<PAGE> 1
Filed pursuant to Rule 424(b)(3)
Registration No. 333-63271
PROSPECTUS
SECURITY OF PENNSYLVANIA FINANCIAL CORP.
(Proposed Holding Company for
Security Savings Association of Hazleton)
1,314,450 SHARES OF COMMON STOCK
This offering is made as part of the plan of conversion of Security
Savings Association of Hazleton, Hazleton, Pennsylvania, from a mutual to a
stock association. In this conversion, the Association will become a wholly
owned subsidiary of Security of Pennsylvania Financial Corp., a Delaware
corporation. No shares will be sold if the minimum number of shares are not
subscribed for or if the necessary approvals from the banking regulatory
authorities and the members of the Association are not received.
There is currently no public market for the common stock. The Company
has applied for the common stock to be listed on the American Stock Exchange,
under the symbol "SPN", upon completion of the conversion.
Investing in the common stock involves certain risks. See "Risk
Factors" beginning on page 15.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE OFFICE OF
THRIFT SUPERVISION, THE PENNSYLVANIA DEPARTMENT OF BANKING OR ANY OTHER FEDERAL
AGENCY, NOR HAS SUCH OFFICE OR OTHER AGENCY PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. THE SHARES
ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS
ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY NOR ARE THEY INSURED
OR GUARANTEED BY THE ASSOCIATION OR THE COMPANY. THE COMMON STOCK IS SUBJECT TO
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL INVESTED.
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
971,550 1,314,450
PER SHARE SHARES SHARES
--------- ----------- -----------
<S> <C> <C> <C>
Public offering price.................. $10.00 $9,715,500 $13,144,500
Estimated underwriting commissions
and other expenses................ $ 733,500 $796,400
Estimated proceeds to Company.......... $8,982,000 $12,348,100
</TABLE>
The maximum number of shares to be sold may be increased up to the
adjusted maximum of 1,511,617 shares, a 15% increase above the maximum, if the
aggregate estimated pro forma market value of the common stock to be sold is
increased.
The shares are being offered in a Subscription Offering to persons who
have specified priorities of subscription rights based on their relationship
with the Association. IN ORDER TO PURCHASE SHARES PURSUANT TO A SUBSCRIPTION
RIGHT, YOU MUST SUBMIT A PROPERLY COMPLETED SUBSCRIPTION ORDER FORM AND
CERTIFICATION, TOGETHER WITH PAYMENT FOR THE SHARES, TO THE ASSOCIATION PRIOR TO
THE EXPIRATION DATE, 12:00 NOON, EASTERN TIME, ON DECEMBER 14, 1998, UNLESS
EXTENDED.
To the extent sufficient shares to complete the conversion are not sold
in the Subscription Offering, the remaining shares will be offered for sale in a
Community Offering and, if necessary, a Syndicated Community Offering or other
offering. The Community Offering may be commenced prior to completion of the
Subscription Offering.
Sandler O'Neill & Partners, L.P. has agreed to assist the Company in
selling the shares, but does not guarantee that at least the minimum number of
shares will be sold. Sandler O'Neill & Partners, L.P. is not obligated to take
or purchase any of the shares offered hereby.
----------------------------------------------------
SANDLER O'NEILL & PARTNERS, L.P.
----------------------------------------------------
The date of this Prospectus is
November 16, 1998.
<PAGE> 2
INSERT MAP PAGE HERE
2
<PAGE> 3
SUMMARY
This summary highlights selected information from this document and
does not contain all the information that you need to know before making an
informed investment decision. To understand the stock offering fully, you should
read carefully this entire Prospectus, including the financial statements and
the notes to the financial statements of Security Savings Association of
Hazleton included elsewhere herein. References in this document to the
"Association" refer to Security Savings Association of Hazleton. References in
this document to the "Company" refer to Security of Pennsylvania Financial Corp.
SECURITY OF PENNSYLVANIA
FINANCIAL CORP................. The Company was recently organized to
become a savings and loan holding
company and own all of the capital
stock of the Association to be issued
upon its conversion from mutual to
stock form. To date, the Company has
not engaged in any business.
The Company's office is located at 31
W. Broad Street, Hazleton,
Pennsylvania and its telephone number
is (717) 454-0824. The Association's
executive office has the same address
and phone number.
SECURITY SAVINGS ASSOCIATION
OF HAZLETON.................... The Association is a Pennsylvania
chartered mutual savings and loan
association. At June 30, 1998, the
Association had total assets of
$112.0 million, total deposits of
$102.6 million and total equity of
$9.2 million.
The Association operates four banking
offices in Luzerne and Carbon
counties in Northeast Pennsylvania.
The Association historically has
operated as a community-oriented
banking institution offering
primarily one- to four-family
residential mortgage loans, consumer
loans and a variety of retail deposit
products.
THE CONVERSION................... The Association has adopted a Plan of
Conversion, as amended (the "Plan"),
which is subject to requirements of
the Office of Thrift Supervision (the
"OTS") and the Pennsylvania
Department of Banking (the
"Pennsylvania Department"). The
conversion, which hereafter is
referred to as the "Conversion," is
governed by the Plan and has three
major components, as follows:
(i) The conversion of the Association
to stock form;
(ii) The acquisition by the Company
of all of the outstanding capital
stock of the Association;
(iii) The sale by the Company of its
common stock, par value $0.01 per
share (the "Common Stock").
As a result of the Conversion,
members of the Bank will no longer
have voting rights. All voting rights
of the Bank will be vested in the
Company as the sole stockholder of
the Bank. Voting rights of the
Company will be vested in the holders
of the Common Stock.
SECURITY SAVINGS CHARITABLE
FOUNDATION................... The Association intends to establish
a charitable foundation, Security
Savings Charitable Foundation, or the
"Foundation." The Company intends to
contribute to the Foundation common
stock equal to 5% of the common stock
sold in the
3
<PAGE> 4
conversion. The authority for the affairs of
the Foundation is vested in its Board of
Directors, all but one of whom will be
existing Directors or officers of the Company
and the Association. All shares held by the
Foundation will be required to be voted in the
same ratio as all other shares of the Common
Stock on all proposals considered by
stockholders of the Company.
TERMS OF THE OFFERING ......... The shares of Common Stock are
offered at a fixed price of $10.00
per share (the "Purchase Price") in
the Subscription Offering pursuant to
subscription rights in the following
order of priority to:
(i) Eligible Account Holders in the
Association as of March 31, 1997;
(ii) the Security Savings Association
of Hazleton Employee Stock Ownership
Plan (the "ESOP");
(iii) Supplemental Eligible Account
Holders in the Association as of
September 30, 1998 who are not
entitled to a first priority
subscription right; and
(iv) Other Members in the Association
as of November 5, 1998 who are not
entitled to a higher priority
subscription right. See "The
Conversion--Subscription Offering and
Subscription Rights" for the complete
qualifications of each of the
subscription right priorities.
Shares of Common Stock not subscribed
for by persons having priority
subscription rights will be offered
to certain members of the general
public with preference given to
natural persons residing in all
counties in which the Association has
its home office or a branch office,
all zip codes corresponding to the
Association's delineated Community
Reinvestment Area service area and
each county's metropolitan
statistical area, in a Community
Offering.
EXPIRATION DATE OF
SUBSCRIPTION OFFERING ....... Subscription rights will expire if
not exercised and all orders to
purchase Common Stock in the
Subscription Offering must be
received by 12:00 noon, Eastern time,
on December 14, 1998, unless extended
for up to 45 days by the Association
or such additional periods with the
approval of the OTS, if required,
which is the "Expiration Date."
NONTRANSFERABILITY OF
SUBSCRIPTION RIGHTS ......... The subscription rights are not transferable.
NUMBER OF SHARES OFFERED ...... The Company is offering between a
minimum of 971,550 shares and a
maximum of 1,314,450 shares of Common
Stock, or up to an adjusted maximum
of 1,511,617 shares if the maximum
number of shares is increased.
The number of shares offered is based
upon an independent appraisal
prepared by Keller & Company, Inc.
("Keller") dated as of August 14,
1998, and updated on October 23,
1998, which estimated that the
aggregate pro forma market value of
the Common Stock to be sold ranged
from $9.7 million to $13.1 million.
(This range is referred to as the
"Estimated Price Range"). No sale of
shares of Common Stock may be
consummated unless, prior to such
consummation, Keller confirms to the
Association and the OTS that, to the
best of its knowledge, nothing of a
material nature has occurred which,
taking into account all relevant
4
<PAGE> 5
factors, would cause Keller to
conclude that the value of the Common
Stock at the price so determined is
incompatible with its estimate of the
pro forma market value of the Common
Stock at the conclusion of the
Subscription Offering. For its
services in making such appraisal,
Keller will receive a fee of $21,000.
Keller is an independent appraisal
firm experienced in appraisals of
savings institutions. Establishing
the Foundation in connection with the
Conversion will result in a lower
aggregate market valuation than if
the Conversion were completed without
the Foundation.
The final aggregate estimated pro
forma market value of the Common
Stock to be sold will be determined
at the time of closing of the
Subscription Offering, or if all
shares are not sold in the
Subscription Offering, the closing of
the Community Offering or other
subsequent offering. The Subscription
Offering, Community Offering and any
other subsequent offerings are
referred to collectively as the
"Offerings." Such estimated aggregate
pro forma market value is subject to
change due to changes in market and
general financial and economic
conditions.
The maximum number of shares to be
sold may be increased up to the
adjusted maximum, a 15% increase
above the maximum, if the aggregate
estimated pro forma market value of
the Common Stock to be sold is
increased.
HOW DO I ORDER STOCK? ......... If you are entitled to a subscription
right, you may order shares in the
Subscription Offering by delivering
to the Association a properly
executed stock order form and
certification ("order form") together
with full payment for the shares
ordered on or prior to the Expiration
Date. ONCE TENDERED, SUBSCRIPTION
ORDERS CANNOT BE REVOKED OR MODIFIED
WITHOUT THE CONSENT OF THE
ASSOCIATION. All order forms must be
accompanied or preceded by a
Prospectus. Please make sure you
review the Prospectus carefully prior
to submitting an order form. To
ensure that each purchaser receives a
Prospectus at least 48 hours prior to
the Expiration Date in accordance
with Rule 15c2-8 of the Securities
Exchange Act of 1934, as amended (the
"Exchange Act"), no Prospectus will
be mailed any later than five days
prior to the Expiration Date or hand
delivered any later than two days
prior to such date. The Association
is not obligated to accept
subscriptions not submitted on an
original stock order form.
Persons wishing to order shares
offered in the Community Offering
also must submit a properly executed
order form and certification prior to
the expiration date to be set for the
Community Offering.
FORM OF PAYMENT
FOR SHARES ................. Payment for subscriptions may be made:
(i) in cash (if delivered in person
at any banking office of the
Association);
(ii) by check, bank draft or money
order; or
(iii) by authorization of withdrawal
from deposit accounts maintained at
the Association.
5
<PAGE> 6
NUMBER OF SHARES THAT MAY
BE ORDERED ................. Minimum: 25 shares ($250).
Maximum:
- No Eligible Account Holder,
Supplemental Eligible Account Holder
or Other Member may purchase in the
Subscription Offering more than
$150,000 of Common Stock.
- No person, together with associates
or persons acting in concert with
such person, may purchase in the
Community Offering more than $150,000
of Common Stock.
- No person, together with associates
or persons acting in concert with
such person, may purchase in the
aggregate more than $150,000 of the
Common Stock to be sold. However, the
ESOP may purchase up to 10% of the
Common Stock to be issued in connection
with the Conversion, including shares
issued to the Foundation. It is intended
that the ESOP will purchase 8% of the
Common Stock issued, including shares
issued to the Foundation.
USE OF PROCEEDS ............... The Company will use 50% of the net
proceeds from the sale of Common
Stock to purchase all of the Common
Stock of the Association to be issued
in the Conversion. The portion of net
proceeds retained by the Company will
be used for general business
activities, including the lending of
funds to the ESOP (to the extent such
loan is not funded by a third party)
to enable the ESOP to purchase up to
8% of the stock issued in connection
with the Conversion, including shares
issued to the Foundation. The Company
intends initially to invest the
remaining net proceeds in federal
funds and securities, primarily
mortgage-related securities and
federal agency obligations. The
Association intends to utilize the
net proceeds from the sale of its
stock to the Company for general
business purposes, including
investment in loans and
mortgage-related securities.
DIVIDEND POLICY ............... No decision has been made by the
Company with respect to the payment
of dividends if any. Additionally, in
connection with the Conversion, the
Company and the Association have
committed to the OTS that during the
one-year period following the
Conversion, the Company will not take
any action to further any
distribution to stockholders that,
for federal tax purposes, would be
treated as a return of capital
without the prior approval of the
OTS.
BENEFITS OF THE CONVERSION TO
MANAGEMENT .................. One of the advantages anticipated
from the Conversion will be the
ability to attract and retain
personnel through the use of
stock-related benefit programs. In
connection with the Conversion, the
Company intends to establish the
ESOP, which it is contemplated would
purchase stock equal to 8% of the
shares sold in the Conversion,
including shares issued to the
Foundation, using funds loaned to it
by the Company. The ESOP is a
tax-qualified retirement benefit plan
for all eligible employees. The
Common Stock purchased by the ESOP in
the Conversion will be required to be
allocated under Internal Revenue Code
of 1986, as amended (the "Code"),
standards to eligible employees of
the Company and the Association over
the term of the loan, currently
anticipated to be 12 years.
6
<PAGE> 7
Also, after the Conversion, the
Company intends to adopt a
Stock-Based Incentive Plan for the
benefit of directors, officers and
employees of the Company and
Association. If the Stock-Based
Incentive Plan is adopted within one
year after the Conversion, the plan
will be subject to stockholders'
approval at a meeting of stockholders
which may not be held earlier than
six months after the Conversion and
any awards or options granted under
the Plan would have to vest at least
on a pro rata basis over as five year
period.
The following table presents
information regarding the aggregate
of the shares of common stock, at the
maximum of the Estimated Price Range,
which would be acquired by the ESOP
and allocated over an anticipated 12
year period to all eligible employees
and the aggregate of all shares
available for award and issuance upon
the exercise of options granted under
the Stock-Based Incentive Plan:
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES ISSUED,
ESTIMATED INCLUDING
VALUE SHARES ISSUED TO
OF SHARES (1) THE FOUNDATION (2)
------------ -----------------
<S> <C> <C>
ESOP......................................... $ 1,104,000 8.0%
Stock-Based Incentive Plan:
Stock Awards (3)........................... $ 552,000 4.0
Stock Options (4).......................... -- 10.0
----------- ----
$1,656,000 22.0%
========== ====
</TABLE>
(1) Assumes shares are valued at
allocated to participants at $10.00
per share and that shares are sold in
the Offering at the maximum of the
Valuation Range.
(2) Percentages do not give effect to
the issuance of shares pursuant to
the exercise of options.
(3) Any Common Stock awarded under
the Stock-Based Incentive Plan will
be awarded at no cost to the
recipients.
(4) Stock options will be granted with an
exercise price equal to the fair market value
of Common Stock on the day of grant. Recipients
of stock options realize value only in the
event of an increase in the price of the Common
Stock following the date of grant of the stock
options.
Additionally, certain officers of the
Company and the Association will be
provided with employment agreements
or change in control agreements which
provide such officers with employment
rights and/or payments upon their
termination of service following a
change in control. The Stock-Based
Incentive Plan may also provide
participants with benefits upon a
change in control of the Company or
the Association.
VOTING CONTROL OF OFFICERS
AND DIRECTORS ............... Directors and executive officers of
the Association and the Company
expect to purchase approximately
7.42% or 5.50% of shares of Common
Stock to be issued in the Conversion,
including shares issued to the
Foundation, based on the estimated
minimum and maximum number of shares
issued, respectively. Additionally,
assuming the implementation of the
ESOP and the Stock-Based Incentive
Plan (and the exercise of all options
which may be granted under that
plan), directors, executive officers
and employees have the potential to
control the voting of approximately
29.42% or 27.50% of the Common Stock
to be issued in the Conversion,
including shares issued to the
Foundation, based on the minimum and
maximum of such shares, respectively.
Additionally, all shares held by the
Foundation will be required to be
voted in the same ratio as all other
shares of the Common Stock on all
proposals considered by stockholders
of the Company.
7
<PAGE> 8
NO BOARD RECOMMENDATIONS ...... The Association's and the Company's
Board of Directors make no
recommendation to depositors or other
potential investors regarding whether
such persons should purchase the
Common Stock. An investment in the
Common Stock must be made pursuant to
each investor's evaluation of his or
her best interests and financial
capability.
CONVERSION CENTER ............. If you have any questions regarding
the Conversion, please call the
Conversion Center at (717) 455-9805.
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<PAGE> 9
SELECTED FINANCIAL AND OTHER DATA OF THE ASSOCIATION
The selected financial and other data of the Association set forth
below is derived in part from, and should be read in conjunction with, the
Financial Statements of the Association and Notes thereto presented elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets.................................... $111,990 $107,447 $107,943 $104,326 $102,108
Cash and due from banks......................... 3,272 2,867 1,910 1,543 4,599
Interest-bearing deposits with banks............ 8,586 6,167 8,196 7,429 13,163
Loans, net (1).................................. 69,211 66,738 65,071 63,943 57,347
Securities held-to-maturity (2):
Mortgage-related securities, net.............. 2,281 4,706 5,565 6,414 7,577
Investment securities, net.................... 18,502 20,136 18,509 18,411 12,787
Securities available-for-sale (2):
Mortgage-related securities, net.............. 1,353 1,672 2,246 995 1,253
Investment securities, net................ 6,548 2,576 4,056 3,438 3,352
Deposits....................................... 102,604 98,465 99,348 96,398 94,817
Total equity................................... 9,231 8,583 8,325 7,741 7,004
Foreclosed real estate, net.................... 221 531 171 -- 107
Nonperforming assets and troubled debt
restructurings................................ 2,085 2,117 2,041 1,591 1,624
</TABLE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED JUNE 30,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income........................... $7,740 $7,440 $7,459 $7,121 $6,575
Interest expense................................ 4,260 4,029 4,230 3,717 3,373
------- ------- ------- ------- -------
Net interest income.......................... 3,480 3,411 3,229 3,404 3,202
Provision for loan losses....................... 176 34 102 249 46
-------- -------- -------- -------- ---------
Net interest income after provision
for loan losses........................... 3,304 3,377 3,127 3,155 3,156
Noninterest income:
Net gain on sale and calls of available-for-
sale securities........................... 1 17 -- -- --
Other........................................ 303 267 258 239 265
Noninterest expenses........................... 2,485 3,107(3) 2,426 2,378 2,101
------- ------- ------- ------- -------
Income before provision for income taxes....... 1,123 554 959 1,016 1,320
Provision for income taxes..................... 506 344 362 366 506
-------- -------- -------- -------- --------
Net income................................... $ 617 $ 210 $ 597 $ 650 $ 814
======= ======= ======= ======= =======
</TABLE>
(See footnotes on next page)
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<PAGE> 10
<TABLE>
<CAPTION>
AT OR FOR THE FISCAL YEAR ENDED JUNE 30,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING RATIOS AND OTHER DATA (4):
PERFORMANCE RATIOS:
Average yield on interest-earning assets (5) ......... 7.40% 7.28% 7.28% 7.32% 7.42%
Average rate paid on interest-bearing liabilities .... 4.24 4.11 4.31 3.91 3.65
Average interest rate spread (6) ..................... 3.16 3.17 2.97 3.41 3.77
Net interest margin (7) .............................. 3.33 3.34 3.15 3.50 3.61
Ratio of interest-earning assets to
interest-bearing liabilities ....................... 104.27 104.22 104.31 102.36 95.90
Net interest income after provision for loan
losses to noninterest expense ...................... 132.96 108.69 128.90 132.67 150.21
Noninterest expense as a percent of
average assets ..................................... 2.26 2.91 2.27 2.31 2.11
Return on average assets ............................. 0.56 0.20 0.56 0.63 0.82
Return on average equity ............................. 6.89 2.52 7.40 8.81 11.97
Ratio of average equity to average assets ............ 8.16 7.79 7.56 7.17 6.83
REGULATORY CAPITAL RATIOS: (8)
Tangible capital ratio ............................... 8.35 8.13 7.89 7.59 7.11
Core capital ratio ................................... 8.35 8.13 7.89 7.59 7.11
Risk-based capital ratio ............................. 16.92 21.70 21.15 18.31 16.85
ASSET QUALITY RATIOS:
Nonperforming loans and troubled debt
restructurings as a percent of total loans (9) ..... 2.69 2.38 2.87 2.49 2.65
Nonperforming assets and troubled debt
restructurings as a percent of total assets (10) ... 1.86 1.97 1.89 1.53 1.59
Allowance for loan losses as a percent
of total loans ..................................... 0.65 0.64 0.69 0.63 0.37
Allowance for loan losses as a percent of
nonperforming loans and troubled debt
restructurings (1)(9) .............................. 24.25 27.05 23.90 25.20 14.17
Net loans charged-off to average interest-
earning loans ...................................... 0.22 0.05 0.02 0.09 0.05
FULL SERVICE OFFICES AT END OF PERIOD ................... 4 4 4 4 4
</TABLE>
(1) Loans, net, represents gross loans receivable net of the allowance for loan
losses, loans in process and deferred loan origination fees. The allowance
for loan losses at June 30, 1998, 1997, 1996, 1995 and 1994 was $452,000,
$429,000, $447,000, $401,000 and $215,000, respectively.
(2) The Association adopted Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," during fiscal 1994.
(3) Includes a one-time special assessment of $620,000 in order to recapitalize
the Savings Association Insurance Fund ("SAIF") in fiscal 1997.
(4) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based on
average monthly balances during the indicated periods.
(5) Calculations of yield for tax-exempt investments are not presented on a tax
equivalent basis due to the average balance of tax-exempt investments in
1998 not being material. There were no securities exempt from federal or
state taxes in previous years.
(6) The average interest rate spread represents the difference between the
weighted average yield on average interest-earning assets and the weighted
average cost of average interest-bearing liabilities.
(7) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(8) For definitions and further information relating to the Association's
regulatory capital requirements, see "Regulation--Federal Regulation of
Savings Institutions--Capital Requirements." See "Regulatory Capital
Compliance" for the Association's pro forma capital levels as a result of
the Offerings.
(9) Non-performing loans consist of all nonaccrual loans and all other loans 90
days or more past due. It is the policy of the Association to cease
accruing interest on loans 90 days or more past due (unless the loan
principal and interest are determined by management to be fully secured and
in the process of collection) and to charge off all accrued interest. See
"Business of the Association--Delinquent Loans, Classified Assets and
Foreclosed Real Estate."
(10) Non-performing assets consist of non-performing loans and foreclosed real
estate.
10
<PAGE> 11
RECENT DEVELOPMENTS
The selected financial and other data presented below at September 30,
1998 and for the three month periods ended September 30, 1998 and 1997 are
derived from unaudited financial data, but, in the opinion of management,
reflect all adjustments (consisting only of normal recurring adjustments) which
are necessary to present fairly the results for such interim periods. The
results of operations for the three months ended September 30, 1998 are not
necessarily indicative of the results of operations that may be expected for the
fiscal year ending June 30, 1999.
<TABLE>
<CAPTION>
AT A
SEPTEMBER 30, JUNE 30,
------------ -----------
1998 1998
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
SELECTED FINANCIAL DATA:
Total assets............................... $109,972 $111,990
Cash and due from banks.................... 1,972 3,272
Interest-bearing deposits with banks....... 8,670 8,586
Loans, net (1)............................. 68,846 69,211
Securities held-to-maturity:
Mortgage-related securities, net........ 1,891 2,281
Investment securities, net.............. 17,097 18,502
Securities available-for-sale:
Mortgage-related securities, net........ 1,613 1,353
Investment securities, net.............. 7,316 6,548
Deposits................................... 100,288 102,604
Total equity............................... 9,478 9,231
Foreclosed real estate, net................ 256 221
Nonperforming assets and troubled debt
restructurings............................ 1,961 2,085
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
----------------------
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
SELECTED OPERATING DATA:
Total interest income............................ $1,919 $1,897
Interest expense................................. 1,085 1,048
------ ------
Net interest income........................... 834 849
Provision for loan losses........................ 2 8
------ ------
Net interest income after provision
for loan losses............................ 832 841
Noninterest income............................... 81 84
Noninterest expenses............................. 623 580
------ ------
Income before provision for income taxes......... 290 345
Provision for income taxes....................... 92 138
------ ------
Net income.................................... $ 198 $ 207
====== ======
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
AT OR FOR THE THREE
MONTHS ENDED
SEPTEMBER 30,
---------------------------
1998 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
SELECTED OPERATING RATIOS AND OTHER DATA (2):
PERFORMANCE RATIOS:
Average interest rate spread (3).................................... 2.93% 3.15%
Net interest margin (4)............................................. 3.13 3.31
Ratio of interest-earning assets to interest-bearing liabilities.... 104.84 103.85
Noninterest expense as a percent of average assets.................. 2.24 2.15
Return on average assets............................................ 0.71 0.77
Return on average equity............................................ 8.48 9.51
Ratio of average retained equity to average assets.................. 8.39 8.06
Retained earnings to total assets at end of period.................. 8.62 8.20
REGULATORY CAPITAL RATIOS: (5)
Tangible capital ratio.............................................. 8.67 8.30
Core capital ratio.................................................. 8.67 8.30
Risk-based capital ratio............................................ 16.99 23.04
ASSET QUALITY RATIOS:
Nonperforming loans and troubled debt restructurings
as a percent of total loans (6).................................. 2.48 2.71
Nonperforming assets and troubled debt restructurings
as a percent of total assets (7)................................. 1.78 2.17
Allowance for loan losses as a percent of total loans .............. 0.65 0.63
Allowance for loan losses as a percent of nonperforming loans and
troubled debt restructurings ..................................... 26.22 23.16
FULL SERVICE OFFICES AT END OF PERIOD.................................. 4 4
</TABLE>
(1) Loans, net, represents gross loans receivable net of the allowance for loan
losses, loans in process and deferred loan origination fees. The allowance
for loan losses at September 30, 1998 and 1997 was $447,000 and $427,000,
respectively.
(2) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based on
average monthly balances during the indicated periods and are annualized
where appropriate.
(3) The average interest rate spread represents the difference between the
weighted average yield on average interest-earning assets and the weighted
average cost of average interest-bearing liabilities.
(4) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(5) For definitions and further information relating to the Association's
regulatory capital, see "Regulation--Federal Regulation of Savings
Institutions--Capital Requirements." See "Regulatory Capital Compliance"
for the Association's pro forma capital levels as a result of the
Offerings.
(6) Non-performing loans consist of all nonaccrual loans and all other loans 90
days or more past due. It is the policy of the Association to cease
accruing interest on loans 90 days or more past due (unless the loan
principal and interest are determined by management to be fully secured and
in the process of collection) and to charge off all accrued interest. See
"Business of the Association--Delinquent Loans, Classified Assets and
Foreclosed Real Estate."
(7) Non-performing assets consist of non-performing loans and foreclosed real
estate.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND JUNE 30, 1998.
Total assets decreased by $2.0 million, or 1.8%, from $112.0 million at
June 30, 1998 to $110.0 million at September 30, 1998. The decline in assets was
primarily due to a decrease of $1.3 million, or 39.7%, in cash and due from
banks and a $767,000 decrease in the investment securities portfolio.
Loans declined $365,000 from $69.2 million at June 30, 1998 to $68.8
million at September 30, 1998, a decrease of 0.5%. The decrease in loans was due
in significant part to many of the Association's customers refinancing at lower
rates with the Association's competitors. Many of these competitors are
significantly larger and have greater financial resources than the Association.
Nonperforming loans totalled $1.7 million at September 30, 1998 as compared to
$1.9 million at June 30, 1998, a decrease of $200,000, or 10.5%.
Total deposits decreased by $2.3 million, or 2.2%, from $102.6 million
at June 30, 1998 to $100.3 million at September 30, 1998. The decrease was
primarily due to the payment of $1.1 million on Christmas club accounts in
accordance with their terms. There was also an additional $1.2 million, or a
1.2%, decrease in total deposits from June 30, 1998 to September 30, 1998, also
the result of the competition the Association faces.
Total equity increased by $200,000, or 2.2%, from $9.2 million at June
30, 1998 to $9.4 million at September 30, 1998. The increase in equity was
primarily due to net income of $198,000 for the three months ended September 30,
1998.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
AND SEPTEMBER 30, 1997.
GENERAL. Net income for the three months ended September 30, 1998 was
$198,000, a decrease of $9,000, or 4.3%, from $207,000 for the three months
ended September 30, 1997. The $9,000 decrease was primarily attributable to a
decrease of $15,000 in net interest income, which reflected a decline in net
interest margin from 3.31% for the three months ended September 30, 1997 to
3.13% for the three months ended September 30, 1998. This decrease in net
interest income was offset by a $46,000 decrease in the provision for income
taxes. Also, contributing to the decrease in net income for the September 30,
1998 period was an increase of $43,000 in noninterest expenses.
INTEREST INCOME. Interest income for the three months ended September
30, 1998 and 1997 remained stable at $1.9 million. The average balance of loans
and the yields at September 30, 1998 and 1997 have remained essentially the
same.
INTEREST EXPENSE. Interest expense increased $37,000, or 3.5%, in the
three months ended September 30, 1998 compared to the three months ended
September 30, 1997. The increase in net expense was primarily the result of a
$2.7 million increase in the average balance of deposits from $98.9 million for
the three months ended September 30, 1997 to $101.6 million average balance for
the same period in 1998.
PROVISION FOR LOAN LOSSES. The Association's provision for loan losses
totalled $2,000 for the three months ended September 30, 1998 compared to $8,000
for the three months ended September 30, 1997, a decrease of $6,000. At
September 30, 1998 and 1997, nonperforming loans totalled $1.7 million and $1.8
million, respectively. At September 30, 1998, the ratio of nonperforming loans
and troubled debt restructurings as a percentage of loans was 2.48% compared to
2.71% at September 30, 1997. At September 30, 1998, the ratio of nonperforming
assets and troubled debt restructurings as percent of total assets was 1.78%
compared to 2.17% at September 30, 1997. Management calculates an allowance upon
the portfolio composition, asset classifications, potential impairments in the
loan portfolio, and other factors on a monthly basis. Management considered a
decrease in the provision for loan losses to be appropriate in 1998 based on a
review of these factors. Management believes that the allowance for loan losses
is currently reasonable and adequate to cover any known losses using the
information available to it. No
13
<PAGE> 14
assurances can be given that additions to the allowance will not be necessary
based on changes in economic and real estate market conditions, further
information obtained regarding known problem loans, identification of additional
problem loans and other factors.
NONINTEREST INCOME. Noninterest income decreased $3,000 to $81,000 for
the three months ended September 30, 1998, from $84,000 for the three months
ended September 30, 1997. Noninterest income decreased primarily due to a
decrease in loan fees and service charge income.
NONINTEREST EXPENSES. Noninterest expenses increased by $43,000, or
7.4% from $580,000 for the three months ended September 30, 1997, to $623,000
for the three months ended September 30, 1998. The increase was primarily due to
an increase of $26,000 in foreclosed real estate expenses due to an increased
number of loan foreclosures during the period. Compensation and employee
benefits expense also increased $13,000, or 4.1%, due to normal increases in
salaries as well as increases in benefit costs.
PROVISION FOR INCOME TAXES. Income tax expense was $92,000 for the
three months ended September 30, 1998, compared to $138,000 for the three months
ended September 30, 1997. The decline in income tax expense for 1998 was the
result of a combination of a decrease in pretax earnings and a decrease in the
effective income tax rate. Pretax earnings decreased by $55,000, or 15.9%, to
$290,000 for the three months ended September 30, 1998 from $345,000 for the
three months ended September 30, 1997. The effective tax rate decreased to 31.7%
for the three months ended September 30, 1998 from 40.0% for 1997, due to an
inordinately high effective tax rate in fiscal 1997 as a result of a one time
recognition of deferred tax liability for the recapture of certain of the
Association's bad debt reserve as a result of a change in federal income tax
law. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Comparison of Operating Results for the Fiscal Years
Ended June 30, 1998 and June 30, 1997--Provision for Income Taxes."
14
<PAGE> 15
RISK FACTORS
The following risk factors should be considered by investors in
deciding whether to purchase the Common Stock.
SENSITIVITY TO CHANGES IN INTEREST RATES
The Association's profitability is dependent to a large extent upon its
net interest income, which is the difference between its interest income on
interest-earning assets, such as loans and investments, and its interest expense
on interest-bearing liabilities, such as deposits and borrowings. Accordingly,
the Association's profitability will be significantly affected by changes in
market interest rates and its ability to manage its assets and liabilities in
response to such changes.
The Association anticipates that an increase in interest rates could
have an adverse effect on the Association. The Association primarily monitors
its interest rate sensitivity through the use of a model which estimates the
change in the Association's net portfolio value ("NPV") over a range of interest
rate scenarios. NPV is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. As of June 30, 1998, based on
assumptions utilized by the Association, it is estimated that a 200 basis point
increase in market interest rates would result in a 12% decrease in NPV,
compared to a 8% estimated increase in NPV as a result of a 200 basis point
decrease in market interest rates. NPV estimated changes do not provide a
precise forecast of the effect of changes in market interest rates on the
Association's net interest income. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Management of Interest Rate Risk
and Market Risk Analysis."
Increases in interest rates also could adversely affect the type
(fixed-rate or adjustable-rate) and amount of loans originated by the
Association and the average life of loans and securities which, in turn, could
adversely impact the yields earned on the Association's loan and securities
portfolios.
POTENTIAL LOW RETURN ON EQUITY FOLLOWING THE CONVERSION WHICH MAY NEGATIVELY
INFLUENCE MARKET PRICE AND LIQUIDITY
At June 30, 1998, the Association's ratio of equity to total assets was
8.2%. The Company's equity position will be significantly increased as a result
of the Conversion. On a pro forma basis as of June 30, 1998, assuming the sale
of Common Stock at the midpoint of the Estimated Price Range, the Company's
ratio of equity to assets would approximate 15.38%. The Company's ability to
invest this new capital in interest-earning assets, such as loans and
securities, which bear rates of return comparable to its current loans and
securities investments will be significantly affected by industry competition.
The Company currently anticipates that it will take time to prudently deploy
such capital. As a result, the Company's return on equity initially is expected
to be below its historical return on equity. For the year ended June 30, 1998,
the Association's return on average equity was 6.89%. The return on average
equity for peer group institutions for the four quarters ended June 30, 1998 was
7.63%. Such peer group consists of ten institutions, nine of which have
converted within the past five years, with an average asset size of $186.6
million and an average of just over four offices per institution. While the
Company anticipates that the return on equity it achieves after Conversion may
improve over time and may approach industry or peer averages in the future, no
assurances can be made that the Company will be able to generate a return on
equity which approaches the level of the industry or its peers. No assurances
can be made as to when or if the Company will achieve returns on its equity that
are comparable to industry peers or industry averages. Additionally, due to the
implementation of stock-based benefit plans such as the ESOP and Stock-Based
Incentive Plan, the Company's future compensation expense will be increased,
thereby, adversely affecting its net income and return on equity.
15
<PAGE> 16
WEAKNESS OF REGIONAL AND LOCAL ECONOMY
Economic conditions at the local and national levels, as well as
government policies and regulations concerning, among other things, monetary and
fiscal affairs, significantly affect the operations of financial institutions
such as the Association. The population of the market in which the Association
operates is relatively small and in recent years has remained relatively static.
In addition, the population of Luzerne County has one of the oldest average ages
of all counties in the United States and the unemployment rate in the
Association's market area is greater than the national average. According to
Pennsylvania Labor Market Information, as of July 1998, the unemployment rate
for the market area was 6.3% compared to the national level of 4.6%. The median
household income for 1997 for the market area was $29,130 compared to the
national level of $36,961. Further, because of the significant number of
financial institutions competing for funds in the market, the Association has
experienced increased competition for loan and deposit customers. Accordingly,
the Association could be exposed to a higher cost of funds and/or a decreased
net interest margin in the future.
LENDING RISKS
REAL ESTATE LOANS
ONE- TO FOUR-FAMILY LOANS. Due to the current relatively low interest
rate environment, a significant portion of the Association's originations of
one- to four-family real estate mortgage loans (65% during the first six months
of calendar 1998) relate to refinancings of existing mortgage loans either with
the Association or other lenders. Refinancing of existing loans at lower rates
tends to compress the Association's net interest margin and may result in
reduced profitability.
Commencing in 1996, the Association experienced an increase in the
aggregate amount of its nonperforming assets and troubled debt restructurings
which it attributes in significant part to a general decline in real estate
values in its market area during that period. Initially, the Association was
slow to handle the increased number of loans which warranted foreclosure. The
Association has improved its procedures for addressing delinquent loans. As a
result, its level of nonperforming assets at June 30, 1998 of 1.86% of total
assets is relatively high compared to its peer group, which as of June 30, 1998,
had an average level of nonperforming assets of 0.67% of total assets. The
Association anticipates that its level of nonperforming assets will decrease in
future periods. At June 30, 1998, loans 60-89 days delinquent had been reduced
to 0.18% of total loans compared to 1.14% at June 30, 1997.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LOANS. The Association's
multi-family and commercial real estate loans aggregated $4.8 million or 6.8% of
total loans at June 30, 1998. Multi-family and commercial real estate loans
generally are considered to have a higher degree of risk and involve larger
principal amounts than one- to four-family mortgage loans. In addition, because
multi-family and commercial real estate loans often are dependent on successful
operation and management of the properties, repayment of such loans may be
subject to adverse conditions in the real estate market or the economy to a
greater extent than one- to four-family loans.
CONSTRUCTION LOANS. At June 30, 1998, construction loans totalled
$523,000, or 0.8% of total loans. During fiscal 1998 the Association originated
$2.1 million of construction loans for one- to four-family properties, or 13.5%
of total loan originations for that year. Construction loans are generally
considered to involve a higher degree of credit risk than long-term financing on
improved, owner-occupied real estate because the risk of loss on such loans is
dependent largely upon the accuracy of the initial estimate of the property's
value at completion of construction or development compared to the estimated
cost (including interest) of construction. If the estimate of value proves to be
inaccurate, the property securing the loan, when completed, may have a value
which is insufficient to assure full repayment of the loan.
16
<PAGE> 17
CONSUMER LOANS
At June 30, 1998, the Association's consumer loan portfolio totalled
$9.9 million, or 14.2% of total loans. These consumer loans include home equity
loans and lines of credit, which although secured by one- to four-family real
property, generally are secured by a second lien rather than a first mortgage on
such property. In addition, consumer loans generally are dependent on the
borrower's continuing financial stability and, therefore, are more likely to be
adversely affected by unemployment, divorce, illness or personal bankruptcy.
COMMERCIAL LOANS
The Association does not currently originate any commercial loans.
However, the Association is actively considering the commencement of commercial
lending on a limited basis as part of the long-term deployment of proceeds from
the Conversion. The Association would only commence such commercial lending
after it hired an experienced commercial lending officer. Commercial loans are
generally considered to involve a higher degree of risk compared to first
mortgage loans on one- to four-family real property. Risk of loss on commercial
business lending is dependent in significant part on the business success of the
borrower and on general economic conditions in the region or industry in which
the borrower operates. Commercial business loans also require continued review
and evaluation regarding the performance of the borrower.
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
The Company intends to establish the Foundation and to contribute to it
shares of Common Stock equal to 5% of the shares to be sold in the Conversion.
Establishment of the Foundation is subject to the approval of the Association's
members at a special meeting of members (the "Special Meeting"). If approved by
members, the establishment of the Foundation will be dilutive to the voting and
ownership interests of stockholders and will have an adverse impact on the
operating results of the Company for its fiscal year ending June 30, 1999,
possibly resulting in an operating loss for that year.
DILUTION OF STOCKHOLDERS' INTERESTS. At the minimum, midpoint and
maximum of the Estimated Price Range, the contribution to the Foundation would
be 48,450, 57,000 and 65,550 shares, with a value of $484,500, $570,000 and
$655,500, respectively, based on the Purchase Price of $10.00 per share for the
shares of Common Stock to be sold in the Conversion. Upon completion of the
Conversion and establishment of the Foundation, the Company will have 1,380,000
shares issued and outstanding at the maximum of the Estimated Price Range, of
which the Foundation will own 65,550 shares, or 4.8% AS A RESULT, PERSONS
PURCHASING SHARES IN THE CONVERSION WILL HAVE THEIR OWNERSHIP AND VOTING
INTERESTS IN THE COMPANY DILUTED BY 4.8%. SEE "PRO FORMA DATA."
ADVERSE IMPACT ON EARNINGS. The Company will recognize an expense in
the amount of the contribution to the Foundation in the quarter in which it
occurs, which is expected to be the second quarter of fiscal 1999. Such expense
will reduce earnings and have a material adverse impact on the Company's
earnings for the fiscal year. The amount of the contribution will range from
$484,500 to $655,500, depending on the amount of Common Stock sold in the
Conversion. The contribution expense will be partially offset by the tax
deductibility of the expense. The Company has been advised by its independent
accountants that the contribution to the Foundation will be deductible for
federal income tax purposes, subject to a limitation based on 10% of the
Company's annual taxable income. Assuming a contribution of $655,500 in Common
Stock, based on the maximum of the Estimated Price Range, the Company estimates
a net tax effected expense of $393,000. If the Foundation had been established
at June 30, 1998, the Association would have reported net income of $224,000 for
fiscal 1998 rather than reporting net income of $617,000. In addition to the
contribution to the Foundation, the Association may in the future continue to
make ordinary charitable contributions within its community.
POSSIBLE NONDEDUCTIBILITY OF THE CONTRIBUTION. Based on the maximum of
the Estimated Price Range, the Company estimates that substantially all of the
contribution to the Foundation should be deductible for federal tax purposes
over the permissible six-year period. However, no assurance can be made that the
Company will have
17
<PAGE> 18
sufficient pre-tax income over the five-year period following the year in which
the contribution is initially made to fully utilize the carryover related to the
excess contribution. Furthermore, although the Company and the Association have
received an opinion of their independent accountants that the Company will be
entitled to the deduction for the contribution to the Foundation, there can be
no assurance that the Internal Revenue Service (the "IRS") will recognize the
Foundation as a Section 501(c)(3) exempt organization or that the deduction will
be permitted. In such event, there would be no tax benefit related to the
Foundation.
POTENTIAL ANTI-TAKEOVER EFFECT. If approved by the Association's
members, upon completion of the Conversion, the Foundation will own 4.8% of the
total shares of the Company's Common Stock outstanding. However, pursuant to the
terms of the contribution as mandated by the OTS, the shares of Common Stock
held by the Foundation must be voted in the same ratio as all other shares of
the Company's Common Stock on all proposals considered by the stockholders of
the Company. As a result, the Company does not believe the Foundation will have
an anti-takeover effect on the Company. In the event, however, that the OTS were
to waive this voting restriction and not impose other restrictions and
requirements with respect to the Foundation, the Foundation's board of directors
would exercise sole voting power over such shares. See "The
Conversion--Establishment of the Charitable Foundation--Regulatory Conditions
Imposed on the Foundation." If the Foundation's shares are combined with shares
purchased directly by officers and directors of the Company, shares held by the
proposed stock benefit plan, if approved by stockholders, and shares held in the
ESOP, the aggregate of such shares could exceed 20% of the Company's outstanding
Common Stock, which could enable management to defeat stockholder proposals
requiring 80% approval. Consequently, in the event the voting restriction was
waived, this potential voting control might preclude takeover attempts that
certain stockholders deem to be in their best interest, and might tend to
perpetuate management. Since the ESOP shares are allocated to all eligible
employees of the Association, and any unallocated shares will be voted by an
independent trustee, and because awards under the proposed stock benefit plan
may be granted to employees other than executive officers and directors,
management of the Company does not expect to have voting control of all shares
held or allocated by the ESOP or other stock benefit plans. See "--Certain
Anti-Takeover Provisions Which May Discourage Takeover Attempts--Voting Control
of Officers and Directors."
There will be no agreements or understandings, written or tacit, with
respect to the exercise of either direct or indirect control over the management
or policies of the Company by the Foundation which may discourage takeover
attempts, including agreements related to voting, acquisition or disposition of
the Company's Common Stock. Finally, as the Foundation sells its shares of
Common Stock over time, its ownership interest and voting power in the Company
are expected to decrease.
POTENTIAL CHALLENGES. The establishment and funding of a charitable
foundation as part of a conversion is innovative and has been done in only a
limited number of instances. As such, the Foundation may be subject to potential
challenges notwithstanding that the Boards of Directors of the Company and the
Association have carefully considered the various factors involved in the
establishment of the Foundation. See "The Conversion--Establishment of the
Charitable Foundation--Purpose of the Foundation." If anyone were to institute
an action seeking to require that the Association eliminate establishment of the
Foundation, no assurances can be made that the resolution of such action would
not result in a delay in the consummation of the Conversion or that any
objecting persons would not be ultimately successful in obtaining the
elimination of the Foundation or other equitable relief or monetary damages
against the Company or the Association. Additionally, if the Company and the
Association are forced to eliminate the Foundation, the Company may be required
to resolicit subscribers in the Offerings.
APPROVAL OF MEMBERS. Establishment of the Foundation is subject to the
approval of a majority of the total outstanding votes of the Association's
members eligible to be cast at a Special Meeting. The Foundation will be
considered as a separate matter from approval of the Plan of Conversion. If the
Association's members approve the Plan of Conversion, but not the establishment
of the Foundation, the Association intends to complete the Conversion without
the establishment of the Foundation. Failure to approve the Foundation may
materially increase the aggregate pro forma market value of the Common Stock to
be sold in the Conversion since the estimate of such amount takes into account
the dilutive impact of the issuance of shares to the Foundation. If the
aggregate pro forma market value of the Common Stock without the Foundation is
either greater than $15.1 million or less than $9.7 million, the
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<PAGE> 19
Association will establish a new Estimated Price Range and commence a
resolicitation of subscribers (i.e., subscribers will be permitted to continue
their orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
subscriptions funds will be promptly refunded with interest at the Association's
passbook rate of interest, or be permitted to increase, decrease or cancel their
subscriptions). Any change in the Estimated Price Range must be approved by the
OTS. See "The Conversion--Stock Pricing." A resolicitation, if any, following
the conclusion of the Subscription and Community Offerings would not exceed 45
days unless further extended by the OTS for periods of up to 90 days not to
extend beyond December 28, 2000.
HIGHLY COMPETITIVE INDUSTRY
The Association faces significant competition in its market area both
in attracting deposits and in originating loans. The population of the market is
relatively small and population growth is relatively static in the county in
which the Association is headquartered. This competition arises from commercial
banks, savings banks, mortgage brokers, mortgage banking companies, credit
unions, and other providers of financial services, many of which are
significantly larger than the Association and, therefore, have greater financial
and marketing resources than those of the Association. Also, many of such
competitors have a statewide or even a national presence. The Association's
competitive environment raises the possibility of the Association's need to
increase the rates paid and lower the yields on its deposits and loans,
respectively, in order to remain competitive, thus potentially reducing its
profitability. See "Business of the Association--Market Area and Competition."
FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION
The Association is subject to extensive federal and state regulation
and supervision as a state savings and loan association. In addition, the
Company, as a savings and loan holding company, is subject to regulation and
supervision. Such regulations, which affect the Association and the Company on a
daily basis, may be changed at any time, and the interpretation of the relevant
law and regulations is also subject to change by the authorities who examine the
Association and interpret those laws and regulations. Any change in the
regulatory structure or the applicable statutes or regulations, whether by the
OTS, the Pennsylvania Department, the Federal Deposit Insurance Corporation
("FDIC") or the Congress, could have a material impact on the Company, the
Association, its operations or the Association's Conversion. See "Regulation."
THRIFT RECHARTERING
The Deposit Insurance Funds Act of 1996 (the "Funds Act"), which was
enacted in September 1996, provides that the Bank Insurance Fund ("BIF") (the
deposit insurance fund that covers most commercial bank deposits) and the SAIF
will merge on January 1, 1999, if there are no more savings associations as of
that date. Several bills have been introduced in the current Congress that would
eliminate the federal thrift charter and the OTS. A bill originally reported by
the House Banking Committee would have required federal thrifts to become
national banks or state banks within two years of enactment or they would have
become national banks by operation of law. The OTS would have been abolished and
its functions transferred to the bank regulatory agencies. State savings
associations would have become subject to the same federal regulation as state
banks. The bill as passed by the House of Representatives, however, did not
provide for the elimination of the federal thrift charter or OTS or revise the
federal regulation of state associations, but did provide that unitary savings
and loan holding companies existing or applied for after March 31, 1998 would
not have the ability to engage in unlimited activities but would be subject to
the activities restrictions applicable to multiple savings and loan holding
companies. Unitary holding companies existing or applied for before such date
would be grandfathered and could continue to engage in unlimited activities and
could transfer the grandfather rights to acquirors of the holding company. The
Senate has not acted on the legislation but if such legislation is enacted, the
Company would not qualify for unlimited activities but would be subject to the
activities restrictions applicable to multiple savings and loan holding
companies. The Association is unable to predict whether the legislation will be
enacted or, given such uncertainty, determine the extent to which the
legislation, if enacted, would affect its business. The Association is also
unable to predict whether the SAIF and BIF will eventually be
19
<PAGE> 20
merged, the federal thrift charter eliminated or the regulation of state
associations revised, and what effect, if any, such legislation would have on
the Association.
STOCK-BASED BENEFITS TO MANAGEMENT AND DIRECTORS, EMPLOYMENT CONTRACTS AND
CHANGE IN CONTROL PAYMENTS
STOCK-BASED INCENTIVE PLAN. The Company intends to adopt a Stock-Based
Incentive Plan which would provide for the granting of options to purchase
Common Stock ("Stock Options"), awards of Common Stock ("Stock Awards"), and
certain related rights to eligible officers, employees and directors of the
Company and Association. While the Company currently anticipates granting Stock
Options and Stock Awards under a single plan, it may establish separate plans to
provide for such awards. In the event such plan is adopted within one year after
conversion, OTS regulations require the plan to be approved by stockholders at a
meeting of stockholders which may be held no earlier than six months after
completion of the Conversion. It is anticipated the Stock-Based Incentive Plan
will provide for the granting of options to purchase shares of Common Stock
equal to 10% of the shares of Common Stock issued in the Conversion, including
shares issued to the Foundation (102,000 shares and 138,000 shares at the
minimum and maximum of the Estimated Price Range, respectively) and the granting
of Stock Awards in an amount equal to 4% of the shares of Common Stock issued in
the Conversion, including shares issued to the Foundation (40,800 shares and
55,200 shares at the minimum and maximum of the Estimated Price Range,
respectively).
Under the Stock-Based Incentive Plan, Stock Awards would be granted in
the form of non-transferable, non-assignable shares of Common Stock. The shares
of Common Stock used as Stock Awards would be acquired by the Stock-Based
Incentive Plan or a trust established for the Stock-Based Incentive Plan, either
through open market purchases or from authorized but unissued Common Stock. The
Board of Directors intends to appoint an independent trustee who will vote
unallocated Stock Awards in the same proportion as it receives instructions from
recipients with respect to allocated shares which have not been earned and
distributed. The trustee will not vote allocated shares which have not been
distributed if it does not receive instructions from the recipient.
It is anticipated that the exercise price of Stock Options granted
under the Stock-Based Incentive Plan will be equal to the fair market value of
the underlying Common Stock on the date of grant. Such options will permit such
officers and directors to benefit from any increase in the market value of the
shares in excess of the exercise price at the time of exercise. Officers and
directors receiving Stock Options will not be required to pay for the shares
until the date of exercise. The granting of Stock Awards and the exercise of
non-statutory Stock Options (and disqualifying dispositions of stock acquired
through the exercise of incentive Stock Options) will result in additional
compensation expense to the Company and, accordingly, may result in an increase
in overall compensation expense in future periods. See "Management of the
Association--Other Benefit Plans."
Although no specific determinations have been made, the Company
anticipates that it will provide Stock Awards and/or Stock Options to directors,
officers and employees to the extent permitted by applicable regulations.
Current OTS regulations provide that, with respect to any non-tax qualified
stock benefit plan, such as the Stock-Based Incentive Plan, which is implemented
within one year after consummation of the Conversion, no individual may receive
more than 25% of the shares or options under any such plan and non-employee
directors may not receive more than 5% individually, or 30% in the aggregate, of
the shares or options awarded under any such plan. Such regulations also provide
that any awards granted under such a plan may not vest at a rate greater than
20% per year except in limited circumstances. It is also anticipated that the
Stock-Based Incentive Plan may under certain circumstances provide for cash
payments to participants in lieu of the benefit provided by the Stock Award or
Stock Option in the event of a change in control of the Company or Association.
The Board of Directors, in determining specific allocations and grants
of Stock Awards and Stock Options, will consider various factors, including but
not limited to, the financial condition of the Company, current and past
performance of plan participants and tax and securities law and regulation
requirements.
20
<PAGE> 21
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL PROVISIONS. Employment and
change in control agreements proposed to be entered into with certain officers
and the employee severance compensation plan expected to be adopted provide for
benefits and cash payments in the event of a change in control of the Company or
the Association. The provisions in such agreements and plan would provide the
recipient with a change in control payment in the event of the recipient's
involuntary or, in certain circumstances, voluntary termination of employment
subsequent to a change in control of the Company or the Association. In addition
to any payments which may be made under the Stock-Based Incentive Plan upon a
change in control, these provisions may have the effect of increasing the cost
of acquiring the Company, thereby discouraging future attempts to take over the
Company or the Association. Based on current salaries, cash payments to be paid
in the event of a change in control pursuant to the terms of the employment
agreements, change in control agreements and an employee severance compensation
plan would be approximately $1.1 million. However, the actual amount to be paid
in the event of a change in control of the Company or Association cannot be
estimated at this time because the actual amount is based on the average
compensation of the employee and other factors existing at the time of the
change in control. See "Management of the Association--Employment Agreements,"
"--Change in Control Agreements," "--Employee Severance Compensation Plan,"
"--Other Benefit Plans" and "Restrictions on Acquisition of the Company and the
Association--Restrictions in the Company's Certificate of Incorporation and
Bylaws."
POSSIBLE DILUTIVE EFFECT OF STOCK-BASED INCENTIVE PLAN
Following the Conversion, the Stock-Based Incentive Plan will acquire
an amount of shares equal to 4% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation, either through open
market purchases or the issuance of authorized but unissued shares of Common
Stock from the Company. If the Stock-Based Incentive Plan is funded by the
issuance of authorized but unissued shares, the voting interests of existing
stockholders at that time will be diluted by 3.8%. Also following the
Conversion, directors, officers and employees will be granted stock options
under the Stock-Based Incentive Plan in an amount equal to 10% of the Common
Stock issued in the Conversion, including shares issued to the Foundation. The
exercise of such Stock Options may be satisfied by the issuance of authorized
but unissued shares. If all of the Stock Options were to be exercised using
authorized but unissued Common Stock and the Stock Awards granted under the
Stock-Based Incentive Plan were funded with authorized but unissued shares, the
voting interests of existing stockholders at that time would be diluted at that
time by 12.3%.
CERTAIN ANTI-TAKEOVER PROVISIONS WHICH MAY DISCOURAGE TAKEOVER ATTEMPTS
PROVISIONS IN THE COMPANY'S AND THE ASSOCIATION'S GOVERNING
INSTRUMENTS. Certain provisions of the Company's Certificate of Incorporation
and Bylaws, particularly a provision limiting voting rights, and the
Association's Stock Articles of Incorporation and Bylaws, as well as certain
federal regulations, may assist the Company in maintaining its status as an
independent publicly owned corporation. These provisions provide for, among
other things, supermajority voting on certain matters, staggered boards of
directors, non-cumulative voting for directors, limits on the calling of special
meetings, limits on voting shares in excess of 10% of outstanding shares, and
certain uniform price provisions for certain business combinations. These
provisions in the Company's governing instruments may discourage potential proxy
contests and other potential takeover attempts, particularly those which have
not been negotiated with the Board of Directors, and thus, generally may serve
to perpetuate existing management. For a more detailed discussion of these
provisions, see "Restrictions on Acquisitions of the Company and the
Association."
VOTING CONTROL OF OFFICERS AND DIRECTORS. Directors and officers of the
Association and the Company expect to purchase approximately 7.42% or 5.50% of
the shares of Common Stock to be issued in the Conversion, including shares
issued to the Foundation, based upon the minimum and the maximum of the
Estimated Price Range, respectively. The ESOP may be viewed as giving directors,
officers and employees the potential to control the voting of an additional 8%
of the Company's Common Stock. In addition, the Foundation will be funded with a
contribution by the Company equal to 5% of the Common Stock sold in the
Conversion. If a waiver of the voting restriction imposed on such Common Stock
is obtained from the OTS and the OTS does not impose other restrictions, the
21
<PAGE> 22
Foundation shares may be voted as determined by the directors of the Foundation
who also will be directors or officers of the Company and Association.
Management's potential voting control could, together with additional
stockholder support, defeat stockholder proposals requiring 80% approval of
stockholders. As a result, this potential voting control may preclude takeover
attempts that certain stockholders deem to be in their best interest and may
tend to perpetuate existing management. See "Restrictions on Acquisition of the
Company and the Association--Restrictions in the Company's Certificate of
Incorporation and Bylaws."
ABSENCE OF MARKET FOR COMMON STOCK
The Company and the Association have never issued capital stock. The
Company has applied to have its Common Stock listed on the American Stock
Exchange ("AMEX") under the symbol "SPN" upon completion of the Conversion.
However, there can be no assurance that an active and liquid trading market for
the Common Stock will develop or, once developed, will continue, nor can there
be any assurances that purchasers of the Common Stock will be able to sell their
shares at or above the purchase price. The absence or discontinuance of a market
for the Common Stock would have an adverse impact on both the price and
liquidity of the Common Stock. See "Market for the Common Stock."
POSSIBLE INCREASE IN ESTIMATED PRICE RANGE AND NUMBER OF SHARES ISSUED
The number of shares to be issued in the Conversion, including shares
issued to the Foundation may be increased as a result of an increase in the
Estimated Price Range of up to 15% to reflect changes in market and financial
conditions following the commencement of the Subscription and Community
Offerings. In the event that the Estimated Price Range is so increased, it is
expected that the Company will issue up to 1,511,617 shares of Common Stock for
an aggregate purchase price of up to $15.1 million. An increase in the number of
shares issued will decrease a subscriber's pro forma net earnings per share and
stockholders' equity per share and will increase the Company's pro forma
consolidated stockholders' equity and net earnings. Such an increase will also
increase the purchase price as a percentage of pro forma stockholders' equity
per share and net earnings per share.
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
The Association has received an opinion of Keller that, pursuant to
Keller's Valuation, subscription rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members have no value. However,
such valuation is not binding on the IRS. If the subscription rights granted to
Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members are deemed to have an ascertainable value, receipt of such rights could
result in taxable gain to those Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members who receive and/or exercise the subscription
rights in an amount equal to such value. Additionally, the Association could
recognize a gain for tax purposes on such distribution. Whether subscription
rights are considered to have ascertainable value is an inherently factual
determination. See "The Conversion--Effects of Conversion" and "--Tax Aspects."
YEAR 2000 COMPLIANCE
As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Many existing application software products were
designed to accommodate only two-digits. For example, "96" is stored on the
system and represents 1996. The Association relies significantly on an outside
service bureau. The Association has not received any guarantee from the outside
service bureau that the bureau will be Year 2000 compliant. However, the service
bureau has completed its inventory and assessment of its Year 2000 compliance
and is scheduled to have resolved all identified problems by the end of 1998.
This will provide for a full year of testing for compliance. The Association has
also completed its inventory and assessment and has completed upgrading its
internal system to handle the Year 2000 problem. The Association currently is
testing its upgraded system and will perform extensive tests with the service
bureau system. The cost to the Association for the internal system upgrade, not
including staff time, has been
22
<PAGE> 23
less than $50,000. There can be no assurances, however, that the performance by
the Association and its service bureau will be effective to remedy all potential
problems. To the extent the Company's systems are not fully Year 2000 compliant,
there can be no assurance that potential systems interruptions or the cost
necessary to update software would not have a materially adverse effect on the
Company's business, financial condition, results of operations and business
prospects.
SECURITY OF PENNSYLVANIA FINANCIAL CORP.
The Company was organized in Delaware at the direction of the Board of
Directors of the Association for the purpose of acquiring all of the capital
stock to be issued by the Association in the Conversion. The Company has applied
to the OTS for approval to become a savings and loan holding company. The
Company will acquire the Common Stock of the Association and sell its Common
Stock only if such approval is received. As a savings and loan holding company,
the Company will be subject to regulation by the OTS. See "The
Conversion--General." Upon consummation of the Conversion, the Company will
conduct business initially as a unitary savings and loan holding company. See
"Regulation--Holding Company Regulation." After completion of the Conversion,
the Company's assets will consist of all of the outstanding shares of the
Association's capital stock issued to the Company in the Conversion and 50% of
the net proceeds of the Offerings to be retained by the Company. The Company
intends to use part of such net proceeds to loan funds to the ESOP to enable the
ESOP to purchase 8% of the Common Stock issued in the Conversion, including
shares issued to the Foundation. The Company and Association may, however,
alternatively choose to fund the ESOP through a loan to the ESOP trust by a
third-party financial institution. The Company intends initially to utilize the
remaining proceeds for investments in mortgage-related securities and federal
agency obligations. See "Use of Proceeds." Immediately after the Conversion, the
Company will have no significant liabilities. The management of the Company is
set forth under "Management of the Company." Initially, the Company will neither
own nor lease any property, but will instead use the premises, equipment and
furniture of the Association. At the present time, the Company does not intend
to employ any persons other than officers of the Company who are also officers
of the Association, but will utilize the support staff of the Association from
time to time. Additional employees will be hired as appropriate to the extent
the Company expands its business in the future.
Management believes that the holding company structure will provide the
Company with additional flexibility to diversify, should it decide to do so, its
business activities through existing or newly-formed subsidiaries, or through
acquisitions of other financial institutions and financial services related
companies. In addition, management believes that the Company will be in a
position after the Conversion, subject to regulatory limitations and the
Company's financial position, to take advantage of any acquisition and expansion
opportunities that may arise. There are no current arrangements, understandings
or agreements, written or oral, regarding any such opportunities or
transactions. The initial activities of the Company are anticipated to be funded
by the net proceeds retained by the Company and earnings thereon or,
alternatively, through dividends from the Association.
The Company's executive offices are located at 31 W. Broad Street,
Hazleton, Pennsylvania 18201 and its telephone number is (717) 454-0824.
23
<PAGE> 24
SECURITY SAVINGS ASSOCIATION OF HAZLETON
The Association was originally incorporated in 1889 as a
state-chartered building and loan association under the name The Middle Coal
Field Building and Loan Association of Hazleton, Pennsylvania. In January 1987,
the Association acquired through merger Anthracite Building and Loan Association
of Weatherly, Pennsylvania. The Association currently maintains four banking
offices in Luzerne and Carbon counties in Northeast Pennsylvania.
The Association operates as a community savings association and its
corporate philosophy has traditionally been focused on providing a competitive
array of financial products and services to consumers within its market area.
The Association's business primarily consists of accepting deposits from
customers and investing those funds primarily in mortgage loans secured by one-
to four-family residences, consumer loans and, to a lesser extent, other types
of loans and securities. At June 30, 1998, the Association had $69.9 million, or
62.4% of total assets, invested in loans, consisting of: $54.7 million, or 48.9%
of total assets, of one- to four-family mortgage loans; $9.9 million, or 8.9% of
total assets, of consumer loans (consisting primarily of home equity loans and
lines of credit, automobile and education loans); $4.8 million, or 4.2% of total
assets, of multi-family and commercial real estate loans; and $523,000, or 0.47%
of total assets, of construction loans. See "Business of the
Association--Lending Activities."
The Association's investment activities primarily consist of
mortgage-related and investment securities. At June 30, 1998, the Association's
securities portfolio totalled $28.7 million, or 25.6% of total assets, of which
$20.8 million was categorized as held-to-maturity. At June 30, 1998, the
Association's debt investments totalled $24.4 million, or 21.8% of total assets,
$18.5 million of which was classified as held-to-maturity and consisted
primarily of investments in various certificates of deposit. At June 30, 1998,
the Association's equity investments totalled $594,000, or 0.5% of total assets,
all of which was classified as available-for-sale and consisted of an investment
in Federal Home Loan Bank ("FHLB") stock. At June 30, 1998, the Association's
mortgage-backed securities, consisting primarily of U.S. Government and agency
obligations, totalled $6.3 million, or 5.6% of total assets, of which $2.8
million was categorized as held-to-maturity. At June 30, 1998, the Association's
mortgage-related securities portfolio totalled $3.6 million, or 3.2% of total
assets, of which $2.3 million was classified as held-to-maturity and consisted
primarily of securities guaranteed or issued by Government-sponsored and federal
agencies such as Fannie Mae ("FNMA"), Freddie Mac ("FHLMC"), and Ginnie Mae
("GNMA"). See "Business of the Association--Investment Activities."
At June 30, 1998, the Association's deposit accounts totalled $102.6
million, or 99.8% of total liabilities, of which $42.1 million, or 41.1%, were
comprised of core deposits (savings, negotiable order of withdrawal ("NOW") and
money market accounts). In addition to core deposits, the Association had $60.5
million of certificate accounts, or 58.9% of total liabilities, of which $38.8
million were certificates of deposit with maturities of one year or less and
$13.5 million were jumbo certificates of deposit.
The Association is subject to extensive regulation, supervision and
examination by the Pennsylvania Department, the OTS, and the FDIC. As of June
30, 1998, the Association exceeded all regulatory capital requirements with
tangible, core and risk-based capital of $9.4 million, $9.4 million and $9.8
million, respectively. Additionally, the Association's regulatory capital was in
excess of the amount necessary for the Association to be deemed "well
capitalized" under the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"). See "Regulatory Capital Compliance" and "Regulation." The
Association is a member of the FHLB of Pittsburgh which is one of the twelve
regional banks which comprise the FHLB system. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business of the
Association."
The Association's executive offices are located at 31 W. Broad Street,
Hazleton, Pennsylvania 18201 and its telephone number is (717) 454-0824.
24
<PAGE> 25
REGULATORY CAPITAL COMPLIANCE
At June 30, 1998, the Association exceeded all regulatory capital
requirements. See "Regulation--Federal Regulation of Savings
Institutions--Capital Requirements." Set forth below is a summary of the
Association's compliance with the regulatory capital standards as of June 30,
1998, on a historical and pro forma basis assuming that the indicated number of
shares were sold as of such date and receipt by the Association of 50% of the
net proceeds.
<TABLE>
<CAPTION>
SECURITY SAVINGS ASSOCIATION OF HAZLETON
PRO FORMA AT JUNE 30, 1998 BASED UPON THE SALE
AT $10.00 PER SHARE
--------------------------------------------------
971,550 SHARES 1,143,000 SHARES
(MINIMUM (MIDPOINT
OF OF
HISTORICAL AT ESTIMATED ESTIMATED
JUNE 30, 1998 PRICE RANGE) PRICE RANGE)
--------------------- ------------------------- ----------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
------ --------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
GAAP Capital (3) $ 9,231 8.2% $13,110 11.3% $13,844 11.9%
======= ==== ======= ==== ======= ====
TANGIBLE
CAPITAL:
Capital Level $ 9,362 8.4% $13,241 11.4% $13,990 12.0%
Requirement 1,682 1.5 1,740 1.5 1,751 1.5
------- ---- ------- ---- ------- ----
Excess $ 7,680 6.9% $11,501 9.9% $12,239 10.5%
======= ==== ======= ==== ======= ====
CORE CAPITAL:
Capital Level $ 9,362 8.4% $13,241 11.4% $13,990 12.0%
Requirement (4) 4,485 4.0 4,640 4.0 4,670 4.0
------- ---- ------- ---- ------- ----
Excess $ 4,877 4.4% $ 8,601 7.4% $ 9,320 8.0%
======= ==== ======= ==== ======= ====
RISK-BASED
CAPITAL:
Capital
Level (5)(6) $ 9,814 16.9% $13,693 22.8% $14,442 23.9%
Requirement 4,641 8.0 4,796 8.0 4,826 8.0
------- ---- ------- ---- ------- ----
Excess $ 5,173 8.9% $ 8,897 14.8% $ 9,616 15.9%
======= ==== ======= ==== ======= ====
<CAPTION>
SECURITY SAVINGS ASSOCIATION OF HAZLETON
PRO FORMA AT JUNE 30, 1998 BASED UPON THE SALE
AT $10.00 PER SHARE
------------------------------------------------
1,314,450 1,511,617
(MAXIMUM 15% ABOVE
OF (MAXIMUM OF
ESTIMATED ESTIMATED
PRICE RANGE) PRICE RANGE)(1)
----------------------- -----------------------
PERCENT PERCENT
OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2)
------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GAAP Capital (3) $14,577 12.4% $15,421 13.0%
======= ==== ======= ====
TANGIBLE
CAPITAL:
Capital Level 14,708 12.5 $15,552 13.1%
Requirement 1,762 1.5 1,775 1.5
------- ---- ------- ----
Excess $12,946 11.0% $13,777 11.6%
======= ==== ======= ====
CORE CAPITAL:
Capital Level $14,708 12.5% $15,552 13.1%
Requirement (4) 4,699 4.0 4,732 4.0
------- ---- ------- ----
Excess $10,009 8.5% $10,820 9.1%
======= ==== ======= ====
RISK-BASED
CAPITAL:
Capital
Level (5)(6) $ 5,160 25.0% $16,004 26.2%
Requirement 4,855 8.0 4,889 8.0
------- ---- ------- ----
Excess $10,305 17.0 $11,115 18.2%
======= ==== ======= ====
</TABLE>
- -------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
(2) Tangible capital levels are shown as a percentage of tangible assets. Core
capital levels are shown as a percentage of total adjusted assets.
Risk-based capital levels are shown as a percentage of risk-weighed assets.
(3) GAAP Capital includes unrealized loss on available-for-sale securities,
net, which is not included as regulatory capital.
(4) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements which
would require a core capital ratio of 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and
soundness and a 4% to 5% core capital ratio requirement for all other
thrifts. See "Regulation--Federal Regulation of Savings
Institutions--Capital Requirements."
(5) Assumes net proceeds are invested in assets that carry a 50%
risk-weighting.
(6) The difference between equity under generally accepted accounting
principles ("GAAP") and regulatory risk-based capital is attributable to
the addition of the general valuation allowance of $452,000 at June 30,
1998 (in addition to the exclusion of unrealized gain on available-
for-sale securities, net).
25
<PAGE> 26
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock
cannot be determined until the Conversion is completed, it is presently
anticipated that the net proceeds from the sale of the Common Stock will be
between $9.0 million and $12.3 million (or $14.3 million if the Estimated Price
Range is increased by 15%). See "Pro Forma Data" and "The Conversion--Stock
Pricing" as to the assumptions used to arrive at such amounts. The Company will
be unable to utilize any of the net proceeds of the Offerings until the
consummation of the Conversion.
The Company will purchase all of the outstanding capital stock of the
Association to be issued upon Conversion in exchange for 50% of the net
proceeds, with the remaining net proceeds to be retained by the Company. Based
on the midpoint of the Estimated Price Range, the Company expects to utilize the
$5.3 million of net proceeds to purchase the Common Stock of the Association.
Such portion of net proceeds will be added to the Association's general funds
which the Association currently intends to utilize for general corporate
purposes, including investments in loans, mortgage-related and investment
securities, and the funding of the Stock-Based Incentive Plan. The Association
may also use such funds for the expansion of its facilities, and to expand
operations through acquisitions of other financial institutions, branch offices
or other financial services companies. Additionally, the Association may explore
expanding the types of lending products it offers. This may be accomplished, in
part, by the hiring of a commercial lending officer. The Association has not yet
determined the approximate amount of net proceeds to be used for any of the
purposes mentioned above.
The Company intends to use a portion of the net proceeds to make a loan
directly to the ESOP to enable the ESOP to purchase 8% of the Common Stock
issued in the Conversion, including shares issued to the Foundation. The Company
and Association may alternatively choose to fund the ESOP's stock purchases
through a loan by a third-party financial institution. The remaining net
proceeds retained by the Company will initially be invested in mortgage-related
securities and federal agency obligations. Based upon the sale of 971,550 shares
or 1,314,450 shares at the minimum and maximum of the Estimated Price Range, and
the issuance of shares to the Foundation, the amount of the loan to the ESOP
would be $816,000 or $1.1 million, respectively (or $1.3 million if the
Estimated Price Range is increased by 15%), to be repaid over a 12-year period
at the prevailing prime rate of interest, which currently is 8.5%. See
"Management of the Association--Other Benefit Plans--Employee Stock Ownership
Plan."
The net proceeds retained by the Company may also be used to support
the future expansion of operations through branch acquisitions, the
establishment of branch offices and the acquisition of other financial
institutions or their assets, including those located within the Association's
market area or diversification into other banking related businesses. The
Company has no current arrangements, understandings or agreements regarding any
such opportunities or transactions. The Company, upon the Conversion, will be a
unitary savings and loan holding company, which under existing laws would
generally not be restricted as to the types of business activities in which it
may engage, provided that the Association continues to be a qualified thrift
lender ("QTL"). See "Regulation--Holding Company Regulation" for a description
of certain regulations applicable to the Company.
Upon completion of the Conversion, the Board of Directors of the
Company will have the authority to adopt stock repurchase plans, subject to
statutory and regulatory requirements. Unless approved by the OTS, the Company,
pursuant to OTS regulations, will be prohibited from repurchasing any shares of
Common Stock for three years except (i) for an offer to all stockholders on a
pro rata basis, or (ii) for the repurchase of qualifying shares of a director.
Notwithstanding the foregoing and except as provided below, beginning one year
following completion of the Conversion, the OTS regulations permit the Company
to repurchase its Common Stock so long as: (i) the repurchases within the
following two years are part of an open-market program not involving greater
than 5% of its outstanding capital stock during a 12-month period; (ii) the
repurchases do not cause the Association to become "undercapitalized" within the
meaning of the OTS prompt corrective action regulation; and (iii) the Company
provides to the Regional Director of the OTS no later than 10 days prior to the
commencement of a repurchase program written notice containing a full
description of the program to be undertaken and such program is not disapproved
by the Regional Director. See "Regulation--Prompt Corrective Regulatory Action."
In addition, under current OTS policies, repurchases may be allowed in the first
year following Conversion and in amounts greater than 5% in the second and
26
<PAGE> 27
third years following Conversion provided there are valid and compelling
business reasons for such repurchases and the OTS approves such repurchases.
Based upon facts and circumstances following Conversion and subject to
applicable regulatory requirements, the Board of Directors may determine to
repurchase stock in the future. Such facts and circumstances may include but are
not limited to: (i) market and economic factors such as the price at which the
Common Stock is trading in the market, the volume of trading, the attractiveness
of other investment alternatives in terms of the rate of return and risk
involved in the investment, the ability to increase the book value and/or
earnings per share of the remaining outstanding shares, and the opportunity to
improve the Company's return on equity; (ii) the avoidance of dilution to
stockholders by not having to issue additional shares to cover the exercise of
stock options or to fund employee stock benefit plans; and (iii) any other
circumstances in which repurchases would be in the best interests of the Company
and its stockholders. Although the Company has no current plans to repurchase
its stock, in the event the Company does determine to repurchase stock, such
repurchases may be made at market prices which may be in excess of the Purchase
Price in the Conversion.
Any stock repurchases will be subject to the determination of the Board
of Directors that both the Company and the Association will be capitalized in
excess of all applicable regulatory requirements after any such repurchases and
that such capital will be adequate, taking into account, among other things, the
level of non-performing and other risk assets, the Company's and the
Association's current and projected results of operations and asset/liability
structure, the economic environment, tax and other considerations. See "The
Conversion--Certain Restrictions on Purchase or Transfer of Shares After
Conversion."
Additionally, in connection with the Conversion, the Company and
Association have committed to the OTS that during the one-year period following
the consummation of the Conversion, the Company will not make any distribution
to stockholders that, for federal tax purposes, would be treated as a return of
capital without prior approval of the OTS.
DIVIDEND POLICY
Upon Conversion, the Board of Directors of the Company will have the
authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. In the future, the Board of Directors intends to
consider a policy of paying cash or stock dividends on the Common Stock.
However, no decision has been made with respect to the payment of dividends.
Declarations of dividends by the Board of Directors, if any, will depend upon a
number of factors, including the amount of net proceeds retained by the Company
in the Conversion, investment opportunities available to the Company or the
Association, capital requirements, regulatory limitations, the Company's and the
Association's financial condition and results of operations, tax considerations
and general economic conditions. No assurances can be given, however, that any
dividends will be paid or, if commenced, will continue to be paid.
The Association will not be permitted to pay dividends to the Company
on its capital stock if its stockholders' equity would be reduced below the
amount required for the liquidation account. See "The Conversion--Liquidation
Rights." For information concerning regulations which apply to the Association
in determining the amount of proceeds which may be retained by the Company and
regarding a savings institution's ability to make capital distributions,
including payment of dividends to its holding company, see "Federal and State
Taxation--Federal Taxation--Potential Recapture of Base Year Bad Debt Revenue"
and "Regulation--Federal Regulation of Savings Institutions--Limitation on
Capital Distributions."
Unlike the Association, the Company is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders, although the
source of such dividends will be dependent on the net proceeds retained by the
Company and earnings thereon and may be dependent, in part, upon dividends from
the Association. The Company is subject, however, to the requirements of
Delaware law, which generally limits dividends to an amount equal to the excess
of the net assets of the Company (the amount by which total assets exceed total
liabilities) over
27
<PAGE> 28
its statutory capital (generally defined as the aggregate par value of the
outstanding shares of the Company's capital stock having a par value plus the
amount of the consideration paid for shares of the Company's capital stock
without par value) or, if there is no such excess, to its net profits for the
current and/or immediately preceding fiscal year.
Additionally, in connection with the Conversion, the Company and
Association have committed to the OTS that during the one-year period following
the consummation of the Conversion, the Company will not take any action to
further any distribution to stockholders that, for federal tax purposes, would
be treated as a return of capital without prior approval of the OTS.
MARKET FOR THE COMMON STOCK
The Company and Association have not previously issued capital stock
and, consequently, there is no established market for the Common Stock. The
Company has applied to have its Common Stock listed on the AMEX under the symbol
"SPN" upon completion of the Conversion. Such approval is subject to various
conditions, including completion of the Conversion and the satisfaction of
applicable listing criteria. There can be no assurance that the Common Stock
will be able to meet the applicable listing criteria in order to maintain its
listing on the AMEX or that an active and liquid trading market will develop or,
if developed, will be maintained. A public market having the desirable
characteristics of depth, liquidity and orderliness, however, depends upon the
presence in the marketplace of both willing buyers and sellers of Common Stock
at any given time, which is not within the control of the Company. No assurance
can be given that an investor will be able to resell the Common Stock at or
above the Purchase Price of the Common Stock after the Conversion.
28
<PAGE> 29
CAPITALIZATION
The following table presents the unaudited historical consolidated
capitalization of the Association at June 30, 1998, and the pro forma
consolidated capitalization of the Company after giving effect to the
Conversion, including the issuance of shares to the Foundation, based upon the
sale of the number of shares indicated in the table and the other assumptions
set forth under "Pro Forma Data."
<TABLE>
<CAPTION>
COMPANY PRO FORMA BASED UPON SALE AT $10.00 PER SHARE
----------------------------------------------------------
971,550 1,143,000 1,314,450 1,511,617
SHARES SHARES SHARES SHARES
(MINIMUM (MIDPOINT (MAXIMUM (15% ABOVE
OF OF OF MAXIMUM
ASSOCIATION ESTIMATED ESTIMATED ESTIMATED OF ESTIMATED
HISTORICAL PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE) (1)
----------- ------------ ------------ ------------ ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Borrowings:
Deposits (2) ........................................ $ 102,604 $ 102,604 $ 102,604 $ 102,604 $ 102,604
FHLB advances and other borrowings .................. -- -- -- -- --
--------- --------- --------- --------- ---------
Total ............................................. $ 102,604 $ 102,604 $ 102,604 $ 102,604 $ 102,604
========= ========= ========= ========= =========
Stockholders' equity:
Preferred Stock, $.01 par value, 1,000,000
shares authorized; none to be issued .............. $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par value, 5,000,000
shares authorized; shares to be issued
as reflected ...................................... -- 10 12 14 15
Additional paid-in capital(3) ....................... -- 8,972 10,653 12,334 14,268
Retained earnings(4) ................................ 9,362 9,362 9,362 9,362 9,362
Unrealized loss on available-for-sale securities, net (131) (131) (131) (131) (131)
Less: Expense of contribution to the
Foundation, net of taxes(5) .............. -- (291) (342) (394) (453)
Plus: Shares issued to the Foundation .............. -- 485 570 656 756
Less: Common Stock acquired by the ESOP(6) ......... -- (816) (960) (1,104) (1,270)
Less: Common Stock acquired by
the Stock-Based Incentive Plan (7) ....... -- (408) (480) (552) (635)
--------- --------- --------- --------- ---------
Total stockholders' equity ...................... $ 9,231 $ 17,183 $ 18,684 $ 20,185 $ 21,912
========= ========= ========= ========= =========
</TABLE>
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) No effect has been given to the issuance of additional shares of Common
Stock to the Foundation at a value of $10.00 per share or to the issuance
of additional shares for option grants under the Stock-Based Incentive
Plan intended to be adopted by the Company. An amount equal to 10% of the
shares of Common Stock issued in the Conversion, including shares issued
to the Foundation, will be reserved for issuance upon the exercise of
options to be granted under the Stock-Based Incentive Plan. See "Risk
Factors--Possible Dilutive Effect of Stock-Based Incentive Plan,"
Footnote 4 to the tables under "Pro Forma Data" and "Management of the
Association--Other Benefit Plans."
(4) The retained earnings of the Association will be substantially restricted
after the Conversion. See "Regulation--Federal Regulation of Savings
Institutions--Limitation on Capital Distributions" and "The
Conversion--Liquidation Rights."
(5) Represents the value of the contribution of Common Stock to the
Foundation at $10.00 per share reduced by the associated tax benefit of
$194,000, $228,000, $262,000 and $303,000 at the minimum, midpoint,
maximum and 15% above the maximum of the range, respectively. The
realization of the federal tax benefit is limited annually to 10% of the
Company's annual taxable income, subject to the ability of the Company to
carry forward any unused portion of the deduction for five years
following the year in which the contribution is made. For state income
tax purposes, the Company will be able to deduct the contribution and to
carry forward any unused portion of the deduction for a five-year period
following the year in which the contribution is initially made. Such
deductions by the Company for Pennsylvania income tax purposes can be
utilized only if the Company generates sufficient state taxable income on
an unconsolidated basis, and also are subject to the limitation of 10% of
unconsolidated income of the Company.
(6) Assumes that 8% of the shares issued in connection with the Conversion,
including shares issued to the Foundation, will be purchased by the ESOP
and that the funds used to acquire such shares will be borrowed from the
Company. The Common Stock acquired by the ESOP is reflected as a
reduction of stockholders' equity. See "Management of the
Association--Other Benefit Plans--Employee Stock Ownership Plan."
(7) Assumes an amount equal to 4% of the shares of Common Stock sold in the
Conversion and issued to the Foundation, is purchased by the Stock-Based
Incentive Plan through open market purchases at the Purchase Price. The
Common Stock purchased by the Stock-Based Incentive Plan is reflected as
a reduction of stockholders' equity. See "Risk Factors--Possible Dilutive
Effect of Stock-Based Incentive Plan," Footnote 3 to the table under "Pro
Forma Data" and "Management of the Association--Other Benefit Plans."
29
<PAGE> 30
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $9.0 million and $12.3 million (or $14.3
million in the event the Estimated Price Range is increased by 15%) based upon
the following assumptions: (i) 100% of the shares of Common Stock will be sold
in the Subscription Offering to Eligible Account Holders, the ESOP and
Supplemental Eligible Account Holders; (ii) directors, officers and employees of
the Association and members of their immediate families (collectively,
"Insiders") will purchase an aggregate of $757,500 of Common Stock and the ESOP
will purchase 8% of the Common Stock issued in connection with the Conversion,
including shares issued to the Foundation; (iii) Sandler O'Neill & Partners,
L.P. ("Sandler O'Neill") will receive a fee equal to 2.0% of the aggregate
Purchase Price of shares sold in the Subscription and Community Offerings,
excluding shares purchased by directors, officers, employees and any immediate
family member thereof and the ESOP for which Sandler O'Neill will not receive a
fee; and (iv) Conversion expenses, excluding the marketing fees paid to Sandler
O'Neill, will be approximately $570,000. Actual Conversion expenses may vary
from those estimated.
Pro forma consolidated net income of the Company for the fiscal year
ended June 30, 1998, has been calculated as if the Common Stock had been sold at
the beginning of the fiscal year and the net proceeds had been invested at 4.5%,
which is the arithmetic average of the weighted average yield earned by the
Association on its interest-earning assets and the weighted average rate paid on
its deposits during such period (as required by OTS regulations). The tables
below do not reflect the effect of withdrawals from deposit accounts for the
purchase of Common Stock or the effect of any possible use of the net Conversion
proceeds. The pro forma after-tax yield for the Company and the Association is
assumed to be 2.70% for the fiscal year ended June 30, 1998, based on an
effective tax rate of 40.0%. Historical and pro forma net earnings per share
amounts have been calculated by dividing historical and pro forma amounts by the
indicated number of shares of Common Stock issued, as adjusted to give effect to
the purchase of shares by the ESOP and the issuance of shares to the Foundation.
Historical and pro forma stockholders' equity per share amounts have been
calculated by dividing historical and pro forma amounts by the indicated number
of shares of Common Stock issued.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company. The pro forma stockholders' equity is not intended to represent the
fair market value of the Common Stock and may be stated in an amount greater
than amounts that would be available for distribution to stockholders in the
event of liquidation.
The following tables summarize historical data of the Association and
pro forma data of the Company at or for the fiscal year ended June 30, 1998,
based on the assumptions set forth above and in the table and should not be used
as a basis for projections of market value of the Common Stock following the
Conversion. The tables below give effect to Stock Awards reserved for grant
under the Stock-Based Incentive Plan, which is expected to be adopted by the
Company following the Conversion. See Footnote 3 to the table and "Management of
the Association--Other Benefit Plans." No effect has been given in the tables to
the possible issuance of additional shares of Common Stock upon the exercise of
stock options to be granted under the Stock-Based Incentive Plan, nor does book
value give any effect to the liquidation account to be established for the
benefit of Eligible Account Holders and Supplemental Eligible Account Holders
or, in the event of liquidation of the Association, to the tax effect of the bad
debt reserve and other factors. See Footnote 5 to the table below, "Management
of the Association--Other Benefit Plans" and "The Conversion--Liquidation
Rights." THE FOLLOWING TABLE ASSUMES THAT The FOUNDATION IS APPROVED AS PART OF
THE CONVERSION AND THEREFORE GIVES EFFECT TO THE ISSUANCE OF AUTHORIZED BUT
UNISSUED SHARES OF THE COMPANY'S COMMON STOCK TO THE FOUNDATION CONCURRENTLY
WITH THE COMPLETION OF THE CONVERSION. THE ESTIMATED PRICE RANGE, AS SET FORTH
HEREIN AND IN THE TABLE BELOW, TAKES INTO ACCOUNT THE DILUTIVE IMPACT OF THE
ISSUANCE OF SHARES TO THE FOUNDATION.
30
<PAGE> 31
<TABLE>
<CAPTION>
AT OR FOR THE FISCAL YEAR ENDED JUNE 30, 1998
-------------------------------------------------------------------------
971,550 1,143,000 1,314,450 1,511,617
SHARES SOLD AT SHARES SOLD AT SHARES SOLD AT SHARES SOLD AT
$10.00 $10.00 $10.00 $10.00
PER SHARE PER SHARE PER SHARE PER SHARE (15%
(MINIMUM (MIDPOINT (MAXIMUM ABOVE MAXIMUM
OF ESTIMATED OF ESTIMATED OF ESTIMATED OF ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE) (7)
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross Proceeds ...................................... $ 9,715 $ 11,430 $ 13,144 $ 15,116
Plus: Shares issued to Foundation (equal to
5% of the stock sold in the Conversion) ... 485 570 656 754
-------- -------- -------- --------
Pro forma market capitalization ..................... $ 10,200 $ 12,000 $ 13,800 $ 15,870
======== ======== ======== ========
Gross proceeds ...................................... $ 9,715 $ 11,430 $ 13,144 $ 15,116
Less: Offering expenses and commissions ............ (733) (765) (796) (833)
Estimated net proceeds .............................. 8,982 10,665 12,348 14,283
Less: Common Stock purchased by ESOP ............... (816) (960) (1,104) (1,270)
Common Stock purchased by Stock-Based
Incentive Plan ............................ (408) (480) (552) (635)
-------- -------- -------- --------
Estimated net proceeds, as adjusted ............ $ 7,758 $ 9,225 $ 10,692 $ 12,378
======== ======== ======== ========
Consolidated net earnings (1):
Historical ..................................... $ 617 $ 617 $ 617 $ 617
Pro forma earnings on net proceeds ............. 210 249 288 334
Less: Pro forma ESOP adjustment (2) ........... (41) (48) (55) (64)
Pro forma Stock-Based Incentive Plan
adjustment (3) ......................... (49) (58) (66) (76)
-------- -------- -------- --------
Pro forma net earnings ......................... $ 737 $ 760 $ 784 $ 811
======== ======== ======== ========
Per share net earnings (1):
Historical ..................................... $ 0.65 $ 0.55 $ 0.48 $ 0.42
Pro forma earnings on net proceeds ............. 0.22 0.22 0.22 0.22
Less: Pro forma ESOP adjustment (2) ........... (0.04) (0.04) (0.04) (0.04)
Pro forma Stock-Based Incentive Plan
adjustment (3) ......................... (0.05) (0.05) (0.05) (0.05)
-------- -------- -------- --------
Pro forma net earnings per share ............... $ 0.78 $ 0.68 $ 0.61 $ 0.55
======== ======== ======== ========
Stockholders' equity:
Historical ..................................... $ 9,231 $ 9,231 $ 9,231 $ 9,231
Estimated net proceeds ......................... 8,982 10,665 12,348 14,283
Plus: Tax Benefit of Foundation(4) ............ 194 228 262 303
Less: Common Stock acquired by ESOP (2) ....... (816) (960) (1,104) (1,270)
Common Stock acquired by Stock-Based
Incentive Plan (3) ..................... (408) (480) (552) (635)
-------- -------- -------- --------
Pro forma stockholders' equity (3)(4)(5)(6) .... $ 17,183 $ 18,684 $ 20,185 $ 21,912
======== ======== ======== ========
Stockholders' equity per share:
Historical ..................................... $ 9.05 $ 7.69 $ 6.69 $ 5.81
Estimated net proceeds ......................... 8.81 8.89 8.95 9.00
Plus: Tax Benefit of Foundation(4) ............ 0.19 0.19 0.19 0.19
Less: Common Stock acquired by ESOP (2) ....... (0.80) (0.80) (0.80) (0.80)
Common Stock acquired by Stock-Based
Incentive Plan (3) ..................... (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- --------
Pro forma stockholders' equity
per share (3)(4)(5)(6) ................... $ 16.85 $ 15.57 $ 14.63 $ 13.80
======== ======== ======== ========
Offering price as a percentage of pro forma
stockholders' equity per share .................... 59.36% 64.23% 68.37% 72.43%
Offering price to pro forma net earnings per share .. 12.83 14.62 16.31 18.12
</TABLE>
(footnotes on next page)
31
<PAGE> 32
- ----------------------------------
(1) Does not give effect to the non-recurring expense that is expected to be
recognized in the second quarter of fiscal 1999 if the establishment of the
Foundation is approved. In that event, the Company will recognize an
after-tax expense for the amount of the contribution to the Foundation which
is expected to be $291,000, $342,000, $394,000 and $453,000 at the minimum,
midpoint, maximum, and maximum as adjusted, of the Estimated Price Range,
respectively.
(2) It is assumed that 8% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation, will be purchased by
the ESOP. For purposes of this table, the funds used to acquire such shares
are assumed to have been borrowed by the ESOP from the Company. The amount
to be borrowed is reflected as a reduction of stockholders' equity. The
Association intends to make annual contributions to the ESOP in an amount at
least equal to the principal and interest requirement of the debt. The
Association's total annual payment of the ESOP debt is based upon 12 equal
annual installments of principal, with an assumed interest rate at 8.5%. The
pro forma net earnings assume: (i) that the Association's contribution to
the ESOP is equivalent to the debt service requirement for the year ended
June 30, 1998, and was made at the end of the period; (ii) that 6,800,
8,000, 9,200 and 10,580 shares at the minimum, midpoint, maximum and 15%
above the maximum of the range, respectively, were committed to be released
during the year ended June 30, 1998 at an average fair value of $10.00 per
share in accordance with Statement of Position ("SOP") 93-6; and (iii) only
the ESOP shares committed to be released were considered outstanding for
purposes of the net earnings per share calculations. See "Management of the
Association--Other Benefit Plans--Employee Stock Ownership Plan."
(3) Gives effect to the Stock Awards available for grant under the Stock-Based
Incentive Plan expected to be adopted by the Company following the
Conversion and presented for approval at a meeting of stockholders. The
Stock-Based Incentive Plan intends to acquire an amount of Common Stock
equal to 4% of the shares of Common Stock sold in the Conversion and issued
to the Foundation, or 40,800, 48,000, 55,200 and 63,480 shares of Common
Stock at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Price Range, respectively, either through open market purchases,
if permissible, or from authorized but unissued shares of Common Stock or
treasury stock of the Company, if any. Funds used by the Stock-Based
Incentive Plan to purchase the shares will be contributed to the Stock-Based
Incentive Plan by the Company. In calculating the pro forma effect of the
Stock-Based Incentive Plan, it is assumed that the shares were acquired by
the Stock-Based Incentive Plan at the beginning of the period presented in
open market purchases at the Purchase Price and that 20% of the amount
contributed was an amortized expense during such period. The issuance of
authorized but unissued shares of the Company's Common Stock to the
Stock-Based Incentive Plan instead of open market purchases would dilute the
voting interests of existing stockholders by approximately 3.8% and pro
forma net earnings per share would be $0.76, $0.67, $0.60 and $0.54 at the
minimum, midpoint, maximum, and 15% above the maximum of the range,
respectively, and pro forma stockholders' equity per share would be $16.58,
$15.36, $14.45 and $13.66 at the minimum, midpoint, maximum, and 15% above
the maximum of the range, respectively. There can be no assurance that
stockholder approval of the Stock-Based Incentive Plan will be obtained, or
that the actual purchase price of the shares will be equal to the Purchase
Price. See "Management of the Association--Other Benefit Plans."
(4) Assumes a combined federal and state effective income tax rate of 40%.
(5) No effect has been given to the issuance of additional shares of Common
Stock upon the exercise of options to be granted under the Stock-Based
Incentive Plan. An amount equal to 10% of the Common Stock issued in the
Conversion, including shares issued to the Foundation, or 102,000, 120,000,
138,000 and 158,700 shares at the minimum, midpoint, maximum and 15% above
the maximum of the Estimated Price Range, respectively, will be reserved for
future issuance upon the exercise of options to be granted under the
Stock-Based Incentive Plan. The issuance of Common Stock pursuant to the
exercise of options under the Stock-Based Incentive Plan will result in the
dilution of existing stockholders' interests. Assuming all options were
exercised at the end of the period at an exercise price of $10.00 per share,
the pro forma net earnings per share would be $0.73, $0.64, $0.58 and $0.52,
respectively, and the pro forma stockholders' equity per share would be
$16.22, $15.06, $14.21 and $13.46, respectively. See "Management of the
Association--Other Benefit Plans."
(6) The retained earnings of the Association will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "Regulation--Federal
Regulation of Savings Institutions--Limitation on Capital Distributions" and
"The Conversion--Liquidation Rights."
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
32
<PAGE> 33
COMPARISON OF VALUATION AND
PRO FORMA INFORMATION WITH NO FOUNDATION
In the event that the Foundation was not being established as part of
the Conversion, Keller has estimated that the pro forma market capitalization of
the Association would be approximately $12.5 million, at the midpoint, which is
approximately $500,000 greater than the pro forma market capitalization of the
Association if the Foundation is approved by members of the Association and
would result in approximately a $1.1 million increase, or 9.36%, in the amount
of Common Stock offered for sale in the Conversion. The pro forma price to book
ratio and pro forma price to earnings ratio would be approximately the same
under both the current appraisal and the estimate of the value of the Company
without the Foundation. Further, assuming the midpoint of the Estimated Price
Range, pro forma stockholders' equity per share and pro forma earnings per share
would be substantially the same with the Foundation as without the Foundation.
In this regard, pro forma stockholders' equity and pro forma net earnings per
share would be $15.56 and $0.68, respectively, at the midpoint of the estimate,
assuming no Foundation, and $15.57 and $0.68, respectively, with the Foundation.
The pro forma price to book ratio and the pro forma price to earnings ratio are
64.28% and 14.80x, respectively, at the midpoint of the estimate, assuming no
Foundation and are 64.23% and 14.62x, respectively, with the Foundation. This
estimate by Keller was prepared at the request of the OTS and is solely for
purposes of providing members with sufficient information with which to make an
informed decision on the Foundation. There is no assurance that in the event the
Foundation is not approved at the Special Meeting of members that the appraisal
prepared at that time would conclude that the pro forma market value of the
Company would be the same as that estimated herein. Any appraisal prepared at
that time would be based on the facts and circumstances existing at that time,
including, among other things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing
ratios and financial data and ratios, at the minimum, midpoint, maximum and
maximum, as adjusted, of the Estimated Price Range, assuming the Conversion was
completed at June 30, 1998.
<TABLE>
<CAPTION>
AT THE MAXIMUM,
AT THE MINIMUM AT THE MIDPOINT AT THE MAXIMUM AS ADJUSTED
---------------------- ---------------------- ----------------------- -----------------------
WITH NO WITH NO WITH NO WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Estimated offering amount ..... $ 9,715 $ 10,625 $ 11,430 $ 12,500 $ 13,144 $ 14,375 $ 15,116 $ 16,531
Pro forma market capitalization 10,200 10,625 12,000 12,500 13,800 14,375 15,870 16,531
Total assets .................. 119,942 120,589 121,443 122,204 122,944 123,820 124,671 125,678
Total liabilities ............. 102,759 102,759 102,759 102,759 102,759 102,759 102,759 102,759
Pro forma stockholders' equity 17,183 17,830 18,684 19,445 20,185 21,061 21,912 22,919
Pro forma consolidated net
earnings..................... 737 756 760 783 784 810 811 841
Pro forma stockholders' equity
per share.................... 16.85 16.78 15.57 15.56 14.63 14.65 13.80 13.86
Pro forma consolidated net
earnings per share........... 0.78 0.77 0.68 0.68 0.61 0.61 0.55 0.55
Pro Forma Pricing Ratios:
Offering Price as a percentage
of pro forma stockholders'
equity per share............. 59.36% 59.59% 64.23% 64.28% 68.37% 68.25% 72.43% 72.13%
Offering price to pro forma net
earnings per share........... 12.83x 13.03x 14.62x 14.80x 16.31x 16.45x 18.12x 18.21x
Offering price to assets ...... 8.50% 8.81% 9.88% 10.23% 11.22% 11.61% 12.73% 13.15%
Pro Forma Financial Ratios:
Return on assets .............. 0.61% 0.63% 0.63% 0.64% 0.64% 0.65% 0.65% 0.67%
Return on stockholders' equity 4.29% 4.24% 4.07% 4.03% 3.89% 3.85% 3.70% 3.67%
Stockholders' equity to assets 14.33% 14.79% 15.39% 15.91% 16.42% 17.01% 17.58% 18.24%
</TABLE>
33
<PAGE> 34
SECURITY SAVINGS ASSOCIATION OF HAZLETON
STATEMENTS OF INCOME
The following Statement of Income of the Association for the fiscal
years ended June 30, 1998, 1997 and 1996 have been audited by Parente, Randolph,
Orlando, Carey & Associates, independent auditors, whose report thereon is
included elsewhere in this Prospectus. These Statements of Income should be read
in conjunction with the Financial Statements and notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED JUNE 30,
--------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Loans ............................... $5,414,524 $5,181,464 $5,133,778
Interest and dividends on securities:
Taxable interest income(1) ....... 1,887,331 1,804,963 1,716,776
Nontaxable interest income ....... 2,983 -- --
Dividends ........................ 36,835 34,727 33,564
Interest-bearing deposits with banks 398,053 418,819 574,992
---------- ---------- ----------
Total interest income ......... 7,739,726 7,439,973 7,459,110
Interest expense:
Deposits ............................ 4,259,958 4,028,973 4,229,652
---------- ---------- ----------
Net interest income .................... 3,479,768 3,411,000 3,229,458
Provision for loan losses .............. 175,626 34,450 101,997
---------- ---------- ----------
Net interest income after provision
for loan losses ..................... 3,304,142 3,376,550 3,127,461
---------- ---------- ----------
Noninterest income:
Other loan fees and service charges . 266,628 241,342 234,277
Net realized gain on sale and calls
of available-for-sale securities . 701 16,776 --
Other ............................... 36,748 25,736 24,095
---------- ---------- ----------
Total noninterest income ... 304,077 283,854 258,372
---------- ---------- ----------
Noninterest expenses:
Salaries and employee benefits ...... 1,298,666 1,268,649 1,221,930
Occupancy and equipment expenses .... 233,788 214,289 250,505
FDIC deposit insurance premiums ..... 64,457 752,450 220,377
Data processing ..................... 138,096 132,943 140,695
Professional fees ................... 103,919 98,238 85,401
Foreclosed real estate expenses, net 136,331 142,127 3,738
Other noninterest expenses .......... 509,438 498,176 503,882
---------- ---------- ----------
Total noninterest expenses ....... 2,484,695 3,106,872 2,426,528
---------- ---------- ----------
Income before provision for income taxes 1,123,524 553,532 959,305
Provision for income taxes ............. 506,300 343,981 362,300
---------- ---------- ----------
Net income ............................. $ 617,224 $ 209,551 $ 597,005
========== ========== ==========
</TABLE>
- ------------
(1) Includes interest earned on FHLB demand accounts.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
34
<PAGE> 35
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has only recently been formed and, accordingly, has no
results of operations. The Association's results of operations are dependent
primarily on net interest income, which is the difference between the income
earned on its loan and investment portfolios and its cost of funds, consisting
of the interest paid on deposits. Results of operations are also affected by the
Association's provision for loan losses, security sales activities, service
charges and other fee income, and noninterest expense. The Association's
noninterest expense principally consists of compensation and employee benefits,
office occupancy and equipment expense, federal deposit insurance premiums, data
processing, professional fees, advertising and business promotion and other
expenses. Results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in interest rates,
government policies and actions of regulatory authorities.
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements which are
based on certain assumptions and describe future plans, strategies and
expectations of the Company. These forward-looking statements are generally
identified by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project," or similar expressions. The Company's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse effect on the operations
of the Company and the subsidiaries include, but are not limited to, changes in:
interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. The Company does not undertake--and
specifically disclaims any obligation--to publicly release the result of any
revisions which may be made to any forward-looking statements to reflect events
or circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events.
MANAGEMENT STRATEGY
The Association's operating strategy has been that of a community-based
banking institution, offering a wide variety of savings products to its retail
customers, while concentrating on residential and consumer lending and, to a
lesser extent, multi-family and commercial real estate and construction lending.
In order to promote long-term financial strength and profitability, the
Association's operating strategy has focused on: (i) maintaining strong asset
quality by originating primarily one- to four-family mortgage loans and home
equity loans and lines of credit secured by residential real estate located in
its market area; (ii) managing its interest rate risk within the context of its
significant fixed-rate one- to four-family mortgage lending activity; (iii)
providing products and delivery systems directed at the needs and expectations
of its customer base, including through taking advantage of technological
advances when appropriate; and (iv) maintaining a strong regulatory capital
position.
MANAGEMENT OF INTEREST RATE RISK AND MARKET RISK ANALYSIS
QUALITATIVE ANALYSIS
The Association's interest rate risk management has involved the
evaluation of the interest rate risk included in certain balance sheet accounts,
the determination of the level of interest rate risk appropriate given the
Association's business strategy, operating environment, capital and liquidity
requirements and performance objectives, and management of its interest rate
risk pursuant to strategies approved by the Board of Directors to achieve a
level of interest rate risk consistent with guidelines approved by the Board of
Directors. Through such management, the
35
<PAGE> 36
Association seeks to reduce the vulnerability of its operations to changes in
interest rates. The Board of Directors has established an Investment/Asset
Liability Committee ("ALCO"), which is responsible for reviewing asset/liability
policies and the interest rate risk position. The extent of the movement of
interest rates is an uncertainty that could have a negative impact on the
earnings of the Association. See "Risk Factors--Sensitivity to Changes in
Interest Rates."
In recent years, the Association has utilized the following strategies
to manage interest rate risk: (i) originating shorter-term (20 years or less)
fixed-rate mortgage loans, in addition to 30-year fixed-rate loans; (ii)
originating consumer loans which have a generally shorter term and may have a
variable interest rate; (iii) promoting longer-term deposits, particularly
three-year certificates of deposit; and (iv) investing in shorter-term
investment and mortgage-related securities.
Management believes that limiting its exposure to interest rate risk
fluctuations enhances long-term profitability. However, the Association's
strategies also can adversely impact net interest income due to lower yields on
shorter-term investments in comparison to longer-term fixed-rate investments and
whole loans. To promote a higher yield on its investment securities while at the
same time addressing the Association's interest rate risk management policies,
the Association has invested a significant portion of its portfolio of
investment securities in longer-term (more than five years) federal agency
obligations which have call features. Given the rates of such securities in
comparison to current market interest rates, the Association anticipates the
substantial majority of such securities will be called prior to their
contractual maturity. However, if changes in interest rates exceed ranges
anticipated by the Association in estimating the anticipated life of such
callable securities, the Association would be subject to increased interest rate
or reinvestment risk, depending on the direction of the change in market
interest rates.
QUANTITATIVE ANALYSIS
NET PORTFOLIO VALUE. The Association's interest rate sensitivity is
primarily monitored by management through the use of a model which generates
estimates of the change in the Association's NPV over a range of interest rate
scenarios. Such model is prepared by a third party for the Association. The OTS
also prepares and sends to the Association a NPV model based upon the
Association's quarterly financial reports to the OTS and assumptions utilized by
the OTS. NPV is the present value of expected cash flows from assets,
liabilities, and off-balance sheet contracts. The NPV ratio, under any interest
rate scenario, is defined as the NPV in that scenario divided by the market
value of assets in the same scenario. The OTS model makes assumptions, among the
other things regarding the annual prepayment rates for residential mortgage
loans, adjustable-rate and fixed-rate, prepayment rates ranged from 4% to 30%
annually. Mortgage-related securities were assumed to prepay at rates between 6%
and 62% annually. Investment securities, which include callable federal agency
obligations, are presented based on their stated maturities. Savings accounts,
NOW accounts and Money Market Cash accounts are assumed by the OTS to decay at
14%, 17%, and 31%, respectively, for each of the following periods: one year,
one to two years, two to three years, three to four years, four to five years
and over five years. The results of the OTS model may vary from the
Association's model primarily due to differences in assumptions utilized,
including estimated loan prepayment rates, reinvestment rates and deposit decay
rates. See "Regulation--Federal Regulation of Savings Institutions." The
following table sets forth the OTS's NPV as of June 30, 1998.
36
<PAGE> 37
<TABLE>
<CAPTION>
CHANGE IN NPV AS % OF PORTFOLIO
INTEREST RATES VALUE OF ASSETS
IN BASIS NET PORTFOLIO VALUE ---------------------------
POINTS ----------------------------------- NPV
(RATE SHOCK) AMOUNT $ CHANGE % CHANGE RATIO CHANGE (1)
- --------------- -------- -------- -------- ----- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
400 $ 8,608 $(3,611) (30)% 7.92% (270)
300 9,728 (2,491) (20) 8.81 (182)
200 10,789 (1,430) (12) 9.62 (100)
100 11,687 (532) (4) 10.27 (35)
Static 12,219 -- -- 10.62 --
(100) 12,847 528 5 11.03 41
(200) 13,232 1,013 8 11.25 63
(300) 13,872 1,653 14 11.64 203
(400) 14,725 2,506 21 12.28 257
</TABLE>
- ----------------------------------
(1) Expressed in basis points.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require the making of
certain assumptions which may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the NPV model presented assumes that the composition of the Association's
interest sensitive assets and liabilities existing at the beginning of a period
remains constant over the period being measured and also assumes that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the NPV table provides an indication of the
Association's interest rate risk exposure at a particular point in time, such
measurements are not intended to and do not provide a precise forecast of the
effect of changes in market interest rates on the Association's net interest
income and will differ from actual results.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income also depends upon the relative amounts of interest-earning
assets and interest-bearing liabilities and the interest rate earned or paid on
them.
37
<PAGE> 38
AVERAGE BALANCE SHEET. The following table sets forth certain
information relating to the Association at and for the fiscal years ended June
30, 1998, 1997 and 1996. The average yields and costs are derived by dividing
income or expense by the average balance of interest-earning assets or
interest-bearing liabilities, respectively, for the periods shown, except where
noted, otherwise and reflect annualized yields and costs. Average balances are
derived from average monthly balances. In management's opinion, such balances
are not materially different than average daily balances. The yields and costs
include fees which are considered adjustments to yields.
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED JUNE 30,
-------------------------------------------------------------
AT JUNE 30, 1998 1998 1997
----------------- --------------------------- ------------------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------- ------ ------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans (1):
Real estate(2) ........................... $ 55,782 7.81% $ 55,841 $ 4,358 7.80% $ 53,399 $ 4,031 7.55%
Consumer ................................. 9,935 8.30 10,331 825 7.99 11,212 1,018 9.08
Commercial real estate ................... 3,946 5.88 3,131 232 7.41 2,080 132 6.35
-------- -------- -------- -------- --------
Total loans ........................... 69,663 7.77 69,303 5,415 7.81 66,691 5,181 7.77
Mortgage-related securities (3) ........... 2,196 7.24 2,629 159 6.05 4,846 196 4.04
Investment securities (4)(5) .............. 26,487 6.67 26,723 1,768 6.62 24,405 1,644 6.74
Interest-bearing deposits ................. 8,586 4.64 5,995 398 6.64 6,282 419 6.67
-------- -------- -------- -------- --------
Total interest-earning assets ............ 106,932 7.24 104,650 7,740 7.40 102,224 7,440 7.28
-------- -------- --------
NONINTEREST-EARNING ASSETS:
Cash and due from banks .................... 3,272 3,092 2,691
Premises and equipment ..................... 1,364 1,327 1,101
Other, less allowance for loan losses ...... 422 767 919
-------- -------- --------
Total noninterest-earning assets ......... 5,058 5,186 4,711
-------- -------- --------
Total assets ................................. $111,990 $109,836 $106,935
======== ======== ========
INTEREST-BEARING LIABILITIES:
Deposits:
Passbook and statement savings ........... $ 29,053 2.74 $ 28,788 795 2.76 $ 30,996 827 2.67
Money market ............................. 2,084 2.54 2,151 53 2.46 2,374 60 2.53
NOW ...................................... 10,983 1.38 10,081 152 1.51 9,065 135 1.49
Certificates of deposit .................. 60,484 5.39 59,342 3,260 5.49 55,653 3,007 5.40
-------- -------- -------- -------- --------
Total interest-bearing deposits ........ 102,604 4.15 100,362 4,260 4.24 98,088 4,029 4.11
-------- -------- --------
NONINTEREST-BEARING LIABILITIES:
Other liabilities .......................... 155 513 513
-------- -------- --------
Total liabilities ............................ 102,759 100,875 98,601
Equity ....................................... 9,231 8,961 8,334
-------- -------- --------
Total liabilities and equity ................. $111,990 $109,836 $106,935
======== ======== ========
Net interest-earning assets ................ $ 4,288 $ 4,136
======== ========
Net interest income/interest rate spread (6) 3.09% $ 3,480 3.16% $ 3,411 3.17%
===== ======== ====== ======== ========
Net interest margin as a percentage
of interest-earning assets (7) .......... 3.33% 3.34%
======== ========
Ratio of interest-earning assets to
interest-bearing liabilities ............ 104.22% 104.27% 104.22%
======== ======== ========
<CAPTION>
FOR THE FISCAL YEARS ENDED JUNE 30,
-----------------------------------
1996
--------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST RATE
------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans (1):
Real estate(2) ........................... $ 52,447 $ 3,995 7.62%
Consumer ................................. 10,932 910 8.32
Commercial real estate ................... 1,657 229 13.82
-------- --------
Total loans ........................... 65,036 5,134 7.89
Mortgage-related securities (3) ........... 6,562 266 4.05
Investment securities (4)(5) .............. 21,957 1,484 6.76
Interest-bearing deposits ................. 8,880 575 6.48
-------- --------
Total interest-earning assets ............ 102,435 7,459 7.28
--------
NONINTEREST-EARNING ASSETS:
Cash and due from banks .................... 2,533
Premises and equipment ..................... 1,132
Other, less allowance for loan losses ...... 579
--------
Total noninterest-earning assets ......... 4,244
--------
Total assets ................................. $106,679
========
INTEREST-BEARING LIABILITIES:
Deposits:
Passbook and statement savings ........... $ 32,747 931 2.84
Money market ............................. 2,692 74 2.75
NOW ...................................... 9,106 190 2.09
Certificates of deposit .................. 53,653 3,035 5.66
-------- --------
Total interest-bearing deposits ........ 98,198 4,230 4.31
--------
NONINTEREST-BEARING LIABILITIES:
Other liabilities .......................... 416
--------
Total liabilities ............................ 98,614
Equity ....................................... 8,065
--------
Total liabilities and equity ................. $106,679
========
Net interest-earning assets ................ $ 4,237
========
Net interest income/interest rate spread (6) $ 3,229 2.97%
======== =======
Net interest margin as a percentage
of interest-earning assets (7) .......... 3.15%
========
Ratio of interest-earning assets to
interest-bearing liabilities ............ 104.31%
========
</TABLE>
- -----------------------------
(1) Balances are net of deferred loan origination costs, undisbursed proceeds of
construction loans in process, and include nonperforming loans.
(2) Includes in addition to one- to four-family real estate loans, multi-family
and construction real estate loans which at June 30, 1998 totalled $811,000
and $523,000, respectively.
(3) Includes mortgage-related securities available-for-sale and
held-to-maturity.
(4) Includes investment securities available-for-sale and held-to-maturity and
stock in the FHLB of Pittsburgh.
(5) The average balance of tax-exempt investments in 1998 was not material.
There were no tax-exempt investments owned in 1997 or 1996.
(6) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(7) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
38
<PAGE> 39
RATE/VOLUME ANALYSIS. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Association's interest income
and interest expense during the periods indicated. Information is provided in
each category with respect to: (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) the net
change. The changes attributable to the combined impact of volume and rate have
been allocated on a proportional basis between changes in rate and volume.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED
JUNE 30, 1998 JUNE 30, 1997
COMPARED TO COMPARED TO
FISCAL YEAR ENDED FISCAL YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
-------------------------- ---------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
------------------- -------------------
RATE VOLUME NET RATE VOLUME NET
---- ------ --- ---- ------ ---
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans:
Real estate(1) ................... $ 138 $ 189 $ 327 $ (37) $ 73 $ 36
Consumer ......................... (117) (76) (193) 85 23 108
Commercial real estate ........... 25 75 100 (145) 48 (97)
----- ----- ----- ----- ----- -----
Total .......................... 46 188 234 (97) 144 47
----- ----- ----- ----- ----- -----
Mortgage-related securities ........ 74 (111) (37) (1) (69) (70)
Investment securities (2) .......... (29) 153 124 (4) 164 160
Interest-earning deposits .......... (2) (19) (21) 17 (173) (156)
----- ----- ----- ----- ----- -----
Total interest-earning assets .... 89 211 300 (85) 66 (19)
----- ----- ----- ----- ----- -----
INTEREST-BEARING LIABILITIES:
Deposits:
Passbook and statement savings ... 28 (60) (32) (55) (49) (104)
Money market ..................... (2) (5) (7) (6) (8) (14)
NOW .............................. 2 15 17 (54) (1) (55)
Certificate of deposit ........... 51 202 253 (141) 113 (28)
----- ----- ----- ----- ----- -----
Total interest-bearing liabilities 79 152 231 (256) 55 (201)
----- ----- ----- ----- ----- -----
Increase in net interest income ...... $ 10 $ 59 $ 69 $ 171 $ 11 $ 182
===== ===== ===== ===== ===== =====
</TABLE>
- -----------------------------
(1) Includes in addition to one- to four-family real estate loans, multi-family
and construction real estate loans which at June 30, 1998 totalled $811,000
and $523,000, respectively.
(2) Calculations of rate/volume changes are not presented on a tax equivalent
basis due to the volume of tax-exempt investments in 1998 not being
material. There were no tax-exempt investments owned in 1997 or 1996.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND JUNE 30, 1997.
Total assets increased by $4.6 million, or 4.3%, from $107.4 million at
June 30, 1997 to $112.0 million at June 30, 1998. The growth in assets was
primarily due to loan growth, which was funded through increased deposits and
retained earnings. Loan growth during the 1998 period was primarily due to
increased demand, particularly as a result of refinancings in light of decreased
interest rates, the introduction of 30-year fixed-rate loans and special
promotions for home equity loans and lines of credit. Cash and due from banks
also increased due to the growth in deposits during 1998 exceeding the growth in
loans and investment securities.
Real estate loans increased by $2.9 million, or 5.1%, from $57.1
million at June 30, 1997 to $60.0 million at June 30, 1998 primarily due to
increases in the origination of one- to four-family loans, including the
conversion of construction loans to permanent financing, and multi-family and
commercial real estate loans. One- to four-family loans increased $1.0 million
from $53.7 million at June 30, 1997 to $54.7 million at June 30, 1998.
Multi-family and
39
<PAGE> 40
commercial real estate loans increased $1.5 million from $3.3 million at June
30, 1997 to $4.8 million at June 30, 1998, a 45.5% increase, primarily due to
the Association's increased business development efforts. Consumer loans
decreased by $400,000, or 3.9%, from $10.3 million at June 30, 1997 to $9.9
million at June 30, 1998.
Nonperforming loans increased from $1.6 million at June 30, 1997 to
$1.9 million at June 30, 1998, representing 2.4% and 2.7%, respectively, of
total loans at such dates. The increase of $300,000 in nonperforming loans was
in one- to four-family real estate loans. This increase continued a trend which
commenced in 1996 as a result of a decline in real estate values in the market
area. Initially, the Association was slow to handle the increased number of
loans which warranted foreclosure. The Association has improved its procedures
for addressing delinquent loans and believes that real estate values in its
market area have stabilized in recent periods. Nonperforming assets and troubled
debt restructurings remained stable at $2.1 million for both June 30, 1998 and
1997, representing 1.9% and 2.0%, respectively, of total assets at such dates.
Total deposits increased by $4.1 million, or 4.2%, from $98.5 million
at June 30, 1997 to $102.6 million at June 30, 1998. The increase was primarily
due to an increase of $3.2 million, or 5.6%, in certificates of deposit from
$57.3 million at June 30, 1997 to $60.5 million at June 30, 1998. The increase
in certificates of deposit was primarily due to the Association's strategy of
offering more competitive rates on such deposits.
Total equity increased $600,000, or 7.0%, from $8.6 million at June 30,
1997 to $9.2 million at June 30, 1998. The increase in equity was a result of
net income of $600,000 for the fiscal year.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED JUNE 30, 1998 AND
JUNE 30, 1997.
GENERAL. Net income for fiscal 1998 increased by $407,000, or 193.8%,
to $617,000 from $210,000 for fiscal year 1997. The increase was primarily due
to a decrease in noninterest expense resulting from the absence of the one time
special assessment of $620,000 to recapitalize the SAIF which occurred in the
second quarter of fiscal 1997. Net income also increased due to an increase in
net interest income. These items were slightly offset by an increase in the
provision for loan losses and an increase in noninterest expenses.
INTEREST INCOME. Total interest income increased by $300,000, or 4.1%,
from $7.4 million for fiscal 1997 to $7.7 million for fiscal 1998, primarily due
to a $2.4 million, or 2.3%, increase in the average balance of interest-earning
assets and a slight increase in the weighted average yield on interest-earning
assets, which increased from 7.28% for fiscal 1997 to 7.40% for fiscal 1998.
Interest income on real estate loans increased $300,000, or 7.5%, from $4.0
million for fiscal year 1997 to $4.3 million for fiscal year 1998, primarily due
to a $2.4 million increase in the average balance of real estate loans and a
slight increase in the weighted average yield from 7.55% for fiscal 1997 to
7.80% for fiscal 1998. Interest income on consumer loans decreased $175,000,
from $1.0 million for fiscal year 1997 to $825,000 for fiscal year 1998. This
was principally due to decreases in the average balance of consumer loans from
$11.2 million in 1997 to $10.3 million in 1998 and a decrease in the yield on
such loans from 9.08% in 1997 to 7.99% in 1998. Interest income on
mortgage-related securities decreased $37,000 from $196,000 for fiscal 1997 to
$159,000 for fiscal 1998 due to the increase in weighted average yield from
4.04% in 1997 to 6.05% in 1998 being offset by a decrease of $2.2 million in the
average balance of such securities from $4.8 million in 1997 to $2.6 million in
1998. Interest income on investment securities increased slightly by $100,000,
from $1.6 million for fiscal year 1997 to $1.7 million for fiscal year 1998 due
to an increase in the average balance of investment securities from $24.4
million in 1997 to $26.7 million in 1998, offset by a decrease in the yield on
such investments.
INTEREST EXPENSE. Interest expense increased by $200,000, or 5.0%, from
$4.0 million for fiscal 1997 to $4.2 million for fiscal 1998. The increase in
interest expense was primarily the result of increased expense on certificates
of deposit, which was a result of a $3.7 million, or 6.7% increase in the
average balance of such accounts from $55.6 million for fiscal 1997 to $59.3
million for fiscal 1998. These net increases were partially offset by a decrease
in interest expense on savings accounts of $32,000 due to the decrease in the
average balance of such accounts, which declined from an average balance of
$30.1 million for fiscal 1997 to $28.8 million for fiscal 1998. The increase in
the average balance of certificates of deposit and the decrease in the average
balance of savings accounts was due primarily to the Association's efforts to
solicit certificate accounts by more competitively pricing
40
<PAGE> 41
such accounts and by customers shifting funds from lower-yielding savings
accounts to higher-yielding certificates of deposit.
PROVISION FOR LOAN LOSSES. The Association's provision for loan losses
for fiscal 1998 was $176,000, compared to $34,000 for fiscal 1997. The allowance
for loan losses increased $23,000 from $429,000 at June 30, 1997 to $452,000 at
June 30, 1998. Total nonaccrual loans also increased from $1.6 million at June
30, 1997 to $1.9 million at June 30, 1998. The increase in the provision for
loan losses and corresponding increase in the Association's allowance for loan
losses reflected an increase in the amount of nonaccrual and substandard loans.
This increase was due to the general decline in real estate values in its market
area which commenced in 1996. Initially, the Association was slow to handle the
increased number of loans which warranted foreclosure. The Association has
improved its procedures for addressing delinquent loans and believes that real
estate values in its market area have stabilized in recent periods. As a result,
at June 30, 1998, the allowance for loan losses was 0.65% of total loans,
compared to 0.64% at June 30, 1997. The Association anticipates that, as a
result of its increasing emphasis on consumer and multi-family and commercial
real estate loans, it may need to maintain an allowance for loan losses in the
future at a level that is higher than that which it maintained in recent periods
to offset any greater risk resulting from the shifting composition of its loan
portfolio. See "Business of the Association - Delinquent Loans, Classified
Assets and Foreclosed Real Estate" and "--Delinquent Loans, Classified Assets
and Foreclosed Real Estate--Allowance for Loan Losses."
NONINTEREST INCOME. In fiscal 1998, the Association experienced a
$20,000 increase in noninterest income from $284,000 in fiscal year 1997 to
$304,000 for fiscal year 1998 due primarily to a $25,000 increase in loan fees
and service charges associated with the implementation of surcharges on
automated teller machine ("ATM") transactions and the increase in the average
balance of loans originated. This increase was offset by a $16,000 reduction in
the gain of sale and calls of securities from $17,000 for fiscal 1997 to $1,000
for fiscal 1998.
NONINTEREST EXPENSES. Total noninterest expenses decreased from $3.1
million for fiscal 1997 to $2.5 million for fiscal 1998 due primarily to a
reduction in the FDIC deposit insurance premiums in fiscal 1998 and the absence
of a one-time charge of $620,000 in order to recapitalize the SAIF fund which
occurred in the fourth quarter of 1997. As a result of the FDIC premium
reduction and absence of the SAIF assessment in fiscal 1998, FDIC insurance
assessments and premiums decreased from $750,000 for fiscal 1997 to $64,000 for
fiscal 1998. Noninterest expenses other than FDIC premiums and the SAIF special
assessment increased approximately $66,000 for fiscal 1998 compared to fiscal
1997. Compensation and employee benefits increased $30,000, or 2.4%, primarily
due to normal increases in salaries as well as increases in benefit costs
offered in part by a decrease of $26,000 in pension expense contribution. This
contribution is determined annually by the Association's pension administrator.
Other noninterest expenses aggregating $510,000 at June 30, 1998 were comprised
of $51,000 of advertising expense, $57,000 of printing and postage, $211,000 of
outside service fees, $31,000 in loan expenses, $20,000 in telephone expense,
$32,000 in insurance, $41,000 in ATM expense, $15,000 in contributions and
$51,000 in other miscellaneous operating expenses. These expenses have remained
fairly constant from year to year.
PROVISION FOR INCOME TAXES. Income tax expense totaled $506,000 for
fiscal 1998, compared to $344,000 for fiscal 1997, resulting in an effective tax
rate of 45.1% for fiscal 1998 compared to 62.1% for fiscal 1997. The increase
in income tax expense in fiscal 1998 was attributable to higher pre-tax income,
which increased from $554,000 in 1997 to $1.1 million in 1998, offset in part by
a lower effective tax rate. The fiscal 1997 effective tax rate of 62.1% was
inordinately high as a result of a one time recognition of a deferred tax
liability of $136,000 for the recapture of certain of the Association's bad debt
reserve as a result of a change in federal income tax law. The 1997 effective
tax rate was also impacted by a reduced state income tax rate also attributable
to the deferred federal tax expense recognition. Without the one-time
adjustment, the fiscal 1997 effective tax rate would approximate the fiscal 1998
effective tax rate.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED JUNE 30, 1997 AND
JUNE 30, 1996.
GENERAL. Net income decreased $387,000, or 64.8%, from $597,000 for
fiscal 1996 to $210,000 for fiscal 1997. The decrease was primarily attributable
to a one-time special assessment of $620,000 from the FDIC in order to
recapitalize the SAIF, which was offset, in part, by a $182,000 increase in net
interest income.
41
<PAGE> 42
INTEREST INCOME. Interest income remained stable at $7.4 million for
fiscal 1997 and fiscal 1996, primarily due to the average balance of
interest-earning assets and weighted average yield remaining stable for fiscal
1997 and 1996. Interest income on loans also remained stable at $5.1 million for
fiscal 1997 and 1996 due to the higher average balance of loans being offset by
a decrease in the weighted average yield of loans from 7.89% for fiscal 1996 to
7.77% for fiscal 1997.
INTEREST EXPENSE. Interest expense decreased by $200,000, or 4.8%, from
$4.2 million for fiscal 1996 to $4.0 million for fiscal 1997 primarily due to a
$200,000 decrease in the average balance of deposits and a decrease in the
weighted average costs of such liabilities from 4.31% for 1996 to 4.11% for
1997, due primarily to the Association's decision to reduce the rate paid on its
savings accounts during 1997 as part of the Association's determination to
extend the maturity of its deposit portfolio by competitively pricing its time
deposit products. The Association's revised deposit pricing strategy of
competitively pricing certificates of deposit and reducing the rate paid on
savings accounts resulted in an increase in the average balance of certificates
of deposit for 1997 compared to 1996, which was more than offset by the $1.7
million decrease in the average balance of savings accounts for 1997 compared to
1996. This movement to certificates of deposit also extended the average
maturity of the Association's deposits.
PROVISION FOR LOAN LOSSES. During 1997, the provision for loan losses
decreased by $68,000 from the prior year's level of $102,000. The lower
provision was based on management's evaluation of existing real estate market
conditions, the level of charge-offs and nonperforming loans, as well as an
evaluation of the general economic conditions in the Association's market areas.
At June 30, 1996, the Association's allowance for loan losses to total
nonperforming loans and to total loans was 23.9% and 0.69% respectively,
compared to 27.1% and 0.64% at June 30, 1997.
NONINTEREST INCOME. Noninterest income increased by $26,000, or 10.1%,
from $258,000 in 1996 to $284,000 in 1997. The increase was primarily
attributable to the increase in loan fees and service charges and gains on sale
of securities available-for-sale. The increase in loan fees and service charges
was primarily due to an increase in the average balance of loans and the
implementation of surcharges on ATM transactions.
NONINTEREST EXPENSES. Noninterest expenses increased $700,000, or
29.2%, in 1997 to $3.1 million compared to $2.4 million in 1996. The increase
primarily related to the special assessment by the FDIC for the SAIF
recapitalization of $620,000. Compensation and employee benefits also increased
$47,000, or 3.8%, due to normal annual increases in salaries and benefit costs.
PROVISION FOR INCOME TAXES. Income tax expense decreased by $18,000, or
5.0%, from $362,000 in fiscal 1996 to $344,000 in fiscal 1997, resulting in an
effective tax rate of 62.1% for fiscal year 1997 compared to 37.8% for fiscal
1996. The decrease in income tax expense in fiscal 1997 was attributable to a
decrease in the Association's pre-tax earnings for fiscal 1997 compared to
fiscal 1996, offset by a $136,000 deferred tax expense related to the change in
income tax law relating to the Association's tax bad debt reserve. The 1997
effective tax rate was also impacted by a reduced state income tax rate also
attributable to the deferred federal income tax expense recognition. The
Association's effective tax rate for fiscal 1997 was 62.1% as compared to 37.8%
for fiscal 1996 as a result of this change.
LIQUIDITY AND CAPITAL RESOURCES
The Association's primary sources of funds are deposits, principal and
interest payments on loans, mortgage-backed and investment securities. The
Association uses the funds generated to support its lending and investment
activities as well as any other demands for liquidity such as deposit outflows.
While maturities and scheduled amortization of loans are predictable sources of
funds, deposit flows, mortgage prepayments and the exercise of call features are
greatly influenced by general interest rates, economic conditions and
competition. The Association has continued to maintain the required levels of
liquid assets as defined by OTS regulations. This requirement of the OTS, which
may be varied at the direction of the OTS depending upon economic conditions and
deposit flows, is based upon a percentage of deposits and short-term borrowings.
The Association's currently required liquidity ratio is 4.0%. At June 30, 1998,
1997, 1996, 1995 and 1994, the Association's liquidity ratios were 22.9%, 21.1%,
21.1%, 19.4% and 25.6%, respectively.
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<PAGE> 43
At June 30, 1998, the Association exceeded all of its regulatory
capital requirements with a tangible capital level of $9.4 million, or 8.4% of
total adjusted assets, which is above the required level of $1.7 million, or
1.5%; core capital of $9.4 million, or 8.4%, of total adjusted assets, which is
above the required level of $4.5 million, or 4.0%; and risk-based capital of
$9.8 million, or 16.9%, of risk-weighted assets, which is above the required
level of $4.6 million, or 8.0%. See "Regulatory Capital Compliance."
The Association has other sources of liquidity if a need for additional
funds arises, including FHLB advances. At June 30, 1998, the Association did not
have any advances outstanding from the FHLB, and at June 30, 1998 had an overall
borrowing capacity from the FHLB of $5.9 million.
The Association's most liquid assets are cash and due from banks,
interest-bearing deposits with banks and its investment and mortgage-related
securities available-for-sale. The levels of these assets are dependent on the
Association's operating, financing, lending and investing activities during any
given period. At June 30, 1998, cash and due from banks, interest-bearing
deposits with banks and investment securities available for sale totaled $19.8
million, or 17.7% of total assets.
At June 30, 1998, the Association had commitments to originate loans
and unused outstanding lines of credit and undisbursed proceeds of construction
mortgages totaling $2.0 million. The Association anticipates that it will have
sufficient funds available to meet its current loan origination commitments.
Certificate accounts, which are scheduled to mature in less than one year from
June 30, 1998, totaled $38.8 million. The Association expects that substantially
all of the maturing certificate accounts will be retained by the Association at
maturity.
The initial impact of the Conversion on the liquidity and capital
resources of the Company will be significant as it will substantially increase
the liquid assets of the Company and the capital base on which the Company
operates. Additionally, the Company expects the substantial majority of
Conversion proceeds will initially be invested in readily marketable investment
grade securities which, if liquidity needs developed, could be sold by the
Company to provide additional liquidity. Further, the additional capital
resulting from the Offerings is expected to increase the capital base of the
Company. At June 30, 1998, the Association had total equity, determined in
accordance with GAAP, of $9.2 million, or 8.2% of total assets, which
approximated the Association's regulatory tangible capital at that date of 8.4%
of assets. An institution with a ratio of tangible capital to total assets of
greater than or equal to 5% is considered to be "well-capitalized" pursuant to
OTS regulations. Assuming that the Company uses 50% of the net proceeds at the
maximum of the Estimated Price Range to purchase the stock of the Association,
the Association's GAAP capital will increase to $14.6 million or a ratio of GAAP
capital to adjusted assets, on a pro forma basis, of 12.4% after the Conversion.
In the event that the holding company form of organization is not utilized and
all of the net Conversion proceeds, at the midpoint of the Estimated Price
Range, are retained by the Association, the Association's ratios of tangible and
core capital to adjusted assets, on a pro forma basis, will both increase to
15.3% after Conversion. The investment of the net proceeds from the sale of the
Common Stock is expected to provide the Association with additional income to
increase further its capital position. The additional capital may also assist
the Association in offering new programs and expanded services to its customers.
See "Use of Proceeds."
YEAR 2000 COMPLIANCE
As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Many existing application software products were
designed to accommodate only two-digits. For example, "96" is stored on the
system and represents 1996. The Association relies significantly on an outside
service bureau. The Association has not received any guarantee from the outside
service bureau that the bureau will be Year 2000 compliant. However, the service
bureau has completed its inventory and assessment of its Year 2000 compliance
and is scheduled to have resolved all identified problems by the end of 1998.
This will provide for a full year of testing for compliance. The Association has
also completed its inventory and assessment and has completed upgrading its
internal system to handle the Year 2000 problem. The Association currently is
testing its upgraded system and will perform extensive tests with the service
bureau system. The cost to the Association for the internal system upgrade, not
including staff time, has been less than $50,000. There can be no assurances,
however, that the performance by the Association and its service bureau will be
effective to remedy all potential problems. To the extent the Company's systems
are not fully Year
43
<PAGE> 44
2000 compliant, there can be no assurance that potential systems interruptions
or the cost necessary to update software would not have a materially adverse
effect on the Company's business, financial condition, results of operations and
business prospects.
IMPACT OF INFLATION AND CHANGING PRICES
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with GAAP, which require the measurement of financial
position and operating results generally in terms of historical dollar amounts
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Association's operations. Unlike industrial companies, nearly all of
the assets and liabilities of the Association are monetary in nature. As a
result, interest rates have a greater impact on the Association's performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES. In June 1996, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." This Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on consistent application of a financial-components approach that focuses
on control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under the financial-components approach,
after a transfer of financial assets, an entity recognizes all financial and
servicing assets it controls and liabilities it has incurred and derecognizes
financial assets it no longer controls and liabilities that have been
extinguished. The financial-components approach focuses on the assets and
liabilities that exist after the transfer. If a transfer does not meet the
criteria for a sale, the transfer is accounted for as a secured borrowing with a
pledge of collateral. The Statement became effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after December
31, 1996, and is to be applied prospectively. Adoption of this Statement did not
have a material impact on the net income, equity, or financial position of the
Association.
ACCOUNTING FOR EARNINGS PER SHARE. In February 1997, the FASB issued
SFAS No. 128, "Earnings Per Share." This statement establishes standards for
computing and presenting earnings per share ("EPS") and applies to entities with
publicly-held common stock or potential common stock. This statement simplifies
the standards for computing earnings per share previously found in APB Opinion
No. 15, "Earnings Per Share," and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
This statement is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods, and earlier application is
not permitted.
REPORTING COMPREHENSIVE INCOME. In September 1997, the FASB issued SFAS
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). This statement
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. SFAS No.
130 requires that all items that are required to be recognized as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The statement does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. The Association will make the appropriate
disclosures in the applicable financial statements, as required.
DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. In
September 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments
44
<PAGE> 45
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS No. 131
is effective for financial statements for periods beginning after December 15,
1997. Management has not yet determined the impact, if any, of this statement on
the Association.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. In
connection with the implementation of SFAS No. 133, the Association may transfer
debt securities classified as held-to-maturity to the available-for-sale
category. Such a transfer will not call into question the Association's
intention to hold other debt to maturity in the future. SFAS No. 133 is
effective for financial statements for periods beginning after June 15, 1999.
Management has not yet determined the impact, if any, of this statement on the
Association. Management plans to adopt SFAS No. 133 during its fiscal year
ending June 30, 1999 in order to use the special provision allowing the transfer
of debt securities classified as held-to-maturity to the available-for-sale
category. Management has not identified which securities might be transferred to
the available-for-sale category; and, as a result, is not able to determine
whether such transfer could have a material impact on its financial condition.
If the Association had transferred all of its held-to-maturity securities to
available-for-sale securities as of June 30, 1998, its shareholders' equity
would have increased by approximately $14,000.
BUSINESS OF THE ASSOCIATION
GENERAL
The Association's principal business has been and continues to be
attracting retail deposits from the general public in the areas surrounding its
four banking offices and investing those deposits, together with funds generated
from operations, primarily in one- to four-family mortgage loans and consumer
loans. The Association currently originates, for investment, adjustable- and
fixed-rate one- to four-family mortgage loans, as well as a variety of consumer
loans, including home equity loans, lines of credit, automobile and education
loans. To a lesser extent, the Association also originates multi-family and
commercial real estate loans and construction loans. The Association also
invests in mortgage-related and investment securities, primarily U.S. government
and agency obligations, and certificates of deposit in other financial
institutions and other permissible investments. The Association's revenues are
derived principally from interest on its loans, and to a lesser extent, interest
and dividends on its investment and mortgage-related securities and certificates
of deposit investments, and other noninterest income. The Association's primary
sources of funds are deposits and principal and interest payments on loans and
mortgage-related securities.
MARKET AREA AND COMPETITION
The Association is a community-oriented banking institution offering a
variety of financial products and services to meet the needs of the communities
it serves. The Association's lending and deposit gathering is concentrated in
its market area consisting of Luzerne and Carbon counties in Northeast
Pennsylvania. The Association invests primarily in loans secured by first and
second mortgages on properties located in its market area.
The Association maintains two banking branch offices in Hazleton (in
Luzerne County), one in Weatherly (in Carbon County) and one in Drums (in
Luzerne County). Hazleton is situated approximately 100 miles from Philadelphia
and New York City and approximately 50 miles from Allentown and the
Wilkes-Barre/Scranton area.
The economy of the greater Hazleton area is characterized by
diversified light manufacturing and is the site of production facilities for
several manufacturers including Union Camp, Hershey-Cadbury Chocolates, Quebacor
and Hazleton Pumps, Inc. As a consequence, the manufacturing sector employs more
than one third of the area's work
45
<PAGE> 46
force. The Hazleton area has excellent access to major highway transportation
routes including Interstates 80 and 81 as well as rail transportation. The
population of Luzerne County has remained relatively static and has one of the
oldest average ages for all counties in the United States. The unemployment rate
in the area is greater than the national average. According to Pennsylvania
Labor Market Information, as of July 1998, the unemployment rate for the market
area was 6.3% compared to the national level of 4.6%. The median household
income for 1997 for the market area was $29,130 compared to the national level
of $36,961.
The Association faces significant competition both in generating loans
and in attracting deposits. The Association's primary market area is highly
competitive and the Association faces direct competition from a significant
number of financial institutions, many with a state wide or regional presence
and, in some cases, a national presence. Many of these financial institutions
are significantly larger and have greater financial resources than the
Association. The Association's competition for loans comes principally from
commercial banks, savings banks, credit unions, mortgage brokers, mortgage
banking companies and insurance companies. Its most direct competition for
deposits has historically come from savings banks and associations, commercial
banks and credit unions. In addition, the Association faces increasing
competition for deposits from non-bank institutions such as brokerage firms and
insurance companies in such instruments as short-term money market funds,
corporate and government securities funds, mutual funds and annuities.
Competition may also increase as a result of the removal of restrictions on the
interstate operations of financial institutions. See "Risk Factors--Highly
Competitive Industry."
In addition, the Association recognizes that its customer base
increasingly focuses on convenience and access to services. The Association has
addressed these customer desires recently through the implementation of
telephone banking system and the introduction of a new debit card. Additionally,
the Association intends to expand its telephone banking system to promote bill
payment services and install ATMs. The Association will continue to evaluate and
enhance its service delivery system.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Association's loan portfolio consists
primarily of mortgage loans secured by one- to four-family residential real
estate, consumer loans and multi-family and commercial real estate loans. At
June 30, 1998, the Association's loans totaled $69.9 million, of which $54.7
million, or 78.2%, were one- to four-family residential mortgage loans. Total
real estate mortgage loans included 28.7% of adjustable-rate loans, which are
indexed primarily to the United States Treasury Bill rates and the prime rate as
reported in The Wall Street Journal.
The Association's consumer loans at June 30, 1998 aggregated $9.9
million, or 14.2% of total loans. Such consumer loans included $6.3 million of
home equity loans and lines of credit, $1.0 million of automobile loans,
$345,000 of education loans and $2.3 million of other consumer loans. At June
30, 1998, the Association also had $5.3 million, or 7.6% of total loans, in
multi-family and commercial real estate loans and construction loans.
The types of loans that the Association may originate are subject to
federal and state laws and regulations. Interest rates charged by the
Association on loans are affected by the demand for such loans and the supply of
money available for lending purposes and the rates offered by competitors. These
factors are, in turn, affected by, among other things, economic conditions,
monetary policies of the federal government, including the Federal Reserve
Board, and legislative tax policies.
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<PAGE> 47
The following table sets forth the composition of the Association's
loan portfolio in dollar amounts and as a percentage of the portfolio at the
dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
----------------------------------------------------------------------------------------------
1998 1997 1996 1995
--------------------- -------------------- -------------------- -------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------- -------- ------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family .......... $54,722 78.24% $53,685 79.59% $51,561 78.36% $50,494 78.11%
Multi-family and commercial .. 4,757 6.80 3,263 4.84 2,955 4.49 2,538 3.93
Construction ................. 523 0.75 194 0.29 298 0.45 505 0.78
------- ------- ------- ------- ------- ------- ------- -------
Total real estate loans 60,002 85.79 57,142 84.72 54,814 83.30 53,537 82.82
------- ------- ------- ------- ------- ------- ------- -------
Consumer loans:
Home equity loans and
lines of credit ............ 6,306 9.02 6,848 10.15 6,820 10.37 7,208 11.14
Automobile ................... 967 1.38 1,067 1.58 1,245 1.89 1,362 2.11
Education .................... 345 0.49 16 0.02 711 1.08 568 0.88
Secured by deposits .......... 907 1.30 937 1.39 858 1.30 812 1.26
Other ........................ 1,410 2.02 1,441 2.14 1,353 2.06 1,159 1.79
------- ------- ------- ------- ------- ------- ------- -------
Total consumer loans ... 9,935 14.21 10,309 15.28 10,987 16.70 11,109 17.18
------- ------- ------- ------- ------- ------- ------- -------
Total loans ............... 69,937 100.00% 67,451 100.00% 65,801 100.00% 64,646 100.00%
======= ======= ======= =======
Less:
Deferred loan origination fees
and discounts............... 274 284 283 302
Allowance for loan losses .... 452 429 447 401
------- ------- ------- -------
Total loans, net .......... $69,211 $66,738 $65,071 $63,943
======= ======= ======= =======
<CAPTION>
AT JUNE 30,
--------------------
1994
--------------------
PERCENT
AMOUNT OF TOTAL
------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real estate loans:
One- to four-family .......... $47,015 81.28%
Multi-family and commercial .. 2,143 3.71
Construction ................. 407 0.70
------- -------
Total real estate loans 49,565 85.69
------- -------
Consumer loans:
Home equity loans and
lines of credit............. 5,361 9.27
Automobile ................... 796 1.38
Education .................... 341 0.59
Secured by deposits .......... 685 1.18
Other ........................ 1,092 1.89
------- -------
Total consumer loans ... 8,275 14.31
------- -------
Total loans ............... 57,840 100.00%
=======
Less:
Deferred loan origination fees
and discounts .............. 278
Allowance for loan losses .... 215
-------
Total loans, net .......... $57,347
=======
</TABLE>
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<PAGE> 48
LOAN MATURITY. The following table shows the remaining contractual
maturity of the Association's total loans at June 30, 1998. The table does not
include the effect of future principal prepayments.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
-------------------------------------------------------
MULTI-
ONE- TO FAMILY AND
FOUR- COMMERCIAL TOTAL
FAMILY(1) REAL ESTATE CONSUMER LOANS
--------- ----------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Amounts due in:
One year or less .................... $ 11 $ -- $ 242 $ 253
After one year:
More than one year to three years . 330 426 1,589 2,345
More than three years to five years 1,313 327 2,888 4,528
More than five years to 10 years .. 8,393 360 5,095 13,848
More than 10 years to 15 years .... 16,920 2,633 81 19,634
More than 15 years ................ 27,377 1,912 40 29,329
------- ------- ------- -------
Total amount due ............... $54,344 $ 5,658 $ 9,935 $69,937
======= ======= ======= =======
</TABLE>
- ------------------------
(1) Includes construction loans for the construction of one- to four-family
residences, which generally convert to permanent financing upon completion
of the construction phase.
The following table sets forth, at June 30, 1998, the dollar amount of
loans contractually due after June 30, 1999, and whether such loans have fixed
interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER JUNE 30, 1999
---------------------------------------
FIXED ADJUSTABLE TOTAL
------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans:
One- to four-family(1) .... $40,904 $13,263 $54,167
Multi-family and commercial 1,893 3,931 5,824
------- ------- -------
Total real estate loans 42,797 17,194 59,991
Consumer loans ............... 8,235 1,458 9,693
------- ------- -------
Total loans ............ $51,032 $18,652 $69,684
======= ======= =======
</TABLE>
- ------------------------
(1) Includes construction loans for the construction of one- to four-family
residences, which generally convert to permanent financing upon completion
of the construction phase.
ORIGINATION AND SALE OF LOANS. The Association's mortgage lending
activities are conducted primarily by its loan personnel operating at its
banking offices. All loans originated by the Association are underwritten
pursuant to the Association's policies and procedures. For fiscal 1998 and 1997,
the Association originated $15.2 million and $13.4 million of loans,
respectively. The Association originates both adjustable- and fixed-rate loans.
The Association's ability to originate fixed- or adjustable-rate loans is
dependent upon the relative customer demand for such loans, which is affected by
the current and expected future level of interest rates. All real estate loans
originated by the Association are originated for investment.
During fiscal years 1998 and 1997, the Association originated $8.6
million and $7.1 million, respectively, of one- to four-family mortgage loans.
In addition, during fiscal years 1998 and 1997, the Association originated $2.1
million and $1.4 million, respectively, of construction loans, all of which were
for owner financing of single-family properties, which, upon completion of the
construction phase, generally will convert to permanent financing. Also, the
Association originated $1.0 million and $872,000, respectively, of multi-family
and commercial real estate loans during fiscal 1998 and 1997.
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<PAGE> 49
Also, during fiscal 1998 and 1997, respectively, the Association
originated $3.6 million and $4.0 million of consumer loans, consisting of $1.4
million and $2.0 million, respectively, of home equity loans and lines of
credit, $813,000 and $713,000, respectively, of automobile loans, $457,000 and
$191,000, respectively, of education loans, and $913,000 and $1.1 million,
respectively, of other consumer loans.
The following table sets forth the Association's loan originations and
principal repayments and prepayments for the periods indicated:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED JUNE 30,
---------------------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Loans at beginning of period ................. $68,882 $66,604 $65,282
Originations:
Real estate:
One- to four-family ................. 8,567 7,109 6,500
Multi-family and commercial ......... 1,034 872 681
Construction ........................ 2,060 1,362 1,269
------- ------- -------
Total real estate loans .......... 11,661 9,343 8,450
Consumer:
Home equity loans and lines of credit 1,374 1,974 1,367
Automobile .......................... 813 713 919
Education ........................... 457 191 210
Unsecured lines of credit ........... -- -- --
Other ............................... 913 1,168 947
------- ------- -------
Total consumer loans ............. 3,557 4,046 3,443
------- ------- -------
Total loans originated ........... 15,218 13,389 11,893
Deduct:
Principal loan repayments and prepayments . 12,335 10,593 10,326
Transfers to foreclosed real estate ....... 718 518 245
------- ------- -------
Total deductions ................. 13,053 11,111 10,571
Net loan activity ............................ 2,165 2,278 1,322
------- ------- -------
Loans at end of period (1) ............. $71,047 $68,882 $66,604
======= ======= =======
</TABLE>
- ------------------------
(1) Loans at end of period include loans in process of $1.1 million, $1.4
million and $803,000 for fiscal years 1998, 1997 and 1996, respectively.
ONE- TO FOUR-FAMILY MORTGAGE LENDING. One- to four-family mortgage loan
originations are generally obtained by the Association's in-house loan
representatives, from existing or past customers, and through referrals from
members of the Association's local community. At June 30, 1998, the
Association's one- to four-family mortgage loans totalled $54.7 million, or
78.2% of total loans. Of the one- to four-family mortgage loans outstanding at
that date, 75.5% were fixed-rate mortgage loans and 24.5% were adjustable-rate
mortgage ("ARM") loans.
The Association currently offers a variety of fixed-rate mortgage
loans, including 30-year and 15-year mortgage loans. The Association also
currently offers ARM loans with a term of 30 years and an interest rate which
adjusts annually from the outset of the loan. The interest rates for the
Association's ARM loans adjust in accordance with an index based on United
States Treasury Bill rates. The Association originates ARM loans with initially
discounted rates, often known as "teaser rates." The Association's ARM loans
generally provide for periodic (not
49
<PAGE> 50
more than 2%) caps on the increase or decrease in the interest at any adjustment
date. Currently, the Association has a contractual rate ceiling of 5% over the
life of the loan.
The origination of ARM loans, as opposed to fixed-rate residential
mortgage loans, helps reduce the Association's exposure to increases in interest
rates. However, adjustable-rate loans generally pose credit risks not inherent
in fixed-rate loans, primarily because as interest rates rise, the underlying
payments of the borrower rise, thereby increasing the potential for default.
Periodic and lifetime caps on interest rate increases help to reduce the credit
risks associated with adjustable-rate loans but also limit the interest rate
sensitivity of such loans.
Most one-to-four-family mortgage loans are underwritten according to
FNMA and FHLMC guidelines. Generally, the Association originates
one-to-four-family residential mortgage loans in amounts up to 80% of the lower
of the appraised value or the selling price of the property securing the loan
and up to 95% of the appraised value or selling price if private mortgage
insurance ("PMI") is obtained. Mortgage loans originated by the Association
generally include due-on-sale clauses which provide the Association with the
contractual right to deem the loan immediately due and payable in the event the
borrower transfers ownership of the property without the Association's consent.
Due-on-sale clauses are an important means of adjusting the yields on the
Association's fixed-rate mortgage loan portfolio and the Association has
generally exercised its rights under these clauses. The Association requires
fire, casualty, title and, in certain cases, flood insurance on all properties
securing real estate loans made by the Association.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. The Association
originates adjustable-rate multi-family and commercial real estate loans that
generally are secured by properties used for a combination of residential and
retail purposes. Also, the Association participates in commercial real estate
loans promoted by a local regional development agency. At June 30, 1998, the
Association had $4.8 million of multi-family and commercial real estate loans.
At that date, the Association's largest multi-family or commercial real estate
loan were five commercial real estate loans which ranged from $264,000 to
$395,000 and were secured by commercial real estate a combination of lease
assignments, rents and equipment.
A multi-family mortgage loan may be made to an amount up to 70% of the
lower of the appraised value or sales price of the underlying property with a
term of up to 30 years. The Association's adjustable-rate multi-family loans are
offered at interest rates which adjust annually. The Association also generally
requires an appraisal on the property conducted by an independent appraiser and
title insurance.
The Association's underwriting procedures for commercial real estate
loans provide that such loans generally may be made in amounts up to 70% of the
lower of the appraised value or purchase price of the property unless the
property is owned by an individual who lives more than 50 miles from the
property. In those cases, a commercial real estate loan may only be made in
amounts up to 65% of the lower of the appraised value or purchase price of the
property. The Association may request PMI on a case by case basis. These
adjustable-rate loans may be made with terms up to 20 years and are generally
offered at interest rates which adjust every five years, in accordance with an
index based on the prime rate as published in The Wall Street Journal. The
factors considered by the Association include: the net operating income of the
mortgaged premises before debt service and depreciation; the debt coverage ratio
(the ratio of net earnings to debt service); and the ratio of loan amount to
appraised value.
Multi-family and commercial real estate loans generally are considered
to involve a higher degree of credit risk than financing on improved,
owner-occupied real estate. Multi-family and commercial real estate loans
generally involve larger principal amounts than one- to four-family residential
mortgage loans. In addition, because multi-family and commercial real estate
loans often are dependent on successful operation and management of the
properties, repayment of such loans may be subject to adverse conditions in the
real estate market or the economy to a greater extent than one- to four-family
residential loans.
50
<PAGE> 51
CONSTRUCTION LENDING. The Association also offers residential
construction loans. Such lending has consisted primarily of loans for the
construction of presold one- to four-family residences which convert into
permanent financing upon the completion of construction. The Association
generates residential construction loans primarily through direct contact with
the borrower or home builders, and these loans involve properties located in the
Association's market area. Such loans require that an appraisal be conducted by
a qualified appraiser and the Association review plans, specifications and cost
estimates. The appraiser must also conduct an inspection following completion of
the work. The amount of construction advances to be made, together with the sum
of previous disbursements, may not exceed the percentage of completion of the
construction. The maximum loan-to-value ratio for such loans is 95%.
Furthermore, borrowers have six months to complete the home and only pay
interest on amounts disbursed during the construction process. The Association
requires that it possess the first and only lien on these types of loans. At
June 30, 1998, the Association's largest construction loan was a performing loan
with an aggregate commitment of $396,000 secured by a single-family residence
located in Luzerne County. At that date, construction loans totalled $523,000
(net), or 0.8% of the Association's total loans. Risk of loss on a construction
loan is dependent largely upon the accuracy of the initial estimate of the
property's value at completion of construction or development.
CONSUMER LENDING. Consumer loans at June 30, 1998 amounted to $9.9
million or 14.2% of the Association's total loans. These loans include home
equity loans and lines of credit, automobile loans, education loans and other
consumer loans. Such loans are generally originated in the Association's primary
market area and if over $5,000 must be secured by real estate, automobiles or a
titled vehicle. These loans are typically shorter term and generally have higher
interest rates than one- to four-family mortgage loans. The maximum limit on
consumer loans, excluding home equity loans and home equity lines of credit, is
$50,000.
At June 30, 1998, home equity loans and lines of credit accounted for
$6.3 million, or 9.0% of total loans and 63.5% of consumer loans. The
Association generally offers home equity loans with terms of up to 120 months.
The Association also offers home equity lines of credit with terms up to 120
months with adjustable rates of interest which adjust on a quarterly basis. The
adjustable rate of interest is indexed to the prime rate as reported in The Wall
Street Journal on the last day of the month preceding adjustment. Generally, the
maximum loan-to-value ratio on both home equity loans and home equity lines of
credit is 75%.
The Association also offers automobile loans on both new and used cars.
Loans are offered with 60 month terms and loan-to-value ratios of 80% on new
cars. The Association will also finance high dollar new cars for an extended
term greater than 60 months. For used cars, the maximum loan-to-value ratio is
the lesser of the retail value shown in the NADA Used Car Guide or the contract
price and the terms for such loans are determined based on the age of the
vehicle, but are generally limited to 60 months. However, the Association will
not make a loan on an automobile over five years old unless such automobile is
deemed an investment property. In those cases, an inspection is required and the
valuation is determined by the retail value as listed in the Cars of Particular
Interest booklet. The Association also offers loans on recreational vehicles
with terms up to 15 years for new and 84 months for used vehicles and
loan-to-value ratios of 80% for new and used recreational vehicles.
Other consumer loans include education loans which are federally
guaranteed and originated under regulations of the Pennsylvania Higher Education
Assistance Agency, deposit-secured loans, and other personal and unsecured
loans. During the last two years, it has become the policy of the Association to
sell its education loans once the borrower has left school to Sallie Mae with
servicing released.
Loans secured by rapidly depreciable assets such as automobiles or that
are unsecured entail greater risks than one- to four-family mortgage loans. In
such cases, repossessed collateral for a defaulted loan may not provide an
adequate source of repayment of the outstanding loan balance, since there is a
greater likelihood of damage, loss or depreciation of the underlying collateral.
Further, consumer loan collections on these loans are dependent on the
borrower's continuing financial stability and, therefore, are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Finally, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans in the event of a default.
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<PAGE> 52
LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Directors
establishes the lending policies and loan approval limits of the Association.
Such policies provide that all mortgage loans will be reviewed and either
approved or rejected by the Executive Committee of the Board of Directors or the
full Board of Directors, except those loans made under consumer lending
guidelines. Additionally, the Board of Directors has authorized the following
persons to approve loans up to the amounts indicated: branch managers may
approve loans up to $5,000; the Vice President, Lending may approve loans up to
$10,000; loans up to $20,000 may be approved by the Association's President and
Chief Executive Officer; two officers signatures are required for loans over
$20,000 but less than $30,000; and loans over $30,000 require the approval of
the Board of Directors. All approved loans are reported monthly to the Board of
Directors.
DELINQUENT LOANS, CLASSIFIED ASSETS AND FORECLOSED REAL ESTATE
DELINQUENCIES AND CLASSIFIED ASSETS. Reports listing all delinquent
accounts are generated and reviewed by management and the Board of Directors on
a monthly basis. The procedures taken by the Association with respect to
delinquencies vary depending on the nature of the loan, period and cause of
delinquency and whether the borrower has been habitually delinquent. When a
borrower fails to make a required payment on a loan, the Association takes a
number of steps to have the borrower cure the delinquency and restore the loan
to current status. The Association generally sends the borrower a written notice
of non-payment after the loan is first past due. The Association's guidelines
provide that telephone, written correspondence and/or face-to-face contact will
be attempted to ascertain the reasons for delinquency and the prospects of
repayment. When contact is made with the borrower at any time prior to
foreclosure, the Association will attempt to obtain full payment, work out a
repayment schedule with the borrower to avoid foreclosure or, in some instances,
accept a deed in lieu of foreclosure. In the event payment is not then received
or the loan not otherwise satisfied, additional letters and telephone calls
generally are made. If the loan is still not brought current or satisfied and it
becomes necessary for the Association to take legal action, which typically
occurs after a loan is 90 days or more delinquent, the Association will commence
foreclosure proceedings against any real or personal property that secures the
loan. If a foreclosure action is instituted and the loan is not brought current,
paid in full, or refinanced before the foreclosure sale, the property securing
the loan generally is sold at foreclosure and, if purchased by the Association,
becomes foreclosed real estate.
Applicable regulations and the Association's Asset Classification
Policy require that the Association utilize an internal asset classification
system as a means of reporting problem and potential problem assets. The
Association has incorporated the OTS internal asset classifications as a part of
its credit monitoring system. The Association currently classifies problem and
potential problem assets as "Substandard," "Doubtful" or "Loss" assets. An asset
is considered "Substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "Doubtful" have all of the weaknesses
inherent in those classified "Substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "Loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When an insured institution classifies one or more assets, or
portions thereof, as "Loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the asset so classified or
to charge off such amount.
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<PAGE> 53
A savings institution's determination as to the classification of
its assets and the amount of its valuation allowances is subject to review by
the OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
Although management believes that, based on information currently available to
it at this time, its allowance for loan losses is adequate, actual losses are
dependent upon future events and, as such, further additions to the level of
allowances for loan losses may become necessary. In addition, the OTS or other
banking agencies may require the Association to recognize additions to the
allowance, based on their judgments about information available to them at the
time of their examination.
The Board of Directors and management review the results of the
reports on a monthly basis. The Association classifies assets in accordance with
the management guidelines described above. At June 30, 1998, the Association had
$1.9 million of assets designated as Substandard which consisted of mortgage and
consumer loans. At that same date the Association had $6,000 of assets
classified as Loss consisting of four loans. All assets designated Loss by the
Association are fully reserved. The following table sets forth the delinquencies
in the Association's loan portfolio as of the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30, 1998 AT JUNE 30, 1997
----------------------------------------- ---------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------ ------------------ ------------------ -------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF OF BALANCE OF OF BALANCE OF OF BALANCE OF
LOANS LOANS LOANS LOANS LOANS LOANS LOANS LOANS
------ ---------- ------ ---------- ------ ---------- ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family... 3 $ 112 21 $1,443 9 $ 717 19 $1,188
Multi-family and
commercial ......... -- -- 6 247 -- -- 5 174
Consumer Loans:
Home equity loans and
lines of credit .... -- -- 11 200 1 40 10 200
Automobile ........... 2 9 -- -- 1 1 2 13
Other ................ 4 7 4 6 1 -- 2 11
------ ------ ------ ------ ------ ------ ------ ------
Total ............. 9 $ 128 42 $1,896 12 $ 758 38 $1,586
====== ====== ====== ====== ====== ====== ====== ======
Delinquent Loans to
Total Loans .......... 0.18% 2.74% 1.14% 2.38%
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1996
-------------------------------------------
60-89 DAYS 90 DAYS OR MORE
------------------ --------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF OF BALANCE OF
LOANS LOANS LOANS LOANS
------ ---------- ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family .......................................... 6 $ 146 17 $1,050
Multi-family and commercial .................................. -- -- 6 304
Consumer Loans
Home equity loans and lines of credit ........................ 2 21 5 116
Automobile ................................................... 1 -- 2 8
Other ........................................................ 7 12 4 14
------ ------ ------ ------
Total ..................................................... 16 $ 179 34 $1,492
====== ====== ====== ======
Delinquent Loans to Total Loans ................................. 0.27% 2.29%
</TABLE>
53
<PAGE> 54
NONPERFORMING ASSETS AND IMPAIRED LOANS. The following table sets
forth information regarding nonaccrual loans, foreclosed real estate (including
a $66,000 loan which was a troubled debt restructuring effect in 1998) and
troubled debt restructurings. At June 30, 1998, nonaccrual loans and troubled
debt restructurings totalled $1.9 million and consisted of 42 loans. At such
date, foreclosed real estate totalled $221,000 and consisted of seven one- to
four-family properties. It is the policy of the Association to cease accruing
interest on loans 90 days or more past due (unless the loan principal and
interest are determined by management to be fully secured and in the process of
collection) and to charge off all accrued interest. For the year ended June 30,
1998, the amount of additional interest income that would have been recognized
on nonaccrual loans if such loans had continued to perform in accordance with
their contractual term was approximately $102,000. At June 30, 1998, the
Association had a $291,000 recorded investment in impaired loans which had
specific allowances of $35,000. At June 30, 1997, there were $175,000 of
impaired loans with specific loan loss allowances of $60,000.
<TABLE>
<CAPTION>
AT JUNE 30,
---------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
One- to four-family real estate $1,477 $1,188 $1,055 $1,087 $1,220
Consumer ....................... 206 224 138 178 146
Multi-family and commercial .... 181 174 304 326 151
------ ------ ------ ------ ------
Total(1) .................... 1,864 1,586 1,497 1,591 1,517
Foreclosed real estate(2) ......... 221 531 171 -- 107
------ ------ ------ ------ ------
Total nonperforming assets(3) 2,085 2,117 1,668 1,591 1,624
Troubled debt restructurings ...... -- -- 373 -- --
------ ------ ------ ------ ------
Troubled debt restructurings and
total nonperforming assets ...... $2,085 $2,117 $2,041 $1,591 $1,624
====== ====== ====== ====== ======
Total nonperforming loans and
troubled debt restructurings as a
percentage of total loans ....... 2.69% 2.38% 2.87% 2.49% 2.65%
Total nonperforming assets and
troubled debt restructurings as a
percentage of total assets ...... 1.86% 1.97% 1.89% 1.53% 1.59%
</TABLE>
- ---------------
(1) Total nonaccrual loans equals total nonperforming loans.
(2) Foreclosed real estate balances are shown net of related loss allowances.
(3) Nonperforming assets consist of nonperforming loans (and impaired loans) and
foreclosed real estate.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is
established through a provision for loan losses based on management's evaluation
of the risks inherent in its loan portfolio and the general economy. The
allowance for loan losses is maintained at an amount management considers
adequate to cover estimated losses in loans receivable which are deemed probable
and estimable based on information currently known to management. The allowance
is based upon a number of factors, including current economic conditions, actual
loss experience and industry trends. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the
Association's allowance for loan losses. Such agencies may require the
Association to make additional provisions for estimated loan losses based upon
their judgments about information available to them at the time of their
examination. As of June 30, 1998, the Association's allowance for loan losses
was 0.65% of total loans compared to 0.64% as of June 30, 1997. The Association
had nonaccrual loans of $1.9 million and $1.6 million at June 30, 1998 and June
30, 1997, respectively. The increase in the allowance from June 30, 1997 to June
30, 1998 was the result of an increase in the average amount of loans from $66.7
million at June 30, 1997 to $69.3 million at June 30, 1998, as well as an
increase in charge-off experience. The Association will continue to monitor and
modify its
54
<PAGE> 55
allowances for loan losses as conditions dictate. While management believes the
Association's allowance for loan losses at June 30, 1998 is sufficient to cover
losses inherent in its loan portfolio, no assurances can be given that the
Association's level of allowance for loan losses will be sufficient to cover
future loan losses incurred by the Association or that future adjustments to the
allowance for loan losses will not be necessary if economic and other conditions
differ substantially from the economic and other conditions used by management
to determine the current level of the allowance for loan losses.
The following table sets forth activity in the Association's
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
AT OR FOR THE FISCAL YEARS ENDED JUNE 30,
-------------------------------------------------------------
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses, beginning of year $ 429 $ 447 $ 401 $ 215 $ 182
Charged-off loans:
One- to four-family real estate ........... 165 20 44 5 --
Multi-family and commercial real estate.... 6 -- -- -- --
Consumer .................................. 7 41 24 59 14
----- ----- ----- ----- -----
Total charged-off loans .............. 178 61 68 64 14
----- ----- ----- ----- -----
Recoveries on loans previously charged off:
One- to four-family real estate ........... 22 -- -- -- --
Consumer .................................. 3 9 12 1 1
----- ----- ----- ----- -----
Total recoveries ..................... 25 9 12 1 1
----- ----- ----- ----- -----
Net loans charged-off ........................ (153) (52) (56) (63) (13)
Provision for loan losses .................... 176 34 102 249 46
Allowance for loan losses, end of period ..... $ 452 $ 429 $ 447 $ 401 $ 215
===== ===== ===== ===== =====
Net loans charged-off to average
interest-earning loans .................... 0.22% 0.08% 0.09% 0.10% 0.02%
----- ----- ----- ----- -----
Allowance for loan losses to total loans ..... 0.65% 0.64% 0.69% 0.63% 0.37%
----- ----- ----- ----- -----
Allowance for loan losses to nonperforming
loans and troubled debt restructuring ..... 24.25% 27.05% 23.90% 25.20% 14.17%
----- ----- ----- ----- -----
Net loans charged-off to allowance for
loan losses ................................ (33.85)% (12.12)% (12.53)% (15.71)% (6.05)%
----- ----- ----- ----- -----
Recoveries to charge-offs .................... 14.04% 14.75% 17.65% 1.56% 7.14%
----- ----- ----- ----- -----
</TABLE>
55
<PAGE> 56
The following table sets forth the Association's allowance for loan
losses in each of the categories listed at the dates indicated and the
percentage of such amounts to the total allowance and to total loans.
<TABLE>
<CAPTION>
AT JUNE 30,
-----------------------------------------------------------------------
1998 1997
--------------------------------- --------------------------------
% OF PERCENT % OF PERCENT
ALLOWANCE OF LOANS ALLOWANCE OF LOANS
IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ --------- -------- ------ --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate(1) ........ $273 60.40% 80.08% $ 278 64.80% 80.95%
Consumer .............. 135 29.87 14.25 120 27.97 15.35
Multi-family and
commercial .......... 39 8.63 5.67 27 6.30 3.70
Unallocated ........... 5 1.10 -- 4 0.93 --
---- ------ ------ ------ ------ ------
Total allowance
for loan losses... $452 100.00% 100.00% $ 429 100.00% 100.00%
==== ====== ====== ====== ====== ======
<CAPTION>
AT JUNE 30,
-----------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ --------------------------- ---------------------------
% OF PERCENT % OF PERCENT % OF PERCENT
ALLOWANCE OF LOANS ALLOWANCE OF LOANS ALLOWANCE OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ ----------- -------- ------ --------- -------- ------ --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate(1) ........ $ 298 66.67% 80.17% $ 275 68.58% 80.31% $ 139 64.65% 82.85%
Consumer .............. 125 27.96 16.77 110 27.43 17.27 67 31.16 14.38
Multi-family and
commercial .......... 22 4.92 3.06 13 3.24 2.42 5 2.33 2.77
Unallocated ........... 2 0.45 -- 3 0.75 -- 4 1.86 --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance
for loan losses... $ 447 100.00% 100.00% $ 401 100.00% 100.00% $ 215 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- -------------
(1) Includes one- to four-family real estate loans and construction loans.
56
<PAGE> 57
FORECLOSED REAL ESTATE. At June 30, 1998, the Association had
$221,000 of foreclosed real estate consisting of seven one- to four-family
properties. When the Association acquires property through foreclosure or deed
in lieu of foreclosure, it is initially recorded at the lesser of carrying value
of the loan or fair value of the property at the date of acquisition less costs
to sell. Thereafter, if there is a further deterioration in value, the
Association provides for a specific valuation allowance and charges operations
for the diminution in value. It is the policy of the Association to have
obtained an appraisal or broker's price opinion on all real estate subject to
foreclosure proceedings prior to the time of foreclosure. It is the
Association's policy to require appraisals on a periodic basis on foreclosed
properties and conducts inspections on foreclosed properties.
INVESTMENT ACTIVITIES
Pennsylvania-chartered savings institutions have the authority to
invest in various types of liquid assets, including United States Treasury
obligations, securities of various federal agencies and certificates of deposit
of insured banks and savings institutions. Subject to various restrictions,
state-chartered savings institutions may also invest their assets in
investment-grade corporate debt securities and mutual funds whose assets conform
to the investments that a state-chartered savings institution is otherwise
authorized to make directly. Additionally, the Association must maintain minimum
levels of investments that qualify as liquid assets under OTS regulations. See
"Regulation -Federal Regulation of Savings Institutions-Liquidity."
Historically, the Association has maintained liquid assets above the minimum OTS
requirements and at a level considered to be adequate to meet its normal daily
activities.
The investment policy of the Association, as approved by the Board
of Directors, requires management to maintain adequate liquidity, generate a
favorable return on investments without incurring undue interest rate and credit
risk and to complement the Association's lending activities. The Association
primarily utilizes investments in securities for liquidity management and as a
method of deploying excess funding not utilized for loan originations.
Generally, the Association's investment policy is more restrictive than the OTS
regulations allow and, accordingly, the Association has invested primarily in
U.S. Government and agency securities, which qualify as liquid assets under the
OTS regulations, and U.S. Government sponsored agency issued mortgage-backed
securities. As required by SFAS No. 115, the Association has established an
investment portfolio of securities that are categorized as held-to- maturity,
available-for-sale or held for trading. The Association generally invests in
securities as a method of utilizing funds not utilized for loan origination
activity and as a method of maintaining liquidity at levels deemed appropriate
by management. The Association does not currently maintain a portfolio of
securities categorized as held for trading. At June 30, 1998, the
available-for-sale securities portfolio totalled $7.9 million, or 7.1% of assets
and the held-to- maturity portfolio totalled $20.8 million, or 18.6% of assets.
Included in the Association's available-for-sale securities portfolio is an
equity-based mutual fund with a carrying value of $2.0 million.
At June 30, 1998, the Association had invested $3.6 million in FNMA,
FHLMC and GNMA mortgage-related securities, or 3.2% of total assets, of which
62.8% were classified as held-to-maturity. In addition, $6.3 million, or 22.0%
of the Association's securities, were debt obligations issued by federal
agencies which generally have stated maturities from 3 to 15 years but which
also have call features. Such callable securities allow the issuer, after a
certain time period, to repay the security prior to its stated maturity. Based
on interest rate ranges anticipated by the Association, the Association
estimates that the substantial majority of such securities will be called prior
to their stated maturities. The Association is subject to additional interest
rate risk and reinvestment risk compared to its evaluation of that risk if
changes in interest rates exceed ranges anticipated by the Association in
estimating the anticipated life of such callable investment securities.
Investments in mortgage-related securities involve a risk that actual
prepayments will be greater than estimated prepayments over the life of the
security, which may require adjustments to the amortization of any premium or
accretion of any discount relating to such instruments thereby changing the net
yield on such securities. There is also reinvestment risk associated with the
cash flows from such securities or in the event such securities are redeemed by
the issuer. In addition, the market value of such securities may be adversely
affected by changes in interest rates. Of the Association's investment in
mortgage-related securities at June 30, 1998, 62.8% were being held-to-maturity.
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<PAGE> 58
The following table sets forth certain information regarding the
amortized cost and fair value of the Association's securities at the dates
indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
-------------------------------------------------------------
1998 1997 1996
------------------ ----------------- ------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- ------- --------- ------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
Debt securities held-to-maturity:
Obligations of U.S. government agencies .......... $ 2,801 $ 2,810 $ 7,425 $ 7,395 $ 5,947 $ 5,876
Certificates of deposit .......................... 15,457 15,457 12,595 12,595 11,477 11,474
Other securities ................................. 244 242 116 114 1,085 1,076
------- ------- ------- ------- ------- -------
Total ...................................... $18,502 $18,509 $20,136 $20,104 $18,509 $18,426
======= ======= ======= ======= ======= =======
Debt securities available-for-sale:
Obligations of U.S. Treasury and U.S.
government agencies ............................ $ 3,548 $ 3,548 $ -- $ -- $ 1,074 $ 1,120
Other securities ................................. 2,561 2,406 2,188 2,010 2,636 2,394
------- ------- ------- ------- ------- -------
Total ...................................... $ 6,109 $ 5,954 $ 2,188 $ 2,010 $ 3,710 $ 3,514
======= ======= ======= ======= ======= =======
Equity securities available-for-sale:
FHLB stock ....................................... $ 594 $ 594 $ 566 $ 566 $ 542 $ 542
------- ------- ------- ------- ------- -------
Total investment securities ................ $25,205 $25,057 $22,890 $22,680 $22,761 $22,482
======= ======= ======= ======= ======= =======
Mortgage-related securities:
Mortgage-related securities held-to-maturity:
FHLMC ............................................ $ 472 $ 477 $ 1,698 $ 1,698 $ 1,058 $ 1,067
FNMA ............................................. 1,450 1,458 1,904 1,905 1,676 1,665
GNMA ............................................. 200 203 267 273 314 314
Collateralized mortgage obligations .............. 159 159 837 831 2,517 2,498
------- ------- ------- ------- ------- -------
Total mortgage-related securities held-to-
maturity ................................. $ 2,281 $ 2,297 $ 4,706 $ 4,707 $ 5,565 $ 5,544
======= ======= ======= ======= ======= =======
Mortgage-related securities available-for-sale:
FHLMC ............................................ $ -- $ -- $ -- $ -- $ 342 $ 343
FNMA ............................................. 578 582 678 656 764 739
GNMA ............................................. 740 771 982 1,016 1,132 1,164
------- ------- ------- ------- ------- -------
Total mortgage-related securities available-
for-sale ................................. 1,318 1,353 1,660 1,672 2,238 2,246
------- ------- ------- ------- ------- -------
Total mortgage-related securities .......... 3,599 3,650 6,366 6,379 7,803 7,790
------- ------- ------- ------- ------- -------
Total securities ........................... $28,804 $28,707 $29,256 $29,059 $30,564 $30,272
======= ======= ======= ======= ======= =======
</TABLE>
58
<PAGE> 59
The following table sets forth the Association's securities activities
for the periods indicated.
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED JUNE 30,
----------------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
MORTGAGE-RELATED SECURITIES:
Mortgage-related securities, beginning of period(1) ...... $ 6,378 $ 7,811 $ 7,409
======== ======== ========
Purchases,
Mortgage-related securities - held-to-maturity ....... $ 650 $ 1,850 $ 1,850
Maturities and calls,
Mortgage-related securities - held-to-maturity ....... (2,300) (1,941) --
Repayments and prepayments,
Mortgage-related securities .......................... (1,125) (1,350) (1,407)
Increase(decrease) in net premium ........................ 8 4 (45)
Increase in unrealized gain .............................. 23 4 4
-------- -------- --------
Net increase (decrease) in mortgage-related securities (2,744) (1,433) 402
-------- -------- --------
Mortgage-related securities, end of period ............... $ 3,634 $ 6,378 $ 7,811
======== ======== ========
INVESTMENT SECURITIES (2):
Investment securities, beginning of period(3) ............ $ 22,712 $ 22,565 $ 21,849
======== ======== ========
Purchases,
Investment securities - held-to-maturity ............. $ 12,571 $ 11,597 $ 13,291
Investment securities - available-for-sale ........... 3,949 25 --
Sales,
Investment securities - available-for-sale ........... -- (1,021) --
Repayments and prepayments ............................... (22) (833) (680)
Maturities and calls:
Investment securities - held-to-maturity ............. (14,176) (9,625) (11,646)
Investment securities - available-for-sale ........... -- -- (266)
Increase (decrease) in net premium ....................... (7) (14) 16
Increase in unrealized gain .............................. 23 18 1
-------- -------- --------
Net increase in investment securities ....... 2,338 147 716
-------- -------- --------
Investment securities, end of period ..................... $ 25,050 $ 22,712 $ 22,565
======== ======== ========
</TABLE>
- -----------------
(1) Includes mortgage-related securities available-for-sale.
(2) Includes certificates of deposit.
(3) Includes investment securities available-for-sale.
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<PAGE> 60
The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the Association's
investment securities and mortgage-related securities as of June 30, 1998.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
--------------------------------------------------------------------------------------------------
MORE THAN ONE YEAR MORE THAN 5 YEARS
ONE YEAR OR LESS TO FIVE YEARS TO 10 YEARS MORE THAN 10 YEARS TOTAL
----------------- ------------------- ------------------ ------------------- -----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- ------- -------- -------- -------- -------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-maturity securities:
Investment securities:
Municipal securities(1) .. $ -- -% $ -- -% $ -- -% $ 165 4.55% $ 165 4.55%
Obligations of U.S.
Government agencies... 250 5.70 500 6.45 1,500 7.14 551 7.39 2,801 6.94
Certificates of deposit .. 11,498 5.88 3,959 6.23 -- -- -- -- 15,457 5.97
Corporate obligations .... -- -- -- -- -- -- 79 6.20 79 6.20
Mortgage-related
securities ................ 670 5.04 431 6.92 508 7.33 672 7.20 2,281 6.54
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total securities
at amortized cost .... $12,418 5.83% $ 4,890 6.31% $ 2,008 7.19% $ 1,467 6.92% $20,783 6.15%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Available-for-sale securities:
Investment securities:
Municipal securities(1) .. $ -- -% $ -- -% $ 198 4.38% $ 175 4.48% $ 373 4.42%
Obligations of the U.S.
government agencies ... -- -- 750 6.17 2,298 6.63 500 6.99 3,548 6.58
Equity securities ........ 595 4.96 -- -- -- -- -- -- 595 4.96
Mutual fund .............. 2,187 -- -- -- -- -- -- -- 2,187 --
Mortgage-related
securities ................ -- -- 279 6.56 3 8.99 1,036 7.80 1,318 7.54
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total securities
at fair value ........ $ 2,782 4.96% $ 1,029 6.27% $ 2,499 6.45% $ 1,711 7.22% $ 8,021 6.47%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
- -----------
(1) Weighted average yield data for municipal securities is not presented on a
tax equivalent basis due to the immaterial amount of municipal securities
at June 30, 1998.
SOURCES OF FUNDS
GENERAL. Deposits, loan repayments and prepayments and cash flows generated
from operations are the primary sources of the Association's funds for use in
lending, investing and for other general purposes.
DEPOSITS. The Association offers a variety of deposit accounts with a range
of interest rates and terms. The Association's deposits consist of checking,
money market, savings, NOW, club accounts, certificate accounts and Individual
Retirement Accounts. More than 58% of the funds deposited in the Association are
in certificate of deposit accounts. At June 30, 1998, core deposits (savings,
NOW and money market accounts) represented 41.1% of total deposits. The flow of
deposits is influenced significantly by general economic conditions, changes in
money market rates, prevailing interest rates and competition. Deposits have
remained relatively static in recent years. Deposits increased $4.1 million, or
4.2%, from $98.5 million at June 30, 1997 to $102.6 million at June 30, 1998 and
decreased $800,000, or 0.8%, the previous year, from $99.3 million at June 30,
1996 to $98.5 million at June 30, 1997.
The Association's deposits are obtained predominantly from the areas in
which its branch offices are located. The Association has historically relied
primarily on customer service and long-standing relationships with customers to
attract and retain these deposits; however, market interest rates and rates
offered by competing financial institutions significantly affect the
Association's ability to attract and retain deposits. The Association uses
traditional means of
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<PAGE> 61
advertising its deposit products, including radio and print media and generally
does not solicit deposits from outside its market area. The Association has not
actively solicited certificate accounts in excess of $100,000 or used brokers to
obtain deposits in recent years. However, the Association has used brokers to
obtain deposits in the past and if circumstances warranted, would in the future
seek deposits through those methods. At June 30, 1998, 64.2% of the
Association's certificate of deposit accounts were to mature within one year.
Further increases in short-term certificate of deposit accounts, which tend to
be more sensitive to movements in market interest rates than core deposits, may
result in the Association's deposit base being less stable than if it had a
large amount of core deposits which, in turn, may result in further increases in
the Association's cost of deposits.
The following table presents the deposit activity of the Association for the
periods indicated:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED JUNE 30,
------------------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Increase (decrease) before interest credited $ 977 $(4,077) $ (436)
Interest credited .......................... 3,162 3,194 3,386
------- ------- -------
Net increase (decrease) .................... $ 4,139 $ (883) $ 2,950
======= ======= =======
</TABLE>
At June 30, 1998, the Association had $13.6 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
MATURITY PERIOD AMOUNT
- ------------------- --------------
(IN THOUSANDS)
<S> <C>
Three months or less ... $ 2,095
Over 3 through 6 months 3,342
Over 6 through 12 months 2,729
Over 12 months ......... 5,385
-------
Total .................. $13,551
=======
</TABLE>
61
<PAGE> 62
The following table sets forth the distribution of the Association's
average deposit accounts for the periods indicated and the weighted average
interest rates on each category of deposits presented and such information at
June 30, 1998. Averages for the periods presented utilize month-end balances.
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED JUNE 30,
------------------------------------------------------------
AT JUNE 30, 1998 1998 1997
------------------------ ----------------------------- -----------------------------
PERCENT OF PERCENT OF
PERCENT TOTAL AVERAGE TOTAL AVERAGE
OF TOTAL RATE AVERAGE AVERAGE RATE AVERAGE AVERAGE RATE
BALANCE DEPOSITS PAID BALANCE DEPOSITS PAID BALANCE DEPOSITS PAID
------- -------- ---- -------- ---------- ------- -------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook and statement savings . $ 29,053 28.32% 2.74% $ 28,788 28.68% 2.76% $ 30,996 31.60% 2.67%
Money market ................... 2,084 2.03 2.54 2,151 2.14 2.46 2,374 2.42 2.53
NOW ............................ 10,983 10.70 1.38 10,081 10.04 1.51 9,065 9.24 1.49
Certificates of deposit ........ 60,484 58.95 5.39 59,342 59.14 5.49 55,653 56.74 5.40
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total average deposits ... $102,604 100.00% 4.15% $100,362 100.00% 4.24% $ 98,088 100.00% 4.11%
======== ====== ==== ======== ====== ==== ======== ====== ====
<CAPTION>
FOR THE FISCAL YEARS ENDED JUNE 30,
------------------------------
1996
------------------------------
PERCENT OF
TOTAL
AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE PAID
-------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Passbook and statement savings . $ 32,747 33.35% 2.84%
Money market ................... 2,692 2.74 2.75
NOW ............................ 9,106 9.27 2.09
Certificates of deposit ........ 53,653 54.64 5.66
-------- ------ ----
Total average deposits ... $ 98,198 100.00% 4.31%
======== ====== ====
</TABLE>
62
<PAGE> 63
The following table presents by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at June 30, 1998.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM JUNE 30, 1998
-----------------------------------------------------
LESS ONE TWO TO OVER
THAN ONE TO TWO THREE THREE
YEAR YEARS YEARS YEARS TOTAL
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CERTIFICATE ACCOUNTS:
2.60 to 4.00% ............... $ 103 $ -- $ -- $ -- $ 103
4.01 to 5.00% ............... 11,280 6 -- -- 11,286
5.01 to 6.00% ............... 24,418 4,446 2,507 2,337 33,708
6.01 to 7.00% ............... 3,006 5,005 1,865 4,574 14,450
7.01 to 8.00% ............... -- 100 -- 837 937
------- ------- ------- ------- -------
Total certificate accounts $38,807 $ 9,557 $ 4,372 $ 7,748 $60,484
======= ======= ======= ======= =======
</TABLE>
PROPERTIES
The Association currently conducts its business through four full service
banking offices located in Luzerne and Carbon counties in Northeast
Pennsylvania. The following table sets forth the Association's offices as of
June 30, 1998.
<TABLE>
<CAPTION>
NET BOOK VALUE
ORIGINAL OF PROPERTY OR TOTAL
YEAR DATE OF LEASEHOLD DEPOSITS AT
LEASED OR LEASED OR LEASE IMPROVEMENTS AT JUNE 30,
LOCATION OWNED ACQUIRED EXPIRATION JUNE 30, 1998 1998
- -------------------- --------- --------- ---------- --------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ADMINISTRATIVE/HOME OFFICE:
31 W. Broad Street
Hazleton, Pennsylvania 18201..................... Owned 1968 -- $103 $64,556
25 W. Broad Street (1)
Hazleton, Pennsylvania 18201.................... Owned 1987 -- 272 --
BRANCH OFFICES:
Laurel Mall Office Building
345 Laurel Mall owned, land June 1,
Hazleton, Pennsylvania 18201.................... leased 1980 2000 333 20,269
Weatherly Office
140 Carbon Street
Weatherly, Pennsylvania 18252................... Owned 1975 -- 38 10,736
Drums Office
P.O. Box 4040
Drums, Pennsylvania 18222....................... Owned 1994 -- 419 7,043
</TABLE>
(1) This building, which houses the home office's loan department, is adjacent
and connected to the property at 31 W. Broad Street.
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<PAGE> 64
LEGAL PROCEEDINGS
The Association is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operations.
PERSONNEL
As of June 30, 1998, the Association had 39 authorized full-time employee
positions. The employees are not represented by a collective bargaining unit and
the Association considers its relationship with its employees to be good. See
"Management of the Association--Other Benefit Plans" for a description of
certain compensation and benefit programs offered to the Association's
employees.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Association will report their income on a
calendar year basis using the accrual method of accounting and will be subject
to federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Association's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Association or the Company. The Association has not been
audited by the IRS in the past five years.
BAD DEBT RESERVE. For taxable years beginning after December 31, 1995, the
Association is entitled to take a bad debt deduction for federal income tax
purposes which is based on its current or historic net charge-offs. For tax
years beginning prior to December 31, 1995, the Association as a qualifying
thrift had been permitted to establish a reserve for bad debts and to make
annual additions to such reserve, which were deductible for federal income tax
purposes. Under such prior tax law, generally the Association recognized a bad
debt deduction equal to 8% of taxable income.
Under the 1996 Tax Act, the Association is required to recapture all or a
portion of its additions to its bad debt reserve made subsequent to the base
year (which is the Association's last taxable year beginning before January 1,
1988). This recapture is required to be made, after a deferral period based on
certain specified criteria, ratably over a six-year period commencing in the
Association's calendar 1998 tax year. The Association, in fiscal 1997, recorded
a deferred tax liability for this bad debt recapture. As a result, the recapture
is not anticipated to effect the Association's future net income or federal
income tax expense for financial reporting purposes.
POTENTIAL RECAPTURE OF BASE YEAR BAD DEBT REVENUE. The Association's bad
debt reserve as of the base year is not subject to automatic recapture as long
as the Association continues to carry on the business of banking. If the
Association no longer qualifies as a bank, the balance of the pre-1988 reserves
(the base year reserves) are restored to income over a six-year period beginning
in the tax year the Association no longer qualifies as a bank. Such base year
bad debt reserve is subject to recapture to the extent that the Association
makes "non-dividend distributions" that are considered as made from the base
year bad debt. To the extent that such reserves exceed the amount that would
have been allowed under the experience method ("Excess Distributions"), then an
amount based on the amount distributed will be included in the Association's
taxable income. Non-dividend distributions include distributions in excess of
the Association's current and accumulated earnings and profits, distributions in
redemption of stock, and distributions in partial or complete liquidation.
However, dividends paid out of the Association's current or accumulated earnings
and profits, as calculated for federal income tax purposes, will not be
considered to result in a distribution from the Association's bad debt reserve.
Thus, any dividends to the Company that would reduce
64
<PAGE> 65
amounts appropriated to the Association's bad debt reserve and deducted for
federal income tax purposes would create a tax liability for the Association.
The amount of additional taxable income created from an Excess Distribution is
an amount that, when reduced by the tax attributable to the income, is equal to
the amount of the distribution. Thus, if, after the Conversion, the Association
makes a "non-dividend distribution," then approximately one and one-half times
the amount so used would be includable in gross income for federal income tax
purposes, assuming a 34% corporate income tax rate (exclusive of state and local
taxes). See "Regulation" and "Dividend Policy" for limits on the payment of
dividends of the Association. The Association does not intend to pay dividends
that would result in a recapture of any portion of its bad debt reserve.
CORPORATE ALTERNATIVE MINIMUM TAX. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the bad debt
reserve deduction claimed by the Association over the deduction that would have
been allowable under the experience method is treated as a preference item for
purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating
loss carryovers of which the Association currently has none. AMTI is increased
by an amount equal to 75% of the amount by which the Association's adjusted
current earnings exceeds its AMTI (determined without regard to this preference
and prior to reduction for net operating losses). In addition, for taxable years
beginning after June 30, 1986 and before January 1, 1996, an environmental tax
of 0.12% of the excess of AMTI (with certain modifications) over $2.0 million is
imposed on corporations, including the Association, whether or not an
Alternative Minimum Tax ("AMT") is paid. The Association does not expect to be
subject to the AMT.
DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS. The Company may exclude
from its income 100% of dividends received from the Association as a member of
the same affiliated group of corporations. The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Association will not file a
consolidated tax return, except that if the Company or the Association own more
than 20% of the stock of a corporation distributing a dividend then 80% of any
dividends received may be deducted.
STATE AND LOCAL TAXATION
The Company and its non-thrift Pennsylvania subsidiaries are subject to the
Pennsylvania Corporate Net Income Tax and Capital Stock and Franchise Tax. The
Corporate Net Income Tax rate for 1998 is 9.99% and is imposed on the Company's
and its non-thrift subsidiaries' unconsolidated taxable income for federal
purposes with certain adjustments. In general, the Capital Stock Tax is a
property tax imposed at the rate of 1.275% of a corporation's capital stock
value, which is determined in accordance with a fixed formula. The Company is
also required to file an annual report with and pay an annual Franchise tax to
the State of Delaware.
The Association is taxed under the Pennsylvania Mutual Thrift Institutions
Tax Act (the "MTIT"), as amended, to include thrift institutions having capital
stock. Pursuant to the MTIT, the Company's tax rate is 11.5%. The MTIT exempts
the Company from all other taxes imposed by the Commonwealth of Pennsylvania for
state income tax purposes and from all local taxation imposed by political
subdivisions, except taxes on real estate and real estate transfers. The MTIT is
a tax upon net earnings, determined in accordance with GAAP with certain
adjustments. The MTIT, in computing GAAP income, allows for the deduction of
interest earned on Pennsylvania and federal securities, while disallowing a
percentage of a thrift's interest expense deduction in the proportion of
interest income on those securities to the overall interest income of the
Company. Net operating losses, if any, thereafter can be carried forward three
years for MTIT purposes. The Association has not been audited by the
Commonwealth of Pennsylvania in the last five years.
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<PAGE> 66
REGULATION
GENERAL
The Association is subject to extensive regulation, examination and
supervision by the Pennsylvania Department, as its chartering agency, the OTS,
as its federal banking regulator, and the FDIC, as the deposit insurer. The
Association is a member of the FHLB System. The Association's deposit accounts
are insured up to applicable limits by the SAIF managed by the FDIC. The
Association must file reports with the Commissioner of the Pennsylvania
Department, the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the Pennsylvania Department,
the OTS and the FDIC to test the Association's compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the Pennsylvania Department, the OTS, the
FDIC or the Congress, could have a material adverse impact on the Company, the
Association and their operations. The Company, as a savings and loan holding
company, will also be required to file certain reports with, and otherwise
comply with the rules and regulations of the OTS and of the Securities and
Exchange Commission (the "SEC") under the federal securities laws.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the Pennsylvania Department, the OTS, the FDIC or the
Congress, could have a material impact on the Company, the Association, their
operations or the Conversion and Reorganization. Congress currently has under
consideration various proposals to eliminate the federal thrift charter, abolish
the OTS and restrict the activities of savings and loan holding companies. The
outcome of such legislation is uncertain. Therefore, the Association is unable
to determine the extent to which legislation, if enacted, would affect its
business.
The description of statutory provisions and regulations applicable to
savings associations set forth in this Prospectus do not purport to be complete
descriptions of such statutes and regulations and their effects on the
Association and the Company and is qualified in its entirety by reference to
such statutes and regulations.
FEDERAL REGULATION OF SAVINGS INSTITUTIONS
BUSINESS ACTIVITIES. The activities of Pennsylvania chartered, FDIC insured
savings institutions are governed by the Pennsylvania Savings Association Code
of 1967, as amended (the "Savings Association Code"), the Home Owners' Loan Act,
as amended (the "HOLA") and, in certain respects, the Federal Deposit Insurance
Act ("FDI Act") and the regulations issued by the agencies to implement these
statutes. These laws and regulations delineate the nature and extent of the
activities in which savings associations may engage.
ACTIVITIES AND INVESTMENTS. The FDI Act imposes certain restrictions on the
activities and investments of state savings associations such as the
Association. No state savings association may engage as principal in any
activity that is not permissible for federally chartered savings associations
unless the association is in compliance with federal regulatory capital
requirements and the FDIC has determined that the activity does not pose a
significant risk to the deposit insurance fund. A state savings association may
engage in an activity that is permissible for a federal savings association, but
in a greater amount, only if the institution is in capital compliance and the
FDIC had not determined that engaging in that amount of activity does not pose a
risk to the affected deposit insurance fund. Also, a state savings association
may not acquire directly an equity investment of a type or in an amount that is
not permissible for a federal association. However, a state savings association
may acquire shares of service corporations so long as the institution is in
capital compliance and the FDIC determines that no significant risk to the
deposit insurance fund is posed by the amount that the institution seeks to
acquire or the activities of the savings association.
66
<PAGE> 67
LOANS-TO-ONE BORROWER. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans-to-one borrower. Generally, this
limit is 15% of the Association's unimpaired capital and surplus, plus an
additional 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. At June 30, 1998, the Association's general policy is
to limit loans-to-one borrower to $500,000. At June 30, 1998, the Association's
largest aggregate amount of loans-to-one borrower consisted of $630,000.
QTL TEST. The HOLA requires savings institutions to meet a QTL test. Under
the QTL test, a savings association is required to maintain at least 65% of its
"portfolio assets" (total assets less: (i) specified liquid assets up to 20% of
total assets; (ii) intangibles, including goodwill; and (iii) the value of
property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed and related securities) in at least nine months out of each 12
month period. A savings association that fails the QTL test must either convert
to a bank charter or operate under certain restrictions. As of June 30, 1998,
the Association maintained 78.11% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test. Recent legislation has expanded
the extent to which education loans, credit card loans and small business loans
may be considered as "qualified thrift investments."
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon all capital distributions by a savings institution, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in regulatory capital requirements before and after a proposed
capital distribution ("Tier 1 Association") and has not been advised by the OTS
that it is in need of more than normal supervision, could, after prior notice
to, but without the approval of the OTS, make capital distributions during a
calendar year equal to the greater of: (i) 100% of its net earnings to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year; or (ii) 75% of its net
earnings for the previous four quarters. Any additional capital distributions
would require prior OTS approval. In the event the Association's capital fell
below its capital requirements or the OTS notified it that it was in need of
more than normal supervision, the Association's ability to make capital
distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
LIQUIDITY. The Association is required to maintain an average daily balance
of specified liquid assets equal to a monthly average of not less than a
specified percentage (currently 4%) of its net withdrawable deposit accounts
plus short-term borrowings. Monetary penalties may be imposed for failure to
meet these liquidity requirements. The Association's average liquidity ratio for
the year ended June 30, 1998 was 22.9%, which exceeded the applicable
requirements. The Association has never been subject to monetary penalties for
failure to meet its liquidity requirements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
ASSESSMENTS. Savings institutions are required by regulation to pay
assessments to the OTS and the Pennsylvania Department to fund the various
agencies' operations. The assessments paid by the Association to these agencies
for the years ended June 30, 1998 and 1997 totaled $59,000 and $57,000,
respectively.
TRANSACTIONS WITH RELATED PARTIES. The Association's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries that the Company may establish) is
limited by Sections 23A and 23B of the Federal Reserve Act. Section 23A
restricts the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low
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quality assets from affiliates is generally prohibited. Section 23B generally
requires that certain transactions with affiliates, including loans and asset
purchases, must be on terms and under circumstances, including credit standards,
that are substantially the same or at least as favorable to the institution as
those prevailing at the time for comparable transactions with non-affiliated
companies.
ENFORCEMENT. Under the FDI Act, the OTS has primary federal enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including stockholders, and any
attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive or
cease and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1 million per
day in especially egregious cases. Under the FDI Act, the FDIC has the authority
to recommend to the Director of the OTS that enforcement action be taken with
respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances. Federal and state law also establishes criminal penalties for
certain violations.
STANDARDS FOR SAFETY AND SOUNDNESS. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted final regulations and Interagency
Guidelines Establishing Standards for Safety and Soundness ("Guidelines") to
implement these safety and soundness standards. The Guidelines set forth the
safety and soundness standards that the federal banking agencies use to identify
and address problems at insured depository institutions before capital becomes
impaired. The Guidelines address internal controls and information systems;
internal audit system; credit underwriting; loan documentation; interest rate
risk exposure; asset growth; asset quality; earnings; and compensation, fees and
benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.
CAPITAL REQUIREMENTS. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3% leverage ("core" or "Tier 1" capital) ratio and an 8% risk based capital
standard. Core (Tier 1) capital is defined as common stockholder's equity
(including retained earnings), certain non-cumulative perpetual preferred stock
and related surplus, minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain mortgage servicing rights and
credit card relationships. The OTS regulations require that, in meeting the
leverage ratio, tangible and risk-based capital standards institutions generally
must deduct investments in and loans to subsidiaries engaged in activities not
permissible for a national bank. In addition, the OTS prompt corrective action
regulation provides that a savings institution that has a leverage capital ratio
of less than 4% (3% for institutions receiving the highest examination rating)
will be deemed to be "undercapitalized" and may be subject to certain
restrictions. See "- Prompt Corrective Regulatory Action."
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8%. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet assets,
are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed earlier under
the 3% leverage standard. The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate preferred
stock and, within specified limits, the allowance for loan and lease losses.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
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The OTS has incorporated an interest rate risk component into its
regulatory capital rule. The final interest rate risk rule also adjusts the
risk-weighting for certain mortgage derivative securities. Under the rule,
savings associations with "above normal" interest rate risk exposure would be
subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the association's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2% must deduct an
interest rate component in calculating its total capital under the risk-based
capital rule. The interest rate risk component is an amount equal to one-half of
the difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is a
two quarter lag between the reporting date of an institution's financial data
and the effective date for the new capital requirement based on that data. A
savings association with assets of less than $300 million and risk-based capital
ratios in excess of 12% is not subject to the interest rate risk component,
unless the OTS determines otherwise. The rule also provides that the Director of
the OTS may waive or defer an association's interest rate risk component on a
case-by-case basis. The OTS has postponed the date that the component will first
be deducted from an institution's total capital to provide it with an
opportunity to review the interest rate risk approaches taken by the other
federal banking agencies.
At June 30, 1998, the Association met each of its capital requirements, in
each case on a fully phased-in basis. See "Regulatory Capital Compliance" for a
table which sets forth in terms of dollars and percentages the OTS tangible,
leverage and risk-based capital requirements, the Association's historical
amounts and percentages at June 30, 1998, and pro forma amounts and percentages
based upon the issuance of the shares within the Estimated Price Range and
assuming that a portion of the net proceeds are retained by the Company.
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS prompt corrective action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has a total risk-based capital of less
than 8.0% or a leverage ratio or a Tier 1 capital to risk-based assets ratio
that is less than 4.0% is considered to be undercapitalized. A savings
institution that has a total risk-based capital less than 6.0%, a Tier 1
risk-based capital ratio of less than 3.0% or a leverage ratio that is less than
3.0% is considered to be "significantly undercapitalized" and a savings
institution that has a tangible capital to assets ratio equal to or less than
2.0% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the banking regulator is required to appoint a receiver or
conservator for an institution that is critically undercapitalized. The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date an association receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions may become
immediately applicable to the institution depending upon its category,
including, but not limited to, increased monitoring by regulators, restrictions
on growth, and capital distributions and limitations on expansion. The OTS could
also take any one of a number of discretionary supervisory actions, including
the issuance of a capital directive and the replacement of senior executive
officers and directors.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period. The capital categories are (1) well
capitalized, (2) adequately capitalized or (3) undercapitalized. An institution
is also placed in one of three supervisory subcategories within each capital
group. The supervisory subgroup to which an institution is assigned is based on
a supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information that the FDIC determines to be relevant to the
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institution's financial condition and the risk posed to the deposit insurance
funds. An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned with the most well capitalized,
healthy institutions receiving the lowest rates.
Deposits of the Association are presently insured by the SAIF. Both the
SAIF and the BIF are statutorily required to be recapitalized to a 1.25% of
insured reserve deposits ratio. Until recently, members of the SAIF and BIF were
paying average deposit insurance assessments of between 24 and 25 basis points.
The BIF met the required reserve in 1995, whereas the SAIF was not expected to
meet or exceed the required level until 2002 at the earliest. This situation was
primarily due to the statutory requirement that SAIF members make payments on
bonds issued in the late 1980s by the Financing Corporation ("FICO") to
recapitalize the predecessor to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted
a new assessment rate schedule of from 0 to 27 basis points under which 92% of
BIF members paid an annual premium of only $2,000. With respect to SAIF member
institutions, the FDIC adopted a final rule retaining the previously existing
assessment rate schedule applicable to SAIF member institutions of 23 to 31
basis points. As long as the premium differential continued, it may have had
adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Association could have been placed at a substantial
competitive disadvantage to BIF members with respect to pricing of loans and
deposits and the ability to achieve lower operating costs.
On September 30, 1996, the President of the United States signed into law
the Funds Act which, among other things, imposed a special one-time assessment
on SAIF member institutions, including the Association, to recapitalize the
SAIF. As required by the Funds Act, the FDIC imposed a special assessment of
65.7 basis points on SAIF assessable deposits held as of March 31, 1995, payable
November 27, 1996 (the "SAIF Special Assessment"). The SAIF Special Assessment
was recognized by the Association as an expense in the quarter ended June 30,
1997 and is generally tax deductible. The SAIF Special Assessment recorded by
the Association amounted to $619,763 on a pre-tax basis and $372,000 on an
after-tax basis.
The Funds Act also spread the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits were
assessed for a FICO payment of 1.3 basis points, while SAIF deposits pay 6.48
basis points. Full pro rata sharing of the FICO payments between BIF and SAIF
members will occur on the earlier of January 1, 2000 or the date the BIF and
SAIF are merged.
As a result of the Funds Act, the FDIC voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable to
that of BIF members. SAIF members will also continue to make the FICO payments
described above. The FDIC also lowered the SAIF assessment schedule for the
fourth quarter of 1996 to 18 to 27 basis points. Management cannot predict the
level of FDIC insurance assessments on an on-going basis, whether the federal
thrift charter will be eliminated or whether the BIF and SAIF will eventually be
merged.
The Association's assessment rate for fiscal 1998 ranged from 15.3 to 15.8
basis points, and the regular premium paid for this period was $62,000.
The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such action is taken by the
FDIC, it could have an adverse effect on the earnings of the Association.
FEDERAL HOME LOAN BANK SYSTEM
The Association is a member of the FHLB System, which consists of 12
regional FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Association, as a member of the FHLB, is required to acquire
and hold shares of capital stock in the FHLB in an amount at least equal to 1%
of the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20
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of its advances (borrowings) from the FHLB, whichever is greater. The
Association was in compliance with this requirement with an investment in FHLB
stock at June 30, 1998 of $594,600. FHLB advances must be secured by specified
types of collateral and all long-term advances may only be obtained for the
purpose of providing funds for residential housing finance. At June 30, 1998,
the Association had no FHLB advances and repurchase agreements.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended June 30, 1998, 1997 and 1996,
dividends from the FHLB to the Association amounted to approximately $37,000,
$35,000 and $34,000, respectively. If dividends were reduced, the Association's
net interest income would likely also be reduced. Further, there can be no
assurance that the impact of recent or future legislation on the FHLBs will not
also cause a decrease in the value of the FHLB stock held by the Association.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain noninterest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $47.8 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts greater than $47.8 million, the reserve requirement is $1.4
million, plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $47.8
million. The first $4.7 million of otherwise reservable balances (subject to
adjustment by the Federal Reserve Board) are exempted from the reserve
requirements. The Association is in compliance with the foregoing requirements.
Because required reserves must be maintained in the form of either vault cash, a
noninterest-bearing account at a Federal Reserve Bank or a pass-through account
as defined by the Federal Reserve Board, the effect of this reserve requirement
is to reduce the's interest-earning assets. FHLB System members are also
authorized to borrow from the Federal Reserve "discount window," but Federal
Reserve Board regulations require institutions to exhaust all FHLB sources
before borrowing from a Federal Reserve Bank.
PENNSYLVANIA LAW
INTERSTATE ACQUISITIONS AND BRANCHES. In 1986, Pennsylvania Act No. 260
(the "Pennsylvania Act") became law. The Pennsylvania Act: (1) permits federal
or state savings and loan associations, federal savings banks, and bank or
savings and loan holding companies (collectively, "Thrift Entities") that are
"located" (as defined below) in a state that offers reciprocal rights to similar
Thrift Entities located in Pennsylvania, to acquire 5% or more of a Pennsylvania
Thrift Entity's voting stock, merge or consolidate with a Pennsylvania Thrift
Entity or purchase the assets and assume the liabilities of the Pennsylvania
Thrift Entity and (2) permits a federal or state savings and loan association or
federal savings bank to establish and maintain branches in Pennsylvania,
provided that the state where such foreign Thrift Entity is located offers
reciprocal rights to similar entities located in Pennsylvania and provided that
each state where any bank holding company or savings and loan holding company
owning or controlling 5% or more of the foreign Thrift Entity's shares is also
located in a state that offers reciprocal rights. The legislation also provides
for nationwide branching by Pennsylvania chartered savings banks and savings and
loan associations, subject to the Pennsylvania Department's approval and certain
other conditions.
Under the Pennsylvania Act, a depository is "located" where its deposits
are largest and a holding company is generally "located" where the aggregate
deposits of its subsidiaries are largest. Whether a foreign state's laws are
"reciprocal" is determined by the Pennsylvania Department, which may impose
limitations and conditions on the branching and acquisition activities of a
Thrift Entity located in a foreign state in order to make the laws of such state
reciprocal to Pennsylvania law with respect to the type of transaction at issue.
In determining whether to approve an interstate thrift acquisition, the
Pennsylvania Department is directed to consider the effects the proposed
acquisition would have on the availability in Pennsylvania of basic banking and
transaction account services. If the Pennsylvania Department determines that the
overall performance of any Pennsylvania Thrift Entity involved in the
transaction has
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not been materially deficient in providing suitable credit and financial
services to its communities, it may approve the application without imposing any
terms or conditions. Otherwise, the Pennsylvania Department may impose such
terms and conditions as it deems appropriate to improve such overall performance
over a stated period of time. Additionally, the Pennsylvania Department may
impose requirements, both before and after approval of an acquisition, to assure
the availability to the public of those basic transaction account services
deemed necessary by the Pennsylvania Department.
PENNSYLVANIA SAVINGS ASSOCIATION CODE. The Association is incorporated
under the Savings Association Code which contains detailed provisions governing
the organization, location of offices, rights and responsibilities of directors,
officers, employees and members, as well as corporate powers, savings and
investment operations and other aspects of the Association and its affairs. The
Savings Association Code delegates extensive rulemaking power and administrative
discretion to the Pennsylvania Department so that the supervision and regulation
of Pennsylvania chartered association may be flexible and readily responsive to
changes in economic conditions and in savings and lending practices. The
Pennsylvania Department exercises its power through the Savings Association
Bureau.
One of the purposes of the Savings Association Code is to provide
associations with the opportunity to be competitive with each other and with
other financial institutions existing under other state, federal and foreign
laws. To this end, the Savings Association Code provides Pennsylvania chartered
savings associations with all of the powers enjoyed by federal savings
associations, subject to regulation by the Pennsylvania Department.
A Pennsylvania savings association may locate or change the location of its
principal place of business, and may establish an office anywhere in the
Commonwealth or in certain states within the Pennsylvania region, with the prior
approval of the Pennsylvania Department. See "--Interstate Acquisitions and
Branches."
The Pennsylvania Department shall examine each savings association at least
once each year. The Savings Association Code permits the Pennsylvania Department
to accept the examinations and reports of the Federal Savings and Loan Insurance
Corporation (now the OTS) in lieu of their own examination. The Pennsylvania
Department may order any association to discontinue any violation of law or
unsafe or unsound business practice and may direct any director, officer,
attorney or employee of an association engaged in an objectionable activity,
after the Pennsylvania Department has ordered the activity to be terminated, to
show cause at a hearing before the Savings Association Bureau of the
Pennsylvania Department why such person should not be removed.
HOLDING COMPANY REGULATION
The Company will be a non-diversified unitary savings and loan holding
company within the meaning of the HOLA. As such, the Company will be required to
register with the OTS and will be subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Company and its non-savings institution subsidiaries. Among
other things, this authority permits the OTS to restrict or prohibit activities
that are determined to be a serious risk to the subsidiary savings institution.
The Association must notify the OTS 30 days before declaring any dividend to the
Company.
As a unitary savings and loan holding company, the Company generally will
not be restricted under existing laws as to the types of business activities in
which it may engage, provided that the Association continues to be a QTL. See "-
Federal Regulation of Savings Institutions - QTL Test" for a discussion of the
QTL requirements. Upon any non-supervisory acquisition by the Company of another
savings association, the Company would become a multiple savings and loan
holding company (if the acquired institution is held as a separate subsidiary)
and would be subject to extensive limitations on the types of business
activities in which it could engage. The HOLA limits the activities of a
multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company ("BHC") Act, subject to the
prior approval of the OTS, and to other activities authorized by OTS regulation.
Recently proposed legislation would limit the activities of unitary savings and
loan holding companies to those permissible for multiple savings and loan
holding companies. See "Risk Factors - Financial Institution Regulation and
Possible Legislation."
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The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution, or holding company thereof,
without prior written approval of the OTS; from acquiring or retaining, with
certain exceptions, more than 5% of a non-subsidiary holding company or savings
association. The HOLA also prohibits a multiple savings and loan holding company
from acquiring more than 5% of a company engaged in activities other than those
authorized for multiple savings and loan holding companies by the HOLA; or
acquiring or retaining control of a depository institution that is not insured
by the FDIC. In evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources and
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance funds, the convenience and needs of the
community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition of
a savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. "See Pennsylvania
Law--Interstate Acquisitions and Branches."
The Secretary of Banking for the Pennsylvania Department (the "Secretary")
may require any savings and loan holding company to furnish such reports as the
Secretary deems appropriate to the proper supervision of such companies. Unless
the Secretary deems otherwise, reports prepared by Federal authorities are
satisfactory to meet such requirement. The Secretary may make examinations of
the Company, the cost of which shall be assessed against and paid by the
Company. Additionally, the Secretary shall have the authority to issue rules,
regulations and orders as may be necessary and the authority to order a savings
and loan holding company to cease and desist from engaging in an activity which
constitutes a services risk to the financial safety, soundness or stability of
the savings association.
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), for the registration of the Common Stock to be issued
pursuant to the Conversion. Upon completion of the Conversion, the Company's
Common Stock will be registered with the SEC under the Exchange Act. The Company
will then be subject to the information, proxy solicitation, insider trading
restrictions and other requirements under the Exchange Act.
The registration under the Securities Act of shares of the Common Stock to
be issued in the Conversion does not cover the resale of such shares. Shares of
the Common Stock purchased by persons who are not affiliates of the Company may
be resold without registration. Shares purchased by an affiliate of the Company
will be subject to the resale restrictions of Rule 144 under the Securities Act.
If the Company meets the current public information requirements of Rule 144
under the Securities Act, each affiliate of the Company who complies with the
other conditions of Rule 144 (including those that require the affiliate's sale
to be aggregated with those of certain other persons) would be able to sell in
the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
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MANAGEMENT OF THE COMPANY
The Board of Directors' of the Company is divided into three classes, each
of which contains approximately one-third of the Board. The directors shall be
elected by the stockholders of the Company for staggered three year terms, or
until their successors are elected and qualified. One class of directors,
consisting of Messrs. Richard C. Laubach and John J. Raynock, has a term of
office expiring at the first annual meeting of stockholders, a second class,
consisting of Messrs. Frederick L. Barletta, Peter B. Deisroth and George J.
Hayden, has a term of office expiring at the second annual meeting of
stockholders, and a third class, consisting of Messrs. Joseph E. Lundy, Vincent
L. Marusak and Anthony P. Sidari, has a term of office expiring at the third
annual meeting of stockholders. Information concerning the principal
occupations, employment and other information concerning the directors and
officers of the Company during the past five years is set forth under
"Management of the Association--Biographical Information."
The following individuals are the executive officers of the Company and
hold the offices set forth below opposite their names.
EXECUTIVE POSITION(S) HELD WITH COMPANY
- --------- ---------------------------
Richard C. Laubach President and Chief Executive Officer
David P. Marchetti, Sr. Chief Financial Officer and Treasurer
Nancy Latoff Corporate Secretary
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal at the discretion of the Board of Directors.
DIRECTOR COMPENSATION
Since the formation of the Company, none of the executive officers,
directors or other personnel has received remuneration from the Company. For
information regarding fees paid to the Association's Board of Directors see
"Management of the Association--Director Compensation."
MANAGEMENT OF THE ASSOCIATION
DIRECTORS
The following table sets forth certain information regarding the Board
of Directors of the Association.
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME AGE(1) POSITION(S) HELD WITH THE ASSOCIATION SINCE EXPIRES
- ---- ------ ------------------------------------- -------- -------
<S> <C> <C> <C> <C>
Vincent L. Marusak 74 Chairman of the Board 1972 1998
Richard C. Laubach 60 Director, President and 1989 1998
Chief Executive Officer
Frederick L. Barletta 64 Director 1983 1998
Peter B. Deisroth 60 Director 1980 1998
George J. Hayden 61 Director 1984 1998
Joseph E. Lundy 75 Director 1964 1998
John J. Raynock 67 Director 1987 1998
Anthony P. Sidari 67 Director 1964 1998
</TABLE>
- -----------------
(1) As of June 30, 1998
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EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth certain information regarding the executive
officers of the Association who are not also directors.
<TABLE>
<CAPTION>
NAME AGE (1) POSITION(S) HELD WITH ASSOCIATION
- ------ ------- ---------------------------------
<S> <C> <C>
David P. Marchetti, Sr. 45 Vice President, Chief Operating Officer
Joseph P. Correale 46 Vice President - Lending
</TABLE>
- ----------------------
(1) As of June 30, 1998.
Each of the executive officers of the Association will retain his/her
office in the converted Association until their re-election at the annual
meeting of the Board of Directors of the Association, held immediately after the
first annual meeting of stockholders subsequent to the Conversion, and until
their successors are elected and qualified or until they are removed or
replaced. Officers are subject to re-election by the Board of Directors
annually.
BIOGRAPHICAL INFORMATION
DIRECTORS
Vincent L. Marusak was an executive at Lehigh Gas and Oil Company and a
partner at Lehigh Supply prior to his retirement in 1991. Mr. Marusak has served
on the Association's Board of Directors since 1972 and has served as Chairman of
the Board since 1989.
Richard C. Laubach joined the Association in 1982 as Chief Lending Officer
and continued in that position until 1987 when he was named Chief Executive
Officer. In 1989, Mr. Laubach was also named President of the Association. Mr.
Laubach has been a director since 1989.
Frederick L. Barletta was President and Chief Executive Officer of the
Pines Golf Course and Restaurant in Edgewood, Pennsylvania prior to his
retirement in 1997. Mr. Barletta has been a director of the Association since
1983.
Peter B. Deisroth has been a manager of Peton Fashions, a retail company,
and Advanced Mailing Services, a mail fulfillment house since 1994. Prior to
1994, Mr. Deisroth was the general merchandise manager of Peton Fashions. Mr.
Deisroth is also a general partner of several retail companies and the sole
proprietor of Dizzy's Pizza. He has served on the Association's Board of
Directors since 1980.
George J. Hayden is the President of George J. Hayden, Inc., an electrical
contracting firm. Mr. Hayden is also the President of several Wendy's fast food
restaurants. Mr. Hayden has served as a director of the Association since 1984.
Joseph E. Lundy worked in the insurance industry for over 45 years prior to
his retirement in 1991. Mr. Lundy has been a director of the Association since
1964.
John J. Raynock is secretary and treasurer of E and R Plumbing and Heating
Inc. Mr. Raynock has served on the Association's Board of Directors since the
Association's merger with Anthracite Building and Loan Association of Weatherly,
Pennsylvania in 1987.
Anthony P. Sidari has been an attorney for over 40 years. Mr. Sidari has
served as a director of the Association since 1964. He also serves as a
solicitor for the Association.
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EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
David P. Marchetti, Sr. joined the Association in 1986 and served as branch
office coordinator and later controller until 1991, when he was named
Vice-President, Chief Operating Officer.
Joseph P. Correale joined the Association in 1986 as a loan officer until
1989 when he was named Assistant Vice President, Lending. In 1992, Mr. Correale
was named Vice- President, Lending.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE ASSOCIATION AND THE
COMPANY
The Association's Board of Directors meets twice per month and may have
additional special meetings called in the manner specified in the Bylaws.
The Board of Directors of the Association has established the following
committees:
The Executive Committee consists of Messrs. Laubach (President and
Chairman), Marusak (Vice President), Deisroth (Treasurer), Sidari (Solicitor),
Barletta and Hayden. The purpose of this committee is to formulate internal
policies, set long-term objectives and evaluate issues of major importance to
the Association and then to make recommendations to the whole Board. The
committee meets when necessary and did not meet during the fiscal year ended
June 30, 1998.
The Audit and Compliance Committee consists of Messrs. Lundy (Chairman),
Deisroth, Hayden, Laubach and Sidari. The purpose of this committee is to
oversee external audit activities, review the procedures used to establish the
loan loss provision and approve the classification of assets. The Audit and
Compliance Committee meets quarterly and met three times during the fiscal year
ended June 30, 1998.
The Budget Committee consists of Messrs. Lundy (Chairman and Compliance
Officer), Barletta, Hayden, Laubach and Marusak. The purpose of this committee
is to review the Compliance Officer's report and to review and approve the
Association's annual budget. This committee meets semi-annually and met two
times during the fiscal year ended June 30, 1998.
The Investment, Asset/Liability Management Committee consists of, Messrs.
Laubach (Chairman), Barletta, Deisroth, Hayden and Raynock. The Investment,
Asset/Liability Management Committee meets quarterly and approves all
investments, the sale of assets and the borrowing of monies by the Association
and reviews the Association's interest rate risk. The Investment,
Asset/Liability Management Committee met 11 times during the fiscal year ended
June 30, 1998.
The Loan Committee consists of Messrs. Marusak (Chairman), Barletta,
Deisroth, Laubach, Lundy and Raynock. The Loan Committee reviews the lending
guidelines, loan portfolio and delinquency reports. The Loan Committee meets
semi-annually and met five times during the fiscal year ended June 30, 1998.
The Property Committee consists of Messrs. Marusak (Chairman), Barletta,
Hayden, Laubach and Raynock. The Property Committee meets as needed and is
responsible for overseeing the structure and maintenance of the Association's
physical properties. The Property Committee met three times during the fiscal
year ended June 30, 1998.
Additionally, the Association has a number of other management committees
including the Evaluation, Salary and Bonus Committee, Personnel Committee and
Security Committee.
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The Board of Directors of the Company has established the following
committees: the Audit Committee consisting of Messrs. Deisroth, Hayden and
Lundy; the Compensation Committee consisting of Messrs. Barletta, Hayden, Lundy,
Marusak and Sidari; the Nominating Committee consisting of Messrs. Barletta,
Deisroth and Raynock; and the Pricing Committee consisting of Messrs. Barletta,
Marusak and Raynock.
DIRECTOR COMPENSATION
All directors receive $400 for each Board meeting attended and for a
maximum of three unattended meetings. All outside directors of the Association
also receive $250 for each committee meeting attended. In addition, the
treasurer of the Board of Directors receives a $3,000 annual retainer. The
Association also provides life insurance for all of the directors. The
Association pays $550 annually for a $90,000 policy for Mr. Laubach, $306
annually for $50,000 policies for Messrs. Barletta, Deisroth and Hayden, $199
annually for $32,500 policies for Messrs. Marusak, Raynock and Sidari and $130
annually for a $21,125 policy for Mr. Lundy.
DIRECTOR EMERITUS
The Association has one Director Emeritus. Pursuant to the Association's
Bylaws, a director may not serve beyond the Annual Meeting of Members
immediately following his or her attainment of age 75 with the exception of all
directors serving on January 2, 1988. Any director who retires because of the
age limitation may be appointed as Director Emeritus. The Directors Emeritus
shall be compensated for each meeting attended, at the same rate of compensation
as the Directors, but may not vote at any meeting of the Board of Directors or
be counted in determining a quorum.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table sets forth the cash compensation
paid by the Association for services rendered in all capacities during the
fiscal year ended June 30, 1998, to the Chief Executive Officer and to executive
officers of the Association who received cash compensation in excess of $100,000
("Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
---------------------------------- ------------------------ -------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND FISCAL SALARY BONUS COMPENSATION AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($)(2) ($) (#) ($) ($)
- ----------------- ------- -------- -------- ------------ ---------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard C. Laubach
President and Chief
Executive Officer 1998 $123,400 10,000 -- -- -- -- --
</TABLE>
- --------------------------
(1) Under Annual Compensation, the column titled "Salary" includes director's
fees.
(2) For fiscal year 1998, there were no (a) perquisites over the lesser of
$50,000 or 10% of the individual's total salary and bonus for the year; (b)
payments of above-market preferential earnings on deferred compensation;
(c) payments of earnings with respect to long-term incentive plans prior to
settlement or maturation; (d) tax payment reimbursements; or (e)
preferential discounts on stock. For fiscal year 1998, the Association had
no restricted stock or stock related plans in existence.
EMPLOYMENT AGREEMENTS
Upon consummation of the Conversion, the Association and the Company intend
to enter into employment agreements (collectively, the "Employment Agreements")
with Messrs. Laubach and Marchetti (individually, the "Executive"). The
Employment Agreements are subject to the review and approval of the OTS and may
be amended as a result of such OTS review. Review of compensation arrangements
by the OTS does not indicate, and should not be construed to indicate, that the
OTS has passed upon the merits of such arrangements. The Employment
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Agreements are intended to ensure that the Association and the Company will be
able to maintain a stable and competent management base after the Conversion.
The continued success of the Association and the Company depends to a
significant degree on the skills and competence of Messrs. Laubach and
Marchetti.
The Employment Agreements will provide for a three-year term. The
Association Employment Agreements will provide that, commencing on the first
anniversary date of entering into the agreement and continuing each such
anniversary date thereafter, the Board of Directors of the Association may
extend the agreement for an additional year so that the remaining term shall be
three years, unless written notice of non-renewal is given by the Board of
Directors of the Association after conducting a performance evaluation of the
Executive. The terms of the Company Employment Agreements shall automatically
renew on a daily basis, unless written notice of non-renewal is given by the
Board of Directors of the Company. The Association and Company Employment
Agreements provide that the Association and Company will review the Executive's
base salary annually. Initially, the Employment Agreements will provide for base
salary of $125,000 for Mr. Laubach. Mr. Laubach would also be entitled to
Directors' fees. In addition to the base salary, the Employment Agreements will
provide for, among other things, participation in various employee benefit plans
and arrangements, stock-based benefits plans, and fringe benefits applicable to
similarly situated executive personnel.
The Employment Agreements provide for termination of the Executive by the
Association or the Company for cause (as described in the agreements) at any
time. In the event the Association or the Company chooses to terminate the
Executive's employment for reasons other than for cause or, in the event of the
Executive's resignation from the Association or the Company upon: (i) failure to
re-elect the Executive to his current offices; (ii) a material change in the
Executive's functions, duties or responsibilities; (iii) a relocation of the
Executive's principal place of employment by more than 25 miles; (iv)
liquidation or dissolution of the Association or the Company; or (v) a breach of
the Employment Agreements by the Association or the Company, the Executive or,
in the event of the Executive's death, his beneficiary, would receive an amount
equal to the base salary payments due to the Executive and the contributions
that would have been made on the Executive's behalf to any employee benefit
plans of the Association or the Company during the remaining term of the
Employment Agreement. The Association and the Company would also continue or pay
for the Executive's life, health and disability coverage for the remaining term
of the Employment Agreement. Upon any termination of the Executive, the
Executive is subject to a covenant not to compete with the Company or the
Association for one year.
Under the Employment Agreements, if involuntary termination or, under
certain circumstances, voluntary termination, follows a change in control of the
Association or the Company, the Executive or, in the event of the Executive's
death, his beneficiary, would receive a severance and/or liquidated damages
payment equal to the greater of: (i) the payments due under the agreement for
the remaining terms of the agreement; or (ii) three times the average of the
five preceding taxable years' annual compensation (subject to certain
limitations contained in the Association Employment Agreement). The Association
and the Company would also continue the Executive's life, health, and disability
coverage for thirty-six months from the date of termination. Notwithstanding
that both agreements provide for a severance payment in the event of a change in
control, the Executive may receive a severance payment under only one agreement.
The Company will guarantee payments to the Executive under the Association
Employment Agreement in the event that payments or benefits are not paid by the
Association. The Company will make any payment required under the Company
Employment Agreements. Pursuant to the Employment Agreements, the Company or
Association will pay all reasonable costs and legal fees paid or incurred by the
Executive pursuant to any dispute or question of interpretation relating to the
Employment Agreements, if the Executive is successful on the merits pursuant to
a legal judgment, arbitration or settlement. The Employment Agreements also
provide that the Association and Company shall indemnify the Executive to the
fullest extent allowable under federal, Pennsylvania and Delaware law,
respectively. In the event of a change in control of the Association or Company,
the total amount of payments due under the Employment Agreements, based solely
on the base salaries to be paid to Messrs. Laubach and Marchetti, under the
agreements upon the consummation of the Conversion and excluding any benefits
under any employee benefit plan which may otherwise become payable would equal
approximately $298,00 and $161,000, respectively.
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CHANGE IN CONTROL AGREEMENTS
Upon Conversion, the Association intends to enter into three-year Change in
Control Agreements (the "CIC Agreements") with two vice presidents of the
Association, none of whom will be covered by an Employment Agreement. Commencing
on the first anniversary date of a CIC Agreement and continuing on each
anniversary thereafter, the Board of Directors may renew the agreement for an
additional year. Each CIC Agreement will provide that in the event voluntary or
involuntary termination follows a change in control of the Association or the
Company, as the case may be, the officer covered by the agreement would receive
a severance payment equal to three times the officer's average annual
compensation for the 36 months preceding his termination (subject to certain
limitations contained in the Association's Change in Control Agreement). The
Association would also continue to pay for the officer's life, health and
disability coverage for 36 months following termination. In the event of a
change in control of the Association or the Company the total payments that
would be due under the CIC Agreements, based solely on the current annual
compensation paid to the two vice presidents covered by the CIC Agreements and
excluding any benefits under any employee benefit plan which may be payable;
would be approximately $210,000.
EMPLOYEE SEVERANCE COMPENSATION PLAN
The Association's Board of Directors, upon consummation of the Conversion,
intends to establish the Security Savings Association of Hazleton Employee
Severance Compensation Plan ("Severance Plan") to provide eligible employees
with severance pay benefits in the event of a change in control of the
Association or the Company. Management personnel with employment or CIC
Agreements are not eligible to participate in the Severance Plan. Generally,
employees will participate in the Severance Plan if they have completed at least
one (1) year of service with the Association. The Severance Plan vests in each
participant a contractual right to the benefits such participant is entitled to
thereunder. Under the Severance Plan, in the event of a change in control of the
Association or the Company, eligible employees who terminate employment within
one year of the change in control (for reasons specified under the Severance
Plan), will receive a severance payment. If the participant, whose employment
has terminated, has completed at least six months of service, the participant
will be entitled to cash equal to one-twelfth of their current annual
compensation for each year of service completed with the Association, up to a
maximum of 199% of current annual compensation. In the event the provisions of
the Severance Plan were triggered, the total amount of payments that would be
due thereunder, based solely upon current salary levels, would be approximately
$414,000.
INSURANCE PLANS
All full-time employees of the Association, upon completion of the
applicable introductory period, are covered as a group for comprehensive
hospitalization, including major medical and long-term disability insurance.
Life insurance is also provided to employees and directors.
OTHER BENEFIT PLANS
PENSION PLAN. The Association participates in the Financial Institutions
Retirement Fund (the "Retirement Fund") to provide retirement benefits for
eligible employees. Employees are eligible to participate in the Retirement Plan
after the completion of 12 consecutive months of employment with the Association
and the attainment of age 21. Hourly paid employees are excluded from
participating in the Retirement Plan. Benefits payable to a participant under
the Retirement Plan are based on the participant's years of service and salary.
The formula for normal retirement benefits payable annually under the Retirement
Plan is 2% multiplied by years of benefit service multiplied by the average of
the participant's highest five years of salary paid by the Association. A
participant may elect early retirement as early as age 45. However, such
participant's normal retirement benefits will be reduced by an early retirement
factor based on age at early retirement. Participants generally have no vested
interest in Retirement Plan benefits prior to the completion of five years of
service with the Association. Following the completion of five years of vesting
service, or in the event of a participant's attainment of age 65, death or
termination of employment due to disability, a participant will become 100%
vested in the accrued benefits under the Retirement Plan. The table below
reflects the pension benefit payable to a participant assuming various levels of
earnings and years of service.
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The following table sets forth the estimated annual benefits payable upon
retirement at age 65.
<TABLE>
<CAPTION>
YEARS OF BENEFIT SERVICE
FIVE YEAR AVERAGE --------------------------------------------------------------
COMPENSATION 15 20 25 30 35
- ------------------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
$ 25,000............................ $ 7,500 $ 10,000 $ 12,500 $ 15,000 $ 17,500
50,000............................ 15,000 20,000 25,000 30,000 35,000
75,000............................ 22,500 30,000 37,500 45,000 52,500
100,000............................ 30,000 40,000 50,000 60,000 70,000
125,000............................ 37,500 50,000 62,500 75,000 87,500
150,000............................ 45,000 60,000 75,000 90,000 105,000
160,000............................ 48,000 64,000 80,000 96,000 112,000
</TABLE>
The benefits listed in the table above for the Retirement Plan are not
subject to a deduction for Social Security benefits or any other offset amount.
As of June 30, 1998, Richard C. Laubach had 15 years of credited service.
EMPLOYEE STOCK OWNERSHIP PLAN. The Association intends to establish a
tax-qualified employee stock ownership plan (the "ESOP") in connection with the
Conversion. Generally, employees will become participants in the ESOP upon the
completion of one year of service with the Association (with credit given for
service with the Association prior to adoption of the plan) and attainment of
age 21. With the consent of the Association, an affiliate of the Association may
also adopt the ESOP for the benefit of its employees.
The Association expects a committee of the Board of Directors to serve as
the administrative committee of the ESOP (the "ESOP Committee"). The ESOP
Committee will appoint an unrelated corporate trustee for the ESOP prior to the
Conversion. Among other matters, the ESOP Committee may generally instruct the
trustee regarding the investment of funds contributed to the ESOP, subject to
the terms of the plan document and the trust agreement. The Association expects
the ESOP to purchase 8% of the Common Stock issued in the Conversion. As part of
the Conversion, and in order to fund the ESOP's purchase of the Common Stock
issued in the Conversion, the ESOP will borrow 100% of the aggregate purchase
price of the Common Stock from either the Company or a third-party lender.
The trustee of the ESOP will repay the loan principally from the
Association's annual contributions to the ESOP over an expected period of 12
years. Subject to receipt of any necessary regulatory approvals or opinions, the
Association may make contributions to the ESOP for repayment of the loan since
some participants in the ESOP will be employees of the Association or,
alternatively, the Association may reimburse the Company for contributions made
by the Company with respect to employees of the Association. The Association
expects the initial interest rate (which may be fixed or variable) for the loan
to be at or near the prime rate on or about the date of Conversion.
The trustee of the ESOP will pledge the shares of Common Stock purchased by
the ESOP in connection with the Conversion as collateral for the loan and will
hold the shares in a suspense account under the plan. As the trustee repays the
loan, the trustee will release a portion of the shares from the suspense account
and allocate them to the accounts of active participants in the ESOP based on
each participant's compensation (as determined under the terms of the plan)
relative to all participants' compensation for the plan year. In the event of a
change in control of the Association or the Company prior to complete repayment
of the loan, the ESOP trustee, in accordance with the terms of the plan
document, will sell enough shares of Common Stock held in the suspense account
to repay the loan in full. Upon repayment of the loan, the ESOP trustee will
then allocate all remaining shares of Common Stock held in the suspense account
to the accounts of active participants based on each participant's account
balance as of a specific date or based on some other method set forth in the
plan document.
Participants will become vested in contributions made to the ESOP by the
Association at the rate of twenty percent per year of vesting service (with
credit given for service with the Association prior to its adoption of the
ESOP). Accordingly, participants will become fully vested in their accounts
under the ESOP after completing five years of vesting service. The Association
expects that participants will also become fully vested in their accounts under
the ESOP upon the attainment of their early or normal retirement age while an
employee of the Association,
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upon their death, upon a change in control of the Association or the Company, or
upon termination of the plan. Benefits generally become distributable under the
ESOP and potentially become subject to income tax upon death, retirement,
disability or other separation from service.
The ESOP trustee will vote all allocated shares held in the ESOP in
accordance with the instructions of the plan participants. The ESOP trustee,
subject to its fiduciary duties under the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), will vote the unallocated shares (i.e., those
held in the suspense account) and allocated shares for which it receives no
proper voting instructions in a manner calculated to most accurately reflect the
instructions it receives from participants regarding the allocated stock. In the
event no shares have been allocated under the ESOP at the time such shares are
to be voted, each participant shall be deemed to have one share allocated to his
or her account for voting purposes.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Code limits the amount of
compensation the Association may consider in providing benefits under its
tax-qualified retirement plans, such as the Pension Plan and the ESOP. The Code
further limits the amount of contributions and benefit accruals under such plans
on behalf of any employee. To provide benefits to make up for the reduction in
benefits flowing from these limits in connection with the Pension Plan and ESOP,
the Association intends to implement a non-qualified deferred compensation
arrangement known as a "Supplemental Executive Retirement Plan" ("SERP"). The
SERP will generally provide benefits to eligible individuals (designated by the
Board of Directors of the Association or its affiliates) that cannot be provided
under the Pension Plan and/or ESOP as a result of the limitations imposed by the
Code, but that would have been provided under the Pension Plan and/or ESOP but
for such limitations. In addition to providing for benefits lost under
tax-qualified plans as a result of limitations imposed by the Code, the SERP
will also make up lost ESOP benefits to designated individuals who retire, who
terminate employment in connection with a change in control, or whose
participation in the ESOP ends due to termination of the ESOP in connection with
a change in control (regardless of whether the individual terminates employment)
prior to the complete scheduled repayment of the ESOP loan. Generally, upon the
retirement of an eligible individual or upon a change in control of the
Association or the Company prior to complete repayment of the ESOP Loan, the
SERP will provide the individual with a benefit equal to what the individual
would have received under the ESOP had he remained employed throughout the term
of the ESOP or had the ESOP not been terminated prior to the scheduled repayment
of the ESOP loan. An individual's benefits under the SERP become payable upon
the participant's retirement (in accordance with the standard retirement
policies of the Association), upon the change in control of the Association or
the Company or as determined under the ESOP and Pension Plan.
The Association may establish a grantor trust in connection with the SERP
to satisfy the obligations of the Association with respect to the SERP. The
assets of the grantor trust would remain subject to the claims of the
Association's general creditors in the event of the Association's insolvency
until paid to the individual pursuant to the terms of the SERP.
STOCK-BASED INCENTIVE PLAN. Following the Conversion, the Board of
Directors of the Company intends to adopt the Stock-Based Incentive Plan which
will provide for the grant of options to purchase Common Stock ("Stock
Options"), and the award of restricted shares of Common Stock ("Stock Awards")
to eligible officers, employees, and directors of the Company and Association.
Stock Options granted under the Plan may be intended to qualify as Incentive
Stock Options under Section 422 of the Code ("Incentive Stock Options") or
options that do not so qualify ("Non-Statutory Stock Options"). The plan may
also provide for certain limited rights that, in the event of a change in
control, may permit the option holder to receive a cash payment in lieu of
exercise of the option or distribution of the Stock Award. The Company expects
to provide such stock-based benefits under the Stock-Based Incentive Plan or, in
the alternative, under one or more separate stock benefit plans.
In the event the Stock-Based Incentive Plan (or any separate plan(s)) is
adopted within one year after the Conversion, OTS regulations require such plan
to be approved by a majority of the Company's stockholders at a meeting of
stockholders to be held no earlier than six months after the completion of the
Conversion. The Company intends to grant Stock Options in an amount up to 10% of
the shares of Common Stock issued in connection with the
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Conversion, including shares issued to the Foundation (138,000 shares based upon
the maximum of the Estimated Price Range), and intends to grant Stock Awards in
an amount up to 4% of the shares of Common Stock issued in connection with the
Conversion, including shares issued to the Foundation (55,200 shares based upon
the maximum of the Estimated Price Range). Stock Awards will be granted under
the Stock-Based Incentive Plan at no cost to the recipients. While no decision
has been made, as yet, it is possible that the grants of Stock Options and Stock
Awards could involve a substantial portion or all of the options and awards
available under the Stock-Based Incentive Plan. The Company may fund the plan
through the purchase of Common Stock by a trust established in connection with
the Stock-Based Incentive Plan (or any separate plan(s)) or from authorized but
unissued shares. The Board of Directors of the Company intends to appoint an
independent fiduciary to serve as trustee of any trust established in connection
with the Stock-Based Incentive Plan. In the event that additional authorized but
unissued shares are acquired by the Stock-Based Incentive Plan or its
participants after the Conversion, the interests of existing shareholders would
be diluted. See "Pro Forma Data."
The Company expects to design the grants of Stock Options and Stock Awards
to attract and retain qualified personnel in key positions, provide officers and
key employees with a propriety interest in the Company as an incentive to
contribute to the success of the Company, and reward key employees for
outstanding performance. All employees of the Company and its subsidiaries,
including the Association, will be eligible to participate in the Stock-Based
Incentive Plan. It is expected that the committee administering the plan will
determine the terms of awards granted to officers and employees. The committee
will also determine whether Stock Options will qualify as Incentive Stock Option
or Non-Statutory Stock Options, as described below, the number of shares subject
to each Stock Option and Stock Award, the exercise price of each Stock Option,
the method of exercising Stock Options, and when Stock Options become
exercisable or Stock Awards vest. Only employees may receive grants of Incentive
Stock Options. Directors who are not employees may receive only grants of
Non-Statutory Stock Options. If the Stock-Based Incentive Plan (or other
separate plans) is adopted within one year after conversion, OTS regulations
provide that no individual officer or employee of the Association may receive
more than 25% of the Stock Options available under the Stock-Based Incentive
Plan (or any separate plan for officers and employees) and non-employee
directors may not receive more than 5% individually, or 30% in the aggregate, of
the Stock Options available under the Stock-Based Incentive Plan (or any
separate plan for directors). OTS regulations also provide that no individual
officer or employee of the Association may receive more than 25% of the Stock
Awards available under the Stock-Based Incentive Plan (or any separate plan for
officers and employees) and non-employee directors may not receive more than 5%
individually, or 30% in the aggregate, of the Stock Awards available under the
Stock-Based Incentive Plan (or any separate plan for directors).
Unless sooner terminated, the Stock-Based Incentive Plan will remain in
effect for a period of ten years from the earlier of adoption by the Board of
Directors of the Company or approval by the Company's stockholders. Subject to
stockholder approval, the Company anticipates granting Stock Options under the
plan at an exercise price equal to at least the fair market value of the
underlying Common Stock on the date of grant.
An individual will not recognize taxable income upon the grant of a
Non-Statutory Stock Option or Incentive Stock Option or upon the exercise of an
Incentive Stock Option, provided the individual does not dispose of the shares
received through the exercise of the Incentive Stock Option such option for at
least one year after the date the individual receives the shares in connection
with the stock option exercise and two years after the date of grant of the
stock option (a "disqualifying disposition"). No compensation deduction will
generally be available to the Company as a result of the exercise of Incentive
Stock Options unless there has been a disqualifying disposition. In the case of
a Non-Statutory Stock Option and in the case of a disqualifying disposition of
share received in connection with the exercise of an Incentive Stock Option, an
individual will recognize ordinary income upon exercise of the stock option (or
upon the disqualifying disposition) in an amount equal to the amount by which
the exercise price exceeds the fair market value of the Common Stock purchased
by exercising the stock option on the date of exercise. The amount of any
ordinary income recognized by an optionee upon the exercise of a Non-Statutory
Stock Option or due to a disqualifying disposition of an Incentive Stock Option
will be a deductible expense to the Company for tax purposes. In the case of
limited rights, the holder will recognize any amount paid to him or her upon
exercise in the
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year in which the payment is made and the Company will be entitled to a
deduction for federal income tax purposes of the amount paid.
Grants of Stock Awards may be made in the form of base grants and/or
performance grants (the vesting of which would be contingent upon performance
goals established by the committee administering the plan). In establishing any
performance goals, the committee may utilize the annual financial results of the
Company, actual performance of the Company as compared to targeted goals such as
the ratio of the Association's net worth to total assets, the Company's return
on average assets, or such other performance standards as determined by the
committee with the approval of the Board of Directors of the Company.
When a participant becomes vested with respect to Stock Award, the
participant will recognize ordinary income equal to the fair market value of the
Common Stock at the time of vesting (unless the participant made an election
pursuant to Section 83(b) of the Code). The amount of income recognized by the
participant will be a deductible expense for tax purposes for the Company. When
restricted Stock Awards become vested and shares of Common Stock are actually
distributed to participants, the participants receive amounts equal to any
accrued dividends with respect thereto, if not earlier received. Prior to
vesting, recipients of Stock Awards may direct the voting of the shares awarded
to them. Shares not subject to grants and shares allocated subject to the
achievement of performance goals will be voted by the trustee in proportion to
the directions provided with respect to shares subject to grants. Vested shares
will be distributed to recipients as soon as practicable following the day on
which they vest.
The vesting periods for awards under the Stock-Based Incentive Plan will be
determined by the committee administering the Plan. If the Company adopts the
Stock-Based Incentive Plan (or any separate plans for employees and directors)
within one year after conversion, awards would become vested and exercisable
subject to applicable OTS regulations, which require that any awards begin
vesting no earlier than one year from the date of shareholder approval of the
plan and, thereafter, vest at a rate of no more than 20% per year and may not be
accelerated except in the case of death or disability. Stock Options could be
exercisable for a period of time (likely three months) following the date on
which the employee or director ceases to perform services for the Association or
the Company, except that in the event of death or disability, options accelerate
and become fully vested and could be exercisable for up to one year thereafter
or such other period of time as determined by the Company. In the case of death
or disability, Stock Options may be exercised for a period of 12 months or such
other period of time as determined by the committee. However, any Incentive
Stock Options exercised more than three months following the date the employee
ceases to perform services as an employee would be treated essentially as a
Non-Statutory Stock Option. In the event of retirement, if the optionee
continues to perform services as a director or consultant on behalf of the
Association, the Company or an affiliate, unvested options and awards would
continue to vest in accordance with their original vesting schedule until the
optionee ceases to serve as a consultant or director. In the event of death,
disability or normal retirement, the Company, if requested by the optionee, or
the optionee's beneficiary, could elect, in exchange for vested options, to pay
the optionee, or the optionee's beneficiary in the event of death, the amount by
which the fair market value of the Common Stock exceeds the exercise price of
the options on the date of the employee's termination of employment.
Subject to any applicable regulatory requirements, the Stock-Based
Incentive Plan (or any separate plans for employees and directors) may be
amended subsequent to the expiration of the one-year period to provide for
accelerated vesting of previously granted Stock Options or Stock Awards in the
event of a change in control of the Company or the Association. A change in
control would generally be considered to occur when a person or group of persons
acting in concert acquires beneficial ownership of 20% or more of any class of
equity security of the Company or the Association or in the event of a tender or
exchange offer, merger or other form of business combination, sale of all or
substantially all of the assets of the Company or the Association or contested
election of directors which resulted in the replacement of a majority of the
Board of Directors by persons not nominated by the directors in office prior to
the contested election.
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TRANSACTIONS WITH CERTAIN RELATED PERSONS
The Association offers officers and full-time employees of the
Association who satisfy the general underwriting standards of the Association,
loans with interest rates up to 1% below the current interest rate in effect,
the Insider Loan Rate ("ILR"); provided, however, that the ILR shall not be
below the Association's cost of funds at the time of the approval of the loan.
All ILR loans requested by officers must be approved by the Board of Directors.
The ILR normally ceases upon termination of employment. Upon termination of the
ILR, the interest rate reverts to the contract rate currently in effect. All
other terms and conditions contained in the original mortgage and note continue
to remain in effect. As of June 30, 1998, seven of the Association's directors
and officers had loans with outstanding balances totalling $273,000 in the
aggregate. All such loans were made by the Association in the ordinary course of
business, with no favorable terms (except for ILR loans) and such loans do not
involve more than the normal risk of collectibility or present unfavorable
features.
The Company intends that all transactions in the future between the
Company and its executive officers, directors, holders of 10% or more of the
shares of any class of its Common Stock and affiliates thereof, will contain
terms no less favorable to the Company than could have been obtained by it in
arm's length negotiations with unaffiliated persons and will be approved by a
majority of independent outside directors of the Company not having any interest
in the transaction.
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the number of shares of Common Stock the
Association's officers and directors and their associates propose to purchase,
assuming shares of Common Stock are issued at the minimum and maximum of the
Estimated Price Range, including the effect of shares issued to the Foundation,
and that sufficient shares will be available to satisfy their subscriptions. The
table also sets forth the total expected beneficial ownership of Common Stock as
to all directors and officers as a group.
<TABLE>
<CAPTION>
AT THE MINIMUM OF THE AT THE MAXIMUM OF THE
ESTIMATED PRICE RANGE ESTIMATED PRICE RANGE
--------------------- ---------------------
AS A AS A
PERCENT PERCENT
OF OF
NUMBER OF SHARES NUMBER OF SHARES
NAME AMOUNT(1) SHARES SOLD SHARES SOLD
- ------ -------- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Vincent L. Marusak........................... $150,000(2) 15,000 1.47% 15,000 1.09%
Richard C. Laubach........................... 50,000 5,000 0.49 5,000 0.36
Frederick L. Barletta........................ 150,000(2) 15,000 1.47 15,000 1.09
Peter B. Deisroth............................ 30,000 3,000 0.29 3,000 0.22
George J. Hayden............................. 150,000(2) 15,000 1.47 15,000 1.09
Joseph E. Lundy.............................. 15,000 1,500 0.15 1,500 0.11
John J. Raynock.............................. 50,000 5,000 0.49 5,000 0.36
Anthony P. Sidari............................ 150,000(2) 15,000 1.47 15,000 1.09
David P. Marchetti, Sr....................... 5,000 500 0.05 500 0.04
Joseph P. Correale........................... 7,500 750 0.07 750 0.05
-------- ------ ---- ------ ----
All Directors and Executive
Officers as a Group (10 persons).. $757,500 75,750 7.42% 75,750 5.50%
======== ====== ==== ====== ====
</TABLE>
- ----------
(1) Includes proposed subscriptions, if any, by associates. Does not
include subscription orders by the ESOP. Intended purchases by the ESOP
are expected to be 8% of the shares issued in the Conversion, including
shares issued to the Foundation.
(2) Such amount represents the maximum allowable purchase for such
individuals.
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THE CONVERSION
THE BOARD OF DIRECTORS OF THE ASSOCIATION, AND THE OTS HAVE APPROVED
THE PLAN OF CONVERSION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE ASSOCIATION
ENTITLED TO VOTE ON THE MATTER AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS.
SUCH OTS APPROVAL, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT
OF THE PLAN BY SUCH AGENCY. THE OTS NEITHER APPROVED NOR DISAPPROVED THE
ESTABLISHMENT OF THE FOUNDATION. THE PLAN OF CONVERSION IS ALSO SUBJECT TO
RECEIPT OF THE APPROVAL OF THE PENNSYLVANIA DEPARTMENT, WHICH WILL ONLY CONSIDER
SUCH APPROVAL BASED UPON APPROVAL OF THE PLAN OF CONVERSION BY THE MEMBERS OF
THE ASSOCIATION.
GENERAL
The Plan was adopted unanimously on June 26, 1998 and amended on
September 8, 1998 and November 12, 1998 by the Association's Board of Directors,
subject to approval by the Pennsylvania Department and the OTS. Pursuant to the
Plan, the Association will be converted from a Pennsylvania-chartered mutual
savings association to a Pennsylvania-chartered capital stock savings
association. It is currently intended that all of the outstanding capital stock
of the Association will be held by the Company, which is incorporated under
Delaware law. The Plan was approved by the OTS and the Pennsylvania Department,
subject to, among other things, approval of the Plan by the Association's
members. A Special Meeting of members has been called for this purpose to be
held on December 28, 1998.
The Company has applied for and expects to receive approval from the
OTS to become a savings and loan holding company and to acquire all of the
Common Stock of the Association to be issued in the Conversion. The Company
plans to purchase the shares of issued and outstanding capital stock of the
Association in exchange for 50% of the net proceeds and retain the remaining net
proceeds. The Conversion will be effected only upon completion of the sale of
all of the shares of Common Stock of the Company or the Association, if the
holding company form of organization is not utilized, to be issued pursuant to
the Plan.
The Plan provides that the Board of Directors of the Association may,
at any time prior to the issuance of the Common Stock and for any reason, decide
not to use a holding company form. Such reasons may include possible delays
resulting from overlapping regulatory processing or policies which could
adversely affect the Association's or the Company's ability to consummate the
Conversion and transact its business as contemplated herein and in accordance
with the Association's operating policies. In the event such a decision is made,
the Association will withdraw the Company's Registration Statement from the SEC
and take steps necessary to complete the Conversion without the Company,
including filing any necessary documents with the OTS. In such event, and
provided there is no regulatory action, directive or other consideration upon
which basis the Association determines not to complete the Conversion, if
permitted by the OTS, the Association will issue and sell the Common Stock of
the Association and subscribers will be notified of the elimination of a holding
company and resolicited (i.e., be permitted to affirm their orders, in which
case they will need to affirmatively reconfirm their subscriptions prior to the
expiration of the resolicitation offering or their funds will be promptly
refunded with interest at the Association's passbook rate of interest; or be
permitted to modify or rescind their subscriptions), and notified of the time
period within which the subscriber must affirmatively notify the Association of
his intention to affirm, modify or rescind his subscription. The following
description of the Plan assumes that a holding company form of organization will
be used in the Conversion. In the event that a holding company form of
organization is not used, all other pertinent terms of the Plan as described
below will apply to the conversion of the Association from the mutual to stock
form of organization and the sale of the Association's Common Stock.
The Plan provides generally that (i) the Association will convert from
a mutual savings association to a capital stock savings association and (ii) the
Company will offer shares of Common Stock for sale in the Subscription Offering
to the Association's Eligible Account Holders, the ESOP, Supplemental Eligible
Account Holders, and Other
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<PAGE> 86
Members. Subsequent to the Subscription Offering, any remaining shares will be
offered in a Community Offering with preference given to certain members of the
general public with preference given to natural persons residing in all counties
in which the Association has its home office or a branch office, all zip codes
corresponding to the Association's delineated Community Reinvestment Area
service area and each county's metropolitan statistical area (the Association's
"Local Community") (such natural persons are herein referred to as "Preferred
Subscribers"). The Community Offering may be commenced prior to completion of
the Subscription Offering. It is anticipated that all shares not subscribed for
in the Subscription and Community Offerings will be offered for sale by the
Company to the general public in a Syndicated Community Offering, or in another
offering. The Association has the right to accept or reject, in whole or in
part, any orders to purchase shares of the Common Stock received in the
Community Offering or in the Syndicated Community Offering. See "--Community
Offering" and "--Syndicated Community Offering."
The aggregate price of the shares of Common Stock to be sold in the
Conversion within the Estimated Price Range, currently estimated to be between
$9.7 million and $13.1 million, will be determined based upon an independent
appraisal, prepared by Keller of the estimated pro forma market value of the
Common Stock of the Company. All shares of Common Stock to be issued and sold in
the Conversion, will be sold at the same price. The independent appraisal will
be affirmed or, if necessary, updated at the completion of the Subscription and
Community Offerings, if all shares are subscribed for, or at the completion of
the Syndicated Community Offering. The appraisal has been performed by Keller, a
consulting firm experienced in the valuation and appraisal of savings
institutions. See "--Stock Pricing" for additional information as to the
determination of the estimated pro forma market value of the Common Stock.
The following is a brief summary of the material aspects of the
Conversion. The summary is qualified in its entirety by reference to the
provisions of the Plan, as amended. A copy of the Plan is available for
inspection at each branch of the Association and at the Northeast Region and
Washington, D.C. offices of the OTS.
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
GENERAL. In furtherance of the Association's long-standing commitment
to its local community, the Association's Plan of Conversion provides for the
establishment of a charitable foundation in connection with the Association's
Conversion. The Plan provides that the Association and the Company will
establish the Foundation, which will be incorporated under Delaware law as a
non-stock corporation, and will fund the Foundation with Common Stock of the
Company, as further described below. The Company and the Association believe
that the funding of the Foundation with Common Stock of the Company is a means
of establishing a common bond between the Association and the communities in
which the Association operates and thereby enables such communities to share in
the potential growth and success of the Company and the Association over the
long term. By further enhancing the Association's visibility and reputation in
the communities in which it operates, the Association believes that the
Foundation will enhance the long-term value of the Association's community
banking franchise.
The Foundation would be dedicated to the promotion of charitable
purposes within the communities in which the Association operates, including,
but not limited to, providing grants or donations to support housing assistance,
not-for-profit medical facilities, community groups and other types of
organizations or projects. Establishment of the Foundation is subject to the
approval of a majority of the total outstanding votes of the Association's
members eligible to be cast at the Special Meeting. The Foundation will be
considered as a separate matter from approval of the Plan of Conversion. If the
Association's members approve the Plan of Conversion, but not the Foundation,
the Association intends to complete the Conversion without the establishment of
the Foundation. Failure to approve the establishment of the Foundation may
materially affect the pro forma market value of the Common Stock. In such an
event, the Association may establish a new Estimated Price Range and commence a
resolicitation of subscribers. In the event of a resolicitation, unless an
affirmative response is received within a specified period of time, all funds
will be promptly returned to investors, as described elsewhere herein. See
"--Stock Pricing."
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<PAGE> 87
PURPOSE OF THE FOUNDATION. The purpose of the Foundation is to serve
and make grants in the Association's local community. The Association has long
emphasized community lending and community development activities and currently
has a satisfactory Community Reinvestment Act ("CRA") rating. The Foundation is
being formed as a complement to the Association's existing community activities,
not as a replacement for such activities. Indeed, the Association intends to
continue to emphasize community lending and community development activities
following the Conversion. However, such activities are not the Association's
sole corporate purpose. The Foundation, conversely, will be completely dedicated
to community activities and the promotion of charitable causes, and may be able
to support such activities in ways that are not presently available to the
Association. Since the Association already engages in community development
activities, the Association believes that the Foundation will enable the Company
and the Association to assist their local community in areas beyond community
development and lending. In this regard, the Board of Directors believes the
establishment of a charitable foundation is consistent with the Association's
commitment to community service. The Boards of Directors of the Association and
Company also believe that the funding of the Foundation with Common Stock of the
Company is a means of enabling the communities in which the Association operates
to share in the potential growth and success of the Company long after
completion of the Conversion. The Foundation accomplishes that goal by providing
for continued ties between the Foundation and Association, thereby forming a
partnership with the Association's community. The establishment of the
Foundation would also enable the Company and the Association to develop a
unified charitable donation strategy and would centralize the responsibility for
administration and allocation of corporate charitable funds. The Association,
however, does not expect the contribution to the Foundation to take the place of
the Association's traditional community lending and charitable activities. The
Association expects in future periods to continue making charitable
contributions within its communities.
STRUCTURE OF THE FOUNDATION. The Foundation will be incorporated under
Delaware law as a non-stock corporation. It is currently anticipated that the
Foundation's board of directors will be comprised of five members, four of whom
will be individuals elected from existing directors and officers of the
Association. In addition, for a period of at least five years the Foundation
will reserve at least one board seat for an individual who is not an officer
and/or director of the Company or the Association and who is a civic or
community leader within Hazleton, Pennsylvania or its neighboring communities
who has appropriate experience with local grant making activities and is not an
associate of any officer or director of the Company or the Association or any
successor organization. For that same period of time, the Foundation will
reserve one seat for a director or officer of the Association or any successor
organization. It is expected that less than a majority of the Association's
directors will also serve as directors of the Foundation. The officers and
directors of the Association and Company that are expected to serve on the Board
of Directors of the Foundation consist of Messrs. Deisroth, Hayden, Marchetti
and Raynock, who intend to purchase 3,000, 15,000, 500 and 5,000 shares of
Common Stock in the Conversion, respectively. At the supermaximum of the
Estimated Price Range, such purchases equal 0.19%, 0.95%, 0.03% and 0.32%,
respectively, or 1.49% in the aggregate of the total number of shares to be
issued in the Conversion, including shares issued to the Foundation. On an
on-going basis, a Nominating Committee of the board of directors of the
Foundation, will nominate individuals eligible for election to the board of
directors of the Foundation. The members of the Foundation, who are comprised of
its board members, will elect the directors at the annual meeting of the
Foundation from those nominated by the Nominating Committee. Only persons
serving as directors of the Foundation qualify as members of the Foundation with
voting authority. Directors will be divided into three classes with each class
appointed for three-year terms. The certificate of incorporation of the
Foundation will provide that the Foundation is organized exclusively for
charitable purposes as set forth in Section 501(c)(3) of the Code. The
Foundation's certificate of incorporation further will provide that no part of
the net earnings of the Foundation will inure to the benefit of, or be
distributable to, its directors, officers or members. A person who is a
director, officer or employee of the Association, or has the power to direct its
management or policies, or otherwise owes a fiduciary duty to the Association,
and who will also serve as a director or employee of the Foundation would be
subject to the requirements of OTS Conflicts of Interest Regulations.
The authority for the affairs of the Foundation will be vested in the
board of directors of the Foundation. The directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the stated purposes for
which the Foundation is established.
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<PAGE> 88
Although no formal policy governing Foundation grants exists at this time, the
Foundation's board of directors will adopt such a policy upon establishment of
the Foundation. The directors will also be responsible for directing the assets
of the Foundation. Pursuant to the terms of the contribution as mandated by the
OTS, all shares of Common Stock held by the Foundation must be voted in the same
ratio as all other shares of the Company's Common Stock on all proposals
considered by stockholders of the Company; provided, however, that the OTS will
waive this voting restriction under certain circumstances if compliance with the
restriction would: (i) cause a violation of the law of the State of Delaware and
the OTS determines that federal law would not preempt the application of the
laws of the State of Delaware to the Foundation; (ii) would cause the Foundation
to lose its tax-exempt status or otherwise have a material and adverse tax
consequence on the Foundation; or (iii) would cause the Foundation to be subject
to an excise tax under Section 4941 of the Code. In order for the OTS to waive
such voting restriction, the Company's or the Foundation's legal counsel must
render an opinion satisfactory to OTS that compliance with the voting
restriction would have the effect described in clauses (i), (ii) or (iii) above.
Under those circumstances, the OTS will grant a waiver of the voting restriction
upon submission of such legal opinion(s) by the Company or the Foundation. In
the event that the OTS waived the voting restriction, the directors would direct
the voting of the Common Stock held by the Foundation. However, a condition to
the OTS approval of the Conversion provides that in the event such voting
restriction is waived or becomes unenforceable, the Director of the OTS, or his
designees, at that time may impose conditions on the composition of the board of
directors of the Foundation or such other conditions or restrictions relating to
the control of the Common Stock held by the Foundation, any of which could limit
the ability of the board of directors of the Foundation to control the voting of
the Common Stock held by the Foundation. There will be no agreements or
understandings with directors of the Foundation regarding the exercise of
control, directly or indirectly, over the management or policies of the Company
or the Association, including agreements related to voting, acquisition or
disposition of the Company's stock. As directors of a nonprofit corporation,
directors of the Foundation will at all times be bound by their fiduciary duty
to advance the Foundation's charitable goals, to protect the assets of the
Foundation and to act in a manner consistent with the charitable purpose for
which the Foundation is established.
The Company will provide office space and administrative support
services to the Foundation. Initially, the Foundation is expected to have no
employees. The board of directors of the Foundation will appoint such officers
as may be necessary to manage the operations of the Foundation. It is
anticipated that initially such officers will be selected from the board of
directors of the Foundation. Any transaction between the Association and the
Foundation will comply with the affiliate transaction restrictions set forth in
Sections 23A and 23B of the Federal Reserve Act, as amended.
The Company proposes to capitalize the Foundation with Company Common
Stock in an amount equal to 5% of the total amount of Common Stock to be sold in
connection with the Conversion. At the minimum, midpoint and maximum of the
Estimated Price Range, the contribution to the Foundation would equal 48,450,
57,000 and 65,550 shares, which would have a market value of $484,500, $570,000
and $655,500, respectively, based on the Purchase Price. Such contribution, once
made, will not be recoverable by the Company or the Association. The Company and
the Association determined to fund the Foundation with Common Stock rather than
cash because it desired to form a bond with its community in a manner that would
allow the community to share in the potential growth and success of the Company
and the Association over the long term. The funding of the Foundation with stock
also provides the Foundation with a potentially larger endowment than if the
Company contributed cash to the Foundation since, as a shareholder, the
Foundation will share in the potential growth and success of the Company. As
such, the contribution of stock to the Foundation has the potential to provide a
self-sustaining funding mechanism which reduces the amount of cash that the
Company, if it were not making the stock contribution, would have to contribute
to the Foundation in future years in order to maintain a level amount of
charitable grants and donations.
The Foundation would receive working capital from any dividends that
may be paid on the Common Stock in the future, and subject to applicable federal
and state laws, loans collateralized by the Common Stock or from the proceeds of
the sale of any of the Common Stock in the open market from time to time as may
be permitted to provide the Foundation with additional liquidity. As a private
foundation under Section 501(c)(3) of the Code, the Foundation will be required
to distribute annually in grants or donations, a minimum of 5% of the average
fair market value of
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its net investment assets. One of the conditions imposed on the gift of Common
Stock by the Company is that the amount of Common Stock that may be sold by the
Foundation in any one year shall not exceed 5% of the average market value of
the assets held by the Foundation, except where the board of directors of the
Foundation determines that the failure to sell an amount of Common Stock greater
than such amount would result in a long-term reduction of the value of the
Foundation's assets or would otherwise jeopardize the Foundation's capacity to
carry out its charitable purposes. While there may be a greater risk associated
with a one-stock portfolio in comparison to a diversified portfolio, the Company
believes any such risk is mitigated by the ability of the Foundation's directors
to sell more than 5% of its stock in such circumstances. Upon completion of the
Conversion and the contribution of shares to the Foundation immediately
following the Conversion, the Company would have 1,020,000, 1,200,000 and
1,380,000 shares issued and outstanding at the minimum, midpoint and maximum of
the Estimated Price Range. Because the Company will have an increased number of
shares outstanding, the voting and ownership interests of shareholders in the
Company's Common Stock would be diluted by 4.8%, as compared to their interests
in the Company if the Foundation was not established. For additional discussion
of the dilutive effect, see "Comparison of Valuation and Pro Forma Information
With No Foundation" and "Pro Forma Data."
COMPARISON OF VALUATION AND OTHER FACTORS ASSUMING THE FOUNDATION IS
NOT ESTABLISHED AS PART OF THE CONVERSION. The Company proposes to capitalize
the Foundation with Common Stock in an amount equal to 5% of the total amount of
Common Stock sold in connection with the Conversion. At the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range, the contribution
to the Foundation would equal 48,450, 57,000, 65,550 and 75,383 shares,
respectively, which would have a market value of $484,500, $570,000, $655,500
and $753,830, respectively, based on the Purchase Price. Such contribution, once
made, will not be recoverable by the Company or the Association. As a result of
the establishment of the Foundation, the Estimated Price Range, as estimated by
Keller, has decreased and the amount of stock available for sale in the
Offerings has also correspondingly decreased. The amount of the decrease is
$90,950, $107,080, $123,050 and $141,483 shares, or $909,500, $1.1 million, $1.2
million and $1.4 million at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Price Range, respectively. See "Pro Forma Data" and
"Comparison of Valuation and Pro Forma Data Information with No Foundation."
TAX CONSIDERATIONS. The Company and the Association have been advised
by their independent accountants that an organization created for the above
purposes will qualify as a 501(c)(3) exempt organization under the Code, and
will be classified as a private foundation rather than a public charity. A
private foundation typically receives its support from one person or one
corporation whereas a public charity receives its support from the public. The
Foundation will submit a request to the IRS to be recognized as an exempt
organization after approval of the Foundation by the Association's members at
the Special Meeting being held to consider the Conversion. As long as the
Foundation files its application for tax-exempt status within 15 months from the
date of its organization, and provided the IRS approves the application, the
effective date of the Foundation's status as a Section 501(c)(3) organization
will be the date of its organization. The Company's independent accountants,
however, have not rendered any advice on the condition of the gift which
requires that all shares of Common Stock of the Company held by the Foundation
must be voted in the same ratio as all other shares of the Company's Common
Stock, on all proposals considered by stockholders of the Company. In the event
that the Company or the Foundation receives an opinion of their tax counsel
satisfactory to the OTS that compliance with the voting restriction would cause
the Foundation to lose its tax-exempt status, otherwise have a material adverse
tax consequence on the Foundation or subject the Foundation to an excise tax
under Section 4941 of the Code, the OTS will waive such condition upon
submission of such opinion(s) by the Company or the Foundation. See
"--Regulatory Conditions Imposed on the Foundation."
A legal opinion of the OTS which addresses the establishment of
charitable foundations by savings associations opines that as a general rule
funds contributed to a charitable foundation should not exceed the deductible
limitations set forth in the Code, and if an association's contributions exceed
the deductible limit, such action must be justified by the board of directors.
In addition, under Delaware law, the Company is authorized by statute to make
charitable contributions and case law has recognized the benefits of such
contributions to a Delaware corporation. In this regard, Delaware case law
provides that a charitable gift must merely be within reasonable limits as to
amount
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and purpose to be valid. Under the Code, the Company may deduct up to 10%
of its taxable income in any one year and any contributions made by the Company
in excess of the deductible amount will be deductible for federal tax purposes
over each of the five succeeding taxable years. The Company and the Association
believe that the Conversion presents a unique opportunity to establish and fund
a charitable foundation given the substantial amount of additional capital being
raised in the Conversion. In making such a determination, the Company and the
Association considered the dilutive impact of the Foundation on the amount of
Common Stock available to be offered for sale in the Conversion. See "Comparison
of Valuation and Pro Forma Information with No Foundation." Based on such
consideration, the Company and Association believe that the contribution to the
Foundation in excess of the 10% annual limitation is justified given the
Association's capital position and its earnings, the substantial additional
capital being raised in the Conversion and the potential benefits of the
Foundation to the Association's community. In this regard, assuming the sale of
the Common Stock at the midpoint of the Estimated Price Range, the Company would
have pro forma consolidated capital of $18.7 million, or 15.4% of consolidated
assets and the Association's pro forma tangible, core and risk-based capital
ratios would be 12.0%, 12.0% and 23.9%, respectively. See "Regulatory Capital
Compliance," "Capitalization," and "Comparison of Valuation and Pro Forma
Information with No Foundation." Thus, the amount of the contribution will not
adversely impact the financial condition of the Company and the Association and
the Company and the Association therefore believe that the amount of the
charitable contribution is reasonable given the Company and the Association's
pro forma capital positions. As such, the Company and the Association believe
that the contribution does not raise safety and soundness concerns.
The Company and the Association have received an opinion of their
independent accountants that the Company's contribution of its own stock to the
Foundation will not constitute an act of self-dealing, and that the Company will
be entitled to a deduction in the amount of the fair market value of the stock
at the time of the contribution less the nominal par value that the Foundation
is required to pay to the Company for such stock, subject to a limitation based
on 10% of the Company's annual taxable income. The Company, however, would be
able to carry forward any unused portion of the deduction for five years
following the year in which the contribution is made for federal tax purposes.
Thus, while the Company expects, based on the maximum of the Estimated Price
Range, to be able to utilize for federal income tax purposes a charitable
contribution deduction of approximately $654,844 in fiscal year 1999, the
Company is permitted under the Code to carryover the excess of the total
contribution over such 1999 deduction over a five-year period for federal income
tax purposes. For Commonwealth of Pennsylvania state income tax purposes, the
Company also would be able to deduct its contribution to the Foundation and to
carry forward any unused portion over a five-year period, subject to the
limitation based on 10% of the Company's unconsolidated annual taxable income,
and provided the Company generates sufficient state taxable income on an
unconsolidated basis. Assuming the close of the Offerings at the maximum of the
Estimated Price Range, the Company estimates that all of the federal tax
deduction should be deductible over the six-year period. However, no assurances
can be made that the Company will have sufficient pre-tax income over the five
year period following the year in which the contribution was made to fully
utilize the carryover related to the excess contribution. Neither the Company
nor the Association expects to make any further contributions to the Foundation
within the first five years following the initial contribution. After that time,
the Company and the Association may consider future contributions to the
Foundation. Any such decisions would be based on an assessment of, among other
factors, the financial condition of the Company and the Association at that
time, the interests of shareholders and depositors of the Company and the
Association, and the financial condition and operations of the Foundation.
Although the Company and the Association have received an opinion of
their independent accountants that the Company is entitled to a deduction for
the charitable contribution, there can be no assurances that the IRS will
recognize the Foundation as a Section 501(c)(3) exempt organization or that the
deduction will be permitted. In such event, the Company's contribution to the
Foundation would be expensed without tax benefit, resulting in a reduction in
earnings in the year in which the IRS makes such a determination. See "Risk
Factors--Establishment of the Charitable Foundation." In cases of willful,
flagrant or repeated acts or failures to act which result in violations of the
IRS rules governing private foundations, a private foundation's status as a
private foundation may be involuntarily terminated by the IRS. In such event,
the managers of a private foundation could be liable for excise taxes based on
such violations and the private foundation could be liable for a termination tax
under the Code. The Foundation's certificate of incorporation provides that it
shall have a perpetual existence. In the event, however, the Foundation
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were subsequently dissolved as a result of a loss of its tax exempt status, the
Foundation would be required under the Code and its certificate of incorporation
to distribute any assets remaining in the Foundation at that time for one or
more exempt purposes within the meaning of Section 501(c)(3) of the Code, or to
distribute such assets to the federal government, or to a state or local
government, for a public purpose.
As a private foundation, earnings and gains, if any, from the sale of
Common Stock or other assets are exempt from federal and state corporate
taxation. However, investment income, such as interest, dividends and capital
gains, will be subject to a federal excise tax of 2.0%. The Foundation will be
required to make an annual filing with the IRS within four and one-half months
after the close of the Foundation's fiscal year to maintain its tax-exempt
status. The Foundation will be required to publish a notice that the annual
information return will be available for public inspection for a period of 180
days after the date of such public notice. The information return for a private
foundation must include, among other things, an itemized list of all grants made
or approved, showing the amount of each grant, the recipient, any relationship
between a grant recipient and the Foundation's managers and a concise statement
of the purpose of each grant.
REGULATORY CONDITIONS IMPOSED ON THE FOUNDATION. Establishment of the
Foundation is subject to the following conditions imposed by the OTS: (i) the
Foundation will be subject to examination by the OTS, at the Foundation's own
expense; (ii) the Foundation must comply with supervisory directives imposed by
the OTS; (iii) the Foundation will provide annual reports to the OTS describing
grants made and grant recipients; (iv) the Foundation will operate in accordance
with written policies adopted by the board of directors, including a conflict of
interest policy; (v) the Foundation will not engage in self-dealing and will
comply with all laws necessary to maintain its tax-exempt status; (vi) any
purchases of Common Stock by the Foundation following that Conversion will be
subject to OTS regulations on stock repurchases; and (vii) any shares of Common
Stock of the Company held by the Foundation must be voted in the same ratio as
all other shares of the Company's Common Stock on all proposals considered by
stockholders of the Company; provided, however, that the OTS will waive this
voting restriction under certain circumstances if compliance with the voting
restriction would: (a) cause a violation of the law of the State of Delaware and
the OTS determines the federal law does not preempt the application of the laws
of the State of Delaware to the Foundation; (b) cause the Foundation to lose its
tax-exempt status or otherwise have a material and adverse tax consequence on
the Foundation; or (c) cause the Foundation to be subject to an excise tax under
Section 4941 of the Code. In order for the OTS to waive such voting restriction,
the Company's or the Foundation's legal counsel must render an opinion
satisfactory to OTS that compliance with the voting restriction would have the
effect described in clauses (a), (b) or (c) above. Under those circumstances,
the OTS will grant a waiver of the voting restriction upon submission of such
opinion(s) by the Company or the Foundation. There can be no assurances that
either a legal or tax opinion addressing these issues will be rendered, or if
rendered, that the OTS will grant an unconditional waiver of the voting
restriction. In this regard, a condition to the OTS approval of the Conversion
provides that in the event such voting restriction is waived or becomes
unenforceable, the Director of the OTS, or his designees, at that time may
impose conditions on the composition of the board of directors of the Foundation
or such other conditions or restrictions relating to the control of the Common
Stock held by the Foundation, any of which could limit the ability of the board
of directors of the Foundation to control the voting of Common Stock held by the
Foundation. In no event will the voting restriction survive the sale of shares
of the Common Stock held by the Foundation.
In addition, establishment of the Foundation is subject to the approval
of a majority of the total outstanding votes of the Association's members
eligible to be cast at the special meeting being held to consider the
Conversion. The Foundation will be considered as a separate matter from approval
of the Plan of Conversion. If the Association's members approve the Plan of
Conversion, but not the Foundation, the Association intends to complete the
Conversion without the establishment of the Foundation. Failure to approve the
Foundation may materially increase the pro forma market value of the Common
Stock being offered for sale in the Offering since the Estimated Price Range, as
set forth herein, takes into account the dilutive impact of the issuance of
shares to the Foundation. See "Comparison of Valuation and Pro Forma Information
With No Foundation."
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PURPOSES OF CONVERSION
The Association, as a Pennsylvania-chartered mutual savings and loan
association, does not have shareholders and has no authority to issue capital
stock. By converting to the capital stock form of organization, the Association
will be structured in the form used by commercial banks, other business entities
and a growing number of savings institutions. The Conversion will enhance the
Association's ability to access capital markets, expand its current operations,
acquire other financial institutions or branch offices, provide affordable home
financing opportunities to the communities it serves or diversify into other
financial services to the extent allowable by applicable law and regulation. The
Conversion would also position the Association for a conversion to a commercial
bank charter if the Board of the Association chooses to do so in the future.
The holding company form of organization, if used, would provide
additional flexibility to diversify the Association's business activities
through existing or newly formed subsidiaries, or through acquisitions of or
mergers with both mutual and stock institutions, as well as other companies.
Although there are no current arrangements, understandings or agreements
regarding any such opportunities, the Company will be in a position after the
Conversion, subject to regulatory limitations and the Company's financial
position, to take advantage of any such opportunities that may arise.
The potential impact of the Conversion upon the Association's capital
base is significant. The Conversion will significantly increase the
Association's capital position to a level whereby the Association will be better
positioned to take advantage of business opportunities and engage in activities
which, prior to Conversion, would have been more difficult for the Association
to engage in and still continue to meet its status as a "well capitalized"
institution. At June 30, 1998, the Association had total equity, determined in
accordance with GAAP, of $9.2 million, or 8.2% of total assets, which
approximated the Association's regulatory tangible capital at that date of 8.4%
of assets. An institution with a ratio of tangible capital to total assets of
greater than or equal to 5.0% is considered to be "well-capitalized" pursuant to
OTS regulations. Assuming that the Company uses 50% of the net proceeds at the
maximum of the Estimated Price Range to purchase the stock of the Association,
the Association's GAAP capital will increase to $14.6 million or a ratio of GAAP
capital to adjusted assets, on a pro forma basis, of 12.4% after the Conversion.
In the event that the holding company form of organization is not utilized and
all of the net Conversion proceeds, at the midpoint of the Estimated Price
Range, are retained by the Association, the Association's ratios of tangible and
core capital to adjusted assets, on a pro forma basis, will both increase to
15.3% after Conversion. The investment of the net proceeds from the sale of the
Common Stock is expected to provide the Association with additional income to
increase further its capital position. The additional capital may also assist
the Association in offering new programs and expanded services to its customers.
See "Use of Proceeds."
After completion of the Conversion, the unissued common and preferred
stock authorized by the Company's Certificate of Incorporation will permit the
Company, subject to market conditions and any required regulatory approval of an
offering, to raise additional equity capital through further sales of
securities, and to issue securities in connection with possible acquisitions. At
the present time, the Company has no plans with respect to additional offerings
of securities, other than the possible issuance of additional shares upon
exercise of Stock Options under the Stock-Based Incentive Plan or the possible
issuance of authorized but unissued shares to the Stock-Based Incentive Plan for
Stock Awards. Following the Conversion, the Company will also be able to use
stock-related incentive plans to attract and retain executive and other
personnel for itself and its subsidiaries. See "Management of the
Association--Executive Compensation."
EFFECTS OF CONVERSION
GENERAL. Each depositor in a mutual savings institution has both a
deposit account in the institution and a pro rata ownership interest in the net
worth of the institution based upon the balance in his or her account, which
interest may only be realized in the event of a liquidation of the institution
or in the event the institution declares a capital distribution to depositors,
subject to applicable regulations of the OTS and the Pennsylvania Department.
However, this ownership interest is tied to the depositor's account and has no
tangible market value separate from such
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deposit account. Any depositor who opens a deposit account obtains a pro rata
ownership interest in the net worth of the institution without any additional
payment beyond the amount of the deposit. A depositor who reduces or closes his
account receives a portion or all of the balance in the account but nothing for
his ownership interest in the net worth of the institution, which is lost to the
extent that the balance in the account is reduced.
Consequently, mutual savings institution depositors normally have no
way to realize the value of their ownership interest, which has realizable value
only in the unlikely event that the mutual savings institution is liquidated or
in the event the institution declares a capital distribution to depositors,
subject to applicable regulations of the OTS. In such event, the depositors of
record at that time, as owners, would share pro rata in any residual surplus and
reserves after other claims, including claims of depositors to the amounts of
their deposits, are paid.
When a mutual savings institution converts to stock form, permanent
nonwithdrawable capital stock is created to represent the ownership of the
institution's net worth. THE COMMON STOCK IS SEPARATE AND APART FROM DEPOSIT
ACCOUNTS AND CANNOT BE AND IS NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENTAL
AGENCY. Certificates are issued to evidence ownership of the capital stock. The
stock certificates are transferable and, therefore, the stock may be sold or
traded if a purchaser is available with no effect on any account the seller may
hold in the institution.
CONTINUITY. While the Conversion is being accomplished, the normal
business of the Association of accepting deposits and making loans will continue
without interruption. The Association will continue to be subject to regulation
by the OTS and the FDIC. After the Conversion, the Association will continue to
provide services for depositors and borrowers under current policies by its
present management and staff.
The Directors serving the Association at the time of Conversion will
serve initially as Directors of the Association after the Conversion. The
Directors of the Company will consist initially of individuals currently serving
on the Board of Directors of the Association. All officers of the Association at
the time of Conversion will retain their positions immediately after Conversion.
EFFECT ON DEPOSIT ACCOUNTS. Under the Plan, each depositor in the
Association at the time of Conversion will automatically continue as a depositor
after the Conversion, and each such deposit account will remain the same with
respect to deposit balance, interest rate and other terms. Each such account
will be insured by the FDIC to the same extent as before the Conversion (i.e.,
up to $100,000 per depositor). Depositors will continue to hold their existing
certificates, passbooks and other evidences of their accounts.
EFFECT ON LOANS. No loan outstanding from the Association will be
affected by the Conversion, and the amount, interest rate, maturity and security
for each loan will remain as they were contractually fixed prior to the
Conversion.
EFFECT ON VOTING RIGHTS OF MEMBERS. At present, all depositors and
certain borrowers of the Association are members of, and have voting rights in,
the Association as to all matters requiring membership action. Upon Conversion,
depositors and borrowers will cease to be members and will no longer be entitled
to vote at meetings of the Association. Upon Conversion, all voting rights in
the Association will be vested in the Company as the sole stockholder of the
Association. Exclusive voting rights with respect to the Company will be vested
in the holders of Common Stock. Depositors and borrowers of the Association will
not have voting rights after the Conversion except to the extent that they
become stockholders of the Company through the purchase of Common Stock.
TAX EFFECTS. The Association has received an opinion from Muldoon,
Murphy & Faucette with regard to federal income taxation and an opinion from
Parente, Randolph, Orlando, Carey & Associates with regard to Pennsylvania
income taxation which provide that the adoption and implementation of the Plan
of Conversion set forth herein will not be taxable for federal or Pennsylvania
income tax purposes to the Association, its Eligible Account Holders, or its
Supplemental Eligible Account Holders or the Company, except as discussed below.
See "--Tax Aspects."
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EFFECT ON LIQUIDATION RIGHTS. If a mutual savings institution were to
liquidate, all claims of creditors (including those of depositors, to the extent
of deposit balances) would be paid first. Thereafter, if there were any assets
remaining, depositors would be entitled to such remaining assets, pro rata,
based upon the deposit balances in their deposit accounts immediately prior to
liquidation. In the unlikely event that the Association were to liquidate after
Conversion, all claims of creditors (including those of depositors, to the
extent of their deposit balances) would also be paid first, followed by
distribution of the "liquidation account" to certain depositors (see
"--Liquidation Rights"), with any assets remaining thereafter distributed to the
Company as the holder of the Association's capital stock. Pursuant to the rules
and regulations of the OTS, a post-Conversion merger, consolidation, sale of
bulk assets or similar combination or transaction with another insured savings
institution would not be considered a liquidation and, in such a transaction,
the liquidation account would be assumed by the surviving institution.
STOCK PRICING
The Plan of Conversion requires that the aggregate purchase price of
the Common Stock must be based on the appraised pro forma market value of the
Common Stock, as determined on the basis of an independent valuation. The
Association and the Company have retained Keller to make such valuation. For its
services in making such appraisal, Keller will receive a fee of $21,000 plus
reasonable expenses not to exceed $1,000. The Association and the Company have
agreed to indemnify Keller and its employees and affiliates against certain
losses (including any losses in connection with claims under the federal
securities laws) arising out of its services as appraiser, except where Keller's
liability results from its negligence, willful misconduct or bad faith.
An appraisal has been made by Keller in reliance upon the information
contained in this Prospectus, including the Financial Statements. Keller also
considered the following factors, among others: the present and projected
operating results and financial condition of the Company and the Association and
the economic and demographic conditions in the Association's existing marketing
area; certain historical, financial and other information relating to the
Association; a comparative evaluation of the operating and financial statistics
of the Association with those of other similarly situated publicly-traded
savings banks and savings institutions located in the Association's market area
and the Midwest and the Mid-Atlantic areas of the United States; the aggregate
size of the offering of the Common Stock; the impact of Conversion on the
Association's net worth and earnings potential; the proposed dividend policy of
the Company and the Association; and the trading market for securities of
comparable institutions and general conditions in the market for such
securities.
On the basis of the foregoing, Keller has advised the Company and the
Association that, in its opinion, dated August 14, 1998 and updated on October
23, 1998, the estimated pro forma market value of the Common Stock, being
offered for sale ranged from a minimum of $9.7 million to a maximum of $13.1
million with a midpoint of $11.4 million. Based upon the Valuation Range and the
Purchase Price for the Common Stock established by the Board of Directors, the
Board of Directors has established the Estimated Price Range of $9.7 million to
$13.1 million, with a midpoint of $11.4 million, and the Company expects to
issue between 971,550 and 1,314,450 shares of Common Stock. The Board of
Directors of the Company and the Association have reviewed the appraisal of
Keller and in determining the reasonableness and adequacy of such appraisal
consistent with OTS regulations and policies, have reviewed the methodology and
reasonableness of the assumptions utilized by Keller in the preparation of such
appraisal. The Estimated Price Range may be amended with the approval of the OTS
(if required), if necessitated by subsequent developments in the financial
condition of the Company or the Association or market conditions generally. The
$10.00 per share price for the Common Stock was based on the consideration of a
number of factors, including the potential after market liquidity of the stock,
stock exchange or AMEX listing requirements and other marketing conditions.
SUCH APPRAISAL, HOWEVER, IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS
A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING COMMON STOCK
IN THE OFFERINGS. KELLER DID NOT INDEPENDENTLY VERIFY THE FINANCIAL STATEMENTS
AND OTHER INFORMATION PROVIDED BY THE ASSOCIATION, NOR DID KELLER VALUE
INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE ASSOCIATION. THE APPRAISAL
CONSIDERS THE ASSOCIATION AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN
INDICATION OF THE LIQUIDATION VALUE OF THE ASSOCIATION. MOREOVER, BECAUSE SUCH
APPRAISAL
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IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS, ALL
OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT
PERSONS PURCHASING COMMON STOCK IN THE CONVERSION WILL THEREAFTER BE ABLE TO
SELL COMMON STOCK AT PRICES AT OR ABOVE THE PURCHASE PRICE OR IN THE RANGE OF
THE FOREGOING VALUATION OF THE PRO FORMA MARKET VALUE THEREOF. SEE "RISK
FACTORS--ABSENCE OF MARKET FOR COMMON STOCK."
Following commencement of the Subscription Offering, the maximum of the
Estimated Price Range may be increased up to 15% and the number of shares of
Common Stock to be issued in the Conversion may be increased to 1,511,617 shares
due to regulatory considerations, changes in the market and general financial
and economic conditions, without the resolicitation of subscribers. See
"--Limitations on Common Stock Purchases" as to the method of distribution and
allocation of additional shares that may be issued in the event of an increase
in the Estimated Price Range to fill unfilled orders in the Subscription
Offering.
No sale of shares of Common Stock may be consummated unless, prior to
such consummation, Keller confirms to the Association and the OTS that, to the
best of its knowledge, nothing of a material nature has occurred which, taking
into account all relevant factors, would cause Keller to conclude that the value
of the Common Stock at the price so determined is incompatible with its estimate
of the pro forma market value of the Common Stock at the conclusion of the
Subscription Offering.
If the pro forma market value of the Common Stock is either more than
15% above the maximum of the Estimated Price Range or less than the minimum of
the Estimated Price Range, the Association and the Company, after consulting
with the OTS, may terminate the Plan and return all funds promptly with interest
at the Association's passbook rate of interest on payments made by check, bank
draft or money order, extend or hold a new Subscription Offering and/or
Community Offering, establish a new Estimated Price Range, commence a
resolicitation of subscribers or take such other actions as permitted by the OTS
in order to complete the Conversion. In the event that a resolicitation is
commenced, unless an affirmative response is received within a reasonable period
of time, all funds will be promptly returned to investors as described above. A
resolicitation, if any, following the conclusion of the Subscription Offering
would not exceed 45 days unless further extended by the OTS for periods of up to
90 days not to extend beyond March 30, 2000.
If all shares of Common Stock are not sold through the Subscription
Offering or Community Offering, then the Association and the Company expect to
offer the remaining shares in a Syndicated Community Offering which would occur
as soon as practicable following the close of the Subscription Offering but may
commence during the Subscription Offering subject to prior rights of
subscribers. All shares of Common Stock will be sold at the same price per share
in the Syndicated Community Offering as in the Subscription Offering and
Community Offering. See "--Syndicated Community Offering."
No sale of shares of Common Stock may be consummated unless, prior to
such consummation, Keller confirms to the Association, the Company and the OTS
that, to the best of its knowledge, nothing of a material nature has occurred
which, taking into account all relevant factors, including those which would be
involved in a cancellation of the Syndicated Community Offering, would cause
Keller to conclude that the aggregate value of the Common Stock at the Purchase
Price is incompatible with its estimate of the pro forma market value of the
Common Stock of the Company at the time of the Syndicated Community Offering.
Any change which would result in an aggregate purchase price which is below or
more than 15% above the Estimated Price Range would be subject to OTS approval.
If such confirmation is not received, the Association may extend the Conversion,
extend, reopen or commence a new Subscription Offering, Community Offering or
Syndicated Community Offering, establish a new Estimated Price Range and
commence a resolicitation of all subscribers with the approval of the OTS or
take such other actions as permitted by the OTS in order to complete the
Conversion, or terminate the Plan and cancel the Subscription and Community
Offerings and/or the Syndicated Community Offering. In the event market or
financial conditions change so as to cause the aggregate purchase price of the
shares to be below the minimum of the Estimated Price Range or more than 15%
above the maximum of such range, and the Company and the Association determine
to continue the Conversion, subscribers will be resolicited (i.e., be permitted
to continue their orders, in which case they will need
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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 Association's passbook rate of interest, or be permitted to
decrease or cancel their subscriptions). Any change in the Estimated Price Range
must be approved by the OTS. A resolicitation, if any, following the conclusion
of the Subscription Offering would not exceed 45 days unless further extended by
the OTS for periods up to 90 days not to extend beyond December 28, 2000. If
such resolicitation is not effected, the Association will return all funds
promptly with interest at the Association's passbook rate of interest on
payments made by check, bank draft or money order.
Copies of the appraisal report of Keller, including any amendments
thereto, and the detailed memorandum of the appraiser setting forth the method
and assumptions for such appraisal are available for inspection at the main
office of the Association and the other locations specified under "Additional
Information."
NUMBER OF SHARES TO BE ISSUED
Depending upon market or financial conditions following the
commencement of the Subscription Offering, the total number of shares to be
issued in the Conversion may be increased or decreased without a resolicitation
of subscribers, provided that the product of the total number of shares times
the price per share is not below the minimum of the Estimated Price Range or
more than 15% above the maximum of the Estimated Price Range. Based on a fixed
purchase price of $10.00 per share and Keller's estimate of the pro forma market
value of the Common Stock ranging from a minimum of $9.7 million to a maximum,
as increased by 15%, of $15.1 million, the number of shares of Common Stock
expected to be sold in the Conversion is between a minimum of 971,550 shares and
a maximum, as adjusted by 15%, of 1,511,617 shares. The actual number of shares
sold between this range will depend on a number of factors and shall be
determined by the Association and Company subject to OTS approval, if necessary.
In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the Estimated
Price Range or more than 15% above the maximum of the Estimated Price Range, if
the Plan is not terminated by the Company and the Association after consultation
with the OTS, purchasers will be resolicited (i.e., permitted to continue their
orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
subscription funds will be promptly refunded, or be permitted to modify or
rescind their subscriptions). Any change in the Estimated Price Range must be
approved by the OTS. If the number of shares issued in the Conversion is
increased due to an increase of up to 15% in the Estimated Price Range to
reflect changes in market or financial condition, persons who subscribed for the
maximum number of shares will not be given the opportunity to subscribe for an
adjusted maximum number of shares, except for the ESOP which will be able to
subscribe for such adjusted amount. See "--Limitations on Common Stock
Purchases."
In the event the members of the Association approve the establishment
of the Foundation, the number of shares to be issued and outstanding following
the Conversion will be increased by a number of shares equal to 5.0% of the
Common Stock sold in the Conversion. Assuming the sale of shares in the
Offerings at the maximum of the Estimated Price Range, the Company will issue
65,550 shares of its Common Stock from authorized but unissued shares to the
Foundation immediately following the completion of the Conversion. In that
event, the Company will have total shares of Common Stock outstanding of
1,380,000 shares. Of that amount, the Foundation will own 4.8%. Funding the
Foundation with authorized but unissued shares will have the effect of diluting
the ownership and voting interests of persons purchasing shares in the
Conversion by 4.8% since a greater number of shares will be outstanding upon
completion of the Conversion than would be if the Foundation were not
established. See "Pro Forma Data."
An increase in the number of shares to be issued in the Conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and the Company's pro forma net earnings
and stockholders' equity on a per share basis while increasing pro forma net
earnings and stockholders' equity on an aggregate basis. A decrease in the
number of shares to be issued in the Conversion would increase both a
subscriber's ownership interest and the Company's pro forma net earnings and
stockholders' equity on a per share
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basis while decreasing pro forma net earnings and stockholder's equity on an
aggregate basis. For a presentation of the effects of such changes, see "Pro
Forma Data."
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock have been granted under the Plan of Conversion to the
following persons in the following order of descending priority: (1) holders of
deposit accounts with a balance of $50 or more as of March 31, 1997 ("Eligible
Account Holders"); (2) the ESOP; (3) holders of deposit accounts with a balance
of $50 or more as of September 30, 1998 ("Supplemental Eligible Account
Holders"); and (4) members of the Association, consisting of depositors of the
Association as of November 5, 1998 (the "Voting Record Date"), and borrowers
with loans outstanding as of the Voting Record Date other than Eligible Account
Holders and Supplemental Eligible Account Holders ("Other Members"). All
subscriptions received will be subject to the availability of Common Stock after
satisfaction of all subscriptions of all persons having prior rights in the
Subscription Offering and to the maximum and minimum purchase limitations set
forth in the Plan of Conversion and as described below under "--Limitations on
Common Stock Purchases."
Deposit accounts which will provide subscription rights to holders
thereof consist of any "savings account," as defined by the Plan of Conversion
consistent with OTS regulations. Pursuant to the Plan and federal regulation,
certain deposits do not qualify as "savings accounts," including but not limited
to noninterest-bearing demand accounts, (primarily noninterest-bearing checking
accounts) and mortgage escrow deposits, maintained at the Association.
PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable subscription
rights to subscribe for in the Subscription Offering up to the greater of (1)
the amount permitted to be purchased in the Community Offering, currently
$150,000 of Common Stock; (2) one-tenth of one percent (.10%) of the total
offering of shares of Common Stock; or (3) fifteen times the product (rounded
down to the next whole number) obtained by multiplying the total number of
shares of Common Stock to be issued by a fraction of which the numerator is the
amount of the Eligible Account Holder's Qualifying Deposit (defined by the Plan
as any deposit account in the Association with a balance of $50 or more as of
March 31, 1997) and the denominator is the total amount of Qualifying Deposits
of all Eligible Account Holders, in each case on the Eligibility Record Date,
subject to the overall purchase limitation and exclusive of an increase in the
shares issued pursuant to an increase in the Estimated Price Range of up to 15%.
See "--Limitations on Common Stock Purchases."
In the event that Eligible Account Holders exercise subscription rights
for a number of shares of Conversion Stock in excess of the total number of such
shares eligible for subscription, the shares of Conversion Stock shall be
allocated among the subscribing Eligible Account Holders so as to permit each
subscribing Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation of Conversion
Stock equal to the lesser of 100 shares or the number of shares subscribed for
by the Eligible Account Holder. Any shares remaining after that allocation will
be allocated among the subscribing Eligible Account Holders whose subscriptions
remain unsatisfied in the proportion that the amount of the Qualifying Deposit
of each Eligible Account Holder whose subscription remains unsatisfied bears to
the total amount of the Qualifying Deposits of all Eligible Account Holders
whose subscriptions remain unsatisfied. If the amount so allocated exceeds the
amount subscribed for by any one or more Eligible Account Holders, the excess
shall be reallocated (one or more times as necessary) among those Eligible
Account Holders whose subscriptions are still not fully satisfied on the same
principle until all available shares have been allocated or all subscriptions
satisfied.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his subscription order form all accounts in which he has an ownership
interest. Failure to list an account could result in less shares being allocated
than if all accounts had been disclosed. The subscription rights of Eligible
Account Holders who are also Directors or Officers of the Association or their
associates will be subordinated to the subscription rights of other Eligible
Account Holders to the extent attributable to increased deposits in the 12
months preceding June 30, 1997.
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PRIORITY 2: EMPLOYEE STOCK OWNERSHIP PLAN. To the extent that there are
sufficient shares remaining after satisfaction of the subscriptions by Eligible
Account Holders, the ESOP will receive, without payment therefor, second
priority, nontransferable subscription rights to purchase, in the aggregate, up
to 10% of Common Stock issued in the Conversion, including shares issued to the
Foundation, and any increase in the number of shares of Common Stock to be
issued in the Conversion after the date hereof as a result of an increase of up
to 15% in the maximum of the Estimated Price Range. The ESOP intends to purchase
8% of the shares to be issued in the Conversion, including shares issued to the
Foundation, or 81,600 shares and 110,400 shares, based on the minimum and
maximum of the Estimated Price Range, respectively. Subscriptions by the ESOP
will not be aggregated with shares of Common Stock purchased directly by or
which are otherwise attributable to any other participants in the Subscription
Offering, including subscriptions of any of the Association's directors,
officers, employees or associates thereof. See "Management of the
Association--Other Benefit Plans--Employee Stock Ownership Plan."
PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third priority,
nontransferable subscription rights to subscribe for in the Subscription
Offering up to the greater of the amount permitted to be purchased in the
Community Offering, currently $150,000 of Common Stock, one-tenth of one percent
(.10%) of the total offering of shares of Common Stock or fifteen times the
product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Common Stock to be issued by a fraction of which the
numerator is the amount of the Supplemental Eligible Account Holder's Qualifying
Deposit and the denominator is the total amount of Qualifying Deposits of all
Supplemental Eligible Account Holders, in each case on the Supplemental
Eligibility Record Date, subject to the overall purchase limitation and
exclusive of an increase in the shares issued pursuant to an increase in the
Estimated Price Range of up to 15%. See "--Limitations on Common Stock
Purchases."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Conversion Stock in excess of the
total number of such shares eligible for subscription, the shares of Conversion
Stock shall be allocated among the subscribing Supplemental Eligible Account
Holders so as to permit each subscribing Supplemental Eligible Account Holder,
to the extent possible, to purchase a number of shares sufficient to make his or
her total allocation of Conversion Stock equal to the lesser of 100 shares or
the number of shares subscribed for by the Supplemental Eligible Account Holder.
Any shares remaining after that allocation will be allocated among the
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied in the proportion that the amount of the Qualifying Deposit of each
Supplemental Eligible Account Holder whose subscription remains unsatisfied
bears to the total amount of the Qualifying Deposits of all Supplemental
Eligible Account Holders whose subscriptions remain unsatisfied. If the amount
so allocated exceeds the amount subscribed for by any one or more Supplemental
Eligible Account Holders, the excess shall be reallocated (one or more times as
necessary) among those Supplemental Eligible Account Holders whose subscriptions
are still not fully satisfied on the same principle until all available shares
have been allocated or all subscriptions satisfied.
To ensure proper allocation of stock, each Supplemental Eligible
Account Holder must list on his subscription order form all accounts in which he
has an ownership interest. Failure to list an account could result in less
shares being allocated than if all accounts had been disclosed. The subscription
rights received by Eligible Account Holders will be applied in partial
satisfaction to the subscription rights to be received as a Supplemental
Eligible Account Holder.
PRIORITY 4: OTHER MEMBERS. To the extent that there are sufficient
shares remaining after satisfaction of subscriptions by the Eligible Account
Holders, the ESOP and the Supplemental Eligible Account Holders, each Other
Member will receive, without payment therefor, fourth priority nontransferable
subscription rights to subscribe for Common Stock in the Subscription Offering
up to the greater of the amount permitted to be purchased in the Community
Offering, currently $150,000 of Common Stock, or one-tenth of one percent (.10%)
of the total offering of shares of Common Stock, subject to the overall purchase
limitation and exclusive of an increase in shares issued pursuant to an increase
in the Estimated Price Range of up to 15%.
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In the event that Other Members subscribe for a number of shares of
Conversion Stock which, when added to the shares of Conversion Stock subscribed
for by the Eligible Account Holders, the Employee Plans and the Supplemental
Eligible Account Holders is in excess of the total number of shares of
Conversion Stock being issued, the subscriptions of such Other Members will be
allocated among the subscribing Other Members so as to permit each subscribing
Other Member, to the extent possible, to purchase a number of shares sufficient
to make his or her total allocation of Conversion Stock equal to the lesser of
100 shares or the number of shares subscribed for by the Other Member. Any
shares remaining after that allocation will be allocated among the subscribing
Other Members whose subscriptions remain unsatisfied pro rata in the same
proportion that the number of votes of a subscribing Other Member on the Voting
Record Date bears to the total votes on the Voting Record Date of all
subscribing Other Members whose subscriptions remain unsatisfied. If the amount
so allocated exceeds the amount subscribed for by any one or more remaining
Other Members, the excess shall be reallocated (one or more times as necessary)
among those remaining Other Members whose subscriptions are still not fully
satisfied on the same principle until all available shares have been allocated
or all subscriptions satisfied.
EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The Subscription
Offering will terminate at 12:00 noon, Eastern time on December 14, 1998 (the
"Expiration Date"), unless extended for up to 45 days by the Association or such
additional periods with the approval of the OTS. Subscription rights which have
not been exercised prior to the Expiration Date will become void.
The Association will not execute orders until all shares of Common
Stock have been subscribed for or otherwise sold. If all shares have not been
subscribed for or sold within 45 days after the Expiration Date, unless such
period is extended with the consent of the OTS, all funds delivered to the
Association pursuant to the Subscription Offering will be returned promptly to
the subscribers with interest and all withdrawal authorizations will be
canceled. If an extension beyond the 45 day period following the Expiration Date
is granted, the Association will notify subscribers of the extension of time and
of any rights of subscribers to modify or rescind their subscriptions and have
their funds returned promptly with interest, and of the time period within which
subscribers must affirmatively notify the Association of their intention to
confirm, modify, or rescind their subscription. If an affirmative response to
any resolicitation is not received by the Company from a subscriber, such order
will be rescinded and all subscription funds will be promptly returned with
interest. Such extensions may not go beyond December 28, 2000.
COMMUNITY OFFERING
To the extent that shares remain available for purchase after
satisfaction of all subscriptions of the Eligible Account Holders, the ESOP, the
Supplemental Eligible Account Holders and Other Members, the Association intends
to offer shares pursuant to the Plan to certain members of the general public in
a Community Offering. The Community Offering may be commenced prior to the
expiration of the Subscription Offering. In the event a Community Offering is
held, a preference will be given to Preferred Subscribers, subject to the right
of the Company to accept or reject any such orders, in whole or in part, in
their sole discretion. Persons purchasing stock in the Community Offering,
together with associates of and persons acting in concert with such persons, may
purchase up to $150,000 of Common Stock subject to the maximum purchase
limitation and exclusive of shares issued pursuant to an increase in the
Estimated Price Range by up to 15%. See "--Limitations on Common Stock
Purchases." This amount may be increased to up to a maximum of 5% or decreased
to less than $150,000 at the sole discretion of the Company and the Association.
THE OPPORTUNITY TO SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE COMMUNITY
OFFERING CATEGORY IS SUBJECT TO THE RIGHT OF THE ASSOCIATION AND THE COMPANY, IN
ITS SOLE DISCRETION, TO ACCEPT OR REJECT ANY SUCH ORDERS IN WHOLE OR IN PART
EITHER AT THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING
THE EXPIRATION DATE.
Subject to the foregoing, if the amount of stock remaining is
insufficient to fill the orders of Preferred Subscribers after completion of the
Subscription Offering and Community Offering, such stock will be allocated first
to each Preferred Subscriber whose order is accepted by the Association, in an
amount equal to the lesser of 100 shares or the number of shares subscribed for
by each such Preferred Subscriber, if possible. Thereafter, unallocated shares
will be allocated among the Preferred Subscribers whose order remains
unsatisfied on a 100 shares per order
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basis until all such orders have been filled or the remaining shares have been
allocated. If there are any shares remaining, shares will be allocated to other
persons of the general public who purchase in the Community Offering applying
the same allocation described above for Preferred Subscribers.
PERSONS IN NONQUALIFIED STATES OR FOREIGN COUNTRIES
The Company and the Association will make reasonable efforts to comply
with the securities laws of all states in the United States in which persons
entitled to subscribe for stock pursuant to the Plan reside. However, the Plan
provides that the Association and the Company are not required to offer stock in
the Subscription Offering to any person who resides in a foreign country or
resides in a state of the United States with respect to which both of the
following apply: (i) a small number of persons otherwise eligible to subscribe
for shares of Common Stock reside in such state; and (ii) the Company or the
Association determines that compliance with the securities laws of such state
would be impracticable for reasons of cost or otherwise, including but not
limited to a request that the Company and the Association or their officers,
directors or trustees register as a broker, dealer, salesman or selling agent,
under the securities laws of such state, or a request to register or otherwise
qualify the subscription rights or Common Stock for sale or submit any filing
with respect thereto in such state. Where the number of persons eligible to
subscribe for shares in one state is small, the Association and the Company will
base their decision as to whether or not to offer the Common Stock in such state
on a number of factors, including the size of accounts held by account holders
in the state, the cost of registering or qualifying the shares or the need to
register the Company, its officers, directors or employees as brokers, dealers
or salesmen.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Association and the Company have engaged Sandler O'Neill as a
consultant and financial advisor in connection with the offering of the Common
Stock, and Sandler O'Neill has agreed to use its best efforts to solicit
subscriptions and purchase orders for shares of Common Stock in the Offerings.
Sandler O'Neill is not obligated to take or purchase any of the shares of Common
Stock offered hereby. Based upon negotiations between the Association and the
Company concerning fee structure, Sandler O'Neill will receive a fee equal to 2%
of the aggregate Purchase Price of the shares sold in the Subscription and
Community Offerings, excluding shares purchased by directors, officers,
employees, and any immediate family member thereof, and any employee benefit
plan of the Company or Association, including the ESOP for which Sandler O'Neill
will not receive a fee. In the event that a selected dealers agreement is
entered into in connection with a Syndicated Community Offering, the Association
will pay a fee (to be negotiated at such time under such agreement) to such
selected dealers, any sponsoring dealers fees, and a management fee to Sandler
O'Neill of 1.5% of the aggregate Purchase Price for shares sold by a National
Association of Securities Dealers, Inc. member firms pursuant to a selected
dealers agreement; provided, however, that any fees payable to Sandler O'Neill
for Common Stock sold by them pursuant to such a selected dealers agreement
shall not exceed 2% of the Purchase Price and provided, further, however, that
the aggregate fees payable to Sandler O'Neill and the selected dealers will not
exceed 5% of the aggregate purchase price of the Common Stock sold by selected
dealers. Fees to Sandler O'Neill and to any other broker-dealer may be deemed to
be underwriting fees, and Sandler O'Neill and such broker-dealers may be deemed
to be underwriters. Sandler O'Neill will also be reimbursed for its reasonable
out-of-pocket expenses (including legal fees, subject to a maximum of $50,000).
The Company and the Association have agreed to indemnify Sandler O'Neill for
reasonable costs and expenses in connection with certain claims or liabilities,
including certain liabilities under the Securities Act. Sandler O'Neill has
received advances towards its fees totaling $25,000. Total marketing fees to
Sandler O'Neill are expected to be $163,500 and $226,400 at the minimum and the
maximum of the Estimated Price Range, respectively. See "Pro Forma Data" for the
assumptions used to arrive at these estimates.
Sandler O'Neill will perform proxy solicitation services, conversion
agent services and records management services for the Association in the
Conversion and will receive a fee for these services of $10,000. Sandler O'Neill
will be reimbursed for its out-of-pocket expenses.
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Directors and executive officers of the Company and Association may
participate in the solicitation of offers to purchase Common Stock. Questions of
prospective purchasers will be directed to executive officers or registered
representatives. Other employees of the Association may participate in the
Offering in ministerial capacities or providing clerical work in effecting a
sales transaction. Such other employees have been instructed not to solicit
offers to purchase Common Stock or provide advice regarding the purchase of
Common Stock. The Company will rely on Rule 3a4-1 under the Exchange Act, and
sales of Common Stock will be conducted within the requirements of Rule 3a4-1,
so as to permit officers, directors and employees to participate in the sale of
Common Stock. No officer, director or employee of the Company or the Association
will be compensated in connection with his participation by the payment of
commissions or other remuneration based either directly or indirectly on the
transactions in the Common Stock.
Sandler O'Neill has not prepared any report or opinion constituting
recommendations or advice to the Association or the Company. In addition,
Sandler O'Neill has expressed no opinion as to the prices at which the 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.
PROCEDURE FOR PURCHASING SHARES IN THE SUBSCRIPTION AND COMMUNITY OFFERINGS
To ensure that each purchaser receives a prospectus at least 48 hours
before the Expiration Date in the case of the Subscription Offering or the
termination of the Community Offering in accordance with Rule 15c2-8 of the
Exchange Act, no prospectus will be mailed any later than five days prior to
such date or hand delivered any later than two days prior to such date.
Execution of the stock order form and certification form will confirm receipt or
delivery in accordance with Rule 15c2-8. Stock order and certification forms
will only be distributed with a prospectus.
To purchase shares in the Offerings, an executed stock order form and
certification form with the required payment for each share subscribed for, or
with appropriate authorization for withdrawal from the Association's deposit
account (which may be given by completing the appropriate blanks in the stock
order form), must be received by the Association at any of its offices by 12:00
noon, Eastern time, on the Expiration Date in the case of the Subscription
Offering or the termination of the Community Offering. Stock order forms which
are not received by such time or are executed defectively or are received
without full payment (or appropriate withdrawal instructions) are not required
to be accepted. In addition, the Association and Company are not obligated to
accept orders submitted on photocopied or facsimilied stock order forms and will
not accept stock order forms unaccompanied by an executed certification form.
Notwithstanding the foregoing, the Company shall have the right, in its sole
discretion, to permit institutional investors to submit irrevocable orders
together with a legally binding commitment for payment and to thereafter pay for
the shares of Common Stock for which they subscribe in the Community Offering at
any time prior to 48 hours before the completion of the Conversion. The Company
and the Association have the right to waive or permit the correction of
incomplete or improperly executed forms, but do not represent that they will do
so. Once received, an executed stock order form may not be modified, amended or
rescinded without the consent of the Association unless the Conversion has not
been completed within 45 days after the end of the Subscription Offering, unless
such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (March 31,
1997) and/or the Supplemental Eligibility Record Date (September 30, 1998)
and/or the Voting Record Date (November 5, 1998) must list all accounts on the
stock order form giving all names in each account and the account number.
Payment for subscriptions may be made (i) in cash if delivered in
person at any branch office of the Association, (ii) by check, bank draft or
money order, or (iii) by authorization of withdrawal from deposit accounts
maintained with the Association. No wire transfers will be accepted. Interest
will be paid on payments made by cash, check, bank draft or money order at the
Association's passbook rate of interest from the date payment is received until
the completion or termination of the Conversion. If payment is made by
authorization of withdrawal from deposit
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accounts, the funds authorized to be withdrawn from a deposit account will
continue to accrue interest at the contractual rates until completion or
termination of the Conversion, but a hold will be placed on such funds, thereby
making them unavailable to the depositor until completion or termination of the
Conversion.
If a subscriber authorizes the Association to withdraw the amount of
the purchase price from his deposit account, the Association will do so as of
the effective date of the Conversion. The Association will waive any applicable
penalties for early withdrawal from certificate accounts. If the remaining
balance in a certificate account is reduced below the applicable minimum balance
requirement at the time that the funds actually are transferred under the
authorization, the certificate will be canceled at the time of the withdrawal,
without penalty, and the remaining balance will earn interest at the
Association's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the
ESOP will not be required to pay for the shares subscribed for at the time it
subscribes, but rather, may pay for such shares of Common Stock subscribed for
at the Purchase Price upon consummation of the Subscription Offering, if all
shares are sold, or upon consummation of the Community Offering or Syndicated
Community Offering if shares remain to be sold in such offerings; provided, that
there is in force from the time of its subscription until such time, a loan
commitment from an unrelated financial institution or the Company to lend to the
ESOP, at such time, the aggregate Purchase Price of the shares for which it
subscribed.
Owners of self-directed Individual Retirement Accounts ("IRAs") and
Qualified Plans may use the assets of such IRAs and Qualified Plans to purchase
shares of Common Stock in the Subscription Offering and/or Community Offering,
provided that such IRAs are not maintained at the Association. Persons with
self-directed IRAs and Qualified Plans maintained at the Association must have
their accounts transferred to an unaffiliated institution or broker to purchase
shares of Common Stock in the Subscription Offering and/or Community Offering.
In addition, the provisions of ERISA and IRS regulations require that officers,
directors and ten percent shareholders who use self-directed IRA funds and
Qualified Plans to purchase shares of Common Stock in the Subscription Offering
and/or Community Offering, make such purchases for the exclusive benefit of the
IRAs and Qualified Plans.
Certificates representing shares of Common Stock purchased will be
mailed to purchasers at the address specified in properly completed stock order
forms, as soon as practicable following consummation of the sale of all shares
of Common Stock. Any certificates returned as undeliverable will be disposed of
in accordance with applicable law.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the completion of the Conversion, the OTS conversion
regulations prohibit any person with subscription rights, including the Eligible
Account Holders, the ESOP, the Supplemental Eligible Account Holders and Other
Members of the Association, from transferring or entering into any agreement or
understanding to transfer the legal or beneficial ownership of the subscription
rights issued under the Plan or the shares of Common Stock to be issued upon
their exercise. Such rights may be exercised only by the person to whom they are
granted and only for his account. Each person exercising such subscription
rights will be required to certify that he is purchasing shares solely for his
own account and that he has no agreement or understanding regarding the sale or
transfer of such shares. The regulations also prohibit any person from offering
or making an announcement of an offer or intent to make an offer to purchase
such subscription rights or shares of Common Stock prior to the completion of
the Conversion.
THE ASSOCIATION AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND
EQUITABLE REMEDIES (INCLUDING FORFEITURE) IN THE EVENT THEY BECOME AWARE OF THE
TRANSFER OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO
INVOLVE THE TRANSFER OF SUCH RIGHTS.
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SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion, the Plan provides that, if feasible,
all shares of Common Stock not purchased in the Subscription and Community
Offerings, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed and managed by Sandler O'Neill acting as agent of the Company to
assist the Company and the Association in the sale of the Common Stock. The
Company and the Association have the right to reject orders in whole or in part
in their sole discretion in the Syndicated Community Offering. Neither Sandler
O'Neill nor any registered broker-dealer shall have any obligation to take or
purchase any shares of the Common Stock in the Syndicated Community Offering;
however, Sandler O'Neill has agreed to use its best efforts in the sale of
shares in the Syndicated Community Offering.
The price at which Common Stock is sold in the Syndicated Community
Offering will be determined as described above under "--Stock Pricing." Subject
to overall purchase limitations, no person, together with any associate or group
of persons acting in concert, will be permitted to subscribe in the Syndicated
Community Offering for more than $150,000 of the Common Stock, exclusive of an
increase in shares issued pursuant to an increase in the Estimated Price Range
of up to 15%; provided, however, that shares of Common Stock purchased in the
Community Offering by any persons, together with associates of or persons acting
in concert with such persons, will be aggregated with purchases in the
Syndicated Community Offering and be subject to an overall maximum purchase
limitation of $150,000 of Common Stock, exclusive of an increase in shares
issued pursuant to an increase in the Estimated Price Range by up to 15%.
Payments made in the form of a check, bank draft, money order or in
cash will earn interest at the Association's passbook rate of interest from the
date such payment is actually received by the Association until completion or
termination of the Conversion.
In addition to the foregoing, if a syndicate of broker-dealers
("selected dealers") is formed to assist in the Syndicated Community Offering, a
purchaser may pay for his shares with funds held by or deposited with a selected
dealer. If an order form is executed and forwarded to the selected dealer or if
the selected dealer is authorized to execute the order form on behalf of a
purchaser, the selected dealer is required to forward the order form and funds
to the Association for deposit in a segregated account on or before noon of the
business day following receipt of the order form or execution of the order form
by the selected dealer. Alternatively, selected dealers may solicit indications
of interest from their customers to place orders for shares. Such selected
dealers shall subsequently contact their customers who indicated an interest and
seek their confirmation as to their intent to purchase. Those indicating an
intent to purchase shall execute order forms and forward them to their selected
dealer or authorize the selected dealer to execute such forms. The selected
dealer will acknowledge receipt of the order to its customer in writing on the
following business day and will debit such customer's account on the third
business day after the customer has confirmed his intent to purchase (the "debit
date") and on or before noon of the next business day following the debit date
will send order forms and funds to the Association for deposit in a segregated
account. Although purchasers' funds are not required to be in their accounts
with selected dealers until the debit date in the event that such alternative
procedure is employed once a confirmation of an intent to purchase has been
received by the selected dealer, the purchaser has no right to rescind his
order.
Certificates representing shares of Common Stock purchased, together
with any refund due, will be mailed to purchasers at the address specified in
the order form, as soon as practicable following consummation of the sale of the
Common Stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
The Syndicated Community Offering will terminate no more than 45 days
following the Subscription Offering Expiration Date, unless extended by the
Company with the approval of the OTS. Such extensions may not be beyond December
28, 2000. See "--Stock Pricing" above for a discussion of rights of subscribers,
if any, in the event an extension is granted.
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LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased during the Conversion:
(1) No less than 25 shares;
(2) Each Eligible Account Holder may subscribe for and purchase in
the Subscription Offering up to the greater of: 1) the amount
permitted to be purchased in the Community Offering, currently
$150,000 of Common Stock; 2) one-tenth of one percent (.10%)
of the total offering of shares of Common Stock; or 3) fifteen
times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Common
Stock to be issued by a fraction of which the numerator is the
amount of the Qualifying Deposit of the Eligible Account
Holder and the denominator is the total amount of Qualifying
Deposits of all Eligible Account Holders, in each case on the
Eligibility Record Date subject to the overall maximum
purchase limitation in (8) below and exclusive of an increase
in the total number of shares issued due to an increase in the
Estimated Price Range of up to 15%;
(3) The ESOP is permitted to purchase in the aggregate up to 10%
of the shares of Common Stock issued in the Conversion,
including shares issued to the Foundation, including shares
issued in the event of an increase in the Estimated Price
Range of 15%, and intends to purchase 8% of the shares of
Common Stock issued in the Conversion, including shares issued
to the Foundation;
(4) Each Supplemental Eligible Account Holder may subscribe for
and purchase in the Subscription Offering up to the greater
of: 1) the amount permitted to be purchased in the Community
Offering, currently $150,000 of Common Stock; 2) one-tenth of
one percent (.10%) of the total offering of shares of Common
Stock; or 3) fifteen times the product (rounded down to the
next whole number) obtained by multiplying the total number of
shares of Common Stock to be issued by a fraction of which the
numerator is the amount of the Qualifying Deposit of the
Supplemental Eligible Account Holder and the denominator is
the total amount of Qualifying Deposits of all Supplemental
Eligible Account Holders, in such case on the Supplemental
Eligibility Record Date subject to the overall maximum
purchase limitation in (8) below and exclusive of an increase
in the total number of shares issued due to an increase in the
Estimated Price Range of up to 15%;
(5) Each Other Member may subscribe for and purchase in the
Subscription Offering up to the greater of: 1) the amount
permitted to be purchased in the Community Offering, currently
$150,000 of Common Stock; or 2) one-tenth of one percent
(.10%) of the total offering of shares of Common Stock, in
each case subject to the overall maximum purchase limitation
in (8) below and exclusive of an increase in the total number
of shares issued due to an increase in the Estimated Price
Range of up to 15%;
(6) Persons purchasing shares of Common Stock in the Community
Offering, together with associates of and groups of persons
acting in concert with such persons, may purchase in the
Community Offering up to $150,000 of Common Stock, subject to
the overall maximum purchase limitation in (8) below and
exclusive of an increase in the total number of shares issued
due to an increase in the Estimated Price Range of up to 15%;
(7) Persons purchasing shares of Common Stock in the Syndicated
Community Offering, together with associates of and persons
acting in concert with such persons, may purchase in the
Syndicated Offering up to $150,000 of Common Stock, subject to
the overall maximum purchase limitation in (8) below and
exclusive of an increase in the total number of shares issued
due to an increase in the Estimated Price Range of up to 15%
and, provided further that shares of Common Stock purchased in
the Community Offering by any persons, together with
associates of or persons acting in concert
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with such persons, will be aggregated with purchases in the
Syndicated Community Offering in applying the $150,000
purchase limitation;
(8) Except for the ESOP, the overall maximum number of shares of
Common Stock subscribed for or purchased in all categories of
the Conversion by any person, together with associates of or
persons acting in concert with such persons, shall not exceed
$150,000; and
(9) No more than 30% of the total number of shares offered for
sale in the Conversion may be purchased by directors and
officers of the Association 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 Association, both the individual amount permitted to be subscribed for and
the overall maximum purchase limitation may be increased to up to a maximum of
5% at the sole discretion of the Company and the Association. If such amount is
increased, subscribers for the maximum amount will be, and certain other large
subscribers in the sole discretion of the Association may be, given the
opportunity to increase their subscriptions up to the then applicable limit. In
addition, the Boards of Directors of the Company and the Association may, in
their sole discretion, increase the maximum purchase limitation referred to
above up to 9.99%, provided that orders for shares exceeding 5% of the shares
being offering in the Subscription and Community Offerings shall not exceed, in
the aggregate, 10% of the shares being offered in the Subscription and Community
Offerings. Requests to purchase additional shares of Common Stock under this
provision will be determined by the Boards of Directors and, if approved,
allocated on a pro rata basis giving priority in accordance with the priority
rights set forth herein.
The overall maximum purchase limitation may not be reduced to less than
1% of the shares of Common Stock offered in the Conversion exclusive of an
increase in the total number of shares issued due to an increase in the
Estimated Price Range of up to 15% but the individual amount permitted to be
subscribed for may be reduced by the Association to less than $150,000 subject
to paragraphs (2), (4) and (5) above without the further approval of members or
resolicitation of subscribers. An individual Eligible Account Holder,
Supplemental Eligible Account Holder or Other Member may not purchase
individually in the Subscription Offering the overall maximum purchase limit of
1.0% of the shares offered, if such limit were to become greater than $150,000,
but may make such purchase, together with associates of and persons acting in
concert with such person, by also purchasing in other available categories of
the Conversion, subject to availability of shares and the overall maximum
purchase limit for purchases in the Conversion.
In the event of an increase in the total number of shares offered in
the Conversion due to an increase in the Estimated Price Range of up to 15% (the
"Adjusted Maximum"), the additional shares will be allocated in the following
order or priority in accordance with the Plan: (i) to fill the ESOP's
subscription of 8% of the amount of Common Stock issued in the Conversion,
including shares issued to the Foundation, at the Adjusted Maximum number of
shares; (ii) in the event that there is an oversubscription by Eligible Account
Holders, to fill unsatisfied subscriptions of Eligible Account Holders,
exclusive of the Adjusted Maximum; (iii) in the event that there is an
oversubscription by Supplemental Eligible Account Holders, to fill unsatisfied
subscriptions of Supplemental Eligible Account Holders, exclusive of the
Adjusted Maximum; (iv) in the event that there is an oversubscription by Other
Members, to fill unsatisfied subscriptions of Other Members exclusive of the
Adjusted Maximum; and (v) to fill unsatisfied subscriptions in the Community
Offering to the extent possible, exclusive of the Adjusted Maximum, with
preference to institutional investors then a preference to Preferred
Subscribers.
The term "associate" of a person is defined to mean: (i) any
corporation, partnership (other than the Association or a majority-owned
subsidiary of the Association) of which such person is an officer, partner or
10% stockholder; (ii) any trust or other estate in which such person has a
substantial beneficial interest or serves as a trustee or in a similar fiduciary
capacity; provided, however, such term shall not include any employee stock
benefit plan of the Association in which such person has a substantial
beneficial interest or serves as a trustee or in a similar fiduciary capacity;
and (iii) any relative or spouse of such person, or any relative of such spouse,
who either has the same home as such person or who is a director or officer of
the Association. Directors are not treated as associates of each other solely
because of their Board membership. For a further discussion of limitations on
purchases of a converting
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institution's stock at the time of Conversion and subsequent to Conversion, see
"Management of the Association--Subscriptions by Executive Officers and
Directors," "--Certain Restrictions on Purchase or Transfer of Shares After
Conversion" and "Restrictions on Acquisition of the Company and the
Association."
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Association in
its present mutual form, each depositor would receive his pro rata share of any
assets of the Association remaining after payment of claims of all creditors
(including the claims of all depositors to the withdrawal value of their
accounts). Each depositor's pro rata share of such remaining assets would be in
the same proportion as the value of his deposit account was to the total value
of all deposit accounts in the Association at the time of liquidation. After the
Conversion, each depositor, in the event of a complete liquidation, would have a
claim as a creditor of the same general priority as the claims of all other
general creditors of the Association. However, except as described below, his
claim would be solely in the amount of the balance in his deposit account plus
accrued interest. He would not have an interest in the value or assets of the
Association above that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the surplus and reserves of the Association as of the date of its latest balance
sheet contained in the final Prospectus used in connection with the Conversion.
Each Eligible Account Holder and Supplemental Eligible Account Holder, if he
were to continue to maintain his deposit account at the Association, would be
entitled, on a complete liquidation of the Association after the Conversion, to
an interest in the liquidation account prior to any payment to the stockholders
of the Association. Each Eligible Account Holder and Supplemental Eligible
Account Holder would have an initial interest in such liquidation account for
each deposit account, including regular accounts, transaction accounts such as
NOW accounts, money market deposit accounts, and certificates of deposit, with a
balance of $50 or more held in the Association on March 31, 1997 and September
30, 1998, respectively. Each Eligible Account Holder and Supplemental Eligible
Account Holder will have a pro rata interest in the total liquidation account
based on the proportion that the balance of his Qualifying Deposits on the
Eligibility Record Date or Supplemental Eligibility Record Date, respectively,
bore to the total amount of all Qualifying Deposits of all Eligible Account
Holders and Supplemental Eligible Account Holders in the Association. For
deposit accounts in existence at both dates separate subaccounts shall be
determined on the basis of the Qualifying Deposits in such deposit accounts on
such respective record dates.
If, however, on any annual closing date subsequent to the Eligibility
Record Date or Supplemental Eligibility Record Date, the amount of the
Qualifying Deposit of an Eligible Account Holder or Supplemental Eligible
Account Holder is less than the amount of the Qualifying Deposit of such
Eligible Account Holder or Supplemental Eligible Account Holder as of the
Eligibility Record Date or Supplemental Eligibility Record Date, respectively,
or less than the amount of the Qualifying Deposits as of the previous annual
closing date, then the interest in the liquidation account relating to such
Qualifying Deposit would be reduced from time to time by the proportion of any
such reduction, and such interest will cease to exist if such Qualifying Deposit
accounts are closed. In addition, no interest in the liquidation account would
ever be increased despite any subsequent increase in the related Qualifying
Deposit. Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders are satisfied would be
distributed to the Company as the sole stockholder of the Association.
TAX ASPECTS
Consummation of the Conversion is expressly conditioned upon the
receipt by the Association of either a favorable ruling from the IRS or an
opinion with respect to federal income taxation, and an opinion with respect to
Pennsylvania income taxation, to the effect that the Conversion will not be a
taxable transaction to the Company, the Association, Eligible Account Holders,
or Supplemental Eligible Account Holders except as noted below. The federal and
Pennsylvania income tax consequences will remain unchanged in the event that a
holding company form of organization is not utilized.
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No private ruling will be received from the IRS with respect to the
proposed Conversion. Instead, the Association has received an opinion of its
counsel, Muldoon, Murphy & Faucette, that for federal income tax purposes, among
other matters: (i) the Association's change in form from mutual to stock
ownership will constitute a reorganization under section 368(a)(1)(F) of the
Code and neither the Association nor the Company will recognize any gain or loss
as a result of the Conversion; (ii) no gain or loss will be recognized to the
Association or the Company upon the purchase of the Association's capital stock
by the Company or to the Company upon the purchase of its Common Stock in the
Conversion; (iii) no gain or loss will be recognized by Eligible Account Holders
or Supplemental Eligible Account Holders upon the issuance to them of Deposit
Accounts in the Association in its stock form plus their interests in the
liquidation account in exchange for their deposit accounts in the Association;
(iv) the tax basis of the depositors' accounts in the Association immediately
after the Conversion will be the same as the basis of their deposit accounts
immediately prior to the Conversion; (v) the tax basis of each Eligible Account
Holder's and Supplemental Eligible Account Holder's interest in the liquidation
account will be zero; (vi) no gain or loss will be recognized by Eligible
Account Holders or Supplemental Eligible Account Holders upon the distribution
to them of nontransferable subscription rights to purchase shares of the Common
Stock, provided that the amount to be paid for the Common Stock is equal to the
fair market value of such stock; and (vii) the tax basis to the stockholders of
the Common Stock of the Company purchased in the Conversion will be the amount
paid therefor and the holding period for the shares of Common Stock purchased by
such persons will begin on the date on which their subscription rights are
exercised. Parente, Randolph, Orlando, Carey & Associates has opined that the
Conversion will not be a taxable transaction to the Company, the Association,
Eligible Account Holders or Supplemental Eligible Account Holders for
Pennsylvania income tax purposes. Certain portions of both the federal and the
state income tax opinions are based upon the assumption that the subscription
rights issued in connection with the Conversion will have no value.
Unlike private rulings, an opinion of counsel or an opinion of an
independent accountant is not binding on the IRS and the IRS could disagree with
conclusions reached therein. In the event of such disagreement, there can be no
assurance that the IRS would not prevail in a judicial or administrative
proceeding.
Keller has issued an opinion stating that, pursuant to its valuation,
Keller is of the opinion that the subscription rights do not have any value,
based on the fact that such rights are acquired by the recipients without cost,
are nontransferable and of short duration, and afford the recipients the right
only to purchase the Common Stock at a price equal to its estimated fair market
value, which will be the same price as the Purchase Price for the shares of
Common Stock sold in the Community Offering. Such valuation is not binding on
the IRS. If the subscription rights granted to Eligible Account Holders or
Supplemental Eligible Account Holders are deemed to have an ascertainable value,
receipt of such rights could be taxable to those Eligible Account Holders or
Supplemental Eligible Account Holders who receive and/or exercise the
subscription rights in an amount equal to such value and the Association could
recognize gain on such distribution. Eligible Account Holders and Supplemental
Eligible Account Holders are encouraged to consult with their own tax advisor as
to the tax consequences in the event that such subscription rights are deemed to
have an ascertainable value.
INTERPRETATION AND AMENDMENT OF THE PLAN OF CONVERSION
To the extent permitted by law, all interpretations of the Plan by the
Board of Directors of the Association will be final. The Plan provides that the
Association's Board of Directors shall have the discretion to interpret and
apply the provisions of the Plan to particular circumstances and that such
interpretation or application shall be final. This includes any and all
interpretations, applications and determinations made by the Board of Directors
on the basis of such information and assistance as was then reasonably available
for such purpose.
The Plan provides that, if deemed necessary or desirable by the Board
of Directors, the Plan may be substantively amended at any time prior to
solicitation of proxies from members to vote on the Plan by a two-thirds vote of
the Association's Board of Directors. After submission of the proxy materials to
the members, the Plan may be amended by a two-thirds vote of the Association's
Board of Directors at any time prior to the Special Meeting with the concurrence
of the OTS. The Plan may be amended at any time after the approval of members
with the approval of the OTS and no further approval of the members will be
necessary unless otherwise required by the OTS. By
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adoption of the Plan, the Association's members will be deemed to have
authorized amendment of the Plan under the circumstances described above.
The establishment of the Foundation will be considered as a separate
matter from approval of the Plan of Conversion. If the Association's members
approve the Plan of Conversion, but not the creation of the Foundation, the
Association intends to complete the Conversion without the Foundation. Failure
to approve the establishment of the Foundation may materially increase the pro
forma market value of the Common Stock since the Valuation Range, as set forth
herein, takes into account the dilutive impact of the issuance of shares to the
Foundation. In such an event, the Association may establish a new Estimated
Price Range and commence a resolicitation of subscribers. In the event of a
resolicitation, unless an affirmative response is received within a specified
period of time, all funds will be promptly returned to investors, as described
elsewhere herein. See "--Stock Pricing."
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION
All shares of Common Stock purchased in connection with the Conversion
by a director or an officer of the Association will be subject to a restriction
that the shares not be sold for a period of one year following the Conversion,
except in the event of the death of such director or officer. Each certificate
for restricted shares will bear a legend giving notice of this restriction on
transfer, and instructions will be issued to the effect that any transfer within
such time period of any certificate or record ownership of such shares other
than as provided above is a violation of the restriction. Any shares of Common
Stock issued at a later date as a stock dividend, stock split, or otherwise,
with respect to such restricted stock will be subject to the same restrictions.
The directors and officers of the Association will also be subject to the
insider trading rules promulgated pursuant to the Exchange Act and any other
applicable requirements of the federal securities laws.
Purchases of outstanding shares of Common Stock of the Company by
directors, officers (or any person who was an officer or director of the
Association after adoption of the Plan of Conversion) and their associates
during the three-year period following Conversion may be made only through a
broker or dealer registered with the SEC, except with the prior written approval
of the OTS. This restriction does not apply, however, to negotiated transactions
involving more than 1.0% of the Company's outstanding Common Stock or to the
purchase of stock pursuant to any stock option plan to be established after the
Conversion.
Unless approved by the OTS, the Company, pursuant to OTS regulations,
will be prohibited from repurchasing any shares of the Common Stock for three
years after the Conversion except: (i) for an offer to all stockholders on a pro
rata basis; or (ii) for the repurchase of qualifying shares of a director.
Notwithstanding the foregoing, beginning one year following completion of the
Conversion the Company may repurchase its Common Stock so long as: (i) the
repurchases within the following two years are part of an open-market program
not involving greater than 5% of its outstanding capital stock during a
twelve-month period; (ii) the repurchases do not cause the Company to become
undercapitalized; and (iii) the Company provides to the Regional Director of the
OTS no later than 10 days prior to the commencement of a repurchase program
written notice containing a full description of the program to be undertaken and
such program is not disapproved by the Regional Director. In addition, under
current OTS policies, repurchases may be allowed in the first year following
Conversion and in amounts greater than 5% in the second and third years
following Conversion, provided there are valid and compelling business reasons
for such repurchases and the OTS approves such repurchases.
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RESTRICTIONS ON ACQUISITION OF THE COMPANY
AND THE ASSOCIATION
GENERAL
The Association's Plan of Conversion provides for the Conversion of the
Association from the mutual to the stock form of organization and, in connection
therewith, a new Stock Articles of Incorporation and Bylaws to be adopted by
members of the Association. The Plan also provides for the concurrent formation
of a holding company, which form of organization may or may not be utilized at
the option of the Board of Directors of the Association. See "The
Conversion--General." In the event that the holding company form of organization
is utilized, as described below, certain provisions in the Company's Certificate
of Incorporation and Bylaws and in its management remuneration entered into in
connection with the Conversion, together with provisions of Delaware corporate
law, may have anti-takeover effects. In the event that the holding company form
of organization is not utilized, the Association's Stock Charter and Bylaws and
management remuneration entered into in connection with the Conversion may have
anti-takeover effects as described below. In addition, regulatory restrictions
may make it difficult for persons or companies to acquire control of either the
Company or the Association.
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
A number of provisions of the Company's Certificate of Incorporation
and Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of the material
provisions of the Company's Certificate of Incorporation and Bylaws and certain
other statutory and regulatory provisions relating to stock ownership and
transfers, the Board of Directors and business combinations, which might be
deemed to have a potential "anti-takeover" effect. These provisions may have the
effect of discouraging a future takeover attempt which is not approved by the
Board of Directors but which individual Company stockholders may deem to be in
their best interests or in which shareholders may receive a substantial premium
for their shares over then current market prices. As a result, stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so. Such provisions will also render the removal of the current Board of
Directors or management of the Company more difficult. The following description
of certain of the provisions of the Certificate of Incorporation and Bylaws of
the Company is necessarily general and reference should be made in each case to
such Certificate of Incorporation and Bylaws, which are incorporated herein by
reference. See "Additional Information" as to how to obtain a copy of these
documents.
LIMITATION ON VOTING RIGHTS. The Certificate of Incorporation of the
Company provides that in no event shall any record owner of any outstanding
Common Stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. Beneficial ownership is determined pursuant
to Rule 13d-3 of the General Rules and Regulations promulgated pursuant to the
Exchange Act, and includes shares beneficially owned by such person or any of
his affiliates (as defined in the Certificate of Incorporation), shares which
such person or his affiliates have the right to acquire upon the exercise of
conversion rights or options and shares as to which such person and his
affiliates have or share investment or voting power, but shall not include
shares beneficially owned by the ESOP or directors, officers and employees of
the Association or Company or shares that are subject to a revocable proxy and
that are not otherwise beneficially owned, or deemed by the Company to be
beneficially owned, by such person and his affiliates. The Certificate of
Incorporation of the Company further provides that this provision limiting
voting rights may only be amended upon the vote of 80% of the outstanding shares
of voting stock (after giving effect to the limitation on voting rights).
BOARD OF DIRECTORS. The Board of Directors of the Company is divided
into three classes, each of which shall contain approximately one-third of the
whole number of members of the Board. Each class shall serve a staggered term,
with approximately one-third of the total number of directors being elected each
year. The Company's Certificate of Incorporation and Bylaws provide that the
size of the Board shall be determined by a majority of the directors. The
Certificate of Incorporation and the Bylaws provide that any vacancy occurring
in the Board, including
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a vacancy created by an increase in the number of directors or resulting from
death, resignation, retirement, disqualification, removal from office or other
cause, shall be filled for the remainder of the unexpired term exclusively by a
majority vote of the directors then in office. The classified Board is intended
to provide for continuity of the Board of Directors and to make it more
difficult and time consuming for a stockholder group to fully use its voting
power to gain control of the Board of Directors without the consent of the
incumbent Board of Directors of the Company. The Certificate of Incorporation of
the Company provides that a director may be removed from the Board of Directors
prior to the expiration of his term only for cause, upon the vote of 80% of the
outstanding shares of voting stock.
In the absence of these provisions, the vote of the holders of a
majority of the shares could remove the entire Board, with or without cause, and
replace it with persons of such holders' choice.
CUMULATIVE VOTING, SPECIAL MEETINGS AND ACTION BY WRITTEN CONSENT. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Company may be called
only by the Board of Directors of the Company. The Certificate of Incorporation
also provides that any action required or permitted to be taken by the
stockholders of the Company may be taken only at an annual or special meeting
and prohibits stockholder action by written consent in lieu of a meeting.
AUTHORIZED SHARES. The Certificate of Incorporation authorizes the
issuance of 5,000,000 shares of Common Stock and 1,000,000 shares of Preferred
Stock. The shares of Common Stock and Preferred Stock were authorized in an
amount greater than that to be issued in the Conversion to provide the Company's
Board of Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and
employee Stock Options. However, these additional authorized shares may also be
used by the Board of Directors consistent with its fiduciary duty to deter
future attempts to gain control of the Company. The Board of Directors also has
sole authority to determine the terms of any one or more series of Preferred
Stock, including voting rights, conversion rates, and liquidation preferences.
As a result of the ability to fix voting rights for a series of Preferred Stock,
the Board has the power, to the extent consistent with its fiduciary duty, to
issue a series of Preferred Stock to persons friendly to management in order to
attempt to block a post-tender offer merger or other transaction by which a
third party seeks control, and thereby assist management to retain its position.
The Company's Board of Directors currently has no plans for the issuance of
additional shares, other than the issuance of additional shares pursuant to the
terms of the Stock-Based Incentive Plan, which is to be established and
presented to stockholders at the first annual meeting after the Conversion.
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH
PRINCIPAL STOCKHOLDERS. The Certificate of Incorporation requires the approval
of the holders of at least 80% of the Company's outstanding shares of voting
stock to approve certain "Business Combinations," as defined therein, and
related transactions. Under Delaware law, absent this provision, Business
Combinations, including mergers, consolidations and sales of all or
substantially all of the assets of a corporation must, subject to certain
exceptions, be approved by the vote of the holders of only a majority of the
outstanding shares of Common Stock of the Company and any other affected class
of stock. Under the Certificate of Incorporation, at least 80% approval of
shareholders is required in connection with any transaction involving an
Interested Stockholder (as defined below) except (i) in cases where the proposed
transaction has been approved in advance by a majority of those members of the
Company's Board of Directors who are unaffiliated with the Interested
Stockholder and were directors prior to the time when the Interested Stockholder
became an Interested Stockholder or (ii) if the proposed transaction meets
certain conditions set forth therein which are designed to afford the
shareholders a fair price in consideration for their shares in which case, if a
stockholder vote is required, approval of only a majority of the outstanding
shares of voting stock would be sufficient. The term "Interested Stockholder" is
defined to include any individual, corporation, partnership or other entity
(other than the Company or its subsidiary) which owns beneficially or controls,
directly or indirectly, 10% or more of the outstanding shares of voting stock of
the Company. This provision of the Certificate of Incorporation applies to any
"Business Combination," which is defined to include (i) any merger or
consolidation of the Company or any of its subsidiaries with or into any
Interested Stockholder or Affiliate (as defined in the Certificate of
Incorporation) of an Interested Stockholder; (ii) any sale, lease, exchange,
mortgage, pledge, transfer, or other disposition to or with any Interested
Stockholder or Affiliate
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of 25% or more of the assets of the Company or combined assets of the Company
and its subsidiary; (iii) the issuance or transfer to any Interested Stockholder
or its Affiliate by the Company (or any subsidiary) of any securities of the
Company in exchange for any assets, cash or securities the value of which equals
or exceeds 25% of the fair market value of the Common Stock of the Company; (iv)
the adoption of any plan for the liquidation or dissolution of the Company
proposed by or on behalf of any Interested Stockholder or Affiliate thereof; and
(v) any reclassification of securities, recapitalization, merger or
consolidation of the Company which has the effect of increasing the
proportionate share of Common Stock or any class of equity or convertible
securities of the Company owned directly or indirectly by an Interested
Stockholder or Affiliate thereof. The directors and executive officers of the
Association are purchasing in the aggregate approximately 5.50% of the shares of
the Common Stock to be issued in the Conversion, including shares to be issued
to the Foundation, at the maximum of the Estimated Price Range. In addition, the
ESOP intends to purchase 8% of the Common Stock issued in connection with the
Conversion, including shares issued to the Foundation. Additionally, if at a
meeting of stockholders following the Conversion stockholder approval of the
proposed Stock-Based Incentive Plan is received, the Company expects to acquire
4% of the Common Stock issued in connection with the Conversion, including
shares issued to the Foundation, on behalf of the Stock-Based Incentive Plan and
expects to issue options to purchase up to 10% of the Common Stock issued in
connection with the Conversion, including shares issued to the Foundation, under
the Stock-Based Incentive Plan to directors and executive officers. As a result,
at the maximum of the Estimated Price Range, assuming the Stock-Based Incentive
Plan is approved by Stockholders, directors, executive officers and employees
have the potential to control the voting of approximately 27.50% of the
Company's Common Stock, if the shares held by the Foundation and the ESOP are
aggregated with the shares purchased in the Conversion by management and
acquired for award under the Stock-Based Incentive Plan (without giving effect
to any exercise of options granted under the Stock-Based Incentive Plan),
thereby enabling them to prevent the approval of the transactions requiring the
approval of at least 80% of the Company's outstanding shares of voting stock
described hereinabove.
EVALUATION OF OFFERS. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating any
offer of another "Person" (as defined therein) to (i) make a tender or exchange
offer for any equity security of the Company, (ii) merge or consolidate the
Company with another corporation or entity, or (iii) purchase or otherwise
acquire all or substantially all of the properties and assets of the Company,
may, in connection with the exercise of its judgment in determining what is in
the best interest of the Company, the Association and the stockholders of the
Company, give due consideration to all relevant factors, including, without
limitation, the social and economic effects of acceptance of such offer on the
Company's customers and the Association's present and future account holders,
borrowers and employees; on the communities in which the Company and the
Association operate or are located; and on the ability of the Company to fulfill
its corporate objectives as a savings and loan holding company and on the
ability of the Association to fulfill the objectives of a federally-chartered
stock savings association under applicable statutes and regulations. By having
these standards in the Certificate of Incorporation of the Company, the Board of
Directors may be in a stronger position to oppose such a transaction if the
Board concludes that the transaction would not be in the best interest of the
Company, even if the price offered is significantly greater than the then market
price of any equity security of the Company.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS. Amendments to the
Company's Certificate of Incorporation must be approved by a majority vote of
its Board of Directors and also by a majority of the outstanding shares of its
voting stock; provided, however, that an affirmative vote of at least 80% of the
outstanding voting stock entitled to vote (after giving effect to the provision
limiting voting rights) is required to amend or repeal certain provisions of the
Certificate of Incorporation, including the provision limiting voting rights,
the provisions relating to approval of certain business combinations, calling
special meetings, the number and classification of directors, director and
officer indemnification by the Company and amendment of the Company's Bylaws and
Certificate of Incorporation. The Company's Bylaws may be amended by its Board
of Directors, or by a vote of 80% of the total votes eligible to be voted at a
duly constituted meeting of stockholders.
CERTAIN BYLAW PROVISIONS. The Bylaws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a stockholder meeting to give at least 90
days advance notice to the Secretary of the Company. The notice provision
requires a stockholder who desires
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to raise new business to provide certain information to the Company concerning
the nature of the new business, the stockholder and the stockholder's interest
in the business matter. Similarly, a stockholder wishing to nominate any person
for election as a director must provide the Company with certain information
concerning the nominee and the proposing stockholder.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AND MANAGEMENT REMUNERATION ADOPTED IN CONVERSION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its Board of Directors. The
provisions of the Employment Agreements, CIC Agreements, Employee Severance
Compensation Plan and Stock-Based Incentive Plan to be established may also
discourage takeover attempts by increasing the costs to be incurred by the
Association and the Company in the event of a takeover. See "Management of the
Association--Employment Agreements," "--Change in Control Agreements,"
"--Employee Severance Compensation Plan" and "--Other Benefit Plans--Stock-Based
Incentive Plan."
The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation, Bylaws and management remuneration plans to be
established are in the best interest of the Company and its stockholders. An
unsolicited non-negotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of the Company and its
stockholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts. It is also the Board of Directors'
view that these provisions should not discourage persons from proposing a merger
or other transaction at a price that reflects the true value of the Company and
that otherwise is in the best interest of all stockholders.
DELAWARE CORPORATE LAW
The state of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Section 203 of the Delaware General Corporate Law
("Section 203"), is intended to discourage certain takeover practices by
impeding the ability of a hostile acquiror to engage in certain transactions
with the target company.
In general, Section 203 provides that a "Person" (as defined therein)
who owns 15% or more of the outstanding voting stock of a Delaware corporation
(an "Interested Stockholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such "Person" became an Interested Stockholder. The
term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
an Interested Stockholder, the Board of Directors approved either the business
combination or the transaction which resulted in the stockholder becoming an
Interested Stockholder; (ii) any business combination involving a person who
acquired at least 85% of the outstanding voting stock in the transaction in
which he became an Interested Stockholder, with the number of shares outstanding
calculated without regard to those shares owned by the corporation's directors
who are also officers and by certain employee stock plans; (iii) any business
combination with an Interested Stockholder that is approved by the Board of
Directors and by a two-thirds vote of the outstanding voting stock not owned by
the Interested Stockholder; and (iv) certain business combinations that are
proposed after the corporation had received other acquisition proposals and
which are approved or not opposed by a majority of certain continuing members of
the Board of Directors. A corporation may exempt itself from the requirements of
the statute by adopting an amendment to its Certificate of Incorporation or
Bylaws electing not to be governed by Section 203. At the present time, the
Board of Directors does not intend to propose any such amendment.
112
<PAGE> 113
RESTRICTIONS IN THE ASSOCIATION'S NEW ARTICLES OF INCORPORATION AND BYLAWS
Although the Board of Directors of the Association is not aware of any
effort that might be made to obtain control of the Association after the
Conversion, the Board of Directors believes that it is appropriate to adopt
certain provisions permitted by federal regulations to protect the interests of
the converted Association and its stockholders from any hostile takeover. Such
provisions may, indirectly, inhibit a change in control of the Company, as the
Association's sole stockholder. See "Risk Factors--Certain Anti-Takeover
Provisions Which May Discourage Takeover Attempts."
The Association's Stock Articles of Incorporation contain a provision
whereby shareholders will not be permitted to call a special meeting of
shareholders relating to a change of control of the Association or a charter
amendment or to cumulate their votes in the election of directors. Furthermore,
the staggered terms of the Board of Directors could have an anti-takeover effect
by making it more difficult for a majority of shares to force an immediate
change in the Board of Directors since only one-third of the Board is elected
each year. The purpose of these provisions is to assure stability and continuity
of management of the Association in the years immediately following the
Conversion.
Although the Association has no arrangements, understandings or plans
at the present time, except as described in "Description of Capital Stock of the
Company--Preferred Stock," for the issuance or use of the shares of undesignated
Preferred Stock proposed to be authorized, the Board of Directors believes that
the availability of such shares will provide the Association with increased
flexibility in structuring possible future financings and acquisitions and in
meeting other corporate needs which may arise. In the event of a proposed
merger, tender offer or other attempt to gain control of the Association of
which management does not approve, it might be possible for the Board of
Directors to authorize the issuance of one or more series of Preferred Stock
with rights and preferences which could impede the completion of such a
transaction. An effect of the possible issuance of such Preferred Stock,
therefore, may be to deter a future takeover attempt. The Board of Directors
does not intend to issue any Preferred Stock except on terms which the Board
deems to be in the best interest of the Association and its then existing
stockholders.
REGULATORY RESTRICTIONS
The Plan of Conversion prohibits any person, prior to the completion of
the Conversion, from transferring, or from entering into any agreement or
understanding to transfer, to the account of another, legal or beneficial
ownership of the subscription rights issued under the Plan or the Common Stock
to be issued upon their exercise. The Plan also prohibits any person, prior to
the completion of the Conversion, from offering, or making an announcement of an
offer or intent to make an offer, to purchase such subscription rights or Common
Stock.
For three years following the Conversion, OTS regulations prohibit any
person from acquiring or making an offer to acquire more than 10% of the stock
of any converted savings institution, except for: (i) offers that, if
consummated, would not result in the acquisition by such person during the
preceding 12-month period of more than 1% of such stock; (ii) offers for up to
25% in the aggregate by the ESOP or other tax qualified plans of the Association
or the Company; or (iii) offers which are not opposed by the Board of Directors
of the Association and which receive the prior approval of the OTS. Such
prohibition is also applicable to the acquisition of the stock of the Company.
Such acquisition may be disapproved by the OTS if it is found, among other
things, that the proposed acquisition (a) would frustrate the purposes of the
provisions of the regulations regarding conversions; (b) would be manipulative
or deceptive; (c) would subvert the fairness of the conversion; (d) would be
likely to result in injury to the savings institution; (e) would not be
consistent with economical home financing; (f) would otherwise violate law or
regulation; or (g) would not contribute to the prudent deployment of the savings
institution's conversion proceeds. In the event that any person, directly or
indirectly, violates this regulation, the securities beneficially owned by such
person in excess of 10% shall not be counted as shares entitled to vote and
shall not be voted by any person or counted as voting shares in connection with
any matters submitted to a vote of stockholders. Ownership of more than 10% of a
class of stock for purposes of this prohibition extends to persons holding a
combination of stock and revocable
113
<PAGE> 114
or irrevocable proxies for the Company's stock under circumstances that give
rise to a conclusive or rebuttable determination of control under the OTS
regulations.
In addition, any acquisition, direct or indirect, of more than 10% of
any class of equity security of the Company by a person or group of persons
acting in concert may require prior notice to and non-objection by the OTS under
the Change in Bank Control Act and/or the approval of the OTS under the Savings
and Loan Holding Company Act, as an acquisition of control. Any company that
acquires control of a savings association or a savings and loan holding company
under the standards set forth in OTS regulations becomes a "savings and loan
holding company" subject to registration, examination, and regulation by the
OTS. Pursuant to OTS regulations, "control" of a savings association or a
savings and loan holding company, subject to the requirements of the Change in
Bank Control Act and/or the savings and Loan Holding Company Act, is
conclusively deemed to have been acquired by, among other things, the
acquisition of more than 25% of any class of voting stock of the company or
irrevocable proxies representing more than 25% of any class of voting stock of
the company or the ability to control the election of a majority of the
directors. The regulations also establish a rebuttable presumption of "control"
upon the acquisition of more than 10% of any class of voting stock, or of more
than 25% of any class of stock, of a savings and loan holding company, where
certain enumerated "control factors" are also present in the acquisition. The
OTS may prohibit an acquisition by a person of "control" if (i) it would result
in a monopoly or substantially lessen competition, (ii) the financial condition
of the acquiring person might jeopardize the financial stability of the
institution, or (iii) the competence, experience, or integrity of the acquiring
person indicates that it would not be in the interest of the depositors or the
public to permit the acquisition of control by such person or (iv) the proposed
acquisition would have an adverse effect on the deposit insurance funds.
Applications by a company to acquire "control" of a savings and loan holding
company are evaluated by OTS based upon factors such as the financial and
managerial resources and future prospects of the acquirer and the institution
involved, competitive factors and the convenience and needs of the community
involved. The foregoing restrictions do not apply to the acquisition of the
Company's capital stock by one or more tax-qualified employee stock benefit
plans, provided that the plan or plans do not have beneficial ownership in the
aggregate of more than 25% of any class of equity security of the Company.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 5,000,000 shares of Common Stock
having a par value of $.01 per share and 1,000,000 shares of preferred stock
having a par value of $.01 per share (the "Preferred Stock"). Based on the sale
of Common Stock in connection with the Conversion and issuance of authorized but
unissued Common Stock in an amount equal to 5.0% of the Common stock sold in the
Conversion, the Company currently expects to issue up to 1,380,000 shares of
Common Stock (or 1,587,000 in the event of an increase of 15% in the Estimated
Price Range) and no shares of Preferred Stock in the Conversion. Except as
discussed above in "Restriction on Acquisition of the Company and the
Association," each share of the Company's Common Stock will have the same
relative rights as, and will be identical in all respects with, each other share
of Common Stock. Upon payment of the Purchase Price for the Common Stock, in
accordance with the Plan, all such stock will be duly authorized, fully paid and
non-assessable.
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NON-WITHDRAWABLE
CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY
THE FDIC.
114
<PAGE> 115
COMMON STOCK
DIVIDENDS. The Company can pay dividends out of statutory surplus or
from certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to limitations which are imposed
by law and applicable regulation. See "Dividend Policy" and "Regulation." The
holders of Common Stock of the Company will be entitled to receive and share
equally in such dividends as may be declared by the Board of Directors of the
Company out of funds legally available therefor. If the Company issues Preferred
Stock, the holders thereof may have a priority over the holders of the Common
Stock with respect to dividends.
VOTING RIGHTS. Upon Conversion, the holders of Common Stock of the
Company will possess exclusive voting rights in the Company. They will elect the
Company's Board of Directors and act on such other matters as are required to be
presented to them under Delaware law or the Company's Certificate of
Incorporation or as are otherwise presented to them by the Board of Directors.
Except as discussed in "Restrictions on Acquisition of the Company and the
Association," each holder of Common Stock will be entitled to one vote per share
and will not have any right to cumulate votes in the election of directors. If
the Company issues Preferred Stock, holders of the Preferred Stock may also
possess voting rights. Certain matters require an 80% shareholder vote. See
"Restrictions on Acquisition of the Company and the Association."
As a Pennsylvania-chartered mutual savings and loan association,
corporate powers and control of the Association are vested in its Board of
Directors, who elect the officers of the Association and who fill any vacancies
on the Board of Directors as it exists upon Conversion. Subsequent to
Conversion, voting rights will be vested exclusively in the owners of the shares
of capital stock of the Association, which will be the Company, and voted at the
direction of the Company's Board of Directors. Consequently, the holders of the
Common Stock will not have direct control of the Association.
LIQUIDATION. In the event of any liquidation, dissolution or winding up
of the Association, the Company, as holder of the Association's capital stock,
would be entitled to receive, after payment or provision for payment of all
debts and liabilities of the Association (including all deposit accounts and
accrued interest thereon) and after distribution of the balance in the special
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders (see "The Conversion--Liquidation Rights"), all assets of the
Association available for distribution. In the event of liquidation, dissolution
or winding up of the Company, the holders of its Common Stock would be entitled
to receive, after payment or provision for payment of all its debts and
liabilities, all of the assets of the Company available for distribution. If
Preferred Stock is issued, the holders thereof may have a priority over the
holders of the Common Stock in the event of liquidation or dissolution.
PREEMPTIVE RIGHTS. Holders of the Common Stock of the Company will not
be entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without stockholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights which could dilute the
voting strength of the holders of the Common Stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
115
<PAGE> 116
DESCRIPTION OF CAPITAL STOCK OF THE ASSOCIATION
GENERAL
The Stock Articles of Incorporation of the Association, to be effective
upon the Conversion, authorizes the issuance of capital stock consisting of
5,000,000 shares of Common Stock, par value $1.00 per share, and 1,000,000
shares of preferred stock, par value $1.00 per share, which preferred stock may
be issued in series and classes having such rights, preferences, privileges and
restrictions as the Board of Directors may determine. Each share of Common Stock
of the Association will have the same relative rights as, and will be identical
in all respects with, each other share of Common Stock. After the Conversion,
the Board of Directors will be authorized to approve the issuance of Common
Stock up to the amount authorized by the Stock Articles of Incorporation without
the approval of the Association's stockholders. Assuming that the holding
company form of organization is utilized, all of the issued and outstanding
Common Stock of the Association will be held by the Company as the Association's
sole stockholder. THE CAPITAL STOCK OF THE ASSOCIATION WILL REPRESENT
NON-WITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL
NOT BE INSURED BY THE FDIC.
COMMON STOCK
DIVIDENDS. The holders of the Association's Common Stock will be
entitled to receive and to share equally in such dividends as may be declared by
the Board of Directors of the Association out of funds legally available
therefor. See "Dividend Policy" for certain restrictions on the payment of
dividends and "Federal and State Taxation--Federal Taxation" for a discussion of
the consequences of the payment of cash dividends from income appropriated to
bad debt reserves.
VOTING RIGHTS. Immediately after the Conversion, the holders of the
Association's Common Stock will possess exclusive voting rights in the
Association. Each holder of shares of Common Stock will be entitled to one vote
for each share held, subject to the right of shareholders to cumulate their
votes for the election of directors. During the five-year period after the
effective date of the Conversion, cumulation of votes will not be permitted. See
"Restrictions on Acquisition of the Company and the Association--Anti-Takeover
Effects of the Company's Certificate of Incorporation and Bylaws and Management
Remuneration Adopted in Conversion."
LIQUIDATION. In the event of any liquidation, dissolution, or winding
up of the Association, the holders of Common Stock will be entitled to receive,
after payment of all debts and liabilities of the Association (including all
deposit accounts and accrued interest thereon), and distribution of the balance
in the special liquidation account to Eligible Account Holders and Supplemental
Eligible Account Holders, all assets of the Association available for
distribution in cash or in kind. If preferred stock is issued subsequent to the
Conversion, the holders thereof may also have priority over the holders of
Common Stock in the event of liquidation or dissolution.
PREEMPTIVE RIGHTS; REDEMPTION. Holders of the Common Stock of the
Association will not be entitled to preemptive rights with respect to any shares
of the Association which may be issued. The Common Stock will not be subject to
redemption. Upon receipt by the Association of the full specified purchase price
therefor, the Common Stock will be fully paid and non-assessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Registrar and
Transfer Company.
116
<PAGE> 117
EXPERTS
The financial statements of the Association as of June 30, 1998 and
1997 and for the years ended June 30, 1998, 1997 and 1996 have been included in
this Prospectus in reliance upon the report of Parente, Randolph, Orlando, Carey
& Associates, independent auditors, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
Keller has consented to the publication herein of the summary of its
report to the Association and Company setting forth its opinion as to the
estimated pro forma market value of the Common Stock upon Conversion and its
valuation with respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal income tax
consequences of the Conversion will be passed upon for the Association and the
Company by Muldoon, Murphy & Faucette, Washington, D.C., special counsel to the
Association and the Company. Muldoon, Murphy & Faucette will rely as to the
legality of the Common Stock under Delaware law on the opinion of Morris,
Nichols, Arsht & Tunnel. The Commonwealth of Pennsylvania income tax
consequences of the Conversion and certain matters related to the Foundation
will be passed upon for the Association and the Company by Parente, Randolph,
Orlando, Carey & Associates. Certain legal matters will be passed upon for
Sandler O'Neill by Elias, Matz, Tiernan & Herrick L.L.P., Washington, D.C.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the Registration Statement. Such information can be
examined without charge at the public reference facilities of the SEC located at
450 Fifth Street, N.W., Washington, D.C. 20549, and copies of such material can
be obtained from the SEC at prescribed rates. Information on the operation of
the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
In addition, the SEC maintains a web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC including the Company. This
Prospectus contains a description of the material terms and features of all
material contracts, reports or exhibits to the Registration Statement required
to be described. The statements contained in this Prospectus as to the contents
of any contract or other document filed as an exhibit to the Registration
Statement are, of necessity, brief descriptions thereof and are not necessarily
complete; each such statement is qualified by reference to such contract or
document.
The Association has filed an application for conversion with the OTS
with respect to the Conversion. Pursuant to the rules and regulations of the
OTS, this Prospectus omits certain information contained in that application.
The application may be examined at the principal office of the OTS, 1700 G
Street, N.W., Washington, D.C. 20552 and at the Office of the Regional Director
of the OTS located at 10 Exchange Place, 18th Floor, Jersey City, New Jersey
07302.
The Association will file articles of conversion with the Pennsylvania
Department with respect to the Conversion following the Special Meeting. The
application may be examined at the principal office of the Pennsylvania
Department, Department of State, Corporation Bureau, 308 North Office Building,
Harrisburg, Pennsylvania 17120-0029.
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(b) of the Exchange Act and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors,
117
<PAGE> 118
officers and greater than 10% stockholders, the annual and periodic reporting
and certain other requirements of the Exchange Act. Under the Plan, the Company
has undertaken that it will not terminate such registration for a period of at
least three years following the Conversion. In the event that the Association
amends the Plan to eliminate the concurrent formation of the Company as part of
the Conversion, the Association will register its stock with the OTS under
Section 12(b) of the Exchange Act and, upon such registration, the Association
and the holders of its stock will become subject to the same obligations and
restrictions.
A copy of the Certificate of Incorporation and the Bylaws of the
Company and the Stock Articles of Incorporation and Bylaws of the Association
and the Certificate of Incorporation and Bylaws of the Foundation are available
without charge from the Association.
118
<PAGE> 119
SECURITY SAVINGS ASSOCIATION OF HAZLETON
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Independent Auditors' Report...................................... F-2
Balance Sheet as of June 30, 1998 and 1997........................ F-3
Statements of Income for the Years Ended
June 30, 1998, 1997 and 1996.................................... 34
Statements of Changes in Equity for the Years Ended
June 30, 1998, 1997 and 1996.................................... F-4
Statements of Cash Flows for the Years Ended
June 30, 1998, 1997 and 1996.................................... F-5 - F-6
Notes to Financial Statements..................................... F-7 - F-30
</TABLE>
All schedules are omitted because they are not required or applicable, or
the required information is shown in the financial statements or notes thereto.
The financial statements of Security of Pennsylvania Financial Corp.
have been omitted because Security of Pennsylvania Financial Corp. has not
yet issued any stock, has no assets and no liabilities, and has not conducted
any business other than of an organizational nature.
F-1
<PAGE> 120
[PARENTE - RANDOLPH - ORLANDO-
CAREY & ASSOCIATES LOGO]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Security Savings Association of Hazleton
Hazleton, Pennsylvania
We have audited the accompanying balance sheet of Security Savings
Association of Hazleton (the "Association") as of June 30, 1998 and 1997, and
the related statements of income, changes in equity, and cash flows for each of
the three years in the period ended June 30, 1998. These financial statements
are the responsibility of the Association's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Security Savings
Association of Hazleton as of June 30, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1998 in conformity with generally accepted accounting principles.
/s/ PARENTE - RANDOLPH - ORLANDO - CAREY & ASSOCIATES
Hazleton, Pennsylvania
July 24, 1998
- F-2 -
<PAGE> 121
SECURITY SAVINGS ASSOCIATION OF HAZLETON
BALANCE SHEET
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------
ASSETS
======
<S> <C> <C>
Cash and due from banks $ 3,272,263 $ 2,867,171
Interest-bearing deposits with banks 8,585,785 6,166,551
------------- -------------
Total cash and cash equivalents 11,858,048 9,033,722
Held-to-maturity securities (fair value of $20,806,552
in 1998 and $24,810,869 in 1997) 20,782,740 24,841,688
Available-for-sale securities 7,900,600 4,247,778
Loans receivable (net of allowance for loan losses
of $451,856 in 1998 and $428,857 in 1997) 69,211,264 66,737,536
Office premises and equipment, net 1,364,352 1,178,504
Accrued interest receivable 618,656 665,002
Foreclosed real estate (net of $12,000 allowance
in 1998 and $24,852 in 1997) 220,889 530,919
Other assets 33,948 211,687
------------- -------------
TOTAL ASSETS $ 111,990,497 $ 107,446,836
============= =============
LIABILITIES AND EQUITY
======================
Deposits $ 102,603,545 $ 98,464,717
Advances from borrowers for taxes and
insurance 34,468 130,914
Accrued interest payable and other liabilities 121,614 267,766
------------- -------------
Total liabilities 102,759,627 98,863,397
------------- -------------
Commitments and contingent liabilities - -
Retained earnings - substantially restricted 9,362,089 8,744,865
Net unrealized holding losses on
available-for-sale securities, net of taxes (131,219) (161,426)
------------- -------------
Equity, net 9,230,870 8,583,439
------------- -------------
TOTAL LIABILITIES
AND EQUITY $ 111,990,497 $ 107,446,836
============= =============
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements
-F-3-
<PAGE> 122
SECURITY SAVINGS ASSOCIATION OF HAZLETON
STATEMENT OF CHANGES IN EQUITY
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
UNREALIZED
HOLDING LOSSES
ON AVAILABLE-
RETAINED FOR-SALE EQUITY,
EARNINGS SECURITIES NET
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, JUNE 30, 1995 $ 7,938,309 $ (196,901) $ 7,741,408
INCREASE IN UNREALIZED
HOLDING LOSSES ON
AVAILABLE-FOR-SALE
SECURITIES (13,772) (13,772)
NET INCOME 597,005 597,005
----------- ---------- -----------
BALANCE, JUNE 30, 1996 8,535,314 (210,673) 8,324,641
DECREASE IN UNREALIZED
HOLDING LOSSES ON
AVAILABLE-FOR-SALE
SECURITIES 49,247 49,247
NET INCOME 209,551 209,551
----------- ---------- -----------
BALANCE, JUNE 30, 1997 8,744,865 (161,426) 8,583,439
DECREASE IN UNREALIZED
HOLDING LOSSES ON
AVAILABLE-FOR-SALE
SECURITIES 30,207 30,207
NET INCOME 617,224 617,224
----------- ---------- -----------
BALANCE, JUNE 30, 1998 $ 9,362,089 $ (131,219) $ 9,230,870
=========== ========== ===========
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements
-F-4-
<PAGE> 123
SECURITY SAVINGS ASSOCIATION OF HAZLETON
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 617,224 $ 209,551 $ 597,005
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan and foreclosed
real estate losses 197,626 94,336 101,997
Amortization and accretion on
investment securities (186) 10,532 28,988
Depreciation and amortization 98,071 82,109 112,629
Deferred income taxes 46,160 148,892 23,665
(Gain) loss on sale of foreclosed real estate 47,894 62,985 (1,293)
Net realized gain on sales and calls of securities (701) (16,776) -
Changes in assets and liabilities:
Accrued interest receivable 46,346 39,421 (77,978)
Other assets 162,399 225,285 (84,567)
Accrued interest payable and other
liabilities (192,312) (96,869) 63,359
----------- ----------- -----------
Net cash provided by operating
activities 1,022,521 759,466 763,805
----------- ----------- -----------
INVESTMENT ACTIVITIES:
Purchases of held-to-maturity securities (13,221,443) (13,447,016) (15,100,592)
Purchases of securities available-for-sale (3,948,894) (24,900) (40,200)
Proceeds from maturities of held-to-maturity
securities 16,270,943 11,565,915 11,646,490
Proceeds from the call of held-to-maturity securities 204,758 - -
Proceeds from maturities and principal paydowns
on available-for-sale securities 340,561 1,075,920 505,417
Proceeds from principal paydowns of
held-to-maturity securities 806,635 1,106,292 1,848,163
Proceeds from the sale of available-for-sale
securities - 1,038,300 -
Loans made to customers, net of principal collected (3,128,008) (2,459,676) (1,411,992)
Acquisition of office premises and equipment (283,919) (155,210) (36,532)
Proceeds from sale of foreclosed real estate 718,790 276,144 11,783
----------- ----------- -----------
Net cash used in investing activities (2,240,577) (1,024,231) (2,577,463)
----------- ----------- -----------
</TABLE>
-F-5-
<PAGE> 124
SECURITY SAVINGS ASSOCIATION OF HAZLETON
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Net change in deposit accounts $ 4,138,828 $ (883,425) $ 2,949,870
Net (decrease) increase in
advances from borrowers
for taxes and insurance (96,446) 76,095 (2,598)
------------ ----------- ------------
Net cash provided
by (used in)
financing activities 4,042,382 (807,330) 2,947,272
------------ ----------- ------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 2,824,326 (1,072,095) 1,133,614
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 9,033,722 10,105,817 8,972,203
------------ ----------- ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 11,858,048 $ 9,033,722 $ 10,105,817
============ =========== ============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Interest paid on deposits $ 4,207,744 $ 4,007,074 $ 4,188,942
Income taxes paid $ 422,408 $ 139,732 $ 376,569
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES,
The Association foreclosed on mortgage loans and transferred $717,928,
$517,672 and $245,340 from loans to foreclosed real estate during the years
ended June 30, 1998, 1997 and 1996, respectively.
- --------------------------------------------------------------------------------
See Notes to Financial Statements
-F-6-
<PAGE> 125
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Security Savings Association of Hazleton (the "Association") provides a
variety of financial services to individual and corporate customers through
four offices in Hazleton, Weatherly and Butler Township, Pennsylvania.
These communities have diversified economies. The primary deposit products
are regular savings accounts, certificates of deposit, and checking
accounts. Its primary lending products are single-family residential loans
and secured consumer loans. The Association is subject to competition from
other financial institutions and other companies that provide financial
services. The Association is subject to the regulations of certain federal
and state agencies and undergoes periodic examinations by those regulatory
authorities.
RISKS AND UNCERTAINTIES
In the normal course of its business, the Association encounters two
significant types of risk: economic and regulatory. There are three main
components of economic risk: interest rate risk, credit risk, and market
risk. The Association is subject to interest rate risk to the degree that
its interest-bearing liabilities mature or reprice at different speeds, or
on different bases from its interest-earning assets. The Association's
primary credit risk is the risk of default on the Association's loan
portfolio that results from the borrowers inability or unwillingness to
make contractually required payments. The Association's lending activities
are concentrated in Pennsylvania. The largest concentration of the
Association's loan portfolio is located in Northeastern Pennsylvania. The
ability of the Association's borrowers to repay amounts owed is dependent
on several factors, including the economic conditions in the borrower's
geographic region and the borrower's financial condition. Market risk
reflects changes in the value of collateral underlying loans and valuation
of real estate held by the Association.
The Association is subject to the regulations of various government
agencies. These regulations can and do change significantly from period to
period. The Association also undergoes periodic examinations by the
regulatory agencies which may subject it to further changes with respect to
asset valuations, amounts of required loss allowances, and operating
restrictions resulting from the regulators' judgements based on information
available to them at the time of their examination.
-F-7-
<PAGE> 126
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
USE OF ESTIMATES
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 revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination for the allowance for loan losses and the
valuation of property acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of allowances
for loan losses and foreclosed assets, management obtains independent
appraisals for significant properties.
A majority of the Association's loan portfolio consist of single-family
residential loans in the Hazleton, Weatherly and Butler Township areas.
Although these local economies are diversified and fairly stable, a
substantial portion of its debtor's ability to honor their contracts is
dependent on the economic sector in which the Association operates.
While management uses available information to recognize losses on loans
and foreclosed assets, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically
review the Association's allowances for losses on loans and foreclosed
assets. Such agencies may require the Association to recognize additions to
the allowances based on their judgments about information available to them
at the time of their examination. Association management has no reason to
believe that the allowances for loan losses and foreclosed assets will
change materially in the near term.
-F-8-
<PAGE> 127
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash and cash equivalents
include cash on hand and amounts due from banks.
DEBT AND EQUITY SECURITIES
The Association classifies each of its investments in debt and equity
securities into one of two categories:
Held-To-Maturity Securities - Securities that the institution has the
positive intent and ability to hold to maturity.
Available-For-Sale Securities - Securities that are not eligible for
classification as held-to-maturity.
Held-to-Maturity Securities are carried at amortized cost. Those securities
classified as Available-For-Sale are carried at fair value. The change in
net unrealized holding gain or loss on available-for-sale securities, net
of taxes is included in a separate component of equity.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at the amount of unpaid principal, reduced by unamortized
loan fees and an allowance for loan losses. Interest on loans is calculated
by using the simple interest method on daily balances of the principal
amount outstanding.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that the collectibility of the principal is
unlikely. The allowance is an amount that management believes will be
adequate to absorb probable losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans and
prior loan loss experience. The evaluations take into consideration such
factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific impaired loans, and current economic
conditions and trends that may affect the borrowers' ability to pay.
Loans are deemed to be "impaired" if management's assessment of the
relevant facts and circumstances, it is probable that the bank will be
unable to collect all proceeds due according to the contractual terms of
the loan agreement. For purposes of applying the measurement criteria for
impaired loans, the Association excludes large groups of smaller balance
homogeneous loans, primarily consisting of residential real estate and
consumer loans.
-F-9-
<PAGE> 128
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
Accrual of interest on impaired loans is discontinued when payments are
past due ninety days or more when collateral is inadequate to cover
principal and interest or immediately if management believes, after
considering economic and business conditions and collection efforts, that
the borrowers' financial condition is such that collection is doubtful.
Nonrefundable loan origination fees and certain direct loan origination
costs for loans are recognized over the contractual life of the related
loans as an adjustment of yield. Prior to 1988, such fees and costs were
recognized when received or incurred.
FORECLOSED REAL ESTATE
Foreclosed real estate comprised of property acquired in the settlement of
loans, is recorded at the lower of the related principal balance and
accrued interest upon foreclosure or its fair value. Costs of developing
and improving such properties are capitalized. Expenses related to holding
such real estate, net of rental and other income, are charged against
income as incurred. An allowance for foreclosed real estate losses is
established through a provision for foreclosed real estate losses for
declines in fair value after acquisition. Any subsequent writedowns are
charged to the allowance and any recoveries of amounts previously written
down are added to the allowance.
OFFICE PREMISES AND EQUIPMENT
AND DEPRECIATION
Office premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using straight-line and accelerated
methods over the estimated useful lives of the assets (office premises,
30-50 years; equipment, 5-10 years).
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets
or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
ADVERTISING COSTS
The Association follows the policy of charging the production costs of
advertising to expense as incurred.
-F-10-
<PAGE> 129
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
DERIVATIVES
The Association has no derivative financial instruments requiring
disclosure under Statement of Financial Accounting Standards ("SFAS") No.
119.
RECLASSIFICATIONS
Certain items in the 1997 and 1996 financial statements have been
reclassified to conform to the 1998 financial statement presentation
format. These reclassifications had no effect on net income.
2. DEBT AND EQUITY SECURITIES
Held-to-maturity securities at June 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
U. S. government agency
securities $ 2,801,355 $ 9,127 $ 2,810,482
Certificates of deposit 15,456,963 15,456,963
Corporate obligations 79,012 79,012
Mortgage-backed
securities (FNMA, GNMA) 2,281,088 16,893 $ 649 2,297,332
State and political
subdivisions 164,322 1,559 162,763
-------------- ------- -------- ------------
Total $ 20,782,740 $ 26,020 $ 2,208 $ 20,806,552
============== ======== ======== ============
</TABLE>
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
U. S. government agency
securities $ 7,425,322 $ 8,056 $ 37,709 $ 7,395,669
Certificates of deposit 12,594,699 12,594,699
Corporate obligations 115,915 2,010 113,905
Mortgage-backed
securities (FNMA, GNMA) 4,705,752 17,741 16,897 4,706,596
------------ -------- -------- ------------
Total $ 24,841,688 $ 25,797 $ 56,616 $ 24,810,869
============ ======== ======== ============
</TABLE>
-F-11-
<PAGE> 130
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
Available-for-sale securities at June 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
U. S. Government agency
securities $ 3,547,627 $ 2,293 $ 2,313 $ 3,547,607
Mortgage-backed securities
(FNMA, GNMA) 1,317,978 34,546 1,352,524
State and political
subdivisions 373,558 3,767 369,791
Mutual fund 2,187,598 151,520 2,036,078
Federal Home Loan Bank
of Pittsburgh stock 594,600 594,600
----------- -------- --------- -----------
Total $ 8,021,361 $ 36,839 $ 157,600 $ 7,900,600
=========== ======== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
GNMA certificates $ 981,752 $ 34,228 $ 1,015,980
FNMA certificates 393,488 $ 19,026 374,462
FNMA balloon 284,748 3,471 281,277
Mutual fund 2,187,598 178,039 2,009,559
Federal Home Loan Bank
of Pittsburgh stock 566,500 566,500
----------- -------- --------- -----------
Total $ 4,414,086 $ 34,228 $ 200,536 $ 4,247,778
=========== ======== ========= ===========
</TABLE>
Unamortized premiums on mortgage-backed securities held-to-maturity were
$2,868 and $9,956 at June 30, 1998 and 1997, respectively. Unaccreted
discounts on mortgage-backed securities held-to-maturity were $11,089
and $10,106 at June 30, 1998 and 1997, respectively.
-F-12-
<PAGE> 131
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
The amortized cost and fair value of held-to-maturity and
available-for-sale securities at June 30, 1998, by contractual maturity,
are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
HELD-TO-MATURITY AVAILABLE-FOR-SALE
SECURITIES SECURITIES
------------------------------- ----------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 12,417,691 $ 12,417,504 $ 2,782,198 $ 2,630,678
Due after one year through
five years 4,889,685 4,894,016 1,028,564 1,031,382
Due after five years
through ten years 2,008,276 2,018,945 2,499,545 2,499,772
Due after ten years 1,467,088 1,476,087 1,711,054 1,738,768
------------ ------------ ----------- -----------
Total $ 20,782,740 $ 20,806,552 $ 8,021,361 $ 7,900,600
============ ============ =========== ===========
</TABLE>
Gross gains of $701 were realized on the call of a held-to-maturity security
in 1998.
Gross gains of $47,038 and gross losses of $30,262 were realized on the sale
of available-for-sale securities in 1997.
Securities with an amortized cost of $1,057,559 and $1,342,997 at June 30,
1998 and 1997, respectively were pledged as collateral on public deposits and
for other purposes as required or permitted by law.
-F-13-
<PAGE> 132
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
3. LOANS RECEIVABLE
Loans receivable at June 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Real estate $ 56,056,778 $ 54,658,451
Commercial real estate 3,945,708 2,484,206
Consumer 9,934,736 10,307,977
------------ ------------
69,937,222 67,450,634
Less:
Net deferred loan-origination fees (274,102) (284,241)
Allowance for loan losses (451,856) (428,857)
------------ ------------
Loans receivable, net $ 69,211,264 $ 66,737,536
============ ============
</TABLE>
One-to-four family residential mortgage loans included in real estate loans
totaled $54,721,745 and $53,685,049 at June 30, 1998 and 1997, respectively.
The recorded investment in impaired loans, not requiring an allowance for
loan losses, was $1,572,855 and $1,410,742 at June 30, 1998 and 1997,
respectively. The recorded investment in impaired loans requiring an
allowance for loan losses was $291,027 and $175,258 at June 30, 1998 and
1997, respectively. At June 30, 1998 and 1997, the related allowance
associated with those loans, which is included in the allowance for loan
losses, was $35,000 and $60,000, respectively. For the years ended June 30,
1998 and 1997, the average recorded investment in these impaired loans was
approximately $1,864,000 and $1,612,000, respectively. There was no interest
income recognized on impaired loans in 1998 or 1997. Interest income that
would have been recognized on impaired loans would have approximated $102,000
and $134,000 in 1998 and 1997, respectively. The Association has no
commitments to lend additional funds to borrowers whose loans were classified
as nonperforming or troubled debt restructuring.
-F-14-
<PAGE> 133
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
An analysis of the allowance for loan losses for the years ended June 30,
1998, 1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance, beginning $ 428,857 $ 447,000 $ 401,000
Provision for loan losses 175,626 34,450 101,997
Loans charged off (177,505) (61,763) (67,823)
Recoveries of loans charged off 24,878 9,170 11,826
--------- --------- ---------
Balance, ending $ 451,856 $ 428,857 $ 447,000
========= ========= =========
</TABLE>
At June 30, 1998, 1997 and 1996, the Association serviced loans for others of
$140,000, $162,000 and $260,000, respectively.
In the ordinary course of business, the Association has and expects to
continue to have transactions, including borrowings, with its executive
officers, directors and their affiliates In the opinion of management, such
transactions were on substantially the same terms, as those prevailing at the
time of comparable transactions with other persons and did not involve more
than a normal risk of collectibility or present any other unfavorable
features to the Association. The Association offers officers and full-time
employees of the Association who satisfy the general underwritting standards
of the Association, loans with interest rates up to 1% below the current
interest rate in effect. An analysis of the activity in loans to directors
and executive officers for the year ended June 30, 1998, follows:
<TABLE>
<S> <C>
Balance, beginning of year $ 219,364
New loans 51,972
Repayments (41,700)
Loan balance of new executive officer 43,626
---------
Balance, end of year $ 273,262
=========
</TABLE>
-F-15-
<PAGE> 134
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
4. OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at June 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land and building $ 938,870 $ 915,120
Improvements 848,784 693,690
Furniture and equipment 883,490 778,173
----------- -----------
Total 2,671,144 2,386,983
Less accumulated depreciation and
amortization 1,306,792 1,208,479
----------- -----------
Office premises and equipment, net $ 1,364,352 $ 1,178,504
=========== ===========
</TABLE>
5. FORECLOSED REAL ESTATE
An analysis of the allowance for foreclosed real estate losses for the years
ended June 30, 1998, 1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance, beginning $ 24,852 $ 44,000 $ -
Provision for foreclosed real estate losses 22,000 59,886 44,000
Writedowns (63,546) (79,034) -
Recoveries 28,694 - -
-------- -------- --------
Balance, ending $ 12,000 $ 24,852 $ 44,000
======== ======== ========
</TABLE>
-F-16-
<PAGE> 135
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
6. DEPOSITS
Deposits at June 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998
-----------------------------------
WEIGHTED
DAILY
AVERAGE
AMOUNT PERCENT RATE
------ ------- ----
<S> <C> <C> <C>
Passbook and statement savings $ 29,052,601 28.32% 2.61%
Variable rate money market 2,083,512 2.03 2.56%
Negotiable order of withdrawal 10,983,296 10.70 1.74%
Certificates of deposit 60,484,136 58.95 5.59%
------------- -----
Total $ 102,603,545 100.0%
============= =====
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------
WEIGHTED
DAILY
AVERAGE
AMOUNT PERCENT RATE
------ ------- ----
<S> <C> <C> <C>
Passbook and statement savings $ 30,240,180 30.71% 2.61%
Variable rate money market 2,181,747 2.22 2.56%
Negotiable order of withdrawal 8,758,384 8.89 1.75%
Certificates of deposit 57,284,406 58.18 5.53%
------------- ------
Total $ 98,464,717 100.0%
============= ======
</TABLE>
Scheduled maturities of certificates of deposits at June 30, 1998 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30:
- -------------------
<S> <C>
1999 $ 38,806,970
2000 9,556,810
2001 4,372,052
2002 2,596,145
2003 3,566,569
Thereafter 1,585,590
------------
Total $ 60,484,136
============
</TABLE>
-F-17-
<PAGE> 136
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
Certificates of deposit in denominations of $100,000 or more amounted to
$13,552,029 and $12,235,268 at June 30, 1998 and 1997, respectively.
Certificates of deposits in denominations of greater than $100,000 are not
insured by the FDIC.
Interest expense on deposits for the years ended June 30, 1998, 1997 and 1996
is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Certificates of deposit $ 3,260,039 $ 3,007,740 $ 3,035,503
Passbook savings 795,011 826,597 930,815
Money market 53,142 59,527 73,710
NOW 151,766 135,109 189,624
----------- ----------- -----------
Total $ 4,259,958 $ 4,028,973 $ 4,229,652
=========== =========== ===========
</TABLE>
-F-18-
<PAGE> 137
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
7. INCOME TAXES
The Small Business Job Protection Act of 1996, enacted August 20, 1996,
provided for the repeal of the tax bad debt deduction computed under the
percentage of taxable income method. The repeal of the use of this method was
effective for tax years beginning after December 31, 1995. Prior to the
change in law, the Association had qualified under the provisions of the
Internal Revenue Service Code which permitted it to deduct from taxable
income an allowance for bad debts based on 8% of taxable income.
The Association is required to recapture into income, over a six year period,
the portion of its tax bad debt reserves that exceed its base year reserves
(i.e., tax reserves for tax years beginning before 1988). The base year tax
reserves, which may be subject to recapture if the Association ceases to
qualify as a Association for federal income tax purposes, are restricted with
respect to certain distributions. The Association's total tax bad debt
reserves at June 30, 1998, are approximately $2.3 million, of which $1.9
million represents the base year amount and $400,000 is subject to recapture.
The Association has previously recorded a deferred tax liability for the
amount to be recaptured; therefore, this recapture will not impact the
statement of income.
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Currently payable $ 460,140 $ 195,089 $ 338,635
Deferred 46,160 148,892 23,665
--------- --------- ---------
Total provision $ 506,300 $ 343,981 $ 362,300
========= ========= =========
</TABLE>
-F-19-
<PAGE> 138
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
The effective income tax rate for the years ended June 30, 1998, 1997 and
1996 was 45.1%, 62.1% and 37.8%, respectively. A reconciliation between the
expected statutory income tax rate and the effective income tax rate on
income before taxes follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
Provision at
statutory
rate $ 382 34.0% $ 188 34.0% $ 326 34.0%
State income
tax, net
of federal
benefit 118 10.5 17 3.1 51 5.3
Other, primarily
bad debt
deduction 6 .6 139 25.0 (15) (1.5)
----- ----- ----- ---- ----- ----
Total $ 506 45.1% $ 344 62.1% $ 362 37.8%
===== ===== ===== ===== ===== ====
</TABLE>
The components of the net deferred tax (liability) asset are as follows at
June 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax asset:
Deferred loan fees, net $ 60,959 $ 95,072
Deferred tax liabilities:
Allowance for loan losses (141,052) (135,981)
Depreciation (17,993) (11,017)
Unrealized holding gains (losses) (10,458) (4,881)
---------- ---------
Total $ (108,544) $ (56,807)
========== =========
</TABLE>
The deferred tax (liability) asset is included in other (liabilities) assets
on the balance sheet.
-F-20-
<PAGE> 139
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
8. OTHER NONINTEREST EXPENSE
Other noninterest expense amounts are summarized as follows for the years
ended June 30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Outside service fees $ 210,924 $ 200,053 $ 192,320
Advertising and promotion 50,725 44,014 39,491
All other expenses 247,789 254,109 272,071
--------- --------- ---------
Total $ 509,438 $ 498,176 $ 503,882
========= ========= =========
</TABLE>
9. PENSION PLAN
The Association participates in a contributory defined benefit multi-employer
pension plan administered through Pentegra. The Association makes annual
contributions to the Plan equal to amounts accrued for pension expense. Total
pension expense for the years ended June 30, 1998, 1997 and 1996 was $3,581,
$29,364 and $67,851, respectively. The relative position of the Association
regarding the accumulated plan benefits and net assets of the Plan is not
readily determinable by the Association.
10. FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) SPECIAL ASSESSMENT
On September 30, 1996, legislation was enacted to bring the funding level of
the Savings Association Insurance Fund (of which the Association is a member)
of the FDIC to the same level as the Bank Insurance Fund of the FDIC. As a
result of that legislation, the Association paid a single premium payment of
$619,763 for the year ended June 30, 1997. The impact of this single premium
payment, net of estimated federal and state taxes on 1997 net income tax was
approximately $372,000. The single premium payment was assessed at 65.7 basis
points of the March 31, 1995 deposit base of the Association. With the
enactment of the legislation, the regular assessment rate for the fourth
quarter, October 1 to December 31, 1996, was lowered retroactively from 57.5
to 16.25 basis points. Beginning January 1, 1997, annual premium assessments
further decreased to an annual premium level of 15.75 basis points.
-F-21-
<PAGE> 140
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
11. RELATED PARTY TRANSACTIONS
The Association retains a law firm, in which a member of the Association's
Board of Directors also is a member, that provides general legal counsel to
the Association. The Association paid $25,513, $25,874 and $43,330, in legal
fees to this firm for the years ended June 30, 1998, 1997 and 1996,
respectively.
12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Association is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments are commitments to extend credit.
These commitments involve, to varying degrees, elements of credit, interest
rate or liquidity risk in excess of the amount recognized in the balance
sheet. The contract or notional amounts of these commitments express the
extent of involvement the Association has in particular classes of financial
instruments.
The Association's exposure to credit loss from nonperformance by the other
party to the financial instruments for commitments to extend credit is
represented by the contractual amount of those instruments. The Association
uses the same credit policies in making commitments as it does for
on-balance-sheet instruments.
The Association's contract amounts of commitments to extend credit which
represent credit risk at June 30, 1998 and 1997 were $2,011,917 and
$1,977,048, respectively. These amounts exclude undisbursed portions of loans
in process amounting to $1,109,499 and $1,431,532 at June 30, 1998 and 1997,
respectively. At June 30, 1998 $372,000 of the Association's commitments were
for fixed rate loans which had interest rates that ranged between 6.75% and
7.50%.
Commitments to extend credit are legally binding agreements to lend to
customers. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future liquidity
requirements. The Association evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Association on extension of credit, is based on management's credit
assessment of the counterparty.
-F-22-
<PAGE> 141
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
13. REGULATORY MATTERS
The Association is subject to various regulatory capital requirements
administered by 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 Association's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Association must meet specific capital guidelines that
involve quantitative measures of the Association's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Association's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I capital (as defined) to
total assets (as defined). Management believes, as of June 30, 1998, that the
Association 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 Association as well capitalized under the
regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the
Association's category.
-F-23-
<PAGE> 142
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
To be categorized as well capitalized the Association must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth
in the following table. The Association's actual capital amounts and ratios
are presented in the following table. No deductions were made in either year
from capital for interest-rate risk.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------ ----------------- ------------------
JUNE 30, 1998 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted
Assets) (risk-based capital ratio) $9,814 16.9% $4,641 =/>8.0% $5,801 =/>10.0%
Tier I Capital (to Risk Weighted
Assets) $9,362 16.1% $2,321 =/>4.0% $3,481 =/> 6.0%
Tier I Capital (to Total Assets)
(core capital ratio) $9,362 8.4% $4,485 =/>4.0% $5,606 =/> 5.0%
</TABLE>
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
-------------------------------------------------------------
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------ ---------------- -----------------
JUNE 30, 1997 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted
Assets) (risk-based capital ratio) $9,173 21.7% $3,382 =/>8.0% $4,228 =/>10.0%
Tier I Capital (to Risk Weighted
Assets) $8,744 20.7% $1,691 =/>4.0% $2,537 =/> 6.0%
Tier I Capital (to Total Assets)
(core capital ratio) $8,744 8.1% $4,298 =/>4.0% $5,372 =/> 5.0%
</TABLE>
-F-24-
<PAGE> 143
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1998 1997
---- ----
<S> <C> <C>
Regulatory capital reconciliation (in thousands):
Total equity $ 9,231 $ 8,583
Unrealized losses on certain available for sale
securities, net of taxes 131 161
------- -------
Tangible and core capital 9,362 8,744
Allowance for loan losses 452 429
------- -------
Risk based capital $ 9,814 $ 9,173
======= =======
</TABLE>
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires that the Association disclose estimated fair values for its
financial instruments. Fair value estimates are made at a specific point in
time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Association's entire
holdings of a particular financial instrument. Also, it is the Association's
general practice and intention to hold most of its financial instruments to
maturity and not to engage in trading or sales activities. Because no market
exists for a significant portion of the Association's financial instruments,
fair value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions can
significantly affect the estimates.
Estimated fair values have been determined by the Association using
historical data, as generally provided in the Association's regulatory
reports, and an estimation methodology suitable for each category of
financial instruments. The estimated fair value of the Association's
investment securities is described in Note 2. The Association's fair value
estimates, methods and assumptions are set forth below for the Association's
other financial instruments.
-F-25-
<PAGE> 144
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
Cash and due from banks and interest-bearing deposits with banks:
The carrying amounts for cash and due from banks and interest-bearing
deposits with banks approximate fair value because they mature in 90 days
or less and do not present unanticipated credit concerns.
Loans:
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial,
commercial real estate, residential mortgage, credit card and other
consumer. Each loan category is further segmented into fixed and adjustable
rate interest terms and by performing and nonperforming categories.
The fair value of performing loans, except residential mortgage is
calculated by discounting schedules cash flows through the estimated
maturity using estimated market discount rates that reflect the credit and
interest rate risk inherent in the loan. The estimate of maturity is based
on the Association's historical experience with repayments for each loan
classification, modified, as required, by an estimate of the effect of
current economic and lending conditions. For performing residential
mortgage loans, fair value is estimated using discounted rates based on
secondary market sources adjusted to reflect differences in servicing and
credit costs.
Fair value for significant nonperforming loans is based on recent external
appraisals. If appraisals are not available, estimated cash flows are
discounted using a rate commensurate with the risk associated with the
estimated cash flows. Assumptions regarding credit risk, cash flows, and
discounted rates are judgmentally determined using available market
information and specific borrower information.
Deposits:
The fair value of deposits with no stated maturity, such as noninterest
bearing demand deposits, savings and NOW accounts, and money market and
checking accounts, is equal to the amount payable on demand as of the
valuation date. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows. The discount rate is estimated
using the rates currently offered for deposits of similar remaining
maturities.
The fair value estimates above do not include the benefit that results from
the low-cost funding provided by the deposit liabilities compared to the
cost of borrowing funds in the market, commonly referred to as the core
deposit intangible.
-F-26-
<PAGE> 145
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
Accrued Interest:
The carrying amounts of accrued interest approximate their fair values.
Off-balance sheet instruments:
The fair values of commitments to extend credit are estimated using the
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the counterparties'
credit standing.
The estimated fair values of the Association's financial instruments are as
follows at June 30 (in thousands):
<TABLE>
<CAPTION>
1998 1997
----------------------- ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- --------- --------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from
banks $ 3,272 $ 3,272 $ 2,868 $ 2,868
Interest-bearing deposits
with banks 8,586 8,586 6,167 6,167
Held-to-maturity
securities 20,783 20,807 24,842 24,811
Available-for-sale
securities 7,901 7,901 4,248 4,248
Loans, net of allowance 69,211 70,123 66,738 67,021
Accrued interest
receivable 619 619 665 665
Financial liabilities:
Deposits 102,604 102,672 98,465 98,133
Accrued interest payable 106 106 154 154
Off-balance sheet financial
instruments:
Commitments to extend
credit - 2,012 - 1,977
</TABLE>
-F-27-
<PAGE> 146
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
15. RECENT ACCOUNTING PRONOUNCEMENTS
In September 1997, the Financial Accounting Standard Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." This statement establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. SFAS No.
130 requires that all items that are required to be recognized as components
of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The
statement does not require a specific format for that financial statement but
requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997. The
Association will make the appropriate disclosures in the applicable financial
statements, as required.
In September 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. Management has not yet determined the
impact, if any, of this statement on the Association.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 is effective for financial statements
for periods beginning after June 15, 1999. In connection with the
implementation of SFAS No. 133, the Association may transfer debt securities
classified as held-to-maturity to the available-for-sale category. Such a
transfer will not call into question the Association's intention to hold
other debt to maturity in the future. Management has not yet determined the
impact, if any, of this statement on the Association. Management does plan on
early adoption of SFAS No. 133 to take advantage of the special provision
that would allow the Association to transfer debt securities classified as
held-to-maturity to the available-for-sale category.
-F-28-
<PAGE> 147
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
16. PLAN OF CONVERSION
On June 26, 1998, the Board of Directors of the Association adopted a plan of
conversion (the "Plan") pursuant to which the Association will convert from a
state chartered mutual savings and loan association to a state chartered
stock capital savings association. All of the outstanding common stock of the
Association will be acquired in exchange for a portion of the net conversion
proceeds (the "Conversion") by a holding company formed expressly for such
purpose (the "Company"). All of the stock to be issued in the Conversion is
being offered to eligible account holders as of March 31, 1997.
The Association plans to establish an ESOP for the benefit of eligible
employees, to become effective upon the conversion. The ESOP intends to
purchase up to 8% of the common stock issued in the conversion utilizing
proceeds of a loan from a wholly-owned subsidiary of the company or a third
party lender. The loan will be repaid over a period of 12 years and the
collateral for the loan will be the common stock purchased by the ESOP.
Pursuant to the Plan, the Company intends to establish a charitable
foundation ("Foundation") in connection the conversion. The Plan provides
that the Association and the Company will create the Foundation and donate an
amount of the Company's common stock equal to 5% of the common stock to be
sold in the conversion. The Foundation will be dedicated to charitable
purposes within the communities in which the Association operates and to
complement the Association's existing community activities. Establishment of
the Foundation is subject to the approval of the Association's members at the
special meeting being held to vote upon the Conversion.
The Foundation will submit a request to the Internal Revenue Service to be
recognized as a tax-exempt organization and would likely be classified as a
private foundation. A contribution of common stock to the Foundation by the
Company would be tax deductible, subject to a limitation based on 10 percent
of the Company's taxable income. The Company, however, would be able to carry
forward any unused portion of the deduction for five years following the
contribution. Upon funding the Foundation, the Company will recognize an
expense in the full amount of the contribution, offset in part by the
corresponding benefit for the tax deduction, during the quarter in which the
contribution is made.
-F-29-
<PAGE> 148
SECURITY SAVINGS ASSOCIATION OF HAZLETON
NOTES TO FINANCIAL STATEMENTS
The Association may provide support services to the Foundation including, but
not limited to, employee time, office space and accounting support. The
Association expects to provide these services without compensation, however,
expenses incurred on behalf of the Foundation are not expected to be
significant to the operations of the Association.
At the time of Conversion, the Association will establish a liquidation
account in an amount equal to its equity as reflected in the latest balance
sheet used in the final conversion prospectus. The liquidation account will
be maintained for the benefit of eligible account holders and supplemental
eligible account holders who continue to maintain their accounts at the
Association after the conversion. The liquidation account will be reduced
annually to the extent that eligible account holders and supplemental
eligible account holders have reduced their qualifying deposits as of each
anniversary date. Subsequent increases will not restore an eligible account
holder's or supplemental account holder's interest in the liquidation
account. In the event of a completed liquidation of the Association, each
eligible account holder and supplemental eligible account holder will be
entitled to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held.
The costs associated with Conversion will be deferred and will be deducted
from the proceeds upon the sale and issuance of stock. In the event the
Conversion is not consummated, costs incurred will be charged to expense. At
June 30, 1998 deferred conversion costs totaled $20,000.
After the conversion, the Association may not declare or pay dividends on its
stock if such declaration and payment would violate statutory or regulatory
requirements.
- --------------------------------------------------------------------------------
-F-30-
<PAGE> 149
================================================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY SECURITY OF PENNSYLVANIA FINANCIAL CORP., THE ASSOCIATION OR
SANDLER O'NEILL & PARTNERS, L.P. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF SECURITY OF PENNSYLVANIA FINANCIAL
CORP. OR THE ASSOCIATION SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS
FURNISHED HEREIN OR SINCE THE DATE HEREOF.
------------------------------
TABLE OF CONTENTS
Page
----
Summary...........................................................3
Selected Financial and Other
Data of the Association.......................................9
Recent Developments..............................................11
Risk Factors.....................................................15
Security of Pennsylvania Financial Corp. ........................23
Security Savings Association of Hazleton ........................24
Regulatory Capital Compliance....................................25
Use of Proceeds..................................................26
Dividend Policy..................................................27
Market for the Common Stock..................................... 28
Capitalization...................................................29
Pro Forma Data...................................................30
Comparison of Valuation and Pro Forma Information
With No Foundation............................................33
Security Savings Association of Hazleton Statements
of Income......................................................34
Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................35
Business of the Association......................................45
Federal and State Taxation.......................................64
Regulation.......................................................66
Management of the Company........................................74
Management of the Association....................................74
The Conversion...................................................85
Restrictions on Acquisition of the Company
and the Association.........................................109
Description of Capital Stock of the Company.....................114
Description of Capital Stock of the Association.................116
Transfer Agent and Registrar....................................116
Experts.........................................................117
Legal and Tax Opinions..........................................117
Additional Information..........................................117
Index to Financial Statements...................................F-1
------------------------------
UNTIL DECEMBER 17, 1998 OR 25 DAYS AFTER COMMENCEMENT OF THE COMMUNITY OFFERING
AND/OR SYNDICATED COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
1,314,450 Shares
SECURITY OF PENNSYLVANIA
FINANCIAL CORP.
(Proposed Holding Company for
Security Savings Association of Hazleton)
COMMON STOCK
______________
PROSPECTUS
______________
November 16, 1998
Sandler O'Neill & Partners, L.P.
================================================================================
