<PAGE>
As Filed with the Securities and Exchange Commission on October 14, 1999
Registration No. 333-______
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
______________________
ESB Financial Corporation
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
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<CAPTION>
Pennsylvania 6035 25-1659846
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation
or Organization) Classification Code Number) Identification No.)
</TABLE>
ESB Financial Corporation
600 Lawrence Ave.
Ellwood City, Pennsylvania 16117
(724) 758-5584
- --------------------------------------------------------------------------------
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
________________________
Charlotte A. Zuschlag
President and Chief Executive Officer
ESB Financial Corporation
600 Lawrence Ave.
Ellwood City, Pennsylvania 16117
(724) 758-5584
- --------------------------------------------------------------------------------
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
Copies To:
Raymond A. Tiernan, Esq. John F. Breyer, Jr., Esq.
Kenneth B. Tabach, Esq. Breyer & Associates PC
Elias, Matz, Tiernan & Herrick L.L.P. 1100 New York Avenue, N.W., Suite 700
734 15th Street, N.W. Washington, D.C. 20005
Washington, D.C. 20005 (202) 737-7900
(202) 347-0300
________________________________
Approximate Date of Commencement of the Proposed Sale of the Securities to
the Public: As soon as practicable after the effective date of this Registration
Statement and the satisfaction or waiver of all other conditions to the Merger
described in the proxy statement/prospectus.
<PAGE>
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- -----------------------------------------------------------------------------------------
TITLE OF EACH PROPOSED PROPOSED
CLASS OF AMOUNT MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO TO BE OFFERING AGGREGATE REGISTRATION
BE REGISTERED REGISTERED (1) PRICE PER UNIT OFFERING PRICE (2) FEE (2)
- --------------- ---------------- ---------------- -------------------- --------------
<S> <C> <C> <C> <C>
Common stock, 660,275 shares N/A $ 7,042,952 $ 1,958
($.01 par value)
</TABLE>
____________________
(1) This Registration Statement covers the maximum number of shares of the
Registrant's common stock expected to be issued upon consummation of the
merger of SHS Bancorp, Inc. with and into the Registrant, pursuant to the
Agreement and Plan of Reorganization, dated as of July 21, 1999, by and
between SHS Bancorp Inc. and the Registrant.
(2) The registration fee has been computed in accordance with Rule 457(f) under
the Securities Act of 1933, as amended, based on $15.44, the average of the
bid and ask prices for a share of common stock of SHS Bancorp, Inc., as
reported on the over-the-counter market on October 13, 1999, multiplied by
846,507, the maximum number of shares of SHS Bancorp Inc. to be exchanged
in the merger, including shares issuable upon the exercise of outstanding
stock options, reduced by $6,027,116, the amount of cash to be paid by the
Registrant for such shares.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
________________________________________________________________________
<PAGE>
SHS BANCORP, INC.
One North Shore Center
Suite 120
Pittsburgh, Pennsylvania 15212
------------------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON ___________, 1999
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of SHS
Bancorp, Inc. will be held on _______, 1999, at ____ .m., eastern time, at
________________________________, Pennsylvania. A proxy statement/prospectus
and proxy card for the special meeting are enclosed.
The special meeting will be held for the purpose of considering and voting
upon the following matters:
1. The approval and adoption of an agreement and plan of reorganization,
dated as of July 21, 1999, by and between ESB Financial Corporation and
SHS Bancorp, Inc. pursuant to which SHS Bancorp Inc. will merge into ESB
Financial Corporation and each outstanding share of SHS common stock,
par value $.01 per share, will be converted into the right to receive,
at the election of the holder, either 1.3 shares of common stock of ESB
or $17.80 in cash, subject to the election, allocation and proration
procedures set forth in the reorganization agreement; and
2. Such other business incident to the conduct of the special meeting as
may properly come before the special meeting and any adjournment or
postponement thereof, including, without limitation, a motion to adjourn
the special meeting to another time or place for the purpose of
soliciting additional proxies in order to approve and adopt the
reorganization agreement.
The board of directors of SHS Bancorp Inc. has established _______________,
1999 as the record date for the determination of stockholders entitled to
receive notice of and to vote at the special meeting and at any adjournment or
postponement thereof. Only record holders of SHS Bancorp Inc. common stock as of
the close of business on that date will be entitled to vote at the special
meeting or any adjournment or postponement thereof.
The board of directors unanimously recommends that you vote "For" the
proposal to approve the reorganization agreement.
It is important that your shares be represented at the special meeting.
Whether or not you plan to attend the special meeting, please complete, sign and
promptly return the enclosed proxy card in the enclosed postage-paid envelope as
soon as possible.
By Order of the Board of Directors,
Joanne C. Wienand
Secretary
Pittsburgh, Pennsylvania
________________, 1999
Important: the prompt return of proxies will save SHS Bancorp, Inc. the expense
of further requests for proxies to ensure a quorum at the special meeting.
Please complete, sign and date the enclosed proxy and promptly mail it in the
enclosed envelope. You may revoke your proxy in the manner described in the
proxy statement/prospectus at any time before it is exercised.
Please do not send in any stock certificates at this time.
<PAGE>
--------------------------------
SHS BANCORP, INC.
PROXY STATEMENT
--------------------------------
PROSPECTUS OF ESB FINANCIAL CORPORATION
--------------------------------
The boards of directors of SHS Bancorp, Inc. and ESB Financial Corporation
have agreed on a merger of SHS and ESB. We believe the combined company will be
an effective competitor on many fronts in its Pennsylvania market area, with
total assets approaching $1.1 billion and stockholders' equity of approximately
$69 million. We are convinced that this merger will position our two companies
to grow and flourish as the financial services business evolves and
consolidates. As a result of the merger, each share of SHS common stock that
you hold will be converted automatically into the right to receive either $17.80
in cash or 1.3 shares of ESB common stock, as described under "Summary-Merger
Consideration" on page __________. The total consideration to all stockholders
is payable 60% in ESB common stock and 40% in cash. It is intended that the
exchange of ESB common stock be tax-free, except for the receipt of cash
received in the transaction. On ___________, 1999, the closing price for the
ESB common stock was $__________ on the Nasdaq Stock Market.
We cannot complete the merger unless we receive the affirmative vote of at
least a majority of the SHS common stock voting at the meeting. Your vote is
very important. Whether or not you plan to attend the special meeting, please
take the time to vote by completing and mailing the enclosed proxy card to us.
If you sign, date and mail your proxy card without indicating how you want to
vote, your proxy card will be counted as a vote in favor of the merger.
The date, time, and place of the meeting are as follows:
______________, 1999, _____ m., Eastern Time at _______________, Pennsylvania
This document provides you with detailed information about this meeting and
the proposed merger. You also can get information about our company and ESB
from publicly available documents that our company and ESB have filed with
Securities and Exchange Commission. We encourage you to read this entire
document carefully.
We strongly support the combination of SHS and ESB and we strongly urge
that you vote in favor of the merger.
Sincerely,
Thomas F. Angotti
President and Chief Executive Officer
Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the proxy statement/prospectus. Any representation to
the contrary is a criminal offense. These securities are not savings or deposit
accounts or other obligations of any bank or nonbank subsidiary of any of the
parties, and they are not insured by the Federal Deposit Insurance Corporation,
the Bank Insurance Fund, the Savings Association Insurance Fund or any
governmental agency.
--------------------------------
SHS's common stock is traded on the OTC Bulletin Board and ESB's common stock is
traded on the Nasdaq Stock Market. The trading symbol for the SHS common stock
is "SHSB." The trading symbol for the ESB common stock is "ESBF."
<PAGE>
This proxy statement/prospectus is dated _________, 1999 and was first
mailed to SHS stockholders on _________, 1999.
REFERENCES TO ADDITIONAL INFORMATION
This proxy statement/prospectus incorporates important business and
financial information about ESB from documents that may not be included in or
delivered with this document. You can obtain documents incorporated by
reference not otherwise accompanying this proxy statement/prospectus by
requesting them in writing or by telephone from ESB at the following address:
ESB Financial Corporation
600 Lawrence Avenue
Ellwood City, Pennsylvania 16117
Attention: Frank D. Martz
(724) 758-5584
You will not be charged for any of these documents that you request. If
you would like to request documents, please do so by ______ _____, 1999 in order
to receive them before the special meeting.
Accompanying this proxy statement/prospectus are ESB's 1998 Annual Report
to Stockholders and Quarterly Report on Form 10-Q for the quarter ended June 30,
1999.
See "Where You Can Find More Information" on page ________.
ii
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
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Page
----
<S> <C>
SUMMARY
The Companies...........................................................
The SHS Stockholders' Meeting...........................................
Who Can Vote at the Special Meeting; What Vote is Required for Approval
of the Reorganization Agreement.......................................
The Merger..............................................................
Merger Consideration....................................................
Manner of Payment.......................................................
When and How to Choose the Method of Payment for Your Shares............
Tax Consequences for SHS Stockholders...................................
SHS has Given ESB an Option to Purchase Shares of SHS Common Stock......
The Directors and Officers of SHS have Entered Into a Stockholders
Agreement with ESB to Vote for the Reorganization Agreement...........
You have Dissenters Rights in the Merger................................
Accounting Treatment of the Merger......................................
Interests of SHS's Directors and Officers in the Merger that are
Different from Your Interests.........................................
Differences in the Rights of ESB's and SHS's Stockholders...............
Our Reasons for the Merger..............................................
Our Recommendation to Stockholders......................................
The Consideration is Fair to Stockholders According to SHS's Financial
Advisor...............................................................
What We Need to do to Complete the Merger...............................
Terminating the Reorganization Agreement................................
Amending Provisions of the Reorganization Agreement.....................
COMPARATIVE COMMON STOCK PRICE AND DIVIDEND INFORMATION...................
SELECTED PRO FORMA CONSOLIDATED COMPARATIVE PER SHARE DATA................
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF ESB....................
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF SHS....................
FORWARD-LOOKING STATEMENTS................................................
THE SPECIAL MEETING.......................................................
Date, Time and Place; Purpose of Special Meeting........................
Recommendation of the SHS Board.........................................
Who Can Vote on Matters Addressed in this Document......................
Voting and Solicitation of Proxies......................................
Vote Required...........................................................
Solicitation of Proxies.................................................
THE MERGER................................................................
Parties to the Merger...................................................
General.................................................................
Background of the Merger................................................
SHS's Reasons for the Merger; Recommendation of the SHS Board of
Directors.............................................................
Opinion of SHS's Financial Advisor.....................................
SHS Stockholders Will Receive Shares of ESB Common Stock and/or Cash
for Each SHS Share....................................................
Procedures for Exchanging Your Stock Certificates.......................
Interests of Directors and Officers in the Merger that are Different
from Your Interests...................................................
Management and Operations Following the Merger..........................
Employee Matters........................................................
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
Conditions to the Merger................................................
Regulatory Approval Needed to Complete the Merger.......................
Conduct of Business Pending the Merger..................................
Representations and Warranties Made by ESB and SHS in the
Reorganization Agreement..............................................
What Happens if a Third Party Offers to Buy SHS.........................
Waiving and Amending Provisions In, or Terminating, the Reorganization
Agreement.............................................................
Accounting Treatment of the Merger......................................
Federal Income Tax Consequences for SHS Stockholders....................
Selling the ESB Common Stock You Receive in the Merger..................
You Have Dissenters' Rights in the Merger...............................
Dissenters' Rights Procedures...........................................
Who Pays for What.......................................................
When Will the Merger be Completed.......................................
CERTAIN RELATED TRANSACTIONS..............................................
Stock Option Agreement..................................................
Stockholders Agreement..................................................
BENEFICIAL OWNERSHIP OF SHS COMMON STOCK BY SHS MANAGEMENT................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF SHS............................................
General.................................................................
Operating Strategy......................................................
Comparison of Financial Conditions......................................
Comparison of Operating Results for the Six Months Ended June 30, 1999
and 1998..............................................................
Comparison of Operating Results for the Years Ended December 31, 1998
and 1997..............................................................
Impact of Inflation and Changing Prices.................................
Average Balances, Interest and Yields/Cost..............................
Rate/Volume Analysis....................................................
Liquidity and Capital Resources.........................................
Asset and Liability Management..........................................
Data Processing Issues for the Year 2000................................
Nonperforming Assets....................................................
BUSINESS OF SHS...........................................................
General.................................................................
Market Area.............................................................
Lending Activities......................................................
Delinquencies and Classified Assets.....................................
Investment Activities...................................................
Deposit Activities and Other Sources of Funds...........................
Competition.............................................................
Personnel...............................................................
Subsidiary Activities...................................................
REGULATION OF SHS.........................................................
General.................................................................
Federal Regulation of Savings Associations..............................
Savings and Loan Holding Company Regulations............................
TAXATION OF SHS...........................................................
Federal Taxation........................................................
State Taxation..........................................................
Audits..................................................................
COMPARISON OF THE RIGHTS OF STOCKHOLDERS OF ESB AND SHS...................
Special Meetings of Stockholders........................................
Amendment of Articles of Incorporation and Bylaws.......................
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
Cumulative Voting.......................................................
Stockholder Consent to Corporate Action.................................
Stockholder Nominations and Proposals...................................
Dividends...............................................................
Removal of Directors; Number of Directors...............................
Indemnification and Limitations of Liability of Directors And Officers..
Provisions Affecting Business Combination and Control Share
Acquisitions..........................................................
Limitations on Voting Rights; Restrictions on Offers and Acquisitions...
Preemptive Rights.......................................................
DESCRIPTION OF CAPITAL STOCK OF ESB.......................................
General.................................................................
Common Stock............................................................
Preferred Stock.........................................................
LEGAL MATTERS.............................................................
EXPERTS...................................................................
STOCKHOLDER PROPOSALS FOR THE SHS 2000 ANNUAL MEETING.....................
WHERE YOU CAN FIND MORE INFORMATION.......................................
INDEX TO SHS FINANCIAL STATEMENTS.........................................
APPENDIX A Agreement and Plan of Reorganization dated as of
July 21, 1999.............................................. A-1
APPENDIX B Stock Option Agreement dated as of July 21, 1999............. B-1
APPENDIX C Opinion of SHS's Financial Advisor........................... C-1
APPENDIX D Pennsylvania Business Corporation Law regarding dissenters'
rights..................................................... D-1
ACCOMPANYING DOCUMENTS
" ESB Financial Corporation's 1998 Annual Report to
Stockholders
" ESB Financial Corporation's Form 10-Q for the quarter ended
June 30, 1999
</TABLE>
v
<PAGE>
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. To understand the merger fully and for a more complete
description of the legal terms of the merger, you should read carefully this
entire document, including the reorganization agreement and the other documents
to which we have referred you. See "Where Can You Find More Information" on
page ___. Page references are included in this summary to direct you to a more
complete description of the topics.
The Companies (Page __)
ESB FINANCIAL CORPORATION
600 Lawrence Avenue
Ellwood City, Pennsylvania 16117
(724) 758-5584
ESB is a Pennsylvania-chartered thrift holding company. ESB operates ESB
Bank, F.S.B. which has 11 full-service bank offices in western Pennsylvania. At
June 30, 1999, ESB had total assets of $1.0 billion, deposits of $424.7 million
and stockholders' equity of $57.5 million.
SHS BANCORP, INC.
One North Shore Center
Suite 120
Pittsburgh, Pennsylvania 15212
(412) 231-0809
SHS is a Pennsylvania-chartered thrift holding company. SHS operates
Spring Hill Savings Bank, F.S.B. which has four full-service bank offices in
Allegheny County, Pennsylvania. At June 30, 1999, SHS had total assets of $91.1
million, deposits of $69.6 million and stockholders' equity of $11.7 million.
The SHS Stockholders' Meeting (Page ___)
A special meeting of SHS's stockholders will be held on ___________, 1999,
at _____.m., Eastern Time, at _______________________, Pennsylvania. At the
SHS special meeting, you will be asked to:
1. approve and adopt the reorganization agreement under which SHS will
merge with and into ESB; and
2. act on any other items that may be submitted to a vote at the special
meeting, including a motion to adjourn the special meeting for the
purpose of soliciting additional proxies in order to approve the merger
of SHS and ESB.
Who Can Vote at the Special Meeting; What Vote is Required for Approval of the
Reorganization Agreement
(Page ___)
You can vote at the special meeting of SHS stockholders if you owned SHS
common stock at the close of business on ____________, 1999. You can cast one
vote for each share of SHS common stock you owned at that time. In order to
approve the merger, the holders of a majority of the shares of SHS common stock
voting at the special meeting must vote in favor of the merger.
You can vote your shares by attending the special meeting and voting in
person, or by completing and mailing the enclosed proxy card. You can revoke
your proxy as late as the date of the meeting either by sending in a new proxy
card or by attending the meeting and voting in person.
1
<PAGE>
The Merger (Page ___)
We propose to merge SHS with and into ESB. We hope to complete this merger
by March 31, 2000. We have attached the agreement and plan of reorganization to
this document as Appendix A. Please read the reorganization agreement. It is
the legal document that governs the merger.
Merger Consideration (Page ___)
In total, based upon the anticipated number of SHS shares outstanding
(assuming currently issued options are not exercised) at the date of the merger,
ESB will exchange approximately 600,000 shares of its common stock and $5.5
million in cash for all of the outstanding shares of SHS (not including cash to
be paid for outstanding options to purchase SHS common stock), subject to the
overall proportional cash limitations imposed by the Internal Revenue Service in
order for the merger to be tax-free. Each share of SHS common stock you own
will be exchanged for either $17.80 in cash or 1.3 shares of ESB common stock
(which would be valued at $17.80 per share based upon the value of ESB common
stock on July 20, 1999, the last trading day prior to execution of the
reorganization agreement), subject to certain limitations. The total
consideration to all stockholders is payable 60% in ESB common stock and 40% in
cash. Because the exchange ratio for your shares of SHS common stock is fixed,
except under limited circumstances, and the value of ESB's common stock has and
will continue to fluctuate, the actual value of any shares of ESB common stock
you may receive in the merger may be worth more or less than $17.80 per share.
Manner of Payment (Page ___)
Shares of SHS common stock will be exchanged for either ESB common stock or
cash as chosen by you, subject to certain procedures described in detail in the
reorganization agreement as discussed elsewhere in this proxy
statement/prospectus. (See "Allocation Procedures" on page ___.) If the merger
is approved at the special meeting of SHS's stockholders, you will be sent a
form on which you may specify whether you wish to receive all cash, all ESB
common stock or that you make "no-election" as to receiving cash and/or ESB
common stock in payment for your SHS shares. Your choice will be honored to the
extent possible, but because of the overall limitation on the amount of cash and
shares of ESB common stock available, whether you receive the amount of cash or
stock you request will depend in part on how many other SHS stockholders submit
instructions, how many choose to receive cash and how many chose to receive
stock. ESB will not issue fractional shares. Instead, you will receive the
value of any fractional share in cash based on a $13.69 per share value of ESB
common stock. The total consideration to all stockholders is payable 60% in ESB
common stock and 40% in cash.
When and How to Choose the Method of Payment for Your Shares (Page ___)
Detailed instructions on how to choose your preferred method of payment
will be sent to you if the merger is approved by the SHS stockholders. You will
then have a period of approximately three weeks in which to complete the form
and return it as instructed with your stock certificates. After the forms have
been received and processed and the merger consideration has been determined,
and all other conditions necessary to complete the merger have been satisfied,
the merger will take place and you will be sent the cash and/or ESB common stock
to which you are entitled.
If you have a preference as to the form of consideration you wish to
receive for your shares of SHS common stock, you should notify us on the forms
that will be provided to you. Shares as to which a choice has been made will be
given priority in providing such consideration over shares as to which no choice
has been made.
Neither the SHS board nor SHS's financial advisor makes any recommendation
as to whether SHS stockholders should choose to receive the cash consideration
or the stock consideration in the merger. You must make your own decision with
respect to such choice.
Tax Consequences for SHS Stockholders (Page ___)
For United States federal income tax purposes, your exchange of shares of
SHS common stock for shares of ESB common stock generally will not cause you to
have any gain or loss. You will, however, have gain in connection with any cash
received.
2
<PAGE>
The requirement to complete the merger depends on our receipt of legal
opinions about the federal income tax treatment of our companies and our
stockholders. You should consult your own tax advisor for a full understanding
of the merger's tax consequences that are particular to you.
SHS has Given ESB an Option to Purchase Shares of SHS Common Stock (Page ___)
In connection with the reorganization agreement, SHS and ESB entered into a
stock option agreement under which ESB can purchase up to 115,000 shares of
SHS's common stock (14.97% of its issued and outstanding shares) at a price of
$11.00 per share. ESB may only exercise the option and purchase the SHS shares
in the event certain events occur. These events include the merger of SHS or
the sale of a substantial portion of its assets to a third party unrelated to
ESB. We do not know of any event that has occurred prior to the date of the
proxy statement/prospectus that would permit ESB to exercise the option. See
"Certain Related Transactions-Stock Option Agreement" on page __.
The Directors and Officers of SHS have Entered into a Stockholders Agreement
with ESB to Vote for the Reorganization Agreement (Page ___)
In conjunction with the reorganization agreement and the option agreement,
ESB has entered into a stockholders agreement, dated as of July 21, 1999, with
each of the directors and certain officers of SHS. Pursuant to such
stockholders agreement, each such director and officer of SHS has agreed, among
other things, not to sell, pledge, transfer or otherwise dispose of his or her
shares of SHS common stock and to vote such shares of SHS common stock in favor
of the reorganization agreement. See "Certain Related Transactions-Stockholders
Agreement" on page _____.
You have Dissenters' Rights in the Merger (Page ___)
Pennsylvania law provides SHS stockholders with dissenters' rights in the
merger. This means that if you comply with certain procedures under
Pennsylvania law, you have the right to receive payment for your shares of SHS
common stock based upon an independent determination of their value. In
addition to the summary of the dissenters' rights beginning on page ______, a
copy of the provisions of Pennsylvania law regarding dissenters' rights is
attached to this proxy statement/prospectus as Appendix D. Failure to follow
these provisions may result in a loss of your dissenters' rights.
Accounting Treatment of the Merger (Page ___)
We will account for the merger as a "purchase." In addition, because ESB
is paying more for the SHS common stock than the fair market value of SHS's net
assets, ESB will record an asset called "goodwill," currently estimated to be
approximately $2.7 million. ESB will write off this goodwill as an expense over
approximately the next 15 years, reducing net income during that period.
Interests of SHS's Directors and Officers in the Merger that are Different from
Your Interests (Page ___)
Some of SHS's directors and officers have interests in the merger that are
different from, or are in addition to, their interests as SHS stockholders. The
members of our boards of directors knew about these additional interests, and
considered them, when they approved the reorganization agreement and the merger.
Under the terms of the reorganization agreement, the number of directors of ESB
Bank will be increased by two and Guy Dille and Edward W. Preskar, each of whom
currently serve as directors of SHS, will become directors of ESB Bank. In
addition, upon the merger of Spring Hill Savings Bank and ESB Bank, the two
remaining non-employee directors of SHS and Spring Hill Savings Bank who have
not been elected to the board of directors of ESB Bank will be appointed to a
newly created Spring Hill Savings Bank advisory board for a period of not less
than two years. Advisory board members will receive for their services an
annual retainer of $7,100 and a fee of $475 for each quarterly meeting attended.
Thomas F. Angotti will continue to serve as president and chief executive
officer and Vincent C. Ashoff will continue to serve as executive vice president
and chief financial officer of Spring Hill Savings Bank following the
3
<PAGE>
merger of SHS with and into ESB. Upon the merger of Spring Hill Savings Bank and
ESB Bank, ESB will appoint Mr. Angotti as a senior vice president of ESB and ESB
Bank and Mr. Ashoff as a vice president of ESB Bank.
After the merger, ESB will honor all existing employment agreements,
severance and change in control agreements or plans of SHS and Spring Hill
Savings Bank that were in effect at the time of the reorganization agreement.
These include employment agreements with SHS's chief executive officer and chief
financial officer, SHS's employee severance compensation plan and SHS's
management recognition and development plan and stock option plan.
See "The Merger-Interests of Directors and Officers in the Merger that
are Different from Your Interests" on page __ for a more detailed discussion of
the benefits and interests of SHS's directors and officers.
Differences in the Rights of ESB's and SHS's Stockholders (Page ___)
After the merger is completed, SHS's stockholders who receive ESB common
stock will become stockholders of ESB. ESB is a company governed by its
existing articles of incorporation and bylaws, as well as Pennsylvania law, as
is SHS. As a result, certain rights of SHS's stockholders will change. See
"Comparison of the Rights of Stockholders of ESB and SHS" on page ___.
Our Reasons for the Merger (Page ___)
SHS and ESB are proposing to merge because we believe that by combining
the two companies, we can create a stronger and more diversified company that
will provide significant benefits to our stockholders and customers alike and
strengthen our position as a competitor in the financial services business.
SHS's board of directors also believes that the transaction is financially
attractive to the SHS stockholders, because it gives them the opportunity to
receive a favorable price in cash or in stock. To review our reasons for the
merger in greater detail, as well as how we came to agree on the merger, please
see pages ___ to ___ of this document.
Our Recommendation to Stockholders (Page ___)
The board of directors of SHS believes that the terms of the reorganization
agreement are fair to, and in the best interests of, SHS and its stockholders.
The SHS board unanimously recommends that you vote "FOR" the proposal to approve
the reorganization agreement.
The Consideration is Fair to Stockholders According to SHS's Financial Advisor
(Page ___)
Feldman Financial Advisors, Inc., SHS's financial advisor, has delivered to
the SHS board its opinion that, as of the date of this document, the merger
consideration is fair to SHS stockholders from a financial point of view. See
"The Merger-The Consideration is Fair to SHS's Stockholders According to SHS's
Financial Advisor" on page ___.
What We Need to Do to Complete the Merger (Page ___)
The completion of the merger depends on a number of conditions being met.
See "The Merger-Conditions to the Merger" on page ___.
Terminating the Reorganization Agreement (Page ___)
We can agree at any time to terminate the reorganization agreement without
completing the merger even if SHS's shareholders have approved it. Under
certain circumstances, either ESB or SHS may unilaterally terminate the
reorganization agreement.
Amending Provisions of the Reorganization Agreement (Page ___)
We can agree to amend the reorganization agreement and each of us can waive
our right to require the other party to adhere to the terms and conditions of
the reorganization agreement, where the law allows. However, we may not do so
after you approve the reorganization agreement if the amendment or waiver
reduces or changes the
4
<PAGE>
consideration that will be received by you. In that case, you would have to
approve the amendment or waiver for it to be adopted.
COMPARATIVE COMMON STOCK PRICE AND DIVIDEND INFORMATION
SHS common stock is included for quotation on the OTC Bulletin Board under
the symbol "SHSB," and ESB common stock is included for quotation on the Nasdaq
Stock Market under the symbol "ESBF." The following table sets forth the high
and low sale prices of shares of SHS common stock and ESB common stock as
reported in the OTC Bulletin Board and Nasdaq Stock Market, respectively, and
the quarterly cash dividends declared per share, for the periods indicated. The
SHS common stock began trading on October 1, 1997.
<TABLE>
<CAPTION>
SHS Common Stock ESB Common Stock (1)
--------------------------- ----------------------------
High Low Dividends High Low Dividends
<S> <C> <C> <C> <C> <C> <C>
1997
----
Quarter ended March 31.............. NA NA NA $11.98 $11.16 $0.074
Quarter ended June 30............... NA NA NA $13.13 $11.16 $0.074
Quarter ended September 30.......... NA NA NA $17.73 $13.02 $0.082
Quarter ended December 31........... $17.88 $14.75 -- $17.50 $14.77 $0.082
1998
----
Quarter ended March 31.............. $18.00 $15.75 -- $18.19 $16.81 $0.082
Quarter ended June 30............... $18.00 $16.00 -- $20.00 $17.44 $0.090
Quarter ended September 30.......... $16.38 $10.00 $0.065 $19.38 $15.50 $0.090
Quarter ended December 31........... $13.00 $ 9.50 $0.065 $17.00 $15.06 $0.090
1999
----
Quarter ended March 31.............. $13.25 $12.25 $0.065 $17.00 $15.25 $0.090
Quarter ended June 30............... $12.50 $ 9.50 $0.070 $15.50 $13.13 $0.090
Quarter ended September 30.......... $16.88 $ 9.50 $0.070 $14.42 $13.00 $0.090
Quarter ended December 31
(through _________, 1999).......... $ $ $ $ $ $
</TABLE>
- ----------------
(1) Adjusted for the 10 percent common stock dividends paid on the ESB Common
Stock on August 25, 1997 and May 29, 1998.
The following table sets forth the last reported sale price per share of
ESB common stock and SHS common stock, as reported on the Nasdaq Stock Market
and OTC Bulletin Board, respectively, on (i) July 20, 1999, the last business
day preceding public announcement of the signing of the reorganization agreement
and (ii) _________, 1999, the latest practicable trading date prior to the
mailing of this proxy statement/prospectus:
<TABLE>
<CAPTION>
Equivalent Price
ESB SHS of SHS
Common Stock Common Stock Common Stock (1)
------------ ------------ ----------------
<S> <C> <C> <C>
July 20, 1999............ $13.125 $11.00 $17.0625
______, 1999............. $ $ $
</TABLE>
- ---------------
(1) The equivalent prices per share of SHS common stock on July 20, 1999 and on
___________, 1999 were determined by multiplying an assumed exchange ratio
of 1.3 by the closing price of ESB common stock on the relevant date.
You should obtain current market quotations for ESB common stock and SHS
common stock since the market price of ESB common stock will continue to
fluctuate between the date of this document and the date on which the merger is
completed and thereafter.
5
<PAGE>
SELECTED PRO FORMA
CONSOLIDATED COMPARATIVE PER SHARE DATA
(Unaudited)
The following table sets forth information about earnings per share,
dividends per share and book value per share, and similar information reflecting
the SHS merger. You can use this table to understand how the SHS merger would
have affected ESB's earnings, dividends and book value, all on a per share
basis, if the merger had taken effect on the first day of the periods described
below. The first item listed in each category gives you historical information
relating to ESB. The information set forth below is only a summary and you
should read it together with the historical financial statements and related
notes contained in the annual reports and other information that ESB and SHS
have either included in or attached to this document or have filed previously
with the SEC. See "Where You Can Find More Information" on page ___.
The pro forma and pro forma equivalent per share data in the following
tables are presented for comparative purposes only and are not necessarily
indicative of what the combined financial position or results of operations
would have been had the merger been consummated during the period or as of the
date for which such pro forma tables are presented.
<TABLE>
<CAPTION>
At or for the At or for
Six Months Ended the Year Ended
June 30, 1999 December 31, 1998
---------------- -----------------
<S> <C> <C>
Cash dividend per common share:
ESB............................... $ 0.18 $ 0.35
SHS............................... $ 0.14 $ 0.13
ESB pro forma (1)................. $ 0.18 $ 0.35
Per equivalent SHS share (2)...... $ 0.23 $ 0.46
Book value per common share:
ESB............................... $11.02 $11.60
SHS............................... $15.29 $14.97
ESB pro forma (3)................. $11.20 $11.72
Per equivalent SHS share (2)...... $14.56 $15.24
Basic earnings per common share:
ESB............................... $ 0.58 $ 1.12
SHS............................... $ 0.37 $ 0.63
ESB pro forma (3)................. $ 0.53 $ 1.02
Per equivalent SHS share (2)...... $ 0.69 $ 1.33
Diluted earnings per common share:
ESB............................... $ 0.56 $ 1.08
SH................................ $ 0.32 $ 0.99
ESB pro forma..................... $ 0.68 $ 1.29
Per equivalent SHS share (2)......
</TABLE>
- -------------------------
(1) ESB pro forma cash dividends per share represent historical cash dividends
declared by ESB and assumes no changes in cash dividends declared per
share.
(2) Represents the ESB pro forma amounts (assuming conversion of 60% of the
outstanding shares of SHS Common Stock into shares of ESB Common Stock)
multiplied by 1.3 which is the assumed number of shares of ESB Common Stock
to be issued for SHS Common Stock
(3) Reflects (i) estimated purchase accounting adjustments to be recorded in
connection with the merger, consisting of mark-to-market valuation
adjustments for assets acquired and liabilities assumed and adjustments for
intangible assets established, and the resultant amortization/accretion of
all such adjustments over appropriate future periods, (ii) the issuance of
599,010 shares of ESB Common Stock (assuming conversion of 60% of the
outstanding shares of SHS Common Stock into shares of ESB Common Stock at
an exchange ratio of 1.3), and (iii) the exclusion of 74,608 shares of
unallocated SHS ESOP stock from earnings per common share calculations.
6
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF ESB
The following tables set forth selected historical consolidated financial
and other data of ESB for the five years ended December 31, 1998 and for the six
months ended June 30, 1999 and 1998. The historical consolidated financial data
for the six months ended June 30, 1999 and 1998 is derived from unaudited
consolidated financial statements. However, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation at such dates and for such periods have been made. Operating
results for the six months ended June 30, 1999 are not necessarily indicative of
the results that may be expected for any interim period or the entire year ended
December 31, 1999. The financial information for the five years ended December
31, 1998 of ESB is based on, and qualified in its entirety by, the consolidated
financial statements of ESB, including the notes thereto, which are incorporated
by reference in this proxy statement/prospectus and should be read in
conjunction therewith.
<TABLE>
<CAPTION>
At December 31,
At June 30, ------------------------------------------------
1999 1998 1997 1996 1995 1994
----------- -------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets........................................ $1,003,749 $972,438 $910,770 $698,735 $659,371 $637,916
Cash and cash equivalents........................... 8,395 10,303 18,947 7,284 6,794 8,926
Investment securities held-to-maturity.............. -- 13,231 23,109 17,849 20,757 25,206
Investment securities available for sale............ 162,783 157,010 60,990 88,687 43,932 3,206
Mortgage-backed securities held-to-maturity......... -- 50,082 67,476 75,712 91,173 307,172
Mortgage-backed securities available for sale....... 402,661 324,224 365,672 259,442 286,921 105,175
Loans receivable, net............................... 369,661 360,280 336,757 216,865 183,878 161,630
Intangible assets (1)............................. 6,567 6,869 7,471 4,475 4,841 5,453
Deposit accounts.................................... 424,713 423,051 399,568 332,889 338,494 333,825
Borrowed funds...................................... 510,500 480,382 435,170 309,195 259,472 246,437
Total stockholders' equity.......................... 57,484 61,083 68,509 51,543 54,926 52,407
</TABLE>
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, For the Year Ended December 31,
------------------------ ------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- -------- -------- -------- -------- --------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income................................ $31,344 $31,724 $63,791 $55,011 $46,891 $44,357 $34,873
Interest expense............................... 23,476 23,139 47,140 38,346 32,629 30,219 22,159
------- ------- ------- ------- ------- ------- -------
Net interest income............................ 7,868 8,585 16,651 16,665 14,262 14,138 12,714
Provision for loan losses...................... 6 -- 5 799 873 13 41
------- ------- ------- ------- ------- ------- -------
Net interest income after provision for loan
losses........................................ 7,862 8,585 16,646 15,866 13,389 14,125 12,673
Non-interest income............................ 1,594 801 1,939 1,075 679 772 1,011
Non-interest expense........................... 5,949 5,312 11,067 9,510 10,535 8,962 7,364
------- ------- ------- ------- ------- ------- -------
Income before provision for income taxes....... 3,507 4,074 7,518 7,431 3,533 5,935 6,320
Provision for income taxes..................... 597 976 1,517 1,984 703 1,967 2,461
------- ------- ------- ------- ------- ------- -------
Net income..................................... $ 2,910 $ 3,098 $ 6,001 $ 5,447 $ 2,830 $ 3,968 $ 3,859
======= ======= ======= ======= ======= ======= =======
Per Share data:
Basic earnings per share (2)................... $ 0.58 $ 0.56 $ 1.12 $ 1.02 $ 0.61 $ 0.81 $ 0.78
Diluted earnings per share (2)................. $ 0.56 $ 0.54 $ 1.08 $ 0.98 $ 0.59 $ 0.77 $ 0.75
Cash dividends per common share (2)............ $ 0.18 $ 0.17 $ 0.35 $ 0.31 $ 0.71 $ 0.30 $ 0.25
Tangible book value per common share (2)...... $ 9.76 $ 10.57 $ 10.30 $ 10.53 $ 9.97 $ 10.38 $ 8.92
Weighted average number of common shares
outstanding (in thousands):
Basic......................................... 5,018 5,502 5,338 5,366 4,660 4,899 4,927
Diluted....................................... 5,159 5,760 5,569 5,552 4,793 5,116 5,160
</TABLE>
(footnotes on following page)
7
<PAGE>
<TABLE>
<CAPTION>
At or For the Six
Months Ended June 30, At or For the Year Ended December 31,
--------------------- -------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS: (3)
Return on assets........................................... 0.59% 0.66% 0.63% 0.68% 0.41% 0.61% 0.68%
Return on equity........................................... 9.43 9.08 9.10 8.64 5.47 7.44 7.68
Equity to assets........................................... 6.27 7.27 6.93 7.92 7.50 8.24 8.79
Interest rate spread (4)(5)................................ 1.69 1.68 1.70 1.95 1.98 1.93 1.96
Net interest margin (4)(5)................................. 1.96 2.11 2.06 2.34 2.33 2.33 2.29
Interest-earning assets to interest-bearing liabilities.... 1.05 1.08 1.07 1.08 1.07 1.08 1.08
Non-interest expense, exclusive of amortization of
intangible assets, to total assets........................ 1.21 1.13 1.16 1.20 2.71 1.39 1.29
Efficiency ratio (5)(6).................................... 54.09 47.66 49.13 45.56 47.98 55.40 52.72
ASSET QUALITY RATIOS:
Non-performing loans as a percent of total loans at
end of period............................................. 1.12% 1.47% 1.31% 1.08% 1.80% 0.42% 1.31%
Non-performing assets to total assets at
end of period (7)......................................... 0.44 0.60 0.51 0.45 0.59 0.13 0.40
Allowance for loan losses to non-performing loans at
end of period............................................. 109.80 87.56 96.67 126.43 81.02 309.26 109.08
Allowance for loan losses to total loans at
end of period............................................. 1.23 1.29 1.26 1.36 1.46 1.29 1.43
CAPITAL AND OTHER RATIOS: (3)
Equity to assets at end of period.......................... 6.27% 7.27% 6.28% 7.52% 7.38% 8.33% 8.22%
Leverage capital.......................................... 16.40 16.64 16.35 20.13 17.83 18.24 20.45
Tangible equity to risk-weighted assets at end of
period................................................... 6.70 6.74 6.90 6.32 6.11 6.09 6.24
Total capital to risk-weighted assets at end of
period................................................... 17.61 17.89 17.58 21.39 19.08 19.38 21.42
Number of full service offices at end of period........... 11 11 11 11 9 9 9
</TABLE>
- -----------------------
(1) Represents the excess of cost over fair value of net assets acquired which
consists of $6.5 million of goodwill and $51,000 of other intangibles at
June 30, 1999.
(2) Per share amounts for the years ended December 31, 1994 through December
31, 1997 have been adjusted for the 10% stock dividend declared and paid in
the second quarter of 1998.
(3) With the exception of end of period ratios and the efficiency ratio, all
ratios are based on average monthly balances during the respective periods
and are annualized where appropriate.
(4) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of interest-
bearing liabilities; net interest margin represents net interest income as
a percentage of average interest-earning assets.
(5) Interest income utilized in calculation is on a fully tax equivalent basis.
(6) Reflects adjusted operating expense (net of amortization of intangibles and
the special Savings Association Insurance Fund assessment) as a percent of
the aggregate of net interest income and adjusted non-interest income
(excluding gains and losses on the sales of loans and securities).
(7) Non-performing assets consist of non-accrual loans, loans past due 90 days
or more as to interest or principal repayment and accruing and real estate
acquired through foreclosure or by deed-in-lieu thereof.
8
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF SHS
The following tables set forth selected historical consolidated financial
and other data of SHS for the five years ended December 31, 1998 and for the six
months ended June 30, 1999 and 1998. The historical consolidated financial data
for the six months ended June 30, 1999 and 1998 is derived from unaudited
consolidated financial statements. However, such data reflect all normal,
recurring adjustments which are, in the opinion of management, necessary for a
fair statement of the results for the interim periods presented. The results of
operations for the interim periods presented are not necessarily an indication
of the results that can be expected for the entire year ending December 31,
1999. The financial information for the five years ended December 31, 1998 of
SHS is based on, and qualified in its entirety by, the consolidated financial
statements of SHS and subsidiary, including the notes thereto, which are
incorporated by reference in this proxy statement-prospectus and should be read
in conjunction therewith.
<TABLE>
<CAPTION>
At June 30, At December 31,
----------- ------------------------------------------------
1999 1998 1997 1996 1995 1994
----------- -------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL
CONDITION DATA:
Total assets $91,173 $89,414 $88,252 $81,688 $81,656 $83,920
Loans receivable, net 58,403 57,306 57,925 54,789 52,526 54,888
Cash and cash equivalents 7,102 7,949 7,692 3,573 2,829 1,215
Mortgage-backed securities 18,276 17,192 16,724 19,557 21,291 22,382
Investment securities 4,844 4,149 3,276 1,273 2,160 2,540
Deposits 69,580 67,666 64,513 64,294 65,160 60,836
Collateralized mortgage obligations -- -- 1,395 6,937 8,251 9,546
Borrowed funds 8,363 8,743 8,863 3,772 1,778 7,313
Total stockholders' equity 11,745 11,600 12,015 4,840 4,441 4,212
</TABLE>
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, For the Year Ended December 31,
----------- ----------- ------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ----------- -------- -------- -------- -------- --------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income................................. $3,309 $3,330 $6,660 $6,603 $6,323 $6,503 $6,386
Interest expense 1,828 1,896 3,753 4,036 4,155 4,460 4,663
------ ------ ------ ------ ------ ------ ------
Net interest income............................. 1,481 1,434 2,907 2,567 2,168 2,043 1,723
Provision for loan losses....................... 27 -- 20 70 239 64 61
------ ------ ------ ------ ------ ------ ------
Net interest income after provision for
loan losses.................................... 1,454 1,434 2,887 2,497 1,929 1,979 1,662
Non-interest income............................. 47 119 175 192 968 124 202
Non-interest expense............................ 1,073 1,041 2,262 1,653 2,273 1,760 1,718
------ ------ ------ ------ ------ ------ ------
Income before income taxes and
extraordinary item............................. 428 512 800 1,036 624 343 146
Income tax expense.............................. 166 197 324 403 231 112 46
------ ------ ------ ------ ------ ------ ------
Income before extraordinary item................ 262 315 476 633 393 231 100
Extraordinary item, net of tax(1)............... -- -- -- (562) -- -- --
------ ------ ------ ------ ------ ------ ------
Net income...................................... $ 262 $ 315 $ 476 $ 71 $ 393 $ 231 $ 100
====== ====== ====== ====== ====== ====== ======
Per Share Data:
Book value at end of period.................... $15.29 $15.10 $14.97 $14.65 N/A N/A N/A
Earnings-basic(2).............................. 0.37 0.41 0.63 0.25 N/A N/A N/A
Earnings-diluted(2)............................ 0.36 0.41 0.63 0.25 N/A N/A N/A
Dividends paid(2).............................. 0.14 -- 0.13 -- N/A N/A N/A
Dividend payout ratio(2)....................... 38% --% 21% -- N/A N/A N/A
Weighted average number of common
shares outstanding (in thousands):
Basic......................................... 715 757 756 755 N/A N/A N/A
Diluted....................................... 727 757 758 755 N/A N/A N/A
</TABLE>
(footnotes on following page)
9
<PAGE>
<TABLE>
<CAPTION>
At or for the Six
Months Ended June 30, At or For the Year Ended December 31,
--------------------- -------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average assets.................................. 0.58% 0.72% 0.54% 0.08% 0.49% 0.28% 0.12%
Return on average equity.................................. 4.49 5.16 3.86 1.10 8.54 5.31 2.40
Average equity to average assets.......................... 12.91 13.88 14.00 7.66 5.68 5.18 4.88
Equity to total assets at end of period................... 12.88 14.20 12.97 13.61 5.93 5.44 5.02
Interest rate spread(3)................................... 2.88 2.79 2.83 2.83 2.50 2.32 1.89
Non-interest expense to average total assets.............. 2.37 2.37 2.57 1.95 2.81 2.10 2.01
ASSET QUALITY RATIOS:
Nonaccrual and 90 days or more past due
loans to loans receivable, net........................... 1.62% 2.70% 2.57% 1.62% 2.03% 1.43% 0.37%
Nonperforming assets to total assets 1.08 1.75 1.70 1.09 1.41 2.10 1.55
Allowance for loan losses to total loans
receivable 0.72 0.80 0.76 0.76 0.75 0.52 0.48
Allowance for loan losses to nonperforming
loans 45.13 29.83 29.98 46.91 37.39 36.70 132.67
Net charge-offs to average loans outstanding 0.07 (0.02) 0.03 0.08 0.19 0.10 0.26
CAPITAL RATIOS:
Leverage capital 12.87% 14.19% 12.93% 13.59% 5.93% 5.52% 5.13%
Tier 1 capital to total risk-weighted assets 27.45 29.74 27.78 28.56 12.33 11.82 10.58
Total capital to total risk-weighted assets 28.45 30.83 28.84 29.61 13.39 12.54 11.24
</TABLE>
- -----------------------
(1) Reflects losses recorded upon the extinguishment of Spring Hill Savings
Bank's class C CMO bonds in 1997.
(2) Earnings per share for 1997 represents earnings from September 30, 1997,
the initial date of the stock issuance.
(3) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of interest-
bearing liabilities.
10
<PAGE>
FORWARD-LOOKING STATEMENTS
This document, the documents incorporated by reference in this document, or
any other written or oral statements made by or on behalf of ESB and SHS may
include forward-looking statements with respect to the financial condition,
results of operations and business of ESB and SHS based on management's belief
and information currently available to management. Such forward-looking
statements are subject to risks, uncertainties and assumptions. Actual results
may vary materially from those anticipated, estimated, projected or expected.
Among the factors that may cause variations from such forward-looking statements
are:
. fluctuations in the economy, especially in the market areas of ESB and
SHS;
. changes in the interest rate environment;
. ESB's ability to realize anticipated cost savings or revenue
enhancements relating to the merger;
. changes in the amount of merger-related expenses;
. changes in real estate values;
. issues related to the Year 2000 computer problem;
. the continued growth of the markets in which ESB and SHS operate; and
. the enactment of legislation impacting ESB.
Readers are cautioned not to place undue reliance on any forward-looking
statements made by or on behalf of ESB and SHS. Additional information with
respect to factors that may cause the results to differ materially from those
contemplated by such forward-looking statements is included in ESB's current and
subsequent filings with the SEC.
THE SPECIAL MEETING
Date, Time and Place; Purpose of Special Meeting. This document and the
accompanying proxy card are being furnished to you in connection with
solicitation of proxies by the SHS board of directors to be used at the special
meeting. The special meeting is scheduled to be held on________, 1999, at
_____ .m., eastern time, at ____________, Pennsylvania. At the special
meeting, SHS stockholders will be asked to vote upon:
. a proposal to approve and adopt the reorganization agreement under
which SHS will merge with and into ESB; and
. other matters properly brought before the special meeting. As of the
date hereof, the board knows of no business that will be presented for
consideration at the special meeting, other than matters described in
this document.
You are requested to complete, sign and date the accompanying proxy card
and return it promptly in the enclosed postage-paid, addressed envelope. You
should not forward any stock certificates with your proxy cards.
Recommendation of the SHS Board. The SHS board of directors has
unanimously approved the reorganization agreement and has determined that the
terms of the merger and the reorganization agreement are fair to and in the best
interests of SHS and its stockholders. The SHS board unanimously recommends
that SHS's
11
<PAGE>
stockholders vote "FOR" approval and adoption of the reorganization agreement.
See "The Merger-SHS's Reasons for the Merger; Recommendation of the SHS Board
of Directors."
Who Can Vote on Matters Addressed in this Document. The SHS board of
directors has fixed the close of business on _______________, 1999, as the
record date for determining which stockholders are entitled to receive notice of
and to vote at the special meeting. Only holders of record of SHS common stock
at the close of business on the record date are entitled to receive notice of
and to vote at the special meeting.
Voting and Solicitation of Proxies. Each record holder of SHS common stock
is entitled to cast one vote for each share of SHS common stock owned. The
presence in person or by proxy of the holders of at least a majority of the
outstanding shares of SHS common stock on the record date is necessary to
constitute a quorum at the special meeting.
The shares of SHS common stock represented by properly executed proxies
received at or prior to the special meeting and not subsequently revoked prior
to the vote at the special meeting will be voted as directed in such proxies.
If instructions are not given, shares represented by properly executed proxies
will be voted for approval and adoption of the reorganization agreement. If any
other matters incident to the conduct of the special meeting are properly
brought before the special meeting for consideration, including a motion to
adjourn the special meeting to another time or place for the purpose of
soliciting additional proxies or otherwise, shares represented by properly
executed proxies will be voted in the discretion of the persons named in the
proxy card enclosed herewith in accordance with their best judgment. However,
no proxy which is voted against the proposal to approve the reorganization
agreement will be voted in favor of any adjournment of the special meeting to
solicit further proxies for such proposal.
Any holder of SHS common stock who has executed and delivered a proxy may
revoke it at any time before it is voted by attending the special meeting and
voting in person, by giving timely notice of revocation in writing, or by
submitting a signed proxy card bearing a later date to the Secretary of SHS at
One North Shore Center, Suite 120, Pittsburgh, Pennsylvania 15212. In order to
be timely, the notice or proxy card must actually be received by SHS before the
vote of SHS stockholders.
If you are an SHS stockholder whose shares are not registered in your own
name, you will need additional documentation from your record holder in order to
vote your shares at the special meeting in person. Examples of such additional
documents include an omnibus proxy, confirming your ownership of shares.
Vote Required. The affirmative vote of at least a majority of the votes
cast by holders of SHS common stock entitled to be voted at the special meeting
is required in order to approve and adopt the reorganization agreement. Under
Pennsylvania law, only votes cast in favor of or against a proposal count as
being voted on the proposal. Therefore, abstentions and brokers non-votes will
have no effect on the voting on the reorganization agreement. As of the record
date, there were a total of ______________ shares of SHS common stock
outstanding. Each share of SHS common stock is entitled to one vote.
As of the record date, SHS's directors and executive officers and their
affiliates (six persons) had voting power with respect to an aggregate of 54,586
shares, or approximately 7.11% of the outstanding shares, of SHS common stock
(exclusive of shares of SHS common stock which may be acquired upon the exercise
of outstanding stock options). The directors and certain officers of SHS have
signed a stockholders agreement which provides, among other things, that they
will vote any shares of SHS common stock over which they have voting power in
favor of the reorganization agreement. The directors and officers of SHS who
signed the stockholders agreement beneficially owned 54,586 shares or 7.11% of
the SHS common stock outstanding on the record date (exclusive of shares of SHS
common stock which may be acquired upon the exercise of outstanding stock
options).
Solicitation of Proxies. ESB will bear all the costs and expenses that are
incurred in printing and mailing this document. SHS will pay all other costs of
soliciting proxies. Such solicitation will be made by mail, but also
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may be made by telephone or in person by the directors, officers and employees
of SHS (who will receive no additional compensation for doing so). SHS has
retained Morrow & Co., Inc., a proxy solicitation firm, to assist in such
solicitation. The fee to be paid to such firm is not expected to exceed $3,000,
plus reasonable out-of-pocket costs and expenses authorized by SHS. In addition,
SHS will make arrangements with brokerage firms and other custodians, nominees
and fiduciaries.
THE MERGER
The following information relates to matters contained in the
reorganization agreement. It describes the material aspects of the merger but
is not a complete description of the reorganization agreement. The
reorganization agreement is attached as Appendix A. SHS stockholders are urged
to read the reorganization agreement carefully.
Parties to the Merger
ESB is a Pennsylvania corporation and thrift holding company that provides
a wide range of retail and commercial financial products and services to
customers in western Pennsylvania through its wholly-owned subsidiary bank, ESB
Bank, F.S.B. ESB also is the parent company of PennFirst Financial Services,
Inc., a Delaware corporation engaged in the management of certain investment
activities on behalf of ESB, PennFirst Capital Trust I, a Delaware statutory
business trust established during 1997 to facilitate the issuance of trust
preferred securities to the public by ESB, and THF, Inc., a Pennsylvania
corporation established to provide loan closing services and issue title
insurance.
ESB Bank is a federally chartered, FDIC-insured stock savings bank which
conducts business through 11 offices in Allegheny, Beaver, Butler and Lawrence
Counties, Pennsylvania. ESB Bank operates a wholly-owned subsidiary, AMSCO,
Inc., which engages in the management of certain real estate development
partnerships on behalf of ESB.
ESB Bank is a financial intermediary whose principal business consists of
attracting deposits from the general public and investing such deposits in real
estate loans secured by liens on residential and commercial properties, consumer
loans, commercial business loans, securities and interest-earning deposits.
Substantially all of ESB Bank's deposits are received from residents of their
principal market area and most loans are secured by properties in western
Pennsylvania. In addition, ESB utilizes borrowed funds, including primarily
advances from the Federal Home Loan Bank of Pittsburgh and reverse repurchase
agreements to fund ESB's investment portfolio. ESB invests in securities issued
by the U.S. government and agencies and other investments permitted by federal
law and regulations.
SHS, a Pennsylvania corporation, was organized in June 1997 for the purpose
of becoming the holding company for Spring Hill Savings Bank, F.S.B. upon its
conversion from a federal mutual savings bank to a federal stock savings bank.
The mutual to stock conversion was completed on September 30, 1997 through the
issuance of 819,950 shares of common stock by SHS at a price of $10.00 per
share.
Spring Hill Savings Bank, founded in 1893, is a federally chartered savings
bank with four full-service offices located in Pittsburgh, Pennsylvania. It
operates as a community-oriented financial institution that engages primarily in
the business of attracting deposits from the general public and using those
funds to originate residential mortgage loans within Spring Hill Savings Bank's
primary market area. Spring Hill Savings Bank also originates multi-family,
construction, commercial real estate and consumer loans. Most of Spring Hill
Savings Bank's depositors reside in the communities surrounding Spring Hill
Savings Bank's offices and most of its loans are made to borrowers residing in
Allegheny County.
General
SHS will be merged with and into ESB, and SHS's stockholders will receive
the consideration discussed under "-SHS Stockholders Will Receive Shares of ESB
Common Stock and/or Cash for Each SHS Share." ESB
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will be the surviving corporation in the merger and will continue its corporate
existence under Pennsylvania law. After the merger, the separate corporate
existence of SHS will terminate. The merger is subject to the satisfaction of
certain conditions, including the receipt of all necessary regulatory approvals
and the approval by the requisite vote of the stockholders of SHS. See "-
Conditions to the Merger."
Background of the Merger
In September 1997, SHS converted from a mutual savings bank to a stock
savings bank. Since the conversion, the board of directors and management of
SHS have recognized that increased competition from traditional and
nontraditional providers of financial services has fundamentally changed the
environment in which traditional thrifts operate and threatens the market share
held by thrifts and correspondingly their growth and income potential.
Competition from these entities is aggressive and comprehensive and makes it
increasingly more difficult, especially for smaller institutions such as SHS, to
systematically increase shareholder value despite cost cutting and revenue
enhancement efforts.
Since May 1998, the board of directors and management of SHS have
undertaken a strategic planning process that included assessing the economic,
regulatory, and competitive environment in which SHS operates. These issues were
examined in the context of SHS's size, financial capacity, long term
technological needs, and personnel resources and their resulting impact on the
enhancement of shareholder value.
In light of these occurrences and conditions, the board of directors, in
September 1998, decided to undertake a more formal study of the strategic
options available to SHS. The board of directors engaged Feldman Financial
Advisors, Inc. to provide business and financial advice regarding the various
options for the strategic future of SHS. With the assistance of Feldman
Financial and in cooperation with SHS management, the SHS board of directors
considered several options for the future of SHS, including: (i) remaining
independent and seeking to generate growth and added profits through acquisition
and by expanding and diversifying SHS's financial services and product
offerings, (ii) merging with an institution of nearly equal size, and (iii)
combining with a larger bank or thrift holding company. The board reviewed
each option and concluded, in light of current business conditions, SHS's
particular circumstances and prospects, and the risks and expenses of expanding
its products, services, and / or branch network on an independent basis, that
the best interest of SHS and its shareholders should be served by exploring
closely the methods of enhancing shareholder value including the possibility of
combining with another institution in a sale or merger transaction.
During this planning period, management of SHS had several informal and
exploratory discussions with an out of area commercial bank that had both the
financial capacity and a prior history of completing mergers. However, these
discussions never progressed to any formal proposal.
In early April 1999, a representative of ESB approached executive
management of SHS, indicating that ESB was interested in meeting with a
representative of SHS to discuss a possible transaction between the two
companies. As a result of this indication of interest, Charlotte A. Zuschlag,
president and chief executive officer of ESB, and Thomas F. Angotti, president
and chief executive officer of SHS, met on April 7, 1999 in order to discuss the
respective companies, the competitive challenges faced by each, consolidation
within the banking industry and the possible strategic benefits of a business
combination between ESB and SHS.
SHS received a letter from ESB, dated April 26, 1999, which indicated ESB's
interest in continuing to discuss a possible transaction with SHS and proposed
in general terms the structure of a possible transaction and outlined certain
potential plans for integrating the combined companies. The April 26th letter
summarized the informal discussions that Ms. Zuschlag and Mr. Angotti had held
to date. On May 5, 1999 Mr. Angotti met with the full board of directors of SHS
in order to familiarize them with ESB, its business strategies, and long range
goals and to discuss the April 26th letter.
The SHS board of directors reviewed the April 26th letter and, as advised
by Feldman Financial, concluded that it was a serious and significant proposal.
The SHS board directed management to continue evaluation of this
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proposal and advised management to consult with Trent Feldman of Feldman
Financial for financial purposes and with special counsel John Breyer of Breyer
& Associates to determine and advise the board on its fiduciary
responsibilities. It was determined that in order to evaluate the terms and
conditions on which SHS could combine with a larger holding company a process
would need to be implemented to assure the board that the offer was fair from a
financial perspective and in the best interest of shareholders. On May 28, 1999,
SHS expanded its engagement with Feldman Financial to evaluate and advise the
board of directors as to the financial fairness of the ESB proposal.
On May 28, 1999, ESB and SHS entered into a mutual confidentiality
agreement and, between June 1, 1999 and June 25, 1999, ESB and SHS conducted
reciprocal due diligence analysis.
On June 23, 1999 Ms. Zuschlag met with SHS's financial advisor, Feldman
Financial to discuss ESB's proposal to acquire SHS. Subsequent to the meeting
and after further negotiation between the two companies and their counsel, on
July 9, 1999 Ms. Zuschlag provided a letter of interest outlining the pricing
and form of consideration provided for in the reorganization agreement. In this
letter of interest, ESB had increased the value of its offer from the level in
its April 26/th/ letter. This proposal carried with it a deadline of 5:00 p.m.,
July 9, 1999, for an affirmative response.
During the period May 14th through June 24th, Feldman Financial and SHS
management had contact with six other financial institutions. Some of the
institutions contacted had initiated telephonic expressions of interest to SHS.
Each of the six parties were determined to have the capacity to consummate a
transaction with SHS and several of the parties had a history of doing merger
transactions. One institution immediately expressed no interest. The five
remaining institutions were provided public information for review and analysis.
Feldman Financial also requested confidentiality agreements be executed and
established guidelines including time requirements to submit any indication of
interest indicating potential merger terms inclusive of the level and form of
consideration. Feldman Financial periodically reported to the board of SHS
during this period on the progress of the discussions and the extent of interest
of each participant.
By early July 1999, only one of the five remaining institutions had
expressed any interest to continue exploring the possibility of a business
combination with SHS. This one institution did indicate a tentative expression
of interest provided in the form of a letter that was unsigned and marked draft.
Feldman Financial contacted the institution and advised that it was important
that the SHS receive a formal written proposal signed by the institution and not
marked draft. However, the institution submitted an unsigned revised draft of
its expression of interest. Both the original draft and the subsequent revised
draft of the expression of interest clearly indicated that the pricing levels
were preliminary indications requiring both additional due diligence and an
endorsement of the board of directors. The revised draft was placed under
consideration at a meeting of the board of directors of SHS on July 9, 1999. At
that meeting, Trent Feldman of Feldman Financial noted to the board that the
subsequent revised pricing was lower than was put forth in the initial draft and
provided for a per share expression of interest at $16 in a combination of stock
and cash or $17 per share in an exclusively cash exchange.
Additionally at this meeting, Trent Feldman discussed the financial
analysis of the business combination with regard to the ESB proposal presenting
pro forma analysis on the balance sheet and income impact. Mr. Feldman also
reviewed the various responses and expressions of interest, or lack thereof, of
the other financial institutions that were contacted in the market evaluation
process. After considering the advice of Feldman Financial, the board
determined that the unsigned draft proposal from the other institution was not a
bona fide proposal and did not want to risk the substantial likelihood of
withdrawal of ESB's proposal in order to pursue further negotiations with the
other interested party, which had continued to defer committing to the process
of negotiating more definitive terms despite having had sufficient time to do
so. Based on the relative merits of the ESB proposal, its capacity, intensity
of interest, and propensity to do such transaction, a motion was made and passed
to move toward negotiating a definitive agreement with ESB. Feldman Financial
advised the other institution of SHS's decision to proceed with a merger
transaction with another party without identifying ESB. The other institution
did not respond or pursue any further discussions.
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On July 20, 1999, at a meeting of the board of directors of ESB, Ms.
Zuschlag reviewed with the ESB board the reasons for, and the potential benefits
of the merger; and ESB's legal counsel reviewed with the ESB board the terms of
the reorganization agreement, the stock option agreement and the stockholders
agreement and the transactions contemplated thereby. After a thorough
discussion and consideration of the factors discussed below under "-SHS's
Reasons for the Merger; Recommendation of the SHS Board of Directors," the board
of directors of ESB unanimously approved the reorganization agreement and the
transactions contemplated thereby and authorized the execution of the
reorganization agreement, the stock option agreement and the stockholders
agreement.
On July 21, 1999, at a meeting of the board of directors of SHS, the SHS
board discussed the reasons for, and potential benefits of, the merger; SHS's
legal counsel reviewed the terms of the reorganization agreement, the stock
option agreement and the stockholders agreement and the transactions
contemplated thereby; and SHS's financial advisor made a presentation regarding
the financial terms of the reorganization agreement and delivered its opinion
that the merger consideration was fair, from a financial point of view, to
holders of SHS common stock. After a thorough discussion and consideration of
the factors discussed below under "-SHS's Reasons for the Merger;
Recommendation of the SHS Board of Directors," the board of directors of SHS
unanimously approved the reorganization agreement and the transactions
contemplated thereby and authorized the execution of the reorganization
agreement and the stock option agreement.
The reorganization agreement, the stock option agreement and the
stockholders agreement were entered into on July 21, 1999.
SHS's Reasons for the Merger; Recommendation of the SHS Board of Directors
In the course of reaching its determination to approve the reorganization
agreement, the SHS board consulted with legal counsel with respect to its legal
duties and the terms of the reorganization agreement. The SHS board consulted
with its financial advisor with respect to the financial aspects of the
transaction and fairness of the consideration to be received by stockholders
from a financial point of view, and with senior management regarding, among
other things, operational matters.
The following discussion of the information and factors considered by the
SHS board is not intended to be exhaustive, but does include all material
factors considered by the board. In reaching its decision to approve the
reorganization agreement, the SHS board considered the following:
. The financial terms of the transaction, including (a) the implied price
(based upon ESB's market price at the time the reorganization agreement
was executed) of $17.80 per share, (b) the cash component and the
ability of SHS's stockholders to receive either cash or stock, and (c)
the fact that the transaction will be accounted for as a purchase,
rather than a pooling, which allows ESB to continue its stock repurchase
program. These last two factors are viewed by SHS's financial advisor as
providing greater price protection than is typically present in a
pooling transaction which does not permit the use of cash and imposes
certain restrictions on share repurchases by the acquiror.
. That SHS and ESB serve contiguous market areas with similar communities
and that the expanded reach of the combined company would benefit
existing customers and make the combined company more attractive to
potential customers.
. That ESB offers a broader range of products and services and that the
merger would provide SHS's customers with access to these products and
services, including greater access to commercial loan products, without
SHS having to undergo the expense of introducing them on its own.
. The strength of ESB's management and the similarity of the commitment
to the community and operating philosophies of the companies.
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. The financial condition, results of operations, cash flow, businesses
and prospects of SHS. In this regard, the board analyzed the options of
selling SHS or continuing on a stand-alone basis. The range of values on
a sale of control basis were determined to generally exceed the present
value of SHS shares on a stand-alone basis.
. The opinion of Feldman Financial Advisors, Inc., that, as of July 21,
1999, the consideration was fair to SHS stockholders from a financial
point of view.
. The financial condition, results of operations, cash flow, businesses
and prospects of ESB.
. The current operating environment, including the continued consolidation
and increasing competition in the banking and financial services
industries, the prospect for further changes in these industries and the
substantial investment that may be required to remain technologically
competitive.
. The other terms of the reorganization agreement, including the
opportunity for SHS stockholders to receive shares of ESB common stock
in a tax-free exchange for some, or possibly all, of their shares of SHS
common stock.
. The detailed financial analyses, pro forma and other information,
including the anticipated effects of purchase accounting on the combined
company on a prospective basis, with respect to SHS and ESB discussed by
Feldman Financial Advisors, Inc., as well as the board's knowledge of
SHS, ESB and their respective businesses.
. The likelihood of the merger and related transactions being approved by
the appropriate regulatory authorities. See "-Regulatory Approval Needed
to Complete the Merger."
. The board's review of the status of ESB's preparations to be Year 2000
compliant.
In reaching its determination to approve and recommend the reorganization
agreement, the SHS board did not assign any specific weights to the foregoing
factors, and apart from the financial terms of the transaction, individual
directors may have weighed factors differently.
In considering the reorganization agreement, the SHS board also took into
account the various expenses which would be incurred due to the merger.
Although these costs may have effected the amount of the merger consideration,
the SHS board still believes that the merger is in the best interests of
shareholders.
Accordingly, the SHS board unanimously recommends that SHS's stockholders
vote "FOR" approval and adoption of the reorganization agreement.
Opinion of SHS's Financial Advisor
SHS retained Feldman Financial on September 28,1998 to provide strategic
financial advice to the SHS board on various matters, including the evaluation
of strategic business alternatives and the potential enhancement of shareholder
value. Feldman Financial was subsequently requested to act as SHS's financial
advisor in connection with the merger and related matters based upon its
qualifications, expertise and reputation, as well as upon its advisory
relationship and familiarity with SHS. At the July 21, 1999 meeting of the SHS
board, Feldman Financial delivered an oral opinion to the SHS board, which
opinion was subsequently confirmed in writing, that as of such date and subject
to certain considerations set forth in such opinion, the merger consideration in
the reorganization agreement was fair from a financial point of view to SHS
stockholders. Feldman Financial subsequently confirmed its July 21, 1999
opinion by delivery to the SHS board of a written opinion dated as of the date
of this proxy statement/prospectus. In connection with its opinion dated the
date of this proxy statement/prospectus, Feldman
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Financial updated certain of the analyses performed in connection with the July
21, 1999 opinion and reviewed the assumptions on which such analyses were based
and the factors that it considered in rendering such an opinion.
The full text of Feldman Financial's written opinion dated as of the date
of this proxy statement/prospectus, which sets forth a description of the
procedures followed, assumptions made, matters considered and limitations on the
review undertaken, is attached as Appendix C to this document. You should read
the opinion carefully and in its entirety. Feldman Financial's opinion is
directed to the SHS board and addresses only the merger consideration. The
opinion does not address the underlying business decision of SHS to engage in
the merger and does not constitute a recommendation to you as to how to vote at
the special meeting. The summary of Feldman Financial's opinion set forth in
this proxy statement/prospectus is qualified in its entirety by reference to the
full text of such opinion.
In arriving at its opinion, Feldman Financial reviewed the reorganization
agreement as well as certain publicly available business and financial
information relating to SHS and ESB. Feldman Financial also reviewed certain
other information related to SHS and ESB, and met with the senior management of
SHS and ESB to discuss the future prospects of SHS and ESB. Feldman Financial
also considered certain financial and stock data of SHS and ESB and compared
that data with similar data for other publicly held companies in businesses
similar to those of SHS and ESB, and considered the financial terms of other
merger and acquisition transactions that were recently effected. Feldman
Financial also considered such other information, studies, analyses and
examinations, and general financial, economic and market criteria, which it
deemed relevant.
In preparing its opinion, Feldman Financial assumed and relied upon the
accuracy and completeness of all financial and other information that it
received, reviewed, or discussed. With respect to certain financial forecasts,
Feldman Financial assumed that such forecasts were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
management of SHS and ESB. The projections furnished to Feldman Financial and
used by it in certain of its analyses were prepared by management of SHS and
ESB. Neither SHS nor ESB publicly discloses internal management projections of
the type provided to Feldman Financial and, as a result, such projections were
not prepared with a view towards public disclosure. The projections were based
on numerous variables and assumptions which are inherently uncertain, including,
without limitation, factors related to general economic and competitive
conditions, and accordingly, actual results could vary significantly from those
set forth in such projections. Feldman Financial did not assume any
responsibility for independently verifying such information, did not undertake
an independent evaluation or appraisal of the assets or liabilities of SHS or
ESB, and was not furnished with any such appraisal or evaluation. Feldman
Financial was not retained to and did not review any individual loan credit
files. Feldman Financial's opinion was necessarily based upon financial,
economic, market and other conditions as they existed and could be evaluated on
the date of its opinion. Feldman Financial did not express any opinion as to
the actual value of ESB common stock when issued pursuant to the merger or the
prices at which ESB common stock will trade subsequent to the merger.
In formulating its opinion to the SHS board, Feldman Financial prepared a
variety of financial and comparative analyses, including those described below.
The following is a summary of the material financial analyses performed by
Feldman Financial and reviewed with the SHS board in connection with its opinion
dated July 21, 1999, and does not purport to be a comprehensive description of
the analyses underlying Feldman Financial's opinion. The preparation of a
fairness opinion is a complex process involving various determinations as to the
most relevant and appropriate methods of financial analyses and the application
of these methods to the particular circumstances. Therefore, such an opinion is
not readily susceptible to partial analysis or summary description.
Accordingly, Feldman Financial believes that its analyses must be considered as
a whole and selecting portions of the analyses and factors, without considering
all factors and analyses, could create a misleading or incomplete view of the
processes underlying such analyses and its opinion.
Calculation of Implied Value of Merger Consideration. Feldman Financial
calculated the implied value of the merger consideration. The per share cash
consideration was equivalent to $17.80 and the per share stock consideration was
equivalent to $17.39 per share based upon the market price of ESB common stock
of $13.375 as
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of July 19, 1999. Assuming an allocation of 60% of the outstanding SHS common
shares receiving the stock consideration and 40% receiving the cash
consideration, the implied acquisition offer value for SHS was equivalent to
$17.55 per share as of July 19, 1999. The implied offer value of $17.55 per
share equated to multiples for SHS of 115.9% of book value per share, 115.9% of
tangible book value per share, 31.3 times last twelve months earnings per share,
26.6 times last twelve months core earnings per share, a 3.7% tangible book
premium to core deposits, and a 59.6% premium to the closing market price of SHS
common stock of $11.00 at July 19, 1999. These ratios were based on SHS's
historical financial data as of March 31, 1999.
Comparable Company Analysis. As part of its analysis, Feldman Financial
compared certain financial performance and market valuation data of SHS with
corresponding publicly available information of 16 publicly traded thrift
institutions based in Pennsylvania or Ohio and with asset sizes less than $250
million (which are referred to as the small comparables): Carnegie Financial
Corporation, Community Investors Bancorp, FFD Financial Corporation, First
Federal Financial Bancorp, Harvest Home Financial Corp., Home City Financial
Corp., Home Loan Financial Corp., Laurel Capital Group, Lenox Bancorp, Pennwood
Bancorp, Peoples Financial Corporation, Peoples-Sidney Financial Corp., Prestige
Bancorp, PSB Bancorp, SFSB Holding Company, and WSB Holding Company. The return
on average assets for SHS was 0.47% versus the average of 0.67% for the small
comparables. The return on average equity for SHS was 3.42% versus the average
of 4.60% for the small comparables. SHS's ratio of total equity to assets was
12.94%, as compared to the average of 14.29% for the small comparables. SHS's
ratio of nonperforming assets to total assets was 1.35% versus the average of
0.32% for the small comparables. SHS's market price to book value ratio was
71.0%, as compared to the average price to book ratio of 88.8% for the small
comparables. SHS's price to tangible book ratio was 71.0%, as compared to the
average price to tangible book ratio of 88.8% for the small comparables. SHS's
market price to earnings per share ratio was 19.2 times, as compared to the
average price to earnings ratio of 21.1 times for the small comparables.
Historical financial data used in connection with the ratios provided above and
below was the latest available as of March 31, 1999 and market price data was as
of July 16, 1999.
Feldman Financial also compared certain financial performance and market
valuation data of ESB with corresponding publicly available information of 15
publicly traded thrift institutions based in Pennsylvania or adjacent states and
with asset sizes between $500 million and $1.5 billion (which are referred to as
the mid-sized comparables): Ambanc Holding Company, Camco Financial Corporation,
FFY Financial Corporation, First Bell Bancorp, First Defiance Financial Corp.,
Flushing Financial Corporation, FMS Financial Corporation, GA Financial Inc.,
Hudson River Bancorp, Metropolitan Financial Corporation, Northeast Pennsylvania
Financial Corp, Parkvale Financial Corporation, Progress Financial Corporation,
TF Financial Corporation, and York Financial Corporation. The return on average
assets for ESB was 0.60% versus the average of 0.78% for the mid-sized
comparables. The return on average equity for ESB was 9.01% versus the average
of 8.72% for the mid-sized comparables. ESB's ratio of total equity to assets
was 6.46%, as compared to the average of 10.12% for the mid-sized comparables.
ESB's ratio of nonperforming assets to total assets was 0.50% versus the average
of 0.54% for the mid-sized comparables. ESB's market price to book value ratio
was 108.8%, as compared to the average price to book ratio of 125.5% for the
mid-sized comparables. ESB's price to tangible book value ratio was 121.8%, as
compared to the price to tangible book ratio of 131.5% for the mid-sized
Comparables. ESB's market price to earnings per share ratio was 12.3 times, as
compared to the average price to earnings ratio of 14.5 times for the mid-sized
comparables.
Comparable Transaction Analysis. Feldman Financial reviewed publicly
available information for 16 transactions that were announced after July 1, 1998
and involved acquisitions of thrifts with asset sizes less than $250 million,
equity to assets ratios greater than 10.0%, and returns on average equity less
than 10.0% (which are referred to as the comparable thrift transactions). The
various offer price ratios analyzed were based upon information available at the
time of announcement. Feldman Financial compared the ratios of price to book
value, price to tangible book value, price to last twelve months earnings, price
to core earnings, and tangible book premium to core deposits as offered in the
comparable thrift transactions to the corresponding ratios offered in the merger
to SHS. The comparable thrift transactions consisted of the following
(identified by acquirer/acquiree): Union Financial Bancshares/South Carolina
Community Bancshares, First Busey Corp./Eagle BancGroup, PAB Bankshares/Baxley
Federal Savings Bank, Local Financial Corp./Guthrie Savings Inc., Central
Bancompany/Fulton
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Bancorp, Hudson River Bancorp/SFS Bancorp, Citizens Bancshares/MBLA Financial
Corp., CCB Financial Corp./Stone Street Bancorp, Bremer Financial
Corp./Northwest Equity Corp., NBC Capital Corp./FFBS BanCorp, CNB
Bancorp/Adirondack Financial Services, Crown Group Inc./Delaware First
Financial, Peoples Holding Company/Inter-City Federal Savings Bank, Capital
Bank/Home Savings Bank of Siler City, Centura Banks Inc./Scotland Bancorp, and
Enterprise Federal Bancorp/Security Savings Holding Company. The analysis of the
comparable thrift transactions yielded the following ratios: (i) average price
to book ratio of 144.5% with a range from 103.8% to 227.1% (compared with an
offer ratio of 115.9% for SHS), (ii) average price to tangible book value ratio
of 144.5% with a range from 103.8% to 227.1% (compared with a ratio of 115.9%
for SHS), (iii) average price to earnings ratio of 26.9 times with a range of
15.3 to 58.1 times (compared with 31.3 times for SHS), (iv) average price to
core earnings ratio of 23.6 times with a range of 15.3 to 35.5 times (compared
with 26.6 times for SHS), (v) average tangible book premium to core deposits of
10.6% with a range from 1.9% to 23.8% (compared with 3.7% for SHS), and (vi)
average offer premium to prior one-week market price of 38.2% with a range from
16.1% to 98.3% (compared with 69.5% for SHS). The acquisition transaction ratios
for SHS were based on an implied offer price of $17.55 per share as of July 19,
1999.
No company or transaction used in the comparable company or comparable
transaction analyses is identical to SHS or the merger. Accordingly, an
analysis of the results involves complex considerations and judgments concerning
differences in financial and operating characteristics of the various companies
as well as other factors that may affect trading values or announced merger
values of SHS or the comparable companies.
Pro Forma Merger Analysis. Feldman Financial performed a pro forma merger
analysis, combining SHS's and ESB's balance sheet and projected earnings based
upon certain assumptions provided by the management of SHS and ESB. The
acquisition was assumed to be accounted for using the purchase method. This
analysis indicated that the merger would be accretive to ESB's book value and
earnings per share for the estimated 1999 period on a pro forma basis before the
impact of nonrecurring merger-related charges. The analysis included estimates
of expected cost savings resulting from the merger. The actual results achieved
by ESB may vary from the estimated results and the variations may be material.
Discounted Dividend Stream and Terminal Value Analysis. Feldman Financial
performed a discounted cash flow analysis to determine a range of present values
per share of SHS common stock on a trading basis, assuming SHS continued to
operate as an independent company. This range was determined by adding (i) the
present value of the estimated future dividend stream that SHS could generate
over the five-year period from 1999 through 2003, and (ii) the present value of
the terminal value of SHS common stock at the end of year 2003. The earnings
projections that formed the basis for the dividends and the terminal values were
based on annual growth rates of 5.0%. The terminal value of SHS common stock at
the end of the period was determined by applying a range of market valuation
ratios representing price to earnings multiples from 14.0 to 20.0 times and
price to book ratios from 70% to 100%. The dividend stream and terminal values
were discounted to present values using discount rates from 10% to 14%. Based
on the above assumptions, this present value analysis yielded a market valuation
range for SHS common stock of $7.37 to $12.09 per share.
Analysis at Various Prices for ESB Common Stock. Feldman Financial
reviewed the implied value of the merger consideration at assumed market prices
of ESB common stock ranging from $9.00 to $18.00 per share. Based on the
equivalent value of the per share stock consideration at 1.3 shares of ESB
common stock and assuming a 60% proportionate value attributed to the stock
consideration and 40% apportioned to the per share cash consideration of $17.80,
the overall implied value of the merger consideration ranged from $14.14 to
$21.16 per share at the corresponding market prices of ESB common stock. This
analysis yielded a range of offer values as a multiple of earnings per share of
25.3 times to 37.8 times, a range of offer values of 93.4% to 139.8% of book
value, and a range of offer premiums to prior trading market price of SHS common
stock of 28.5% to 92.4%.
In performing its analyses, Feldman Financial made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond the control of SHS or ESB. The
analyses performed by Feldman Financial are not necessarily indicative of actual
values or actual
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future results, which may be significantly more or less favorable than suggested
by such analyses. Such analyses were prepared solely as a part of Feldman
Financial's evaluation of the fairness from a financial point of view of the
merger consideration to SHS stockholders and were conducted in connection with
the rendering of Feldman Financial's opinion. As described above, Feldman
Financial's opinion and the information provided by Feldman Financial to the SHS
board were among various factors taken into consideration by the SHS board in
making its determination to approve the reorganization agreement. The merger
consideration was determined through negotiations between SHS and ESB, and was
approved by the entire SHS board.
The SHS board retained Feldman Financial to act as financial advisor to SHS
in connection with the merger based upon Feldman Financial's experience and
expertise and its familiarity with SHS and transactions similar to the merger.
As part of its business, Feldman Financial is regularly engaged in the valuation
of businesses and securities in connection with mergers and acquisitions,
initial public offerings, private placements, and recapitalizations. In the
past, Feldman Financial has provided to SHS other financial advisory services
for which Feldman Financial received customary fees. Over the past two years,
Feldman Financial has been paid professional fees aggregating approximately
$10,000 for such other financial advisory services rendered to SHS. Pursuant to
a letter agreement dated May 20, 1999 between SHS and Feldman Financial, SHS has
agreed to pay Feldman Financial a merger transaction advisory fee ranging from
1.00% to 1.25% of the aggregate consideration received by SHS's stockholders and
optionholders, of which $60,000 has been paid and the remainder is due upon
closing of the merger. The letter agreement with Feldman Financial also
provides that SHS will reimburse Feldman Financial for its reasonable out-of-
pocket expenses incurred in connection with its engagement and indemnify Feldman
Financial and any related parties against certain expenses and liabilities,
which may include certain liabilities under securities laws.
SHS Stockholders Will Receive Shares of ESB Common Stock and/or Cash for Each
SHS Share
Upon consummation of the merger, each outstanding share of SHS common stock
will be converted into the right to receive, at the election of each SHS
stockholder and subject to the election, allocation and proration procedures set
forth in the reorganization agreement and described below, either the stock
consideration or the cash consideration, in each case, as determined pursuant to
the reorganization agreement. See "-Merger Consideration," "-Election
Procedures" and "-Allocation Procedures" below. No fractional shares of ESB
common stock will be issued in connection with the merger. Instead, ESB will
make a cash payment to each SHS stockholder who would otherwise receive a
fractional share.
The form of the consideration ultimately received by you will depend upon
the election, allocation and proration procedures described below and the
choices of other stockholders. Accordingly, no guarantee can be given that the
choice of any given stockholder of SHS will be honored. In addition, because
the tax consequences of receiving the cash consideration will differ from the
tax consequences of receiving the stock consideration, SHS stockholders are
urged to read carefully the information set forth below under "-Federal Income
Tax Consequences for SHS Stockholders."
Merger Consideration. ESB will exchange a total of approximately 600,000
shares of its common stock and pay approximately $5.5 million in cash (not
including cash to be paid for outstanding options to purchase SHS common stock)
for all of the outstanding shares of common stock of SHS, subject to the overall
proportional cash limitations imposed by the IRS. The total number of
outstanding shares represents issued and outstanding shares and any options of
SHS which are exercised before the effective time of the merger. In the event
that all 78,545 options currently outstanding and exercisable are exercised
prior to the closing of the merger, the number of shares of ESB common stock to
be issued would increase to approximately 660,000 shares and the cash
consideration would increase to $6.0 million. The reorganization agreement
provides that each holder of SHS common stock will be entitled to receive, at
the election of the holder thereof, for each share of SHS common stock either:
(1) 1.3 shares of ESB common stock (which is referred to as the per share
stock consideration), except that cash will be paid for any remaining
fractional shares, or
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(2) cash in an amount equal to $17.80 (which is referred to as the per
share cash consideration).
The total consideration to all stockholders is payable 60% in ESB common
stock and 40% in cash.
Although the per share stock consideration is fixed, it may be increased
under one set of circumstances. SHS may terminate the reorganization agreement
prior to the merger in the event certain ratios fall below set values during a
specified time period. If SHS terminated the reorganization agreement under
these circumstances, ESB would have a limited right to increase the per share
stock consideration. If ESB exercised this right, the termination would be
deemed not to have occurred. (The ability to terminate the reorganization
agreement discussed in this paragraph is discussed further under "-Waiving and
Amending Provisions In, or Terminating, the Reorganization Agreement"). The per
share stock consideration, if ESB decided to exercise its right to increase it,
would equal the lesser of:
(1) a number (rounded to the nearest one thousandth) obtained by dividing
(A) the product of the starting price multiplied by 0.80 and 1.3, by
(B) the average closing price, and
(2) a number (rounded to the nearest one thousandth) obtained by dividing
(A) the product of the index ratio multiplied by 1.3, by (B) the ESB
ratio.
The following definitions apply for purposes of determining the possible
increased per share stock consideration:
"Average closing price" means the average closing prices of a share of ESB
common stock on the Nasdaq Stock Market's National Market (as reported in The
---
Wall Street Journal, or if not reported therein, in another authoritative
- -------------------
source) during the 20 consecutive trading days ending on the trading day prior
to the determination date, rounded to the nearest whole cent.
"Determination date" means the date on which the last required approval of
a government entity is obtained with respect to the merger, without regard to
any requisite waiting period in respect thereof.
"ESB ratio" means the number obtained by dividing the average closing price
by the starting price.
"Final index value" means the average of the index values for the 20
consecutive trading days ending on the trading day prior to the determination
date.
"Index ratio" means the number obtained by (A) dividing the final index
value by the index value on the starting date and (B) then subtracting 0.20.
"Index value" means, on a given date, the index value on such date of the
SNL Thrift Index, as such index is reported by SNL Securities on such date.
"Starting date" means the last trading day immediately preceding the date
of the first public announcement of entry into the reorganization agreement.
"Starting price" means the closing price of a share of ESB common stock on
the Nasdaq Stock Market's National Market (as reported in The Wall Street
---------------
Journal, or if not reported therein, in another authoritative source) on the
- -------
starting date.
For further information concerning the historical prices of ESB common
stock, see "Comparative Common Stock Price and Dividend Information." You are
urged to obtain current market prices for ESB common stock in connection with
voting your shares at the special meeting and making your election decision.
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Elections. At least 30 days prior to the completion of the merger, you
will be sent an election form, which will permit you to elect to receive for
each share of SHS common stock owned by you either (i) per share stock
consideration or (ii) the per share cash consideration. If you either (i) do
not submit a properly completed election form in a timely fashion or (ii) revoke
your election form prior to the deadline for the submission of the election
form, the shares of SHS common stock held by you will be designated "no election
shares."
Election Procedures. All elections will be required to be made on an
election form. To make an effective election with respect to your shares of SHS
common stock, you must, in accordance with the election form, (i) properly
complete and return the letter of transmittal and election forms to the company
designated by ESB to receive these materials, (ii) deliver the election form
with your stock certificates representing such shares (or an appropriate
guarantee of delivery of such certificates) and (iii) deliver with the election
forms any other required documents, prior to the deadline for returning the
letter of transmittal and election form. It is anticipated that the letter of
transmittal and election forms will be mailed to you at least 30 days prior to
the anticipated date on which the merger will be completed.
The deadline for surrendering all documentation required for an effective
election (the "election deadline date") will be set forth in the election
instructions and will be approximately ten days prior to the anticipated date
for completion of the merger, although the date may be extended by mutual
agreement of ESB and SHS. In the event the reorganization agreement is
terminated without the merger having been consummated, your certificates will be
promptly returned by the designated agent or they will be returned to you at any
time prior to consummation of the merger upon your request.
SHS stockholders should not return their stock certificates with the
enclosed proxy, and stock certificates should not be forwarded to the designated
agent until a SHS stockholder has received the letter of transmittal and
election form.
If you have a particular preference as to the form of consideration to be
received for your shares of SHS common stock, you should make an election
because shares as to which an election has been made will be given priority in
allocating such consideration over shares as to which an election is not
received. Neither the SHS board nor its financial advisor makes any
recommendation as to whether stockholders should elect to receive the cash
consideration or the stock consideration in the merger. You must make your own
decision with respect to such election, bearing in mind the tax consequences of
the election you choose. See "-Federal Income Tax Consequences for SHS
Stockholders."
Even if you have no preference, it is suggested that you return your
transmittal and election forms by the election deadline date, indicating that
you have no preference, so that you may receive the merger consideration
allocable to you promptly following consummation of the merger, rather than
following completion of exchange procedures after the merger is consummated.
See "Procedures for Exchanging Your Stock Certificates."
Allocation Procedures. Your ability to elect to receive all cash is
subject to a requirement that the aggregate cash consideration may not exceed
$5.5 million (assuming 767,962 shares of SHS common stock are outstanding prior
to the completion of the merger) based upon the overall proportional cash
limitations imposed by the IRS. If the total cash elections are greater, or
less, than the aggregate cash consideration, the elections will be reallocated
as follows so that the resultant exchange for cash is as close as practical to
the aggregate cash consideration:
. If the cash elections total more than the aggregate cash consideration,
no election shares will be converted to stock election shares. If after
the conversion of the no election shares, the total cash elections are
still more than the aggregate cash consideration, then on a pro rata
basis, a sufficient number of shares from among the holders of cash
election shares will be converted into stock election shares, so that
the total cash paid equals as closely as practicable the aggregate cash
consideration. This proration will reflect the proportion that the
number of cash election shares of each holder of cash election shares
bears to the total number of cash election shares.
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. If the cash elections total less than the aggregate cash consideration,
a sufficient number of shares will be converted on a pro rata basis into
cash election shares, first from among the holders of no election shares
and then, if necessary, from among the holders of stock election shares,
so that the total cash paid equals as closely as practicable the
aggregate cash consideration. This proration will reflect the proportion
that the number of stock election shares of each holder of stock
election shares bears to the total number of stock election shares.
Upon consummation of the merger, any shares of SHS common stock that are
owned by SHS as treasury stock or that are held directly or indirectly by ESB,
other than in a fiduciary capacity or in satisfaction of a debt previously
contracted, will be canceled and retired and no payment will be made with
respect to those shares and such shares will not be considered for purposes of
the foregoing allocation procedures.
Procedures for Exchanging Your Stock Certificates
SHS stockholders who surrender their stock certificates and completed
transmittal and election forms prior to the election deadline date, or any
extension of such time period, will automatically receive the merger
consideration allocated to them as the result of the merger promptly following
consummation of the merger. Other stockholders will receive the merger
consideration allocated to them as soon as practicable after their stock
certificates have been surrendered with appropriate documentation to the
designated agent or other steps have been taken to surrender the evidence of
their stock interest in SHS in accordance with the instructions accompanying the
letter of transmittal form.
Within seven business days after the completion of the merger, a bank or
trust company selected by ESB and reasonably satisfactory to SHS will mail to
each holder of record of SHS common stock who has not previously surrendered his
or her stock certificates representing SHS common stock a letter of transmittal
and instructions for use in effecting the surrender of the certificates in
exchange for the merger consideration allocated to them. Upon surrender of a
stock certificate for SHS common stock for exchange and cancellation to the
designated agent, together with a duly executed letter of transmittal, the
holder of such certificate will be entitled to receive such merger consideration
allocated to them and the certificate for SHS common stock so surrendered will
be canceled. No interest will be paid or accrued on any cash constituting merger
consideration (including the cash in lieu of fractional shares) and any unpaid
dividends and distributions, if any, payable to holders of stock certificates
for SHS common stock.
No stock certificates representing fractional shares of ESB common stock
will be issued upon the surrender for exchange of SHS stock certificates. In
lieu of the issuance of any such fractional share, ESB will pay to each former
stockholder of SHS who otherwise would be entitled to receive a fractional share
of ESB common stock an amount in cash determined by multiplying the fraction of
a share of ESB common stock which such holder would otherwise be entitled to
receive pursuant to the reorganization agreement by $13.69.
If you receive shares of ESB common stock in the merger, you will receive
dividends on ESB common stock or other distributions declared after the
completion of the merger only if you have surrendered your SHS stock
certificates. Only then will you be entitled to receive all previously withheld
dividends and distributions, without interest.
After completion of the merger, no transfers of SHS common stock issued and
outstanding immediately prior to the completion of the merger will be allowed.
SHS stock certificates that are presented for transfer after the completion of
the merger, will be canceled and exchanged for the merger consideration.
If your SHS stock certificates have been lost, stolen or destroyed, you
will have to prove your ownership of those certificates and that they were lost,
stolen or destroyed before you receive any consideration for your shares. The
agent designated by ESB will send you instructions on how to provide this
evidence.
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Interests of Directors and Officers in the Merger that are Different from
Your Interests
Some members of SHS's management and the SHS board may have interests in
the merger that are in addition to or different from the interests of
stockholders. The SHS board was aware of these interests and considered them in
approving the reorganization agreement.
Appointment of SHS Directors to Board of Directors of ESB Bank. Upon
completion of the merger, the number of directors of ESB Bank will be increased
by two and ESB Bank will nominate and elect Guy Dille and Edward W. Preskar,
each of whom is a current director of SHS, as directors of ESB Bank for terms of
not less than three years.
Creation of Spring Hill Savings Bank Advisory Board. At the time of the
merger of Spring Hill Savings Bank and ESB Bank, the two remaining non-employee
directors of SHS and Spring Hill Savings Bank who have not been elected to the
board of directors of ESB Bank will be appointed to a newly created Spring Hill
Savings Bank advisory board for a period of not less than two years. Each
advisory board member shall receive for their services an annual retainer of
$7,100, paid in equal quarterly installments of $1,775, and a fee for each
quarterly meeting attended of $475.
Employment of Officers of SHS and Spring Hill Savings Bank. Following the
merger, Thomas F. Angotti will continue to serve as president and chief
executive officer and Vincent C. Ashoff will continue to serve as executive vice
president and chief financial officer of Spring Hill Savings Bank until the
merger of Spring Hill Savings Bank and ESB Bank. Upon the merger of Spring Hill
Savings Bank and ESB Bank, ESB will appoint Thomas F. Angotti as a senior vice
president of ESB and ESB Bank and Vincent C. Ashoff as a vice president of ESB
Bank. Mr. Angotti will receive a salary and benefits commensurate to that of
other comparable officers of ESB and ESB Bank at not less than his current base
salary. As a senior vice president, Mr. Angotti will be provided a company car
and a change in control agreement. The change of control agreement will provide
for a three year term, and subject to satisfactory performance reviews, among
other things, shall extend on each anniversary date for another year so that the
remaining term will be three years, unless either the board of directors of ESB
or Mr. Angotti provides contrary written notice to the other not less than 30
days in advance of such anniversary date. The agreement will be automatically
extended for an additional one year upon a change of control of ESB. The
agreement will provide for payments in the event that certain adverse actions
are taken with respect to Mr. Angotti's employment subsequent to a change of
control of ESB in an amount equal to 1.5 times Mr. Angotti's annual
compensation. Mr. Ashoff will receive a salary and benefits commensurate to
that of other comparable officers of ESB Bank at not less than his current base
salary.
Existing Employment, Severance and Change in Control Agreements. ESB shall
honor all existing employee agreements, severance or change in control
agreements or plans of SHS and Spring Hill Savings Bank, in effect as of July
21, 1999, the date of the reorganization agreement. Certain officers of SHS
will receive termination benefits. SHS has employment agreements with Messrs.
Angotti and Ashoff that provide severance payments and other benefits in the
event of involuntary termination of employment in connection with any change of
control. If exercised, the approximate severance payment for the employment
agreements for Mr. Angotti and Mr. Ashoff will be $234,000 and $170,000
respectively. Other officers are entitled to severance payments under a bank
wide employee severance plan. This plan covers three officers and total
payments would approximate $165,000.
Employee Benefit Plans. All employees of SHS or Spring Hill Savings Bank
immediately prior to completion of the merger who are employed by ESB, ESB Bank
or Spring Hill Savings Bank (the "employers") immediately following the merger
("transferred employees") will be covered by the employers' employee benefit
plans on substantially the same basis as any employee of the employers in a
comparable position. Notwithstanding the foregoing, ESB may determine to
continue any of the SHS benefit plans for transferred employees in lieu of
offering participation in the employers' benefit plans providing similar
benefits (e.g., medical and hospitalization benefits), to terminate any of SHS's
benefit plans, or to merge any such benefit plans with the employers' benefit
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plans, provided the result is the provision of benefits to transferred employees
that are substantially similar to the benefits provided to the employers'
employees generally. Except as otherwise prohibited by law, transferred
employees' service with SHS or Spring Hill Savings Bank shall be recognized as
service with the employers for purposes of eligibility to participate and
vesting, if applicable (but not for purposes of benefit accrual) under the
employers' benefit plans, subject to applicable break-in-service rules. ESB
agrees that any pre-existing condition, limitation or exclusion in its medical,
long-term disability and life insurance plans shall not apply to transferred
employees or their covered dependents who are covered under a medical or
hospitalization indemnity plan maintained by SHS or Spring Hill Savings Bank at
the closing of the merger and who then change coverage to the employers' medical
or hospitalization indemnity health plan at the time such transferred employees
are first given the option to enroll. Notwithstanding anything in the
reorganization agreement to the contrary, after the completion of the merger,
(x) any amendment to, or grant of additional benefits under, any SHS or Spring
Hill Savings Bank benefit plan, including stock based plans, which continues to
exist subsequent to the completion of the merger, shall require the prior
consent of ESB, and (y) ESB may cause any of the SHS or Spring Hill Savings Bank
benefit plans which continue to exist, including stock based plans, to be
amended in order to provide that employees of ESB or ESB Bank may be
participants in such plans.
After the completion of the merger, but not prior to January 1, 2000, the
SHS employee stock ownership plan may, at ESB's discretion, be combined with the
ESB employee stock ownership plan; provided, however, that prior to any such
combination of the SHS ESOP and the ESB ESOP, the parties will take all
necessary action in order to amend the SHS ESOP in order to ensure that any such
combination or the merger of ESB and SHS does not accelerate (other than as
required by law or regulation) or materially increase the benefits available to
the participants in the SHS ESOP. Notwithstanding anything in the
reorganization agreement to the contrary, the parties hereto will take all
necessary action to amend the SHS ESOP in order to provide that the merger will
not accelerate (other than as required by law or regulation) or materially
increase the benefits available to any participant in the SHS ESOP, provided,
however, that SHS may amend the SHS ESOP to permit, if the merger is effective
on or prior to December 31, 1999, SHS to make its fourth quarter contribution to
the SHS ESOP as of the date the merger is effective and to delete the provision
of the SHS ESOP which requires a participant to be an employee on the last day
of the plan year in order to share in the allocation of the employer's
contributions for the 1999 plan year.
SHS Stock Options. Outstanding and exercisable options to purchase shares
of SHS common stock under SHS's 1998 Stock Option Plan (the "option plan") will
be, at each option holder's election, either converted into options to purchase
ESB common stock, with the number of shares and exercise price per share
adjusted to reflect the per share stock consideration, or canceled with a cash
payment to be made in an amount equal to the difference, if any, between the
per share cash consideration and the exercise price per share. As of
________________, 1999, the record date, the directors and executive officers of
SHS held options to purchase a total of 51,000 shares of SHS common stock. The
duration of the converted options will remain the same. Assuming the options are
cashed out, Thomas F. Angotti will receive $156,000 and all other directors and
officers will receive payments aggregating $349,440. ESB will reserve
sufficient shares of ESB common stock to allow the exercise of the converted
options after the merger.
Restricted Stock. Certain officers and directors of SHS have been awarded
shares of restricted stock under the SHS management recognition and development
plan. As of the effective date of the merger, the plan will terminate, all
unvested restricted stock (50% of the initial allocation) awarded to officers
and directors of SHS will vest and be exchanged into ESB Common Stock or cash in
accordance with the reorganization agreement.
Protection of Directors, Officers and Employees Against Claims. ESB has
also agreed to protect and hold harmless each present and former director,
officer and employee of SHS and Spring Hill Savings Bank. These people will be
protected against any costs, expenses, judgments, fines, losses, claims, or
liabilities incurred in
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connection with any claim, suit, proceeding or investigation relating to matters
existing or occurring at or prior to the completion of the merger.
Moreover, ESB will maintain SHS's and Spring Hill Savings Bank's existing
directors' and officers' insurance policy for a period of three years following
the merger, provided that annual premiums do not exceed 150% of the current
annual premium.
Management and Operations Following the Merger
ESB expects to achieve significant consolidation efficiencies following the
consummation of the merger, although there can be no assurance that the
anticipated efficiencies will be achieved. The efficiencies are expected to be
achieved primarily through the elimination of duplicative compensation costs,
computer system costs, and redundant expenses for services.
Employee Matters
Each SHS or Spring Hill Savings Bank employee whose employment is not
specifically terminated will become an employee of ESB or ESB Bank. However:
. SHS's continuing employees will not be, or act as, officers of ESB or
ESB Bank, unless elected or appointed to that position by ESB or ESB
Bank.
. All of SHS's continuing employees who remain following the completion of
the merger will be employed at the will of ESB or ESB Bank.
. No employee of SHS will become a contractual employee of ESB or ESB
Bank unless the contract is in writing with ESB or ESB Bank.
. Each SHS employee who becomes an employee of ESB or ESB Bank will be
eligible to participate in ESB or ESB Bank employee plans, on the same
basis as any newly-hired employee of ESB or ESB Bank. However, with
respect to each ESB or ESB Bank employee plan, service with SHS or
Spring Hill Savings Bank will be treated as service with ESB or ESB Bank
to determine eligibility to participate, vesting and entitlement to
benefits but not for purposes of benefit accrual. Service will not be
recognized to the extent that it would result in a duplication of
benefits.
. Each existing employment or severance agreement of SHS will be honored
by ESB. See "-Existing Employment and Severance Agreements" above for a
complete explanation.
Conditions to the Merger
The obligations of ESB and SHS to complete the merger are conditioned on
the following being satisfied at or prior to the completion of the merger:
. all corporate action necessary to authorize, execute and consummate the
reorganization agreement and the merger must have been duly and validly
taken by ESB and SHS;
. SHS's stockholders must approve the reorganization agreement;
. the requisite regulatory approvals, consents and waivers must be
obtained and all statutory waiting periods must have expired;
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. any necessary material third party consents, waivers or approvals must
be obtained or made;
. the shares of ESB common stock which will be issued to the SHS
stockholders upon completion of the merger must be authorized for
listing for quotation on the Nasdaq Stock Market;
. no approval or consent will have imposed any condition or requirement
that would materially and adversely impact the economic or business
benefits to either party giving effect to the merger;
. no party to the merger will be subject to any order, decree or
injunction that prohibits closing any of the merger's transactions;
. no statute, rule or regulation will prohibit completion of the merger's
transactions;
. the registration statement will have been declared effective by the SEC
and the SEC will not be taking actions to stop the merger from
proceeding;
. all required approvals by state securities or "blue sky" authorities
will have been obtained; and
. holders of SHS common stock who dissent from the merger under
Pennsylvania law will not hold more than 20% of the SHS common stock
immediately before the merger.
The obligations of ESB and SHS to complete the merger are also conditioned
on the following:
. all parties will have performed their respective obligations under the
reorganization agreement;
. subject to prior disclosure of any necessary qualifications, the
representations and warranties made by the parties in the reorganization
agreement will be materially true when the merger closes. Each party
will furnish the other with a certificate attesting to this fact;
. ESB and SHS will have obtained all necessary material consents or
approvals to permit ESB to assume SHS's contracts, leases and other
agreements;
. ESB and SHS will have received an opinion from their respective counsel
dated as of the completion of the merger, that the merger will be
treated for federal income tax purposes as a reorganization within the
meaning of the IRS and that as a result:
(a) no gain or loss will be recognized by ESB or SHS as a result of
the merger;
(b) no gain or loss will be recognized by the stockholders of SHS who
exchange all of their SHS common stock solely for ESB common stock
pursuant to the merger (except with respect to cash received in
lieu of a fractional share of interest in ESB common stock); and
(c) the aggregate tax basis of the ESB common stock received by
stockholders who exchange all of their SHS common stock solely for
ESB common stock pursuant to the merger will be the same as the
aggregate tax basis of the SHS common stock surrendered in exchange
therefor (reduced by any amount allocable to a fractional share
interest for which cash is received).
. the delivery to each of ESB and SHS of various letters, certificates
and other documents.
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We cannot guarantee when, or whether, the regulatory consents and approvals
necessary to complete the merger will be obtained or whether all of the other
conditions to the merger will be satisfied or waived by the party permitted to
do so. See "Regulatory Approvals Needed to Complete the Merger" below. If the
merger is not completed on or before March 31, 2000, the reorganization
agreement may be terminated by ESB's or SHS's board. However, the failure to
complete the merger by that date cannot be due to the breach of the
reorganization agreement by the party seeking to terminate.
Regulatory Approval Needed to Complete the Merger
Completion of the merger is subject to approval from the OTS. ESB has
applied to the Office of Thrift Supervision pursuant to Section 10(e)(1)(A) of
the Home Owners' Loan Act of 1933 to merge SHS with and into ESB.
The period for the OTS' review of any proposed acquisition, such as the
acquisition of SHS, commences upon receipt by the OTS of an application deemed
sufficient by the OTS. Once an application is deemed sufficient, the OTS
generally has a 60-day period for review of the application, which may be
extended by the OTS for up to an additional 30 days.
Generally, the OTS will approve an application unless it determines that
the financial and managerial resources and future prospects of the acquiror and
the savings association involved would be detrimental to the savings association
or to the Savings Association Insurance Fund or the Bank Insurance Fund, or if
the acquiror fails or refuses to furnish information requested by the OTS. The
OTS will also consider the convenience and needs of the community to be served,
and it will examine the impact of the acquisition under the relevant antitrust
laws.
OTS regulations provide that an acquiror must publish a notification, no
earlier than three calendar days before and no later than three calendar days
after filing an application, in the community in which the home office of the
savings association to be acquired is located. Generally, within 20 calendar
days of the date of filing (or up to 40 calendar days after such date if an
extension is requested in writing within the initial 20-day period), anyone may
file comments in favor of or in protest of the application and may also submit
such information as he or she deems relevant.
There can be no assurance that the necessary regulatory authorities will
approve the merger, and if the merger is approved, there can be no assurance as
to the dates of such approvals. There can also be no assurance that any such
approval will not contain a condition or requirement which would cause such
approval to fail to satisfy one of the conditions to consummation of the merger
set forth in the reorganization agreement. There can likewise be no assurance
that the Department of Justice will not challenge the merger, or if such a
challenge is made, as to the results thereof. In the event the merger is not
completed on or before March 31, 2000, the reorganization agreement may be
terminated by either ESB or SHS.
ESB is not aware of any other regulatory approvals that would be required
for completion of the merger, except as described above. If any other approvals
are required, it is presently contemplated that such approvals would be sought.
There can be no assurance that any other approvals, if required, will be
obtained.
The approval of any application merely implies the satisfaction of
regulatory criteria for approval, which do not include review of the merger from
the standpoint of the adequacy of the consideration to be received by SHS
stockholders. Further, regulatory approvals do not constitute an endorsement or
recommendation of the merger.
Conduct of Business Pending the Merger
Except as expressly provided for in the reorganization agreement and except
to the extent required by law or by regulatory authorities, ESB and SHS have
agreed that, during the period from July 21, 1999 to the completion of the
merger, SHS and Spring Hill Savings Bank will use their best efforts to:
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. conduct their business in the regular, ordinary and usual course
consistent with past practice; and
. preserve intact their business organization and advantageous business
relationships, and retain the services of their employees.
Further, except as otherwise provided in the reorganization agreement,
during the period from July 21, 1999 to the completion of the merger, SHS has
agreed that neither it nor Spring Hill Savings Bank will take certain actions
unless permitted to by ESB or permitted to or required by the reorganization
agreement. These include:
. change any provision of their articles of incorporation, bylaws or
other similar governing documents;
. except for the issuance of SHS common stock pursuant to the present
terms of stock options which are outstanding as of July 21, 1999 and
have been previously disclosed and compliance with the terms of the
stock option agreement dated July 21, 1999 (as discussed under "Certain
Related Transactions--Stock Option Agreement" on page ___), (i) change
the number of shares of its authorized or issued capital stock, (ii)
issue or grant any option, warrant, call, commitment, subscription,
award, right to purchase or agreement of any character relating to the
authorized or issued capital stock of SHS or Spring Hill Savings Bank,
or any securities convertible into shares of such capital stock, or
(iii) split, combine or reclassify any shares of its capital stock, or
redeem or otherwise acquire any shares of such capital stock;
. declare or pay any dividends on, or make other distributions in respect
of, any of its capital stock, other than normal quarterly dividends not
in excess of $0.07 per share of SHS common stock;
. (i) grant any severance or termination pay (other than pursuant to
binding contracts of SHS previously disclosed under the terms of the
reorganization agreement), to, or enter into or amend any employment,
consulting or compensation agreement with, any of its directors,
officers or employees; or (ii) award any increase in compensation or
benefits to its directors, officers or employees, except, in the case of
officers or employees, as may be granted in the ordinary course of
business and consistent with past practices and policies and except
certain employee bonuses mutually agreed upon by ESB and SHS, which
shall not exceed $50,000 in the aggregate (provided that such employees
agree in writing that the amount of any severance payments which
otherwise would become due to such employees will be reduced by the
amount of any bonus payments received hereunder);
. (i) enter into or modify (except as may be required by applicable law or
as may be required by the reorganization agreement) any pension,
retirement, stock option, stock purchase, stock grant, stock
appreciation right, savings, profit sharing, deferred compensation,
consulting, bonus, group insurance or other employee benefit, incentive
or welfare contract, plan or arrangement, or any trust agreement related
thereto, in respect of any of its directors, officers or employees; or
(ii) make any contributions to the SHS ESOP or any other defined
contribution plan or any defined benefit pension or retirement plan
other than in the ordinary course of business consistent with past
practice except that payments customarily made by SHS to the SHS ESOP at
the end of a period may be made prior to the end of such period;
. (i) sell or dispose of any significant assets or incur any significant
liabilities other than in the ordinary course of business consistent
with past practices and policies, or (ii) acquire in any manner
whatsoever (other than to realize upon collateral for a defaulted loan)
any business or entity;
. make any capital expenditures in excess of $25,000 in the aggregate,
other than pursuant to binding commitments existing as of July 21, 1999,
other than expenditures necessary to maintain
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existing assets in good repair and other than as previously disclosed
under the reorganization agreement;
. file any applications or make any contract with respect to branching or
site location or relocation, except as previously disclosed under the
reorganization agreement;
. (i) make any material change in accounting methods or practices, other
than changes required by generally accepted accounting principles, or
(ii) change any of its methods of reporting income and deductions for
federal income tax purposes, except as required by changes in laws or
regulations;
. change its lending, investment, deposit or asset and liability
management or other banking policies in any material respect except as
may be required by applicable law;
. engage in any transaction with an "affiliated person" or "affiliate," as
defined in the reorganization agreement;
. enter into any futures contract, option or other agreement or take any
other action for purposes of hedging the exposure of its interest-
earning assets and interest-bearing liabilities to changes in market
rates of interest;
. take any action that would result in any of its representations and
warranties contained in Article II of the reorganization agreement not
being true and correct in any material respect upon completion of the
merger; or
. agree to do any of the foregoing.
Except as provided in the reorganization agreement, during the period from
July 21, 1999 to the completion of the merger, ESB has agreed that neither it
nor ESB Bank will take certain actions unless permitted to by SHS or permitted
or required by the reorganization agreement. These include:
. take any action which can reasonably be expected to adversely affect or
delay the ability of ESB or SHS to perform its covenants and agreements
on a reasonably timely basis under the reorganization agreement or to
consummate the transactions contemplated under the reorganization
agreement;
. declare or pay any special cash distributions in respect of any of its
capital stock in excess of $1.00 per share, provided, however, that ESB
shall be permitted to continue to declare and pay its regular quarterly
dividends; or
. agree to do any of the foregoing.
Representations and Warranties Made by ESB and SHS in the Reorganization
Agreement
Pursuant to the execution of the reorganization agreement, both ESB and SHS
have made customary representations and warranties relating to their businesses.
For detailed information on these representations and warranties, see the
reorganization agreement attached as Appendix A. Such representations and
warranties must remain true in all material respects through the completion of
the merger unless such change does not have a material negative impact on the
party's business, financial condition or results of operations. See "Conditions
to the Merger."
What Happens if a Third Party Offers to Buy SHS
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SHS has agreed not to try to have an outside third party merge with, buy
substantial assets or liabilities of, or buy shares of capital stock of SHS or
Spring Hill Savings Bank, or any other similar transactions (an "acquisition
transaction"). However, the SHS board may provide information to anyone who
makes an unsolicited possible acquisition transaction if, after receiving advice
of counsel, it determines in the exercise of its fiduciary responsibilities that
such information should be furnished.
SHS must promptly communicate to ESB the terms of any proposed acquisition
transaction and must provide ESB with copies of (i) the written inquiry or
proposal, (ii) any written legal advice provided to the SHS board and (iii) a
written synopsis of all such oral inquiries or proposals.
Waiving and Amending Provisions In, or Terminating, the Reorganization Agreement
Prior to the completion of the merger, any provision of the reorganization
agreement may be waived, amended or modified by the parties. However, after the
vote by the stockholders of SHS, no amendment or modification may be made that
would reduce the amount to be received by SHS's stockholders under the terms of
the merger.
The reorganization agreement also may be terminated at any time prior to
the completion of the merger, either before or after approval of the merger by
the SHS stockholders by:
. the mutual consent of both parties;
. either party (i) if the merger is not completed by March 31, 2000 or
(ii) if the stockholders of SHS do not approve the reorganization
agreement. However, the failure of such occurrence cannot be due to the
breach of any representation, warranty or covenant contained in the
reorganization agreement by the party seeking to terminate;
. by either party upon written notice to the other 30 or more days after
the date upon which any application for a regulatory or governmental
approval necessary to consummate the merger shall have been denied or
withdrawn at the request or recommendation of the applicable regulatory
agency or governmental authority, unless within such 30-day period a
petition for rehearing or an amended application is filed or noticed, or
30 or more days after any petition for rehearing or amended application
is denied;
. by either party if there shall have been a material breach of any of the
covenants or agreements set forth in the reorganization agreement. Each
party must give the other party 30 days to cure the breach. The party
seeking to terminate the reorganization agreement cannot be in material
breach of any representation warranty, covenant or other agreement in
the reorganization agreement.
. by either party, if any of the applications for prior approval by third
parties and governmental bodies are denied or are approved contingent
upon the satisfaction of any non-standard condition or requirement
which, in the reasonable opinion of the ESB board, would materially
impair the value of SHS and Spring Hill Savings Bank to ESB, and the
time period for appeals and requests for reconsideration has run.
. by SHS if, at any time during the five-day period commencing with the
determination date, both of the following conditions are satisfied
(additional definitions for certain terms below are located under "-The
SHS Stockholders Will Receive Shares of ESB Common Stock and/or Cash for
Each SHS Share--Merger Consideration" on page___):
(i) the number obtained by dividing the average closing price by the
starting price (the "ESB ratio") shall be less than .80; and
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(ii) the ESB ratio shall be less than the number obtained by dividing
the final index value by the index value on the starting date and
subtracting 0.20 from the quotient in this clause (ii) (such
number being referred to herein as the "index ratio");
subject, however, to the following three sentences. If SHS elects to exercise
its termination right described above, it shall give written notice to ESB
(provided that such notice of election to terminate may be withdrawn at any time
within the aforementioned five-day period). During the five-day period
commencing with its receipt of such notice, ESB shall have the option to
increase the per share stock consideration (calculated to the nearest one one-
thousandth) to equal the lesser of (x) a number (rounded to the nearest
thousandth) obtained by dividing (A) the product of the starting price, 0.80 and
1.3 by (B) the average closing price and (y) a number (rounded to the nearest
one one-thousandth) obtained by dividing (A) the product of the index ratio and
1.3 by (B) the ESB ratio. If ESB so elects within such five-day period, it
shall give prompt written notice to SHS of such election and the revised per
share stock consideration, whereupon no termination shall have occurred (except
as the per share stock consideration shall have been so modified).
In the event of termination of the reorganization agreement by either ESB
or SHS as set forth above, the reorganization agreement shall become void and
have no effect, except that the provisions of the reorganization agreement
relating to confidentiality of information and expenses shall survive any such
termination. Notwithstanding the foregoing, neither ESB nor SHS shall be
relieved or released from any liabilities or damages arising out of its breach
of any provision of the reorganization agreement.
Accounting Treatment of the Merger
The merger will be accounted for under the purchase method of accounting in
accordance with generally accepted accounting principles. This means that ESB
and SHS will be treated as one company as of the date of the combination, and
that ESB will record the fair market value of SHS's assets and liabilities on
its financial statements. Any difference between the purchase price and the
fair value of the identifiable net assets is recorded as goodwill. The income
statements incorporate the recorded income of SHS's operations beginning at the
completion of the merger.
Federal Income Tax Consequences for SHS Stockholders
The following is a discussion of the material federal income tax
consequences of the merger to ESB, SHS and holders of SHS common stock. The
discussion is based upon the IRS, Treasury regulations, IRS rulings, and
judicial and administrative decisions in effect as of the date of this document.
This discussion assumes that SHS common stock is generally held for investment.
In addition, this discussion does not address all of the tax consequences that
may be relevant to a holder of SHS common stock in light of his or her
particular circumstances or to holders subject to special rules, such as foreign
persons, financial institutions, tax-exempt organizations, dealers in securities
or foreign currencies or insurance companies. The opinions of counsel referred
to in this section will be based on facts existing at the completion of the
merger. In rendering their opinions, counsel will require and rely upon
representations contained in certificates of officers of ESB, SHS and others.
Holders of SHS common stock should consult their tax advisors as to the
particular tax consequences to them of the merger.
It is a condition to the obligation of ESB and SHS to complete the merger
that the parties each will have received an opinion of their respective counsel,
dated as of the completion of the merger, that the merger will be treated as a
reorganization within the meaning of the IRS. In addition, such opinions will
state that:
(1) none of the companies involved in the merger will recognize a gain or
a loss;
(2) no stockholders of SHS who exchange all their SHS common stock solely
for ESB common stock will recognize a gain or a loss for exchanging
their SHS shares for ESB shares except for cash received instead of
fractional shares; and
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(3) SHS stockholders who exchange all their shares of SHS common stock
solely for shares of ESB common stock will not have their individual
tax basis or holding periods affected by exchanging their SHS shares
for ESB shares, except to the extent cash is received instead of
fractional shares.
The federal income tax consequences of the merger to a SHS stockholder
generally will depend on whether the stockholder receives cash, ESB common stock
or a combination thereof in exchange for such stockholder's SHS common stock.
No gain or loss will be recognized by a SHS stockholder who receives solely
ESB common stock in exchange for all of such stockholder's shares of SHS common
stock pursuant to the merger (except to the extent such a stockholder receives
cash in lieu of a fractional share interest in ESB common stock). Such
stockholder's tax basis in the ESB common stock received pursuant to the merger
will equal such stockholder's tax basis in the shares of SHS common stock being
exchanged reduced by any amount allocable to a fractional share interest of ESB
common stock for which cash is received. The holding period of ESB common stock
received will include the holding period of the shares of SHS common stock being
exchanged.
An SHS stockholder who receives both ESB common stock and cash
consideration in exchange for all of his or her shares of SHS common stock will
generally recognize gain, but not loss, to the extent of the lesser of:
(1) the excess of (a) the sum of the aggregate fair market value of the
ESB common stock received and the amount of cash received over (b) the
stockholder's aggregate tax basis for the shares of SHS common stock
exchanged; and
(2) the amount of cash received by such stockholder.
For this purpose, gain or loss must be calculated separately for each
identifiable block of shares surrendered in the exchange, and a loss realized on
one block of shares may not be used to offset gain realized on another block of
shares. Any such gain will be long-term capital gain if the shares of SHS
common stock exchanged were held for more than one year, unless the receipt of
cash has the effect of a distribution of a dividend under the provisions of the
IRS, in which case such gain will be treated as a dividend to the extent of such
stockholder's ratable share of the undistributed accumulated earnings and
profits of SHS. SHS stockholders should consult their tax advisors as to the
possibility that all or a portion of any cash received in exchange for their SHS
common stock will be treated as a dividend.
Such stockholder's aggregate tax basis in the ESB common stock received
pursuant to the merger will equal such stockholder's aggregate tax basis in the
shares of SHS common stock being exchanged, reduced by any amount allocable to a
fractional share interest of ESB common stock for which cash is received and by
the amount of any cash consideration received, and increased by the amount of
gain, if any, recognized by such stockholder in the merger (including any
portion of such gain that is treated as a dividend). The holding period of ESB
common stock received will include the holding period of the shares of SHS
common stock being exchanged.
An SHS stockholder who receives solely cash in exchange for all of such
stockholder's shares of SHS common stock pursuant to the merger will generally
recognize capital gain or loss in an amount equal to the difference between the
amount of cash received and the stockholder's aggregate tax basis for such
shares of SHS common stock, which gain or loss will be long-term capital gain or
loss if such shares of SHS common stock were held for more than one year. If,
however, any such SHS stockholder constructively owns shares of SHS common stock
that are exchanged for shares of ESB common stock in the merger or owns shares
of ESB common stock actually or constructively after the merger, the
consequences to such stockholder may be similar to the consequences described
above, except that the amount of consideration, if any, treated as a dividend
may not be limited to the amount of such stockholder's gain. SHS stockholders
should consult their tax advisors as to the possibility that all or a portion of
any cash received in exchange for their shares of SHS common stock will be
treated as a dividend.
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No fractional shares of ESB common stock will be issued in the merger. An
SHS stockholder who receives cash in lieu of such a fractional share will be
treated as having received such fractional share pursuant to the merger and then
as having exchanged such fractional share for cash in a redemption by ESB. An
SHS stockholder will generally recognize capital gain or loss on such a deemed
redemption of the fractional share in an amount determined by the excess of the
amount of cash received and the stockholder's tax basis in the fractional share.
Any capital gain or loss will be long-term capital gain or loss if the SHS
common stock exchanged was held for more than one year.
Selling the ESB Common Stock You Receive in the Merger
The shares of ESB common stock to be issued in the merger will be
registered under the Securities Act and will be freely transferable under the
Securities Act except for shares issued to any SHS stockholder who may be deemed
to control SHS, such as an executive officer, director or someone who owns a
significant amount of SHS's stock. These controlling persons may not sell their
shares of ESB common stock acquired in connection with the merger except under
an effective registration statement under the Securities Act covering such
shares or in compliance with an applicable exemption from the registration
requirements of the Securities Act. This document does not cover any resales of
ESB common stock received in the merger by persons who may be deemed to be
controlling persons of SHS.
You Have Dissenters' Rights in the Merger
The following discussion is not a complete statement of the law pertaining
to dissenters' rights under Pennsylvania Business Corporation Law, referred to
as the PBCL, and is qualified in its entirety by the full text of section 1930
and Subchapter D of Chapter 15 of the PBCL, which is referred to as Subchapter
D. Subchapter D is reprinted in its entirety as Appendix D to this proxy
statement/prospectus. Any SHS shareholder who desires to exercise his or her
dissenters' rights should review carefully Subchapter D and is urged to consult
a legal advisor before electing or attempting to exercise their rights. All
references in Subchapter D to a "shareholder" and in this summary to a "SHS
shareholder" or a "holder of SHS stock" are to the record holder of shares as to
which dissenters' rights are asserted.
Subject to the exceptions stated below, holders of SHS stock who comply
with the applicable procedures summarized below will be entitled to dissenters'
rights under Subchapter D. Voting against, abstaining from voting or failing to
vote on approval and adoption of the proposed merger will not constitute a
demand for appraisal within the meaning of Subchapter D.
SHS shareholders electing to exercise dissenters' rights under Subchapter D
must not vote for approval of the proposed merger. A vote by a shareholder
against the proposed merger is not required to exercise dissenters' rights.
However, if a shareholder returns a signed proxy but does not specify a vote
against the proposed merger or a direction to abstain, the proxy, if not revoked
prior to the special meeting of shareholders, will be voted for approval of the
proposed merger, which will have the effect of waiving that shareholder's
dissenters' rights. It is a condition to the closing of the merger that holders
of less than 20% of SHS's outstanding stock exercise their dissenters' rights.
What Are Dissenters' Rights? SHS shareholders who follow the procedures of
Subchapter D will be entitled to receive from SHS the fair value of their
shares, immediately before the completion of the merger. Fair value takes into
account all relevant factors but excludes any appreciation or depreciation in
anticipation of the merger. SHS shareholders who elect to exercise their
dissenters' rights must comply with all of the procedures to preserve those
rights.
Shares Eligible for Dissenters' Rights. Generally, if you chose to assert
your dissenters' rights, you must dissent as to all of the shares you own. The
PBCL distinguishes between record holders and beneficial owners. You may assert
dissenters' rights as to fewer than all the shares registered in your name only
if you are not the beneficial owner of the shares with respect to which you do
not exercise dissenters' rights.
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Record Holder Who is Not the Beneficial Owner. A record holder may assert
dissenters' rights on behalf of the beneficial owner. If you are a registered
owner and you wish to exercise dissenters' rights on behalf of the beneficial
owner, you must disclose the name and address of the person or persons on whose
behalf you dissent. In that event, your rights shall be determined as if the
dissenting shares and the other shares were registered in the names of the
beneficial holders.
Beneficial Owner Who is Not the Record Holder. A beneficial owner of SHS
common stock who is not also the record holder, may assert dissenters' rights.
If you are a beneficial owner who is not the record holder and you wish to
assert your dissenters' rights you must submit a written consent of the record
holder to the Secretary of SHS prior to the vote, but in no event later than the
SHS special meeting. You may not dissent with respect to some but less than all
shares you own.
Dissenters' Rights Procedures
Notice of Intention to Dissent. If you wish to exercise your dissenters'
rights, you must follow the procedures set forth in Appendix D. You must file a
written notice of intention to demand the fair value of your shares with the
Secretary of SHS prior to the vote, but in no event later than the SHS special
meeting. You must not make any change in your beneficial ownership of SHS
shares from the date you file the notice until the effective time of the merger.
You must refrain from voting your shares for the adoption of the merger.
Notice of Approval. If the SHS shareholders approve the merger, SHS will
mail a notice to all dissenters' who filed a notice of intention to dissent
prior to the vote on the merger proposal and who refrained from voting for the
adoption of the merger. SHS expects to mail the notice of approval promptly
after the merger. The notice of approval will state where and when a demand for
payment must be sent and where the certificates for eligible shares must be
deposited in order to obtain payment. The notice of approval will also supply a
form for demanding payment which includes a request for certification of the
date on which the holder, or the person on whose behalf the holder dissents,
acquired beneficial ownership of the shares. The demand form will be
accompanied by a copy of Subchapter D.
If you assert your dissenters' rights, you must ensure that SHS receives
your demand form and your certificates on or before the demand deadline. All
mailings to SHS are at your risk. Accordingly, SHS recommends that your notice
of intention to dissent, demand form and stock certificates be sent by certified
mail only, by overnight courier or by hand delivery.
If you fail to file a notice of intention to dissent, fail to complete and
return the demand form, or fail to deposit stock certificates with SHS, each
within the specified time periods, you will lose your dissenters' rights under
Subchapter D. You will retain all rights of a shareholder, or beneficial owner,
until those rights are modified by completion of the merger.
Payment of Fair Value by SHS. Upon timely receipt of the completed demand
form, the PBCL requires SHS to either: remit to dissenters' who complied with
the procedures, the amount SHS estimates to be the fair value for such
dissenting shares; or give written notice that no such remittance will be made.
SHS will determine whether to make such a remittance or to defer payment
for such shares until completion of the necessary appraisal proceedings. SHS
may consider the number of shares, if any, with respect to which shareholders
dissented and any objections that may be raised with respect to the standing of
the dissenting shareholder.
The remittance or notice will be accompanied by: (i) the closing balance
sheet and statement of income of SHS for the fiscal year ended December 31, 1998
or the latest available interim financial statements; (ii) a statement
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of SHS's estimate of the fair value of the shares; and (iii) notice of the right
of the dissenter to demand payment or supplemental payment, as the case may be,
accompanied by a copy of Subchapter D.
Return of Deposited Certificates. If SHS does not remit the amount of its
estimate of the fair value of the shares, it will return any deposited
certificates with a notation that a demand for payment in accordance with
Subchapter D has been made. If shares carrying this notation are transferred
after that, each new certificate issued may bear a similar notation, together
with the name of the original dissenting holder or owner of such shares. A
transferee of such shares will not acquire by this transfer any rights in SHS
other than those which the original dissenter had after making demand for
payment of their fair value.
Dissenting Shareholders Estimate of Fair Value. If SHS gives notice of its
estimate of the fair value of your shares, without remitting this amount, or
remits payment of its estimate of the fair value of your shares and you believe
that the amount remitted or stated is less than the fair value of such shares,
you may send to SHS your own estimate of the fair value of the shares. Such
estimate shall be deemed a demand for payment of the amount of the deficiency.
If you do not file a holder's estimate within 30 days after the mailing by SHS
of its remittance or notice, you will only be entitled to the amount stated in
the notice or remitted to you by SHS.
Resort to Court for Relief. If, after the later of, 60 days after the
completion of the merger or after the timely receipt of any holder's estimate,
demands remain unpaid, SHS may file an application for relief, requesting the
court determine the fair value of the shares. We cannot assure you that SHS
will file this application.
In the court proceeding, all dissenters, wherever residing, whose demands
have not been settled will be made parties to any such appraisal proceeding.
The court may appoint an appraiser to receive evidence and recommend a decision
on the issue of fair value. Each dissenter made a party will be entitled to
recover an amount equal to the fair value of the dissenter's shares, plus
interest, or if SHS previously remitted any amount to the dissenter, any amount
by which the fair value of the dissenter's shares is found to exceed the amount
previously remitted, plus interest.
If SHS fails to file an application for relief, any dissenter who made a
demand and who has not already settled his or her claim against SHS may file an
application for relief in the name of SHS any time within 30 days after the
later of the expiration of the 60-day period after the merger or the timely
receipt of any holder's estimate. If a dissenter does not file an application
within the 30-day period, each dissenter entitled to file an application shall
be paid SHS's estimate of the fair value of the shares and no more, and may
bring an action to recover any amount not previously remitted.
Costs and Expenses of Court Proceedings. The costs and expenses of the
court proceedings, including the reasonable compensation and expenses of the
appraiser appointed by the court, will be determined by the court and assessed
against SHS. The court may, however, apportion and assess any part of the costs
and expenses of court proceedings as it deems appropriate against all or some of
the dissenters' who are parties and whose action in demanding supplemental
payment the court finds to be in bad faith. If SHS fails to comply
substantially with the requirements of Subchapter D, the court may assess fees
and expenses of counsel and of experts for the parties as it deems appropriate
against SHS and in favor of any or all dissenters. The court may assess fees and
expenses of counsel and experts against either SHS or a dissenter, if the court
finds that a party acted in bad faith. If the court finds that the services of
counsel for any dissenter substantially benefitted other dissenters' similarly
situated and should not be assessed against SHS, it may award counsel reasonable
fees to be paid out of the amounts awarded to the dissenters' who benefitted.
No Right to an Injunction. Under Pennsylvania corporate law, a SHS
shareholder has no right to obtain, in the absence of fraud or fundamental
unfairness, an injunction against the merger proposal, nor any right to
valuation and payment of the fair value of the holder's shares because of the
merger proposal, except to the extent provided by the dissenters' rights
provisions of Subchapter D. Pennsylvania corporate law also provides that,
absent fraud or fundamental unfairness, the rights and remedies provided by
Subchapter D are exclusive.
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Who Pays for What
All costs and expenses incurred in connection with the merger will be paid
by the party incurring such expense. However, ESB will bear all costs of
printing, mailing and filing this document.
When Will the Merger be Completed
The merger will become effective at the time set forth in the articles of
merger that will be filed with the Secretary of State of the Commonwealth of
Pennsylvania. The articles of merger will be filed on the fifth business day
following the satisfaction or waiver of certain conditions to the merger, unless
another date is agreed to in writing by ESB or SHS. See "-Conditions to the
Merger." The closing of the transactions contemplated by the reorganization
agreement is expected to take place as of the date of such filing. It is
expected that a period of time will elapse between the SHS meeting and the
completion of the merger while the parties seek to obtain the regulatory
approval required to complete the merger. There can be no assurance that such
regulatory approval will be obtained, and if obtained, there can be no assurance
as to the date of any such approval. There can likewise be no assurance that
the Department of Justice will not challenge the merger or, if such a challenge
is made, the result of the challenge. See "-Regulatory Approval Needed to
Complete the Merger." The reorganization agreement may be terminated by either
party if, among other reasons, the merger has not been completed on or before
March 31, 2000. See "-Waiving and Amending Provisions In, or Terminating, the
Reorganization Agreement."
CERTAIN RELATED TRANSACTIONS
Stock Option Agreement
The following is a summary of the material provisions of the stock option
agreement between ESB and SHS, which is attached hereto as Appendix B. The
following summary is qualified in its entirety by reference to the stock option
agreement. Execution of the stock option agreement was a condition to the
parties entering into the reorganization agreement.
Concurrently with the execution of the reorganization agreement, ESB and
SHS entered into the stock option agreement which will permit ESB, under certain
circumstances, to purchase up to 14.97% of SHS's issued and outstanding common
stock (up to 115,000 shares) at a price of $11.00 per share (the number of
shares covered by the stock option agreement and the purchase price are subject
to adjustment in certain circumstances). The stock option agreement is designed
to enhance the likelihood that the merger will be successfully consummated in
accordance with the terms contemplated by the reorganization agreement and ESB
insisted on such agreement for that reason.
ESB may only exercise the option (assuming it is not in material breach of
its agreements and covenants in the reorganization agreement) if SHS, without
ESB's approval:
. has entered into an agreement to undertake an acquisition transaction
(as defined below) with anyone other than ESB or one of its
subsidiaries;
. SHS's board recommends that SHS's stockholders approve or accept any
acquisition transaction with any party other than ESB or one if its
subsidiaries or withdraws or modifies (or announces that it intends to
do so) in any manner adverse to ESB its recommendation that SHS's
stockholders approve the reorganization agreement;
. any person other than ESB and certain parties owning in excess of 15% of
SHS's common stock on July 21, 1999 acquire beneficial ownership of 15%
or more of SHS's outstanding common stock;
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. any party other than ESB or one of its subsidiaries make a public
proposal to SHS or its shareholders to undertake an acquisition
transaction;
. any person other than ESB or its subsidiaries files a registration
statement or tender offer materials with the SEC calling for an
"acquisition transaction" with SHS;
. after a party approaches SHS concerning an acquisition transaction, SHS
breaches the reorganization agreement in a manner which would permit ESB
to terminate the reorganization agreement; or
. any person other than ESB or its subsidiaries files regulatory
applications calling for an acquisition transaction with SHS (each of
the foregoing events constituting an initial triggering event) and after
such initial triggering event occurs:
. any person acquires 25% or more of SHS's outstanding common
stock;
. SHS terminates the reorganization agreement to pursue the
acquisition transaction; or
. a person proposing an acquisition transaction acquires 15%
or more of SHS's outstanding common stock.
For purposes of the stock option agreement, an acquisition transaction
means:
. a merger or consolidation involving SHS;
. a purchase, lease or sale by SHS of all or a substantial portion of its
assets or deposits;
. a purchase or other acquisition by any person of 15% or more of SHS's
outstanding voting securities; or
. any similar transaction.
If a triggering event has not yet occurred, the stock option agreement will
terminate:
. at the completion of the merger;
. upon termination of the reorganization agreement, unless the
reorganization agreement is terminated by ESB due to a willful breach of
the reorganization agreement by SHS; or
. 12 months after the termination of the reorganization agreement if the
reorganization agreement is terminated by ESB because of a willful
breach by SHS or after the occurrence of an initial triggering event.
The stock option agreement is intended to increase the likelihood that the
merger will be completed. Consequently, certain aspects of the stock option
agreement may have the effect of discouraging persons who might now or prior to
the completion of the merger be interested in acquiring all of or a significant
interest in SHS from considering or proposing such an acquisition. The
acquisition of SHS or a significant interest therein, or an agreement to acquire
all or part of SHS, could cause the option granted under the stock option
agreement to become exercisable. The existence of the stock option agreement
could significantly increase the cost to a potential acquiror of acquiring SHS
compared to its cost had the stock option agreement not been entered into. Such
increased cost might discourage a potential acquiror from considering or
proposing an acquisition. Moreover, SHS's management
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<PAGE>
believes that the exercise of the option granted under the stock option
agreement is likely to prohibit any acquiror from accounting for an acquisition
of SHS using the pooling-of-interests accounting method for a period of two
years following such exercise. Consequently, the existence of the stock option
agreement may deter significantly, or completely prevent an acquisition of SHS
by certain other companies. The SHS board took this factor into account before
approving the merger stock option agreement. See "The Merger-SHS's Reasons for
the Merger-Recommendation of the SHS Board of Directors."
Stockholders Agreement
In conjunction with the reorganization agreement and the option agreement,
ESB has also entered into a stockholders agreement with each of the directors
and certain officers of SHS. Pursuant to such stockholders agreement, the
directors and certain officers of SHS have agreed, among other things, not to
sell, pledge, transfer or otherwise dispose of his or her shares of SHS common
stock prior to the record date established in connection with the special
meeting and to vote such shares of SHS common stock in favor of the
reorganization agreement, and against any plan or proposal pursuant to which SHS
is to be acquired by or merged with, or pursuant to which SHS proposes to sell
all or substantially all of its assets and liabilities to, any person, entity or
group (other than ESB or any affiliate thereof).
40
<PAGE>
BENEFICIAL OWNERSHIP OF SHS COMMON STOCK BY SHS MANAGEMENT
The following table includes, as of the record date, certain information as
to the SHS common stock beneficially owned by (i) the only persons or entities,
including any "group" as that term is used in Section 13(d)(3) of the Exchange
Act, who or which were known to SHS to be the beneficial owner of more than 5%
of the issued and outstanding SHS common stock, (ii) the directors of SHS, (iii)
certain executive officers of SHS, and (iv) all directors and executive officers
of SHS as a group.
<TABLE>
<CAPTION>
Number of Shares
Beneficially Owned as of Percent of Shares
Beneficial Owner September 30, 1999 (1) Outstanding
- ------------------------------------------------------ -------------------------- -----------------
<S> <C> <C>
Spring Hill Savings Bank, FSB 65,455 8.5%
Employee Stock Ownership Plan Trust
Jeffrey L. Gendell 69,900(2) 9.1%
Tontine Financial Partners, L.P.
Tontine Management, L.L.C.
Tontine Overseas Associates, L.L.C.
200 Park Avenue, Suite 3900
New York, New York 10166
Directors:
Guy Dille 7,140(5) *
George C. Dorsch 6,493(5) *
Edward W. Preskar 6,640(5) *
Thomas F. Angotti** 17,062(3)(5) 2.22%
Vincent C. Ashoff*** 14,311(4)(5) 1.86%
Charles W. Hergenroeder III 2,940(5) *
All directors and executive officers of SHS as a group 54,586(5) 7.11%
(six persons)
</TABLE>
_______________
* Represents less than 1% of the outstanding SHS Common Stock.
** Mr. Angotti is also chief executive officer of SHS.
*** Mr. Ashoff is also chief financial officer of SHS.
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to
be the beneficial owner, for purposes of this table, of any shares of SHS
common stock if he or she has voting or investment power with respect to
such security. The table includes shares owned by spouses, other immediate
family members in trust, shares held in retirement accounts or funds for
the benefit of the named individuals, and other forms of ownership, over
which shares the persons named in the table may possess voting and/or
investment power. Shares held in accounts under the Spring Hill Savings
Bank's ESOP, as to which the holders have voting power but not investment
power, are included as follows: Mr. Angotti, 1,109 shares; and Mr. Ashoff,
812 shares.
(2) Information concerning the shares owned by Mr. Gendell and related entities
was obtained from a Schedule 13D dated December 3, 1997. According to this
filing, Mr. Gendell, has shared voting and dispositive power with respect
to 69,900 shares, Tontine Financial Partners, L.P. has shared voting and
dispositive power with respect to 54,000 shares, Tontine Management, L.L.C.
has shared voting and dispositive power with respect to 54,000 shares, and
Tontine Overseas Associates, L.L.C. has shared voting and dispositive power
with respect to 15,900 shares.
(3) Includes 3,825 shares owned by Mr. Angotti's spouse.
(4) Includes 3,500 shares owned by Mr. Ashoff's spouse.
(5) Includes restricted stock granted under the management recognition and
development plan.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SHS
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of SHS. The information contained in this section should
be read in conjunction with the audited consolidated financial statements and
accompanying notes included elsewhere herein.
General
SHS is a unitary savings and loan holding company incorporated under the
laws of the Commonwealth of Pennsylvania for the purpose of serving as the
holding company of Spring Hill Bank. Spring Hill Savings Bank converted from
mutual to stock form on September 30, 1997, and became a wholly-owned subsidiary
of SHS. In connection with the conversion, SHS completed the sale of 819,950
shares of SHS Common Stock at $10 per share and received proceeds of $7,059,047,
which is net of conversion costs of $484,493 and $655,960 loaned to Spring Hill
Savings Bank's Employee Stock Ownership Plan ("ESOP") for the purchase of shares
in the conversion. SHS's principal business has been limited to the business of
Spring Hill Savings Bank. To aid in the comparative analysis, SHS's operations
are measured against those of Spring Hill Savings Bank for periods preceding
SHS's formation.
Operating Strategy
Spring Hill Savings Bank's principal business consists of attracting
deposits from the general public in the areas surrounding its branch offices and
using those funds, together with funds generated from operations and borrowings,
to originate residential mortgage loans secured by owner occupied and non-owner
occupied one-to-four family properties within Spring Hill Savings Bank's primary
market area. To a lesser extent, Spring Hill Savings Bank also originates loans
secured by multi-unit buildings, single-family builder construction, and
commercial real estate properties, as well as secured and unsecured consumer
installment loans. During 1998, Spring Hill Savings Bank increased the level of
construction/permanent financing to borrowers for new construction of single-
family properties. These construction loans, referred to as "owner-builder"
loans, are based on a plan and materials package provided by a nationally
recognized company and are highly structured in which the owner functions as the
general contractor with loan disbursements scheduled upon regular inspections.
These loans convert into permanent mortgages of a fixed term after the
completion of construction. The total of these owner-builder commitments
originated in 1998 was $4,777,000 of which $2,591,000 had been disbursed as of
December 31, 1998. As of December 31, 1998, one loan with a total commitment
balance of $115,000 had been completed and converted to a permanent mortgage.
To complement its loan portfolio and to assist in asset/ liability management,
Spring Hill Savings Bank maintains a portfolio of investment and mortgage-backed
securities.
Spring Hill Savings Bank has been, and intends to continue to be, a
community oriented financial institution. Spring Hill Savings Bank's goals
include: (1) serving the borrowing and savings needs of Spring Hill Savings
Bank's communities, (2) maintaining strong asset quality, (3) controlling the
exposure of earnings to fluctuations in interest rates, and (4) maintaining a
stable and adequate stream of earnings.
The profitability of Spring Hill Savings Bank's operations depends
primarily on its net interest income, which is the difference between the
interest income it receives on its interest-earning assets, principally loans,
mortgage backed securities and other investments, and the interest expense on
its interest-bearing liabilities, principally deposits and borrowings. Spring
Hill Savings Bank's net income is also affected by its level of non-interest
income, non-interest expenses, its provision for loan losses, and income taxes.
Non-interest income is comprised of service fees, gain/(loss) on the sale of
securities and miscellaneous fees and income. Non-interest expenses include
compensation and employee benefits, occupancy and equipment expenses, data
processing expenses, deposit insurance premiums and other miscellaneous
operating costs.
The financial condition and results of operations of Spring Hill Savings
Bank are significantly affected by prevailing economic conditions, competition
and the monetary, fiscal and regulatory policies of governmental
42
<PAGE>
agencies. Lending activities are influenced by the general demand for and supply
of credit, competition among the varied lenders and the level of interest rates
in Spring Hill Savings Bank's market areas. Spring Hill Savings Bank's deposit
flows and cost of funds are influenced by prevailing market rates of interest,
including competing types of investments, as well as account maturities and the
levels of personal income and savings within Spring Hill Savings Bank's market
area.
Comparison of Financial Condition
Total assets increased $1,759,000, or 2.0%, from $89,414,000 at December
31, 1998 to $91,173,000 at June 30, 1999. This growth is the result of
increases in the total investment portfolio and in the balance of loans
receivable. These increases were partially offset by the change in cash and
cash equivalents, which decreased $847,000, or 10.7%, from $7,949,000 at
December 31, 1998 to $7,102,000 at June 30, 1999. The total investment
portfolio, inclusive of mortgage-backed securities and exclusive of short-term
investments, increased $1,780,000 or 8.3%, from $21,340,000 at December 31, 1998
to $23,120,000 at June 30, 1999. During the same period, loans receivable
increased $1,096,000, or 1.9%. The divestment of funds from cash and cash
equivalents and the funds received from the increase in deposits were used to
fund investment security purchases as well as loan originations.
Total assets increased by $1,162,000, or 1.3%, to $89,414,000 at December
31, 1998 from $88,252,000 at December 31, 1997. Cash and cash equivalents,
investment securities and mortgage-backed securities increased an aggregate
$1,597,000, or 5.8%, to $29,289,000 at December 31, 1998 from $27,692,000 at
December 31, 1997. During the year, loans receivable decreased $618,000, or
1.1%, to $57,307,000 from $57,925,000. Interest rates have remained at lower
levels since declining in the fourth quarter of 1997. This lower rate
environment has resulted in higher levels of loan refinancings and early
repayments. The modest decline in loan balances is the result of principal
repayments and prepayments exceeding the level of new loan disbursements during
the year. During 1998, Spring Hill Savings Bank provided an increased level of
construction/permanent financing to borrowers for new construction of single-
family properties. Referred to as "owner-builder", these loans convert to
permanent financing after completion of the construction project. The total of
these owner-builder commitments originated in 1998 was $4,777,000 of which
$2,591,000 had been disbursed as of December 31, 1998.
During the first six months of 1999, total liabilities increased
$1,615,000, or 2.1%, to $79,428,000. Total deposits increased $1,914,000, or
2.8%, during the period. The increase in deposits was partially offset by a
modest decline in non-deposit liabilities, primarily borrowed funds. The
increase in advances by borrowers for taxes and insurance results from a timing
difference in the monthly receipt of these escrowed funds from Spring Hill
Savings Bank's mortgage customers and the payment of tax bills on the respective
properties.
Total liabilities increased $1,576,000, or 2.1%, during 1998 from
$76,237,000 to $77,813,000. Deposits increased $3,153,000, or 4.9%, to
$67,666,000 at December 31, 1998 from $64,513,000 at December 31, 1997. On
March 16, 1998, Spring Hill Savings Bank opened a branch office in Pittsburgh's
Brighton Heights community. Deposits at this new location totaled $2,341,000 at
December 31, 1998. The increase in deposits was partially offset by a reduction
in borrowed funds which occurred in the form of a slight decline to Federal Home
Loan Bank ("FHLB") borrowings and repayment of the remaining principal balance
on the Collateralized Mortgage Obligation ("CMO"). Collectively, these
borrowings declined $1,514,000 during the year, or 14.8%, to $8,743,000.
Total stockholders' equity declined $415,000, or 3.4%, from $12,015,000 at
December 31, 1997 to $11,600,000 at December 31, 1998. Stockholders' equity
decreased primarily from SHS's repurchase of its outstanding common shares to
establish the Management Recognition and Development Plan ("MRDP") and to
establish Treasury stock in accordance with a stock repurchase plan that
received regulatory approval on November 24, 1998. The decline in stockholders'
equity related to the stock repurchase and creation of the MRDP was partially
offset by the increase in retained earnings.
The repurchase plan was initiated so that the establishment of the MRDP
would not be dilutive through the issuance of additional shares. The repurchase
plan allows for the acquisition through open market purchases and unsolicited
transactions of up to 14% of the outstanding common, or 114,793 shares. During
December 1998, SHS repurchased 32,798 shares of it's common stock at an average
price of $12.875 to fund the MRDP. Additionally, during this period SHS
repurchased 45,152 shares of its common stock, at an average cost of $12.8955
per share, to be maintained in treasury.
Retained earnings increased $378,000, or 7.6%, from $4,960,000 at December
31, 1998 to $5,338,000 at December 31, 1997. This increase results from 1998
net income of $476,000, less dividends paid during the year of $98,000.
Dividends were paid on outstanding shares, excluding the unreleased ESOP shares.
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<PAGE>
Comparison of Operating Results for the Six Months Ended June 30, 1999 and 1998
Net Income. Net income decreased $52,000 to $262,000 for the six months
ended June 30, 1999 compared to $314,000 for the same period in 1998. This
decline was primarily due to a decrease in noninterest income, largely the
result of a one time gain on property of $66,000 that was realized in 1998.
Additionally, noninterest expense increased in 1999 compared to 1998 but this
was partially offset by an increase in net interest income.
Net Interest Income. Net interest income increased $47,000, or 3.3%, from
$1,434,000 for the six months ended June 30, 1998 compared to $1,481,000 for the
comparable period in 1999. The improved net interest income for the comparable
periods is the result of decreased interest expense, partially offset by a
decrease in interest income. The interest rate spread, or the difference
between the weighted average yields on interest earning assets and interest
bearing liabilities, improved to 2.88% in the first six months of 1999 compared
to 2.79% for the same period in 1998 as the yields on assets declined less than
the yield costs on liabilities. The improvement in the interest rate spread is
due to the lower weighted average yield on interest bearing liabilities as a
result of the improved liability structure from the payoff of the higher costing
CMO debt in October 1998.
Interest Income. Total interest and dividend income for the first six
months decreased $21,000, or 1.0%, in 1999 as compared to 1998. The decrease in
interest income was due to the decrease in the yield earned on these assets.
Although the average of interest-earning assets for the period ended June 30,
1999 exceeded average interest-earning assets for the same period in 1998 by
$2,756,000, the yield earned on these assets declined 29 basis points (0.29%) to
7.54% in 1999 compared to 7.83% in 1998. This reduction in yield is due to the
lower reinvestment rates prevalent in the market compared to the yields on the
principal repayments on the loan and investment portfolio.
Interest Expense. Total interest expense for the period decreased $68,000,
or 3.6%, to $1,828,000 in 1999, as compared to $1,896,000 in 1998. This
decrease resulted from the difference in interest expense recognized on the CMO
debt, which was paid-off in October 1998. Additionally, the lower rate
environment resulted in a reduced yield paid on deposits. The weighted average
yield on deposit accounts declined 28 basis points (.28%) to 4.48% for the first
six months of 1999 compared to 4.76% in 1998. This, however, was offset by
growth in deposit balances. Average deposits for the first six months of 1999
increased $3,936,000 to $69,914,000 as compared to $65,978,000 for the
comparable period in 1998.
Provision for Loan Losses. No provision for loan losses was charged to
earnings for the six months ended June 30, 1998 compared to $27,000 during the
same period in 1999. The additional provision expensed this period was due to
the reduction in the allowance for loan losses as a result of net charge-offs of
$42,000 realized during the period.
Non-interest Income. Total non-interest income decreased $72,000, or
60.5%, to $47,000 in 1999, as compared to $119,000 in 1998. The decrease was
the result of a one-time gain of $66,000 that was realized on property acquired
during the first quarter of 1998. The gain was due to the value of the property
exceeding the acquisition cost. Spring Hill Savings Bank has used the property
to open a new branch location.
Non-interest Expense. Total non-interest expense for the first six months
increased by $32,000 to $1,073,000 in 1999 compared to $1,041,000 in 1998. This
resulted primarily from an increase in compensation and employee benefits
expense which was partially offset by a decrease in other operating expenses.
Compensation and employee benefits expense rose $89,000 in 1999 compared to
1998. This increase is partly due to $41,000 of expense recognized in the first
six months of 1999 for the management recognition and development plan that
was adopted on October 1, 1998. This expense represents the market price of SHS
common stock as of the grant date multiplied by the number of shares earned by
all eligible employees during the period. Salary expense also increased in part
during the first six months of 1999 as compared to the same period in 1998
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due to an increase in staffing for the additional branch opened in March of 1998
as well as from general salary increases.
Other operating expenses decreased $65,000 in 1999 compared to 1998. This
decrease in operating expenses is the result of several factors, including: one
time expenses incurred last year which were related to opening a new branch;
expenses that were recognized in 1998 for the operation of Spring Hill Funding
Corp., the CMO, which was dissolved in December 1998; and, a net gain of $10,000
that was recognized in 1999 from the sale of foreclosed property, whereas in
1998, no gain or loss was recognized.
Income Taxes. Income tax expense decreased $31,000 to $166,000 in 1999 as
a result of the lower level of pre-tax income.
Comparison of Operating Results for the Years Ended December 31, 1998 and 1997
Net Income. SHS had net income of $476,000 for the year ended December 31,
1998, compared to net income of $71,000 in 1997. The increase in net income for
1998 was the result of an extraordinary charge of $563,000 (net of related
income tax benefit of $400,000) that was recorded in the three month period
ended March 31, 1997. The extraordinary loss was recorded upon the purchase and
extinguishment of a significant portion of Spring Hill Savings Bank's CMO debt
issuance. After tax income before the extraordinary charge was $476,000 for
December 31, 1998, compared to $633,000 at December 31, 1997. This decline of
$157,000 was the result of a non-recurring charge of $119,000 that was taken in
1998 to close the defined benefit plan ("Pension Plan") and an increase to
noninterest expense, that was only partially offset by an increase in net
interest income.
Net Interest Income. Net interest income increased $339,000, or 13.2%,
from $2,567,000 for the twelve months ended December 31, 1997 to $2,906,000 for
1998. The improved net interest income was primarily the result of the higher
average level of interest earning assets to interest bearing liability balances.
For the twelve months ended December 31, 1998, the ratio of average interest
earning assets to average interest bearing liabilities was 113.2% as compared to
105.9% in 1997. The twelve month average balance of interest earning assets
less interest bearing liabilities increased $5,311,000 to $9,905,000 in 1998.
This increase resulted from the higher level of capitalization in 1998 which is
primarily due to the proceeds received from the stock offering on September 30,
1997. The interest rate spread, or the difference between the weighted average
yields on interest earning assets and interest bearing liabilities, remained
unchanged. Both the twelve months ended December 31, 1998 and 1997 yielded an
interest spread of 2.83% as lower average asset yields were offset with lower
average liability costs.
Interest Income. Total interest income increased $57,000, or 0.9%, in 1998
as compared to 1997. This modest increase in interest income was primarily the
result of an increase in the average level of interest earning assets which were
$2,807,000 higher in 1998 as compared to 1997. Although the average level of
interest earning assets increased during 1998, asset yields declined 20 basis
points (.20%) from 8.03% for the year ended 1997 to 7.83% in 1998 due to the
lower market interest rates. Interest income on loans receivable and dividends
from FHLB stock were essentially unchanged for the two years. Interest income
on mortgage backed securities declined $199,000 in 1998 as compared to the year
1997. This decline was partially offset by an increase to interest income on
investment securities of $148,000 in the year 1998 as compared to 1997.
Interest on deposits with other banks increased $120,000 in 1998 as compared to
1997.
Interest Expense. Total interest expense declined $282,000, or 7.0%, in
1998 to $3,754,000 as compared to $4,036,000 in 1997. Interest expense declined
$150,000 due to the lower average cost on interest bearing liabilities. This
lower cost of funds resulted from the reduction of the CMO debt relative to
deposits and FHLB advance borrowings. Interest expense on the CMO decreased
$269,000 between the two years. This shift in the composition of liabilities
resulted in a reduction in interest cost. The yield cost on average interest
bearing liabilities was 5.00% during 1998 compared to 5.20% for 1997 a decline
of 20 basis points matching the decline in the yield on assets. Additionally,
interest expense declined $130,000 between the two years due to the $2,505,000
decline in the average balance of interest bearing liabilities in 1998 as
compared to 1997.
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Provision for Loan Losses. Provision for loan losses totaled $20,000 in
1998 as compared to $70,000 in 1997. This was due to the improved level of
recoveries versus loan charge-offs between the two years. During 1998, net
charge-offs to the allowance for loan losses totaled $19,000. In 1997, net loan
charge-offs totaled $44,000 while additional provisions for loan losses were
established due to the growth in the loan portfolio.
Non-interest Income. Non-interest income decreased $17,000 to $175,000 in
1998 compared to $192,000 in 1997. The decrease was the result of a one-time
gain of $123,000 that was realized in 1997 on the early redemption of a CMO
residual investment. This was partially offset by the increase in other income
in the first quarter of 1998, which resulted primarily from a one-time gain of
$66,000 that was realized on property acquired during the period. There was a
gain because the value of the property exceeded the acquisition cost. Spring
Hill Savings Bank acquired the property and opened a new branch location on
March 16, 1998. Additionally, other income increased as a result of fees
related to construction inspections for the owner-builder loans.
Non-interest Expense. Total non-interest expense increased by $609,000 to
$2,262,000 in 1998 compared to $1,653,000 in 1997. The significant increase in
non-interest expense resulted from the implementation of new benefit programs, a
non-recurring charge to close Spring Hill Savings Bank's pension plan, expenses
related to the first year of operating as a public company, and expenses related
to the opening of a new branch.
Compensation and employee benefits rose $254,000 in 1998 compared to 1997.
The increase in compensation expense is partly due to ESOP expense of $97,000 in
1998, as compared to $27,000 in 1997. This increase reflects a full year's
expense compared to three months in 1997. Additionally, compensation expense of
$82,000 was recognized during the fourth quarter of 1998 for the allocation of
shares in connection with the MRDP, adopted October 1, 1998. The plan consists
of 32,798 shares of SHS's common stock that were granted to the plan
participants subject to vesting. One-quarter of the shares will be released
every January 1, beginning in 1999 and continuing through 2002. The $82,000
expense represents the accrual for the release of 8,200 shares on January 1,
1999 at a par value of $10 per share. This $82,000 expense will again be
recognized in the three succeeding calendar years. Compensation expense also
increased in 1998, as compared to 1997, due to an increase in staffing for the
additional branch opened in March 1998, as well as annual employee salary
increases.
During 1998, Spring Hill Savings Bank received the required approvals and
had an actuarial analysis performed to establish final distributions from the
Pension Plan. In closing the Pension Plan, Spring Hill Savings Bank incurred a
one-time charge of $119,000. The plan was closed to reduce the future benefit
expenses related to the pension in order to offset a portion of future ESOP
expense.
Occupancy and equipment expenses increased $42,000 to $250,000 in 1998.
This increase results from expenses related to renovations to the Beechview
office, the relocation of the North Shore offices and expenses related to
opening the new branch office. Professional fees increased $39,000 to $114,000
in 1998 as compared to $75,000 in 1997. The increase results in part from
fourth quarter expenses of $12,000 associated with the termination of Spring
Hill Savings Bank's financing subsidiary. The remaining increase results
primarily from various expenses related to completing and submitting the
required filings as a public company. Data processing expenses increased
$24,000 to $214,000 in 1998 as compared to $190,000 in 1997 as a result of
higher processing costs, increased check and deposit activity and increased
transaction processing costs related to the addition of two ATM's. Other
operating expenses increased $131,000, comprised in part of increased marketing
expenses, higher printing costs for promotional materials and shareholder
publications, other expenses related to being a public company including stock
transfer services and year 2000 related expenses.
Income Taxes. Income tax expense decreased $79,000 to $324,000 in 1998 as
a result of the decrease in pre-tax income.
46
<PAGE>
Impact of Inflation and Changing Prices
The financial statements and related financial data presented herein have
been prepared in accordance with GAAP, which requires measurement of financial
position and operating results in terms of historical dollars, without
considering changes in relative purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of Spring Hill Savings
Bank's assets and liabilities are monetary in nature. As a result, interest
rates generally have a more significant impact on a financial institution's
performance than does the effect of inflation.
47
<PAGE>
Average Balances, Interest, and Yields/Cost
The table below sets forth certain information for the years and at the
date indicated. This information includes average balances of assets and
liabilities as well as the total dollar amounts of interest income from average
interest-earning assets and interest expense on average interest-bearing
liabilities and average yields and costs. Such yields and costs for the years
indicated are derived by dividing income or expense by the average monthly
balance of assets or liabilities, respectively, for the years presented.
<TABLE>
<CAPTION>
As of
December 31, Year Ended December 31,
------------ -------------------------------------------------------------------------
1998 1998 1997
------------ ------------------------------------ -----------------------------------
Weighted Average Interest and Average Average Interest and Average
Yield/Rate Balance Dividends Yield/Cost Balance Dividends Yield/Cost
------------ -------- ------------ ------------ -------- ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1).................... 8.29% $56,851 $4,816 8.47% $56,355 $4,828 8.57%
Investment securities(2)................ 6.61 5,407 354 6.55 2,937 206 7.01
Mortgage-backed securities.............. 6.83 16,566 1,139 6.88 18,992 1,338 7.05
Other interest-earning assets........... 4.92 6,226 351 5.64 3,959 231 5.83
------- ------ ------- ------
Total interest-earning assets.......... 7.69 85,050 6,660 7.83 82,243 6,603 8.03
Non-interest-earning assets.............. 2,902 2,418
------- -------
Total assets.......................... $87,952 $84,661
======= =======
Interest-bearing liabilities:
NOW and money market accounts........... 2.68 10,036 289 2.88 9,950 286 2.87
Savings accounts........................ 3.17 12,382 382 3.09 13,136 409 3.11
Time certificates of deposit............ 5.53 43,939 2,489 5.66 43,415 2,467 5.68
Collateralized mortgage obligation...... -- 598 73 12.21 2,921 342 11.71
Borrowed funds.......................... 6.14 8,189 521 6.36 8,227 532 6.47
------- ------ ------- ------
Total interest-bearing liabilities..... 4.73 75,144 3,754 5.00 77,649 4,036 5.20
Non-interest-bearing liabilities......... 492 530
------- -------
Total liabilities..................... 75,636 78,179
------- -------
Total equity........................... 12,316 6,482
------- -------
Total liabilities and total equity.... $87,952 $84,661
======= =======
Net interest income...................... $2,906 $2,567
====== ======
Interest rate spread..................... 2.96% 2.83% 2.83%
Net interest margin(3)................... 3.42 3.12
Average interest-earning assets to
average interest-bearing liabilities.... 113.18 105.92
</TABLE>
_________________
(1) Average balances include non-accrual loans.
(2) Average balances include investment securities held to maturity, available
for sale and short-term investments.
(3) Net interest income divided by average interest-earning assets.
48
<PAGE>
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on
the interest income and interest expense of Spring Hill Savings Bank for the
years indicated. Information is provided for each category of interest-earning
asset and interest-bearing liability with respect to: (i) effects attributable
to changes in rate (changes in rate multiplied by prior year's volume); (ii)
effects attributable to changes in volume (changes in volume multiplied by prior
year's rate); and (iii) effects attributable to changes in rate/volume (changes
in rate multiplied by changes in volume).
<TABLE>
<CAPTION>
Year Ended December 31, 1998
Compared to December 31, 1997
-------------------------------------
Increase (Decrease) Due to
-----------------------------
Volume Rate Rate/Volume Net
------ ------ ----------- -----
(In thousands)
<S> <C> <C> <C> <C>
Interest Income:
Loans receivable............... $ 43 $ (56) $ 1 $ (12)
Investment securities.......... 173 (14) (12) 147
Mortgage-backed securities..... (171) (32) 3 (200)
Other interest-earning assets.. 132 (8) (2) 122
----- ----- ---- -----
Total interest income......... 177 (110) (10) 57
----- ----- ---- -----
Interest Expense:
NOW and money market accounts.. 2 1 0 3
Savings accounts............... (23) (3) 0 (26)
Time certificates of deposit... 30 (9) 0 21
Collateralized mortgage
obligation.................... (272) 15 (12) (269)
Borrowed funds................. (2) (9) 0 (11)
----- ----- ---- -----
Total interest expense........ (265) (5) (12) (282)
----- ----- ---- -----
Net Change in Interest Income..... $ 442 $(105) $ 2 $ 339
===== ===== ==== =====
</TABLE>
Liquidity and Capital Resources
SHS's primary sources of funds are Spring Hill Savings Bank's deposits,
amortization and prepayment of loans, maturities of, and repayments from
investment securities, and funds provided from operations. While scheduled loan
repayments are a relatively predictable source of funds, loan prepayments and
deposit flows are influenced by general interest rates, economic conditions and
competition. In light of these exogenous variables and to provide an adequate
source of funding for its operations, Spring Hill Savings Bank maintains a
varying level of funds in overnight deposits, as well as a credit facility
through the Federal Home Loan Bank ("FHLB") of Pittsburgh. This available
credit arrangement with the FHLB provides for a maximum borrowing capacity of up
to $53,585,000 at June 30, 1999. Spring Hill Savings Bank had outstanding term
borrowings from the FHLB of $8,363,000 at June 30, 1999.
At June 30, 1999, Spring Hill Savings Bank had $4,916,000 in outstanding
mortgage, credit lines and construction loan commitments. Management believes
it has adequate sources to meet its funding requirements. Additionally, Spring
Hill Savings Bank is required to maintain long term liquidity in excess of a
prescribed minimum regulatory ratio of 4% of net withdrawable accounts. As a
matter of practice, Spring Hill Savings Bank normally maintains liquidity in
excess of the regulatory minimums. At June 30, 1999 this ratio was 9.10%.
49
<PAGE>
Management monitors risk-based capital and leverage ratios in order to
assess compliance with regulatory guidelines. Management believes, as of June
30, 1999, that SHS and Spring Hill Savings Bank meet all capital adequacy
requirements to which they are subject. At June 30, 1999, Spring Hill Savings
Bank had risk-based capital of 24.12% and a leverage capital ratio of 10.98% of
tangible assets. SHS's and Spring Hill Savings Bank's GAAP capital ratios as of
the same date were 12.88% and 10.98%, respectively.
Asset and Liability Management
Management seeks to limit the exposure of Spring Hill Savings Bank's
earnings to changes in market interest rates by attempting to manage the
mismatch between asset and liability maturities and interest rates. Spring Hill
Savings Bank's management meets at least quarterly to review the asset/liability
policies and interest rate risk position of Spring Hill Savings Bank. This
quarterly review includes analysis of certain interest rate risk measurement
reports provided by the Office of Thrift Supervision. Using data from Spring
Hill Savings Bank's quarterly reports provided to the OTS, Spring Hill Savings
Bank receives a report which measures interest rate risk by modeling the change
in Net Portfolio Value ("NPV") over a range of up and down 4% in interest rates.
NPV is the difference in the present value of expected cash flows from assets,
liabilities and off-balance sheet items. The calculation is intended to reflect
the impact on NPV given an immediate and sustained change in interest rates
without giving effect to any remedial steps that management might take to reduce
the impact.
The following table is provided by the OTS and illustrates the change in
NPV at December 31, 1998, based on OTS assumptions, including those mentioned
above.
<TABLE>
<CAPTION>
NPV as % of Portfolio
Change in Rates NPV Value of Assets
- --------------- ------------------------------ --------------------
$ Amount $ Change % Change NPV Ratio Change
-------- --------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
+400 $ 6,899 $(4,355) (39)% 8.24% (432)bp
+300 8,170 (3,084) (27) 9.57 (299)
+200 9,425 (1,829) (16) 10.83 (173)
+100 10,488 (767) (7) 11.86 (70)
No Change 11,255 -- -- 12.56 --
(100) 11,810 556 5 13.03 47
(200) 12,301 1,046 9 13.42 86
(300) 12,967 1,712 15 13.97 141
(400) 13,530 2,275 20 14.41 185
</TABLE>
In the above table, the first column on the left presents the change in
rates in basis points (1 basis point is equal to .01%). The second column
presents the overall dollar valuation of NPV for each assumed interest rate
level. The third and fourth columns present Spring Hill Savings Bank's change
in the NPV in dollar and percentage terms for the various interest rate levels.
The final two columns reflect the ratio of NPV to the portfolio value of total
assets and the change in that ratio in basis points for each of the assumed
interest rate levels.
50
<PAGE>
The following table is also provided by the OTS. It summarizes, by
comparison, the key interest rate sensitivity measures for both December 31,
1998 and December 31, 1997.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
NPV Ratio at No Change in Rates........... 12.56% 13.33%
Risk Measures: 200 Basis Point Rate Shock:
Exposure Measure: Post-Shock NPV Ratio.... 10.83% 11.69%
Sensitivity Measure: Change in NPV Ratio.. (173)bp (164)bp
</TABLE>
Spring Hill Savings Bank's measures of interest rate sensitivity have
increased modestly between year end 1997 to year end 1998 with the sensitivity
measure, or change in the NPV ratio for a change in rates of 200 basis points,
increasing from (164) basis points to (173) basis points. This measured
increase in exposure is within prescribed policy limits and is the result of
Spring Hill Savings Bank's increased capacity for greater levels of exposure due
to the level of capital and its pre-shock valuation. This increased capacity is
reflected in the comparison of the change in NPV for year end 1998 and 1997 with
a 200 basis point change in rates. For December 31, 1998, NPV was calculated to
change ($1,829,000) which equated to (16)% of the pre-shock NPV of $11,255,000,
this compares to 1997 levels of ($1,841,000), or a similar (16)%, of the pre-
shock NPV which was $11,739,000.
Data Processing Issues for the Year 2000
Many older computer systems, programs and applications use two digits to
identify the year. Such systems, if they are not adapted to appropriately
identify years beyond 1999, could fail or produce erroneous results by the year
2000. In order to diminish the exposure to this processing risk, Spring Hill
Savings Bank has adopted a multiphase plan for achieving year 2000 readiness.
The following summarizes the plan's five phases and provides a brief description
of the progress:
1. Awareness - Involved Company wide educational initiatives. This phase
is completed.
2. Assessment - Essentially completed in 1997, this involved a review of
all internal systems, equipment, external service dependencies and
other third party risks with assignment of ratings for each item as to
criticality for Spring Hill Savings Bank's operations.
3. Remediation - Involving systems upgrading for year 2000 processing
compliance and/or readiness. Spring Hill Savings Bank has completed
this phase. Mission critical systems were completed early this year and
non-mission critical system and equipment renovations and upgrading was
also completed this year.
4. Testing - This involved testing and validating the accuracy of results
of our internal systems and participating in testing by our primary
third party service provider. Additionally, Spring Hill Savings Bank's
other service providers performed their own internal as well as
interoperative testing with other third parties and provided
documentation of the effectiveness of these tests. Spring Hill Savings
Bank has completed this phase for mission critical operations and is
substantially complete for non-mission critical areas.
5. Implementation - This involves bringing year 2000 compliant and/or
ready systems into operation. Spring Hill Savings Bank and its
significant third party service providers are well in to this phase.
From June 1997 through July 26, 1999, Spring Hill Savings Bank has incurred
year 2000 related expenses of $24,000. Additional expenses related to customer
awareness and contingency planning efforts are not anticipated to exceed $15,000
through 1999, inclusive of allocated employee time. Possible contingent costs
in the year 2000 are currently estimated at $14,000. A more complete status of
management's efforts follows.
51
<PAGE>
Based upon management's year 2000 planning process, Spring Hill Savings
Bank has various levels of year 2000 processing risk in three general areas:
(i) third party service providers, (ii) Spring Hill Savings Bank's internal
computer systems and equipment, and (iii) borrowers of Spring Hill Savings Bank
who are dependent upon computer systems.
Third party service providers. As with most financial companies, Spring
Hill Savings Bank is highly dependent on a broad mix of external data service
providers and interchanges, however, much of the material data processing of
Spring Hill Savings Bank that could be affected by this problem is provided by a
national third party service bureau and, to a lesser extent, two additional
third party service providers. Although dependent upon the three companies each
is a significant nationally recognized leader in their market. Nevertheless,
Spring Hill Savings Bank is highly dependent upon their progress toward
achieving a comprehensive processing solution. A significant component of
Spring Hill Savings Bank's plan is to monitor the progress of the remedial
actions that have been implemented and are being implemented by these service
providers to achieve proper system functioning. In connection with these
efforts, Spring Hill Savings Bank's primary service provider has reported that
substantially all of the necessary remediation was completed as of June 30,
1998. Additionally, the testing process for their system was essentially
completed by September 30, 1998. Spring Hill Savings Bank was actively involved
in the testing process, including sending representatives to participate in the
user acceptance proxy testing. Testing with our primary service provider also
included an on-line connectivity test on August 16, 1998 which involved both
Spring Hill Savings Bank and our service bureau rolling our system dates to
March 31, 2000 and conducting sample transaction postings to back-up customer
files. Additionally, a follow-up on-line test was conducted on July 25, 1999
using an on-line test date of January 3, 2000. This recent test allowed the
bank to test all of our branches for connectivity as well as to test the current
system upgrade that will be in production at December 31, 1999. The resulting
activity reports, transaction postings and interest calculations have been
reviewed and revealed no exceptions. User institutions from other regions
tested on-line with our service provider on alternate dates and tested other
dates in 2000 including the leap year date of February 29, 2000. No exceptions
have been noted from these tests either. The other two service providers
perform wire services, check processing, securities safekeeping and ATM driving
and transaction processing on behalf of Spring Hill Savings Bank. Both service
providers have reported substantially complete remediation and testing. An
additional important component to the testing process is integration testing, or
testing the interface between two of these third party providers. Mission
critical third party integration testing has been completed with no reported
year 2000 problems.
Internal systems and equipment. Internally, Spring Hill Savings Bank has
tested and determined that mission critical computer hardware and programs are
year 2000 ready. Additionally, Spring Hill Savings Bank has no in-house
developed programs or customized software and the only items that remain to be
replaced are part of ongoing technological upgrades that are in the normal
course of business. As of February 15, 1999, the bank completed remedial
upgrades to mission critical branch platform equipment and conducted tests that
verified year 2000 readiness. Testing of upgrades will continue on non-mission
critical systems through September 30, 1999.
Borrowers with computer system dependency. A review of Spring Hill Savings
Bank's borrowers has been performed. Since the loan portfolio is significantly
comprised of loans collateralized with residential related property it is not
believed by management that the year 2000 problem will, on an aggregate basis,
impact Spring Hill Savings Bank's capacity to recover repayment of the debt.
Additional customer contact is anticipated to further minimize any risk in this
area.
Despite Spring Hill Savings Bank's best efforts and high level of
preparedness there is, nevertheless, the possibility for some service
disruptions related to the year 2000. This risk is due to Spring Hill Savings
Bank's third party service provider dependencies and the significant amount of
external data interfaces within the financial industry, including for instance,
various customer payroll direct deposit originating sources. Contingency plans
have been developed to address the potential problems that may arise. Should
year 2000 related failures prove numerous or sustained for indefinite periods
there would be a profound impact on Spring Hill Savings Bank's operations as
well as the likelihood of curtailed banking services.
52
<PAGE>
Nonperforming Assets
The table below presents information concerning nonperforming assets
including nonaccrual loans, renegotiated loans, loans 90 days or more past due,
other real estate owned, and repossessed assets. A loan is classified as
nonaccrual when, in the opinion of management, there are serious doubts about
the collectibility of interest and principal, generally when the loan becomes 90
days or more past due. At the time the accrual of interest is discontinued,
future income is recognized as payments are received. Restructured loans are
those loans for which terms have been renegotiated to provide for a deferral of
principal and/or a reduction of interest as a result of deterioration in the
borrowers' credit capacity.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
(Dollars in Thousands)
<S> <C> <C>
Loans on nonaccrual basis.......................... $1,471 $ 933
Loans past due 90 days or more..................... -- 7
------ -----
Total nonperforming loans..................... 1,471 940
------ -----
Real estate owned.................................. 41 13
Repossessed assets................................. 11 12
------ -----
Total nonperforming assets......................... $1,523 $ 965
====== =====
Nonperforming loans as a percent of net loans...... 2.57% 1.62%
------ -----
Nonperforming assets as a percent of total assets.. 1.70% 1.09%
------ -----
Restructured loans................................. $ 39 $ 99
------ -----
Potential problem loans............................ $ -- $ 278
------ -----
</TABLE>
During 1998, loans decreased $618,000 while nonperforming loans increased
$531,000 and the allowance for loan losses was essentially unchanged.
Consequently, the percentage of allowance for loan losses to total loans
outstanding remained unchanged at .76%.
Although nonperforming loan balances increased in 1998, a significant
portion of the balances have been in long term workouts. Resolution on certain
of these loans is anticipated within the ensuing quarters. Additionally,
management regularly reviews these nonperforming loans as well as the collateral
property. These reviews continue to be part of the regular assessment of the
adequacy of the allowance for loan losses. Potential problem loans consisted of
two loans to one borrower. These loans had been outstanding since April 1986
and April 1987. The ongoing effort to reduce the level of underperforming loans
translated into resolution of these loans. During the fourth quarter of 1998, a
workout plan was completed whereby one of the loans with an outstanding balance
of $158,000 was paid-off, inclusive of all delinquent interest and fees, and the
other loan brought current.
Provisions for loan losses are charged to operations to bring the total
allowance for loan losses to a level considered by management to be adequate to
provide for estimated losses based on management's evaluation of individual
loans, economic factors, past loan loss experiences, changes in the composition
and volume of the portfolio, and other relevant factors. Management believes
the level of the allowance for loan losses at December 31, 1998 is sufficient;
however, there can be no assurance that the current allowance for loan losses
will be adequate to absorb all future losses.
Recent Developments. Subsequent to June 30, 1999, management of SHS became
aware of a mortgage that was inadvertently satisfied which has resulted in an
unsecured position of approximately $80,000 with one borrower. This borrower is
presently current on all loan payments that are due under the note and
management is working to reinstate its mortgage position and to resecure the
loan. However, due to intervening judgments, including a pending civil suit of
which the borrower is a party, SHS's security interest is potentially
jeopardized exposing SHS to possible future losses of up to $80,000. SHS
carries insurance that provides indemnification against losses arising from such
errors that could reduce the maximum exposure to $50,000 on a pretax basis.
Despite the uncertainty of resolving its security position, management of SHS
does not expect any loss that may arise from such failure and subsequent default
by the borrower to have a material impact on its operations.
53
<PAGE>
BUSINESS OF SHS
General
SHS, a Pennsylvania corporation, was organized in June 1997 for the purpose
of becoming the holding company for Spring Hill Savings Bank upon its conversion
from a federal mutual savings bank to a federal stock savings bank.
Spring Hill Bank, founded in 1893, is a federally chartered savings bank
located in Pittsburgh, Pennsylvania. Spring Hill Savings Bank is regulated by
the Office of Thrift Supervision, its primary federal regulator, and the Federal
Deposit Insurance Corporation, the insurer of its deposits. Spring Hill Savings
Bank's deposits are federally insured by the FDIC under the Savings Association
Insurance Fund. Spring Hill Savings Bank is a member of the Federal Home Loan
Bank System. Spring Hill Savings Bank operates as a community-oriented
financial institution that engages primarily in the business of attracting
deposits from the general public and using those funds to originate residential
mortgage loans within Spring Hill Savings Bank's primary market area. Spring
Hill Savings Bank also originates multi-family, construction, commercial real
estate and consumer loans.
Market Area
Spring Hill Savings Bank is headquartered in Pittsburgh, Pennsylvania and
operates four full-service offices in the city of Pittsburgh. Most of Spring
Hill Savings Bank's depositors reside in the communities surrounding Spring Hill
Savings Bank's offices and most of Spring Hill Savings Bank's loans are made to
borrowers residing in Allegheny County.
Pittsburgh is a significant metropolitan market and serves as headquarters
to several large manufacturing and service companies. In addition, there are
several universities, colleges and teaching hospitals. The economy in the
Pittsburgh area experienced a significant restructuring during the early 1980s
from a heavy manufacturing and industrial base (notably steel) to a more
diversified, service-oriented economy. During this period, many of the area's
industrial plants reduced their operations and staff or were closed. Although
the economy in the Pittsburgh area has improved in recent periods, there can be
no assurance that the economy will continue to improve.
Lending Activities
General. At December 31, 1998, Spring Hill Savings Bank's total loans
receivable amounted to $60.4 million, or 67.5% of total assets. The principal
lending activity of Spring Hill Savings Bank is the origination of conventional
mortgage loans for the purpose of purchasing or refinancing one- to four-family
residential property. At December 31, 1998, $42.2 million, or 69.9%, of Spring
Hill Savings Bank's total loan portfolio consisted of loans secured by one- to
four-family residential real estate. Including single family loans secured by
properties that were under construction, the total of loans secured by one- to
four-family properties was $49.0 million. To a lesser extent, Spring Hill
Savings Bank also originates multi-family real estate, construction, commercial
real estate and consumer loans. Historically, Spring Hill Savings Bank's
lending activities have been concentrated in its primary market of Allegheny
County, Pennsylvania.
The maximum amount that Spring Hill Savings Bank will typically lend to one
borrower is $500,000. At times, individual loan requests exceed this amount or
existing borrowers of Spring Hill Savings Bank seek to finance additional
residential housing units as investment properties. Exceptions are made to the
loans to one borrower limit by a majority vote of the Directors based on such
factors as: the creditworthiness of the borrower, the debt service capacity of
the subject properties and of the borrower, and the value of the collateral
securing the loan. Typically, these exceptions are for existing borrowers, in
which case, the payment history is also considered. During 1998, the Directors
approved five exceptions to the $500,000 loans to one borrower limit. The
largest of these was an approval up to $875,000 for a borrower who has been with
Spring Hill Savings Bank since 1977.
54
<PAGE>
More typical in amount was the second highest exception at $600,000 of which
$572,000 was outstanding at December 31, 1998.
Loan Portfolio Analysis. The following table sets forth the composition of
Spring Hill Savings Bank's loan portfolio by type of loan at the dates
indicated. Spring Hill Savings Bank had no concentration of loans exceeding 10%
of total gross loans other than as disclosed below.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent
------- -------- ------- -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family (1)...... $42,207 69.92% $44,643 75.50% $41,778 75.10%
Multi-family................. 6,301 10.44 6,128 10.37 5,677 10.21
Construction................. 7,045 11.67 2,606 4.40 1,727 3.10
Commercial real estate....... 2,669 4.42 3,043 5.15 3,296 5.93
------- ------ ------- ------ ------- ------
Total mortgage loans....... 58,222 96.45 56,420 95.42 52,478 94.34
Consumer loans:
Mobile home.................. 1,460 2.42 1,890 3.20 2,454 4.41
Other........................ 686 1.13 817 1.38 697 1.25
------- ------ ------- ------ ------- ------
Total consumer loans....... 2,146 3.55 2,707 4.58 3,151 5.66
------- ------ ------- ------ ------- ------
Total loans................ 60,368 100.00% 59,127 100.00% 55,629 100.00%
------- ====== ------- ====== ------- ======
Less:
Undisbursed portion of loans.. 2,502 727 509
Deferred loan origination
fees (costs) net............. 118 34 (84)
Allowance for loan losses..... 441 441 415
------- ------- ------
Loans receivable, net...... $57,307 $57,925 $54,789
======= ======= =======
</TABLE>
- ---------------------------
(1) Includes $1.8 million, $1.7 million and $1.2 million at December 31, 1998,
1997 and 1996, respectively, of home equity loans where the combined loan-
to-value ratio of loans secured by the borrowers residence is less than 80%.
One- to Four-Family Residential Real Estate Lending. The principal lending
activity of Spring Hill Savings Bank is the origination of mortgage loans to
enable borrowers to purchase existing one- to four-family residential real
estate. At December 31, 1998, $42.2 million, or 69.9%, of Spring Hill Savings
Bank's total loan portfolio consisted of loans secured by one- to four-family
residential real estate. Substantially all of Spring Hill Savings Bank's
residential mortgage loans are secured by property located in Spring Hill
Savings Bank's primary market area. Spring Hill Savings Bank generally retains
for its portfolio all of the loans that it originates. As a result, Spring Hill
Savings Bank believes it is better able to vary the terms of its loan products
to meet the needs of its customers.
Spring Hill Savings Bank's primary product is owner-occupied, fixed-rate
mortgage loans. Spring Hill Savings Bank's fixed-rate loans generally have
maturities ranging from ten to 20 years. In late 1994, Spring Hill Savings Bank
began originating ten- and 15-year balloon loans with a 30-year amortization
schedule. During 1998, Spring Hill Savings Bank began originating loans with a
30-year amortization schedule and a one-time rate reset at the end of the 15th
year. The interest rate adjustment on these loans is based on the index value
of the Federal National Mortgage Association ("FNMA") net yield on 15-year
fixed-rate mortgage loans plus a margin. The amount of the rate adjustment is
limited to 5.00%. In recent years, the balloon and 15th year reset loans have
accounted for a significant portion of Spring Hill Savings Bank's originations
of one- to four-family loans.
55
<PAGE>
Generally, Spring Hill Savings Bank originates all fixed-rate loans under terms,
conditions and documentation that would permit them to be sold in the secondary
market to U.S. Government sponsored agencies, although Spring Hill Savings Bank
has not sold any loans in recent years.
Spring Hill Savings Bank also offers mortgage loans for non-owner-occupied
one- to four-family residences both on a fixed- and adjustable-rate basis. At
December 31, 1998, $9.3 million, or 22.0%, of Spring Hill Savings Bank's one- to
four-family mortgage loans were secured by non-owner-occupied property. Spring
Hill Savings Bank offers fixed-rate loans for terms not to exceed 15 years with
a matching amortization and adjustable-rate loans for terms not to exceed 20
years with a matching amortization. These adjustable-rate loans have interest
rates that adjust annually based on the prime rate as published in The Wall
Street Journal. The periodic interest rate cap (the maximum amount by which the
interest rate may be increased or decreased in a given period) on such loans is
generally 2% per adjustment period and the lifetime interest rate cap is
generally 5% over the initial interest rate of the loan. The terms and
conditions of the non-owner-occupied one- to four-family loans offered by Spring
Hill Savings Bank may vary from time to time. At December 31, 1998, Spring Hill
Savings Bank's portfolio of non-owner-occupied one- to four-family loans was
composed of 81.8% with a fixed interest rate and 18.2% with an adjustable
interest rate. Loans secured by non-owner-occupied residences generally involve
greater risks than loans secured by owner-occupied residences. Payments on
loans secured by such properties are often dependent on successful operation or
management of the properties. Repayment of such loans may be subject to a
greater extent to adverse conditions in the real estate market or the economy.
Spring Hill Savings Bank does not currently offer adjustable-rate mortgage
loans with annual rate resets secured by owner-occupied real estate. From 1983
to 1989, Spring Hill Savings Bank originated such loans based on the One Year
U.S. Treasury Note Constant Maturity Rate and a portion of these loans remain in
the portfolio. At December 31, 1998, Spring Hill Savings Bank's one- to four-
family mortgage loans included $3.5 million of ARM loans. The retention of ARM
loans in Spring Hill Savings Bank's loan portfolio helps reduce Spring Hill
Savings Bank's exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased costs due
to increased rates to be paid by the customer. It is possible that during
periods of rising interest rates the risk of default on ARM loans may increase
as a result of repricing and the increased payments required by the borrower.
Another consideration is that although ARM loans allow Spring Hill Savings Bank
to increase the sensitivity of its asset base to changes in interest rates, the
extent of this interest sensitivity is limited by the periodic and lifetime
interest rate adjustment limits. Because of these considerations, Spring Hill
Savings Bank has no assurance that yields on ARM loans will be sufficient to
offset increases in Spring Hill Savings Bank's cost of funds.
While one- to four-family residential real estate loans are normally
originated with ten to 20 year terms, such loans typically remain outstanding
for shorter periods. This is because borrowers often prepay their loans in full
upon sale of the property pledged as security or upon refinancing the original
loan. In addition, substantially all mortgage loans in Spring Hill Savings
Bank's loan portfolio contain due-on-sale clauses providing that Spring Hill
Savings Bank may declare the unpaid amount due and payable upon the sale of the
property securing the loan. Typically, Spring Hill Savings Bank enforces these
due-on-sale clauses to the extent permitted by law and as business judgment
dictates. Thus, average loan maturity is a function of, among other factors,
the level of purchase and sale activity in the real estate market, prevailing
interest rates and the interest rates payable on outstanding loans.
Spring Hill Savings Bank generally obtains title insurance insuring the
status of its lien on all loans where real estate is the primary source of
security. Spring Hill Savings Bank also requires that fire and casualty
insurance (and, if appropriate, flood insurance) be maintained in an amount at
least equal to the outstanding loan balance.
Pursuant to Spring Hill Savings Bank's underwriting guidelines, Spring Hill
Savings Bank can lend up to 95% of the appraised value of the property securing
a one- to four-family residential loan; however, Spring Hill Savings Bank
generally requires mortgage insurance when the loan-to-value ratio is greater
than 80%.
56
<PAGE>
Multi-Family Real Estate Lending. Spring Hill Savings Bank is actively
involved in originating loans secured by multi-family real estate. At December
31, 1998, $6.3 million, or 10.4%, of Spring Hill Savings Bank's total loan
portfolio consisted of loans secured by multi-family real estate. All of these
loans are secured by property located in Spring Hill Savings Bank's market area.
Such properties generally consist of five to 30 dwelling units. At December 31,
1998, Spring Hill Savings Bank had 46 multi-family real estate loans, the
largest of which was $508,000 and which was performing in accordance with its
original terms.
Spring Hill Savings Bank originates multi-family residential real estate
loans with fixed and adjustable interest rates. Fixed-rate loans have a term of
15 years while adjustable-rate loans have a maximum term of 20 years with
matching amortizations. Adjustable-rate loans adjust annually based on the
prime rate. Loan-to-value ratios on Spring Hill Savings Bank's multi-family
residential real estate loans are generally limited to 70% on purchase
transactions and 65% on refinancings. Spring Hill Savings Bank requires
appraisals of all properties securing multi-family residential real estate
loans. Appraisals are performed by independent appraisers designated by Spring
Hill Savings Bank and are reviewed by management. Spring Hill Savings Bank
considers the quality and location of the real estate, the credit of the
borrower, the cash flow of the project and the quality of management involved
with the property. It is Spring Hill Savings Bank's general policy to obtain
personal guarantees from the principals of its corporate borrowers.
Multi-family residential real estate lending affords Spring Hill Savings
Bank an opportunity to receive interest at rates higher than those generally
available from one- to four-family mortgage loans. However, loans secured by
such properties usually are greater in amount, more difficult to evaluate and
monitor and, therefore, involve a greater degree of risk than one- to four-
family residential mortgage loans. Because payments on loans secured by multi-
family residential properties are often dependent on the successful operation
and management of the properties, repayment of such loans may be affected by
supply and demand conditions in the market for apartments, as well as adverse
conditions in the real estate market or the economy.
Construction Lending. Spring Hill Savings Bank originates loans for the
construction of new homes. At December 31, 1998, construction loans totaled
$7.0 million, or 11.7% of total loans. All of Spring Hill Savings Bank's
construction loans are secured by property located in Spring Hill Savings Bank's
primary market area. Construction loans are made to both professional home
builders and to individuals who contract for the construction of their personal
residence.
Construction loans made by Spring Hill Savings Bank to professional home
builders are primarily those for which purchasers for the finished homes are
identified either during or following the construction period (i.e., speculative
loans). Spring Hill Savings Bank generally limits the number of unsold homes
under construction by its borrowers, with the amount dependent on the reputation
of the borrower, the current exposure of the borrower, the location of the
property and prior sales of homes in the development. Construction loans to
professional home builders are typically made for a term of 18 months with an
interest rate that adjusts monthly based on the prime rate. Loan-to-value
ratios are generally limited to 80%. Prior to making a commitment to fund a
construction loan, Spring Hill Savings Bank requires an appraisal of the
property by an independent fee appraiser. Spring Hill Savings Bank also reviews
and inspects each project at the commencement of construction and throughout the
term of the construction loan. Loan proceeds are disbursed after inspections of
the project by the appraiser based on a percentage of completion. Spring Hill
Savings Bank requires monthly interest payments during the construction term.
Spring Hill Savings Bank's construction loans to individuals are typically
made in connection with the granting of a permanent loan on the property. Such
loans provide for interest only payments during the construction period
(typically nine months) after which they convert to a fully amortizing fixed-
rate loan. During 1998, Spring Hill Savings Bank increased the level of this
construction/permanent financing to borrowers for new construction of single-
family properties. These construction loans, referred to as "owner-builder"
loans, are based on a plan and materials package provided by a nationally
recognized company and are highly structured in which the owner functions as the
general contractor with loan disbursements scheduled upon regular inspections.
The total of these
57
<PAGE>
owner-builder commitments originated in 1998 was $4,777,000 of which $2,591,000
had been disbursed as of December 31, 1998. Of these originations during 1998,
one loan with a total commitment balance of $115,000 had been completed and
converted to a permanent mortgage as of December 31, 1998.
Construction lending affords Spring Hill Savings Bank the opportunity to
achieve higher interest rates and fees with shorter terms to maturity than does
its one- to four-family permanent mortgage lending. Construction lending,
however, is generally considered to involve a higher degree of risk than one- to
four-family existing property lending because of the somewhat greater difficulty
in estimating both a property's value at completion of the project and the
estimated cost of the project. The nature of these loans is such that they are
generally more difficult to evaluate and monitor. If the estimate of
construction cost proves to be inaccurate, Spring Hill Savings Bank may be
required to advance funds beyond the amount originally committed to permit
completion of the project. If the estimate of value upon completion proves to
be inaccurate, Spring Hill Savings Bank may be confronted with a project whose
value is insufficient to assure full repayment. Projects may also be
jeopardized by disagreements between borrowers and builders and by the failure
of builders to pay subcontractors. Loans to builders to construct homes for
which no purchaser has been identified carry more risk because the payoff for
the loan is dependent on the builder's ability to sell the property prior to the
time that the construction loan is due. Spring Hill Savings Bank has sought to
address these risks by limiting the extent of its construction lending as a
proportion of the total loan portfolio, by limiting its construction lending to
residential properties and by limiting the amount outstanding to any one builder
to $500,000. In addition, Spring Hill Savings Bank has adopted underwriting
guidelines that impose stringent loan-to-value, debt service and other
requirements for loans which are believed to involve higher elements of credit
risk, by limiting the geographic area in which Spring Hill Savings Bank will do
business to its existing market, and by generally working with builders with
whom it has established relationships. It is also Spring Hill Savings Bank's
general policy to obtain personal guarantees from the principals of its
corporate borrowers on its construction loans.
Commercial Real Estate Lending. Spring Hill Savings Bank invests a portion
of its loan portfolio in commercial real estate loans. At December 31, 1998,
Spring Hill Savings Bank's commercial real estate loan portfolio totaled $2.7
million, or 4.4% of total loans. In recent years, Spring Hill Savings Bank has
not solicited commercial real estate loans, but has generally offered such loans
to accommodate its current and past customers. Spring Hill Savings Bank's
commercial real estate loans include loans secured by office buildings,
warehouses, undeveloped land and mixed-use buildings comprised of offices and
apartments. All of Spring Hill Savings Bank's commercial real estate loans are
secured by property in Spring Hill Savings Bank's primary market area. At
December 31, 1998, Spring Hill Savings Bank had 29 commercial real estate loans,
the largest of which was $572,000 and which was performing in accordance with
its original terms.
Spring Hill Savings Bank originates commercial real estate loans with fixed
and adjustable interest rates. Fixed-rate loans have a term of 15 years while
adjustable-rate loans have a maximum term of 20 years with matching
amortizations. Adjustable rate loans adjust annually based on the prime rate.
Loan-to-value ratios on Spring Hill Savings Bank's commercial real estate loans
are generally limited to 70% on purchase transactions and 65% on refinancings.
Spring Hill Savings Bank requires appraisals of all properties securing
commercial real estate loans. Appraisals are performed by independent
appraisers designated by Spring Hill Savings Bank and are reviewed by
management. Spring Hill Savings Bank considers the quality and location of the
real estate, the credit of the borrower, the cash flow of the project and the
quality of management involved with the property. It is Spring Hill Savings
Bank's general policy to obtain personal guarantees from the principals of its
corporate borrowers.
Commercial real estate lending affords Spring Hill Savings Bank an
opportunity to receive interest at rates higher than those generally available
from one- to four-family residential mortgage loans. However, loans secured by
such properties usually are greater in amount, more difficult to evaluate and
monitor and, therefore, involve a greater degree of risk than one- to four-
family residential mortgage loans. Because payments on loans secured by
commercial properties are often dependent on the successful operation and
management of the properties, repayment of such loans may be affected by adverse
conditions in the real estate market or the economy.
58
<PAGE>
Consumer Lending. Spring Hill Savings Bank currently offers a variety of
consumer loans, including secured, partially secured and unsecured personal
loans, vehicle loans and loans secured by savings deposits. At December 31,
1998, Spring Hill Savings Bank's consumer loans totaled $2.1 million, or 3.6% of
Spring Hill Savings Bank's total loan portfolio. Consumer loans are generally
made to existing customers as Spring Hill Savings Bank advertises these loans
only on a limited basis.
The largest component of Spring Hill Savings Bank's consumer loan portfolio
consists of mobile home loans. At December 31, 1998, mobile home loans totaled
$1.5 million, or 68.0% of Spring Hill Savings Bank's consumer loan portfolio.
From 1987 through 1992, Spring Hill Savings Bank originated mobile home loans
through a broker located in Ohio. Since 1992, Spring Hill Savings Bank has not
originated any mobile home loans other than loans to facilitate the sale of
repossessed mobile homes. At December 31, 1998, Spring Hill Savings Bank's
mobile home loan portfolio consisted of 134 loans with an average loan balance
of approximately $10,900. Mobile homes securing this portfolio are located
primarily in Kentucky, South Carolina, West Virginia, Indiana, Illinois, and
Georgia. Mobile home loans involve a greater degree of risk than one- to four-
family mortgage loans, but are typically made at a higher interest rate and for
a shorter maturity. Spring Hill Savings Bank's mobile home loans have fixed
interest rates and terms up to 12 years. At December 31, 1998, Spring Hill
Savings Bank had two repossessed mobile home, with a carrying value of $11,000.
At December 31, 1998, Spring Hill Savings Bank had two mobile home loans
totaling $22,000 that were 30 to 59 days delinquent, two mobile home loans
totaling $24,000 that were 60 to 89 days delinquent and two mobile home loans
totaling $22,000 that were 90 days or more delinquent. Spring Hill Savings Bank
may resume originating mobile home loans in the future, although it has no
current plans to do so.
The underwriting standards employed by Spring Hill Savings Bank for
consumer loans include a determination of the applicant's payment history on
other debts and an assessment of the ability to meet existing obligations and
payments on the proposed loan. Although creditworthiness of the applicant is a
primary consideration, the underwriting process also includes a comparison of
the value of the security, if any, in relation to the proposed loan amount.
Consumer loans may entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured, or are secured
by rapidly depreciable assets, such as automobiles or mobile homes. In such
cases, any repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. In addition, consumer
loan collections are dependent on the borrower's continuing financial stability
and thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans.
Although Spring Hill Savings Bank currently holds no commercial loans, it
has in the past purchased office equipment leases. These purchased lease
packages had performed well until the bankruptcy of one of the originators,
which resulted in a charge-off of $39,000 in 1997. Leases generally have
shorter terms than mortgage loans, but generally involve more credit risk since
payment may be dependent on successful operation of the lessee's business.
Spring Hill Savings Bank may review the purchase of leases in the future,
although it currently has no plans to do so.
59
<PAGE>
Maturity of Loan Portfolio. The following table sets forth certain
information at December 31, 1998 regarding the maturity of Spring Hill Savings
Bank's loan portfolio. All loans are included in the period in which the final
contractual payment is due. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as due within one
year. The table does not include any estimate of prepayments which
significantly shorten the average life of all loans and may cause Spring Hill
Savings Bank's actual repayment experience to differ from that shown below.
<TABLE>
<CAPTION>
After After After After 10
One Year 3 Years 5 Years Years
Within Through Through Through Through Beyond
One Year 3 Years 5 Years 10 Years 15 Years 15 Years Total
-------- ------- ------- -------- -------- -------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family..... $ 246 $ 247 $2,020 $ 7,873 $18,963 $12,858 $42,207
Multi-family............ -- -- 599 2,480 3,115 107 6,301
Construction............ 1,546 607 -- -- -- 4,892 7,045
Commercial real estate.. -- 571 91 1,093 737 177 2,669
Consumer loans:
Mobile home............. 7 50 288 1,104 11 -- 1,460
Other................... 380 114 164 28 -- -- 686
------ ------ ------ ------- ------- ------- -------
Total loans........... $2,179 $1,589 $3,162 $12,578 $22,826 $18,034 $60,368
====== ====== ====== ======= ======= ======= =======
</TABLE>
The following table sets forth the dollar amount of all loans due after
December 31, 1999, that have fixed interest rates and have floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Floating or
Rates Adjustable Rates
------- ----------------
(In Thousands)
<S> <C> <C>
Mortgage loans:
One- to four-family..... $38,593 $3,368
Multi-family............ 4,559 1,742
Construction............ 5,499 --
Commercial real estate.. 1,374 1,295
Consumer loans:
Mobile home............. 1,453 --
Other................... 306 --
------- ------
Total loans........... $51,784 $6,405
======= ======
</TABLE>
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of a loan is substantially less
than its contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give Spring Hill Savings Bank the right to declare
loans immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to increase, however, when
current mortgage loan market rates are substantially higher than rates on
existing mortgage loans and, conversely, decrease when rates on existing
mortgage loans are substantially higher than current mortgage loan market rates.
Loan Solicitation and Processing. Loan applicants come primarily through
referrals by business and industry contacts, local advertising and current and
past customers. Spring Hill Savings Bank also has relationships with local
mortgage brokers who underwrite mortgage loans in accordance with Spring Hill
Savings Bank's loan underwriting procedures.
60
<PAGE>
Upon receipt of a loan application from a prospective borrower, a credit
report and other data are obtained to verify specific information relating to
the loan applicant's employment, income and credit standing. An appraisal of
the real estate offered as collateral generally is undertaken by an independent
fee appraiser.
Loan applications originated by Spring Hill Savings Bank are centrally
processed. A loan application is initially processed by a loan processor or
loan officer and, once completed, is submitted to Spring Hill Savings Bank's
Loan Committee. The loan committee may approve consumer loans up to $50,000,
loans up to $300,000 that are to be secured by one- to four-family residential
real estate, and loans up to $250,000 that are to be secured by other real
estate. Loans greater than these amounts are submitted for approval to Spring
Hill Savings Bank's board of directors with a report and recommendation from the
loan committee.
Loan Originations, Sales and Purchases. During 1998, Spring Hill Savings
Bank originated $12.4 million of loans, compared with $11.8 million during 1997.
Originations in 1998 and 1997 reflect a significant increase compared to earlier
years. The increase in originations in 1998 and 1997 was due to increased
referrals from local business and industry contacts, more competitive interest
rates and a higher level of new construction financing.
In recent years, Spring Hill Savings Bank has not been an active purchaser
of whole loans or participation interests in loans nor has Spring Hill Savings
Bank been a seller of loans.
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1998 1997 1996
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Gross loans at beginning of period.. $59,127 $55,629 $52,894
Loans originated:
Mortgage loans:
One- to four-family................ 6,283 8,248 8,118
Multi-family....................... 1,180 1,074 1,089
Construction....................... 4,585 1,933 1,129
Commercial real estate............. -- -- 639
Consumer loans:
Mobile home........................ -- 23 --
Other.............................. 334 503 760
------- ------- -------
Total loans originated.......... 12,382 11,781 11,735
------- ------- -------
Loans purchased:
Mortgage loans:
One- to four-family................ -- 9 27
------- ------- -------
Total loans purchased........... -- 9 27
------- ------- -------
Loan principal repayments........... 11,141 8,292 9,027
Net loan activity................... 1,241 3,498 2,735
------- ------- -------
Gross loans at end of period........ $60,368 $59,127 $55,629
======= ======= =======
</TABLE>
Loan Commitments. Spring Hill Savings Bank issues commitments to originate
loans conditioned upon the occurrence of certain events. Such commitments are
made on specified terms and conditions and, in most cases, are honored for up to
60 days from the date of loan approval. Commitments in excess of 60 days are
generally charged an additional fee. Spring Hill Savings Bank had outstanding
loan commitments of approximately $3.8 million at December 31, 1998.
61
<PAGE>
Loan Origination and Other Fees. Spring Hill Savings Bank, in most
instances, receives loan origination fees. Loan fees are a fixed dollar amount
or a percentage of the principal amount of the mortgage loan that is charged to
the borrower for funding the loan. Current accounting standards require fees
received (net of certain loan origination costs) for originating loans to be
deferred and amortized into interest income over the contractual life of the
loan. Net deferred fees or costs associated with loans that are prepaid are
recognized as income or expense at the time of prepayment. Spring Hill Savings
Bank had $118,000 of net deferred loan origination fees at December 31, 1998.
In addition to loan origination fees, Spring Hill Savings Bank receives income
from fees in connection with loan modifications, late payments and for various
services related to its loans.
Loan Servicing. Spring Hill Savings Bank has sold most of its servicing
rights with respect to loans held by others, with the last sale occurring in
1994. At December 31, 1998, Spring Hill Savings Bank was servicing $341,000 of
loans for others. Loan servicing includes processing payments, accounting for
loan funds and collecting and paying real estate taxes, hazard insurance and
other loan-related items, such as private mortgage insurance. When Spring Hill
Savings Bank receives the gross mortgage payment from individual borrowers, it
remits to the investor in the mortgage a predetermined net amount based on the
yield on that mortgage. The difference between the coupon on the underlying
mortgage and the predetermined net amount paid to the investor is the gross loan
servicing fee.
Delinquencies and Classified Assets
Delinquent Loans. When a borrower fails to make a required payment when
due, Spring Hill Savings Bank institutes collection procedures. Contact is
generally made 16 days after a payment is due. In most cases, deficiencies are
cured promptly. If a delinquency continues, the loan and payment history is
reviewed and efforts are made to collect the loan. While Spring Hill Savings
Bank prefers to work with borrowers to resolve delinquencies, Spring Hill
Savings Bank will institute foreclosure or other proceedings, as necessary, to
minimize any loss. Spring Hill Savings Bank generally initiates proceedings
when a loan becomes 90 days delinquent.
Loans are generally placed on nonaccrual status when they become 90 days
delinquent or when, in the judgment of management, the probability of collection
of interest is deemed to be insufficient to warrant further accrual. When a
loan is placed on nonaccrual status, previously accrued but unpaid interest is
deducted from interest income. Loans may be reinstated to accrual status when
they become less than 90 days delinquent and, in the opinion of management,
collection of the remaining balance can be reasonably expected.
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<PAGE>
The following table sets forth information with respect to Spring Hill
Savings Bank's nonperforming assets and restructured loans within the meaning of
Statement of Financial Accounting Standards ("SFAS") No. 15 at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------
1998 1997 1996
------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
Loans accounted for on a nonaccrual
basis:
Mortgage loans:
One- to four-family...................... $ 856 $ 393 $ 432
Multi-family............................. 134 134 149
Commercial real estate................... 431 386 407
Consumer loans:
Mobile home.............................. 22 19 33
Other.................................... 28 1 3
Commercial................................ -- -- 86
------ ----- ------
Total................................... 1,471 933 1,110
------ ----- ------
Accruing loans which are contractually
past due 90 days or more:
Mortgage loans:
One- to four-family...................... -- -- --
Consumer loans:
Mobile home.............................. -- -- --
Other.................................... -- 7 --
------ ----- ------
Total................................... -- 7 --
------ ----- ------
Total of nonaccrual and 90 days past
due loans................................. 1,471 940 1,110
Real estate owned........................... 41 13 13
Other repossessed assets.................... 11 9 31
------ ----- ------
Total nonperforming assets............... $1,523 $ 962 $1,154
====== ===== ======
Restructured loans.......................... $ 39 $ 99 --
Total loans delinquent 90 days
or more as a percent of net loans......... 2.57% 1.62% 2.03%
Total loans delinquent 90 days
or more as a percent of total assets...... 1.65% 1.06% 1.36%
Total nonperforming assets as a percent of
total assets............................... 1.70% 1.09% 1.41%
</TABLE>
Interest income that would have been recorded for the year ended December
31, 1998 had nonaccruing loans been current in accordance with their original
terms amounted to approximately $153,000. The amount of interest included in
interest income on such loans for the year ended December 31, 1998 amounted to
approximately $60,000.
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<PAGE>
Real Estate Owned and Other Repossessed Assets. Real estate acquired by
Spring Hill Savings Bank as a result of foreclosure or by deed-in-lieu of
foreclosure is classified as real estate owned until it is sold. When property
is acquired it is recorded at the lower of its cost, which is the unpaid
principal balance of the related loan plus foreclosure costs, or fair market
value. Subsequent to foreclosure, REO is carried at the lower of the foreclosed
amount or fair value, less estimated selling costs. At December 31, 1998,
Spring Hill Savings Bank had $52,000 of REO and other repossessed assets, net of
specific reserves, which consisted of one building and two mobile homes.
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible
and of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the insured
institution establishes specific allowances for loan losses for the full amount
of the portion of the asset classified as loss. All or a portion of general
loan loss allowances established to cover possible losses related to assets
classified substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do not qualify as regulatory capital. Assets that do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are classified as special mention and monitored by Spring Hill Savings Bank.
The aggregate amounts of Spring Hill Savings Bank's classified assets at
the dates indicated were as follows:
<TABLE>
<CAPTION>
At December 31,
---------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Loss................ $ -- $ -- $ --
Doubtful............ -- -- --
Substandard assets.. 1,238 1,183 1,352
Special mention..... -- -- --
</TABLE>
At December 31, 1998, classified assets consisted of $562,000 of 14 loans
comprised chiefly of one- to four-family mortgage loans, $52,000 in REO and
repossessed assets, two loans to related borrowers totaling $384,000 that are
secured by a small office building, the personal residence of one of the
borrowers and a parcel of undeveloped land, and four loans to related borrowers
totaling $240,000 that are secured by non-owner-occupied, one- to four-family
residential real estate.
Allowance for Loan Losses. The allowance for loan losses represents the
amount which management estimates is adequate to provide for potential losses in
its loan portfolio. The allowance method is used in providing for loan losses.
Accordingly, all loan losses are charged to the allowance and all recoveries are
credited to it. The allowance for loan losses is established through a
provision for loan losses charged to operations. The provision for loan losses
is based on management's periodic evaluation of individual loans, economic
factors, past loan loss experience, changes in the composition and volume of the
portfolio, and other relevant factors. The estimates used in determining the
adequacy of the allowance for loan losses, including the amounts and timing of
future cash flows expected on impaired loans, are particularly susceptible to
changes in the near term.
64
<PAGE>
At December 31, 1998, Spring Hill Savings Bank had an allowance for loan
losses of $441,000. Although management believes that it uses the best
information available to establish the allowance for loan losses, future
adjustments to the allowance for loan losses may be necessary and results of
operations could be significantly and adversely affected if circumstances differ
substantially from the assumptions used in establishing the allowance.
While Spring Hill Savings Bank believes it has established its existing
allowance for loan losses in accordance with GAAP, there can be no assurance
that regulators, in reviewing Spring Hill Savings Bank's loan portfolio, will
not request Spring Hill Savings Bank to increase significantly its allowance for
loan losses. In addition, because future events affecting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that
the existing allowance for loan losses is adequate or that substantial increases
will not be necessary should the quality of any loans deteriorate as a result of
the factors discussed above. Any material increase in the allowance for loan
losses may adversely affect Spring Hill Savings Bank's financial condition and
results of operations.
The following table sets forth an analysis of Spring Hill Savings Bank's
allowance for loan losses at and for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1998 1997 1996
------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
Allowance at beginning of period......... $ 441 $ 415 $ 276
Provision for loan losses................ 20 70 239
Recoveries:
Mortgage loans:
One- to four-family................... 8 18 4
Consumer loans:
Mobile home........................... 6 -- --
Other................................. -- 6 5
Commercial loans....................... 1 10 2
----- ----- -----
Total recoveries..................... 15 34 11
----- ----- -----
Charge-offs:
Mortgage loans:
One- to four-family................... (9) (21) (24)
Consumer loans:
Mobile home........................... (26) (9) (69)
Other................................. -- (9) (12)
Commercial loans....................... -- (39) (6)
----- ----- -----
Total charge-offs.................... (35) (78) (111)
----- ----- -----
Net charge-offs......................... (20) (44) (100)
----- ----- -----
Balance at end of period................ $ 441 $ 441 $ 415
===== ===== =====
Allowance for loan losses as a percent
of total loans receivable............... 0.76% 0.76% 0.75%
Net charge-offs to average
loans outstanding....................... 0.03% 0.08% 0.19%
</TABLE>
65
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any other category.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
% of % of % of
Loans in Loans in Loans in
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ --------- ------ --------- ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family................ $140 69.91% $130 75.50% $ 115 75.10%
Multi-family....................... 110 10.44 106 10.37 84 10.21
Construction....................... 45 11.67 19 4.40 17 3.10
Commercial real estate............. 67 4.42 81 5.15 62 5.93
Consumer loans:
Mobile home........................ 65 2.42 89 3.20 105 4.41
Other.............................. 14 1.14 16 1.38 15 1.10
Commercial loans.................... -- -- -- -- 17 0.15
---- ------ ---- ------ ----- ------
Total allowance for loan losses.. $441 100.00% $441 100.00% $ 415 100.00%
==== ====== ==== ====== ===== ======
</TABLE>
Investment Activities
Spring Hill Savings Bank is permitted under federal law to invest in
various types of assets, including U.S. Government obligations, securities of
various federal agencies and of state and municipal governments, deposits at the
FHLB-Pittsburgh, certificates of deposit of federally insured institutions,
certain bankers' acceptances and federal funds. Subject to various
restrictions, Spring Hill Savings Bank may also invest a portion of its assets
in commercial paper and corporate debt securities. Savings institutions like
Spring Hill Savings Bank are also required to maintain an investment in FHLB
stock. Spring Hill Savings Bank is required under federal regulations to
maintain a minimum amount of liquid assets. Spring Hill Savings Bank's policies
generally limit investments to U.S. Government and agency securities, municipal
bonds, banker's acceptances, corporate bonds, commercial paper, mutual funds,
federal funds and certificates of deposit. Investment in mortgage-backed and
mortgage related securities is also authorized, and includes securities issued
and guaranteed by Federal Home Loan Mortgage Corporation ("FHLMC"), FNMA,
Government National Mortgage Association ("GNMA") and privately-issued
collateralized mortgage-backed securities that have the highest rating by two
national rating services. A high credit rating indicates only that the rating
agency believes there is a low risk of default. However, all of Spring Hill
Savings Bank's investment securities, including those that have high credit
ratings, are subject to market risk insofar as increases in market rates of
interest may cause a decrease in their market value. Spring Hill Savings Bank's
policies prescribe risk limits and certain other restrictions and provide that
investment purchases be reviewed at monthly Board of Directors meetings. From
time to time, investment levels may be increased or decreased depending upon the
yields on investment alternatives and upon management's judgment as to the
attractiveness of the yields then available in relation to other opportunities
and its expectation of the level of yield that will be available in the future,
as well as management's projections as to the short-term demand for funds to be
used in Spring Hill Savings Bank's loan origination and other activities.
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires that investments be categorized as "held to maturity,"
"trading securities" or "available for sale," based on management's intent as to
the ultimate disposition of each security. SFAS No. 115 allows debt securities
to be classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be
66
<PAGE>
classified as "held to maturity." Debt and equity securities held for current
resale are classified as "trading securities." Such securities are reported at
fair value, and unrealized gains and losses on such securities would be included
in earnings. Spring Hill Savings Bank does not currently use or maintain a
trading account. Debt and equity securities not classified as either "held to
maturity" or "trading securities" are classified as "available for sale." Such
securities are reported at fair value, and unrealized gains and losses on such
securities are excluded from earnings and reported as a net amount in a separate
component of equity. Of the $21.3 million of investment and mortgage-backed
securities at December 31, 1998, $2.5 million, or 11.5%, were classified as
available for sale.
Mortgage-Backed Securities. Spring Hill Savings Bank purchases mortgage-
backed securities in order to: (i) generate positive interest rate spreads on
large principal balances with minimal administrative expense; (ii) lower the
credit risk of Spring Hill Savings Bank as a result of the guarantees provided
by FHLMC, FNMA, and GNMA; (iii) increase Spring Hill Savings Bank's liquidity;
and (iv) control interest rate risk. Spring Hill Savings Bank invests in both
adjustable- and fixed-rate mortgage-backed securities with maturities typically
up to 15 years. Spring Hill Savings Bank has invested primarily in federal
agency securities, principally FNMA, FHLMC and GNMA. Spring Hill Savings Bank
also invests in collateralized mortgage obligations ("CMOs"). At December 31,
1998, mortgage-backed securities totaled $17.2 million, or 19.2% of SHS's total
assets of which $6.8 million consisted of CMOs. At December 31, 1998, 22.1% of
the mortgage-backed securities were adjustable-rate and 77.9% were fixed-rate.
Mortgage-backed securities (which also are known as mortgage participation
certificates or pass-through certificates) typically represent a participation
interest in a pool of single-family or multi-family mortgages. The principal
and interest payments on these mortgages are passed from the mortgage
originators, through intermediaries (generally U.S. Government agencies and
government sponsored enterprises) that pool and resell the participation
interests in the form of securities, to investors such as Spring Hill Savings
Bank. Such U.S. Government agencies and government sponsored enterprises, which
guarantee the payment of principal and interest to investors, primarily include
the FHLMC, FNMA and the GNMA. Mortgage-backed securities typically are issued
with stated principal amounts, and the securities are backed by pools of
mortgages that have loans with interest rates that fall within a specific range
and have varying maturities. Mortgage-backed securities generally yield less
than the loans that underlie such securities because of the cost of payment
guarantees and credit enhancements. In addition, mortgage-backed securities are
usually more liquid than individual mortgage loans and may be used to
collateralize certain liabilities and obligations of Spring Hill Savings Bank.
These types of securities also permit Spring Hill Savings Bank to optimize its
regulatory capital because they have low risk weighting.
CMOs are generally classified as derivative financial instruments because
they are created by redirecting the cash flows from the pool of mortgages or
mortgage-backed securities underlying these securities to create two or more
classes (or tranches) with different maturity or risk characteristics designed
to meet a variety of investor needs and preferences. Management believes these
securities may represent attractive alternatives relative to other investments
due to the wide variety of maturity, repayment and interest rate options
available. Consistent with the guidelines of the OTS, the current investment
policy of Spring Hill Savings Bank prohibits the purchase of high risk CMOs.
CMOs may be sponsored by private issuers, such as mortgage bankers or money
center banks, or by U.S. Government agencies and government sponsored entities.
The privately issued CMOs held by Spring Hill Savings Bank carry the highest
credit rating offered by either Moody's or Standard and Poor's. Spring Hill
Savings Bank generally purchases CMOs in order to shorten the average life of
its investment portfolio and to assist in asset/liability management. Spring
Hill Savings Bank evaluates its mortgage-related securities portfolio quarterly
for compliance with applicable regulatory requirements.
Derivatives also include "off balance sheet" financial products whose value
is dependent on the value of an underlying financial asset, such as a stock,
bond, foreign currency, or a reference rate or index. Such derivatives include
"forwards," "futures," "options" or "swaps." Spring Hill Savings Bank has not
invested in these "off balance sheet" derivative instruments, although Spring
Hill Savings Bank's investment policies authorize such investments.
Of Spring Hill Savings Bank's $17.2 million mortgage-backed securities
portfolio at December 31, 1998, $6.0 million with a weighted average yield of
6.59% had contractual maturities within ten years and $11.2 million with a
weighted average yield of 6.96% had contractual maturities over ten years.
However, the actual maturity of a
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<PAGE>
mortgage-backed security may be less than its stated maturity due to prepayments
of the underlying mortgages. Prepayments that are faster than anticipated may
shorten the life of the security and may result in a loss of any premiums paid
and thereby reduce the net yield on such securities. Although prepayments of
underlying mortgages depend on many factors, including the type of mortgages,
the coupon rate, the age of mortgages, the geographical location of the
underlying real estate collateralizing the mortgages and general levels of
market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments. During periods of
declining mortgage interest rates, if the coupon rate of the underlying
mortgages exceeds the prevailing market interest rates offered for mortgage
loans, refinancing generally increases and accelerates the prepayment of the
underlying mortgages and the related security. Under such circumstances, Spring
Hill Savings Bank may be subject to reinvestment risk because, to the extent
that Spring Hill Savings Bank's mortgage-backed securities amortize or prepay
faster than anticipated, Spring Hill Savings Bank may not be able to reinvest
the proceeds of such repayments and prepayments at a comparable rate. In
contrast to mortgage-backed securities in which cash flow is received (and
hence, prepayment risk is shared) pro rata by all securities holders, the cash
flow from the mortgages or mortgage-backed securities underlying CMOs are
segmented and paid in accordance with a predetermined priority to investors
holding various tranches of such securities or obligations. A particular
tranche of CMOs may therefore carry prepayment risk that differs from that of
both the underlying collateral and other tranches.
The following table sets forth the composition of Spring Hill Savings
Bank's investment and mortgage-backed securities portfolios at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio Value Portfolio
-------- ----------- -------- ----------- -------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities
Available for sale:
U.S. Government obligations......... $ -- --% $ -- --% $ 498 39.15%
U.S. Government agency obligations.. 948 22.85 807 24.64 328 25.79
Corporate stock..................... 35 0.84 46 1.40 -- --
------- ------ ------- ------ ------- ------
Total available for sale........... 983 23.69 853 26.04 826 64.94
------- ------ ------- ------ ------- ------
Held to maturity:
U.S. Government agency obligations.. 2,917 70.31 2,423 73.96 446 35.06
Corporate securities................ 249 6.00 -- -- -- --
------- ------ ------- ------ ------- ------
Total held to maturity............ 3,166 76.31 2,423 73.96 446 35.06
------- ------ ------- ------ ------- ------
Total investment securities....... $ 4,149 100.00% $ 3,276 100.00% $ 1,272 100.00%
======= ====== ======= ====== ======= ======
Mortgage-backed securities
Available for sale:
GNMA................................ $ 291 1.69% $ 376 2.25% $ 472 2.41%
FHLMC............................... 368 2.15 677 4.05 782 4.00
FNMA................................ 451 2.62 555 3.32 664 3.40
CMOs................................ 370 2.15 522 3.12 512 2.62
------- ------ ------- ------ ------- ------
Total available for sale.......... 1,480 8.61 2,130 12.74 2,430 12.43
------- ------ ------- ------ ------- ------
Held to maturity:
GNMA................................ 1,123 6.53 1,394 8.34 1,025 5.24
FHLMC............................... 1,395 8.11 1,130 6.75 1,448 7.40
FNMA................................ 6,719 39.09 7,867 47.04 9,335 47.73
CMOs................................ 6,475 37.66 4,203 25.13 5,319 27.20
------- ------ ------- ------ ------- ------
Total held to maturity............ 15,712 91.39 14,594 87.26 17,127 87.57
------- ------ ------- ------ ------- ------
Total mortgage-backed securities.. $17,192 100.00% $16,724 100.00% $19,557 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
68
<PAGE>
The following table sets forth the maturities and weighted average yields
of the debt securities in Spring Hill Savings Bank's investment and
mortgage-backed securities portfolio at December 31, 1998.
<TABLE>
<CAPTION>
Over Over
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years
-------------- -------------- -------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Securities
Available for sale:
U.S. Government agency obligations.. $ -- --% $ 754 6.03% $ -- --% $ 194 6.75%
---- ---- ------ ---- ------ ---- ------- ----
Total available for sale.......... -- -- 754 6.03 -- -- 194 6.75
---- ---- ------ ---- ------ ---- ------- ----
Held to maturity:
U.S. Government agency obligations.. -- -- 1,250 6.73 1,500 7.20 167 7.25
Corporate securities................ -- -- 249 5.78 -- -- -- --
---- ---- ------ ---- ------ ---- ------- ----
Total held to maturity............ -- -- 1,499 6.57 1,500 7.20 167 7.25
---- ---- ------ ---- ------ ---- ------- ----
Total investment securities....... $ -- --% $2,253 6.39% $1,500 7.20% $ 361 6.98%
==== ==== ====== ==== ====== ==== ======= ====
Mortgage-backed securities
Available for sale:
GNMA................................ $ -- --% $ -- --% $ -- --% $ 291 6.95%
FHLMC............................... -- -- -- -- -- -- 368 6.64
FNMA................................ -- -- -- -- -- -- 451 5.77
CMOs................................ -- -- -- -- 370 5.75 -- --
---- ---- ------ ---- ------ ---- ------- ----
Total available for sale.......... -- -- -- -- 370 5.75 1,110 6.37
---- ---- ------ ---- ------ ---- ------- ----
Held to maturity:
GNMA................................ -- -- -- -- 285 7.25 838 6.80
FHLMC............................... -- -- 219 7.82 346 6.78 830 7.06
FNMA................................ -- -- 1,076 7.68 411 7.08 5,232 7.62
CMOs................................ 280 5.02 263 6.00 2,732 6.22 3,200 6.09
---- ---- ------ ---- ------ ---- ------- ----
Total held to maturity............ 280 5.02 1,558 7.42 3,774 6.44 10,100 7.02
---- ---- ------ ---- ------ ---- ------- ----
Total mortgage-backed securities.. $280 5.02% $1,558 7.42% $4,144 6.38% $11,210 6.96%
==== ==== ====== ==== ====== ==== ======= ====
</TABLE>
A significant portion of Spring Hill Savings Bank's U.S. Government agency
obligations contain call features which allow the issuing agency to redeem the
securities prior to their maturity dates. The call provisions associated with
the securities in Spring Hill Savings Bank's portfolio provide for advance
notification of the exercise of the call and repayment at 100% of the principal
balance plus accrued interest. At December 31, 1998, a total of $3.5 million of
the $3.9 million in U.S. Government agency obligations were subject to early
call provisions. Of these totals, $2.5 million, with a weighted average yield
of 6.67%, are subject to early call in 1999 and based on market yields at
December 31, 1998 were likely to be called.
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major sources of Spring Hill
Savings Bank's funds for lending and other investment purposes. Scheduled loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and money market conditions. Borrowings through the FHLB-Pittsburgh are
used to compensate for reductions in the availability of funds from other
sources and at times for asset and liability management. Currently, Spring Hill
Savings Bank has no other borrowing arrangements.
69
<PAGE>
Deposit Accounts. Savings deposits are the primary source of funds for
Spring Hill Savings Bank's lending and investment activities and for its general
business purposes. Substantially all of Spring Hill Savings Bank's depositors
are residents of Pennsylvania. Deposits are attracted from within Spring Hill
Savings Bank's primary market area through the offering of a broad selection of
deposit instruments, including negotiable order of withdrawal ("NOW") checking
accounts, money market deposit accounts, regular savings accounts, certificates
of deposit and retirement savings plans. Deposit account terms vary, according
to the minimum balance required, the time periods the funds must remain on
deposit and the interest rate, among other factors. In determining the terms of
its deposit accounts, Spring Hill Savings Bank considers current market interest
rates, profitability to Spring Hill Savings Bank, matching deposit and loan
products and its customer preferences and concerns. Spring Hill Savings Bank
reviews its deposit mix and pricing weekly. Currently, Spring Hill Savings Bank
does not accept brokered deposits, nor has it aggressively sought jumbo
certificates of deposit, although Spring Hill Savings Bank has in the past
accepted brokered certificates of deposit. At December 31, 1998, certificates
of deposit that are scheduled to mature in less than one year totaled $31.2
million.
On March 16, 1998, Spring Hill Savings Bank opened its fourth office. The
new location is in the Brighton Heights community of Pittsburgh and as of
December 31, 1998, total deposits at this new branch were $2.3 million.
Continued efforts are being extended to increase the community awareness of our
new location as well as the profitability of this new branch.
Spring Hill Savings Bank currently offers certificates of deposit for terms
not exceeding 60 months but will consider requests for longer terms. As a
result, Spring Hill Savings Bank believes that it is better able to match the
repricing of its liabilities to the repricing of its loan portfolio.
The following table indicates the amount of Spring Hill Savings Bank's
jumbo certificates of deposit by time remaining until maturity as of December
31, 1998. Jumbo certificates of deposit are certificates in amounts of $95,000
or more that receive a premium to the rate paid on other time deposits for
similar terms, normally 10 basis points (0.10%).
<TABLE>
<CAPTION>
Maturity Period Amount
--------------- --------------
(In Thousands)
<S> <C>
Three months or less............ $ 495
Over three through six months... 750
Over six through 12 months...... 2,590
Over 12 months.................. 2,980
------
Total jumbo certificates
of deposit................ $6,815
======
</TABLE>
70
<PAGE>
Deposit Flow. The following table sets forth the balances (inclusive of
interest credited) and changes in dollar amounts of deposits in the various
types of accounts offered by Spring Hill Savings Bank between the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ---------------------------- ------------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
------- ------- ---------- ------- -------- ---------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing checking........ $ 738 1.09% $ 318 $ 420 0.65% $ 108 $ 312 0.49%
Interest-bearing demand.............. 8,803 13.01 (219) 9,022 13.98 383 8,639 13.44
Savings accounts..................... 12,535 18.52 690 11,845 18.36 (989) 12,834 19.96
Fixed-rate certificates which
mature:
Within 1 year...................... 31,181 46.08 4,579 26,602 41.24 (713) 27,315 42.48
After 1 year, but within 2 years... 5,026 7.43 (2,288) 7,314 11.34 1,974 5,340 8.31
After 2 years, but within 5 years.. 9,381 13.86 75 9,306 14.42 (546) 9,852 15.32
Certificates maturing thereafter... 2 -- (2) 4 0.01 2 2 --
------- ------ ------- ------- ------ ------ ------- ------
Total........................... $67,666 100.00% $ 3,153 $64,513 100.00% $ 219 $64,294 100.00%
======= ====== ======= ======= ====== ====== ======= ======
</TABLE>
71
<PAGE>
Time Deposits by Rates. The following table sets forth the time deposits
in Spring Hill Savings Bank categorized by rates at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------
1998 1997 1996
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
2.00 - 3.99%........ $ 1 $ 25 $ 25
4.00 - 5.99%........ 35,646 30,876 32,154
6.00 - 7.99%........ 9,929 12,307 10,264
8.00 - 8.99%........ 14 18 66
------- ------- -------
Total.............. $45,590 $43,226 $42,509
======= ======= =======
</TABLE>
The following table sets forth the amount and maturities of time deposits
at December 31, 1998.
<TABLE>
<CAPTION>
Amount Due
-----------------------------------------
Percent
of Total
Less Than 1-2 2-3 3-4 After Certificate
One Year Years Years Years 4 Years Total Accounts
--------- ------ ------ ------ ------- ------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
2.00 - 3.99%............... $ 1 $ -- $ -- $ -- $ -- $ 1 --%
4.00 - 5.99%............... 27,841 2,940 3,773 -- 1,092 35,646 78.19
6.00 - 7.99%............... 3,339 2,080 2,357 2,146 7 9,929 21.78
8.00 - 8.99%............... -- 6 8 -- -- 14 0.03
------- ------ ------ ------ ------ ------- ------
Total..................... $31,181 $5,026 $6,138 $2,146 $1,099 $45,590 100.00%
======= ====== ====== ====== ====== ======= ======
</TABLE>
Deposit Activity. The following table sets forth the deposit activities of
Spring Hill Savings Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1998 1997 1996
------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Beginning balance............... $64,513 $64,294 $65,160
Net increase (decrease) before
interest credited............. 3 (2,906) (3,913)
Interest credited............... 3,150 3,125 3,047
------- ------- -------
Net increase (decrease)
in savings deposits........... 3,153 219 (866)
------- ------- -------
Ending balance.................. $67,666 $64,513 $64,294
======= ======= =======
</TABLE>
Borrowings. Spring Hill Savings Bank utilizes advances from the FHLB-
Pittsburgh to supplement its supply of funds, to meet deposit withdrawal
requirements and for asset and liability management. The FHLB-
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<PAGE>
Pittsburgh functions as a central reserve bank providing credit for savings
associations and certain other member financial institutions. As a member of
the FHLB-Pittsburgh, Spring Hill Savings Bank is required to own capital stock
in the FHLB-Pittsburgh and is authorized to apply for advances on the security
of such stock and certain of its mortgage loans and other assets (principally
securities that are obligations of, or guaranteed by, the U.S. Government)
provided certain creditworthiness standards have been met. Advances are made
pursuant to several different credit programs. Each credit program has its own
interest rate and range of maturities. Depending on the program, limitations on
the amount of advances are based on the financial condition of the member
institution and the adequacy of collateral pledged to secure the credit. Spring
Hill Savings Bank is currently authorized to borrow from the FHLB up to an
amount equal to approximately 50% of total assets.
In 1987, Spring Hill Savings Bank incorporated Spring Hill Funding
Corporation ("SHFC") for the purpose of issuing a CMO to various investors. In
1987, SHFC issued a CMO with a total par value of $32.1 million comprised of
three classes of bonds with different stated maturity dates ranging from July 1,
2002 to December 1, 2017. The net proceeds of the CMO offering amounted to
$27.8 million, reflecting issuance costs and the original issue discount. The
collateral and source of cash flows for the principal and interest payments on
the CMO consisted of certain mortgage-backed securities transferred from Spring
Hill Savings Bank to SHFC. As a result of the lower interest rate environment
prevailing since the issuance of the CMO bonds, the mortgage-backed securities
that were used to collateralize the CMO paid off faster than originally
projected, and the CMO balance was likewise reduced in advance of the original
schedule of stated maturities. In 1993, the class A bonds of the CMO were paid
off. In March 1997, the class C bonds of the CMO with a par value of $4.8
million were repurchased and extinguished. During 1998, the remaining principal
balance for the class B bond was repaid through scheduled repayments from the
collateral, the CMO trust was closed and SHFC was dissolved as a company.
The following tables sets forth certain information regarding borrowings by
Spring Hill Savings Bank at the dates and for the periods indicated:
<TABLE>
<CAPTION>
At December 31,
-------------------------
1998 1997 1996
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Weighted average rate paid on:
FHLB advances....................... 6.14% 6.47% 6.63%
Collateralized mortgage obligation.. -- 11.75 12.30
Balance outstanding:
FHLB advances....................... $8,743 $8,863 $3,772
Collateralized mortgage obligation.. -- 1,395 6,937
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum amount of borrowings outstanding
at any month end during the period:
FHLB advances........................... $8,743 $9,609 $6,378
FHLB agreements to repurchase
securities previously sold............. -- -- --
Collateralized mortgage obligation...... 1,239 6,836 8,156
Average amount of borrowings
outstanding during the period:
FHLB advances........................... 8,189 8,227 2,629
FHLB agreements to repurchase
securities previously sold............. -- -- --
Collateralized mortgage obligation...... 598 2,921 7,565
Approximate weighted average
interest rate during the period:
FHLB advances........................... 6.36% 6.47% 6.50%
FHLB agreements to repurchase
securities previously sold............. -- -- --
Collateralized mortgage obligation...... 12.21 11.71 12.31
</TABLE>
Competition
Spring Hill Savings Bank operates in a competitive market for the
attraction of savings deposits (its primary source of lendable funds) and in the
origination of loans. Its most direct competition for savings deposits has
historically come from commercial banks, credit unions and other thrifts
operating in its primary market area. Spring Hill Savings Bank's competitors
include large regional and super regional banks. These institutions are
significantly larger than Spring Hill Savings Bank and therefore have greater
financial and marketing resources than Spring Hill Savings Bank. Particularly
in times of high interest rates, Spring Hill Savings Bank has faced additional
significant competition for investors' funds from short-term money market
securities and other corporate and government securities. In recent years,
Spring Hill Savings Bank has experienced an increased level of competition for
deposits from securities firms, insurance companies and other investment
vehicles, such as mutual funds. Spring Hill Savings Bank's competition for
loans comes from commercial banks and other thrifts operating in its market as
well as from mortgage bankers and brokers and consumer finance companies. Such
competition for deposits and the origination of loans may limit Spring Hill
Savings Bank's growth and profitability in the future.
Personnel
As of December 31, 1998, Spring Hill Savings Bank had 22 full-time and 9
part-time employees. The employees are not represented by a collective
bargaining unit and Spring Hill Savings Bank believes its relationship with its
employees to be good.
During 1998, SHS initiated two stock based compensation plans and
terminated its defined benefit program. These changes were initiated in order
to more closely align the long term compensation of the employees with the
financial performance of SHS. The costs associated with these actions is
described under the section "Management's Discussion and Analysis of Financial
Condition and Results of Operations." For additional information, see Note 14
of the Notes to the Consolidated Financial Statements.
74
<PAGE>
Subsidiary Activities
During 1998, Spring Hill Savings Bank dissolved its operating subsidiary,
SHFC, which was created in 1987 for the purpose of issuing a CMO.
Federal savings associations generally may invest up to 3% of their assets
in service corporations, provided that any amount in excess of 2% is used
primarily for community, inner-city and community development projects. Spring
Hill Savings Bank did not have any service corporations at December 31, 1998.
REGULATION OF SHS
General
Spring Hill Savings Bank is subject to extensive regulation, examination
and supervision by the OTS as its chartering agency, and the FDIC, as the
insurer of its deposits. The activities of federal savings institutions are
governed by the HOLA and, in certain respects, the Federal Deposit Insurance Act
("FDIA"), and the regulations issued by the OTS and the FDIC to implement these
statutes. These laws and regulations delineate the nature and extent of the
activities in which federal savings associations may engage. Lending activities
and other investments must comply with various statutory and regulatory capital
requirements. In addition, Spring Hill Savings Bank's relationship with its
depositors and borrowers is also regulated to a great extent, especially in such
matters as the ownership of deposit accounts and the form and content of Spring
Hill Savings Bank's mortgage documents. Spring Hill Savings Bank must file
reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS to review Spring Hill
Savings Bank's compliance with various regulatory requirements. The regulatory
structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or Congress, could have a
material adverse impact on SHS, Spring Hill Savings Bank and their operations.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the Treasury.
The OTS generally possesses the supervisory and regulatory duties and
responsibilities formerly vested in the Federal Home Loan Bank Board. Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs, is
under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to supervise the FHLBs, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
ensure that the FHLBs operate in a safe and sound manner.
Spring Hill Savings Bank, as a member of the FHLB-Pittsburgh, is required
to acquire and hold shares of capital stock in the FHLB-Pittsburgh in an amount
equal to the greater of (i) 1.0% of the aggregate outstanding principal amount
of residential mortgage loans, home purchase contracts and similar obligations
at the beginning of each year, or (ii) 1/20 of its advances (i.e., borrowings)
from the FHLB-Pittsburgh. Spring Hill Savings Bank is in compliance with this
requirement with an investment in FHLB-Pittsburgh stock of $627,000 at December
31, 1998.
Among other benefits, the FHLB provides a central credit facility primarily
for member institutions. It is funded primarily from proceeds derived from the
sale of consolidated obligations of the FHLB System. It makes
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advances to members in accordance with policies and procedures established by
the FHFB and the Board of Directors of the FHLB-Pittsburgh.
Federal Deposit Insurance Corporation. The FDIC is an independent federal
agency established originally to insure the deposits, up to prescribed statutory
limits, of federally insured banks and to preserve the safety and soundness of
the banking industry. The FDIC maintains two separate insurance funds: the Bank
Insurance Fund ("BIF") and the SAIF. Spring Hill Savings Bank's deposit
accounts are insured by the FDIC under the SAIF to the maximum extent permitted
by law. As insurer of Spring Hill Savings Bank's deposits, the FDIC has
examination, supervisory and enforcement authority over all savings
associations.
Under applicable regulations, 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: (i) well-capitalized, (ii) adequately capitalized, or
(iii) 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 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.
On September 30, 1996, the Deposit Insurance Funds Act ("DIF Act") was
enacted, which, among other things, imposed a special one-time assessment on
SAIF member institutions, including Spring Hill Savings Bank, to recapitalize
the SAIF. As a result of the DIF Act and the special one-time assessment, the
FDIC reduced the assessment schedule for SAIF members, effective January 1,
1997, to a range of 0% to 0.27%, with most institutions, including Spring Hill
Savings Bank, paying 0%. This assessment schedule is the same as that for the
BIF, which reached its designated reserve ratio in 1995. In addition, since
January 1, 1997, SAIF members are charged an assessment of 0.065% of SAIF-
assessable deposits for the purpose of paying interest on the obligations issued
by the Financing Corporation ("FICO") in the 1980s to help fund the thrift
industry cleanup. BIF-assessable deposits are charged an assessment to help pay
interest on the FICO bonds at a rate of approximately .013%. Full pro rata
sharing of the FICO payments between BIF and SAIF members will occur until the
earlier of December 31, 1999, or the date the BIF and SAIF are merged.
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 Spring Hill Savings
Bank.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. Management of Spring Hill Savings Bank does not know of any practice,
condition or violation that might lead to termination of deposit insurance.
Liquidity Requirements. Under OTS regulations, each savings institution is
required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and specified U.S.
Government, state or federal agency obligations, mortgage-backed securities and
certain other investments) equal to a monthly average of not less than a
specified percentage (currently 4.0%) of its net withdrawable accounts plus
short-term borrowings. Monetary penalties may be imposed for failure to meet
liquidity requirements.
Prompt Corrective Action. The FDIA requires each federal banking agency is
required to implement a system of prompt corrective action for institutions that
it regulates. The federal banking agencies have promulgated substantially
similar regulations to implement this system of prompt corrective action. Under
the regulations, an
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institution shall be deemed to be (i) "well capitalized" if it has a total
risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital
ratio of 6.0% or more, has a leverage ratio of 5.0% or more and is not subject
to specified requirements to meet and maintain a specific capital level for any
capital measure; (ii) "adequately capitalized" if it has a total risk-based
capital ratio of 8.0% or more, a Tier I risk-based capital ratio of 4.0% or
more and a leverage ratio of 4.0% or more (3.0% under certain circumstances)
and does not meet the definition of "well capitalized;" (iii)
"undercapitalized" if it has a total risk-based capital ratio that is less than
8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a leverage
ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio
that is less than 6.0%, a Tier I risk-based capital ratio that is less than
3.0% or a leverage ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%.
The FDIA also provides that a federal banking agency may, after notice and
an opportunity for a hearing, reclassify a well capitalized institution as
adequately capitalized and may require an adequately capitalized institution or
an undercapitalized institution to comply with supervisory actions as if it were
in the next lower category if the institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice. The OTS may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.
An institution generally must file a written capital restoration plan that
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with the appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. Immediately upon becoming undercapitalized, an
institution shall become subject to various mandatory and discretionary
restrictions on its operations.
At December 31, 1998, Spring Hill Savings Bank was categorized as "well
capitalized" under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal banking regulatory
agencies have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)
interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). 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. If the OTS determines that Spring Hill Savings
Bank fails to meet any standard prescribed by the Guidelines, the agency may
require Spring Hill Savings Bank to submit to the agency an acceptable plan to
achieve compliance with the standard. Management is aware of no conditions
relating to these safety and soundness standards which would require submission
of a plan of compliance.
Qualified Thrift Lender Test. All savings associations, including Spring
Hill Savings Bank, are required to meet a qualified thrift lender ("QTL") test
to avoid certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio asset (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, the savings association
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code ("Code"). Under either test, such assets primarily
consist of residential housing related loans and investments. At December 31,
1998, Spring Hill Savings Bank met the test and its QTL percentage was 96%.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
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subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements. SHS is not subject to any
minimum capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion of
certain assets from capital and to account appropriately for the investments in
and assets of both includable and nonincludable subsidiaries. Institutions that
fail to meet the core capital requirement would be required to file with the OTS
a capital plan that details the steps they will take to reach compliance. In
addition, the OTS' prompt corrective action regulation provides that a savings
institution that has a leverage ratio of less than 4% (3% for institutions
receiving the highest CAMEL examination rating) will be deemed to be
"undercapitalized" and may be subject to certain restrictions. See "--Federal
Regulation of Savings Associations--Prompt Corrective Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations rated
a composite one (the highest rating) under the CAMEL rating system for savings
associations will be permitted to operate at or near the regulatory minimum
leverage ratio of 3%. All other savings associations will be required to
maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a case-by-case
basis to determine the applicable requirement. No assurance can be given as to
the final form of any such regulation, the date of its effectiveness or the
requirement applicable to Spring Hill Savings Bank.
Savings associations also must maintain "tangible capital" not less than
1.5% of Spring Hill Savings Bank's adjusted total assets. "Tangible capital" is
defined, generally, as core capital minus any "intangible assets" other than
purchased mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal to at
least 8% of risk-weighted assets. Total risk-based capital consists of the sum
of core and supplementary capital, provided that supplementary capital cannot
exceed core capital, as previously defined. Supplementary capital includes (i)
permanent capital instruments such as cumulative perpetual preferred stock,
perpetual subordinated debt and mandatory convertible subordinated debt, (ii)
maturing capital instruments such as subordinated debt, intermediate-term
preferred stock and mandatory convertible subordinated debt, subject to an
amortization schedule, and (iii) general valuation loan and lease loss
allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held by
a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities that
are backed by the full faith and credit of the U.S. Government to 100%
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for repossessed assets or assets more than 90 days past due. Qualifying
residential mortgage loans (including multi-family mortgage loans) are assigned
a 50% risk weight. Consumer, commercial, home equity and residential
construction loans are assigned a 100% risk weight, as are nonqualifying
residential mortgage loans and that portion of land loans and nonresidential
construction loans that do not exceed an 80% loan-to-value ratio. The book
value of assets in each category is multiplied by the weighing factor (from 0%
to 100%) assigned to that category. These products are then totalled to arrive
at total risk-weighted assets. Off-balance sheet items are included in
risk-weighted assets by converting them to an approximate balance sheet "credit
equivalent amount" based on a conversion schedule. These credit equivalent
amounts are then assigned to risk categories in the same manner as balance
sheet assets and included as risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. 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 risk 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. Under certain
circumstances, a savings association may request an adjustment to its interest
rate risk component if it believes that the OTS-calculated interest rate risk
component overstates its interest rate risk exposure. In addition, certain
"well-capitalized" institutions may obtain authorization to use their own
interest rate risk model to calculate their interest rate risk component in lieu
of the OTS-calculated amount. The OTS has postponed the date that the component
will first be deducted from an institution's total capital.
At December 31, 1998, Spring Hill Savings Bank's core capital of
approximately $9.7 million, or 11.1% of adjusted total assets, was $7.1 million
in excess of the OTS requirement of $2.6 million, or 3% of adjusted total
assets. As of such date, Spring Hill Savings Bank's tangible capital of
approximately $9.7 million, or 11.1% of adjusted total assets, was $8.4 million
in excess of the OTS requirement of $1.3 million, or 1.5% of adjusted total
assets. Finally, at December 31, 1998, Spring Hill Savings Bank had risk-based
capital of approximately $10.2 million or 24.4% of total risk-weighted assets,
which was $6.9 million in excess of the OTS risk-based capital requirement of
$3.3 million or 8% of risk-weighted assets.
Limitations on Capital Distributions. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require Spring Hill Savings Bank to give
the OTS 30 days' advance notice of any proposed declaration of dividends, and
the OTS has the authority under its supervisory powers to prohibit the payment
of dividends. The regulation utilizes a three-tiered approach which permits
various levels of distributions based primarily upon a savings association's
capital level.
A Tier 1 savings association has capital in excess of its fully phased-in
capital requirement (both before and after the proposed capital distribution).
A Tier 1 savings association may make (without application but upon prior notice
to, and no objection made by, the OTS) capital distributions during a calendar
year up to 100% of its net income to date during the calendar year plus one-half
its surplus capital ratio (i.e., the amount of capital in excess of its fully
----
phased-in requirement) at the beginning of the calendar year or the amount
authorized for a Tier 2
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association. Capital distributions in excess of such amount require advance
notice to the OTS. A Tier 2 savings association has capital equal to or in
excess of its minimum capital requirement but below its fully phased-in capital
requirement (both before and after the proposed capital distribution). Such an
association may make (without application) capital distributions up to an
amount equal to 75% of its net income during the previous four quarters
depending on how close the association is to meeting its fully phased-in
capital requirement. Capital distributions exceeding this amount require prior
OTS approval. A Tier 3 savings association has capital below the minimum
capital requirement (either before or after the proposed capital distribution).
A Tier 3 savings association may not make any capital distributions without
prior approval from the OTS.
Spring Hill Savings Bank currently meets the criteria to be designated a
Tier 1 association and, consequently, could at its option (after prior notice
to, and no objection made by, the OTS) distribute up to 100% of its net income
during the calendar year plus 50% of its surplus capital ratio at the beginning
of the calendar year less any distributions previously paid during the year.
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 Spring Hill Savings Bank's unimpaired capital and surplus, plus
an additional 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. The OTS by regulation has amended the loans to one
borrower rule to permit savings associations meeting certain requirements,
including capital requirements, to extend loans to one borrower in additional
amounts under circumstances limited essentially to loans to develop or complete
residential housing units. At December 31, 1998, Spring Hill Savings Bank's
regulatory limit on loans to one borrower was $1.5 million. However, Spring
Hill Savings Bank's current loans to one borrower limit as set by policy is
generally $500,000. At December 31, 1998, Spring Hill Savings Bank's largest
aggregate amount of loans to one borrower was $720,000, which was performing
according to their original terms.
Activities of Associations and Their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide the
information each agency may, by regulation, require. Savings associations also
must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings association of its
ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to which
the insured association or its subsidiaries may engage in certain covered
transactions with an affiliate to an amount equal to 10% of such institution's
capital and surplus and place an aggregate limit on all such transactions with
affiliates to an amount equal to 20% of such capital and surplus, and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable to the institution or subsidiary, as those provided to a non-
affiliate. The term "covered transaction" includes the making of loans, the
purchase of assets, the issuance of a guaranty and similar types of
transactions. Any loan or extension of credit by Spring Hill Savings Bank to an
affiliate must be secured by collateral in accordance with Section 23A.
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Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies; (ii) a savings association may not purchase or invest in securities
issued by an affiliate (other than securities of a subsidiary); and (iii) the
OTS may, for reasons of safety and soundness, impose more stringent restrictions
on savings associations but may not exempt transactions from or otherwise
abridge Section 23A or 23B. Exemptions from Section 23A or 23B may be granted
only by the Federal Reserve Board, as is currently the case with respect to all
FDIC-insured banks. Spring Hill Savings Bank has not been significantly
affected by the rules regarding transactions with affiliates.
Spring Hill Savings Bank's authority to extend credit to executive
officers, directors and 10% shareholders, as well as entities controlled by such
persons, is governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and
Regulation O thereunder. Among other things, these regulations require that
such loans be made on terms and conditions substantially the same as those
offered to unaffiliated individuals and not involve more than the normal risk of
repayment. Regulation O also places individual and aggregate limits on the
amount of loans Spring Hill Savings Bank may make to such persons based, in
part, on Spring Hill Savings Bank's capital position, and requires certain board
approval procedures to be followed. The OTS regulations, with certain minor
variances, apply Regulation O to savings institutions.
Community Reinvestment Act. Under the federal Community Reinvestment Act
("CRA"), all federally-insured financial institutions have a continuing and
affirmative obligation consistent with safe and sound operations to help meet
all the credit needs of its delineated community. The CRA does not establish
specific lending requirements or programs nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to meet all the credit needs of its delineated community. The CRA
requires the federal banking agencies, in connection with regulatory
examinations, to assess an institution's record of meeting the credit needs of
its delineated community and to take such record into account in evaluating
regulatory applications to establish a new branch office that will accept
deposits, relocate an existing office, or merge or consolidate with, or acquire
the assets or assume the liabilities of, a federally regulated financial
institution, among others. The CRA requires public disclosure of an
institution's CRA rating. Spring Hill Savings Bank received a "satisfactory"
rating as a result of its latest evaluation.
Regulatory and Criminal Enforcement Provisions. The OTS has primary
enforcement responsibility over savings institutions and has the authority to
bring action against all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers or directors,
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $27,500 per day, or
$1.1 million per day in especially egregious cases. Under the FDIA, 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 law also establishes criminal penalties for
certain violations.
Savings and Loan Holding Company Regulations
Holding Company Acquisitions. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without prior
OTS approval, from acquiring more than 5% of the voting stock of any other
savings association or savings and loan holding company or controlling the
assets thereof. They also prohibit, among other things, any director or officer
of a savings and loan holding company, or any individual who owns or controls
more than 25% of the voting shares of such holding company, from acquiring
control of any savings association not a subsidiary of such savings and loan
holding company, unless the acquisition is approved by the OTS.
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Holding Company Activities. As a unitary savings and loan holding company,
SHS generally is not subject to activity restrictions under the HOLA. If SHS
acquires control of another savings association as a separate subsidiary other
than in a supervisory acquisition, it would become a multiple savings and loan
holding company. There generally are more restrictions on the activities of a
multiple savings and loan holding company than on those of a unitary savings and
loan holding company. The HOLA provides that, among other things, no multiple
savings and loan holding company or subsidiary thereof which is not an insured
association shall commence or continue for more than two years after becoming a
multiple savings and loan association holding company or subsidiary thereof, any
business activity other than: (i) furnishing or performing management services
for a subsidiary insured institution, (ii) conducting an insurance agency or
escrow business, (iii) holding, managing, or liquidating assets owned by or
acquired from a subsidiary insured institution, (iv) holding or managing
properties used or occupied by a subsidiary insured institution, (v) acting as
trustee under deeds of trust, (vi) those activities previously directly
authorized by regulation as of March 5, 1987 to be engaged in by multiple
holding companies or (vii) those activities authorized by the Federal Reserve
Board as permissible for bank holding companies, unless the OTS by regulation,
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above also must be approved by the OTS prior
to being engaged in by a multiple savings and loan holding company.
Qualified Thrift Lender Test. The HOLA provides that any savings and loan
holding company that controls a savings association that fails the QTL test, as
explained under "--Federal Regulation of Savings Banks--Qualified Thrift
Lender Test," must, within one year after the date on which the association
ceases to be a QTL, register as and be deemed a bank holding company subject to
all applicable laws and regulations.
TAXATION OF SHS
Federal Taxation
General. SHS and Spring Hill Savings Bank report their income on a fiscal
year basis using the accrual method of accounting and are subject to federal
income taxation in the same manner as other corporations with some exceptions,
including particularly Spring Hill Savings Bank's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to Spring Hill Savings Bank or SHS.
Bad Debt Reserve. Historically, savings institutions such as Spring Hill
Savings Bank which met certain definitional tests primarily related to their
assets and the nature of their business ("qualifying thrift") were permitted to
establish a reserve for bad debts and to make annual additions thereto, which
may have been deducted in arriving at their taxable income. Spring Hill Savings
Bank's deductions with respect to "qualifying real property loans," which are
generally loans secured by certain interest in real property, were computed
using an amount based on Spring Hill Savings Bank's actual loss experience, or a
percentage equal to 8% of Spring Hill Savings Bank's taxable income, computed
with certain modifications and reduced by the amount of any permitted additions
to the non-qualifying reserve. Due to Spring Hill Savings Bank's loss
experience, Spring Hill Savings Bank generally recognized a bad debt deduction
equal to 8% of taxable income.
The thrift bad debt rules were revised by Congress in 1996. The new rules
eliminated the 8% of taxable income method for deducting additions to the tax
bad debt reserves for all thrifts for tax years beginning after December 31,
1995. These rules also required that all institutions recapture all or a
portion of their bad debt reserves added since the base year (last taxable year
beginning before January 1, 1988). Spring Hill Savings Bank has no post-1987
reserves subject to recapture. For taxable years beginning after December 31,
1995, Spring Hill Savings Bank's bad debt deduction will be determined under the
experience method using a formula based on actual bad debt experience over a
period of years. The unrecaptured base year reserves will not be subject to
recapture as long as the institution continues to carry on the business of
banking. In addition, the balance of the pre-1988 bad
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debt reserves continue to be subject to provisions of present law referred to
below that require recapture in the case of certain excess distributions to
shareholders.
Distributions. To the extent that Spring Hill Savings Bank makes
"nondividend distributions" to SHS, such distributions will be considered to
result in distributions from the balance of its bad debt reserve as of December
31, 1987 (or a lesser amount if Spring Hill Savings Bank's loan portfolio
decreased since December 31, 1987) and then from the supplemental reserve for
losses on loans ("Excess Distributions"), and an amount based on the Excess
Distributions will be included in Spring Hill Savings Bank's taxable income.
Nondividend distributions include distributions in excess of Spring Hill Savings
Bank's current and accumulated earnings and profits, distributions in redemption
of stock and distributions in partial or complete liquidation. However,
dividends paid out of Spring Hill Savings Bank's current or accumulated earnings
and profits, as calculated for federal income tax purposes, will not be
considered to result in a distribution from Spring Hill Savings Bank's bad debt
reserve. 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 Spring Hill
Savings Bank makes a "nondividend distribution," then approximately one and one-
half times the Excess Distribution 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 of SHS" for limits on the payment of
dividends by Spring Hill Savings Bank. Spring Hill Savings Bank does not intend
to pay dividends that would result in a recapture of any portion of its tax bad
debt reserve.
Corporate Alternative Minimum Tax. The Internal Revenue Code imposes a tax
on alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of
the tax bad debt reserve deduction using the percentage of taxable income method
over the deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which Spring Hill Savings
Bank's adjusted current earnings exceeds its AMTI (determined without regard to
this preference and prior to reduction for net operating losses). For taxable
years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of 0.12% of the excess of AMTI (with certain modification)
over $2.0 million is imposed on corporations, including Spring Hill Savings
Bank, whether or not an Alternative Minimum Tax is paid.
Dividends-Received Deduction. SHS may exclude from its income 100% of
dividends received from Spring Hill Savings Bank as a member of the same
affiliated group of corporations. The corporate dividends-received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which SHS and Spring Hill Savings Bank will not file a consolidated tax
return, except that if SHS or Spring Hill Savings Bank owns more than 20% of the
stock of a corporation distributing a dividend, then 80% of any dividends
received may be deducted.
State Taxation
Spring Hill Savings Bank is subject to the mutual thrift institutions tax
of the Commonwealth of Pennsylvania based on Spring Hill Savings Bank's
financial net income determined in accordance with generally accepted accounting
principles with certain adjustments. The tax rate under the mutual thrift
institutions tax is 11.5%. Interest on Commonwealth of Pennsylvania and Federal
obligations is excluded from net income. An allocable portion of net interest
expense incurred to carry the obligations is disallowed as a deduction. Three
year carryforwards of losses are allowed.
SHS is subject to the corporate net income tax and the capital stock tax of
the Commonwealth of Pennsylvania.
Audits
SHS's income tax returns have not been audited by federal or state
authorities within the last five years. For additional information regarding
income taxes, see Note 13 of the Notes to Consolidated Financial Statements.
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COMPARISON OF THE RIGHTS OF STOCKHOLDERS OF ESB AND SHS
ESB and SHS are both business corporations incorporated in Pennsylvania
under the Pennsylvania Business Corporation Law. Prior to the merger, the
rights of SHS stockholders are governed by Pennsylvania corporate law and the
articles of incorporation and bylaws of SHS. Upon the completion of the merger,
each SHS stockholder who is allocated shares of ESB common stock will become a
stockholder of ESB. Accordingly, after the merger, the rights of such
stockholders will be governed by the articles of incorporation and bylaws of
ESB, in addition to Pennsylvania corporate law. Because both ESB and SHS are
Pennsylvania corporations, the differences in the rights of SHS and ESB
stockholders generally will consist of differences found in their respective
articles of incorporation and bylaws. The following is a comparison of those
differences as well as certain important similarities. The summary, however,
does not purport to be complete and is qualified in its entirety by reference to
Pennsylvania law, which statutes change from time to time, and the respective
articles of incorporation and bylaws of ESB and SHS, which also may be changed.
Special Meeting of Stockholders
Under ESB's articles of incorporation, special meetings of stockholders may
be called only by (i) the board of directors pursuant to a resolution approved
by the affirmative vote of a majority of the directors then in office, (ii) the
chairman of the board or (iii) the president, except as otherwise required by
law.
Under SHS's articles of incorporation, special meetings of stockholders may
be called only by (i) the board of directors pursuant to a resolution approved
by the affirmative vote of a majority of the directors then in office, (ii) the
chairman of the board or (iii) the president, except as otherwise required by
law and subject to the rights of the holders of any class or series of preferred
stock.
Amendment of Articles of Incorporation and Bylaws
Under Pennsylvania law, no amendment to a corporation's articles of
incorporation may be made unless it is first proposed by the board of directors,
or, unless otherwise provided in the articles of incorporation, by petition of
stockholders entitled to cast at least 10% of the votes that all stockholders
are entitled to cast thereon.
ESB's articles of incorporation provide that no amendment may be made
unless it is first approved by the ESB board of directors and thereafter is
approved by the holders of a majority of the shares of ESB common stock entitled
to vote generally in an election of directors, voting together as a single
class, with the exception of Article 7 (directors), Article 8 (preemptive
rights), Article 9 (indemnification, etc. of officers, directors, employees and
agents), Article 10 (meetings of stockholders and stockholder proposals),
Article 11 (restrictions on offers and acquisitions of ESB's's equity
securities) and Article 12 (amendment of articles and bylaws), which may not be
amended without the affirmative vote of the holders of at least 75% of the
shares of ESB common stock entitled to vote generally in an election of
directors. SHS's articles of incorporation contain comparable amendment
language and, in addition, require the affirmative vote of the holders of at
least 75% of the shares of SHS common stock entitled to vote generally in an
election of directors with respect to (i) limitations on voting SHS common stock
and (ii) notice for stockholder nominations and proposals.
ESB's bylaws may be amended by a majority vote of the ESB board of
directors or by the affirmative vote of the holders of a majority of the shares
of ESB common stock entitled to vote generally in an election of directors,
voting together as a single class, with the exception of Sections 2.3
(organization and conduct of stockholders' meetings), 4.1 (number and powers of
board of directors), 4.2 (change of number of board of directors), 4.3
(vacancies in board of directors) and 4.4 (removal of directors) of the bylaws
and Articles VIII (personal liability of directors) and XII (amendments), which
may not be amended without the affirmative vote of the holders of at least 75%
of the shares of ESB common stock entitled to vote generally in an election of
directors. SHS's articles of incorporation contain comparable amendment
language for the amendment of SHS's bylaws.
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Cumulative Voting
The respective articles of incorporation of ESB and SHS do not permit
stockholders to cumulate their votes for the election of directors.
Stockholder Consent to Corporate Action
The articles of incorporation of ESB and SHS each provide that any action
permitted to be taken by their respective stockholders at a meeting may be taken
by unanimous written consent of such stockholders.
Stockholder Nominations and Proposals
ESB's articles of incorporation provide that all nominations for election
to the ESB board of directors, other than those made by the ESB board or a
committee thereof, be made by a stockholder who has complied with the notice
provisions in ESB's articles of incorporation. Written notice of a stockholder
nomination must be communicated to the attention of the Secretary of ESB and
either delivered to, or mailed and received at, the principal executive offices
of ESB not less than 60 days prior to the anniversary date of the immediately
preceding annual meeting of stockholders of ESB. Each such notice shall set
forth the information required by Article 7.F of ESB's articles of
incorporation.
ESB's articles of incorporation also provide that only such business as
shall have been properly brought before an annual meeting of stockholders shall
be conducted at the annual meeting. For business to be properly brought before
an annual meeting, such business must be (a) brought before the meeting by or at
the direction of the ESB board of directors or (b) otherwise properly brought
before the meeting by a stockholder who has given timely notice thereof in
writing to the Secretary of ESB. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive office of ESB not
less than 60 days prior to the anniversary date of the immediately preceding
annual meeting. A stockholder's notice to the Secretary shall set forth as to
each matter the stockholder proposes to bring before the annual meeting the
information required by Article 10.F of ESB's articles of incorporation. The
presiding officer of an annual meeting shall determine and declare to the
meeting whether the business was properly brought before the meeting in
accordance with the provisions of the ESB articles of incorporation, and any
such business not properly brought before the annual meeting shall not be
transacted.
SHS's articles of incorporation also provide for notice and information
requirements for stockholder proposals and nominations for the election of
directors. Nominations for the election of directors and stockholder proposals
may be made by the SHS board of directors or by any SHS stockholder entitled to
vote generally in the election of directors. In order for an SHS stockholder to
have any such proposal or nomination considered at an annual meeting, he or she
must give written notice thereof, delivered or mailed by first class U.S. mail,
postage prepaid, to the Secretary of SHS not less than 30 days nor more than 60
days prior to any such meeting. However, if less than 30 days' notice of the
annual meeting is given to stockholders, such written notice by the stockholder
must be received by the Secretary of SHS no later than the tenth day following
the day on which notice of the meeting was mailed to stockholders. The
stockholder's written notice must contain the information required by SHS's
articles of incorporation. The chairman of the annual meeting will determine
and declare to the meeting whether the nomination or proposal was properly
brought before the meeting in accordance with the provisions of the SHS articles
of incorporation, and any such defective nomination or proposal will be
disregarded and laid over for action at the next succeeding adjourned, special
or annual meeting of stockholders taking place 30 days or more thereafter.
Dividends
Under Pennsylvania law, a corporation is prohibited from making a
distribution to shareholders if, after giving effect thereto:
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. that corporation would be unable to pay its debts as they become due
in the usual course of business; or
. the total assets of that corporation would be less than the sum of its
total liabilities plus the amount that would be needed, if that
corporation were then dissolved, to satisfy the rights of
shareholders having superior preferential rights upon dissolution to
the shareholders receiving such distribution. For the purpose of
valuing the assets of the corporation, the board of directors may
base its determination on one or more of the following: the book
value, or the current value, of the corporation's assets and
liabilities, unrealized appreciation and depreciation of the
corporation's assets and liabilities or any other method that is
reasonable in the circumstances.
ESB's bylaws provide that dividends may be declared by the ESB board and
paid by ESB out of its unreserved and unrestricted earned surplus or out of the
unrestricted capital surplus of ESB, subject to Pennsylvania law.
SHS's bylaws provide that dividends may be declared by the SHS board and
paid by SHS, subject to Pennsylvania law.
Removal of Directors; Number of Directors
Under ESB's articles of incorporation, any director may be removed from
office without cause by an affirmative vote of not less than 75% of the total
votes eligible to be cast by stockholders at a duly constituted meeting of
stockholders called expressly for such purpose and may be removed from office
with cause by an affirmative vote of not less than a majority of the total votes
eligible to be cast by stockholders. In addition, under ESB's articles of
incorporation, vacancies in ESB's board of directors, including vacancies
created by newly created directorships resulting from an increase in the number
of directors, may be filled by ESB's board, acting by a vote of a majority of
the directors then in office, even if less than a quorum, and any director so
chosen shall serve for the remainder of the term of the class of directors in
which the vacancy occurred and until his successor is elected and qualified.
SHS's articles of incorporation contain comparable language to remove directors
and fill vacancies.
Indemnification and Limitations of Liability of Directors and Officers
ESB's articles of incorporation and bylaws provide that a director of ESB
will not be personally liable for monetary damages for actions taken, or any
failure to take any action, as a director except to the extent that by law a
director's liability for monetary damages may not be limited. This provision,
which is permitted under the Pennsylvania Directors' Liability Act, does not
limit the personal liability of the directors of ESB for monetary damages for
breaches of the standard of care imposed on directors as fiduciaries which
constitute self-dealing, willful misconduct or recklessness. In addition, this
provision does not limit the liability of directors arising under any criminal
statute or for the payment of any federal, state or local taxes. This provision
applies to actions taken by a director only in that capacity; it does not apply
to actions taken in any other capacity, including that of an officer. ESB's
articles of incorporation and bylaws also provide that any amendment or repeal
of this provision will not adversely affect any right of a director of ESB with
respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
ESB's articles of incorporation provide that ESB shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, because such person is or was a director,
officer, employee or agent of ESB. Indemnification will be furnished to the
full extent provided by law against expenses (including attorneys' fees),
judgments, fines, excise taxes and amounts paid in settlement actually and
reasonably incurred in connection with such action, suit or proceeding. In
particular, indemnification will be made against judgments and settlements in
derivative suits. Indemnification will be made unless a judgment or other final
adjudication establishes that the act or failure to act giving rise to the claim
for indemnification constituted willful misconduct or recklessness. The
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indemnification provisions also permit ESB to pay reasonable expenses in advance
of the final disposition of any action, suit or proceeding as authorized by
ESB's board of directors, provided that the indemnified person undertakes to
repay ESB if it is ultimately determined that such person was not entitled to
indemnification.
The rights of indemnification provided in ESB's articles of incorporation
are not exclusive of any other rights which may be available under ESB's bylaws,
any insurance or other agreement, by vote of stockholders or disinterested
directors or otherwise. In addition, ESB's articles of incorporation authorize
ESB to maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of ESB, whether or not ESB would have the power to
provide indemnification to such person. By action of the ESB board, ESB may
create and fund a trust fund or fund of any nature, and may enter into
agreements with its officers and directors, for securing or insuring in any
manner its obligation to indemnify or advance expenses provided for in the
provisions in ESB's articles of incorporation and bylaws regarding
indemnification.
SHS's articles of incorporation and bylaws also contain the aforementioned
director indemnification and liability provisions.
Provisions Affecting Business Combinations and Control Share Acquisitions
Pennsylvania law contains four anti-takeover sections that apply to
Pennsylvania corporations relating to (i) control share acquisitions, (ii) the
disgorgement of profits by certain controlling persons, (iii) business
combination transactions with interested stockholders and (iv) the ability of
stockholders to put their stock following a control transaction. Pennsylvania
law allows Pennsylvania corporations to opt-out of these anti-takeover sections
and ESB has elected to do so with respect to "control share acquisitions," while
SHS has not opted out of any of the four "anti-takeover" sections.
Under Pennsylvania law, unless a corporation has opted out of certain
statutory provisions, shares of a corporation whose shares are registered under
the Securities Exchange Act of 1934 acquired in a "control share acquisition" do
not have voting rights unless restored by a resolution approved by a vote of the
disinterested shareholders. Under Pennsylvania law a "control share acquisition"
means an acquisition by any person of voting power of a corporation that would,
when added to all other voting power of such person, entitle such person to cast
for the first time, the amount of voting power in any of the following ranges:
. at least 20% but less than 33 1/3%;
. at least 33 1/3% but less than 50%; or
. more than 50%.
SHS's articles of incorporation also require the approval of the holders of
at least 80% of the outstanding shares of SHS voting stock to approve certain
business combinations involving a related person except in cases where the
proposed transaction has been approved in advance by a majority of those members
of SHS's board of directors who are unaffiliated with the related person and
were directors prior to the time when the related person became a related
person. The term "related person" is defined to include any individual,
corporation, partnership or other entity (other than SHS or its subsidiary)
which owns beneficially or controls, directly or indirectly, 10% or more of the
outstanding shares of SHS voting stock or an affiliate of such person or entity.
This provision of SHS articles of incorporation applies to any "business
combination," which is defined to include:
. any merger or consolidation of SHS with or into any related person;
. any sale, lease, exchange, mortgage, transfer, or other disposition of
25% or more of the assets of SHS or combined assets of SHS and its
subsidiaries to a related person;
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. any merger or consolidation of a related person with or into SHS or
any of its subsidiaries;
. any sale, lease, exchange, transfer, or other disposition of 25% or
more of the assets of a related person to SHS or any of its
subsidiaries;
. the issuance of any securities of SHS or any of its subsidiaries to a
related person;
. the acquisition by SHS or any of its subsidiaries of any securities of
a related person;
. any reclassification of SHS common stock or any recapitalization
involving SHS common stock; or
. any agreement or other arrangement providing for any of the foregoing.
Limitation on Voting Rights; Restrictions on Offers and Acquisitions
ESB's articles of incorporation provide that until five years from the
completion of ESB Bank's conversion from the mutual to stock form, which
occurred on June 13, 1995, no person shall directly or indirectly offer to
acquire or acquire the beneficial ownership of more than 10% of the issued and
outstanding shares of any class of ESB equity security. In the event a person
acquires ESB shares in violation of this provision, all shares owned by such
person in excess of 10% will be considered "excess shares" and will not be able
to be voted.
SHS's articles of incorporation provide that a record owner of SHS 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 SHS common
stock (the "Limit") may not vote SHS shares held in excess of the Limit, unless
permitted by a resolution adopted by a majority of the SHS board of directors.
Beneficial ownership does not include shares beneficially owned by the SHS ESOP
or directors, officers and employees of SHS or Spring Hill Savings Bank or
shares that are subject to a revocable proxy and that are not otherwise
beneficially, or deemed by SHS to be beneficially, owned by such person and his
or her affiliates.
Preemptive Rights
Neither ESB's nor SHS's articles of incorporation provides for preemptive
rights for its stockholders.
DESCRIPTION OF CAPITAL STOCK OF ESB
General
ESB is authorized to issue 10,000,000 shares of common stock having a par
value of $0.01 per share, and 5,000,000 shares of preferred stock having a par
value of $0.01 per share. Each share of ESB common stock has the same relative
rights as, and is identical in all aspects with, each other share of ESB common
stock. Presented below is a description of all aspects of ESB's capital stock
which are deemed material to an investment decision with respect to the merger
proposal.
Common Stock
Distributions. ESB can pay dividends if, as and when declared by its
board, subject to compliance with limitations which are imposed by law. The
holders of ESB common stock are entitled to receive and share equally in such
dividends as may be declared by the board out of funds legally available
therefor. If ESB issues preferred stock, the holders of the preferred stock may
have a priority over the holders of ESB common stock with respect to dividends.
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Voting Rights. The holders of ESB common stock possess exclusive voting
rights in ESB. They elect ESB's board and act on such other matters as are
required to be presented to them under Pennsylvania law or ESB's articles of
incorporation or as are otherwise presented to them by the board of directors.
Each holder of ESB common stock is entitled to one vote per share and does not
have any right to cumulate votes in the election of directors. If ESB issues
preferred stock, holders of the preferred stock may also possess voting rights.
Liquidation. In the event of any liquidation, dissolution or winding up of
ESB Bank, ESB, as holder of ESB Bank's capital stock, would be entitled to
receive, after payment or provision for payment of all debts and liabilities of
ESB Bank (including all deposit accounts and accrued interest thereon) and after
distribution of the balance in the special liquidation account to certain
depositors of ESB Bank, all assets of ESB Bank available for distribution. In
the event of liquidation, dissolution or winding up of ESB, 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 ESB available for
distribution. If preferred stock is issued, the holders of the preferred stock
may have a priority over the holders of the common stock in the event of
liquidation or dissolution.
Preemptive Rights. Holders of ESB common stock do not have preemptive
rights with respect to any shares which may be issued. ESB common stock is not
subject to redemption.
Preferred Stock
None of the shares of ESB's authorized preferred stock has been issued.
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
ESB common stock and may assist management in impeding an unfriendly takeover or
attempted change in control.
LEGAL MATTERS
The validity of the shares of ESB common stock which will be issued in the
merger will be passed upon for ESB by Elias, Matz, Tiernan & Herrick L.L.P.,
Washington, D.C. In addition, Elias, Matz, Tiernan & Herrick L.L.P., Washington,
D.C., will opine upon the tax consequences of the merger for ESB and Breyer &
Associates PC, will opine on the tax consequences of the merger for SHS.
EXPERTS
The consolidated financial statements of ESB Financial Corporation as of
December 31, 1998 and 1997, and for each of the years in the three-year period
ended December 31, 1998, incorporated by reference in the 1998 ESB Financial
Corporation Form 10-K, have been incorporated by reference herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants incorporated by reference in the ESB Financial
Corporation 1998 Form 10-K, and upon the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements of SHS and subsidiary as of December
31, 1998 and 1997, and for each of the years in the two-year period ended
December 31, 1998, have been included in this proxy statement/prospectus in
reliance upon the report of S.R. Snodgrass, A.C., independent certified public
accountants, appearing elsewhere herein and upon the authority of said firm as
experts in accounting and auditing.
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STOCKHOLDER PROPOSALS FOR THE SHS 2000 ANNUAL MEETING
Proposals of stockholders intended to be presented at SHS's annual meeting
expected to be held in April 2000, which will be held only if the merger is not
consummated before the time of such meeting, must be received by SHS no later
than November 26, 1999 to be considered for inclusion in the proxy materials and
form of proxy relating to such meeting. Any such proposals shall be subject to
the requirements of the proxy rules adopted under the Exchange Act.
The articles of incorporation of SHS provide that in order for a
stockholder to make nominations for the election of directors or proposals for
business to be brought before the annual meeting, a stockholder must deliver
notice of such nominations and/or proposals to the secretary of SHS not less
than 30 nor more than 60 days prior to the date of the annual meeting; provided
that if less than 31 days' notice of the annual meeting is given to
stockholders, such notice must be delivered not later than the close of the
tenth day following the day on which notice of the annual meeting was mailed to
stockholders. As specified in the SHS articles of incorporation, the notice
with respect to nominations for election of directors must set forth certain
information regarding each nominee for election as a director, including such
person's written consent to being named in the proxy statement as a nominee and
to serving as a director, if elected, and certain information regarding the
stockholder giving such notice. The notice with respect to business proposals
to be brought before the annual meeting must state the stockholder's name,
address and number of shares of SHS common stock held, and briefly discuss the
business to be brought before the annual meeting, the reasons for conducting
such business at the annual meeting and any interest of the stockholder in the
proposal.
WHERE YOU CAN FIND MORE INFORMATION
ESB and SHS file annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission. You may read
and copy any reports, statements or other information that the companies file at
the SEC's public reference rooms in Washington, D.C., New York, New York, and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms.
ESB's and SHS's public filings are also available to the public from
commercial document retrieval services and at the Internet World Wide Website
maintained by the SEC at "http://www.sec.gov."
ESB has filed the registration statement to register with the SEC the
shares of ESB common stock to be issued to SHS stockholders in the merger. This
proxy statement/prospectus is a part of the registration statement and
constitutes a prospectus of ESB and a proxy statement of SHS for the special
meeting.
ESB common stock is traded on the Nasdaq Stock Market under the symbol
"ESBF," and SHS common stock is traded on the OTC Bulletin Board under the
symbol "SHSB." Documents filed by ESB also can be inspected at the offices of
the National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
As allowed by SEC rules, this document does not contain all the information
that stockholders can find in the registration statement or the exhibits to the
registration statement.
The SEC allows ESB to "incorporate by reference" information into this
document, which means that ESB can disclose important information to you by
referring you to another document filed separately with the SEC. The
information incorporated by reference is deemed to be part of this document,
except for any information superseded by information contained directly in the
document. This document incorporates by reference other documents which are
listed below that ESB has previously filed with the SEC. The documents contain
important information about ESB's financial condition.
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ESB SEC Filings (File No. 0-19345):
. ESB's Annual Report on Form 10-K for the fiscal year ended December
31, 1998;
. ESB's Quarterly Reports on Form 10-Q for the quarter ended March 31,
1999 and June 30, 1999; and
. ESB's Current Reports on Form 8-K filed on March 22, 1999, June 17,
1999, July 23, 1999 and September 23, 1999.
ESB also incorporates by reference additional documents that they might
file with the SEC between the date of this proxy statement-prospectus and the
date of the special meeting. These include periodic reports, such as Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form
8-K.
ESB has supplied all information contained or incorporated by reference in
this document relating to ESB.
SHS has supplied all information contained or incorporated by reference in
this document relating to SHS.
Accompanying this proxy statement/prospectus are ESB's 1998 Annual Report
to Stockholders and Quarterly Form 10-Q for the quarter ended June 30, 1999.
Copies of any of the ESB documents incorporated by reference (excluding
exhibits unless specifically incorporated therein) not otherwise accompanying
this proxy statement/prospectus are available without charge upon written or
oral request from Frank D. Martz, ESB Financial Corporation, 600 Lawrence
Avenue, Ellwood City, Pennsylvania 16117 (telephone number: (724) 758-5584).
To ensure timely delivery of the documents, any request should be made by
___________, 1999.
You should rely only on the information contained or incorporated by
reference in this document and the accompanying documents to vote your shares at
the special meeting. ESB and SHS have not authorized anyone to provide you with
information that is different from what is contained in this document. This
proxy statement/prospectus is dated ________, 1999. You should not assume that
the information contained in the proxy statement/prospectus is accurate as of
any date other than that date, and neither the mailing of this document to
stockholders nor the issuance of ESB's securities in the merger shall create any
implication to the contrary.
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INDEX TO SHS CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheet
(As of December 31, 1998 and 1997) F-3
Consolidated Statement of Income
(For the years ended December 31, 1998 and 1997) F-4
Consolidated Statement of Changes in Stockholders' Equity
(For the years ended December 31, 1998 and 1997) F-5
Consolidated Statement of Cash Flows
(For the years ended December 31, 1998 and 1997) F-6
Notes to Consolidated Financial Statements
(For the years ended December 31, 1998 and 1997) F-8
Consolidated Balance Sheet
(As of June 30, 1999 (unaudited) and December 31, 1998) F-32
Consolidated Statement of Income
(For the six months ended June 30, 1999 and 1998 (both unaudited)) F-33
Consolidated Statement of Comprehensive Income
(For the six months ended June 30, 1999 and 1998 (both unaudited)) F-34
Consolidated Statement of Cash Flows
(For the six months ended June 30, 1999 and 1998 (both unaudited)) F-35
Notes to Consolidated Financial Statements
(For the six months ended June 30, 1999 (unaudited) and
December 31, 1998) F-37
F-1
<PAGE>
[Letterhead of S.R. Snodgrass, A.C.]
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors and Stockholders
SHS Bancorp, Inc.
We have audited the accompanying consolidated balance sheet of SHS Bancorp,
Inc. and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SHS Bancorp,
Inc. and subsidiary as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ S.R. Snodgrass, A.C.
Wexford, PA
February 26, 1999
F-2
<PAGE>
SHS BANCORP, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 892,428 $ 685,622
Interest-bearing deposits in other banks 6,002,437 5,007,919
Short-term investments 1,054,217 1,998,742
----------- -----------
Cash and cash equivalents 7,949,082 7,692,283
Investment securities available for sale 982,767 852,829
Investment securities held to maturity
(market value of $3,210,263
and $2,473,368) 3,165,963 2,422,926
Mortgage-backed securities available
for sale 1,480,171 2,129,682
Mortgage-backed securities held to maturity
(market value of $15,950,798 and
$14,934,833) 15,711,490 14,594,274
Loans receivable (net of allowance for
loan losses of $441,080 and $440,982) 57,306,942 57,925,275
Accrued interest receivable 527,372 504,589
Premises and equipment 1,027,639 918,597
Federal Home Loan Bank stock 627,422 607,022
Other assets 634,695 604,112
----------- -----------
TOTAL ASSETS $89,413,543 $88,251,589
=========== ===========
LIABILITIES
Deposits $67,665,946 $64,513,197
Advances by borrowers for taxes and insurance 1,090,364 1,128,622
Collateralized mortgage obligation - 1,394,821
Borrowed funds 8,743,179 8,862,707
Accrued interest payable 96,904 116,833
Other liabilities 216,714 220,476
----------- -----------
TOTAL LIABILITIES 77,813,107 76,236,656
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 15) - -
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 5,000,000
shares authorized; none issued - -
Common stock, $.01 par value; 10,000,000
shares authorized; 819,950 issued 8,200 8,200
Additional paid-in capital 7,654,255 7,716,938
Retained earnings - substantially restricted 5,337,645 4,960,280
Unallocated shares held by Employee Stock
Ownership Plan (ESOP) (573,910) (639,550)
Unallocated shares held by Management
Recognition and Development Plan (MRDP) (245,980) -
Other components of comprehensive income 2,483 (30,935)
Treasury stock, 45,152 shares at cost (582,257) -
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 11,600,436 12,014,933
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $89,413,543 $88,251,589
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
SHS BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
----------- -----------
<S> <C> <C>
INTEREST INCOME
Loans receivable $4,816,193 $4,827,955
Interest-bearing deposits in other banks 311,268 191,449
Investment securities 353,710 206,443
Mortgage-backed securities 1,138,620 1,338,438
Dividends on Federal Home Loan Bank stock 40,447 38,514
----------- -----------
Total interest income 6,660,238 6,602,799
----------- -----------
INTEREST EXPENSE
Deposits 3,146,844 3,148,440
Advances by borrowers for taxes and insurance 13,216 12,782
Collateralized mortgage obligation 73,141 342,007
Borrowed funds 520,572 532,482
----------- -----------
Total interest expense 3,753,773 4,035,711
----------- -----------
NET INTEREST INCOME 2,906,465 2,567,088
Provision for loan losses 19,525 69,734
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,886,940 2,497,354
----------- -----------
NONINTEREST INCOME
Service charges on deposits 43,608 35,970
Investment securities gains, net - 123,076
Other income 131,463 32,882
----------- -----------
Total noninterest income 175,071 191,928
----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits 1,093,247 838,771
Occupancy and equipment 250,333 208,141
Pension plan termination 118,859 -
Professional fees 113,832 75,206
Data processing 213,582 190,103
Other operating expenses 472,424 341,125
----------- -----------
Total noninterest expense 2,262,277 1,653,346
----------- -----------
Income before income taxes and extraordinary item 799,734 1,035,936
Income tax expense 324,089 402,617
----------- -----------
Income before extraordinary item 475,645 633,319
Extraordinary item:
Loss on extinguishment of debt, net
of related income taxes of $400,537 - 562,525
----------- -----------
NET INCOME $ 475,645 $ 70,794
=========== ===========
EARNINGS PER SHARE (since inception
September 30, 1997)
Basic $0.63 $0.25
Diluted 0.63 N/A
WEIGHTED-AVERAGE SHARES OUTSTANDING
Basic 755,788 755,266
Diluted 758,411 N/A
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE>
SHS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained Unallocated
Additional Earnings- Shares
Common Paid-in Subtantially Held by
Stock Capital Restricted ESOP
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 $ - $ - $4,889,486 $ -
Net income 70,794
Other comprehensive income:
Unrealized gain on available for sale
securities, net of reclassification
adjustment
Comprehensive income
Issuance of 819,950 shares of
common stock on September 30,
1997, net of conversion costs 8,200 7,706,808 (655,960)
ESOP shares released 10,130 16,410
----------- ----------- ----------- -----------
Balance, December 31, 1997 8,200 7,716,938 4,960,280 (639,550)
Net income 475,645
Other comprehensive income:
Unrealized loss on available
for sale securities
Settlement of minimum pension liability
Comprehensive income
Cash dividends declared
($.13 per share) (98,280)
Purchase of treasury shares
Purchase of MRDP shares (94,294)
ESOP shares released 31,611 65,640
MRDP shares released
----------- ----------- ----------- -----------
Balance, December 31, 1998 $8,200 $7,654,255 $5,337,645 $(573,910)
=========== =========== =========== ===========
Components of comprehensive income:
Change in net unrealized gain (loss) on
investment securities available for sale
Realized gains included in net income, net
of tax
Minimum pension liability adjustment
Total
</TABLE>
<TABLE>
<CAPTION>
Unallocated Other
Shares Components of
Held by Comprehensive Treasury Comprehensive
MRDP Income Stock Total Income
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ - $ (49,469) $ - $4,840,017
Net income 70,794 $ 70,794
Other comprehensive income:
Unrealized gain on available for sale
securities, net of reclassification
adjustment 18,534 18,534 18,534
-----------
Comprehensive income $ 89,328
===========
Issuance of 819,950 shares of
common stock on September 30,
1997, net of conversion costs 7,059,048
ESOP shares released 26,540
----------- ----------- ----------- -----------
Balance, December 31, 1997 - (30,935) - 12,014,933
Net income 475,645 $ 475,645
Other comprehensive income:
Unrealized loss on available
for sale securities (9,690) (9,690) (9,690)
Settlement of minimum pension liability 43,108 43,108 43,108
-----------
Comprehensive income $ 509,063
===========
Cash dividends declared
($.13 per share) (98,280)
Purchase of treasury shares (582,257) (582,257)
Purchase of MRDP shares (327,980) (422,274)
ESOP shares released 97,251
MRDP shares released 82,000 82,000
----------- ----------- ----------- -----------
Balance, December 31, 1998 $ (245,980) $ 2,483 $ (582,257) $11,600,436
=========== =========== =========== ===========
1998 1997
Components of comprehensive income: ----------- -----------
Change in net unrealized gain (loss)
on investment securities available
for sale $ (9,690) $ 90,410
Realized gains included in net
income, net of tax - (71,876)
Minimum pension liability adjustment 43,108 -
----------- -----------
Total $ 33,418 $ 18,534
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE>
SHS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
1998 1997
OPERATING ACTIVITIES ------------ ------------
Net income $ 475,645 $ 70,794
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for losses on loans 19,525 69,734
Depreciation and amortization 339,316 300,065
Net securities gains - (123,076)
Loss on extinguishment of debt - 963,062
Deferred income taxes 275,459 (52,934)
Release of unearned ESOP shares 97,251 26,540
Increase in accrued interest receivable (22,783) (6,087)
Decrease in accrued interest payable (19,929) (44,407)
Other, net (302,038) (517,148)
----------- -----------
Net cash provided by
operating activities 862,446 686,543
----------- -----------
INVESTING ACTIVITIES
Investment securities available for sale:
Purchases (750,000) (1,543,882)
Proceeds from sales - 1,623,601
Maturities and repayments 611,245 27,557
Investment securities held to maturity:
Purchases (748,750) (2,749,609)
Maturities and repayments 5,474 772,971
Mortgage-backed securities available for sale:
Maturities and repayments 638,353 319,050
Mortgage-backed securities held to maturity:
Purchases (7,220,310) (2,329,683)
Maturities and repayments 6,049,520 4,822,741
Net decrease (increase) in loans receivable 557,412 (3,205,976)
Purchase of Federal Home Loan Bank stock (20,400) (12,300)
Purchase of premises and equipment, net (188,786) (210,963)
Other, net 5,566 -
----------- -----------
Net cash used for investing activities $(1,060,676) $(2,486,493)
----------- -----------
See accompanying notes to the consolidated financial statements.
F-6
<PAGE>
SHS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Year Ended December 31,
1998 1997
----------- -----------
FINANCING ACTIVITIES
Net increase in deposits $ 3,152,749 $ 219,078
Increase (decrease) in
advances by borrowers for
taxes and insurance (38,258) 66,416
Collateralized mortgage obligation
payments (1,437,123) (1,586,536)
Extinguishment of debt - (4,929,000)
Proceeds from borrowed funds 1,500,000 5,158,421
Repayment of borrowed funds (1,619,528) (67,750)
Purchase of treasury stock (582,257) -
Common stock acquired by MRDP (422,274)
Dividends paid (98,280) -
Proceeds from the issuance of common
stock - 7,059,048
----------- ----------
Net cash provided by financing
activities 455,029 5,919,677
----------- ----------
Increase in cash and cash
equivalents 256,799 4,119,727
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 7,692,283 3,572,556
----------- ----------
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 7,949,082 $7,692,283
=========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid during the year for:
Interest on deposits and borrowing $ 3,773,702 $4,080,118
Income taxes 438,877 464,710
See accompanying notes to the consolidated financial statements.
F-7
<PAGE>
SHS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting and reporting policies applied in the
presentation of the accompanying consolidated financial statements follows:
Nature of Operations and Basis of Presentation
----------------------------------------------
On September 30, 1997, SHS Bancorp, Inc. (the "Company") was formed as part
of a corporate reorganization completed in connection with the mutual-to-
stock conversion of Spring Hill Savings Bank (the "Bank") (see Note 19). As a
result of this transaction, the Bank became a wholly-owned subsidiary of the
Company. The Company and its subsidiary derive substantially all their income
from banking and bank-related services which include interest earnings on
residential real estate, commercial real estate, and consumer loan financing
as well as interest earnings on investment securities and charges for deposit
services to its customers. The Bank is a federally-chartered stock savings
bank located in Pittsburgh, Pennsylvania. The Company and the Bank are
subject to regulation and supervision by the Office of Thrift Supervision.
During 1998, Spring Hill Funding Corporation ("SHFC"), a wholly-owned
subsidiary of the Bank which had been formed to issue bonds collateralized by
Federal National Mortgage Association mortgage-backed securities, was
liquidated as a result of satisfaction of its collateralized mortgage
obligation.
The accounting policies followed by the Company, the Bank, and SHFC, and the
methods of applying these principles, conform with generally accepted
accounting principles and with general practice within the banking industry.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the consolidated balance sheet date and revenues and
expenses for the period. Actual results could differ significantly from those
estimates.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, the Bank, and the Bank's wholly-owned
subsidiary, SHFC. All intercompany transactions have been eliminated in
consolidation. The investments in subsidiaries on the Company's financial
statements are carried at the Company's equity in the underlying net assets.
Short-term Investments
----------------------
Short-term investments, which are carried at estimated cost, consist of
commercial paper with scheduled maturities within 90 days.
Investment Securities and Mortgage-backed Securities
----------------------------------------------------
Investment and mortgage-backed securities are classified at the time of
purchase, based on management's intentions and abilities, as securities held
to maturity or securities available for sale. Debt securities, including
mortgage-backed securities, acquired with the intent and ability to hold to
maturity are classified as held to maturity and are stated at cost and
adjusted for amortization of premium and accretion of discount which are
computed using a level yield method and recognized as adjustments of interest
income. Certain other debt and equity securities have been classified as
available for sale to serve principally as a source of liquidity. Unrealized
holding gains and losses on available for sale securities are reported as a
separate component of stockholders' equity, net of tax, until realized.
Realized securities gains and losses are computed using the specific
identification method. Interest and dividends on investment securities are
recognized as income when earned.
F-8
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment Securities Including Mortgage-backed Securities (Continued)
----------------------------------------------------------
Common stock of the Federal Home Loan Bank (the "FHLB") represents ownership
in an institution which is wholly-owned by other financial institutions. This
equity security is accounted for at cost and reported separately on the
accompanying consolidated balance sheet.
Loans Receivable
----------------
Loans receivable are stated at their unpaid principal amounts net of the
allowance for loan losses. Interest on loans is credited to income as earned
on the accrual basis. Interest accrued on loans more than 90 days delinquent
is generally offset by a reserve for uncollected interest and is not
recognized as income. Interest payments received on nonaccrual loans are
recorded as income or applied against principal according to management's
judgment as to the collectibility of such principal.
Loan Origination Fees
---------------------
Loan origination and commitment fees and certain direct loan origination
costs are being deferred and the net amount amortized as an adjustment of the
related loan's yield. The Company is amortizing these amounts over the
contractual life of the related loans.
Allowance for Loan Losses
-------------------------
The allowance for loan losses represents the amount which management
estimates is adequate to provide for potential losses in its loan portfolio.
The allowance method is used in providing for loan losses. Accordingly, all
loan losses are charged to the allowance, and all recoveries are credited to
it. The allowance for loan losses is established through a provision for loan
losses charged to operations. The provision for loan losses is based on
management's periodic evaluation of individual loans, economic factors, past
loan loss experience, changes in the composition and volume of the portfolio,
and other relevant factors. The estimates used in determining the adequacy of
the allowance for loan losses, including the amounts and timing of future
cash flows expected on impaired loans, are particularly susceptible to
changes in the near term.
Impaired loans are commercial real estate loans for which it is probable the
Company will not be able to collect all amounts due according to the
contractual terms of the loan agreement. The Company individually evaluates
such loans for impairment and does not aggregate loans by major risk
classifications. The definition of "impaired loans" is not the same as the
definition of "nonaccrual loans," although the two categories overlap. The
Company may choose to place a loan on nonaccrual status due to payment
delinquency or uncertain collectibility, while not classifying the loan as
impaired if the loan is not a commercial real estate loan. Factors considered
by management in determining impairment include payment status and collateral
value. The amount of impairment for these types of impaired loans is
determined by the difference between the present value of the expected cash
flows related to the loan using the original interest rate, and its recorded
value, or as a practical expedient in the case of collateralized loans, the
difference between the fair value of the collateral and the recorded amount
of the loans. When foreclosure is probable, impairment is measured based on
the fair value of the collateral.
Mortgage loans on one-to-four family properties and all consumer loans are
large groups of smaller-balance homogeneous loans and are measured for
impairment collectively. Loans that experience insignificant payment delays,
which are defined as 90 days or less, generally are not classified as
impaired. Management determines the significance of payment delays on a case-
by-case basis taking into consideration all circumstances surrounding the
loan and the borrower including the length of the delay, the borrower's prior
payment record, and the amount of shortfall in relation to the principal and
interest owed.
F-9
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment
----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the useful
lives of the related assets of three to thirty-five years. Expenditures for
maintenance and repairs are charged to operations as incurred. Costs of major
additions and improvements are capitalized.
Debt Discount and Issue Costs
-----------------------------
Discounts and issue costs related to the issuance of the CMO are amortized to
interest expense on the interest method.
Real Estate Owned
-----------------
Real estate owned acquired in settlement of foreclosed loans is carried at
the lower of cost or fair value minus estimated cost to sell. Valuation
allowances for estimated losses are provided when the carrying value exceeds
the fair value. Direct costs incurred on such properties are recorded as
expenses of current operations.
Stock Options
-------------
The Company maintains a stock option plan for the directors, officers, and
employees. The stock options typically have expiration terms of ten years
subject to certain extensions and early terminations. The per share exercise
price of a stock option shall be, at a minimum, equal to the fair value of a
share of common stock on the date the option is granted. Because the exercise
price of the Company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized
in the Company's financial statements. Pro forma net income and earnings per
share are presented to reflect the impact of the stock option plan assuming
compensation expense had been affected based on the fair value of the stock
options granted under this plan.
Federal Income Taxes
--------------------
Deferred tax assets or liabilities are computed based on the difference
between the financial statement and income tax basis of assets and
liabilities using the enacted marginal tax rates. Deferred income tax
expenses or benefits are based on the changes in the deferred tax asset or
liability from period to period.
Comprehensive Income
--------------------
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." In adopting
Statement No. 130, the Company is required to present comprehensive income
and its components in a full set of general purpose financial statements for
all periods presented. The Company has elected to report the effects of
Statement No. 130 as part of the consolidated statement of changes in
stockholders' equity.
Earnings Per Share
------------------
The Company provides dual presentation of Basic and Diluted earnings per
share. Basic earnings per share utilizes net income as reported as the
numerator and the actual average shares outstanding as the denominator.
Diluted earnings per share include any dilutive effects of options, warrants,
and convertible securities.
F-10
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share (Continued)
------------------
Earnings per share for the period from September 30, 1997, the date of the
conversion, to December 31, 1997, are based upon the weighted number of
shares outstanding on earnings for that period which amounted to $185,269. If
earnings per share had been computed on a retroactive basis for the year
ended December 31, 1997, recognizing earnings for the entire year, earnings
per share would have been $.84 per share before the extraordinary item and
$.09 per share after the extraordinary item, as compared to $.25 per share
reported in the accompanying consolidated statement of income.
Pending Accounting Pronouncements
---------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement provides accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, by requiring the recognition of
those items as assets or liabilities in the consolidated balance sheet
recorded at fair value. Statement No. 133 precludes a held to maturity
security from being designated as a hedged item; however, at the date of
initial application of this Statement, an entity is permitted to transfer any
held to maturity security into the available for sale or trading categories.
The unrealized holding gain or loss on such transferred securities shall be
reported consistent with the requirements of Statement No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Such transfers do not
raise an issue regarding an entity's intent to hold other debt securities to
maturity in the future. This Statement applies prospectively for all fiscal
quarters of all years beginning after June 15, 1999. Earlier adoption is
permitted for any fiscal quarter that begins after the issue date of this
Statement.
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." This SOP, which is effective for
fiscal years beginning after December 15, 1998, provides guidance on
accounting for the costs of computer software developed or obtained for
internal use and provides guidance for determining whether computer software
is for internal use. The Company will adopt SOP 98-1 in the first quarter of
1999 and does not believe the effect of adoption will be material.
Reclassification of Comparative Amounts
---------------------------------------
Certain comparative account balances for 1997 have been reclassified to
conform to the 1998 classifications. Such reclassifications did not effect
stockholders' equity or net income.
F-11
<PAGE>
2. EARNINGS PER SHARE
The following table sets forth the computation of Basic and Diluted earnings
per share. There were no convertible securities which would affect the
numerator in calculating Basic and Diluted earnings per share; therefore, net
income as presented on the Consolidated Statement of Income will be used as
the numerator. The following table sets forth a reconciliation of the
denominator of the Basic and Diluted earnings per share computation:
1998 1997
------- -------
Denominator:
Denominator for Basic earnings per
share - weighted-average shares 755,788 755,266
Employee stock options 2,623 -
------- -------
Denominator for Diluted earnings per
share - adjusted weighted-average
assumed conversions 758,411 755,266
======= =======
3. INTEREST-BEARING DEPOSITS IN OTHER BANKS
Interest-bearing deposits in other banks is comprised of the following:
1998 1997
---------- -----------
Overnight deposits $5,977,437 $ 4,982,919
Federal funds sold 25,000 25,000
---------- -----------
Total $6,002,437 $ 5,007,919
========== ===========
4. INVESTMENT SECURITIES
1998
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ----------- ---------- ---------
Available for Sale
U.S. Government agency
securities $ 750,000 $ 3,411 $ - $ 753,411
Small Business
Administration
guaranteed loan pool 188,055 6,238 - 194,293
---------- ---------- -------- ----------
Total debt securities 938,055 9,649 - 947,704
Equity securities 47,788 - (12,725) 35,063
---------- ---------- -------- ----------
Total $ 985,843 $ 9,649 $(12,725) $ 982,767
========== ========== ======== ==========
Held to Maturity
U.S. Government agency
securities $2,917,136 $ 44,300 $ - $2,961,436
Corporate securities 248,827 - - 248,827
---------- ---------- -------- ----------
Total $3,165,963 $ 44,300 $ - $3,210,263
========== ========== ======== ==========
F-12
<PAGE>
4. INVESTMENT SECURITIES (Continued)
1997
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
Available for Sale
U.S. Government agency
securities $ 500,000 $ - $ (1,404) $ 498,596
Small Business
Administration
guaranteed loan pool 299,352 8,681 - 308,033
---------- ---------- -------- ----------
Total debt
securities 799,352 8,681 (1,404) 806,629
Equity securities 47,788 - (1,588) 46,200
---------- ---------- -------- ----------
Total $ 847,140 $ 8,681 $ (2,992) $ 852,829
========== ========== ======== ==========
Held to Maturity
U.S. Government agency
securities $2,422,926 $ 50,442 $ - $2,473,368
========== ========== ======== ==========
The amortized cost and estimated market value of investment securities at
December 31, 1998, by contractual maturity, are shown below.
Available for Sale Held to Maturity
-------------------- ----------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------- --------- ---------- ----------
Due after one year through
five years $750,000 $753,412 $1,498,827 $1,513,905
Due after five years
through ten years - - 1,500,000 1,521,945
Due after ten years 188,055 194,292 167,136 174,413
-------- -------- ---------- ----------
Total $938,055 $947,704 $3,165,963 $3,210,263
======== ======== ========== ==========
During 1997, the Company had proceeds from sales of investment securities
available for sale of $1,623,601, and gross gains and gross losses of
$127,598 and $4,522, respectively. There were no sales of investment
securities during 1998.
A gain of $121,063 was realized in 1997 from the early redemption of the last
remaining CMO residual owned by the Company as an investment. This gain
resulted from the exercise of the early call provisions of the Trust
Indenture and the collateral value exceeding the debt obligations secured by
the collateral. The Company received its proportionate interest in the
premium realized from the sale of the collateral that had been held by the
Trustee to secure the CMO bonds.
F-13
<PAGE>
5. MORTGAGE-BACKED SECURITIES
1998
----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- ----------
Available for Sale
Government National
Mortgage Association $ 292,425 $ - $ (1,253) $ 291,172
Federal Home Loan
Mortgage Corporation 370,974 217 (2,857) 368,334
Federal National Mortgage
Association 453,231 - (1,991) 451,240
Collateralized mortgage
obligations 356,212 13,213 - 369,425
----------- -------- -------- -----------
Total $ 1,472,842 $ 13,430 $ (6,101) $ 1,480,171
=========== ======== ======== ===========
Held to Maturity
Government National
Mortgage Association $ 1,122,602 $ 7,166 $ (934) $ 1,128,834
Federal Home Loan
Mortgage Corporation 1,394,707 18,885 - 1,413,592
Federal National Mortgage
Association 6,718,781 214,926 - 6,933,707
Collateralized mortgage
obligations 6,475,400 16,703 (17,438) 6,474,665
----------- -------- -------- -----------
Total $15,711,490 $257,680 $(18,372) $15,950,798
=========== ======== ======== ===========
F-14
<PAGE>
5. MORTGAGE-BACKED SECURITIES (Continued)
1997
----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
Available for Sale
Government National
Mortgage Association $ 373,127 $ 2,833 $ - $ 375,960
Federal Home Loan
Mortgage Corporation 674,169 4,457 (1,616) 677,010
Federal National Mortgage
Association 560,029 - (4,874) 555,155
Collateralized mortgage
obligations 507,204 14,353 - 521,557
----------- -------- -------- -----------
Total $ 2,114,529 $ 21,643 $ (6,490) $ 2,129,682
=========== ======== ======== ===========
Held to Maturity
Government National
Mortgage Association $ 1,394,585 $ 17,557 $ - $ 1,412,142
Federal Home Loan
Mortgage Corporation 1,129,975 37,184 (935) 1,166,224
Federal National Mortgage
Association 7,866,641 255,886 - 8,122,527
Collateralized mortgage
obligations 4,203,073 33,054 (2,187) 4,233,940
----------- -------- -------- -----------
Total $14,594,274 $343,681 $ (3,122) $14,934,833
=========== ======== ======== ===========
At December 31, 1998 and 1997, substantially all the CMOs consisted of
federal agency CMOs.
The amortized cost and estimated market value of mortgage-backed securities
at December 31, 1998, by contractual maturity, are shown below. Mortgage-
backed securities provide for periodic payments of principal and interest.
Due to expected repayment terms being significantly less than the underlying
mortgage loan pool contractual maturities, the estimated lives of these
securities could be significantly shorter.
Available for Sale Held to Maturity
---------------------- ------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------- --------- ------------ ----------
Due within one year $ - $ - $ 280,024 $ 279,146
Due after one year through
five years - - 1,558,738 1,585,872
Due after five years through
ten years 356,212 369,425 3,773,008 3,808,020
Due after ten years 1,116,630 1,110,746 10,099,720 10,277,760
---------- ---------- ----------- -----------
Total $1,472,842 $1,480,171 $15,711,490 $15,950,798
========== ========== =========== ===========
F-15
<PAGE>
5. MORTGAGE-BACKED SECURITIES (Continued)
Mortgage-backed securities of U.S. Government agencies with a carrying value
of $507,259 and $641,960, and estimated market value of $513,301 and $650,759
at December 31, 1998 and 1997, respectively, were pledged to secure public
funds.
At December 31, 1997, Federal National Mortgage Association ("FNMA")
mortgage-backed securities with a carrying value of $6,122,435 and an
estimated market value of $6,311,304, were pledged as collateral for the CMO
bonds issued by SHFC.
6. LOANS RECEIVABLE
Loans receivable consist of the following:
1998 1997
----------- -----------
Mortgage loans:
1 - 4 family units $42,207,335 $44,643,377
Multi-family units 6,300,941 6,128,011
Construction loans 7,045,223 2,606,179
Commercial real estate 2,668,545 3,042,789
----------- -----------
58,222,044 56,420,356
----------- -----------
Consumer loans:
Mobile home 1,460,485 1,889,930
Other 685,513 816,811
----------- -----------
2,145,998 2,706,741
----------- -----------
Less:
Undisbursed portion of loans 2,501,763 727,343
Deferred loan origination costs, net 118,257 33,497
Allowance for loan losses 441,080 440,982
----------- -----------
3,061,100 1,201,822
----------- -----------
Total $57,306,942 $57,925,275
=========== ===========
The Company's primary business activity is with customers located within its
local trade area. Commercial real estate, residential, and personal loans are
granted. The repayment of these loans is dependent upon the local economic
conditions in its immediate trade area. The mobile home loan portfolio at
December 31, 1998 and 1997, consists primarily of loans granted to
individuals outside of the Company's immediate trade area.
Activity in the allowance for loan losses is as follows:
1998 1997
---------- ----------
Balance, January 1 $440,982 $415,426
Loans charged off (34,367) (78,090)
Recoveries 14,940 33,912
-------- --------
Net loans charged off (19,427) (44,178)
Provision for loan losses 19,525 69,734
-------- --------
Balance, December 31 $441,080 $440,982
======== ========
F-16
<PAGE>
6. LOANS RECEIVABLE (Continued)
The recorded investment in loans which are considered to be impaired was
$671,031 and $625,805 at December 31, 1998 and 1997, respectively, all of
which were on a nonaccrual basis. At December 31, 1998 and 1997, $118,816
and $104,629, respectively, of the allowance for loan losses has been
allocated for impaired loans.
The average recorded investment in impaired loans at December 31, 1998 and
1997, was $760,778 and $645,334, respectively. For the years ended December
31, 1998 and 1997, interest income totaling $6,536 and $46,817,
respectively, was recognized using the cash basis method of income
recognition.
The Company also had nonaccrual loans of $800,366 and $326,258 at December
31, 1998 and 1997, respectively, which in management's opinion did not meet
the definition of impaired. Interest income on loans would have been
increased by $36,151 and $32,369, respectively, if these loans had
performed in accordance with their original terms.
7. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
1998 1997
----------- ----------
Investment securities $ 77,178 $ 53,380
Mortgage-backed securities 111,128 109,913
Loans receivable 339,066 341,296
---------- ----------
Total $ 527,372 $ 504,589
========== ==========
8. PREMISES AND EQUIPMENT
Premises and equipment consists of the following:
1998 1997
---------- ----------
Land and improvements $ 175,342 $ 106,313
Buildings and improvements 849,743 827,044
Furniture and equipment 955,962 843,590
Leasehold improvements 11,975 3,831
---------- ----------
1,993,022 1,780,778
Less accumulated depreciation 965,383 862,181
---------- ----------
Total $1,027,639 $ 918,597
========== ==========
Depreciation expense for 1998 and 1997 was $103,202 and $79,744,
respectively.
9. FEDERAL HOME LOAN BANK STOCK
The Bank is a member of the Federal Home Loan Bank System. As a member, the
Bank maintains an investment in the capital stock of the FHLB of
Pittsburgh, at cost, in an amount not less than the greater of one percent
of its outstanding home loans or five percent of its outstanding notes
payable to the FHLB of Pittsburgh as calculated at December 31, of each
year.
F-17
<PAGE>
10. DEPOSITS
Comparative details of deposits are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
Amount % Amount %
----------- ------ ----------- ------
<S> <C> <C> <C> <C>
Noninterest-bearing $ 737,984 1.1% $ 419,844 0.6%
Interest-bearing
Savings 12,534,625 18.5 11,845,105 18.4
NOW 3,089,573 4.6 2,494,376 3.9
Money market 5,713,639 8.4 6,527,416 10.1
----------- ----- ----------- -----
22,075,821 32.6 21,286,741 33.0
----------- ----- ----------- -----
Time certificates of deposit:
2.00 - 3.99% 589 - 25,500 -
4.00 - 5.99% 35,646,519 52.7 30,876,030 47.9
6.00 - 7.99% 9,929,290 14.7 12,307,259 19.1
8.00 - 9.99% 13,727 - 17,667 -
----------- ----- ----------- -----
45,590,125 67.4 43,226,456 67.0
----------- ----- ----------- -----
Total $67,665,946 100.0% $64,513,197 100.0%
=========== ===== =========== =====
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was $4,380,423 and $4,386,324 at December 31, 1998 and 1997,
respectively.
Maturities on time deposits of $100,000 or more at December 31, 1998 are as
follows:
Within three months $ 510,296
Three through six months 749,855
Six through twelve months 1,618,822
Over twelve months 1,501,450
----------
Total $4,380,423
==========
Interest expense by deposit category is as follows:
1998 1997
----------- ----------
Savings $ 381,875 $ 408,292
NOW and money market 276,379 273,265
Time certificates of deposit 2,488,590 2,466,883
---------- ----------
Total $3,146,844 $3,148,440
========== ==========
F-18
<PAGE>
11. COLLATERALIZED MORTGAGE OBLIGATION
The bonds are collateralized by a pledge of the FNMAs and are identified
as follows:
1998 1997
Original ------------------- -----------------------
Par Par Carrying Par Carrying
Class Value Value Value Value Value
----- ----------- ------ -------- ---------- ----------
A $14,420,000 $ - $ - $ - $ -
B 12,847,000 - - 1,437,123 1,394,821
C 4,800,000 - - - -
----------- ----- -------- ---------- ----------
$32,067,000 $ - $ - $1,437,123 $1,394,821
=========== ===== ======== ========== ==========
The amount of monthly payments on the bonds is based upon the timing of cash
receipts from the FNMAs. Interest is paid monthly. All principal payments on
the bonds is allocated among the bonds in the order of their respective
stated maturities. During 1998, the Company satisfied its CMO bonds and
subsequently liquidated SHFC.
On March 7, 1997, the Bank purchased the Class C bonds at a loss of
$963,062, as discussed in Note 16.
12. BORROWED FUNDS
Borrowed funds consist of credit arrangements with the FHLB of Pittsburgh.
FHLB borrowings are subject to annual renewal, incur no service charges, and
are secured by a blanket security agreement on certain investment and
mortgage-backed securities, qualifying residential mortgages, and the Bank's
investment in FHLB stock. At December 31, 1998, the Bank's maximum borrowing
capacity with the FHLB was $47.8 million.
The following table presents the scheduled repayments of the outstanding
advances:
Weighted- Weighted-
interest interest
Maturity Rate 1998 Rate 1997
-------- --------- ---------- --------- ----------
1998 -% $ - 6.84% $1,619,529
1999 6.51 661,056 6.51 661,056
2000 6.19 1,483,369 6.19 1,483,369
2001 5.91 1,752,655 6.33 1,252,654
2002 6.33 1,064,586 6.33 1,064,586
2003 5.91 979,645 6.61 479,645
2004 6.61 512,306 6.61 512,306
2005 6.61 547,194 6.61 547,194
2006 6.34 1,084,456 6.34 1,084,456
2007 6.66 157,912 6.66 157,912
2008 4.86 500,000 - -
---------- ----------
Total $8,743,179 $8,862,707
========== ==========
At December 31, 1998, a total of $1,000,000 of advances are subject to
conversion to an adjustable rate at the option of the FHLB based on the
short-term market index of three month LIBOR. These advances are:
Amount Maturity Date Rate Conversion Date
-------- ------------- ---- ---------------
$500,000 March 2002 6.08% March 1999
500,000 October 2008 4.86 October 2003
F-19
<PAGE>
13. INCOME TAXES
The components of income tax expense are summarized as follows:
1998 1997
-------- ---------
Current payable
Federal $ 18,554 $388,854
State 30,076 66,697
-------- --------
48,630 455,551
Deferred taxes 275,459 (52,934)
-------- --------
Total $324,089 $402,617
======== ========
On August 20, 1996, the Small Business Job Protections Act (the "Act") was
signed into law. The Act eliminated the percentage of taxable income bad
debt deduction for thrift institutions for tax years beginning after
December 31, 1995. The Act provides that bad debt reserves accumulated prior
to 1988 be exempt from recapture. Bad debt reserves accumulated after 1987
are subject to recapture. The Company has not accumulated any additional bad
debt reserves since 1987; therefore, the impact of this legislation did not
have a material effect on the Company's financial statements.
The following temporary differences gave rise to the net deferred tax
assets:
1998 1997
--------- ---------
Deferred tax assets:
Allowance for loan losses $149,967 $149,934
Pension adjustment - 30,695
Investment in SHFC - 142,885
Gain on liquidation of SHFC 52,306 -
Deferred loan origination costs, net 31,495 19,137
Loss on extinguishment of debt - 393,757
MRDP compensation accrual 27,880 -
Other 537 11,373
-------- --------
Total gross deferred tax assets 262,185 747,781
-------- --------
Deferred tax liabilities:
Net unrealized gain on securities 1,769 8,669
Discount on mortgage-backed securities - 158,328
SHFC debt issuance costs - 43,841
Other, net 28,502 36,470
-------- --------
Total gross deferred tax liabilities 30,271 247,308
-------- --------
Net deferred tax assets $231,914 $500,473
======== ========
F-20
<PAGE>
13. INCOME TAXES (Continued)
No valuation allowance was established at December 31, 1998 and 1997, in
view of the Company's ability to carryback taxes paid in previous years, and
to a lesser extent, future anticipated taxable income.
The reconciliation of the federal statutory rate and the Company's effective
income tax rate is as follows:
1998 1997
------------------ -----------------
% of % of
Pre-tax Pre-tax
Amount Income Amount Income
--------- ------- --------- -------
Provision at statutory rate $271,910 34.0% $352,218 34.0%
State tax expense, net of
federal tax benefit 30,551 3.8 44,020 4.3
Other, net 21,628 2.7 6,379 0.6
Actual tax expense -------- ---- -------- ----
and effective rate $324,089 40.5% $402,617 38.9%
======== ==== ======== ====
14. EMPLOYEE BENEFITS
Defined Benefit Plan
--------------------
During 1998, the Company settled its post-retirement obligation with
employees by providing a cash settlement for vested benefits up until the
plan was suspended. The loss associated with this settlement was $118,859
and is included in the accompanying consolidated statement of income.
The following table sets forth the change in the Company's plan assets and
funded status at December 31:
1998 1997
---------- ----------
Plan assets at fair value, beginning of year $ 110,919 $100,406
Actual return on plan assets 6,932 7,166
Contributions 80,231 3,347
Benefits paid (198,082) -
--------- --------
Plan assets at fair value, end of year - 110,919
--------- --------
Benefit obligation, beginning of year 163,096 133,376
Actuarial loss 24,792 19,526
Interest cost 10,194 10,194
Benefits paid (198,082) -
--------- --------
Benefit obligation, end of year - 163,096
--------- --------
Funded status - (52,177)
Unrecognized net loss from past experience
different from that assumed - 88,433
Additional minimum liability - (88,433)
--------- --------
Prepaid pension cost $ - $(52,177)
========= ========
F-21
<PAGE>
14. EMPLOYEE BENEFITS (Continued)
In preparing the above information for the years ended December 31, 1998 and
1997, a 5.99 percent and 6.25 percent discount rate and 5.99 percent and
7.00 percent expected long-term rate of return on plan assets, respectively,
was assumed. Plan assets were invested primarily in certificates of deposit
of the Bank.
Net periodic pension cost includes the following components:
1998 1997
--------- ---------
Interest cost on projected benefit obligation $10,194 $10,194
Actual return on plan assets (6,932) (7,166)
Net amortization and deferral - 5,754
------- -------
Net periodic pension cost $ 3,262 $ 8,782
======= =======
The Bank also sponsors a contributory defined contribution 401(k) plan in
which substantially all employees participate. The plan permits employees to
make pre-tax contributions, up to a maximum of six percent of annual salary
which are matched 50 percent by the Bank. The Bank recorded expense of
$15,185 and $14,207 in 1998 and 1997, respectively.
Employee Stock Ownership Plan (ESOP)
------------------------------------
The Company has an ESOP for the benefit of employees who meet the
eligibility requirements which include having completed six months service
with the Company and having attained age 18. The ESOP Trust purchased 65,596
shares of common stock in the initial public offering with proceeds from a
loan from the Company. The Bank makes cash contributions to the ESOP on an
annual basis sufficient to enable the ESOP to make the required loan
payments to the Company. The loan bears interest at a fixed rate of 8.50
percent with both principal and interest payable in quarterly installments
over a ten-year period. The loan is secured by the shares of the stock
purchased.
As the debt is repaid, shares are released from collateral and allocated to
qualified employees based on the proportion of debt service paid in the
year. Accordingly, the shares pledged as collateral are reported as
unallocated ESOP shares in the consolidated balance sheet. As shares are
released from collateral, the Company reports compensation expense equal to
the current market price of the shares, and the shares become outstanding
for earnings per share computations.
Compensation expense for the ESOP was $97,251 and $26,540 for the years
ended December 31, 1998 and 1997, respectively. The following table presents
the components of the ESOP shares:
1998 1997
--------- ----------
Allocated shares 1,641 -
Shares released for allocation 6,564 1,641
Unreleased shares 57,391 63,955
-------- ----------
Total ESOP shares 65,596 65,596
======== ==========
Fair value of unreleased shares $717,388 $1,071,246
======== ==========
F-22
<PAGE>
14. EMPLOYEE BENEFITS (Continued)
Management Recognition and Development Plan (MRDP)
--------------------------------------------------
In February 1998, the Board of Directors adopted a MRDP for certain
officers, employees, and directors which was approved by stockholders at the
annual meeting held on April 23, 1998. The objective of this Plan is to
enable the Company and the Bank to retain its corporate officers, key
employees, and directors who have the experience and ability necessary to
manage these entities. Directors, officers, and key employees who are
selected by members of a Board-appointed committee are eligible to receive
benefits under the MRDP. The nonemployee directors of the Company and the
Bank serve as trustees for the MRDP which has the responsibility to invest
all funds contributed by the Bank to the Trust created for the MRDP.
In December, 1998, the Trust purchased, with funds contributed by the Bank,
32,798 shares of the common stock of the Company, of which 6,560 shares were
issued to directors and 26,238 shares were issued to officers and employees.
Directors, officers, and employees who terminate their association with the
Company shall forfeit the right to any shares which were awarded but not
earned.
The Company granted a total of 32,798 shares of common stock on October 1,
1998 of which 8,200 shares became immediately vested under the plan with the
remaining shares vesting over a three-year period beginning January 1, 1999.
A total of 8,200 shares were vested as of January 1, 1999. The MRDP shares
purchased initially are excluded from stockholders' equity. The Company
recognizes compensation expense in the amount of fair value of the common
stock at the grant date, pro rata over the years during which the shares are
earned and recorded as an addition to stockholders' equity. Net compensation
expense attributable to the MRDPs amounted to $82,000 for the year ended
December 31, 1998.
Stock Option Plan
-----------------
In February 1998, the Board of Directors adopted a Stock Option Plan for the
directors, officers, and employees which was approved by stockholders at the
annual meeting held on April 23, 1998. An aggregate of 81,995 shares of
authorized but unissued common stock of the Company were reserved for future
issuance under the plan. The stock options typically have expiration terms
of ten years subject to certain extensions and early terminations. The per
share exercise price of a stock option shall be, at a minimum, equal to the
fair value of a share of common stock on the date the option is granted.
Proceeds from the exercise of the stock options are credited to common stock
for the aggregate par value, and the excess is credited to additional paid-
in capital.
On October 15, 1998, qualified stock options were granted for the purchase
of 79,995 shares exercisable at the market price of $10.00 per share. Of the
79,995 shares, certain executive officers were granted options for 35,000
shares of which 50 percent vested immediately with the remainder vesting one
year later. Options for the remaining 44,995 shares will vest
proportionately over a three-year period beginning October 1, 1999. All
options expire ten years from the date of grant. At December 31, 1998, the
initial stock options granted remain outstanding with none being exercised.
F-23
<PAGE>
14. EMPLOYEE BENEFITS (Continued)
Stock Option Plan (Continued)
-----------------
No compensation expense has been recognized with respect to the options
granted under the stock option plans. Had compensation expense been
determined on the basis of fair value, net income and earnings per share
would have been reduced as follows:
Net income:
As reported $475,465
Pro forma $408,379
Basic earnings per share:
As reported $ 0.63
Pro forma $ 0.54
Diluted earnings per share:
As reported $ 0.63
Pro forma $ 0.54
The following table presents share data related to the outstanding options:
Weighted-
average
Exercise
1998 Price
-------- ---------
Outstanding, beginning - -
Granted 79,995 10.00
Exercised - -
Forfeited - -
------
Outstanding, ending 79,995 $10.00
======
15. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments
-----------
In the normal course of business, the Company makes various commitments
which are not reflected in the accompanying financial statements. These
instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the consolidated balance
sheet. The Company's exposure to credit loss in the event of nonperformance
by the other parties to the financial instruments is represented by the
contractual amounts as disclosed. The Company minimizes its exposure to
credit loss under these commitments by subjecting them to credit approval
and review procedures and collateral requirements as deemed necessary.
F-24
<PAGE>
15. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
Commitments (Continued)
-----------
The off-balance sheet commitments were comprised of the following:
1998 1997
----------- ----------
Commitments to extend credit:
Fixed rate $2,336,514 $ 214,420
Variable rate 1,490,580 912,059
Standby letters of credit 14,000 14,000
---------- ----------
Total $3,841,094 $1,140,479
========== ==========
The range of interest rates for variable rate commitments was 6.50 percent
to 12.90 percent at December 31, 1998.
At December 31, 1998, the minimum rental commitment for one of the Bank's
office facilities is as follows:
1999 $ 71,622
2000 71,622
2001 71,622
2002 72,286
2003 79,580
Thereafter 490,744
---------
Total $ 857,476
=========
Occupancy and equipment expenses include rental expenditures of $65,713 and
$58,852 for 1998 and 1997, respectively.
Contingent Liabilities
----------------------
In the normal course of business, the Company is involved in various legal
proceedings primarily involving the collection of outstanding loans. None of
these proceedings are expected to have a material effect on the consolidated
financial position or results of operations of the Company.
16. DEBT EXTINGUISHMENT
On March 7, 1997, the Bank purchased the Class C bond of the CMO issued by
SHFC from a third-party investor. The bond was purchased for $4,929,000 and
had a carrying value of $4,073,151. The Bank also accelerated the
recognition of deferred debt issuance costs by $107,213, in connection with
this transaction. As a result, the Bank recorded a loss on the
extinguishment of the Class C bond of $562,525, net of related taxes of
$400,537.
17. CAPITAL REQUIREMENTS
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking
agencies. The Office of Thrift Supervision ("OTS") sets forth capital
standards applicable to all thrifts. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by the regulators that, if undertaken, could have a
direct material effect on the Company's and the Bank's financial statements.
Capital adequacy guidelines involve quantitative measures of the Company's
and the Bank's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company's and the
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, Risk-weightings, and other
factors.
F-25
<PAGE>
17. CAPITAL REQUIREMENTS (Continued)
Quantitative measures established by the regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts and
ratios of Total and Tier I capital (as defined in the regulations) to Risk-
weighted assets, and of Tangible and Core Capital (as defined in the
regulations) to adjusted assets (as defined). Management believes, as of
December 31, 1998, the Company and the Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 1998, the most recent notification from the Company's and
the Bank's primary regulator categorized the Company and the Bank as well
capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized they must maintain minimum tangible,
core, and Risk-based ratios. There have been no conditions or events since
that notification that management believes have changed the Company's or the
Bank's category.
The following table reconciles the Company's capital under generally
accepted accounting principles to OTS regulatory capital:
1998 1997
------------- -------------
Total capital $11,600,436 $12,014,933
Unrealized gain on securities (2,483) (12,173)
Net unrealized pre-tax loss on equity
securities (12,725) (1,588)
----------- -----------
Tier I, core, and tangible capital 11,585,228 12,001,172
Allowance for loan losses 441,080 440,982
----------- -----------
Risk-based capital $12,026,308 $12,442,154
=========== ===========
F-26
<PAGE>
17. CAPITAL REQUIREMENTS (Continued)
The following table sets forth the Company's capital position and minimum
requirements as of December 31:
1998 1997
------------------- -------------------
Amount Ratio Amount Ratio
----------- ----- ----------- -----
Total Capital
(to Risk-weighted Assets)
-------------------------
Actual $12,026,308 28.84% $12,442,154 29.61%
For Capital Adequacy Purposes 3,335,770 8.00 3,361,423 8.00
To Be Well Capitalized 4,169,712 10.00 4,201,779 10.00
Tier I Capital
(to Risk-weighted Assets)
-------------------------
Actual $11,585,228 27.78% $12,001,172 28.56
For Capital Adequacy Purposes 1,667,885 4.00 1,680,712 4.00
To Be Well Capitalized 2,501,827 6.00 2,521,067 6.00
Core Capital
(to Adjusted Assets)
--------------------
Actual $11,585,228 12.93% $12,001,172 13.59%
For Capital Adequacy Purposes 3,584,300 3.00 2,649,447 3.00
To Be Well Capitalized 4,480,375 5.00 4,415,744 5.00
Tangible Capital
(to Adjusted Assets)
--------------------
Actual $11,585,228 12.93% $12,001,172 13.59%
For Capital Adequacy Purposes 2,688,225 1.50 1,324,723 1.50
To Be Well Capitalized N/A N/A N/A N/A
Prior to the enactment of the Small Business Job Protection Act discussed
in Note 13, the Bank accumulated approximately $4,475,000 of retained
earnings at December 31, 1998, which amount represents allocations of
income to bad debt deductions for tax purposes only. Since this amount
represents the accumulated bad debt reserves prior to 1988, no provision
for federal income tax has been made for such amount. If any portion of
this amount is used other than to absorb loan losses (which is not
anticipated), the amount will be subject to federal income tax at the
current corporate rate.
F-27
<PAGE>
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at
December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 7,949,082 $ 7,949,082 $ 7,692,283 $ 7,692,283
Investment securities:
Available for sale 982,767 982,767 852,829 852,829
Held to maturity 3,165,963 3,210,263 2,422,926 2,473,368
Mortgage-backed securities:
Available for sale 1,480,171 1,480,171 2,129,682 2,129,682
Held to maturity 15,711,490 15,950,798 14,594,274 14,934,833
Loans receivable 57,306,942 58,573,000 57,925,275 59,223,000
FHLB stock 627,422 627,422 607,022 607,022
Accrued interest receivable 527,372 527,372 504,589 504,589
----------- ----------- ----------- -----------
Total $87,751,209 $89,300,875 $86,728,880 $88,417,606
=========== =========== =========== ===========
Financial liabilities:
Deposits $67,665,946 $68,238,961 $64,513,197 $64,581,428
Advances by borrowers
for taxes and insurance 1,090,364 1,090,364 1,128,622 1,128,622
CMOs - - 1,394,821 1,411,821
Borrowed funds 8,743,179 8,951,465 8,862,707 8,896,106
Accrued interest payable 96,904 96,904 116,833 116,833
----------- ----------- ----------- -----------
Total $77,596,393 $78,377,694 $76,016,180 $76,134,810
=========== =========== =========== ===========
</TABLE>
Financial instruments are defined as cash, evidence of an ownership interest
in an entity, or a contract which creates an obligation or right to receive
or deliver cash or another financial instrument from/to a second entity on
potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties other than in a
forced or liquidation sale. If a quoted market price is available for a
financial instrument, the estimated fair value would be calculated based
upon the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for
financial instruments are based upon management's judgment regarding current
economic conditions, interest rate risk, expected cash flows, future
estimated losses, and other factors as determined through various option
pricing formulas or simulation modeling. As many of these assumptions result
from judgments made by management based upon estimates which are inherently
uncertain, the resulting estimated fair values may not be indicative of the
amount realizable in the sale of a particular financial instrument. In
addition, changes in the assumptions on which the estimated fair values are
based may have a significant impact on the resulting estimated fair values.
As certain assets such as deferred tax assets and premises and equipment are
not considered financial instruments, the estimated fair value of financial
instruments would not represent the full value of the Company.
F-28
<PAGE>
18. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The Company employed simulation modeling in determining the estimated fair
value of financial instruments for which quoted market prices were not
available based upon the following assumptions:
Cash and Cash Equivalents, Accrued Interest Receivable, FHLB Stock, Advances
----------------------------------------------------------------------------
by Borrowers for Taxes and Insurance, and Accrued Interest Payable
------------------------------------------------------------------
The fair value is equal to the current carrying value.
Investment Securities and Mortgage-backed Securities
----------------------------------------------------
The fair value of these securities is equal to the available quoted market
price. If no quoted market price is available, fair value is estimated using
the quoted market price for similar securities.
Loans Receivable, Deposits, CMOs, and Borrowed Funds
----------------------------------------------------
The fair value of loans is estimated by discounting the future cash flows
using a simulation model which estimates future cash flows based upon
current market rates adjusted for prepayment risk and credit quality.
Savings, checking, and money market deposit accounts are valued at the
amount payable on demand as of year end. Fair values for time deposits,
CMOs, and borrowed funds are estimated using a discounted cash flow
calculation that applies contractual costs currently being offered in the
existing portfolio to current market rates being offered for deposits and
notes of similar remaining maturities.
Commitments to Extend Credit and Commercial Letters of Credit
-------------------------------------------------------------
These financial instruments are generally not subject to sale, and estimated
fair values are not readily available. The carrying value, represented by
the net deferred fee arising from the unrecognized commitment or letter of
credit, and the fair value, determined by discounting the remaining
contractual fee over the term of the commitment using fees currently charged
to enter into similar agreements with similar credit risk, are not
considered material for disclosure. The contractual amounts of unfunded
commitments and letters of credit are presented in Note 15.
19. CONVERSION AND REORGANIZATION
On April 16, 1997, the Board of Directors of the Bank adopted a Plan of
Conversion (the "Conversion") to convert from a federally-chartered mutual
savings bank to a federally-chartered stock savings bank and the concurrent
formation of a holding company for the Bank. All outstanding capital stock
of the Bank was acquired after conversion by the Company. From the proceeds
of the Conversion, $8,200 was allocated to common stock and $7,706,808,
which is net of $484,493 of conversion costs, was allocated to additional
paid-in capital.
As a part of the conversion process, the Company was organized at the
direction of the Board of Directors of the Bank for the purpose of acquiring
all of the capital stock to be issued by the Bank in the Conversion. The
Company became a bank holding company with its only significant assets being
the capital stock of the Bank, which was acquired by exchanging $4,400,000
of the proceeds received in the public offering for all common stock of the
Bank and a percentage of the conversion proceeds permitted by the OTS to be
retained.
F-29
<PAGE>
19. CONVERSION AND REORGANIZATION (Continued)
In accordance with regulations, at the time the Bank converted from a mutual
savings bank to a stock savings bank, a portion of retained earnings was
restricted by establishing a liquidation account. The liquidation account
will be maintained for the benefit of eligible account holders who continue
to maintain their accounts at the Bank after the Conversion. The liquidation
account will be reduced annually to the extent that eligible account holders
have reduced their qualifying deposits. Subsequent increases will not
restore an eligible account holder's interest in the liquidation account. In
the event of a complete liquidation of the Bank, each 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.
20. CONDENSED FINANCIAL INFORMATION OF SHS BANCORP, INC. (PARENT COMPANY
ONLY)
CONDENSED BALANCE SHEET
December 31,
1998 1997
----------- -----------
ASSETS
Interest-bearing deposits in other banks $ 2,144,451 $ 2,635,360
Investment securities available for sale 35,063 46,200
Investment in subsidiary bank 9,123,616 8,653,200
Loan receivable from ESOP 600,901 645,501
Other assets 47,227 53,774
----------- -----------
Total assets $11,951,258 $12,034,035
=========== ===========
LIABILITIES
Management Recognition Plan payable $ 245,980 $ -
Other liabilities 104,842 19,102
----------- -----------
Total liabilities 350,822 19,102
----------- -----------
STOCKHOLDERS' EQUITY 11,600,436 12,014,933
----------- -----------
Total liabilities and stockholders' equity $11,951,258 $12,034,035
=========== ===========
F-30
<PAGE>
20. CONDENSED FINANCIAL INFORMATION OF SHS BANCORP, INC. (PARENT COMPANY
ONLY) (CONTINUED)
CONDENSED STATEMENT OF INCOME
For the Period
For the Year September 30,
Ended to
December 31, December 31,
1998 1997
--------------- --------------
INCOME
Interest and dividends from investment
securities $ 199,366 $ 52,525
OPERATING EXPENSES 59,382 1,850
---------- -----------
Income before equity in undistributed
net income of subsidiary and income
taxes 139,984 50,675
Equity in undistributed net income of
subsidiary 383,058 153,696
---------- -----------
Income before income taxes 523,042 204,371
Applicable income taxes 47,397 19,102
---------- -----------
NET INCOME $ 475,645 $ 185,269
========== ===========
CONDENSED STATEMENT OF CASH FLOWS
For the Period
For the Year September 30,
Ended to
December 31, December 31,
1998 1997
--------------- --------------
OPERATING ACTIVITIES
Net income $ 475,645 $ 185,269
Adjustments to reconcile net income
to net cash provided by
operating activities:
Undistributed net income of subsidiary (383,058) (153,696)
Other, net 52,441 (17,932)
---------- -----------
Net cash provided by operating
activities 145,028 13,641
---------- -----------
INVESTING ACTIVITIES
Purchases of investment securities - (47,788)
Payments from ESOP 44,600 10,459
Purchase of savings bank stock - (4,400,000)
---------- -----------
Net cash provided by (used for)
investing activities 44,600 (4,437,329)
---------- -----------
FINANCING ACTIVITIES
Purchase of treasury stock (582,257) -
Dividends paid (98,280) -
Proceeds from issuance of common stock - 7,059,048
---------- -----------
Net cash provided by (used for)
financing activities (680,537) 7,059,048
---------- -----------
Increase (decrease) in cash (490,909) 2,635,360
CASH AT BEGINNING OF YEAR 2,635,360 -
---------- -----------
CASH AT END OF YEAR $2,144,451 $ 2,635,360
========== ===========
F-31
<PAGE>
SHS Bancorp, Inc.
Consolidated Balance Sheet (Unaudited)
June 30, December 31,
1999 1998
----------- ------------
ASSETS
Cash and due from banks $ 626,046 $ 892,428
Interest-bearing deposits with other banks 5,380,719 6,002,437
Short-term investments 1,095,457 1,054,217
----------- -----------
Cash and cash equivalents 7,102,222 7,949,082
Investment securities available for sale 2,180,876 982,767
Investment securities held to maturity
(market value of $2,656,014 and
$3,210,263) 2,663,017 3,165,963
Mortgage-backed securities available for
sale 776,255 1,480,171
Mortgage-backed securities held to
maturity (market value of $17,526,729
and $15,950,798) 17,500,213 15,711,490
Loans receivable (net of allowance for
loan losses of $425,572 and $441,080) 58,402,972 57,306,942
Accrued interest receivable 575,137 527,372
Premises and equipment 979,228 1,027,639
Federal Home Loan Bank stock 627,400 627,422
Other assets 365,732 634,695
----------- -----------
TOTAL ASSETS $91,173,052 $89,413,543
=========== ===========
LIABILITIES
Deposits $69,579,729 $67,665,946
Advances by borrowers for taxes and
insurance 1,234,509 1,090,364
Borrowed funds 8,362,784 8,743,179
Accrued interest payable 108,304 96,904
Other liabilities 142,865 216,714
----------- -----------
TOTAL LIABILITIES 79,428,191 77,813,107
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value;
5,000,000 shares authorized; none
outstanding - -
Common stock, $.01 par value; 10,000,000
shares authorized, 819,950 issued 8,200 8,200
Additional paid-in capital 7,659,774 7,654,255
Retained earnings - substantially
restricted 5,503,178 5,337,645
Unallocated shares held by Employee
Stock Ownership Plan (ESOP) (541,090) (573,910)
Unallocated shares held by Management
Recognition and Development Plan (MRDP) (205,480) (245,980)
Accumulated other comprehensive income
(loss) (18,659) 2,483
Treasury stock, 51,988 and 45,152 shares
at cost (661,062) (582,257)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 11,744,861 11,600,436
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $91,173,052 $89,413,543
=========== ===========
See accompanying notes to the unaudited consolidated financial statements.
F-32
<PAGE>
SHS Bancorp, Inc.
Consolidated Statement of Income (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
---------- ----------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Loan receivable $2,380,396 $2,403,766
Interest-bearing deposits with other banks 156,369 167,516
Investment securities 180,377 163,621
Mortgage-backed securities 571,734 575,259
Dividends on Federal Home Loan Bank stock 20,223 19,889
---------- ----------
Total interest and dividend income 3,309,099 3,330,051
---------- ----------
INTEREST EXPENSE
Deposits 1,559,859 1,565,175
Advances by borrowers for taxes and insurance 6,212 6,319
Collateralized mortgage obligation -- 62,485
Borrowed funds 276,711 262,516
---------- ----------
Total interest expense 1,827,782 1,896,495
---------- ----------
NET INTEREST INCOME 1,481,317 1,433,556
Provision for loan losses 27,367 --
---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,453,950 1,433,556
---------- ----------
NONINTEREST INCOME
Service charge on deposits 25,466 20,694
Other income 21,169 98,071
---------- ----------
Total noninterest income 45,635 118,765
---------- ----------
NONINTEREST EXPENSE
Compensation and employee benefits 581,699 492,531
Occupancy and equipment 132,845 135,312
Professional fees 62,240 54,650
Data processing 112,919 110,876
Other operating expenses 182,891 247,439
---------- ----------
Total noninterest expense 1,072,594 1,040,808
---------- ----------
Income before income taxes 427,991 511,513
Income tax expense 166,206 197,316
---------- ----------
NET INCOME $ 261,785 $ 314,197
---------- ----------
EARNINGS PER SHARE
Basic $ 0.37 $ 0.41
Diluted 0.36 N/A
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 714,986 757,454
Diluted 726,785 N/A
DIVIDEND PER SHARE $ 0.14 $ N/A
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
F-33
<PAGE>
SHS Bancorp, Inc.
Consolidated Statement of Comprehensive Income (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
------------------ -----------------
<S> <C> <C> <C> <C>
Net Income $261,785 $314,197
Other Comprehensive Income, net of tax:
Unrealized gain (loss) on available-for-sale securities (17,724) 812
Less: reclassification adjustment for gain included
in net income (3,418) (21,142) -- 812
------- ---
Minimum pension liability -- (8,545)
-------- --------
Total other comprehensive loss (21,142) (7,733)
-------- --------
Comprehensive income $240,643 $306,464
======== ========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
F-34
<PAGE>
SHS Bancorp, Inc.
Consolidated Statement of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 261,785 $ 314,197
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for losses on loans and real estate owned 27,367 --
Depreciation and amortization 59,656 94,761
Release of unearned ESOP shares 38,339 56,035
Release of unearned MRDP shares 40,500 --
(Increase) decrease in accrued interest receivable (47,765) 274
Increase (decrease) in accrued interest payable 11,400 (13,325)
Other, net (52,717) (94,723)
----------- -----------
Net cash provided by operating activities 338,565 357,219
----------- -----------
INVESTING ACTIVITIES
Investment securities available for sale:
Purchases (1,763,165) (750,000)
Proceeds from sales -- --
Maturities and repayments 545,082 553,543
Investment securities held to maturity:
Purchases (749,727) (500,000)
Maturities and repayments 1,252,673 2,862
Mortgage-backed securities available for sale:
Maturities and repayments 516,114 206,563
Proceeds from sales 171,959 --
Mortgage-backed securities held to maturity:
Purchases (4,641,929) (2,774,629)
Maturities and repayments 2,845,489 3,233,342
Loans receivable:
Purchases (375,000) --
Other net (increase) decrease (489,397) 1,868,857
Purchase of Federal Home Loan Bank Stock -- (20,400)
Purchase of premises and equipment, net -- (132,266)
----------- -----------
Net cash provided by (used for) investing activities (2,687,901) 1,687,872
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
F-35
<PAGE>
SHS Bancorp, Inc.
Consolidated Statement of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
----------- -----------
<S> <C> <C>
FINANCING ACTIVITIES
Net increase in deposits $ 1,913,783 $ 196,315
Increase in advances by borrowers for taxes and insurance 144,145 99,284
Collateralized mortgage obligation payments -- (971,142)
Repayment of borrowed funds (380,395) (856,498)
Purchase of Treasury Stock (78,805) --
Dividends Paid (96,252) --
----------- -----------
Net cash provided by (used for) financing activities 1,502,476 (1,532,041)
Increase (decrease) in cash and cash equivalents (846,860) 513,050
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,949,082 7,692,283
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,102,222 $ 8,205,333
----------- -----------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid during the period for:
Interest on deposits and borrowings $ 1,816,382 $ 1,909,820
Income Taxes 89,200 280,800
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
F-36
<PAGE>
SHS BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
The consolidated financial statements of SHS Bancorp, Inc. (the "Company"),
includes its wholly-owned subsidiary, Spring Hill Savings Bank, FSB (the
"Savings Bank"), and for the periods preceding October 1, 1998, the Savings
Bank's wholly-owned subsidiary, Spring Hill Funding Corporation ("SHFC"). SHFC
was a limited purpose finance subsidiary that was liquidated in December of 1998
after satisfying the obligations of the bond issuance. All significant
intercompany balances and transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions for Form 10-QSB and, therefore, do not
necessarily include all information that would be included in audited financial
statements. The information furnished reflects all adjustments which are, in the
opinion of management, necessary for a fair statement of the results of
operations. All such adjustments are of a normal recurring nature. The results
of operations for the interim periods are not necessarily indicative of the
results to be expected for the full year. These statements should be read in
conjunction with the audited financial statements and the notes thereto for the
year ended December 31, 1998 which are incorporated in Form 10-KSB.
Certain comparative account balances for 1998 have been reclassified to conform
to the 1999 classifications. Such reclassifications did not effect stockholders'
equity or net income.
NOTE 2--CORPORATE REORGANIZATION
On July 21, 1999, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") with ESB Financial Corporation ("ESB"), a
Pennsylvania corporation headquartered in Ellwood City, Pennsylvania. The
Agreement set forth the terms and conditions under which the Company will merge
with and into ESB (the "Merger"). In accordance with the terms, conditions and
procedures set forth in the Agreement, each shareholder of the Company will be
entitled to receive either $17.80 in cash or 1.30 shares of common stock of ESB
for each share of common stock of the Company, subject to an overall requirement
that 40% of the outstanding Company common stock be exchanged for cash. The
Merger is subject to, among other things, the receipt of requisite regulatory
approvals as well as the approval of the shareholders of the Company. In
connection with the execution of the Agreement, the Company entered into a Stock
Option Agreement with ESB whereby the Company granted to ESB an option to
purchase up to 115,000 shares of the Company's common stock that is exercisable
only upon the occurrence of certain events.
NOTE 3--EARNINGS PER SHARE
The Company provides dual presentation of Basic and Diluted earnings per share
("EPS"). Basic EPS is computed based upon income available to common
shareholders and the weighted average number of common shares outstanding for
the period (less the unallocated ESOP shares). Diluted EPS reflects the dilutive
effects that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then would share in the earnings of the Company.
Diluted EPS is only reported for periods following October 1998 when the Company
initially granted options pursuant to the Stock Option Plan approved by
shareholders on April 23, 1998. Prior to that period, the Company maintained a
simple capital structure with no dilutive effects on EPS.
F-37
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION, dated as of July 21, 1999
("Agreement"), between ESB Financial Corporation ("ESB"), a Pennsylvania
corporation headquartered in Ellwood City, Pennsylvania, and SHS Bancorp, Inc.
("SHS"), a Pennsylvania corporation headquartered in Pittsburgh, Pennsylvania.
WITNESSETH:
WHEREAS, the Boards of Directors of ESB and SHS have determined that it is
in the best interests of their respective companies and their shareholders to
consummate the business combination transactions provided for herein, including
the merger of SHS with and into ESB subject to the terms and conditions set
forth herein; and
WHEREAS, the parties desire to provide for certain undertakings,
conditions, representations, warranties and covenants in connection with the
transactions contemplated hereby; and
WHEREAS, as a condition and inducement to ESB's willingness to enter into
this Agreement, (i) SHS is concurrently entering into a Stock Option Agreement
with ESB (the "Stock Option Agreement"), in substantially the form attached
hereto as Exhibit A, pursuant to which SHS is granting to ESB the option to
purchase shares of SHS Common Stock (as defined herein) under certain
circumstances and (ii) certain stockholders of SHS are concurrently entering
into a Stockholder Agreement with ESB (the "Stockholder Agreement"), in
substantially the form attached hereto as Exhibit B, pursuant to which, among
other things, such stockholders agree to vote their shares of SHS Common Stock
in favor of this Agreement and the transactions contemplated hereby.
NOW, THEREFORE, in consideration of the premises and the mutual covenants,
representations, warranties and agreements herein contained, the parties hereto
agree as follows:
ARTICLE I
THE MERGER
1.01. The Merger. Subject to the terms and conditions of this Agreement
and the Agreement of Merger, dated as of the date hereof, between ESB and SHS, a
copy of which is attached hereto as Appendix A, at the Effective Time (as
defined in Section 1.02 hereof), SHS shall be merged with and into ESB in
accordance with Chapter 19, Subchapter C of the Pennsylvania Business
Corporation Law ("PBCL") (the "Merger"), with ESB as the surviving corporation
(hereinafter sometimes called the "Surviving Corporation"). Each share of
common stock, par value $.01 per share, of SHS ("SHS Common Stock") outstanding
immediately prior to the Effective Time (other than shares as to which
dissenters' rights have been asserted and duly perfected in accordance with
Pennsylvania law (the "SHS Dissenting Shares") and shares held by SHS (including
treasury shares) or ESB or any of their respective wholly-owned subsidiaries)
shall, by virtue of the Merger and without any further action by the holder
thereof, be converted into and represent the right to receive shares of common
stock, par value $.01 per share, of ESB ("ESB Common Stock") or $17.80 in cash
("Merger Consideration"), as provided in Section 1.03 hereof and subject to the
terms, conditions, limitations and procedures set forth in this Agreement and
the Agreement of Merger.
A-1
<PAGE>
1.02. Effective Time. The Merger shall become effective on the date and
at the time that Articles of Merger are filed with the Secretary of State of the
Commonwealth of Pennsylvania pursuant to Section 1927 of the PBCL, unless a
later date and time is specified as the effective time in such Articles of
Merger ("Effective Time"). A closing (the "Closing") shall take place
immediately prior to the Effective Time at 10:00 a.m., on the fifth business day
following the receipt of all necessary regulatory or governmental approvals and
consents and the expiration of all statutory waiting periods in respect thereof
and the satisfaction or waiver, to the extent permitted hereunder, of the
conditions to the consummation of the Merger specified in Article V of this
Agreement (other than the delivery of certificates, opinions and other
instruments and documents to be delivered at the Closing), at the offices of
ESB, 600 Lawrence Avenue, Ellwood City, Pennsylvania, or at such other place, at
such other time, or on such other date as the parties may mutually agree upon.
At the Closing, there shall be delivered to ESB and SHS the opinions,
certificates and other documents required to be delivered under Article V
hereof.
1.03 Conversion of Shares. At the Effective Time, by virtue of the
Merger and without any action on the part of a holder of shares of SHS Common
Stock:
(a) Each share of ESB Common Stock that is issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding and
shall be unchanged by the Merger.
(b) All shares of SHS Common Stock owned by SHS (including treasury
shares) or ESB or any of their respective wholly-owned subsidiaries, in each
case other than in a fiduciary capacity, shall be canceled and retired and
shall not represent capital stock of the Surviving Corporation and shall not be
exchanged for shares of ESB Common Stock, cash or other consideration.
(c) (1) Subject to Sections 1.04, 1.05, 1.08 and 1.09 each share of
SHS Common Stock issued and outstanding at the Effective Time (other than
shares to be canceled in accordance with Section 1.03(b)) shall be converted
into, and shall be canceled in exchange for, the right to receive, at the
election of the holder thereof:
(i) 1.30 shares, subject to Section 6.01(f) hereof (the "Exchange
Ratio"), of ESB Common Stock (the "Per Share Stock Consideration"), or
(ii) a cash amount equal to $17.80 per share of SHS Common Stock
(the "Per Share Cash Consideration").
(2) For purposes of this Agreement, the "Aggregate Cash
Consideration" shall amount to the product of the number of shares of SHS
Common Stock (other than SHS Common Stock owned by SHS (including treasury
shares) or ESB) outstanding at the Effective Time times .40 times $17.80.
1.04 Election and Exchange Procedures
(a) The parties shall designate an exchange agent to act as agent (the
"Exchange Agent") for purposes of conducting the election procedure and the
exchange procedure as described in Sections 1.04 and 1.05. No later than 30
days prior to the anticipated Effective Time, or on such earlier date as ESB and
SHS shall mutually agree (the "Mailing Date"), ESB shall cause the Exchange
Agent to mail an election form in such form as ESB and SHS shall mutually agree
(the "Election Form") to each holder of record of SHS Common Stock as of five
business days prior to the Mailing Date ("Election Form Record Date"). Each
Election Form shall permit the holder (or in the case of nominee record holders,
the beneficial owner through proper instructions and documentation) (i) to elect
to receive ESB Common Stock with respect to all such holder's SHS Common Stock
as hereinabove provided (the "Stock Election Shares"), (ii) to elect to receive
cash with respect to all such holder's SHS Common Stock as hereinabove provided
(the "Cash Election Shares"), or (iii) to indicate that such holder makes no
such election with respect to such holder's shares of SHS Common Stock (the "No-
Election Shares"). Any shares of SHS Common Stock with respect to which the
holder thereof shall not, as of the Election Deadline, have made such an
election by submission to the Exchange Agent of an effective, properly completed
Election Form shall be deemed to be No-
A-2
<PAGE>
Election Shares. Any SHS Dissenting Shares shall be deemed to be Cash Election
Shares, and with respect to such shares the holders thereof shall in no event
be classified as Reallocated Stock Shares (as hereinafter defined).
ESB shall make available up to two separate Election Forms, or such
additional Election Forms as ESB may permit, to all persons who become holders
(or beneficial owners) of SHS Common Stock between the Election Form Record Date
and close of business on the business day prior to the Election Deadline. ESB
shall provide to the Exchange Agent all information reasonably necessary for it
to perform as specified herein.
No later than seven business days following the Effective Time, ESB shall
cause the Exchange Agent to mail or make available to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented issued and outstanding shares of SHS Common Stock (i) a notice and
letter of transmittal (which shall specify that delivery shall be effected and
risk of loss and title to the certificates theretofore representing shares of
SHS Common Stock shall pass only upon proper delivery of such certificates to
the Exchange Agent) advising such holder of the effectiveness of the Merger and
the procedure for surrendering to the Exchange Agent such certificate or
certificates which immediately prior to the Effective Time represented issued
and outstanding shares of SHS Common Stock in exchange for the consideration set
forth in Section 1.03(c) hereof deliverable pursuant to this Agreement.
(b) The term "Election Deadline" shall mean 5:00 p.m., Eastern Time, on
the 20th day following but not including the date of mailing of the Election
Form or such other date as ESB and SHS shall mutually agree upon.
(c) Any election to receive ESB Common Stock or cash shall have been
properly made only if the Exchange Agent shall have actually received a properly
completed Election Form by the Election Deadline. Any Election Form may be
revoked or changed by the person submitting such Election Form to the Exchange
Agent by written notice to the Exchange Agent only if such notice is actually
received by the Exchange Agent at or prior to the Election Deadline. The
Exchange Agent shall have reasonable discretion to determine when any election,
modification or revocation is received and whether any such election,
modification or revocation has been properly made.
(d) Prior to the Effective Time, the Exchange Agent shall effect the
allocation among holders of SHS Common Stock of rights to receive ESB Common
Stock or cash in the Merger in accordance with the Election Forms as follows:
(i) If the number of Cash Election Shares times the Per Share
Cash Consideration is less than the Aggregate Cash Consideration, then:
(1) all Cash Election Shares (subject to Section 1.08 with respect to
SHS Dissenting Shares) will be converted into the right to receive cash,
(2) the Exchange Agent will select first from among the holders of No-
Election Shares and then (if necessary) will allocate among the holders of Stock
Election Shares (by the method of allocation described below), a sufficient
number of Stock Election Shares ("Reallocated Cash Shares") such that the sum of
the number of Cash Election Shares plus the number of Reallocated Cash Shares
times the Per Share Cash Consideration equals the Aggregate Cash Consideration,
and all Reallocated Cash Shares will be converted into the right to receive
cash, and
(3) the No-Election Shares and Stock Election Shares which are not
Reallocated Cash Shares will be converted into the right to receive ESB Common
Stock.
(ii) If the number of Cash Election Shares times the Per Share
Cash Consideration is greater than the Aggregate Cash Consideration, then:
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(1) all Stock Election Shares and all No-Election Shares will be
converted into the right to receive ESB Common Stock,
(2) the Exchange Agent will allocate among the holders of Cash Election
Shares (by the method of allocation described below), a sufficient number of
Cash Election Shares (excluding any SHS Dissenting Shares) ("Reallocated Stock
Shares") such that the number of remaining Cash Election Shares (including SHS
Dissenting Shares) times the Per Share Cash Consideration equals the Aggregate
Cash Consideration, and all Reallocated Stock Shares shall be converted into the
right to receive ESB Common Stock, and
(3) the Cash Election Shares (subject to Section 1.08 with respect to
SHS Dissenting Shares) which are not Reallocated Stock Shares will be converted
into the right to receive cash.
(iii) If the number of Cash Election Shares (including SHS
Dissenting Shares) times the Per Share Cash Consideration is equal to the
Aggregate Cash Consideration, then subparagraphs (d)(i) and (ii) above
shall not apply and all No-Election Shares and all Stock Election Shares
will be converted into the right to receive ESB Common Stock.
(e) In the event that the Exchange Agent is required pursuant to Section
1.04(d)(i)(2) to designate from among all Stock Election Shares the Reallocated
Cash Shares to receive cash, each holder of Stock Election Shares shall be
allocated a pro rata portion of the remainder of the total Reallocated Cash
Shares less the number of No Election Shares which are Reallocated Cash Shares.
In the event the Exchange Agent is required pursuant to Section 1.04(d)(ii)(2)
to designate from among all holders of Cash Election Shares the Reallocated
Stock Shares to receive ESB Common Stock, each holder of Cash Election Shares
shall be allocated a pro rata portion of the total Reallocated Stock Shares.
(f) At the Effective Time, ESB shall issue to the Exchange Agent the
number of shares of ESB Common Stock issuable and the amount of cash payable in
the Merger (which shall be held by the Exchange Agent in trust for the holders
of SHS Common Stock and invested only in deposit accounts of a Federal Deposit
Insurance Corporation ("FDIC") insured institution, direct obligations of the
U.S. Government or obligations issued or guaranteed by an agency thereof which
carry the full faith and credit of the United States). No later than ten (10)
days after receipt of a properly completed letter of transmittal, the Exchange
Agent shall distribute ESB Common Stock and cash as provided herein. The
Exchange Agent shall not be entitled to vote or exercise any rights of
ownership with respect to the shares of ESB Common Stock held by it from time
to time hereunder, except that it shall receive and hold all dividends or other
distributions paid or distributed with respect to such shares for the account
of the persons entitled thereto.
(g) After the completion of the foregoing allocation, each holder of an
outstanding certificate or certificates which prior thereto represented shares
of SHS Common Stock who surrenders such certificate or certificates to the
Exchange Agent will, upon acceptance thereof by the Exchange Agent, be entitled
to a certificate or certificates representing the number of full shares of ESB
Common Stock or the amount of cash into which the aggregate number of shares of
SHS Common Stock previously represented by such certificate or certificates
surrendered shall have been converted pursuant to this Agreement and, if such
holder's shares of SHS Common Stock have been converted into ESB Common Stock,
any other distribution theretofore paid with respect to ESB Common Stock
issuable in the Merger, in each case without interest. The Exchange Agent shall
accept such certificates upon compliance with such reasonable terms and
conditions as the Exchange Agent may impose to effect an orderly exchange
thereof in accordance with normal exchange practices. Each outstanding
certificate which prior to the Effective Time represented SHS Common Stock and
which is not surrendered to the Exchange Agent in accordance with the procedures
provided for herein shall, except as otherwise herein provided, until duly
surrendered to the Exchange Agent be deemed to evidence ownership of the number
of shares of ESB Common Stock or the right to receive the amount of cash into
which such SHS Common Stock shall have been converted. After the Effective Time,
there shall be no further transfer on the records of SHS of certificates
representing shares of SHS Common Stock and if such certificates are presented
to SHS for transfer, they shall be canceled against
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delivery of certificates for ESB Common Stock or cash as hereinabove provided.
No dividends which have been declared will be remitted to any person entitled
to receive shares of ESB Common Stock under this Section 1.04 until such person
surrenders the certificate or certificates representing SHS Common Stock, at
which time such dividends shall be remitted to such person, without interest.
(h) ESB shall not be obligated to deliver cash and/or a certificate or
certificates representing shares of ESB Common Stock to which a holder of SHS
Common Stock would otherwise be entitled as a result of the Merger until such
holder surrenders the certificate or certificates representing the shares of SHS
Common Stock for exchange as provided in this Section 1.04, or, in default
thereof, an appropriate affidavit of loss and indemnity agreement and/or a bond
as may be required in each case by ESB. If any certificates evidencing shares
of ESB Common Stock are to be issued in a name other than that in which the
certificate evidencing SHS Common Stock surrendered in exchange therefor is
registered, it shall be a condition of the issuance thereof that the certificate
so surrendered shall be properly endorsed or accompanied by an executed form of
assignment separate from the certificate and otherwise in proper form for
transfer and that the person requesting such exchange pay to the Exchange Agent
any transfer or other tax required by reason of the issuance of a certificate
for shares of ESB Common Stock in any name other than that of the registered
holder of the certificate surrendered or otherwise establish to the satisfaction
of the Exchange Agent that such tax has been paid or is not payable.
(i) Any portion of the shares of ESB Common Stock and cash delivered to
the Exchange Agent by ESB pursuant to Section 1.04(f) that remains unclaimed by
the shareholders of SHS for six months after the Effective Time (as well as any
proceeds from any investment thereof) shall be delivered by the Exchange Agent
to ESB. Any shareholders of SHS who have not theretofore complied with Section
1.04(g) shall thereafter look only to ESB for the consideration deliverable in
respect of each share of SHS Common Stock such shareholder holds as determined
pursuant to this Agreement without any interest thereon. If outstanding
certificates for shares of SHS Common Stock are not surrendered or the payment
for them is not claimed prior to the date on which such shares of ESB Common
Stock or cash would otherwise escheat to or become the property of any
governmental unit or agency, the unclaimed items shall, to the extent permitted
by abandoned property and any other applicable law, become the property of ESB
(and to the extent not in its possession shall be delivered to it), free and
clear of all claims or interest of any person previously entitled to such
property. Neither the Exchange Agent nor any party to this Agreement shall be
liable to any holder of stock represented by any certificate for any
consideration paid to a public official pursuant to applicable abandoned
property, escheat or similar laws. ESB and the Exchange Agent shall be entitled
to rely upon the stock transfer books of SHS to establish the identity of those
persons entitled to receive consideration specified in this Agreement, which
books shall be conclusive with respect thereto. In the event of a dispute with
respect to ownership of stock represented by any certificate, ESB and the
Exchange Agent shall be entitled to deposit any consideration represented
thereby in escrow with an independent third party and thereafter be relieved
with respect to any claims thereto.
1.05 No Fractional Shares. Notwithstanding any other provision of this
Agreement, neither certificates nor scrip for fractional shares of ESB Common
Stock shall be issued in the Merger. Each holder who otherwise would have been
entitled to a fraction of a share of ESB Common Stock shall receive in lieu
thereof cash (without interest) in an amount determined by multiplying the
fractional share interest to which such holder would otherwise be entitled by
$13.69. No such holder shall be entitled to dividends, voting rights or any
other rights in respect of any fractional share.
1.06 Stock Options.
(a) Immediately before the Effective Time, each option with respect to
SHS Common Stock (a "SHS Stock Option") that has been issued pursuant to SHS's
1998 Stock Option Plan and is outstanding and exercisable at the Effective Time
shall be canceled and converted into the right to receive from ESB, subject to
required withholding taxes, if any, at the election of the optionholder (x)
cash in an amount equal to the difference between the exercise price of such
SHS Stock Option and the Per Share Cash Consideration for each share of SHS
Common Stock subject to such SHS Stock Option or (y) an option to purchase
shares of ESB Common Stock in an amount
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and at an exercise price determined as provided below (and otherwise subject to
the terms of SHS's 1998 Stock Option Plan):
(1) the number of shares of ESB Common Stock to be subject to the
new option shall be equal to the product of the number of shares of SHS
Common Stock subject to the original option and the Exchange Ratio,
provided that any fractional shares of ESB Common Stock resulting from
such multiplication shall be rounded down to the nearest share; and
(2) the exercise price per share of ESB Common Stock under the
new option shall be equal to the exercise price per share of SHS Common
Stock under the original option divided by the Exchange Ratio, provided
that such exercise price shall be rounded up to the nearest cent.
The duration and other terms of the new option shall be the same as the original
option, except that all references to SHS shall be deemed to be references to
ESB.
(b) Within thirty (30) business days after the Effective Time, ESB shall
file with the Securities and Exchange Commission (the "SEC") a registration
statement on an appropriate form under the Securities Act of 1933, as amended
(the "Securities Act") with respect to the shares of ESB Common Stock subject to
options to acquire ESB Common Stock issued pursuant to Section 1.06(a) hereof,
and shall use its reasonable best efforts to maintain the current status of the
prospectus contained therein, as well as comply with applicable state securities
or "blue sky" laws, for so long as such options remain outstanding.
1.07 Withholding Rights. ESB (through the Exchange Agent, if applicable)
shall be entitled to deduct and withhold from any amounts otherwise payable
pursuant to this Agreement to any holder of shares of SHS Common Stock such
amounts as ESB is required under the Internal Revenue Code of 1986, as amended
("Code") or any provision of state, local or foreign tax law to deduct and
withhold with respect to the making of such payment. Any amounts so withheld
shall be treated for all purposes of this Agreement as having been paid to the
holder of SHS Common Stock in respect of which such deduction and withholding
was made by ESB.
1.08 Dissenting Shares. Each outstanding share of SHS Common Stock the
holder of which has perfected his right to dissent under the PBCL and has not
effectively withdrawn or lost such right as of the Effective Time shall not be
converted into or represent a right to receive shares of ESB Common Stock or
cash hereunder, and the holder thereof shall be entitled only to such rights as
are granted by the PBCL. SHS shall give ESB prompt notice upon receipt by SHS
of any such written demands for payment of the fair value of such shares of SHS
Common Stock and of withdrawals of such demands and any other instruments
provided pursuant to the PBCL (any shareholder duly making such demand being
hereinafter called a "Dissenting Shareholder"). Any payments made in respect of
SHS Dissenting Shares shall be made by ESB. If any Dissenting Shareholder shall
effectively withdraw or lose (through failure to perfect or otherwise) his right
to such payment at or prior to the Effective Time, such holder's shares of SHS
Common Stock shall be converted into a right to receive cash or ESB Common Stock
in accordance with the applicable provisions of this Agreement. If such holder
shall effectively withdraw or lose (through failure to perfect or otherwise) his
right to such payment after the Effective Time, each share of SHS Common Stock
of such holder shall be converted on a share by share basis into either the
right to receive cash or ESB Common Stock as ESB shall determine.
1.09 Anti-Dilution Provisions. The Exchange Ratio and the Per Share
Stock Consideration shall be subject to appropriate adjustments in the event
that, subsequent to the date of this Agreement but prior to the Effective Time,
the outstanding shares of ESB Common Stock shall have been increased,
decreased, changed into or exchanged for a different number or kind of shares
or securities through reorganization, recapitalization, reclassification, stock
dividend, stock split, reverse stock split or other like changes in ESB's
capitalization. Nothing contained herein shall be deemed to permit any action
which may be proscribed by this Agreement.
1.10 Additional Actions. If at any time after the Effective Time the
Surviving Corporation shall consider that any further assignments or assurances
in law or any other acts are necessary or desirable to (i) vest,
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perfect or confirm, of record or otherwise, in the Surviving Corporation its
rights, title or interest in, to or under any of the rights, properties or
assets of SHS acquired or to be acquired by the Surviving Corporation as a
result of, or in connection with, the Merger, or (ii) otherwise carry out the
purposes of this Agreement, SHS and its proper officers and directors shall be
deemed to have granted to the Surviving Corporation an irrevocable power of
attorney to execute and deliver all such proper deeds, assignments and
assurances in law and to do all acts necessary or proper to vest, perfect or
confirm title to and possession of such rights, properties or assets in the
Surviving Corporation and otherwise to carry out the purposes of this
Agreement; and the proper officers and directors of the Surviving Corporation
are fully authorized in the name of SHS or otherwise to take any and all such
action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SHS
References to "SHS Disclosure Schedules" shall mean all of the disclosure
schedules required by this Article II, dated as of the date hereof and
referenced to the specific sections and subsections of Article II of this
Agreement, which have been delivered by SHS to ESB. SHS hereby represents and
warrants to ESB as follows as of the date hereof:
2.01. Corporate Organization.
(a) SHS is a corporation duly organized, validly existing and in good
standing under the laws of the Commonwealth of Pennsylvania. SHS has the
corporate power and authority to own or lease all of its properties and assets
and to carry on its business as it is now being conducted and is duly licensed
or qualified to do business and is in good standing in each jurisdiction in
which the nature of the business conducted by it or the character or location of
the properties and assets owned or leased by it makes such licensing or
qualification necessary, except where the failure to be so licensed, qualified
or in good standing would not have a material adverse effect on the business,
operations, assets or financial condition of SHS and Spring Hill Savings Bank,
F.S.B. ("Spring Hill Savings Bank") taken as a whole. SHS is registered as a
thrift holding company under the Home Owners' Loan Act, as amended ("HOLA").
SHS Disclosure Schedule 2.01(a) sets forth true and complete copies of the
Articles of Incorporation or other governing instrument and Bylaws of SHS and
Spring Hill Savings Bank as in effect on the date hereof.
(b) The only direct or indirect subsidiary of SHS is Spring Hill Savings
Bank. Spring Hill Savings Bank (i) is duly organized and is validly existing
under the laws of its jurisdiction of incorporation, (ii) has the corporate
power and authority to own or lease all of its properties and assets and to
conduct its business as it is now being conducted, and (iii) is duly licensed or
qualified to do business and is in good standing in each jurisdiction in which
the nature of the business conducted by it or the character or location of the
properties and assets owned or leased by it makes such licensing or
qualification necessary, except where the failure to be so licensed, qualified
or in good standing would not have a material adverse effect on the business,
operations, assets or financial condition of SHS and Spring Hill Savings Bank
taken as a whole. Each of SHS and Spring Hill Savings Bank has satisfied in all
material respects all commitments, financial or otherwise, as may have been
agreed upon with their appropriate thrift regulatory agencies. Except as set
forth in SHS Disclosure Schedule 2.01(b) and other than Spring Hill Savings
Bank, SHS does not own or control, directly or indirectly, greater than a 5%
equity interest in any corporation, company, association, partnership, joint
venture or other entity.
2.02. Capitalization. The authorized capital stock of SHS consists of
10,000,000 shares of SHS Common Stock, of which 767,962 are issued and
outstanding and 51,988 shares are held in treasury as of the date hereof, and
5,000,000 shares of preferred stock, of which no shares are issued and
outstanding as of the date hereof. All issued and outstanding shares of capital
stock of SHS, and all issued and outstanding shares of capital stock of Spring
Hill Savings Bank, have been duly authorized and validly issued and are fully
paid, nonassessable and free of preemptive rights. All of the outstanding
shares of capital stock of Spring Hill Savings Bank are owned by SHS free and
clear of any liens, encumbrances, charges, restrictions or rights of third
parties of any kind whatsoever, and,
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except for options granted to ESB pursuant to the Option Agreement and for
options to purchase 79,045 shares of SHS Common Stock which have been granted
pursuant to SHS's 1998 Stock Option Plan, and which are outstanding, none of
SHS or Spring Hill Savings Bank has or is bound by any outstanding
subscriptions, options, warrants, calls, commitments or agreements of any
character calling for the transfer, purchase or issuance of any shares of
capital stock of SHS or Spring Hill Savings Bank or any securities representing
the right to purchase or otherwise receive any shares of such capital stock or
any securities convertible into or representing the right to purchase or
subscribe for any such stock.
2.03. Authority; No Violation.
(a) Subject to the approval of this Agreement and the Agreement of
Merger and the transactions contemplated hereby and thereby by the stockholders
of SHS, SHS has full corporate power and authority to execute and deliver this
Agreement and the Agreement of Merger and to consummate the transactions
contemplated hereby and thereby in accordance with the terms hereof and
thereof. The execution and delivery of this Agreement and the Agreement of
Merger and the consummation of the transactions contemplated hereby and thereby
have been duly and validly approved by the Board of Directors of SHS. Except
for the approval of SHS's stockholders of this Agreement and the Agreement of
Merger, no other corporate proceedings on the part of SHS are necessary to
consummate the transactions so contemplated. This Agreement and the Agreement
of Merger have been duly and validly executed and delivered by SHS and
constitute valid and binding obligations of SHS, enforceable against it in
accordance with and subject to their terms, except as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally, and except that the availability of
equitable remedies (including, without limitation, specific performance) is
within the discretion of the appropriate court.
(b) None of the execution and delivery of this Agreement and the
Agreement of Merger by SHS, nor the consummation by SHS of the transactions
contemplated hereby and thereby in accordance with the terms hereof and
thereof, or compliance by SHS with any of the terms or provisions hereof or
thereof, will (i) violate any provision of the Articles of Incorporation or
other governing instrument or Bylaws of SHS or Spring Hill Savings Bank,
(ii) assuming that the consents and approvals set forth below are duly
obtained, violate any statute, code, ordinance, rule, regulation, judgment,
order, writ, decree or injunction applicable to SHS or Spring Hill Savings Bank
or any of their respective properties or assets, or (iii) except as disclosed
in SHS Disclosure Schedule 2.03(b), violate, conflict with, result in a breach
of any provisions of, constitute a default (or an event which, with notice or
lapse of time, or both, would constitute a default) under, result in the
termination of, accelerate the performance required by, or result in the
creation of any lien, security interest, charge or other encumbrance upon any
of the respective properties or assets of SHS or Spring Hill Savings Bank under
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other instrument or
obligation to which SHS or Spring Hill Savings Bank is a party, or by which any
of their respective properties or assets may be bound or affected, except, with
respect to (ii) and (iii) above, such as individually or in the aggregate will
not have a material adverse effect on the business, operations, assets or
financial condition of SHS and Spring Hill Savings Bank taken as a whole and
which will not prevent or delay the consummation of the transactions
contemplated hereby. Except as set forth in SHS Disclosure Schedule 2.03(b)
and for consents and approvals of or filings or registrations with or notices
to the Securities and Exchange Commission ("Commission"), the Secretary of
State of the Commonwealth of Pennsylvania, the Office of Thrift Supervision
("OTS") and the stockholders of SHS, no consents or approvals of or filings or
registrations with or notices to any federal, state, municipal or other
governmental or regulatory commission, board, agency, or non-governmental
third party are required on behalf of SHS in connection with (a) the execution
and delivery of this Agreement and the Agreement of Merger by SHS and (b) the
consummation by SHS of the Merger and the other transactions contemplated
hereby and by the Agreement of Merger.
2.04. Financial Statements.
(a) SHS has previously delivered to ESB copies of the consolidated
statements of financial condition of SHS as of December 31, 1998, 1997 and 1996
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for the years ended December 31, 1998, 1997 and 1996 in
each case
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accompanied by the audit reports of S.R. Snodgross, A.C., independent public
accountants, as well as the unaudited consolidated statement of financial
condition of SHS as of March 31, 1999 and the related unaudited consolidated
statement of income, changes in stockholders' equity and cash flows for the
three months ended March 31, 1999 and 1998. The consolidated statements of
financial condition of SHS referred to herein (including the related notes,
where applicable), as well as the consolidated financial statements contained
in the reports of SHS to be delivered by SHS pursuant to Section 4.04 hereof,
fairly present or will fairly present, as the case may be, the consolidated
financial condition of SHS as of the respective dates set forth therein, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows (including the related notes, where applicable) fairly present
or will fairly present, as the case may be, the results of the consolidated
operations, changes in stockholders' equity and cash flows of SHS for the
respective periods or as of the respective dates set forth therein (it being
understood that SHS's interim financial statements are not audited and are not
prepared with related notes but reflect all adjustments which are, in the
opinion of SHS, necessary for a fair presentation of such financial
statements).
(b) Each of the financial statements referred to in this Section 2.04
(including the related notes, where applicable) has been or will be, as the case
may be, prepared in accordance with generally accepted accounting principles
consistently applied during the periods involved. The books and records of SHS
and Spring Hill Savings Bank are being maintained in material compliance with
applicable legal and accounting requirements and reflect only actual
transactions.
(c) Except to the extent reflected, disclosed or reserved against in the
consolidated financial statements referred to in the first sentence of Section
2.04(a) or the notes thereto or liabilities incurred since March 31, 1999 in the
ordinary course of business and consistent with past practice, neither SHS nor
Spring Hill Savings Bank has any obligation or liability, whether absolute,
accrued, contingent or otherwise, material to the business, operations, assets
or financial condition of SHS and Spring Hill Savings Bank taken as a whole.
2.05. Absence of Certain Changes or Events.
(a) There has not been any material adverse change in the business,
operations, assets or financial condition of SHS and Spring Hill Savings Bank
taken as a whole since March 31, 1999, other than: (i) any such effect
attributable to or resulting from any change in banking or similar laws, rules
or regulations of general applicability to banks, thrift institutions or their
holding companies or interpretations thereof by courts or governmental
authorities; (ii) changes in generally accepted accounting principles that are
generally applicable to the banking or savings industries; (iii) expenses
incurred in connection with the transactions contemplated hereby; (iv) actions
or omissions of a party (or any of its subsidiaries) taken with the prior
informed written consent of the other party or parties in contemplation of the
transactions contemplated hereby; or (v) changes attributable to or resulting
from changes in general economic conditions, including changes in the prevailing
level of interest rates. To the best knowledge of SHS, no fact or condition
exists which SHS believes will cause such a material adverse change in the
future.
(b) Neither SHS nor Spring Hill Savings Bank has taken or permitted any
of the actions set forth in Section 4.02 hereof between March 31, 1999 and the
date hereof.
2.06. Legal Proceedings. Except as disclosed in SHS Disclosure Schedule
2.06, neither SHS or Spring Hill Savings Bank is a party to any, and there are
no pending or, to the best knowledge of SHS, threatened legal, administrative,
arbitration or other proceedings, claims, actions or governmental investigations
of any nature against SHS or Spring Hill Savings Bank, except such proceedings,
claims, actions or governmental investigations which in the good faith judgment
of SHS will not have a material adverse effect on the business, operations,
assets or financial condition of SHS and the Spring Hill Savings Bank taken as a
whole. Neither SHS or Spring Hill Savings Bank is a party to any order,
judgment or decree which materially adversely affects the business, operations,
assets or financial condition of SHS and Spring Hill Savings Bank taken as a
whole.
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2.07. Taxes and Tax Returns.
(a) Each of SHS and Spring Hill Savings Bank, or the affiliated,
combined or unitary group (within the meaning of applicable federal income tax
law) of which any such corporation is or was a member, as the case may be
(individually an "Affiliate" and collectively, "Affiliates"), has duly filed
(and until the Effective Time will so file) all returns, declarations,
reports, information returns and statements ("Returns") required to be filed or
sent by or with respect to them in respect of any Taxes (as hereinafter
defined), and has duly paid (and until the Effective Time will so pay) all
Taxes due and payable other than Taxes or other charges which (i) are being
contested in good faith (and disclosed in writing to ESB) and (ii) have not
finally been determined. SHS and its Affiliates have established (and until
the Effective Time will establish) on their books and records reserves that
are adequate for the payment of all Taxes not yet due and payable, whether or
not disputed, accrued or applicable. Except as set forth in SHS Disclosure
Schedule 2.07(a), (i) the federal income tax returns of SHS and its Affiliates
have been examined by the Internal Revenue Service ("IRS") (or are closed to
examination due to the expiration of the applicable statute of limitations),
and (ii) the Pennsylvania income tax returns of SHS and its Affiliates have
been examined by applicable authorities (or are closed to examination due to
the expiration of the statute of limitations), and in the case of both (i) and
(ii) no deficiencies were asserted as a result of such examinations which have
not been resolved and paid in full. There are no audits or other
administrative or court proceedings presently pending nor any other disputes
pending, or claims asserted for, Taxes or assessments upon SHS or any of its
Affiliates, nor has SHS or any of its Affiliates given any currently
outstanding waivers or comparable consents regarding the application of the
statute of limitations with respect to any Taxes or Returns.
(b) Except as set forth in SHS Disclosure Schedule 2.07(b), none of SHS
or any of its Affiliates (i) has requested any extension of time within which to
file any Return which Return has not since been filed, (ii) is a party to any
agreement providing for the allocation or sharing of Taxes, (iii) is required to
include in income any adjustment pursuant to Section 481(a) of the Code, by
reason of a voluntary change in accounting method initiated by SHS or any
Affiliate (nor does SHS have any knowledge that the IRS has proposed any such
adjustment or change of accounting method), or (iv) has filed a consent pursuant
to Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code
apply.
(c) For purposes of this Agreement, "Taxes" shall mean all taxes,
charges, fees, levies or other assessments, including, without limitation, all
net income, gross income, gross receipts, sales, use, ad valorem, transfer,
franchise, profits, license, withholding, payroll, employment (including
withholding, payroll and employment taxes required to be withheld with respect
to income paid to employees), excise, estimated, severance, stamp, occupation,
property or other taxes, customs duties, fees, assessments or charges of any
kind whatsoever, together with any interest and any penalties, additions to tax
or additional amounts imposed by any taxing authority (domestic or foreign) upon
SHS or any of its Affiliates.
2.08. Employee Benefit Plans.
(a) Each employee benefit plan or arrangement of SHS or Spring Hill
Savings Bank which is an "employee benefit plan" within the meaning of Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), is listed in SHS Disclosure Schedule 2.08(a) ("SHS Plans"). SHS has
previously furnished to ESB true and complete copies of each of the SHS Plans
together with (i) the most recent actuarial and financial reports prepared with
respect to any qualified SHS Plans, (ii) the most recent annual reports filed
with any government agency, and (iii) all rulings and determination letters and
any open requests for rulings or letters that pertain to any qualified SHS
Plans.
(b) Each SHS Plan has been operated in compliance in all material
respects with the applicable provisions of ERISA, the Code, all regulations,
rulings and announcements promulgated or issued thereunder, and all other
applicable governmental laws and regulations.
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(c) Neither SHS nor Spring Hill Savings Bank participates in or has
incurred any liability under Section 4201 of ERISA for a complete or partial
withdrawal from a multi-employer plan (as such term is defined in ERISA).
(d) The present value of all accrued benefits under each of the SHS
Plans subject to Title IV of ERISA did not, as of the latest valuation date of
each such Plan, exceed the then current value of the assets of such plans
allocable to such accrued benefits, based upon the actuarial and accounting
assumptions currently utilized for such SHS Plans.
(e) Neither SHS nor Spring Hill Savings Bank, nor, to the best knowledge
of SHS, any trustee, fiduciary or administrator of an SHS Plan or any trust
created thereunder, has engaged in a "prohibited transaction," as such term is
defined in Section 4975 of the Code, which could subject SHS or Spring Hill
Savings Bank, or, to the best knowledge of SHS, any trustee, fiduciary or
administrator thereof, to the tax or penalty on prohibited transactions imposed
by said Section 4975.
(f) Except as disclosed on SHS Disclosure Schedule 2.08(f), no SHS Plan
or any trust created thereunder has been terminated, nor have there been any
"reportable events" with respect to any SHS Plan, as that term is defined in
Section 4043(b) of ERISA.
(g) No SHS Plan or any trust created thereunder has incurred any
"accumulated funding deficiency," as such term is defined in Section 302 of
ERISA.
(h) Each of the SHS Plans which is intended to be a qualified plan
within the meaning of Section 401(a) of the Code has been determined by the IRS
to be so qualified, and SHS is not aware of any fact or circumstance which
would adversely affect the qualified status of any such Plan.
2.09. Securities Documents and Regulatory Reports.
(a) SHS has previously delivered or made available to ESB a complete
copy of each final registration statement, prospectus, annual, quarterly or
current report and definitive proxy statement or other communication (other
than general advertising materials) filed pursuant to the Securities Act of
1933, as amended ("1933 Act"), or the Securities Exchange Act of 1934, as
amended ("1934 Act"), or mailed by SHS to its stockholders as a class since
January 1, 1997, and each such final registration statement, prospectus,
annual, quarterly or current report and definitive proxy statement or other
communication, as of its date, complied in all material respects with all
applicable statutes, rules and regulations and did not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading; provided
that information as of a later date shall be deemed to modify information as of
an earlier date.
(b) SHS and Spring Hill Savings Bank has duly filed with the OTS and the
FDIC in correct form the monthly, quarterly and annual reports required to be
filed under applicable laws and regulations, and SHS has delivered or made
available to ESB accurate and complete copies of such reports. SHS Disclosure
Schedule 2.09(b) lists all examinations of SHS or Spring Hill Savings Bank
conducted by the applicable thrift regulatory authorities since January 1, 1996
and the dates of any responses thereto submitted by SHS. In connection with the
most recent examinations of SHS or Spring Hill Savings Bank by the applicable
thrift regulatory authorities, neither SHS nor Spring Hill Savings Bank was
required to correct or change any action, procedure or proceeding which SHS or
Spring Hill Savings Bank believes has not been now corrected or changed as
required.
2.10. SHS Information. None of the information relating to SHS and Spring
Hill Savings Bank to be provided by SHS or Spring Hill Savings Bank for use in
(i) the Registration Statement on Form S-4 to be filed by ESB in connection with
the issuance of shares of ESB Common Stock pursuant to the Merger, as amended or
supplemented (or on any successor or other appropriate form) ("Form S-4"), will,
at the time the Form S-4 becomes effective, contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
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statements therein, in light of the circumstances under which they were made,
not misleading, and (ii) the proxy statement/prospectus contained in the Form
S-4, as amended or supplemented, and to be delivered to stockholders of SHS in
connection with the solicitation of their approval of this Agreement, the
Agreement of Merger and the transactions contemplated hereby and thereby
("Proxy Statement/Prospectus"), as of the date(s) such Proxy
Statement/Prospectus is mailed to stockholders of SHS and up to and including
the date(s) of the meeting of stockholders to which such Proxy
Statement/Prospectus relates, will contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading,
provided that information as of a later date shall be deemed to modify
information as of an earlier date.
2.11. Compliance with Applicable Law.
(a) Each of SHS and Spring Hill Savings Bank has all permits, licenses,
certificates of authority, orders and approvals of, and has made all filings,
applications and registrations with, federal, state, local and foreign
governmental or regulatory bodies that are required in order to permit it to
carry on its business as it is presently being conducted and the absence of
which could have a material adverse effect on the business, operations, assets
or financial condition of SHS and Spring Hill Savings Bank taken as a whole; all
such permits, licenses, certificates of authority, orders and approvals are in
full force and effect; and to the best knowledge of SHS and Spring Hill Savings
Bank, no suspension or cancellation of any of the same is threatened.
(b) Neither SHS nor Spring Hill Savings Bank is in violation of its
respective Articles of Incorporation or other governing instrument or Bylaws, or
of any applicable federal, state or local law or ordinance or any order, rule or
regulation of any federal, state, local or other governmental agency or body
(including, without limitation, all banking, securities, municipal securities,
safety, health, zoning, anti-discrimination, antitrust, and wage and hour laws,
ordinances, orders, rules and regulations), or in default with respect to any
order, writ, injunction or decree of any court, or in default under any order,
license, regulation or demand of any governmental agency, any of which
violations or defaults could have a material adverse effect on the business,
operations, assets or financial condition of SHS and Spring Hill Savings Bank
taken as a whole; and neither SHS nor Spring Hill Savings Bank has received any
notice or communication from any federal, state or local governmental authority
asserting that SHS or Spring Hill Savings Bank is in violation of any of the
foregoing which could have a material adverse effect on the business,
operations, assets or financial condition of SHS and Spring Hill Savings Bank
taken as a whole. Neither SHS nor Spring Hill Savings Bank is subject to any
regulatory or supervisory cease and desist order, agreement, written directive,
memorandum of understanding or written commitment (other than those of general
applicability to all savings associations issued by governmental authorities),
and none of them has received any written communication requesting that they
enter into any of the foregoing.
2.12. Deposit Insurance and Other Regulatory Matters.
(a) The deposit accounts of Spring Hill Savings Bank are insured by the
Savings Association Insurance Fund administered by the FDIC to the maximum
extent permitted by the Federal Deposit Insurance Act, as amended ("FDIA"), and
Spring Hill Savings Bank has paid all premiums and assessments required by the
FDIA and the regulations thereunder.
(b) Spring Hill Savings Bank is a member in good standing of the Federal
Home Loan Bank ("FHLB") of Pittsburgh and owns the requisite amount of stock in
the FHLB of Pittsburgh.
(c) Spring Hill Savings Bank is a "qualified thrift lender," as such
term is defined in the HOLA and the regulations thereunder.
(d) Spring Hill Savings Bank has at all times qualified as a "domestic
building and loan association," as such term is defined in Section 7701(a)(19)
of the Code, for purposes of Section 593 of the Code.
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2.13. Certain Contracts.
(a) Except as disclosed in SHS Disclosure Schedule 2.13(a), neither SHS
nor Spring Hill Savings Bank is a party to, is bound or affected by, receives,
or is obligated to pay benefits under, (i) any agreement, arrangement or
commitment, including without limitation, any agreement, indenture or other
instrument relating to the borrowing of money by SHS or Spring Hill Savings
Bank or the guarantee by SHS or Spring Hill Savings Bank of any obligation,
(ii) any agreement, arrangement or commitment relating to the employment of a
consultant or the employment, election or retention in office of any present or
former director or officer of SHS or Spring Hill Savings Bank, (iii) any
contract, agreement or understanding with a labor union, (iv) any agreement,
arrangement or understanding pursuant to which any payment (whether of
severance pay or otherwise) became or may become due to any director, officer
or employee of SHS or Spring Hill Savings Bank upon execution of this Agreement
or upon or following consummation of the transactions contemplated by this
Agreement (either alone or in connection with the occurrence of any additional
acts or events), (v) any agreement, arrangement or understanding to which SHS
or Spring Hill Savings Bank is a party or by which any of the same is bound
which limits the freedom of SHS or Spring Hill Savings Bank to compete in any
line of business or with any person, (vi) any assistance agreement, supervisory
agreement, memorandum of understanding, consent order, cease and desist order
or condition of any regulatory order or decree with or by the OTS, the FDIC or
any other regulatory agency, (vii) any other agreement, arrangement or
understanding which would be required to be filed as an exhibit to SHS's Annual
Report on Form 10-K (or Form 10-KSB) under the 1934 Act and which has not been
so filed, or (viii) any other agreement, arrangement or understanding to which
SHS or Spring Hill Savings Bank is a party and which is material to the
business, operations, assets or financial condition of SHS and Spring Hill
Savings Bank taken as a whole (excluding loan agreements or agreements relating
to deposit accounts), in each of the foregoing cases whether written or oral.
(b) Neither SHS nor Spring Hill Savings Bank is in default or in non-
compliance, which default or non-compliance would have a material adverse effect
on the business, operations, assets or financial condition of SHS and Spring
Hill Savings Bank taken as a whole or the transactions contemplated hereby,
under any contract, agreement, commitment, arrangement, lease, insurance policy
or other instrument to which it is a party or by which its assets, business or
operations may be bound or affected, whether entered into in the ordinary course
of business or otherwise and whether written or oral, and there has not occurred
any event that with the lapse of time or the giving of notice, or both, would
constitute such a default or non-compliance.
2.14. Properties and Insurance.
(a) All real and personal property owned by SHS or Spring Hill Savings
Bank or presently used by any of them in their respective business is in an
adequate condition (ordinary wear and tear excepted) and is sufficient to carry
on the business of SHS and Spring Hill Savings Bank in the ordinary course of
business consistent with their past practices. SHS and Spring Hill Savings
Bank have good and, as to owned real property, marketable title to all material
assets and properties, whether real or personal, tangible or intangible,
reflected in SHS's consolidated statement of financial condition as of March
31, 1999, or owned and acquired subsequent thereto (except to the extent that
such assets and properties have been disposed of for fair value in the ordinary
course of business since March 31, 1999), subject to no encumbrances, liens,
mortgages, security interests or pledges, except (i) those items that secure
liabilities that are reflected in said consolidated statement of financial
condition or the notes thereto or have been incurred in the ordinary course of
business after the date of such consolidated statement of financial condition,
(ii) statutory liens for amounts not yet delinquent or which are being
contested in good faith, (iii) such encumbrances, liens, mortgages, security
interests, pledges and title imperfections that are not in the aggregate
material to the business, operations, assets or financial condition of SHS and
Spring Hill Savings Bank taken as a whole, and (iv) with respect to owned real
property, title imperfections noted in title reports prior to the date hereof.
SHS and Spring Hill Savings Bank as lessees have the right under valid and
subsisting leases to occupy, use, possess and control all property leased by
them in all material respects as presently occupied, used, possessed and
controlled by SHS and Spring Hill Savings Bank and the consummation of the
transactions contemplated hereby and by the Agreement of Merger will not affect
any such right. SHS Disclosure Schedule 2.14(a) sets forth an accurate listing
of each lease pursuant to which SHS or Spring Hill Savings Bank acts as lessor
or lessee, including the expiration date and the terms of any renewal options
which relate to the same.
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(b) The business operations and all insurable properties and assets of
SHS and Spring Hill Bank are insured for their benefit against all risks
which, in the reasonable judgment of the management of SHS, should be insured
against, in each case under valid, binding and enforceable policies or bonds
issued by insurers of recognized responsibility, in such amounts with such
deductibles and against such risks and losses as are in the opinion of the
management of SHS adequate for the business engaged in by SHS and Spring Hill
Savings Bank. As of the date hereof, neither SHS nor Spring Hill Savings Bank
has received any notice of cancellation or notice of a material amendment of
any such insurance policy or bond or is in default under such policy or bond,
no coverage thereunder is being disputed and all material claims thereunder
have been filed in a timely fashion.
2.15. Environmental Matters. For purposes of this Agreement, the
following terms shall have the indicated meaning:
"Environmental Law" means any federal, state or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization, approval,
consent, order, judgment, decree, injunction or agreement with any governmental
entity relating to (1) the protection, preservation or restoration of the
environment (including, without limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface soil, subsurface soil, plant and
animal life or any other natural resource), and/or (2) the use, storage,
recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of Hazardous Substances. The term
Environmental Law includes without limitation (1) the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C.
(S)9601, et seq; the Resource Conservation and Recovery Act, as amended, 42
-- ---
U.S.C. (S)6901, et seq; the Clean Air Act, as amended, 42 U.S.C. (S)7401, et
-- --- --
seq; the Federal Water Pollution Control Act, as amended, 33 U.S.C. (S)1251, et
- --- --
seq; the Toxic Substances Control Act, as amended, 15 U.S.C. (S)9601, et seq;
- --- -- ---
the Emergency Planning and Community Right to Know Act, 42 U.S.C. (S)11001, et
--
seq; the Safe Drinking Water Act, 42 U.S.C. (S)300f, et seq; and all comparable
- --- -- ---
state and local laws, and (2) any common law (including without limitation
common law that may impose strict liability) that may impose liability or
obligations for injuries or damages due to, or threatened as a result of, the
presence of or exposure to any Hazardous Substance.
"Hazardous Substance" means any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, under any Environmental Law, whether by type or by
quantity, including any regulated material containing any such substance as a
component. Hazardous Substances include without limitation petroleum (including
crude oil or any fraction thereof), asbestos, radioactive material, and
polychlorinated biphenyls.
"Loan Portfolio Properties and Other Properties Owned" means those
properties owned, leased or operated by SHS or Spring Hill Savings Bank or those
properties which serve as collateral for loans owned by SHS or Spring Hill
Savings Bank.
(a) To the best knowledge of SHS and Spring Hill Savings Bank, neither
SHS nor Spring Hill Savings Bank has been or is in violation of or liable under
any Environmental Law, except any such violations or liabilities which would
not singly or in the aggregate have a material adverse effect on the business,
operations, assets or financial condition of SHS and Spring Hill Savings Bank
taken as a whole.
(b) To the best knowledge of SHS and Spring Hill Savings Bank, none of
the Loan Portfolio Properties and Other Properties Owned by SHS or Spring Hill
Savings Bank has been or is in violation of or liable under any Environmental
Law, except any such violations or liabilities which singly or in the aggregate
would not have a material adverse effect on the business, operations, assets or
financial condition of SHS and the Spring Hill Savings Bank taken as a whole.
(c) To the best knowledge of SHS and Spring Hill Savings Bank, there
are no actions, suits, demands, notices, claims, investigations or proceedings
pending or threatened relating to the liability of the Loan Portfolio
Properties and Other Properties Owned by SHS or Spring Hill Savings Bank under
any Environmental Law, including without limitation any notices, demand letters
or requests for information from any federal or state environmental agency
relating to any such liabilities under or violations of Environmental Law,
except such which
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would not have or result in a material adverse effect on the business,
operations, assets or financial condition of SHS and Spring Hill Savings Bank
taken as a whole.
2.16. Allowance for Loan Losses and Real Estate Owned. The allowance for
loan losses reflected on SHS's consolidated statements of financial condition
included in the consolidated financial statements referred to in Section 2.04
hereof is, or will be in the case of subsequently delivered financial
statements, as the case may be, in the opinion of SHS's management adequate in
all material respects as of their respective dates under the requirements of
generally accepted accounting principles to provide for reasonably anticipated
losses on outstanding loans net of recoveries. The real estate owned reflected
on the consolidated statements of financial condition included in the
consolidated financial statements referred to in Section 2.04 hereof is, or will
be in the case of subsequently delivered financial statements, as the case may
be, carried at the lower of cost or fair value, or the lower of cost or net
realizable value, as required by generally accepted accounting principles.
2.17. Minute Books. Since January 1, 1996, the minute books of SHS and
Spring Hill Savings Bank contain complete and accurate records of all meetings
and other corporate action held or taken by their respective Boards of Directors
(including committees of their respective Boards of Directors) and stockholders.
2.18. Affiliate Transactions.
(a) Except as disclosed in SHS Disclosure Schedule 2.18(a) or in SHS's
proxy statements, and except as specifically contemplated by this Agreement,
since January 1, 1997, neither SHS nor Spring Hill Savings Bank has engaged in
or agreed to engage in (whether in writing or orally) any transaction with any
"affiliated person" or "affiliate" of Spring Hill Savings Bank, as such terms
are defined in 12 C.F.R. (S)561.5 and 12 C.F.R. (S)563.41, respectively.
(b) SHS Disclosure Schedule 2.18(b) sets forth the name and number of
shares of SHS Common Stock owned as of the date hereof beneficially or of record
by any persons SHS considers to be affiliates of SHS ("SHS Affiliates") as that
term is defined for purposes of Rule 145 under the 1933 Act.
2.19. Broker Fees. Except as set forth in SHS Disclosure Schedule 2.19,
none of SHS, Spring Hill Savings Bank or any of the respective directors or
officers of such companies has employed any consultant, broker or finder or
incurred any liability for any consultant's, broker's or finder's fees or
commissions in connection with any of the transactions contemplated by this
Agreement.
2.20. Year 2000 Compliance. All hardware, firmware, software and computer
systems owned, used or licensed by SHS and Spring Hill Savings Bank, including
but not limited to system and application programs, files, data bases and
computer services, are Year 2000 Compliant (as defined below) and shall continue
to function in accordance with their intended purpose without material error or
material interruption during and after the Year 2000. For purposes of this
Agreement, "Year 2000 Compliant" means that the hardware, firmware, software and
computer systems (i) will correctly and accurately address, produce, store,
process and calculate data involving dates beginning with January 1, 2000 and
will not produce abnormally ending or incorrect results involving such dates as
used in any forward or regression dated based functions; (ii) will provide that
all "date"-related functionalities and data fields include the indication, or
provide for the interpretation, of century and millennium, and will perform
calculations which involve a four-digit year; and (iii) will be interoperable
with other Year 2000 Compliant hardware or software owned, used or licensed by
SHS and Spring Hill Savings Bank which may deliver records to, receive records
from or otherwise interact with such hardware or software in the course of
processing records or data.
2.21. Disclosures. No representation or warranty contained in Article II
of this Agreement, and no statement contained in the SHS Disclosure Schedules,
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements herein or therein not
misleading.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ESB
References to "ESB Disclosure Schedules" shall mean all of the disclosure
schedules required by this Article III, dated as of the date hereof and
referenced to the specific sections and subsections of Article III of this
Agreement, which have been delivered by ESB to SHS. ESB hereby represents and
warrants to SHS as follows as of the date hereof:
3.01. Corporate Organization.
(a) ESB is a corporation duly organized, validly existing and in good
standing under the laws of the Commonwealth of Pennsylvania. ESB has the
corporate power and authority to own or lease all of its properties and assets
and to carry on its business as it is now being conducted and is duly licensed
or qualified to do business and is in good standing in each jurisdiction in
which the nature of the business conducted by it or the character or location of
the properties and assets owned or leased by it makes such licensing or
qualification necessary, except where the failure to be so licensed, qualified
or in good standing would not have a material adverse effect on the business,
operations, assets or financial condition of ESB and the ESB Subsidiaries (as
defined below) taken as a whole. ESB is registered as a thrift holding company
under the HOLA. ESB Disclosure Schedule 3.01(a) sets forth true and complete
copies of the Articles of Incorporation or other governing instrument and Bylaws
of ESB and the ESB Subsidiaries as in effect on the date hereof.
(b) The only direct or indirect subsidiaries of ESB are ESB Bank, FSB
("ESB Bank"), Amsco, Inc., PennFirst Financial Services, Inc., PennFirst Capital
Trust I, THF, Inc., ESB Bank Building Associates (a limited partnership),
McCormick Place (a limited partnership), Madison Woods (a limited partnership)
and Shady Park II Townhouse Associates (a limited partnership) (together the
"ESB Subsidiaries"). Each of the ESB Subsidiaries (i) is duly organized and
validly existing or in good standing under the laws of its respective
jurisdiction of incorporation, (ii) has the corporate power and authority to own
or lease all of its properties and assets and to conduct its business as it is
now being conducted, and (iii) is duly licensed or qualified to do business and
is in good standing in each jurisdiction in which the nature of the business
conducted by it or the character or location of the properties and assets owned
or leased by it makes such licensing or qualification necessary, except where
the failure to be so licensed, qualified or in good standing would not have a
material adverse effect on the business, operations, assets or financial
condition of ESB and the ESB Subsidiaries taken as a whole. Each of ESB and ESB
Bank has satisfied in all material respects all commitments, financial or
otherwise, as may have been agreed upon with their appropriate thrift regulatory
agencies. Other than the ESB Subsidiaries, ESB does not own or control,
directly or indirectly, greater than a 5% equity interest in any corporation,
company, association, partnership, joint venture or other entity.
3.02. Capitalization. The authorized capital stock of ESB consists of
10,000,000 shares of ESB Common Stock, of which 6,337,755 are issued and
outstanding and 1,121,955 shares which are held in treasury as of the date
hereof, and 5,000,000 shares of preferred stock, par value $.01 per share, of
which no shares are issued and outstanding as of the date hereof. All issued
and outstanding shares of capital stock of ESB, and all issued and outstanding
shares of capital stock of each of the ESB Subsidiaries, have been duly
authorized and validly issued and are fully paid, nonassessable and free of
preemptive rights. All of the outstanding shares of capital stock of each of
the ESB Subsidiaries are owned by ESB free and clear of any liens, encumbrances,
charges, restrictions or rights of third parties of any kind whatsoever, and,
except for options to purchase 464,083 shares of ESB Common Stock which have
been granted pursuant to ESB's 1997 Stock Option Plan, 1992 Stock Incentive Plan
or Ellwood Federal Savings Bank's 1990 Stock Option Plan (or options granted by
ESB pursuant thereto after the date hereof), none of ESB or any of the ESB
Subsidiaries has or is bound by any outstanding subscriptions, options,
warrants, calls, commitments or agreements of any character calling for the
transfer, purchase or issuance of any shares of capital stock of ESB or any of
the ESB Subsidiaries or any securities representing the right to purchase or
otherwise receive any shares of such capital stock or any securities convertible
into or representing the right to purchase or subscribe for any such stock.
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3.03. Authority; No Violation.
(a) ESB has full corporate power and authority to execute and deliver
this Agreement and the Agreement of Merger and to consummate the transactions
contemplated hereby and thereby in accordance with the terms hereof and
thereof. The execution and delivery of this Agreement and the Agreement of
Merger and the consummation of the transactions contemplated hereby and thereby
have been duly and validly approved by the Board of Directors of ESB and no
other corporate proceedings on the part of ESB are necessary to consummate the
transactions so contemplated. This Agreement and the Agreement of Merger have
been duly and validly executed and delivered by ESB and constitute valid and
binding obligations of ESB, enforceable against it in accordance with and
subject to their terms, except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors' rights
generally, and except that the availability of equitable remedies (including,
without limitation, specific performance) is within the discretion of the
appropriate court.
(b) None of the execution and delivery of this Agreement and the
Agreement of Merger by ESB, nor the consummation by ESB of the transactions
contemplated hereby and thereby in accordance with the terms hereof and
thereof, or compliance by ESB with any of the terms or provisions hereof or
thereof, will (i) violate any provision of the Articles of Incorporation or
other governing instrument or Bylaws of ESB or any of the ESB Subsidiaries,
(ii) assuming that the consents and approvals set forth below are duly
obtained, violate any statute, code, ordinance, rule, regulation, judgment,
order, writ, decree or injunction applicable to ESB or any of the ESB
Subsidiaries or any of their respective properties or assets, or (iii) violate,
conflict with, result in a breach of any provisions of, constitute a default
(or an event which, with notice or lapse of time, or both, would constitute a
default) under, result in the termination of, accelerate the performance
required by, or result in the creation of any lien, security interest, charge
or other encumbrance upon any of the respective properties or assets of ESB or
any of the ESB Subsidiaries under any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, deed of trust, license, lease, agreement
or other instrument or obligation to which ESB or any of the ESB Subsidiaries
is a party, or by which any of their respective properties or assets may be
bound or affected, except, with respect to (ii) and (iii) above, such as
individually or in the aggregate will not have a material adverse effect on the
business, operations, assets or financial condition of ESB and the ESB
Subsidiaries taken as a whole and which will not prevent or delay the
consummation of the transactions contemplated hereby. Except for consents and
approvals of or filings or registrations with or notices to the Commission, the
Secretary of State of the Commonwealth of Pennsylvania and the OTS, no consents
or approvals of or filings or registrations with or notices to any federal,
state, municipal or other governmental or regulatory commission, board, agency
or non-governmental third party are required on behalf of ESB in connection
with (a) the execution and delivery of this Agreement and the Agreement of
Merger by ESB and (b) the consummation by ESB of the transactions contemplated
hereby and by the Agreement of Merger.
3.04. Financial Statements.
(a) ESB has previously delivered to SHS copies of the consolidated
statements of financial condition of ESB as of December 31, 1998, 1997 and 1996,
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for the years ended December 31, 1998, 1997 and 1996 in
each case accompanied by the audit reports of KPMG LLP, independent public
accountants, as well as the unaudited consolidated statement of financial
condition of ESB as of March 31, 1999 and the related unaudited consolidated
statements of income, changes in stockholders' equity and cash flows for the
three months ended March 31, 1999 and 1998. The consolidated statements of
financial condition of ESB referred to herein (including the related notes,
where applicable), as well as the consolidated financial statements contained in
the reports of ESB to be delivered by ESB pursuant to Section 4.04 hereof,
fairly present or will fairly present, as the case may be, the consolidated
financial condition of ESB as of the respective dates set forth therein, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows (including the related notes, where applicable) fairly present or
will fairly present, as the case may be, the results of the consolidated
operations, changes in stockholders' equity and cash flows of ESB for the
respective periods or as of the respective dates set forth therein (it being
understood that ESB's interim financial statements are not audited and are not
prepared with related notes but reflect all adjustments which are, in the
opinion of ESB, necessary for a fair presentation of such financial statements).
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(b) Each of the financial statements referred to in this Section 3.04
(including the related notes, where applicable) has been or will be, as the case
may be, prepared in accordance with generally accepted accounting principles
consistently applied during the periods involved. The books and records of ESB
and the ESB Subsidiaries are being maintained in material compliance with
applicable legal and accounting requirements and reflect only actual
transactions.
(c) Except to the extent reflected, disclosed or reserved against in the
consolidated financial statements referred to in the first sentence of this
Section 3.04 or the notes thereto or liabilities incurred since March 31, 1999
in the ordinary course of business and consistent with past practice, none of
ESB or any of the ESB Subsidiaries has any obligation or liability, whether
absolute, accrued, contingent or otherwise, material to the business,
operations, assets or financial condition of ESB and the ESB Subsidiaries taken
as a whole.
3.05. Absence of Certain Changes or Events.
(a) There has not been any material adverse change in the business,
operations, assets or financial condition of ESB and the ESB Subsidiaries taken
as a whole since March 31, 1999, other than: (i) any such effect attributable
to or resulting from any change in banking or similar laws, rules or regulations
of general applicability to banks, thrift institutions or their holding
companies or interpretations thereof by courts or governmental authorities; (ii)
changes in generally accepted accounting principles that are generally
applicable to the banking or savings industries; (iii) expenses incurred in
connection with the transactions contemplated hereby; (iv) actions or omissions
of a party (or any of its subsidiaries) taken with the prior informed written
consent of the other party or parties in contemplation of the transactions
contemplated hereby; or (v) changes attributable to or resulting from changes in
general economic conditions, including changes in the prevailing level of
interest rates. To the best knowledge of ESB, no fact or condition exists which
ESB believes will cause such a material adverse change in the future.
(b) ESB has not taken or permitted any of the actions set forth in
Section 4.04 hereof between March 31, 1999 and the date hereof.
3.06. Legal Proceedings. None of ESB or any of the ESB Subsidiaries is a
party to any, and there are no pending or, to the best knowledge of ESB,
threatened legal, administrative, arbitration or other proceedings, claims,
actions or governmental investigations of any nature against ESB or any of the
ESB Subsidiaries, except such proceedings, claims actions or governmental
investigations which in the good faith judgment of ESB will not have a material
adverse effect on the business, operations, assets or financial condition of ESB
and the ESB Subsidiaries taken as a whole. None of ESB or any of the ESB
Subsidiaries is a party to any order, judgment or decree which materially
adversely affects the business, operations, assets or financial condition of ESB
and the ESB Subsidiaries taken as a whole.
3.07. Taxes and Tax Returns.
(a) Each of ESB and the ESB Subsidiaries, or the affiliated, combined or
unitary group (within the meaning of applicable federal income tax law) of which
any such corporation is or was a member, as the case may be (individually an
"Affiliate" and collectively, "Affiliates"), has duly filed (and until the
Effective Time will so file) all returns, declarations, reports, information
returns and statements ("Returns") required to be filed or sent by or with
respect to them in respect of any Taxes, and has duly paid (and until the
Effective Time will so pay) all Taxes due and payable other than Taxes or other
charges which (i) are being contested in good faith (and disclosed in writing to
SHS and (ii) have not finally been determined. ESB and its Affiliates have
established (and until the Effective Time will establish) on their books and
records reserves that are adequate for the payment of all Taxes not yet due and
payable, whether or not disputed, accrued or applicable. Except as set forth in
ESB Disclosure Schedule 3.07(a), (i) the federal income tax returns of ESB and
its Affiliates have been examined by the IRS (or are closed to examination due
to the expiration of the applicable statute of limitations), and (ii) the
Pennsylvania income
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tax returns of ESB and its Affiliates have been examined by applicable
authorities (or are closed to examination due to the expiration of the statute
of limitations), and in the case of both (i) and (ii) no deficiencies were
asserted as a result of such examinations which have not been resolved and paid
in full. There are no audits or other administrative or court proceedings
presently pending nor any other disputes pending, or claims asserted for, Taxes
or assessments upon ESB or any of its Affiliates, nor has ESB or any of its
Affiliates given any currently outstanding waivers or comparable consents
regarding the application of the statute of limitations with respect to any
Taxes or Returns.
(b) Except as set forth in ESB Disclosure Schedule 3.07(b), none of ESB
or any of its Affiliates (i) has requested any extension of time within which to
file any Return which Return has not since been filed, (ii) is a party to any
agreement providing for the allocation or sharing of Taxes, (iii) is required to
include in income any adjustment pursuant to Section 481(a) of the Code, by
reason of a voluntary change in accounting method initiated by ESB or any
Affiliate (nor does ESB have any knowledge that the IRS has proposed any such
adjustment or change of accounting method), or (iv) has filed a consent pursuant
to Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code
apply.
3.08. Employee Benefit Plans.
(a) Each employee benefit plan or arrangement of ESB or either of the
ESB Subsidiaries which is an "employee benefit plan" within the meaning of
Section 3(3) of the ERISA, is listed in ESB Disclosure Schedule 3.08(a) ("ESB
Plans"). ESB has previously furnished or made available to SHS true and
complete copies of each of the ESB Plans together with (i) the most recent
actuarial and financial reports prepared with respect to any qualified ESB
Plans, (ii) the most recent annual reports filed with any government agency,
and (iii) all rulings and determination letters and any open requests for
rulings or letters that pertain to any qualified ESB Plans.
(b) Each ESB Plan has been operated in compliance in all material
respects with the applicable provisions of ERISA, the Code, all regulations,
rulings and announcements promulgated or issued thereunder, and all other
applicable governmental laws and regulations.
(c) Neither ESB nor any ESB Subsidiary participates in or has incurred
any liability under Section 4201 of ERISA for a complete or partial withdrawal
from a multi-employer plan (as such term is defined in ERISA).
(d) The present value of all accrued benefits under each of the ESB
Plans subject to Title IV of ERISA did not, as of the latest valuation date of
each such Plan, exceed the then current value of the assets of such plans
allocable to such accrued benefits, based upon the actuarial and accounting
assumptions currently utilized for such ESB Plans.
(e) Neither ESB nor any of the ESB Subsidiaries, nor, to the best
knowledge of ESB, any trustee, fiduciary or administrator of a ESB Plan or any
trust created thereunder, has engaged in a "prohibited transaction," as such
term is defined in Section 4975 of the Code, which could subject ESB or any of
the ESB Subsidiaries, or, to the best knowledge of ESB, any trustee, fiduciary
or administrator thereof, to the tax or penalty on prohibited transactions
imposed by said Section 4975.
(f) No ESB Plan or any trust created thereunder has been terminated, nor
have there been any "reportable events" with respect to any ESB Plan, as that
term is defined in Section 4043(b) of ERISA.
(g) No ESB Plan or any trust created thereunder has incurred any
"accumulated funding deficiency," as such term is defined in Section 302 of
ERISA.
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(h) Each of the ESB Plans which is intended to be a qualified plan
within the meaning of Section 401(a) of the Code has been determined by the IRS
to be so qualified, and ESB is not aware of any fact or circumstance which
would adversely affect the qualified status of any such Plan.
3.09. Securities Documents and Regulatory Reports.
(a) ESB has previously delivered or made available to SHS a complete
copy of each final registration statement, prospectus, annual, quarterly or
current report and definitive proxy statement or other communication (other
than general advertising materials) filed pursuant to the 1933 Act or the 1934
Act or mailed by ESB to its stockholders as a class since January 1, 1997, and
each such final registration statement, prospectus, annual, quarterly or
current report and definitive proxy statement or other communication, as of its
date, complied in all material respects with all applicable statutes, rules and
regulations and did not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements made therein, in light of the circumstances under which
they were made, not misleading; provided that information as of a later date
shall be deemed to modify information as of an earlier date.
(b) ESB and each of the ESB Subsidiaries has duly filed with the OTS and
the FDIC in correct form the monthly, quarterly and annual reports required to
be filed under applicable laws and regulations, and ESB has delivered or made
available to SHS accurate and complete copies of such reports. ESB Disclosure
Schedule 3.09(b) lists all examinations of ESB or of the ESB Subsidiaries
conducted by the applicable thrift regulatory authorities since January 1, 1996
and the dates of any responses thereto submitted by ESB. In connection with the
most recent examinations of ESB or the ESB Subsidiaries by the applicable thrift
regulatory authorities, neither ESB nor any ESB Subsidiary was required to
correct or change any action, procedure or proceeding which ESB or such ESB
Subsidiary believes has not been now corrected or changed as required.
3.10. ESB Information. None of the information relating to ESB and the
ESB Subsidiaries to be contained in (i) the Form S-4 will, at the time the Form
S-4 becomes effective, contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, and (ii) the Proxy
Statement/Prospectus, as of the date(s) such Proxy Statement/Prospectus is
mailed to stockholders of SHS and up to and including the date(s) of the meeting
of stockholders to which such Proxy Statement/Prospectus relates, will contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, provided that information as of a later
date shall be deemed to modify information as of an earlier date.
3.11. Compliance with Applicable Law.
(a) ESB and each of the ESB Subsidiaries has all permits, licenses,
certificates of authority, orders and approvals of, and has made all filings,
applications and registrations with, federal, state, local and foreign
governmental or regulatory bodies that are required in order to permit it to
carry on its business as it is presently being conducted and the absence of
which could have a material adverse effect on the business, operations, assets
or financial condition of ESB and the ESB Subsidiaries taken as a whole; all
such permits, licenses, certificates of authority, orders and approvals are in
full force and effect; and to the best knowledge of ESB and the ESB
Subsidiaries, no suspension or cancellation of any of the same is threatened.
(b) Neither ESB nor any of the ESB Subsidiaries is in violation of its
respective Articles of Incorporation or other governing instrument or Bylaws, or
of any applicable federal, state or local law or ordinance or any order, rule or
regulation of any federal, state, local or other governmental agency or body
(including, without limitation, all banking, securities, municipal securities,
safety, health, zoning, anti-discrimination, antitrust, and wage and hour laws,
ordinances, orders, rules and regulations), or in default with respect to any
order, writ, injunction or decree of any court, or in default under any order,
license, regulation or demand of any governmental agency, any of which
violations or defaults could have a material adverse effect on the business,
operations, assets
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or financial condition of ESB and the ESB Subsidiaries taken as a whole; and
neither ESB nor any ESB Subsidiary has received any notice or communication
from any federal, state or local governmental authority asserting that ESB or
any ESB Subsidiary is in violation of any of the foregoing which could have a
material adverse effect on the business, operations, assets or financial
condition of ESB and the ESB Subsidiaries taken as a whole. Neither ESB nor
any ESB Subsidiary is subject to any regulatory or supervisory cease and desist
order, agreement, written directive, memorandum of understanding or written
commitment (other than those of general applicability to all savings
associations issued by governmental authorities), and none of them has received
any written communication requesting that they enter into any of the foregoing.
3.12. Deposit Insurance and Other Regulatory Matters.
(a) The deposit accounts of ESB Bank are insured by the Savings
Association Insurance Fund administered by the FDIC to the maximum extent
permitted by the FDIA, and ESB Bank has paid all premiums and assessments
required by the FDIA and the regulations thereunder.
(b) ESB Bank is a member in good standing of the FHLB of Pittsburgh and
owns the requisite amount of stock in the FHLB of Pittsburgh.
(c) ESB Bank is a "qualified thrift lender," as such term is defined in
the HOLA and the regulations thereunder.
(d) ESB Bank has at all times qualified as a "domestic building and loan
association," as such term is defined in Section 7701(a)(19) of the Code, for
purposes of Section 593 of the Code.
3.13. Properties and Insurance.
(a) All real and personal property owned by ESB or any of the ESB
Subsidiaries or presently used by any of them in their respective business is in
an adequate condition (ordinary wear and tear excepted) and is sufficient to
carry on the business of ESB and the ESB Subsidiaries in the ordinary course of
business consistent with their past practices. ESB and the ESB Subsidiaries
have good and, as to owned real property, marketable title to all material
assets and properties, whether real or personal, tangible or intangible,
reflected in ESB's consolidated statement of financial condition as of March 31,
1999, or owned and acquired subsequent thereto (except to the extent that such
assets and properties have been disposed of for fair value in the ordinary
course of business since March 31, 1999), subject to no encumbrances, liens,
mortgages, security interests or pledges, except (i) those items that secure
liabilities that are reflected in said consolidated statement of financial
condition or the notes thereto or have been incurred in the ordinary course of
business after the date of such consolidated statement of financial condition,
(ii) statutory liens for amounts not yet delinquent or which are being contested
in good faith, (iii) such encumbrances, liens, mortgages, security interests,
pledges and title imperfections that are not in the aggregate material to the
business, operations, assets or financial condition of ESB and the ESB
Subsidiaries taken as a whole, and (iv) with respect to owned real property,
title imperfections noted in title reports prior to the date hereof. ESB and
the ESB Subsidiaries as lessees have the right under valid and subsisting leases
to occupy, use, possess and control all property leased by them in all material
respects as presently occupied, used, possessed and controlled by ESB and the
ESB Subsidiaries and the consummation of the transactions contemplated hereby
and by the Agreement of Merger will not affect any such right.
(b) The business operations and all insurable properties and assets of
ESB and the ESB Subsidiaries are insured for their benefit against all risks
which, in the reasonable judgment of the management of ESB, should be insured
against, in each case under valid, binding and enforceable policies or bonds
issued by insurers of recognized responsibility, in such amounts with such
deductibles and against such risks and losses as are in the opinion of the
management of ESB adequate for the business engaged in by ESB and the ESB
Subsidiaries. As of the date hereof, neither ESB nor either of the ESB
Subsidiaries has received any notice of cancellation or notice of a
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material amendment of any such insurance policy or bond or is in default under
such policy or bond, no coverage thereunder is being disputed and all material
claims thereunder have been filed in a timely fashion.
3.14. Environmental Matters.
(a) To the best knowledge of ESB and the ESB Subsidiaries, neither ESB
nor any of the ESB Subsidiaries has been or is in violation of or liable under
any Environmental Law, except any such violations or liabilities which would
not singly or in the aggregate have a material adverse effect on the business,
operations, assets or financial condition of ESB and ESB Subsidiaries taken as
a whole.
(b) To the best knowledge of ESB and the ESB Subsidiaries, none of the
Loan Portfolio Properties and Other Properties Owned by ESB or the ESB
Subsidiaries has been or is in violation of or liable under any Environmental
Law, except any such violations or liabilities which singly or in the aggregate
would not have a material adverse effect on the business, operations, assets or
financial condition of ESB and the ESB Subsidiaries taken as a whole.
(c) To the best knowledge of ESB and the ESB Subsidiaries, there are no
actions, suits, demands, notices, claims, investigations or proceedings pending
or threatened relating to the liability of the Loan Portfolio Properties and
Other Properties Owned by ESB or the ESB Subsidiaries under any Environmental
Law, including without limitation any notices, demand letters or requests for
information from any federal or state environmental agency relating to any such
liabilities under or violations of Environmental Law, except such which would
not have or result in a material adverse effect on the business, operations,
assets or financial condition of ESB and the ESB Subsidiaries taken as a whole.
3.15. Allowance for Loan Losses and Real Estate Owned. The allowance for
loan losses reflected on ESB's consolidated statements of financial condition
included in the consolidated financial statements referred to in Section 3.04
hereof is, or will be in the case of subsequently delivered financial
statements, as the case may be, in the opinion of ESB's management adequate in
all material respects as of their respective dates under the requirements of
generally accepted accounting principles to provide for reasonably anticipated
losses on outstanding loans net of recoveries. The real estate owned reflected
on the consolidated statements of financial condition included in the
consolidated financial statements referred to in Section 3.04 hereof is, or will
be in the case of subsequently delivered financial statements, as the case may
be, carried at the lower of cost or fair value, or the lower of cost or net
realizable value, as required by generally accepted accounting principles.
3.16. Minute Books. Since January 1, 1996, the minute books of ESB and
the ESB Subsidiaries contain complete and accurate records of all meetings and
other corporate action held or taken by their respective Boards of Directors
(including committees of their respective Boards of Directors) and stockholders.
3.17. Broker Fees. Except as set forth in ESB Disclosure Schedule 3.17,
neither ESB nor any of its directors or officers has employed any consultant,
broker or finder or incurred any liability for any consultant's, broker's or
finder's fees or commissions in connection with any of the transactions
contemplated by this Agreement.
3.18. Year 2000 Compliance. All hardware, firmware, software and computer
systems owned, used or licensed by ESB and ESB Subsidiaries, including but not
limited to system and application programs, files, data bases and computer
services, are Year 2000 Compliant (as defined below) and shall continue to
function in accordance with their intended purpose without material error or
material interruption during and after the Year 2000. For purposes of this
Agreement, "Year 2000 Compliant" means that the hardware, firmware, software and
computer systems (i) will correctly and accurately address, produce, store,
process and calculate data involving dates beginning with January 1, 2000 and
will not produce abnormally ending or incorrect results involving such dates as
used in any forward or regression dated based functions; (ii) will provide that
all "date"-related functionalities and data fields include the indication, or
provide for the interpretation, of century and millennium, and will perform
calculations which involve a four-digit year; and (iii) will be interoperable
with other Year 2000
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Compliant hardware or software owned, used or licensed by ESB and ESB Bank
which may deliver records to, receive records from or otherwise interact with
such hardware or software in the course of processing records or data.
3.19. Disclosures. No representation or warranty contained in Article III
of this Agreement, and no statement contained in the ESB Disclosure Schedules,
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements herein or therein not misleading.
ARTICLE IV
COVENANTS OF THE PARTIES
4.01. Conduct of the Business of SHS. During the period from the date
hereof to the Effective Time, SHS shall, and shall cause Spring Hill Savings
Bank to, conduct its businesses and engage in transactions permitted hereunder
or only in the ordinary course and consistent with past practice, except with
the prior written consent of ESB, which consent shall not be unreasonably
withheld. SHS shall use its best efforts to (i) preserve its business
organization and that of Spring Hill Savings Bank intact, (ii) keep available to
itself and ESB the present services of the employees of SHS and Spring Hill
Savings Bank, and (iii) preserve for itself and ESB the goodwill of the
customers of itself and Spring Hill Savings Bank and others with whom business
relationships exist.
4.02. Negative Covenants of SHS. SHS agrees that from the date hereof to
the Effective Time, except as otherwise approved by ESB in writing or as
permitted or required by this Agreement, SHS will not, nor will SHS permit
Spring Hill Savings Bank to:
(i) change any provision of the Articles of Incorporation or other
governing instrument or Bylaws of SHS or Spring Hill Savings Bank;
(ii) except for the issuance of SHS Common Stock pursuant to the present
terms of stock options which are outstanding as of the date hereof (and
identified on SHS Disclosure Schedule 4.02) and compliance with the terms of the
Option Agreement of even date herewith, change the number of shares of its
authorized or issued capital stock or issue or grant any option, warrant, call,
commitment, subscription, award, right to purchase or agreement of any character
relating to the authorized or issued capital stock of SHS or Spring Hill Savings
Bank, or any securities convertible into shares of such capital stock, or split,
combine or reclassify any shares of its capital stock, or redeem or otherwise
acquire any shares of such capital stock;
(iii) declare, set aside or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect of
the capital stock of SHS or Spring Hill Savings Bank, except for regular
quarterly cash dividends not in excess of $0.07 per share of SHS Common Stock;
provided, however, SHS shall coordinate the declaration of any dividends in
respect of the SHS Common Stock and the record dates and payment dates relating
thereto with that of the ESB Common Stock, it being the intention of the parties
that the holders of ESB Common Stock or SHS Common Stock shall not receive more
than one dividend, or fail to receive one dividend, for any single calendar
quarter with respect to their shares of ESB Common Stock and/or SHS Common Stock
and any shares of ESB Common Stock any holder of SHS Common Stock receives in
exchange therefor in the Merger.
(iv) grant any severance or termination pay (other than pursuant to
binding contracts of SHS in effect on the date hereof and disclosed to ESB on
SHS Disclosure Schedule 2.13(a)), to, or enter into or amend any employment,
consulting or compensation agreement with, any of its directors, officers or
employees; or award any increase in compensation or benefits to its directors,
officers or employees, except, in the case of officers or employees, such as
may be granted in the ordinary course of business and consistent with past
practices and policies and except certain bonuses, which shall not exceed
$50,000 in the aggregate, which may, upon the mutual consent of ESB and SHS, be
paid on or subsequent to the Effective Time to the employees identified on SHS
Schedule
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Disclosure Schedule 4.02 (iv) (provided that such employees agree in writing
that the amount of any severance payments which otherwise would become due to
such employees will be reduced by the amount of any bonus payments received
hereunder);
(v) enter into or modify (except as may be required by applicable law or
as may be required by Section 4.13(f)(2) hereof, with the prior written consent
of ESB, which shall not be unreasonably withheld) any pension, retirement,
stock option, stock purchase, stock grant, stock appreciation right, savings,
profit sharing, deferred compensation, consulting, bonus, group insurance or
other employee benefit, incentive or welfare contract, plan or arrangement, or
any trust agreement related thereto, in respect of any of its directors,
officers or employees; or make any contributions to the employee stock
ownership plan of SHS ("SHS ESOP") or any other defined contribution plan or
any defined benefit pension or retirement plan other than in the ordinary
course of business consistent with past practice except that payments
customarily made by SHS to the SHS ESOP at the end of a period may be made
prior to the end of such period;
(vi) sell or dispose of any significant assets or incur any significant
liabilities other than in the ordinary course of business consistent with past
practices and policies, or acquire in any manner whatsoever (other than to
realize upon collateral for a defaulted loan) any business or entity;
(vii) make any capital expenditures in excess of $25,000 in the aggregate,
other than pursuant to binding commitments existing on the date hereof, other
than expenditures necessary to maintain existing assets in good repair and other
than as set forth in SHS Disclosure Schedule 4.02(vii);
(viii) except as set forth on SHS Disclosure Schedule 4.02(viii), file
any applications or make any contract with respect to branching or site location
or relocation;
(ix) make any material change in its accounting methods or practices,
other than changes required by generally accepted accounting principles, or
change any of its methods of reporting income and deductions for federal income
tax purposes, except as required by changes in laws or regulations;
(x) change its lending, investment, deposit or asset and liability
management or other banking policies in any material respect except as may be
required by applicable law;
(xi) engage in any transaction with an "affiliated person" or
"affiliate," in each case as defined in Section 2.18(a) hereof;
(xii) enter into any futures contract, option or other agreement or take
any other action for purposes of hedging the exposure of its interest-earning
assets and interest-bearing liabilities to changes in market rates of interest;
(xiii) take any action that would result in any of its representations
and warranties contained in Article II of this Agreement not being true and
correct in any material respect at the Effective Time; or
(xiv) agree to do any of the foregoing.
4.03. No Solicitation. Neither SHS nor Spring Hill Savings Bank shall,
nor shall SHS or Spring Hill Savings Bank authorize or permit any of its
directors, officers or employees or any investment banker, financial advisor,
attorney, accountant or other representative of SHS or Spring Hill Savings Bank
to, directly or indirectly, encourage or solicit or hold discussions or
negotiations with, or provide any information to, any person, entity or group
(other than ESB) concerning any merger, sale of substantial assets or
liabilities not in the ordinary course of business, sale of shares of capital
stock or similar transactions involving SHS or Spring Hill Savings Bank (an
"Acquisition Transaction"); provided, however, that SHS may provide information
in connection with an unsolicited possible Acquisition Transaction if the Board
of Directors of SHS, after receiving advice of counsel, determines in
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the exercise of its fiduciary responsibilities that such information should be
furnished. SHS will promptly communicate to ESB the terms of any proposal
which it may receive in respect of any such Acquisition Transaction and shall
provide ESB with copies of (i) any written legal advice provided to the Board
of Directors of SHS, (ii) all such written inquiries or proposals and (iii) an
accurate and complete written synopsis of all such oral inquiries or proposals.
4.04. Negative Covenants of ESB. ESB agrees that from the date hereof to
the Effective Time, except as otherwise approved by SHS in writing or as
permitted or required by this Agreement, ESB will not:
(i) take any action which can reasonably be expected to adversely affect
or delay the ability of ESB or SHS to perform its covenants and agreements on a
reasonably timely basis under this Agreement or to consummate the transactions
contemplated under this Agreement;
(ii) declare or pay any special cash distributions in respect of any of
its capital stock in excess of $1.00 per share, provided, however, that ESB
shall be permitted to continue to declare and pay its regular quarterly
dividends; or
(iii) agree to do any of the foregoing.
4.05. Current Information. During the period from the date hereof to the
Effective Time, each party will cause one or more of its designated
representatives to confer on a monthly or more frequent basis with
representatives of the other party regarding its business, operations,
prospects, assets and financial condition and matters relating to the completion
of the transactions contemplated hereby. As soon as reasonably available, but
in no event more than 45 days after the end of each calendar quarter (other than
the last quarter of each calendar year) ending after the date of this Agreement,
each party will deliver to the other party its quarterly report on Form 10-Q (or
Form 10-QSB) under the 1934 Act, and, as soon as reasonably available, but in no
event more than 90 days after the end of each fiscal year, each party will
deliver to the other party its Annual Report on Form 10-K (or Form 10-KSB).
Within 25 days after the end of each month, each party shall provide the other
party with a copy of the Thrift Financial Report filed with the OTS.
4.06. Access to Properties and Records; Confidentiality.
(a) SHS shall permit ESB and its representatives reasonable access to
its properties and those of Spring Hill Savings Bank, and shall disclose and
make available to ESB all books, papers and records relating to the assets,
properties, operations, obligations and liabilities of SHS and Spring Hill
Savings Bank, including, but not limited to, all books of account (including the
general ledger), tax records, minute books of directors' and stockholders'
meetings, organizational documents, bylaws, material contracts and agreements,
filings with any regulatory authority, accountants' work papers, litigation
files (except as necessary to preserve attorney-client privilege), plans
affecting employees, and any other business activities or prospects in which ESB
may have a reasonable interest. Neither SHS nor Spring Hill Savings Bank shall
be required to provide access to or to disclose information where such access or
disclosure would violate or prejudice the rights of any customer or would
contravene any law, rule, regulation, order or judgment. SHS will use its best
efforts to obtain waivers of any such restriction and in any event make
appropriate substitute disclosure arrangements under circumstances in which the
restrictions of the preceding sentence apply. SHS and Spring Hill Savings Bank
shall make their respective directors, officers, employees and agents and
authorized representatives (including counsel and independent public
accountants) available to confer with ESB and its representatives, provided that
such access shall be reasonably related to the transactions contemplated hereby
and not unduly interfere with normal operations. Similar access shall be
provided by ESB to SHS and its representatives to the extent necessary to enable
SHS to satisfy its due diligence obligations with respect to ESB.
(b) All information furnished previously in connection with the
transactions contemplated by this Agreement or pursuant hereto shall be treated
as the sole property of the party furnishing the information until consummation
of the Merger and, if such Merger shall not occur, the party receiving the
information shall, at the
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request of the party which furnished such information, either return to the
party which furnished such information or destroy all documents or other
materials containing, reflecting or referring to such information; shall use
its best effort to keep confidential all such information; shall use such
information only for the purpose of consummating the transactions contemplated
by this Agreement; and shall not directly or indirectly use such information
for any competitive or commercial purposes. The obligation to keep such
information confidential shall continue for three years from the date the
proposed Merger is abandoned but shall not apply to (i) any information which
(A) the party receiving the information can establish by convincing evidence
was already in its possession prior to the disclosure thereof to it by the
party furnishing the information; (B) was then generally known to the public;
(C) became known to the public through no fault of the party receiving the
information; or (D) was disclosed to the party receiving the information by a
third party not bound by an obligation of confidentiality; or (ii) disclosures
pursuant to a legal requirement or in accordance with an order of a court of
competent jurisdiction.
(c) From the date hereof until the earlier of the Effective Time or the
termination of this Agreement in accordance with the terms hereof, SHS may
invite one person (to be designated by ESB) to attend all meetings of the Board
of Directors of SHS and Spring Hill Savings Bank.
4.07. Regulatory Matters.
(a) The parties hereto will cooperate with each other and use their best
efforts to prepare all necessary documentation (including without limitation the
Form S-4 and the Proxy Statement/Prospectus), to effect all necessary filings
and to obtain all necessary permits, consents, approvals and authorizations of
all third parties and governmental bodies necessary to consummate the
transactions contemplated by this Agreement as soon as practicable. The parties
shall each have the right to review and approve in advance all information
relating to the other, as the case may be, and any of their respective
subsidiaries, which appears in any filing made with, or written material
submitted to, any third party or governmental body in connection with the
transactions contemplated by this Agreement.
(b) Each of the parties will furnish each other with all information
concerning themselves, their subsidiaries, directors, officers and stockholders
and such other matters as may be necessary or advisable in connection with any
statement or application made by or on behalf of them, or any of their
respective subsidiaries to any governmental body in connection with the Merger
and the other transactions, applications or filings contemplated by this
Agreement.
(c) Each of the parties will promptly furnish each other with copies of
written communications received by them or any of their respective subsidiaries
from, or delivered by any of the foregoing to, any governmental body in
connection with the Merger and the other transactions, applications or filings
contemplated by this Agreement.
4.08. Approval of Stockholders. SHS will (a) take all steps (including,
without limitation, the preparation of the Form S-4 and Proxy
Statement/Prospectus in accordance with all applicable requirements) necessary
to duly call, give notice of, convene and hold a meeting of its stockholders as
soon as reasonably practicable, but in no event earlier than October 31, 1999,
for the purposes of securing the approval of such stockholders of this Agreement
and the Agreement of Merger, (b) recommend to its stockholders the approval of
this Agreement and the Agreement of Merger and the transactions contemplated
hereby and thereby, and use its best efforts to obtain, as promptly as
practicable, such approval, provided however, that the Board of Directors of SHS
may fail to make such recommendation, or withdraw, modify or change any such
recommendation, if such Board of Directors, after having consulted with and
considered the advice of outside counsel experienced in such matters, has
determined that the making of such recommendation or the failure to withdraw,
modify or change such recommendation, would constitute a breach of the fiduciary
duties of such directors under applicable law, and (c) cooperate and consult
with ESB with respect to the foregoing matters.
4.09. Further Assurances. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use its best efforts to take, or
cause to be taken, all reasonable action and to do, or cause to be done,
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all things necessary, proper or advisable under applicable laws and regulations
to satisfy the conditions to closing contained herein and to consummate and
make effective the transactions contemplated by this Agreement and the
Agreement of Merger. In case at any time after the Effective Time any further
action is necessary or desirable to carry out the purposes of this Agreement,
the proper officers and directors of each party to this Agreement shall take
all such necessary action. Nothing in this section shall be construed to
require any party to participate in any threatened or actual legal,
administrative or other proceedings (other than proceedings, actions or
investigations to which it is a party or subject or threatened to be made a
party or subject) in connection with consummation of the transactions
contemplated by this Agreement unless such party shall consent in advance and
in writing to such participation and the other party agrees to reimburse and
indemnify such party for and against any and all costs and damages related
thereto.
4.10. Disclosure Supplements. From time to time prior to the Effective
Time, each party will promptly supplement or amend its respective Disclosure
Schedules delivered pursuant hereto with respect to any matter hereafter arising
which, if existing, occurring or known as of the date hereof, would have been
required to be set forth or described in such Schedules or which is necessary to
correct any information in such Schedules which has been rendered inaccurate
thereby. No supplement or amendment to such Schedules shall have any effect
for the purpose of determining satisfaction of the conditions set forth in
Article V or the compliance by SHS with the covenants set forth in Section 4.01
hereof.
4.11. Public Announcements. The parties hereto shall approve in advance
the substance of and cooperate with each other in the development and
distribution of all news releases and other public disclosures with respect to
this Agreement or any of the transactions contemplated hereby, except as may be
otherwise required by law or regulation and as to which the parties releasing
such information have used their best efforts to discuss with the other parties
in advance.
4.12. Failure to Fulfill Conditions. In the event that either of the
parties hereto determines that a condition to its respective obligations to
consummate the transactions contemplated hereby cannot be fulfilled on or prior
to March 31, 2000 and that it will not waive that condition, it will promptly
notify the other party. ESB and SHS will promptly inform the other of any facts
applicable to them, or their respective directors or officers, that would be
likely to prevent or materially delay approval of the Merger by any governmental
authority or which would otherwise prevent or materially delay completion of the
Merger.
4.13. Certain Post-Merger Agreements.
The parties hereto agree to the following arrangements following the
Effective Time:
(a) Operations of Spring Hill Savings Bank. Following the Merger, ESB
may, in its sole discretion, determine to merge or consolidate Spring Hill
Savings Bank with ESB Bank.
(b) Boards of Directors of ESB Bank. At the Effective Time, the number
of directors of ESB Bank shall be increased by two and ESB Bank shall nominate
and elect two current directors of SHS (the identity of the directors to be
nominated and elected as set forth on ESB Disclosure Schedule 4.13(b)) as a
director of ESB Bank for a term of not less than three years. In addition, at
the time of the merger of Spring Hill Savings Bank and ESB Bank, the two
remaining non-employee directors of SHS and Spring Hill Savings Bank who have
not been elected to the Board of Directors of ESB Bank will be appointed to a
newly created Spring Hill Savings Bank Advisory Board for a period of not less
than two years. Each advisory board member shall receive for their services an
annual retainer of $7,100, paid in equal quarterly installments of $1,775, and
a fee for each quarterly meeting attended of $475. The provisions of this
Section 4.13(b) are intended to be for the benefit of, and shall be enforceable
by, members of the Board of Directors of SHS.
(c) Board of Directors of Spring Hill Savings Bank. Effective as of the
Effective Time, Charles Delman, a director of ESB, shall be elected to the Board
of Directors of Spring Hill Savings Bank.
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(d) Officers and Employees of SHS and Spring Hill Savings Bank. Thomas
F. Angotti shall serve as President and Chief Executive Officer of Spring Hill
Savings Bank and Vincent C. Ashoff shall serve as Executive Vice President and
Chief Financial Officer of Spring Hill Savings Bank until the merger of Spring
Hill Savings Bank and ESB Bank. Upon the merger of Spring Hill Savings Bank and
ESB Bank, ESB will appoint Thomas F. Angotti as a Senior Vice President of ESB
and ESB Bank and Vincent C. Ashoff as a Vice President of ESB Bank. Mr. Angotti
will receive a salary and benefits commensurate to that of other comparable
officers of ESB and ESB Bank at not less than his current base salary. As a
Senior Vice President, Mr. Angotti will be provided a company car and a change
in control agreement in the form included in ESB Disclosure Schedule 4.13(d).
Mr. Ashoff will receive a salary and benefits commensurate to that of other
comparable officers of ESB Bank at not less than his current base salary.
(e) Employment, Severance and Change in Control Agreements. ESB shall
honor all existing employee agreements, severance or change in control
agreements or plans of SHS and Spring Hill Savings Bank, in effect as of the
date of this Agreement, each of which is disclosed on SHS Disclosure Schedule
4.13(e), which schedule describes and quantifies in reasonable detail the
maximum amount of payments and benefits which could become due and payable to
each such person (assuming the Merger is consummated on or before December 31,
1999) under the agreements or plans as a result of a termination of employment
and/or a change in control of SHS or Spring Hill Savings Bank.
(f) Employee Benefit Plans.
(1) Subject to the provisions of this Section 4.13, all employees of SHS
or Spring Hill Savings Bank immediately prior to the Effective Time who are
employed by ESB, ESB Bank or Spring Hill Savings Bank (the "Employers")
immediately following the Effective Time ("Transferred Employees") will be
covered by Employers' employee benefit plans on substantially the same basis as
any employee of the Employers in a comparable position. Notwithstanding the
foregoing, ESB may determine to continue any of the SHS benefit plans for
Transferred Employees in lieu of offering participation in the Employers'
benefit plans providing similar benefits (e.g., medical and hospitalization
benefits), to terminate any of SHS's benefit plans, or to merge any such benefit
plans with the Employers' benefit plans, provided the result is the provision of
benefits to Transferred Employees that are substantially similar to the benefits
provided to the Employers' employees generally. Except as specifically provided
in this Section 4.13 and as otherwise prohibited by law, Transferred Employees'
service with SHS or Spring Hill Savings Bank shall be recognized as service with
the Employers for purposes of eligibility to participate and vesting, if
applicable (but not for purposes of benefit accrual) under the Employers'
benefit plans, subject to applicable break-in-service rules. ESB agrees that
any pre-existing condition, limitation or exclusion in its medical, long-term
disability and life insurance plans shall not apply to Transferred Employees or
their covered dependents who are covered under a medical or hospitalization
indemnity plan maintained by SHS or Spring Hill Savings Bank on the Effective
Time and who then change coverage to the Employers' medical or hospitalization
indemnity health plan at the time such Transferred Employees are first given the
option to enroll. Notwithstanding anything herein to the contrary, after the
Effective Time, (x) any amendment to, or grant of additional benefits under, any
SHS or Spring Hill Savings Bank benefit plan, including stock based plans, which
continues to exist subsequent to the Effective Time, shall require the prior
consent of ESB, and (y) ESB may cause any of the SHS or Spring Hill Savings Bank
benefit plans which continue to exist, including stock based plans, to be
amended in order to provide that employees of ESB or ESB Bank may be
participants in such plans.
(2) After the Effective Time, but not prior to January 1, 2000, the SHS
ESOP may, at ESB's discretion, be combined with the ESB employee stock ownership
plan ("ESB ESOP"); provided, however, that prior to any such combination of the
SHS ESOP and the ESB ESOP, the parties shall take all necessary action in order
to amend the SHS ESOP in order to ensure that any such combination or the Merger
does not accelerate (other than as required by law or regulation) or materially
increase the benefits available to the participants in the SHS ESOP.
Notwithstanding anything herein to the contrary, the parties hereto will take
all necessary action to amend the SHS ESOP in order to provide that the Merger
will not accelerate (other than as required by law or regulation) or materially
increase the benefits available to any participant in the SHS ESOP, provided,
however, that SHS may amend the SHS ESOP to permit, if the Effective Time is on
or prior to December 31, 1999, SHS to make its fourth quarter contribution to
the SHS ESOP as of the Effective Time and to delete the provision of the SHS
ESOP which
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requires a participant to be an employee on the last day of the plan year in
order to share in the allocation of the employer's contributions for the 1999
plan year.
(g) Indemnification. ESB shall indemnify and hold harmless each present
and former director, officer and employee of SHS and Spring Hill Savings Bank
determined as of the Effective Time (the "Indemnified Parties") against any
costs or expenses (including reasonable attorneys' fees), judgments, fines,
losses, claims, damages or liabilities (collectively, "Costs") incurred in
connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative or investigative, arising out of matters
existing or occurring at or prior to the Effective Time, whether asserted or
claimed prior to, at or after the Effective Time (collectively, "Claims"), to
the fullest extent to which such Indemnified Parties were entitled under
Pennsylvania law, the Articles of Incorporation and Bylaws of SHS or Spring Hill
Savings Bank as in effect on the date hereof.
Any Indemnified Party wishing to claim indemnification under this Section
4.13(g), upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify ESB, but the failure to so notify shall not
relieve ESB of any liability it may have to such Indemnified Party if such
failure does not materially prejudice ESB. In the event of any such claim,
action, suit, proceeding or investigation (whether arising before or after the
Effective Time), (i) ESB shall have the right to assume the defense thereof and
ESB shall not be liable to such Indemnified Parties for any legal expenses of
other counsel or any other expenses subsequently incurred by such Indemnified
Parties in connection with the defense thereof, except that if ESB elects not to
assume such defense or counsel for the Indemnified Parties advises that there
are issues which raise conflicts of interest between ESB and the Indemnified
Parties, the Indemnified Parties may retain counsel which is reasonably
satisfactory to ESB, and ESB shall pay, promptly as statements therefor are
received, the reasonable fees and expenses of such counsel for the Indemnified
Parties (which may not exceed one firm in any jurisdiction unless the use of one
counsel for such Indemnified Parties would present such counsel with a conflict
of interest), (ii) the Indemnified Parties will cooperate in the defense of any
such matter, and (iii) ESB shall not be liable for any settlement effected
without its prior written consent, which consent shall not be withheld
unreasonably.
In the event that ESB or any of its respective successors or assigns (i)
consolidates with or merges into any other entity and shall not be the
continuing or surviving corporation or entity of such consolidation or merger or
(ii) transfers all or substantially all of its properties and assets to any
entity, then, and in each such case, the successors and assigns of such entity
shall assume the obligations set forth in this Section 4.13(g), which
obligations are expressly intended to be for the irrevocable benefit of, and
shall be enforceable by, each of the Indemnified Parties.
(h) Insurance. ESB and ESB Bank shall maintain a directors' and
officers' liability insurance policy covering the Indemnified Parties Costs in
connection with any Claims for a period of three (3) years after the Effective
Time if such policy can be obtained at annual premiums no greater than 150% of
the annual premium of the directors' and officers' liability insurance
maintained by SHS and Spring Hill Savings Bank as of the date hereof.
ARTICLE V
CLOSING CONDITIONS
5.01. Conditions to the Parties' Obligations Under This Agreement. The
respective obligations of the parties under this Agreement shall be subject to
the fulfillment at or prior to the Effective Time of the following conditions:
(a) All necessary regulatory or governmental approvals and consents
(including without limitation any required approval of the OTS required to
consummate the transactions contemplated hereby) shall have been obtained
without any non-standard term or condition which would materially impair the
value of SHS and the Spring Hill Savings Bank to ESB; all conditions required to
be satisfied prior to the Effective Time by the terms of such approvals and
consents shall have been satisfied; and all waiting periods in respect thereof
shall have expired.
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(b) All corporate action necessary to authorize the execution and
delivery of this Agreement and consummation of the transactions contemplated
hereby and by the Agreement of Merger shall have been duly and validly taken by
ESB and SHS, including approval by the requisite vote of the stockholders of
SHS of this Agreement and the Agreement of Merger.
(c) No order, judgment or decree shall be outstanding against a party
hereto or a third party that would have the effect of preventing completion of
the Merger; no suit, action or other proceeding shall be pending or threatened
by any governmental body in which it is sought to restrain or prohibit the
Merger; and no suit, action or other proceeding shall be pending before any
court or governmental agency in which it is sought to restrain or prohibit the
Merger or obtain other substantial monetary or other relief against one or more
of the parties hereto in connection with this Agreement and which ESB or SHS
determines in good faith, based upon the advice of their respective counsel,
makes it inadvisable to proceed with the Merger because any such suit, action or
proceeding has a significant potential to be resolved in such a way as to
deprive the party electing not to proceed of any of the material benefits to it
of the Merger.
(d) The Form S-4 shall have become effective under the 1933 Act, and ESB
shall have received all state securities laws or "blue sky" permits and other
authorizations or there shall be exemptions from registration requirements
necessary to issue the ESB Common Stock in connection with the Merger, and
neither the Form S-4 nor any such permit, authorization or exemption shall be
subject to a stop order or threatened stop order by the Commission or any state
securities authority.
(e) The parties shall have received, in form and substance reasonably
satisfactory to them (x) an opinion of Elias, Matz, Tiernan & Herrick L.L.P. to
the effect that, for federal income tax purposes, the Merger will qualify as a
"reorganization" under Section 368(a) of the Code; no taxable gain will be
recognized by ESB or SHS (i) upon the transfer of SHS's assets to ESB in
exchange for ESB Common Stock, cash and the assumption of SHS's liabilities or
(ii) upon the distribution of such ESB Common Stock and cash to SHS stockholders
and (y) an opinion of Breyer & Associates PC to such effect and to the effect
that (i) no gain or loss will be recognized by the shareholders of SHS who
receive ESB Common Stock in exchange for their SHS Common Stock in the Merger;
(ii) the tax basis of a shareholder in the ESB Common Stock received in the
Merger in exchange for his or her SHS Common Stock will be the same as the tax
basis of the SHS Common Stock surrendered in exchange therefor; and (iii) the
holding period of the shares of ESB Common Stock received in the Merger will
include the holding period of the shares of SHS Common Stock surrendered
therefor, provided that such SHS Common Stock was held as a capital asset by
such shareholder, provided, however, that in the event either of such counsel
believes that the Merger will not qualify as a reorganization under Section
368(a) of the Code, ESB shall have the right but not the obligation to increase
the aggregate stock consideration as necessary to cause the transaction to
qualify for such tax treatment.
5.02. Conditions to the Obligations of ESB Under This Agreement. The
obligations of ESB under this Agreement shall be further subject to the
satisfaction, at or prior to the Effective Time, of the following conditions,
any one or more of which may be waived by ESB:
(a) Each of the obligations of SHS required to be performed by it at or
prior to the Closing pursuant to the terms of this Agreement shall have been
duly performed and complied with in all material respects and the
representations and warranties of SHS contained in this Agreement shall have
been true and correct as of the date hereof and as of the Effective Time as
though made at and as of the Effective Time, except (i) as to any representation
or warranty which specifically relates to an earlier date or (ii) where the
facts which caused the failure of any representation or warranty to be so true
and correct would not, either individually or in the aggregate, constitute a
material adverse change in the business, operations, assets or financial
condition of SHS and Spring Hill Savings Bank taken as a whole, other than:
(i) any such effect attributable to or resulting from any change in banking or
similar laws, rules or regulations of general applicability to banks, thrift
institutions or their holding companies or interpretations thereof by courts or
governmental authorities; (ii) changes in generally accepted accounting
principles that are generally applicable to the banking or savings industries;
(iii) expenses incurred in connection with the transactions contemplated hereby;
(iv) actions or omissions of a party (or any of its subsidiaries) taken with the
prior informed written consent of the other party or parties in contemplation of
the
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transactions contemplated hereby; or (v) changes attributable to or resulting
from changes in general economic conditions, including changes in the
prevailing level of interest rates, and ESB shall have received a certificate
to that effect signed by the President and Chief Executive Officer of SHS.
(b) All permits, consents, waivers, clearances, approvals and
authorizations of all regulatory or governmental authorities or third parties
which are necessary in connection with the consummation of the Merger shall have
been obtained, and none of such permits, consents, waivers, clearances,
approvals and authorizations shall contain any non-standard term or condition
which would materially impair the value of SHS and Spring Hill Savings Bank to
ESB.
(c) Holders of SHS Common Stock who dissent from the Merger pursuant to
Chapter 15, Subchapter D of the PBCL by meeting the requirements set forth in
the PBCL shall not hold more than 20% of the SHS Common Stock immediately prior
to the Effective Time.
(d) Each stockholder of SHS who is a SHS Affiliate shall have executed
and delivered a commitment and undertaking to the effect that (i) such
stockholder will dispose of the shares of ESB Common Stock received by him in
connection with the Merger only in accordance with the provisions of paragraph
(d) of Rule 145 under the 1933 Act; (ii) such stockholder will not dispose of
any of such shares until ESB has received an opinion of counsel acceptable to
it that such proposed disposition is in compliance with the provisions of
paragraph (d) of Rule 145 under the 1933 Act, which opinion shall be rendered
promptly following counsel's receipt of such stockholder's written notice of
its intention to sell shares of ESB Common Stock; and (iii) the certificates
representing said shares may bear a legend referring to the foregoing
restrictions.
(e) SHS shall have furnished ESB with such certificates of its officers
or others and such other documents to evidence fulfillment of the conditions
set forth in this Section 5.02 as ESB may reasonably request.
5.03. Conditions to the Obligations of SHS Under this Agreement. The
obligations of SHS under this Agreement shall be further subject to the
satisfaction, at or prior to the Effective Time, of the following conditions,
any one or more of which may be waived by SHS:
(a) Each of the obligations of ESB required to be performed by it at or
prior to the Closing pursuant to the terms of this Agreement shall have been
duly performed and complied with in all material respects and the
representations and warranties of ESB contained in this Agreement shall have
been true and correct as of the date hereof and as of the Effective Time as
though made at and as of the Effective Time, except (i) as to any representation
or warranty which specifically relates to an earlier date or (ii) where the
facts which caused the failure of any representation or warranty to be so true
and correct would not, either individually or in the aggregate, constitute a
material adverse change in the business, operations, assets or financial
condition of ESB and the ESB Subsidiaries taken as a whole, and SHS shall have
received a certificate to that effect signed by the President and Chief
Executive Officer of ESB.
(b) ESB shall have furnished SHS with such certificates of its officers
or others and such other documents to evidence fulfillment of the conditions
set forth in this Section 5.03 as SHS may reasonably request.
ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER, ETC.
6.01. Termination. This Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval of this Agreement and the
Agreement of Merger by the stockholders of SHS:
(a) by mutual written consent of the parties hereto;
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(b) by ESB or SHS (i) if the Effective Time shall not have occurred on
or prior to March 31, 2000 or (ii) if a vote of the stockholders of SHS is
taken and such stockholders fails to approve this Agreement and the Agreement
of Merger at the meeting of stockholders (or any adjournment thereof) of SHS
contemplated by Section 4.08 hereof; unless the failure of such occurrence
shall be due to the failure of the party seeking to terminate this Agreement to
perform or observe its agreements set forth herein to be performed or observed
by such party at or before the Effective Time;
(c) by ESB or SHS upon written notice to the other 30 or more days after
the date upon which any application for a regulatory or governmental approval
necessary to consummate the Merger and the other transactions contemplated
hereby shall have been denied or withdrawn at the request or recommendation of
the applicable regulatory agency or governmental authority, unless within such
30-day period a petition for rehearing or an amended application is filed or
noticed, or 30 or more days after any petition for rehearing or amended
application is denied;
(d) by ESB in writing if SHS has, or by SHS in writing if ESB has,
breached (i) any covenant or undertaking contained herein or in the Agreement
of Merger, or (ii) any representation or warranty contained herein, which
breach would have a material adverse effect on the business, operations, assets
or financial condition of SHS and Spring Hill Savings Bank or ESB and the ESB
Subsidiaries, as applicable, taken as a whole, or upon the consummation of the
transactions contemplated hereby, in any case if such breach has not been cured
by the earlier of 30 days after the date on which written notice of such breach
is given to the party committing such breach or the Effective Time; provided
that it is understood and agreed that either party may terminate this Agreement
on the basis of any such material breach of any representation or warranty
contained herein, notwithstanding any qualification therein relating to the
knowledge of the other party;
(e) by ESB or SHS in writing, if any of the applications for prior
approval referred to in Section 4.07 hereof are denied or are approved
contingent upon the satisfaction of any non-standard condition or requirement
which, in the reasonable opinion of the Board of Directors of ESB, would
materially impair the value of SHS and Spring Hill Savings Bank to ESB, and the
time period for appeals and requests for reconsideration has run.
(f) by SHS, if its Board of Directors so determines by a vote of a
majority of the members of its entire Board, at any time during the five-day
period commencing with the Determination Date if both of the following
conditions are satisfied:
(i) the number obtained by dividing the Average Closing Price by
the Starting Price (the "ESB Ratio") shall be less than .80; and
(ii) the ESB Ratio shall be less than the number obtained by
dividing the Final Index Value by the Index Value on the Starting Date and
subtracting 0.20 from the quotient in this clause (ii) (such number being
referred to herein as the "Index Ratio");
subject, however, to the following three sentences. If SHS elects to exercise
its termination right pursuant to this Section 6.01(f), it shall give written
notice to ESB (provided that such notice of election to terminate may be
withdrawn at any time within the aforementioned five-day period). During the
five-day period commencing with its receipt of such notice, ESB shall have the
option to increase the Exchange Ratio (calculated to the nearest one one-
thousandth) to equal the lesser of (x) a number (rounded to the nearest
thousandth) obtained by dividing (A) the product of the Starting Price, 0.80 and
the Exchange Ratio (as then in effect) by (B) the Average Closing Price and (y)
a number (rounded to the nearest one one-thousandth) obtained by dividing (A)
the product of the Index Ratio and the Exchange Ratio (as then in effect) by (B)
the ESB Ratio. If ESB so elects within such five-day period, it shall give
prompt written notice to SHS of such election and the revised Exchange Ratio,
whereupon no termination shall have occurred pursuant to this Section 6.01(f)
and this Agreement shall remain in effect in accordance with its terms (except
as the Exchange Ratio shall have been so modified).
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For purposes of this Section 6.01(f), the following terms shall have the
meanings indicated:
"Average Closing Price" shall mean the average of the closing prices
of a share of ESB Common Stock on the Nasdaq Stock Market's National Market
(as reported in The Wall Street Journal, or if not reported therein, in
-----------------------
another authoritative source) during the period of 20 consecutive trading
days ending on the trading day prior to the Determination Date, rounded to
the nearest whole cent.
"Determination Date" shall mean the date on which the last required
approval of a Governmental Entity is obtained with respect to the Merger,
without regard to any requisite waiting period in respect thereof.
"Final Index Value" shall mean the average of the Index Values for
the 20 consecutive trading days ending on the trading day prior to the
Determination Date.
"Index Value," on a given date, shall mean the index value on such
date of the SNL Thrift Index, as such index value is reported by SNL
Securities on such date.
"Starting Date" shall mean the last trading day immediately
preceding the date of the first public announcement of entry into this
Agreement.
"Starting Price" shall mean the closing price of a share of ESB
Common Stock on the Nasdaq Stock Market's National Market (as reported in
The Wall Street Journal, or if not reported therein, in another
-----------------------
authoritative source) on the Starting Date.
6.02. Effect of Termination. In the event of termination of this
Agreement by either ESB or SHS as provided above, this Agreement shall forthwith
become void (other than Sections 4.05(b) and 7.01 hereof, which shall remain in
full force and effect) and there shall be no further liability on the part of
the parties or their respective officers or directors except for the liability
of the parties under Sections 4.05(b) and 7.01 hereof and except for liability
for any breach of this Agreement.
6.03. Amendment, Extension and Waiver. Subject to applicable law, at any
time prior to the consummation of the Merger, whether before or after approval
thereof by the stockholders of SHS, the parties may (a) amend this Agreement and
the Agreement of Merger, (b) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (c) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto, or (d) waive compliance with any of the
agreements or conditions contained herein; provided, however, that after any
approval of the Merger by the stockholders of SHS, there may not be, without
further approval of such stockholders, any amendment or waiver of this Agreement
or the Agreement of Merger which modifies either the amount or the form of the
Merger Consideration to be delivered to stockholders of SHS. This Agreement and
the Agreement of Merger may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto. Any agreement on the part of a
party hereto to any extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party, but such waiver or failure
to insist on strict compliance with such obligation, covenant, agreement or
condition shall not operate as a waiver of, or estoppel with respect to, any
subsequent or other failure.
ARTICLE VII
MISCELLANEOUS
7.01. Expenses.
(a) All costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby (including without limitation legal,
accounting, investment banking and printing expenses)
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shall be borne by the party incurring such costs and expenses, provided that
ESB shall bear all costs of printing, mailing and filing the Form S-4 and Proxy
Statement/Prospectus and all other registration and filing fees relating to the
Merger.
(b) Notwithstanding any provision in this Agreement to the contrary, in
the event that either of the parties shall default in its obligations
hereunder, the non-defaulting party may pursue any remedy available at law or
in equity to enforce its rights and shall be paid by the defaulting party for
all damages, costs and expenses, including without limitation legal,
accounting, investment banking and printing expenses, incurred or suffered by
the non-defaulting party in connection herewith or in the enforcement of its
rights hereunder.
7.02. Survival. The respective representations, warranties and covenants
of the parties to this Agreement shall not survive the Effective Time but shall
terminate as of the Effective Time, except for the provisions of Section 4.13
hereof.
7.03. Notices. All notices or other communications hereunder shall be in
writing and shall be deemed given if delivered personally, sent by overnight
express or mailed by prepaid registered or certified mail (return receipt
requested) or by cable, telegram or telex addressed as follows:
(a) If to ESB, to:
ESB Financial Corporation
600 Lawrence Avenue
Ellwood City, Pennsylvania 16117
Attn: Charlotte A. Zuschlag
Copy to:
Elias, Matz, Tiernan and Herrick L.L.P.
734 15th Street, N.W.
Washington, D.C. 20005
Attn: Raymond A. Tiernan, Esq.
(b) If to SHS, to:
SHS Bancorp, Inc.
One North Shore Center
Suite 120
Pittsburgh, Pennsylvania 15212
Attn: Thomas F. Angotti
Copy to:
Breyer & Associates PC
1100 New York Avenue, N.W.
Suite 700
Washington, D.C. 20005
Attn: John F. Breyer, Jr., Esq.
or such other address as shall be furnished in writing by any party, and any
such notice or communication shall be deemed to have been given as of the date
so mailed.
7.04. Parties in Interest. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
assigns; provided, however, that neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any party hereto without
the prior written
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consent of the other party and, except as otherwise expressly provided herein,
that nothing in this Agreement is intended to confer, expressly or by
implication, upon any other person any rights or remedies under or by reason of
this Agreement.
7.05. Complete Agreement. This Agreement and the Agreement of Merger,
including the documents and other writings referred to herein or therein or
delivered pursuant hereto or thereto, contain the entire agreement and
understanding of the parties with respect to their subject matter and shall
supersede all prior agreements and understandings between the parties, both
written and oral, with respect to such subject matter. There are no
restrictions, agreements, promises, representations, warranties, covenants or
undertakings between the parties other than those expressly set forth herein or
therein.
7.06. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
7.07. Governing Law. This Agreement shall be governed by the laws of the
Commonwealth of Pennsylvania, without giving effect to the principles of
conflicts of laws thereof.
7.08. Headings. The Article and Section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
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IN WITNESS WHEREOF, ESB and SHS have caused this Agreement to be executed
by their duly authorized officers as of the day and year first above written.
ESB FINANCIAL CORPORATION
Attest:
/s/ Frank D. Martz By: /s/ Charlotte A. Zuschlag
- ----------------------------------- -------------------------------------
Frank D. Martz Charlotte A. Zuschlag
Senior Vice President of Operations President and Chief Executive Officer
and Secretary
SHS BANCORP, INC.
Attest:
/s/ Joanne C. Weinand By: /s/ Thomas F. Angotti
- ----------------------------------- -------------------------------------
Joanne C. Weinand Thomas F. Angotti
Secretary President and Chief Executive Officer
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<PAGE>
AGREEMENT OF MERGER
This Agreement of Merger is dated as of July 21, 1999, by and between ESB
Financial Corporation ("ESB"), a Pennsylvania corporation, and SHS Bancorp, Inc.
("SHS"), a Pennsylvania corporation.
W I T N E S S E T H:
WHEREAS, ESB and SHS have entered into an Agreement and Plan of
Reorganization, dated as of the date hereof (the "Reorganization Agreement");
and
WHEREAS, pursuant to the Reorganization Agreement and this Agreement of
Merger, and subject to the terms and conditions set forth therein and herein,
SHS shall be merged with and into ESB, with ESB the surviving corporation of
such merger;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein and in the Reorganization Agreement, the parties
hereto do mutually agree as follows:
ARTICLE I
DEFINITIONS
Except as otherwise provided herein, the capitalized terms set forth below
shall have the following meanings:
1.1 "Effective Time" shall mean the date and time at which the Merger
contemplated by this Agreement of Merger becomes effective as provided in
Section 2.2 of this Agreement of Merger.
1.2 "SHS Common Stock" shall mean the common stock, par value $.01 per
share, of SHS.
1.3 "Merger" shall refer to the merger of SHS with and into ESB as
provided in Section 2.1 of this Agreement of Merger.
1.4 "Merging Corporations" shall collectively refer to ESB and SHS.
1.5 "ESB Common Stock" shall mean the common stock, par value $.01 per
share, of ESB.
1.6 "Stockholder Meeting" shall mean the meeting of the stockholders of
SHS held pursuant to Section 4.07 of the Agreement.
1.7 "Surviving Corporation" shall mean ESB as the surviving corporation
of the Merger.
ARTICLE II
TERMS OF THE MERGER
2.1 The Merger. Subject to the terms and conditions set forth in the
Reorganization Agreement, at the Effective Time, SHS shall be merged with and
into ESB pursuant to Chapter 19, Subchapter C of the Pennsylvania Business
Corporation Law ("PBCL"). ESB shall be the Surviving Corporation of the Merger
and shall continue to be governed by the laws of the Commonwealth of
Pennsylvania. At the Effective Time, the separate existence and corporate
organization of SHS shall cease, and ESB shall thereupon and thereafter possess
all the rights, privileges, powers and franchises of a public as well as of a
private nature of each of SHS and ESB; and be subject to all the restrictions,
disabilities and duties of each of SHS and ESB; and all and singular, the
rights,
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privileges, powers and franchises of each of SHS and ESB, and all property,
real, personal and mixed, and all debts due to either SHS or ESB on whatever
account, as well for stock subscriptions and all other things in action or
belonging to each of SHS and ESB shall be vested in the Surviving Corporation;
and all property, rights, privileges, powers and franchises, and all and every
other interest shall be thereafter as effectually the property of the Surviving
Corporation as they were of, respectively, SHS and ESB, and the title to any
real estate vested by deed or otherwise, under the laws of the Commonwealth of
Pennsylvania or elsewhere in either SHS or ESB shall not revert or be in any way
impaired by reason of the Merger, but all rights of creditors and all liens upon
any property of either of SHS or ESB shall be preserved unimpaired, and all
debts, liabilities and duties of SHS and ESB shall thenceforth attach to the
Surviving Corporation and may be enforced against it to the same extent as if
said debts, liabilities and duties had been incurred or contracted by it.
2.2 Effective Time. The Merger shall become effective on the date and
at the time that Articles of Merger are executed and filed with the Secretary of
State of the Commonwealth of Pennsylvania pursuant to Section 1927 of the PBCL,
unless a later date and time is specified as the Effective Time in such Articles
of Merger.
2.3 Name of the Surviving Corporation. The name of the Surviving
Corporation shall be "ESB Financial Corporation."
2.4 Articles of Incorporation. On and after the Effective Time, the
Articles of Incorporation of ESB shall be the Articles of Incorporation of the
Surviving Corporation until amended in accordance with applicable law.
2.5 Bylaws. On and after the Effective Time, the Bylaws of ESB shall be
the Bylaws of the Surviving Corporation until amended in accordance with
applicable law.
ARTICLE III
CONVERSION OF SHARES
3.1 Conversion of SHS Common Stock and Options to Purchase SHS Common
Stock.
(a) Subject to Section 3.2 hereof, each share of SHS Common Stock
outstanding immediately prior to the Effective Time, other than (i) shares held
by SHS (including treasury shares) or ESB or any of their respective wholly
owned subsidiaries and (ii) SHS Dissenting Shares (as hereinafter defined),
shall be converted into the number of shares of ESB Common Stock equal to the
Exchange Ratio (as defined in the Reorganization Agreement) or $17.80 in cash in
accordance with the terms of Section 1.03 of the Reorganization Agreement.
(b) Notwithstanding any other provision hereof, no fractional shares of
ESB Common Stock shall be issued to holders of SHS Common Stock. In lieu
thereof, each holder of shares of SHS Common Stock entitled to a fraction of a
share of ESB Common Stock shall, at the time of surrender of the certificate or
certificates representing such holder's shares, receive an amount of cash in
accordance with the terms of Section 1.05 of the Reorganization Agreement. No
such holder shall be entitled to dividends, voting rights or any other rights in
respect of any fractional share.
(c) At or immediately prior to the Effective Time, each option to
purchase SHS Common Stock issued pursuant to SHS's 1998 Stock Option Plan shall
be cancelled, and each holder of any such option, whether or not then vested or
exercisable, shall be entitled to receive from ESB at the election of the
optionholder either a new option to acquire shares of ESB Common Stock or a cash
amount determined in accordance with Section 1.06 of the Reorganization
Agreement. The payment of the consideration referred to in this Section 3.1(c)
to holders of options to purchase SHS Common Stock shall be subject to the
execution by any such holder of such instruments of cancellation as ESB may
reasonable deem appropriate.
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3.2 Exchange of Certificates for Stock and/or Cash.
After the Effective Time, each holder of a certificate for theretofore
outstanding shares of SHS Common Stock, shall be surrendered and exchanged for
cash or stock consideration in the manner provided in Section 1.04 of the
Reorganization Agreement.
3.3 Dissenting Shares. Notwithstanding anything in this Agreement of
Merger to the contrary, shares of SHS Common Stock which are outstanding
immediately prior to the Effective Time and which are held by stockholders
(other than ESB or any wholly-owned subsidiary thereof) who shall not have voted
such shares in favor of the Agreement and this Agreement of Merger and who shall
have satisfied all of the applicable requirements of Chapter 15, Subchapter D of
the PBCL ("SHS Dissenting Shares"), shall not be converted into the right to
receive, or be exchangeable for, shares of ESB Common Stock or cash as set forth
in Section 3.1 hereof, but the holders thereof shall be entitled to payment of
the fair value of such shares in accordance with said section of the PBCL,
subject to the procedures and the conditions specified in such provision of the
PBCL, unless and until such holders shall have failed to perfect or shall have
effectively withdrawn or lost their right to appraisal and payment under such
law. If any such holder shall have failed to perfect or shall have effectively
withdrawn or lost such right of appraisal, the shares of SHS Common Stock held
by such holder shall thereupon be deemed to have been converted into the right
to receive, or be exchangeable at the Effective Time for, cash as provided in
1.08 of the Reorganization Agreement. ESB hereby agrees to make, or cause to be
made, payment in cash for any Dissenting Shares.
3.4 ESB Common Stock. Each share of ESB Common Stock issued and
outstanding immediately prior to the Effective Time shall, on and after the
Effective Time, continue to be issued and outstanding as an identical share of
ESB Common Stock.
ARTICLE IV
MISCELLANEOUS
4.1 Conditions Precedent. The respective obligations of each party
under this Agreement of Merger shall be subject to the satisfaction, or waiver
by the party permitted to do so, of the conditions set forth in Article V of the
Reorganization Agreement.
4.2 Termination. This Agreement of Merger shall be terminated
automatically without further act or deed of either of the parties hereto in the
event of the termination of the Reorganization Agreement in accordance with
Section 6.01 thereof.
4.3 Amendments. To the extent permitted by the PBCL, this Agreement of
Merger may be amended by a subsequent writing signed by each of the parties
hereto upon the approval of the Board of Directors of each of the parties
hereto; provided, however, that the provisions of Article III of this Agreement
of Merger relating to the consideration to be paid for the shares of SHS Common
Stock shall not be amended after the meeting of stockholders of SHS so as to
modify either the amount or the form of such consideration or to otherwise
materially adversely affect the shareholders of SHS without the approval of the
stockholders of SHS.
4.4 Successors. This Agreement of Merger shall be binding on the
successors of ESB and SHS.
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<PAGE>
IN WITNESS WHEREOF, ESB and SHS have caused this Agreement of Merger to be
executed by their duly authorized officers as of the day and year first above
written.
ESB FINANCIAL CORPORATION
Attest:
/s/ Frank D. Martz By: /s/ Charlotte A. Zuschlag
- ----------------------------------- -------------------------------------
Frank D. Martz Charlotte A. Zuschlag
Senior Vice President of Operations President and Chief Executive Officer
and Secretary
SHS BANCORP, INC.
Attest:
/s/ Joanne C. Wienand By: /s/ Thomas F. Angotti
- ----------------------------------- -------------------------------------
Joanne C. Wienand Thomas F. Angotti
Secretary President and Chief Executive Officer
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<PAGE>
APPENDIX B
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated as of July 21, 1999, by and between ESB
Financial Corporation ("ESB"), a Pennsylvania corporation, and SHS Bancorp, Inc.
("SHS"), a Pennsylvania corporation (the "Agreement").
WITNESSETH
WHEREAS, ESB and SHS have entered into an Agreement and Plan of
Reorganization and related Agreement of Merger, each dated as of July 21, 1999
(collectively, the "Reorganization Agreement");
WHEREAS, ESB has requested the execution of this Agreement by SHS in order
to increase the likelihood that the transactions contemplated by the
Reorganization Agreement will be consummated in accordance with its terms and as
a condition to ESB's obligation to complete the transactions contemplated by the
Reorganization Agreement and, in consideration for such execution, SHS has
agreed to issue to ESB an option entitling ESB to purchase shares of its common
stock upon the terms and subject to the conditions set forth herein; and
NOW, THEREFORE, in consideration of the execution of the Reorganization
Agreement and the premises therein and herein contained, the parties agree as
follows:
1. Grant of Option. Subject to the terms and conditions hereof, SHS
irrevocably grants to ESB as of July 21, 1999 the option ("Option") to purchase
at one time or from time to time an aggregate of 115,000 shares of common stock,
par value $.01 per share, of SHS ("Common Stock") at a price per share equal to
$11.00 (the price per share is referred to below as the "Purchase Price" and the
price when used with respect to a number of shares is referred to below as the
"aggregate Purchase Price" for such shares). As used in this Agreement, the
term "Shares" means the shares of Common Stock subject to the Option.
2. Exercise of Option.
(a) Subject to the terms and conditions hereof, ESB may exercise the
Option, in whole at any time or in part from time to time, to the extent not
previously exercised, if a Purchase Event (as defined below) shall have occurred
and be continuing, provided that to the extent the Option shall not have been
exercised, it shall terminate and be of no further effect, except as to notices
of exercise given prior thereto, on the Termination Date, which shall be the
date on which occurs the earliest of (i) immediately prior to the Effective
Time, as defined in Section 1.02 of the Reorganization Agreement, (ii) twelve
(12) months after the first occurrence of a Purchase Event, (iii) twelve (12)
months following a termination of the Reorganization Agreement by ESB pursuant
to Section 6.01(d) thereof prior to the occurrence of a Purchase Event; and (iv)
a termination of the Reorganization Agreement in accordance with its terms
(other than by ESB pursuant to Section 6.01(d) thereof) prior to the occurrence
of a Purchase Event, provided, however, that any purchase of shares upon
exercise of the Option shall be subject to compliance with applicable laws and
regulations.
(b) As used herein, a "Purchase Event" shall mean any of the following
events or transactions occurring after the date hereof:
(i) SHS or any of its subsidiaries shall have entered into an
agreement with any person (other than ESB or any subsidiary thereof) (A) to
merge, consolidate or enter into any similar transaction with such person,
(B) for the disposition, by sale, lease, exchange or otherwise, of all or
substantially all of
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the consolidated assets or deposits of SHS or any of its subsidiaries or
(C) for the issuance, sale or other disposition (including by way of
merger, consolidation, share exchange or any similar transaction) of
securities (or an option or right to acquire such securities) representing
15% or more of the voting power of SHS or any of its subsidiaries;
(ii) any person (other than ESB or any subsidiary thereof) shall
have acquired beneficial ownership of, or any group of persons shall have
been formed which beneficially owns, 15% or more of the then outstanding
Common Stock (any of the foregoing in Section 2(b)(i) or (ii) is
hereinafter referred to as an "Acquisition Transaction");
(iii) any person (other than ESB or any subsidiary thereof) shall
have (A) commenced a tender offer or filed a registration statement under
the Securities Act of 1933, as amended ("Securities Act"), with respect to
an exchange offer to purchase or otherwise acquire control of 15% or more
of the then outstanding shares of Common Stock (such offers being referred
to herein as a "Tender Offer" and an "Exchange Offer," respectively); or
(iv) the holders of the outstanding Common Stock shall not have
approved the Reorganization Agreement (including the related Agreement of
Merger) at the meeting of such holders called for such purpose pursuant to
the Reorganization Agreement, such meeting shall not have been held or
shall have been cancelled prior to the termination of the Reorganization
Agreement in accordance with its terms, or SHS's Board of Directors shall
have withdrawn or modified in a manner which is adverse to ESB the
recommendation of SHS's Board of Directors with respect to the
Reorganization Agreement and the Agreement of Merger, in each case after it
shall have been publicly announced that any person (other than ESB or any
subsidiary thereof) shall have (A) commenced a Tender Offer or filed a
registration statement under the Securities Act with respect to an Exchange
Offer, (B) made, or disclosed an intention to make, a proposal to engage in
an Acquisition Transaction, (C) filed an application (or given notice),
whether in draft or final form, under the Bank Holding Company Act of 1956,
the Home Owners' Loan Act, the Bank Merger Act or the Change in Bank
Control Act of 1978, for approval to engage in an Acquisition Transaction
or (D) any person shall have solicited proxies in a proxy solicitation
subject to Regulation 14A under the Securities Exchange Act of 1934, as
amended ("Exchange Act"), in opposition to approval of the Reorganization
Agreement by SHS's stockholders.
(c) As used in this Agreement, (i) "beneficial ownership," "person" and
"group of persons" shall have the meanings conferred thereon by Section 13(d) of
the Exchange Act and the regulations promulgated thereunder and (ii) "commenced"
shall have the meaning conferred thereon by Rule 14d-2 under the Exchange Act.
(d) SHS shall promptly give written notice to ESB of the occurrence of a
Purchase Event known to SHS. However, the giving of such notice by SHS shall
not be a condition to the right of ESB to exercise the Option. If more than one
transaction or event giving rise to a Purchase Event is undertaken or effected,
then all such transactions shall give rise to only one Purchase Event, which
Purchase Event shall be deemed continuing for all purposes hereunder until all
such transactions or events are abandoned.
(e) Notwithstanding the foregoing, SHS shall not be obligated to issue
Shares upon exercise of the Option (i) in the absence of any required
governmental, regulatory or stockholder approval or consent necessary for SHS to
issue the Shares or for ESB to exercise the Option or prior to the expiration or
termination of any waiting period required by law, or (ii) so long as any
injunction or other order, decree or ruling issued by any federal or state court
of competent jurisdiction is in effect which prohibits the sale or delivery of
the Shares. If the Option is otherwise exercisable but cannot be exercised
prior to termination as specified in Section 2(a) hereof solely because of any
injunction, order or similar restraint issued by a court of competent
jurisdiction, the Option shall continue and will expire on the twentieth
business day after such injunction, order or restraint shall have been dissolved
or when such injunction, order or restraint shall have become permanent and no
longer subject to appeal, as the case may be.
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<PAGE>
3. Notice of Exercise; Payment and Delivery of Shares.
(a) In the event that ESB desires to exercise the Option, ESB shall send
a written notice (the date of which being herein referred to as the "Notice
Date") to SHS specifying the total number of Shares it will purchase and a
place and date for the closing of such purchase, which date shall be not later
than 60 calendar days nor earlier than three business days from the date such
notice is given, unless additional time is needed to give notification to or to
obtain approval from any governmental or regulatory authority and, if so
required, three business days from the date on which the required notification
period has expired or been terminated or such approval has been obtained and
any requisite waiting period with respect thereto shall have passed.
(b) At any closing hereunder, (a)(i) ESB shall make payment to SHS of
the aggregate Purchase Price for the Shares to be purchased by delivery to SHS
of a certified, cashier's or bank check payable to the order of SHS in such
amount or, if mutually agreed, by wire transfer of funds in such amount to an
account designated in writing by SHS, or (ii) if requested by ESB, in lieu of
the payment set forth in (a)(i) above, SHS shall issue to ESB a number of whole
Shares determined by (A) multiplying the excess, if any, of the closing price
of the Common Stock on the Notice Date over the Purchase Price by the number of
Shares with respect to which the Option is being exercised, and (B) dividing
such product by the Purchase Price; and (b) SHS shall deliver to ESB a
certificate or certificates representing the Shares so purchased, registered in
the name of ESB or its designee. SHS shall pay any and all federal, state and
local taxes, or other charges that may be imposed upon ESB in connection with
the preparation, issuance and delivery of stock certificates hereunder.
4. Representations and Warranties of SHS. SHS hereby represents and
warrants to ESB as follows:
(a) This Agreement has been duly authorized, executed and delivered by
SHS and constitutes a valid and binding agreement of SHS, enforceable against
SHS in accordance with its terms, except to the extent that the obligations of
SHS set forth in Section 8(a) and (d) hereof may be unenforceable under
applicable federal and state securities laws.
(b) SHS has taken all necessary corporate and other action (excluding
any required governmental or stockholder approvals) to authorize and reserve
and to permit it to issue, and at all times from the date hereof until such
time as the obligation to deliver Shares upon the exercise of the Option
terminates, will have reserved for issuance, upon any exercise of the Option,
the number of Shares subject to the Option (less the number of Shares
previously issued upon any partial exercise of the Option or as to which the
Option may no longer be exercised). All of the Shares to be issued pursuant to
the Option are duly authorized and, upon issuance and delivery thereof pursuant
to this Agreement, will be duly and validly issued, fully paid and
nonassessable, free and clear of all claims, liens, charges, encumbrances and
security interests, and will not have been issued in violation of, and will not
be subject to, any preemptive rights of any stockholders of SHS.
(c) The execution, delivery and performance by SHS of this Agreement and
the consummation of the transactions contemplated hereby (excluding any required
governmental approvals) do not contravene, or constitute a default under, (i)
the Articles of Incorporation or Bylaws of SHS or (ii) any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
binding upon SHS or any of its subsidiaries.
5. Representations and Warranties of ESB. ESB hereby represents and
warrants to SHS as follows:
(a) This Agreement has been duly authorized, executed and delivered by
ESB and constitutes a valid and binding agreement of ESB, enforceable against
ESB in accordance with its terms, except to the extent that the obligations of
ESB set forth in Section 8(b) and (d) hereof may be unenforceable under
applicable federal and state securities laws.
(b) ESB is acquiring the Option for the purpose set forth in the second
Whereas clause of this Agreement and hereby acknowledges that (i) the Option has
not been, and the Shares may not be, registered under
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the Securities Act or any other applicable securities registration requirements
and (ii) the Option and the Shares may not be transferred except in compliance
with applicable registration requirements or an available exemption therefrom.
6. Adjustment Upon Change in Capitalization, Etc. In the event of any
change in the Common Stock by reason of stock dividends, stock splits, mergers,
consolidations, recapitalizations, combinations, conversions, exchanges of
shares, extraordinary or liquidating dividends, or other changes in the
corporate or capital structure of SHS which would have the effect of diluting or
changing ESB's rights hereunder, the number and kind of shares or securities
subject to the Option and the Purchase Price (but not the aggregate Purchase
Price of the Shares) shall be appropriately and equitably adjusted so that ESB
shall receive upon exercise of the Option the number and class of shares or
other securities or property that ESB would have received in respect of the
Shares that could have been purchased upon exercise of the Option if the Option
could have been and had been exercised immediately prior to such event or the
record date therefor, as applicable. In the event that after the date hereof
SHS issues any additional shares of Common Stock other than pursuant to any
event described in the preceding sentence or pursuant to the exercise of the
Option, the number of shares of Common Stock which can be purchased pursuant to
the Option shall be increased by an amount so that after such issuance the
number of shares of Common Stock subject to the Option, less any shares
previously acquired upon exercise of the Option, shall equal (a) 20.0% of the
number of shares of Common Stock then issued and outstanding minus (b) one
share, without giving effect to any shares which may be issued pursuant to the
Option. SHS shall take such steps in connection with any consolidation, merger,
liquidation or other such action as may be necessary to ensure that the
provisions hereof shall thereafter apply as nearly as possible to any securities
or property thereafter deliverable upon exercise of the Option. Nothing
contained in this Section 6 shall be deemed to authorize SHS to effect any of
the changes contemplated by this Section 6 in breach of the provisions of the
Reorganization Agreement.
7. Registration of the Shares.
(a) If ESB requests SHS in writing to register under the Securities Act
or any other applicable securities registration requirements Shares which have
been purchased by ESB hereunder, SHS will use its best efforts to cause the
Shares so specified in such request to be registered as soon as practicable so
as to permit the sale or other distribution by ESB of such Shares (and to keep
such registration in effect for a period of at least 180 days) and in
connection therewith shall prepare and file as promptly as reasonably possible
(but in no event later than 45 days from receipt of ESB's request) a
registration statement under the Securities Act to effect such registration on
an appropriate form, which would permit the sale of the Shares by ESB in the
manner specified by ESB in its request. In connection with such registration,
SHS shall use its best efforts to cause to be delivered to ESB (and any other
holder whose Shares are the subject of such registration) such certificates,
opinions, accountants' letters and other documents as ESB (or any such other
holder) shall reasonably request and are customarily rendered in connection
with the registration of securities under the Securities Act. ESB shall
provide all information reasonably requested by SHS for inclusion in any
documents to be prepared hereunder. All expenses incurred by SHS in complying
with the provisions of this Section 7, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for SHS and blue sky fees and expenses shall be paid by SHS.
Underwriting discounts and commissions to brokers and dealers relating to the
Shares, fees and disbursements of counsel to ESB and any other expenses
incurred by ESB in connection with such registration shall be borne by ESB.
SHS shall not be obligated to make effective more than two registration
statements pursuant to this Section 7(a).
(b) SHS shall notify ESB in writing not less than ten business days
prior to filing a registration statement under the Securities Act with respect
to any Common Stock (other than a filing on Form S-4 or Form S-8) of SHS's
intention so to file. If ESB wishes to have any portion of its Shares
purchased hereunder included in such registration statement, it shall advise
SHS in writing to that effect within five business days following receipt of
such notice from SHS pursuant to the preceding sentence, and SHS will thereupon
include the number of shares indicated by ESB under such registration
statement, provided, however, that if the managing underwriter determines and
advises SHS and ESB in writing that the inclusion in the registration statement
of the number of shares indicated by ESB would interfere with the successful
marketing of the Common Stock proposed to be registered and sold by SHS, then
the number of shares indicated by ESB to be included in the underwriting shall
be reduced or
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eliminated pro rata among all holders of shares of Common Stock requesting such
registration, and further provided, however, that nothing herein shall prevent
SHS from, at any time, abandoning or delaying any registration.
(c) The rights provided under this Section 7 shall expire upon the third
annual anniversary of the first acquisition of Shares by ESB hereunder.
8. Indemnification.
(a) In connection with any registration under the provisions of Section
7 hereof, SHS shall indemnify and hold harmless ESB and any underwriter (as
defined in the Securities Act) for ESB and each person who controls ESB or such
underwriter within the meaning of the Securities Act, from and against any and
all loss, damage, liability, cost and expense to which ESB or any such
underwriter or controlling person may become subject under the Securities Act
or otherwise, insofar as such losses, damages, liabilities, costs or expenses
are caused by or arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in such registration statement,
any preliminary or final offering prospectus contained therein or any amendment
or supplement thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading; provided, however, that SHS will not be
liable in any such case to the extent that any such loss, damage, liability,
cost or expense arises out of or is based upon an untrue statement or omission
so made in conformity with information furnished by ESB, such underwriter or
such controlling persons in writing specifically for use in the preparation
thereof.
(b) ESB will indemnify and hold harmless SHS, any underwriter for SHS
and each person who controls SHS or such underwriter within the meaning of the
Securities Act, from and against any and all loss, damage, liability, cost and
expense to which SHS or any such underwriter or controlling person may become
subject under the Securities Act or otherwise, insofar as such losses, damages,
liabilities, costs or expenses are caused by or arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact contained
in such registration statement, any preliminary or final offering prospectus
contained therein or any amendment or supplement thereto, or arise out of or
are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances in which they were made, not misleading, in each
case to the extent, but only to the extent, that such untrue statement or
omission was so made in conformity with information furnished by ESB in writing
specifically for use in the preparation thereof.
(c) Promptly after receipt by an indemnified party pursuant to the
provisions of Section 8(a) or (b) of notice of the commencement of any action
involving the subject matter of the foregoing indemnity provisions, such
indemnified party will, if a claim in respect thereof is to be made against the
indemnifying party pursuant to the provisions of Section 8(a) or (b), promptly
notify the indemnifying party of the commencement thereof; except to the extent
of any actual prejudice to the indemnifying party, the omission to so notify the
indemnifying party will not relieve it from any liability which it may have to
any indemnified party otherwise hereunder. In case such action is brought
against any indemnified party and it notifies the indemnifying party of the
commencement thereof, the indemnifying party shall have the right to participate
in, and, to the extent that it may wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; provided, however, that if the
defendants in any action include both the indemnified party and the indemnifying
party and there is a conflict of interests which would prevent counsel for the
indemnifying party from also representing the indemnified party, the indemnified
party or parties shall have the right to select one separate counsel to
participate in the defense of such action on behalf of such indemnified party or
parties. After notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party pursuant to the provisions of Section 8(a)
or (b) for any legal or other expenses subsequently incurred by such indemnified
party in connection with the defense thereof other than reasonable costs of
investigation, unless (i) the indemnified party shall have employed counsel in
accordance with the provisions of the preceding sentence, (ii) the indemnifying
party shall not have employed counsel reasonably satisfactory to the indemnified
party to represent the indemnified party within a reasonable time
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after the notice of the commencement of the action, or (iii) the indemnifying
party has authorized the employment of counsel for the indemnified party at the
expense of the indemnifying party.
(d) If recovery is not available under the foregoing indemnification
provisions, for any reason other than as expressly specified therein, the
parties entitled to indemnification by the terms thereof shall be entitled to
contribution to liabilities and expenses, except to the extent that contribution
is not permitted under Section 11(f) of the Securities Act. In determining the
amount of contribution to which the respective parties are entitled, there shall
be considered the parties' relative fault, knowledge and access to information
concerning the matter with respect to which the claim was asserted, the
opportunity to correct and/or prevent any statement or omission, and any other
equitable considerations appropriate under the circumstances.
9. Quotation. If the Common Stock or any other securities to be
acquired upon exercise of the Option are then authorized for quotation or
trading or listing on the Nasdaq Stock Market or any securities exchange, SHS,
upon the request of ESB after the occurrence of a Purchase Event, will promptly
file an application, if required, to authorize for quotation or trading or
listing the Shares of Common Stock (or other securities to be acquired upon
exercise of the Option pursuant to the terms of Section 6 hereof) on the Nasdaq
Stock Market or such other securities exchange and will use its best efforts to
obtain approval, if required, of such quotation or listing as soon as
practicable.
10. Further Assurances. SHS agrees to execute and deliver such
documents and instruments and take such further actions as may be necessary or
appropriate or as ESB may reasonably request in order to ensure that ESB
receives the full benefits of this Agreement (including, without limitation,
the prompt filing of any required notice or application for approval with any
applicable federal or state regulatory agency and the expeditious processing of
the same). Prior to the Termination Date, SHS will refrain from taking any
action which would have the effect of preventing or interfering with the
delivery by SHS of the Shares (or other securities deliverable pursuant to
Section 6 hereof) to ESB upon any exercise of the Option or from otherwise
performing its obligations under this Agreement.
11. Remedies. The parties agree that ESB would be irreparably damaged
if for any reason SHS failed to issue any of the Shares (or other securities
deliverable pursuant to Section 6 hereof) upon exercise of the Option or to
perform any of its other obligations under this Agreement, and that ESB would
not have an adequate remedy at law in such event. Accordingly, ESB shall be
entitled to specific performance and injunctive and other equitable relief to
enforce the performance of this Agreement by SHS. This provision is without
prejudice to any other rights that ESB may have against SHS for any failure to
perform its obligations under this Agreement.
12. Miscellaneous.
(a) Expenses. Except as otherwise provided herein, each of the parties
hereto shall bear and pay all costs and expenses incurred by it or on its behalf
in connection with the transactions contemplated hereunder, including fees and
expenses of its own financial consultants, investment bankers, accountants and
counsel.
(b) Notices. All notices or other communications hereunder shall be in
writing and shall be deemed given if delivered personally, sent by overnight
express or mailed by prepaid registered or certified mail (return receipt
requested) or by cable, telegram, telecopy or telex addressed as follows:
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(i) If to ESB, to:
ESB Financial Corporation
600 Lawrence Avenue
Ellwood City, Pennsylvania 16117
ATTN: Charlotte A. Zuschlag
Copy to:
Elias, Matz, Tiernan and Herrick L.L.P.
734 15th Street, N.W.
Washington, D.C. 20005
ATTN: Raymond A. Tiernan, Esq.
(ii) If to SHS, to:
SHS Bancorp, Inc.
One North Shore Center, Suite 120
Pittsburgh, Pennsylvania 15212
ATTN: Thomas F. Angotti
Copy to:
Breyer & Associates PC
1100 New York Avenue, N.W.
Suite 700
Washington, D.C. 20005
ATTN: John F. Breyer, Jr., Esq.
or such other address as shall be furnished in writing by any party, and any
such notice or communication shall be deemed to have been given as of the date
so mailed.
(c) Severability. If any term, provision, covenant or restriction of
this Agreement is held to be invalid, void or unenforceable, the remainder of
the terms, provisions, covenants and restrictions of this Agreement shall
remain in full force and effect and shall in no way be affected, impaired or
invalidated.
If for any reason any court or regulatory agency determines that the Option
will not permit the holder to acquire the full number of Shares, it is the
express intention of SHS to allow the holder to acquire such lesser number of
shares as may be permissible, without any amendment or modification hereof.
(d) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania without giving
effect to the principles of conflicts of laws thereof.
(e) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
(f) Headings. The section headings herein are for convenience only and
shall not affect the construction hereof.
(g) Assignment. ESB may assign this Agreement to any wholly owned
subsidiary of ESB. ESB may not, without the prior written consent of SHS,
assign this Agreement to any other person in whole or in part, provided that
upon the occurrence of and following a Purchase Event, ESB may sell, transfer,
assign or otherwise
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dispose of its rights and obligations hereunder in whole or in part without
such consent. In the case of any permitted sale, transfer, assignment or
disposition in part of this Option, SHS shall do all things necessary to
facilitate the same and the person to whom this Option is sold, transferred
assigned or disposed of shall agree in writing to the terms and conditions
hereof. This Agreement shall not be assignable by SHS except by operation of
law. Subject to the foregoing, this Agreement shall be binding upon, inure to
the benefit of and be enforceable by the parties and their respective
successors and assigns.
(h) Parties in Interest. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to confer upon any other person (other than an
assignee or transferee of ESB pursuant to Section 12(g) hereof) any rights or
remedies of any nature whatsoever under or by any reason of this Agreement.
13. Entire Agreement. This Agreement, including the documents and other
writings referred to herein or delivered pursuant hereto, contains the entire
agreement and understanding of the parties with respect to its subject matter.
There are no restrictions, agreements, promises, warranties, covenants or
undertakings between the parties other than those expressly set forth herein or
therein. This Agreement supersedes all prior agreements and understandings
between the parties, both written and oral, with respect to its subject matter.
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IN WITNESS WHEREOF, ESB and SHS have caused this Agreement to be executed
by their duly authorized officers as of the day and year first above written.
ESB FINANCIAL CORPORATION
Attest:
/s/ Frank D. Martz By: /s/ Charlotte A. Zuschlag
- ----------------------------------- -------------------------------------
Frank D. Martz Charlotte A. Zuschlag
Senior Vice President of Operations President and Chief Executive Officer
and Secretary
SHS BANCORP, INC.
Attest:
/s/ Joanne C. Wienand By: /s/ Thomas F. Angotti
- ----------------------------------- -------------------------------------
Joanne C. Wienand Thomas F. Angotti
Secretary President and Chief Executive Officer
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APPENDIX C
_________, 1999
Board of Directors
SHS Bancorp, Inc.
One North Shore Center
Suite 120
Pittsburgh, Pennsylvania 15212
Gentlemen:
SHS Bancorp, Inc. ("SHS") and ESB Financial Corporation ("ESB") have
entered into an Agreement and Plan of Reorganization ("Agreement"), dated as of
July 21, 1999, pursuant to which SHS will be merged with and into ESB (the
"Merger"). As set forth in the Agreement and subject to certain election rights
and limitations thereupon contained in the Agreement, at the effective time of
the Merger each of the outstanding shares of common stock, par value $0.01 per
share, of SHS ("SHS Common Stock") will be converted into 1.3 shares (the
"Exchange Ratio") of common stock, par value $0.01 per share, of ESB ("ESB
Common Stock") or a cash amount equal to $17.80 per share (the "Merger
Consideration"). Under the Agreement, the aggregate cash consideration paid by
ESB will amount to the product of the total shares of SHS Common Stock
outstanding times 0.40 times $17.80. You have requested our opinion as to the
fairness, from a financial point of view, of the Merger Consideration to be paid
by ESB to the shareholders of SHS.
Feldman Financial Advisors, Inc. ("Feldman Financial") specializes in
providing financial advisory and consulting services to savings institutions and
commercial banks. As part of our business, we are regularly engaged in the
independent valuation of businesses and securities in connection with merger and
acquisition transactions, initial public offerings, private placements, and
recapitalizations. Feldman Financial is familiar with SHS, having acted as
financial advisor to SHS in connection with, and having participated in the
negotiations leading to, the Agreement and will receive a fee from SHS for our
services.
During the course of our engagement, we reviewed and analyzed material
bearing upon the financial and operating conditions of SHS and ESB and material
prepared in connection with the proposed transaction, including the following:
the Agreement; the Stock Option Agreement; certain historical financial
information concerning SHS and ESB; the terms of recent merger and acquisition
transactions involving savings institutions that we considered relevant;
historical market prices and trading activity for SHS Common Stock and ESB
Common Stock; and financial and other information provided to us by the
management of SHS and ESB.
In addition, we have conducted meetings with members of the senior
management of SHS and ESB for the purposes of reviewing the future prospects of
SHS and ESB. We also conducted such other studies, analyses, and examinations
as we deemed appropriate. We also took into account our assessment of general
market and financial conditions and our experience in other transactions,
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Board of Directors
SHS Bancorp, Inc.
___________ __, 1999
Page Two
as well as our knowledge of the thrift and banking industries and our general
experience in securities valuations.
In rendering this opinion, we have, with your consent, assumed and relied,
without independent verification, upon the accuracy and completeness of the
financial and other information and the representations contained in the
materials provided to us by SHS and ESB and in the discussions with SHS and ESB
management. We did not independently verify and have relied on and assumed that
the aggregate allowances for loan losses set forth in the balance sheets of each
of SHS and ESB at December 31, 1998 were adequate to cover such losses and
complied fully with applicable law, regulatory policy, and sound banking
practices as of the date of such financial statements. We were not retained and
did not conduct a physical inspection of any of the properties or facilities of
SHS or ESB, nor did we make any independent evaluation or appraisal of the
assets, liabilities, or prospects of SHS or ESB, nor were we furnished with any
such evaluation or appraisal, and we were not retained to and did not review any
individual credit files.
We have also assumed that there has been no material change in SHS's or
ESB's assets, financial condition, results of operations, business, or prospects
since the date of the last financial statements made available to us by SHS and
ESB, respectively. Counsel to SHS has undertaken responsibility for all legal
matters with respect to SHS, the Board of Directors of SHS, the Agreement, and
the Merger. Our opinion is necessarily based upon economic, market, monetary,
and other conditions as they exist and can be evaluated as of the date hereof
and the information made available to us through the date hereof.
We are not expressing any opinion herein as to the price at which shares of
ESB Common Stock issued in the Merger may trade if and when they are issued or
at any future time, nor does our opinion constitute a recommendation to any
shareholder of SHS as to how such shareholder should vote with respect to the
Agreement at any meeting of shareholders of SHS.
This letter is solely for the information of the Board of Directors of SHS
and is not to be used, circulated, quoted, or otherwise referred to for any
other purpose without our prior written consent, except as set forth in our
engagement letter with SHS. We hereby consent to the inclusion and reference to
this letter in any registration statement or proxy statement to be delivered to
shareholders of SHS in connection with the Merger if and only if this letter is
quoted in full or attached as an exhibit to such document and this letter has
not been withdrawn prior to the date of such document.
Based upon and subject to the foregoing, and based upon such other matters
as we considered relevant, we are of the opinion that, as of the date hereof,
the Merger Consideration to be paid by ESB pursuant to the terms of the
Agreement is fair, from a financial point of view, to the shareholders of SHS.
Sincerely,
Feldman Financial Advisors, Inc.
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APPENDIX D
Pennsylvania Business Corporation Law of 1988, as Amended,
Provisions For Dissenting Shareholders
Subchapter D.--Dissenters Rights.
(S) 1571. Application and effect of subchapter.
(a) General rule.--Except as otherwise provided in subsection (b), any
shareholder of a business corporation shall have the right to dissent from, and
to obtain payment of the fair value of his shares in the event of, any corporate
action, or to otherwise obtain fair value for his shares, where this part
expressly provides that a shareholder shall have the rights and remedies
provided in this subchapter. See:
Section 1906(c) (relating to dissenters rights upon special treatment).
Section 1930 (relating to dissenters rights).
Section 1931(d) (relating to dissenters rights in share exchanges).
Section 1932(c) (relating to dissenters rights in asset transfers).
Section 1952(d) (relating to dissenters rights in division).
Section 1962(c) (relating to dissenters rights in conversion).
Section 2104(b) (relating to procedure).
Section 2324 (relating to corporation option where a restriction on
transfer of a security is held invalid).
Section 2325(b) (relating to minimum vote requirement).
Section 2704(c) (relating to dissenters rights upon election).
Section 2705(d) (relating to dissenters rights upon renewal of election).
Section 2907(a) (relating to proceedings to terminate breach of
qualifying conditions).
Section 7104(b)(3) (relating to procedure).
(b) Exceptions.--(1) Except as otherwise provided in paragraph (2), the
holders of the shares of any class or series of shares that, at the record
date fixed to determine the shareholders entitled to notice of and to vote
at the meeting at which a plan specified in any of section 1930, 1931(d),
1932(c) or 1952(d) is to be voted on, are either:
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(i) listed on a national securities exchange; or
(ii) held of record by more than 2,000 shareholders;
shall not have the right to obtain payment of the fair value of any such shares
under this subchapter.
(2) Paragraph (1) shall not apply to and dissenters rights shall be
available without regard to the exception provided in that paragraph in the
case of:
(i) Shares converted by a plan if the shares are not converted solely
into shares of the acquiring, surviving, new or other corporation or solely
into such shares and money in lieu of fractional shares.
(ii) Shares of any preferred or special class unless the articles, the
plan or the terms of the transaction entitle all shareholders of the class
to vote thereon and require for the adoption of the plan or the
effectuation of the transaction the affirmative vote of a majority of the
votes cast by all shareholders of the class.
(iii) Shares entitled to dissenters rights under section 1906(c)
(relating to dissenters rights upon special treatment).
(3) The shareholders of a corporation that acquires by purchase, lease,
exchange or other disposition all or substantially all of the shares,
property or assets of another corporation by the issuance of shares,
obligations or otherwise, with or without assuming the liabilities of the
other corporation and with or without the intervention of another
corporation or other person, shall not be entitled to the rights and
remedies of dissenting shareholders provided in this subchapter regardless
of the fact, if it be the case, that the acquisition was accomplished by
the issuance of voting shares of the corporation to be outstanding
immediately after the acquisition sufficient to elect a majority or more of
the directors of the corporation.
(c) Grant of optional dissenters rights.--The bylaws or a resolution of the
board of directors may direct that all or a part of the shareholders shall have
dissenters rights in connection with any corporate action or other transaction
that would otherwise not entitle such shareholder to dissenters rights.
(d) Notice of dissenters rights.--Unless otherwise provided by statute, if
a proposed corporate action that would give rise to dissenters rights under this
subpart is submitted to a vote at a meeting of shareholders, there shall be
included in or enclosed with the notice of meeting:
(1) a statement of the proposed action and a statement that the
shareholders have a right to dissent and obtain payment of the fair value
of their shares by complying with the terms of this subchapter; and
(2) a copy of this subchapter.
(e) Other statutes.--The procedures of this subchapter shall also be
applicable to any transaction described in any statute other than this part that
makes reference to this subchapter for the purpose of granting dissenters
rights.
(f) Certain provisions of articles ineffective.--This subchapter may not be
relaxed by any provision of the articles.
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(g) Cross references.--See sections 1105 (relating to restriction on
equitable relief), 1904 (relating to de facto transaction doctrine abolished)
and 2512 (relating to dissenters rights procedure).
(S) 1572. Definitions.
The following words and phrases when used in this subchapter shall have the
meanings given to them in this section unless the context clearly indicates
otherwise:
"Corporation." The issuer of the shares held or owned by the dissenter
before the corporate action or the successor by merger, consolidation, division,
conversion or otherwise of that issuer. A plan of division may designate which
of the resulting corporations is the successor corporation for the purposes of
this subchapter. The successor corporation in a division shall have sole
responsibility for payments to dissenters and other liabilities under this
subchapter except as otherwise provided in the plan of division..
"Dissenter." A shareholder or beneficial owner who is entitled to and does
assert dissenters rights under this subchapter and who has performed every act
required up to the time involved for the assertion of those rights.
"Fair value." The fair value of shares immediately before the effectuation
of the corporate action to which the dissenter objects taking into account all
relevant factors, but excluding any appreciation or depreciation in anticipation
of the corporate action.
"Interest." Interest from the effective date of the corporate action until
the date of payment at such rate as is fair and equitable under all the
circumstances, taking into account all relevant factors including the average
rate currently paid by the corporation on its principal bank loans.
(S) 1573. Record and beneficial holders and owners.
(a) Record holders of shares.--A record holder of shares of a business
corporation may assert dissenters rights as to fewer than all of the shares
registered in his name only if he dissents with respect to all the shares of the
same class or series beneficially owned by any one person and discloses the name
and address of the person or persons on whose behalf he dissents. In that event,
his rights shall be determined as if the shares as to which he has dissented and
his other shares were registered in the names of different shareholders.
(b) Beneficial owners of shares.--A beneficial owner of shares of a
business corporation who is not the record holder may assert dissenters rights
with respect to shares held on his behalf and shall be treated as a dissenting
shareholder under the terms of this subchapter if he submits to the corporation
not later than the time of the assertion of dissenters rights a written consent
of the record holder. A beneficial owner may not dissent with respect to some
but less than all shares of the same class or series owned by the owner, whether
or not the shares so owned by him are registered in his name.
(S) 1574. Notice of intention to dissent.
If the proposed corporate action is submitted to a vote at a meeting of
shareholders of a business corporation, any person who wishes to dissent and
obtain payment of the fair value of his shares must file with the corporation,
prior to the vote, a written notice of intention to demand that he be paid the
fair value for his shares if the proposed action is effectuated, must effect no
change in the beneficial ownership of his shares from the date of such filing
continuously through the effective date of the proposed action and must refrain
from voting his shares in approval of such action. A dissenter who fails in any
respect shall not acquire any right to payment of the fair value
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of his shares under this subchapter. Neither a proxy nor a vote against the
proposed corporate action shall constitute the written notice required by this
section.
(S) 1575. Notice to demand payment.
(a) General rule.--If the proposed corporate action is approved by the
required vote at a meeting of shareholders of a business corporation, the
corporation shall mail a further notice to all dissenters who gave due notice of
intention to demand payment of the fair value of their shares and who refrained
from voting in favor of the proposed action. If the proposed corporate action
is to be taken without a vote of shareholders, the corporation shall send to all
shareholders who are entitled to dissent and demand payment of the fair value of
their shares a notice of the adoption of the plan or other corporate action. In
either case, the notice shall:
(1) State where and when a demand for payment must be sent and
certificates for certificated shares must be deposited in order to obtain
payment.
(2) Inform holders of uncertificated shares to what extent transfer of
shares will be restricted from the time that demand for payment is
received.
(3) Supply a form for demanding payment that includes a request for
certification of the date on which the shareholder, or the person on whose
behalf the shareholder dissents, acquired beneficial ownership of the
shares.
(4) Be accompanied by a copy of this subchapter.
(b) Time for receipt of demand for payment.--The time set for receipt of
the demand and deposit of certificated shares shall be not less than 30 days
from the mailing of the notice.
(S) 1576. Failure to comply with notice to demand payment, etc.
(a) Effect of failure of shareholder to act.--A shareholder who fails to
timely demand payment, or fails (in the case of certificated shares) to timely
deposit certificates, as required by a notice pursuant to section 1575 (relating
to notice to demand payment) shall not have any right under this subchapter to
receive payment of the fair value of his shares.
(b) Restriction on uncertificated shares.--If the shares are not
represented by certificates, the business corporation may restrict their
transfer from the time of receipt of demand for payment until effectuation of
the proposed corporate action or the release of restrictions under the terms of
section 1577(a) (relating to failure to effectuate corporate action).
(c) Rights retained by shareholder.--The dissenter shall retain all other
rights of a shareholder until those rights are modified by effectuation of the
proposed corporate action.
(S) 1577. Release of restrictions or payment for shares.
(a) Failure to effectuate corporate action.--Within 60 days after the date
set for demanding payment and depositing certificates, if the business
corporation has not effectuated the proposed corporate action, it shall return
any certificates that have been deposited and release uncertificated shares from
any transfer restrictions imposed by reason of the demand for payment.
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(b) Renewal of notice to demand payment.--When uncertificated shares have
been released from transfer restrictions and deposited certificates have been
returned, the corporation may at any later time send a new notice conforming to
the requirements of section 1575 (relating to notice to demand payment), with
like effect.
(c) Payment of fair value of shares.--Promptly after effectuation of the
proposed corporation action, or upon timely receipt of demand for payment if the
corporate action has already been effectuated, the corporation shall either
remit to dissenters who have made demand and (if their shares are certificated)
have deposited their certificates the amount that the corporation estimates to
be the fair value of the shares, or give written notice that no remittance under
this section will be made. The remittance or notice shall be accompanied by:
(1) The closing balance sheet and statement of income of the issuer of
the shares held or owned by the dissenter for a fiscal year ending not more
than 16 months before the date of remittance or notice together with the
latest available interim financial statements.
(2) A statement of the corporation's estimate of the fair value of the
shares.
(3) A notice of the right of the dissenter to demand payment or
supplemental payment, as the case may be, accompanied by a copy of this
subchapter.
(d) Failure to make payment.--If the corporation does not remit the amount
of its estimate of the fair value of the shares as provided by subsection (c),
it shall return any certificates that have been deposited and release
uncertificated shares from any transfer restrictions imposed by reason of the
demand for payment. The corporation may make a notation on any such certificate
or on the records of the corporation relating to any such uncertificated shares
that such demand has been made. If shares with respect to which notation has
been so made shall be transferred, each new certificate issued therefor or the
records relating to any transferred uncertificated shares shall bear a similar
notation, together with the name of the original dissenting holder or owner of
such shares. A transferee of such shares shall not acquire by such transfer any
rights in the corporation other than those that the original dissenters had
after making demand for payment of their fair value.
(S) 1578. Estimate by dissenter of fair value of shares.
(a) General rule.--If the business corporation gives notice of its estimate
of the fair value of the shares, without remitting such amount, or remits
payment of its estimate of the fair value of a dissenter's shares as permitted
by section 1577(c) (relating to payment of fair value of shares) and the
dissenter believes that the amount stated or remitted is less than the fair
value of his shares, he may send to the corporation his own estimate of the fair
value of the shares, which shall be deemed a demand for payment of the amount or
the deficiency.
(b) Effect of failure to file estimate.--Where the dissenter does not file
his own estimate under subsection (a) within 30 days after the mailing by the
corporation of its remittance or notice, the dissenter shall be entitled to no
more than the amount stated in the notice or remitted to him by the corporation.
(S) 1579. Valuation proceedings generally.
(a) General rule.--Within 60 days after the latest of:
(1) Effectuation of the proposed corporate action;
(2) Timely receipt of any demands for payment under section 1575
(relating to notice to demand payment); or
D-5
<PAGE>
(3) Timely receipt of any estimates pursuant to section 1578 (relating to
estimate by dissenter of fair value of shares);
If any demands for payment remain unsettled, the business corporation may file
in court an application for relief requesting that the fair value of the shares
be determined by the court.
(b) Mandatory joinder of dissenters.--All dissenters, wherever residing,
whose demands have not been settled shall be made parties to the proceeding as
in an action against their shares. A copy of the application shall be served on
each such dissenter. If a dissenter is a nonresident, the copy may be served on
him in the manner provided or prescribed by or pursuant to 42 Pa.C.S. Ch. 53
(relating to bases of jurisdiction and interstate and international procedure).
(c) Jurisdiction of the court.--The jurisdiction of the court shall be
plenary and exclusive. The court may appoint an appraiser to receive evidence
and recommend a decision on the issue of fair value. The appraiser shall have
such power and authority as may be specified in the order of appointment or in
any amendment thereof.
(d) Measure of recovery.--Each dissenter who is made a party shall be
entitled to recover the amount by which the fair value of his shares is found to
exceed the amount, if any, previously remitted, plus interest.
(e) Effect of corporation's failure to file application.--If the
corporation fails to file an application as provided in subsection (a), any
dissenter who made a demand and who has not already settled his claim against
the corporation may do so in the name of the corporation at any time within 30
days after the expiration of the 60-day period. If a dissenter does not file an
application within the 30-day period, each dissenter entitled to file an
application shall be paid the corporation's estimate of the fair value of the
shares and no more, and may bring an action to recover any amount not previously
remitted.
(S) 1580. Costs and expenses of valuation proceedings.
(a) General rule.-- The costs and expenses of any proceeding under section
1579 (relating to valuation proceedings generally), including the reasonable
compensation and expenses of the appraiser appointed by the court, shall be
determined by the court and assessed against the business corporation except
that any part of the costs and expenses may be apportioned and assessed as the
court deems appropriate against all or some of the dissenters who are parties
and whose action in demanding supplemental payment under section 1578 (relating
to estimate by dissenter of fair value of shares) the court finds to be
dilatory, obdurate, arbitrary, vexatious or in bad faith.
(b) Assessment of counsel fees and expert fees where lack of good faith
appears.--Fees and expenses of counsel and of experts for the respective parties
may be assessed as the court deems appropriate against the corporation and in
favor of any or all dissenters if the corporation failed to comply substantially
with the requirements of this subchapter and may be assessed against either the
corporation or a dissenter, in favor of any other party, if the court finds that
the party against whom the fees and expenses are assessed acted in bad faith or
in a dilatory, obdurate, arbitrary or vexatious manner in respect to the rights
provided by this subchapter.
(c) Award of fees for benefits to other dissenters.--If the court finds
that the services of counsel for any dissenter were of substantial benefit to
other dissenters similarly situated and should not be assessed against the
corporation, it may award to those counsel reasonable fees to be paid out of the
amounts awarded to the dissenters who were benefited.
D-6
<PAGE>
(S) 1930. Dissenters rights.
(a) General rule.--If any shareholder of a domestic business corporation
that is to be a party to a merger or consolidation pursuant to a plan of merger
or consolidation objects to the plan of merger or consolidation and complies
with the provisions of Subchapter D of Chapter 15 (relating to dissenters
rights), the shareholder shall be entitled to the rights and remedies of
dissenting shareholders therein provided, if any. See also section 1906(c)
(relating to dissenters rights upon special treatment).
(b) Plans adopted by directors only.--Except as otherwise provided pursuant
to section 1571(c) (relating to grant of optional dissenters rights), Subchapter
D of Chapter 15 shall not apply to any of the shares of a corporation that is a
party to a merger or consolidation pursuant to section 1924(b)(1)(i) (relating
to adoption by board of directors).
(c) Cross references.--See sections 1571(b) (relating to exceptions) and
1904 (relating to de facto transaction doctrine abolished).
D-7
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
In accordance with the Pennsylvania General Corporation Law, Article 9 of
the Registrant's articles of incorporation and Article VIII of the Registrant's
bylaws provide as follows:
Article 9 of Articles of Incorporation
A. Personal Liability of Directors. A director of the Corporation shall
not be personally liable for monetary damages for any action taken, or any
failure to take any action, as a director except to the extent that by law a
director's liability for monetary damages may not be limited.
B. Indemnification. The Corporation shall indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action , suit or proceeding, including actions by or in the right of
the Corporation, whether civil, criminal, administrative or investigative, by
reason of the fact that such person is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer employee or agent of another corporation, partnership,
joint venture, trust of other enterprise, against expenses (including attorneys'
fees), judgments, fines, excise taxes and amounts paid in settlement actually
and reasonably incurred by such person in connection with such action, suit or
proceeding to the full extent permissible under Pennsylvania law.
C. Advancement of Expenses. Reasonable expenses incurred by a director,
officer or employee or agent of the Corporation in defending a civil or criminal
action, suit or proceeding described in Article 9.B may be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such person to
repay such amount if it shall ultimately be determined that person is not
entitled to be indemnified by the Corporation.
D. Other Rights. The indemnification and advancement of expenses provided
by or pursuant to this Article 9 shall not be deemed exclusive or any other
rights to which those seeking indemnification of advancement of expenses may be
entitled under any insurance or other agreement, vote of stockholders or
directors or otherwise, both as to actions in their official capacity and as to
actions in another capacity while holding an office, and shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such person.
E. Insurance. The Corporation shall have the power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent or another corporation,
partnership, joint venture, trust or other enterprise, against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of this Article 9.
F. Security Fund; Indemnity Agreements. By such action of the Board of
Directors (notwithstanding their interest in the transaction), the Corporation
may create and fund a trust fund or fund of any nature, and may enter into
II-1
<PAGE>
agreements with its officers, directors, employees and agents for the purpose of
securing or insuring in any manner its obligation to indemnify or advance
expenses provided for in this Article 9.
G. Modification. The duties of the Corporation to indemnify and to
advance expenses to any person as provided in this Article 9 shall be in the
nature of a contract between the Corporation and each such person, and no
amendment or repeal of any provision of this Article 9, and no amendment or
termination of any trust or other fund created pursuant to Article 9.F hereof,
shall alter to the detriment of such person the right of such person to the
advancement of expenses or indemnification related to a claim based on an act or
failure to act which took place prior to such amendment, repeal or termination.
H. Proceeding. Initiated by Indemnified Persons. Notwithstanding any
other provision of this Article 9, the Corporation shall not indemnify a
director, officer, employee or agent for any liability incurred in an action,
suit or proceeding initiated by (which shall not be deemed to include counter-
claims or affirmative defenses) or participated in as an intervenor or amicus
curiae by the person seeking indemnification unless such initiation of or
participation in the action, suit or proceeding is authorized, either before or
after its commencement, by the affirmative vote of a majority of the directors
then in office.
Article VIII of Bylaws
A director of the Corporation shall not be personally liable for monetary
damages for any action taken, or any failure to take any action, as a director
to the extent set forth in the Corporation's Articles of Incorporation, which
provisions are incorporated herein with the same effect as if they were set
forth herein.
Item 21. Exhibits and Financial Statements Schedules
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
2.1 Agreement and Plan of Reorganization, dated as of July 21, 1999, between
ESB Financial Corporation and SHS Bancorp, Inc. is included as Appendix A
to the Proxy Statement/Prospectus which is part of this Registration
Statement
2.2 Stock Option Agreement, dated as of July 21, 1999, between ESB Financial
Corporation and SHS Bancorp, Inc. is included as Appendix B to the Proxy
Statement/Prospectus which is part of this Registration Statement
2.3 Stockholders Agreement, dated July 21, 1999, by and among ESB Financial
Corporation and the directors and certain executive officers of SHS
Bancorp, Inc. (1)
3.1 Amended and Restated Articles of Incorporation of ESB Financial
Corporation(2)
3.2 Bylaws of ESB Financial Corporation(2)
4.1 Specimen Stock Certificate of ESB Financial Corporation(3)
5.1 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. re: legality
8.1 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. re: federal tax matters *
10.1 Stock Option Plan (3) (6)
10.2 Employee Stock Ownership Plan (3) (6)
10.3 Management Development and Recognition Plan and Trust Agreement (3) (6)
10.4 Employment Agreement with Charlotte A. Zuschlag (3) (6)
10.5 1992 Stock Incentive Plan (4) (6)
10.6 1997 Stock Option Plan (5) (6)
II-2
<PAGE>
10.7 Change of Control Agreement among ESB Financial Corporation, ESB Bank,
F.S.B. and Charles P. Evanoski (Representative of similar agreements
entered into with Frank D. Martz, Todd F. Palkovich and Robert C.
Hilliard)(5) (6)
23.1 Consent of Elias, Matz, Tiernan & Herrick L.L.P. (included in Exhibits
5.1 and 8.1, respectively)
23.2 Consent of KPMG LLP (independent auditors for ESB Financial Corporation)
23.3 Consent of S.R. Snodgrass A.C. (independent auditors for SHS Bancorp,
Inc.)
23.4 Consent of Feldman Financial Advisors, Inc.
24.1 Power of Attorney (included in Signature Page of this Registration
Statement)
99.1 Form of proxy for the SHS special meeting
99.2 Other SHS solicitation matters
___________
* To be filed by amendment.
(1) Incorporated by reference from the Current Report on Form 8-K filed by ESB
Financial Corporation with the SEC on July 23, 1999.
(2) Incorporated by reference from the Current Report on Form 8-K filed by ESB
Financial Corporation with the SEC on March 27, 1991.
(3) Incorporated by reference from the Registration Statement on Form S-4
(Registration No. 33-39219) filed by ESB Financial Corporation with the SEC
on March 1, 1991.
(4) Incorporated by reference from the Annual Report on From 10-K filed by ESB
Financial Corporation with the SEC on March, 29, 1993.
(5) Incorporated by reference from the Annual Report on From 10-K filed by ESB
Financial Corporation with the SEC on March 30, 1998.
(6) Management contract or compensatory plan or arrangement.
(b) Financial Statement Schedules
All schedules have been omitted as not applicable or not required
under the rules of Regulation S-X.
(c) Reports, Opinions, or Appraisals of Outside Parties
The opinion of Feldman Financial Advisors, Inc. is included as
Appendix C to the Proxy Statement/Prospectus.
Item 22. Undertakings.
The undersigned Registrant hereby undertakes:
(A) (1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
II-3
<PAGE>
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
the securities offered would not exceed that which was
registered) and any deviation from the low or high and the
estimated maximum offering range may be reflected in the form
of Prospectus filed with the Commission pursuant to Rule 424
(b) if, in the aggregate, the changes in volume and price
represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration
Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
---- ----
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the Offering.
(B) For purposes of determining any liability under the Securities Act of
1933, each filing of the Registrant's annual report pursuant to Section 13
(a) or 15 (d) of the Securities Exchange Act of 1934 (and each filing of an
employee benefit plan's annual report pursuant to Section 15 (d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(C) To respond to requests for information that is incorporated by
reference into the Joint Proxy statement/prospectus pursuant to Item 4, 10
(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(D) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
(E) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
II-4
<PAGE>
(F) That every prospectus: (i) that is filed pursuant to paragraph (E)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act of 1933 and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part
of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
---- ----
(G) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Form S-4 Registration Statement to be signed on its behalf
by the undersigned, hereunto duly authorized, in the Commonwealth of
Pennsylvania on October 13, 1999.
ESB FINANCIAL CORPORATION
By: /s/ Charlotte A. Zuschlag
----------------------------------------------
Charlotte A. Zuschlag
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature appears
below hereby makes, constitutes and appoints Charlotte A. Zuschlag his true and
lawful attorney, with full power to sign for each person and in such person's
name and capacity indicated below, and with full power of substitution, any and
all amendments to this Registration Statement, hereby ratifying and confirming
such person's signature as it may be signed by said attorney to any and all
amendments.
<TABLE>
<CAPTION>
Name Title Date
- ------------------------------ -------------------------------------- ----------------
<S> <C> <C>
/s/Charlotte A. Zuschlag President, Chief Executive Officer and October 13, 1999
- ------------------------------ Director (principal executive officer)
Charlotte A. Zuschlag
/s/Charles P. Evanoski Senior Vice President and Chief October 13, 1999
- ------------------------------ Financial Officer (principal financial
Charles P. Evanoski and accounting officer)
/s/William B. Salsgiver Chairman of the Board October 13, 1999
- ------------------------------
William B. Salsgiver
/s/Herbert S. Skuba Vice Chairman of the Board October 13, 1999
- ------------------------------
Herbert S. Skuba
/s/George William Blank, Jr. Director October 13, 1999
- ------------------------------
George William Blank, Jr.
/s/Charles Delman Director October 13, 1999
- ------------------------------
Charles Delman
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Name Title Date
- ------------------------------ -------------------------------------- ----------------
<S> <C> <C>
/s/Lloyd L. Kildoo Director October 13, 1999
- ------------------------------
Lloyd L. Kildoo
/s/Edmund C. Smith Director October 13, 1999
- ------------------------------
Edmund C. Smith
/s/Edwin A. Thaner Director October 13, 1999
- ------------------------------
Edwin A. Thaner
</TABLE>
II-7
<PAGE>
Exhibit 5.1
Law Offices
Elias, Matz, Tiernan & Herrick L.L.P.
12th Floor
734 15th Street, N.W.
Washington, D.C. 20005
202-347-0300
October 14, 1999
VIA EDGAR
Board of Directors
ESB Financial Corporation
600 Lawrence Avenue
Ellwood City, Pennsylvania 16117
Re: Registration Statement on Form S-4
Issuance of Shares of Common Stock
Ladies and Gentlemen:
We have acted as special counsel to ESB Financial Corporation (the
"Company") in connection with the preparation and filing with the Securities and
Exchange Commission pursuant to the Securities Act of 1933, as amended, of the
registration statement on Form S-4 (the "Registration Statement") relating to
the issuance of shares of the Company's common stock, $0.01 par value per share
(the "Shares"), in connection with the proposed merger (the "Merger") of SHS
Bancorp, Inc. ("SHS") with and into the Company pursuant to the Agreement and
Plan of Reorganization between the Company and SHS dated July 21, 1999 (the
"Agreement"), all as described in the Registration Statement. In rendering the
opinion set forth below, we do not express any opinion concerning any laws other
than the federal law of the United States and the corporate law of the State of
Pennsylvania.
We have examined originals or copies, certified or otherwise identified to
our satisfaction, of such documents, corporate records and other instruments,
and have examined such matters of law, as we have deemed necessary or advisable
for purposes of rendering the opinion set forth below. As to matters of fact,
we have examined and relied upon the representations of the Company and SHS
contained in the Agreement and the Registration Statement, and, where we have
deemed appropriate, representations or certificates of officers of the Company
or SHS or public officials. We have assumed the authenticity of all documents
submitted to us as originals, the genuiness of all signatures, the legal
capacity of natural persons and the conformity to the originals of all
documents submitted to us as copies. In making our examination of any
documents, we have assumed that all parties, other than the Company, had the
corporate power and authority to enter into and perform all obligations
thereunder, and, as to such parties, we have
<PAGE>
Board of Directors
ESB Financial Corporation
Page 2
also assumed the due authorization by all requisite action, the due execution
and delivery of such documents and the validity and binding effect and
enforceability thereof.
Based on the foregoing, we are of the opinion that, upon effectiveness of
the Registration Statement and the approval of the Agreement by the SHS
stockholders, the issuance of the Shares in accordance with the terms of the
Agreement (including compliance with all conditions of the Merger set forth
therein unless waived by the parties thereto) will have been duly authorized
and, when the Shares are issued in accordance with the terms of the Agreement
and the Registration Statement, such Shares will be validly issued, fully paid
and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Company's Registration Statement, and we consent to the use of our name under
the heading "Legal Matters" in the Proxy Statement/Prospectus constituting a
part hereof. In giving such consent we do not hereby admit that we are experts
or otherwise within the category of persons whose consent is required under
Section 7 of the Act or the rules or regulations of the Securities and Exchange
Commission thereunder.
ELIAS, MATZ, TIERNAN & HERRICK L.L.P.
By: /s/ Kenneth B. Tabach
--------------------------------------
Kenneth B. Tabach, a Partner
<PAGE>
Exhibit 23.2
Independent Auditors' Consent
We consent to the incorporation by reference in this Registration Statement on
Form S-4 of ESB Financial Corporation and the related Prospectus of our report
dated January 20, 1999, with respect to the consolidated financial statements
of ESB Financial Corporation and subsidiaries as of December 31, 1998 and 1997,
and for each of the years in the three-year period ended December 31, 1998,
which report is incorporated by reference in the Annual Report on Form 10-K
filed by ESB Financial Corporation for the year ended December 31, 1998, and to
the reference to our firm under the heading "Experts" in the Registration
Statement and the related Prospectus.
/s/ KPMG LLP
Pittsburgh, Pennsylvania
October 13, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in the Proxy Statement/Prospectus which is part of this
Registration Statement of ESB Financial Corporation on Form S-4 of our report
dated February 26, 1999 relating to the consolidated financial statements of
SHS Bancorp, Inc. as of December 31, 1998 and 1997 and for years then ended.
We also consent to the reference to us under the heading "Experts" in such
Proxy Statement/Prospectus.
/s/ S.R. Snodgrass A.C.
Wexford, PA
October 12, 1999
<PAGE>
EXHIBIT 23.4
CONSENT OF FELDMAN FINANCIAL ADVISORS, INC.
We hereby consent to the inclusion of our opinion letter to the Board of
Directors of SHS Bancorp, Inc. ("SHS Bancorp") as an Appendix to the Proxy
Statement/Prospectus relating to the proposed merger of SHS Bancorp with and
into ESB Financial Corporation contained in the Registration Statement on Form
S-4 as filed with the Securities and Exchange Commission ("SEC") on the date
hereof, and to the references to our firm and such opinion in such Proxy
Statement/Prospectus. In giving such consent, we do not admit that we come
within the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended (the "Act"), or the rules and regulations of
the SEC thereunder (the "Regulations"), nor do we admit that we are experts with
respect to any part of such Registration Statement within the meaning of the
term "experts" as used in the Act or the Regulations.
FELDMAN FINANCIAL ADVISORS, INC.
By: /s/ Trent R. Feldman
------------------------------
Trent R. Feldman
President
Washington, D.C.
October 13, 1999
<PAGE>
Exhibit 99.1
SHS BANCORP, INC.
REVOCABLE PROXY
Special Meeting of Stockholders
_______ __, 1999
This Proxy is solicited on behalf of the Board of Directors.
The undersigned, as a holder of Common Stock of SHS Bancorp, Inc. ("SHS"),
hereby appoints the Board of Directors of SHS, or any successors thereto, as
Proxies, with full powers of substitution, to represent and to vote as
designated on the reverse of this card all of the shares of Common Stock of SHS
which the undersigned is entitled to vote at the Special Meeting of Stockholders
of SHS to be held at ____________________________________, Pennsylvania on
_________ __ , 1999 at __:__ _.m., Eastern Time, or any adjournment thereof.
This Proxy may be revoked at any time before it is exercised.
Shares of Common Stock of SHS will be voted as specified. Unless otherwise
specified, this Proxy will be voted FOR the proposal to adopt the Agreement and
Plan of Reorganization, dated as of July 21, 1999, by and between ESB Financial
Corporation and SHS. If any other matter is properly presented at the Special
Meeting of Stockholders, the Proxy will be voted in accordance with the judgment
of the persons appointed as Proxies.
IMPORTANT: PLEASE DATE AND SIGN THE PROXY ON REVERSE SIDE.
<PAGE>
PLEASE MARK YOUR CHOICE LIKE THIS [X] IN BLUE OR BLACK INK
I plan to attend the
meeting
[_]
1. Proposal to adopt an Agreement and Plan of Reorganization, dated as of July
21, 1999, by and between ESB Financial Corporation ("ESB") and SHS Bancorp,
Inc. ("SHS"), and a related Agreement of Merger (together, the
"Reorganization Agreement"), pursuant to which SHS will merge into ESB and
each outstanding shares of SHS common stock, will be converted into the
right to receive, at the election of the holder, either 1.3 shares of common
stock of ESB or $17.80 in cash, subject to the election, allocation and
proration procedures set forth in the Reorganization Agreement.
FOR AGAINST ABSTAIN
[_] [_] [_]
2. In their discretion, upon any other matter that may properly come before the
Special Meeting of Stockholders or any adjournments thereof.
The Board of Directors of SHS recommends a vote FOR approval of the
Reorganization Agreement. Such votes are hereby solicited by the Board of
Directors of SHS.
Dated: _____________________________, 1999
Signature ____________________________________________
Signature ____________________________________________
Important: Please sign your name exactly as it appears hereon.
When shares are held as joint tenants, either may sign. When
signing as an attorney, executor, administrator, trustee or
guardian, add such title to your signature.
Note: If you receive more than one proxy card, please date and
sign each card and return all proxy cards in the enclosed
envelope.
<PAGE>
Exhibit 99.2
[SHS Letterhead]
________ __, 1999
To: Participants in the Employee Stock Ownership Plan of Spring Hill Savings
Bank
As described in the enclosed materials, your proxy as a shareholder of SHS
Bancorp, Inc. ("SHS") is being solicited in connection with an upcoming Special
Meeting of Stockholders of SHS, at which stockholders of SHS will consider and
vote upon a proposal to adopt an Agreement and Plan of Reorganization, dated as
of July 21, 1999 (the "Reorganization Agreement"), by and between ESB Financial
Corporation ("ESB") and SHS, pursuant to which, among other things, SHS will be
merged with and into ESB. If the merger is approved and consummated each
outstanding share of SHS common stock, will be converted into the right to
receive, at the election of the holder, either 1.3 shares of common stock of ESB
or $17.80 in cash, subject to election, allocation and proration procedures. I
hope you will take advantage of the opportunity to direct, on a confidential
basis, the manner in which shares of SHS common stock allocated to your account
under Spring Hill Savings Bank's Employee Stock Ownership Plan (the "ESOP") will
be voted.
Enclosed with this letter is a proxy statement/prospectus, which describes
the matter to be voted upon, a voting instruction ballot for the ESOP, which
will permit you to vote the shares allocated to your account under the ESOP, and
a stamped, pre-addressed return envelope. After you have reviewed the proxy
statement/prospectus, I urge you to vote your shares in the ESOP by marking,
dating, signing and returning the enclosed voting instruction ballot to Joanne
C. Weinard. Your voting instructions will remain completely confidential. As
trustee for the ESOP, I will vote as directed the shares held in the ESOP. No
other person associated with SHS or Spring Hill Savings Bank will see the
individual voting instructions.
If your voting instructions are not received, the shares allocated to your
account will be voted in the same proportion as the shares under the ESOP have
voted.
Your Board of Directors has determined the merger to be fair to and in the
best interests of SHS and its stockholders and has unanimously approved the
Reorganization Agreement and the transactions contemplated thereby. The Board
of Directors unanimously recommends that stockholders vote FOR approval of the
Reorganization Agreement.
On behalf of the Board, I thank you for your attention to this important
matter.
Sincerely,
Thomas F. Angotti
President and Chief Executive Officer
<PAGE>
SHS BANCORP, INC.
Special Meeting of Stockholders
_______ __, 1999
The undersigned, as a holder of Common Stock of SHS Bancorp, Inc. ("SHS")
pursuant to Spring Hill Savings Bank's Employee Stock Ownership Plan (the
"ESOP"), hereby instructs Thomas F. Angotti, as Trustee for the ESOP, to vote as
designated on the reverse of this card all of the shares of Common Stock of SHS
which the undersigned holds pursuant to the ESOP at the Special Meeting of
Stockholders to be held at ________________________________, Pennsylvania, on
_______ __, 1999 at __:__ _.m., Eastern Time, or any adjournment thereof.
Shares of Common Stock of SHS will be voted as specified. If you return
this ballot properly signed but do not otherwise specify, shares held by you
pursuant to the ESOP will be voted FOR the proposal to adopt the Agreement and
Plan of Reorganization, dated as of July 21, 1999, by and between ESB Financial
Corporation ("ESB") and SHS. If you do not return this ballot, shares held by
you pursuant to the ESOP will be voted in the same proportion as the shares
under the ESOP have voted.
IMPORTANT: PLEASE DATE AND SIGN THIS BALLOT ON REVERSE SIDE.
<PAGE>
PLEASE MARK YOUR CHOICE LIKE THIS [X] IN BLUE OR BLACK INK
I plan to attend the
meeting
[_]
1. Proposal to adopt an Agreement and Plan of Reorganization, dated as of July
21, 1999, by and between ESB Financial Corporation ("ESB") and SHS Bancorp,
Inc. ("SHS"), and a related Agreement of Merger (together, the
"Reorganization Agreement"), pursuant to which SHS will merge into ESB and
each outstanding shares of SHS common stock, will be converted into the
right to receive, at the election of the holder, either 1.3 shares of
common stock of ESB or $17.80 in cash, subject to the election, allocation
and proration procedures set forth in the Reorganization Agreement.
FOR AGAINST ABSTAIN
[_] [_] [_]
2. In their discretion, upon any other matter that may properly come before
the Special Meeting of Stockholders or any adjournments thereof.
The Board of Directors of SHS recommends a vote FOR approval of the
Reorganization Agreement. Such votes are hereby solicited by the Board of
Directors of SHS.
Dated: _____________________________, 1999
Signature ____________________________________________
Signature ____________________________________________
Important: Please sign your name exactly as it appears hereon.
When shares are held as joint tenants, either may sign. When
signing as an attorney, executor, administrator, trustee or
guardian, add such title to your signature.
