would be
$11.16, $10.65, $10.28 and $9.95, in each case at the minimum, midpoint,
maximum and 15% above maximum of the Offering Price Range, respectively.
Furthermore, book value does not give effect to the liquidation account,
intangibles or the tax effect of the bad-debt deduction in the event of
liquidation.
(7) Per share figures include Exchange Shares that will be exchanged for Public
Mid-Tier Shares. Book value per share calculations are based upon the sum
of (i) the number of shares of Conversion Stock assumed to be sold in the
Offerings, and (ii) Exchange Shares equal to the minimum, midpoint, maximum
and 15% above maximum of the Offering Price Range, respectively. The
Exchange Shares reflect an Exchange Ratio of 4.7188, 5.5516, 6.3843, and
7.3420, respectively, at the minimum, midpoint, maximum, and 15% above
maximum of the Offering Range, respectively. The number of Conversion Stock
actually sold and the corresponding number of Exchange Shares may be more
or less than the assumed amounts.
(8) The retained earnings of Company will be substantially restricted after the
Conversion and Reorganization. See "DIVIDEND POLICY," "THE CONVERSION AND
REORGANIZATION - Effects of the Conversion and Reorganization - Effect on
Liquidation Rights" and "REGULATION - Savings Institution Regulation -
Dividend and Other Capital Distribution Limitations." Direct costs beyond
estimated offering expenses related to the sale of Common Stock, if the
Offerings are completed, will be recorded as a reduction in proceeds and
applied to paid in capital. If the Conversion and Reorganization is not
consummated, such costs will be charged to expenses. At December 31, 1997,
no such costs had been incurred or accrued.
-18-
<PAGE>
THISTLE GROUP HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1997 1996 1995
------------ ------------- -------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest on loans $8,763,057 $ 8,602,904 $ 8,689,150
Interest on mortgage-backed securities 6,491,208 6,554,426 5,891,955
Interest and dividends on investments 5,328,034 5,106,685 5,209,146
---------- ---------- ----------
Total interest income 20,582,299 20,264,015 19,790,251
---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits 10,538,158 10,599,955 10,172,631
Other 464,284 469,178 472,932
---------- ---------- ----------
Total interest expense 11,002,442 11,069,133 10,645,563
---------- ---------- ----------
NET INTEREST INCOME 9,579,857 9,194,882 9,144,688
PROVISION FOR LOAN LOSSES 120,000 139,194 135,000
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 9,459,857 9,055,688 9,009,688
---------- ---------- ----------
OTHER INCOME:
Gain on sales of loans 8,992 61,922
Gain on sale of deposit liabilities 2,234,268
Loss on sale of mortgage-backed securities available for sale (30,994)
Rental income 173,776 163,822 157,031
Other 391,216 419,527 356,426
---------- ---------- ----------
Total other income 2,808,252 583,349 544,385
--------- ---------- ----------
OTHER EXPENSES:
Salaries 2,718,471 2,620,365 2,576,090
Amortization of goodwill 32,544 114,547 200,461
Office occupancy 477,232 500,515 500,448
Depreciation 240,037 265,582 332,957
Telephone and postage 163,666 171,269 170,977
Pension and profit-sharing 905,145 533,898 549,697
Federal insurance premium 158,195 572,161 554,827
SAIF special assessment 1,533,127
Stationery, printing and supplies 111,996 128,070 110,155
Payroll taxes 190,507 194,422 197,174
Other employee benefits 203,601 228,570 241,470
Directors' fees 125,200 130,800 120,700
Furniture, fixture and equipment expense 215,401 215,474 204,835
Director, officer and employee expenses 172,355 157,204 159,668
Professional services 321,765 351,371 233,619
Advertising 118,265 186,013 150,064
Writedown of trustee receivable 1,180,628
Other 669,736 806,263 931,737
---------- ---------- ----------
Total other expenses 6,824,116 9,890,279 7,234,879
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 5,443,993 (251,242) 2,319,194
---------- ---------- ----------
INCOME TAXES:
Current 2,083,482 36,234 736,907
Deferred 6,518 75,766 149,993
---------- ---------- ----------
Total income taxes 2,090,000 112,000 886,900
---------- ---------- ----------
NET INCOME (LOSS) $ 3,353,993 $ (363,242) $1,432,294
========== ========== =========
BASIC EARNINGS (LOSS) PER SHARE $ 2.07 $ (0.22) $ 0.88
========== ========== =========
DILUTED EARNINGS (LOSS) PER SHARE $ 2.04 $ (0.22) $ 0.88
========== ========== =========
</TABLE>
See notes to consolidated financial statements
-19-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The Mid-Tier Holding Company's net income is primarily dependent on its
net interest income, which is the difference between interest income earned on
its loans, mortgage-backed securities and investment portfolios, and its cost of
funds consisting of interest paid on deposits and borrowings. The Mid-Tier
Holding Company's net income also is affected by its provision for loan losses,
as well as the amount of non-interest income, including gains on sales, loan
fees and service charges, and non-interest expense, such as salaries and
employee benefits, deposit insurance premiums, occupancy and equipment costs and
income taxes. Earnings of the Mid-Tier Holding Company also are affected
significantly by general economic and competitive conditions, particularly
changes in market interest rates, government policies and actions of regulatory
authorities. The discussion herein includes the Mid-Tier Holding Company and the
Bank on a consolidated basis. Unless the context requires otherwise, any
reference to the Bank, includes the Mid-Tier Holding Company on a consolidated
basis.
Business Strategy
The Bank's current business strategy is to operate as a well
capitalized, profitable and independent community savings bank dedicated to
financing home ownership and providing quality service to customers. The Bank
has sought to implement this strategy in recent years by: (1) closely monitoring
the needs of customers and providing quality customer service; (2) emphasizing
the origination of residential mortgage loans, and home equity loans and
offering other personal and family financial services; (3) reducing interest
rate risk exposure; (4) controlling operating expenses; (5) improving asset
quality; and (6) maintaining capital in excess of regulatory requirements and
controlling growth.
Upon completion of the Conversion and Reorganization, the Mid-Tier
Holding Company will focus on operating as a well capitalized, profitable and
independent community bank with increased products and services provided to its
customers. To implement this strategy, the Mid-Tier Holding Company will (i) use
its unitary thrift holding company structure to enhance the Bank's traditional
savings association business by building a focused portfolio of investments
including equity investments in non-bank financial services firms that
complement traditional banking activity, and demonstrate the ability to generate
non-interest sensitive forms of revenue; (ii) utilize available capital market
opportunities, such as stock repurchases, to enhance stockholder value; (iii)
expand the Bank's delivery network by implementing a branching strategy focused
on growth markets; (iv) implement a wholesale leverage strategy to enhance
earnings per share and growth by matching wholesale funding opportunities with
fixed and possibly variable rate assets that assist in the mitigation of balance
sheet interest rate sensitivity; (v) utilize stock benefit programs and other
incentive to seek experienced personnel to support asset and liability growth;
and (vi) enhance the Bank's infrastructure through technology investments to
accommodate growth in both existing and new customer segments.
Changes in Financial Condition
The Bank's assets decreased by $17,681,000 or 6.0% during the fiscal
year ended December 31, 1997, due primarily to a net decrease of cash, cash
equivalents and investments, as interest-bearing deposits and investments were
used to fund the sale to a local financial institution of $37,237,000 in
deposits and two branch buildings to a locally headquartered financial
institution in May of 1997 ("Branch Sale"). The Bank's 1996 business plan
included the sale of two branches which were outside of its core growth markets.
-20-
<PAGE>
Investments (including those available for sale) decreased $10,868,000
or 22.1% from $49,096,000 at December 31, 1996 to $38,228,000 at December 31,
1997 due to such funds being used to fund the sale of deposits. Mortgage-backed
securities (including those available for sale) increased $18,077,000 or 19.4%
as excess liquidity was invested in mortgage-backed securities due to decreased
loan originations. Loans receivable, including loans available for sale,
decreased $3,338,000 or 3.3% from $100,773,000 to $97,435,000 due to prepayments
exceeding decreased originations.
The Bank's liabilities similarly decreased by $21,571,000 or 8.0%
during the fiscal year ended December 31, 1997, due to a decrease in deposits of
$25,988,000 from $256,547,000 to $230,558,000 primarily from the sale to a local
financial institution of $37,237,000 in deposits as previously discussed. As a
result of the Branch Sale, the Bank recognized a gain on the liabilities sold.
Accrued income taxes increased from $86,900 to $2,096,000 due to earnings
present in 1997 compared to a loss in 1996.
The Bank's total stockholders' equity increased by $3,889,000, or 15.8%
due mainly to earnings in 1997 and a $655,000 increase in unrealized gains on
securities available for sale, offset partially by dividends paid of $165,000 .
The Bank's assets increased by $4,745,000 or 1.64% during the fiscal
year ended December 31, 1996, due primarily to a net increase of cash due the
prepayment of mortgage-backed securities during fiscal 1997 as the Bank
accumulated liquid assets in anticipation of the Branch Sale as previously
discussed.
The Bank's liabilities increased by $5,312,000 or 2.0% during the
fiscal year ended December 31, 1996, due to a $6,363,000 or 2.5% increase in
interest-bearing deposits due to management's decision to aggressively seek
certificates of deposits to accumulate funds needed for the Branch Sale.
The Bank's stockholders' equity decreased by $567,000, or 2.3% due
mainly to dividends paid of $165,000 and a $363,000 loss experienced by the Bank
in the fiscal year ended December 31, 1996.
Results of Operations
General. The earnings of the Bank depend primarily on its level of net
interest income, which is the difference between interest earned on the Bank's
interest-earning assets and the interest paid on interest-bearing liabilities.
Net interest income is a function of the Bank's interest rate spread, which is
the difference between the average yield earned on interest-earning assets and
the average rate paid on interest-bearing liabilities, as well as a function of
the average balance of interest-earning assets as compared to interest-bearing
liabilities. The Bank reported net income of $1,432,000 and $3,354,000 for the
fiscal years ended December 31, 1995 and 1997, respectively, and a net operating
loss of $363,000 for the fiscal year ended December 31, 1996.
-21-
<PAGE>
Balance Sheet. The following table sets forth certain information
relating to the Bank's average balance sheet and reflects the average yield on
assets and average cost of liabilities for the periods indicated and the average
yields earned and rates paid. Such yields and costs are derived by dividing
income or expense by the average balance of assets or liabilities, respectively,
for the periods presented. Average balances are derived from month-end balances.
Management does not believe that the use of month-end balances instead of daily
average balances has caused any material differences in the information
presented.
<TABLE>
<CAPTION>
At
December 31, Year Ended December 31,
------------ ---------------------------------------------------------------------------------
1997 1997 1996 1995
----------- ------------------------- -------------------------- --------------------------
Average Average Average
Yield/ Average Yield/ Average Yield/ Average Yield/
Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost
------ ------- -------- ------- ------- -------- --------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1).................... 8.24% $101,472 $ 8,763 8.64% $101,726 $ 8,603 8.46% $ 99,194 $ 8,689 8.76%
Mortgage-backed securities............. 7.01 93,427 6,491 6.95 93,925 6,554 6.98 86,653 5,892 6.80
Cash and investment securities(2)...... 6.31 72,813 4,977 6.84 77,272 4,728 6.12 80,694 4,864 6.03
Other interest-earning assets.......... 6.81 6,317 351 5.56 6,761 379 5.61 4,964 345 6.95
------- ------ ------- ------- ------- -------
Total interest-earning assets......... 7.34 274,029 $20,582 7.51 279,684 $20,264 7.25 271,505 $19,790 7.29
------- ====== ------- ====== ------- ======
Non-interest-earning assets............. 10,013 9,529 8,369
------- ------- -------
Total assets.......................... $284,042 $289,213 $279,874
======= ======= =======
Interest-bearing liabilities:
Regular savings accounts............... 3.27 $ 35,448 $ 1,133 3.20 $ 39,487 $ 1,233 3.12 $39,460 $ 1,261 3.20
Senior club savings.................... 4.06 65,868 2,673 4.06 71,117 2,886 4.06 68,953 2,797 4.06
Certificate accounts................... 5.41 116,523 6,223 5.34 112,756 5,886 5.22 106,731 5,327 4.99
Other deposit accounts................. 2.03 24,550 509 2.08 26,792 595 2.22 26,991 788 2.92
------- ------- ------- ------- ------- -------
Total deposits....................... 4.39 242,389 10,538 4.35 250,152 10,600 4.24 242,135 10,173 4.20
------- ------ ------- ------ ------- ------
FHLB borrowings........................ 5.53 7,884 436 5.53 7,884 436 5.53 7,884 436 5.53
Other liabilities (escrow)............. 1.86 1,730 28 1.62 1,772 33 1.86 1,920 37 1.93
------- -------- ------- ------ ------- -------
Total interest-bearing liabilities.... 4.41 252,003 $11,002 4.37 259,808 11,069 4.26 251,939 $10,646 4.23
------- ====== ------- ------ ------- ======
Non-interest bearing liabilities........ 5,020 4,412 4,002
------- ------- -------
Total liabilities...................... 257,023 264,220 255,941
------- ------- -------
Retained earnings....................... 27,019 24,993 23,933
------- ------- -------
Total liabilities and
retained earnings.................... $284,042 $289,213 $279,874
======= ======= =======
Net interest income..................... $ 9,580 $ 9,195 $ 9,144
====== ====== ======
Interest rate spread(3)................. 2.93% 3.14% 2.99% 3.06%
===== ====== ====== ======
Net yield on interest-
earning assets(4)..................... 4.66% 4.38% 4.49%
====== ====== ======
Ratio of average interest-
earning assets to average
interest-bearing liabilities.......... 108.74% 107.65% 107.77%
====== ====== ======
</TABLE>
- ---------------------------------
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
-22-
<PAGE>
Rate/Volume Analysis. The table below sets forth certain information
regarding changes in interest income and interest expense of the Bank for the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (changes in average volume multiplied by old rate); (ii)
changes in rates (changes in rate multiplied by old average volume); (iii)
changes in rate-volume (changes in rate multiplied by the change in average
volume).
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
Increase (Decrease) Increase (Decrease)
----------------------------------- ---------------------------------
Due to Due to
------ ------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable .................... $ (21) $ 181 $-- $ 160 $ 222 $(300) $ (8) $ (86)
Mortgage-backed securities .......... (35) (28) -- (63) 494 155 13 662
Cash and investment securities ...... (273) 554 (32) 249 (206) 73 (3) (136)
Other interest earning assets ....... (25) (3) -- (28) 125 (67) (24) 34
----- ----- ----- ----- ----- ----- ----- -----
Total interest-earning assets ...... $(354) $ 704 $ (32) $ 318 $ 635 $(139) $ (22) $ 474
===== ===== ===== ===== ===== ===== ===== =====
Interest expense:
Savings accounts .................... $(329) $ 276 $ (9) $ (62) $ 337 $ 87 $ 3 $ 427
Other liabilities ................... (2) (3) -- (5) (7) 3 -- (4)
----- ----- ----- ----- ----- ----- ----- -----
Total interest-bearing liabilities $(331) $ 273 $ (9) $ (67) $ 330 $ 90 $ 3 $ 423
===== ===== ===== ===== ===== ===== ===== =====
Net change in interest income ........ $ (23) $ 431 $ (23) $ 385 $ 305 $(229) $ (25) $ 51
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
Comparison of Operating Results for Years Ended December 31, 1997 and December
31, 1996.
General. Net income for the year ended December 31, 1997 increased
$3,717,000 from a loss of $363,000 in 1996 to a profit of $3,354,000 for the
year ended December 31, 1997. The increase was primarily due to a gain from the
sale of two branch offices and the absence in 1997 of a one-time SAIF special
assessment of $1,533,000 and the write-off of trustee receivables caused by the
bankruptcy of Bennett Funding. See "- Comparison of Operating Results for Years
Ended December 31, 1996 and December 31, 1995 - Other Expenses." Furthermore,
net interest income increased $385,000 or 4.2% as the Bank's interest rate
spread improved during 1997 and other income increased $2,225,000 or 381.4% due
to a gain on the sale of deposit liabilities. These increases were offset
somewhat by an increase in total income taxed due to the Bank returning to
profitability in 1997.
Net Interest Income. Net interest income increased $385,000 or 4.2%
from $9,195,000 for the year ended December 31, 1996 to $9,580,000 during the
year ended December 31, 1997 as interest income increased and interest expense
decreased, and the Bank's interest rate spread improved 15 basis points (100
basis points equalling 1%) due primarily to increased yields on loans and
investment securities. The Bank's net interest rate spread increased from 2.99%
to 3.14%.
Interest Income. Interest income increased from $20,264,000 for 1996
to $20,582,000 for 1997, or 1.6% primarily due to an increase in income from
loans and interest and dividend on investments. Interest on loans increased
$160,000 due to increased yields as the Bank emphasized equity loans. The
-23-
<PAGE>
interest on cash and investment securities increased $221,000 during 1997 due to
a 72 basis point increase in the yield. The average balance and yield on
mortgage-backed securities remained relatively stable.
Interest Expense. Interest expense decreased $67,000 or .06% due
primarily to a decease in the average balance of deposits due to the sale of
$37,237,000 of deposits in May, 1997 which was partially offset by an increase
of the cost of funds from certificates of deposit due to management's decision
to seek funds for the Branch Sale. See "- Changes in Financial Condition."
Provision for Losses on Loans. The provision for losses on loans
decreased $19,000 from $139,000 for the year ended December 31, 1996 to $120,000
for the year ended December 31, 1997. Provisions for losses included charges to
reduce the recorded balances of mortgage loans receivable and the collateral
real estate to their estimated net realizable value or fair value, as
applicable. Such provisions are based on management's estimate of net realizable
value or fair value of the collateral, as applicable, considering the current
and currently anticipated further operating or sales conditions, thereby causing
these estimates to be particularly susceptible to changes that could result in a
material adjustment to results of operations in the near term. Recovery of the
carrying value of such loans and real estate is dependent to a great extent on
economic, operating and other conditions that may be beyond the Bank's control.
Other Income. Other income increased from $583,000 for 1996 to
$2,808,000 for the year ended December 31, 1997 primarily as a result of the
$2,234,000 gain on the sale of deposit liabilities in May, 1997. See "- Changes
in Financial Condition."
Other Expenses. Other expenses decreased by $3,066,000 or 31.0% from
$9,890,000 in 1996 to $6,824,000 for the year ended December 31, 1997. This
decrease was primarily caused by the absence in 1997 of a one-time special SAIF
assessment and a write down of $1,181,000 of a trustee receivable. The Bank
previously invested in loans secured by commercial equipment leases from a
single entity. During 1996, the borrower declared bankruptcy. On December 27,
1996, the company entered into an agreement with the trustee for the bankruptcy
court whereby the Bank will receive approximately 65% of the cash receipts from
the collateral principal in exchange for all rights to the collateral. In
connection with this agreement, the company charged-off $1.2 million of the
outstanding balance due from the trustee at December 31, 1996. The receivable
balance of approximately $361,000 and $1,771,000, resulting from the agreement
with the trustees, is a component of prepaid expenses and other assets in the
consolidated statement of financial condition at December 31, 1997 and 1996,
respectively. The receivable is to be repaid by the trustee from subsequent cash
collections. Other decreases in 1997 included a $414,000 or 72.4% decrease in
federal insurance premiums due to the resolution of the SAIF, a $82,000 or 71.6%
decrease in the amortization of goodwill as goodwill obtained in the acquisition
of Aetna Federal in 1982 was completely amortized in 1997, and a $137,000 or
16.9% decrease in other operating expenses due to write off of expenses of
$350,000 related to the inability to consummate a conversion and merger with
Progress Financial Corp. Offsetting these decreases were increases of $371,000
or 69.5% in pension and profit sharing expense due to increased profit sharing
on increased earnings compared to 1996, and $98,000 or 3.7% in salaries due to
normal salary increases offset by a decrease in the number of employees (eight)
due to the sale of the two branch offices from the Branch Sale in May 1998.
Upon completion of the Conversion and Reorganization, the Company
expects an increase in other expenses due to being a public company and the cost
of stock benefit plans, if adopted.
Income Tax Expense. Income tax expense increased significantly from
$112,000 in 1996 to $2,090,000 in 1997 due to the Bank's return to
profitability.
-24-
<PAGE>
Comparison of Operating Results for Years Ended December 31, 1996 and December
31, 1995.
General. Net income for the year ended December 31, 1996 decreased
$1,795,000 or 125.3% to a loss of $363,000 from a profit of $1,432,000 for the
year ended December 31, 1995. The decrease was primarily due to the SAIF special
assessment of $1,533,000 and the write down of trustee receivable caused by the
bankruptcy of Bennett Funding. See "BUSINESS OF THE BANK - Lending Activities -
Loans Secured by Commercial Equipment Leases."
Net Interest Income. Net interest income increased $50,000 or .5% from
$9,145,000 for the year ended December 31, 1995 to $9,195,000 during the year
ended December 31, 1996 as the average balances and yield/costs of
interest-earning assets and interest-bearing liabilities increased at a
relatively similar pace. The Bank experienced a slight decrease in the net
interest rate spread from 3.06% to 2.99% due to the Bank's aggressive marketing
of certificates of deposit during the period.
Interest Income. Interest income increased from $19,790,000 for 1995 to
$20,264,000 for 1996, or 2.4% primarily due to an increase in income from an
increase in the average balance of mortgage-backed securities. Interest on loans
and interest and dividends on investments remained relatively stable, decreasing
$86,000 or .9% and $102,000 or 2.0%, respectively, due primarily to a slight
increase in the average balance of loans receivable and the yield on cash and
investment securities.
Interest Expense. Interest expense increased $424,000 or 4.0% due
primarily to an increase in the average balance of deposits, in particular
certificates of deposit due to management's effort to accumulate funds for the
Branch Sale. The average balance of certificates of deposit increased $6,025,000
or 5.6% as the Bank emphasized certificate of deposit products during 1996.
Provision for Losses on Loans. The provision for losses on loans
increased $4,000 from $135,000 for the year ended December 31, 1995 to $139,000
for the year ended December 31, 1996. See also "- Comparison of Operating
Results for Years Ended December 31, 1996 and December 31, 1997 - Provision for
Loan Losses."
Other Income. Other income increased from $544,000 for 1995 to $583,000
for the year ended December 31, 1996 primarily as a result of an increase in fee
income as well as an absence of any losses on the sale of mortgage-backed
securities present in 1995, offset somewhat by no gains on the sale of loans in
1996 as the Bank did not sell any loans during such period.
Other Expenses. Other expenses increased by $2,655,000 or 37% from
$7,235,000 in 1995 to $9,890,000 for the year ended December 31, 1996. This
increase was primarily the result of a $1,533,000 special assessment required to
recapitalize the SAIF. On September 30, 1996, pursuant to legislation, all
SAIF-insured institutions were charged a one-time assessment of 65.7 basis
points per $100 of insurable deposits as of March 31, 1995. The legislation also
provides that the Bank, in addition to the payment of normal deposit insurance
premium as a member of the SAIF, pay an annual amount equal to approximately 6.4
basis points of outstanding SAIF deposits toward the retirement of the Financial
Corporation Bonds ("Fico Bonds") issued in the 1980's to assist in the recovery
of the savings and loan industry. Members of the Bank Insurance Fund ("BIF"), by
contrast, will pay, in addition to their normal deposit insurance premium,
approximately 1.3 basis points toward the retirement of the Fico Bonds.
Beginning no later than January 1, 2000, the rate paid to retire the Fico Bond
will be equal for members of the BIF and the SAIF. The legislation also provided
for the merging of the BIF and the SAIF by January 1, 1999 provided there are no
financial institutions still chartered as savings associations at that time.
Should the insurance funds be merged before January 1, 2000, the rate paid by
all members of this new fund to retire the Fico Bond would be equal.
-25-
<PAGE>
In addition, the Bank wrote down trustee receivables by $1,181,000. See
"Business of the Bank - Lending Activities - Loans Secured by Commercial
Equipment Leases." Furthermore, the Bank experienced increased advertising costs
of $36,000 or 24.0% due to home equity loan advertising; and increased
professional service fees of $118,000 due to legal fees in challenging
previously paid state taxes. Such increases were partially offset by decreased
amortization of goodwill from the acquisition of Aetna Federal in 1982 and
decreased depreciation due to the Bank's data processing system becoming fully
depreciated.
Income Tax Expense. Income tax expense decreased significantly from
$887,000 in 1995 to $112,000 in 1996 due to the loss recognized in 1996.
Year 2000
A great deal of information has been disseminated about the global
computer year 2000. Many computer programs that can only distinguish the final
two digits of the year entered (a common programming practice in earlier years)
are expected to read entries for the year 2000 as the year 1900 and compute
payment, interest or delinquency based on the wrong date or are expected to be
unable to compute payment, interest or delinquency. Rapid and accurate data
processing is essential to the operation of the Bank. Data processing is also
essential to most other financial institutions and many other companies.
Based on a recognized need to upgrade the date processing system, to be
more competitive in the marketplace and to address the year 2000 problem, the
Bank signed an agreement with Open Solutions Incorporated, Glastonbury,
Connecticut, to purchase its information processing system. The system has been
certified by its vendor as year 2000 compliant. This system, which is scheduled
to be installed at the Bank in late July 1998, is a PC-based client server
system which, management believes, will serve the Bank well beyond the year
2000. It is estimated the total cost of this system will be approximately $1.2
million with an annual cost of approximately $344,000 including depreciation,
software cost and maintenance. See also "RISK FACTORS - Year 2000 Compliance."
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits and proceeds from
principal and interest payments on loans, mortgage-backed securities and other
investments. While maturities and scheduled amortization of loans and
mortgage-backed securities are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions, competition and the consolidation of the financial institution
industry.
The primary investment activity of the Bank is the origination and
purchase of mortgage loans, mortgage-backed securities and other investments.
During the years ended December 31, 1995, 1996, and 1997, the Bank originated
mortgage loans in the amounts of $11.5 million, $17.8 million, and $19.9 million
respectively. The Bank also purchases loans and mortgage-backed securities to
reduce liquidity not otherwise required for local loan demand. Purchases of
mortgage loans and mortgage-backed securities totaled $33.0 million, $17.8
million and $35.1 million, respectively, in those same periods. Other investment
activities include investment in short term certificates of deposit of other
financial institutions, FHLB of Pittsburgh stock, consumer loans and the U.S.
government and federal agency obligations.
The Bank has other sources of liquidity if a need for additional funds
arises. Although the Bank has historically not utilized borrowings as a source
of funds, the Bank had outstanding advances from the FHLB of Pittsburgh in 1995,
1996 and 1997. In addition, other sources of liquidity can be found in the
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<PAGE>
Bank's balance sheet, such as investment securities maturing within one year and
unencumbered mortgage-backed securities that are readily marketable.
The Bank is required to maintain minimum levels of liquid assets as
defined by OTS regulations. The requirement, which may be varied at the
direction of the OTS depending upon economic conditions and deposit flows, is
based upon a percentage of deposits and short-term borrowings. The required
minimum ratio is currently 4.0%. The Bank's liquidity ratio was 18.87% at
December 31, 1997.
The Bank's most liquid assets are cash and cash equivalents, which
include investments in highly liquid short-term investments. The level of these
assets are dependent on the Bank's operating, financing and investing activities
during any given period. At December 31, 1997, cash and cash equivalents
totalled $20,151,000.
The Bank anticipates that it will have sufficient funds available to
meet its current commitments. As of December 31, 1997, the Bank had $761,000 in
commitments to fund loans. Certificates of deposit which were scheduled to
mature in one year or less as of December 31, 1997 totaled $89,887,000.
Management believes that a significant portion of such deposits will remain with
the Bank.
The Bank had core, tangible and risk-based capital ratios of 9.5%, 9.5%
and 28.6%, respectively, at December 31, 1997, which significantly exceeded the
OTS's respective minimum requirements of 3.00%, 1.50% and 8.00%. The Bank was
classified as a "well capitalized" institution on December 31, 1997. See
"HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE."
Market Risk Analysis
Qualitative Analysis. The goal of the Bank's asset/liability policy is
to manage interest rate risk so as to maximize net interest income over time in
changing interest rate environments. Management monitors the Bank's net interest
spreads (the difference between yields received on assets and rates paid on
liabilities) and, although constrained by market conditions, economic
conditions, and prudent underwriting standards, it offers deposit rates and loan
rates in an attempt to maximize net interest income. Management also attempts to
fund the Bank's assets with liabilities of a comparable duration to minimize the
impact of changing interest rates on the Bank's net interest income. Since the
relative spread between financial assets and liabilities is constantly changing,
the Bank's current net interest income may not be an indication of future net
interest income.
The Bank has sought to manage its interest rate risk by maintaining a
high degree of liquid assets and short-term securities, coupled with the
purchase of mortgage-backed securities secured by adjustable rate mortgage
loans.
The Bank is also managing interest rate risk by the origination of
multi-family residential loans with a balloon payment after five to seven years.
In general, these loans have higher yields, shorter maturities and greater
interest rate sensitivity than traditional one- to four-family residential real
estate loans.
The Bank constantly monitors its deposits in an effort to decrease
their interest rate sensitivity. Rates of interest paid on deposits at the Bank
are priced competitively in order to meet the Bank's asset/liability management
objectives and spread requirements. As of December 31, 1997, the Bank's savings
accounts, checking accounts and money market deposit accounts totaled
$119,508,000 or 51.8% of its total deposits. The Bank believes, based on
historical experience, that a substantial portion of such accounts represent
non-interest rate sensitive core deposits.
-27-
<PAGE>
Quantitative Interest Rate Sensitivity Analysis. The value of the
Bank's loan portfolio will change as interest rates change. Rising interest
rates will decrease the Bank's net portfolio value, while falling interest rates
increase the value of that portfolio.
The following table sets forth, quantitatively, as of December 31,
1997, the OTS estimate of the projected changes in net portfolio value ("NPV")
in the event of 100, 200, 300, and 400 basis points ("bp") instantaneous and
permanent increases and decreases in market interest rates. Dollar amounts are
expressed in thousands.
<TABLE>
<CAPTION>
Estimated Net Portfolio Value NPV as % of PV of Assets
BP Change -------------------------------------------------- -------------------------------
in Rates $ Amount $ Change % Change NPV Ratio BP Change
-------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
+400 bp $13,521 $-22,349 -62% 5.41% -758 bp
+300 19,126 -16,743 -47 7.45 -553 bp
+200 25,004 -10,865 -30 9.49 -349 bp
+100 30,793 -5,077 -14 11.40 -159 bp
NC 35,870 12.98
-100 40,663 4,794 +13 14.42 +143 bp
-200 46,863 10,994 +31 16.20 +321 bp
-300 54,166 18,296 +51 18.19 +521 bp
-400 63,402 27,532 +77 20.58 +759 bp
12/31/97 12/31/96
-------- --------
* * * RISK MEASURES: 200 BP RATE SHOCK * * *
Pre-Shock NPV Ratio: NPV as % of PV of Assets........................ 12.98% 12.50%
Exposure Measure: Post-Shock NPV Ratio............................... 9.49% 9.78%
Sensitivity Measure: Change in NPV Ratio............................. -349 bp -273 bp
</TABLE>
Computations of prospective effects of hypothetical interest rate
changes are calculated by the OTS from data provided by the Bank and are based
on numerous assumptions, including relative levels of market interest rates,
loan repayments and deposit runoffs, and should not be relied upon as indicative
of actual results. Further, the computations do not contemplate any actions the
Bank may undertake in response to changes in interest rates.
Management cannot predict future interest rates or their effect on the
Bank's NPV in the future. Certain shortcomings are inherent in the method of
analysis presented in the computation of NPV. For example, although certain
assets and liabilities may have similar maturities or periods to repricing, they
may react in differing degrees to changes in market interest rates.
Additionally, certain assets, such as adjustable rate loans, which represent the
bank's primary loan product, have features which restrict changes in interest
rates during the initial term and over the remaining life of the asset. In
addition, the proportion of adjustable rate loans in the Bank's portfolio could
decrease in future periods due to refinancing activity if market interest rates
remain or decrease in future periods due to refinancing activity. Further, in
the event of a change in interest rates, prepayment and early withdrawal levels
could deviate significantly from those assumed in the table. Finally, the
ability of many borrowers to service their adjustable-rate debt may decrease in
the event of an interest rate increase.
The Bank's Board of Directors is responsible for reviewing and
approving the asset and liability policies. The Board meets quarterly to review
interest rate risk and trends, as well as liquidity and capital ratios and
requirements. The Bank's management is responsible for administering the
policies and determinations of the Board of Directors with respect to the Bank's
asset and liability goals and strategies. Management expects that the Bank's
asset and liability policies and strategies will continue as described
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<PAGE>
above so long as competitive and regulatory conditions in the financial
institution industry and market interest rates continue as they have in recent
years.
Recent Accounting Pronouncements
FASB Statement on Reporting Comprehensive Income. In June 1997, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 130. SFAS No. 130 will require the Mid-Tier
Holding Company to classify items of other comprehensive income by their nature
in the financial statements and display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the statement of changes in stockholders'
equity. SFAS No. 130 is effective for fiscal years beginning after December 15,
1997.
FASB Statement on Earnings Per Share. In March 1997, FASB issued SFAS
No. 128. The Statement establishes standards for computing and presenting
earnings per share and applies to entities with publicly held common stock or
potential common stock. This Statement simplifies the standards for computing
earnings per share previously found in Accounting Principles Board ("APB")
Opinion No. 15, Earnings per Share ("EPS"), and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and the
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB Opinion No. 15. This statement
supersedes Opinion 15 and American Institute of Certified Public Accountants
("AICPA") Accounting Interpretation 1-102 of Opinion 15. This statement is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. SFAS No. 128 has been adopted by Mid-Tier
Holding Company.
FASB Statement on Disclosure of Information about Capital Structure. In
February 1997, the FASB issued SFAS No. 129. The Statement incorporates the
disclosure requirements of APB Opinion No. 15, Earnings per Share, and makes
them applicable to all public and nonpublic entities that have issued securities
addressed by the Statement. APB Opinion No. 15 requires disclosure of
descriptive information about securities that is not necessarily related to the
computation of earnings per share. This statement continues the previous
requirements to disclose certain information about an entity's capital structure
found in APB Opinions No. 10, Omnibus Opinion- 1966, and No. 15, Earnings per
Share, and FASB Statement No. 47, Disclosure of Long-Term Obligations, for
entities that were subject to the requirements of those standards. This
Statement eliminates the exemption of nonpublic entities from certain disclosure
requirements of Opinion 15 as provided by FASB Statement No. 21, Suspension of
the Reporting of Earnings per Share and Segment Information by Nonpublic
Enterprises. It supersedes specific disclosure requirements of Opinions 10 and
15 and Statement 47 and consolidates them in this Statement for ease of
retrieval and for greater visibility to nonpublic entities. The Statement is
effective for financial statements for periods ending after December 15, 1997.
SFAS No. 129 has been adopted by Mid-Tier Holding Company.
FASB Statement on Accounting for Stock-Based Compensation. In October
1995, the FASB issued SFAS No. 123. SFAS No. 123 defines a "fair value based
method" of accounting for an employee stock option whereby compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period. FASB has encouraged all entities to adopt the fair
value based
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<PAGE>
method, however, it will allow entities to continue the use of the "intrinsic
value based method" prescribed by APB Opinion No. 25. Under the intrinsic value
based method, compensation cost is the excess of the market price of the stock
at the grant date over the amount an employee must pay to acquire the stock.
However, most stock option plans have no intrinsic value at the grant date and,
as such, no compensation cost is recognized under APB Opinion No. 25. Entities
electing to continue use of the accounting treatment of APB Opinion No. 25 must
make certain pro forma disclosures as if the fair value based method had been
applied. The accounting requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years beginning after December 15, 1995. Pro
forma disclosures must include the effects of all awards granted in fiscal years
beginning after December 15, 1994. The Mid- Tier Holding Company expects to use
the "intrinsic value based method" as prescribed by APB Opinion No. 25.
FASB Statement on Reporting Comprehensive Income. In June 1997, the
FASB issued SFAS No. 130, Reporting Comprehensive Income, which requires an
entity to present, as a component of comprehensive income, the amounts from
transactions and other events which currently are excluded from the statement of
income and are recorded directly to stockholders' equity. SFAS No. 130 is
applicable for years beginning after December 15, 1997. Management has not
completed an analysis of the impact, if any, the adoption of this statement will
have on the Company's consolidated financial condition or results of operations.
FASB Statement on Segments of an Enterprise and Related Information.
Also in June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 131 requires an entity to
disclose financial information in a manner consistent to internally used
information and requires more detailed disclosures of operating and reporting
segments that are currently in practice. SFAS No. 131 is applicable for years
beginning after December 15, 1997. Management has not completed an analysis of
the impact, if any, the adoption of this statement will have on the Company's
consolidated financial condition or results of operations.
FASB Statement on Employers' Disclosure About Pensions and Other
Postretirement Benefits. In February 1998, the FASB issued SFAS No. 132,
Employers' Disclosure About Pensions and Other Postretirement Benefits. SFAS No.
132 revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of those plans.
SFAS No. 132 is applicable for years beginning after December 15, 1997.
Management has not completed an analysis of the impact, if any, the adoption of
this statement will have on the Company's consolidated financial condition or
results of operations.
Impact of Inflation and Changing Prices
The financial statements of the Mid-Tier Holding Company and notes
thereto, presented elsewhere herein, have been prepared in accordance with
generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
the Mid-Tier Holding Company's operations.
Unlike most industrial companies, nearly all the assets and liabilities
of the Mid-Tier Holding Company are monetary. As a result, interest rates have a
greater impact on the Mid-Tier Holding Company's performance than do the effects
of general levels of inflation. Interest rates do not necessary move in the same
direction or to the same extent as the price of goods and services.
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<PAGE>
BUSINESS OF THE COMPANY
The Company is a Pennsylvania corporation organized in March 1998 at
the direction of the Bank to acquire all of the capital stock of the Bank. The
Company is not an operating company and has not engaged in any significant
business to date. Management believes that the holding company structure and
retention of proceeds will, should it decide to do so, facilitate
diversification into other non-banking activities and possible future
acquisitions of other financial institutions such as savings institutions and
commercial banks, and thereby further its expansion into existing and new market
areas and also enable the Company to repurchase its own stock. However, there
are no present plans, arrangements, agreements, or understandings, written or
oral, regarding any such activities.
Upon completion of the Conversion and Reorganization, the Company will
be a unitary savings and loan holding company which, under existing laws,
generally would not be restricted in the types of business activities in which
it may engage provided that the Bank retains a specified amount of its assets in
housing-related investments. The Company will not initially conduct any active
business. The Company does not intend to employ any persons other than officers
but will utilize the support staff of the Bank from time to time. See also
"THISTLE GROUP HOLDINGS, CO."
BUSINESS OF THE BANK
General
Roxborough-Manayunk is a federally-chartered stock savings association,
which was originally chartered as a mutual savings association through the
combination of 11 building and loan associations as Roxborough- Manayunk Federal
Savings and Loan Association (the "Association") on May 3, 1939, at which time
the Association's accounts were insured by the Federal Savings and Loan
Insurance Corporation ("FSLIC") and currently the SAIF. In 1939, the Association
became a member of the FHLB System. On December 31, 1992, the Association
reorganized from a mutual savings association into a mutual holding company
named FJF Financial, M.H.C. and chartered a new stock savings bank named
Roxborough-Manayunk Federal Savings Bank. On October 1, 1997, the Bank formed a
middle-tier stock holding company (Thistle Group) whereby the Bank became a
wholly-owned subsidiary of the Mid-Tier Holding Company, which in turn is over
80% owned by the Mutual Holding Company. The Bank's main office is located at
6060 Ridge Avenue, Philadelphia, Pennsylvania 19128, and the telephone number at
that office is (215) 483-2800. The Bank serves the Pennsylvania counties of
Philadelphia and Delaware through a network of six offices, providing a full
range of retail banking services, with emphasis on one-to-four family
residential mortgages. Upon completion of the Conversion and Reorganization the
Bank will change its name to "Roxborough-Manayunk Bank." At December 31, 1997,
the Mid-Tier Holding Company had total assets, deposits, and stockholders'
equity of approximately $276.7 million, $230.6 million, and $28.5 million,
respectively.
The principal business of the Bank is the acceptance of savings
deposits from the general public and the origination and purchase of mortgage
loans for the purpose of constructing, financing or refinancing one- to
four-family residences and other improved residential and commercial real
estate. The Bank's income is derived largely from interest and fees in
connection with its lending activities. Its principal expenses are interest paid
on savings deposits and borrowings and operating expenses.
Unless the context requires otherwise, any reference to the Bank
includes the Mid-Tier Holding Company on a Consolidated basis.
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<PAGE>
Geographic Lending Area
Although authorized to make real estate loans throughout the United
States, the Bank's lending area generally includes Philadelphia, Bucks,
Delaware, Chester, and Montgomery Counties, which comprise the Philadelphia
metropolitan area. The Bank's primary lending area consists of the far northwest
sections of Philadelphia, South Philadelphia, and Montgomery County,
Pennsylvania.
The Pennsylvania real estate market was generally depressed in the
late-1980s. The market has shown improvement in the 1990s, but whether the
recovery will continue is dependent upon general economic conditions, not just
in Pennsylvania, but in the United States as a whole.
Lending Activities
General. Historically, the principal lending activity of Roxborough-
Manayunk has been the origination of mortgage loans for the purpose of
constructing, financing or refinancing residential properties.
Loan Portfolio Composition. The Bank's loan portfolio composition
consists primarily of conventional fixed-rate and adjustable- rate first
mortgage loans secured by residential residences and, to a much lesser extent,
multi-family residences and commercial real estate. As of December 31, 1997, the
Bank's total net portfolio of loans, excluding loans classified as held for sale
(the "loan portfolio"), was $98.7 million, of which $71.4 million, or 72.4%, was
secured by one-to-four family residential dwellings. At that same date, $10.3
million or 10.4% of the loan portfolio was secured by commercial real estate and
$6.3 million or 6.4% was secured by multi-family real estate.
Analysis of Loan Portfolio. The following table sets forth selected
data relating to the composition of the Bank's loan portfolio by type of loan
and type of security on the dates indicated.
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<PAGE>
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ------------------- ----------------------- --------------------- ------------------
$ % $ % $ % $ % $ %
--- --- --- --- --- --- --- --- --- --
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:(1)
Construction..........$ 1,693 1.72% $ 964 .96% $ 495 .48% $ 910 .93% $ 558 .55%
1-4 Family............ 71,397 72.36 73,871 73.30 72,675 71.20 74,124 75.88 80,886 80.09
Multi-family
and commercial...... 16,647 16.87 17,615 17.54 20,200 19.79 14,603 14.95 13,900 13.76
Home equity........... 8,133 8.24 7,011 6.96 5,004 4.91 4,300 4.40 2,277 2.25
Home equity line
of credit........... 73 .07 - -
Loans secured by
commercial
equipment leases...... - - - - 3,341 3.27 3,179 3.25 2,829 2.80
Commercial loans........ 329 .33 770 .76 - - - - - -
Consumer loans:
Line of credit........ 96 .10 92 .09 - - - - - -
Secured demand note... 60 .06 - - - - - - - -
Share loans........... 243 .25 384 .38 347 0.34 537 0.55 509 .50
Home improvement...... 4 - 8 .01 15 .01 24 .03 31 .03
------ ----- ------- ------ ------- ------ ------ ------ ------- ------
Total loans.............$98,675 100.00% $100,715 100.00% $102,077 100.00% $97,677 100.00% $100,990 100.00%
====== ====== ======== ====== ======= ====== ======= ====== ======= ======
Less:
Premiums and
(discounts).........$ 54 $ 76 $ 26 $ (61) $ (210)
Deferred fees......... (1,233) (1,299) (1,221) (1,254) $ (1,381)
Loans in process...... (433) (289) (156) (422) (327)
Allowance for
loan losses......... (783) (577) (455) (417) (450)
------ ------- ------- ----- -------
Total loans, net......$96,280 $ 98,626 $100,271 $95,523 $ 98,622
====== ======= ======= ====== =======
</TABLE>
- ------------------
(1) Does not include $1,155, $2,147, $1,613, and $1,198 of mortgage loans
classified as held for sale at December 31, 1997, 1996, 1995, and 1994,
respectively. There were no mortgage loans classified as held for sale
at December 31, 1993. See "-Loans Available for Sale".
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<PAGE>
Residential Mortgage Loans. The Bank offers first mortgage loans
secured by one- to four-family residences in Roxborough- Manayunk's primary
lending area. Typically, such residences are single- family homes that serve as
the primary residence of the owner. Roxborough- Manayunk offers fixed-rate
mortgage loans with terms of up to 30 years. Interest rates charged on
fixed-rate loans are competitively priced based on the local competitive market.
Loan origination fees on these loans are generally 3% of the loan amount;
however, this amount may vary. As of December 31, 1997, $71.4 million or 72.4%
of the loan portfolio consisted of residential mortgage loans, of which
approximately 95.1% were fixed-rate loans. See also "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATION - Market Risk Analysis.
The adjustable-rate mortgage loans originated by the Bank generally
adjust every year based upon selected published indices. The Bank had limited
success in originating adjustable-rate mortgage loans during recent periods of
prevailing low market interest rates. Adjustable- rate mortgage loans generally
have a 2% cap on any change in rate per year, with an overall limit of 6% on any
increase over the life of the loan. Mortgage loans originated and held by the
Bank in its portfolio 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 that the borrower transfers ownership of the property without the
Bank's consent.
Adjustable-rate mortgage loans buffer the risks associated with changes
in interest rates, but involve other risks because as interest rates increase,
the underlying payments by the borrower increase, thus increasing the potential
for default. At the same time, the marketability of the underlying collateral
may be adversely affected by higher interest rates. The Bank's adjustable-rate
loan underwriting policy recognizes these inherent risks and the Bank reviews a
credit application accordingly. These risks have not had an adverse effect on
the Bank to date.
Home Equity Loans and Home Equity Lines of Credit. The Bank originates
home equity loans secured by single-family residences. At December 31, 1997,
home equity loans totaled $8.2 million or 8.3% of total loans. These loans are
originated as fixed-rate loans with terms from 3 to 10 years. The Bank began
offering home equity loans in early 1992. These loans are made on
owner-occupied, single-family residences or vacation homes. The loans are
generally subject to an 80% combined loan-to-value limitation, including any
other outstanding mortgages or liens. Home equity loans are generally originated
for retention in the Bank's loan portfolio.
Multi-Family and Commercial Real Estate Loans. The Bank originates to a
limited extent multi-family mortgage loans secured primarily by apartment
buildings located in its primary lending area. These loans are generally
fixed-rate loans with maturities up to 15 years, or amortized over 25 years with
a balloon payment after 5 to 7 years. The Bank also originates adjustable-rate
multi-family loans which adjust with The Wall Street Journal prime rate annually
and have maturities of 5 to 10 years. These loans typically amortize over 20 to
25 years. As of December 31, 1997, $6.3 million, or 6.4%, of the Bank's loan
portfolio consisted of multi-family residential loans. These loans are generally
made in amounts up to 75% of the appraised value of the mortgaged property. In
making such loans, the Bank evaluates the mortgage primarily on the net
operating income generated by the real estate to support the debt service. The
Bank also considers the financial resources and income level of the borrower,
the borrower's experience in owning or managing similar property, the
marketability of the property and the Bank's lending experience, if any, with
the borrower. An origination fee of 1 1/2% to 3% is usually charged on such
loans. The typical multi-family property in the Bank's multi-family lending
portfolio has between 5 and 25 dwelling units with an average loan balance of
approximately $500,000. The largest multi-family loan as of December 31, 1997
had an outstanding balance of $1.8 million and was secured by 45 dwelling units.
The Bank also originates commercial real estate loans secured by
property located within its primary market area. The Bank's commercial real
estate loans are permanent loans secured by improved
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<PAGE>
property such as office buildings, retail stores, industrial facilities and
other non-residential buildings. Essentially all originated commercial real
estate loans are within the Bank's market area. As of December 31, 1997, the
Bank had 90 loans secured by commercial real estate, totalling $10.3 million or
10.4% of the Bank's total loan portfolio, with an average principal balance of
$115,000. None of the 90 loans had principal balances outstanding of over $1.4
million as of December 31, 1997. The largest commercial real estate loan was
secured by a shopping center with an outstanding balance of $1,402,000 on
December 31, 1997. This loan represents approximately 8.42% of the Bank's
$16,647,000 multifamily and commercial real estate loans at December 31, 1997.
Commercial real estate loans are generally originated in amounts ranging from
70% to 75% of the appraised value of the mortgaged property, although sometimes
commercial real estate loans are made with an 80% loan to value ratio. The Bank
makes both adjustable and fixed-rate commercial real estate loans. The
adjustable-rate loans have terms of up to 15 years, or are amortized over 25
years with a balloon payment after 5 and 7 years, if negotiated by management.
The rate of interest on the adjustable-rate loans is often tied to the Wall
Street Journal stated prime rate.
Construction Loans. At December 31, 1997, construction loans totaled
$1.7 million. The Bank's construction loan portfolio consists of substantially
residential construction loans with initial terms of generally 12 to 18 months.
Land acquisition and development loans are also made on a very limited basis.
The construction loans made by the Bank have adjustable rates tied to the Wall
Street Journal stated prime rate, adjusting monthly. Generally, such loans are
repaid or converted to permanent loans when the property is completed or sold.
The permanent loan can be an adjustable or fixed-rate loan at a rate equal to
the prevailing rates offered by the Bank 30 days prior to the date of closing.
Loans Secured by Commercial Equipment Leases. The Bank previously
invested in loans secured by commercial equipment leases from a single entity.
During 1996, the borrower declared bankruptcy. On December 27, 1996, the company
entered into an agreement with the trustee for the bankruptcy court whereby the
Bank will receive approximately 65% of the cash receipts from the collateral
principal in exchange for all rights to the collateral. In connection with this
agreement, the company charged-off $1.2 million of the outstanding balance due
from the trustee at December 31, 1996. The receivable balance of approximately
$361,000 and $1,771,000, resulting from the agreement with the trustees, is a
component of prepaid expenses and other assets in the consolidated statement of
financial condition at December 31, 1997 and 1996, respectively. The receivable
is to be repaid by the trustee from subsequent cash collections. The Bank has
since discontinued such lending and currently has no plans to re-enter such
market.
Consumer Loans. OTS regulations permit the Bank to make secured and
unsecured consumer loans up to 35% of the Bank's assets. Consumer loans
originated by the Bank are loans secured by savings deposits or fully marketable
securities pledged as collateral. Consumer loans, excluding home improvement
loans, amounted to $399,000 or less than 1% of the Bank's loan portfolio as of
December 31, 1997.
Loan Underwriting Risks. While multi-family and commercial real estate,
construction, commercial business, and consumer loans provide benefits to the
Bank's asset/liability management program and reduce exposure to interest rate
changes, such loans may entail significant additional credit and interest rate
risks compared to residential mortgage lending. Multi-family and commercial real
estate and construction mortgage loans may involve large loan balances to single
borrowers or groups of related borrowers. In addition, the ability to make
payments on loans secured by income producing properties is typically dependent
on the successful operation of the properties and thus may be subject to a
greater extent to adverse conditions in the real estate market or in the general
economy. Construction loans may involve additional risks attributable to the
fact that loan funds are advanced upon the security of the project under
construction. Moreover, because of the uncertainties inherent in estimating
construction costs, delays arising from labor problems, material shortages, and
other unpredictable contingencies, it
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<PAGE>
is relatively difficult to evaluate accurately the total loan funds required to
complete a project, and related loan-to-value ratios. Because of these factors,
the analysis of prospective construction loan projects requires an expertise
that is different in significant respects from the expertise required for
residential mortgage lending.
Loan Origination and Other Fees. In addition to interest earned on
loans, the Bank recognizes service charges which consist primarily of loan
application fees, processing fees, and late charges. The Bank recognized service
charges of $245,000 for the year ended December 31, 1997.
Loans-to-One Borrower. Loans-to-one borrower, or group of related
borrowers, by the Bank are limited by regulation to an amount equal to 15% of
unimpaired capital and retained earnings on an unsecured basis and an additional
amount equal to 10% of unimpaired capital and retained earnings if the loan is
secured by readily marketable collateral (generally, financial instruments, not
real estate). The Bank's maximum loan-to-one borrower limit was approximately
$4.3 million as of December 31, 1997. The net proceeds of the Offerings to be
contributed to the Bank will raise the lending limit of the Bank so that it may
originate larger loans.
As of December 31, 1997, the Bank's five largest lending relationships
ranged from $1.8 million to $802,000. The largest loan is to a developer of
low-income housing units in West Philadelphia. Funds for this loan were obtained
from the FHLB Pittsburgh's Community Investment Program - See "Borrowings." The
remaining four loans are secured by commercial, multi-family and a primary
single family residence are also located in the Bank's primary market area. All
five loans were current at December 31, 1997.
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<PAGE>
Loan Maturity Schedules. The following table sets forth the maturity of
the Bank's loan portfolio at December 31, 1997. The table does not include
prepayments or scheduled principal repayments. Prepayments and scheduled
principal repayments on loans totalled $22,489,000, $16,320,000 and $13,984,000
for the fiscal years ended December 31, 1997, 1996 and 1995, respectively. All
mortgage loans are shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
Multi-Family
Residential and
and Commercial
Home Equity Real Estate Construction Consumer Commercial Total
----------- ----------- ------------ -------- ---------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-performing.................. $ 716 $ - $ - $ - $ - $ 716
Amounts Due:
Within 3 months................. $ 52 $ 681 $1,693 $ 351 $ - $2,777
3 months to 1 Year.............. 44 2 - 48 - 94
After 1 year:
1 to 3 years.................. 1,040 517 - 4 - 1,561
3 to 5 years.................. 3,371 281 - - 176 3,828
5 to 10 years................. 18,936 4,541 - - 153 23,630
10 to 20 years................ 32,888 4,576 - - - 37,464
Over 20 years................. 22,556 6,049 - - - 28,605
------ ------ ------ ------ ------ ------
Total due after one year........ 78,791 15,964 - 4 329 95,088
------ ------ ------ ------ ----- ------
Total amount due................ $79,603 $16,647 $1,693 $ 403 $ 329 $98,675
====== ====== ===== ====== ===== ======
</TABLE>
The following table sets forth the dollar amount of all loans due after
December 31, 1998, which have pre-determined interest rates and which have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
<S> <C> <C> <C>
Residential and home equity............... $75,018 $3,773 $78,791
Multi-family and commercial real estate... 13,719 2,245 15,964
Construction.............................. -- -- --
Consumer.................................. 4 -- --
Commercial................................ -- 329 329
-------- ------ ------
Total................................... $88,741 $6,347 $95,088
====== ===== ======
</TABLE>
Loan Solicitation and Processing. The Bank's primary source of mortgage
loan applications is referrals from existing or past customers. The Bank also
solicits loan applications from real estate brokers, contractors, and call-ins
and walk-ins to its offices. The Bank advertises in local newspapers and
occasionally on cable television for first mortgage and home equity loans.
Upon receipt of any loan application from a prospective borrower, a
credit report and verifications are ordered to confirm specific information
relating to the loan applicant's employment, income and credit standing. An
appraisal of the real estate intended to secure the proposed loan is undertaken
by an independent fee appraiser. In connection with the loan approval process,
the Bank's loan officers analyze the loan applications and the property
involved. All residential, home equity, multi-family, construction and
commercial real estate loans are processed at the Bank's lending office by the
Bank's loan origination department. The executive committee of the Board of
Directors approves all loans, with the exception of home equity and consumer
loans. A committee of three officers, including
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<PAGE>
any of the following: Chairman of the Board, President, Chief Financial Officer,
and Senior Loan Officer, approve all home equity loans up to $100,000. All loans
purchased by the Bank are reviewed by senior lending officers. Loan applicants
are promptly notified of the decision of Roxborough- Manayunk by a letter
setting forth the terms and conditions of the decision. If approved, these terms
and conditions include the amount of the loan, interest rate basis, amortization
term, a brief description of real estate to be mortgaged to the Bank, and the
notice of requirement of insurance coverage to be maintained to protect
Roxborough- Manayunk's interest. The Bank requires title, fire, and casualty
insurance on all properties securing loans, which insurance must be maintained
during the entire term of the loan. In certain instances where the Bank is
making a small second mortgage, and the Bank holds the performing first
mortgage, it may not require a title policy, but only certain informal
assurances that there are no liens superior to the second mortgage.
Loan Purchases. In the past, the Bank purchased loans from a number of
financial institutions located in Pennsylvania and Delaware. Generally, such
loans were fix-rate loans secured by single family residential loans located in
Central and Eastern Pennsylvania and Delaware. At December 31, 1997, $13.97
million of such loans were outstanding. In each transaction, the seller retained
the loan servicing.
The Bank purchased such loans to increase its residential loan portfolio.
In 1994, the Bank agreed to act as a correspondent with a bank in
Souderton, Pennsylvania. The correspondent bank originates fixed-rate
residential loans based on terms, conditions, fees, and rates posted by the
Bank. All underwriting conforms to the Bank's underwriting guidelines. The Bank
receives from the correspondent bank a completed application to underwrite and
determine whether to issue a loan commitment. At December 31, 1997, the Bank had
a balance of $2.3 million of such loans outstanding. The Bank still maintains
this relationship but only to a limited extent.
In loan purchase transactions, the Bank typically receives a due
diligence package that provides loan level detail on a comparative basis against
the Federal Home Loan Mortgage Corporation ("FHLMC") underwriting guidelines.
All loans must be documented, including an original appraisal that substantiates
the value of the subject property at the time the loan was originated.
The Bank obtains from the seller a duplicate copy of each original loan
file which generally includes an executed loan application, financial
statements, credit report, and original title policy and mortgage note. In the
event that a loan package has substantial seasoning and low original
loan-to-value ratios, or the market is well beyond the Bank's primary lending
area, a fee appraiser may not be employed to underwrite the appraisal reports in
the loan files. The Bank attempts to physically review and document each loan
file in a purchase transaction. Occasionally, it is reasonable to employ a
random sampling of loan files purchased.
The Bank originates residential first mortgage loans that conform to
the FHLMC and Federal National Mortgage Association ("FNMA") guidelines. It is
the Bank's intent to retain servicing for loans originated for sale or
subsequently packaged as participations. Primary markets for loans sold will be
FNMA and other secondary market investors.
Loans Available For Sale. The Bank holds as available for sale certain
residential mortgage loans that have an annual yield determined by Management to
be at rates not compatible with its asset management strategy. These loans
conform to FHLMC and FNMA guidelines and are readily salable in the secondary
market.
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<PAGE>
Origination, Purchase and Sale of Loans. The following table sets forth
total loans originated, purchased, sold, and repaid during the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- ---------- --------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Total gross loans receivable at
beginning of period ........ $ 100,775 $ 102,077 $ 97,677 $ 100,990 $ 81,163
========= ========= ========= ========= =========
Loans originated:
Construction loans .......... $ 1,570 $ 1,055 $ 430 $ 660 $ 1,511
Residential and home equity . 14,795 13,546 7,064 11,378 10,884
Multi-family and commercial
real estate ............... 2,211 810 1,962 2,015 5,473
Consumer .................... 372 368 190 327 387
Commercial .................. 707 770 -- -- --
--------- --------- --------- --------- ---------
Total loans originated ........ $ 19,655 $ 16,549 $ 9,646 $ 14,380 $ 18,255
========= ========= ========= ========= =========
Loans purchased:
Residential ................. $ 1,088 $ 2,360 $ 4,363 $ 1,860 $ 23,451
Multi-family and commercial
real estate ............... -- -- 2,897 -- --
Commercial equipment leases . -- -- 1,629 1,600 1,651
--------- --------- --------- --------- ---------
Total loans purchased ......... 1,088 2,360 8,889 3,460 25,102
--------- --------- --------- --------- ---------
Total loans sold .............. 383 -- -- -- --
--------- --------- --------- --------- ---------
Loan principal repayments ..... 22,489 16,320 13,984 20,005 22,742
--------- --------- --------- --------- ---------
Other (debits less credits) ... (29) (3,891) (151) (1,148) (788)
--------- --------- --------- --------- ---------
Net loan activity ............. $ (2,100) $ (1,302) $ 4,400 $ (3,313) $ 19,827
========= ========= ========= ========= =========
Total gross loans receivable at
end of period ............... $ 98,675 $ 100,775 $ 102,077 $ 97,677 $ 100,990
========= ========= ========= ========= =========
</TABLE>
Loan Commitments. The Bank generally grants commitments to fund
fixed-rate single-family mortgage loans for periods of up to 90 days at a
specified term and interest rate. The Bank also makes loan commitments for
non-conforming or commercial real estate loans for up to 90 days, which
generally carry additional requirements for funding. The total amount of the
Bank's commitments to originate loans as of December 31, 1997 was $761,000. See
Note 5 of the Notes to Consolidated Financial Statements.
Loan Servicing and Servicing Fees. The Bank has retained servicing on
loans it has sold to FHLMC and FNMA. The Bank also services all of its own
loans. As of December 31, 1997, 1996 and 1995, the Bank serviced loans for
others totalling $3.7 million, $3.5 million and $4.4 million, respectively. Loan
servicing fees have not constituted a material source of income.
Asset Quality
Non-Performing Assets and Asset Classification. The Bank's collection
procedures provide that when a loan is 30 days or more delinquent, the borrower
is contacted by mail and telephone and payment is requested. If the delinquency
continues, subsequent efforts will be made to contact the delinquent borrower.
In certain instances, the Bank may modify the loan or grant a limited moratorium
on loan payments to enable the borrower to reorganize his financial affairs. If
the loan continues in a delinquent
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<PAGE>
status for 60 days, the Bank will initiate foreclosure proceedings. Any property
acquired as the result of foreclosure or by deed in lieu of foreclosure is
classified as REO until such time as it is sold or otherwise disposed of by the
Bank. For the year ended December 31, 1997, the Bank had transferred loans
totalling $250,000 to REO. When REO is acquired, it is recorded at the lower of
the unpaid principal balance of the related loan or its fair market value. Any
write-down of the property is charged to the allowance for losses.
Loans are reviewed on a regular basis and are placed on a non-accrual
status when, in the opinion of management, the collection of additional interest
is doubtful. The Bank continues to accrue for residential mortgage loans 90 days
or more past due, however a reserve is set up for such loans. Consumer loans
generally are charged off when the loan becomes 90 days or more delinquent.
Commercial business and real estate loans are placed on non-accrual status when
the loan is 90 days or more past due. Interest accrued and unpaid at the time a
loan is placed on non-accrual status is charged against interest income.
Subsequent payments are either applied to the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan.
At December 31, 1997, the Bank had approximately $718,000 of loans that
were 60-89 days delinquent, all of which were secured by residential properties.
The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated. At the dates indicated, the
Bank had no accruing loans past due 90 days or more and no restructured loans
within the meaning of SFAS No. 15.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------- -------------- -------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis... $ - $ - $ - $ - $ -
Accruing loans which are contractually past
due 90 days or more:
Residential and home equity................ $716 $1,357 $1,441 $1,244 $1,998
Construction loans......................... - 109 133 - -
Multi-family and commercial real estate.... - 1,533 565 - 234
Consumer................................... - - - 7 22
---- ------ ------ ------ -----
Total........................................ $716 $2,999 $2,139 $1,251 $2,254
=== ===== ===== ===== =====
Real estate owned............................ $116 $ 186 $ 227 $ 88 $ 189
=== ====== ====== ===== =====
Total non-performing assets.................. $832 $3,185 $2,366 $1,339 $2,443
=== ===== ===== ===== =====
Total non-accrual and accrual loans to
net loans.................................. .74% 3.04% 2.35% 1.40% 2.29%
==== ==== ==== ==== ====
Total non-performing assets to total assets.. .30% 1.08% .82% .49% .88%
==== ==== ==== ==== ====
</TABLE>
Non-performing assets decreased $2,353,000 or 73.9% due to foreclosure
and subsequent liquidation of non-performing assets in addition to normal
collections.
Management of the Bank regularly reviews the loan portfolio in order to
identify potential problem loans and classifies any potential problem loan as a
special mention, substandard, doubtful or loss asset according to the OTS
classification of asset regulations.
OTS regulations provide for savings institutions to classify their
loans and other assets as substandard, doubtful, or loss assets. Assets
classified as substandard are those inadequately protected by the current net
worth and paying capacity of the obligor or the pledged collateral. They are
characterized by the distinct possibility that the institution will sustain some
loss if the deficiencies are
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<PAGE>
not corrected. Assets classified as doubtful have all the weaknesses of those
classified as substandard with the additional characteristic that the weaknesses
make collection or liquidation in full highly questionable and improbable.
Assets classified as "loss" are considered uncollectible and of such little
value that their continuance as assets without the establishment of a specific
reserve is not warranted. Assets that do not currently expose a savings
institution to a sufficient degree of risk to warrant classification but do
possess credit deficiencies or potential weaknesses deserving management's close
attention are designated "special mention." Special mention assets have a
potential weakness or pose an unwarranted financial risk that, if not corrected,
could weaken the asset and increase risk in the future. Assets designated as
substandard or doubtful are recorded at fair value. At December 31, 1997, the
Bank had $2.6 million of classified assets of which $2.6 million were classified
as substandard and $13,000 were classified as loss. Furthermore, at December 31,
1997 $718,000 of assets were designated special mention.
Allowance for Losses on Loans and REO. The Bank's management evaluates
the need to establish reserves against losses on loans and other assets each
year based on estimated losses on specific loans and on any real estate held for
sale or investment when a finding is made that a loss is estimable and probable.
Such evaluation includes a review of all loans for which full collectibility may
not be reasonably assured and considers, among other matters, the estimated
market value of the underlying collateral of problem loans, prior loss
experience, economic conditions and overall portfolio quality. These provisions
for losses are charged against earnings in the year they are established. The
Bank's provisions for losses on loans for the years ended December 31, 1997,
1996 and 1995 were $120,000, $139,000 and $135,000, respectively. At December
31, 1997, the Bank had an allowance for loan losses of $783,000, which
represented .85% of total loans. The Bank had $13,000 in allowances for losses
on REO at that date, which represents 11.0% of net real estate owned.
While the Bank believes it has established its existing allowance for
loan losses in accordance with GAAP and the Interagency Policy Statement on the
Allowance for Loan and Lease Losses issued by the OTS, in conjunction with the
OCC, FDIC and FRB, there can be no assurance that the applicable regulators, in
reviewing the Bank's loan portfolio, will not request the Bank to significantly
increase its allowance for loan losses, or that changes in the real estate
market or local or national economy will not cause the Bank to significantly
increase its allowance for loans losses, thereby negatively affecting the Bank's
financial condition and earnings.
In making loans, the Bank recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan and, in the case of a secured loan, the quality of the security for the
loan.
During the years ended December 31, 1997, 1996 and 1995, the Bank
(recovered) charged-off $(85,526), $16,895 and $96,629, respectively, of loans
receivable and $33,506, $23,675 and $0, respectively, of REO in connection with
assets classified by the Bank as loss. It is the Bank's policy to review its
loan portfolio, in accordance with regulatory classification procedures, on a
quarterly basis. Additionally, the Bank maintains a program of reviewing loan
applications prior to making the loan and immediately after loans are made in an
effort to maintain loan quality. See Notes 5 and 6 of Notes to Consolidated
Financial Statements.
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<PAGE>
The following table sets forth information with respect to the Bank's
allowance for loan losses at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding, net(1) ........ $ 96,280 $ 98,626 $ 100,271 $ 95,524 $ 98,622
========= ========= ========= ========= =========
Average loans outstanding, net(1) ...... $ 101,472 $ 101,726 $ 99,194 $ 97,302 $ 85,293
========= ========= ========= ========= =========
Allowance balances (at beginning of
period) .............................. $ 577 $ 455 $ 417 $ 450 $ 385
Provision:
Residential .......................... 37 - 24 49 76
Multi-family and commercial
real estate ........................ 83 139 27 9 14
Consumer ............................. - - 84 2 4
Net Charge-offs (recoveries):
Residential .......................... (86) 17 97 83 29
Multi-family and commercial
real estate ........................ - - - - -
Consumer ............................. - - - 10 -
--------- --------- --------- --------- ---------
Allowance balance (at end of period) ... $ 783 $ 577 $ 455 $ 417 $ 450
========= ========= ========= ========= =========
Allowance for loan losses as a percent
of total loans outstanding ........... .85% .59% .45% .44% .46%
Net loans charged off (recovery) as
a percent of average loans outstanding (.08)% .02% .09% .10% .03%
</TABLE>
- -------------
(1) Does not include loans available for sale.
-42-
<PAGE>
The following table sets forth certain information regarding
the allocation of the allowance for loan losses by type.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------- ----------------- ----------------- ------------------- ------------------
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ------- ------ ------- ------ ------- ------ ------- ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential and home equity(1).. $234 82.39% $197 81.22% $275 79.86% $262 84.47% $300 85.71%
Multi-family and commercial
real estate................... 549 16.87 380 17.54 106 19.79 55 14.95 79 13.76
Consumer loans.................. - 0.41 - 0.48 - 0.35 - 0.58 - 0.53
Commercial loans(2)............. - 0.33 - 0.76 74 - 100 - 71 -
--- ------ --- ------ --- ------ --- ------ --- ------
Total allowance............... $783 100.00% $577 100.00% $455 100.00% $417 100.00% $450 100.00%
=== ====== === ====== === ====== === ====== === ======
</TABLE>
- ------------
(1) Includes residential construction loans.
(2) Includes loans secured by commercial equipment leases at December 31, 1995,
1994 and 1993.
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<PAGE>
The following table sets forth certain information regarding the Bank's
allowance for REO losses for the periods indicated.
At December 31,
---------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
Total real estate owned, net...... $116 $186 $227
=== === ===
Allowance balance - beginning..... $ 46 $24 $ 2
=== == ===
Provision......................... - 46 22
Charge-offs....................... 33 24 -
--- --- ---
Allowance balance - ending........ $ 13 $ 46 $ 24
=== === ===
Investment Activities
General. The investment policy of the Bank, which is established by
senior management and approved by the Board of Directors, is based upon its
asset and liability management goals and is designed primarily to provide a
portfolio of high quality, diversified investments while seeking to optimize net
interest income within acceptable limits of safety and liquidity. The current
investment goal is to invest available funds in instruments that meet specific
requirements of the Bank's asset and liability management goals. The investment
activities of the Bank consist primarily of investments in fixed and
adjustable-rate mortgage-backed securities and U.S. Government agency bonds. At
December 31, 1997, the Bank had a mortgage-backed securities portfolio with a
market value of $111.5 million, all of which was held for sale. At December 31,
1997, the Bank had an investment securities portfolio of approximately $37.8
million consisting of U.S. Government treasury, agency securities, and municipal
and equity securities. The market value of such securities at December 31, 1997
was $38.9 million. See Notes 3 and 4 to the Notes to the Consolidated Financial
Statements.
Mortgage-Backed Securities. The Bank also purchases mortgage-backed
securities guaranteed by Government National Mortgage Association ("GNMA") and
FNMA and issued by the FHLMC which are secured by fixed-rate and adjustable-rate
mortgages. GNMA mortgage-backed securities are pass-through certificates issued
and backed by the GNMA and are secured by interests in pools of mortgages which
are fully insured by the Federal Housing Administration ("FHA") or partially
guaranteed by the Department of Veterans' Affairs ("VA"). The FNMA
mortgage-backed securities consist of pass-through certificates and real estate
mortgage investment conduits ("REMICs"). FHLMC mortgage-backed securities
consist of both REMICs and pass-through certificates issued and guaranteed by
the FHLMC and secured by interests in pools of conventional mortgages originated
by savings institutions. As of December 31, 1997, the Bank's mortgage-backed
securities amounted to $111.5 million, or 40% of total assets, all of which are
currently classified as available for sale.
REMICs held by the Bank at December 31, 1997 consisted of floating-rate
tranche, with the exception of one fixed-rate security in the amount of $2.6
million. The interest rate of all of the Bank's floating-rate securities adjusts
monthly and provides the institution with net interest margin protection in an
increasing market interest rate environment. The securities are backed by
mortgages on one- to four-family residential real estate and have contractual
maturities up to 30 years. At December 31, 1997,
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<PAGE>
none of these securities are deemed to be "High Risk" according to Federal
Financial Institutions Examination Council ("FFIEC") guidelines which have been
adopted by the OTS. The securities are primarily companion tranche to "PACs" and
"TACs". PACs and TACs (Planned and Targeted Amortization Classes) are designed
to provide a specific principal and interest cash-flow. Principal payments that
are received in excess of the amount needed for the PACs and TACs is allocated
to the companion tranche. When the PACs and TACs are repaid in full, all
principal is then used to pay the companion tranche.
Investment Securities. Income from investment securities provides a
significant source of income for the Bank. The Bank maintains a portfolio of
investment securities such as U.S. government and agency securities,
non-governmental securities, including interest-bearing deposits, in addition to
the Bank's mortgage-backed securities portfolio. The Bank is required by federal
regulation to maintain a minimum percentage of its liquidity base in the form of
qualifying long and short-term liquid assets. Currently, the liquidity
requirement is 4%. In addition, longer-term corporate, agency and government
debt securities may be held subject to similar creditworthiness, ratings and
maturity criteria. As of December 31, 1997, the Bank's, liquidity ratio was
18.9%. The balance of short-term security investments in excess of regulatory
requirements reflects management's response to the significantly increasing
percentage of savings deposits with short maturities. It is the intention of
management to maintain shorter maturities in the Bank's investment portfolio in
order to better match the interest rate sensitivities of its assets and
liabilities. However, during periods of rapidly declining interest rates, the
yield on such investments also declines at a faster rate than does the yield on
long-term investments.
Investment decisions are made within policy guidelines established by
the Board of Directors and the Asset/Liability Committee. As of December 31,
1997, the Bank's investment portfolio (including investment securities
classified as available for sale) (the "investment portfolio") totalled $168.7
million.
At December 31, 1997, the Mid-Tier Holding Company had various
investments in capital bank notes and equity securities. Those investments are
held as available for sale and are included in the table.
The following table sets forth the fair value or amortized cost (as
applicable) of the Bank's investment portfolio, short-term investments, and FHLB
stock at the dates indicated. The amounts for securities held to maturity are
listed at amortized cost; amounts for securities available for sale are listed
at approximate market value.
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<PAGE>
Investment Portfolio. The following table sets forth the carrying value
(market value or amortized cost, as applicable) of the Company's investment
securities portfolio, short-term investments, FHLB stock, and mortgage-backed
securities at the dates indicated. At December 31, 1997, the market value of the
Mid-Tier Holding Company's investment securities portfolio and mortgage-backed
securities portfolio were $38,852,000 and $111,486,000, respectively.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------
1997 1996 1995
------------------ ------------------ -------------------
(In Thousands)
<S> <C> <C> <C>
Investment Securities:
U.S. Treasury Securities................. $ 5,043 $ 5,055 $ 5,066
FHLB bonds............................... 17,284 22,000 20,711
Other agencies(1)........................ 4,168 19,160 17,996
Municipal bonds.......................... 8,034 - -
Mutual funds(2).......................... 1,222 1,147 557
FHLMC preferred stock(2)................. - 985 1,009
Capital trust securities(2)(3)........... 1,060 - -
Subordinated debt(3)..................... 250 250 250
------- ------- -------
Total investment securities............ 37,061 48,597 45,589
------- ------- -------
Interest-bearing deposits................. 15,312 36,067 30,717
Federal funds sold........................ 2,000 2,000 2,000
FHLB of Pittsburgh stock.................. 1,701 1,691 1,686
Mortgage-backed securities(2)............. 111,486 93,410 98,315
Equity investments(2)(3).................. 1,166 499 -
------- ------- -------
Total Investments...................... $168,726 $182,264 $178,307
======= ======= =======
</TABLE>
- ------------
(1) Consists of FNMA, FHLMC, SLMA debentures and certificates of deposit.
(2) Classified as available for sale and carried at approximate fair value.
All other investment securities are classified as held to maturity.
(3) Investments held by the Mid-Tier Holding Company.
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<PAGE>
Investment Portfolio Maturities. The following table sets forth certain
information regarding the carrying values, weighted average yields and
maturities of the Mid-Tier Holding Company's investment securities portfolio at
December 31, 1997.
<TABLE>
<CAPTION>
As of December 31, 1997
--------------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Securities
------------------- ----------------- ----------------- ------------------- ----------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities.... $ - -% $ - -% $ 5,043 7.50% $ - -% $ 5,043 7.50% $ 5,419
FHLB bonds and notes........ 3,000 3.17 3,000 6.02 - - 11,284 8.00 17,284 6.82 17,291
Other agencies(1)........... 168 5.50 - - 4,000 8.00 - - 4,168 7.90 4,228
Municipal bonds............. - - - - - - 8,034 5.13 8,034 5.13 8,215
Subordinated debt .......... - - - - 250 8.25 - - 250 8.25 250
Capital securities.......... - - - - - - 1,025 9.70 1,025 9.70 1,060
Mutual funds................ 1,222 5.86 - - - - - - 1,222 5.86 1,222
Mortgage-backed securities:
GNMA pass-through......... - - - - 562 9.51 31,275 7.43 31,837 7.47 32,477
FNMA pass-through......... - - 3,254 6.25 21,219 6.68 - - 24,473 6.62 24,733
FHLMC pass-through........ 298 9.00 6,214 6.99 6,403 8.92 30,841 6.87 43,756 7.20 44,648
FNMA REMICs............... - - - - - - 2,531 5.00 2,531 5.00 2,478
FHLMC REMICs.............. - - 4,257 5.56 - - 2,993 6.23 7,250 5.84 7,150
----- ---- ------ ---- ------- ---- ------ ---- ------- ---- -------
Total..................... $4,688 4.32% $16,725 6.31% $37,477 7.31% $87,983 6.43% $146,873 6.57% $149,171
===== ==== ====== ==== ====== ==== ====== ==== ======= ==== =======
</TABLE>
- ---------------------
(1) Consists of FNMA, FHLMC, and SLMA debentures and certificates of deposit.
-47-
<PAGE>
Unrealized holding gains and losses for trading securities are included
in earnings. Unrealized gains and losses for available-for-sale securities are
excluded from earnings and reported net of income tax effect as a separate
component of stockholders' equity until realized. Investments classified as held
to maturity are accounted for at amortized cost.
Sources of Funds
General. Deposits are the major source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from loan and mortgage-backed securities principal repayments, and proceeds from
the sale of loans, mortgage-backed securities and investment securities. Loan
and mortgage-backed securities principal repayments are a relatively stable
source of funds, while deposit inflows are significantly influenced by general
interest rates and money market conditions. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds from
other sources. They also may be used on a longer-term basis for general business
purposes.
Deposits. The Bank offers a wide variety of deposit accounts, although
a majority of such deposits are in fixed-term, market-rate certificate accounts.
Deposit account terms vary, primarily as to the required minimum balance amount,
the amount of time that the funds must remain on deposit and the applicable
interest rate.
Fixed-term certificates have been a major source of new deposits for
the Bank and, as of December 31, 1997, such certificates represented $111.1
million or 48.2% of the Bank's deposit accounts. As of December 31, 1997, $9.1
million or 4.0% of the Bank's deposit portfolio consisted of one- to six-month
fixed-term, market-rate certificates, and $38.7 million or 16.8% consisted of 13
to 60-month fixed-term, market-rate certificates. Savings accounts are a primary
source of deposit funds for the Bank and, as of December 31, 1997, represented
$96.2 million, or 41.7% of the deposit portfolio.
The Bank also offers standardized individual retirement accounts
("IRAs"), as well as qualified defined master plans for self- employed
individuals. IRAs are marketed in the form of all of the available savings
deposits and certificates.
The Bank had no brokered certificates of deposit as of December 31,
1997.
The Bank pays interest rates on its certificate accounts which are
competitive in its market. Interest rates on deposits are reviewed weekly by
management based on a combination of factors, including the need for funds and
local competition.
Deposits in the Bank as of December 31, 1997 were represented by
various types of savings programs described below.
-48-
<PAGE>
Deposit Portfolio. Deposits in the Bank as of December 31, 1997, were
represented by various types of savings programs described below.
<TABLE>
<CAPTION>
Minimum Balance as of Percentage of
Category Term Interest Rate(1) Balance Amount December 31, 1997 Total Deposits
- -------- ---- ---------------- -------------- ----------------- --------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Regular Savings None 3.25% $ 10 $ 32,780 14.2%
Senior Club Savings None 4.00 500 62,950 27.3
Christmas and Vacation
Clubs None 2.00 10 428 .2
NOW Accounts None 1.48 10 14,078 6.1
Super NOW None 1.48 1,000 872 .4
Money Market Accounts None 3.64 1,000 7,687 3.3
Non-interest Deposits None - 300 712 .3
Certificates of Deposit:
Fixed Term, Fixed Rate 1-3 Months 3.64 500 582 .3
Fixed Term, Fixed Rate 4-6 Months 3.88 500 8,519 3.7
Fixed Term, Fixed Rate 7-12 Months 5.55 500 63,269 27.4
Fixed Term, Fixed Rate 13-24 Months 5.08 500 8,027 3.5
Fixed Term, Fixed Rate 25-36 Months 5.32 500 14,290 6.2
Fixed Term, Fixed Rate 60 Months 5.79 1,000 16,364 7.1
------- -----
Total deposits $230,558 100.0%
=====
Accrued interest on deposits 30
---------
Total $230,588
=======
</TABLE>
- -------------------------
(1) Interest rate offerings as of December 31, 1997.
Time Deposits by Rate. The following table sets forth the time deposits
in the Bank classified by interest rate as of the dates indicated.
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------
1997 1996 1995
---------- ---------- ---------
(In Thousands)
Weighted average rate:
<S> <C> <C> <C>
3.00-3.99%........................... $ 9,102 $ 14,497 $ 8,732
4.00-4.99%........................... 4,858 19,199 20,152
5.00-5.99%........................... 91,505 65,362 65,206
6.00-6.99%........................... 5,586 19,440 19,595
Accrued interest on certificate
accounts............................. 10 16 23
------ ------ -------
Total.............................. $111,061 $118,514 $113,708
======= ======= =======
</TABLE>
-49-
<PAGE>
Time Deposits Maturity Schedule. The following table sets forth the
amount and maturities of time deposits at December 31, 1997.
<TABLE>
<CAPTION>
Amount Due
---------------------------------------------------------------------------------------------------
After December 31, December 31, December 31, December 31,
Interest Rate 1998 1999 2000 2000 Total
- ------------- -------------------- ------------------- ------------------- ----------------- -------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
2.99% or less................. $ - $ - $ - $ - $ -
3.00-3.99%.................... 9,092 - - - 9,092
4.00-4.99%.................... 4,754 90 - - 4,844
5.00-5.99%.................... 75,659 8,562 3,876 3,448 91,545
6.00-6.99%.................... 383 4,028 1,159 - 5,570
Accrued Interest on
Certificate Accounts.......... 10 - - -- 10
------- ------- ------- ------- -------
Total $89,898 $12,680 $5,035 $3,448 $111,061
====== ====== ===== ===== =======
</TABLE>
Jumbo Certificates of Deposit. The following table indicates the amount
of the Bank's certificates of deposit of $100,000 or more by time remaining
until maturity as of December 31, 1997.
Certificates
Maturity Period of Deposits
- --------------- -----------
(In Thousands)
Within three months................... $ 3,767
Three through six months.............. 512
Six through twelve months............. 4,811
Over twelve months.................... 1,597
------
$10,687
-50-
<PAGE>
Savings Deposit Activity. The following table sets forth the savings
activities of the Bank for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits .................. $ 337,170 $ 336,937 $ 305,790 $ 309,093 $ 294,955
Withdrawals ............... 335,365 340,105 305,593 318,822 286,765
Net increase (decrease)
before interest credited 1,805 (3,168) 197 (9,729) 8,190
Deposits sold ............. (37,238) -- -- -- --
Interest credited ......... 9,449 9,532 8,750 6,654 7,154
--------- --------- --------- --------- ---------
Net increase (decrease) in
savings deposits ........ $ (25,984) $ 6,364 $ 8,947 $ (3,075) $ 15,344
========= ========= ========= ========= =========
</TABLE>
Borrowings
Deposits are the primary source of funds of the Bank's lending and
investment activities and for its general business purposes. The Bank may obtain
advances from the FHLB of Pittsburgh to supplement its supply of lendable funds.
Advances from the FHLB of Pittsburgh are typically secured by a pledge of the
Bank's stock in the FHLB of Pittsburgh and a portion of the Bank's first
mortgage loans and certain other assets. The Bank, if the need arises, may also
access the Federal Reserve Bank discount window to supplement its supply of
lendable funds and to meet deposit withdrawal requirements. At December 31,
1997, the Bank had $7.9 million in advances outstanding from the FHLB of
Pittsburgh at fixed rates of interest, all of which were matched to a specific
investment at a positive interest rate spread. Most of these advances provide
for a prepayment penalty. At December 31, 1997, the Bank had no other
borrowings. See Note 9 of the Notes to Consolidated Financial Statements.
The following table sets forth certain information as to FHLB advances
at the dates indicated. Included in the table below is a $1,884,000 Community
Investment Program loan ("CIP") from the FHLB Pittsburgh used to finance the
Bank's low income housing project to a developer/manager of Section 8 housing.
As of and For the
Year Ended December 31,
-------------------------------------
1997 1996 1995
---- ---- ----
(Dollars In Thousands)
FHLB advances........................... $7,884 $7,884 $7,884
Weighted average interest rate of
FHLB advances......................... 5.53% 5.53% 5.53%
Maximum amount of advances at
any month end.......................... $7,884 $7,884 $7,884
Average amount of advances.............. $7,884 $7,884 $7,884
Weighted average interest rate
of average amount of advances......... 5.53% 5.53% 5.53%
-51-
<PAGE>
Subsidiaries and Joint Venture Activity
The Bank is permitted to invest up to 2% of its assets in the capital
stock of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. Under such limitations,
as of December 31, 1997, the Bank was authorized to invest up to approximately
$5.5 million in the stock of, or loans to, service corporations (based upon the
2% limitation). As of December 31, 1997, the net book value of the Bank's
investment in stock, unsecured loans, and conforming loans in its service
corporations was $136,000.
The Bank has two wholly owned subsidiary corporations, Montgomery
Service Corporation ("MSC") and Ridge Service Corporation ("RSC"). MSC engages
in the management of real estate. RSC is presently inactive.
Personnel
As of December 31, 1997, the Bank had 61 full-time employees and 17
part-time employees. The employees are not represented by a collective
bargaining unit. The Bank believes its relationship with its employees to be
satisfactory.
Competition
The Bank faces strong competition in its attraction of savings
deposits, which are its primary source of funds for lending, and in the
origination of real estate loans. The Bank's competition for savings deposits
and loans historically has come from other thrift institutions and commercial
banks located in the Bank's market area. The Bank also competes with mortgage
banking companies for real estate loans, and faces competition for investor
funds from short-term money market securities and corporate and government
securities.
The Bank's market area generally includes Philadelphia, Bucks,
Delaware, Chester and Montgomery Counties, which comprise the Philadelphia
metropolitan area. The Bank's primary lending area consists of the Roxborough,
Manayunk, Overbrook and Andorra neighborhoods located in the far northwest
sections of Philadelphia and South Philadelphia. The Bank has no significant
loan concentrations in any one part of its primary lending area.
The Bank competes for loans by charging competitive interest rates and
loan fees, remaining efficient and providing a wide range of services to its
customers. The Bank offers all consumer banking services such as checking
accounts, certificates of deposit, retirement accounts, consumer and mortgage
loans and ancillary services such as safe deposit boxes, convenient offices and
drive-up facilities, automated teller machines and overdraft protection. These
services help the Bank compete for deposits, in addition to offering competitive
rates on deposits.
Recent legislative and regulatory measures have significantly expanded
the range of services which savings institutions can offer the public, such as
demand deposits, trust services,and consumer and commercial lending. These
changes, combined with increasingly sophisticated depositors, have dramatically
increased competition for savings dollars among savings institutions and other
types of investment entities, as well as with commercial banks in regard to
loans, checking accounts and other types of financial services. In addition,
large conglomerates and investment banking firms have entered the market for
financial services. The competition between commercial banks and savings
institutions is also increased by allowing banks to acquire healthy savings
institutions, imposing similar capital requirements on banks and savings
institutions and placing certain investment and other regulatory restrictions on
savings institutions which are similar to those imposed on banks. Thus, in the
future, the
-52-
<PAGE>
Bank, like other savings institutions, will face increased competition to
provide savings and lending services and, in order to remain competitive, will
have to be innovative and knowledgeable about its market, as well as to continue
to exert effective controls over its costs.
Properties and Equipment
The Bank's executive offices are located at 6060 Ridge Avenue in
Philadelphia, Pennsylvania. The Bank conducts its business through six offices,
all of which are located in the Philadelphia, Pennsylvania area.
The following table sets forth the location of each of the Bank's
offices, the year the office was first acquired and the net book value of each
office. The Bank owns five of its six office locations.
<TABLE>
<CAPTION>
Year
Owned Facility Net Book
or Opened or Value as of
Office Location Leased Acquired December 31, 1997
- ----------------------------------------- ---------------- ------------------ ----------------------
(In Thousands)
<S> <C> <C> <C>
Main Office Owned 1958 $ 391
6060 Ridge Avenue
Philadelphia, PA 19128
7568 Ridge Avenue Owned 1962 16
Philadelphia, PA 19128
8345 Ridge Avenue Owned 1974 115
Philadelphia, PA 19128
4370 Main Street Leased 1993 63(1)
Philadelphia, PA 19127
Church Lane & Chester Avenue Owned 1982 134
Yeadon, PA 19050
6503-15 Haverford Avenue Owned 1982 277
---
Philadelphia, PA 19151
$996
====
</TABLE>
- -------------------------
(1) Includes leasehold improvements. The lease expires on December 31,
1999, with an option to renew to 2004.
The Bank performs its own data processing through its data processing
department located in its main office and utilizes several hardware platforms
and a combination of internally developed and purchased software systems. The
net book value of this data processing equipment as of December 31, 1997 was
$14,500. As of December 31, 1997, the net book value of land, buildings,
furniture, and equipment owned by the Bank, less accumulated depreciation
totalled $1.5 million. See Note 7 of Notes to Consolidated Financial Statements
of the Mid-Tier Holding Company.
-53-
<PAGE>
Based on a recognized need to upgrade the date processing system, to be
more competitive in the marketplace and to address the year 2000 problem, the
Bank signed an agreement with Open Solutions Incorporated, Glastonbury,
Connecticut, to purchase its information processing system. This system is a
PC-based client service system which, management believes, will serve the Bank
well into the next century. It is estimated the total cost of this system will
be approximately $1.2 million with an annual cost of approximately $344,000
including depreciation, software cost and maintenance. See also "RISK FACTORS -
Year 2000 Compliance."
Legal Proceedings
The Bank from time to time is a party to legal proceedings in the
ordinary course of business such as enforcing security interests in loans. In
the opinion of management, the Bank is not engaged in any other legal
proceedings of a material nature at the present time.
REGULATION
Set forth below is a brief description of certain laws which relate to
the Bank, the Mid-Tier Holding Company and the Company. The description is not
complete and is qualified in its entirety by references to applicable laws and
regulation.
Holding Company Regulation
General. The Company will be required to register and file reports with
the OTS and will be subject to regulation and examination by the OTS. In
addition, the OTS will have enforcement authority over the Company and any
non-savings institution subsidiaries. This will permit the OTS to restrict or
prohibit activities that it determines to be a serious risk to the Bank. This
regulation is intended primarily for the protection of depositors and not for
the benefit of stockholders.
QTL Test. Since the Company will only own one savings institution, it
will be able to diversify its operations into activities not related to banking,
but only so long as the Bank satisfies the QTL test. If the Company controls
more than one savings institution, it would lose the ability to diversify its
operations into nonbanking related activities, unless such other savings
institutions each also qualify as a QTL or were acquired in a supervised
acquisition. See "- Savings Institution Regulation - Qualified Thrift Lender
Test. "
Restrictions on Acquisitions. The Company must obtain approval from the
OTS before acquiring control of any other SAIF-insured savings institution. No
person may acquire control of a federally insured savings institution without
providing at least 60 days written notice to the OTS and giving the OTS an
opportunity to disapprove the proposed acquisition.
-54-
<PAGE>
Savings Institution Regulation
General. As a federally chartered, SAIF-insured savings institution,
the Bank is subject to extensive regulation by the OTS and the FDIC. Its lending
activities and other investments must comply with various federal and state
statutory and regulatory requirements. The Bank is also subject to certain
reserve requirements promulgated by the Board of Governors of the Federal
Reserve System ("Federal Reserve").
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's board of directors on any
deficiencies that the OTS finds in the Bank's operations. The Bank's
relationship with its depositors and borrowers is also regulated to a great
extent by federal and state law, especially in such matters as the ownership of
savings accounts and the form and content of the Bank's mortgage documents.
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. 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 SAIF 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 regulations, whether by the OTS, the FDIC or any other
government agency, could have a material adverse impact on the operations of the
Bank, the Mid-Tier Holding Company and/or the Mutual Holding Company.
Insurance of Deposit Accounts. The FDIC is authorized to establish
separate annual assessment rates for deposit insurance for members of the BIF
and the SAIF. The FDIC may increase assessment rates for either fund if
necessary to restore the fund's ratio of reserves to insured deposits to its
target level within a reasonable time and may decrease such assessment rates if
such target level has been met. The FDIC has established a risk-based assessment
system for both SAIF and BIF members. Under this system, assessments are set
within a range, based on the risk the institution poses to its deposit insurance
fund. This risk level is determined based on the institution's capital level and
the FDIC's level of supervisory concern about the institution.
Because a significant portion of the assessments paid into the SAIF by
savings institutions were used to pay the cost of prior savings institution
failures, the reserves of the SAIF were below the level required by law. The BIF
had, however, met its required reserve level during the third calendar quarter
of 1995. As a result, deposit insurance premiums for deposits insured by the BIF
were substantially less than premiums for deposits such as the Bank which are
insured by the SAIF. Legislation to capitalize the SAIF and to eliminate the
significant premium disparity between the BIF and the SAIF became effective
September 30, 1996. The recapitalization plan provided for a special assessment
equal to $.657 per $100 of SAIF deposits held at March 31, 1995, in order to
increase SAIF reserves to the level required by law. Certain BIF institutions
holding SAIF-insured deposits were required to pay a lower special assessment.
Based on the Bank's deposits at March 31, 1995, the Bank paid a pre-tax special
assessment of $1,533,000.
The recapitalization plan also provides that the cost of prior failures
which were funded through the issuance of Fico Bonds (bonds issued to fund the
cost of savings institution failures in prior years) will be shared by members
of both the SAIF and the BIF. This increased BIF assessments for healthy banks
to approximately $.013 per $100 of deposits in 1997. SAIF assessments for
healthy savings institutions in 1997 were approximately $.064 per $100 in
deposits and may be reduced, but not below the level set for healthy BIF
institutions.
-55-
<PAGE>
The FDIC has lowered the rates on assessments paid to the SAIF and
widened the spread of those rates. The FDIC's action established a base
assessment schedule for the SAIF with rates ranging from 4 to 31 basis points,
and an adjusted assessment schedule that reduces these rates by 4 basis points.
As a result, the effective SAIF rates range from 0 to 27 to basis points as of
October 1, 1996. In addition, the FDIC's final rule prescribed a special interim
schedule of rates ranging from 18 to 27 basis points for SAIF-member savings
institutions for the last quarter of calendar 1996, to reflect the assessments
paid to the Financing Corp. (Fico Bonds). Finally, the FDIC's action established
a procedure for making limited adjustments to the base assessment rates by
rulemaking without notice and comment, for both the SAIF and the BIF.
The recapitalization plan also provides for the merger of the SAIF and
BIF effective January 1, 1999, assuming there are no savings institutions under
federal law. Under separate proposed legislation, Congress is considering the
elimination of the federal thrift charter and elimination of the separate
federal regulation of thrifts. As a result, the Bank might have to convert to a
different financial institution charter and be regulated under federal law as a
bank, including being subject to the more restrictive activity limitations
imposed on national banks. It is not possible to predict the impact of the
Conversion and Reorganization to, or regulation as, a bank until the legislation
requiring such change is enacted.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) core capital equal to at least 3% of total
adjusted assets, and (3) risk-based capital equal to 8% of total risk-weighted
assets. The Bank's capital ratios are set forth under "HISTORICAL AND PRO FORMA
CAPITAL COMPLIANCE."
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), less certain mortgage servicing rights and
less certain investments. Core capital is defined as common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits of mutual savings associations and
qualifying supervisory goodwill, less nonqualifying intangible assets, certain
mortgage servicing rights and certain investments.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock, and the portion of the allowance for loan
losses not designated for specific loan losses. The portion of the allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is
limited to 100% of core capital. A savings association must calculate its
risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans, and other assets.
The risk-based capital standards of the OTS generally require savings
institutions with more than a "normal" level of interest rate risk to maintain
additional total capital. An institution's interest rate risk will be measured
in terms of the sensitivity of its "net portfolio value" to changes in interest
rates. Net portfolio value is defined, generally, as the present value of
expected cash inflows from existing assets and off-balance sheet contracts less
the present value of expected cash outflows from existing liabilities. A savings
institution will be considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. An institution with a greater than normal interest rate
risk will be required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest
-56-
<PAGE>
rate risk component") equal to one-half the difference between the institution's
measured interest rate risk and the normal level of interest rate risk,
multiplied by the economic value of its total assets.
The OTS calculates the sensitivity of an institution's net portfolio
value with data submitted by the institution and the interest rate risk
measurement model adopted by the OTS. The amount of the interest rate risk
component, if any, to be deducted from an institution's total capital will be
based on the institution's Thrift Financial Report filed two quarters earlier.
Savings institutions with less than $300 million in assets and a risk-based
capital ratio above 12% are generally exempt from filing the interest rate risk
schedule with their Thrift Financial Reports. However, the OTS may require any
exempt institution that it determines may have a high level of interest rate
risk exposure to file such schedule on a quarterly basis and may be subject to
an additional capital requirement based upon its level of interest rate risk as
compared to its peers. Although the rule is not yet in effect, due to the Bank's
net size and risk-based capital level, we are exempt from the interest rate risk
component. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Market Risk Analysis."
Dividend and Other Capital Distribution Limitations. OTS regulations
require us to give the OTS 30 days advance notice of any proposed declaration of
dividends to the Bank, and the OTS has the authority under its supervisory
powers to prohibit the payment of dividends by us to the Bank. In addition, we
may not declare or pay a cash dividend on the Bank's capital stock if the effect
would be to reduce the Bank's regulatory capital below the amount required for
the liquidation account to be established at the time of the conversion. See
"THE CONVERSION AND REORGANIZATION - Effects of Conversion and Reorganization -
Effect on Liquidation Account."
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to stockholders of another institution in
a cash-out merger, and other distributions charged against capital. The rule
establishes three tiers of institutions based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory notice. As of
December 31, 1997, the Bank qualified as a Tier 1 institution.
In the event the Bank's capital falls below the Bank's fully phased-in
requirement or the OTS notifies the Bank that it is in need of more than normal
supervision, the Bank would become a Tier 2 or Tier 3 institution and as a
result, the Bank's ability to make capital distributions could be restricted.
Tier 2 institutions, which are institutions that before and after the proposed
distribution meet their current minimum capital requirements, may only make
capital distributions of up to 75 % of net income over the most recent four
quarter period. Tier 3 institutions, which are institutions that do not meet
current minimum capital requirements and propose to make any capital
distribution, and Tier 2 institutions that propose to make a capital
distribution in excess of the noted safe harbor level, must obtain OTS approval
prior to making such distribution. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. The OTS has proposed rules relaxing
certain approval and notice requirements for well-capitalized institutions.
A savings institution is prohibited from making a capital distribution
if, after making the distribution, the savings institution would be
undercapitalized (i.e., not meet any one of its minimum
-57-
<PAGE>
regulatory capital requirements). Further, a savings institution cannot
distribute regulatory capital that is needed for its liquidation account.
Qualified Thrift Lender Test. Savings institutions must meet a
qualified thrift lender ("QTL") test. If the Bank maintains an appropriate level
of qualified thrift investments ("QTIs") (primarily residential mortgages and
related investments, including certain mortgage-related securities) and
otherwise qualify as a QTL, the Bank will continue to enjoy full borrowing
privileges from the FHLB of Pittsburgh. The required percentage of QTIs is 65%
of portfolio assets (defined as all assets minus intangible assets, property
used by the institution in conducting its business and liquid assets equal to
10% of total assets). Certain assets are subject to a percentage limitation of
20% of portfolio assets. In addition, savings institutions may include shares of
stock of the FHLBs, FNMA, and FHLMC as QTIs. Compliance with the QTL test is
determined on a monthly basis in nine out of every 12 months. As of December 31,
1997, the Bank was in compliance with the Bank's QTL requirement with
approximately 83.18% of its assets invested in QTIs.
Transactions With Affiliates. Generally, restrictions on transactions
with affiliates require that transactions between a savings institution or its
subsidiaries and its affiliates be on terms as favorable to the savings
institution as comparable transactions with non-affiliates. In addition, certain
of these transactions are restricted to an aggregate percentage of the savings
institution's capital. Collateral in specified amounts must usually be provided
by affiliates in order to receive loans from the savings institution. Within
certain limits, affiliates are permitted to receive more favorable loan terms
than non-affiliates. The Bank's affiliates include the Mutual Holding Company,
the Mid-Tier Holding Company and the Company and any company which would be
under common control with the Bank. In addition, a savings institution may not
extend credit to any affiliate engaged in activities not permissible for a bank
holding company or acquire the securities of any affiliate that is not a
subsidiary. The OTS has the discretion to treat subsidiaries of savings
institution as affiliates on a case-by-case basis.
Liquidity Requirements. All savings institutions are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At December 31, 1997, the Bank's liquidity
ratio was 18.87%. Monetary penalties may be imposed upon institutions for
violations of liquidity requirements.
Federal Home Loan Savings Bank System. The Bank is a member of the FHLB
of Pittsburgh, which is one of 12 regional FHLBs. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from funds deposited by savings institutions and proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Pittsburgh in an amount equal to at least 1% of the Bank's aggregate
unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year. At December 31, 1997, the Bank had
$1,702,000 in FHLB stock, at cost, which was in compliance with this
requirement. The FHLB imposes various limitations on advances such as limiting
the amount of certain types of real estate related collateral to 30% of a
member's capital and limiting total advances to a member.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future.
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<PAGE>
Federal Reserve. The Federal Reserve requires all depository
institutions to maintain noninterest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve may be used to
satisfy the liquidity requirements that are imposed by the OTS. At December 31,
1997, the Bank's reserve met the minimum level required by the Federal Reserve.
Savings institutions have authority to borrow from the Federal Reserve
System "discount window," but Federal Reserve System policy generally requires
savings institutions to exhaust all other sources before borrowing from the
Federal Reserve System. The Bank had no borrowings from the Federal Reserve
System at December 31, 1997.
TAXATION
Federal Taxation
The Mid-Tier Holding Company is subject to the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), in the same general
manner as other corporations. In August 1996, the Code was revised to equalize
the taxation of thrifts and banks. Thrifts, such as the Bank, no longer have a
choice between the percentage of taxable income method and the experience method
in determining additions to bad debt reserves. Thrifts with $500 million of
assets or less may still use the experience method, which is generally available
to small banks. Larger thrifts must use the specific charge off method regarding
bad debts. Any reserve amounts added to the Bank's bad debt reserve after 1987
will be recaptured into the Bank's taxable income over a six year period
beginning in 1996. A thrift may delay recapturing into income its post-1987 bad
debt reserves for an additional two years if it meets a residential lending
test. This recapture will not have a material impact on the Bank.
Under the experience method, the bad debt deduction may be based on (i)
a six-year moving average of actual losses on qualifying and non-qualifying
loans, or (ii) a fill-up to the institution's base year reserve amount, which is
the tax bad debt reserve determined as of December 31, 1987.
If a savings institution's qualifying assets (generally, loans secured
by residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
institution may not deduct any addition to a bad debt reserve and generally must
include existing reserves in income over a four year period, which is
immediately accruable for financial reporting purposes. As of September 30,
1997, at least 60% of the Bank's assets were qualifying assets as defined in the
Code. No assurance can be given that the Bank will meet the 60% test for
subsequent taxable years.
Earnings appropriated to the Bank's bad debt reserve and claimed as a
tax deduction including the Bank's supplemental reserves for losses will not be
available for the payment of cash dividends or for distribution to stockholders
(including distributions made on dissolution or liquidation), unless the Bank
includes the amount in income. Distributable amounts may be reduced by any
amount deemed necessary to pay the resulting federal income tax. As of December
31, 1997, the Bank had $5.4 million of accumulated earnings, representing the
Bank's base year tax reserve, for which federal income taxes have not been
provided. If such amount is used for any purpose other than bad debt losses,
including a dividend distribution or a distribution in liquidation, it will be
subject to federal income tax at the then current rate.
Generally, for taxable years beginning after 1986, the Code also
requires most corporations, including savings institutions, to utilize the
accrual method of accounting for tax purposes. Further, for taxable years ending
after 1986, the Code disallows 100% of a savings institution's interest expense
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deemed allocated to certain tax-exempt obligations acquired after August 7,
1986. Interest expense allocable to (i) tax-exempt obligations acquired after
August 7, 1986 which are not subject to this rule, and (ii) tax-exempt
obligations issued after 1982 but before August 8, 1986, are subject to the rule
which applied prior to the Code disallowing the deductibility of 20% of the
interest expense.
The Code imposes an alternative minimum tax ("AMT") on a corporation's
alternative minimum taxable income ("AMTI") at a rate of 20%. AMTI is increased
by certain preference items, including the excess of the tax bad debt reserve
deduction using the percentage of taxable income method over the deduction that
would have been allowable under the experience method. Only 90% of AMTI can be
offset by net operating loss carryovers of which we currently have none. AMTI is
also adjusted by determining the tax treatment of certain items in a manner that
negates the deferral of income resulting from the regular tax treatment of those
items. Thus, the Mid-Tier Holding Company's AMTI is increased by an amount equal
to 75 % of the amount by which the Mid-Tier Holding Company's adjusted current
earnings exceeds the Bank's AMTI (determined without regard to this adjustment
and prior to reduction for net operating losses). In addition, for taxable years
beginning after December 31, 1986 and before January 1, 1996, an environmental
tax of 0.12% of the excess of AMTI (with certain modifications) over $2 million
is imposed on corporations, including the Mid-Tier Holding Company, whether or
not an AMT is paid.
The Mid-Tier Holding Company (and the Company) may exclude from its
income 100% of dividends received from us as a member of the same affiliated
group of corporations. A 70% dividends received deduction generally applies with
respect to dividends received from corporations that are not members of such
affiliated group, except that an 80% dividends received deduction applies if the
Mid- Tier Holding Company owns more than 20% of the stock of a corporation
paying a dividend. The above exclusion amounts, with the exception of the
affiliated group figure, were reduced in years in which the Mid-Tier Holding
Company availed itself of the percentage of taxable income bad debt deduction
method.
The federal income tax returns of the Mid-Tier Holding Company have not
been audited by the IRS since its formation in 1997. The Bank's federal income
tax returns have been audited through 1993.
State Taxation
The Company is subject to the Pennsylvania Corporate Net Income Tax and
Capital Stock and Franchise Tax. The Corporate Net Income Tax rate is currently
11.50% and is imposed on the Company's unconsolidated taxable income for federal
purposes with certain adjustments. In general, the Capital Stock Tax is a
property tax imposed at the rate of 1.3% of a corporation's capital stock value,
which is determined in accordance with a fixed formula based upon average net
income and net worth.
The state tax returns of the Bank and the Mid-Tier Holding Company have
not been audited by the Commonwealth of Pennsylvania during the past ten years.
MANAGEMENT OF THE COMPANY AND THE MID-TIER HOLDING COMPANY
The Boards of Directors of the Company and the Mid-Tier Holding Company
are composed of seven members each, divided into three classes and are elected
by the stockholders of the Mid-Tier Holding Company and the Company,
respectively, for staggered three-year terms, or until their successors are
elected and qualified. One class of directors, consisting of directors John F.
McGill, Jr. and Patrick T. Ryan have terms of office expiring in 1999; a second
class, consisting of directors Francis E. McGill, III and Add B. Anderson, Jr.
have terms of office expiring in 2000; and a third class, consisting of
directors John F. McGill, Sr., Jerry Naessens and Michael G. Crofton have a term
of office expiring in 2001. Their names and biographical information are set
forth under "MANAGEMENT OF THE BANK-Directors."
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The following individuals hold positions as executive officers of the
Company and the Mid-Tier Holding Company, as set forth below their names.
Name Position
- ---- --------
John F. McGill Chairman of the Board
John F. McGill, Jr. Director, President and Chief Executive Officer
Jerry Naessens Director, Secretary and Chief Financial Officer
The executive officers of the Mid-Tier Holding Company and the Company
are elected annually and hold office until their respective successors have been
elected and qualified or until death, resignation or removal by the Board of
Directors.
Since the formation of the Mid-Tier Holding Company and the Company,
none of the executive officers, directors or other personnel has received
remuneration from the Mid-Tier Holding Company or the Company. Information
concerning the principal occupations, employment and compensation of the
directors and certain executive officers of the Mid-Tier Holding Company and the
Company during the past five years is set forth under "MANAGEMENT OF THE BANK."
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<PAGE>
MANAGEMENT OF THE BANK
Directors
The Bank's Board of Directors is composed of eight members. Directors
of the Bank are generally elected to serve for a three-year period or until
their respective successors shall have been elected and shall qualify. The
following table sets forth certain information regarding the composition of the
Bank's Board of Directors as of December 31, 1997, including the terms of office
of Board members.
<TABLE>
<CAPTION>
Year First
Elected Term to
Name Age(1) Position Director(2) Expire
- ---- ------ -------- ----------- -------
<S> <C> <C> <C> <C>
John F. McGill(4) 60 Chairman of the Board and Chief 1967 2001
Executive Officer
Robert E. Domanski, M.D. 53 Director 1991 2001
Pietro M. Jacovini, Jr. 82 Director 1982 2001
John F. McGill, Jr.(3)(4) 36 President and Director 1991 1999
Patrick T. Ryan(5) 65 Director 1998 1999
William A. Lamb, Sr. 61 Director 1993 1999
Francis E. McGill, III(3) 38 Director 1991 2000
Add B. Anderson, Jr. 71 Director 1973 2000
</TABLE>
- ------------------
(1) At December 31, 1997.
(2) Represents year first elected to either the Board of Directors of the
Company, the Mid-Tier Holding Company or the Bank, or a predecessor savings
institution. The Mid-Tier Holding Company was organized March, 1997. The
Company was organized March, 1998.
(3) John F. McGill, Jr. is the son of John F. McGill and cousin of Francis E.
McGill, III.
(4) Effective November 20, 1997, John F. McGill, Jr. was appointed President
and Chief Executive Officer. Prior to that date, John F. McGill was
Chairman of the Board, President and Chief Executive Officer.
(5) On April 30, 1998, Mr. Ryan was elected by the boards of directors of the
Bank, the Mid-Tier Holding Company and the Company to fill the unexpired
term of Joseph P. Healy, who passed away on April 18, 1998.
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<PAGE>
Executive Officers Who Are Not Directors
The following tables sets forth information regarding the executive
officers of the Bank who are not also directors.
Name Age Positions Held in the Bank
- ---- --- --------------------------
Jerry Naessens 62 Chief Financial Officer, Treasurer, Secretary
Ronald D. Masciantinio 58 Vice President, Compliance
Christopher P. McGill 29 Vice President, Lending
Elizabeth Milavsky 47 Vice President, Operations
Frank Zangari 45 Vice President, Internal Audit
Dolores M. Lush 56 Vice President, Support Services
The principal occupation during the past five years of each director
and executive officer of the Bank and the Mid-Tier Holding Company is set forth
below. All directors have held their present positions for five years unless
otherwise stated.
Add B. Anderson, Jr. is 100% owner of KeyBis Corporation (formerly
Eastern Continuous Forms, Inc.), a manufacturer of business forms in Blue Bell,
Pennsylvania. He serves as a member of the Board of Trustees of Roxborough
Memorial Hospital and is Chairman of the Roxborough Memorial Health Foundation.
Michael G. Crofton is Vice President and Senior Portfolio Manager of
Rittenhouse Financial Services, Inc., an investment advisory firm located in
Radnor, Pennsylvania. Mr. Crofton is not a member of the Board of Directors of
the Bank. He is a member of the Boards of Directors of the Company and the
Mid-Tier Holding Company.
Robert E. Domanski, M.D. has been a partner and Director of Radiology
of Northwest Radiology Associates, Ltd., Philadelphia, Pennsylvania, since 1985.
He is a member of the 21st Ward Medical Society.
Pietro M. Jacovini, Jr. has been a board member of the Bank since
1982. He serves as a board member of St. Agnes Medical Center and is Vice
President and a board member of the Philadelphia Fire Museum.
William A. Lamb, Sr. was President/CEO of Lamb Brothers Office
Products, Philadelphia, Pennsylvania for 33 years. In 1992, Lamb Brothers became
part of Philadelphia Stationers where Mr. Lamb assumed the title of Executive
Vice President, a title he currently holds with Staples, Inc.
Francis E. McGill, III is the sole proprietor of the law firm of McGill
and McGill, Philadelphia, Pennsylvania, and has practiced with the firm since
1988. McGill and McGill serve as general counsel to the Mid-Tier Holding Company
and the Bank. See "-Certain Related Transactions." He is a member of the Board
of Trustees of Roxborough Memorial Hospital.
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<PAGE>
John F. McGill, Jr. has been President of the Bank since November 20,
1996. Prior to such positions, he was Executive Vice President in charge of
operations, lending and portfolio management of the Bank since March 1991. He
has served the Bank in various officer positions since 1984 and has been a
director since 1991. Mr. McGill serves on the finance committee of the Basilica
of the National Shrine in Washington, D.C.
John F. McGill, Sr. has been Chief Executive Officer of the Bank since
1980. He was President and Chief Executive Officer of the Bank from 1980 to
November 20, 1997, and Chairman of the Board since 1989, and has been a director
of the Bank for over 30 years. He has served in various officer capacities with
the Bank since 1972. Mr. McGill is also a 25% partner in Francis E. McGill,
Realtor, a real estate and insurance firm. He is a member of the Board of
Roxborough Memorial Hospital.
Jerry A Naessens has been employed by Roxborough-Manayunk as Treasurer
and Chief Financial Office since 1991. Mr. Naessens was a partner in Deloitte
and Touche from 1980 to 1991. Mr. Naessens is not a member of the Board of
Directors of the Bank. He is a member of the Boards of Directors of the Company
and the Mid-Tier Holding Company.
Patrick T. Ryan is Of Counsel in the Litigation Department of the law
firm Drinker Biddle & Reath LLP, Philadelphia, Pennsylvania. Prior to his
retirement as of February 1, 1998, Mr. Ryan was a partner at the firm since
1962. Mr. Ryan has been active in various bar association committees.
Drinker Biddle & Reath LLP does occasional legal work for the Bank.
Meetings and Committees of the Board of Directors
The business of Boards of Directors of the Bank and the Mid-Tier
Holding Company are conducted through meetings of the Board of Directors and the
committees of the Board of the Bank. During the year ended December 31, 1997,
the Board of Directors of the Mid-Tier Holding Company held three regular
meetings and two special meetings and the Board of Directors of the Bank had 12
regular and one special meeting. During the year ended December 31, 1997, no
director attended fewer than 75% of the total meetings of the Board of Directors
of the Mid-Tier Holding Company and the Bank and committees on which such
director served.
The Executive Committee of the Board of Directors of the Bank consists
of members John F. McGill, John F. McGill, Jr., Joseph P. Healy and Francis E.
McGill, III and four other directors who rotate quarterly. The Committee
meetings as necessary in between meetings of the full Board of directors. All
actions of the Executive Committee must be ratified by the full Board of
Directors. The Executive Committee met 12 times during the year ended December
31, 1997.
The Compensation Committee of the Bank consists of Directors John F.
McGill, Joseph P. Healy and Robert E. Domanski. The committee meets annually to
review the performance of the Bank officers and employees, and to determine
compensation programs and adjustments. The Compensation Committee met one time
during fiscal 1997 to consider compensation. Mr. McGill does not participate in
any committee discussions regarding his salary.
The Audit Committee of the Bank consists of Directors Healy (Chairman),
Jacovini, Domanski, Lamb, F.E. McGill, III, and Anderson. In its capacity as the
Audit Committee, the Board is responsible for developing the Bank audit program
and monitoring it. This committee meets with the Bank outside auditors to
discuss the results of the annual audit and any related matters. The Chairman of
the Audit Committee also receives and reviews all the reports and findings and
other information presented to him by the Bank's internal auditors. The Audit
Committee met one time in 1997.
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<PAGE>
The Bank's Nominating Committee consists of John F. McGill, Joseph P.
Healy and John F. McGill, Jr. The Nominating Committee met once during 1997.
Executive Compensation
Summary Compensation Table. The following table sets forth for the year
ended December 31, 1997, certain information as to the compensation received by
the Chief Executive Officer and each executive officer of the Mid-Tier Holding
Company listed above who received total cash compensation in excess of $100,000.
All Compensation is paid by the Bank.
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation(3)
------------------------ -----------------------------
Securities
Restricted Underlying All Other
Name and Fiscal Stock Options/ Compensation
Principal Position Year Salary(1) Bonus Awards($) SARs(#)(2)(3) ($)(4)
- ------------------ ---- --------- ----- --------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
John F. McGill 1997 270,000 65,000 -- -- 168,111
Chairman
John F. McGill, Jr. 1997 200,000 35,000 -- -- 26,046
President and Chief
Executive Officer
Jerry A. Naessens 1997 175,000 8,750 -- -- 68,481
Treasurer and Chief
Financial Officer
</TABLE>
- ----------------
(1) Includes salary and director's fees.
(2) Does not include awards of stock options under the 1992 and 1994 Stock
Option Plans. See "-Stock Option Plans."
(3) Does not include potential stock benefit plans to be adopted after
completion of the Conversion and Reorganization. See "- Proposed Future
Stock Benefit Plans."
(4) Includes allocations of shares of Mid-Tier Common Stock under the Bank's
ESOP, valued at $2,046 as of December 31, 1996, to each of the three named
executive officers. The amounts shown also include a $24,000 contribution
by the Bank to its profit sharing plan on behalf of each of the three named
executive officers, and accruals of $142,065, $0, and $42,435 under the
Bank's supplemental retirement plans for John F. McGill, John F. McGill,
Jr., and Jerry A. Naessens, respectively.
Board Fees. Non-officer members of Board of Directors of the Bank
received fees of 1,000 per month during the 1997 fiscal year plus $1,200
retainer. Members of the Board's Budget, Audit and Advisory Committees were paid
no fees for each meeting attended during fiscal 1997. The Bank paid a total of
$125,200 in directors' fees for the fiscal year ended December 31, 1997. The
Company does not pay any additional compensation for membership on the Board of
Directors. The Executive Committee was paid $1,000, in the aggregate, per
meeting, and met 12 times during 1997.
Francis E. McGill, III is the sole proprietor of McGill and McGill, a
law firm in Philadelphia, Pennsylvania, which during the year ended December 31,
1997 received approximately $119,000 in fees from the Bank for legal services.
The Bank has followed the policy of offering residential mortgage loans
for the financing of personal residences, share loans, and consumer loans to its
officers, directors and employees. The loans are made in the ordinary course of
business and also made on substantially the same terms and conditions, including
interest rate and collateral, as those of comparable transactions prevailing at
the time with other persons, and do not include more than the normal risk of
collectibility or present other unfavorable features.
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<PAGE>
Benefits Plans
General. The Mid-Tier Holding Company has no full time employees,
relying upon employees of the Bank for the limited services required by the
Mid-Tier Holding Company. All compensation paid to directors, officers and
employees is paid by the Bank. The Bank currently provides benefits to its
officers, directors and employees, as described below.
Insurance. Full-time employees and part-time employees who work at
least 1,000 hours per year are provided, with no contribution or expense to
them, with group plan insurance that covers hospitalization, major medical,
dental and long term disability, accidental death and life insurance. This
insurance is available generally and on the same basis to all employees. Long
term disability is available after completion of a minimum of one year of
service, while the other benefits are available immediately. Part-time employees
who work less than 1,000 hours per year have no benefits.
Pension Plan. The Bank sponsors a defined benefit pension plan (the
"Pension Plan"). All full-time employees and part-time employees of the Bank who
work 1,000 hours are eligible to participate after one year of service and
attainment of age 21. A qualifying employee becomes fully vested in the Pension
Plan upon completion of five years service or when the normal retirement age
(the later of age 65 or the 5th anniversary of the first day of the Pension Plan
year in which the participant commenced participation in the Pension Plan) is
attained.
Benefits are payable in the form of various annuity alternatives,
including a joint and survivor option, or in a lump-sum amount. The following
table shows the estimated annual benefits payable under the Pension Plan based
on the respective employee's years of benefit service and applicable average
annual salary, as calculated under the Pension Plan. Benefits under the Pension
Plan take into account permitted disparity allowed under the Code. Benefits
shown below are based on the covered compensation of an employee retiring at age
65 in 1997.
<TABLE>
<CAPTION>
Years of Benefit Service
--------------------------------------------------------------------------------------
15 20 25 30 35
---- ---- ---- ---- ---
<S> <C> <C> <C> <C> <C>
$ 60,000........................ $ 7,921 $10,562 $13,203 $15,843 $18,484
80,000........................ 11,221 14,962 18,703 22,443 18,703
100,000........................ 14,521 19,362 24,203 29,043 33,884
125,000........................ 18,646 24,862 31,078 37,293 43,509
150,000........................ 22,771 30,362 37,953 45,543 53,134
160,000........................ 24,552 32,736 40,920 49,104 57,288
</TABLE>
The Pension Plan provides for monthly payments to each participating
employee at normal retirement age. The annual allowance payable under the
Pension Plan is equal to the sum of (A) and (B), where (A) equals the product of
(i) .65% of the participant's average monthly compensation, based on the highest
five (5) consecutive years and excluding compensation in excess of $150,000, and
(ii) the participant's years of participation as of his normal retirement date,
and (B) equals the product of (i) .45% of the participant's average monthly
compensation in excess of covered compensation (as defined in Section 401(1) (5)
(E) of the Code), and (ii) the participant's years of participation as of his
normal retirement date (but not to exceed thirty-five (35) years). A participant
who is vested in the Pension Plan may elect an early retirement (at age 55 with
20 years of service or age 62 with 10 years of service), and may elect to
receive a reduced monthly benefit. The Pension Plan also provides for payments
in the event of disability or death. At December 31, 1997, John McGill, John
McGill, Jr. and Jerry Naessens
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had 25, 13 and 6 years of credited service under the Pension Plan. Total Company
pension expense for 1995, 1996 and 1997 amounted to $69,263, $131,360 and
$143,394, respectively.
Supplemental Retirement Agreements. In November, 1993, the Bank entered
into non-tax qualified retirement and death benefit agreements with John F.
McGill, then President and Chief Executive Officer and Jerry Naessens,
Treasurer. The agreements were subsequently amended in June 1996. In recognition
of the services provided by these officers to the Bank, the retirement
agreements provide that Messrs. McGill and Naessens (or their spouses) shall
receive at age 67 monthly retirement benefits of $12,500 and $4,167,
respectively. If either officer becomes permanently and totally disabled prior
to age 67, the employee will receive the monthly supplemental retirement
benefits upon reaching age 67. The retirement agreements provide that the
officer's spouse shall receive a pro-rated monthly death benefit if the officer
dies while employed by the Bank prior to age 67, based on the officer's age at
the time of death. This pro-rated benefit for Mr. McGill ranges from $4,166 to
$11,875, for ages 55 to 64, and for Mr. Naessens ranges from $1,375 to $3,625,
for ages 58 to 64. The retirement agreements provide that the Bank may purchase
a policy or policies of life insurance on the life of these officers, for which
the Bank will be the beneficiary. Such policies need not be designated for the
payment of benefits pursuant to the retirement agreements.
Employment Agreements. Effective January 1, 1995, the Bank entered into
separate employment agreements with John F. McGill, Sr., Chairman of the Board,
then President and Chief Executive Officer of the Bank, and Jerry A. Naessens,
Treasurer of the Bank. The Bank and Mid-Tier Holding Company entered into an
employment agreement with John F. McGill, Jr., President and Chief Executive
Officer effective January 1, 1998. The employment agreements are for terms of
three years. The agreements may be terminable by the Bank for "just cause" as
defined in the employment agreements. If the Bank terminates the employees
without just cause, such employee will be entitled to a continuation of his
salary from the date of termination through the remaining term of the employment
agreement. Each employment agreement contains a provision stating that in the
event of the termination of employment in connection with, or within one year
after, any change in control of the Bank, the Mid-Tier Holding Company, or the
Company, the employee will be paid a lump sum amount equal to 2.99 times the
employee's most recent base salary. If such payments were to be made under the
employment agreements, as of January 1, 1998, such payments would equal
approximately $750,000, $675,000 and $600,000, respectively to John F. McGill,
John F. McGill, Jr. and Jerry Naessens. The aggregate payments that would be
made pursuant to the employment agreements would be an expense to the Bank,
thereby reducing net income and the Bank's capital by that amount. The
employment agreements may be renewed annually by the Board of Directors upon a
determination of satisfactory performance within the Board's sole discretion. If
any of the employees shall become disabled during the term of their respective
employment agreements, the employee shall nevertheless continue to receive
payment of his base salary for a period of 12 months but such period shall not
exceed the remaining term of the employment agreement, and 80% of such base
salary for the remaining term of the employee's employment agreement. Disability
payments under the employment agreements shall be reduced by any other benefit
payments made under other disability programs in effect for Bank employees.
Implementation of the Conversion and Reorganization will not constitute a change
in control under the employment agreements.
Profit Sharing Plan. The Bank sponsors a tax-qualified defined
contribution profit sharing plan, ("Profit Sharing Plan"), for the benefit of
its employees. Employees became eligible to participate under the Plan after age
21 and completing six months of service. Benefits under the plan are determined
based upon annual discretionary contributions to the plan. Such benefits are
allocated to participant accounts as a percentage of base compensation of such
participant to the base compensation of all participants. At the end of each
year, the Board of Directors determines whether to make a contribution and the
amount of the contribution to the Plan, based upon a number of factors, such as
the Bank's retained earnings, profits, regulatory capital and employee
performance. Such discretionary contributions shall
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not exceed 7.5% of the Bank's Gross Income before taxes, or 15% of employee base
pay, whichever is less. No employee contributions are permitted under the plan.
Plan Participants are not permitted to direct contributions under the Plan.
Benefits are payable upon termination of employment, retirement, death,
disability or Plan termination. Normal retirement age under the Plan is age 65
or, if later, the fifth anniversary of the first day of the Plan year during
which you entered the Plan. It is intended that the Plan operate in compliance
with the provisions of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") and the requirements of Section 401(a) of the Internal Revenue
Code of 1986, as amended (the "Code"). Benefits under the Profit Sharing Plan
become 100% vested and non-forfeitable following five years of service.
The contributions to the Profit Sharing Plan on behalf of John F.
McGill, John F. McGill, Jr., and Jerry Naessens were $24,000 each for the fiscal
year ended December 31, 1997. Total contributions to the Plan for all employees
for the fiscal year ended December 31, 1997 were $315,670.
Employee Stock Ownership Plan. The Bank sponsors an employee stock
ownership plan (the "ESOP") for the exclusive benefit of participating
employees, which was implemented upon the completion of the Reorganization.
Participating employees are employees who have completed one year of service
with the Bank or its subsidiaries.
The ESOP is fully funded. Benefits may be paid either in shares of the
Common Stock or in cash. The ESOP borrowed funds from an unrelated third party
lender, in an amount sufficient to purchase 14,000 shares of the Common Stock.
This loan was secured by the shares purchased and earnings of ESOP assets. This
loan was paid in full at December 31, 1997.
Contributions to the ESOP and shares released from the suspense account
are allocated among participants on the basis of total compensation as reported
on Form W-2, excluding bonuses. All participants must be employed at least 1,000
hours in a plan year and be employed on the last day of the plan year in order
to receive an allocation. Participants who are not actively employed at the last
day of the Plan year due to retirement, total and permanent disability, or death
shall share in the allocation of contributions and forfeitures for that Plan
year only if otherwise eligible. Participant benefits become 20% vested after
three years of service, increasing by 20% annually thereafter until benefits are
100% vested after seven years. Vesting will be accelerated upon retirement,
death, disability or termination of the ESOP. Forfeitures will be reallocated to
participants on the same basis as other contributions in the plan year. Benefits
may be payable in the form of a lump sum upon retirement, death, disability or
separation from service.
The Board of Directors has appointed a committee (the "ESOP Committee")
to administer the ESOP and trustees (the "ESOP Trustees"). Directors John
McGill, John McGill, Jr. and Joseph P. Healy serve as the members of the ESOP
Committee and as the initial ESOP Trustees. The Board of Directors or the ESOP
Committee may instruct the ESOP Trustees regarding investments of funds
contributed to the ESOP. The ESOP Trustees must vote all allocated shares held
in the ESOP in accordance with the instructions of the participating employees.
Unallocated shares and allocated shares for which no timely direction is
received will be voted by the ESOP Trustees as directed by the Board of
Directors or the ESOP Committee.
As part of the Conversion and Reorganization, the ESOP plans to borrow
funds from the Company and use the funds to purchase up to 8% of the Conversion
to be sold in the Offerings. Collateral for the loan will be the Common Stock
purchased by the ESOP. The loan will be repaid principally from the Bank's
contributions to the ESOP over a period of at least fifteen years. The interest
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<PAGE>
rate for the loan will be the prime rate. Shares purchased by the ESOP will be
held in a suspense account for allocation among participants as the loan is
repaid.
Stock Option Plans. In connection with the Reorganization, the Bank
adopted the Roxborough- Manayunk Federal Savings Bank 1992 Stock Option Plan
(the "1992 Option Plan"). Pursuant to the 1992 Option Plan, 20,000 shares (a
number of shares equal to 10% of the common stock of the Bank issued in the
Bank's stock offering) were reserved for issuance by the Bank upon exercise of
stock options. The purpose of the 1992 Option Plan is to provide additional
incentive to certain officers, directors and key employees by facilitating their
purchase of a stock interest in the Bank. The 1992 Option Plan provides for a
term of ten years, after which no awards may be made, unless earlier terminated
by the Board of Directors pursuant to the 1992 Option Plan. Options which may be
granted under the Plan include Incentive Stock Options within the meaning of
Section 422 of the Internal Revenue Code of 1986 ("Code") or Non-Incentive Stock
Options (collectively referred to as "Stock Options").
The 1992 Option Plan is administered by a committee of at least three
directors designated by the Board of Directors (the "1992 Option Committee").
Such members of the 1992 Option Committee shall be deemed "disinterested" within
the meaning of Rule 16b-3 pursuant to the Securities Exchange Act of 1934 (the
"1934 Act"). Directors J. P. Healy, A. B. Anderson, and F. E. McGill, III, serve
as members of the Option Committee. The Option Committee selects the employees
to whom options are to be granted and the number of shares to be granted, based
upon the employee's position at the Bank, years of service and performance.
An initial grant of options under the Option Plan took place upon
completion of the MHC Reorganization and the option exercise price was the
purchase price of the common stock of the Bank in the offering (i.e., $10.00 per
share of Common Stock). Options to purchase approximately 10,000, 6,000, 14,000,
and 20,000 shares of the Bank Common Stock were granted to John F. McGill, John
F. McGill, Jr., Jerry Naessens, and all executive officers as a group (3
persons), respectively, as of December 31, 1992. Such options were incentive
stock options and became exercisable at the rate of one-third annually following
one year after grant. The 1992 Option Plan was ratified by the Bank's
stockholders at the first Annual Meeting of Stockholders on April 14, 1993. No
options were granted or exercised during the fiscal year ended December 31, 1997
under the 1992 Stock Option Plan.
The Board of Directors of the Bank adopted the 1994 Stock Option Plan
("1994 Option Plan"), which was ratified by The Bank's stockholders on April 19,
1995. Pursuant to the 1994 Option Plan, 20,000 shares of the Bank's common stock
were reserved for issuance. As of December 31, 1995, all 20,000 options had been
granted. Option granted under the 1994 Option Plan were 100% exercisable as of
the date of grant at purchase prices equal to the fair market value on the date
of grant (i.e., $11.50) and remain exercisable for ten years. Options to
purchase 5,000, 5,000, 4,000 and 6,000 shares of the Bank's common stock were
granted to John F. McGill, John F. McGill, Jr., Jerry A. Naessens and all
non-employee directors as a group (six persons), respectively.
The 1994 Stock Option Plan, which became effective on the date it was
adopted by the Board of Directors, provides for a term of ten years unless
terminated earlier by the Board of Directors. No awards may be made after such
ten year period. No stock options were granted or exercised during the years
ended December 31, 1996 and 1997.
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<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Value of
Underlying Unexercised in-the-
Unexercised Money
Options/SARs at Options/SARs at
Shares December 31, 1997 December 31,1997
Acquired on Value (#) Exercisable/ ($) Exercisable/
Name Exercise (#) Realized($) Unexercisable Unexercisable (1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John F. McGill -0- -0- 15,000/0 $270,300/$0
Chairman
John F. McGill, Jr. -0- -0- 11,000/0 196,220/0
President and CEO
Jerry A. Naessens -0- -0- 8,000/0 142,160/0
Treasurer and Chief
Financial Officer,
Secretary
</TABLE>
- -------------------
(1) Based on an appraisal of the Bank's illiquid stock undertaken for purposes
of the Bank's ESOP ($28.52 per share).
Management Stock Bonus Plans. In connection with the Reorganization,
the Bank adopted a Management Stock Bonus Plan and Trust Agreement (the "1992
MSBP"), the objective of which is to enable the Bank to retain personnel of
experience and ability in key positions of responsibility. All employees of the
Bank are eligible to receive benefits under the 1992 MSBP. Benefits may be
granted in the sole discretion of a committee (the "1992 MSBP Committee")
appointed by the Board of Directors of the Bank. The 1992 MSBP is managed by
trustees (the "1992 MSBP Trustees") who are directors of the Bank and who have
the responsibility to invest all funds contributed by the Bank to the trust
created for the 1992 MSBP (the "1992 MSBP Trust"). The 1992 MSBP was ratified by
the Bank's stockholders at the first Annual Meeting of Stockholders on April 14,
1993.
The Bank contributed sufficient funds to the 1992 MSBP Trust so that
the 1992 MSBP Trust could purchase 3% of the Bank's common stock offered in the
stock offering (i.e., 6,000 shares). In recognition of their prior and expected
services to the Bank and for the profitable operation of the Bank, Messrs. John
F. McGill, John F. McGill, Jr., Jerry Naessens, and all executive officers as a
group (three persons) were awarded 50%, 30%, 20% and 100%, respectively, of the
shares purchased by the 1992 MSBP. The shares granted were in the form of
restricted stock payable over a five-year period at the rate of 20% of such
shares per year following the date of grant of the award. All such restricted
shares are fully vested.
The Bank adopted the 1994 Management Stock Bonus Plan (the "1994 MSBP")
as of November 19, 1994. The Bank contributed sufficient funds to enable the
1994 MSBP to purchase 6,000 shares of the Bank's common stock all of which have
been awarded. The Bank's stockholders ratified the 1994 MSBP on April 19, 1995
at its 1995 annual meeting of stockholders. Awards of 1,500, 1,500, 1,200 and
1,800 shares of Common Stock were granted to John F. McGill, John F. McGill,
Jr., Jerry A. Naessens and all non-employee directors as a group (six persons),
respectively. All awards are fully vested.
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<PAGE>
Proposed Future Stock Benefit Plans
Stock Option Plan. The boards of director of the Company intends to
adopt a stock option plan (the Option Plan) following the Conversion and
Reorganization, subject to approval by the Company's stockholders, at a
stockholders meeting to be held no sooner than six months after the conversion.
The Option Plan will comply with the applicable OTS regulations in effect at
that time. See "- Restrictions on Stock Benefit Plans." If the Option Plan is
implemented within one year after the conversion, in accordance with OTS
regulations, a number of shares equal to 10% (subject to a downward adjustment
for shares issued pursuant to the 1994 Option Plan, see "-Restrictions on Stock
Benefit Plans") of the aggregate shares of Conversion Stock sold in the
Offerings (i.e., 785,637 shares based upon the sale of 7,856,370 shares at the
midpoint) would be reserved for issuance by the Company upon exercise of stock
options to be granted to our officers, directors and employees from time to time
under the Option Plan. The purpose of the Option Plan would be to provide
additional performance and retention incentives to certain officers, directors
and employees by facilitating their purchase of a stock interest in the Company.
Under the OTS regulations, the Option Plan, if adopted within one year of the
Conversion and Reorganization, would provide for a term of 10 years, after which
no awards could be made, unless earlier terminated by the board of directors
pursuant to the Option Plan and the options would vest over a five year period
(i.e., 20% per year), beginning one year after the date of grant of the option.
Options would be granted based upon several factors, including seniority, job
duties and responsibilities, job performance, our financial performance and a
comparison of awards given by other savings institutions converting from mutual
to stock form.
The Company would receive no monetary consideration for the granting of
stock options under the Option Plan. It would receive the option price for each
share issued to optionees upon the exercise of such options. Shares issued as a
result of the exercise of options will be either authorized but unissued shares
or shares purchased in the open market by the Company. However, no purchases in
the open market will be made that would violate applicable regulations
restricting purchases by the Company. The exercise of options and payment for
the shares received would contribute to the equity of the Company.
If the Option Plan is implemented more than one year after the
Conversion and Reorganization, the Option Plan will comply with OTS regulations
and policies that are applicable at such time.
Recognition Plan. The board of directors of the Company intends to
adopt the Recognition Plan following the conversion, the objective of which is
to enable us to retain personnel and directors of experience and ability in key
positions of responsibility. The Company expects to hold a stockholders' meeting
no sooner than six months after the conversion in order for stockholders to vote
to approve the Recognition Plan. If the Recognition Plan is implemented within
one year after the Conversion and Reorganization, in accordance with applicable
OTS regulations, the shares granted under the Recognition Plan will be in the
form of restricted stock vesting over a five year period (i.e., 20% per year)
beginning one year after the date of grant of the award. Compensation expense in
the amount of the fair market value of the common stock granted will be
recognized pro rata over the years during which the shares are payable. Until
they have vested, such shares may not be sold, pledged or otherwise disposed of
and are required to be held in escrow. Any shares not so allocated would be
voted by the Recognition Plan Trustees. The Recognition Plan will be implemented
in accordance with applicable OTS regulations. See "- Restrictions on Stock
Benefit Plans." Awards would be granted based upon a number of factors,
including seniority, job duties and responsibilities, job performance, our
performance and a comparison of awards given by other institutions converting
from mutual to stock form. The Recognition Plan would be managed by a committee
of non-employee directors (the "Recognition Plan Trustees"). The Recognition
Plan Trustees would have the responsibility to invest all funds contributed by
us to the trust created for the Recognition Plan (the "Recognition Plan Trust").
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<PAGE>
The Company expects to contribute sufficient funds to the Recognition
Plan so that the Recognition Plan Trust can purchase, in the aggregate, up to 4%
(subject to a downward adjustment for shares issued pursuant to the 1994 MSBP,
see "-Restrictions on Stock Benefit Plans") of the amount of Conversion Stock
that is sold in the Offerings. The shares purchased by the Recognition Plan
would be authorized but unissued shares or would be purchased in the open
market. In the event the market price of the common stock is greater than $10.00
per share, our contribution of funds will be increased. Likewise, in the event
the market price is lower than $10.00 per share, our contribution will be
decreased. In recognition of their prior and expected services to us and the
Company, as the case may be, the officers, other employees and directors
responsible for implementation of the policies adopted by the board of directors
and our profitable operation will, without cost to them, be awarded stock under
the Recognition Plan. Based upon the sale of 7,856,370 shares of Common Stock in
the Offerings at the midpoint, the Recognition Plan Trust is expected to
purchase up to 314,254 shares of Common Stock.
If the Recognition Plan is implemented more than one year after the
Conversion, the Recognition Plan will comply with such OTS regulations and
policies that are applicable at such time.
Restrictions on Stock Benefit Plans. OTS regulations provide that in
the event stock option or management and/or employee stock benefit plans are
implemented within one year from the date of conversion, such plans must comply
with the following restrictions: (1) the plans must be fully disclosed in the
prospectus, (2) for stock option plans, the total number of shares for which
options may be granted may not exceed 10% of the shares issued in the
conversion, (3) for restricted stock plans, the shares may not exceed 3% of the
shares issued in the conversion (4% for institutions with 10% or greater
tangible capital), (4) the aggregate amount of stock purchased by the ESOP in
the conversion may not exceed 10% (8% for well-capitalized institutions
utilizing a 4% restricted stock plan), (5) no individual employee may receive
more than 25 % of the available awards under the option plan or the restricted
stock plans, (6) directors who are not employees may not receive more than 5 %
individually or 30% in the aggregate of the awards under any plan, (7) all plans
must be approved by a majority of the total votes eligible to be cast at any
duly called meeting of stockholders held no earlier than six months following
the conversion, (8) for stock option plans, the exercise price must be at least
equal to the market price of the stock at the time of grant, (9) for restricted
stock plans, no stock issued in a conversion may be used to fund the plan, (10)
neither stock option awards nor restricted stock awards may vest earlier than
20% as of one year after the date of stockholder approval and 20% per year
thereafter, and vesting may be accelerated only in the case of disability or
death (or if not inconsistent with applicable OTS regulations in effect at such
time, in the event of a change in control), (11) the proxy material must clearly
state that the OTS in no way endorses or approves of the plans, and (12) prior
to implementing the plans, all plans must be submitted to the Regional Director
of the OTS within five days after stockholder approval with a certification that
the plans approved by the stockholders are the same plans that were filed with
and disclosed in the proxy materials relating to the meeting at which
stockholder approval was received.
Because the Bank initially conducted a minority stock offering in 1992,
the above-mentioned percentage restrictions will apply to the amount of
Conversion Stock sold in the Offerings (87.29% of the total shares to be
outstanding upon completion of the Conversion and Reorganization). Furthermore,
any plans adopted within on year of the Conversion and Reorganization will
require an additional downward adjustment to reflect the number of options and
shares issued pursuant to the 1994 Option Plan (20,000 options) and 1994 MSBP
(6,000 shares). Such formula will take into account the Exchange Ratio and must
be acceptable to the OTS.
Certain Related Transactions
Transactions with the Bank and the Mid-Tier Holding Company. John F.
McGill, Chairman of the Board of the Company is a 25% partner in Francis E.
McGill, Realtor, a real estate and insurance firm in Philadelphia, Pennsylvania.
During the fiscal year ended December 31, 1997, Francis E. McGill,
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<PAGE>
Realtor received fees totaling approximately $74,000 from buyers or sellers of
real estate where the Company financed the purchase of the real estate. These
fees included insurance commissions, real estate brokerage commissions and
conveyancing fees. The Company pays premiums on insurance policies obtained
through Francis E. McGill, Realtor, for insurance coverage for its own
operations, including coverage for workmen's compensation, errors and omissions,
blanket bond, safe deposit box, automobile liability, fire insurance on Mid-Tier
Holding Company properties. Total premiums for the fiscal year ended December
31, 1997 were approximately $193,000. During the fiscal year ended December 31,
1997, the Mid-Tier Holding Company also paid servicing commissions to the office
of Francis E. McGill, Realtor, for rental collections made through that firm on
properties owned by the Bank. The total servicing commissions paid for the year
were approximately $9,000. Furthermore, the law firm of McGill and McGill serve
as general counsel to the Mid-Tier Holding Company and the Bank. Francis E.
McGill, III is the sole proprietor of McGill and McGill, a law firm in
Philadelphia, Pennsylvania, which during the year ended December 31, 1997
received approximately $119,000 in fees from the Bank for legal services. Such
legal fees charged the Mid-Tier Holding Company and the Bank are comparable to
market rates charged by competing law firms.
Indebtedness of Management. The Bank has followed the policy of
offering residential mortgage loans for the financing of personal residences,
share loans, and consumer loans to its officers, directors and employees. The
loans are made in the ordinary course of business and also made on substantially
the same terms and conditions, including interest rate and collateral, as those
of comparable transactions prevailing at the time with other persons, and do not
include more than the normal risk of collectibility or present other unfavorable
features. Loans to officers and directors of the Bank and their affiliates
amounted to $815,174 or 2.86% of the Bank's total equity at December 31, 1997.
Assuming the Conversion and Reorganization had occurred at December 31, 1997
with the issuance of 7,860,140 shares, these loans would have totalled
approximately .85% of pro forma consolidated stockholders' equity.
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<PAGE>
BENEFICIAL OWNERSHIP OF MID-TIER COMMON STOCK
The following table sets forth information as of December 31, l997,
with respect to ownership of the Mid-Tier Holding Company's Common Stock by: (i)
the Mutual Holding Company; (ii) the Bank's Employee Stock Ownership Plan; (iii)
the executive officers and directors of the Bank; and (iv) all the directors and
executive officers of the Bank as a group. The Boards of Directors of the Mutual
Holding Company, Bancorp and the Mid-Tier Holding Company, as well as both the
companies' executive officers, are identical to those of the Bank. Except as
those listed below, the Bank has no knowledge of any person (including any
"group" as that term is used in Section 13(d)(3) of the Securities Exchange Act
of 1934, as amended) who owns beneficially more than 5% of the Common Stock.
<TABLE>
<CAPTION>
Shares of Mid-Tier
Common Stock Percent of Class Percent of
Beneficially Owned Outstanding to Persons Total Class
Name at December 31, 1997 Other than MHC(1) Outstanding(2)
- ---- ------------------------------ ---------------------------- -----------------
<S> <C> <C> <C>
John F. McGill 38,500(3) 17.42 2.35
Jerry Naessens 21,400(3)(4) 10.00 1.31
Michael G. Crofton 4,000(4) 1.94 .25
John F. McGill, Jr. 25,800(3) 11.89 1.58
Patrick T. Ryan, Esq. 5,000 2.42 .31
Francis E. McGill, III 4,800(5) 2.32 .30
Add B. Anderson, Jr. 15,800(5) 7.63 .97
Pietro M. Jacovini, Jr. 11,300(5) 5.46 .70
William A. Lamb, Sr. 6,300(5) 3.04 .39
Robert E. Domanski, M.D. 6,300(5) 3.04 .39
Directors and executive
officers as a group
(10 persons) 139,200(6) 56.59 8.38
FJF Financial, M.H.C. 1,415,000 -- 87.29
ESOP 14,000 6.80 .86
</TABLE>
- ----------------
(1) 206,000 shares of Mid-Tier Common Stock were held by persons other than
the MHC.
(2) The total amount of shares of Mid-Tier Common Stock issued by the Mid-
Tier Holding Company is 1,621,000, which includes 1,415,000 issued to
the MHC and 206,000 shares held by persons other than the MHC.
(3) Includes 15,000, 8,000, and 11,000 shares of Mid-Tier Common Stock that
may be acquired, through the exercise of stock options, by John F.
McGill, Jerry Naessens, and John F. McGill, Jr., respectively.
(4) Messrs. Naessens and Crofton are not members of the Board of Directors
of the Bank. Such individuals are members of the Boards of Directors of
the Company and the Mid-Tier Holding Company.
(5) Includes 1,000 shares of Mid-Tier Common Stock that may be acquired
through the exercise of stock options.
(6) Includes 40,000 shares of Mid-Tier Common Stock that may be acquired
through the exercise of stock options.
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<PAGE>
PROPOSED SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, for each of the Mid-Tier Holding
Company's and the Bank's directors and executive officers, and for all of the
directors and executive officers as a group, (1) the number of Exchange Shares
to be held upon consummation of the Conversion and Reorganization, based upon
their beneficial ownership of Mid-Tier Common Stock as of May 6, 1998, and (2)
the total amount of Common Stock to be held upon consummation of the Conversion
and Reorganization, in each case assuming that 7,856,370 shares of Conversion
Stock are sold, which is the midpoint of the Offering Price Range. The purchase
limit of $300,000 includes shares received as Exchange Shares. Accordingly,
pursuant to the policies and regulations of the OTS, none of the Directors or
senior management will be permitted to purchase stock in the Conversion and
Reorganization if the maximum number of shares of Conversion Stock are sold. See
"THE CONVERSION AND REORGANIZATION - Purchase Limitations."
<TABLE>
<CAPTION>
Proposed Purchases of Total Common Stock
Number Conversion Stock(1) To Be Held
of Exchange ---------------------------- ---------------------------
Shares To Be Dollar Number Number Percentage
Held(2)(3)(4) Amount($) of Shares of Shares of Total
------------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
John F. McGill 213,736 -- -- 213,736 2.37
Jerry Naessens 118,804 -- -- 118,804 1.32
Michael G. Crofton 22,206 10,000 1,000 23,206 .26
John F. McGill, Jr. 143,231 -- -- 143,231 1.59
Patrick T. Ryan, Esq. 27,757 250,000 25,000 52,757 .59
Francis E. McGill, III 26,647 -- -- 26,647 .30
Add B. Anderson, Jr. 87,715 26,850 2,685 90,400 1.00
Pietro M. Jacovini, Jr. 62,733 -- -- 62,733 .70
William A. Lamb, Sr. 34,975 -- -- 34,975 .39
Robert E. Domanski, M.D. 34,975 160,000 16,000 50,975 .56
-------- --------- -------- -------- -------
772,779 446,850 44,685 817,464 9.08
======== ========= ======== ======== =====
</TABLE>
- ----------------------
*Less than 1%
(1) Includes proposed subscriptions, if any, by associates. Does not include
subscriptions by the ESOP. Intended purchases by the ESOP are expected to
be 8% of the shares issued in the Offering.
(2) Includes shares underlying options that may be exercised within 60 days of
the date as of which ownership is being determined, and vested and unvested
shares of restricted stock. See "BENEFICIAL OWNERSHIP OF MID-TIER COMMON
STOCK."
(3) Does not include stock options and awards that may be granted under the
1998 Stock Option Plan and 1998 Recognition Plan if such plans are approved
by stockholders at an annual meeting or special meeting of stockholders at
least six months following the Conversion. See "MANAGEMENT OF THE BANK -
Potential Stock Benefit Plans."
(4) Individuals that are to receive in excess of 30,000 Exchange Shares are
precluded from purchasing Common Stock in the Offerings.
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<PAGE>
THE CONVERSION AND REORGANIZATION
The Boards of Directors of the Primary Parties have approved the Plan,
as has the OTS, subject to approval by the members of the Mutual Holding Company
and the stockholders of the Company entitled to vote on the matter and the
satisfaction of certain other conditions. Such OTS approval, however, does not
constitute a recommendation or endorsement of the Plan by such agency.
General
The Boards of Directors of the Mutual Holding Company, the Mid-Tier
Holding Company and the Bank adopted the Plan as of February 18, 1998. The Plan,
which has been subsequently amended, has been approved by the OTS, subject to,
among other things, approval of the Plan by the Members of the Mutual Holding
Company and the Public Stockholders of the Mid-Tier Holding Company. The
Members' Meeting and the Stockholders' Meeting have been called for this purpose
on June 26, 1998.
The following is a brief summary of pertinent aspects of the Plan. The
summary is qualified in its entirety by reference to the provisions of the Plan,
which is available for inspection at each branch office of the Bank and at
certain offices of the OTS. The Plan also is filed as an exhibit to the
Registration Statement of which this Prospectus is a part, copies of which may
be obtained from the SEC.
See "ADDITIONAL INFORMATION."
Purposes of the Conversion and Reorganization
The Mutual Holding Company, as a federally chartered mutual holding
company, does not have stockholders and has no authority to issue capital stock.
As a result of the Conversion and Reorganization, the Company will be structured
in the form used by holding companies of commercial banks, many business
entities and a growing number of savings institutions. An important distinction
between the mutual holding company form of organization and the fully public
form is that, by federal law, a mutual holding company must always own over 50%
of the common stock of its savings institution subsidiary. Only a minority of
the subsidiary's outstanding stock can be sold to investors. If the Bank had
undertaken a full conversion to public ownership in 1992, a much greater amount
of Bank Common Stock would have been offered, resulting in more stock offering
proceeds than management believes could have been effectively deployed at that
time. High levels of capital might, in the opinion of management, have exceeded
the available opportunities in the Bank's market area in 1992. Management
determined therefore that the amount of capital raised in the MHC Reorganization
was consistent with its capabilities and loan demand in its market at that time.
The Mid-Tier Holding Company is a Pennsylvania corporation and is the
current holding company for the Bank owning 100% of the Bank Common Stock. The
Mid-Tier Holding Company's shares are owned by the Mutual Holding Company
(87.29%) and the Public Stockholders (12.71%). Following the Conversion and
Reorganization, the Mid-Tier Holding Company and the Mutual Holding Company will
cease to exist and the Company will own 100% of the Bank Common Stock.
Through the Conversion and Reorganization, the Company will become the
stock holding company of the Bank, which will complete the transition to full
public ownership. The stock holding company form of organization will provide
the Company with the ability to diversify the Company's and the Bank's business
activities through acquisition of or mergers with both stock savings
institutions and commercial banks, as well as other companies. There has been
significant consolidation in Pennsylvania where the Bank conducts its
operations, and although there are no current arrangements, understanding or
agreements regarding any such opportunities, the Company will be in a position
(subject to regulatory limitations and the Company's financial position) to take
advantage of any such opportunities that may arise because of the increase in
its capital after the Conversion and Reorganization.
-76-
<PAGE>
The Conversion and Reorganization will be important to the future
growth and performance of the Company and the Bank by providing a larger capital
base to support the operations of the Bank and the Company and by enhancing
their future access to capital markets, ability to diversify into other
financial services related activities, and ability to provide services to the
public. The Conversion and Reorganization will result in increased funds being
available for lending purposes, greater resources for expansion of services, and
better opportunities for attracting and retaining qualified personnel. Although
the Mid-Tier Holding Company currently has the ability to raise additional
capital through the sale of additional shares of Mid-Tier Common Stock, that
ability is limited by the mutual holding company structure which, among other
things, requires that the Mutual Holding Company always hold a majority of the
outstanding shares of Mid-Tier Common Stock.
The Conversion and Reorganization also will result in an increase in
the number of outstanding shares of Common Stock following the Conversion and
Reorganization, as compared to the number of outstanding shares of Public
Mid-Tier Shares prior to the Conversion and Reorganization, which will increase
the likelihood of the development of an active and liquid trading market for the
Common Stock.
See "MARKET FOR COMMON STOCK."
In light of the foregoing, the Boards of Directors of the Primary
Parties believe that the Conversion and Reorganization is in the best interests
of such companies and their respective stockholders and members.
Description of the Conversion and Reorganization
On February 18, 1998, the Boards of Directors of the Mid-Tier Holding
Company, the Bank and the Mutual Holding Company adopted the Plan. It was
subsequently amended and adopted by the Company. Pursuant to the Plan, the
Conversion and Reorganization will be completed as follows: (i) The Mutual
Holding Company will convert into an interim federal stock savings bank to be
known as Interim Bank #1. The Mid-Tier Holding Company will then adopt a federal
charter and immediately thereafter an interim federal stock charter to be known
as Interim Bank #2; (ii) Interim Bank #2 will then merge into the Bank ("Merger
#1"), with the Bank as the surviving entity; (iii) immediately following Merger
#1, Interim Bank #1, formerly the Mutual Holding Company, will merge with and
into the Bank with the Bank as the surviving entity ("Merger #2"). The shares of
Mid-Tier Common Stock previously held by the Mutual Holding Company (now Interim
Bank #1) will be canceled. Eligible members of the Mutual Holding Company as of
certain specified dates will be granted interests in a liquidation account to be
established by the Bank. The amount in the liquidation account is the amount of
dividends waived by the Mutual Holding Company plus 100% of retained earnings as
of June 30, 1992, or 87.29% of the Mid-Tier Holding Company's total
stockholders' equity as reflected in its latest statement of financial
condition; (iv) the Company will form an interim corporation ("Interim FSB"), a
new, wholly owned first-tier subsidiary with an interim federal stock charter;
(vi) immediately following Merger #2, Interim FSB will merge with and into the
Bank, with the Bank as the surviving entity ("Merger #3"). As a result of Merger
#3, Bank stock deemed held by Public Stockholders will be converted into the
Common Stock based upon the Exchange Ratio which is designed to ensure that the
same Public Stockholders will own, subject to certain adjustments described in
"-The Exchange Ratio," approximately the same percentage of the Common Stock as
the percentage of the Mid-Tier Common Stock owned by them immediately prior to
the Conversion and Reorganization before giving effect to (a) cash paid in lieu
of fractional shares and (b) any shares of the Conversion Stock purchased by
Public Stockholders in the Offerings and subject to any adjustment as a result
of a change in OTS policy; (vii) simultaneously with the consummation of Merger
#3, the Company will sell additional shares of Conversion Stock, with priority
subscription rights granted to certain members of the Mutual Holding Company;
and to tax qualified employee benefit plans pursuant to the Plan adopted by the
Primary Parties.
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Pursuant to OTS regulations, consummation of the Conversion and
Reorganization (including the offering of Conversion Stock in the Offerings, as
described below) is conditioned upon the approval of the Plan by (1) the OTS,
(2) at least a majority of the total number of votes eligible to be cast by
Members of the Mutual Holding Company at the Members' Meeting, and (3) at least
two thirds of the shares of the outstanding Mid-Tier Common Stock at the
Stockholders' Meeting. In addition, the Primary Parties have conditioned the
consummation of the Conversion and Reorganization on the approval of the Plan by
at least a majority of the votes cast, in person or by proxy, by the Public
Stockholders at the Stockholders' Meeting.
Effects of the Conversion and Reorganization
General. Prior to the Conversion and Reorganization, each depositor in
the Bank has both a deposit account in the Bank and a pro rata ownership
interest in the net worth of the Mutual Holding Company based upon the balance
in his account, which interest may only be realized in the event of a
liquidation of the Mutual Holding Company. However, this ownership interest is
tied to the depositor's account and has no tangible market value separate from
such deposit account. A depositor who reduces or closes his account receives a
portion or all of the balance in the account but nothing for his ownership
interest in the net worth of the Mutual Holding Company, which is lost to the
extent that the balance in the account is reduced.
Consequently, the depositors of the Bank normally have no way to
realize the value of their ownership interest in the Mutual Holding Company,
which has realizable value only in the unlikely event that the Mutual Holding
Company is liquidated. In such event, the depositors of record at that time, as
owners, would share pro rata in any residual surplus and reserves of the Mutual
Holding Company after other claims are paid.
Upon consummation of the Conversion and Reorganization, including the
Offerings, additional permanent nonwithdrawable capital stock will be created
which will represent the ownership of the consolidated net worth of the Company.
The Common Stock of the Company is separate and apart from deposit accounts and
cannot be and is not insured by the FDIC or any other governmental agency.
Certificates are issued to evidence ownership of the permanent stock. The stock
certificates are transferable, and therefore, the stock may be sold or traded if
a purchaser is available with no effect on any account the seller may hold in
the Bank.
Continuity. While the Conversion and Reorganization is being
accomplished, the normal business of the Bank of accepting deposits and making
loans will continue without interruption. The Bank will continue to be subject
to regulation by the OTS and the FDIC. After the Conversion and Reorganization,
the Bank will continue to provide services for depositors and borrowers under
current policies by its present management and staff.
The directors and officers of the Bank at the time of the Conversion
and Reorganization will continue to serve as directors and officers of the Bank
after the Conversion and Reorganization. The directors and executive officers of
the Company consist of individuals currently serving as directors and executive
officers of the Mid-Tier Holding Company, and they generally will retain their
positions in the Company after the Conversion and Reorganization.
Effect on Deposit Accounts. Under the Plan, each depositor in the Bank
at the time of the Conversion and Reorganization will automatically continue as
a depositor after the Conversion and Reorganization, and each such deposit
account will remain the same with respect to deposit balance, interest rate and
other terms, except to the extent that funds in the account are withdrawn to
purchase Conversion Stock to be issued in the Offerings. Each such account will
continue to be insured by the
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FDIC to the same extent as before the Conversion and Reorganization. Depositors
will continue to hold their existing certificates, passbooks and other evidences
of their accounts.
Effects on Loans. No loan outstanding from the Bank will be affected by
the Conversion and Reorganization, and the amount, interest rate, maturity and
security for each loan will remain as they were contractually fixed prior to the
Conversion and Reorganization.
Effect on Voting Rights of Members. At present, all depositors and
certain borrowers of the Bank are members of, and have voting rights in, the
Mutual Holding Company as to all matters requiring membership action. Upon
completion of the Conversion and Reorganization, depositors will cease to be
members and will no longer be entitled to vote at meetings of the Mutual Holding
Company. The reorganization which created the Mid-Tier Holding Company vested
all voting rights in the Mid-Tier Holding Company as the sole stockholder of the
Bank. With the merger of the Mutual Holding Company and the Mid-Tier Holding
Company into the Bank and the acquisition of the Company of all of the Bank's
shares, exclusive voting rights with respect to the Company will be vested in
the holders of Common Stock.
Tax Effects. Consummation of the Conversion and Reorganization is
conditioned on prior receipt by the Primary Parties of rulings or opinions with
regard to federal and Pennsylvania income taxation which indicate that the
adoption and implementation of the Plan set forth herein will not be taxable for
federal or Pennsylvania income tax purposes to the Primary Parties or the Bank's
Eligible Account Holders, Supplemental Eligible Account Holders or Other
Members, except as discussed below.
See " - Tax Aspects" below and "RISK FACTORS."
Effect on Liquidation Rights. If the Mutual Holding Company were to
liquidate, all claims of the Mutual Holding Company's creditors would be paid
first. Thereafter, if there were any assets remaining, members of the Mutual
Holding Company would receive such remaining assets, pro rata, based upon the
deposit balances in their deposit accounts at the Bank immediately prior to
liquidation. In the unlikely event that the Bank were to liquidate after the
Conversion and Reorganization, all claims of creditors (including those of
depositors, to the extent of the deposit balances) also would be paid first,
followed by distribution of the "liquidation account" to certain depositors (see
" - Liquidation Rights" below), with any assets remaining thereafter distributed
to the Company as the holder of the Bank's capital stock. Pursuant to the rules
and regulations of the OTS, a merger, consolidation, sale of bulk assets or
similar combination or transaction with another insured savings institution
would not be considered a liquidation for this purpose and, in such a
transaction, the liquidation account would be required to be assumed by the
surviving institution.
Effect on Existing Option Plans. Under the Mid-Tier Holding Company
reorganization, the option and restricted stock plans remained benefit plans of
the Bank with shares of Mid-Tier Common Stock. After the Conversion and
Reorganization, they will become benefit plans of the Company. As of December
31, 1997, 100% of the options and restricted stock available for grant under
these plans had been granted and were fully vested but options for 40,000 shares
had not yet been exercised.
The Offerings
Subscription Offering. In accordance with the Plan to subscribe for the
purchase of Conversion Stock have been granted under the Plan to the following
persons in the following order of descending priority: (i) First Priority, to
Eligible Account Holders; (ii) Second Priority, to the ESOP; (iii) Third
Priority, to Supplemental Eligible Account Holders; and (iv) Fourth Priority, to
Other Members. All subscriptions received will be subject to the availability of
Conversion Stock after satisfaction of all subscriptions of all persons having
prior rights in the Subscription Offering and to the maximum and minimum
purchase limitations set forth in the Plan and as described below under
"-Limitations on
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Conversion Stock Purchases and Ownership." All purchase amounts described below
except Priority 2 are purchase amounts combined with Exchange Shares received by
stockholders.
Priority 1: Eligible Account Holders (First Priority). Each Eligible
Account Holder will receive, without payment therefor, first priority,
nontransferable subscription rights to subscribe for in the Subscription
Offering up to the greater of (i) the maximum purchase limitation established
for the Offerings, (ii) one-tenth of 1% of the total offering of shares of
Conversion Stock in the Subscription Offering, or (iii) 15 times the product
(rounded down to the next whole number) obtained by multiplying the total number
of shares of Conversion Stock offered in the Subscription Offering by a
fraction, of which the numerator is the amount of the Qualifying Deposits of the
Eligible Account Holder and the denominator is the total amount of all
Qualifying Deposits of all Eligible Account Holders, subject to the overall
purchase limitations and the overall ownership limitation. See "- Limitations on
Conversion Stock Purchases and Ownership."
If there are not sufficient shares available to satisfy all
subscriptions of Eligible Account Holders, shares first may be allocated so as
to permit each subscribing Eligible Account Holder to purchase a number of
shares sufficient to make his total allocation equal to the lesser of the number
of shares subscribed for or 100 shares. Thereafter, unallocated shares may be
allocated to subscribing Eligible Account Holders whose subscriptions remain
unfilled in the proportion that the amounts of their respective eligible
deposits bear to the total amount of eligible deposits of all subscribing
Eligible Account Holders whose subscriptions remain unfilled, provided that no
fractional shares shall be issued. The subscription rights of Eligible Account
Holders who are also directors or officers of the Primary Parties and their
associates will be subordinated to the subscription rights of other Eligible
Account Holders to the extent attributable to increased deposits in the year
preceding December 31, 1996.
Priority 2: ESOP (Second Priority). The ESOP will receive, without
payment therefore, second priority, nontransferable subscription rights to
purchase, in the aggregate, up to 10% of the Conversion Stock within the
Offering Price Range, including any increase in the number of shares of
Conversion Stock after the date hereof as a result of an increase of up to 15%
in the maximum of the Offering Price Range. The ESOP currently intends to
purchase 8% of the shares of Conversion Stock, or 723,132 shares based on the
midpoint of the Offering Price Range. Subscriptions by the ESOP will not be
aggregated with shares of Conversion Stock purchased directly by or which are
otherwise attributable to any other participants in the Offerings, including
subscriptions of any of the Bank's directors, officers, employees or associates
thereof. See "MANAGEMENT OF THE BANK - Benefit Plans - Employee Stock Ownership
Plan."
Priority 3: Supplemental Eligible Account Holders (Third Priority).
Each Supplemental Eligible Account Holder will receive, without payment
therefor, third priority, nontransferable subscription rights to subscribe for
in the Subscription Offering up to the greater of (i) the maximum purchase
limitation established for the Offerings, (ii) one-tenth of 1% of the total
offering of shares of Conversion Stock in the Subscription Offering, or (iii) 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Conversion Stock offered in the
Subscription Offering by a fraction, of which the numerator is the amount of the
Qualifying Deposits of the Supplemental Eligible Account Holder and the
denominator is the total amount of all Qualifying Deposits of all Supplemental
Eligible Account Holders, subject to the overall purchase limitation, the
overall ownership limitations, and the availability of shares of Conversion
Stock for purchase after taking into account the shares of Conversion Stock
purchased by Eligible Account Holders and the ESOP. See " - Limitations on
Conversion Stock Purchases and Ownership."
If there are not sufficient shares available to satisfy all
subscriptions of Supplemental Eligible Account Holders, shares first will be
allocated so as to permit each subscribing Supplemental Eligible Account Holder
to purchase a number of shares sufficient to make his total allocation equal to
the lesser
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of the number of shares subscribed for or 100 shares. Thereafter, unallocated
shares will be allocated to subscribing Supplemental Eligible Account Holders
whose subscriptions remain unfilled in the proportion that the amounts of their
respective eligible deposits bear to the total amount of eligible deposits of
all such subscribing Supplemental Eligible Account Holders whose subscriptions
remain unfilled, provided that no fractional shares shall be issued.
Priority 4: Other Members (Fourth Priority). To the extent that there
are sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders, the ESOP and Supplemental Eligible Account Holders, each Other
Member will receive, without payment therefor, fourth priority, nontransferable
subscription rights to subscribe for Conversion Stock in the Subscription
Offering up to the greater of (i) the maximum purchase limitation established
for the Offerings or (ii) one-tenth of 1% of the total offering of shares of
Conversion Stock in the Subscription Offering, in each case subject to the
overall purchase limitation, the overall ownership limitation, and the
availability of shares of Conversion Stock for purchase after taking into
account the shares of Conversion Stock purchased by Eligible Account Holders,
the ESOP, and Supplemental Eligible Account Holders. See " - Limitations on
Conversion Stock Purchases and Ownership."
If sufficient shares are not available to satisfy all subscriptions of
Other Members, available shares will first be allocated to the remaining
subscribing Other Members so as to permit each subscribing Other Member to
purchase a number of shares sufficient to make his allocation equal to the
lesser of the number of shares subscribed for or 100 shares. Thereafter, any
remaining shares will be allocated among subscribing Other Members on a pro rata
basis in the proportion that each such Other Member's subscription bears to the
total subscriptions of all subscribing Other Members, provided that no
fractional shares shall be issued.
Expiration Date for the Subscription Offering. The Subscription
Offering will expire at 12:00 Noon, Philadelphia time, on June 15, 1998, unless
extended for up to 45 days or such additional periods by the Primary Parties
with the approval of the OTS. Such extensions may not be extended beyond June
26, 2000. Subscription rights that have not been exercised prior to the
Expiration Date will become void.
The Primary Parties will not execute orders until at least the minimum
number of shares of Conversion Stock (6,677,927 shares) have been subscribed for
or otherwise sold. If all shares have not been subscribed for or sold within 45
days after the Expiration Date, unless such period is extended with the consent
of the OTS, all funds delivered to the Company and the Bank pursuant to the
Offerings will be returned promptly to the subscribers with interest and all
withdrawal authorizations will be canceled. If an extension beyond the 45-day
period following the Expiration Date is granted, the Primary Parties will notify
subscribers of the extension of time and of any rights of subscribers to modify
or rescind their subscriptions.
Community Offering. To the extent that shares remain available for
purchase after satisfaction of all subscriptions by Eligible Account Holders,
the ESOP, Supplemental Eligible Account Holders, and Other Members, the Primary
Parties have determined to offer shares pursuant to the Plan to certain members
of the general public, with preference first given to Public Stockholders as of
May 6, 1998 and second, natural persons residing in the Local Community.
Individually, such persons may purchase, when combined with Exchange Shares,
$300,000 of Conversion Stock, subject to overall purchase and ownership
limitations. See " - Limitations on Conversion Stock Purchases and Ownership."
This amount may be increased at the sole discretion of the Primary Parties. The
opportunity to submit orders for shares of Conversion Stock in the Community
Offering category is subject to the right of the Primary Parties, in their sole
discretion, to accept or reject any such orders in whole or in part for any
reason either at the time of receipt of an order or as soon as practicable
following the completion of the Community Offering. All purchases in the
Community Offering will be combined with Exchange Shares for purposes of
complying with the purchase limitations in the Plan.
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If there are not sufficient shares available to fill the orders of the
subscribers in the Community Offering, available shares of stock will be
allocated first to each such subscriber whose order is accepted by the Primary
Parties, in an amount equal to the lesser of 100 shares or the number of shares
ordered by each such subscriber, if possible. Thereafter, unallocated shares
will be allocated among the subscribers whose orders remain unsatisfied in the
same proportion that the unfilled order of each bears to the total unfilled
orders of all such subscribers whose order remains unsatisfied. If the orders of
such subscribers are filled, and there are shares remaining, shares will be
allocated to other members of the general public who submit orders in the
Community Offering applying the same allocation described above for such
subscribers.
Limitations on Conversion Stock Purchases and Ownership
The Plan includes the following limitations on the number of shares of
Conversion Stock that may be purchased:
(1) No less than 25 shares of Conversion Stock may be purchased, to
the extent such shares are available;
(2) The number of shares of Conversion Stock which may be purchased by
any person (or persons through a single account) in the Subscription Offering
shall not exceed such number of shares of Conversion Stock that, when combined
with Exchange Shares, shall equal $300,000 (or 30,000 shares), except for the
ESOP, which in the aggregate may subscribe for up to 10% of the Conversion
Stock.
(3) The number of shares of Conversion Stock which may be purchased by
any person, in the Subscription Offering or the Community Offering combined
shall not exceed such number of shares of Conversion Stock that shall, when
combined with Exchange Shares, equal $300,000 (or 30,000 shares).
(4) Except for Tax-Qualified Employee Stock Benefit Plans, the maximum
amount of Conversion Stock that may be purchased in all categories in the
Conversion and Reorganization by any person together with any associate or group
of persons acting in concert, shall not exceed such number of shares of
Conversion Stock as shall equal when combined with Exchange Shares, $904,000 (or
90,400 shares).
(5) No more than 29% of the total number of shares sold in the
Offerings, when combined with Exchange Shares, may be purchased by directors and
officers of the Primary Parties and their associates in the aggregate, excluding
purchases by the ESOP.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
the Mutual Holding Company or the stockholders of the Mid-Tier Holding Company
or the Company, the purchase limitations in (2), (3) and (4) above may be
decreased, or increased, up to a maximum of 5% of the total shares of Conversion
Stock to be issued in the Conversion and Reorganization, at the sole discretion
of the Primary Parties. If such amounts are increased, subscribers for the
maximum amount will be, and certain other large subscribers in the sole
discretion of the Primary Parties may be, given the opportunity to increase
their subscriptions up to the then applicable limit.
In the event of an increase in the total number of shares of Conversion
Stock offered in the Conversion and Reorganization due to an increase in the
maximum of the Offering Price Range of up to 15% (the "Adjusted Maximum"), the
new total number of shares will be allocated in the following order of priority
in accordance with the Plan: (i) to fill the ESOP's order of up to a total of
8.0% of the Adjusted Maximum number of shares (the Board of Directors has
determined to purchase 8%); (ii) in the event that there is an oversubscription
by Eligible Account holders to fill their unfulfilled subscriptions;
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(iii) in the event that there is an oversubscription by Supplemental Eligible
Account Holders to fill their unfulfilled subscriptions; (iv) in the event that
there is an oversubscription by Other Members to fill their unfulfilled
subscriptions; (v) and to fill unfulfilled subscriptions in the Community
Offering.
Notwithstanding anything to the contrary contained in the Plan, except
as may otherwise be required by the OTS, the Public Stockholders will not have
to sell any Mid-Tier Common Stock or be limited in receiving Exchange Shares
even if their ownership of Mid-Tier Common Stock when converted into Exchange
Shares pursuant to the Conversion and Reorganization would exceed an applicable
purchase limitation; however, they might be precluded from purchasing any
Conversion Stock in the Offerings.
The term "associate," when used to indicate a relationship with any
person, is defined to mean (i) a corporation or organization (other than the
Mutual Holding Company, the Mid-Tier Holding Company or the Company, a
majority-owned subsidiary of the Mid-Tier Holding Company or the Company or the
Bank) of which such person is a director, officer or partner or is, directly or
indirectly, the beneficial owner of 10% or more of any class of equity
securities, (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity, provided, however, that such term shall not
include any tax qualified employee stock benefit plan of the Company, the
Mid-Tier Holding Company or the Bank in which such person has a substantial
beneficial interest or serves as a trustee or in a similar fiduciary capacity,
and (iii) any relative or spouse of such person, or any relative of such spouse,
who has the same home as such person or who is a director or officer of the
Mutual Holding Company, the Mid-Tier Holding Company, the Company or the Bank or
any of the subsidiaries of the foregoing.
Stock Pricing and Number of Shares to be Issued
The Plan requires that the aggregate purchase price of the Conversion
Stock must be based on the appraised pro forma market value of the Mutual
Holding Company, the Mid-Tier Holding Company, the Company and the Bank on a
consolidated basis, as determined on the basis of an independent valuation. The
Primary Parties have retained FinPro, Inc. to make such a valuation. For its
services in making such an appraisal and any expenses incurred in connection
therewith, FinPro, Inc. will receive a maximum of $30,000 plus out of pocket
expenses. The Primary Parties have agreed to indemnify FinPro, Inc. and its
employees and affiliates against certain losses (including any losses in
connection with claims under the federal securities laws) arising out of its
services as appraiser, except where FinPro, Inc.'s liability results from its
negligence or bad faith.
The Independent Valuation has been prepared by FinPro, Inc. in reliance
upon the information contained in this Prospectus, including the financial
statements. FinPro, Inc. also considered the following factors, among others:
the present and projected operating results and financial condition of the
Primary Parties and the economic and demographic conditions in the Bank's
existing market area: certain historical, financial and other information
relating to the Mid-Tier Holding Company, the Company and the Bank; a
comparative evaluation of the operating and financial statistics of the Mid-Tier
Holding Company with those of other similarly situated publicly traded companies
located in Pennsylvania and other regions of the United States; the aggregate
size of the offering of the Conversion Stock; the impact of the Conversion and
Reorganization on the Bank's net worth and earnings potential; the proposed
dividend policy of the Company and the Bank; and the trading market for the
Mid-Tier Common Stock and securities of comparable companies and general
conditions in the market for such securities.
The Independent Valuation was prepared based on the assumption that the
aggregate amount of Conversion Stock sold in the Offerings would be equal to the
estimated pro forma market value of the Mid-Tier Holding Company and the Bank,
on a consolidated basis, multiplied by the percentage of the outstanding shares
of Mid-Tier Common Stock held by the Mutual Holding Company as of the date of
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the appraisal, subject to an adjustment, pursuant to a change in OTS policy,
described below in "- The Exchange Ratio." The Independent Valuation states that
as of March 25, 1998, the estimated pro forma market value ranged from a minimum
of $76.5 million to a maximum of $10.35 million with a midpoint of $9.0 million.
Based on the approximately 87.29% of the outstanding shares of Mid-Tier Common
Stock held by the Mutual Holding Company as of the date of the appraisal and the
adjustment described in "- The Exchange Ratio," the estimated pro forma market
value of the Company was multiplied by approximately 87.29% to determine the
dollar amount of Conversion Stock to be offered in the Offerings, which ranges
from a minimum of $66,779,270 to a maximum of $90,348,340 with a midpoint of
$78,563,700 (the "Offering Price Range").
The Boards of Directors of the Primary Parties reviewed FinPro, Inc.'s
appraisal report, including the methodology and the assumptions used by FinPro,
Inc., and determined that the Estimated Valuation Range was reasonable and
adequate. However, the Boards of Directors of the Primary Parties are relying
upon the expertise, experience and independence of FinPro, Inc., and are not
qualified to determine the appropriateness of the assumptions or the
methodology.
FinPro, Inc.'s valuation is not intended, and must not be construed, as
a recommendation of any kind as to the advisability of purchasing such shares.
FinPro, Inc. did not independently verify the financial statements and other
information provided by the Primary Parties, nor did FinPro, Inc. value
independently the assets or liabilities of the Mutual Holding Company, the
Mid-Tier Holding Company or the Bank. The Independent Valuation considers the
Primary Parties as going concerns and should not be considered as indication of
the liquidation value of the Mid-Tier Holding Company, the Company, the Bank and
the Mutual Holding Company. Moreover, because such valuation is necessarily
based upon the estimates and projections of a number of matters, all of which
are subject to change from time to time, no assurance can be given that persons
purchasing Conversion Stock or receiving Exchange Shares in the Conversion and
Reorganization will thereafter be able to sell such shares at prices at or above
the purchase price per share in the Offerings.
No sale of shares of Conversion Stock or issuance of Exchange Shares
may be consummated unless, prior to such consummation, FinPro, Inc. confirms
that nothing of a material nature has occurred which, taking into account all
relevant factors, would cause it to conclude that the aggregate Purchase Price
is materially incompatible with the estimate of the pro forma market value the
Company, and the Bank on a consolidated basis. If such is not the case, a new
Offering Price Range may be set, a new Exchange Ratio may be determined based
upon the new Offering Price Range, a new Subscription and Community Offerings
may be held or such other action may be taken as the Primary Parties shall
determine and the OTS may permit or require.
Depending upon market or financial conditions following the
commencement of the Subscription Offering, the total number of shares of
Conversion Stock to be sold in the Offerings may be increased by up to 15%, to
10,390,048 shares, without a resolicitation of subscribers. In the event market
or financial conditions change so as to cause the aggregate purchase price of
the shares to be below the minimum of the Offering Price Range (i.e.
$66,779,270) or more than 15% above the maximum of such range (i.e.
$103,900,480), purchasers will be resolicited (i.e., permitted to continue their
orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
subscription funds will be promptly refunded with interest at the Bank's
passbook rate of interest, or be permitted to modify or rescind their
subscriptions). Based upon current market and financial conditions and recent
practices and policies of the OTS, in the event the Company receives orders for
Conversion Stock in excess of $90,348,340 (the maximum of the Offering Price
Range) and up to $103,900,480 (the maximum of the Offering Price Range, as
adjusted by 15%) the Company may be required by the OTS to accept all such
orders. No assurances, however, can be made that the Company will receive orders
for Conversion Stock in excess of the maximum of the Offering Price Range or
that, if such orders are received that all such orders will be accepted.
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An increase in the number of shares of Conversion Stock, as a result of
an increase in the Independent Valuation, would decrease a subscriber's
ownership interest and the Company's pro forma net income and stockholders'
equity on a per share basis while increasing pro forma net income and
stockholders' equity on an aggregate basis. See "RISK FACTORS - Possible
Dilutive Effect of Issuance of Additional Shares" and "PRO FORMA DATA."
The Independent Valuation (including the appraisal report of FinPro,
Inc. as of March 25, 1998) has been filed as an exhibit to this Registration
Statement and Application for Conversion of which this Prospectus is a part and
is available for inspection in the manner set forth under "Additional
Information."
The Exchange Ratio
OTS regulations and policy provide that in a conversion of a mutual
holding company to stock form, stockholders other than the mutual holding
company will be entitled to exchange their shares of subsidiary savings bank (or
mid-tier holding company) common stock for common stock of the converted holding
company, provided that the bank and the mutual holding company demonstrate to
the satisfaction of the OTS that the basis for the exchange is fair and
reasonable. The Boards of Directors of the Primary Parties have determined that
each Public Mid-Tier Share will on the effective date be automatically converted
into and become the right to receive a number of Exchange Shares determined
pursuant to the Exchange Ratio, which was established in order to ensure that
after the Conversion and Reorganization, The percentage of the to-be outstanding
shares of Common Stock issued to Public Stockholders in exchange for their
Public Mid-Tier Shares will be equal to the percentage of the outstanding shares
of Mid-Tier Common Stock held by Public Stockholders immediately prior to the
Conversion and Reorganization. The total number of shares held by Public
Stockholders after the Conversion and Reorganization would also be affected by
any purchases by such persons in the Offering.
The following table sets forth, based upon the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range, the
following: (i) the total number of shares of Conversion Stock and Exchange
Shares to be issued in the Conversion and Reorganization, (ii) the percentage of
the total Common Stock represented by the Conversion Stock and the Exchange
Shares, and (iii) the Exchange Ratio. The table assumes that there is no cash
paid in lieu of issuing fractional Exchange Shares.
<TABLE>
<CAPTION>
Total Shares
of Common
Conversion Stock Exchange Shares Stock to be Exchange
to be Issued to be Issued Outstanding Ratio
----------------------------- ----------------------------- ----------- -----
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Minimum................... 6,677,927 87.29% 972,073 12.71% 7,650,000 4.7188
Midpoint.................. 7,856,370 87.29% 1,143,630 12.71% 9,000,000 5.5516
Maximum................... 9,034,834 87.29% 1,315,166 12.71% 10,350,000 6.3843
Adjusted maximum.......... 10,390,048 87.29% 1,512,452 12.71% 11,902,500 7.3420
</TABLE>
Options to purchase Public Mid-Tier Shares will also be converted into
and become options to purchase Common Stock. As of the date of this Prospectus
there were outstanding options to purchase 40,000 shares of Mid-Tier Common
Stock at an average exercise price of $10.75 per share. The number of shares of
Common Stock to be received upon exercise of such options will be determined
pursuant to the Exchange Ratio. The aggregate exercise price, duration, and
vesting schedule of such options will not be affected. If such options are
exercised prior to the effective date of the Conversion and Reorganization, then
there will be an increase in the number of shares of Common Stock issued to
Public
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Stockholders in the Share Exchange, and a decrease in the Exchange Ratio. The
Mid-Tier Holding Company has no plans to grant additional stock options prior to
the Effective Date.
Persons in Nonqualified States or Foreign Countries
The Primary Parties will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons entitled to
subscribe for the Common Stock pursuant to the Plan reside. However, no person
will be offered or allowed to purchase any Common Stock under the Plan if such
person resides in a foreign country or in a state of the United States with
respect to which any of the following apply: (i) a small number of persons
otherwise eligible to subscribe for shares under the Plan reside in such state
or foreign country; (ii) the granting of subscription rights or offering or
selling shares of Common Stock to such persons would require the Bank, the
Mid-Tier Holding Company, the Company or their employees to register, under the
securities laws of such state or foreign country, as a broker or dealer or to
register or otherwise qualify its securities for sale in such state or foreign
country; or (iii) such registration or qualification would be impracticable for
reasons of cost or otherwise. No payments will be made in lieu of the granting
of subscription rights to any such person.
Marketing Arrangements
The Bank and the Company have engaged Sandler O'Neill as a consultant
and financial advisor in connection with the Offerings, and Sandler O'Neill has
agreed to use its best efforts to assist the Bank and the Company in the
solicitation of subscriptions for shares of Common Stock in the Offerings.
Sandler O'Neill will receive a fee equal to 1.25% of the aggregate Purchase
Price of all shares sold in the Offerings, excluding in each case shares
purchased by directors, officers and employees of the Bank or the Company and
any immediate family member thereof, and the ESOP for which Sandler O'Neill will
not receive a fee. In the event that a selected dealers' agreement is entered
into in connection with a Syndicated Community Offering, the Company and Bank
will pay a fee (to be negotiated at such time under the agreement) to such
selected dealers, any sponsoring dealers' fees, and a management fee to Sandler
O'Neill of 1.25% for shares sold by a NASD member firm pursuant to a selected
dealers' agreement; provided, however, that the aggregate fees payable to
Sandler O'Neill for Conversion Stock sold by them pursuant to such a selected
dealers' agreement shall not exceed 1.25% of the aggregate Purchase Price and
provided, further, however, that the aggregate fees payable to Sandler O'Neill
and the selected dealers will not exceed 6.5% of the aggregate Purchase Price of
the Conversion Stock sold by selected dealers. Fees to Sandler O'Neill and to
any other broker-dealer may be deemed to be underwriters. Sandler O'Neill will
also be reimbursed for its reasonable out-of-pocket expenses (excluding legal
fees, which are estimated to be $40,000). The Company and the Bank have agreed
to indemnify Sandler O'Neill for reasonable costs and expenses in connection
with certain claims or liabilities, including certain liabilities under the
Securities Act. Sandler O'Neill has received advances towards its marketing and
financial advisory service fees totaling $25,000. Total marketing fees to
Sandler O'Neill are expected to be $768,000 and $1.0 million at the minimum and
the maximum of the Offerings, respectively. See "Pro Forma Data" for the
assumptions used to arrive at these estimates.
Sandler O'Neill will also perform proxy solicitation services,
conversion agent services and records management services for the Bank in the
conversion and will receive a fee for these services $25,000, plus reimbursement
of reasonable out-of-pocket expenses.
Sandler O'Neill has not prepared any report or opinion consisting
recommendations or advice to the Bank or the Company. In addition, Sandler
O'Neill has expressed no opinion as to the prices at which Common Stock to be
issued in the Offerings may trade. Furthermore, Sandler O'Neill has not verified
the accuracy or completeness of the information contained in the Prospectus.
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Directors and executive officers of the Primary Parties may participate
in the solicitation of offers to purchase Conversion Stock. Other employees of
the Bank may participate in the Offerings in ministerial capacities or providing
clerical work in effecting a sales transaction. Such other employees have been
instructed not to solicit offers to purchase Conversion Stock or provide advice
regarding the purchase of Conversion Stock. Questions of prospective purchasers
will be directed to executive officers or registered representatives. The
Company will rely on Rule 3a4-1 under the Exchange Act, and sales of Conversion
Stock will be conducted within the requirements of Rule 3a4-1, so as to permit
officers, directors and employees to participate in the sale of Conversion
Stock. No officer, director or employee of the Primary Parties will be
compensated in connection with such person's solicitations or other
participation in the Offerings or the Exchange by the payment of commissions or
other remuneration based either directly or indirectly on transactions in the
Conversion Stock and Exchange Shares, respectively.
Procedure for Purchasing Shares in the Offerings.
To help ensure that each purchaser receives a Prospectus at least 48
hours before the Expiration Date in accordance with Rule 15c2-8 of the Exchange
Act, no Prospectus will be mailed any later than five days prior to such date or
hand delivered any later than two days prior to such date. Execution of the
order form will confirm receipt or delivery of the Prospectus in accordance with
Rule 15c2-8. Order forms will only be distributed with a Prospectus.
To purchase shares in the Offerings, an executed order form with the
required payment for each share subscribed for, or with appropriate
authorization for withdrawal from a deposit account at the Bank (which may be
given by completing the appropriate blanks on the order form), must be received
by the Bank at any of its offices by 12 Noon, Philadelphia Time, on the
Expiration Date. Order forms which are not received by such time or are executed
defectively or are received without full payment (or appropriate withdrawal
instructions) are not required to be accepted. The Bank is not required to
accept orders submitted on facsimilied order forms. The Primary Parties have the
right to waive or permit the correction of incomplete or improperly executed
forms, but do not represent that they will do so. The waiver of an irregularity
on an order form, the allowance by the Primary Parties of a correction of an
incomplete or improperly executed order form, or the acceptance of an order
after 12 Noon on the Expiration Date in no way obligates the Primary Parties to
waive an irregularity, allow a correction, or accept an order with respect to
any other order form. The interpretation by the Primary Parties of the
acceptability of an order form will be final. Once received, an executed order
form may not be modified, amended or rescinded without the consent of the
Primary Parties, unless the Offerings have not been completed within 45 days
after the end of the Subscription and Community Offerings, unless such period
has been extended. If an extension of time has been granted, all subscribers
will be notified of such extension, of any rights to confirm their subscriptions
or to modify or rescind their subscriptions and have their funds returned
promptly with interest, and of the time period within which the subscriber must
notify the Company of his intention to confirm, modify or rescind his
subscription.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priority, depositors as of the close of business on the Eligibility
Record Date (December 31, 1996), the Supplemental Eligibility Record Date (March
31, 1998) or the Voting Record Date (May 6, 1998) must list on the order form
all accounts in which they have an ownership interest at the applicable
eligibility date, giving all names in each account and the account numbers.
Payment for subscriptions and orders may be made (i) in cash if
delivered in person at any office of the Bank, (ii) by check or money order, or
(iii) by authorization of withdrawal from certificate of deposit accounts or
IRAs maintained with the Bank. Funds will be deposited in a segregated account
at the Bank and interest will be paid on funds made by cash, check or money
order at the Bank's passbook
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<PAGE>
rate of interest from the date payment is received until completion or
termination of the Conversion and Reorganization. If payment is made by
authorization of withdrawal from certificate accounts, the funds authorized to
be withdrawn from a Bank deposit account may continue to accrue interest at the
contractual rates until completion or termination of the Conversion and
Reorganization, but a hold will be placed on such funds, thereby making them
unavailable to the depositor until completion or termination of the Conversion
and Reorganization.
If a subscriber authorizes the Bank to withdraw the aggregate amount of
the purchase price from a deposit account, the Bank will do so as of the
effective date of the Conversion and Reorganization. The Bank may waive any
applicable penalties for early withdrawal from certificate accounts. If the
remaining balance in a certificate account is reduced below the applicable
minimum balance requirement at the time that the funds actually are transferred
under the authorization, the certificate will be canceled at the time of the
withdrawal, without penalty, and the remaining balance will earn interest at the
passbook rate.
The ESOP will not be required to pay for the shares subscribed for at
the time it subscribes, but rather may pay for such shares of Conversion Stock
subscribed for upon consummation of the Offerings, provided that there is in
force from the time of its subscription until such time, a loan commitment from
an unrelated financial institution or the Company to lend to the ESOP, at such
time, the aggregate purchase price of the shares for which it subscribed.
A depositor interested in using his or her IRA funds to purchase
Conversion Stock must do so through a self-directed IRA. Since the Bank does not
offer such accounts, it will allow a depositor to make a trustee-to-trustee
transfer of the IRA funds to a trustee offering a self-directed IRA program with
the agreement that such funds will be used to purchase the Conversion Stock in
the Offerings. There will be no early withdrawal or IRS penalties for such
transfers. The new trustee would hold the Conversion Stock in a self-directed
account in the same manner as the Bank now holds the depositor's IRA funds. An
annual administrative fee may be payable to the new trustee. Depositors
interested in using funds in an IRA with the Bank to purchase Conversion Stock
should contact the Stock Center as soon as possible for further information.
Restrictions on Transfer of Subscription Rights and Shares
Pursuant to the rules and regulations of the OTS, no person with
subscription rights may transfer or enter into any agreement or understanding to
transfer the legal or beneficial ownership of the subscription rights issued
under the Plan or the shares of Conversion Stock to be issued upon their
exercise. Such rights may be exercised only by the person to whom they are
granted and only for such person's account. Each person exercising such
subscription rights will be required to certify that such person is purchasing
shares solely for such person's own account and that such person has no
agreement or understanding regarding the sale or transfer of such shares.
Federal regulations also prohibit any person from offering or making an
announcement of an offer or intent to make an offer to purchase such
subscription rights or shares of Conversion Stock prior to the completion of the
Conversion and Reorganization.
The Primary Parties will pursue any and all legal and equitable
remedies in the event they become aware of the transfer of subscription rights
and will not honor orders known by them to involve the transfer of such rights.
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Liquidation Rights
In the unlikely event of a complete liquidation of the Mutual Holding
Company in its present mutual form, each depositor of the Bank would receive his
pro rata share of any assets of the Mutual Holding Company remaining after
payment of claims of all creditors. Each depositor's pro rata share of such
remaining assets would be in the same proportion as the value of his deposit
account was to the total value of all deposit accounts in the Bank at the time
of liquidation. After the Conversion and Reorganization, each depositor, in the
event of a complete liquidation of the Bank, would have a claim as a creditor of
the same general priority as the claims of all other general creditors of the
Bank. However, except as described below, this claim would be solely in the
amount of the balance in the deposit account plus accrued interest. A depositor
would not have an interest in the value of assets of the Bank, or the Company,
above that amount.
The Plan provides for the establishment by the Bank, upon the
completion of the Conversion and Reorganization, of a special "liquidation
account" for the benefit of Eligible Account Holders and Supplemental Eligible
Account Holders in an amount equal to the amount of any dividends waived by the
Mutual Holding Company plus the greater of 100% of the Bank's retained earnings
of $16,431,000 million at September 30, 1992, the date of the latest balance
sheet contained in the final offering circular utilized in the Bank's initial
public offering in the MHC Reorganization, or (2) 87.29% of the Mid-Tier Holding
Company's total stockholders' equity as reflected in its latest balance sheet
contained in the final Prospectus utilized in the Offerings. Upon consummation
of the Conversion and Reorganization, the Bank will amend its Federal stock
charter to provide a special liquidation account. As of the date of this
Prospectus, the initial balance of the liquidation account would be $24,851,738
million. Each Eligible Account Holder and Supplemental Eligible Account Holder,
if such person were to continue to maintain such person's deposit account at the
Bank, would be entitled, upon a complete liquidation of the Bank after the
Conversion and Reorganization, to an interest in the liquidation account prior
to any payment to the Company as the sole stockholder of the Bank. Each Eligible
Account Holder and Supplemental Eligible Account Holder would have an initial
interest in such liquidation account for each deposit account, including
passbook accounts, transaction accounts such as checking accounts, money market
deposit accounts and certificates of deposit, held in the Bank at the close of
business on December 31, 1996 or March 31, 1998, as the case may be. Each
Eligible Account Holder and Supplemental Eligible Account Holder will have a pro
rata interest in the total liquidation account for each of such person's deposit
accounts based on the proportion that the balance of each such deposit account
on the December 31, 1996 eligibility record date (or the March 31, 1998
Supplemental Eligibility Record Date, as the case may be) bore to the balance of
all deposit accounts in the Bank on such date.
If, however, on any December 31 annual closing date of the Bank,
commencing December 31, 1998 for Eligible Account Holders and on December 31,
1998 for Supplemental Eligible Account Holders, the amount in any deposit
account is less than the amount in such deposit account on December 31, 1996, or
March 31, 1998, as the case may be, or any other annual closing date, then the
interest in the liquidation account relating to such deposit account would be
reduced by the proportion of any such reduction, and such interest will cease to
exist if such deposit account is closed. In addition, no interest in the
liquidation account would ever be increased despite any subsequent increase in
the related deposit account. Any assets remaining after the above liquidation
rights of Eligible Account Holders and Supplemental Eligible Account Holders are
satisfied would be distributed to the Company as the sole stockholder of the
Bank.
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Tax Aspects
Consummation of the Conversion and Reorganization is expressly
conditioned upon prior receipt of either a ruling from the IRS or an opinion of
counsel with respect to federal tax effects of the transaction, and either a
ruling or an opinion with respect to Pennsylvania tax laws, to the effect that
consummation of the transactions contemplated hereby will not result in a
taxable reorganization under the provisions of the applicable codes or otherwise
result in any material adverse tax consequences to the Mutual Holding Company,
the Bank, the Company or to account holders receiving subscription rights,
except to the extent, if any, that subscription rights are deemed to have fair
market value on the date such rights are issued. This condition may not be
waived by the Primary Parties.
Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C. ("Counsel"), has
issued an opinion to the Company and the Bank to the effect outlined below. The
opinions of counsel are subject to certain assumptions stated therein. The
assumptions include: (i) that the Plan of Conversion and Reorganization has been
duly and validly adopted; (ii) the Primary Parties will comply with the Plan of
Conversion and Reorganization; (iii) various representations and warranties of
management are accurate, complete, true and correct; and (iv) that there were no
adverse facts not present on the face of instruments and documents examined.
In the opinion of Counsel
1. The transactions qualify as statutory mergers and each merger
required by the Plan qualifies as a reorganization within the meaning of Section
368(a)(1)(A) of the Code. The Mutual Holding Company, the Mid-Tier Holding
Company and the Bank will be a party to a "reorganization" as defined in Section
368(b) of the Code.
2. Interim Bank #1 (the Mutual Holding Company following its conversion
to a federal stock savings bank) and Interim Bank #2 (the Mid-Tier Holding
Company following its conversion to a federal holding company and then to a
federal stock savings bank) will recognize no gain or loss pursuant to the
Conversion and Reorganization.
3. No gain or loss will be recognized by the Bank upon the receipt of
the assets of Interim Bank #1 and Interim Bank #2 pursuant to the Conversion and
Reorganization.
4. The reorganization of the Company as the holding company of the Bank
qualifies as a reorganization within the meaning of Section 368(a)(1)(A) of the
Code by virtue of Section 368(a)(2)(E) of the Code. Therefore, the Bank, the
Company, and Interim FSB will each be a party to a reorganization as defined in
Section 368(b) of the Code.
5. No gain or loss will be recognized by Interim FSB upon the transfer
of its assets to the Bank pursuant to the Conversion and Reorganization.
6. No gain or loss will be recognized by the Bank upon the receipt of
the assets of Interim FSB.
7. No gain or loss will be recognized by the Company upon the receipt
of Bank Common Stock solely in exchange for Common Stock.
8. No gain or loss will be recognized by the Public Stockholders upon
the receipt of Common Stock.
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9. The basis of the Common Stock to be received by the Public
Stockholders will be the same as the basis of the Mid-Tier Common Stock
surrendered before giving effect to any payment of cash in lieu of fractional
shares.
10. No gain or loss will be recognized by the Company upon the sale of
Common Stock to investors.
11. The Eligible Account Holders, Supplemental Eligible Account
Holders, and Other Members will recognize gain, if any, upon the issuance to
them of: (i) withdrawable savings accounts in the Bank following the Conversion
and Reorganization, (ii) Bank Liquidation Accounts, and (iii) nontransferable
subscription rights to purchase Conversion Stock, but only to the extent of the
value, if any, of the subscription rights.
Furthermore, Malizia, Spidi, Sloane & Fisch, P.C., has issued an
opinion to the Company and the Bank to the effect that the income tax
consequences of the Conversion and Reorganization are substantially the same
under Pennsylvania law as they are under the Code.
The opinion states that although case law and IRS pronouncements
indicate otherwise, it is possible that the IRS could assert that the overall
plan of the transactions contemplated by the Plan is the maintenance of the
Bank's holding company structure and the merger of the Mutual Holding Company
into the Bank. If so, the IRS could argue that the "step transaction" doctrine
should be applied and the transitory elimination of the holding company
structure in Merger #1 (the merger of Interim Bank #2 with and into the Bank
with the Bank as the surviving entity) and the re-creation of the holding
company structure in Merger #3 (the merger of Interim FSB, a subsidiary of the
Company with and into the Bank with the Bank as the surviving entity) should be
ignored for tax purposes. If the IRS were successful with such an assertion, the
transaction would be treated as a direct merger of the Mutual Holding Company
into the Bank which may not qualify as a tax free reorganization, resulting in
taxable gain to the parties to the transaction.
However, the case law and the IRS's pronouncements indicate that if two
or more transactions carried out pursuant to an overall plan have economic
significance independent of each other, the transactions generally will not be
stepped together. The IRS's most significant pronouncement regarding independent
economic significance is Rev. Rul. 79-250. In that ruling, the IRS will respect
the transaction if each step demonstrates independent economic significance, is
not subject to attack as a sham, and was undertaken for valid business purposes
and not mere avoidance of taxes.
Counsel notes that the parties to Merger #2 (the merger of Interim Bank
#1 (formerly the Mutual Holding Company) with and into the Bank with the Bank as
the surviving entity) maintain a separate and distinct business purpose for
consummating Merger #2 (e.g., allowing for the conversion of the Mutual Holding
Company from mutual to stock form). Immediately after the consummation of Merger
#2, the Bank will no longer be controlled by the Mutual Holding Company but will
instead be controlled by its public stockholders and that the Bank's capital
will be substantially increased. The facts indicate that the merger of the
Mutual Holding Company with and into the Bank will result in a real and
substantial change in the form of ownership of the Bank that is sufficient to
conclude that Merger #2 comports with the underlying purposes and assumptions of
a reorganization under Section 368(a)(1)(A) of the Code.
In addition, Counsel believes that, because the various steps
contemplated by the Plan were necessitated by the requirements of the Office of
Thrift Supervision, each of Merger #1, Merger #2 and Merger #3 has a business
purpose and independent significance and, as a result, the step transaction
should not be applied to this transaction.
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The IRS is currently also reviewing the question of whether certain
downstream mergers of a parent corporation into its subsidiary, known as
inversion transactions, where a parent and its subsidiary reverse positions,
which otherwise qualify for tax-free treatment nevertheless should be treated as
taxable transactions. Counsel does not believe that the transactions undertaken
pursuant to the Plan should be so treated. Counsel's opinions, however, are not
binding upon the IRS, and there can be no assurance that the IRS will not assert
a contradictory position.
The Bank and the Company have also received a letter from FinPro, Inc.
which addresses certain issues surrounding the value of the subscription rights.
The letters states that it is FinPro's belief, which is not binding on the IRS,
that the subscription rights do not have any value, based on the fact that such
rights are acquired by the recipients without cost, are nontransferable and of
short duration, and afford the recipients the right only to purchase the
Conversion Stock at a price equal to its estimated fair market value, which will
be the same price as the Purchase Price for the unsubscribed shares of
Conversion Stock. If the subscription rights granted to eligible subscribers are
deemed to have an ascertainable value, receipt of such rights likely would be
taxable only to those eligible subscribers who exercise the subscription rights
(either as a capital gain or ordinary income) in an amount equal to such value,
and the Primary Parties could recognize gain on such distribution. Eligible
subscribers are encouraged to consult with their own tax advisor as to the tax
consequences in the event that such subscription rights are deemed to have an
ascertainable value.
Unlike private rulings, an opinion of Counsel or letter from FinPro,
Inc. is not binding on the IRS and the IRS could disagree with the conclusions
reached therein. In the event of such disagreement, there can be no assurance
that the IRS would not prevail in a judicial or administrative proceeding.
Management does not believe the fact that the IRS has placed this transaction
into a "no rule" area will result in the IRS treating the Conversion and the
Reorganization any differently from similar transactions already completed for
which the IRS has issued private letter rulings. If the IRS determines that the
tax effects of the transaction are to be treated differently from that presented
in the tax opinion, the Primary Parties may be subject to adverse tax
consequences as a result of the Conversion and Reorganization.
Delivery and Exchange of Certificates
Conversion Stock. Certificates representing Conversion Stock issued in
connection with the Offerings will be mailed by the Company's transfer agent for
the Common Stock to the persons entitled thereto at the addresses of such
persons appearing on the stock order form for Conversion Stock as soon as
practicable following consummation of the Conversion and Reorganization. Any
certificates returned as undeliverable will be held by the Company until claimed
by persons legally entitled thereto or otherwise disposed of in accordance with
applicable law. Until certificates for Conversion Stock are available and
delivered to subscribers, subscribers may not be able to sell such shares.
Exchange Shares. After consummation of the Conversion and
Reorganization, each holder of a certificate or certificates evidencing issued
and outstanding shares of Mid-Tier Common Stock, or Bank Common Stock, which was
held prior to the Mid-Tier Holding Company reorganization and currently
represents an equivalent number of shares of Public Mid-Tier Shares on the
transfer book of the Mid-Tier Holding Company (other than the Mutual Holding
Company), shall be entitled to receive a certificate or certificates
representing the number of full shares of Common Stock which when multiplied by
the Exchange Ratio, will represent the same percentage ownership of Public
Mid-Tier Shares as held prior to the Conversion and Reorganization. The Transfer
or Exchange Agent shall promptly mail to each such holder of record of Public
Mid-Tier Shares immediately after the consummation of the Conversion and
Reorganization, a letter of transmittal advising the holder of the procedures by
which Exchange Shares, pursuant to the Exchange Ratio, will be delivered. The
Company's stockholders need not forward any Mid-Tier Common Stock certificates
to the Bank or the Transfer Agent until they receive a transmittal letter.
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Required Approvals
Various approvals of the OTS are required in order to consummate the
Conversion and Reorganization. The OTS has approved the Plan of Conversion and
Reorganization, subject to approval by the Mutual Holding Company's Members and
the Mid-Tier Holding Company's Stockholders. In addition, consummation of the
Conversion and Reorganization is subject to OTS approval of the applications
with respect to the merger of the Mutual Holding Company (following its
conversion to an interim Federal stock savings bank) and the Mid-Tier Holding
Company (following its adoption of a Federal stock charter) into the Bank, with
the Bank being the surviving entity. Applications for these approvals, including
an application to form the Company as a holding company for the Bank, have been
filed and are currently pending. There can be no assurances that the requisite
OTS approvals will be received in a timely manner, in which event the
consummation of the Conversion and Reorganization may be delayed beyond the
expiration of the Offerings.
Pursuant to OTS regulations, the Plan of Conversion and Reorganization
also must be approved by (1) at least a majority of the total number of votes
eligible to be cast by Members of the Mutual Holding Company at the Members'
Meeting, and (2) holders of at least two-thirds of the outstanding Mid-Tier
Common Stock at the Stockholders' Meeting. In addition, the Primary Parties have
conditioned the consummation of the Conversion and Reorganization on the
approval of the Plan by at least a majority of the votes cast, in person or by
proxy, by the Public Stockholders at the Stockholders' Meeting.
Dissenters' Rights
Under Pennsylvania Law, Mid-Tier Holding Company shareholders have a
right to dissent and obtain the fair value of their shares by complying with the
terms of Subchapter D of the PBCL. The PBCL generally provides that a
shareholder of a Pennsylvania corporation that engages in a merger transaction
shall have the right to demand from the corporation the payment of the fair or
appraised value of his stock in the corporation, subject to the satisfaction of
specified procedural requirements. In connection with the Conversion and
Reorganization, the Mid-Tier Holding Company will merge with and into the Bank,
therefore Subchapter D of the PBCL is triggered. There are certain exceptions to
dissenter's rights under the PBCL, however, none are applicable in the
Conversion and Reorganization, therefore Mid-Tier Holding Company shareholders
have dissenters' rights of appraisal in connection with the Conversion and
Reorganization.
Interpretation and Amendment of the Plan
To the extent permitted by law, all interpretations of the Plan by the
Primary Parties will be final; however, such interpretations shall have no
binding effect on the OTS. The Plan provides that, if deemed necessary or
desirable by the Board of Directors, the Plan may be substantively amended by
the Board of Directors as a result of comments from the OTS or otherwise, prior
to the solicitation of proxies from the members of the Mutual Holding Company
and at any time thereafter with the concurrence of the OTS, except that in the
event that the regulations under which the Plan was adopted are liberalized
subsequent to the approval of the Plan by the OTS and the members of the Mutual
Holding Company at the special meeting of members, the Board of Directors may
amend the Plan to conform to the regulations without further approval of the OTS
or the members, to the extent permitted by law. An amendment to the Plan that
would result in a material adverse change in the terms of the Conversion and
Reorganization would require a resolicitation. In the event of a resolicitation,
subscriptions for which a confirmation or modification was not received would be
rescinded. Any amendment to the Plan regarding preferences to the Local
Community will not be deemed to be a material change.
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Certain Restrictions on Purchase or Transfer of Shares After the Conversion and
Reorganization
All shares of Conversion Stock purchased in connection with the
Conversion and Reorganization by a director or an executive officer of the
Primary Parties will be subject to a restriction that the shares may not be sold
for a period of one year following the Conversion and Reorganization, except in
the event of the death of such director or executive officer or pursuant to a
merger or similar transaction approved by the OTS. Each certificate for
restricted shares will bear a legend giving notice of this restriction on
transfer, and appropriate stop-transfer instructions will be issued to the
Company's transfer agent. Any shares of Conversion Stock issued within this
one-year period as a stock dividend, stock split or otherwise with respect to
such restricted stock will be subject to the same restrictions. The directors
and executive officers of the Company will also be subject to the insider
trading rules promulgated pursuant to the Exchange Act.
Purchases of Conversion Stock of the Company by directors, executive
officers and their associates during the three-year period following completion
of the Conversion and Reorganization may be made only through a broker or dealer
registered with the SEC, except with the prior written approval of the OTS. This
restriction does not apply, however, to negotiated transactions involving more
than 10% of the Company's outstanding Common Stock or to the purchase of Common
Stock pursuant to any tax-qualified employee stock benefit plan, such as the
ESOP, or by any non-tax-qualified employee stock benefit plan.
Pursuant to OTS regulations, the Company will generally be prohibited
from repurchasing any shares of Common Stock within one year following
consummation of the Conversion and Reorganization. During the second and third
years following consummation of the Conversion and Reorganization, the Company
may not repurchase any shares of its Common Stock other than pursuant to (i) an
offer to all stockholders on a pro rata basis that is approved by the OTS; (ii)
the repurchase of qualifying shares of a director, if any; (iii) purchases in
the open market by a tax-qualified or non-tax-qualified employee stock benefit
plan in an amount reasonable and appropriate to fund the plan; or (iv) purchases
that are part of an open-market program not involving more than 5% of its
outstanding capital stock during a 12 month period, if the repurchases do not
cause the Bank to become undercapitalized and the Bank provides to the Regional
Director of the OTS no later than 10 days prior to the commencement of a
repurchase program written notice containing a full description of the program
to be undertaken and such program is not disapproved by the Regional Director.
However, the Regional Director has authority to permit repurchases during the
first year following consummation of the Conversion and Reorganization and to
permit repurchases in excess of 5% during the second and third years upon the
establishment of exceptional circumstances.
COMPARISON OF STOCKHOLDERS' RIGHTS
General. The Conversion and Reorganization involve the elimination of
the Mutual Holding Company and the Mid-Tier Holding Company, and the
substitution of another newly organized company chartered in Pennsylvania. The
resulting structure will be more conventional in nature in that the Company will
be the only entity with a direct ownership interest in the Bank. Further, no
mutual holding company will be present. The Primary Parties were unable to
maintain the Mid-Tier Holding Company as the owner of the Bank because of
certain regulations and policies of the OTS which prohibited the merger of the
Mutual Holding Company into the Mid-Tier Holding Company in a conversion and
reorganization. The material differences between the Articles of Incorporation
of the Mid-Tier Holding Company and the Company are described below.
Authorized Capital Stock and Par Value. The Mid-Tier Holding Company's
authorized capital stock currently consists of 8,000,000 shares of common stock,
par value $.10 per share and 2,000,000 shares of preferred stock, no par value
per share. The Company's Articles of Incorporation authorizes
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40,000,000 shares of Common Stock, par value $.10 per share and 20,000,000
shares of Preferred Stock, no par value per share.
Addition of Indemnification and Elimination of Liability Sections. OTS
regulations require the Bank to indemnify its directors, officers and employees
against legal and other expenses incurred in defending lawsuits brought or
threatened against them by reason of the performance as a director, officer, or
employee. Indemnification may be made to such person only if final judgement on
the merits is in his favor, or in case of (i) settlement, (ii) final judgment
against him, or (iii) final judgment in his favor other than on the merits, if a
majority of the disinterested directors of the determines that he was acting in
good faith within the scope of his employment or authority as he could
reasonably have perceived it under the circumstances and for a purpose he could
have reasonably believed under the circumstances was in the best interests of
the Bank or its stockholders. If a majority of the disinterested directors of
the Bank concludes that in connection with an action any person ultimately may
become entitled to indemnification, the directors may authorize payment of
reasonable costs and expenses arising from defense or settlement of such action.
The Bank is required to give the OTS at least 60 days notice of its intention to
make indemnification and no indemnification shall be made if the OTS objects to
the Bank in writing.
In approving the Mid-Tier Reorganization, the OTS required that the
Mid-Tier Holding Company be subject to the same regulatory requirements
regarding indemnification described above, to which the Bank is subject.
The Articles of Incorporation of the Company provides that any
individual who is or was a director, officer, employee or agent of the Company
in any proceeding in which the person has been made a party or is otherwise
involved as a result of his service in such capacity shall be indemnified and
held harmless to the fullest extent authorized under the Pennsylvania Business
Corporation Law.
Pennsylvania law requires mandatory indemnification for expenses
(including attorney's fees) if a representative of a company is successful on
the merits or otherwise, in either a third party or derivative action. Pursuant
to Pennsylvania, the Articles of Incorporation provides that the Company will
indemnify its directors, officers, employees, and agents against expenses
(including attorneys' fees), judgments, fines, and amounts paid in settlement
actually and reasonably incurred in connection with an action or proceeding
(other than an action by or in the right of the company) if that person to be
indemnified acted in good faith and in a manner he reasonably believed to be in,
or not opposed to, the best interests of the company, and with respect to any
criminal action or proceeding, that such person did not have reasonable cause to
believe that his conduct was unlawful. The Articles of the Company also provides
for indemnification in actions or proceedings by or in the name of the company
if the person to be indemnified was not adjudged to be liable, or despite an
adjudication of liability, such person is fairly and reasonably entitled to
indemnity of certain expenses, as determined by the same court that adjudged
such person liable.
Pennsylvania law requires that indemnification payments (other than
mandatory payments) may be made only on a case-by-case basis. In addition,
payments may be advanced by a company to cover expenses upon the receipt by the
company of an undertaking by the individual to be indemnified to repay such
payments if indemnification is later determined to not be available to that
individual. A Pennsylvania company may grant additional indemnification rights
through its bylaws, or through an agreement, a vote of stockholders, or
disinterested directors and may create a fund of any nature to secure its
indemnification obligations. Pennsylvania law permits a company to obtain
insurance to pay for indemnification expenses.
The Articles of Incorporation of the Company also provides that a
director will not be personally liable to the Company for monetary damages for
any actions taken unless the director has breached or
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failed to perform his fiduciary duty and the breach or failure consists of
self-dealing, willful misconduct, or recklessness. Under Pennsylvania law, the
fiduciary duties of directors are owed to the Company not to the stockholders,
and a stockholder does not have standing to sue directly for a breach of a
fiduciary duty. Federal regulations contain no provisions for the limitation of
director liability.
These provisions may eliminate the potential liability of the Company's
directors for failure, through negligence or gross negligence, to satisfy their
duty of care, which requires directors to exercise informed business judgment in
discharging their duties. It may thus reduce the likelihood of derivative
litigation against directors and discourage or deter stockholders or management
from bringing a lawsuit against directors for breach of their duty of care,
event though such an action, if successful, might otherwise have been beneficial
to the Company and its stockholders. Stockholders will thus be surrendering a
cause of action based upon negligent business decisions, including those
relating to attempts to change control of the Company. The provision will not,
however, affect the right to pursue equitable remedies for breach of the duty of
care, although such remedies might not be available as a practical matter.
To the best of management's knowledge, there is currently no pending or
threatened litigation for which indemnification may be sought or any recent
litigation involving directors of the Bank that might have been affected by the
limited liability provision in the Company's Articles of Incorporation had it
been in effect at the time of the litigation.
The above-described provisions seek to ensure that the ability of the
Company's director to exercise their best business judgment in managing the
Company's affairs, subject to their continuing fiduciary duties of loyalty to
the Company and its stockholders, it not unreasonably impeded by exposure to the
potentially high personal costs or other uncertainties of litigation. The nature
of the tasks and responsibilities undertaken by directors and officers often
requires such persons to make difficult judgements of significant importance
which can expose such persons to personal liability, but from which they will
acquire no personal benefit (other than as stockholders). In recent years,
litigation against corporations and their directors and officers, often
amounting to mere "second guessing" of good-faith judgments and involving
allegations of personal wrongdoing, has become common. Such litigation often
claims damages in large amounts which bear no relationship to the amount of
compensation received by the directors or officers, particularly in the case of
directors who are not officers of the corporation, and the expense of defending
such litigation, regardless of whether it is well founded, can be enormous.
Individual directors and officers can seldom bear either the legal defense costs
involved or the risk of a large judgement.
In order to attract and retain competent and conscientious directors
and officers in the face of these potentially serious risks, corporations have
historically provided for corporate indemnification in their bylaws and have
obtained liability insurance protecting the company and its directors and
officers against the cost of litigation and related expenses. The Bank and the
Mid-Tier Holding Company currently have insurance coverage of its directors and
officers, and management anticipates that the Company will be able to obtain
such coverage for its directors and officers. The Company's Board of Directors,
the individual members of which will benefit from the inclusion of the
indemnification and limitation of liability provisions, has a personal interest
in including these provisions in the Company's Articles of Incorporation at the
potential expense of stockholders.
Certain Anti Takeover Provisions. Certain sections of the Company's
Articles of Incorporation provide for limitations concerning voting rights and
approval of business combinations. See "RESTRICTIONS ON ACQUISITION OF THE
COMPANY - Provisions in the Company's Articles and Bylaws.
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RESTRICTIONS ON ACQUISITIONS OF THE COMPANY
General. While the board of directors is not aware of any effort that
might be made to obtain control of the Company after conversion, the board of
directors believes that it is appropriate to include certain provisions as part
of the Company's Articles of Incorporation to protect the interests of the
Company and its stockholders from hostile takeovers ("anti-takeover"provisions)
which the board of directors might conclude are not in the best interests of us
or our stockholders. These provisions may have the effect of discouraging a
future takeover attempt which is not approved by the board of directors but
which individual stockholders may deem to be in their best interests or in which
stockholders may receive a substantial premium for their shares over the current
market prices. As a result, stockholders who might desire to participate in such
a transaction may not have an opportunity to do so. Such provisions will also
render the removal of the current board of directors or management of the
Company more difficult.
The following discussion is a general summary of the material
provisions of the Articles of Incorporation, bylaws, and certain other
regulatory provisions of the Company, which may be deemed to have such an
anti-takeover effect. The description of these provisions is necessarily general
and reference should be made in each case to the Articles of Incorporation and
bylaws of the Company which are filed as exhibits to the registration statement
of which this prospectus is a part. See "ADDITIONAL INFORMATION" as to how to
obtain a copy of these documents.
Provisions of the Company Articles of Incorporation and Bylaws
Limitations on Voting Rights. The Articles of Incorporation of the
Company provide that for a period of five years from completion of the
conversion, in no event shall any record owner of any outstanding equity
security which is beneficially owned, directly or indirectly, by a person who
beneficially owns in excess of 10% of any class of equity security outstanding
(the "Limit") be entitled or permitted to any vote in respect of the shares held
in excess of the Limit. The number of votes which may be cast by any record
owner who beneficially owned shares in excess of the Limit shall be a number
equal to the total number of votes which a single record owner of all common
stock owned by such person would be entitled to cast, multiplied by a fraction,
the numerator of which is the number of shares of such class or series which are
both beneficially owned by such person and owned of record by such record owner
and the denominator of which is the total number of shares of common stock
beneficially owned by such person owning shares in excess of the Limit. In
addition, for a period of five years from the completion of the Conversion and
Reorganization, no person may directly or indirectly offer to acquire or acquire
the beneficial ownership of more than 10% of any class of an equity security of
the Company, unless such acquisition is approved by two-thirds of the entire
Board of Directors of the Company.
The impact of these provisions on the submission of a proxy on behalf
of a beneficial holder of more than 10% of the common stock is (1) to disregard
for voting purposes and require divestiture of the amount of stock held in
excess of 10% (if within five years of the conversion more than 10% of the
common stock is beneficially owned by a person) and (2) limit the vote on common
stock held by the beneficial owner to 10% or possibly reduce the amount that may
be voted below the 10% level (if more than 10% of the common stock is
beneficially owned by a person more than five years after the conversion).
Unless the grantor of a revocable proxy is an affiliate or an associate of such
a 10% holder or there is an arrangement, agreement or understanding with such a
10% holder, these provisions would not restrict the ability of such a 10% holder
of revocable proxies to exercise revocable proxies for which the 10% holder is
neither a beneficial nor record owner. A person is a beneficial owner of a
security if he has the power to vote or direct the voting of all or part of the
voting rights of the security, or has the power to dispose of or direct the
disposition of the security. The Articles of Incorporation of the
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Company further provide that this provision limiting voting rights may only be
amended upon the vote of a majority of the outstanding shares of voting stock.
Election of Directors. Certain provisions of the Company's Articles of
Incorporation and bylaws will impede changes in majority control of the board of
directors. The Company's Articles of Incorporation provide that the board of
directors of the Company will be divided into three staggered classes, with
directors in each class elected for four-year terms. Thus, it would take three
annual elections to replace a majority of the Company's board. the Company's
Articles of Incorporation provide that the size of the board of directors may be
increased or decreased only if two-thirds of the directors then in office concur
in such action. The Articles of Incorporation also provide that any vacancy
occurring in the board of directors, including a vacancy created by an increase
in the number of directors, shall be filled for the remainder of the unexpired
term by a majority vote of the directors then in office. Finally, the Articles
of Incorporation and the bylaws impose certain notice and information
requirements in connection with the nomination by stockholders of candidates for
election to the board of directors or the proposal by stockholders of business
to be acted upon at an annual meeting of stockholders.
The Articles of Incorporation provide that a director may only be
removed for cause by the affirmative vote of at least a majority of the shares
of the Company entitled to vote generally in an election of directors cast at a
meeting of stockholders called for that purpose.
Restrictions on Call of Special Meetings. The Articles of Incorporation
of the Company provide that a special meeting of stockholders may be called only
pursuant to a resolution adopted by a majority of the board of directors.
Absence of Cumulative Voting. The Company's Articles of Incorporation
provide that stockholders may not cumulate their votes in the election of
directors.
Authorized Shares. The Articles of Incorporation authorizes the
issuance of 40,000,000 shares of common stock and 20,000,000 shares of preferred
stock. The shares of common stock and preferred stock were authorized in an
amount greater than that to be issued in the conversion to provide the Company's
board of directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and the
exercise of stock options. However, these additional authorized shares may also
be used by the board of directors consistent with its fiduciary duty to deter
future attempts to gain control of the Company. The board of directors also has
sole authority to determine the terms of any one or more series of Preferred
Stock, including voting rights, conversion rates, and liquidation preferences.
As a result of the ability to fix voting rights for a series of Preferred Stock,
the board has the power, to the extent consistent with its fiduciary duty, to
issue a series of Preferred Stock to persons friendly to management in order to
attempt to block a post-tender offer merger or other transaction by which a
third party seeks control, and thereby assist management to retain its position.
Procedures for Certain Business Combinations. The Articles of
Incorporation require the affirmative vote of at least 80% of the outstanding
shares of the Company entitled to vote in the election of directors in order for
the Company to engage in or enter into certain "Business Combinations," as
defined therein, with any Principal Stockholder (as defined below) or any
affiliates of the Principal Stockholder, unless the proposed transaction has
been approved in advance by the Company's board of directors, excluding those
who were not directors prior to the time the Principal Stockholder became the
Principal Stockholder. The term "Principal Stockholder" is defined to include
any person and the affiliates and associates of the person (other than the
Company or its subsidiary) who beneficially owns, directly or indirectly, 20% or
more of the outstanding shares of voting stock of the Company. Any amendment to
this provision requires the affirmative vote of at least 80% of the shares of
the Company entitled to vote generally in an election of directors.
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Stockholder Approval of Certain Transactions. Any merger,
consolidation, liquidation, or dissolution of the Company or any action that
would result in the sale or other disposition of all or substantially all of the
assets of the Company ("Transaction") shall require the affirmative vote of the
holders of at least eighty percent (80%) of the outstanding shares of capital
stock of the Company eligible to vote at a legal meeting. This supermajority
vote provision shall not apply to a particular Transaction, and such Transaction
shall require only such stockholder vote, if any, as would be required by
Pennsylvania law, if such Transaction is approved by two-thirds of the entire
Board of Directors of the Company.
Amendment to Articles of Incorporation and Bylaws. Amendments to the
Company's Articles of Incorporation must be approved by the Company's board of
directors and also by a majority of the outstanding shares of the Company's
voting stock, provided, however, that approval by at least 80% of the
outstanding voting stock is generally required for certain provisions (i.e.,
provisions relating to restrictions on the acquisition and voting of greater
than 10% of the common stock; number, classification, election and removal of
directors; amendment of bylaws; call of special stockholder meetings; director
liability; certain business combinations; power of indemnification; certain
merger/acquisition transactions; and amendments to provisions relating to the
foregoing in the Articles of Incorporation).
The bylaws may be amended by a majority vote of the board of directors
or the affirmative vote of the holders of at least 80% of the outstanding shares
of the Company entitled to vote in the election of directors cast at a meeting
called for that purpose.
Other Restrictions
Benefit Plans. In addition to the provisions of the Company's Articles
of Incorporation and bylaws described above, certain benefit plans of ours
adopted in connection with the conversion contain provisions which also may
discourage hostile takeover attempts which the boards of directors might
conclude are not in the best interests for us or our stockholders. For a
description of the benefit plans and the provisions of such plans relating to
changes in control, see "MANAGEMENT - Proposed Future Stock Benefit Plans."
Regulatory Restrictions. A federal regulation prohibits any person
prior to the completion of a conversion from transferring, or entering into any
agreement or understanding to transfer, the legal or beneficial ownership of the
subscription rights issued under a plan of conversion or the stock to be issued
upon their exercise. This regulation also prohibits any person prior to the
completion of a conversion from offering, or making an announcement of an offer
or intent to make an offer, to purchase such subscription rights or stock. For
three years following conversion, OTS regulations prohibit any person, without
the prior approval of the OTS, from acquiring or making an offer to acquire more
than 10% of the stock of any converted savings institution if such person is, or
after consummation of such acquisition would be, the beneficial owner of more
than 10% of such stock. In the event that any person, directly or indirectly,
violates this regulation, the securities beneficially owned by such person in
excess of 10% shall not be counted as shares entitled to vote and shall not be
voted by any person or counted as voting shares in connection with any matter
submitted to a vote of stockholders.
Federal regulations require that, prior to obtaining control of an
insured institution, a person, other than a company, must give 60 days notice to
the OTS and have received no OTS objection to such acquisition of control, and a
company must apply for and receive OTS approval of the acquisition. Control,
involves a 25% voting stock test, control in any manner of the election of a
majority of the institution's directors, or a determination by the OTS that the
acquiror has the power to direct, or directly or indirectly to exercise a
controlling influence over, the management or policies of the institution.
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Acquisition of more than 10% of an institution's voting stock, if the acquiror
also is subject to any one of either "control factors," constitutes a rebuttable
determination of control under the regulations. The determination of control may
be rebutted by submission to the OTS, prior to the acquisition of stock or the
occurrence of any other circumstances giving rise to such determination, of a
statement setting forth facts and circumstances which would support a finding
that no control relationship will exist and containing certain undertakings. The
regulations provide that persons or companies which acquire beneficial ownership
exceeding 10% or more of any class of a savings association's stock after the
effective date of the regulations must file with the OTS a certification that
the holder is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
General
The Company is authorized to issue 40,000,000 shares of the Common
Stock, $.10 par value per share, and 20,000,000 shares of serial preferred
stock, no par value per share. The Company currently expects to issue up to
10,350,000 shares of Common Stock in the Conversion and Reorganization (based
upon the maximum of the Offering Price Range) including shares to be provided to
stockholders in the Exchange. Therefore, after the Conversion and
Reorganization, the Company expects to have 10,350,000 shares outstanding.
The Company can pay dividends if and when declared by its Board of
Directors. See "DIVIDEND POLICY" and "REGULATION." The holders of Common Stock
will be entitled to receive and share equally in such dividends as may be
declared by the Board of Directors of the Company out of funds legally available
therefor. If the Company issues preferred stock, the holders thereof may have a
priority over the holders of the Common Stock with respect to dividends.
The Company does not intend to issue any shares of serial preferred
stock in the Conversion and Reorganization, nor are there any present plans to
issue such preferred stock following the Conversion and Reorganization. The
aggregate par value of the issued shares will constitute the capital account of
the Company. The balance of the purchase price will be recorded for accounting
purposes as additional paid-in capital. See "CAPITALIZATION." The capital stock
of the Company will represent nonwithdrawable capital and will not be insured by
the Company, the FDIC, or any other government agency.
Common Stock
Voting Rights. Each share of the Common Stock will have the same
relative rights and will be identical in all respects with every other share of
the Common Stock. The holders of the Common Stock will possess exclusive voting
rights in the Company, except to the extent that shares of serial preferred
stock issued in the future may have voting rights, if any. Each holder of the
Common Stock will be entitled to only one vote for each share held of record on
all matters submitted to a vote of holders of the Common Stock and will not be
permitted to cumulate their votes in the election of the Company's directors.
Upon payment of the purchase price for the Common Stock all such stock
will be duly authorized, fully paid and nonassessable.
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Liquidation. In the unlikely event of the complete liquidation or
dissolution of the Company, the holders of the Common Stock will be entitled to
receive all assets of the Company available for distribution in cash or in kind,
after payment or provision for payment of (i) all debts and liabilities of the
Company (including all deposits with us and accrued interest thereon); (ii) any
accrued dividend claims; (iii) liquidation preferences of any serial preferred
stock which may be issued in the future; and (iv) any interests in the
liquidation account established upon the Conversion and Reorganization for the
benefit of Eligible Account Holders and Supplemental Eligible Account Holders
who continue to have their deposits with the Bank
Restrictions on Acquisition of the Common Stock. See "RESTRICTIONS ON
ACQUISITION OF THE COMPANY" for a discussion of the limitations on acquisition
of shares of the Common Stock.
Other Characteristics. Holders of the Common Stock will not have
preemptive rights with respect to any additional shares of the Common Stock
which may be issued. Therefore, the Board of Directors may sell shares of
capital stock of the Company without first offering such shares to existing
stockholders of the Company. The Common Stock is not subject to call for
redemption.
Issuance of Additional Shares. Except as disclosed herein, the Company
has no present plans, proposals, arrangements or understandings to issue
additional authorized shares of the Common Stock. In the future, the authorized
but unissued and unreserved shares of the Common Stock will be available for
general corporate purposes, including, but not limited to, possible issuance:
(i) as stock dividends; (ii) in connection with mergers or acquisitions; (iii)
under a cash dividend reinvestment or stock purchase plan; (iv) in a public or
private offering; or (v) under employee benefit plans. See "RISK FACTORS -
Possible Dilutive Effect of Issuance of Additional Shares" and "PRO FORMA DATA."
Normally no stockholder approval would be required for the issuance of these
shares, except as described herein or as otherwise required to approve a
transaction in which additional authorized shares of the Common Stock are to be
issued.
For additional information, see "REGULATION - Savings Institution
Regulation - Dividend and Other Capital Distribution Limitations" with respect
to restrictions on the payment of cash dividends; and "RESTRICTIONS ON
ACQUISITION OF THE COMPANY" for information regarding restrictions on acquiring
Common Stock.
Serial Preferred Stock
None of the 2,000,000 authorized shares of serial preferred stock of
the Company will be issued in the Conversion and Reorganization. After the
Conversion and Reorganization is completed, the Board of Directors of the
Company will be authorized to issue serial preferred stock and to fix and state
voting powers, designations, preferences or other special rights of such shares
and the qualifications, limitations and restrictions thereof, subject to
regulatory approval but without stockholder approval. If and when issued, the
serial preferred stock is likely to rank prior to the Common Stock as to
dividend rights, liquidation preferences, or both, and may have full or limited
voting rights. The Board of Directors, without stockholder approval, can issue
serial preferred stock with voting and conversion rights which could adversely
affect the voting power of the holders of the Common Stock. The Board of
Directors has no present intention to issue any of the serial preferred stock.
LEGAL AND TAX MATTERS
The legality of the Common Stock will be passed upon for the Company by
Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C. Certain legal matters for
Sandler O'Neill will be passed upon by Elias, Matz, Tiernan & Herrick, L.L.P.
Washington, D.C. The material federal and Pennsylvania
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income tax consequences of the Conversion and Reorganization have been passed
upon by Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C.
EXPERTS
The consolidated financial statements of Thistle Group Holdings, Inc.
and subsidiary as of December 31, 1997 and 1996 and for each of the three years
in the period ended December 31, 1997 included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
FinPro, Inc. has consented to the publication herein of a summary of
its letters to the Mid-Tier Holding Company setting forth its opinion as to the
estimated pro forma market value of the Mutual Holding Company in the converted
form and its belief concerning the value of subscription rights and to the use
of its name and statements with respect to it appearing in this Prospectus.
REGISTRATION REQUIREMENTS
Mid-Tier Common Stock of the Mid-Tier Holding Company is not currently
registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Mid- Tier Holding Company is not subject to
the information, proxy solicitation, insider trading restrictions, tender offer
rules, periodic reporting and other requirements of the SEC under the Exchange
Act. After the Conversion and Reorganization the Common Stock will be so
registered and the Company will be subject to the above requirements. The
Company may not deregister the Common Stock under the Exchange Act for a period
of at least three years following the Conversion and Reorganization. The Common
Stock of the Company will be registered pursuant to Section 12(g) of the
Exchange Act and will be subject to the same information, proxy solicitation,
insider trading restrictions, tender offer rules, and period reporting
requirements of the SEC under the Exchange Act as the Company.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement under the
Securities Act of 1933, as amended, with respect to the Conversion Stock and
Exchange Shares offered hereby. As permitted by the rules and regulations of the
SEC, this Prospectus does not contain all the information set forth in the
Registration Statement. Such information can be examined without charge at the
public reference facilities of the SEC located at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of such material can be obtained from the SEC
at prescribed rates. The SEC maintains a World Wide Web site on the Internet
that contains reports, proxy and information statements and other information
regarding registrants such as the Company that file electronically with the SEC.
The address of such site is: http://www.sec.gov. The statements contained in
this Prospectus as to the contents of any contract or other document filed as an
exhibit to the Registration Statement describe all material provisions of such
contracts or other documents. Nevertheless, such statements are, of necessity,
brief descriptions thereof and are not necessarily complete; each such statement
is qualified by reference to such contract or document.
The Mutual Holding Company has filed an Application for Conversion with
the OTS with respect to the Conversion and Reorganization. The Company has filed
an application with OTS to become a savings and loan holding company. This
Prospectus omits certain information contained in these applications. These
applications may be examined at the principal office of the OTS, 1700 G Street,
N.W., Washington, D.C. 20552, and OTS Northeast Regional Office, 10 Exchange
Place Centre, 18th Floor, Jersey City, New York 07302.
-102-
<PAGE>
THISTLE GROUP HOLDINGS, INC.
AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Accountants' Report F-1
Consolidated Statements of Financial Condition as of
December 31, 1997 and 1996 F-2
Consolidated Statements of Operations
for the Years Ended December 31, 1997, 1996 and 1995 19
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995 F-3
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1997, 1996 and 1995 F-4
Notes to Consolidated Financial Statements F-5
All schedules are omitted because they are not required or applicable
or the required information is shown in the financial statements or the notes
thereto.
Financial statements of the Company have not been provided because the
Company has not conducted any operations to date.
-103-
<PAGE>
Deloitte & Twenty-Fourth Floor Telephone: (215) 246-2300
Touche LLP 1700 Market Street Facsimile: (215) 569-2441
[LOGO] Philadelphia, Pennsylvania 19103-3984
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Thistle Group Holdings, Inc. and Subsidiary:
We have audited the accompanying consolidated statements of financial condition
of Thistle Group Holdings, Inc. and subsidiary (the "Company") as of December
31, 1997 and 1996, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Thistle Group
Holdings, Inc. and subsidiary at December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 5, 1998
- -----------------------
Deloitte Touche
Tohmatsu
International
F-1
<PAGE>
<TABLE>
<CAPTION>
THISTLE GROUP HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- -----------------------------------------------------------------------------------------
December 31,
------------------------------
ASSETS 1997 1996
<S> <C> <C>
Cash on hand and in banks $ 2,838,744 $ 2,861,515
Interest-bearing deposits 17,311,852 38,067,662
----------- -----------
Total cash and cash equivalents 20,150,596 40,929,177
Investments held to maturity (approximate fair value -
1997, $35,153,660; 1996, $46,898,138) 34,529,423 46,464,421
Investments available for sale at fair value
(amortized cost - 1997, $3,231,068; 1996, $2,631,218 3,698,205 2,631,218
Mortgage-backed securities available for sale
at fair value (amortized cost - 1997, $109,847,299;
1996, $92,296,514) 111,486,136 93,409,578
Loans receivable (net of allowance for loan losses -
1997, $782,825; 1996, $577,299) 96,280,105 98,626,173
Loans held for sale (amortized cost - 1997,
$1,154,761; 1996, $2,147,223) 1,154,761 2,147,223
Accrued interest receivable:
Loans 675,530 769,399
Mortgage-backed securities 684,637 578,785
Investments 435,053 870,292
Federal Home Loan Bank stock - at cost 1,701,700 1,691,200
Real estate acquired through foreclosure - net 116,262 186,209
Office properties and equipment - net 1,504,014 1,829,021
Excess of cost over fair value of net assets acquired
(goodwill) 32,544
Prepaid expenses and other assets 4,233,765 4,166,283
------------- -------------
TOTAL ASSETS $ 276,650,187 $ 294,331,522
============= =============
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
<S> <C> <C>
Liabilities:
Deposits $ 230,558,288 $ 256,546,566
Accrued interest payable 67,200 78,276
Advances from borrowers for taxes and insurance 2,186,283 2,200,402
FHLB advances 7,884,000 7,884,000
Accounts payable and accrued expenses 4,206,179 2,394,915
Employee Stock Ownership Plan debt 32,735
Dividends payable 365,400 41,200
Accrued income taxes 2,096,000 86,914
Deferred income taxes 816,521 485,450
------------- -------------
Total liabilities 248,179,871 269,750,458
------------- -------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, no par value - 2,500,000 shares
authorized, none issued
Common stock, 1997, $.10 par; $1.00 par 1996;
8,000,000 shares authorized; 1,621,000 shares
issued and outstanding 162,100 1,621,000
Additional paid-in capital 18,455,330 16,997,430
Employee Stock Ownership Plan - (32,735)
Contribution for shares acquired by Management
Recognition Plan - (12,000)
Unrealized gain on securities available for
sale, net of tax 1,389,963 734,640
Retained earnings - partially restricted 8,462,923 5,272,729
------------- -------------
Total stockholders' equity 28,470,316 24,581,064
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 276,650,187 $ 294,331,522
============= =============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
THISTLE GROUP HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized
Employee Gain (Loss) on
Additional Stock Management Securities Total
Common Paid-in Ownership Recognition Available Retained Stockholders'
Stock Capital Plan Plan for Sale Earnings Equity
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $ 1,615,000 $ 16,934,430 $(90,610) $(36,000) $ (2,478,994) $ 4,533,277 $ 20,477,103
Net income 1,432,294 1,432,294
Cash dividends declared (164,800) (164,800)
Recovery of unrealized loss on
investment and mortgage-
backed securities available
for sale, net of tax 3,294,522 3,294,522
Issuance of shares in connection
with Management Recognition Plan 6,000 63,000 69,000
Principal payments made by
Employee Stock Ownership Plan 27,784 27,784
Release of Management Recognition
Plan shares 12,000 12,000
--------- ------------ -------- ------- ----------- ----------- ------------
BALANCE, DECEMBER 31, 1995 1,621,000 16,997,430 (62,826) (24,000) 815,528 5,800,771 25,147,903
Net loss (363,242) (363,242)
Cash dividends declared (164,800) (164,800)
Unrealized loss on investment
and mortgage-backed securities
available for sale, net of tax (80,888) (80,888)
Principal payments made by
Employee Stock Ownership Plan 30,091 30,091
Release of Management
Recognition Plan shares 12,000 12,000
--------- ------------ -------- ------- ----------- ----------- ------------
BALANCE, DECEMBER 31, 1996 1,621,000 16,997,430 (32,735) (12,000) 734,640 5,272,729 24,581,064
--------- ------------ -------- ------- ----------- ----------- ------------
Net income 3,353,993 3,353,993
Cash dividends declared (164,799) (164,799)
Unrealized gain on investment
and mortgage-backed securities
available for sale, net of tax 655,323 655,323
Principal payments made by
Employee Stock Ownership Plan 32,735 32,735
Release of Management
Recognition Plan shares 12,000 12,000
Thistle Group Holdings, Inc.
formation (Note 1) (1,458,900) 1,457,900 1,000
--------- ------------ -------- -------- ----------- ----------- ------------
BALANCE, DECEMBER 31, 1997 $ 162,100 $ 18,455,330 $ - $ - $ 1,389,963 $ 8,462,923 $ 28,470,316
========= ============ ======== ======== =========== =========== ============
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
THISTLE GROUP HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 3,353,993 $ (363,242) $ 1,432,294
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Provision for loan losses 120,000 139,194 135,000
Depreciation 240,037 265,582 332,957
Management Recognition Plan expense 12,000 12,000 12,000
Loans held for sale originated (76,500) (1,888,175) (2,666,675)
Amortization of:
Goodwill 32,544 114,547 200,461
Net premiums (discounts) on:
Loans purchased 22,371 (36,337) (123,654)
Investments (290,012) 38,137 64,699
Mortgage-backed securities (505,943) (656,038) (522,517)
Loss on sale of mortgage-backed securities 30,994
Gain on sale of investments (4,088)
Gain on sale of loans held for sale (8,992) (61,922)
Gain on sale of deposit liabilities (2,234,268)
Loss on real estate owned 50,246 121,374 68,958
Proceeds from sale of loans held for sale 1,054,638 687,873 1,527,832
Changes in assets and liabilities which provided (used) cash:
Deferred income taxes 6,518 75,766 149,993
Deferred loan fees 66,518 79,514 (33,213)
Accrued interest receivable 423,256 (10,869) (158,394)
Prepaid expenses and other assets (67,483) 48,974 (934,297)
Accrued interest payable (11,076) (15,705) 2,417
Accounts payable and accrued expenses 1,811,264 (146,887) 1,376,159
Accrued income taxes 2,009,086 (807,436) 719,968
Dividends payable 324,200 41,200
------------ ------------ ------------
Net cash (used in) provided by operating activities 6,328,309 ^ (2,300,528) ^ 1,553,060
------------ ------------ ------------
INVESTING ACTIVITIES:
Principal collected on:
Mortgage-backed securities 15,171,472 20,235,177 12,796,015
Long-term loans 22,408,973 18,252,461 8,054,172
Loans available for sale 87,318 394,590 79,095
Long-term loans originated (19,777,772) (15,910,800) (8,845,482)
Long-term loans acquired (820,605) (2,910,303) (3,459,670)
Purchases of:
Investments held to maturity (42,094,690) (37,498,648) (32,758,275)
Investments available for sale (1,260,000) (1,820,552) (810,666)
Mortgage-backed securities (32,216,314) (15,440,811) (27,833,884)
Property and equipment (119,038) (126,989) (117,055)
FHLB stock (10,500) (5,500) (71,200)
Proceeds from:
Sale of real estate owned 269,248 319,516 34,684
Maturities of investments 54,000,000 36,594,104 38,000,000
Sale of mortgage-backed securities 20,676,552
Sale of investments 983,938
Sale of property and equipment 204,008
------------ ------------ ------------
Net cash provided by (used in) investing activities ^ (3,173,962) ^ 2,082,245 ^ 5,744,286
------------ ------------ ------------
FINANCING ACTIVITIES:
Net (decrease) increase in deposits (23,754,010) 6,367,851 8,948,181
Net decrease in advances from borrowers for taxes and insurance (14,119) (130,915) (126,162)
Proceeds from sale of stock through Management Recognition Plan 69,000
Cash dividends declared (164,799) (164,800) (164,800)
------------ ------------ ------------
Net cash (used in) provided by financing activities (23,932,928) 6,072,136 8,726,219
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (20,778,581) 5,853,853 16,023,565
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 40,929,177 35,075,324 19,051,759
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, ENDING OF YEAR $ 20,150,596 $ 40,929,177 $ 35,075,324
============ ============ ============
SUPPLEMENTAL DISCLOSURES:
Interest paid on deposits and funds borrowed $ 11,071,000 $ 11,085,000 $ 10,600,000
Income taxes paid 80,914 919,000 954,000
Noncash transfers from loans to real estate owned 249,547 446,721 233,496
Noncash transfer from loans to other assets 1,770,942
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
THISTLE GROUP HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
During 1997, the stockholders of Roxborough-Manayunk Federal Savings Bank
(the "Bank") approved the Agreement and Plan of Reorganization (the
"Plan"), whereby the corporate structure of the Bank was reorganized into
a holding company form of ownership. Accordingly, the Bank became a
wholly-owned subsidiary of the newly formed holding company, Thistle Group
Holdings, Inc. (the "Company"). Prior to its reorganization, the Bank was
principally owned by FJF Financial, M.H.C. ("FJF"). As a result of the
reorganization, all of the issued and outstanding shares of common stock
of the Bank are now held by the Company, and holders of the issued and
outstanding shares of common stock of the Bank became holders of the
issued and outstanding shares of common stock of the Company. Each
outstanding share of common stock of the Bank was converted to one share
of common stock of the Company. No additional shares of common stock were
issued as a result of the reorganization. Consequently, the operations of
the Company, for all periods presented, represent the operations of its
subsidiary, the Bank, and the Bank's wholly owned subsidiaries.
The primary business of the Company is to act as a holding company for the
Bank and to invest in various marketable equity and other securities.
Roxborough-Manayunk Federal Savings Bank is a federally chartered capital
stock savings bank. The Bank has two subsidiaries, Ridge Service
Corporation, which is inactive, and Montgomery Service Corporation, which
manages a small commercial real estate property. The primary business of
the Bank is attracting customer deposits from the general public through
its six branches and investing these deposits, together with funds from
borrowings and operations, primarily in single-family residential loans
and mortgage-backed securities and to a lesser extent in secured consumer,
home improvement and commercial loans and investment securities. The
Bank's primary regulator is the Office of Thrift Supervision ("OTS").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of the Company, the Bank and the Bank's
wholly owned subsidiaries. Intercompany accounts and transactions have
been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with an original maturity of three months or less to be
cash equivalents.
F-5
<PAGE>
Investment and Mortgage-Backed Securities - Debt and equity securities are
classified and accounted for as follows:
Held to Maturity - Debt securities that management has the positive
intent and ability to hold until maturity are classified as held to
maturity and are carried at their remaining unpaid principal
balance, net of unamortized premiums or unaccreted discounts.
Premiums are amortized and discounts are accreted using the interest
method over the estimated remaining term of the underlying security.
Available for Sale - Debt and equity securities that will be held
for indefinite periods of time, including securities that may be
sold in response to changes to market interest or prepayment rates,
needs for liquidity and changes in the availability of and the yield
of alternative investments are classified as available for sale.
These assets are carried at fair value. Fair value is determined
using published quotes as of the close of business. Unrealized gains
and losses are excluded from earnings and are reported net of tax as
a separate component of stockholders' equity until realized.
Realized gains and losses on the sale of investment or
mortgage-backed securities are reported in the consolidated
statement of operations and are determined using the adjusted cost
of the specific security sold.
Interest Income - Interest income on loans and investment and
mortgage-backed securities is recognized as earned. Income recognition is
generally discontinued when loans become 90 days contractually past due.
An allowance for any uncollected interest is established at that time by a
charge to operations.
Loans Held for Sale - The Company originates loans for portfolio
investment or for sale in the secondary market. During the period of
origination, loans are designated as available for sale or held for
investment. Loans held for sale are carried at the lower of cost or fair
value, determined on an aggregate basis. Loans receivable designated as
held for portfolio have been so designated due to management's intent and
ability to hold such loans until maturity or pay-off.
Provisions for Losses - Provisions for losses include charges to reduce
the recorded balances of mortgage loans receivable to their estimated net
realizable value or fair value, as applicable. Such provisions are based
on management's estimate of net realizable value or fair value of the
collateral, as applicable, considering the current and currently
anticipated future operating or sales conditions, thereby causing these
estimates to be particularly susceptible to changes that could result in a
material adjustment to results of operations in the near term. Recovery of
the carrying value of such loans and real estate is dependent to a great
extent on economic, operating and other conditions that may be beyond the
Company's control.
The Company accounts for impaired loans in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 114, Accounting by Creditors
for Impairment of a Loan and SFAS No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure. The Company
values impaired loans using the fair value of the collateral. Any reserves
determined under SFAS No. 114 would be included in the allowance for loan
losses.
Real Estate Acquired Through Foreclosure - Real estate acquired through
foreclosure is carried at the lower of fair value or balance of the loan
on the property at date of acquisition less estimated selling costs. Costs
relating to the development and improvement of property are capitalized,
and those relating to holding the property are charged to expense.
F-6
<PAGE>
Office Properties and Equipment - Office properties and equipment are
recorded at cost. Depreciation is computed using the straight-line method
over the expected useful lives of the related assets which range from
three to 20 years. The costs of maintenance and repairs are expensed as
incurred, and renewals and betterments are capitalized.
Excess Cost Over Fair Value of Net Assets Acquired - Goodwill was being
amortized over the remaining average life of the assets acquired
(originally fifteen years) using the interest method.
Interest Rate Risk - At December 31, 1997, the Company's assets consist
primarily of assets that earned interest at fixed interest rates. Those
assets were funded primarily with short-term liabilities that have
interest rates that vary with market rates over time.
The shorter duration of the interest-sensitive liabilities indicates that
the Company is exposed to interest rate risk because, in a rising rate
environment, liabilities will be repricing faster at higher interest
rates, thereby reducing the market value of long-term assets and net
interest income.
Loan Fees - The Company defers all loan fees, net of certain direct loan
origination costs, and recognizes income as a yield adjustment over the
contractual life of the loan considering prepayments using the interest
method.
Unearned Discounts and Premiums - Unearned discounts and premiums are
accreted over the expected average lives of the loans purchased using the
interest method.
Income Taxes - Deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
Accounting for Stock-Based Compensation - The Company accounts for
stock-based compensation in accordance with SFAS No. 123, Accounting for
Stock-Based Compensation which permits the use of the intrinsic value
method for determining compensation expense associated with grants of
stock options. The Company has not recognized any compensation expense
under this method.
Earnings Per Share - In February 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 128, Earnings Per Share, which is effective
for periods ending after December 15, 1997. The Company adopted this
statement which requires retroactive restatement of earnings per share for
all periods presented, effective December 31, 1997. Basic earnings per
share is computed by dividing income available to common stockholders (net
income) by the weighted-average number of common shares outstanding for
the period. Diluted earnings per share is computed using the weighted
average number of common shares outstanding and common share equivalents
that would arise from the exercise of stock options. The weighted average
shares used in the basic and diluted earnings per share computations are
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Average common shares outstanding - basic 1,621,000 1,621,000 1,621,000
Increase in shares due to dilutive options 24,923 - -
--------- --------- ---------
Adjusted shares outstanding - diluted 1,645,923 1,621,000 1,621,000
========= ========= =========
</TABLE>
F-7
<PAGE>
Dividends - Prior to the reorganization discussed in Note 1, during 1997,
the Bank had declared a dividend of $.60 per share. No dividends were paid
to FJF as a result of a waiver received from the Office of Thrift
Supervision (OTS). The total waived dividends are $849,000 for the year
ending December 31, 1997 and $1,132,000 for each of the years ending
December 31, 1996 and 1995. The Bank is subject to certain restrictions on
the amount of dividends that it may declare without prior regulatory
approval. Subsequent to the reorganization, a $.20 per share dividend was
paid to its shareholders, including $283,000 paid to the Company. The
Company declared a dividend of $.20 per share payable January 15, 1998 to
shareholders of record on December 31, 1997.
Accounting Principles Issued and Not Adopted - In June 1997, the FASB
issued SFAS No. 130, Reporting Comprehensive Income, which requires an
entity to present, as a component of comprehensive income, the amounts
from transactions and other events which currently are excluded from the
statement of income and are recorded directly to stockholders' equity.
Also in June 1997, the FASB issued SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. This statement requires
an entity to disclose financial information in a manner consistent to
internally used information and requires more detailed disclosures of
operating and reporting segments that are currently in practice. In
February 1998, the FASB issued SFAS No. 132, Employers' Disclosure About
Pensions and Other Postretirement Benefits. This statement revises
employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans.
The statements are applicable for years beginning after December 15, 1997.
Management has not completed an analysis of the impact, if any, the
adoption of these statements will have on the Company's consolidated
financial condition or results of operations.
Reclassifications - Certain items in the 1995 and 1996 consolidated
financial statements have been reclassified to conform with the
presentation in the 1997 consolidated financial statements.
3. INVESTMENTS
A comparison of cost and approximate fair value of investments, by
maturity, is as follows:
<TABLE>
<CAPTION>
Held to Maturity
December 31, 1997
-----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
U.S. Treasury securities -
3 to 5 years $ 5,043,487 $ 375,763 $ 5,419,250
FHLB Bonds:
1 year 6,000,000 $ 66,570 5,933,430
More than 10 years 15,283,545 136,753 2,936 15,417,362
Municipal bonds -
more than 10 years 8,033,969 181,227 8,215,196
Other 168,422 168,422
------------ --------- -------- ------------
Total $ 34,529,423 $ 693,743 $ 69,506 $ 35,153,660
============ ========= ======== ============
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
Available for Sale
December 31, 1997
------------------------------------
Amortized Approximate
Cost Fair Value
<S> <C> <C>
Mutual Funds $ 1,222,005 $ 1,222,005
Capital Trust securities 1,025,000 1,060,000
Equity investments 734,063 1,166,200
Other 250,000 250,000
----------- -----------
Total $ 3,231,068 $ 3,698,205
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Held to Maturity
December 31, 1996
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
U.S. Treasury securities -
5 to 10 years $ 5,054,831 $ 347,445 $ 5,402,276
FHLB Bonds:
1 to 3 years 3,000,000 $ 12,384 2,987,616
5 to 10 years 3,000,000 127,500 2,872,500
More than 10 years 16,000,000 16,061,715
61,715
Other agencies (FNMA, FHLMC
and SLMA debentures):
3 to 5 years 2,000,000 2,312 2,002,312
More than 10 years 17,000,000 168,479 6,350 17,162,129
Other 409,590 409,590
-------------- ---------- ---------- --------------
Total $ 46,464,421 $ 579,951 $ 146,234 $ 46,898,138
============== ========== ========== ==============
</TABLE>
<TABLE>
<CAPTION>
Available for Sale
December 31, 1996
------------------------------------
Amortized Approximate
Cost Fair Value
<S> <C> <C>
Federal Home Loan Mortgage Corporation $ 984,750 $ 984,750
7.9% noncumulative preferred stock
Mutual Funds 1,147,268 1,147,268
Other 499,200 499,200
------------- ------------
Total $ 2,631,218 $ 2,631,218
============= ============
</TABLE>
There were no sales of debt securities during the years ended December 31,
1997, 1996 and 1995.
F-9
<PAGE>
4. MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
GNMA pass-through certificates $ 31,836,876 $ 658,548 $ 18,625 $ 32,476,799
FNMA pass-through certificates 24,473,771 351,223 91,948 24,733,046
FNMA real estate mortgage
investment conduits 2,530,993 52,721 2,478,272
FHLMC pass-through certificates 43,756,293 915,621 23,738 44,648,176
FHLMC real estate mortgage
investment conduits 7,249,366 99,523 7,149,843
------------ ---------- ---------- ------------
Total $109,847,299 $1,925,392 $ 286,555 $111,486,136
============ ========== ========== ============
</TABLE>
<TABLE>
December 31, 1996
-------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
GNMA pass-through certificates $20,684,109 $ 448,357 $21,132,466
FNMA pass-through certificates 19,045,788 262,515 $ 80,810 19,227,493
FNMA real estate mortgage
investment conduits 3,490,887 76,905 3,413,982
FHLMC pass-through certificates 41,829,546 801,029 48,177 42,582,398
FHLMC real estate mortgage
investment conduits 7,246,184 192,945 7,053,239
----------- ---------- -------- -----------
Total $92,296,514 $1,511,901 $398,837 $93,409,578
=========== ========== ======== ===========
</TABLE>
Proceeds from the sale of mortgage-backed securities during the year ended
December 31, 1995 were $20,676,552 resulting in a loss of $30,994. There
were no sales of mortgage-backed securities during the years ended
December 31, 1997 and 1996.
F-10
<PAGE>
5. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
Mortgage loans:
<S> <C> <C>
1-4 Family residential $ 71,397,094 $ 73,870,894
Other dwelling units 16,646,987 17,615,571
Home equity lines of credit and improvement loans 8,209,914 7,018,517
Commercial nonmortgage loans 329,100 770,000
Construction loans 1,692,846 964,128
Loans on savings accounts 242,585 384,025
Consumer loans 156,185 92,212
------------- -------------
Total loans 98,674,711 100,715,347
Plus unamortized premiums 100,660 194,391
Less:
Net discounts on loans purchased and
loans acquired through merger (47,003) (118,363)
Loans in process (432,623) (288,570)
Deferred loan fees (1,232,815) (1,299,333)
Allowance for loan losses (782,825) (577,299)
------------- -------------
Total $ 96,280,105 $ 98,626,173
============= =============
</TABLE>
The Company originates loans to customers in its local market area,
principally Philadelphia, Pennsylvania and the four adjoining counties.
The ultimate repayment of these loans is dependent to a certain degree on
the local economy and real estate market.
Originated or purchased commercial real estate loans totaled $16,646,987
and $17,675,024 at December 31, 1997 and 1996, respectively. Of the
commercial real estate loans, as of December 31, 1997 and 1996, $6,337,866
and $4,755,660 are collateralized by multi-family residential property;
$10,309,121 and $12,919,364 by business property, respectively.
At December 31, 1997, 1996 and 1995, the Company was servicing loans for
others amounting to $3,695,280, $3,522,363 and $4,433,526, respectively.
Servicing loans for others generally consists of collecting mortgage
payments, maintaining escrow accounts, disbursing payments to investors
and foreclosure processing. Loan servicing income is recorded on the
accrual basis and includes servicing fees from investors and certain
charges collected from borrowers, such as late payment fees. In connection
with these loans serviced for others, the Company held borrower's escrow
balances of approximately $234,153, $275,863 and $326,485 at December 31,
1997, 1996 and 1995, respectively.
The Company previously invested in loans secured by commercial equipment
leases. During 1996, the borrower declared bankruptcy. At December 27,
1996, the Company entered into an agreement with the trustee for the
bankruptcy court whereby the Bank will receive approximately 65% of the
cash receipts from the collateral principal in exchange for all rights to
the collateral. In connection with this agreement, the Company charged-off
$1,180,628 of the outstanding balance due from the trustee at December 31,
1996. The receivable balance of approximately $361,000 and $1,771,000,
resulting from the agreement with the trustees, is a component of prepaid
expenses and other assets in the consolidated statement of
F-11
<PAGE>
financial condition at December 31, 1997 and 1996, respectively. The
receivable is to be repaid by the trustee from subsequent cash
collections.
Following is a summary of changes in the allowance for loan losses:
Year Ended December 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
Balance, beginning $577,299 $455,000 $416,629
Provision 120,000 139,194 135,000
Net recovery (charge-off) 85,526 (16,895) (96,629)
-------- -------- --------
Balance, ending $782,825 $577,299 $455,000
======== ======== ========
The provision for loan losses charged to expense is based upon past loan
and loss experience and an evaluation of probable losses in the current
loan and lease portfolio, including the evaluation of impaired loans under
SFAS Nos. 114 and 118. A loan is considered to be impaired when, based
upon current information and events, it is probable that the Company will
be unable to collect all amounts due according to the contractual terms of
the loan. An insignificant delay or shortfall in amount of payments does
not necessarily result in the loan being identified as impaired. For this
purpose, delays less than 90 days are considered to be insignificant. As
of December 31, 1997, 100% of the impaired loan balance was measured for
impairment based on the fair value of the loans' collateral. Impairment
losses are included in the provision for loan losses. SFAS Nos. 114 and
118 do not apply to large groups of smaller balance homogeneous loans that
are collectively evaluated for impairment, except for those loans
restructured under a troubled debt restructuring. Loans collectively
evaluated for impairment include consumer loans and residential real
estate loans and are not included in the data that follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
<S> <C> <C>
Impaired loans with no related reserve
for loans losses calculated under SFAS No. 114 $1,274,436 $1,292,178
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1997 1996
<S> <C> <C>
Average impaired loans $1,283,307 $1,298,291
Interest income recognized on impaired loans 109,092 97,485
</TABLE>
No cash basis interest income was recognized in 1997 or 1996 for the
impaired loans included above. Nonaccrual loans for which interest has
been fully reserved totaled approximately $716,000 and $2,999,000 at
December 31, 1997 and 1996, respectively.
The Company originates and purchases fixed and adjustable interest rate
loans and mortgage-backed securities. At December 31, 1997 fixed rate
loans and mortgage-backed securities were approximately $160,000,000, and
adjustable interest rate loans and mortgage-backed securities were
approximately $48,000,000.
As of December 31, 1997, the Company had approximately $761,000, in
outstanding loan commitments with interest rates ranging from 6.25% to
8.125%. These commitments are subject to normal credit risk and have
commitment terms of ninety days or less.
F-12
<PAGE>
Certain directors and officers of the Company have loans with the Company.
Such loans were made in the ordinary course of business and do not
represent more than a normal risk of collection. Total loans to these
persons amounted to $1,225,906, $1,164,350 and $1,011,544, at December 31,
1997, 1996 and 1995, respectively. Current year originations to these
persons were $159,500, $335,000 and $319,950 for the years ended December
31, 1997, 1996 and 1995, respectively. Loan repayments for the years ended
December 31, 1997, 1996 and 1995 were $97,944, $182,194 and $61,381,
respectively.
6. ALLOWANCE FOR REAL ESTATE ACQUIRED THROUGH FORECLOSURE
The following summarizes the changes in the allowance for real estate
acquired through foreclosure losses:
December 31,
---------------------------
1997 1996 1995
Balance, beginning $46,265 $23,675 $ 1,847
Provision 46,265 21,828
Write-offs (33,506) (23,675)
------- ------- ------
Balance, ending $12,759 $46,265 $23,675
======= ======= =======
7. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized by major classification as
follows:
December 31,
--------------------------
1997 1996
Land $ 528,052 $ 613,159
Buildings 2,735,719 3,360,845
Furniture and equipment 2,324,748 2,406,972
Leasehold improvements 87,623 87,623
----------- -----------
Total 5,676,142 6,468,599
Accumulated depreciation and amortization (4,172,128) (4,639,578)
----------- -----------
Net $ 1,504,014 $ 1,829,021
=========== ===========
F-13
<PAGE>
8. DEPOSITS
Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1997 1996
--------------------------- --------------------------
Weighted Weighted
Interest Interest
Amount Rate Amount Rate
<S> <C> <C> <C> <C>
NOW accounts $ 15,622,578 1.48 % $ 16,895,047 1.38%
Money Market Demand accounts 7,686,946 3.16 10,005,404 3.37
Passbook accounts 96,158,033 3.78 111,147,395 3.78
Certificate accounts 111,050,731 5.39 118,498,720 5.28
------------ ---- ------------ ----
Total $230,558,288 4.39% $256,546,566 4.30%
=========== ==== =========== ====
</TABLE>
At December 31, 1997 and 1996, the Company had deposits of $100,000 or
greater totaling approximately $23,621,000 and $19,800,000, respectively.
Deposits in excess of $100,000 are not federally insured.
In May 1997, the Bank sold approximately $37.5 million in deposits and two
branch buildings to a local financial institution. A gain of approximately
$2.2 million was realized on the sale.
While frequently renewed at maturity rather than paid out, certificate
accounts were scheduled to mature contractually within the following
periods:
December 31,
---------------------------
1997 1996
1 year or less $ 89,887,477 $ 54,251,167
1 year - 3 years 17,715,478 40,683,493
3 years - 5 years 3,447,776 23,564,060
------------ ------------
Total $111,050,731 $118,498,720
============ ============
Interest expense on deposits is as follows:
Year Ended December 31,
---------------------------------------------
1997 1996 1995
NOW $ 508,567 $ 595,012 $ 787,473
Passbook 3,806,974 4,119,189 4,058,030
Certificates and MMDA 6,235,089 5,906,063 5,352,195
Early withdrawal penalties (12,472) (20,309) (25,067)
----------- ----------- -----------
Total $10,538,158 $10,599,955 $10,172,631
=========== =========== ===========
F-14
<PAGE>
9. FHLB ADVANCES
Federal Home Loan Bank advances at December 31, 1997 and 1996 were
$7,884,000. Advances are collateralized under a blanket collateral lien
agreement. Advances at December 31, 1997 have maturity dates as follows:
1998, $6,000,000 and 2008, $1,884,000.
10. INCOME TAXES
In August 1996, the Small Business Job Protection Act (the "Act") was
signed into law. The Act repealed the percentage of taxable income method
of accounting for bad debts for thrift institutions effective for years
beginning after December 31, 1995. The Act required the Company, as of
January 1, 1996 to change its method of computing reserves for bad debts
to the experience method. The bad debt deduction allowable under this
method is available to small banks with assets less than $500 million.
Generally, this method allows the Company to deduct an annual addition to
the reserve for bad debts equal to the increase in the balance of the
Company's reserve for bad debts at the end of the year to an amount equal
to the percentage of total loans at the end of the year, computed using
the ratio of the previous six years' net charge-offs divided by the sum of
the previous six years' total outstanding loans at year end.
A thrift institution required to change its method of computing reserves
for bad debts treats such change as a change in a method of accounting
determined solely with respect to the "applicable excess reserves" of the
institution. The amount of the applicable excess reserves is taken into
account ratably over a six-taxable year period, beginning with the first
taxable year beginning after December 31, 1995. For financial reporting
purposes, the Company has not incurred any additional tax expense. At
December 31, 1997, under SFAS No. 109, deferred taxes were provided on the
difference between the book reserve at December 31, 1997 and the
applicable excess reserve in the amount equal to the Company's increase in
the tax reserve from December 31, 1987 to December 31, 1997. Retained
earnings at December 31, 1997 and 1996 includes approximately $5.4 million
of income for which no deferred income taxes will need to be provided.
Income tax expense consists of the following components:
Year Ended December 31: Federal State Total
1997 $ 1,870,200 $ 219,800 $ 2,090,000
1996 112,000 112,000
1995 741,500 145,400 886,900
F-15
<PAGE>
The Company's provision for income taxes (benefit) differs from the
amounts determined by applying the statutory federal income tax rate to
income before income taxes for the following reasons:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1997 1996 1995
----------------------- ---------------------- --------------------
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Tax at federal tax rate ................. $ 1,776,226 34.0 % $ (85,422) (34.0)% $788,526 34.0 %
Tax-exempt income (45,337) (0.9)
Decrease resulting from amortization
of goodwill premiums and discounts
related to an acquisition - net ....... (3,956) (0.1) (9,597) (3.8) (13,405) (0.6)
State income tax expense,
net of federal income tax ............ 145,068 2.8 95,832 4.1
Other ................................... 217,999 4.2 207,019 82.4 15,947 0.7
----------- ---- --------- ----- -------- ----
Total ................................... $ 2,090,000 40.0 % $ 112,000 44.6 % $886,900 38.2 %
=========== ==== ========= ==== ======== ====
</TABLE>
Items that give rise to significant portions of the deferred tax accounts
are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
<S> <C> <C>
Deferred tax assets:
Deferred loan fees $ 419,157 $ 441,773
Allowance for loan losses 1,817
Reserve for uncollected interest 29,597 67,070
Supplemental pension 194,515 131,781
Property 13,643 1,002
----------- -----------
658,729 641,626
----------- -----------
Deferred tax liabilities:
State taxes (568,412) (457,086)
Unrealized gain on investments and mortgage-backed securities (716,032) (378,442)
Other (190,807) (187,921)
Allowance for loan losses (103,627)
----------- -----------
(1,475,251) (1,127,076)
----------- -----------
Total $ (816,522) $ (485,450)
=========== ===========
</TABLE>
11. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
F-16
<PAGE>
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of tangible and core capital (as defined in the regulations)
to total adjusted assets (as defined), and of risk-based capital (as
defined) to risk-weighted assets (as defined). Management believes, as of
December 31, 1997, that the Bank meets all capital adequacy requirements
to which it is subject.
As of December 31, 1997, the most recent notification from the Office of
Thrift Supervision categorized the Bank as well-capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well-capitalized, the Bank must maintain minimum tangible, core and
risk-based ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
Bank's category. The Bank's actual capital amounts and ratios are
presented in the table, in thousands.
<TABLE>
<CAPTION>
Well Capitalized
Required for Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
------------------ ---------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
At December 31, 1997:
<S> <C> <C> <C> <C> <C> <C>
Tangible $25,828 9.5 % $ 4,074 1.5 % N/A N/A
Core (Leverage) 25,828 9.5 8,148 3.0 $13,580 5.0 %
Tier 1 risk-based 25,828 27.7 N/A N/A 16,296 6.0
Total risk-based 26,611 28.6 7,438 8.0 9,298 10.0
</TABLE>
<TABLE>
<CAPTION>
Well Capitalized
Required for Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
----------------- ------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1996:
Tangible $23,314 7.9 % $ 4,383 1.5 % N/A N/A
Core (Leverage) 23,314 7.9 8,766 3.0 14,603 5.0%
Tier 1 risk-based 23,314 22.6 N/A N/A 6,170 6.0
Total risk-based 23,392 22.8 5,141 8.0 10,283 10.0
</TABLE>
Capital for financial statement purposes differs from tangible, core
(leverage), and Tier 1 risk-based capital amounts by $1,082,000
representing the exclusion of unrealized gain on securities available for
sale and $1,560,000 representing the exclusion of capital of the holding
company at December 31, 1997 and $735,000 representing the exclusion of
unrealized gain on securities available for sale at December 31, 1996.
Capital for financial statement purposes differs from total risk-based
capital amounts by the exclusion of the allowance for loan losses from
the risk-based capital calculation.
12. PENSION AND PROFIT-SHARING PLANS
The Company has a defined benefit pension plan which covers all eligible
employees. The plan may be terminated at any time at the discretion of the
Board of Directors. Benefits under the above are based upon years of
service and the employees' average compensation during the term of
employment. The Company's policy is to fund amounts as are necessary to at
least meet the minimum funding standards of ERISA.
F-17
<PAGE>
The following table sets forth the plan's net periodic pension cost at
December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 95,583 $ 88,388 $ 75,184
Interest cost on projected benefit obligation 102,712 89,080 79,938
Actual return on plan assets (81,150) (67,427) (55,841)
Net amortization and deferral (18,781) (23,430) (22,956)
---------- ---------- ----------
Net periodic pension cost $ 98,364 $ 86,611 $ 76,325
========== ========== ==========
</TABLE>
The following table sets forth the plan's prepaid pension asset at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
Actuarial present value of benefit obligations:
<S> <C> <C>
Vested benefits $ 1,271,669 $ 1,059,426
Nonvested benefits 6,598 17,353
----------- -----------
Accumulated benefit obligation 1,278,267 1,076,779
Effect of future salary increases 573,908 511,728
----------- -----------
Projected benefit obligation 1,852,175 1,588,507
Plan assets at fair value 1,630,786 1,422,891
----------- -----------
Plan assets less than projected benefit obligation (221,389) (165,616)
Unrecognized:
Prior service cost 186,611 (181,500)
Net loss from past experience 185,908 460,682
Net asset at date of transition (66,679) (74,145)
----------- -----------
Prepaid pension asset $ 84,451 $ 39,421
=========== ===========
</TABLE>
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation was 6.5% for the years ended December 31,
1997 and 1996. The expected long-term rate of return on assets was 6.5%
for 1997 and 1996. Plan assets consist primarily of certificates of
deposit at the Bank.
The Company also maintains a profit-sharing plan for eligible employees.
Profit-sharing contributions are at the discretion of the Board of
Directors. The contribution was $463,131 in 1997, $124,466 in 1996 and
$199,199 in 1995. Plan assets consist primarily of a diversified stock
portfolio.
13. EMPLOYEE STOCK OWNERSHIP PLAN
The Company has established an employee stock ownership plan (the "ESOP")
for the exclusive benefit of participating employees which purchased
14,000 shares of common stock of the Bank on December 31, 1992. In order
to make the purchase, the ESOP borrowed $140,000 on December 31, 1992 from
a financial institution. The debt was repaid in 1997.
F-18
<PAGE>
14. OTHER EMPLOYEE BENEFITS
Stock Option Plan - In 1992, the Board of Directors adopted the 1992 Stock
Option Plan (the "1992 Plan") to provide additional incentive to retain
officers, directors and key employees. Options granted under the 1992 Plan
were at the estimated fair value at the date of grant and vested over a
five year period. At December 31, 1997, 20,000 options are outstanding and
all are exercisable.
In 1994, the Board of Directors adopted the 1994 Stock Option Plan (the
"1994 Plan"). Options granted under the 1994 plan were at the estimated
fair value at the date of grant and vested immediately. At December 31,
1997, 20,000 options are outstanding and all are exercisable.
There have been no exercises, forfeitures, cancellations or additional
grants of options under either plan for each of the three years in the
period ended December 31, 1997. As the Company accounts for stock-based
compensation under the intrinsic value method, no compensation expense has
been recognized.
Management Recognition Plan - The Company's Board of Directors has also
adopted a Management Recognition Plan (the "MRP") effective December 31,
1992, the objective of which is to enable the Company to retain personnel
of experience and ability in key positions of responsibility. All
employees are eligible to receive benefits under the MRP. Benefits may be
granted at the sole discretion of a committee appointed by the Board of
Directors of the Company. The MRP is managed by trustees who are directors
of the Company and who have responsibility to invest all funds contributed
by the Company to the trust created for the MRP. The Company has
contributed 6,000 shares to the MRP Trust. Unless the MRP committee
specifies otherwise, the shares granted will be in the form of restricted
stock payable over a five-year period at the rate of 20% of such shares
per year following the date of grant of the award. Compensation expense in
the amount of the fair market value of the common stock at the date of the
grant to the employee will be recognized pro rata over the five years
during which the shares are payable. In December 1994, the Board approved
the contribution of an additional 6,000 shares to the MRP Trust. The
shares were contributed in January 1995. As of December 31, 1997, 6,000
shares have been allocated to individual employees.
Supplemental Retirement Benefits - In November 1995, the Company entered
into a Nonqualified Retirement and Death Benefit Agreement (the
"Agreement") with certain officers of the Company. The purpose of the
Agreement is to provide the officers with supplemental retirement benefits
equal to a specified percentage of final compensation and a preretirement
death benefit if the officer does not attain age 65. Total expense
relating to this benefit was approximately $184,512 and $91,800 for the
years ended December 31, 1997 and 1996, respectively.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the carrying amounts and the estimated fair
value of financial instruments is made in accordance with the requirements
of SFAS No. 107, Disclosures about Fair Value of Financial Instruments.
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies.
However, considerable judgment is necessarily required to interpret market
data to develop the estimates of fair value. Accordingly, the estimates
F-19
<PAGE>
presented herein are not necessarily indicative of amounts the Bank could
realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------------- -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 20,150,596 $ 20,150,596 $ 40,929,177 $ 40,929,177
Investments held to maturity 34,529,423 35,153,660 46,464,421 46,898,138
Investments available for sale 3,698,205 3,698,205 2,631,218 2,631,218
Mortgage-backed securities available for
sale 111,486,136 111,486,136 93,409,578 93,409,578
Loans receivable 96,280,105 98,205,707 98,626,173 99,612,435
Loans receivable available for sale 1,154,761 1,154,761 2,147,223 2,147,223
Federal Home Loan Bank stock 1,701,700 1,701,700 1,691,200 1,691,200
Liabilities:
NOW, MMDA and Passbook accounts 119,507,557 119,507,557 138,047,846 138,047,846
Certificate accounts 111,050,731 119,064,812 118,498,720 128,520,215
FHLB Advances 7,884,000 6,429,941 7,884,000 6,406,842
</TABLE>
Cash and Cash Equivalents - For cash and cash equivalents, the carrying
amount is a reasonable estimate of fair value.
Investment and Mortgage-backed Securities - Fair values are based on
quoted market prices or dealer quotes.
Loans Receivable - Fair values are based on broker quotes.
Federal Home Loan Bank Stock - Although FHLB Stock is an equity interest
in an FHLB, it is carried at cost because it does not have a readily
determinable fair value.
NOW, MMDA, Passbook, Certificate Accounts and FHLB Advances - The fair
value of NOW, MMDA and Passbook accounts is the amount payable on demand
at the reporting date. The fair value of certificate accounts and FHLB
Advances is estimated using rates currently offered for deposits and
advances of similar remaining maturities.
Commitments to Extend Credit and Letters of Credit - Fair values for
off-balance sheet commitments are based on fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standings. The fair value of
commitments is deemed immaterial for disclosures in the table above.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1997 and 1996.
Although management is not aware of any factors that would significantly
affect the fair value amounts, such amounts have not been comprehensively
revalued for purposes of these consolidated financial statements since
that date and, therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
F-20
<PAGE>
16. SAVINGS ASSOCIATION INSURANCE FUND
On September 30, 1996, an omnibus appropriations bill was enacted, which
included the recapitalization of the Savings Association Insurance Fund
(SAIF). Accordingly, all SAIF insured depository institutions were charged
a one-time special assessment on their SAIF-assessable deposits as of
March 31, 1995 at the rate of 65.7 basis points. Accordingly, the Bank
incurred a pre-tax expense of $1,533,127 in 1996.
17. CONVERSION AND REORGANIZATION OF THE COMPANY (UNAUDITED)
On February 18, 1998, the Board of Directors of the Company, the Bank and
FJF adopted a Plan of Conversion and Reorganization and Plan of Merger
(the "Plan"). Pursuant to the Plan, (i) the Company will convert first
into a federal stock holding company and then into an interim federal
stock savings bank. Following its conversion into an interim federal stock
savings bank, it will merge into the Bank with the Bank as the survivor;
(ii) FJF will convert to an interim federal stock savings institution and
merge with and into the Bank, pursuant to which FJF will cease to exist
and the 1,415,000 shares of the outstanding Company stock held by FJF will
be canceled. The Bank will then be acquired by Thistle Group Holdings,
Co., a newly created Pennsylvania chartered holding company, and become a
wholly owned subsidiary of Thistle Group Holdings, Co. The outstanding
public shares of the Company, which amount to $206,000 shares, will be
converted into Exchange Shares pursuant to the exchange ratio upon
completion of the Plan.
Pursuant to the Plan and in connection with the Conversion and
Reorganization, Thistle Group Holdings, Co. is offering shares of common
stock. A subscription offering of the shares of common stock will be
offered initially to eligible account holders, employee benefit plans of
the Company, their members, directors, officers and employees of the
Company. Any shares of common stock not sold in the subscription offering
are expected to be sold by the underwriter to eligible public stockholders
and then to certain members of the general public.
Upon completion of the conversion, the Bank will establish a liquidation
account in an amount equal to the greater of 100% of the Bank's retained
earnings at June 30, 1992, the date of the latest balance sheet contained
in the final offering circular utilized in the Bank's initial public
offering the FJF reorganization, 100% of the Bank's total stockholders'
equity as reflected in its latest balance sheet contained in the final
Prospectus utilized in the offering. The liquidation account will be
maintained for the benefit of eligible account holders who continue to
maintain their accounts at the Bank after the conversion. The liquidation
account will be reduced annually to the extent that eligible account
holders have reduced their qualifying deposits as of each anniversary
date. Subsequent increases will not restore the eligible account holder's
interest in the liquidation account. In the event of a complete
liquidation of the Bank, each eligible account holder will be entitled to
receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts
then held.
Conversion costs will be deferred and reduce the proceeds from the shares
sold in the conversion. If the conversion is not completed, all costs will
be charged as an expense. As of December 31, 1997, no conversion costs
have been incurred.
******
F-21
<PAGE>
<TABLE>
<CAPTION>
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<S> <C>
No dealer, salesman or other person has been authorized to give
any information or to make any representations not contained in
this Prospectus in connection with the offering made hereby, and,
if given or made, such information or representations must not be
relied upon as having been authorized by the Bank, the Company
or the Selling Agent. This Prospectus does not constitute an offer
to sell, or the solicitation of an offer to buy, any of the securities Up to 11,902,500 Shares
offered hereby to an person in any jurisdiction in which such
offer or solicitation would be unlawful. Neither the delivery of
this Prospectus by the Bank, th Mutual Holding Company, the
Mid-Tier Holding Company the Company or the Agent nor any
sale made hereunder shall in any circumstances create an
implication that there has been no change in the affairs of the
Bank, the Mutual Holding Company, the Mid-Tier Holding
Company or the Company since any of the dates as of which
information is furnished herein or since the date hereof. [Logo]
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TABLE OF CONTENTS
Page
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Summary..........................................................(i)
Selected Consolidated Financial and Other Data...................(x) Thistle Group Holdings, Co.
Recent Developments............................................(xii)
Management's Discussion and Analysis of
Recent Developments..........................................(xiv) (Proposed Holding Company for
Risk Factors.......................................................1 Roxborough-Manayunk Federal Savings Bank
Thistle Group Holdings, Co.........................................7
Thistle Group Holdings, Inc........................................7
Roxborough-Manayunk Federal Savings Bank...........................8 COMMON STOCK
FJF Financial, M.H.C...............................................9 par value $0.10 per share
Use of Proceeds................................................... 9
Dividend Policy...................................................10
Market for Common Stock...........................................11
Capitalization....................................................12 -------------
Historical and Pro Forma Capital Compliance.......................14
Pro Forma Data....................................................15
Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................20 PROSPECTUS
Business of the Company...........................................31
Business of the Bank..............................................31
Regulation........................................................54
Taxation..........................................................59 -------------
Management of the Company and the Mid-Tier Holding
Company.........................................................60
Management of the Bank............................................62
Beneficial Ownership of Mid-Tier Common Stock.....................74
Proposed Subscriptions by Directors and Executive Officers...... 75 SANDLER O'NEILL & PARTNERS, L.P.
The Conversion and Reorganization.................................76
Comparison of Stockholders' Rights................................94
Restrictions on Acquisition of the Company....................... 97
Description of Capital Stock of the Company......................100
Legal and Tax Matters............................................101
Experts..........................................................102 Dated May 14, 1998
Registration Requirements........................................102
Additional Information...........................................102
Index to Consolidated Financial Statements.......................103
Until the later of June 8, 1998, or 25 days after commencement
of the offering of Common Stock, all dealers effecting
transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a
Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
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