<PAGE>
SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement / / Confidential, for Use
of the Commission Only
(as permitted by Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
SJS BANCORP, INC.
(Name of Registrant as Specified in its Charter)
____________________________________________________________
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
---------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
---------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
---------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
---------------------------------------------------------------------
(5) Total fee paid:
---------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
<PAGE>
/X/ Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by Registration Statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$5,385
---------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
Schedule 14A
---------------------------------------------------------------------
(3) Filing Party:
SJS Bancorp, Inc.
---------------------------------------------------------------------
(4) Date Filed:
January 14, 1997
---------------------------------------------------------------------
-2-
<PAGE>
[SJS Letterhead]
March ___, 1997
Dear Fellow Stockholder:
On behalf of the Board of Directors and the management of SJS
Bancorp, Inc., I am very pleased to invite you to attend a special meeting of
the stockholders of SJS, to be held at __:00 a.m. local time, on April ___,
1997, at the _______________________________________________________,
Michigan.
The purpose of the Special Meeting is to consider and vote on a
proposal to adopt the Agreement and Plan of Merger, dated November 6, 1996,
between SJS, Shoreline Financial Corporation, and SJS Acquisition
Corporation. Under the Merger Agreement, SJS would become a wholly owned
subsidiary of Shoreline.
After the Merger, you will be entitled to receive $27 in cash for
each share of SJS Common Stock you own.
Your Board of Directors has approved the Agreement and Plan of
Merger, believes it is in the best interests of SJS and its stockholders, and
recommends that you vote FOR its approval.
We encourage you to attend the Special Meeting in person. Whether
or not you plan to attend, however, please sign and date the enclosed proxy
promptly.
Sincerely,
[signature]
Thomas G. Watson
President and Chief Executive Officer
<PAGE>
SJS BANCORP, INC.
301 State Street
St. Joseph, Michigan 49085
(616) 983-0134
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To the Shareholders of SJS Bancorp, Inc.:
A special meeting (the "Meeting") of stockholders of SJS Bancorp, Inc.
("SJS") will be held at _____________________________________________________
_______________________________, Michigan at __:00 a.m. local time, on April
___, 1997.
A proxy card and proxy statement for the Meeting are enclosed.
The Meeting is for the purpose of considering and acting upon:
1. The adoption of an Agreement and Plan of Merger, dated November 6,
1996 (the "Merger Agreement"), between SJS, Shoreline Financial Corporation,
and SJS Acquisition Corporation in substantially the form set forth in
Appendix A to the accompanying Proxy Statement, and approval of the
transactions contemplated by the Merger Agreement.
2. Such other matters as may properly come before the Meeting.
The Board of Directors of SJS has fixed the close of business on
March ___, 1997, as the record date for determination of stockholders
entitled to notice of and to vote at the meeting and any adjournment of the
meeting.
Appraisal rights are available for any and all shares of SJS. The
right of any stockholder to participate in the statutory appraisal process is
contingent upon strict compliance with the procedures and time periods set
forth in Section 262 of the Delaware General Corporation Law, a copy of which
is attached as Appendix B to the accompanying Proxy Statement.
BY ORDER OF THE BOARD OF DIRECTORS
[signature]
Thomas G. Watson
President and Chief Executive Officer
St. Joseph, Michigan
March ___, 1997
YOUR VOTE IS IMPORTANT. EVEN IF YOU PLAN TO ATTEND THE SPECIAL
MEETING, PLEASE SIGN, DATE, AND RETURN THE ENCLOSED PROXY CARD
PROMPTLY TO ENSURE YOUR VOTE IS COUNTED.
<PAGE>
Table of Contents
INTRODUCTION AND SUMMARY 1
Introduction 1
Parties to the Merger 2
Summary of Certain Aspects of the
Merger 2
Market and Dividend Information 3
Selected Financial Data 4
Selected Per Share Data 6
GENERAL MEETING INFORMATION 7
Time and Date; Record Date 7
Matters to be Considered 7
Voting By Proxy 7
Proxy Solicitation 7
Voting Rights 8
Expenses 8
Appraisal Rights 8
Proposals For Annual Meeting 9
THE MERGER 9
Background of the Merger 9
Reasons for and the Recommendation
of the Merger 11
Opinion of Financial Advisor 12
Consideration to be Received 16
SJS's Incentive Plan and Stock
Options 16
Effective Time 16
Payment for Shares 16
Conditions Precedent to the Merger
and the Possible Termination of the
Merger Agreement 17
Business of SJS Pending the Merger 20
Consolidation of the Bank 21
Regulatory Approvals 21
Material Agreements Relating to the
Merger and Interests of Certain
Persons 21
Treatment of the ESOP 22
Federal Income Tax Consequences 22
Accounting Treatment 23
SJS BANCORP, INC. 23
Description of the Business 23
Competition 41
Employees 42
Regulation 42
Description of Properties 50
Legal Proceedings 50
Beneficial Ownership of Certain
Persons 51
GENERAL INFORMATION 54
Incorporation by Reference 54
Independent Public Accountants 54
Sources of Information 54
APPENDICES
Agreement and Plan of Merger A-1
Section 262 of the Delaware Law B-1
Opinion of The Chicago Corporation C-1
Audit Report, Audited Financial
Statements as of and for periods
ended June 30, 1996, and
Management's Discussion and Analysis D-1
Financial Statements as of and for
periods ended September 30, 1996,
and Management's Discussion
and Analysis E-1
-i-
<PAGE>
PROXY STATEMENT
SJS BANCORP, INC.
301 State Street
St. Joseph, Michigan 49085
(616) 983-0134
SPECIAL MEETING OF STOCKHOLDERS
April ___, 1997
to consider a proposed merger involving
SHORELINE FINANCIAL CORPORATION
providing consideration of
$27 PER SHARE, CASH
to SJS Stockholders
INTRODUCTION AND SUMMARY
The following introduction and summary should be considered in
conjunction with the more detailed information appearing elsewhere in this
Proxy Statement.
Introduction
This Proxy Statement, which is first being sent on or about March
___, 1997, is furnished to the holders of record on March ___, 1997 (the
"Record Date"), of shares of common stock of SJS Bancorp, Inc. ("SJS"), $0.01
par value ("SJS Common Stock"), in connection with a solicitation on behalf
of the Board of Directors of SJS of proxies to be voted at the special
meeting of stockholders of SJS to be held on April ___, 1997 (the "Special
Meeting"). The purpose of the Special Meeting is to consider and vote upon
adoption of an Agreement and Plan of Merger, dated November 6, 1996 (the
"Merger Agreement"), between SJS, Shoreline Financial Corporation, a Michigan
corporation ("Shoreline"), and SJS Acquisition Corporation, a Michigan
corporation (the "MergerSub"), in substantially the form set forth in
Appendix A to this Proxy Statement.
As a result of the merger contemplated by the Merger Agreement (the
"Merger"), SJS will become a wholly owned subsidiary of Shoreline. Following
the Merger, SJS Federal Savings Bank (the "Bank") will be merged with and
into Shoreline Bank and SJS will be dissolved. The stockholders of SJS at
the effective time of the Merger (other than the stockholders who have
properly exercised appraisal rights under the Delaware General Corporation
Law (the "Delaware Law")) will be entitled to receive $27 in cash for each
share of SJS Common Stock (See "THE MERGER -- Consideration to be Received"
below). After the Merger, SJS stockholders will have no continuing
stockholder relationship with SJS, Shoreline, or MergerSub.
YOUR BOARD OF DIRECTORS RECOMMENDS THAT SJS STOCKHOLDERS
VOTE FOR ADOPTION OF THE AGREEMENT AND PLAN OF MERGER.
<PAGE>
Parties to the Merger
SJS Bancorp, Inc. SJS Bancorp, Inc. is a Delaware corporation that
was organized in 1994 by the Bank for the purpose of becoming the savings and
loan holding company of the Bank. SJS owns all of the outstanding stock of
the Bank issued on February 15, 1995 in connection with the Bank's conversion
from the mutual to the stock form of organization. The Bank, SJS's only
operating subsidiary, was originally chartered under the laws of the state of
Michigan in 1916 as St. Joseph Building and Loan Association and converted to
a federally chartered mutual savings and loan association in 1985. In 1988,
the Bank amended its charter to become a federal savings bank under its
current name. (See "SJS BANCORP" below).
The principal executive offices of SJS are located at 301 State
Street, St. Joseph, Michigan 49085. The telephone number at that address is
(616) 983-0134.
Shoreline Financial Corporation and SJS Acquisition Corporation.
Shoreline Financial Corporation is a bank holding company headquartered at
823 Riverview Dr., Benton Harbor, Michigan, 49023, (616) 927-2251.
Shoreline, as of September 30, 1996, had consolidated assets of $708 million,
deposits of $615 million, and shareholders' equity of $67 million.
Shoreline's business is concentrated exclusively in the commercial banking
industry segment. Shoreline Bank, Shoreline's wholly owned subsidiary, offers
individuals, businesses, institutions and government agencies a full range of
commercial banking services.
The principal markets for Shoreline's financial services are the
Southwestern Michigan communities in which Shoreline Bank offices are located
and the areas immediately surrounding these communities. Shoreline and
Shoreline Bank serve these markets through 13 offices located in and around
these communities. Shoreline and Shoreline Bank employed approximately 320
persons as of December 31, 1995.
SJS Acquisition Corporation ("MergerSub") is a Michigan corporation
that is wholly owned by Shoreline. MergerSub was formed specifically for the
purpose of the acquisition of SJS by Shoreline and has the same address as
Shoreline.
Summary of Certain Aspects of the Merger
Directors' Approval and Recommendation of the Merger. At a Board
of Directors meeting held on November 6, 1996, after considering the terms
and conditions of the Merger Agreement and obtaining the advice of its
financial advisor, the SJS Board of Directors unanimously approved the Merger
Agreement. The SJS Board of Directors believes that the consideration
offered pursuant to the transaction is fair to the stockholders of SJS and,
accordingly, recommends that stockholders of SJS vote "FOR" approval of the
Merger Agreement. (For a discussion of the circumstances surrounding the
Merger and the factors considered by the SJS Board of Directors in making its
recommendation, see "THE MERGER -- Background of the Merger" and "--Reasons
for and the Recommendation of the Merger").
Interests of Insiders. Certain members of SJS's management and
SJS's Board of Directors have certain interests in the Merger that are in
addition to their interests as stockholders of SJS generally. SJS maintains
a 1996 Stock Option and Incentive Plan (the "Incentive Plan") and Management
Recognition Plan (the "Plan") under which directors and executive officer
were granted options and restricted stock awards in February 1996. Upon
consummation of the Merger, each option and restricted stock award granted in
February 1996 will become 100% vested. Unless exercised, each option granted
under the Incentive Plan issued and outstanding immediately prior to the
Effective Time (a "Stock Option") will be converted into the right to receive
$7.375 (the difference between the $27 Merger Consideration and the $19.625
exercise price of the options). In addition, each individual holding
restricted stock will be entitled to $27 for each share of restricted stock
held. At December 31, 1996, directors and executive officers (16 persons) of
SJS held in the aggregate 34,422 shares of restricted stock and 79,509 Stock
Options entitling them to $929,394 and $586,379, respectively, upon
consummation of the Merger. Moreover, certain member of SJS's management
have certain rights under employment agreements and the ESOP (as defined
herein). (See "THE MERGER -- Material Agreements Relating to the Merger and
Interests of Certain Persons").
-2-
<PAGE>
Consideration to be Received in the Merger. The stockholders of
SJS on the effective date of the Merger (other than the stockholders who have
properly exercised appraisal rights under the Delaware Law) will become
entitled to receive $27 in cash for each share of SJS Common Stock (See "THE
MERGER -- Consideration to be Received" below). SJS stockholders will have
no continuing stockholder relationship with SJS, Shoreline, or MergerSub.
Opinion of Financial Adviser. SJS's financial adviser, ABN-AMRO
Chicago Corporation ("The Chicago Corporation"), has rendered an opinion to
SJS's board of directors, dated as of November 6, 1996, which was
subsequently confirmed and reissued as of the date of the mailing of this
proxy statement, to the effect that (as of such date) the consideration to be
received in the Merger is fair to SJS stockholders from a financial point of
view. This opinion is attached in full as Appendix C to this Proxy
Statement. SJS stockholders are urged to read that opinion in its entirety
for a description of the procedures followed, assumptions made, matters
considered, and qualifications on the review undertaken by The Chicago
Corporation (See "THE MERGER -- Opinion of Financial Adviser" below).
Vote Required. The affirmative vote of the holders of a majority
of the outstanding shares of SJS Common Stock entitled to vote as of the
Record Date is required to adopt the Merger Agreement. As of the Record
Date, SJS's directors and executive officers and their affiliates
beneficially owned ___ percent of the outstanding SJS Common Stock. As of
the Record Date, Shoreline's directors and executive officers and their
affiliates held 1,750 shares/___ percent of the outstanding SJS Common Stock.
No vote of the shareholders of Shoreline is required to adopt the Merger
Agreement (See "GENERAL MEETING INFORMATION" below).
Appraisal Rights. Holders of SJS Common Stock are entitled to
statutory rights of appraisal pursuant to Section 262 of the Delaware Law
(See "GENERAL MEETING INFORMATION -- Appraisal Rights" below).
Regulatory Approvals. Consummation of the Merger is subject to
approval of the Board of Governors of the Federal Reserve System ("Federal
Reserve Board") and the Office of Thrift Supervision ("OTS") (collectively,
the "Regulatory Approvals"). The Merger may not be consummated for a period
of 30 days after receipt of the Federal Reserve Board's final approval unless
the Federal Reserve Board has not received any adverse comment from the
United States Department of Justice during the first 15 days following final
approval, in which case the Merger may be consummated on or after the 15th
day after final approval by the Federal Reserve Board. (See "THE MERGER --
Regulatory Approvals" below).
Termination Fee. SJS must pay Shoreline a termination fee of
$2,000,000 (plus reasonable fees and expenses not to exceed $250,000) if
Shoreline's Board of Directors terminates the Merger Agreement as a result of
(i) a third party making an Acquisition Proposal (as defined below), (ii) the
SJS Board of Directors changes its recommendation of the Merger, or (iii) a
third party acquires a certain amount of control over SJS. Under certain
other circumstances, SJS and Shoreline each have obligations to pay the other
$750,000 (plus reasonable fees and expenses not to exceed $250,000) upon
termination of the Merger. (See "THE MERGER -- Conditions Precedent to the
Merger and Possible Termination of the Merger Agreement" below).
Market and Dividend Information
SJS Common Stock is traded on The Nasdaq SmallCap Market. SJS
Common Stock was held of record by __________ shareholders as of the Record
Date. The following table sets forth, from SJS's inception in
-3-
<PAGE>
February 1995 to present, the range of high and low closing prices, as
reported by the Nasdaq Stock Market. The quotations reported in the
following table reflect inter-dealer prices, without retail mark-up,
mark-down or commissions, and may not reflect actual transactions. The table
also shows dividends declared, by quarter, from February 1995 to present.
Closing Price Dividends
Quarter-ended High Low Declared
- ------------- ----------------- ----------
1995
- ----
March 31 $11.75 $10.75 $ --
June 30 15.25 11.75 --
September 30 18.25 14.75 .10
December 31 19.75 18.00 .10
1996
- ----
March 31 $20.25 $18.50 $.10
June 30 20.75 18.50 .10
September 30 21.50 19.75 .11
December 31 25.88 20.75 .11
OTS regulations impose various restrictions or requirements on the ability of
the Bank to pay dividends. (See "SJS BANCORP, INC.--Description of Business
- -- Regulation - Limitation on Dividends and on Other Capital Distributions"
below).
On November 6, 1996, the day preceding the public announcement of
the Merger, SJS Common Stock traded at $22.75. If the Merger is adopted by
the SJS stockholders and the closing occurs, SJS stockholders as of the
Effective Time will be entitled to receive $27 per share.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following financial data does not purport to be complete and is
qualified in its entirety by reference to the more detailed financial
information contained elsewhere herein. In the opinion of SJS management, all
adjustments necessary for a fair presentation of such financial data have
been included. All such adjustments are of a normal recurring nature.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets................. $151,897 $129,513 $118,719 $127,366 $130,627
Loans, net................... 98,862 71,818 52,538 50,237 48,127
Interest-earning deposits.... 190 190 190 387 1,278
Mortgage-backed securities... 36,211 36,065 42,336 60,615 63,876
Investment securities........ 9,298 14,027 11,842 6,304 4,810
Deposits..................... 107,928 106,294 108,847 108,387 109,092
Long-term borrowings......... 23,750 4,500 -- 7,033 11,220
Total shareholders' equity... 16,910 17,017 7,591 8,986 7,574
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In Thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income........ $ 10,428 $ 8,488 $ 7,822 $ 8,977 $ 10,799
Total interest expense....... 6,465 4,993 5,316 6,262 8,070
-------- -------- -------- -------- --------
Net interest income.......... 3,963 3,495 2,506 2,715 2,729
Provision (credit) for
loan losses................ 175 (38) (48) (48) (15)
-------- -------- -------- -------- --------
Net interest income after
provision (credit) for
loan losses................ 3,788 3,533 2,554 2,763 2,744
Fees and service charges..... 431 352 348 314 307
Gain on sales of loans,
mortgage-backed securities
and investment securities.. 15 7 482 806 521
Other noninterest income..... 110 85 72 65 86
-------- -------- -------- -------- --------
Total noninterest income..... 556 444 902 1,185 914
Total noninterest expense.... 3,239 3,000 2,852 2,774 2,739
-------- -------- -------- -------- --------
Income before Federal income
tax expense and extraordinary
item....................... 1,105 977 604 1,174 919
Federal income tax expense... 262 288 220 353 249
-------- -------- -------- -------- --------
Income before extraordinary
item....................... 843 689 384 821 670
Debt extinguishment premium,
net of tax................. -- -- (307) -- --
-------- -------- -------- -------- --------
Net income................... $ 843 $ 689 $ 77 $ 821 $ 670
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Earnings per common and
common equivalent share
(1)...................... $ 0.91 $ 0.38 N/A N/A N/A
Earnings per common share -
assuming full dilution (1). $ 0.91 $ 0.38 N/A N/A N/A
</TABLE>
- ------------------------
(1) Subsequent to the Bank's conversion from mutual to stock form on
February 15, 1995. (See Note 2 of the Consolidated Financial Statements
in Appendix D.)
-5-
<PAGE>
Selected Financial Ratios and Other Data:
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on assets (ratio of
net income to average
total assets)............ 0.59% 0.56% 0.06% 0.64% 0.51%
Return on shareholders'
equity (ratio of net income
to average equity)(1).... 4.73 5.82 0.91 10.29 9.29
Average interest rate spread
during period............ 2.38 2.60 1.90 1.93 1.89
Net interest margin(2)..... 2.90 2.94 2.12 2.19 2.14
Ratio of operating expense
to average total assets.. 2.26 2.32 2.31 2.16 2.07
Ratio of average interest-
earning assets to average
interest-bearing
liabilities.............. 1.11x 1.08x 1.05x 1.05x 1.04x
Asset Quality Ratios at End of Period:
Non-performing assets to
total assets............. 0.28% 0.20% 0.06% 0.09% 0.26%
Allowance for loan losses to
non-performing loans..... 208.39 834.33 1,079.25 953.40 405.25
Allowance for loan losses to
loans receivable, net.... 0.65 0.77 1.09 1.16 1.22
Capital Ratios:
Shareholders' equity to total
assets at end of period.. 11.50% 13.14% 6.39% 7.05% 5.80%
Average shareholders' equity
to average assets........ 12.46 8.93 6.72 6.45 5.45
Other Data:
Number of full-service
offices.................. 4 4 4 4 4
</TABLE>
- ------------------------
(1) Average equity does not include unrealized gain/loss on securities.
(2) Net interest income divided by average interest-earning assets.
Selected Per Share Data
As of and for the As of and for the
year ended period ended
June 30, 1996 Dec. 31, 1996
------------------ ------------------
Book Value Per Share $17.77 $17.56
Dividend Per Share $ .40 $ .22
Net Income (Loss) Per
Share - Primary $ .91 $(0.16)
Net Income (Loss) Per
Share - Fully diluted $ .91 $(0.16)
-6-
<PAGE>
GENERAL MEETING INFORMATION
Time and Date; Record Date
The Special Meeting will be held on April ___, 1997, at ___ a.m.,
local time, at
, Michigan. The Board of Directors of SJS has
fixed March ___, 1997, as the Record Date. Only stockholders of record of
SJS Common Stock at the close of business on the Record Date are entitled to
notice of and to vote at the Special Meeting. As of the Record Date, there
were 917,622 shares SJS Common Stock outstanding and entitled to be voted at
the Special Meeting.
Matters to be Considered
At the Special Meeting, the holders of SJS Common Stock will be
asked to adopt the Merger Agreement.
Voting by Proxy
If a SJS stockholder properly executes and returns a proxy in the
form distributed by SJS, the proxies named will vote the shares represented
by that proxy at the Special Meeting. Where a stockholder specifies a
choice, the proxy will be voted in accordance with the stockholder's
specification. If no specific direction is given, the proxies will vote the
shares in favor of adoption of the Merger Agreement. If other matters are
presented, the shares for which proxies have been received will be voted in
accordance with the discretion of the proxies.
A stockholder may revoke a proxy by: (i) filing with the Secretary
of SJS at or before the Special Meeting a written notice of revocation
bearing a later date than the proxy, (ii) duly executing a subsequent proxy
relating to the same shares and delivering it to the Secretary of SJS at or
before the Special Meeting, or (iii) attending the Special Meeting and voting
in person (although attendance at the Meeting will not in and of itself
constitute revocation of a proxy). Any written notice revoking a proxy
should be delivered to Irma R. Wedde, Senior Vice President and Secretary,
SJS Bancorp, Inc., 301 State Street, St. Joseph, Michigan 49085.
Proxy Solicitation
The board of directors, officers, and employees of SJS will
initially solicit proxies by mail. If they deem it advisable, directors,
officers, and employees of SJS may also solicit proxies in person by
telephone or by other forms of communication without additional compensation,
except for reimbursement of reasonable out-of-pocket expenses incurred in
connection with such solicitation. In addition, nominees and other
fiduciaries may also solicit proxies. Such persons may, at the request of
SJS's management, mail material to or otherwise communicate with the
beneficial owners of shares held by them. Although it does not presently
plan to do so, SJS's management may request that directors, officers, and
employees of Shoreline and its subsidiaries assist in the proxy solicitation.
If management makes such a request, such persons may also solicit proxies of
SJS stockholders by mail, telephone, and personal interview without
additional compensation, except for reimbursement of reasonable out-of-pocket
expenses incurred in connection with such solicitation. All expenses of
solicitation of proxies will be paid by SJS.
The affirmative vote of a majority of the shares represented at the
Special Meeting may authorize the adjournment of the Special Meeting;
provided, however, that no proxy which is voted against the Merger will be
voted in favor of adjournment to solicit further proxies for the Merger.
-7-
<PAGE>
Voting Rights
Each holder of record of SJS Common Stock on the Record Date will be
entitled to one vote for each share registered in his, her, or its name on
each matter presented for a vote of the stockholders at the Special Meeting.
The Merger must be approved by the affirmative vote of the holders of a
majority of the shares of SJS Common Stock outstanding as of the Record Date.
For the purpose of counting votes on this proposal, failures to vote,
abstentions and broker non-votes will have the same effect as votes against
approval of the Merger Agreement.
Expenses
SJS will pay all expenses associated with printing and mailing this
Proxy Statement. Except in the case of certain breaches of the Merger
Agreement by Shoreline or SJS, if the Merger Agreement is terminated before
the Merger becomes effective, Shoreline and SJS each will pay its own fees
and expenses incident to preparing for, entering into and carrying out the
Merger Agreement and procuring any necessary approvals, including fees and
expenses of its own legal counsel, accountants and other experts. (See "THE
MERGER -- Conditions Precedent to the Merger and Possible Termination of the
Merger Agreement" below).
Appraisal Rights
Pursuant to Section 262 of the Delaware Law (a copy of which is
attached hereto as Appendix B), a holder of SJS Common Stock who complies
with the statutory provisions thereof will be entitled to an appraisal by the
Delaware Court of Chancery of the fair value of his or her SJS Common Stock
and to receive payment of such amount in lieu of $27 per share in cash
provided for in the Merger Agreement. Such amount may be more or less than
$27 per share. Any holder of SJS Common Stock desiring to exercise rights of
appraisal should refer to the statute in its entirety and should consult with
legal counsel prior to taking any action to ensure that such holder complies
strictly with the applicable statutory provisions.
To exercise appraisal rights, a holder of SJS Common Stock must:
(i) hold shares of SJS Common Stock on the date of the making of a
demand for appraisal of such shares and continuously hold such shares
through the effective time of the Merger;
(ii) deliver to SJS written demand for appraisal of his or her
shares before the vote on the Merger is taken; and
(iii) not have voted in favor of the Merger.
All former SJS stockholders entitled to appraisal rights will be
notified of the Merger within 10 days after the Effective Time (as defined
below). Within 120 days after the Effective Time, any stockholder who has
met such requirements, or SJS, may file a petition with the Delaware Court of
Chancery seeking a determination of the value of the stock of all such
stockholders. The Court of Chancery must hold a hearing and determine the
fair value (exclusive of any element of value arising from the Merger),
together with a fair rate of interest to be paid on the fair value. SJS (or
its successor) will pay the fair value of the stock held by stockholders
seeking appraisal and the interest determined by the Court. Notwithstanding
the foregoing, at any time within 60 days after the Effective Time, any
stockholder will have the right to withdraw his or her demand for appraisal
rights and accept the terms offered in the Merger.
-8-
<PAGE>
The failure of a holder of SJS Common Stock to vote against the
proposal to adopt the Merger Agreement will not constitute a waiver of such
holder's appraisal rights under the Delaware Law. A vote against adoption of
the Merger Agreement will not satisfy the obligation of a stockholder seeking
an appraisal to give notice pursuant to Section 262 of the Delaware Law.
Proposals For Annual Meeting
In the event that SJS stockholders approve the Merger Agreement and
the Merger is consummated, there will be no annual meeting of SJS
stockholders following SJS's current fiscal year. If the Merger is not
consummated, proposals of SJS's stockholders intended to be presented at the
annual meeting of stockholders in 1997 must be received by SJS for
consideration for inclusion in its proxy statement and form of proxy relating
to that meeting before June 2, 1997.
THE MERGER
The following discussion summarizes the material provisions of the
Merger Agreement and aspects of the Merger. This summary discussion is not
intended to be a complete description of the Merger and is qualified in its
entirety by reference to the Merger Agreement. The Merger Agreement is
attached as Appendix A and incorporated by reference in this Proxy Statement.
Background of the Merger
SJS. Since the conversion of the Bank, the principal subsidiary of
SJS, from the mutual to stock form of organization in February 1995, SJS has
continuously reviewed its strategic alternatives in light of its relatively
small size, the increasing consolidation of the financial services industry,
shareholder activism, and other relevant considerations.
The initial public stock offering by SJS in connection with the
Bank's mutual-to-stock conversion substantially increased SJS's
capitalization, thereby making it increasingly difficult to maintain an
acceptable level of return on equity. Beginning in June 1995, in light of
SJS's modest return on equity and substantial prices being paid in numerous
bank and thrift mergers, a substantial stockholder of SJS began to urge SJS
to engage a financial advisor to evaluate the possibility of an acquisition
of SJS at a price above the prevailing market price for SJS's stock. The SJS
Board was aware of these recommendations but, consistent with its fiduciary
duties to SJS and all of its stockholders and in light of applicable federal
policies which generally prohibited SJS from taking any action in connection
with a change of control of SJS during the first year after it converted from
mutual to stock form (i.e., until February 15, 1996), did not respond to the
stockholder's demands.
In September 1995, this stockholder commenced a proxy contest for
the purpose of replacing two incumbent directors of the Board of Directors of
SJS. The proxy contest was successful and two of this stockholder's nominees
were elected to the SJS Board.
In June 1996, the Board of Directors of SJS interviewed several
investment banking firms to assist it in its analysis of strategic
alternatives to maximize shareholder value. On July 8, 1996, the Board of
Directors of SJS formally retained The Chicago Corporation as its financial
advisor to assist SJS in analyzing its strategic alternatives.
Coincidentally, on July 15, 1996, SJS received an unsolicited letter from a
financial institution expressing an interest in a possible merger between the
two institutions ("Indication of Interest"). The institution which sent the
unsolicited Indication of Interest to the SJS Board explicitly stated that it
would not participate in a competitive sale of SJS.
At the July 30, 1996 meeting of the SJS Board, representatives of
The Chicago Corporation presented an overview of several strategic
alternatives available to SJS, including comparative estimates of potential
returns to stockholders of SJS if it were to remain an independent
institution or merge with a larger institution. The Chicago Corporation also
performed a preliminary analysis of the consideration proposed in the
unsolicited Indication of Interest received by SJS on July 15, 1996. The
Chicago Corporation and the SJS Board discussed whether SJS should remain a
small independent savings institution and, if so, whether SJS should modify
-9-
<PAGE>
its stock repurchase and/or dividend programs to boost its return on equity
and also how SJS might increase its net interest income. The Board also
discussed whether SJS should merge with a larger institution and, if SJS were
to seek a merger, how SJS would develop and evaluate merger opportunities.
The Chicago Corporation informed the SJS Board, based on its analysis of SJS,
that a sale of SJS was likely to produce the highest shareholder returns and
that such returns could not be reasonably expected to be obtained from
improvements in its capital structure or operations as an independent
institution in the near future. The Chicago Corporation also informed the
SJS Board that the consideration proposed in the unsolicited Indication of
Interest was fair from a financial point of view; however, it was not
"compelling." At this point in the meeting extensive deliberations among the
SJS Board and its advisors occurred, including a discussion as to the
consequences a solicitation of acquisition proposals from other institutions
might have on the unsolicited Indication of Interest previously received.
Based on The Chicago Corporation's report and the SJS Board's further
deliberations, the SJS Board authorized The Chicago Corporation to contact
seven institutions (exclusive of the institution which had sent SJS the
unsolicited Indication of Interest), each of which had previously indicated
an interest in an affiliation with SJS.
At the request of the SJS Board, The Chicago Corporation provided
each of the institutions, excluding the institution which submitted the
unsolicited Indication of Interest, with an informational package (subsequent
to the execution and return of a confidentiality agreement) to enable them to
perform an initial analysis and evaluation of SJS. All seven of the
institutions (collectively, the "Bidders") responded by August 16, 1996 with
preliminary proposals. The institution which had submitted the unsolicited
Indication of Interest to the SJS Board on July 15, 1996 declined The Chicago
Corporation's offer of the informational package, thereby effectively
withdrawing from the process.
At the August 20, 1996 meeting of the SJS Board, the preliminary
proposals submitted by the Bidders were presented by The Chicago Corporation
to the SJS Board and discussed at length. With the exception of one Bidder,
the consideration offered by the Bidders was generally all in a comparable
range, however, the form of consideration and anticipated future operations
and structure of SJS post-acquisition varied. The Chicago Corporation, at
the direction of the SJS Board, then engaged in preliminary discussions with
the Bidders to permit clarification and revision of preliminary proposals.
The Chicago Corporation advised the Bidder whose consideration
offered in its preliminary proposal was out of the range of consideration
offered by the other Bidders, that it would need to increase the
consideration offered in its preliminary proposal in order to be competitive
with the other Bidders and in order to be considered as a potential merger
candidate with SJS, at which time this Bidder elected to withdraw from the
process. A second Bidder also elected to withdraw from the process at this
time. The remaining five Bidders thereafter submitted requests for
additional information which was prepared by The Chicago Corporation and SJS
and distributed to these Bidders on September 6, 1996. Shortly thereafter,
four of the five Bidders who had requested additional information, one of
which was Shoreline, expressed an interest in pursuing a transaction and
conducted off-site due diligence of SJS, including meetings with management
of SJS. Following due diligence and further negotiations and discussions
with The Chicago Corporation and SJS, each of these Bidders put forth a
revised proposal in connection with the possible acquisition of SJS. The
Chicago Corporation then prepared and forwarded to each member of the SJS
Board information relating to the operations, and, where applicable, common
stock of the four remaining Bidders.
The SJS Board met on October 15, 1996 to discuss the four revised
proposals submitted by the remaining Bidders. One of the revised proposals
was appreciably lower than the others and therefore was removed from
consideration by the SJS Board. The three other revised proposals were
similar in price, but structured differently, including all stock and a
combination of cash and stock consideration, and despite extensive
deliberation by the SJS Board, no consensus with respect to a particular
proposal was reached by the Board. The SJS Board instructed The Chicago
Corporation to contact the three remaining Bidders to elicit their last and
best proposal ("Final Proposals"). On October 18, 1996, two of the Bidders,
one of which was Shoreline, submitted Final Proposals to The Chicago
Corporation. The third Bidder indicated that it would not be in a position
to respond to SJS's request for a Final Proposal for 30 days. The Chicago
Corporation informed the SJS Board of the Final Proposals and of the response
-10-
<PAGE>
of the third Bidder on October 18, 1996, at which time the SJS Board voted to
pursue a merger with Shoreline, based on its Final Proposal of $27 per share,
in cash, which was the highest proposal received. Subsequent discussions and
negotiations between Shoreline, Shoreline's legal and financial advisors,
SJS, SJS's legal and financial advisors, and additional on-site due diligence
by Shoreline resulted in a formal offer by Shoreline for SJS, as set forth in
the Merger Agreement.
Reasons for and the Recommendation of the Merger
SJS's Board of Directors believes that the terms of the Merger
Agreement, which are the product of arm's length negotiations between
representatives of Shoreline and SJS, are fair and in the best interests of
SJS and its stockholders. In the course of reaching its determination, the
Board of Directors consulted with legal counsel with respect to its legal
duties, the terms of the Merger Agreement and the issues related thereto;
with its financial advisor with respect to the financial aspects and fairness
of the transaction; and with senior management regarding, among other things,
operational matters.
In reaching its determination to approve the Merger Agreement,
SJS's Board of Directors considered all factors it deemed material, which
included the following:
(i) The Board analyzed information with respect to the
financial condition, results of operations, cash flow, businesses,
and prospects of SJS. In this regard, the Board analyzed the
options of selling SJS or continuing on a stand-alone basis. All of
the indications of interest and proposals received throughout the
process, beginning with and including the unsolicited indication of
interest, equaled or exceeded the values which The Chicago
Corporation concluded on July 30, 1996 would be fair values for the
Company.
(ii) The Board considered the written opinion of The Chicago
Corporation that, as of November 6, 1996, the Merger Consideration
to be received by holders of SJS Common Stock pursuant to the
Merger Agreement was fair to stockholders from a financial point of
view (See "-- Opinion of Financial Advisor" below).
(iii) The Board considered the current operating
environment, including, but not limited to, the continued
consolidation and increasing competition in the banking and
financial services industries, the prospect for further changes in
these industries, the uncertainty pertaining to future federal
regulatory agency consolidation, and the importance of being able
to capitalize on developing opportunities in these industries.
This information had been periodically reviewed by the Board at its
regular meetings in the months following the conversion and was
also discussed between the Board and various advisors.
(iv) The Board considered the other terms of the Merger
Agreement and exhibits, including the taxable nature of the Merger
Consideration.
(v) The Board considered the detailed financial analyses, pro
forma and other information with respect to SJS and Shoreline
discussed by The Chicago Corporation, as well as the Board's own
knowledge of SJS, Shoreline, and their respective businesses. In
this regard, the latest publicly-available financial and other
information for SJS and Shoreline were analyzed, including a
comparison to publicly-available financial and other information
for other similar savings institutions.
(vi) On July 30, 1996 The Chicago Corporation presented its
analysis of the Company's strategic alternatives including
comparative estimates of potential returns to stockholders of SJS
if it were to remain an independent institution or to sell control
to another institution. The Chicago Corporation concluded that
-11-
<PAGE>
SJS's then current stock price reflected the approximate present
value of the Company as a stand alone institution under any
reasonably attainable operating strategy and assumptions with
respect to operations. The range of values which could reasonably
be expected under a sale of control, however, appeared to be
materially higher. These expectations were confirmed by
indications of interest subsequently received from prospective
acquirors.
(vii) The Board considered the likelihood of the Merger
being approved by the appropriate regulatory authorities, including
factors such as market share analyses, Shoreline's Community
Reinvestment Act rating at that time and the estimated pro forma
financial impact of the Merger on Shoreline. The Board considered
information presented by counsel to Shoreline as well as counsel to
SJS specifically with regard to federal regulatory viewpoints
concerning potential anti-competitive effects of the Merger (See
"-- Regulatory Approvals" below).
(viii) The Board considered the ability of Shoreline to pay
the aggregate Merger Consideration. The Board reviewed Shoreline's
liquidity and capital position as reflected in Shoreline's latest
shareholder reports in evaluating the ability of Shoreline to pay
the aggregate Merger Consideration.
(ix) The Board considered the fact that the Merger Agreement
prohibits SJS from initiating, soliciting, or encouraging
discussion with third parties relating to alternative transactions
and requires the payment of a termination fee of $2,000,000 to
Shoreline in certain events, and the fact that Shoreline required
such provisions as a condition to entering into the Merger
Agreement. The Board also considered that the Merger Consideration
represented the highest price per share offered by the parties who
expressed interest in the acquisition of SJS.
The foregoing discussion of the information and factors considered
by the Board is not intended to be exhaustive, but constitutes the material
factors considered by the Board. In reaching its determination to approve
and recommend the Merger Agreement, the Board did not assign any relative or
specific weights to the foregoing factors, and individual directors may have
weighed factors differently. After deliberating with respect to the Merger
and the other transactions contemplated by the Merger Agreement, considering
among other things, the matters discussed above and the opinion of The
Chicago Corporation referred to above, the Board unanimously approved and
adopted the Merger Agreement and the transactions contemplated thereby as
being in the best interests of SJS and its stockholders.
-12-
<PAGE>
FOR THE REASONS SET FORTH ABOVE, THE BOARD HAS UNANIMOUSLY APPROVED
THE MERGER AGREEMENT AS ADVISABLE AND IN THE BEST INTERESTS OF SJS AND ITS
STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS OF SJS VOTE FOR THE
APPROVAL OF THE MERGER AGREEMENT.
Opinion of Financial Advisor
In July 1996, The Chicago Corporation was retained by SJS to
evaluate SJS's strategic alternatives and, in certain circumstances, to act
as its financial advisor in connection with its ongoing consideration and/or
implementation of such alternatives. The Chicago Corporation, as part of its
investment banking businesses, is continuously engaged in the evaluation of
business and securities in connection with mergers and acquisitions,
negotiated underwritings, and distributions of listed and unlisted
securities. The Chicago Corporation is familiar with the market for common
stocks of publicly-traded midwest-based banks, thrifts, and bank and thrift
holding companies. The Board selected The Chicago Corporation on the basis
of the firm's reputation and its experience and expertise in the business, as
well as its experience and expertise in transactions similar to the Merger.
On January 2, 1997, The Chicago Corporation was merged with ABN AMRO
Securities, Inc. The resulting company is called ABN AMRO Chicago
Corporation.
The Chicago Corporation participated with the management of SJS in
negotiating the terms of the Merger. Representatives of The Chicago
Corporation attended meetings of the Board in connection with the evaluation
of the Merger, including the meeting held on November 6, 1996 at which time
the Merger was approved. At such meeting, a representative of The Chicago
Corporation made an oral presentation to the Board and reviewed with the
directors the various aspects of the Merger, including the financial terms
and conditions thereof and comparisons to recent transactions involving other
thrift merger transactions.
At the November 6, 1996 meeting of the Board, The Chicago
Corporation rendered its oral opinion to the effect that, as of that date,
the Merger Consideration was fair, from a financial point of view, to the
holders of SJS Common Stock. In addition, The Chicago Corporation has
delivered its written opinion to the Board as of November 6, 1996 and on the
date of this Proxy Statement stating that, as of November 6, 1996 and on the
date of this Proxy Statement, the Merger Consideration is fair, from a
financial point of view, to the holders of SJS Common Stock. No limitations
were imposed by the Board upon The Chicago Corporation with respect to the
investigations made or procedures followed by it in rendering its opinion.
The Chicago Corporation has consented to the inclusion herein of the summary
of its opinion to the Board and to the reference to the entire opinion
attached hereto as Appendix C-1.
The full text of the opinion of The Chicago Corporation, updated as
of the date of this Proxy Statement, which sets forth certain assumptions
made, matters considered and limitations on the reviews undertaken, is
attached as Appendix C-1 to this Proxy Statement and should be read in its
entirety. The summary of the opinion of The Chicago Corporation set forth in
this Proxy Statement is qualified in its entirety by reference to the
opinion.
In arriving at its opinion, The Chicago Corporation reviewed, among
other things, the Merger Agreement together with exhibits and schedules
thereto, certain publicly-available information relating to the business,
financial condition and operations of SJS and Shoreline as well as certain
other non-public information, primarily financial in nature, furnished to it
by SJS and Shoreline relating to their respective businesses, earnings,
assets, financial forecasts and prospects. The Chicago Corporation held
discussions with members of senior management of SJS and Shoreline concerning
their respective businesses, earnings, assets, financial forecasts and
prospects. The Chicago Corporation also reviewed certain publicly available
information concerning the trading of, and the trading market for, SJS Common
Stock and Shoreline Common Stock and certain publicly available information
concerning comparable companies and transactions, all as set forth in its
opinion.
-13-
<PAGE>
In rendering its opinion, The Chicago Corporation assumed and
relied upon the accuracy and completeness of the financial information
provided to it by SJS and Shoreline and obtained by it from public sources.
The Chicago Corporation was not engaged to and did not conduct a physical
inspection of any of the assets, properties or facilities of either SJS or
Shoreline, and was not engaged to do and has not made, obtained or been
furnished with any independent evaluation or appraisal of any such assets,
properties or facilities or any of the liabilities of SJS or Shoreline. The
Chicago Corporation has also assumed that all of the conditions to the Merger
as set forth in the Merger Agreement would be satisfied on a timely basis in
the manner contemplated by the Merger Agreement. No limitations were imposed
by SJS upon The Chicago Corporation with respect to the scope of its
investigation nor were any specific instructions given to The Chicago
Corporation in connection with its opinion. Furthermore, the Merger
Consideration was not determined by The Chicago Corporation, but rather was
proposed by Shoreline in connection with the process described under "THE
MERGER - Background of the Merger" above.
In connection with rendering its opinion dated November 6, 1996,
The Chicago Corporation considered a variety of financial analyses, which are
summarized below. The Chicago Corporation's analyses must be considered as a
whole and selecting portions of such analyses and of the factors considered
by The Chicago Corporation without considering all such analyses and factors
may create an incomplete view of the analytical process underlying its
opinion. In its analyses, The Chicago Corporation made numerous assumptions
with respect to industry performance, business and economic conditions, and
other matters. Any estimates contained in The Chicago Corporation's analyses
are not necessarily indicative of future results or values, which may be
significantly more or less favorable than such estimates.
The following is a summary of the material analyses considered by
The Chicago Corporation in connection with its opinion dated November 6,
1996.
Comparison with Selected Companies. The Chicago Corporation
compared the financial performance and stock market valuation of SJS with
corresponding data for publicly-traded thrifts in Michigan, Ohio and Indiana
with assets between $100 million and $300 million, which consisted of the
following selected companies: ASB Financial Corp.; Bank West Financial Corp.;
CB Bancorp, Inc.; Community Bank Shares; Enterprise Federal Bancorp; FFW
Corp.; Fidelity Federal Bancorp; Fidelity Financial of Ohio; 1ST Bancorp;
First Federal Bancorp, Inc.; First Franklin Corporation; Glenway Financial
Corp; LSB Financial Corp.; Marion Capital Holdings; MFB Corp.; Milton Federal
Financial Corp.; Northeast Indiana Bancorp; OHSL Financial Corp.; Peoples
Bancorp; Potters Financial Corp.; Suburban Bancorporation, Inc.; Winton
Financial Corp.; and Wood Bancorp, Inc. At the time, none of the companies
listed above had announced a merger transaction or disclosed a possible
interest in pursing a possible merger transaction which would have
significantly affected its stock market valuation. The companies were
selected for the relative similarity in size, location outside of major
metropolitan marketplaces, but in some cases, significant market positions
within their marketplaces. The Chicago Corporation presented with respect to
these companies operating statistics and public market valuation statistics
to illustrate how SJS compared to these companies. With respect to market
statistics, it is The Chicago Corporation's experience that they represent
how a company and its prospects are perceived by the market.
Discounted Cash Flow Analysis. Using a discounted cash flow
analysis, The Chicago Corporation estimated the present value of the future
streams of after-tax cash flows that SJS could produce over a five year
period from 1997 through 2001, under various assumptions, based upon SJS
management's forecasts. The Chicago Corporation estimated the terminal value
of SJS after the five year period by applying an estimated perpetual growth
rate to the terminal year's projected after-tax cash flow and then applied to
this result multiples ranging from 14x to 18x the terminal year's estimated
earnings. The cash flow streams and terminal values were then discounted to
present values using different discount rates chosen to reflect different
assumptions regarding the required rates of return of prospective buyers of
SJS. On the basis of such varying assumptions, this discounted cash flow
analysis indicated a reference range of approximately $14.00 to $24.00 per
share of SJS Common Stock. This analysis was based upon earnings projections
developed by The Chicago Corporation in consultation with management. The
projections are based upon many factors and assumptions, many of which are
beyond the control of SJS or Shoreline.
Analysis of Selected Merger Transactions. The Chicago Corporation
reviewed selected pending and completed thrift merger and acquisition
transactions involving recent midwestern thrift sellers with assets between
$100 million and $300 million. The Chicago Corporation reviewed various
pricing multiples such as the ratios of the offer value to assets, deposits,
stated book value, tangible book value and the last twelve months earnings of
the acquired company in each such transaction, as well as the ratio of
tangible book value premium to core deposits in each such transaction. The
Chicago Corporation also computed the average and median ratios and multiples
for each transaction. The calculations yielded ranges of ratios of price to
stated book value and tangible book value of 187.3% to 110.0% and 199.8% to
110.0%, respectively, with median ratios of price to stated book value and
tangible book value of 130.4% and 131.8% respectively. The multiple of
earnings among the group ranged from 29.8x to 12.08x, with a median range of
19.92x; and ratios of offer value to assets ranged from 32.29% to 9.43%, with
a median range of 16.60%. The Merger Consideration implied ratios of price
to stated book value and price to tangible book value of 156.4%. The implied
ratio of price to earnings was 30.1x trailing earnings and the implied ratio
of price to assets was 16.7%.
NO COMPANY OR TRANSACTION USED IN THE ABOVE ANALYSES AS A
COMPARISON IS IDENTICAL TO SJS, SHORELINE, OR THE MERGER. ACCORDINGLY, AN
ANALYSIS OF THE RESULTS OF THE FOREGOING NECESSARILY INVOLVES COMPLEX
CONSIDERATIONS AND JUDGMENTS CONCERNING THE DIFFERENCES IN FINANCIAL AND
OPERATING CHARACTERISTICS OF THE COMPANIES AND OTHER FACTORS THAT COULD
AFFECT THE PUBLIC TRADING VALUES OR ACQUISITION VALUES OF THE COMPANIES TO
WHICH THEY ARE BEING COMPARED.
-14-
<PAGE>
In performing its analyses, The Chicago Corporation made numerous
assumptions with respect to industry performance, general business and
economic conditions and other matters. The analyses performed by The Chicago
Corporation are not necessarily indicative of actual values, which may be
significantly more or less favorable than the values suggested by such
analyses. Such analyses were prepared solely as part of The Chicago
Corporation's opinion. The term "fair from a financial point of view" is a
standard phrase contained in investment banker fairness opinions and refers
to the fact that The Chicago Corporation's opinion as to the fairness of the
Merger Consideration is addressed solely to the financial attributes of the
Merger Consideration. The analyses do not purport to be appraisals or to
reflect the prices at which a company might actually be sold. In addition,
as described above, The Chicago Corporation's fairness opinion and
presentation to the Board were one of many factors taken into consideration
by the Board in making its determination to approve the Merger Agreement.
Consequently, The Chicago Corporation analyses described above should not be
viewed as determinative of the Board's conclusions with respect to the value
of SJS or of the decision of the Board to agree to the Merger Consideration.
The Chicago Corporation's opinion is based on economic and market
conditions and other circumstances existing on, and information made
available as of, the date of such opinion. In addition, the opinion does not
address SJS's or Shoreline's underlying business decision to effect the
Merger or any other terms of the Merger. The Chicago Corporation is not
rendering any opinion as to the value of SJS Common Stock or Shoreline Common
Stock at the Effective Time.
In connection with its opinion dated as of the date of this Proxy
Statement, The Chicago Corporation performed procedures to update certain of
its analyses and reviewed the assumptions on which such analyses were based
and the factors considered therewith.
The Chicago Corporation, as part of its investment banking
business, is customarily engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and
-15-
<PAGE>
other purposes. The Chicago Corporation has extensive experience with the
valuation of financial institutions. The Board selected The Chicago
Corporation as its financial advisor because of The Chicago Corporation's
industry expertise with respect to financial institutions and because of The
Chicago Corporation's industry experience in transactions similar to the
Merger. The Chicago Corporation is not affiliated with either SJS or
Shoreline.
In the ordinary course of business, The Chicago Corporation makes a
market in Shoreline Common Stock and SJS Common Stock and may actively trade
the securities of Shoreline and SJS for its own account and for the accounts
of its customers. Accordingly, at any time The Chicago Corporation may hold
a long or short position in such securities. The Chicago Corporation is a
member of all principal securities exchanges in the United States; and in its
conduct of its broker-dealer activities has from time to time purchased
securities from, and sold securities to, the Company and/or Shoreline. Two
affiliates of The Chicago Corporation manage limited partnerships which
invest in publicly-traded securities of financial institutions.
Additionally, The Chicago Corporation manages two group trusts which invest
in publicly-traded securities of financial institutions. Together, these
investment pools, known as The Banc Funds, have reported ownership of 67,005
shares of SJS Common Stock and 52,610 shares of Shoreline Common Stock.
Contingent upon completion of the transaction, The Chicago
Corporation will receive a fee of approximately $317,000 for services
rendered in connection with advising SJS regarding the Merger, including the
fairness opinion and financial advisory services provided to SJS since The
Chicago Corporation was retained in July 1996, inclusive of out of pocket
expenses as of the date of the Proxy Statement. As of the date of the Proxy
Statement, The Chicago Corporation has received $25,000 of such fee. SJS has
also agreed to indemnify The Chicago Corporation against certain liabilities,
including certain liabilities under federal securities laws.
Consideration to be Received
Under the Merger Agreement, MergerSub will merge with and into SJS,
with SJS becoming a wholly owned subsidiary of Shoreline. Except under
circumstances described in the following paragraph, the stockholders of SJS
at the Effective Time (other than stockholders who have exercised appraisal
rights under the Delaware Law) will become entitled to receive $27 in cash
for each share of SJS Common Stock. SJS stockholders will have no continuing
stockholder relationship with SJS, Shoreline, or MergerSub.
If for any reason, between November 6, 1996 (the date of the Merger
Agreement) and the Effective Time, the number of shares of SJS Common Stock
outstanding or the number of unexercised "Stock Options" (as defined in the
next section ("SJS's Incentive Plan and Stock Options")) outstanding changes
for any reason other than exercise of up to 79,509 existing options (whether
or not in breach of the Merger Agreement), then the amount of cash into which
shares of SJS Common Stock are to be converted will be adjusted as provided
in the Merger Agreement.
SJS's Incentive Plan and Stock Options
Unless exercised, each Stock Option granted under the Incentive
Plan issued and outstanding immediately prior to the Effective Time will be
converted into the right to receive the difference between $27 and the
applicable option exercise price.
At Shoreline's request, SJS must use its best efforts to enter into
option termination agreements with the holders of the options pursuant to
which SJS will agree to pay to the holders the difference between $27 and the
option exercise price immediately prior to the Merger upon surrender and
cancellation of their outstanding options. If SJS fails to enter into
agreements with all holders of options under the Incentive Plan, Shoreline
will notify the remaining holders of options under the Incentive Plan of the
procedure for receipt of payments for their unexercised options. Such
payments will be made by Shoreline within 10 days after an option holder has
surrendered all of his or her options to Shoreline.
-16-
<PAGE>
Effective Time
If the stockholders of SJS approve the Merger Agreement at the
Special Meeting, and the other conditions to the Merger set forth in the
Merger Agreement are satisfied, the closing of the transactions contemplated
by the Merger Agreement (the "Closing") and the Effective Time is anticipated
to be during the second quarter of 1997, provided that the Merger Agreement
has not been terminated prior to such time (See "THE MERGER -- Conditions
Precedent to the Merger and Possible Termination of the Merger Agreement"
below). The Merger may not be consummated prior to receiving the Regulatory
Approvals. The Merger will be effective at a specific time and date to be
specified in the certificates of merger to be filed in accordance with the
Michigan Business Corporation Act and the Delaware Law ("the Effective
Time").
Payment for Shares
At the Effective Time, holders of certificates formerly
representing shares of SJS Common Stock (other than shares held by SJS
stockholders who have exercised appraisal rights) will cease to have any
rights as SJS stockholders and their certificates automatically will
represent only the right to receive the cash into which their shares of SJS
Common Stock will have been converted by the Merger. Promptly after the
Effective Time, Shoreline Bank (acting as the exchange agent) will send
written instructions and a letter of transmittal to each holder of record of
SJS Common Stock (other than stockholders who have exercised appraisal
rights), indicating the method for exchanging such holder's stock
certificates for cash in respect thereof. HOLDERS OF SJS COMMON STOCK SHOULD
NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE INSTRUCTIONS FROM SHORELINE
BANK. Shoreline Bank, upon receipt of such certificates (or affidavits of
lost certificates and indemnity bonds) and a properly completed letter of
transmittal, will promptly pay the holder by check.
Conditions Precedent to the Merger and Possible Termination of the Merger
Agreement
Conditions Precedent. The obligations of Shoreline to consummate
the transactions provided for by the Merger Agreement are subject to the
satisfaction at or prior to the closing of each of the following conditions
(collectively, AShoreline's Conditions@), any one or more of which may, to
the extent waivable, be waived by Shoreline:
(i) That the representations and warranties of SJS contained in
the Merger Agreement are true and correct in all material respects as of
November 6, 1996, and as of the Closing, and SJS has performed all
agreements and covenants required by the Merger Agreement to be performed
by it;
(ii) That there has not occurred any event, development, or
circumstance related to the business, condition (financial or
otherwise), capitalization, or properties of SJS or SJS's
subsidiaries that had or could reasonably be expected to have a
material adverse effect on the financial condition, net income,
business, or operations of SJS and SJS's subsidiaries, taken as a
whole, other than: (A) an adverse effect caused solely by a change
in laws or regulations or other factors (including, but not limited
to, a special SAIF premium assessment or a change in general
economic conditions or interest rates, and the "mark to market"
implications of those events) affecting the financial condition,
net income, business, or operations of thrift or banking
institutions generally; or (B) legal, accounting, and investment
bankers' expenses incurred by SJS in connection with SJS's
negotiation of the Merger Agreement and the consummation of the
Merger;
(iii) That all Regulatory Approvals and other necessary
consents from third parties are received;
(iv) That neither Shoreline nor SJS are subject to any order,
decree, or injunction of a court or agency of competent
jurisdiction that enjoins or prohibits the consummation of the
Merger;
(v) That Shoreline receive an opinion from its independent
auditors to the effect that, immediately prior to the Effective
Time, the Bank qualifies as a "domestic building and loan
association" within the meaning of ' 7701(a)(19) of the Internal
Revenue Code of 1986, as amended (the "Code");
(vi) That Shoreline receive the opinion of SJS's counsel
substantially in the form set forth in the Merger Agreement;
(vii) That Shoreline receive the opinion of its counsel
relating to the tax consequences of the transactions contemplated
under the Merger Agreement, in form and content reasonably
satisfactory to Shoreline;
(viii) That Shoreline receive certificate(s) dated as of
the Closing Date on behalf of SJS, and by the transfer agent for
SJS Common Stock, certifying (A) the total number of shares of
capital stock of SJS issued and outstanding as of the close of
business on the day immediately preceding the Closing; and (B) with
respect to the secretary's certification, the number of shares of
SJS Common Stock, if any, that are issuable on or after that date;
(ix) That Shoreline receive evidence of the waiver of any
material rights and the waiver of the loss of any material rights
that may be triggered by the change of control of SJS upon
consummation of the Merger under any agreements described in SJS's
disclosure statement, the breach of which would cause a material
adverse effect on the financial condition, net income, business, or
operations of SJS and SJS's subsidiaries, taken as a whole;
-17-
<PAGE>
(x) That all investigation and remediation with respect to
any environmental risk identified during Shoreline's environmental
assessments is substantially completed to Shoreline's reasonable
satisfaction, as provided in the Merger Agreement;
(xi) That Shoreline receive statements from key employees of
SJS regarding their current compensation substantially in the form
contained in Merger Agreement;
(xii) That Shoreline receive from the Internal Revenue
Service ("IRS") a private letter ruling, or a satisfactory opinion
from tax counsel or tax accountants, regarding the Bank's pre-1988
bad debt reserves.
(xiii) That Shoreline and SJS receive from SJS's employees
all amendments to employment agreements, severance agreements,
stock option agreements, restricted stock agreements, or other
compensation agreements with respect to "Excess Parachute Payments"
(as defined below), as described in the Merger Agreement; and
(xiv) That SJS deliver to Shoreline at the Closing such
other certificates, instruments, and documents as may be reasonably
requested by Shoreline prior to the Closing.
The obligations of SJS to consummate the transactions provided for
by the Merger Agreement are subject to the satisfaction at or prior to the
closing of each of the following conditions (collectively, ASJS's
Conditions@), any one or more of which may, to the extent waivable, be waived
by SJS:
(i) That at least a majority of the votes eligible to be cast
by SJS's stockholders are voted to adopt the Merger Agreement;
(ii) That all Regulatory Approvals and other necessary
consents from third parties are received;
(iii) That the representations and warranties of Shoreline
contained in the Merger Agreement are true and correct in all
material respects as of November 6, 1996 and as of the Closing and
Shoreline has performed all agreements and covenants required by
the Merger Agreement to be performed by it;
(iv) That neither Shoreline nor SJS are subject to any order,
decree, or injunction of a court or agency of competent
jurisdiction that enjoins or prohibits the consummation of the
Merger;
(v) That SJS receive the opinion of Shoreline's counsel
substantially in the form set forth in the Merger Agreement; and
(vi) That Shoreline deliver to SJS at the Closing such other
certificates, instruments, and documents as may be reasonably
requested by SJS prior to the Closing.
Termination. The Merger Agreement and the Merger may be terminated
and the transactions contemplated by the Merger Agreement may be abandoned at
any time prior to the Closing, regardless of whether the Merger Agreement is
adopted by SJS's stockholders, by (i) mutual agreement authorized by the
boards of directors
-18-
<PAGE>
of Shoreline and SJS (or duly authorized committees of
the boards); (ii) the board of directors of Shoreline upon the occurrence of
certain events, or (iii) the board of directors of SJS upon the occurrence of
certain events.
The board of directors of Shoreline may terminate the Merger
Agreement if, at any time after the Closing could otherwise be called, there
is a failure by SJS to satisfy one or more of certain of the Shoreline
Conditions, as set forth in the Merger Agreement.
The board of directors of Shoreline also may terminate the Merger
Agreement if (i) the Effective Time has not occurred prior to September 30,
1997, without material fault on the part of Shoreline; (ii) the board of
directors of SJS withdraws, modifies, or changes in a manner adverse to
Shoreline, its approval or recommendation of the Merger Agreement or the
Merger (referred to as a "Change in Board Recommendation"), (iii) the board
of directors of SJS recommends an acquisition proposal or offer, or executes
an agreement providing for a tender offer or exchange offer for any shares of
capital stock of SJS, or a merger, consolidation, or other business
combination of SJS or the Bank or a sale of more than 25 percent of the
assets of SJS or the Bank with or to a person or entity other than Shoreline
(referred to as an "Acquisition Proposal"); (iv) it is publicly disclosed
(or Shoreline learns) that any person, entity, or group has acquired
beneficial ownership of more than 19.9 percent of any class or series of
capital stock of SJS through the acquisition of stock, the formation of a
group or otherwise, or has been granted an option, right, or warrant,
conditional or otherwise, to acquire beneficial ownership of more than
19.9 percent of any class or series of capital stock of SJS (referred to as
an "Acquiring Person"); or (v) Shoreline gives SJS notice of an unacceptable
environmental risk pursuant to the Merger Agreement and such risk is not
cured within the 30-day period (or any extension thereof).
The board of directors of SJS may terminate the Merger Agreement
if, at any time after the Closing could otherwise be called, there has been a
failure by Shoreline to satisfy the Shoreline Conditions (referred to as a
"Failure of Condition").
The board of directors of SJS also may terminate the Merger
Agreement if (i) the Effective Time has not occurred prior to September 30,
1997, without material fault on the part of SJS; or (ii) on or after June 30,
1997, the Effective Time has not occurred and the Federal Reserve Board has
not yet approved the Merger (a "Delayed Regulatory Approval").
The board of directors of either Shoreline or SJS may terminate the
Merger Agreement at any time after the date that (i) the SJS stockholders
vote against adoption of the Merger Agreement; (ii) any Regulatory Approval
is denied by final order; or (iii) either Shoreline or SJS is subject to any
order, decree, or injunction of a court or agency of competent jurisdiction
that permanently enjoins or prohibits the consummation of the Merger
(collectively, "Reciprocal Termination Rights").
Effect of Termination. No termination of the Merger Agreement will
release either party from its obligations regarding (among other provisions)
confidentiality and the payment of expenses. In the event of a termination
of the Merger Agreement, notice must be immediately given to the other party.
After the expiration of any applicable cure period without the grounds for
termination being cured, the Merger Agreement will immediately become null
and void, and there will be no liability on the part of Shoreline or SJS
except (i) for fraud or for willful and material breach of the Merger
Agreement, and (ii) obligations regarding expenses, discussed below.
Termination Fee. SJS must pay Shoreline $2,000,000 if:
(i) the board of directors of Shoreline terminates the Merger
Agreement as a result of a Change in Board Recommendation or an
Acquisition Proposal, or
(ii) the board of directors of Shoreline terminates the Merger
Agreement as a result of someone becoming an Acquiring
-19-
<PAGE>
Person and within one year of termination, the Acquiring Person acquires
or beneficially owns a majority of the then outstanding shares of SJS
Common Stock, obtains representation of two or more directors on
SJS's board of directors, or enters into a definitive agreement
with SJS with respect to an acquisition proposal or similar
business combination.
SJS must pay Shoreline $750,000 if the board of directors of
Shoreline terminates the Merger Agreement due to a willful and material
breach of any of the representations and warranties of SJS set forth in the
Merger Agreement or a willful and material breach of any material obligation,
agreement, or covenant contained in the Merger Agreement by SJS. The events
described in the preceding two paragraphs are referred to as "Shoreline
Trigger Events."
In addition to any other amount due, upon the termination of the
Merger Agreement due to the occurrence of a Shoreline Trigger Event, SJS must
promptly assume and pay Shoreline for all reasonable fees and expenses
incurred, or to be incurred by Shoreline and Shoreline Bank (including the
fees and expenses of legal counsel, accountants, financial advisors, other
consultants, and financial printers) in connection with the Merger Agreement,
the Merger, and the other transactions contemplated by the Merger Agreement,
in an amount not to exceed $250,000 in the aggregate.
Shoreline must pay SJS $750,000 if the board of directors of SJS
terminates the Merger Agreement due to a willful and material breach of any
of the representations and warranties of Shoreline set forth in the Merger
Agreement or a willful and material breach of any material obligation,
agreement, or covenant contained in the Merger Agreement by Shoreline
(referred to as an "SJS Trigger Event"). In addition to any other amount
due, upon the termination of the Merger Agreement due to the occurrence of a
SJS Trigger Event or SJS's termination of the Merger Agreement pursuant to a
Failure of Condition, Delayed Regulatory Approval, or Reciprocal Termination
Rights, Shoreline must promptly pay SJS for all reasonable fees and expenses
incurred, or to be incurred by SJS and
-20-
<PAGE>
SJS's subsidiaries (including the fees and expenses of legal counsel,
accountants, financial advisors, other consultants, and financial printers)
in connection with the Merger Agreement, the Merger, and the other
transactions contemplated by the Merger Agreement, in an amount not to exceed
$250,000 in the aggregate.
Business of SJS Pending the Merger
The Merger Agreement contains covenants of SJS concerning the
conduct of its business. The covenants remain in effect until the Effective
Time or until the Merger Agreement has been terminated. They include, among
others, an agreement that SJS and the Bank will (i) allow Shoreline access to
certain information regarding SJS's business; (ii) operate the business in
the ordinary course and consistent with past practices; (iii) advise and
cooperate with Shoreline with respect to anticipated renewals or extensions
of existing data processing service and related agreements; (iv) permit
Shoreline to conduct an environmental assessment of each parcel of SJS's real
property and, at Shoreline's option, any other real estate formerly owned by
SJS or SJS's subsidiaries; and (v) promptly seek to obtain from each employee
of SJS who, as a result of the change of control of SJS in the Merger, would
be entitled to an "Excess Parachute Payment" (as defined below), a mutually
satisfactory amendment to any such agreement to adjust or otherwise modify
the amount or timing of compensation due.
Nothing contained in the Merger Agreement will preclude SJS from
declaring and paying cash dividends on SJS Common Stock quarterly at a rate
not to exceed $0.11 per share in a manner, on dates, and with respect to
record dates consistent with past practice. The Board of Directors of SJS is
under no obligation to pay dividends on SJS Common Stock.
Consolidation of the Bank
Immediately following the Merger, it is anticipated that the Bank
will be merged into Shoreline Bank, with Shoreline Bank surviving that
merger. The merger of the Bank with and into Shoreline Bank will be
accomplished pursuant to a bank consolidation agreement in a form consistent
with the Merger Agreement, the Michigan Banking Code of 1969, as amended, and
the federal Home Owners' Loan Act, as amended.
Regulatory Approvals
Consummation of the Merger is subject to approval of the Federal
Reserve Board and the OTS. The Merger may not be consummated for a period of
30 days after receipt of the Federal Reserve Board's final approval unless
the Federal Reserve Board has not received any adverse comment from the
United States Department of Justice during the first 15 days following final
approval, in which case the Merger may be consummated on or after the 15th
day after final approval by the Federal Reserve Board. An application for
prior approval of the Merger was submitted to the Federal Reserve Board on
February 20, 1997, and to the OTS on ______. There can be no assurance as to
when or if such approvals will be granted.
Material Agreements Relating to the Merger and Interests of Certain Persons
As of _____________, 1996, the directors and executive officers of
SJS are the beneficial owners of a total of _____ shares, or __ percent of
the outstanding shares, of SJS Common Stock.
Shoreline and Shoreline Bank have agreed to honor and be bound by
all employment agreements with SJS's or SJS's subsidiaries' executive
officers. SJS is required to cause the Bank to give each executive officer
notice that, subject to the consummation of the Merger, the term of the
employment agreement will not be extended for any additional period.
-21-
<PAGE>
SJS and Shoreline have agreed to promptly seek to obtain from each
employee of SJS who, as a result of the change of control of SJS in the
Merger, would be entitled to an "Excess Parachute Payment" (as defined in the
Code), a mutually satisfactory amendment to any such agreement to adjust the
aggregate amount of compensation due, extend the time period over which the
compensation is payable, amend other terms and conditions, or any combination
of these changes; all in order to prevent all compensation payable under such
agreements from being characterized as an Excess Parachute Payment.
SJS and Shoreline have agreed to certain treatment of the Stock
Options (See "THE MERGER -- SJS's Incentive Plan and Stock Options" above).
Those individuals who hold such Stock Options and the respective amount held
are set forth in "SJS BANCORP, INC. -- Beneficial Ownership of Certain
Persons" below. In addition, the officers of SJS and its subsidiaries are
participants in the "ESOP" (as defined below), and as such, will receive cash
for those interests, as set forth in the Merger Agreement. (See "THE MERGER
- -- Treatment of the ESOP" below).
SJS maintains the SJS Bancorp, Inc. Management Recognition Plan
(the "Plan"). Under the Plan, certain executives and directors of the
Company were awarded grants of restricted stock in February, 1996. The
restricted stock under the Plan will become 100% vested upon the consummation
of the Merger, and thus, the individuals holding restricted stock under the
Plan would become unconditionally entitled to $27 in cash for each share of
stock granted under the Plan. 34,422 shares of restricted stock have been
granted to directors and executive officers under the Plan.
In the Merger Agreement, Shoreline acknowledged that any and all
rights to indemnification then existing in favor of the directors and
officers of SJS and each of SJS's subsidiaries under their respective
certificate or articles of incorporation or bylaws will survive the Merger
and will continue with respect to acts and omissions occurring before the
Effective Time with the same force and effect as prior to the Effective Time.
Treatment of the ESOP
Prior to the Effective Time, SJS may amend the SJS Bancorp, Inc.
Employee Stock Ownership Plan, as amended (the "ESOP") to provide for (i)
full vesting of benefits by participants; and (ii) elimination of the
requirement for a participant to be employed on the last day of the year to
receive an employer contribution, other annual additions, or allocations.
SJS may not make any other amendments to the ESOP without the prior written
consent of Shoreline and may only make additional contributions to the ESOP
at levels consistent with prior practice and applied to the ESOP indebtedness
(the "ESOP Debt").
Any cash received by the ESOP trustee in the course of the Merger
with respect to unallocated shares of SJS Common Stock must be applied by the
trustee to the repayment of the ESOP Debt. The balance of the cash, if any,
received by the ESOP trustee in the course of the Merger with respect to
unallocated shares of SJS Common Stock will be allocated to the accounts of
all participants in the ESOP who have accounts remaining under the ESOP
(whether or not the participants are then actively employed) and
beneficiaries in proportion to the account balances of the participants and
beneficiaries as they existed as of the Effective Time (and, if required, to
the accounts of former participants or their beneficiaries) as investment
earnings of the ESOP, except to the extent that any portion of the balance of
the cash received by the ESOP trustee would be subject to the limitations of
Section 415 of the Internal Revenue Code for that year.
Prior to such an allocation, the administrative and other authority
previously exercised with respect to the ESOP by the board of directors of
SJS or SJS's subsidiaries will be exercised solely by a committee appointed
by the board of directors of SJS and in place under the terms of the ESOP at
the Effective Time. If the ESOP is required to be maintained for a
transition period after the Effective Time in order to fully allocate to
participants the cash received in the Merger with respect to unallocated
shares of SJS Common Stock, Shoreline has agreed to cause
-22-
<PAGE>
the ESOP to be so continued for a period of up to 24 months after the
Effective Time for the benefit of its participants to the extent permitted by
ERISA, the Code and other applicable laws and regulations. However, in such
event, the ESOP must be amended, effective as of the Effective Time, to
provide that there cannot be any new participants in the plan on or after the
Effective Time.
Upon the making of all allocations required in the Merger
Agreement, the ESOP will be terminated and the account balances therein will
be distributed to participants or their beneficiaries, with the right of
tax-free rollover, to the extent permitted by law, to an individual
retirement account or another tax-qualified plan of Shoreline, at the
election of the distributee. As a condition to any distributions, Shoreline
may secure a favorable determination letter for termination from the IRS
relating to that termination and distribution. If a determination letter is
secured, all distributions will be made in strict compliance with the
determination letter.
SJS is entitled to file with the IRS an application, at any time
prior to the Effective Time, for an advance determination letter relating to
termination of the ESOP and/or the methodology for allocating proceeds. If,
at the expiration of the full transition period for continued maintenance of
the ESOP, there remains unallocated proceeds, then Shoreline may take any
action it deems appropriate with respect to the ESOP, including (but not
limited to) terminating the ESOP and making distributions from the ESOP or
merging the ESOP into another Shoreline tax-qualified plan.
Federal Income Tax Consequences
The following is a summary of certain of the principal federal
income tax consequences of the Merger to holders whose shares of SJS Common
Stock are converted to cash in the Merger (including pursuant to the exercise
of appraisal rights). The discussion applies only to holders of shares of
SJS Common Stock in whose hands shares of SJS Common Stock are capital
assets, and may not apply to shares of SJS Common Stock received pursuant to
the exercise of employee stock options or otherwise as compensation, or to
holders of shares of SJS Common Stock who are in special tax situations (such
as insurance companies, tax-exempt organizations, or non-U.S. persons).
THE FEDERAL INCOME TAX CONSEQUENCES SET FORTH BELOW ARE BASED UPON
CURRENT LAW. BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH HOLDER OF
SHARES OF SJS COMMON STOCK SHOULD CONSULT SUCH HOLDER'S OWN TAX ADVISOR TO
DETERMINE THE APPLICABILITY OF THE RULES DISCUSSED BELOW TO SUCH STOCKHOLDER
AND THE PARTICULAR TAX EFFECTS OF THE MERGER, INCLUDING THE APPLICATION AND
EFFECT OF FOREIGN, STATE, LOCAL AND OTHER INCOME AND OTHER TAX LAWS.
The receipt of cash for shares of SJS Common Stock pursuant to the
Merger (including pursuant to the exercise of appraisal rights) will be a
taxable transaction for federal income tax purposes (and also may be a
taxable transaction under applicable foreign, state, local and other income
and other tax laws). In general, for federal income tax purposes, a holder
of shares of SJS Common Stock will recognize gain or loss equal to the
difference between his or her adjusted tax basis in the shares of SJS Common
Stock converted to cash in the Merger and the amount of cash received
therefor. Gain or loss must be determined separately for each block of
shares of SJS Common Stock (i.e., shares of SJS Common Stock acquired at the
same cost in a single transaction) converted to cash in the Merger. Such
gain or loss will be capital gain or loss and will be long-term gain or loss
if, on the date of the Merger, the shares of SJS Common Stock were held for
more than 1 year. With respect to stockholders exercising appraisal rights,
amounts, if any, that are or are deemed to be interest for federal income tax
purposes will be taxed as ordinary income.
Payments in connection with the Merger may be subject to "backup
withholding" at a rate of 31%. Backup withholding generally applies if a
stockholder (i) fails to furnish to the exchange agent his or her social
security number or taxpayer identification number ("TIN"), (ii) furnishes an
incorrect TIN, (iii) fails properly to include a reportable interest or
dividend payment on such stockholder's federal income tax return, or (iv)
under certain circumstances, fails to provide a certified statement, signed
under penalties of perjury, that the TIN provided is such stockholder's
correct number and that such stockholder is not subject to backup
withholding. Backup withholding is not an additional tax but merely an
advance payment that may be refunded to the extent it results in an
overpayment of tax. Certain persons generally are entitled to exemption from
backup withholding, including corporations and financial institutions.
Certain penalties apply for failure to furnish correct information and for
failure to include reportable payments in income. Each stockholder should
consult with his or her own tax advisor as to qualification for exemption
from backup withholding and the procedure for obtaining such exemption.
Accounting Treatment
Shoreline will treat the Merger as a purchase for accounting
purposes.
SJS BANCORP, INC.
Description of the Business
General. SJS is a Delaware corporation that was organized in 1994
by SJS Federal Savings Bank (the Bank) for the purpose of becoming the
savings and loan holding company of the Bank. SJS owns all of the
outstanding stock of the Bank issued on February 15, 1995 in connection with
the Bank's conversion from the mutual to the stock form of organization (the
"Conversion"). Unless the context otherwise requires, all of the following
references to the Bank or SJS include SJS and the Bank on a consolidated
basis.
-23-
<PAGE>
The Bank, SJS's only operating subsidiary, was originally chartered
under the laws of the state of Michigan in 1916 as St. Joseph Building and
Loan Association and converted to a federally chartered mutual savings and
loan association in 1985. In 1988, the Bank amended its charter to become a
federal savings bank under its current name.
The Bank is a retail oriented financial institution offering a
variety of financial services to meet the needs of the communities it serves.
The Bank attracts retail deposits from the general public and invests those
funds primarily in one- to four-family residential mortgage loans and
mortgage-backed securities. The Bank also originates consumer loans and, to
a significantly lesser extent, commercial real estate, multi-family and
construction loans in its market area. See "Lending Activities - One- to
Four-Family Residential Mortgage Lending." The Bank also invests in U.S.
Government agency obligations and other permissible investments. See
"Lending Activities - Investment Activities."
Through its four full-service offices, the Bank serves communities
located in Berrien, Van Buren, Allegan and Cass Counties, Michigan. At
September 30, 1996, SJS had total assets of $151.8 million, deposits of
$109.8 million, and stockholders' equity of $15.8 million.
The Bank's operations are regulated by the Office of Thrift
Supervision (the "OTS"). The Bank is a member of the Federal Home Loan Bank
System ("FHLB System") and a stockholder in the Federal Home Loan Bank
("FHLB") of Indianapolis. The Bank is also a member of the Savings
Association Insurance Fund ("SAIF") and its deposit accounts are insured up
to applicable limits by the Federal Deposit Insurance Corporation ("FDIC").
Lending Activities - General. Historically, the Bank originated
primarily fixed-rate, one- to four-family mortgage loans. In the early
1980s, the Bank began to originate adjustable-rate mortgage loans ("ARMs")
and shorter-term consumer loans for retention in its portfolio. The Bank
continues to originate fixed-rate mortgage loans in response to customer
demand. The Bank underwrites mortgage loans generally using secondary market
guidelines allowing them to be saleable, primarily to the Federal Home Loan
Mortgage Corporation ("FHLMC"). The Bank generally retains the right to
service the loans it sells. In fiscal 1995, as part of its business plan,
the Bank established interest rate levels at or above which it would retain
certain fixed-rate mortgage loans for its own portfolio. See "One- to
Four-Family Residential Mortgage Lending" and "Loan Originations, Purchases
and Sales." At June 30, 1996, the Bank's net loan portfolio totaled $98.9
million.
Loan applications are initially considered and approved at various
levels of authority, depending on the amount and type of the loan.
Residential loans up to $150,000 are approved by the Bank's Loan Committee,
consisting of three Board members, with loans over that amount requiring
approval of the Board of Directors. Commercial real estate loans up to
$250,000 are approved by the Bank's Loan Committee, with Board approval
required for loans over that amount. Consumer loans are approved by specific
officers or directors pursuant to limits established by the Board.
The aggregate amount of loans that the Bank is permitted to make
under applicable federal regulations to any one borrower, including related
entities, or the aggregate amount that the Bank could have invested in any
one real estate project is generally the greater of 15% of unimpaired capital
and surplus or $500,000. See "Regulation - Federal Regulation of Savings
Associations." At June 30, 1996, the maximum amount which the Bank could
have loaned to any one borrower and the borrower's related entities was
approximately $2.1 million. At that date, the Bank's largest lending
relationship to a single borrower or a group of related borrowers totaled
$640,000, secured by a single family residence located in the Bank's market
area. The Bank had only six other lending relationships to a single borrower
or a group of related borrowers which exceeded $500,000 at June 30, 1996.
These loans were all performing in accordance with their terms at June 30,
1996.
-24-
<PAGE>
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and in percentages at the dates indicated.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------
1996 1995 1994
-----------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Real Estate Loans:
- -------------------
One- to four-family........... $ 70,035 67.60% $ 46,347 62.15% $ 36,870 67.39%
Multi-family.................. 1,286 1.24 874 1.17 437 .80
Commercial.................... 466 .45 536 .72 553 1.01
Construction(1)............... 6,941 6.70 2,736 3.67 1,761 3.22
-------- ------ -------- ------ -------- ------
Total real estate loans.... 78,728 75.99 50,493 67.71 39,621 72.42
-------- ------ -------- ------ -------- ------
Other Loans:
- ------------
Consumer Loans:
Automobile.................. 16,118 15.56 16,118 21.61 9,005 16.46
Home equity................. 2,300 2.22 2,033 2.73 1,925 3.52
Personal loans secured by
real estate............... 2,712 2.62 2,380 3.19 1,772 3.24
Energy conservation......... 1,344 1.30 1,453 1.95 846 1.54
Other....................... 2,206 2.13 2,026 2.72 1,543 2.82
-------- ------ -------- ------ -------- ------
Total consumer loans....... 24,680 23.83 24,010 32.20 15,091 27.58
-------- ------ -------- ------ -------- ------
Commercial business........... 190 .18 68 .09
-------- ------- -------- -------
Total loans..................... 103,598 100.00% 74,571 100.00% 54,712 100.00%
------ ------ ------
------ ------ ------
Less:
- ------
Loans in process.............. 4,030 2,021 1,417
Deferred fees and discounts... 60 173 185
Allowance for losses.......... 646 559 572
-------- -------- --------
Total loans receivable, net... $ 98,862 $ 71,818 $ 52,538
-------- -------- --------
-------- -------- --------
</TABLE>
- ------------------------
(1) Includes approximately $193,000 and $240,000 of loans on undeveloped land
at June 30, 1996 and 1995, respectively.
-25-
<PAGE>
The following table sets forth the composition of the Bank's
loan portfolio by fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------
1996 1995 1994
-----------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Fixed-Rate Loans:
- -----------------
Real estate:
One- to four-family......... $ 45,654 44.07% $ 13,443 18.03% $ 8,803 16.09%
Multi-family................ -- -- -- -- -- --
Commercial real estate...... 314 .30 359 .48 344 .63
Construction................ 6,128 5.91 208 .28 193 .35
-------- ------ -------- ------ -------- -------
Total real estate loans... 52,096 50.28 14,010 18.79 9,340 17.07
-------- ------ -------- ------ -------- -------
Consumer 21,825 21.07 21,432 28.74 12,782 23.36
-------- ------ -------- ------ -------- -------
Total fixed-rate loans.... 73,921 71.35 35,442 47.53 21,122 40.43
Adjustable-Rate Loans:
- ----------------------
Real estate:
One- to four-family......... 24,381 23.54 32,904 44.12 28,067 51.30
Multi-family................ 1,286 1.24 874 1.17 437 .80
Commercial real estate...... 153 .15 177 .24 209 .38
Construction................ 813 .78 2,528 3.39 1,568 2.87
Consumer.................... 3,044 2.94 2,646 3.55 2,309 4.22
-------- ------ -------- ------ -------- -------
Total adjustable-rate
loans................... 29,677 28.65 39,129 52.47 32,590 59.57
-------- ------ -------- ------ -------- -------
Total loans............... 103,598 100.00% 74,571 100.00% 54,712 100.00%
------ ------ ------
------ ------ ------
Less:
- ------
Loans in process............. 4,030 2,021 1,417
Deferred fees and discounts.. 60 173 185
Allowance for loan losses.... 646 559 572
-------- -------- --------
Total loans receivable,
net...................... $ 98,862 $ 71,818 $ 52,538
-------- -------- --------
-------- -------- --------
</TABLE>
-26-
<PAGE>
The following table sets forth the contractual maturity of the
Bank's loan portfolio at June 30, 1996. Loans which have adjustable or
renegotiable interest rates are shown as maturing in the period during which
the contract matures. The table does reflect scheduled principal
amortization but does not reflect the effects of possible prepayments,
interest rate adjustments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
-----------------------------------------------------------------
Multi-family and
One- to Four-Family Commercial Construction Consumer Total
---------------------- -------------------- ------------------- ----------------- ------------------
Due During Weighted Weighted Weighted Weighted Weighted
Years Ending Average Average Average Average Average
June 30, Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
- ------------- ------ -------- ------ -------- ------ -------- ------ -------- ------ ---------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997(1) $ 15 7.59% $ 15 8.00% $ --- ---% $ 1,609 10.02% $ 1,639 9.98%
1998 729 7.59 456 10.50 31 9.32 1,559 9.29 2,775 9.04
1999 1,915 7.17 26 9.62 820 8.53 3,426 9.02 6,187 8.38
2000 and 2001 4,811 7.88 57 9.53 173 7.96 12,960 9.19 18,001 8.83
2002 - 2006 24,749 7.59 725 9.47 5,154 7.46 5,186 9.59 35,814 7.90
2006 - 2021 18,338 7.97 344 8.91 160 8.25 130 10.39 18,972 8.00
2022 and following 19,478 8.09 129 9.38 603 8.30 --- --- 20,210 8.10
</TABLE>
(1) Includes demand loans, loans having no stated maturity and overdraft
loans.
-27-
<PAGE>
The total amount of loans due after June 30, 1997 which have
fixed interest rates is $73.2 million while the total amount of loans
due after such date which have floating or adjustable interest rates is
$28.8 million.
One- to Four-Family Residential Mortgage Lending. The Bank
focuses its lending efforts primarily on the origination of permanent
loans secured by first mortgages on owner-occupied, one- to four-family
residences. At June 30, 1996, $70.0 million, or 67.6% of the Bank's
gross loan portfolio consisted of permanent loans secured by one- to
four-family residences. Substantially all of these loans were secured by
properties located in the Bank's market area.
The Bank currently offers fixed-rate and ARM loans. For the
fiscal year ended June 30, 1996, the Bank originated $42.4 million of
fixed-rate loans and $3.2 million of ARM loans secured by one- to
four-family residential real estate.
The Bank currently originates loans with a maximum term of 30
years, in amounts up to 95% of the appraised value of the security
property, provided that private mortgage insurance is obtained in an
amount sufficient to reduce the Bank's exposure to not more than 80% of
the appraised value. The Bank currently offers one- and three-year ARM
loans with an interest rate margin over the One- and Three-Year Constant
Maturity Treasury Index, respectively. These loans generally provide
for a 2% annual cap and a lifetime cap of 6% over the initial rate. As
a consequence of using caps, the interest rates on these loans may not
be as rate sensitive as is the Bank's cost of funds. The Bank
originates ARMs which may have an initial interest rate that is lower
than the sum of the specified index plus the margin. Borrowers with
adjustable-rate loans are qualified at the fully-indexed rate. The
Bank's permanent ARM loans generally do not provide the borrower the
option to convert the loan to a fixed-rate loan. The Bank's ARMs do not
permit negative amortization of principal.
The Bank also offers fixed-rate balloon loans with maturities
of three, five, seven and nine years. These loans do not have rollover
provisions and require the borrower to repay the loans by the stated
maturity. Underwriting standards for these loans conform to the Bank's
normal standards based on the respective amortization schedules. The
monthly payment schedule is based on amortization schedules of 15 years
for the three-year, 20 years for the five-year, and 30 years for both
the seven- and nine-year products. Total originations for the balloon
products during the fiscal year ended June 30, 1996 totaled $30.5
million, of which $1.7 million were three year balloon mortgages and
$4.2 million were five year balloon mortgages.
During fiscal 1995, the Bank modified its loan sales policy to
provide that fixed-rate loan products that meet certain criteria will be
retained in portfolio. Under the revised policy, the Bank originates
for retention in its portfolio: 15-year, fixed-rate loans with yields
equal to or greater than 8%; 20-year, fixed-rate loans with yields equal
to or greater than 8.5%; and 30-year fixed-rate, loans with yields equal
to or greater than 9.5%. Under the revised policy, the Board of
Directors of the Bank has established an overall limit on the total
amount of 15-year, 20-year and 30-year fixed-rate loans that will be
retained in portfolio, equal to 15%, 10% and 10%, respectively, of total
assets. See "- Loan Originations, Purchases and Sales."
In underwriting one- to four-family residential real estate
loans, the Bank evaluates both the borrower's ability to make monthly
payments and the value of the property securing the loan. Properties
securing real estate loans made by the Bank are appraised either by
in-house appraisers or independent fee appraisers. The Bank requires
borrowers to obtain title insurance and fire and property insurance
(including flood insurance, if appropriate) in an amount not less than
the amount of the loan. Residential loans do not include prepayment
penalties. Real estate loans originated by the Bank contain a "due on
sale" clause allowing the Bank to declare the unpaid principal balance
due and payable upon the sale of the security property.
Residential mortgage loan originations are derived from a
number of sources, including advertising, direct solicitation, real
estate broker referrals, existing borrowers and depositors, builders and
walk-in customers. Loan applications are accepted at all of the Bank's
offices. The Bank employs commissioned loan originators to be more
aggressive in seeking mortgage originations in its market area.
-28-
<PAGE>
Commercial Real Estate and Multi-Family Lending. The Bank has
engaged to a limited extent in commercial real estate and multi-family
lending. At June 30, 1996, the Bank had $1.8 million of commercial real
estate and multi-family loans, which represented 1.7% of the Bank's
gross loan portfolio. The vast majority of commercial real estate and
multi-family loans originated by the Bank are adjustable rate loans
which amortize over a 25-year period.
Commercial real estate and multi-family loans do not generally
exceed 75% of the appraised value of the property securing the loan.
The Bank analyzes the financial condition of the borrower, the
borrower's credit history, and the reliability and predictability of the
net income generated by the property securing the loan. The Bank
generally requires personal guarantees of the borrowers. Appraisals on
properties securing commercial real estate and multi-family loans
originated by the Bank are performed by independent fee appraisers
approved by the Board of Directors.
The largest commercial real estate and multi-family loan
outstanding at June 30, 1996 was a $500,000 land acquisition and
development loan secured by the land and the single and multi-family
residences constructed thereon. At June 30, 1996, this loan was
performing in accordance with its terms.
Loans secured by commercial real estate and multi-family
properties are generally larger and involve a greater degree of credit
risk than one- to four-family residential mortgage loans. Commercial
real estate and multi-family loans typically involve large balances to
single borrowers or groups of related borrowers. Because payments on
loans secured by commercial real estate and multi-family properties are
often dependent on the successful operation or management of the
properties, repayment of such loans may be subject to adverse conditions
in the real estate market or the economy. If the cash flow from the
project is reduced (for example, if leases are not obtained or renewed),
the borrower's ability to repay the loan may be impaired.
Construction Lending. The Bank makes construction loans to
individuals for the construction of their residences as well as to
builders for the construction of one- to four-family residences. At
June 30, 1996, all of these loans were secured by property located
within the Bank's market area. At June 30, 1996, the Bank had $6.7
million in construction loans outstanding, representing 6.7% of the
Bank's gross loan portfolio. In 1995 the Bank began to utilize its
commissioned loan originators to increase its emphasis on construction
lending. In this respect, the commissioned loan originators originated
$7.8 million of construction loans during fiscal 1996, of which $5.8
million remained in the Bank's loan portfolio at June 30, 1996.
Construction loans to individuals are structured to convert to
permanent loans at the end of the construction phase, which typically
lasts six months. These construction loans have rates and terms which
match any one- to four-family loans then offered by the Bank, except
that during the construction phase, the borrower pays interest only.
Residential construction loans are generally underwritten pursuant to
the same guidelines used for originating permanent residential loans.
At June 30, 1996, the Bank had $5.2 million of construction loans to
borrowers intending to live in the properties upon completion of
construction.
Construction loans to builders of one- to four-family
residences generally have terms of up to six months and require the
payment of interest only at a fixed-rate for the loan term. The Bank
generally limits loans to builders for the construction of an unsold
home to one home in process per builder at any given time. At June 30,
1996, the Bank had $1.5 million of construction loans to builders of
one- to four-family residences.
Construction loans are obtained through continued business
from builders, as well as referrals from existing customers and walk-in
customers. The application process includes a submission to the Bank of
accurate plans, specifications and costs of the construction project.
These items are used as a basis to determine the appraised value of the
subject property. Loans are based on the current appraised value. The
Bank requires personal financial statements from the builder.
-29-
<PAGE>
Construction lending is generally considered to involve a
higher level of credit risk than one- to four-family residential lending
since the risk of loss on construction loans is dependent largely upon
the accuracy of the initial estimate of the individual property's value
upon completion of the project and the estimated cost (including
interest) of the project. If the cost estimate proves to be inaccurate,
the Bank may be required to advance funds beyond the amount originally
committed to permit completion of the project.
Consumer Lending. The Bank considers consumer lending an
integral component of its lending operations. Consumer loans generally
have shorter terms to maturity (thus reducing the Bank's exposure to
changes in interest rates) and historically have carried higher rates of
interest than do one- to four-family residential mortgage loans,
although that is not always the case. In addition, management believes
that the offering of consumer loan products helps to expand and create
stronger ties to its existing customer base, by increasing the number of
customer relationships and providing cross-marketing opportunities. At
June 30, 1996, the Bank's consumer loan portfolio totaled $24.7 million,
or 23.8% of its gross loan portfolio. The majority of such loans
consists of indirect and direct automobile paper, accounting for $16.1
million, or 15.6%, of the total loan portfolio at June 30, 1996. Under
applicable federal law, the Bank is authorized to invest up to 35% of
its assets in consumer loans.
The Bank offers a variety of secured consumer loans, including
automobile, boat, home equity, energy conservation loans, personal loans
secured by real estate, home improvement, mobile home, loans secured by
savings deposits and other consumer collateral. The Bank also offers a
limited amount of unsecured loans. The Bank generally originates
consumer loans in its market area. Consumer loan terms vary according
to the type of collateral and length of contract. The Bank's consumer
loans have either a fixed- or variable-rate of interest although
fixed-rate lending predominates.
The Bank is actively engaged in indirect dealer financing of
automobiles. Such indirect dealer loans are originated through a
network of approximately 10 automobile dealers located in, or in
counties contiguous to, the Bank's market area. The underwriting
standards employed by the Bank for indirect dealer loans are in
accordance with the Bank's general standards for underwriting consumer
loans. The determination of compliance with these standards is made by
the Bank rather than by the referring dealer. The Bank's automobile
loans are originated at fixed interest rates and are typically for terms
of up to six years. At June 30, 1996, indirect dealer automobile loans
totaled $14.1 million, or 57.1%, of the Bank's total consumer loan
portfolio. The Bank does not offer floor plan lines of credit to
automobile dealers.
At June 30, 1996, $2.3 million of the Bank's consumer loans
consisted of home equity line of credit loans. Home equity loans are
secured by second mortgages on owner-occupied, single-family residences.
The home equity loans generally have variable rates and typically carry
terms of ten years. At June 30, 1996, the Bank also had $2.7 million of
personal loans secured by real estate. These loans are underwritten
pursuant to the Bank's consumer lending guidelines, have fixed-rates,
have terms of up to ten years and are secured by either first or second
mortgages.
The Bank also originates energy conservation loans for the
purchase of home improvement items for energy conservation (i.e., heating
and cooling systems). These loans are fully guaranteed by the utility
company, however such guarantees are generally difficult to collect on
due to the rigidness of the wording contained in such guarantees. At
June 30, 1996, guaranteed energy conservation loans totaled $1.3
million.
The underwriting standards employed by the 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. In addition, the
stability of the applicant's monthly income from primary employment is
considered during the underwriting process. Although creditworthiness
of the applicant is the primary consideration, the underwriting process
also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount.
-30-
<PAGE>
Consumer loans may entail greater credit risk than do
residential mortgage loans, particularly in the case of consumer loans
that are unsecured, or are secured by rapidly depreciable assets, such
as automobiles. 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. While there can be no assurance that
delinquencies or non-performing consumer loans will not increase in the
future, the level of delinquencies over 90 days in the Bank's $24.7
million consumer loan portfolio was $136,000, or .55% of such loans, at
June 30, 1996.
Loan Originations, Purchases and Sales. The Bank originated
$60.0 million of loans during fiscal 1996, compared to $39.5 million and
$41.5 million in fiscal 1995 and 1994, respectively. The increase in
mortgage loans during fiscal 1996 was the result of the lower interest
rate environment which continued to stimulate the origination of
primarily fixed-rate loans during the period. Mortgage loan
originations are underwritten by the employees of the Bank. The Bank
employs commissioned loan salespersons to originate loans.
While the Bank originates both adjustable-rate and fixed-rate
loans, its ability to originate loans is dependent upon the relative
customer demand for loans in its market. Demand is affected by the
interest rate environment. Pursuant to its asset/liability management
strategy, the Bank's policy during past years has been to sell
fixed-rate loan originations in the secondary market. Effective for the
fiscal year ended June 30, 1995, as part of its business plan, the Bank
established interest rate levels at or above which, 15-, 20- and
30-year, fixed-rate mortgage loans were retained for its own portfolio.
The Bank sold fixed-rate loans in aggregate amounts of $5.8 million and
$2.5 million for the fiscal years ended June 30, 1996 and 1995, compared
to $22.3 million during fiscal 1994. From time to time, the Bank has
sold such loans pursuant to forward sales commitments in order to
mitigate the interest rate risk of loan originations. See "- One- to
Four-Family Residential Mortgage Lending."
When loans are sold, the Bank typically retains the
responsibility for servicing the loans. The Bank receives a servicing
fee for performing these services. The Bank serviced for others
mortgage loans amounting to $46.6 million at June 30, 1996. (See Note 5
of the Notes to the Consolidated Financial Statements contained in the
Annual Report to Stockholders attached as Exhibit 13 to the Form 10-KSB
(the "Annual Report").)
-31-
<PAGE>
The following table shows the loan origination, sale and
repayment activities of the Bank for the periods indicated. In
addition, during 1996 the Bank purchased one $500,000 real estate
development loan. There were no loan purchases during the fiscal 1994
and 1995.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------
1996 1995 1994
-------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable-rate:
Real estate - one to four-family $ 3,248 $13,506 $ 6,845
- multi-family and commercial real estate --- 1,024 ---
Non-real estate - consumer 1,750 673 844
------- ------- -------
Total adjustable-rate 4,998 15,203 7,689
------- ------- -------
Fixed-rate:
Real estate - one to four-family 42,419 7,030 23,456
- multi-family, commercial real estate and land 335 65 ---
Non-real estate - consumer 12,244 17,234 10,380
Total fixed-rate 54,998 24,329 33,836
------- ------- -------
Total loans originated 59,996 39,532 41,525
------- ------- -------
Sales and Repayments:
Real estate - one to four-family 5,839 2,471 22,331
------- ------- -------
Total loans sold 5,839 2,471 22,331
Principal repayments 27,535 17,845 17,266
-------- ------- -------
Total reductions 33,374 20,316 39,597
Increase (decrease) in other items, net 422 64 (374)
------- ------- -------
Net increase (decrease) $27,044 $19,280 $ 2,302
------- ------- -------
------- ------- -------
</TABLE>
Non-Performing Assets and Classified Assets. Generally, when
a borrower fails to make a required payment on real estate secured loans
and other loans the Bank institutes collection procedures by mailing a
delinquency notice. The customer is contacted again, by telephone, if
the delinquency is not promptly cured. In most cases, delinquencies are
cured promptly; however, if a loan secured by real estate has been
delinquent for more than 60 days, a notice is sent to the customer
requesting a personal interview to discuss their account and to make
arrangements to bring the loan current. At 90 days past due, the
delinquency is reviewed with the Board of Directors which generally
directs management to send a letter of default, and unless satisfactory
arrangements are made to bring the loan current by a stated date,
foreclosure procedures are instituted. If a loan secured by other
collateral has been delinquent for more than 60 days, a letter is sent
demanding payment; at 90 days past due, a default notice is sent and if
the loan is 120 or more days delinquent and satisfactory arrangements
have not been made for repayment, immediate repossession commences.
-32-
<PAGE>
Delinquent Loans. The following table sets forth the Bank's loan
delinquencies by type, by amount and by percentage of type at June 30,
1996.
<TABLE>
<CAPTION>
Loans Delinquent For:
---------------------------------------------------------------
60-89 Days 90 Days and Over Total Delinquent Loans
----------------------------- ----------------------------- ----------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One to four- family 1 $ 38 .05% 4 $175 .22% 5 $213 .27%
Consumer 23 125 .50% 25 136 .54% 48 261 1.04%
--- ---- --- ---- --- ----
Total 24 $163 .16% 29 $311 .30% 53 $474 .46%
--- ---- --- ---- --- ----
--- ---- --- ---- --- ----
</TABLE>
Non-Performing Assets. The table below sets forth the amounts
and categories of non-performing assets in the Bank's loan portfolio.
Loans are placed on non-accrual status when the loan is delinquent 90
days or greater. For all years presented, the Bank has had no troubled
debt restructurings (which involve forgiving a portion of interest or
principal on any loans or making loans at a rate materially less than
that of market rates) nor any accruing loans delinquent more than 90
days. Foreclosed assets include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non accruing loans:
One- to four-family $175 $--- $--- $ 31 $129
Consumer 136 67 53 30 16
---- ---- ---- ---- -----
Total 311 67 53 61 145
---- ---- ---- ---- -----
Foreclosed assets:
One- to four-family 83 175 3 55 188
Consumer 30 14 12 --- 7
---- ---- ---- ---- -----
Total 113 189 15 55 195
---- ---- ---- ---- -----
Total non-performing assets $424 $256 $68 $116 $340
---- ---- ---- ---- -----
---- ---- ---- ---- -----
Total as a percentage of total assets .28% .20% .06% .09% .26%
---- ---- ---- ---- -----
---- ---- ---- ---- -----
</TABLE>
For the year ended June 30, 1996, gross interest income which
would have been recorded had the non-accruing loans been current in
accordance with their original terms was immaterial.
Other Loans of Concern. As of June 30, 1996, there were no
loans not included in the table above where known information about the
possible credit problems of borrowers caused management to have doubts
as to the ability of the borrower to comply with present loan repayment
terms and which may result in disclosure of such loans in the future,
except for three consumer loans, aggregating $15,000, that were
previously restructured and 60 days or more past due at June 30, 1996.
-33-
<PAGE>
Classified Assets. Federal regulations provide for the
classification of loans and other assets, such as debt and equity
securities considered by the OTS to be of lesser quality, as
"substandard," "doubtful" or "loss." An asset is considered
"substandard" if it is inadequately protected by the current net worth
and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct
possibility" that the insured institution will sustain "some loss" if
the deficiencies are not corrected. Assets classified as "doubtful"
have all of the weaknesses inherent in those classified "substandard,"
with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing
facts, conditions, and values, "highly questionable and improbable."
Assets classified as "loss" are those considered "uncollectible" and of
such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as
either substandard or doubtful, it may establish general allowances for
loan losses in an amount deemed prudent by management. General
allowances represent loss allowances which have been established to
recognize the inherent risk associated with lending activities, but
which, unlike specific allowances, have not been allocated to particular
problem assets. When an insured institution classifies problem assets
as "loss," it is required either to establish a specific allowance for
losses equal to 100% of that portion of the asset so classified or to
charge off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances
is subject to review by the OTS, which may order the establishment of
additional general or specific loss allowances.
In connection with the filing of its periodic reports with the
OTS and in accordance with its classification of assets policy, the Bank
regularly reviews the problem assets in its portfolio to determine
whether any assets require classification in accordance with applicable
regulations. At June 30, 1996, the Bank had classified $265,000 as
substandard, none as doubtful and $174,000 as loss.
Allowance for Loan Losses. The allowance for loan losses is
established through a provision for loan losses based on management's
evaluation of the risk inherent in its loan portfolio and changes in the
nature and volume of its loan activity. Such evaluation, which includes
a review of loans for which full collectibility may not be reasonably
assured, considers among other matters, the loan classifications
discussed above, the estimated fair value of the underlying collateral,
economic conditions, historical loan loss experience, and other factors
that warrant recognition in providing for an adequate loan loss
allowance.
Real estate properties acquired through foreclosure are
recorded at fair value. If fair value at the date of foreclosure is
lower than the balance of the related loan, the difference will be
charged-off to the allowance for loan losses at the time of transfer.
Valuations are periodically updated by management and if the value
declines, a specific provision for losses on such property is
established by a charge to operations.
Although management believes that it uses the best information
available to determine the allowance, unforeseen market conditions could
result in adjustments and net earnings could be significantly affected
if circumstances differ substantially from the assumptions used in
making the final determination. Future additions to the Bank's
allowance will be the result of periodic loan, property and collateral
reviews and thus cannot be predicted in advance. In addition, federal
regulatory agencies, as an integral part of the examination process,
periodically review the Bank's allowance for loan losses. Such agencies
may require the Bank to recognize additions to the allowance level based
upon their judgment of the information available to them at the time of
their examination. At June 30, 1996, the Bank had a total allowance for
loan losses of $646,000, representing 208.4% of total non-performing
loans. See "Management's Discussion and Analysis - Results of
Operations" in the Annual Report.
-34-
<PAGE>
The following table sets forth an analysis of the Bank's
allowance for loan losses.
Year Ended June 30
------------------------
1996 1995 1994
----- ----- -----
(Dollars in Thousands)
Balance at beginning of period $ 559 $572 $582
Charge-offs:
Consumer (126) (26) (19)
----- ---- ----
Total charge-offs (126) (26) (19)
----- ---- ----
Recoveries:
Consumer 38 51 57
----- ---- ----
Total recoveries 38 51 57
----- ---- ----
Net (charge-offs) recoveries (88) 25 38
Provision charged (credited) to operations 175 (38) (48)
----- ---- ----
Balance at end of period $ 646 $559 $572
----- ---- ----
----- ---- ----
Ratio of net charge-offs during the period to
average loans outstanding during the period .10% N/A N/A
Ratio of net charge-offs during the period to
average non-performing assets 25.96% N/A N/A
The distribution of the Bank's allowance for losses on loans
at the dates indicated is summarized in the following table. The
portion of the allowance allocated to each loan category does not
necessarily represent the total available for losses within that
category since the total allowance is applicable to the entire loan
portfolio.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- -------------------------------- ---------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- --------- ---------- -------- --------- ---------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family $166 $ 70,035 67.60% $154 $46,347 62.15% $154 $36,870 67.39%
Multi-family --- 1,296 1.24 --- 874 1.17 --- 437 .80
Commercial real estate --- 466 .45 --- 536 .72 --- 553 1.01
Construction --- 6,941 6.70 --- 2,73 2.67 --- 1,761 3.22
Consumer 373 24,870 24.01 281 24,078 32.29 226 15,091 27.58
Unallocated 107 --- --- 124 --- --- 192 --- ---
---- -------- ------ ---- ------- ------ ---- ------- ------
Total $646 $103,598 100.00% $559 $74,571 100.00% $572 $54,712 100.00%
---- -------- ------ ---- ------- ------ ---- ------- ------
---- -------- ------ ---- ------- ------ ---- ------- ------
</TABLE>
-35-
<PAGE>
Investment Activities - General. As of June 30, 1996, the
Bank held $9.38 million and $3.67 million, respectively, of principal
amount of mortgage-backed securities and investment securities which the
Bank intends to hold until maturity. As of such date, these securities
had a market value of $9.35 million and $3.63 million, respectively. At
that date, the Bank also held $26.83 million and $5.63 million of
mortgage-backed securities and investment securities, respectively, as
available for sale. For further information regarding the
mortgage-backed securities and investment securities and the accounting
treatment for such securities, see Notes 3 and 4 of the Notes to the
Consolidated Financial Statements in the Annual Report.
Mortgage-backed Securities. The Bank purchases
mortgage-backed securities to supplement loan production. The type of
securities purchased is based upon the Bank's asset/liability management
strategy and balance sheet objectives. Most of the mortgage-backed
securities purchased by the Bank over the last several years have had
adjustable interest rates or short or intermediate average lives to
maturity, generally two to five years. The Bank has invested primarily
in federal agency securities, principally Federal National Mortgage
Association ("FNMA"), FHLMC and Government National Mortgage Association
("GNMA").
The FNMA, FHLMC and GNMA certificates are modified
pass-through mortgage-backed securities that represent undivided
interests in underlying pools of fixed-rate, or certain types of
adjustable-rate, single-family residential mortgages issued by these
government-sponsored entities which provide the holder a guarantee of
timely payments of interest and principal.
The Bank also invests in collateralized mortgage obligations
and certain participating interests in real estate mortgage investment
conduits ("REMICs") (hereinafter collectively referred to as "CMOs").
CMOs are special types of pass-through certificates in which the stream
of principal and interest payments on the underlying mortgages or
mortgage-backed securities is used to create classes with different
maturities and, in some cases, amortization schedules, as well as a
residual interest, with each such class possessing different risk
characteristics. Management believes these securities may represent
attractive alternatives relative to other investments due to the wide
variety of maturity and repayment options available through such
investments. However, these investments may also expose the Bank to
considerable risk of loss if they are not managed effectively. The high
risk nature of these products stem from their price volatility, the high
degree of technical expertise required to understand how they behave in
various interest-rate environments and prepayment scenarios, and the
lack of liquidity which may exist should the securities need to be sold.
Some CMO instruments, like the ones the Bank purchases, are
most like debt instruments because these CMO instruments have stated
principal amounts and traditionally defined interest-rate terms.
Purchasers of certain other CMO instruments are entitled to the excess,
if any, of the issuer's cash inflows, including reinvestment earnings,
over the cash outflows for debt service and administrative expenses.
These CMO instruments may include instruments designated as residual
interests and are thought to be "high risk" in that these CMO
instruments could result in the loss of a portion of the original
investment. Cash flows from residual interests are extremely sensitive
to prepayments and, thus, contain a high degree of interest-rate risk.
The investment policy of the Bank does not allow for the purchase of
high risk CMOs. The Bank held $22.8 million of CMOs at June 30, 1996.
See Note 4 to the Notes to the Consolidated Financial Statements in the
Annual Report for additional information regarding the amortized cost
and estimated fair value of these securities.
-36-
<PAGE>
The following table sets forth the expected lives of the
Bank's mortgage-backed securities at June 30, 1996. See Note 4 of the
Notes to the Consolidated Financial Statements in the Annual Report for
information regarding the classification and accounting treatment of the
Bank's mortgage-backed securities.
<TABLE>
<CAPTION>
----------------------------------------------------- June 30, 1996
1 Year After 1 through After 5 Years Over 10 Balance
or Less 5 Years through 10 Years Outstanding
------- --------------- ------------- ------- --------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
FHLMC $1,990 $ 7,730 $ 991 $5,223 $15,934
FNMA --- 8,106 6,539 738 15,383
GNMA --- 2,864 2,030 --- 4,894
Other --- --- --- --- ---
------ ------- ------ ------ -------
Total $1,990 $18,700 $9,554 $5,962 $36,211
------ ------- ------ ------ -------
------ ------- ------ ------ -------
</TABLE>
The following table shows the mortgage-backed securities
purchase, sale and repayment activities of the Bank for the periods
indicated.
Year Ended June 30
-------------------------------------
1996 1995 1994
-------- ------- --------
(In Thousands)
Purchases $ 14,556 $ 4,920 $ 18,609
Sales (10,833) (4,974) (20,369)
Repayments (4,186) (6,596) (14,129)
Other 609 380 (2,390)
-------- ------- --------
Net increase (decrease) $ 146 $(6,270) $(18,279)
-------- ------- --------
-------- ------- --------
Investment Securities. The Bank must maintain minimum levels
of investments that qualify as liquid assets under OTS regulations.
Liquidity may increase or decrease depending upon the availability of
funds and comparative yields on investments in relation to the return on
loans. Historically, the Bank has maintained liquid assets at levels
above the minimum requirements imposed by the OTS regulations and above
levels believed adequate to meet the requirements of normal operations,
including potential deposit outflows. Cash flow projections are
regularly reviewed and updated to assure that adequate liquidity is
maintained. At June 30, 1996, the Bank's liquidity ratio (liquid assets
as a percentage of net withdrawable savings deposits and current
borrowings) was 5.9%. The Bank's level of liquidity is a result of
management's asset/liability strategy. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Asset/Liability Management" and "- Liquidity and Capital Resources" in
the Annual Report.
Federally chartered savings institutions have the authority to
invest in various types of liquid assets, including U.S. Treasury
obligations, securities of various federal agencies, certain
certificates of deposit of insured banks and savings institutions,
certain bankers' acceptances, repurchase agreements and federal funds.
Subject to various restrictions, federally chartered savings
institutions may also invest their assets in investment grade commercial
paper and corporate debt securities and mutual funds whose assets
conform to the investments that a federally chartered savings
institution is otherwise authorized to make directly.
OTS regulations restrict investments in corporate debt and
equity securities by the Bank. See "Regulation - Federal Regulation of
Savings Associations" for a discussion of restrictions on the Bank's
investment activities.
-37-
<PAGE>
The following table sets forth the composition of the Bank's
investment portfolio and mortgage-backed securities portfolio at the
dates indicated.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------
1996 1995 1994
-------------------- ------------------ -----------------
Book % of Book % of Book % of
Value Total Value Total Value Total
------- ------ ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
Federal agency obligations $ 9,235 88.07% $13,965 93.78% $11,780 92.71%
Equity securities 63 .60 62 .42 62 .49
------- ------ ------- ------ ------- ------
Subtotal 9,298 88.67 14,027 94.20 11,842 93.20
FHLB stock 1,188 11.33 864 5.80 864 6.80
------- ------ ------- ------ ------- ------
Total investment securities and FHLB stock $10,486 100.00% $14,891 100.00% $12,706 100.00%
------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------
Average remaining life of investment securities 2.8 years 2.9 years 6.4 years
Other interest-earning assets:
Interest-bearing deposits with banks 190 100.00% $ 190 100.00% $ 190 100.00%
------- ------ ------- ------ ------- ------
Total $ 190 100.00% $ 190 100.00% $ 190 100.00%
------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------
Mortgage-backed securities:
GNMA $ 2,399 6.62 $ 2,996 8.31 $ 4,159 9.82
FNMA 7,954 21.97 7,175 19.89 8,643 20.42
FHLMC 2,692 7.43 5,805 16.10 9,049 21.37
CMOs/REMICS 22,790 62.94 19,948 55.31 20,157 47.61
------- ------ ------- ------ ------- ------
Total 35,835 98.96 35,924 99.61 42,007 99.22
Unamortized premium, net 376 1.04 141 .39 328 .78
------- ------ ------- ------ ------- ------
Total mortgage-backed securities $36,211 100.00% $36,065 100.00% $42,335 100.00%
------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------
</TABLE>
The composition and maturities of the investment securities
portfolio, excluding equity securities and FHLB stock, are indicated in
the following table.
<TABLE>
<CAPTION>
June 30, 1996
-----------------------------------------------------------------------------------
1 Year After 1 After 5 Over
or Year to Years to 10 Total Investment
Less 5 Years 10 Years Years Securities
------ ------- -------- ----- ------------------
Book Book Book Book Book Fair
Value Value Value Value Value Value
----- ----- ----- ---- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal agency obligations $500 $6,571 $2,214 $450 $9,235 $9,198
---- ------ ------ ---- ------ ------
Total investment securities $500 $6,571 $2,214 $450 $9,235 $9,198
---- ------ ------ ---- ------ ------
---- ------ ------ ---- ------ ------
Weighted average yield 5.80% 5.12% 6.76% 7.59% 5.64% ---
</TABLE>
-38-
<PAGE>
The Bank's investment securities portfolio and mortgage-backed
securities portfolio at June 30, 1996 contained neither tax-exempt
securities nor securities of any issuer with an aggregate book value in
excess of 10% of the Bank's retained earnings, excluding those issued by
the U.S. Government or its agencies.
Sources of Funds. The Bank's primary sources of funds are
deposits, payment of principal and interest on loans and mortgage-backed
securities, sale of loans and mortgage-backed securities, interest
earned on or maturation and sale of investment securities, funds
provided from operations and borrowings.
The Bank offers a variety of deposit accounts having a wide
range of interest rates and terms. The Bank's deposits consist of
passbook and statement savings accounts, NOW and non-interest-bearing
checking accounts, and money market and certificate accounts. The Bank
relies primarily on advertising, competitive pricing policies and
customer service to attract and retain these deposits. The Bank
solicits deposits from its market area only. The Bank does not
currently use brokers to obtain deposits although it did so in the mid
1980s.
The flow of deposits is influenced significantly by general
economic conditions, changes in money market and prevailing interest
rates and competition. The variety of deposit accounts offered by the
Bank has allowed it to be competitive in obtaining funds and to respond
with flexibility to changes in consumer demand. The Bank has become
more susceptible to short-term fluctuations in deposit flows, as
customers have become more interest rate conscious. The Bank manages
the pricing of its deposits in keeping with its asset/liability
management, liquidity and growth objectives. Based on its experience,
the Bank believes that its savings and interest and non-interest-bearing
checking accounts are relatively stable sources of deposits. However,
the ability of the Bank to attract and maintain CDS, and the rates paid
on these deposits, has been and will continue to be significantly
affected by market conditions.
The following table sets forth the savings flows at the Bank
during the periods indicated.
Year Ended June 30
-------------------------------------
1996 1995 1994
-------- -------- --------
(Dollars in Thousands)
Opening balance $106,294 $108,847 $108,387
Net increase (decrease) $ 1,634 $ (2,553) $ 460
-------- -------- ---------
Ending balance $107,928 $106,294 $108,847
-------- -------- ---------
-------- -------- ---------
Percent increase (decrease) 1.51% (2.4)% .42%
---- ----- ---
---- ----- ---
-39-
<PAGE>
The following table indicates the amount of the Bank's
certificates of deposit and other deposits by time remaining until
maturity as of June 30, 1996.
<TABLE>
<CAPTION>
Maturity
--------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------- ------- ------- --------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000 $14,380 $ 9,632 $22,250 $20,099 $66,361
Certificates of deposit of $100,000 or more 1,300 1,000 3,782 5,831 11,913
Public funds (1) 1,543 411 518 219 2,691
------- ------- ------- ------- -------
Total certificates of deposit $17,223 $11,043 $26,550 $26,149 $80,965
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
(1) Deposits from governmental and other public entities.
Borrowings. Savings deposits have historically been the
Bank's primary source of funds. The Bank's other available sources of
funds include advances from the FHLB of Indianapolis and other
borrowings. As a member of the FHLB of Indianapolis, the Bank is
required to own capital stock in the FHLB and is authorized to apply for
advances from the FHLB. Each FHLB credit program has its own interest
rate, which may be fixed or variable, and range of maturities. The FHLB
of Indianapolis may prescribe the acceptable uses for these advances, as
well as limitations on the size of the advances and repayment
provisions. At June 30, 1996, the Bank had FHLB advances totaling $23.8
million.
In 1988, the Bank incorporated SJS Capital Corporation ("SJS
Capital") for the purpose of issuing a CMO to various investors. In
November 1988, the financing subsidiary issued a CMO with a total par
value of $20.8 million comprised of five classes with different stated
maturity dates ranging from April 1993 to January 2020. The net
proceeds of the CMO offering amounted to $18.8 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 the
Bank to the financing subsidiary. As a result of the lower interest
rate environment prevailing since 1988, 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 June 1994, the remaining
outstanding classes of the CMO with a balance of $3.3 million were
extinguished and the corresponding collateral was sold to finance the
transaction. See Note 9 of the Notes to the Consolidated Financial
Statements in the Annual Report for additional information concerning
the CMO.
-40-
<PAGE>
The following table sets forth the maximum month-end balance
and average balance of the Bank's CMO and other borrowings for the
periods indicated.
Year Ended June 30,
--------------------------
1996 1995 1994
------- ------ ------
(In Thousands)
Maximum Balance:
CMO borrowing --- --- $7,033
Other borrowings (FHLB advances) $23,750 $5,000 ---
Average Balance:
CMO borrowing --- --- $4,808
Other borrowings (FHLB advances) $15,679 $3,105 ---
The following table sets forth certain information as to the
Bank's borrowings at the dates indicated.
June 30,
-------------------------------
1996 1995 1994
------- ------ -----
(Dollars In Thousands)
CMO borrowings $ --- $ --- $---
Other borrowings (FHLB advances) 23,750 4,500 ---
Total borrowings $23,750 $4,500 $---
Weighted average interest rate 5.94% 6.09% ---%
Subsidiary and Other Activities. Federal associations
generally may invest up to 2% of their assets in service corporations,
plus an additional 1% of assets for community purposes. In addition,
federal associations may invest up to 50% of their total capital in
conforming loans to their service corporations in which they own more
than 10% of the capital stock. Federal associations are also permitted
to invest an unlimited amount in operating subsidiaries engaged solely
in activities which a federal association may engage in directly.
SJS has two wholly owned service corporation subsidiaries, SJS
Financial Corporation ("SJS Financial") and SJS Capital. SJS Financial
was formed in 1988 to engage in re-insurance activity through a
relationship with Minnesota Mutual Life Insurance Company and has
engaged in no other operations since its formation. At June 30, 1996,
SJS's investment in its service corporation totaled $112,000. For a
discussion on SJS Capital, see "Source of Funds - Borrowings" above and
Note 9 of Notes to Consolidated Financial Statements in the Annual
Report.
Competition
SJS faces strong competition, both in originating real estate
and other loans and in attracting deposits. Competition in originating
real estate loans comes primarily from other savings institutions,
commercial banks, credit unions and mortgage bankers making loans
secured by real estate located in Berrien, Van Buren, Allegan and Cass
Counties, the Bank's market area. Other savings institutions,
commercial banks, credit unions and finance companies provide vigorous
competition in consumer lending.
-41-
<PAGE>
The Bank attracts all of its deposits through its branch
offices, primarily from the communities in which those branch offices
are located; therefore, competition for those deposits is principally
from other savings institutions, commercial banks and credit unions
located in the same communities, as well as mutual funds. The Bank
competes for these deposits by offering a variety of deposit accounts at
competitive rates, convenient business hours, and convenient branch
locations with interbranch deposit and withdrawal privileges.
Employees
At June 30, 1996, the Bank had a total of 51 employees,
including 10 part-time and contract employees. The Bank's employees are
not represented by any collective bargaining group. Management
considers its employee relations to be good.
Regulation
General. The Bank is a federally chartered savings bank, the
deposits of which are federally insured and backed by the full faith and
credit of the United States Government. Accordingly, the Bank is
subject to broad federal regulation and oversight extending to all its
operations. The Bank is a member of the FHLB of Indianapolis and is
subject to certain limited regulation by the Federal Reserve Board. As
the savings and loan holding company of the Bank, SJS also is subject to
federal regulation and oversight. The purpose of the regulation of SJS
and other holding companies is to protect subsidiary savings
associations. The Bank is a member of the SAIF which together with the
Bank Insurance Fund (the "BIF") are the two deposit insurance funds
administered by the FDIC, and the deposits of the Bank are insured by
the FDIC. As a result, the FDIC has certain regulatory and examination
authority over the Bank.
Certain of these regulatory requirements and restrictions are
discussed below or elsewhere in this Proxy Statement.
Federal Regulation of Savings Associations. The OTS has
extensive authority over the operations of savings associations. As
part of this authority, the Bank is required to file periodic reports
with the OTS and is subject to periodic examinations by the OTS and the
FDIC. The last regular OTS and FDIC examinations of the Bank were as of
March 31, 1996 and April 8, 1991, respectively. Under agency scheduling
guidelines, it is likely that another examination will be initiated in
the near future. When these examinations are conducted by the OTS and
the FDIC, the examiners generally have the authority to require the Bank
to provide for higher general or specific loan loss reserves. All
savings associations are subject to a semi-annual assessment, based upon
the savings association's total assets, to fund the operations of the
OTS. The Bank's OTS assessment for the fiscal year ended June 30, 1996
was approximately $41,000.
The OTS also has extensive enforcement authority over all
savings institutions and their holding companies, including the Bank and
SJS. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or
removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound practices. Other actions or inactions
may provide the basis for enforcement action, including misleading or
untimely reports filed with the OTS. Except under certain
circumstances, public disclosure of final enforcement actions by the OTS
is required.
In addition, the investment, lending and branching authority
of the Bank is prescribed by federal laws and regulations, and it is
prohibited from engaging in any activities not permitted by such laws
and regulations. For instance, no savings institution may invest in
non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured
by non-residential real property may not exceed 400% of total capital,
except with approval of the OTS. Federal savings associations are also
generally authorized to branch nationwide. The Bank is in compliance
with the noted restrictions.
-42-
<PAGE>
The Bank's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of
unimpaired capital and surplus (except for loans fully secured by
certain readily marketable collateral, in which case this limit is
increased to 25% of unimpaired capital and surplus). At June 30, 1996,
the Bank's lending limit under this restriction was $2.1 million. The
Bank is in compliance with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has
adopted guidelines establishing safety and soundness standards on
matters such as loan underwriting and documentation, asset quality,
earnings standards, internal controls and audit systems, interest rate
risk exposure and compensation and other employee benefits. Any
institution which fails to comply with these standards must submit a
capital compliance plan. A failure to submit a plan or to comply with
an approved plan will subject the institution to further enforcement
action.
Insurance of Accounts and Regulation by the FDIC. The Bank is
a member of the SAIF, which is administered by the FDIC. Deposits are
insured up to applicable limits by the FDIC and such insurance is backed
by the full faith and credit of the United States Government. As
insurer, the FDIC imposes deposit insurance premiums and is authorized
to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from
engaging in any activity the FDIC determines by regulation or order to
pose a serious risk to the SAIF and the BIF. The FDIC also has the
authority to initiate enforcement actions against savings associations,
after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution
has engaged in unsafe or unsound practices, or is in an unsafe or
unsound condition. (See Note 5 of the Notes to Consolidated Financial
Statements in Appendix E.)
Regulatory Capital Requirements. Federally insured savings
associations, such as the Bank, are required to maintain a minimum level
of regulatory capital. The OTS has established capital standards,
including a tangible capital requirement, a leverage ratio (or core
capital) requirement and a risk-based capital requirement applicable to
such savings associations. Generally, these capital requirements must
be generally as stringent as the comparable capital requirements for
national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on
a case-by-case basis.
The capital regulations require tangible capital of at least
1.5% of adjusted total assets (as defined by regulation). Tangible
capital generally includes common stockholders' equity and retained
income, and certain noncumulative perpetual preferred stock and related
income. In addition, all intangible assets, other than a limited amount
of purchased mortgage servicing rights, must be deducted from tangible
capital. At June 30, 1996, the Bank did not have any intangible assets.
The OTS regulations establish special capitalization
requirements for savings associations that own subsidiaries. In
determining compliance with the capital requirements, all subsidiaries
engaged solely in activities permissible for national banks or engaged
in certain other activities solely as agent for its customers are
"includable" subsidiaries that are consolidated for capital purposes in
proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are
deducted from assets and capital, with a five-year transition period
beginning on July 1, 1990, for investments made before April 12, 1989.
The Bank's subsidiary is an includable subsidiary.
At June 30, 1996, the Bank had tangible capital of $14.3
million, or 9.4% of adjusted total assets, which is approximately $12.0
million above the minimum requirement of 1.5% of adjusted total assets
in effect on that date.
The capital standards also require core capital equal to at
least 3% of adjusted total assets. Core capital generally consists of
tangible capital plus certain intangible assets, including a limited
amount of purchased credit card relationships. As a result of the
prompt corrective action provisions discussed below, however, a savings
association must maintain a core capital ratio of at least 4% to be
considered adequately capitalized unless its supervisory condition is
such to allow it to maintain a 3% ratio. At June 30, 1996, the Bank had
no intangibles which were subject to these tests.
-43-
<PAGE>
At June 30, 1996, the Bank had core capital equal to $14.3
million, or 9.4% of adjusted total assets, which is $8.2 million above
the minimum leverage ratio requirement of 4% as in effect on that date.
The OTS risk-based requirement requires savings associations
to have total capital of at least 8% of risk-weighted assets. Total
capital consists of core capital, as defined above, and supplementary
capital. Supplementary capital consists of certain permanent and
maturing capital instruments that do not qualify as core capital and
general valuation loan and lease loss allowances up to a maximum of
1.25% of risk-weighted assets. Supplementary capital may be used to
satisfy the risk-based requirement only to the extent of core capital.
The OTS is also authorized to require a savings association to maintain
an additional amount of total capital to account for concentration of
credit risk and the risk of non-traditional activities. At June 30,
1996, the Bank had no capital instruments that qualify as supplementary
capital and $646,000 of general loss reserves, which was less than 1.25%
of risk-weighted assets.
Certain exclusions from capital and assets are required to be
made for the purpose of calculating total capital. Such exclusions
consist of equity investments (as defined by regulation) and that
portion of land loans and nonresidential construction loans in excess of
an 80% loan-to-value ratio and reciprocal holdings of qualifying capital
instruments. The Bank had no such exclusions from capital and assets at
June 30, 1996.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk
weight, ranging from 0% to 100%, based on the risk inherent in the type
of asset. For example, the OTS has assigned a risk weight of 50% for
prudently underwritten permanent one- to four-family first lien mortgage
loans not more than 90 days delinquent and having a loan to value ratio
of not more than 80% at origination unless insured to such ratio by an
insurer approved by the FNMA or FHLMC.
On June 30, 1996, the Bank had total risk-based capital of
$14.7 million (including approximately $14.3 million in core capital and
no qualifying supplementary capital, and risk-weighted assets of $75.3
million (with no converted off-balance sheet assets); or total capital
of 19.5% of risk-weighted assets. This amount was $8.7 million above
the 8% requirement in effect on that date.
The OTS has adopted a final rule that requires every savings
association with more than normal interest rate risk exposure to deduct
from its total capital, for purposes of determining compliance with such
requirement, an amount equal to 50% of its interest-rate risk exposure
multiplied by the present value of its assets. This exposure is a
measure of the potential decline in the net portfolio value of a savings
association, greater than 2% of the present value of its assets, based
upon a hypothetical 200 basis point increase or decrease in interest
rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule provides for a two quarter lag
between calculating interest rate risk and recognizing any deduction
from capital. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an
interest rate risk deduction determination. It is uncertain as to when
this evaluation may be completed. Any savings association with less
than $300 million in assets and a total capital ratio in excess of 12%
is exempt from this requirement unless the OTS determines otherwise.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset/Liability Management" in the Annual Report
for information regarding the effect of this rule on the Bank.
The OTS and the FDIC are authorized and, under certain
circumstances required, to take certain actions against savings
associations that fail to meet their capital requirements. The OTS is
generally required to take action to restrict the activities of an
"undercapitalized association" (generally defined to be one with less
than either a 4% core capital ratio, a 4% Tier 1 risked-based capital
ratio or an 8% risk-based capital ratio). Any such association must
submit a capital restoration plan and until such plan is approved by the
OTS may not increase its assets, acquire another institution, establish
a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions, discussed below, that are applicable to significantly
undercapitalized associations.
-44-
<PAGE>
As a condition to the approval of the capital restoration
plan, any company controlling an undercapitalized association must agree
that it will enter into a limited capital maintenance guarantee with
respect to the institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital
plan or is "significantly undercapitalized" (i.e., Tier 1 risk-based or
core capital ratios of less than 3% or a risk-based capital ratio of
less than 6%) must be made subject to one or more of additional
specified actions and operating restrictions which may cover all aspects
of its operations and include a forced merger or acquisition of the
association. An association that becomes "critically undercapitalized"
(i.e., a tangible capital ratio of 2% or less) is subject to further
mandatory restrictions on its activities in addition to those applicable
to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the
FDIC) for a savings association, with certain limited exceptions, within
90 days after it becomes critically undercapitalized. Any
undercapitalized association is also subject to the general enforcement
authority of the OTS and the FDIC, including the appointment of a
conservator or a receiver.
Limitations on Dividends and Other Capital Distributions. OTS
regulations impose various restrictions or requirements on associations
with respect to their ability to pay dividends or make other
distributions of capital. OTS regulations prohibit an association from
declaring or paying any dividends or from repurchasing any of its stock
if, as a result, the regulatory capital of the association would be
reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion.
The OTS utilizes a three-tiered approach to permit
associations, based on their capital level and supervisory condition, to
make capital distributions which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the
capital account. See "- Regulatory Capital Requirements."
Generally, Tier 1 associations, which are associations that
before and after the proposed distribution meet their fully phased-in
capital requirements, may make capital distributions during any calendar
year equal to the greater of 100% of net income for the year-to-date
plus 50% of the amount by which the lesser of the association's
tangible, core or risk-based capital exceeds its fully phased-in capital
requirement for such capital component, as measured at the beginning of
the calendar year, or the amount authorized for a Tier 2 association.
However, a Tier 1 association deemed to be in need of more than normal
supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association as a result of such a determination. The Bank meets the
requirements for a Tier 1 association and has not been notified of a
need for more than normal supervision. Tier 2 associations, which are
associations that before and after the proposed distribution meet their
current minimum capital requirements, may make capital distributions of
up to 75% of net income over the most recent four quarter period.
Tier 3 associations (which are associations that do not meet
current minimum capital requirements) that propose to make any capital
distribution and Tier 2 associations that propose to make a capital
distribution in excess of the noted safe harbor level must obtain OTS
approval prior to making such distribution. Tier 2 associations
proposing to make a capital distribution within the safe harbor
provisions and Tier 1 associations proposing to make any capital
distribution need only submit written notice to the OTS 30 days prior to
such distribution. As a subsidiary of SJS, the Bank will also be
required to give the OTS 30 days' notice prior to declaring any dividend
on its stock. The OTS may object to the distribution during that 30-day
period based on safety and soundness concerns. See "- Regulatory
Capital Requirements."
-45-
<PAGE>
The OTS has proposed regulations that would revise the current
capital distribution restrictions. The proposal eliminates the current
tiered structure and the safe-harbor percentage limitations. Under the
proposal a savings association may make a capital distribution without
notice to the OTS (unless it is a subsidiary of a holding company)
provided that it has a CAMEL 1 or 2 rating, is not in troubled condition
and would remain adequately capitalized (as defined in the OTS prompt
corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following
the proposed distribution but do not meet the other noted requirements
must notify the OTS 30 days prior to declaring a capital distribution.
The OTS stated it will generally regard as permissible that amount of
capital distributions that do not exceed 50% of the institution's excess
regulatory capital plus net income to date during the calendar year. A
savings association may not make a capital distribution without prior
approval of the OTS and the FDIC if it is undercapitalized before, or as
a result of, such a distribution. As under the current rule, the OTS
may object to a capital distribution if it would constitute an unsafe or
unsound practice. No assurance may be given as to whether or in what
form the regulations may be adopted.
Liquidity. All savings associations, including the Bank, are
required to maintain an average daily balance of liquid assets equal to
a certain percentage of the sum of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or
less. For a discussion of what the Bank includes in liquid assets, see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources" in the Annual Report.
This liquid asset ratio requirement may vary from time to time (between
4% and 10%) depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset
ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States
Treasury obligations) currently must constitute at least 1% of the
association's average daily balance of net withdrawable deposit accounts
and current borrowings. Penalties may be imposed upon associations for
violations of either liquid asset ratio requirement. At June 30, 1996,
the Bank was in compliance with both requirements, with an overall
liquid asset ratio of 7.1% and a short-term liquid assets ratio of 3.4%.
Accounting. An OTS policy statement applicable to all savings
associations clarifies and re-emphasizes that the investment activities
of a savings association must be in compliance with approved and
documented investment policies and strategies, and must be accounted for
in accordance with GAAP. Under the policy statement, management must
support its classification of and accounting for loans and securities
(i.e., whether held for investment, sale or trading) with appropriate
documentation.
The OTS has adopted an amendment to its accounting
regulations, which may be made more stringent than GAAP by the OTS, to
require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial
reports must incorporate any other accounting regulations or orders
prescribed by the OTS. The Bank is in compliance with these amended
rules.
Qualified Thrift Lender Test. All savings associations,
including the 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 assets (which consists of total assets less intangibles,
properties used to conduct the savings association's business and liquid
assets not exceeding 20% of total assets) in qualified thrift
investments on a monthly average for nine out of every 12 months on a
rolling basis. Such assets primarily consist of residential housing
related loans and investments. At June 30, 1996, the Bank met the test
and has always met the test since its effectiveness.
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 Bank Insurance Fund. If an
association that fails the test has not yet requalified and has not
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 subject to national bank
limits for payment of dividends.
-46-
<PAGE>
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. See "- Company Regulation."
Community Reinvestment Act. Under the Community Reinvestment
Act ("CRA"), every FDIC insured institution has a continuing and
affirmative obligation consistent with safe and sound banking practices
to help meet the credit needs of its entire community, including low and
moderate income neighborhoods. The CRA does not establish specific
lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and
services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with
the examination of the Bank, to assess the institution's record of
meeting the credit needs of its community and to take such record into
account in its evaluation of certain applications, such as a merger or
the establishment of a branch, by the Bank. An unsatisfactory rating
may be used as the basis for the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently
revised the CRA regulations and the methodology for determining an
institution's compliance with the CRA. Due to the heightened attention
being given to the CRA in the past few years, the Bank may be required
to devote additional funds for investment and lending in its local
community. The Bank was examined for CRA compliance in May 1995 and
received a rating of "satisfactory."
Transactions with Affiliates. Generally, transactions between
a savings association or its subsidiaries and its affiliates are
required to be on terms as favorable to the association as transactions
with non-affiliates. In addition, certain of these transactions are
restricted to a percentage of the association's capital. Affiliates of
the Bank include SJS and any company which is under common control with
the Bank. In addition, a savings association may not lend to any
affiliate engaged in activities not permissible for a bank holding
company or acquire the securities of most affiliates. The Bank's
subsidiary is not deemed to be an affiliate, however; the OTS has the
discretion to treat subsidiaries of savings associations as affiliates
on a case by case basis.
Certain transactions with directors, officers or controlling
persons are also subject to conflict of interest regulations enforced by
the OTS. These conflict of interest regulations and other statutes also
impose restrictions on loans to such persons and their related
interests. Among other things, such loans must be made on terms
substantially the same as for loans to unaffiliated individuals.
Holding Company Regulation. SJS is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such,
SJS is registered with and files reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has
enforcement authority over SJS and its non-savings association
subsidiaries which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary
savings association.
As a unitary savings and loan holding company, SJS generally
is not subject to activity restrictions. If SJS acquires control of
another savings association as a separate subsidiary, it would become a
multiple savings and loan holding company, and the activities of SJS and
any of its subsidiaries (other than the Bank or any other SAIF-insured
savings association) would become subject to such restrictions unless
such other associations each qualify as a QTL and were acquired in a
supervisory acquisition.
If the Bank fails the QTL test, SJS must obtain the approval
of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved
for multiple savings and loan holding companies or their subsidiaries.
In addition, within one year of such failure SJS must register as, and
will become subject to, the restrictions applicable to bank holding
companies. The activities authorized for a bank holding company are
more limited than are the activities authorized for a unitary or
multiple savings and loan holding company. See "- Qualified Thrift
Lender Test."
-47-
<PAGE>
SJS must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings
association.
Federal Securities Law. The stock of SJS is registered with
the SEC under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). SJS is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the SEC under the
Exchange Act.
Company stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of SJS may not be resold
without registration or unless sold in accordance with certain resale
restrictions. If SJS meets specified current public information
requirements, each affiliate of SJS is able to sell in the public
market, without registration, a limited number of shares in any
three-month period.
Federal Reserve System. The Federal Reserve Board requires
all depository institutions to maintain non-interest bearing reserves at
specified levels against their transaction accounts (primarily checking,
NOW and Super NOW checking accounts). At June 30, 1996, the Bank was in
compliance with these reserve requirements. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may
be used to satisfy liquidity requirements that may be imposed by the
OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal
Reserve Bank "discount window," but Federal Reserve Board regulations
require associations to exhaust other reasonable alternative sources of
funds, including FHLB borrowings, before borrowing from the Federal
Reserve Bank.
Federal Home Loan Bank System. The Bank is a member of the
FHLB of Indianapolis, which is one of 12 regional FHLBs, that
administers the home financing credit function of savings associations.
Each FHLB serves as a reserve or central bank for its members within its
assigned region. It is funded primarily from proceeds derived from the
sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures
established by the board of directors of the FHLB. These policies and
procedures are subject to the regulation and oversight of the Federal
Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In
addition, all long-term advances are required to provide funds for
residential home financing.
As a member, the Bank is required to purchase and maintain
stock in the FHLB of Indianapolis. At June 30, 1996, the Bank had
approximately $1.2 million of FHLB stock, which was in compliance with
this requirement.
Under federal law the FHLBs are required to provide funds for
the resolution of troubled savings associations and to contribute to
low- and moderately priced housing programs through direct loans or
interest subsidies on advances targeted for community investment and
low- and moderate-income housing projects. These contributions have
affected adversely the level of FHLB dividends paid and could continue
to do so in the future. These contributions could also have an adverse
effect on the value of FHLB stock in the future. A reduction in value
of the Bank's FHLB stock may result in a corresponding reduction in the
Bank's capital.
Federal and State Taxation. Savings associations such as the Bank
that met certain definitional tests relating to the composition of assets and
other conditions prescribed by the Internal Revenue Code of 1986, as amended
(the "Code"), were permitted to establish reserves for bad debts and to make
annual additions thereto which could, within specified formula limits, be
taken as a deduction in computing taxable income for federal income tax
purposes for taxable years ending prior to January 1, 1996.
-48-
<PAGE>
The amount of the bad debt reserve deduction for "non-qualifying loans" was
computed under the experience method. The amount of the bad debt reserve
deduction for "qualifying real property loans" (generally loans secured by
improved real estate) could be computed under either the experience method or
the percentage of taxable income method (based on an annual election). Under
the experience method, the bad debt reserve deduction was an amount
determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
The percentage of specially computed taxable income that was
used to compute a savings association's bad debt reserve deduction under
the percentage of taxable income method (the "percentage bad debt
deduction") was 8%. The percentage bad debt deduction thus computed was
reduced by the amount permitted as a deduction for non-qualifying loans
under the experience method. The availability of the percentage of
taxable income method permitted qualifying savings associations to be
taxed at a lower effective federal income tax rate than that applicable
to corporations generally (approximately 31.3% assuming the maximum
percentage bad debt deduction).
Under the percentage of taxable income method, the percentage
bad debt deduction could not exceed the amount necessary to increase the
balance in the reserve for "qualifying real property loans" to an amount
equal to 6% of such loans outstanding at the end of the taxable year or
the greater of (i) the amount deductible under the experience method or
(ii) the amount which when added to the bad debt deduction for
"non-qualifying loans" equaled the amount by which 12% of the amount
comprising savings accounts at year end exceeded the sum of surplus,
undivided profits and reserves at the beginning of the year.
In August 1996, legislation was enacted that repeals the
above-described reserve method of accounting (including the percentage
of taxable income method) used by many thrift institutions to calculate
their bad debt reserve for federal income tax purposes. Thrift
institutions with $500 million or less in assets may, however, continue
to use the experience method. As a result, the Bank must recapture that
portion of the reserve that exceeds the amount that could have been
taken under the experience method for post-1987 tax years. At June 30,
1996, the Bank's post-1987 excess reserves amounted to approximately
$508,000. The recapture will occur over a six-year period, the
commencement of which will be delayed until the first taxable year
beginning after December 31, 1997, provided the institution meets
certain residential lending requirements. The legislation also requires
thrift institutions to account for bad debts for federal income tax
purposes on the same basis as commercial banks for tax years beginning
after December 31, 1995.
In addition to the regular federal income tax, corporations,
including savings associations such as the Bank, generally are subject
to a minimum tax. An alternative minimum tax is imposed at a minimum
tax rate of 20% on alternative minimum taxable income, which is the sum
of a corporation's regular taxable income (with certain adjustments) and
tax preference items, less any available exemption. The alternative
minimum tax is imposed to the extent it exceeds the corporation's
regular income tax and net operating losses can offset no more than 90%
of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations
such as the Bank, are also subject to an environmental tax equal to
0.12% of the excess of alternative minimum taxable income for the
taxable year (determined without regard to net operating losses and the
deduction for the environmental tax) over $2 million.
To the extent earnings appropriated to a savings association's
bad debt reserves for "qualifying real property loans" and deducted for
federal income tax purposes exceed the allowable amount of such reserves
computed under the experience method and to the extent of the
association's supplemental reserves for losses on loans ("Excess"), such
Excess may not, without adverse tax consequences, be utilized for the
payment of cash dividends or other distributions to a shareholder
(including distributions on redemption, dissolution or liquidation) or
for any other purpose (except to absorb bad debt losses).
-49-
<PAGE>
The Bank and its subsidiary file consolidated federal income
tax returns on a fiscal year basis ending June 30 using the accrual
method of accounting. SJS intends to file consolidated federal income
tax returns with the Bank and its subsidiary. Savings associations,
such as the Bank, that file federal income tax returns as part of a
consolidated group are required by applicable Treasury regulations to
reduce their taxable income for purposes of computing the percentage bad
debt deduction for losses attributable to activities of the non-savings
association members of the consolidated group that are functionally
related to the activities of the savings association member.
The Bank and its consolidated subsidiary have not been audited
by the IRS recently with respect to consolidated federal income tax
returns. In the opinion of management, any examination of still open
returns (including returns of subsidiaries and predecessors of, or
entities merged into, the Bank) would not result in a deficiency which
could have a material adverse effect on the financial condition of the
Bank and its consolidated subsidiary.
Michigan Taxation. The State of Michigan imposes a tax on
intangible personal property in the amount of $0.20 per $1,000 of
deposits of a savings bank or a savings and loan institution less
deposits owed to the federal or Michigan state governments, their
agencies or certain other financial institutions. The State of Michigan
also imposes a "Single Business Tax." The Single Business Tax is a
value-added type of tax and is for the privilege of doing business in
the State of Michigan. The major components of the Single Business Tax
base are compensation, depreciation and federal taxable income, as
increased by net operating loss carry forwards, if any, utilized in
arriving at federal taxable income, and decreased by the cost of
acquisition of tangible assets during the year. The tax rate through
September 30, 1994 was 2.35% of the Michigan adjusted tax base.
Beginning October 1, 1994, the rate decreased to 2.30% of the Michigan
adjusted tax base.
Delaware Taxation. As a Delaware holding company, SJS is
exempted from Delaware corporate income tax but is required to file an
annual report with and pay an annual fee to the State of Delaware. SJS
is also subject to an annual franchise tax imposed by the State of
Delaware.
Description of Properties
The Bank operates through its main office and three branches
located in St. Joseph, South Haven and Stevensville, Michigan. At June
30, 1996, the Bank owned its main office and its three branch offices.
As of June 30, 1996, the net book value of the Bank's investment in
premises, equipment and leaseholds was approximately $1.2 million. SJS
believes that it current facilities are adequate to meet the present and
foreseeable needs of the Bank and SJS.
Legal Proceedings
From time to time, the Bank is involved as plaintiff or
defendant in various legal actions arising in the normal course of
business. While the ultimate outcome of these proceedings cannot be
predicted with certainty, it is the opinion of management, after
consultation with counsel representing the Bank in the proceedings, that
the resolution of these proceedings should not have a material effect on
the Bank's results of operations.
The Bank's Stevensville branch office is situated on property
purchased by the Bank in 1986 from a large oil company. The property had
been the site of a gas station which had been inactive for several years.
Underground storage tanks were removed prior to the Bank's purchase of the
property. In May 1992, the Michigan Department of Natural Resources (the
"MDNR") notified the Bank that the property was the subject of an inquiry by
MDNR, which claims that the property may be a source of hydrocarbon
contamination of groundwater. In addition, in November 1992, another oil
company which owns and operates a service station located on property
adjacent to the Stevensville branch filed a lawsuit against the Bank in the
Michigan state courts seeking to recover a portion of the costs it had
expended to clean up hydrocarbon contamination on that company's property.
Management of the Bank believes that both claims are predicated upon the
presence of certain hydrocarbons in groundwater samples taken from a
monitoring well which the Bank voluntarily permitted a consultant working for
the oil company to drill on the Bank property in 1991.
-50-
<PAGE>
Based upon additional tests performed by a consultant retained by the Bank,
the consultant concluded that it did not appear that the hydrocarbons
recorded at the site could be directly attributed to a release from the
former underground storage tanks on the Bank property and that the likely
source of the hydrocarbons was the release of gasoline at the oil company
station on the adjacent property in 1989. The Bank presented this evidence
to the MDNR which then requested that the Bank do further testing to
determine whether any underground storage tanks still existed on the site.
This testing was completed in July 1994. The environmental engineer who
conducted the testing reported that there did not appear to be any
underground storage tanks at the site, although the evidence collected by the
Bank is not clearly definitive. Based upon the advice of counsel
representing the Bank in these matters, the Bank has maintained that the
likelihood of liability being imposed upon the Bank for cleanup costs in
connection with these claims is remote. Accordingly, the Bank vigorously
contested the MDNR claim. On June 5, 1995, a new law took effect in Michigan
which substantially altered the basis upon which liability of cleanup costs
could be premised. Contrary to the former law, the new law provides, in
essence, that for property owned prior to June of 1995, liability may only be
imposed when the owner or operator of the property is responsible for an
activity causing a release of contaminants.
On February 5, 1996, the Bank filed a Motion for Summary
Disposition in the Circuit Court for the County of Berrien, State of
Michigan, of the above-mentioned oil company's complaint and on February
16, 1996 an Order Granting Motion for Summary Disposition was entered.
The Order dismissed the oil company's complaint with prejudice, thereby
allowing the oil company 14 days to amended its complaint. An amended
complaint was not filed nor has anything been filed in the Court to date
seeking an appeal. An appeal, however, may be filed at any time prior
to the conclusion of the case among all remaining parties, which could
be more than a year from the date of this filing. The Bank considers
the likelihood of liability remote, however, liability could be imposed
upon the Bank on these claims, in which case the Bank would be
responsible for a portion of the costs associated with a cleanup of the
groundwater contamination.
Beneficial Ownership of Certain Persons
As of the Record Date, SJS had 917,622 shares of SJS Common
Stock issued and outstanding. The following table sets forth
information as of the Record Date regarding share ownership of those
persons or entities known by management to beneficially own more than 5
percent of the SJS Common Stock.
Amount and
Nature of
Name and Address of Beneficial Percent
Beneficial Owner Ownership(1) of Class
- ------------------- ------------ --------
Peter T. Kross
248 Grosse Pointe Boulevard
Grosse Pointe Farms, Michigan 48236 97,084(2) 10.58%
The Bank Funds
208 S. LaSalle Street, Suite 200
Chicago, Illinois 60604 79,005(3) 8.61%
- ----------
(1) The numbers of shares stated are based on information furnished by each
person listed and include shares personally owned of record by that
person and shares that are considered to be otherwise beneficially owned
by that person. A beneficial owner of a security includes any person
who, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise has or shares voting power or
dispositive power with respect to the security. Voting power includes
the power to vote or direct the voting of the security. Dispositive
power includes the power to dispose or direct the disposition of the
security.
-51-
<PAGE>
A person will also be considered the beneficial owner of a security if
the person has a right to acquire beneficial ownership of the security
within 60 days. SJS and the directors and officers of SJS and the Bank
disclaim beneficial ownership of shares held by the Bank in a fiduciary
capacity. This amount also includes options to purchase shares of SJS
Common Stock granted to directors and executive officers that are either
currently exercisable or exercisable within 60 days of the Record Date.
(2) Based on information provided by Peter T. Kross, Richard J. Nelson,
Wallace D. Riley and Robert C. Lucas in an amended Schedule 13D
(the "Kross 13D group") dated August 2, 1996. SJS Common Stock
reported as beneficially owned by the Kross 13D group includes
75,400 shares, 14,500 shares, 6,042 shares and 1,142 shares with
respect to which Messrs. Kross, Nelson, Riley and Lucas,
respectively, reported sole voting and dispositive power. Messrs.
Riley and Lucas are also members of the Board of Directors of SJS.
(3) Based on information provided by The Midwest Bank Fund II, L.P.,
Banc Fund III L.P., Bank Fund III Trust, Banc Fund IV L.P. and Banc
Fund IV Trust (the "Midwest 13D group") in Amendment No. 1 to a
Schedule 13D dated January 7, 1997. SJS Common Stock reported as
beneficially owned by the Midwest 13D group includes 12,700 shares,
14,563 shares, 44,637 shares, 1,627 shares and 5,478 shares with
respect to which The Midwest Bank Fund II, L.P., Banc Fund III
L.P., Bank Fund III Trust, Banc Fund IV L.P. and Banc Fund IV
Trust, respectively, reported sole voting and dispositive power.
The following table sets forth certain information
regarding SJS's Board of Directors, individually, and with executive
officers as a group.
Amount and Nature of Beneficial Ownership(4)
Percent
Stock Stock of
Name Ownership Options(5) Total Class
- ------------------- --------- ---------- --------- --------
James M. Behlen 1,162 381 1,543 *
Neil R. Berndt 21,524 762 22,286 2.43%
William F. Early 12,159 952 13,111 1.43%
W. Ford Kieft III 1,262 381 1,643 *
Robert C. Lucas(6) 96,704 380 97,084 10.58%
James B. McQuillan 762 381 1,143 *
Wallace D. Riley(6) 96,704 380 97,084 10.58%
Edgar F. Ross 11,524 762 12,286 1.34%
Stephen E. Ross 3,524 762 4,286 *
Larry D. Schultz 12,624 762 13,286 1.45%
Thomas G. Watson 8,691 2,857 11,548 1.25%
Directors and 208,559(7) 15,903 224,462 14.46%
executive officers
of SJS and the
Bank, as a
group (16 persons)
____________________
* Less than 1 percent.
(4) See footnote (1) in the preceding table.
-52-
<PAGE>
(5) Represents options to purchase the number of shares of SJS Common Stock
granted under the 1996 Stock Option and Incentive Plan that are either
currently exercisable or exercisable within 60 days of the Record Date.
(6) See footnote (2) in the preceding table.
(7) The shares reported by Messrs. Lucas and Riley represent the same shares;
accordingly, such shares are only included once for purposes of shares
owned by directors and executive officers as a group. See footnote (2)
in the preceding table.
-53-
<PAGE>
GENERAL INFORMATION
Incorporation by Reference
This Proxy Statement incorporates documents by reference that
are not presented herein or delivered with it. All reports SJS files
with the Commission subsequent to the date of this Proxy Statement, but
prior to the date of the Special Meeting, pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act, are hereby incorporated by
reference in this Proxy Statement. A copy of such documents (other than
certain exhibits thereto) is available without charge to each person,
including any beneficial owner, to whom the Proxy Statement is
delivered, upon written or oral request to: SJS Bancorp, Inc., Irma R.
Wedde, Secretary, SJS Bancorp, 301 State Street, St. Joseph, Michigan
49085, (616) 983-0134. Documents requested will be sent by first class
mail or other equally prompt means within one business day of receipt of
the request. In order to ensure timely delivery of such documents, any
such request should be made by _________, 1997.
Any statement contained in a document incorporated or deemed
to be incorporated by reference in this Proxy Statement shall be deemed
to be modified or superseded for purposes of this Proxy Statement to the
extent that a statement contained in this Proxy Statement or in any
other subsequently filed document that also is or is deemed to be
incorporated by reference in this Proxy Statement modifies or supersedes
such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of
this Proxy Statement.
Independent Public Accountants
The consolidated financial statements and schedules of SJS and
its subsidiaries incorporated by reference in this Proxy Statement to
the extent and for the periods indicated in their reports have been
audited by Crowe Chizek LLP, independent public accountants.
Representatives of Crowe Chizek LLP are expected to be present
at the Special Meeting. Such representatives will be given an
opportunity to make a statement if they so desire and are expected to be
available to respond to appropriate questions.
Sources of Information
The information contained in this Proxy Statement relating to
SJS and Shoreline has been furnished by each of them for inclusion in
this Proxy Statement. SJS has relied upon Shoreline with respect to the
accuracy and completeness of the information concerning Shoreline, and
Shoreline has relied upon SJS with respect to the accuracy and
completeness of the information concerning SJS.
No person has been authorized to give any information or to
make any representations other than those contained in this Proxy
Statement and, if given or made, such information or representations
must not be relied upon as having been authorized by SJS. The delivery
of this Proxy Statement shall not under any circumstances create any
implication that there has been no change in the affairs of SJS since
the date hereof or that the information contained herein is correct as
of any time subsequent to its date.
-54-
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
<PAGE>
Agreement and Plan of Merger
among
Shoreline Financial Corporation,
a Michigan corporation,
SJS Acquisition Corporation,
a Michigan corporation,
and
SJS Bancorp, Inc.,
a Delaware corporation
November 6, 1996
<PAGE>
Table of Contents
Page
----
Article I - Merger; Closing; Effective Time; Definitions................ 1
1.1 The Closing................................................. 1
1.2 Effective Time of the Merger................................ 1
1.3 The Merger.................................................. 1
1.4 Bank Consolidation.......................................... 2
1.5 Company Liquidation......................................... 2
1.6 Regulatory and Stockholder Approvals........................ 2
1.7 Certificate of Incorporation; Bylaws........................ 2
1.8 Directors and Officers...................................... 2
1.9 Definitions................................................. 2
Article II - Merger Consideration; Conversion of Shares in The Merger... 4
2.1 Terms of Merger............................................. 4
2.2 Payment for Shares.......................................... 5
2.3 Payment for Options......................................... 6
2.4 Dissenting Shares........................................... 6
Article III - Representations and Warranties of Company................. 6
3.1 Organization, Standing, and Power........................... 6
3.2 Capitalization.............................................. 7
3.3 Subsidiaries................................................ 8
3.4 1996 Financial Statements; Absence of Liabilities........... 8
3.5 Authority of Company........................................ 8
3.6 No Violation................................................ 8
3.7 No Consent.................................................. 9
3.8 Insurance................................................... 9
3.9 Books and Records........................................... 9
3.10 Title to Assets............................................. 9
3.11 Condition of Real Property.................................. 10
3.12 Real and Personal Property Leases........................... 10
3.13 Litigation.................................................. 11
3.14 Taxes....................................................... 11
3.15 Compliance with Laws and Regulations........................ 12
3.16 Performance of Obligations.................................. 13
3.17 Employees................................................... 13
3.18 Brokers and Finders......................................... 13
3.19 Material Contracts.......................................... 13
3.20 Absence of Certain Changes.................................. 14
3.21 Licenses and Permits........................................ 15
3.22 Regulatory Action........................................... 15
3.23 Loans and Investments....................................... 16
3.24 Loan Origination and Servicing.............................. 16
-i-
<PAGE>
TABLE OF CONTENTS
--Continued--
Page
----
3.25 Loan Guarantees............................................. 16
3.26 Employee Benefit Plans...................................... 16
3.27 Company SEC Reports......................................... 18
3.28 Environmental Conditions.................................... 18
3.29 Proxy Statement............................................. 19
3.30 Insider Interests........................................... 20
3.31 Fairness Opinion............................................ 20
3.32 Duties as Fiduciary......................................... 20
3.33 Change in Business Relationships............................ 20
3.34 Public Communications; Securities Offering.................. 20
3.35 No Insider Trading.......................................... 21
3.36 True and Complete Information............................... 21
Article IV - Representations and Warranties of Acquiror................. 21
4.1 Organization and Qualification.............................. 21
4.2 Authority Relative to this Agreement........................ 21
4.3 No Conflict or Violation.................................... 21
4.4 Proxy Statement............................................. 22
4.5 Necessary Capital........................................... 22
4.6 Compliance with Applicable Law.............................. 22
4.7 Litigation.................................................. 22
4.8 Regulatory Approvals........................................ 22
4.9 No Fact or Condition, Etc................................... 22
4.10 True and Complete Information............................... 23
Article V - Additional Covenants and Agreements......................... 23
5.1 Access to Information....................................... 23
5.2 Conduct of Business by Company.............................. 24
5.3 Regulatory Matters.......................................... 26
5.4 Stockholder Approval........................................ 27
5.5 Updated Financial Information............................... 27
5.6 Acquisition Proposals....................................... 27
5.7 Further Assurances.......................................... 27
5.8 Employment Agreements....................................... 27
5.9 Treatment of ESOP........................................... 28
5.10 Conduct of Business......................................... 28
5.11 Indemnification............................................. 28
5.12 Subsequent Disclosures...................................... 29
5.13 WARN Act.................................................... 29
5.14 Dissenting Stockholders' Appraisal Rights................... 29
5.15 Data Processing and Related Contracts....................... 29
5.16 Environmental Investigation................................. 29
-ii-
<PAGE>
TABLE OF CONTENTS
--Continued--
Page
----
5.17 Tax Ruling.................................................. 30
5.18 Employee Agreements......................................... 30
Article VI - Conditions................................................. 30
6.1 Conditions to Obligations of Acquiror....................... 30
6.2 Conditions to Obligations of Company........................ 32
Article VII - Termination............................................... 33
7.1 Termination................................................. 33
7.2 Effect of Termination....................................... 34
Article VIII - General.................................................. 35
8.1 Notices..................................................... 35
8.2 Waiver...................................................... 36
8.3 Choice of Law............................................... 36
8.4 Specific Enforcement........................................ 36
8.5 Jurisdiction; Venue; Jury................................... 36
8.6 Entire Agreement............................................ 36
8.7 Headings, Etc............................................... 36
8.8 Counterparts................................................ 36
8.9 Amendment................................................... 37
8.10 No Assignment............................................... 37
8.11 Severability................................................ 37
8.12 Expenses.................................................... 37
8.13 Publicity................................................... 37
8.14 Survival.................................................... 37
8.15 Calculation of Dates and Deadlines.......................... 37
Definitions
- -----------
1933 Act................................................................ 4
1934 Act................................................................ 4
1996 Financial Statements............................................... 4
Acquiring Person........................................................ 33
Acquiror................................................................ 1
Acquiror Disclosure Statement........................................... 21
Acquiror Trigger Event.................................................. 34
Acquiror Triggering Events.............................................. 35
Acquiror's Bank......................................................... 1
Acquisition Proposal.................................................... 27
Affiliate............................................................... 2
Affiliated Group........................................................ 12
-iii-
<PAGE>
TABLE OF CONTENTS
--Continued--
Page
----
Agreement............................................................... 1
Bank.................................................................... 1
Bank Consolidation...................................................... 2
Bank Consolidation Agreement............................................ 2
Banking Code............................................................ 2
CERCLA.................................................................. 18
Certificate............................................................. 2
Closing................................................................. 2
Code.................................................................... 2
Committee............................................................... 28
Company................................................................. 1
Company Common Stock.................................................... 2
Company Disclosure Statement............................................ 6
Company SEC Reports..................................................... 18
Company Triggering Event................................................ 35
Company-Related Person.................................................. 20
Company's Leases........................................................ 10
Company's Real Properties............................................... 10
Company's Subsidiaries.................................................. 3
DGCL.................................................................... 1
Dissenting Shares....................................................... 6
Employee Benefit Plan................................................... 16
Environmental Laws...................................................... 18
Environmental Risk...................................................... 30
ERISA................................................................... 3
ESOP.................................................................... 3
ESOP Debt............................................................... 28
Excess Parachute Payment................................................ 30
Exchange Agent.......................................................... 3
FDIC.................................................................... 3
Federal Reserve Board................................................... 2
FHLB of Indianapolis.................................................... 3
FHLMC................................................................... 3
FIB..................................................................... 2
Hazardous Substance..................................................... 18
HOLA.................................................................... 3
Immediate Family........................................................ 3
Incentive Plan.......................................................... 3
IRS..................................................................... 3
Knowledge............................................................... 3
MBCA.................................................................... 1
Merger.................................................................. 1
-iv-
<PAGE>
TABLE OF CONTENTS
--Continued--
Page
----
Merger Consideration.................................................... 3
MergerSub............................................................... 1
Non-Bank Subsidiary..................................................... 3
OTS..................................................................... 3
PBGC.................................................................... 3
Person.................................................................. 3
Phase II and III Work................................................... 30
Premises................................................................ 18
Proxy Statement......................................................... 3
Recognition Plan........................................................ 4
SAIF.................................................................... 4
SEC..................................................................... 4
Stock Options........................................................... 7
Subsequent Event........................................................ 29
WARN Act................................................................ 29
Exhibits
- --------
A - Company's Disclosure Statement............................ A-1
B - Acquiror's Disclosure Statement........................... B-1
C - Form of Company's Counsel's Legal Opinion................. C-1
D - Form of Acquiror's Counsel's Legal Opinion................ D-1
E - Form of Definitive Employment Statement................... E-1
-v-
<PAGE>
Agreement And Plan of Merger
This Agreement And Plan of Merger (the "Agreement") is entered into on
November 6, 1996, by and among Shoreline Financial Corporation, a Michigan
corporation ("Acquiror"), SJS Acquisition Corporation, a Michigan
corporation that is a wholly-owned subsidiary of Acquiror ("MergerSub"), and
SJS Bancorp, Inc., a Delaware corporation ("Company").
Acquiror and Company desire to have MergerSub merge with and into
Company upon the terms and subject to the conditions set forth in this
Agreement (the "Merger"). Company will be the surviving corporate entity in
the Merger. The boards of directors of Acquiror, MergerSub, and Company
have each duly approved this Agreement. Upon consummation of the Merger,
Company will carry out its complete liquidation by merging with and into
Acquiror (then its parent corporation, with Acquiror being the surviving
corporation). Simultaneously, SJS Federal Savings Bank (the "Bank"), a
wholly-owned subsidiary of Company, will consolidate with Acquiror's Bank
("Acquiror's Bank"), a wholly-owned subsidiary of Acquiror.
Capitalized terms appearing below have the meanings defined in this
Agreement. References to articles, sections, and exhibits refer to other
parts of this Agreement, unless otherwise indicated.
In consideration of the premises and the mutual covenants,
representations, warranties, and agreements contained in this Agreement,
Acquiror and Company agree as follows:
Article I - Merger; Closing; Effective Time; Definitions
Subject to the terms and conditions of this Agreement, the Merger shall
be carried out in the following manner:
1.1 The Closing. The Merger shall be consummated following the
"Closing." The Closing shall be held at such time, date, and location as
may be agreed by the parties. In the absence of such agreement, the Closing
shall be held at the offices of Warner Norcross & Judd LLP, 900 Old Kent
Building, 111 Lyon Street, N.W., Grand Rapids, Michigan, commencing at 11
a.m. on a date specified by either party upon 15 business days' notice after
the last to occur of the following events: (i) receipt of all consents and
approvals of government regulatory authorities legally required to
consummate the Merger and the expiration of all statutory waiting periods;
and (ii) adoption of this Agreement by Company's stockholders. Scheduling
or commencing the Closing shall not, however, constitute a waiver of the
conditions precedent of either Acquiror or Company as set forth in Article
VI. Upon completion of the Closing, Company and MergerSub shall each
execute and file the certificate of merger as required by the Delaware
General Corporation Law ("DGCL") and the Michigan Business Corporation Act,
as amended (the "MBCA"), to effect the Merger (the "Certificate of Merger").
<PAGE>
1.2 Effective Time of the Merger. The Merger shall be consummated as
promptly as possible following the Closing by filing the Certificate of
Merger in the manner required by law. The "Effective Time" shall be as of
the time and date to be specified in the Certificate of Merger, which shall
be as soon as practicable following the Closing.
1.3 The Merger. Subject to the terms and conditions of this Agreement,
including the receipt of all requisite regulatory and stockholder approvals,
Company and MergerSub shall consummate the Merger in which MergerSub shall
be merged with and into Company and the separate corporate existence of
MergerSub shall then cease. Company shall be the surviving corporation in
the Merger and shall become a wholly-owned subsidiary of Acquiror. Company
shall continue to be governed by the laws of the State of Delaware with all
its rights, privileges, powers, and franchises unaffected by the Merger.
The Merger shall have the effects set forth in Section 259 of the DGCL and
the MBCA in cases where the surviving corporation will be a Delaware
corporation.
1.4 Bank Consolidation. After the Effective Time, Acquiror intends to
consolidate Bank and Acquiror's Bank into a single Michigan banking
corporation where Acquiror's Bank will be the consolidated bank resulting
from the transaction (the "Bank Consolidation"). The Bank Consolidation
will be effected pursuant to a consolidation agreement (the "Bank
Consolidation Agreement"), in the form required by the Michigan Banking Code
of 1969, as amended (the "Banking Code"), and by the HOLA, containing terms
and conditions, not inconsistent with this Agreement, as determined by
Acquiror's Bank. The Bank Consolidation shall only occur if the Merger is
consummated, and it shall become effective immediately after the Effective
Time or such later time as may be determined by Acquiror. In order to
obtain the necessary regulatory approval for the Bank Consolidation to occur
immediately after the Effective Time, Acquiror may request that Bank and
Acquiror's Bank each execute and deliver the Bank Consolidation Agreement
prior to the Effective Time. Regardless of when executed and delivered, the
effectiveness of the Bank Consolidation Agreement shall be subject to
Acquiror's action, in its capacity as the sole shareholder of Acquiror's
Bank and of Bank, to approve the Bank Consolidation Agreement immediately
after the Effective Time.
1.5 Company Liquidation. Immediately following the Bank Consolidation,
Acquiror shall contribute all of its common stock in Company (then a
subsidiary of Acquiror) to the consolidated bank and Company shall adopt a
plan of complete liquidation transferring all of its assets and liabilities
to the consolidated bank and the separate corporate existence of Company
shall then immediately cease.
1.6 Regulatory and Stockholder Approvals. Company will cooperate in
the preparation by Acquiror and Acquiror's Bank of the applications to the
Board of Governors of the Federal Reserve System ("Federal Reserve Board"),
the FDIC, the OTS, the Financial Institutions Bureau ("FIB"), and any other
regulatory authorities as may be necessary in connection with all
governmental approvals requisite to the consummation of the transactions
contemplated by this Agreement. Acquiror and Company will each cooperate in
the preparation of the applications,
-2-
<PAGE>
statements, or materials as may be required to be furnished to the
stockholders of Company or filed or submitted to appropriate governmental
agencies in connection with the Merger.
1.7 Certificate of Incorporation; Bylaws. At the Effective Time, the
Certificate of Incorporation and Bylaws of Company shall become the
Certificate of Incorporation and Bylaws, respectively, of the surviving
corporation.
1.8 Directors and Officers. The directors and officers of MergerSub at
the Effective Time shall, from and after the Effective Time, be the
directors and officers, respectively, of the surviving corporation until
their successors have been duly elected or appointed in accordance with the
Bylaws of the surviving corporation.
1.9 Definitions. In addition to capitalized terms otherwise defined in
this Agreement, the following capitalized terms shall have the meanings
specified below:
(a) "Affiliate" of, or a person "Affiliated" with, a specific person
is a person that directly or indirectly, through one or more intermediaries
(by virtue of legal or beneficial ownership, contractual rights, or
otherwise) controls, or is controlled by, or is under common control with,
the person specified;
(b) "Certificate" means a stock certificate evidencing ownership of
shares of Company Common Stock;
(c) "Closing" means the satisfaction, performance, or waiver by the
parties of all of the conditions set forth in Article VI, which shall take
place as provided in Section 1.1 (The Closing);
(d) "Code" means the Internal Revenue Code of 1986, as amended;
(e) "Company Common Stock" means the common stock, par value $0.01 per
share, of Company;
(f) "Company's Subsidiaries" means Bank, Non-Bank Subsidiary, and any
other person in which Company holds a direct or indirect equity interest
of fifty-one percent (51%) or more;
(g) "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended;
(h) "ESOP" means the SJS Bancorp, Inc., Employee Stock Ownership Plan,
as amended;
(i) "Exchange Agent" means Acquiror's Bank, as agent for the purpose
of effectuating the exchange of Certificates for the Merger Consideration
in accordance with Article II;
-3-
<PAGE>
(j) "FDIC" means the Federal Deposit Insurance Corporation;
(k) "FHLB of Indianapolis" means the Federal Home Loan Bank of
Indianapolis;
(l) "FHLMC" means the Federal Home Loan Mortgage Corporation;
(m) "HOLA" means the federal Home Owners' Loan Act, as amended;
(n) "Immediate Family" means a person's spouse, parents, in-laws,
children, and siblings;
(o) "Incentive Plan" means the SJS Bancorp, Inc., 1996 Stock Option
and Incentive Plan;
(p) "IRS" means the Internal Revenue Service;
(q) "Knowledge" or "to the knowledge of" means to the actual knowledge
of any senior executive officer of the party or the party's subsidiaries
and of any current non-employee director of the party or the party's
subsidiaries;
(r) "Merger Consideration" means the right to receive cash, in the
amount of $27 per share, into which shares of Company Common Stock shall be
converted pursuant to this Agreement upon the effectiveness of the Merger;
if for any reason, between the date of this Agreement and the Effective
Time, the number of shares of Company Common Stock outstanding or the
number of unexercised Stock Options outstanding shall have been changed
for any reason (whether or not a breach of this Agreement), then the
amount of cash into which shares of Company Common Stock are to be
converted shall be adjusted by multiplying $27 by a fraction, the
numerator of which is (x) 917,622 plus (y) the number of Stock Options,
and the denominator of which is (xx) the number of shares of Company
Common Stock outstanding at the Effective Time plus (yy) the number of
Stock Options, any other options, and any other rights to acquire Company
Common Stock outstanding at the Effective Time.
(s) "Non-Bank Subsidiary" means SJS Financial Corporation, a Michigan
corporation;
(t) "OTS" means the Office of Thrift Supervision, an Office of the
United States Department of the Treasury;
(u) "PBGC" means the Pension Benefit Guaranty Corporation;
(v) "Person" (whether or not capitalized) means any individual,
corporation, association, partnership, limited liability company, limited
partnership, trust, joint venture, other legal entity, government or
governmental department or agency;
-4-
<PAGE>
(w) "Proxy Statement" means the proxy statement, including all
amendments, supplements, and related materials to be used by Company in
connection with the solicitation by its board of directors of proxies for
use at the Stockholders' Meeting;
(x) "Recognition Plan" means the SJS Bancorp, Inc., Management
Recognition Plan;
(y) "SAIF" means the Savings Association Insurance Fund
administered by the FDIC;
(z) "SEC" means the Securities and Exchange Commission;
(aa) "Stockholders' Meeting" means the meeting of Company's
stockholders, including all adjournments, properly called, noticed, and
held for the purpose of considering adoption of this Agreement and
approval of the Merger as required by the DGCL and Company's Certificate
of Incorporation;
(bb) "Transaction Document" collectively means the Proxy Statement
and any other documents to be filed with the SEC, the Federal Reserve
Board, the FDIC, the FIB, the State of Delaware, the State of Michigan, or
any other governmental or regulatory agency in connection with the
transactions contemplated by this Agreement.
(cc) "1933 Act" means the Securities Act of 1933, as amended;
(dd) "1934 Act" means the Securities Exchange Act of 1934, as
amended; and
(ee) "1996 Financial Statements" means the audited consolidated
financial statements of Company contained, or incorporated by reference,
in Company's Annual Report on Form 10-KSB for the year ended June 30,
1996, as filed with the SEC.
Article II - Merger Consideration; Conversion of Shares in The Merger
2.1 Terms of Merger. Upon the Merger becoming effective:
(a) Company Common Stock Shares. At the Effective Time, each share of
Company Common Stock issued and outstanding immediately prior to the
Effective Time, other than Company Common Stock representing Dissenting
Shares, and other than Company Common Stock owned by Acquiror and as
provided in Subsection 2.1(b) (Treasury Shares) shall, ipso facto and
without any action on the part of any stockholder, become and be converted
into the right to receive the Merger Consideration. Certificates
representing outstanding Company Common Stock, other than those
representing Dissenting Shares, shall, after the Effective Time,
represent only the right to receive the Merger Consideration from
Acquiror. Upon surrender to the Exchange Agent, in proper
-5-
<PAGE>
form for cancellation, of Certificates held of record by a holder of
Company Common Stock, that holder shall be entitled to receive a check
from the Exchange Agent in an appropriate amount of Merger Consideration
for those shares. Until so presented and surrendered in exchange for the
Merger Consideration, each Certificate which represented issued and
outstanding Company Common Stock shall be deemed for all purposes to
evidence only the right to receive the Merger Consideration. After the
Effective Time, there shall be no transfer on the stock transfer books
of Company of Company Common Stock. No interest shall accrue or be
payable with respect to the Merger Consideration.
(b) Treasury Shares. Each share of Company Common Stock issued and
held by Company in its treasury or owned of record by Acquiror or any
subsidiary of Acquiror on the Effective Time shall be canceled and
retired and no securities shall be issuable and no cash paid with
respect to those shares.
(c) Conversion of Stock Options. Each option granted under the
Incentive Plan issued and outstanding immediately prior to the Effective
Time shall ipso facto and without any action on the part of any option
holder, become and be converted into the right to receive the difference
between the Merger Consideration and the applicable option exercise
price; provided that Company shall, at Acquiror's request, use its best
efforts to enter into option termination agreements with the holders of
the options pursuant to which Company may agree to pay to the holders
the cash amount immediately prior to the Merger upon surrender and
cancellation of their outstanding options.
(d) Conversion of MergerSub Shares. Each share of common stock of
MergerSub issued and outstanding on the Effective Time shall, ipso facto
and without any action on the part of Acquiror, continue as one share of
the common stock of the surviving corporation. Outstanding certificates
representing shares of common stock of MergerSub shall be deemed to
represent an identical number of shares of common stock of the surviving
corporation.
2.2 Payment for Shares. Company's stockholders shall exchange their
Certificates for the Merger Consideration in the following manner:
(a) Funds Availability. From time to time after the Effective Time,
Acquiror shall make available or cause to be made available to the
Exchange Agent amounts sufficient in the aggregate to provide all funds
necessary for the Exchange Agent to make payments of the Merger
Consideration to holders of Company Common Stock issued and outstanding
immediately prior to the Effective Time.
(b) Transmittal Instructions. Promptly after the Effective Time,
Acquiror shall cause to be mailed to each person who was, at the
Effective Time, a holder of record of issued and outstanding Company
Common Stock a form (agreed to by Acquiror and Company) of letter of
transmittal and instructions for use in effecting the surrender of the
Certificates which, immediately prior to the Effective Time, represented
the shares.
-6-
<PAGE>
Acquiror shall make these documents available for hand delivery at Bank
and Acquiror's Bank.
(c) Surrender of Certificates. Upon surrender to the Exchange Agent
of the Certificates (or affidavits of lost Certificates and indemnity
bonds in such form as is acceptable to the Exchange Agent with respect
to lost Certificates), together with the letter of transmittal, duly
executed and completed in accordance with the related instructions, the
Exchange Agent shall promptly cause to be paid to the persons entitled
thereto a check in the amount to which the persons are entitled, after
giving effect to any required tax withholdings.
(d) Uncertificated ESOP Shares. Payment of the Merger Consideration
with respect to uncertificated shares of Company Common Stock (or
fractional shares) held by the trustee of the ESOP shall be made to the
trustee upon delivery to the Exchange Agent of documentation acceptable
to Exchange Agent.
(e) Stock Transfers. If payment is to be made to a person other than
the registered holder of the Certificate surrendered, it shall be a
condition of the payment that the Certificate so surrendered shall be
properly endorsed or accompanied by an executed stock power, with a
satisfactory signature guarantee, and shall be in proper form for
transfer. A record holder requesting payment of the Merger
Consideration to another person shall pay any transfer or other taxes
required by reason of the requested transfer or establish to the
satisfaction of Acquiror or the Exchange Agent that the tax has been
paid or is not applicable.
(f) Unclaimed Cash. One hundred eighty (180) days following the
Effective Time, Acquiror shall be entitled to cause the Exchange Agent
to deliver to it any funds (including any interest received with respect
thereto) made available to the Exchange Agent which have not been
disbursed to holders of Certificates formerly representing Company
Common Stock outstanding at the Effective Time. Thereafter the holders
shall be entitled to look to Acquiror only as general creditors with
respect to the cash payable upon due surrender of their Certificates.
The Exchange Agent shall also deliver to Acquiror a certified list of
the names and addresses of all former registered holders of Company
Common Stock who have not then surrendered their Certificates to receive
the Merger Consideration to which they are entitled. Notwithstanding
the foregoing, neither the Exchange Agent nor any party hereto shall be
liable to any holder of Certificates formerly representing the shares
for any amount paid to a public official pursuant to any applicable
abandoned property, escheat, or similar law.
(g) Exchange Agent Expenses. Acquiror shall pay all charges and
expenses, including those of the Exchange Agent, in connection with the
payment of the Merger Consideration in exchange for Company Common
Stock.
2.3 Payment for Options. If Company has not previously entered into
agreements with all holders of options under the Incentive Plan and caused
the surrender of the options prior to
-7-
<PAGE>
the Effective Time, within five (5) days after the Effective Time, Acquiror
shall notify the remaining holders of options under the Incentive Plan of
the procedure for receipt of payments for their unexercised options, which
payments shall be made by Acquiror within ten (10) days after an option
holder has surrendered all of his options to Acquiror. Acquiror shall also
make available to Company sufficient funds to enable Company to consummate
the termination of unexercised stock options, as contemplated by Subsection
2.1(c) (Conversion of Stock Options).
2.4 Dissenting Shares. Any shares of Company Common Stock held by a
holder who shall not have voted the shares in favor of the Merger and who
shall have complied with the applicable procedures of Section 262 of the DGCL
(if applicable) and becomes entitled to obtain payment for the appraised
value of the shares pursuant to Section 262 of the DGCL (if applicable) shall
be in this Agreement called "Dissenting Shares." Notwithstanding any other
provision of this Agreement, any Dissenting Shares shall not, after the
Effective Time, be entitled to vote for any purpose or receive any dividends
or other distributions and shall be entitled only to the rights as are
afforded in respect of Dissenting Shares pursuant to the DGCL. All payments
in respect of Dissenting Shares shall be from funds of Acquiror and not from
the acquired assets of Company.
Article III - Representations and Warranties of Company
Company represents and warrants to Acquiror that, except as otherwise
set forth in the disclosure statement dated November 6, 1996, constituting
Exhibit A (collectively, the "Company Disclosure Statement"), which has been
delivered to Acquiror prior to the execution of this Agreement:
3.1 Organization, Standing, and Power.
(a) Company's Organization. Company is duly organized, validly
existing, and in good standing as a corporation under the laws of the
State of Delaware and is authorized by the OTS to be a savings and loan
holding company. Company has all requisite corporate power and
authority to own, lease, and operate its properties and assets and to
carry on its business as presently conducted. Neither the scope of the
business of Company nor the location of any of its properties requires
that it be licensed to do business in any jurisdiction other than the
State of Michigan. True and correct copies of Company's Certificate of
Incorporation and Bylaws, including all amendments to the date of this
Agreement, are contained in the Company Disclosure Statement.
(b) Bank's Organization. Bank is duly organized and validly existing
as a federally chartered stock savings bank under HOLA and is authorized
by the OTS to conduct a savings and loan business. Bank is a member of
the FHLB of Indianapolis, and its deposits are insured by the SAIF in
the manner and to the extent provided by law. Bank has paid when due
all deposit insurance assessments by the FDIC. Bank has all requisite
corporate power and authority to own, lease, and operate its properties
and assets and to carry on its business as presently conducted. Neither
the scope of the business of
-8-
<PAGE>
Bank nor the location of any of its properties requires that it be licensed
to do business in any jurisdiction other than the State of Michigan. True
and correct copies of Bank's Charter and Bylaws, including all amendments
to the date of this Agreement, are contained in the Company Disclosure
Statement.
(c) Non-Bank Subsidiary's Organization. Non-Bank Subsidiary is duly
organized, validly existing, and in good standing as a corporation under
the laws of the State of Michigan and is duly qualified or licensed as a
foreign corporation in each other state or jurisdiction in which the
ownership of property or the conduct of business requires licensing or
qualification, except where the failure to be so qualified or licensed
would not have a material adverse effect on the financial condition, net
income, business, or operations of Company and Company's Subsidiaries,
taken as a whole. Non-Bank Subsidiary has all requisite corporate power
and authority to own, lease, and operate its respective properties and
assets and to carry on its business as presently conducted. Non-Bank
Subsidiary is engaged only in those activities which are permitted by
the OTS. True and correct copies of the Articles of Incorporation and
Bylaws of Non-Bank Subsidiary, including all amendments to the date of
this Agreement, are contained in the Company Disclosure Statement.
(d) Other Entities. The Company Disclosure Statement contains a list
of all legal entities that during the past three (3) years were formerly
Affiliates of Company, together with a description of the disposition of
the Affiliate.
3.2 Capitalization.
(a) Company's Capital Stock. The authorized capital stock of Company
consists of 4,500,000 shares of Company Common Stock, par value $0.01
per share, of which 917,622 shares are issued and outstanding as of the
date of this Agreement, and 2,000,000 shares of preferred stock, par
value $0.01 per share, none of which is outstanding. All of the
outstanding shares of Company Common Stock are validly issued, fully
paid, and nonassessable. Except for stock options covering not more
than 79,509 shares of Common Stock granted pursuant to the Incentive
Plan (the "Stock Options"), there are no outstanding options, warrants, or
other rights in or with respect to the unissued shares of Company's
capital stock nor any securities convertible into the stock. Except as
described in this Section, Company is not obligated to issue any
additional shares of Company's capital stock or any additional options,
warrants, or other rights in or with respect to the unissued shares of
Company's capital stock or any other securities convertible into
Company's capital stock.
(b) Issuance of Shares. After the execution of this Agreement, the
number of issued and outstanding shares of Company Common Stock is not
subject to change before the Effective Time except for the exercise of
the Stock Options.
-9-
<PAGE>
(c) Voting Rights. Other than the shares of Company Common Stock,
neither Company nor any of Company's Subsidiaries have outstanding any
security or issue of securities:
(i) The holder or holders of which have the right to vote on
the adoption of this Agreement or approval of the Merger; or
(ii) Which entitle the holder or holders to consent to, or
withhold consent on, the Merger or this Agreement.
(d) Bank Capital Stock. The authorized capital stock of Bank
consists of 4,500,000 shares of common stock, $0.01 par value each, of
which 917,622 shares are issued and outstanding, and 2,000,000 shares of
serial preferred stock, none of which is outstanding. All of the
outstanding shares of Bank's common stock are validly issued, fully
paid, and nonassessable and are owned by Company, free and clear of all
liens and encumbrances. There are no outstanding options, warrants, or
other rights in or with respect to the unissued shares of Bank's common
stock nor any securities convertible into the stock and Bank is not
obligated to issue any additional shares of its common stock or any
additional options, warrants, or other rights in or with respect to the
unissued shares of Bank's common stock or any other securities
convertible into Bank's common stock.
(e) Non-Bank Subsidiary Capital Stock. All of the outstanding shares
of common stock of Non-Bank Subsidiary are validly issued, fully paid, and
nonassessable and are owned by Bank, free and clear of all liens and
encumbrances. There are no outstanding options, warrants, or other
rights in or with respect to the unissued shares of Non-Bank
Subsidiary's common stock nor any securities convertible into that
stock. Non-Bank Subsidiary is not obligated to issue any additional
shares of its common stock or any additional options, warrants, or other
rights in or with respect to the unissued shares of its common stock or
any other securities convertible into Non-Bank Subsidiary's common
stock.
3.3 Subsidiaries. Except for Bank and Non-Bank Subsidiary, and except
for stock held in the FHLB of Indianapolis and MIMLIC Life Insurance Company,
and equity interests obtained upon the exercise of creditors rights in the
usual course of its business or held as collateral against extensions of
credit or held in escrow for safekeeping, neither Company nor any of
Company's Subsidiaries owns or holds, directly or indirectly, more than a
five percent (5%) equity interest in any person.
3.4 1996 Financial Statements; Absence of Liabilities.
(a) Financial Statements. The Company Disclosure Statement contains
copies of the 1996 Financial Statements of Company. The 1996 Financial
Statements of Company: (i) fairly present the consolidated financial
condition of Company and Company's Subsidiaries as of the respective
dates indicated and its consolidated results of operations
-10-
<PAGE>
and the consolidated changes in its stockholders' equity and cash flows
for the respective periods indicated; (ii) have been prepared in accordance
with generally accepted accounting principles consistently applied for the
periods indicated, except as otherwise noted; (iii) are based on the
books and records of Company; and (iv) contain and reflect reserves for
all material accrued liabilities as of the date of the statements and
for all reasonably anticipated losses as of the date of the statements,
including (but not limited to) adequate reserves for reasonably
anticipated loan losses and losses upon disposition or sale of other
real estate owned by Bank.
(b) No Undisclosed Liabilities. Company does not know of any
liabilities or obligations, either accrued or contingent, which are
material to it and which have not been reflected or disclosed in the
1996 Financial Statements of Company other than liabilities and
obligations incurred subsequent to June 30, 1996, in the ordinary course
of business. Company does not know of any basis for the assertion
against it of any liability, obligation, or claim (including, without
limitation, that of any regulatory authority) that might result in or
cause a material adverse change in the financial condition of Company
which is not fairly reflected in the 1996 Financial Statements or in
Company SEC Reports (including the accompanying financial statements
thereto) filed with the SEC subsequent to the filing of Company's most
recent Annual Report on Form 10-KSB.
3.5 Authority of Company. Subject to the requisite adoption of this
Agreement by the stockholders of Company, the execution, delivery, and
performance by Company of this Agreement and the consummation of the
transactions contemplated by this Agreement have been duly and validly
authorized by all necessary corporate action on the part of Company. This
Agreement is a valid and binding obligation of Company, enforceable in
accordance with its terms, except insofar as the enforceability may be
limited by applicable bankruptcy, insolvency, receivership, and other laws
affecting the rights of creditors generally.
3.6 No Violation. Neither the execution, delivery, and performance by
Company of this Agreement, the consummation of the transactions contemplated
in this Agreement, nor compliance by Company with any of the provisions of
this Agreement, will:
(a) Corporate Documents. Conflict with or result in a breach of any
provision of its Certificate of Incorporation or Bylaws;
(b) Material Contracts. Constitute a breach of or result in a
default, or give rise to any rights of termination, cancellation, or
acceleration, or any right to acquire any securities (other than the
options currently outstanding under the Incentive Plan and shares of
Company Common Stock currently outstanding but subject to restrictions
under the Recognition Plan) or assets, under any of the terms,
conditions, or provisions of any note, bond, mortgage, indenture,
franchise, license, permit, agreement, or other instrument or obligation
to which Company or Company's Subsidiaries are a party, or by which
Company or Company's Subsidiaries or any of their respective properties
or assets are bound, if in any of those circumstances the event could
have consequences materially adverse to the financial condition, net
income, business, or operations of Company and
-11-
<PAGE>
Company's Subsidiaries, taken as a whole, or impair Company's ability to
perform its obligations under this Agreement; or
(c) Orders and Injunctions. Violate any order, writ, injunction,
decree, statute, rule, or regulation applicable to Company or Company's
Subsidiaries or any of their respective properties or assets, subject to
receipt of the approvals described in Section 3.7 (No Consent).
3.7 No Consent. No consent of, approval of, notice to, or filing with
any governmental authority having jurisdiction over any aspect of the
business or assets of Company or Company's Subsidiaries, and no consent of,
approval of, or notice to or filing with any other person is required in
connection with the execution, delivery, and performance by Company of this
Agreement or the consummation by Company of the transactions contemplated by
this Agreement, except:
(a) Stockholder Adoption. The adoption of this Agreement and the
transactions contemplated by this Agreement by the stockholders of
Company;
(b) Regulatory Approvals. The approvals of the Federal Reserve Board,
the FDIC, the OTS, the FIB, and any other governmental authorities
having jurisdiction that are required by law or regulation to consummate
the transactions contemplated by this Agreement.
3.8 Insurance. Company and the Company's Subsidiaries have in full force
and effect policies of insurance (including, without limitation, a blanket
bond, fire, third-party liability, use and occupancy) with respect to their
assets and business against the casualties and contingencies and in the
amounts, types, and forms as are, in the reasonable opinion of management of
Company, appropriate for their business, operations, properties, and assets.
The Company Disclosure Statement contains a list of all policies of insurance
carried and owned by Company and Company's Subsidiaries, showing the name of
the insurance company, the nature of the coverage, the policy limit, the
annual premiums, and the expiration dates. The Company Disclosure Statement
contains a complete copy of each policy of insurance.
3.9 Books and Records. The minutes contained in corporate minute books
and files of Company and each of Company's Subsidiaries (including former
wholly owned Subsidiaries for all purposes of this Section) properly and
accurately record in all material respects all actions actually taken by its
shareholders, directors, and committees of directors. The books, accounts,
and financial records of Company and each of Company's Subsidiaries reflect
only actual transactions and have been maintained in all material respects in
the usual and regular manner in accordance with good accounting practices and
in compliance with all applicable laws and regulations.
3.10 Title to Assets. Company and Company's Subsidiaries have good,
sufficient, and marketable title to all of their properties and assets,
whether real, personal, or a combination thereof, reflected in their books
and records as being owned (including those reflected in the
-12-
<PAGE>
consolidated balance sheet of Company and Company's Subsidiaries as of June
30, 1996, except as since disposed of in the ordinary course of business),
free and clear of all liens and encumbrances, except:
(a) Reflected on Balance Sheet. As reflected on the consolidated
balance sheet of Company and Company's Subsidiaries as of June 30, 1996,
or the notes thereto;
(b) Normal to Business. Liens for current taxes not yet delinquent,
and liens or encumbrances which are normal to the business of Company
and Company's Subsidiaries and which are not material in relation to the
financial condition, net income, business, or operations of Company or
any of Company's Subsidiaries; and
(c) Immaterial Imperfections. Such imperfections of title, easements,
and encumbrances, if any, as are not material in character, amount, or
extent, and do not materially detract from the value, or materially
interfere with the present use, of the properties subject thereto or
affected thereby, or which would not otherwise be material to the
financial condition, net income, business, or operations of Company or
any of Company's Subsidiaries.
3.11 Condition of Real Property. With respect to each parcel of real
property owned by Company and Company's Subsidiaries ("Company's Real
Properties"), to Company's knowledge:
(a) No Encroachments. No building or improvement to Company's Real
Properties encroaches on any easement or property owned by another
person. No building or property owned by another person encroaches on
Company's Real Properties or on any easement benefiting Company's Real
Properties. None of the boundaries of Company's Real Properties
deviates substantially from those shown on the survey of such property,
if any, included with the Company Disclosure Statement or from what the
boundaries appear to be through visual inspection. No claim of
encroachment has been asserted by any person with respect to Company's
Real Properties.
(b) Zoning. Neither Company nor any of Company's Subsidiaries are
in material violation of any zoning regulation, building restriction,
restrictive covenant, ordinance, or other law, order, regulation, or
requirement relating to Company's Real Properties.
(c) Buildings. All buildings and improvements to Company's Real
Properties are in good condition (normal wear and tear excepted), are
structurally sound and are not in need of material repairs, are fit for
their intended purposes, and are adequately serviced by all utilities
necessary for the effective operation of business as presently conducted
at that location.
(d) No Condemnation. None of Company's Real Properties are the
subject of any condemnation action. There is, to the best of Company's
knowledge, no proposal under
-13-
<PAGE>
active consideration by any public or governmental authority or entity to
acquire Company's Real Properties for any governmental purpose.
3.12 Real and Personal Property Leases. With respect to the leases and
licenses pursuant to which Company or any of Company's Subsidiaries, as
lessee or licensee, have possession of real or personal property ("Company's
Leases"):
(a) Binding and Valid. To Company's knowledge, each of Company's
Leases are valid, effective, and enforceable against the lessor or
licensor in accordance with its terms.
(b) No Default. There is no existing default under any of Company's
Leases or any event which with notice or lapse of time, or both, would
constitute a default with respect to Company, any of Company's
Subsidiaries, or any other party to the contract, which default would
have a material adverse effect on the financial condition, net income,
business, or operations of Company and Company's Subsidiaries, taken as
a whole.
(c) Assignment. None of Company's Leases contain a prohibition
against assignment by Company or any of Company's Subsidiaries, by
operation of law or otherwise, or any provision which would materially
interfere with the possession or use of the property by Acquiror or its
subsidiaries for the same purposes and upon the same rental and other
terms following consummation of the Merger as are applicable to Company
or Company's Subsidiaries, excepting from this representation any
Company Lease which is not material to the financial condition, net
income, business, or operations of Company and Company's Subsidiaries,
taken as a whole.
3.13 Litigation. There is no private or governmental suit, claim,
action, or proceeding (arbitral or otherwise) pending or, to the knowledge of
Company, threatened against Company, any of Company's Subsidiaries, or any
person who may be entitled to indemnification by Company or Company's
Subsidiaries involving a monetary claim in excess of $10,000 or a demand for
equitable relief, or against any of their directors or officers relating to
the performance of their duties in those capacities. There are no material
judgments, decrees, stipulations, or orders against Company or Company's
Subsidiaries enjoining them or any of their directors or officers in respect
of, or the effect of which is to prohibit, any business practice or the
acquisition of any property or the conduct of business in any area. The
Company Disclosure Statement contains summary reports of its attorneys, dated
on or after June 30, 1996, on all pending litigation to which Company, Bank,
or any of their directors or officers are a party and which names Company,
any of Company's Subsidiaries, or any person who may be entitled to
indemnification by Company or Company's Subsidiaries as a defendant or
cross-defendant and prays for damages or any other remedy or remedies that,
if sustained, could have consequences materially adverse to the financial
condition, net income, business, or operations of Company and Company's
Subsidiaries, taken as a whole, or impair the ability of Company to perform
its obligations under this Agreement or the ability of Bank to perform its
obligations under the Bank Consolidation Agreement. During the last ten (10)
years, neither Company nor any of Company's Subsidiaries have been named in
any class action lawsuit, regardless of its outcome,
-14-
<PAGE>
or in any lawsuit or formal administrative proceeding alleging a material
violation of any banking or thrift laws or regulations.
3.14 Taxes.
(a) Tax Returns. Company and Company's Subsidiaries have each
filed all federal and foreign income tax returns, all state and local
franchise and income tax, real and personal property tax, sales and use
tax, premium tax, excise tax, and other tax returns of every character
required to be filed by it and have paid all taxes, together with any
interest and penalties owing in connection therewith, shown on the
returns to be due in respect of the periods covered by the returns,
other than taxes which are being contested in good faith and for which
adequate reserves have been established.
(b) Payroll Taxes. Company and Company's Subsidiaries have each
filed all required payroll tax returns, have fulfilled all tax
withholding obligations, and have paid over to the appropriate
governmental authorities the proper amounts with respect to the
foregoing.
(c) Tax Positions. The tax and audit positions taken by Company and
Company's Subsidiaries in connection with the tax returns described in
this Section 3.14 were reasonable and asserted in good faith.
(d) Tax Provisions. To Company's knowledge, adequate provision has
been made in the books and records of Company and Company's Subsidiaries
and, to the extent required by generally accepted accounting procedures,
reflected in the 1996 Financial Statements of Company, for all tax
liabilities, including interest or penalties, whether or not due and
payable and whether or not disputed, with respect to any and all
federal, foreign, state, local, and other taxes for the periods covered
by the 1996 Financial Statements and for all prior periods.
(e) Closed Years. The IRS has examined, or the statute of
limitations has expired with respect to, the federal tax returns of
Company and the Company's Subsidiaries (to the extent not filed as part
of a consolidated return of Company) for all periods ending prior to and
including June 30, 1989.
(f) Extensions; Deficiencies. The Company Disclosure Statement sets
forth (a) the date or dates through which any foreign, state, local, or
other taxing authority has examined any other tax returns of Company and
Company's Subsidiaries; (b) a complete list of each year for which any
federal, state, local, or foreign tax authority has obtained or has
requested an extension of the statute of limitations from Company and
Company's Subsidiaries and lists each tax case involving Company or
Company's Subsidiaries currently pending in audit, at the administrative
appeals level, or in litigation; and (c) the date and issuing authority
of each statutory notice of deficiency, notice of proposed
-15-
<PAGE>
assessment, and revenue agent's report issued to Company and Company's
Subsidiaries within the last twelve (12) months.
(g) Audits. Neither the IRS nor any foreign, state, local, or
other taxing authority has, during the past three (3) years, examined or
is in the process of examining any federal, foreign, state, local, or
other tax returns of Company or Company's Subsidiaries. To the
knowledge of Company, neither the IRS nor any foreign, state, local, or
other taxing authority is now asserting or threatening to assert any
deficiency or claim for additional taxes (or interest thereon or
penalties in connection therewith) except as set forth in the Company
Disclosure Statement.
(h) Withholding Taxes. All taxes which Company or Company's
Subsidiaries have been required to collect or withhold (other than
backup withholdings pursuant to Section 3406 of the Code) have been duly
withheld or collected and, to the extent required, have been paid to the
proper taxing authority. With respect to backup withholdings, Company
and the Company's Subsidiaries have exercised the degree of care
required under Section 6724 of the Code to avoid the imposition of any
penalties for failure to obtain certified and correct taxpayer
identification numbers from payees or for failure to make backup
withholdings.
(i) Tax Elections. The Company Disclosure Statement contains a
complete list of all material tax elections made by Company and
Company's Subsidiaries on any income tax return filed during the past
five (5) years which have the effect of deferring the realization of an
item of income to a period after the period for which the item of income
was reported on Company or Company's Subsidiaries financial statements,
or accelerating an item of deduction to a period prior to the period for
which the corresponding item of loss or expense was reported on
Company's or Company's Subsidiaries financial statements. Neither
Company nor any of Company's Subsidiaries are a party to, or bound by,
any tax indemnity, tax sharing, or tax allocation agreement other than
as described in the Company Disclosure Statement.
(j) No Tax Liens. There are no liens for taxes (other than for
current taxes not yet due and payable) upon the assets of Company or
Company's Subsidiaries.
(k) Affiliated Group. Company has never been a member of an
affiliated group of corporations, within the meaning of Section 1504 of
the Code ("Affiliated Group"), other than as a common parent corporation,
and Bank has never been a member of an Affiliated Group except where
Company or Bank was the common parent of the Affiliated Group.
(l) Parachute Provisions. Neither Company nor any of Company's
Subsidiaries are a party to any current agreement, contract,
arrangement, or plan that has resulted or would result, separately or in
the aggregate, in the payment of any "excess parachute
-16-
<PAGE>
payments" within the meaning of Section 280G of the Code other than as may
result from the acceleration of vesting under Company's Incentive Plan or
Recognition Plan.
3.15 Compliance with Laws and Regulations. Neither Company nor any of
Company's Subsidiaries are in default under or in breach of any law,
ordinance, order, rule or regulation promulgated by any governmental agency
having authority over it, including specifically, but not limited to all
applicable federal and state laws, rules and regulations regulating the
conduct of a savings and loan business, banking, securities,
truth-in-lending, truth-in-savings, mortgage origination and servicing,
usury, fair credit reporting, consumer protection, occupational safety, civil
rights, employee protection, fair employment practices, fair labor standards,
and insurance; and Environmental Laws (as defined in Subsection 3.28(b)
(Environmental Laws)); except for violations that would not have a material
adverse effect on the financial condition, net income, business, or
operations of Company or any of Company's Subsidiaries, taken as a whole.
Company and Bank have complied in all material respects with all applicable
laws and regulations governing the conversion of Bank from a federal mutual
savings bank to a federal stock savings bank and the issuance of all of
Bank's capital stock to Company.
3.16 Performance of Obligations. Company and the Company's Subsidiaries
have performed in all respects all material obligations required to be
performed by them to date and are not in default under or in breach of any
term or provision of any covenant, contract, lease, loan servicing agreement
or arrangement, indenture, or any other covenant to which they are a party,
are subject, or are otherwise bound, and no event has occurred which, with
the giving of notice or the passage of time or both, would constitute the
default or breach, where the default or breach would have a material adverse
effect on the financial condition, net income, business, or operations of
Company and Company's Subsidiaries, taken as a whole. Except for loans and
leases made by Company or Company's Subsidiaries in the ordinary course of
business and identified on its books and records as a non-performing or
non-accrual credit, to the knowledge of Company, no party with whom Company
or Company's Subsidiaries have an agreement which is of material importance
to the financial condition, net income, business, properties, or operations
of Company or Company's Subsidiaries are in default under that agreement.
3.17 Employees. There are no controversies pending or threatened
between, or related to, Company, Bank, and any of their employees which could
have consequences materially adverse to the financial condition, net income,
business, or operations of Company and Company's Subsidiaries, taken as a
whole, or impair the ability of Company to perform its obligations under this
Agreement. Except as disclosed in the 1996 Financial Statements of Company,
all material sums due for employee compensation and benefits have been duly
and adequately paid or accrued on its books in accordance with generally
accepted accounting principles. Neither Company nor any of Company's
Subsidiaries are a party to any collective bargaining agreement with respect
to any of its employees or any labor organization to which its employees or
any of them belong.
-17-
<PAGE>
3.18 Brokers and Finders. Except for Company's agreement with The Chicago
Corporation, a copy of which is contained in the Company Disclosure
Statement, Company is not a party to any agreement with any broker, finder,
or investment banker relating to the transactions contemplated by this
Agreement, and neither the execution of this Agreement nor the consummation
of the transactions provided for in this Agreement will result in any
liability to any broker or finder.
3.19 Material Contracts. Except as contained or described in the Company
Disclosure Statement, neither Company nor any of Company's Subsidiaries are a
party to any agreement or understanding described below:
(a) Borrowing Commitments. Any commitment made to Company or
Company's Subsidiaries permitting it to borrow money, any letter of
credit, any pledge, any security agreement, any lease (excluding leases
of real property otherwise identified in the Company Disclosure
Statement), any guarantee or any subordination agreement, or other
similar or related type of understanding, involving an amount in excess
of $50,000 as to which Company or Company's Subsidiaries are a debtor,
pledgor, lessee, or obligor;
(b) Agency Relationships. Any agreement or understanding dealing with
advertising, brokerage, licensing, dealership, representative, or agency
relationships in excess of $50,000;
(c) Benefit Plans. Any profit-sharing, group insurance, bonus,
deferred compensation, stock option, severance pay, pension, retirement,
or any other employee benefit plan or any plan, agreement, contract,
authorization, or arrangement pursuant to which any person is or will
become entitled to any benefit upon a change in control of Company or
Company's Subsidiaries;
(d) Correspondents. Any written correspondent banking contracts;
(e) Asset Transactions. Any agreement or understanding (i) for the
sale of its assets in excess of $50,000 outside of the ordinary course
of business; (ii) for the grant of any preferential right to purchase
any of its assets, properties, or rights in excess of $50,000; or (iii)
which requires the consent of any third party to the transfer and
assignment of any assets, properties, or rights in excess of $50,000;
(f) Long-term Contracts. Any agreement or understanding which
obligates Company or Company's Subsidiaries for a period in excess of
one year, which has a value in excess of $50,000, to purchase, sell, or
provide services, materials, supplies, merchandise, facilities, or
equipment and which is not terminable without penalty on not more than
thirty (30) days' notice;
-18-
<PAGE>
(g) Capital Expenditures. Any agreement or understanding for any one
capital expenditure or a series of capital expenditures, the aggregate
amount of which is in excess of $50,000;
(h) Unfunded Loan Commitments. Any agreement or understanding entered
into to make a loan not yet fully disbursed or funded as of June 30,
1996, to any person, wherein the undisbursed or unfunded amount exceeds
$100,000;
(i) Affiliate Relationships. Any agreement or understanding of any
kind, except for deposit relationships or loans made prior to June 30,
1996, with any current director or officer of Company or Company's
Subsidiaries or with any Affiliate or any member of the Immediate Family
of any director or officer;
(j) Employment Agreements. Any agreement or understanding for the
employment of any officer or employee which is not by its terms,
terminable by Company or Company's Subsidiaries without liability on not
more than thirty (30) days' notice, including any employee manual or
policy which may be construed under applicable law to grant employment
rights or any agreement implied by law or any agreement providing for
severance benefits;
(k) Terminable Contracts. Any material agreement or understanding
which would be terminable by any other party other than Company or
Company's Subsidiaries as a result of the consummation of the
transactions contemplated by this Agreement;
(l) Participation Agreements. Any loan participation agreement with
any other person entered into subsequent to June 30, 1995, in excess of
$50,000 and on the books at June 30, 1996; and
(m) Other Contracts. Any agreement or understanding not otherwise
disclosed or excepted pursuant to this Section 3.19 which is material to
the financial condition, net income, business, or operations of Company
and Company's Subsidiaries, taken as a whole.
3.20 Absence of Certain Changes. Since June 30, 1996, to the date of this
Agreement, the businesses of Company and the Company's Subsidiaries have been
conducted diligently and only in the ordinary course, in the same manner as
theretofore conducted, and there have not been:
(a) Adverse Changes. Any change in the financial condition, net
income, business, or operations of Company and Company's Subsidiaries,
taken as a whole, which has been materially adverse;
(b) Casualty Losses. Any damage, destruction, or loss (whether or
not covered by insurance) individually or in the aggregate materially
adversely affecting the financial
-19-
<PAGE>
condition, net income, business, or operations of Company and Company's
Subsidiaries, taken as a whole;
(c) Material Contracts. Any material contract, agreement, license, or
understanding which Company or Company's Subsidiaries have entered into
or to which Company or Company's Subsidiaries are a party which has been
terminated or amended other than in the ordinary course of business,
which termination or amendment would have a materially adverse effect on
the financial condition, net income, business, or operations of Company
and Company's Subsidiaries, taken as a whole;
(d) Capital Expenditures. Except for supplies or equipment purchased
in the ordinary course of business, any capital expenditure exceeding
individually or in the aggregate $50,000;
(e) Labor Disputes. Any labor trouble, dispute or problem of any
character involving employees having a material adverse effect upon the
financial condition, net income, business, or operations of Company and
Company's Subsidiaries, taken as a whole;
(f) Accounting Changes. Any change in accounting methods or
practices by Company or Company's Subsidiaries, except as required by
applicable governmental authorities or by generally accepted accounting
principles;
(g) Write-downs. Any write-down in excess of $50,000 by Bank of any
of its assets which are not reflected in Company's statement of
financial condition as of June 30, 1996;
(h) Employee Benefits. Any increase in the salary schedule,
compensation, rate, fee, or commission of Company or Bank employees,
officers, or directors, or the declaration, commitment, or obligation of
any kind for the payment by Company or Company's Subsidiaries of a bonus
or other additional salary, compensation, fee, or commission to any
person, except increases made in the ordinary course of business and
consistent with past practices;
(i) Asset Dispositions. Any sale, assignment, or transfer of any
material asset, or any interest in a material asset, except in the
ordinary course of business;
(j) Mortgages. Any mortgage, pledge, or encumbrance of any asset of
Company other than liens for taxes not yet due, except in the ordinary
course of business and except as set forth in Sections 3.10 (Title to
Assets) and 3.11 (Condition of Real Property);
(k) Waivers. Any waiver or release of any material right or claim
of Company or Company's Subsidiaries except in the ordinary course of
business (including, but not limited to, loan, or lease collection
actions); and
-20-
<PAGE>
(l) Distributions. Any declaration, setting aside, or payment of
any dividend or distribution with respect to Company Common Stock or the
issuance of any shares of Company Common Stock or any other securities
of Company, except for shares issued upon exercise of the options
described in Subsection 3.2(a) (Company's Capital Stock).
3.21 Licenses and Permits. Company and Company's Subsidiaries each hold
all material licenses and permits required by federal, state, or local
governmental authorities that are necessary for the conduct of its business,
and the licenses and permits are in full force and effect, which are listed
in the Company Disclosure Statement. Bank is an approved seller-servicer for
FHLMC and each other mortgage investor identified in the Company Disclosure
Statement and in that capacity holds all necessary permits, authorizations,
or approvals of FHLMC necessary to carry on a mortgage banking business. To
the knowledge of Company, the properties of Company and the Company's
Subsidiaries are and have been maintained and conducted, in all material
respects, in compliance with all applicable laws and regulations.
3.22 Regulatory Action. Neither Company nor any of Company's
Subsidiaries:
(a) Governmental Investigations. Have within the last five years been
charged with, or to Company's knowledge are under governmental
investigation with respect to, any actual or alleged violation of any
statute, ordinance, rule, regulation, guideline, or standard except as
disclosed in any report of examination; or
(b) Proceedings. Is the subject of any pending or, to Company's
knowledge, threatened proceeding by any regulatory authority having
jurisdiction over its business, properties, or operations.
3.23 Loans and Investments. To the knowledge of Company, all loans and
investments of Bank are legal and enforceable in accordance with their terms,
except as may be limited by any bankruptcy, insolvency, moratorium, or other
laws affecting creditors rights generally or by the exercise of judicial
discretion, and each is authorized under applicable federal and state laws
and regulations. No loans or investments held by Company or Company's
Subsidiaries are as of June 30, 1996: (a) more than ninety (90) days past
due with respect to any scheduled payment of principal or interest; (b)
classified as "loss," "doubtful," "substandard," or "special mention" by any
federal regulators or by Company's or Company's Subsidiaries' internal credit
review system; (c) on a non-accrual status in accordance with Company's or
Company's Subsidiaries' loan review procedures; or (d) "renegotiated loans,"
as that term is defined in Financial Accounting Standard No. 15.
3.24 Loan Origination and Servicing. In originating, underwriting,
servicing, purchasing, selling, transferring, and discharging loans,
mortgages, land contracts, and other contractual obligations, either for its
own account or for the account of others, Bank has complied with all
applicable terms and conditions of such obligations and with all applicable
laws, regulations, rules, contractual requirements, and procedures, except
for incidents of noncompliance that would
-21-
<PAGE>
not, individually or in the aggregate, have a material effect on the
financial condition, net income, business, or operations of Company or any
of Company's Subsidiaries.
3.25 Loan Guarantees. To Company's knowledge, all guarantees of
indebtedness owed to any of Company's Subsidiaries, including but not limited
to those of the Federal Housing Administration, the Small Business
Administration, and other state and federal agencies, are valid and
enforceable, except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium, or other similar laws affecting
creditors' rights, and by the exercise of judicial discretion in accordance
with general principles applicable to equitable and similar remedies.
3.26 Employee Benefit Plans.
(a) Plan Disclosures. The Company Disclosure Statement contains a
true and correct list of (i) every employee benefit plan within the
meaning of Section 3(3) of ERISA maintained by Company or the Bank for
any employee, or to which Company or the Bank is required to contribute
pursuant to any collective bargaining agreement to which either of them
is a party or by which either of them is bound; (ii) all written bonus,
percentage compensation, stock purchase and stock option plans, to which
Company or the Bank is a party or is subject; (iii) all group insurance
programs in effect for employees of Company or the Bank not included in
(i) above; and (iv) any other material bonus, profit-sharing,
retirement, insurance, death, or other programs or plans not disclosed
pursuant to (i), (ii) or (iii) above (each an "Employee Benefit Plan").
Company has furnished to Acquiror true and complete copies of all
Employee Benefit Plans, as well as any summary plan description for each
benefit plan and, if applicable, the most recent actuarial valuation for
each benefit plan. All expenses associated with each Employee Benefit
Plan which were incurred during the fiscal year ended June 30, 1996,
have been accrued on the books of Company in accordance with generally
accepted accounting principles and are reflected in the 1996 Financial
Statements. All expenses associated with each Employee Benefit Plan
which were incurred since June 30, 1996, have been accrued on the books
of Company in accordance with generally accepted accounting principles.
(b) Pension Benefit Plans. Each Employee Benefit Plan which is a
pension benefit plan within the meaning of Section 3(2) of ERISA has
been duly authorized and adopted by the Board of Directors of Company
and/or the Bank. With respect to each such pension benefit plan,
Company and/or the Bank is in material compliance with the requirements
prescribed by all statutes, governmental or court orders, governmental
rules or regulations currently in effect, including but not limited to
ERISA and the Code, applicable to each such plan or arrangement.
Subject to extensions of time for approval as permitted under Code
Section 401(b) and applicable IRS announcements, each such pension
benefit plan, which is intended to be a qualified plan under Section
401(a) of the Internal Revenue Code, and all trusts created thereunder,
has been determined by the Internal Revenue Service to be a qualified
plan under Section 401(a) and exempt from tax under Section 501(a) of
the Code, respectively. All material government reports and filings
required by law have been properly and timely filed and all information
required
-22-
<PAGE>
to be distributed to plan participants or beneficiaries has been
distributed. Minimum funding standards have been met for each year
to which Section 302 of ERISA or Section 412 of the Code was applicable
and no waiver of minimum funding standards has been requested for any
year with regard to any such pension benefit plan. The present value of
all accrued benefits under each plan did not, as of the latest valuation
date, exceed the then current value of the assets of such plan allocable
to such accrued benefits, based upon the actuarial assumptions currently
used for the plan. To the knowledge of Company and/or the Bank no
condition exists that could constitute grounds for termination of any
such pension benefit plan under Section 4042 of ERISA. To the knowledge
of Company and/or the Bank, no prohibited transaction (within the
meaning of Section 4975 of the Code) or party-in-interest transaction
(within the meaning of Section 406 of ERISA) has occurred or exists with
respect to any Employee Benefit Plan which could subject any plan to
liability under Sections 409 or 502 of ERISA or Section 4975 of the Code
which would have a material adverse effect on the financial condition of
Company and the Bank, taken as a whole, or which would adversely affect
the qualified status of each plan. To the extent applicable, all costs
of each Employee Benefit Plan have been provided for on the basis of
consistent methods in accordance with sound actuarial assumptions and
practices.
(c) Plan Reports. Company or the Bank has made available to
Acquiror for each such pension benefit plan, where applicable: (i) a
copy of the Form 5500 which was filed in each of the most recent three
plan years, including, without limitation, all schedules thereto and all
financial statements with attached opinions of independent accountants;
(ii) the most recent determination letter from the IRS; (iii) the
Statement of Assets and Liabilities as of the most recent valuation
date; and (iv) the Statement of Changes in Fund Balance and Financial
Position or the Statement of Changes in Net Assets Available for
Benefits under each such plan for the most recently ended plan year.
The documents referred to in clauses (iii) and (iv) fairly present the
financial condition of each such plan as of such dates and the results
of operations of each such plan.
(d) Welfare Benefit Plans. With respect to any Employee Benefit Plan
that is an "employee welfare plan" as defined in ERISA Section 3(l), and
except as disclosed in the Company Disclosure Statement: (i) there are
no retiree benefits provided or payable; (ii) each plan that is a "group
health plan" (as defined in Code Section 5000(b)(1)) complies and in
each case has complied in all respects with the applicable requirements
of ERISA Sections 601 and 602, Code Section 162(k) (through December 31,
1988) and Code Sections 4980(B) (commencing on January 1, 1989); and
(iii) subject to reasonable notice requirements that may exist within
plans, each plan that covers current and former employees may be amended
or terminated at any time by Company or its successor on or at any time
after the Effective Time.
(e) Compliance. Each employee welfare plan disclosed in the Company
Disclosure Statement (i) has been duly adopted and maintained in all
material respects in accordance with its respective provisions; and (ii)
has complied and is in compliance in all material respects with the
applicable provisions of law, including the requirements of
-23-
<PAGE>
ERISA, and the Code and the regulations promulgated thereunder by the IRS
and the United States Department of Labor. With respect to each welfare
plan, all material government reports and filings required by law have been
properly and timely filed and all information required to be distributed
to plan participants and beneficiaries has been distributed, and all
contributions required thereunder have been made in a timely fashion.
(f) Multiemployer Plans. No Employee Benefit Plan is a
"multiemployer plan" within the meaning of Section 3(37)(A) of ERISA.
(g) No Defined Benefit Plans. Since January 1, 1974, neither Company
nor any of Company's Subsidiaries have been a sponsor of, or contributor
to, a "defined benefit plan" within the meaning of Section 3(35) of
ERISA with respect to its employees.
(h) Required Contributions. Company or the Bank has made when due all
contributions required under any Employee Benefit Plan and under
applicable laws and regulations.
(i) Payments Due. There are no payments which have become due from
any Employee Benefit Plan, the trusts created thereunder, or from the
Company or the Bank which have not been paid through normal
administrative procedures to the plan participants or beneficiaries
entitled thereto, except for claims for benefits for which
administrative claims procedures under such plan have not been
exhausted.
(j) No Funding Deficiency. No Employee Benefit Plan which is intended
to be a qualified plan under Section 401(a) of the Internal Revenue Code
and no trust created thereunder has incurred, subsequent to June 30,
1974, an "accumulated funding deficiency" as defined in Section 412(a)
of the Internal Revenue Code and Section 302 of ERISA (whether or not
waived).
3.27 Company SEC Reports. Company has filed on a timely basis all proxy
statements, reports, and other documents required to be filed by it under the
1934 Act after June 30, 1996 (collectively, the "Company SEC Reports"). The
Company Disclosure Statement contains copies of Company's Annual Report on
Form 10-KSB for the fiscal year ended June 30, 1996, and all quarterly and
periodic reports and proxy statements filed under the 1934 Act by Company
after that date, each as filed with the SEC. Each Company SEC Report was in
substantial compliance with the requirements of its respective report form
and did not, on the date of filing or as subsequently amended, as applicable,
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
3.28 Environmental Conditions.
(a) Hazardous Substances. For purposes of this Agreement, "Hazardous
Substance" has the meaning set forth in Section 9601 of the Comprehensive
Environmental Response Compensation and Liability Act of 1980, as
amended, 42 U.S.C.A.
-24-
<PAGE>
Section 9601, et seq. ("CERCLA"), and also includes any substance
regulated by or subject to any Environmental Law (as defined below), and
any other pollutant, contaminant, or waste, including, without limitation,
petroleum, asbestos, radon, and polychlorinated biphenyls.
(b) Environmental Laws. For purposes of this Agreement,
"Environmental Laws" means all laws (civil or common), ordinances, rules,
regulations, guidelines, and orders that: (i) regulate air, water, soil,
or solid waste management, including the generation, release, containment,
storage, handling, transportation, disposal, or management of Hazardous
Substances; (ii) regulate or prescribe requirements for air, water, or
soil quality; (iii) are intended to protect public health or the
environment; or (iv) establish liability for the investigation, removal,
or cleanup of, or damage caused by, any Hazardous Substance.
(c) Owned or Operated Property. With respect to: (1) the real estate
owned or leased by Company or any of Company's Subsidiaries or used in
the conduct of their businesses; (2) other real estate acquired by
Company's Subsidiaries in satisfaction of a debt previously contracted;
(3) real estate held and administered in trust by any of Company's
Subsidiaries; and (4) to Company's knowledge, any real estate formerly
owned or leased by Company or any of Company's Subsidiaries (for
purposes of this Section, properties described in any of (1) through (4)
are collectively referred to as "Premises"):
(i) Construction and Content. To Company's knowledge, none of
the Premises are constructed of, or contain as a component part,
any material which (either in its present form or as it may
reasonably be expected to change through aging or normal use)
releases or may release any substance, whether gaseous, liquid, or
solid, that is a Hazardous Substance or is known to be (either by
single exposure or by repeated or prolonged exposure) injurious or
hazardous to the health of persons occupying the Premises at levels
determined to be dangerous to human health.
(ii) Uses of Premises. To Company's knowledge, no part of the
Premises have been used for the generation, manufacture, handling,
storage, disposal, or management of Hazardous Substances.
(iii) Underground Storage Tanks. To Company's knowledge, the
Premises do not contain, and have never contained, any underground
storage tanks. With respect to any underground storage tank that
is listed in the Company Disclosure Statement as an exception to
the foregoing, to Company's knowledge, each such underground
storage tank presently or previously located on Premises are or has
been maintained or removed, as applicable, in compliance with all
applicable Environmental Laws, and has not been the source of any
release of a Hazardous Substance to the environment which has not
been remediated.
-25-
<PAGE>
(iv) Absence of Contamination. To Company's knowledge, the
Premises do not contain, and are not contaminated by, a Hazardous
Substance in a quantity which under applicable laws and regulations
would require Company to clean-up the contamination or to file a
report with any governmental agency giving notice of the
contamination.
(v) Environmental Suits and Proceedings. There is no action,
suit, investigation, liability, inquiry, or other proceeding, ruling,
order, notice of potential liability, or citation against Company,
any of Company's Subsidiaries, or any of Company's Real Properties
pending, or to Company's knowledge threatened, or previously
asserted under, or as a result of any actual or alleged failure to
comply with any requirement of, any Environmental Law. Without
limiting the generality of this Section, there is no basis for any
claim against Company, any of Company's Subsidiaries, or any of
their respective properties or assets under Section 107 of CERCLA
or any similar provision of any other Environmental Law.
(d) Loan Portfolio. With respect to any real estate securing any
outstanding loan or related security interest and any owned real estate
acquired in full or partial satisfaction of a debt previously
contracted, to Company's knowledge:
(i) Investigation. Company and each of Company's Subsidiaries
have complied in all material respects with any policies adopted by
their respective boards of directors (as such policies may have
been in effect from time to time and as disclosed in the Company
Disclosure Statement), and all applicable laws and regulations,
concerning the investigation of each such property to determine
whether or not there exists or is reasonably likely to exist any
Hazardous Substance on, in, or under such property and whether or
not a release of a Hazardous Substance has occurred at or from such
property.
(ii) No Known Contamination. No such property contains or is
contaminated by any quantity of any Hazardous Substance from any
source.
3.29 Proxy Statement.
(a) Accurate Information. None of the information to be supplied by
Company for inclusion, or included, in any Transaction Document will:
(i) Be false or misleading with respect to any material fact,
or omit to state any material fact necessary to make the statements
therein not misleading (1) at the respective times such Transaction
Documents are filed; and (2) with respect to the Proxy Statement,
when it is mailed.
(ii) With respect to the Proxy Statement, as it may be
amended or supplemented, at the time of the Stockholders' Meeting,
be false or misleading with
-26-
<PAGE>
respect to any material fact, or omit to state any material fact
necessary to correct any statement in any earlier communication with
respect to the solicitation of any proxy for the Stockholders'
Meeting.
(b) Compliance of Filings. All documents which Company is responsible
for filing with any regulatory agency in connection with the Merger will
comply as to form in all material respects with the provisions of
applicable law.
3.30 Insider Interests. For purposes of this Agreement, the term
"Company-Related Person" shall mean any director or executive officer of Company
or any of Company's Subsidiaries, their spouses and children, any person who
is a member of the same household as such persons, and any corporation,
partnership, proprietorship, trust, or other entity of which any such
persons, alone or together, have Control.
(a) Insider Loans. No Company-Related Person has any loan, credit,
or other contractual arrangement outstanding with Company or Company's
Subsidiaries which does not conform to applicable rules and regulations
of the OTS or the Federal Reserve Board.
(b) Control of Material Assets. Other than in a capacity as a
shareholder, director, or executive officer of Company or any of
Company's Subsidiaries, no Company-Related Person owns or controls any
material assets or properties which are used in the business of Company
or any of Company's Subsidiaries.
(c) Contractual Relationships. Other than ordinary and customary
banking relationships, no Company-Related Person has any contractual
relationship with Company or any of Company's Subsidiaries.
(d) Loan Relationships. No Company-Related Person has any
outstanding loan or loan commitment from, or on whose behalf an
irrevocable letter of credit has been issued by, Company or any of
Company's Subsidiaries in a principal amount of $10,000 or more.
3.31 Fairness Opinion. The board of directors of Company has received the
written opinion of The Chicago Corporation, to the effect that the Merger
Consideration to be received by stockholders of Company in the Merger is fair
to the stockholders from a financial point of view, and the opinion has not
been withdrawn, modified, or revoked.
3.32 Duties as Fiduciary. Bank has performed all of its duties in any
capacity as custodian, escrow agent, receiver, or other fiduciary in a
fashion that complies in all material respects with all applicable laws,
regulations, orders, agreements, wills, instruments, and common law
standards. Bank has not received notice of any claim, allegation, or
complaint from any person that Bank failed to perform these fiduciary duties
in the required manner.
3.33 Change in Business Relationships. Neither Company nor any of
Company's Subsidiaries has notice, whether on account of the Merger or
otherwise, that (i) any customer,
-27-
<PAGE>
agent, representative, or supplier of Company or any of Company's
Subsidiaries intends to discontinue, diminish, or change its relationship
with Company or any of Company's Subsidiaries, the effect of which would be
material to the business of Company or any of Company's Subsidiaries; or
(ii) any executive officer of Company or any of Company's Subsidiaries
intends to terminate his or her employment.
3.34 Public Communications; Securities Offering. No annual report,
quarterly report, proxy material, press release, or other communication
previously sent or released by Company or any of Company's Subsidiaries to
Company's shareholders or the public was false or misleading with respect to
any material fact, or omitted to state any material fact necessary to make
the statements therein not misleading.
3.35 No Insider Trading. Company has reviewed its stock transfer records
since January 1, 1996, and has questioned its directors and executive
officers concerning known stock transfers since that date. Based upon that
investigation, to Company's knowledge: (i) no director or officer of Company
or any of Company's Subsidiaries; (ii) no person related to any such director
or officer by blood or marriage and residing in the same household; and (iii)
no person knowingly provided material nonpublic information by any one or
more of these persons has purchased or sold, or caused to be purchased or
sold, any shares of Company Common Stock during any period when Company was
in possession of material nonpublic information or in violation of any
applicable provision of the 1934 Act.
3.36 True and Complete Information. No schedule, statement, list,
certificate, or other information furnished or to be furnished by Company in
connection with this Agreement, including the Company Disclosure Statement,
contains or will contain any untrue statement of a material fact, or omits or
will omit to state a material fact necessary to make the statements contained
therein, in light of the circumstances in which they are made, not
misleading.
Article IV - Representations and Warranties of Acquiror
Acquiror represents and warrants to Company that, except as otherwise
set forth in the disclosure statement dated November 6, 1996, constituting
Exhibit B (collectively, the "Acquiror Disclosure Statement"), which has been
delivered to Company prior to the execution of this Agreement:
4.1 Organization and Qualification. Acquiror and MergerSub are
corporations duly organized, validly existing, and in good standing under
the laws of the State of Michigan. Acquiror's Bank is a Michigan banking
corporation duly organized, validly existing, and in good standing under the
Banking Code. Acquiror's Bank is regulated by the FDIC and its deposits are
primarily insured by the Bank Insurance Fund in the manner and to the extent
provided by law. Neither the scope of the business of Acquiror or of
Acquiror's Bank nor the location of any of their respective properties
requires that either of them be licensed to do business in any jurisdiction
other than the State of Michigan. MergerSub has no material assets, has
never
-28-
<PAGE>
conducted any business activities, and is not a party to any contract,
agreement, or understanding other than this Agreement.
4.2 Authority Relative to this Agreement. Acquiror and MergerSub each have
full corporate power and authority to execute, deliver, and perform this
Agreement and to consummate the transaction contemplated by this Agreement,
subject to any governmental approvals required by law. The execution,
delivery, and performance of this Agreement and the consummation of the
transactions contemplated by this Agreement have been duly authorized and
approved by the boards of directors of Acquiror and MergerSub. No other
corporate proceedings on the part of Acquiror or MergerSub are necessary to
authorize this Agreement or to consummate the transactions contemplated by
this Agreement. This Agreement has been duly and validly executed and
delivered by Acquiror and MergerSub and constitutes the valid and binding
agreement of Acquiror and MergerSub, enforceable against either of them in
accordance with its terms, except insofar as the enforceability may be
limited by applicable bankruptcy, insolvency, receivership, and other laws
affecting the rights of creditors generally.
4.3 No Conflict or Violation. Neither the execution nor delivery of this
Agreement nor the consummation by Acquiror and MergerSub of the transactions
contemplated by this Agreement nor the compliance with and fulfillment of the
terms and provisions of this Agreement by Acquiror and MergerSub will
conflict with, or result in a breach of, any term, condition, or provision
of, or constitute a default under:
(a) Corporate Documents. The Articles of Incorporation or Bylaws of
Acquiror or MergerSub;
(b) Material Agreements. Any material agreement or instrument to
which Acquiror or Acquiror's Bank is a party or by which either of them
is bound; or
(c) Orders; Liens. Any material order, judgment, or decree to which
Acquiror or Acquiror's Bank is subject, or result in the creation of any
material lien, charge, or encumbrance on any of their respective
properties.
4.4 Proxy Statement.
(a) Accurate Information. None of the information to be supplied by
Acquiror for inclusion, or included, in any Transaction Document will:
(i) Be false or misleading with respect to any material fact,
or omit to state any material fact necessary to make the statements
therein not misleading (1) at the respective times such Transaction
Documents are filed; and (2) with respect to the Proxy Statement,
when it is mailed.
(ii) With respect to the Proxy Statement, as it may be
amended or supplemented, at the time of the Stockholders' Meeting,
be false or misleading with respect to any material fact, or omit
to state any material fact necessary to correct
-29-
<PAGE>
any statement in any earlier communication with respect to the
solicitation of any proxy for the Stockholders' Meeting.
(b) Compliance of Filings. All documents that Acquiror is responsible
for filing with any regulatory agency in connection with the Merger or
the Bank Consolidation will comply as to form in all material respects
with the provisions of applicable law.
4.5 Necessary Capital. Based on the financial condition of Company as
reflected in the 1996 Financial Statements, Acquiror has the necessary
capital required by the regulations of the Federal Reserve Board and FDIC to
consummate the transactions contemplated by this Agreement.
4.6 Compliance with Applicable Law. Acquiror and Acquiror's Bank each
holds all material licenses, franchises, permits, and authorizations
necessary for the lawful conduct of its business, the lack of which would
prevent Acquiror from obtaining regulatory approval to consummate the
Merger. Acquiror and Acquiror's Bank has each complied with, and is not in
material default under, any applicable law, statute, order, rule,
regulation, policy, and/or guideline of any federal, state, or local
governmental authority the violation of which would prevent Acquiror from
obtaining regulatory approval to consummate the Merger. Neither Acquiror
nor Acquiror's Bank has received notice of a violation of, and does not know
of any violation of, any applicable law, statute, order, rule, regulation,
policy, and/or guideline of any federal, state, or local governmental
authority the violation of which would prevent Acquiror from obtaining
regulatory approval to consummate the Merger.
4.7 Litigation. There is no private or governmental suit, claim, action,
or proceeding pending or threatened, or which reasonably should be expected
to be commenced, against Acquiror, its subsidiaries or against any of their
directors or officers that would impair the ability of Acquiror to perform
its obligations under this Agreement.
4.8 Regulatory Approvals. Acquiror does not know of any circumstances which
would prevent it or Company from obtaining approval of the Federal Reserve
Board, the FDIC, the OTS, or the FIB of the transactions contemplated by this
Agreement, except for their customary review of competitive effects of the
Merger under applicable laws and regulations.
4.9 No Fact or Condition, Etc. To the knowledge of Acquiror, no fact or
condition exists which Acquiror has reason to believe will prevent it from
obtaining all governmental consents and approvals required to consummate the
Merger or the Bank Consolidation.
4.10 True and Complete Information. No schedule, statement, list,
certificate, or other information furnished or to be furnished by Acquiror in
connection with this Agreement, including the Acquiror Disclosure Statement,
contains or will contain any untrue statement of a material fact, or omits or
will omit to state a material fact necessary to make the statements contained
therein, in light of the circumstances in which they are made, not
misleading.
-30-
<PAGE>
Article V - Additional Covenants and Agreements
Subject to the terms and conditions of this Agreement, Company and
Acquiror further agree that:
5.1 Access to Information.
(a) Permitted Investigation. Between the date of this Agreement and
the Effective Time, Company will afford, and will cause Bank to afford,
to the officers, accountants, attorneys, and authorized representatives
of Acquiror and Acquiror's Bank reasonable access during normal business
hours to the banking offices, personnel, advisors, consultants,
properties, examination reports (subject to regulatory approval),
contracts, commitments, books and records of Company and Company's
Subsidiaries, whether the documents are located on the premises of
Company or elsewhere. Company shall furnish Acquiror and Acquiror's
Bank with all the statements (financial and otherwise), records,
examination reports (to the extent permitted or authorized by the OTS),
and original documents or copies, and other information concerning the
business and affairs of Company and the Company's Subsidiaries as
Acquiror or Acquiror's Bank shall from time to time reasonably request.
Company further agrees to cause its accountants, attorneys, and other
persons as the parties may agree upon to fully cooperate with Acquiror
and Acquiror's Bank and its representatives in connection with the right
of access granted in this Agreement.
(b) Confidentiality. All information and documents to which Acquiror
or Acquiror's Bank is given access pursuant hereto shall be subject to
the Confidentiality Agreement executed between the parties dated August
2, 1996. All information furnished by Company or Company's Subsidiaries
to Acquiror or Acquiror's Bank pursuant hereto shall be treated as the
sole property of Company or Company's Subsidiaries until consummation of
the Merger contemplated by this Agreement and, if the Merger shall not
occur, Acquiror and Acquiror's Bank shall return to Company or Company's
Subsidiaries all documents or other materials containing, reflecting, or
referring to this information, shall use its best efforts to keep
confidential all of this information, and shall not directly or
indirectly use this information for any competitive or other commercial
purpose. The obligation to keep this information confidential shall
continue for five (5) years from the date the proposed Merger is
abandoned, but shall not apply to:
(i) Any information which was already in the possession of
Acquiror or Acquiror's Bank prior to its disclosure by Company or
Company's Subsidiaries, information which was then generally known
to the public, information which became known to the public through
no fault of Acquiror or Acquiror's Bank or its agents;
(ii) Any information disclosed in accordance with an order of
a court of competent jurisdiction;
-31-
<PAGE>
(iii) Any information received from any other person who is
not affiliated with a party and who is not under any obligation to
keep such information confidential; or
(iv) Any information reasonably required to be included in
any filing or application required by any governmental or
regulatory agency, including without limitation Acquiror's
application to the Federal Reserve Board, Acquiror's or Company's
reports filed with the SEC, and Acquiror's or Company's annual
report and proxy statement.
(c) No Presumption. Company and Acquiror each acknowledge that each
competes with the other in certain lines of business in a similar market
and each agrees that the fact that a party or a party's Affiliates may
in the future conduct business with a present customer of the other
party shall not, in and of itself, create any presumption or inference
that the party or its Affiliates have used confidential information.
(d) Acquiror's Nonpublic Information. All nonpublic information and
documents about Acquiror or Acquiror's Bank to which Company or its
agents are provided or given access by Acquiror pursuant to this
Agreement shall forever be treated confidentially and shall be treated
as the sole property of Acquiror and Acquiror's subsidiaries.
(e) Prohibit Insider Trading. Acquiror and Company each shall take
responsible steps to assure that any person who receives nonpublic
information concerning the Merger or the other party will (i) treat the
information confidentially as provided in this Section; and (ii) not
directly or indirectly buy or sell, or advise other persons to buy or
sell, the other party's stock until such information is properly
disclosed to the public.
5.2 Conduct of Business by Company. Company shall operate its business and
cause each of Company's Subsidiaries to operate its business in the ordinary
course and consistent with past practices. Company will use all reasonable
efforts to preserve intact the present business organizations of Company and
Company's Subsidiaries and maintain in effect all licenses, permits, and
approvals of governmental authorities and agencies necessary for the conduct
of its present business. Except as otherwise contemplated by this Agreement
or as otherwise consented to or approved by Acquiror in writing, neither
Company nor Company's Subsidiaries shall:
(a) No Issue or Sale. Issue, sell, purchase, or redeem or commit
to issue, sell, purchase, or redeem any shares of its capital stock
other than shares issued pursuant to the exercise of stock options
outstanding on the date of this Agreement and the conversion of
outstanding restricted shares of Company Common Stock for unrestricted
shares pursuant to the Recognition Plan; or grant any options, warrants,
or rights to purchase shares of its capital stock; or issue, sell, or
authorize the issuance or sale of securities of any kind convertible
into or exchangeable for shares of its capital stock; or
-32-
<PAGE>
(b) Dividend Restrictions. Declare, set aside, or pay any dividend or
make any distribution in respect of its capital stock in excess of $0.11
per quarter, in cash, from Company to its stockholders. Company's
Subsidiaries may pay dividends to Company in amounts sufficient to
enable Company to pay its ordinary operating expenses and its accrued
liabilities, including (but not limited to) litigation expenses and
accounting, legal, printing, investment banking, environmental testing
and regulatory application fees, expenses and costs relating to the
transactions contemplated by this Agreement.
(c) Corporate Documents. Amend its Certificate or Articles of
Incorporation (in the case of Company or Non-Bank Subsidiary), Charter
(in the case of Bank), or Bylaws, except as may be contemplated by this
Agreement;
(d) Other Capital Stock Interests. Issue or agree to issue any
additional shares of its capital stock or issue or create any warrants,
obligations, subscriptions, options, convertible security, or other
commitments under which additional shares of its capital stock of any
class might be directly or indirectly authorized, issued, or transferred
from treasury, except in connection with options previously granted
under the Incentive Plan;
(e) Compensation. Make any general or unusual increase in
compensation or rate of compensation payable or to become payable to
hourly, salaried, or commissioned employees or officers, except for
those which are normal, reasonable, and consistent with past practices
or as provided for by contracts in existence and contained in the
Company Disclosure Statement.
(f) Employment Agreements. Enter into any express or implied, written
or oral, employment agreement which by its terms cannot be terminated on
thirty (30) days' notice or less without penalty;
(g) Employee Benefits. Accrue, set aside, or pay to any officer or
employee any bonus, profit-sharing, severance, retirement, insurance,
death, fringe benefit, or other extraordinary compensation (except
pursuant to pension, profit-sharing, bonus, and other fringe benefit
plans, agreements, and arrangements presently in effect and in
accordance with past practices) nor adopt or amend any employee benefit
plan (except that Bank may make amendments to its employee benefit plans
as are specifically contemplated by this Agreement);
(h) Derivatives. Commit to purchase, purchase, or otherwise
acquire any high risk derivative or synthetic mortgage product or enter
into any interest rate swap transaction, other than the purchase and
sale of collateralized mortgage obligations in the ordinary course of
business and consistent with past practices;
(i) Insider Loans. Make any loan or make any loan commitment,
renewal, or extension to any person which would, when aggregated with
all outstanding loans, commitments, renewals, or extensions made by Bank
to the person and the person's Immediate Family and Affiliates, exceed
$250,000; provided, however, that this restriction
-33-
<PAGE>
shall not apply to any renewals or advances on existing lines of credit or
the renegotiation or restructuring of any problem or delinquent loan or to
the making of any residential mortgage loan made with adjustable rates;
(j) Acquisitions. Acquire any business entity, except as it relates
to a foreclosure or other exercise of creditor's rights in the usual and
ordinary course of its business;
(k) Extraordinary Transactions. Enter into any contract or
agreement to buy, sell, exchange, or otherwise deal in any assets or series
of assets in a single transaction in excess of $100,000 in aggregate value
(including, but not limited to, options or commodities or any tangible
real or personal properties of Company or Company's Subsidiaries),
except for the origination, purchase, and sale of mortgage loans and
loan participations and the purchase and sale of readily marketable
investment securities in the ordinary course of business and consistent
with past practices, and sales of real estate owned and other
repossessed properties or acceptance of a deed in lieu of foreclosure;
(l) Capital Expenditures. Make any one capital expenditure or any
series of related capital expenditures (other than emergency repairs and
replacements), the amount or aggregate amount of which (as the case may
be) is in excess of $50,000;
(m) No Branching. File, withdraw, or fail to renew any applications
for additional branches or to relocate operations from existing
locations;
(n) No Extraordinary Liabilities. Create or incur any liabilities in
excess of $50,000, other than liabilities incurred in the ordinary
course of business or as contemplated or permitted by or in connection
with this Agreement and the consummation of the Merger;
(o) No Pledges. Create or incur or suffer to exist any mortgage,
lien, pledge, security interest, charge, encumbrance, or restriction of
any kind against or in respect of any property or right of Company or
Company's Subsidiaries securing any obligation in excess of $50,000,
except for pledges or security interests given in connection with the
acceptance of repurchase agreements or government deposits;
(p) Material Contracts. Make or become a party to any contract or
commitment in excess of $50,000, or renew, extend, amend, or modify any
contract or commitment in excess of $50,000, except in the usual and
ordinary course of business or as otherwise contemplated or permitted by
this Agreement;
(q) No Discharges. Discharge or satisfy any mortgage, lien, charge,
or encumbrance other than as a result of the payment of liabilities in
accordance with their terms, or except in the ordinary course of
business, if the cost to Company or Company's Subsidiaries to discharge
or satisfy any mortgage, lien, charge, or encumbrance is in excess of
$50,000, unless the discharge or satisfaction is covered by general or
specific reserves;
-34-
<PAGE>
(r) Satisfaction of Liabilities. Pay any obligation or liability,
absolute or contingent, in excess of $50,000 except liabilities shown on
the 1996 Financial Statements or except in the usual and ordinary course
of business or in connection with the transactions contemplated by this
Agreement;
(s) Claims and Settlements. Institute, settle, or agree to settle any
claim, action, or proceeding involving an expenditure in excess of
$50,000 before any court or governmental body;
(t) Real Estate. Invest in any real estate, except for investments
in real estate owned as a result of foreclosure or deed in lieu of
foreclosure;
(u) Environmental Precautions. Take title to any real estate, as
legal or beneficial owner or as trustee, without first obtaining an
environmental assessment of the property;
(v) Material Purchases. Enter into or amend any continuing contract
or series of related contracts in excess of $50,000 for the purchase of
materials, supplies, equipment, or services which cannot be terminated
without cause and without payment of any amount as a penalty, bonus,
premium, or other compensation for termination except as contemplated or
permitted by this Agreement;
(w) Insider Contracts. Enter into or amend any contract, agreement,
or other transaction with any officer, director, or principal
shareholder of Company or any Affiliate of the person except as
contemplated or permitted by this Agreement;
(x) Policies and Procedures. Change any basic policies and practices
with respect to liquidity management, asset/liability management or
interest rate sensitivity, cash flow planning, marketing, deposit
origination, lending, budgeting, profit and tax planning, personnel
practices, accounting, or any other material aspect of its business or
operations, except for any changes which, in the opinion of management
of Company, are required to respond to then current market conditions
(as to deposit origination and lending only) and requirements of
applicable governmental authorities; or
(y) Defaults. Knowingly default in any material respect under any
agreement or understanding to which Company or Company's Subsidiaries
are a party, and which, individually or together with other agreements
or understandings with respect to which a default exists, would
materially adversely affect the financial condition, net income,
business, or operations of Company and Company's Subsidiaries, taken as
a whole.
5.3 Regulatory Matters.
(a) Proxy Statement. Acquiror and Company will cooperate in the
preparation and filing by Company as soon as practicable of the Proxy
Statement with the SEC under the 1934 Act to be used by Company for the
solicitation of proxies in order to approve
-35-
<PAGE>
this Agreement and the Merger and will use their best efforts to obtain
permission from the SEC to mail the Proxy Statement to Company's
stockholders as soon as possible following the execution of this Agreement.
(b) Regulatory Filings. Acquiror and Company will cooperate with
each other and use all reasonable efforts to prepare as expeditiously as
possible all necessary documentation, to effect all necessary filings,
and to obtain at the earliest practicable date all necessary permits,
consents, approvals, and authorizations of all third parties and
governmental bodies necessary to consummate the transactions
contemplated by this Agreement. Acquiror and Company shall each have
the right to review and approve in advance all characterizations of the
information relating to Acquiror or Company, as the case may be, and any
of their respective subsidiaries, which appear in any filing made in
connection with the transactions contemplated by this Agreement with any
governmental body. This Section shall not, however, obligate Acquiror
or Acquiror's Bank to divest all or any part of its current business
operations.
(c) Necessary Information. Acquiror and Company will furnish each
other with all information concerning themselves, their subsidiaries,
directors, officers, and stockholders and other matters as may be
necessary or advisable in connection with the Proxy Statement, or any
other statement or application made by or on behalf of Acquiror or
Company to any governmental body in connection with the Merger and the
other transactions contemplated by this Agreement.
5.4 Stockholder Approval. Company will take all steps necessary to duly
call, give notice of, convene, and hold the Stockholders' Meeting as soon as
practicable after the date of this Agreement. At the Stockholders' Meeting,
in the Proxy Statement, and in all proxy materials used in connection with
the meeting, the board of directors of Company shall recommend adoption of
this Agreement and approval of the Merger by the stockholders; provided, that
the recommendation is not inconsistent with the proper exercise of the
fiduciary duties of the directors to the stockholders of Company.
5.5 Updated Financial Information. As soon as reasonably available,
Company shall deliver to Acquiror complete copies of all Quarterly Reports
on Form 10-QSB, Current Reports on Form 8-K, Annual Reports on Form 10-KSB,
and any amendments of past filings, as and when these reports are filed
hereafter with the SEC pursuant to the 1934 Act. The financial statements
contained in the reports will be prepared in accordance with generally
accepted accounting principles consistently applied (except for changes
required by applicable governmental authorities or by generally accepted
accounting principles) and will present fairly the consolidated financial
condition of Company and the Company's Subsidiaries as of the dates
indicated and for the periods then ended.
5.6 Acquisition Proposals. Company shall not, nor shall it authorize or
permit any of Company's Subsidiaries, or any of their respective officers,
directors, investment bankers, attorneys, representatives, or agents to
initiate, solicit, or encourage, directly or indirectly, any inquiries or the
making of any proposal with respect to a tender offer, exchange offer,
merger,
-36-
<PAGE>
consolidation, sale of shares, sale of assets, or assumption of liabilities
not in the ordinary course, or other business combination involving Company
or Company's Subsidiaries other than the Merger (an "Acquisition Proposal").
Company shall notify Acquiror immediately of the details of any indication
of interest from any persons with respect to the foregoing of which any
executive officer or director of Company becomes aware. Notwithstanding the
foregoing, nothing in this Agreement shall prohibit Company's board of
directors from fulfilling their fiduciary duties under Delaware or federal
law to the stockholders of Company and it shall not be a breach of this
Agreement for Company's board of directors to do so.
5.7 Further Assurances. Subject to the terms and conditions in this
Agreement, each of the parties hereto agrees to use its best efforts to take,
or cause to be taken, all action and to do, or cause to be done, all things
necessary, proper, or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this
Agreement. 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
necessary action. In addition, each party agrees to notify the other by
telephone within forty-eight (48) hours of receipt of any inquiry with
respect to a proposed merger, consolidation, asset acquisition, tender offer,
or other takeover transaction involving Company and another person or receipt
of a request for information from the OTS, FDIC, the United States Department
of Justice, or any other governmental authority with respect to a proposed
acquisition of Company by another party.
5.8 Employment Agreements. On and after the Effective Time, Acquiror and
Acquiror's Bank agree to honor and be bound by all employment agreements with
Company's or Company's Subsidiaries' senior officers which are contained in
the Company Disclosure Statement. Prior to March 25, 1997, Company shall
cause Bank to give each senior officer the notice required under Section 2,
Term, of each employment agreement that, subject to the consummation of the
Merger, the term of the employment agreement will not be extended for any
additional period.
5.9 Treatment of ESOP.
(a) ESOP Amendments. Prior to the Effective Time, the ESOP may be
amended to provide for (i) full vesting of benefits by participants; and
(ii) elimination of the requirement for a participant to be employed on
the last day of the year to receive an employer contribution, other
annual additions or allocations, in each case effective as of the
Effective Time. Company shall make no other amendments to the ESOP
without the prior written consent of Acquiror and shall only make
additional contributions to the ESOP at levels consistent with prior
practice and applied to the ESOP indebtedness (the "ESOP Debt").
(b) Wind-up of the ESOP. Any cash received by the ESOP trustee in
the course of the Merger with respect to unallocated shares of Company
Common Stock shall be applied by the trustee to the repayment of the
ESOP Debt. The balance of the cash, if any, received by the ESOP
trustee in the course of the Merger with respect to unallocated shares
of Company Common Stock shall be allocated to the accounts of all
participants
-37-
<PAGE>
in the ESOP who have accounts remaining under the ESOP (whether or not the
participants are then actively employed) and beneficiaries in proportion to
the account balances of the participants and beneficiaries as they existed
as of the Effective Time (and, if required, to the accounts of former
participants or their beneficiaries) as investment earnings of the ESOP,
except to the extent that any portion of the balance of the cash received
by the ESOP trustee would be subject to the limitations of Section 415 of
the Code for that year. Prior to the allocation contemplated by the
preceding sentence, the administrative and other authority previously
exercised with respect to the ESOP by the board of directors of Company or
Company's Subsidiaries shall be exercised solely by a committee appointed
by the board of directors of Company and in place under the terms of the
ESOP at the Effective Time (the "Committee"), which authority shall include
the authority to appoint and remove trustees of the ESOP. If the ESOP is
required to be maintained for a transition period after the Effective
Time in order to fully allocate to participants the cash received in the
Merger with respect to unallocated shares of Company Common Stock,
Acquiror agrees to cause the ESOP to be so continued for a period of up
to 24 months after the Effect Time for the benefit of its participants
to the extent permitted by ERISA, the Code, and other applicable laws
and regulations; provided, however, in such event the ESOP shall be
amended, effective as of the Effective Time, to provide that there shall
be no new participants in the plan on or after the Effective Time. Upon
the making of all allocations in this Agreement, the ESOP shall be
terminated and the account balances therein will be distributed to
participants or their beneficiaries, with the right of tax-free
rollover, to the extent permitted by law, to an individual retirement
account or another tax-qualified plan of Acquiror, at the election of
the distributee. As a condition to any distributions, Acquiror may
secure a favorable determination letter for termination from the IRS
relating to that termination and distribution. If a determination letter
is secured, all distributions will be made in strict compliance
therewith. Notwithstanding the foregoing: (i) Company shall be
entitled to file with the IRS an application, at any time prior to the
Effective Time, for an advance determination letter relating to
termination of the ESOP and/or the methodology for allocating proceeds;
and (ii) if at the expiration of the full transition period for
continued maintenance of the ESOP there remain unallocated proceeds,
then Acquiror may take any action it deems appropriate with respect to
the ESOP, including (but not limited to) terminating the ESOP and making
distributions therefrom or merging the ESOP into another Acquiror
tax-qualified plan.
5.10 Conduct of Business. Acquiror and Company each covenants not to take
any action or fail to take any action which would jeopardize its ability to
consummate the transactions contemplated by this Agreement, including
obtaining all required regulatory approvals for the Merger and the Bank
Consolidation, or which would cause any of its representations and warranties
to become untrue prior to the Effective Time.
5.11 Indemnification. Acquiror acknowledges that any and all rights to
indemnification now existing in favor of the directors and officers of
Company and each of Company's Subsidiaries under their respective certificate
of incorporation, charter, articles of incorporation,
-38-
<PAGE>
or bylaws shall survive the Merger and shall continue with respect to acts
or omissions occurring before the Effective Time with the same force and
effect as prior to the Effective Time.
5.12 Subsequent Disclosures. If, subsequent to the date of this Agreement
and prior to the Closing Date, an event occurs that renders untrue any
representation or warranty of Company made in this Agreement (a "Subsequent
Event"), Company shall promptly deliver to Acquiror an amended or supplemental
disclosure which will contain a detailed description of the Subsequent Event
within five (5) business days after Company learns of the Subsequent Event
but in no event later than the third business day prior to the Closing. The
submission of an amended or supplemental disclosure, and the existence of the
Subsequent Event, shall not constitute a default or breach by Company of any
of its representations or warranties under this Agreement; provided, however,
that all matters therein disclosed, together with all other events,
circumstances, and occurrences may be taken into account by Acquiror in
determining whether the condition set forth in Subsection 6.1(b) (No Adverse
Change) has been satisfied; and provided further, that this Section 5.12 is not
intended to permit Company to alter or amend its representations and
warranties as made in this Agreement, including any disclosure contained in
the Company Disclosure Statement, and any amended or supplemental disclosures
provided by Company pursuant to this Section 5.12 shall not cure the
inaccuracy of any representation or warranty as of the date of this Agreement
for any purpose under this Agreement. Unless waived by the other party in
writing, party in breach of a representation or warranty shall use all
reasonable efforts to take remedial or preventative action in order that such
representations and warranties will be true and complete at the Closing.
5.13 WARN Act. Company agrees that, if requested by Acquiror, it shall,
on behalf of Acquiror and Acquiror's Bank, issue any notice required under
the Worker Adjustment and Retraining Notification Act of 1988 (the "WARN Act")
or any similarly applicable state or local law, in connection with Acquiror's
intended closing of one or more of the banking offices of Bank on or after
the Effective Time. Each notice shall be given sufficiently in advance of
any time of closing of an office so that neither Acquiror nor Bank shall be
liable under the WARN Act for any penalty or payment in lieu of notice to any
employee or governmental entity. Acquiror and Company shall cooperate in the
preparation and giving of any notice and no notice shall be given without the
approval of Acquiror.
5.14 Dissenting Stockholders' Appraisal Rights. Acquiror and Company, as
applicable, will comply with all applicable notification and other provisions
of regulations or statutes relating to Dissenting Shares.
5.15 Data Processing and Related Contracts. Until the Effective Time,
Company shall advise Acquiror of all anticipated renewals or extensions of
existing data processing service agreements, data processing software license
agreements, and data processing hardware lease agreements with independent
vendors. Company agrees to cooperate with Acquiror in negotiating with those
vendors the length of any extension or renewal term of those agreements,
which, unless otherwise agreed with Acquiror, shall not exceed one year from
the date of renewal. Company agrees to send to each vendor, as and when due,
such notices of nonrenewal as may be necessary or appropriate under the terms
of the applicable agreements to prevent those
-39-
<PAGE>
agreements from automatically renewing for a term of more than one year from
the date of renewal, except as otherwise agreed between Company and Acquiror.
5.16 Environmental Investigation. Acquiror shall be permitted to
conduct an environmental assessment of each parcel of Company's Real
Properties and, at Acquiror's option: (i) any other real estate formerly
owned by Company or Company's Subsidiaries; and (ii) acquired by Company's
Subsidiaries in satisfaction of a debt previously contracted. As to each
such property:
(a) Preliminary Environmental Assessments. Acquiror may, at its
expense, engage an environmental consultant acceptable to Company to
conduct a preliminary ("Phase I") assessment of the property. Company
and Company's Subsidiaries shall provide reasonable assistance,
including site access and a knowledgeable contact person, to the
consultant for purposes of conducting the Phase I assessments.
(b) Environmental Risks. If there are any facts or conditions
identified in a Phase I assessment which, in its discretion, Acquiror
believes could potentially pose a current or future risk of a material
adverse effect on the financial condition, net income, business, or
operations of Company and Company's Subsidiaries, taken as a whole, then
Acquiror shall identify that risk to Company, identify the facts or
conditions underlying that risk, and provide Company with a copy of the
Phase I assessment for that property (an "Environmental Risk").
(c) Phase II and III Work. Acquiror may obtain one or more estimates
of the proposed scope of work and cost of any further environmental
investigation, remediation, or other follow-up work it reasonably deems
necessary or appropriate to assess and, if necessary or appropriate,
remediate an Environmental Risk if remediation would be required by
applicable law or if a failure to do so could result in a material
adverse effect on the financial condition, net income, business, or
operations of Company and Company's Subsidiaries, taken as a whole
("Phase II and III Work"). Acquiror shall provide copies of those estimates
to Company. Acquiror and Company shall cooperate in the review,
approval, and implementation of all work plans for Phase II and III
Work. All work plans for any Phase II and III Work shall be mutually
satisfactory to Acquiror and Company. Mutually agreed upon Phase II and
III Work shall be undertaken and completed as quickly as possible and
shall be completed prior to the Closing. If the expenses of any Phase
II and III Work or proposed work plans or removal or remediation actions
would entail a material cost to complete, Acquiror and Company shall
discuss a mutually acceptable allocation of that expense or modification
to this Agreement.
(d) Acquiror's Termination Rights. If Acquiror and Company are unable
to agree upon a course of action to promptly complete any Phase II and
III Work, an acceptable allocation of related expenses, and/or an
acceptable modification to this Agreement, then Acquiror may give
Company notice of the unacceptable Environmental Risk. Company shall
have thirty (30) days following receipt of that notice to cure that
Environmental
-40-
<PAGE>
Risk, if possible, to Acquiror's reasonable satisfaction. If not so cured
within that thirty (30) days, then Acquiror may terminate this Agreement as
provided in Subsection 7.1(b)(v) (Environmental Risk).
5.17 Tax Ruling. Acquiror shall promptly seek to obtain from the IRS a
private letter ruling providing assurance that neither Acquiror nor Company
will be required to recapture Bank's pre-1988 bad debt reserves following the
Merger and the Bank Consolidation. In lieu of the IRS's private letter
ruling, Acquiror may choose to accept an opinion from tax counsel or tax
accountants to the same effect.
5.18 Employee Agreements. Acquiror and Company shall promptly seek to
obtain from each employee of Company who, as a result of the change of
control of Company in the Merger, would be entitled to any compensation in
excess of the limitations prescribed by Section 280G of the Code (an "Excess
Parachute Payment"), a mutually satisfactory amendment to any employment
agreement, severance agreement, stock option agreement, restricted stock
agreement, or other compensation agreement to (i) adjust the aggregate amount
of compensation due; (ii) extend the time period over which the compensation
is payable; (iii) amend other terms and conditions; or (iv) any combination
of these changes; all in order to prevent all compensation payable under such
agreements from being characterized as an Excess Parachute Payment.
Article VI - Conditions
6.1 Conditions to Obligations of Acquiror. The obligations of Acquiror to
consummate the transactions provided for by this Agreement are subject to the
satisfaction at or prior to the Closing of each of the following conditions,
any one or more of which may, to the extent waivable, be waived by Acquiror:
(a) Representations and Warranties. The representations and
warranties of Company contained in this Agreement, as amended or
supplemented pursuant to Section 5.12 (Subsequent Disclosures), shall be
true and correct in all material respects when made as of the date of this
Agreement and as made again as of the Closing, except as to any
representation or warranty which specifically relates to an earlier date;
provided, however, that for purposes of satisfying this condition (but not
for purposes of determining whether or not a breach has occurred), any
representation which contains a knowledge qualification shall be read
without that qualification to verify at Closing whether the representation
was true and correct on the date of this Agreement. Company shall have
performed all agreements and covenants required by this Agreement to be
performed by it. At the Closing there shall be delivered to Acquiror a
certificate signed by the chief executive and chief financial officers
of Company to the foregoing effect.
(b) No Adverse Change. There shall not have occurred any event,
development, or circumstance related to the business, condition
(financial or otherwise), capitalization, or properties of Company or
Company's Subsidiaries that has had or could reasonably be expected to
have a material adverse effect on the financial condition, net income,
-41-
<PAGE>
business, or operations of Company and Company's Subsidiaries, taken as
a whole, whether or not the event, development, circumstance, change, or
effect is reflected in the Company Disclosure Statement, as amended or
supplemented after the date of this Agreement, other than: (i) an
adverse effect caused solely by a change in laws or regulations or other
factors (including, but not limited to, a special SAIF premium
assessment or a change in general economic conditions or interest rates,
and the "mark to market" implications of those events) affecting the
financial condition, net income, business, or operations of thrift or
banking institutions generally; or (ii) legal, accounting, and
investment bankers' expenses incurred by Company in connection with
Company's negotiation of this Agreement and the consummation of the
Merger.
(c) Consents. All consents, approvals, and waivers from
governmental agencies (including, without limitation, the Federal
Reserve Board, the FDIC, the FIB, and the OTS as required by 12 U.S.C.
Section 1467a(e)(1)), necessary to permit the transactions contemplated
by this Agreement shall have been obtained or provided for, all waiting
periods prescribed by applicable law or regulation shall have expired,
and the United States Department of Justice shall not have taken any
adverse action within the period allowed under 12 U.S.C. Section
1828(c)(6).
(d) No Litigation. Neither Acquiror nor Company shall be subject to
any order, decree, or injunction of a court or agency of competent
jurisdiction which enjoins or prohibits the consummation of the Merger.
(e) Continued IRS Status. Acquiror shall have received an opinion
from Crowe Chizek & Co., L.L.P., independent auditors for Company, in
form and substance satisfactory to Acquiror, to the effect that,
immediately prior to the Effective Time, the Bank qualifies as a
"domestic building and loan association" within the meaning of Section
7701(a)(19) of the Code.
(f) Opinion of Counsel. Acquiror shall have received the opinion of
Silver, Freedman & Taff, L.L.P., counsel to Company, substantially in the
form and content set forth in Exhibit C. Any certificate relied upon by
Company's counsel shall also be addressed to Acquiror.
(g) Tax Opinion. Acquiror shall have received the opinion of Warner
Norcross & Judd LLP, counsel to Acquiror, relating to the tax
consequences of the transactions contemplated under this Agreement, in
form and content reasonably satisfactory to Acquiror.
(h) Certificate as to Outstanding Shares. Acquiror shall have
received one or more certificates dated as of the Closing date and signed
by the secretary of Company on behalf of Company, and by the transfer
agent for Company Common Stock, certifying (i) the total number of shares
of capital stock of Company issued and outstanding as of the close of
business on the day immediately preceding the Closing; and (ii) with
respect to the secretary's certification, the number of shares of
Company Common Stock, if any,
-42-
<PAGE>
which are issuable on or after that date, all in such form as Acquiror may
reasonably request.
(i) Change of Control Waivers. Acquiror shall have received evidence
of the waiver of any material rights and the waiver of the loss of any
material rights which may be triggered by the change of control of
Company upon consummation of the Merger under any agreements, contracts,
mortgages, deeds of trust, leases, commitments, indentures, notes, or
other instruments described in the Company Disclosure Statement, the
breach of which would cause a material adverse effect on the financial
condition, net income, business, or operations of Company and Company's
Subsidiaries, taken as a whole, all in form and substance reasonably
satisfactory to Acquiror.
(j) Environmental Risk. All investigation and remediation with
respect to any Environmental Risk identified during its Phase I
assessments and all related Phase II and III Work shall have been
substantially completed to Acquiror's reasonable satisfaction, all as
provided in Section 5.16 (Environmental Investigation).
(k) Executive Employment and Compensation. Acquiror shall have
received definitive statements substantially in the form contained in
Exhibit E. Each definitive statement shall be separately signed and
acknowledged as being true, correct, and complete by each person.
(l) Tax Ruling. Acquiror shall have received from the IRS a private
letter ruling, or a satisfactory opinion from tax counsel or tax
accountants, regarding Bank's pre-1988 bad debt reserves as described in
Section 5.17 (Tax Ruling).
(m) Employee Agreements. Acquiror and Company shall have received
from Company's employees all required amendments to employment
agreements, severance agreements, stock option agreements, restricted
stock agreements, or other compensation agreements with respect to
Excess Parachute Payments as described in Section 5.18 (Employee
Agreements).
(n) Other Closing Transaction Documents. Company shall have delivered
to Acquiror at the Closing such other certificates, instruments, and
documents as may be reasonably requested by Acquiror prior to the
Closing.
6.2 Conditions to Obligations of Company. The obligations of Company to
consummate the transactions provided for by this Agreement are subject to the
satisfaction at or prior to the Closing of each of the following conditions,
any one or more of which may be waived, to the extent waivable:
(a) Stockholder Approval. The affirmative vote of holders of at least
a majority of the outstanding shares of Company's Common Stock entitled
to vote on the adoption of this Agreement shall have been duly received
at the Stockholders' Meeting.
-43-
<PAGE>
(b) Consents. All consents, approvals, and waivers from third
parties and governmental agencies necessary to permit the transactions
contemplated by this Agreement shall have been obtained or provided for,
and all waiting periods shall have expired, as provided in Subsection
6.1(c) (Consents).
(c) Representations and Warranties. The representations and
warranties of Acquiror contained in this Agreement shall be true and correct
in all material respects when made as of the date of this Agreement and as
made again as of the Closing, except as to any representation or warranty
which specifically relates to an earlier date. Acquiror shall have
performed all agreements and covenants required by this Agreement to be
performed by it. At the Closing there shall be delivered to Company a
certificate signed by the chief executive and chief financial officers
of Acquiror to the foregoing effect.
(d) No Litigation. Neither Acquiror nor Company shall be subject to
any order, decree, or injunction of a court or agency of competent
jurisdiction which enjoins or prohibits the consummation of the Merger.
(e) Opinion of Counsel. Company shall have received the opinion of
Warner Norcross & Judd LLP, counsel to Acquiror, substantially in the
form and content set forth in Exhibit D.
(f) Other Closing Transaction Documents. Acquiror shall have
delivered to Company at the Closing such other certificates, instruments,
and documents as may be reasonably requested by Company prior to the
Closing.
Article VII - Termination
7.1 Termination. This Agreement and the Merger may only be terminated
and the transactions contemplated by this Agreement may be abandoned at any
time prior to the Closing (notwithstanding that this Agreement has been
adopted by Company's stockholders):
(a) Mutual Action. By agreement authorized by the boards of
directors of Acquiror and Company, or duly authorized committees of the
boards; or
(b) Acquiror's Termination Rights. By the board of directors, or a
duly authorized committee of the board, of Acquiror if:
(i) Failure of Conditions. At any time after the Closing could
otherwise be called, there has been a failure by Company to satisfy
its conditions precedent set forth in Subsections 6.1 (a)
(Representations and Warranties), (b) (No Adverse Change), (e)
(Continued IRS Status), (f) (Opinion of Counsel), (g) (Tax Opinion),
(h) (Certificate as to Outstanding Shares), (i) (Change of Control
Waivers), (j) (Environmental Risk), (k) (Executive Employment and
Compensation), (m) (Employee Agreements), or (n) (Other Closing
Transaction Documents) which
-44-
<PAGE>
notice has been given in writing by Acquiror and which has not been
cured within thirty (30) business days of receipt of notice, or
(ii) Upset Date. The Effective Time has not occurred prior to
September 30, 1997, without material fault on the part of Acquiror;
or
(iii) Acquisition Proposals. The board of directors of Company
shall have withdrawn, or modified, or changed in a manner adverse
to Acquiror, its approval or recommendation of this Agreement or
the Merger, or shall have recommended an Acquisition Proposal or
offer, or shall have executed an agreement in principle (or similar
agreement), or definitive agreement providing for a tender offer or
exchange offer for any shares of capital stock of Company, or a
merger, consolidation, or other business combination of Company or
Bank or a sale of more than 25 percent of the assets of Company or
Bank with or to a person or entity other than Acquiror or its
affiliates (or the board of directors of Company resolves to do any
of the foregoing); or
(iv) Acquiring Persons. It shall have been publicly disclosed
or Acquiror shall have learned that any person, entity, or "group"
(as that term is defined in Section 13(d)(3) of the Exchange Act)
(an "Acquiring Person"), other than Acquiror or its affiliates or any
group of which any of them is a member, shall have acquired
beneficial ownership (determined pursuant to Rule 13d-3 promulgated
under the 1934 Act) of more than 19.9 percent of any class or
series of capital stock of Company through the acquisition of
stock, the formation of a group or otherwise, or shall have been
granted an option, right, or warrant, conditional or otherwise, to
acquire beneficial ownership of more than 19.9 percent of any class
or series of capital stock of Company; or
(v) Environmental Risks. If Acquiror has given Company notice
of an unacceptable Environmental Risk pursuant to Section 5.16
(Environmental Investigation), and it is not cured within the thirty-
(30) day period, or any extension thereof, as provided in
Subsection 5.16(d) (Acquiror's Termination Rights).
(c) Company's Termination Rights. By the board of directors, or a
duly authorized committee of the board, of Company if:
(i) Failure of Conditions. At any time after the Closing could
otherwise be called, there has been a failure by Acquiror to
satisfy its conditions precedent set forth in Subsection 6.2 (c)
(Representations and Warranties), (e) (Opinion of Counsel), or (f)
(Other Closing Transaction Documents) of which notice has been given
in writing by Company and which has not been cured within thirty (30)
business days of receipt of notice;
(ii) Upset Date. The Effective Time has not occurred prior to
September 30, 1997, without material fault on the part of Company;
or
-45-
<PAGE>
(iii) Delayed Regulatory Approval. On or after June 30, 1997,
the Effective Time has not occurred and the Federal Reserve Board has
not yet approved the Merger.
(d) Reciprocal Termination Rights. By the board of directors, or a
duly authorized committee of the board, of either Acquiror or the
Company at any time after the date that (i) holders of a majority of the
shares of Company Common Stock present, in person or by proxy, at the
Stockholder Meeting vote against adoption of this Agreement or expressly
abstain from voting; (ii) any governmental consent or approval specified
in Subsection 6.1(c) (Consents) is denied by final order; or (iii) either
Acquiror or Company is subject to any order, decree, or injunction of a
court or agency of competent jurisdiction which permanently enjoins or
prohibits the consummation of the Merger.
7.2 Effect of Termination.
(a) No Release of Liability. No termination of this Agreement under
this Article VII for any reason or in any manner shall release, or be
construed as so releasing, either party from its obligations under
Subsections 5.1 (b) (Confidentiality), (c) (No Presumption), (d) (Acquiror's
Nonpublic Information), and (e) (Prohibit Insider Trading) and Section 8.12
(Expenses) or any party hereto from any liability to any other party under
this Section 7.2.
(b) Termination Notice. In the event of the termination of this
Agreement as provided in Section 7.1 (Termination), notice shall
immediately be given to the other party or parties specifying the
provision of this Agreement pursuant to which termination is made.
After the expiration of any applicable cure period without the grounds
for termination being cured, this Agreement shall immediately become
null and void, and there shall be no liability on the part of Acquiror
or Company except (i) for fraud or for willful and material breach of
this Agreement and (ii) as set forth in this Section 7.2 and Section
8.12 (Expenses).
(c) Termination Fee. If (i) the board of directors of Acquiror shall
terminate this Agreement pursuant to Subsection 7.1(b)(iii) (Acquisition
Proposals), or (ii) the board of directors of Acquiror shall terminate
this Agreement pursuant to Subsection 7.1(b)(iv) (Acquiring Persons) and
within one year of termination, the Acquiring Person shall acquire or
beneficially own a majority of the then outstanding shares of Company
Common Stock or shall have obtained representation of two or more
directors on Company's board of directors or shall enter into a
definitive agreement with Company with respect to an Acquisition
Proposal or similar business combination, then in any case described in
clauses (i) or (ii) of this Subsection (each referred to as an "Acquiror
Trigger Event"), Company shall pay to Acquiror (not later than two
business days after termination of this Agreement) an amount equal to
$2,000,000.
-46-
<PAGE>
(d) Company Breach. If the board of directors of Acquiror shall
terminate this Agreement pursuant to Subsection 7.1(b)(i) (Failure of
Conditions) due to (i) a willful and material breach of any of the
representations and warranties of Company set forth in this Agreement;
or (ii) a willful and material breach of any material obligation,
agreement, or covenant contained in this Agreement by Company (also
"Acquiror Triggering Events"), Company shall pay to Acquiror (not later than
two (2) business days after termination of this Agreement) an amount
equal to $750,000.
(e) Acquiror's Expenses. In addition to any other amount due, upon
the termination of this Agreement due to the occurrence of a Trigger
Event, Company agrees that it shall promptly assume and pay, or
reimburse Acquiror for, all reasonable fees and expenses incurred, or to
be incurred by Acquiror and Acquiror's Bank (including the fees and
expenses of legal counsel, accountants, financial advisors, other
consultants, and financial printers) in connection with this Agreement,
the Merger, and the other transactions contemplated by this Agreement,
in an amount not to exceed $250,000 in the aggregate.
(f) Acquiror Breach. If the board of directors of Company shall
terminate this Agreement pursuant to Subsection 7.1(c)(i) (Failure of
Conditions) due to (i) a willful and material breach of any of the
representations and warranties of Acquiror set forth in this Agreement;
or (ii) a willful and material breach of any material obligation,
agreement, or covenant contained in this Agreement by Acquiror (each
referred to as a "Company Triggering Event"), then in any such event,
Acquiror shall pay to Company (not later than two (2) business days
after termination of this Agreement) an amount equal to $750,000.
(g) Company's Expenses. In addition to any other amount due, upon
the termination of this Agreement due to the occurrence of a Company
Trigger Event or Company's termination of this Agreement pursuant to
Subsections 7.1(c)(i) (Failure of Conditions), 7.1(c)(iii) (Delayed
Regulatory Approval) or 7.1(d)(ii) (Reciprocal Termination Rights),
Acquiror agrees that it shall promptly assume and pay, or reimburse
Company for, all reasonable fees and expenses incurred, or to be incurred
by Company and Company's Subsidiaries (including the fees and expenses of
legal counsel, accountants, financial advisors, other consultants, and
financial printers) in connection with this Agreement, the Merger, and
the other transactions contemplated by this Agreement, in an amount not
to exceed $250,000 in the aggregate.
Article VIII - General
Subject to the terms and conditions of this Agreement, Acquiror and
Company further agree as follows:
8.1 Notices. All notices, requests, demands, and other communications
under this Agreement shall be in writing and shall be deemed to have been
duly given if delivered or sent
-47-
<PAGE>
and received by a fax transmission (if receipt by the intended recipient is
confirmed by telephone and if hard copy is delivered by overnight delivery
service the next day), a hand delivery, or a nationwide overnight delivery
service (all fees prepaid) to the following addresses:
If to Acquiror, addressed to: With a copy to:
Shoreline Financial Corporation Gordon R. Lewis, Esq.
Attention: Mr. Dan L. Smith Warner Norcross & Judd LLP
823 Riverview Dr. 900 Old Kent Building
Post Office Box 1248 111 Lyon Street, N.W.
Benton Harbor, MI 49023-1248 Grand Rapids, Michigan 49503-2487
If to Company, addressed to: With a copy to:
SJS Bancorp, Inc. James S. Fleischer, P.C.
Attention: Mr. Thomas G. Watson Silver, Freedman & Taff, L.L.P.
301 State Street Seventh Floor East
St. Joseph, MI 49085-1294 1100 New York Avenue, N.W.
Washington, D.C. 20005-3934
or to such other place and with such other copies as either party may
designate as to itself by written notice to the others.
8.2 Waiver. Any of the terms or conditions of this Agreement may be
waived in writing at any time by action taken by the board of directors of a
party, a duly authorized committee thereof, or a duly authorized officer of
such party. The failure of any party at any time or times to require
performance of any provision of this Agreement shall in no manner affect such
party's right at a later time to enforce the same provision. No waiver by
any party of any condition, or of the breach of any term, covenant,
representation, or warranty contained in this Agreement, whether by conduct
or otherwise, in any one or more instances shall be deemed to be or construed
as a further or continuing waiver of any such condition or breach, or as a
waiver of any other condition, or of the breach of any other term, covenant,
representation, or warranty.
8.3 Choice of Law. This Agreement shall be governed by, construed,
interpreted, and the rights of the parties determined in accordance with the
applicable laws of the United States and the State of Michigan; matters of
corporate law applicable to Company shall be governed by, construed, and
interpreted according to the DGCL and related laws of the State of Delaware.
8.4 Specific Enforcement. The parties each agree that, consistent with
the terms and conditions of this Agreement, in the event of a breach by a
party to this Agreement, money damages will be inadequate and not susceptible
of computation because of the unique nature of Company, Company's
Subsidiaries, and the Merger. Therefore, the parties each agree that a
federal or state court of competent jurisdiction shall have authority,
subject to the rules of law and equity, to specifically enforce the
provisions of this Agreement by injunctive order or such other equitable
means as may be determined in the court's discretion. In no event shall a
party
-48-
<PAGE>
be entitled to a recovery under this Section for damages or expenses
recovered under another section of this Agreement.
8.5 Jurisdiction; Venue; Jury. Acquiror and Company each agree to the
jurisdiction and venue of any state court located in Berrien County,
Michigan. Acquiror and Company each hereby waive their right to a trial by
jury.
8.6 Entire Agreement. The Company Disclosure Statement, the Acquiror
Disclosure Statement, the updates to such disclosure statements, the
exhibits, and the agreements expressly identified in this Agreement are an
integral part of this Agreement. This Agreement contains the entire
agreement between the parties with respect to the Merger. This Agreement
supersedes all prior written and oral arrangements, agreements, or
understandings with respect to its subject matter. The parties have not
relied upon any written or oral statements or representations other than as
stated in this Agreement, the Company Disclosure Statement, the Acquiror
Disclosure Statement, or the updates to such disclosure statements. The
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon Acquiror and Company and their respective successors. Nothing
in this Agreement, express or implied, is intended to confer upon any person
other than these parties any rights, remedies, obligations, or liabilities
under or by reason of this Agreement.
8.7 Headings, Etc. The article headings and section headings contained
in this Agreement are inserted for convenience only and shall not affect in
any way the meaning or interpretation of this Agreement.
8.8 Counterparts. This Agreement may be executed in one or more
counterparts, which taken together shall constitute one and the same
instrument. Executed counterparts of this Agreement shall be deemed to have
been fully delivered and shall become legally binding if and when executed
signature pages are received by fax from a party. If so delivered by fax,
the parties agree to promptly send original, manually executed copies by
nationwide overnight delivery service.
8.9 Amendment. Subject to applicable law, this Agreement may be amended,
modified, or supplemented by, and only by, written agreement of Acquiror and
Company, or by the respective officers thereunto duly authorized, at any time
prior to the Effective Time.
8.10 No Assignment. Neither party may assign any of its rights or
obligations under this Agreement to any other person.
8.11 Severability. If any term, provision, covenant, or restriction
contained in this Agreement is held by a final and unappealable order of a
court of competent jurisdiction to be invalid, void, or unenforceable, then
the remainder of the terms, provisions, covenants, and restrictions contained
in this Agreement shall remain in full force and effect, and shall in no way
be affected, impaired, or invalidated unless the effect would be to cause
this Agreement to not achieve its essential purposes.
-49-
<PAGE>
8.12 Expenses. Except as otherwise provided in Section 7.2 (Effect of
Termination), the costs and expenses of Acquiror and Company shall be allocated
as follows:
(a) Acquiror's Expenses. Acquiror shall bear all fees and expenses
of its counsel, accountants, and investment bankers, and all other costs
and expenses incurred by it in the review and negotiation of this
Agreement and the Bank Consolidation Agreement, the investigation of
Company, the preparation and prosecution of its application for
regulatory approval, the Phase I assessments, and all costs and expenses
of any appeals therefrom. In addition, all filing and application fees
to be paid by either party or its subsidiaries to governmental or
regulatory authorities in connection with the transactions contemplated
by this Agreement shall be borne by Acquiror.
(b) Company's Expenses. Company or Company's Subsidiaries shall bear
all fees and expenses of its counsel, accountants, and investment
bankers, the costs of printing and mailing the Proxy Statement for use
at the Stockholders' Meeting, and all other costs and expenses incurred
by such persons or firms in the preparation of this Agreement, the
calling, noticing, and holding of the Stockholders' Meeting and the
furnishing of information or other cooperation to Acquiror in connection
with the preparation of regulatory applications.
8.13 Publicity. Until the Effective Time, all announcements, press
releases, and other communications with stockholders or employees of Company
shall be made only after consultation by the parties as to the content and
timing of such communications. Until the Effective Time, any such
announcements or communications by Company or Acquiror with third parties or
representatives of the press or news media shall be made only with the prior
approval of the other party hereto, except as and to the extent reasonably
required for a party to comply with disclosure obligations imposed upon that
party under applicable securities laws and related rules and regulations, or
otherwise required by law.
8.14 Survival. The representations and warranties of the parties hereto
shall expire at the Effective Time and shall not survive the consummation of
the Merger or the Bank Consolidation. All covenants and agreements
contemplated to be performed prior to the Effective Time shall expire at the
Effective Time and shall not survive the consummation of the Merger or the
Bank Consolidation, and all covenants and agreements of Acquiror contemplated
to be performed, partially or in full, after the Effective Time, shall
survive the Effective Time and the consummation of the transactions
contemplated by this Agreement.
8.15 Calculation of Dates and Deadlines. Unless otherwise specified, any
period of time to be determined under this Agreement shall be deemed to
commence at 12:01 a.m. on the first full day after the specified starting
date, event, or occurrence. Any deadline, due date, expiration date, or
period-end to be calculated under this Agreement shall be deemed to end at 5
p.m. on the last day of the specified period. The time of day shall be
determined with reference to the then current local time in Benton Harbor,
Michigan.
-50-
<PAGE>
[Balance of this page intentionally blank]
-51-
<PAGE>
In Witness Whereof, Acquiror and MergerSub have each caused this
Agreement and Plan of Merger to be executed in this counterpart by their
respective, duly authorized officers as of the date first above written.
Shoreline Financial Corporation
By:
Dan L. Smith, Chairman of the Board,
President, and Chief Executive Officer
SJS Acquisition Corporation
By:
Dan L. Smith, President
[Balance of this page intentionally blank]
-52-
<PAGE>
In Witness Whereof, Company has caused this Agreement and Plan of Merger
to be executed in this counterpart by its duly authorized officer as of the
date first above written.
SJS Bancorp, Inc.
By:
Thomas G. Watson, President
[Balance of this page intentionally blank]
-53-
<PAGE>
Exhibit A
Company's Disclosure Statement
<PAGE>
Exhibit B
Acquiror's Disclosure Statement
This is the Acquiror Disclosure Statement described in Article IV of
this Agreement. There are no exceptions to Acquiror's representations or
warranties set forth in this Agreement.
<PAGE>
EXHIBIT C
[Silver, Freedman & Taff, L.l.p. Letterhead]
[Date]
Shoreline Financial Corporation
823 Riverview Dr.
PO Box 1248
Benton Harbor, Michigan 49023-1248
Gentlemen:
We are counsel to SJS Bancorp, Inc. ("Company"), in connection with
an Agreement and Plan of Merger dated as of November 6, 1996 (the
"Agreement"), between the Company, Shoreline Financial Corporation
("Shoreline"), and SJS Acquisition Corporation, a Michigan corporation
("MergerSub"). This opinion is delivered to you pursuant to Section 6.1(f)
of the Agreement.
For purposes of this opinion, we have examined the Agreement; the
Company Disclosure Statement, as updated; the certificate of incorporation
and bylaws of Company; the charter and bylaws of Bank; resolutions relating
to the Agreement adopted by Company's board of directors; and such other
documents as we have deemed necessary under the circumstances.
In making our examination, we have assumed the genuineness of
signatures on original documents and the conformity to original documents of
all copies submitted to us as facsimile, photostatic or conformed copies. As
to various facts material to our opinion, we have relied upon statements or
certificates of public officials and officers or representatives of Company
and others, true copies of which are attached. We also reviewed such matters
of law as we deemed necessary under the circumstances.
All terms appearing, but not otherwise defined, in this opinion
shall have the various meanings defined in the Agreement. As used in this
opinion, "knowledge" means the actual knowledge of the lawyer signing this
opinion and the actual knowledge of any lawyer who is a partner or employee
of our firm who has had active involvement in negotiating the Agreement,
preparing the Company Disclosure Statement, preparing documents relating to
the Merger, or preparing this opinion.
Based upon and subject to the foregoing, it is our opinion that:
a. Organization, Standing, and Power.
i. Company's Organization. Company is duly organized, validly
existing, and in good standing as a corporation under the laws
of the State of Delaware and is authorized by the OTS to be a
savings and loan holding company. Company has all requisite
corporate power and authority to own, lease, and operate its
properties and assets and to carry on its business as presently
conducted. Neither the scope of the business of Company nor the
location of any of its properties requires that it be licensed
to do business in any jurisdiction other than the State of
Michigan.
ii. Bank's Organization. Bank is duly organized and validly
existing as a federally chartered stock savings bank under HOLA
and is authorized by the OTS to conduct a savings and loan
business. Bank has all requisite corporate power and authority
to own, lease, and operate its properties and assets and to
carry on its business as presently conducted. Neither the
scope of the business of Bank nor the location of any of its
properties requires that it be licensed to do business in any
jurisdiction other than the State of Michigan.
<PAGE>
Shoreline Financial Corporation
[Date]
Page 2
________________________________
iii. Non-Bank Subsidiary's Organization. Non-Bank Subsidiary is
duly organized, validly existing, and in good standing as a
corporation under the laws of the State of Michigan. Non-Bank
Subsidiary is duly qualified or licensed as a foreign
corporation in each other state or jurisdiction in which the
ownership of property or the conduct of business requires
licensing or qualification, except where the failure to be so
qualified or licensed would not have a material adverse effect
on the financial condition, net income, business, or operations
of Company and Company's Subsidiaries, taken as a whole.
Non-Bank Subsidiary has all requisite corporate power and
authority to own, lease, and operate its respective properties
and assets and to carry on its business as presently conducted.
Non-Bank Subsidiary is engaged only in those activities which
are permitted by the OTS.
b. Capitalization.
i. Company's Capital Stock. The authorized capital stock of
Company consists of 4,500,000 shares of Company Common Stock,
par value $0.01 per share, of which [917,622] shares are issued
and outstanding as of the date of this opinion, and 2,000,000
shares of preferred stock, par value $0.01 per share, none of
which is outstanding. All of the outstanding shares of Company
Common Stock are validly issued, fully paid, and nonassessable.
Except for stock options covering [79,509] shares of Common
Stock granted pursuant to the Incentive Plan (the "Stock
Options"), there are no outstanding options, warrants, or other
rights in or with respect to the unissued shares of Company's
capital stock nor any securities convertible into the stock.
Except as described in this Section, Company is not obligated
to issue any additional shares of Company's capital stock or
any additional options, warrants, or other rights in or with
respect to the unissued shares of Company's capital stock or
any other securities convertible into Company's capital stock.
ii. Issuance of Shares. After the date of this opinion, the number
of issued and outstanding shares of Company Common Stock is not
subject to change before the Effective Time.
iii. Voting Rights. Other than the shares of Company Common Stock
issued and outstanding as of the record date for the
Stockholder meeting, neither Company nor any of Company's
Subsidiaries have outstanding any security or issue of
securities:
(1) The holder or holders of which have the right to vote on
the adoption of the Agreement or approval of the Merger; or
(2) Which entitle the holder or holders to consent to, or
withhold consent on, the Merger or the Agreement.
<PAGE>
Shoreline Financial Corporation
[Date]
Page 3
________________________________
iv. Bank Capital Stock. The authorized capital stock of Bank
consists of 4,500,000 shares of common stock, $0.01 par value
each, of which 917,622 shares are issued and outstanding, and
2,000,000 shares of serial preferred stock, none of which is
outstanding. All of the outstanding shares of Bank's common
stock are validly issued, fully paid, and nonassessable and are
owned by Company, free and clear of all liens and encumbrances.
There are no outstanding options, warrants, or other rights in
or with respect to the unissued shares of Bank's common stock
nor any securities convertible into the stock and Bank is not
obligated to issue any additional shares of its common stock or
any additional options, warrants, or other rights in or with
respect to the unissued shares of Bank's common stock or any
other securities convertible into Bank's common stock.
v. Non-Bank Subsidiary Capital Stock. All of the outstanding
shares of common stock of Non-Bank Subsidiary are validly
issued, fully paid, and nonassessable and are owned by Bank,
free and clear of all liens and encumbrances. There are no
outstanding options, warrants, or other rights in or with
respect to the unissued shares of Non-Bank Subsidiary's common
stock nor any securities convertible into that stock. Non-Bank
Subsidiary is not obligated to issue any additional shares of
its common stock or any additional options, warrants, or other
rights in or with respect to the unissued shares of its common
stock or any other securities convertible into Non-Bank
Subsidiary's common stock.
c. Authority of Company. The execution, delivery, and performance by
Company of the Agreement and the consummation of the transactions
contemplated by the Agreement have been duly and validly authorized
by all necessary corporate action on the part of Company. The
Agreement is a valid and binding obligation of Company, enforceable
in accordance with its terms, except insofar as the enforceability
may be limited by applicable bankruptcy, insolvency, receivership,
and other laws affecting the rights of creditors generally.
d. No Violation. Neither the execution, delivery, and performance by
Company of the Agreement, the consummation of the transactions
contemplated in the Agreement, nor compliance by Company with any of
the provisions of the Agreement, will:
i. Corporate Documents. Conflict with or result in a breach of
any provision of its certificate of incorporation or bylaws;
ii. Material Contracts. Constitute a breach of or result in a
default, or give rise to any rights of termination,
cancellation, or acceleration, or any right to acquire any
securities (other than the options currently outstanding under
the Incentive Plan and shares of Company Common Stock currently
outstanding but subject to restrictions under the Recognition
Plan) or assets, under any of the terms, conditions, or
provisions of any note, bond, mortgage, indenture, franchise,
license, permit, agreement, or other instrument or obligation,
known to us, to which Company or Company's Subsidiaries are a
party, or by which Company or Company's Subsidiaries or any of
their respective properties or assets are bound, if in any of
those circumstances the event could have consequences
materially adverse to the financial condition, net income,
business, or operations of Company and Company's Subsidiaries,
taken as a whole, or impair Company's ability to perform its
obligations under the Agreement; or
<PAGE>
Shoreline Financial Corporation
[Date]
Page 4
________________________________
iii. Orders and Injunctions. Violate any order, writ, injunction,
decree, statute, rule, or regulation, known to us, applicable
to Company or Company's Subsidiaries or any of their respective
properties or assets.
e. No Consent. No consent of, approval of, notice to, or filing with
any governmental authority having jurisdiction over any aspect of
the business or assets of Company or Company's Subsidiaries, and no
consent of, approval of, or notice to or filing with any other
person is required in connection with the execution, delivery, and
performance by Company of the Agreement or the consummation by
Company of the transactions contemplated by the Agreement, except as
has already been obtained.
f. Litigation. To our knowledge:
i. Material Claims. Except as disclosed in the Company Disclosure
Statement, as updated, there is no private or governmental
suit, claim, action, or proceeding (arbitral or otherwise)
pending or threatened against Company, any of Company's
Subsidiaries, or any person who may be entitled to
indemnification by Company or Company's Subsidiaries involving
a monetary claim in excess of $10,000 or a demand for equitable
relief, or against any of their directors or officers relating
to the performance of their duties in those capacities.
ii. No Injunctions. There are no material judgments, decrees,
stipulations, or orders against Company or Company's
Subsidiaries enjoining them or any of their directors or
officers in respect of, or the effect of which is to prohibit,
any business practice or the acquisition of any property or the
conduct of business in any area.
iii. Actions Previously Disclosed. Except as described in the
Company Disclosure Statement, as updated, there is no
litigation to which Company, Bank, or any of their directors or
officers are a party and which names Company, any of Company's
Subsidiaries, or any person who may be entitled to
indemnification by Company or Company's Subsidiaries as a
defendant or cross-defendant and prays for damages or any other
remedy or remedies that, if sustained, could have consequences
materially adverse to the financial condition, net income,
business, or operations of Company and Company's Subsidiaries,
taken as a whole, or impair the ability of Company to perform
its obligations under the Agreement or the ability of Bank to
perform its obligations under the Bank Consolidation Agreement.
This opinion has been furnished to you in accordance with the
Agreement and may not be relied upon by any other person or for any other
purpose. This opinion is based on laws, rules, and regulations in effect as
of the date of this opinion. As and to the extent that Michigan law applies,
we have relied, with your permission, upon counsel licensed to practice law
in Michigan. We express no opinion as to laws, rules, and regulations other
than these. This opinion is limited to those matters expressly stated and no
opinion should be inferred or implied beyond such matters.
<PAGE>
Shoreline Financial Corporation
[Date]
Page 5
________________________________
Very truly yours,
Silver, Freedman & Taff, L.L.P.
By________________________________
, a Partner
<PAGE>
EXHIBIT D
[Warner Norcross & Judd LLP Letterhead]
[Date]
SJS Bancorp, Inc.
301 State Street
St. Joseph, MI 49085-1294
Gentlemen:
We are general counsel to Shoreline Financial Corporation
("Acquiror") and SJS Acquisition Corporation, a Michigan corporation
("MergerSub"), and have served as their counsel in connection with an
Agreement and Plan of Merger dated as of November 6, 1996 (the "Agreement"),
between SJS Bancorp, Inc. ("Company"), Acquiror, and MergerSub. This opinion
is delivered to you pursuant to Section 6.2(e) of the Agreement.
For purposes of rendering this opinion, we have examined the
Agreement; the Acquiror Disclosure Statement, as updated; the articles of
incorporation and bylaws of Acquiror and MergerSub, respectively; resolutions
relating to the Agreement adopted by the boards of directors and board
committees of Acquiror and MergerSub, and such other documents as we have
deemed necessary under the circumstances.
In making our examination, we have assumed the genuineness of
signatures on original documents and the conformity to original documents of
all copies submitted to us as facsimile, photostatic or conformed copies. As
to various facts material to our opinion, we have relied upon statements or
certificates of public officials and officers or representatives of Acquiror
and MergerSub, true copies of which are attached. We also reviewed such
matters of law as we deemed necessary under the circumstances.
All terms appearing, but not otherwise defined, in this opinion
shall have the various meanings defined in the Agreement. As used in this
opinion, "knowledge" means the actual knowledge of the lawyer signing this
opinion and the actual knowledge of any lawyer who is a partner or employee
of our firm who has had active involvement in negotiating the Agreement,
preparing the Acquiror Disclosure Statement, preparing documents relating to
the Merger, or preparing this opinion.
Based upon and subject to the foregoing, we are of the opinion
that:
a. Organization and Qualification. Acquiror and MergerSub are
corporations duly organized, validly existing, and in good standing
under the laws of the State of Michigan. Acquiror's Bank is a
Michigan banking corporation duly organized, validly existing, and
in good standing under the Banking Code.
b. Authority Relative to the Agreement. Acquiror and MergerSub each
have full corporate power and authority to execute, deliver, and
perform the Agreement and to consummate the transaction contemplated
by the Agreement. The execution, delivery, and performance of the
Agreement and the consummation of the transactions contemplated by
the Agreement have been duly authorized and approved by the boards
of directors of Acquiror and MergerSub. No other corporate
proceedings on the part of Acquiror or MergerSub are necessary to
authorize the Agreement or to consummate the transactions
contemplated by the Agreement. The Agreement has been duly and
validly executed and delivered by Acquiror and MergerSub and
constitutes the valid and binding agreement of Acquiror and
MergerSub, enforceable against either of them in accordance with its
terms, except insofar as the enforceability may be limited by
applicable bankruptcy, insolvency, receivership, and other laws
affecting the rights of creditors generally.
<PAGE>
SJS Bancorp, Inc.
[Date]
Page 2
_________________
c. No Conflict or Violation. Neither the execution nor delivery of the
Agreement nor the consummation by Acquiror and MergerSub of the
transactions contemplated by the Agreement nor the compliance with
and fulfillment of the terms and provisions of the Agreement by
Acquiror and MergerSub will conflict with, or result in a breach of,
any term, condition, or provision of, or constitute a default under:
i. Corporate Documents. The articles of incorporation or bylaws
of Acquiror or MergerSub, respectively;
ii. Material Agreements. Any material agreement or instrument,
known to us, to which Acquiror or Acquiror's Bank is a party or
by which either of them is bound; or
iii. Orders; Liens. Any material order, judgment, or decree, known
to us, to which Acquiror or Acquiror's Bank is subject, or
result in the creation of any material lien, charge, or
encumbrance on any of their respective properties.
d. Litigation. To our knowledge, there is no private or governmental
suit, claim, action, or proceeding pending or threatened, or which
reasonably should be expected to be commenced, against Acquiror, its
subsidiaries or against any of their directors or officers that
would impair the ability of Acquiror to perform its obligations
under the Agreement.
This opinion has been furnished to you in accordance with the
Agreement and may not be relied upon by any other person or for any other
purpose. This opinion is based on laws, rules, and regulations in effect as
of the date of this opinion. We express no opinion as to laws, rules, and
regulations other than these. This opinion is limited to those matters
expressly stated and no opinion should be inferred or implied beyond such
matters.
Very truly yours,
Warner Norcross & Judd LLP
By
, a Partner
<PAGE>
EXHIBIT E
Form of Definitive Employment Statement
<PAGE>
Definitive Statement of Employment
I am presently employed by the employer(s) named below in the
capacity indicated. Except as stated below, I have no oral or written
agreement, contract, appointment, engagement, relationship, or claim relating
to my employment as a director, officer, employee, independent contractor,
representative, agent, or otherwise (collectively, my "Employment") with SJS
Bancorp, Inc., or any bank, company, or business that controls, is controlled
by, or is under common control with SJS Bancorp, Inc., (collectively, my
"Employer"). Except as stated below, my employment relationship with my
Employer is "at will," meaning either I or my Employer may terminate my
Employment at any time with or without cause. If there is any written
agreement or contract pertaining to my Employment, it is attached to this
form.
The total amount of my compensation for last year as reported to me
by my Employer on IRS Form W-2 is stated below. My current
employment-related benefits (e.g., health, disability, and life insurance;
bonus and profit sharing; deferred income; retirement; automobile; clubs; and
other perquisites) are each listed below (identify but do not attach plans).
There are no other benefits, during or after my employment, except as
described below.
<TABLE>
<CAPTION>
Last Year's W-2 Written Contract?
Name of Employer Capacity(ies) and Terms Compensation Current Benefits (mark yes or no)
- ---------------- ----------------------- --------------- ---------------- ------------------
<S> <C> <C> <C> <C>
1. See Note 1 below No
Yes, attached
2. See Note 2 below No
Yes, attached
3. See Note 3 below No
Yes, attached
</TABLE>
Notes 1 - 3 (attach pages as necessary): My Current Employment Benefits are:
1. - 3.
This statement is given to and may be relied upon by Shoreline
Financial Corporation and by my Employer. This statement of my Employment is
true, correct, and complete in all respects. This statement is made as of
___________________________________, 19____. I will promptly advise you of
any material changes in this information.
------------------------------
Print or Type Name
------------------------------
Signature
<PAGE>
APPENDIX B
SECTION 262 OF THE DELAWARE LAW
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of
this section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in
favor of the merger or consolidation nor consented thereto in writing
pursuant to s 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used
in this section, the word "stockholder" means a holder of record of stock in
a stock corporation and also a member of record of a nonstock corporation;
the words "stock" and "share" mean and include what is ordinarily meant by
those words and also membership or membership interest of a member of a
nonstock corporation; and the words "depository receipt" mean a receipt or
other instrument issued by a depository representing an interest in one or
more shares, or fractions thereof, solely of stock of a corporation, which
stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to s 251 "(other than a merger effected pursuant to
subsection (g) of s 251)", s 252, s 254, s 257, s 258, s 263 or s 264 of this
title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date
fixed to determine the stockholders entitled to receive notice of and to
vote at the meeting of stockholders to act upon the agreement of merger
or consolidation, were either (i) listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or (ii) held of record by more than 2,000 holders; and
further provided that no appraisal rights shall be available for any
shares of stock of the constituent corporation surviving a merger if the
merger did not require for its approval the vote of the stockholders of
the surviving corporation as provided in subsection (f) of s 251 of this
title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of any class
or series of stock of a constituent corporation if the holders thereof
are required by the terms of an agreement of merger or consolidation
pursuant to ss 251, 252, 254, 257, 258, 263 and 264 of this title to
accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting
from such merger or consolidation, or depository receipts in
respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock or depository
receipts at the effective date of the merger or consolidation will
be either listed on a national securities exchange or designated as
a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or
held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a., b. and c. of
this paragraph.
B-1
<PAGE>
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under s 253 of this title is not
owned by the parent corporation immediately prior to the merger,
appraisal rights shall be available for the shares of the subsidiary
Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for approval
at a meeting of stockholders, the corporation, not less than 20 days
prior to the meeting, shall notify each of its stockholders who was such
on the record date for such meeting with respect to shares for which
appraisal rights are available pursuant to subsection (b) or (c) hereof
that appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of
this section. Each stockholder electing to demand the appraisal of his
shares shall deliver to the corporation, before the taking of the vote
on the merger or consolidation, a written demand for appraisal of his
shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of his shares. A proxy or vote
against the merger or consolidation shall not constitute such a demand.
A stockholder electing to take such action must do so by a separate
written demand as herein provided. Within 10 days after the effective
date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that
the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to s 228
or 253 of this title, the surviving or resulting corporation, either
before the effective date of the merger or consolidation or within 10
days thereafter, shall notify each of the stockholders entitled to
appraisal rights of the effective date of the merger or consolidation
and that appraisal rights are available for any or all of the shares of
the constituent corporation, and shall include in such notice a copy of
this section. The notice shall be sent by certified or registered mail,
return receipt requested, addressed to the stockholder at his address as
it appears on the records of the corporation. Any stockholder entitled
to appraisal rights may, within 20 days after the date of mailing of the
notice, demand in writing from the surviving or resulting corporation
the appraisal of his shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder
and that the stockholder intends thereby to demand the appraisal of his
shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who
has complied with subsections (a) and (d) hereof and who is otherwise
entitled to appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the
merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall
be entitled to receive from the corporation surviving the merger or resulting
from the consolidation a statement setting forth the aggregate number of
shares not voted in favor of the merger or consolidation and with respect to
which demands for appraisal have been received and the aggregate number of
B-2
<PAGE>
holders of such shares. Such written statement shall be mailed to the
stockholder within 10 days after his written request for such a statement is
received by the surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail
and by publication shall be approved by the Court, and the costs thereof
shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates
to submit their certificates of stock to the Register in Chancery for
notation thereon of the pendency of the appraisal proceedings; and if any
stockholder fails to comply with such direction, the Court may dismiss the
proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. In determining such
fair value, the Court shall take into account all relevant factors. In
determining the fair rate of interest, the Court may consider all relevant
factors, including the rate of interest which the surviving or resulting
corporation would have had to pay to borrow money during the pendency of the
proceeding. Upon application by the surviving or resulting corporation or by
any stockholder entitled to participate in the appraisal proceeding, the
Court may, in its discretion, permit discovery or other pretrial proceedings
and may proceed to trial upon the appraisal prior to the final determination
of the stockholder entitled to an appraisal. Any stockholder whose name
appears on the list filed by the surviving or resulting corporation pursuant
to subsection (f) of this section and who has submitted his certificates of
stock to the Register in Chancery, if such is required, may participate fully
in all proceedings until it is finally determined that he is not entitled to
appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of
the certificates representing such stock. The Court's decree may be enforced
as other decrees in the Court of Chancery may be enforced, whether such
surviving or resulting corporation be a corporation of this State or of any
state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
B-3
<PAGE>
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or
to receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal
of his demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger
or consolidation as provided in subsection (e) of this section or thereafter
with the written approval of the corporation, then the right of such
stockholder to an appraisal shall cease. Notwithstanding the foregoing, no
appraisal proceeding in the Court of Chancery shall be dismissed as to any
stockholder without the approval of the Court, and such approval may be
conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized
and unissued shares of the surviving or resulting corporation.
B-4
<PAGE>
APPENDIX C
OPINION OF THE CHICAGO CORPORATION
[LOGO]
ABN-AMRO 208 South LaSalle Street
Chicago Corporation Chicago, Illinois 60604
(312) 855-7600
November 6, 1997
Board of Directors
SJS Bancorp, Inc.
301 State Street
St. Joseph, MI 49085
Members of the Board:
You have asked us to advise you with respect to the fairness to the
shareholders of SJS Bancorp, Inc. (the "Company"), from a financial point of
view, of the consideration to be received by such holders pursuant to the
terms of the Agreement and Plan of Merger, dated as of November 6, 1996, (the
"Merger Agreement"), by and among the Company, Shoreline Financial
Corporation. ("Shoreline") and SJS Acquisition Corporation, a wholly-owned
subsidiary of Shoreline. The Merger Agreement provides that all of the
issued and outstanding shares of Common Stock, par value $0.01 per share (the
"Common Stock"), of the Company will be converted into the right to receive
cash (the "Conversion") in the amount of $27.00 per share (the
"Consideration"), and for the subsequent merger of SJS Acquisition
Corporation with and into the Company (the "Merger" and together with the
Conversion, the "Transaction"). The Company will be the surviving corporate
entity in the Merger. Upon consummation of the Merger, the Company will
carry out its complete liquidation by merging with and into Shoreline (then
its parent corporation, with Shoreline being the surviving corporation).
In arriving at our opinion, we have reviewed certain publicly available
business and financial information relating to the Company and Shoreline. In
addition to the Merger Agreement and this Proxy Statement, we have also
reviewed certain other information, including financial forecasts for the
Company, provided to us by the Company, and have met with the Company's
management to discuss the business and prospects of the Company.
We have also considered certain financial and stock market data of the
Company, we compared that data with similar data for other publicly-held
companies which we deemed relevant, and we have considered the financial
terms of certain other business combinations which have recently been
effected. We also considered such other information, financial studies,
analyses and investigations and financial, economic and market criteria which
we deemed relevant.
ABN AMRO Chicago Corporation ("AACC") is not a bank. Securities sold,
offered or recommended by AACC are not deposits, are not insured by the
Federal Deposit Insurance Corporation, are not guaranteed by or an obligation
or responsibility of ABN AMRO Bank N.V., or any other U.S. bank or thrift
institution and involve investment risks, including the possible loss of
principal.
<PAGE>
[LOGO]
ABN-AMRO
Chicago Corporation
Board of Directors
SJS Bancorp, Inc.
November 6, 1997
Page 2
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied
on its being complete and accurate in all material respects. With respect to
the financial forecasts, we have assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the Company's management as to the future financial performance
of the Company. In addition, we have not made an independent evaluation or
appraisal of the assets of the Company, nor have we been furnished with any
such evaluations or appraisals.
We have acted as financial advisor to the Company in connection with the
Transaction and will receive a fee for our services, including rendering this
opinion, a significant portion of which is contingent upon the consummation
of the Transaction.
ABN AMRO Chicago Corporation, as part of its investment banking business, is
continually engaged in the valuation of banks and bank holding companies and
thrifts and thrift holding companies in connection with mergers and
acquisitions as well as initial and secondary offerings of securities of such
companies and valuations for other purposes. ABN AMRO Chicago Corporation is
a member of all principal U.S. securities exchanges and may from time to time
purchase securities from, and sell securities to, the Company or Shoreline
and, either directly or through affiliates, may buy or sell the equity
securities of the Company or of Shoreline, as principal or for the accounts
of customers and, accordingly, may at any time hold a long or short position
in such securities.
This letter is directed to the Board of Directors of the Company and does not
constitute a recommendation to any shareholder of the Company as to how such
shareholder should vote on the Transaction.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Consideration to be received by the shareholders of the
Company in the Transaction is fair to such shareholders from a financial
point of view.
Very truly yours,
ABN AMRO CHICAGO CORPORATION
<PAGE>
APPENDIX D
AUDIT REPORT, AUDITED FINANCIAL STATEMENTS
AND MANAGEMENT'S DISCUSSION AND ANALYSIS
June 30, 1996
[ON CROWE CHIZEK LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
SJS Bancorp, Inc.
St. Joseph, Michigan
We have audited the accompanying consolidated statements of financial
condition of SJS Bancorp, Inc. as of June 30, 1996 and 1995 and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the three years in the period ended June 30, 1996. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SJS
Bancorp, Inc. as of June 30, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended June 30,
1996 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Corporation changed its methods of accounting for income taxes and impaired
loans effective July 1, 1993 and July 1, 1995, respectively, to conform to
new accounting guidance.
/s/ Crowe, Chizek and Company LLP
---------------------------------
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
August 2, 1996
See accompanying notes to financial statements.
D-1
<PAGE>
SJS BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1996 and 1995
1996 1995
------------ ------------
ASSET
Cash and due from financial institutions $ 3,116,085 $ 3,143,680
Interest-bearing demand deposits in
other financial institutions 14,832 371,500
------------ -----------
Total cash and cash equivalents 3,130,917 3,515,180
Interest-bearing deposits in other financial
institutions 190,000 190,000
Mortgage-backed securities available for
sale (Note 4) 26,831,702 15,185,815
Mortgage-backed securities held to maturity
(fair value: June 30, 1996 - $9,351,120;
June 30, 1995 - $21,168,925) (Note 4) 9,379,310 20,879,256
Equity securities available for sale
(Note 3) 63,280 62,480
Securities available for sale 5,566,705
Securities held to maturity (fair value:
June 30, 1996 - $3,630,989; June 30, 1995
- $13,539,932) (Note 3) 3,667,929 13,965,413
Net loans (Notes 5 and 6) 98,861,649 71,817,876
Accrued interest receivable
Loans 735,897 545,710
Securities 124,703 242,094
Mortgage-backed securities 208,962 221,113
Federal Home Loan Bank stock 1,187,500 863,600
Premises and equipment (Note 7) 1,152,526 1,187,836
Other assets 795,564 836,300
------------ ------------
Total assets $151,896,644 $129,512,673
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits (Note 8) $107,927,968 $106,293,639
Advance payments by borrowers for taxes
and insurance 1,249,689 1,104,735
Federal Home Loan Bank advances (Note 9) 23,750,000 4,500,000
Other borrowings (Note 9) 1,356,934
Accrued interest payable on deposits 251,385 204,961
Other liabilities 450,282 392,125
------------ ------------
Total liabilities 134,986,258 112,495,460
Commitments and contingent liabilities (Note 13)
See accompanying notes to financial statements.
D-2
<PAGE>
SJS BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1996 and 1995
1996 1995
------------ ------------
Shareholders' equity (Notes 10, 11, 12 and 14)
Preferred stock, $.01 par value: 2,000,000
shares authorized; none outstanding
Common stock, $.01 par value: 4,500,000
shares authorized, 951,622 issued and
outstanding 9,866 9,522
Additional paid-in capital 9,519,762 8,808,968
Retained earnings 9,635,294 9,161,369
Net unrealized loss on securities available
for sale, net of tax of $257,903 and
$26,943 for 1996 and 1995, respectively (500,635) (52,302)
Net unrealized loss on securities held to
maturity, net of tax of $26,777 and
$282,182 for 1996 and 1995, respectively (51,979) (547,764)
Employee Stock Ownership Plan (ESOP)
(unallocated shares) (322,140) (362,580)
Management Recognition Plan (MRP) (unearned
shares) (675,532)
Treasury Stock (35,000 shares at cost) (704,250)
-----------
Total shareholders' equity 16,910,386 17,017,213
------------ ------------
Total liabilities and shareholders'
equity $151,896,644 $129,512,673
------------ ------------
------------ ------------
See accompanying notes to financial statements.
D-3
<PAGE>
SJS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30, 1996, 1995 and 1994
<TABLE>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Interest income
Interest and fees on loans $ 7,283,943 $ 5,160,307 $ 3,962,178
Interest on securities 732,025 801,336 544,876
Interest on mortgage-backed securities 2,183,733 2,270,439 2,457,088
Interest on mortgage-backed securities
(collateral for CMO borrowing) 630,025
Other interest income 228,147 256,081 228,182
----------- ----------- -----------
10,427,848 8,488,163 7,822,349
Interest expense
Interest on deposits (Note 8) 5,506,721 4,794,472 4,630,958
Interest on borrowings 957,807 198,144 685,210
----------- ----------- -----------
6,464,528 4,992,616 5,316,168
----------- ----------- -----------
Net interest income 3,963,320 3,495,547 2,506,181
Provision for loan losses (Note 6) 175,109 (38,000) (48,000)
----------- ----------- -----------
Net interest income after provision
for loan losses 3,788,211 3,533,547 2,554,181
Noninterest income
Fees and service charges 431,115 351,945 348,388
Gain on sale of loans (Note 5) 15,996 13,754 268,758
Gain (loss) on sale of securities and
mortgage-backed securities (Notes 3 and 4) (1,117) (6,863) 213,733
Other operating income 110,280 84,907 71,519
----------- ----------- -----------
556,274 443,743 902,398
Noninterest expense
Salaries and employee benefits (Note 10) 1,352,621 1,404,246 1,334,174
Occupancy expense 223,664 219,519 206,641
Furniture, fixtures and equipment expense 80,035 77,127 81,109
Federal insurance premium 308,145 302,967 287,400
Data processing expense 310,580 270,867 276,023
Legal expense 117,480 48,130 28,560
Other operating expense 847,059 676,983 638,569
----------- ----------- -----------
3,239,584 2,999,839 2,852,476
----------- ----------- -----------
Income before federal income tax expense
and extraordinary item 1,104,901 977,451 604,103
Federal income tax expense (Note 14) 261,537 287,766 219,992
----------- ----------- -----------
Income before extraordinary item 843,364 689,685 384,111
Debt extinguishment, net of tax of $158,330
(Note 9) (307,346)
-----------
Net income $ 843,364 $ 689,685 $ 76,765
----------- ----------- -----------
----------- ----------- -----------
Earnings per share (Note 1):
Primary $ .91 $ .38 N/A
----------- ----------- -----------
----------- ----------- -----------
Fully diluted $ .91 $ .38 N/A
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
D-4
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended June 30, 1996, 1995 and 1994
<TABLE>
<S> <C> <C> <C> <C> <C>
Additional Net Unrealized Unallocated
Common Paid-In Retained Gain (Loss) ESOP
Stock Capital Earnings on Securities Shares
------ ------- -------- ------------- ------
Balance at July 1, 1993 $ 8,394,919 $ 590,652
Net income for the year ended June 30, 1994 76,765
Change in net unrealized gain (loss) on
securities, net of tax of $757,985
(Notes 3 and 4) (1,471,379)
----------
Balance at June 30, 1994 8,471,684 (880,727)
Net income for the year ended June 30, 1995 689,685
Sale of 952,200 shares of common stock, net
of conversion costs (Notes 2 and 10) $ 9,522 $ 8,803,608 $ (380,880)
Shares committed to be released
under the ESOP 5,360 18,300
Change in net unrealized gain (loss) on
securities net of tax of ($144,583)
(Notes 3 and 4) 280,661
-------
Balance at June 30, 1995 9,522 8,808,968 9,161,369 (600,066) (362,580)
Net income for the year ended June 30, 1996 843,364
Shares granted under the MRP 344 675,188
Cash dividends - $.40 per share (369,439)
Shares committed to be released
under the ESOP 35,606 40,440
Acquisition of treasury shares (at cost)
Change in net unrealized gain (loss) on
securities net of tax of ($24,445)
(Notes 3 and 4) 47,452
------
Balance at June 30, 1996 $ 9,866 $ 9,519,762 $ 9,635,294 $ (552,614) $ (322,140)
- ----- - --------- - --------- - -------- - --------
- ----- - --------- - --------- - -------- - --------
<C> <C> <C>
Unearned Total
MRP Treasury Shareholders'
Shares Stock Equity
------ ------ ------
Balance at July 1, 1993 $ 8,985,571
Net income for the year ended June 30, 1994 76,765
Change in net unrealized gain (loss) on
securities, net of tax of $757,985
(Notes 3 and 4) (1,471,379)
----------
Balance at June 30, 1994 7,590,957
Net income for the year ended June 30, 1995 689,685
Sale of 952,200 shares of common stock, net
of conversion costs (Notes 2 and 10) 8,432,250
Shares committed to be released
under the ESOP 23,660
Change in net unrealized gain (loss) on
securities net of tax of ($144,583)
(Notes 3 and 4) 280,661
-------
Balance at June 30, 1995 17,017,213
Net income for the year ended June 30, 1996 843,364
Shares granted under the MRP $ (675,532)
Cash dividends - $.40 per share (369,439)
Shares committed to be released
under the ESOP 76,046
Acquisition of treasury shares (at cost) $ (704,250) (704,250)
Change in net unrealized gain (loss) on
securities net of tax of ($24,445)
(Notes 3 and 4) 47,452
------
Balance at June 30, 1996 $ (675,532) $ (704,250) $16,910,386
- -------- - -------- -----------
- -------- - -------- -----------
</TABLE>
See accompanying notes to financial statements
- ------------------------------------------------------------------------------
D-5
<PAGE>
SJS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 843,364 $ 689,685 $ 76,765
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation 83,104 82,726 85,171
Amortization (185,360) 103,342 124,873
Provision for loan losses 175,109 (38,000) (48,000)
Deferred income taxes (56,276) (54,529) (168,782)
ESOP expense 76,046 23,660
Gain on sale of loans (15,996) (13,754) (268,758)
Loss (gain) on sale of securities and
mortgage-backed securities 1,117 6,863 (213,733)
Proceeds from sale of loans 5,871,163 2,470,729 22,600,111
Loans originated for sale (5,975,469) (2,602,887) (17,335,537)
Changes in assets and liabilities:
Deferred loan fees (112,713) (11,601) 2,776
Accrued interest receivable (60,646) (68,893) 76,397
Other assets (18,470) (10,567) 505,720
Accrued interest payable 46,424 65,277 (129,949)
Other liabilities 58,158 (446,649) (313,200)
------ --------- ---------
Net cash from operating activities 729,555 195,402 4,993,854
Cash flows from investing activities
Decrease in interest-bearing deposits
in other financial institutions 197,000
Purchases of equity securities (800)
Purchases of FHLB stock (323,900)
Purchases of securities available for sale (589,111)
Purchase of securities held to maturity (1,450,000) (2,249,883) (7,050,640)
Proceeds from sales of securities available for sale 700,000 588,271 1,532,781
Proceeds from calls and maturities of securities
held to maturity 5,127,652
Purchase of mortgage-backed securities
available for sale (7,761,908) (3,945,535) (14,169,456)
Purchase of mortgage-backed securities
held to maturity (6,793,736) (974,820) (4,439,180)
Proceeds from sales of mortgage-backed
securities available for sale 10,833,312 4,974,391 14,954,801
Proceeds from sales of mortgage-backed
securities held to maturity in connection
with extinguishment of debt 5,643,146
Principal payments on mortgage-backed
securities 4,185,657 6,596,429 14,128,881
Loans purchased (500,000)
Loan originations and principal payments
on loans, net (26,485,867) (19,256,187) (7,252,017)
Net expenditures on foreclosed real estate (5,837)
Proceeds from sale of foreclosed real estate 96,875
Premises and equipment expenditures (47,794) (53,910) (38,881)
-------- -------- --------
Net cash from investing activities (22,426,346) (14,910,355) 3,506,435
</TABLE>
See accompanying notes to financial statements.
D-6
<PAGE>
SJS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<C> <C> <C>
Cash flows from financing activities
Net change in deposits $ 1,634,329 $ (2,553,450) $ 460,088
FHLB borrowing 22,250,000 5,000,000
Repayment of FHLB advances (3,000,000) (500,000)
Principal payments on long-term borrowings (7,032,909)
Net change in advance payments by borrowers 144,954 (198,228) (235,873)
Net change in other borrowings 1,356,934
Common stock issued 8,432,250
Dividends paid (369,439)
Treasury stock purchased (704,250)
---------
Net cash from financing activities 21,312,528 10,180,572 (6,808,694)
---------- ---------- -----------
Net change in cash and cash equivalents (384,263) (4,534,381) 1,691,595
Cash and cash equivalents at beginning of year 3,515,180 8,049,561 6,357,966
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 3,130,917 $ 3,515,180 $ 8,049,561
-------------- -------------- --------------
-------------- -------------- --------------
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 6,418,104 $ 4,927,339 $ 5,828,634
Income taxes 375,505 206,600 335,000
Transfer of mortgage-backed securities from
available for sale to held to maturity at fair
value (Note 4) 16,905,411
Transfer of securities from held to maturity
to available for sale at fair value (Note 4) 23,967,560
</TABLE>
See accompanying notes to financial statements.
D-7
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: SJS Bancorp, Inc. (the "Corporation") was organized as
a thrift holding company in the State of Delaware during February 1995 to be
the sole shareholder of SJS Federal Savings Bank, FSB (the "Bank"). The Bank
is the sole shareholder of SJS Financial Corporation and SJS Capital
Corporation.
SJS Federal Savings Bank is a federally chartered savings bank headquartered
in St. Joseph, Michigan. The Bank attracts retail deposits from the general
public and invests those funds primarily in one- to four-family residential
mortgage loans and mortgage-backed securities. The operations of SJS
Financial Corporation consist of investing in the stock of MIMLIC Life
Insurance Company. See Note 9 for a description of the operations of SJS
Capital Corporation.
Use of Estimates in the Preparation of Financial Statements: The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the
reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The primary estimates
incorporated into the Corporation's financial statements which are
susceptible to change in the near term include the allowance for loan losses
and the determination and carrying value of certain financial instruments.
Concentrations of Credit Risk: The Corporation grants mortgage and
installment loans to, and obtains deposits from, customers primarily in
Southwestern Michigan. Substantially all loans are secured by specific items
of collateral, primarily residential real estate and customer assets. Other
financial instruments which potentially subject the Corporation to
concentrations of credit risk include deposit accounts in other financial
institutions.
Principles of Consolidation: The consolidated financial statements include
the accounts of the Corporation, its wholly-owned subsidiary, the Bank, and
the Bank's wholly-owned subsidiary, SJS Financial Corporation. All
significant intercompany transactions and balances are eliminated in
consolidation.
Securities and Mortgage-Backed Securities Available for Sale: Securities and
mortgage-backed securities available for sale consist of those securities
which might be sold prior to maturity due to changes in interest rates,
prepayment risks, yield and availability of alternative investments,
liquidity needs or other factors. Securities and mortgage-backed securities
classified as available for sale are reported at their fair value and the
related unrealized holding gain or loss is reported, net of related income
tax effects, as a separate component of shareholders' equity, until realized.
Premiums and discounts on securities available for sale are recognized in
interest income using the interest method over the estimated life of the
security based upon current prepayment speeds. The net investment in these
securities is adjusted, as estimated lives change, to the amount that would
have existed had the new effective yield been applied since the acquisition
of the securities. The securities are adjusted to the new balance with a
corresponding charge or credit to interest income. Gains and losses on the
sale of securities available for sale are determined using the specific
identification method.
- -------------------------------------------------------------------------------
(Continued)
D-8
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities and Mortgage-Backed Securities Held to Maturity: Securities and
mortgage-backed securities for which the Corporation has the positive intent
and ability to hold to maturity are reported at cost, adjusted for premiums
and discounts that are recognized in interest income using the interest
method over the period to maturity.
Certain securities have been transferred from available for sale to held to
maturity. The unrealized gain or loss at the date of transfer is being
recognized in interest income using the interest method over the remaining
period to maturity. The unrealized gain or loss reported in equity is being
recognized in the same manner.
Loans: Loans are stated at unpaid principal balances less the allowance for
loan losses and net deferred loan origination fees. Loans are placed on
nonaccrual states unless they are adequately collateralized and in the
process of collection.
Interest Income on Loans: Interest income on loans is accrued over the term
of the loans based upon the principal outstanding except where serious doubt
exists as to the collectibility of a loan, in which case the accrual of
interest is discontinued. Under SFAS No. 114, Accounting for Creditors for
Impairment of a Loan, as amended by SFAS No. 118, the carrying values of
impaired loans are periodically adjusted to reflect cash payments, revised
estimates of future cash flows, and increases in the present value of
expected cash flows due to the passage of time. Cash payments representing
interest income are reported as such. Other cash payments are reported as
reductions in carrying value, while increases or decreases due to changes in
estimates of future payments and due to the passage of time are reported as
adjustments to the provision for loan losses.
For loans originated for portfolio, loan fees are deferred, net of certain
direct loan origination costs. The net amount deferred is reported in the
consolidated statements of financial condition as a reduction of loans and is
recognized as interest income over the contractual term of the loan using the
level-yield method.
Allowance for Loan Losses: Because some loans may not be repaid in full, an
allowance for loan losses is recorded. Increases to the allowance are
recorded by a provision for loan losses charged to expense. Estimating the
risk of the loss and the amount of loss on any loan is necessarily
subjective. Accordingly, the allowance is maintained by management at a
level considered adequate to cover losses that are currently anticipated
based on past loss experience, general economic conditions, information about
specific borrower situations including their financial position and
collateral values, and other factors and estimates which are subject to
change over time. While management may periodically allocate portions of the
allowance for specific problem loan situations, the whole allowance is
available for any loan charge-offs that occur. A loan is charged-off against
the allowance by management as a loss when deemed uncollectible, although
collection efforts may continue and future recoveries may occur.
- -------------------------------------------------------------------------------
(Continued)
D-9
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 114, Accounting for Creditors for
Impairment of a Loan (SFAS No. 114). SFAS No. 114, effective for the
Corporation beginning July 1, 1995, requires that impaired loans, as defined,
be measured based on the present value of expected cash flows discounted at
the loan's effective interest rate or, as a practical expedient, at the
loan's observable market price or the fair value of collateral if the loan is
collateral dependent. Under this standard, loans considered to be impaired
are reduced to the present value of expected future cash flows or to the fair
value of collateral, by allocating a portion of the allowance for loan losses
to such loans. If these allocations cause the allowance for loan losses to
require increase, such increase is reported as an increase to the provision
for loan losses. This Statement did not have a material effect on the
Corporation's consolidated financial position or results of operations at the
implementation date of July 1, 1995.
Smaller-balance homogeneous loans are defined as residential first mortgage
loans secured by one-to-four family residences, residential construction
loans, student loans, home equity and second mortgage loans, and automobile
loans and are evaluated collectively for impairment. Commercial real estate
loans and other commercial loans are evaluated individually for impairment.
Normal loan evaluation procedures, as described in the second preceding
paragraph, are used to identify loans which must be evaluated for impairment.
In general, loans classified as doubtful or loss are considered impaired
while loans classified as substandard are individually evaluated for
impairment. Depending on the relative size of the credit relationship, late
or insufficient payments of 30 to 90 days will cause management to reevaluate
the credit under its normal loan evaluation procedures. While the factors
which identify a credit for consideration for measurement of impairment, or
nonaccrual, are similar, the measurement considerations differ. A loan is
impaired when the economic value estimated to be received is less than the
value implied in the original credit agreement. A loan is placed in
nonaccrual when payments are more than 90 days past due unless the loan is
adequately collateralized and in the process of collection. Although
impaired loan and nonaccrual loan balances are measured differently, impaired
loan disclosures under SFAS Nos. 114 and 118 are not expected to differ
significantly from nonaccrual and renegotiated loan disclosures.
Mortgage Banking Activities: Mortgage loans originated and intended for sale
in the secondary market are carried at the lower of cost or estimated
aggregate market value. Net unrealized losses are recognized in a valuation
allowance by charges to income. Loan servicing fees are recognized when
received and the related costs are recognized when incurred. The Bank sells
mortgage loans into the secondary market at market prices, which includes
consideration for normal servicing fees.
Statement of Cash Flows: For the purpose of this statement, cash and cash
equivalents include cash on hand, demand balances with financial institutions
and short-term investments having original maturities of three months or
less. The Bank reports net cash flows from customer loan transactions,
deposit transactions and deposits made with other financial institutions.
- -------------------------------------------------------------------------------
(Continued)
D-10
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes: Beginning July 1, 1993, the Corporation adopted Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS No.
109). The Corporation records income tax expense based on the amount of
taxes due on its tax return plus deferred taxes computed based on the
expected future tax consequences of temporary differences between the
carrying amounts and tax bases of assets and liabilities, using enacted tax
rates, adjusted for allowances made for uncertainty regarding the realization
of net tax assets. The effect of the adoption of SFAS No. 109 as of July 1,
1993, was immaterial, and accordingly, no provision for the cumulative effect
of the accounting change was reflected in the 1994 consolidated statement of
income.
Defined Contribution Benefit Plan: The Corporation maintains a defined
contribution money purchase pension plan that covers substantially all
employees. Contributions are based on a percentage of compensation
established on a discretionary basis. The Corporation's expense for the plan
was $69,398, $72,820 and $76,209 for the years ending June 30, 1996, 1995 and
1994, respectively. It is the Corporation's policy to fund pension costs
accrued.
Employee Stock Ownership Plan: The cost of shares issued to the ESOP but
not yet allocated to participants is presented in the consolidated statement
of financial condition as a reduction of shareholders' equity. Compensation
expense is recorded based on the market price of the shares as they are
committed to be released for allocation to participant accounts. The
difference between the market price and the cost of shares committed to be
released is recorded as an adjustment to additional paid-in-capital.
Dividends on allocated ESOP shares are recorded as a reduction of retained
earnings; dividends on unallocated ESOP shares are reflected as a reduction
of debt and accrued interest.
Shares are considered outstanding for earnings per share calculations as they
are committed to be released; unallocated shares are not considered
outstanding.
Preferred Stock: The Corporation is authorized to issue preferred stock from
time to time in one or more series subject to applicable provisions of law,
and the Board of Directors is authorized to fix the designations, powers,
preferences and relative participating, optional and other special rights of
such shares, including voting rights (which could be multiple or as a
separate class) and conversion rights. In the event of a proposed merger,
tender offer or other attempt to gain control of the Corporation that the
Board does not approve, it might be possible for the Board to authorize the
issuance of a series of preferred stock with rights and preferences that
would impede the completion of such a transaction. The Board of Directors
has no present plans for the issuance of any preferred stock.
Earnings Per Share: Primary and fully earnings per share are computed by
dividing net income subsequent to conversion by the weighted average number
shares and common share equivalents which would arise from the exercise of
stock options (initial grant occurred in fiscal 1996) (Note 10). Net income
for the period from stock conversion on February 15, 1995 to June 30, 1995
was $350,363.
The weighted average number of shares used in the primary and fully diluted
earnings per share computations were as follows:
<TABLE>
<S> <C> <C> <C>
Year ended June 30,
--------------------------------------------
1996 1995 1994
Primary 924,674 915,027 Not applicable
Fully diluted 925,805 915,027 Not applicable
</TABLE>
Reclassifications: Certain amounts in the 1995 and 1994 consolidated
financial statements have been reclassified to conform with the 1996
presentation.
- -------------------------------------------------------------------------------
(Continued)
D-11
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Issued But Not Yet Adopted Accounting Standards: The Financial Accounting
Standards Board (FASB) has issued Statement of Financial Accounting Standards
No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, (SFAS No. 121). The Statement requires that
long-lived assets and certain identifiable intangibles to be held and used by
an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable, and establishes criteria for evaluating recoverability. The
Statement also requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell, with certain exceptions. The Statement is
effective for fiscal years beginning after December 15, 1995. Management
does not expect the Statement to have a material impact on the consolidated
financial condition or results of operations of the Company.
The Financial Accounting Standards Board recently released Statement of
Financial Accounting Standards No. 122, Accounting for Mortgage Servicing Rights
(SFAS No. 122). This Statement changes the accounting for mortgage servicing
rights retained by the loan originator. Under this Statement, if the
originator sells or securitizes mortgage loans and retains the related
servicing rights, the total cost of the mortgage loan is allocated between
the loan (without the servicing rights) and the servicing rights, based on
their relative fair values. Under current practice, all such costs are
assigned to the loan. The costs allocated to mortgage servicing rights will
be recorded as a separate asset and be amortized in proportion to, and over
the life of, the net servicing income. The carrying value of the mortgage
servicing rights will be periodically evaluated for impairment.
The Corporation currently retains servicing on almost all loans originated
and sold into the secondary market. Accordingly, this Statement will apply
to most loan sales. The impact on the Corporation's results of operations
and financial position is not expected to be significant when adopted,
however, the impact will depend upon the volume of loans sold with servicing
retained, the cost of loans originated, the relative fair values of loans and
servicing rights at the point of sale, among other factors. In general, the
Statement will increase the amount of income recognized when loans are sold
and will reduce the amount of income recognized during the servicing period.
This Statement is effective for the Corporation's loan sale transactions for
fiscal 1997. Retroactive application to servicing rights created prior to
adoption of the Statement is prohibited.
The FASB has issued Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensations (SFAS No. 123). This Statement
establishes a fair value based method of accounting for employee stock
options and similar equity instruments, such as warrants, and encourages all
companies to adopt that method of accounting for all of their employee stock
compensation plans. However, the Statement allows companies to continue
measuring compensation cost for such plans using accounting guidance in place
prior to SFAS No. 123. Companies that elect to remain with the former method
of accounting must make pro-forma disclosures of net income and earnings per
share as if the fair value method provided for in SFAS No. 123 had been
adopted. The accounting requirements of the Statement are required for
transactions entered into in fiscal years that begin after December 15, 1995,
although early adoption is permitted. Disclosure requirements are effective
for financial statements issued after December 15, 1995 or the period in
which the accounting requirements are adopted if they are early adopted.
Companies which elect to continue measuring compensation costs under current
guidance must present pro-forma disclosures for awards granted in the first
fiscal year beginning after December 15, 1994, however that disclosure need
not be made until financial statements for that fiscal year are presented for
comparative purposes with financial statements for a later fiscal year.
Management has concluded that the Corporation will not adopt the fair value
accounting provisions of SFAS No. 123 and will continue to apply its current
method of accounting. Accordingly, adoption of SFAS No. 123 will have no
impact on the Corporation's consolidated financial position or results of
operations.
- -------------------------------------------------------------------------------
(Continued)
D-12
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 2 - CONVERSION TO STOCK FORM OF OWNERSHIP
On June 6, 1994, the Board of Directors of the Bank, subject to regulatory
approval and approval by the members of the Bank, unanimously adopted a Plan
of Conversion to convert from a federally chartered mutual savings bank to a
federally chartered stock savings bank with the concurrent formation of the
Corporation as the Bank's holding company. The conversion was consummated on
February 15, 1995 by amending the Bank's federal charter and the sale of the
holding company's common stock in an amount equal to the pro forma market
value of the Bank after giving effect to the conversion. Subscriptions for
the shares of the Corporation's common stock were offered initially to
tax-qualified employee plans and the Bank's depositors, then to other members
and directors, officers and employees of the Bank. Proceeds of $8,432,250
were received from the sale of 952,200 common shares, after deduction of
conversion costs of $708,870 and the issuance of 38,088 shares for the ESOP
in exchange for a note receivable from the ESOP. Upon closing of the stock
offering, the Corporation purchased 100% of the common shares of the Bank.
SJS Federal Savings Bank is now a wholly-owned subsidiary of the Corporation.
The conversion was an internal reorganization with historical balances
carried forward without adjustment.
NOTE 3 - SECURITIES
The amortized cost and fair values of nonmortgage-backed securities at
June 30, 1996 and 1995 are as follows:
Available for Sale
<TABLE>
<S> <C> <C> <C> <C>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
1996
U.S. Government agencies $ 5,868,074 $ 301,369 $ 5,566,705
Equity securities 63,280 63,280
------ ------
$ 5,931,354 $ 301,369 $ 5,629,985
- --------- - ------- - ---------
- --------- - ------- - ---------
1995
Equity securities $ 62,480 $ 62,480
- ------ - ------
- ------ - ------
Held to Maturity
1996
U.S. Government agencies $ 3,667,929 $ 9,858 $ 46,798 $ 3,630,989
- --------- - ----- - ------ - ---------
- --------- - ----- - ------ - ---------
1995
U.S. Government agencies $13,965,413 $ 23,692 $ 449,173 $13,539,932
----------- - ------ - ------- -----------
----------- - ------ - ------- -----------
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
D-13
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 3 - SECURITIES (Continued)
The amortized cost and fair value of nonmortgage-backed securities at
June 30, 1996, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<S> <C> <C> <C> <C>
Available for Sale Held to Maturity
------------------ ----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Due in one year or less $ 500,000 $ 500,000
Due after one year through
five years $ 4,868,334 $ 4,600,455 1,470,000 1,446,415
Due after five years through
ten years 999,740 966,250 1,247,758 1,236,638
Due after ten years 450,171 447,936
------- -------
$ 5,868,074 $ 5,566,705 $ 3,667,929 $ 3,630,989
- --------- - --------- - --------- - ---------
- --------- - --------- - --------- - ---------
Equity securities $ 63,280 $ 63,280
- ------ - ------
- ------ - ------
</TABLE>
At June 30, 1996, the Corporation had securities with a carrying value of
approximately $500,000 and fair value of $489,435 in various structured debt
securities issued by government-sponsored enterprises. All such securities
were classified as held to maturity. The Corporation's investment objectives
for purchase of these securities was similar to its objectives for the
purchase of other securities.
Proceeds from the sale of debt and equity securities during the years ended
June 30, 1996, 1995 and 1994 were $700,000, $588,271 and $1,532,781,
respectively. Gross gains of $626, $6,569 and $32,781, respectively, were
realized on these sales, with a loss of $2,973 realized during 1996. No
securities classified as held to maturity under SFAS No. 115 were sold during
fiscal 1996 or 1995.
- -------------------------------------------------------------------------------
(Continued)
D-14
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 4 - MORTGAGE-BACKED SECURITIES
The amortized cost and fair value of mortgage-backed securities at June 30,
1996 and 1995 are as follows:
<TABLE>
<S> <C> <C> <C> <C>
Available for Sale
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
1996
Collateralized mortgage obligations
FNMA $ 5,353,705 $ 4,810 $ 149,506 $ 5,209,009
FHLMC 8,473,185 8,234 155,632 8,325,787
--------- ----- ------- ---------
13,826,890 13,044 305,138 13,534,796
Mortgage-backed certificates
FNMA 7,719,975 33,010 107,380 7,645,605
FHLMC 3,253,905 18,230 65,444 3,206,691
GNMA 2,488,101 43,491 2,444,610
--------- ------ ---------
13,461,981 51,240 216,315 13,296,906
---------- ------ ------- ----------
$ 27,288,871 $ 64,284 $ 521,453 $ 26,831,702
- ---------- - ------ - ------- - ----------
- ---------- - ------ - ------- - ----------
1995
Collateralized mortgage obligations
FNMA $ 1,692,272 $ 6,379 $ 28,743 $ 1,669,908
FHLMC 1,013,438 11,698 1,001,740
Other 155,698 726 156,424
------- --- -------
2,861,408 7,105 40,441 2,828,072
Mortgage-backed certificates
FNMA 4,468,214 54,226 22,446 4,499,994
FHLMC 5,748,125 11,794 86,733 5,673,186
GNMA 2,187,313 3,143 5,893 2,184,563
--------- ----- ----- ---------
12,403,652 69,163 115,072 12,357,743
---------- ------ ------- ----------
$ 15,265,060 $ 76,268 $ 155,513 $ 15,185,815
- ---------- - ------ - ------- - ----------
- ---------- - ------ - ------- - ----------
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
D-15
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 4 - MORTGAGE-BACKED SECURITIES (Continued)
Held to Maturity
<TABLE>
<S> <C> <C> <C> <C>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
1996
- ----
Mortgage-backed securities
FNMA $ 2,528,820 $ 40,786 $ 13,545 $ 2,556,061
FHLMC 4,401,852 8,980 23,503 4,387,329
GNMA 2,448,638 40,908 2,407,730
--------- ------ ---------
$ 9,379,310 $ 49,766 $ 77,956 $ 9,351,120
- --------- - ------ - ------ - ---------
- --------- - ------ - ------ - ---------
1995
- ----
Mortgage-backed securities
FNMA $ 9,089,818 $ 189,949 $ 44,217 $ 9,235,550
FHLMC 9,823,537 164,226 30,259 9,957,504
GNMA 858,702 21,797 836,905
Other 1,107,199 33,767 2,000 1,138,966
--------- ------ ----- ---------
$ 20,879,256 $ 387,942 $ 98,273 $ 21,168,925
- ---------- - ------- - ------ - ----------
- ---------- - ------- - ------ - ----------
</TABLE>
Because of their variable payments, asset-backed securities are not reported
by a specific maturity grouping.
Fixed-rate planned amortization class collateralized mortgage obligations
(CMO's) with a carrying value of $16,905,411, including unrealized loss, were
transferred on August 8, 1994 at fair value from available for sale to held
to maturity. Management has determined that these CMO's exhibit
characteristics which result in only a remote likelihood that regulatory
authorities would require classification of such securities as available for
sale. The net unrealized loss on these CMO's at the date of transfer is
being amortized into interest income over the remaining expected lives of the
individual securities.
Proceeds from the sale of mortgage-backed securities during the years ended
June 30, 1996, 1995 and 1994 were $10,833,312, $4,974,391 and $14,954,801,
respectively. Gross gains of $7,592, $16,419 and $201,536 and gross losses
of $6,362, $29,851 and $69,431 were realized on these sales.
As noted in Note 2, the Bank has converted from a mutual ownership to a
stock-based ownership. In completing the conversion, Bank management
simplified the Bank's business plan and thereby prepaid its long-term
borrowing and liquidated the related collateral. The long-term borrowing was
repaid in June of 1994 and the mortgage-backed securities serving as
collateral with a carrying value of $5,594,299 were sold. The extinguishment
and corresponding collateral sale are deemed to be isolated transactions and
unusual in nature for the Bank. Proceeds from the sale of the securities
were $5,643,146 with gross gains of $48,847.
In accordance with the FASB Special Report, A Guide to Implementation of
Statement No. 115 on Accounting for Certain Investments in Debt and Equity
Securities, securities held to maturity with a carrying value of $24,369,673
and a fair value of $23,967,560 were transferred to the available for sale
classification on December 31, 1995. The transfers were made to provide
greater flexibility in managing liquidity and interest rate risk.
- -------------------------------------------------------------------------------
(Continued)
D-16
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 5 - LOANS
Loans as of June 30 are summarized as follows:
<TABLE>
<S> <C> <C>
1996 1995
---- ----
First mortgage loans (principally conventional):
Secured by one-to-four family residences $ 70,034,958 $ 46,346,997
Secured by other properties 1,945,655 1,649,571
Construction loans 6,747,880 2,496,200
--------- ---------
78,728,493 50,492,768
Less:
Undisbursed portion of construction loans (4,029,792) (2,020,567)
Deferred fees and discounts (60,316) (173,028)
-------- ---------
Total first mortgage loans 74,638,385 48,299,173
Consumer and other loans:
Auto loans 16,117,610 16,117,695
Home equity 2,299,820 2,033,269
Other 6,451,925 5,926,393
--------- ---------
24,869,355 24,077,357
---------- ----------
99,507,740 72,376,530
Less allowance for loan losses (646,091) (558,654)
--------- ---------
$ 98,861,649 $ 71,817,876
- ---------- - ----------
- ---------- - ----------
</TABLE>
The following summarizes the Bank's secondary mortgage market activities for
the years ended June 30:
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
---- ---- ----
Activity during the year:
Loans originated for resale, net of
principal paydowns $ 5,975,469 $ 2,602,887 $ 17,335,537
Proceeds from sales of loans
originated for resale 5,871,163 2,470,729 22,600,111
Gain on sales of loans originated
for resale 15,996 13,754 268,758
Loan servicing fees 125,900 127,396 130,503
Balances at June 30:
Loans held for sale 596,797 476,495 330,583
Loans serviced for others 46,604,281 48,235,552 51,295,742
Custodial escrow balances 410,421 532,363 671,198
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
D-17
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDTED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 6 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows for the
years ended June 30:
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
---- ---- ----
Balance - July 1 $ 558,654 $ 571,952 $ 581,576
Provision charged (credited) to income 175,109 (38,000) (48,000)
Loans charged-off (125,690) (26,371) (18,860)
Recoveries 38,018 51,073 57,236
------ ------ ------
Balance - June 30 $ 646,091 $ 558,654 $ 571,952
- ------- - ------- - -------
- ------- - ------- - -------
</TABLE>
During fiscal year 1996, no loans were classified as impaired.
Nonaccrual loans totaled approximately $310,530, $67,141 and $52,600 at
June 30, 1996, 1995 and 1994, respectively.
NOTE 7 - PREMISES AND EQUIPMENT
Premises and equipment at June 30 are summarized as follows:
<TABLE>
<S> <C> <C>
1996 1995
---- ----
Land $ 384,278 $ 384,278
Buildings and improvements 1,634,166 1,631,005
Furniture and equipment 391,663 355,098
------- -------
2,410,107 2,370,381
Less accumulated depreciation (1,257,581) (1,182,545)
---------- ----------
$ 1,152,526 $ 1,187,836
- --------- - ---------
- --------- - ---------
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
D-18
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 8 - DEPOSITS
Deposits at June 30 are summarized as follows:
Weighted
Average 1 9 9 6 1 9 9 5
Rate at ------------------ -----------------
June 30, 1996 Amount % Amount %
------------- ------ --- ------ ---
Noninterest-bearing
deposits $1,225,457 1.1% $2,118,053 2.0%
NOW accounts
and MMDAs 3.26% 13,905,208 12.9 13,855,074 13.0
Passbook and
statement savings 2.48 11,832,053 11.0 11,565,034 10.9
---------- ---- ---------- ----
26,962,718 25.0 27,538,161 25.9
IRAs, Keoghs, and
certificates of deposit
accounts:
2.00% to 3.99% 3.86 41,284 291,174 .3
4.00% to 5.99% 5.34 43,823,361 40.6 44,109,633 41.5
6.00% to 7.99% 6.45 36,897,267 34.2 34,102,375 32.1
8.00% to 9.99% 9.00 103,338 .1 152,296 .1
10.00% and higher 11.75 100,000 .1 100,000 .1
---------- ---- ---------- ----
80,965,250 75.0 78,755,478 74.1
---------- ---- ---------- ----
$107,927,968 100.0% $106,293,639 100.0%
------------ ------ ------------ -----
------------ ------ ------------ -----
The aggregate amount of certificates of deposit greater than $100,000 was
approximately $11,160,080 and $12,048,029 at June 30, 1996 and 1995,
respectively.
At June 30, 1996, scheduled maturities for all of the Bank's certificates of
deposit, IRA and Keogh accounts are as follows:
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
2.00% to 3.99% $40,188 $1,097 $41,285
4.00% to 5.99% 36,086,298 $3,797,610 $2,273,207 $504,282 $1,101,963 $60,000 43,823,360
6.00% to 7.99% 26,700,690 3,037,792 2,118,958 4,658,274 82,579 298,974 36,897,267
8.00% to 9.99% 90,000 6,754 6,584 103,338
10.00% and higher 100,000 100,000
------- -------
$62,917,176 $6,835,402 $4,492,165 $5,170,407 $1,184,542 $365,558 $80,965,250
----------- ---------- ---------- ---------- ---------- -------- -----------
----------- ---------- ---------- ---------- ---------- -------- -----------
</TABLE>
(Continued)
D-19
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 8 - DEPOSITS (Continued)
Interest expense on deposits for the years ended June 30 is summarized as
follows:
1996 1995 1994
---- ---- ----
NOW accounts and MMDAs $456,178 $434,446 $402,806
Passbook and statement savings 280,768 301,416 328,091
Certificates of deposit, IRA and
Keogh accounts 4,769,775 4,058,610 3,900,061
--------- --------- ---------
$5,506,721 $4,794,472 $4,630,958
---------- ---------- ----------
---------- ---------- ----------
Deposits accepted from related parties were $622,944 and $747,716 at June 30,
1996 and 1995, respectively.
NOTE 9 - BORROWINGS
FHLB Advances
At June 30, 1996 and 1995, the Corporation had advances from the Federal Home
Loan Bank of Indianapolis totaling $23,750,000 and $4,500,000, respectively,
with variable and fixed interest rates ranging from 5.23% to 6.61%,
respectively, as of June 30, 1996.
Maturities of advances outstanding at June 30, 1996 are as follows:
1996 $3,650,000
1997 4,250,000
1998 8,050,000
2000 6,800,000
2001 1,000,000
----------
$23,750,000
-----------
-----------
The advances as of June 30, 1996 are collateralized by specific securities
with a carrying value of $28,505,243 and by Federal Home Loan Bank stock.
Other Borrowings
As of June 30, 1996, other borrowings consisted of a net overdraft balance of
$1,356,934 relative to one of the Bank's correspondent bank relationships.
Due to the nature of this relationship, it is not uncommon for the accounts
to fluctuate between net positive and negative balances.
(Continued)
D-20
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 9 - BORROWINGS (Continued)
Collateralized Mortgage Obligation
SJS Capital Corporation was incorporated on November 15, 1988, as a
wholly-owned subsidiary of SJS Federal Savings Bank for the purpose of
issuing a Collateralized Mortgage Obligation (CMO). The CMO, dated October
20, 1988 was issued November 18, 1988 with a total par value of $20,800,000,
original issue discount of $1,650,301 and issuance costs of $307,322,
resulting in net proceeds of $18,842,377.
In June 1994, the remaining CMO balance was extinguished and the
corresponding collateral was sold. Upon extinguishment, remaining
unamortized original issue discount of $278,413 and deferred debt issuance
costs of $104,104 were written off. Further, a premium of $83,159 was paid
upon extinguishment. The total of the unamortized original issue discount,
deferred debt issuance costs and premium upon extinguishment is disclosed as
an extraordinary item (net of the combined tax effect of $158,330) in the
consolidated statement of income.
NOTE 10 - STOCK BASED COMPENSATION PLANS
As part of the conversion transaction, the Corporation established an
employee stock ownership plan ("ESOP") for the benefit of substantially all
employees. The ESOP borrowed $380,880 from the Corporation and used those
funds to acquire 38,088 shares of the Corporation's stock at $10 per share.
Shares issued to the ESOP are allocated to ESOP participants based on
principal and interest repayments made by the ESOP on the loan from the
Corporation. The loan is secured by shares purchased with the loan proceeds
and will be repaid by the ESOP with funds from the Corporation's
discretionary contributions to the ESOP and earnings on ESOP assets. However,
in the event Corporation contributions exceed the minimum debt service
requirements, additional principal payments will be made. Upon withdrawal
from the plan, participants are entitled to require the Corporation to
repurchase the stock at fair value (referred to as the put option).
Withdrawn participants are entitled to exercise the put option for a period
of not more than 60 days following the date of distribution of the stock.
(Continued)
D-21
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 10 - STOCK BASED COMPENSATION PLANS (Continued)
During the years ended June 30, 1996 and 1995, 4,044 and 1,830 shares of
stock with a fair value of $18.80 and $12.93 per share were committed to be
released, resulting in ESOP compensation expense of $76,046 and $23,660,
respectively. Shares held by the ESOP at June 30 are as follows:
1 9 9 6 1 9 9 5
------------------------- ------------------------
Number of Fair Value Number of Fair Value
Shares of Shares Shares of Shares
--------- ---------- --------- ----------
Allocated to participants 5,874 $120,417 1,830 $26,993
Unallocated 32,214 660,387 36,258 534,806
------ ------
Total ESOP shares 38,088 38,088
------ ------
------ ------
A stock option and incentive plan (SOP) and management recognition plan (MRP)
were authorized by the Board of Directors at the February 28, 1996 meeting.
The MRP is a restricted stock award plan. The SOP and MRP are administered
by a Committee of Directors of the Corporation. This Committee selects
recipients and terms of awards pursuant to the plans. Total shares made
available under the SOP and MRP plans were 95,220 and 38,088, respectively.
The Committee has awarded under the SOP options to purchase 79,509 shares of
common stock at an exercise price of $19.625 per share, which was the market
price of the Corporation's stock on the date of the award. At June 30, 1996,
there were 15,711 shares reserved for future grants. SOP options granted
vest ratably over a five-year period with a first scheduled vesting date of
October 1, 1996. The term of the plan is for a period of ten years with
grants expiring on the date ten years after the Grant Date. No compensation
expense is being recognized in connection with the issuance of the options.
The Corporation issued 34,422 shares of common stock for awards under the
MRP. MRP awards vest in ten equal annual installments, with the first award
to have vested on October 1, 1996 subject to the continuous employment of the
recipients and the Corporation's achievement of certain performance standards
as defined under the Plan. The performance criteria for fiscal 1996 were not
met, accordingly the first installment did not vest. Compensation expense
for the MRP is recognized on a prorata basis over the vesting period of the
awards. During the year ended June 30, 1996, no amount was charged to
compensation expense for the MRP. The unamortized unearned compensation
value of the MRP is shown as a reduction to shareholders' equity in the
accompanying consolidated statements of financial condition.
(Continued)
D-22
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 11 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
Under Office of Thrift Supervision (OTS) regulations, limitations have been
imposed on all "capital distributions" by savings institutions, including
cash dividends. The regulation establishes a three-tiered system of
restrictions, with the greatest flexibility afforded to thrifts which are
both well-capitalized and given favorable qualitative examination ratings by
the OTS. For example, a thrift which is given one of the two highest
examination ratings and has "capital" equal to its fully phased-in regulatory
capital requirements (a "tier 1 institution") could, after prior notice but
without the prior approval of the OTS, make capital distributions in any
calendar year that would reduce by up to one-half the amount of its capital
which exceeds its fully phased-in capital requirement, as adjusted to reflect
net income to date during the calendar year. Other thrifts would be subject
to more stringent procedural and substantive requirements, the most
restrictive being prior OTS approval of any capital distribution. The Bank
is a tier one institution.
SJS Federal Savings Bank established a liquidation account of $7,590,957
which was equal to its total net worth as of the date of the latest audited
balance sheet appearing in the final conversion prospectus. The liquidation
account is maintained for the benefit of eligible depositors who continue to
maintain their accounts at SJS Federal Savings Bank after the conversion. The
liquidation account is reduced annually to the extent that eligible
depositors 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, each eligible depositor 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. SJS Federal Savings Bank may not pay dividends that would reduce
shareholders' equity below the required liquidation account balance.
Under the most restrictive of the dividend limitations described above at
June 30, 1996, approximately $4,096,000 is available to the Bank for the
payment of dividends to the holding company.
Savings institutions insured by the FDIC are required by FIRREA to meet three
regulatory capital requirements. If a requirement is not met, regulatory
authorities may take legal or administrative actions, including restrictions
on growth or operations or, in extreme cases, seizure. Institutions not in
compliance may apply for an exemption from the requirements and submit a
recapitalization or merger plan.
(Continued)
D-23
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 11 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (Continued)
At June 30, 1996, under these capital requirements, the Bank had:
Actual Requirement Excess
------ ----------- ------
Tangible capital 9.4% 1.5% 7.9%
Leverage capital 9.4 4.0 5.4
Risk-based capital 19.5 8.0 11.5
The OTS has also issued, but not yet made effective, regulations which add an
interest rate risk component to risk-based capital. Institutions whose
interest rate risk exceeds 2%, as defined, are required to maintain
additional capital equal to one-half the difference between its measured
interest rate risk and 2%, multiplied by the market value of its assets. At
June 30, 1996 the Bank would be required to provide additional risk-based
capital of $720,000 under these regulations.
The following is a reconciliation of the Bank's capital under generally
accepted accounting principles (GAAP) to regulatory capital at June 30, 1996
(000s omitted) and a presentation of excess regulatory capital.
Tangible Leverage Risk-based
Capital Capital Capital
-------- -------- ----------
GAAP capital $13,687 $13,687 $13,687
Additional Capital items
Allowance for loan losses 430
Unrealized (gain) loss
on securities 558 558 558
--- --- ---
Regulatory capital -
computed 14,245 14,245 14,675
Minimum capital requirement 2,274 6,063 6,023
------ ------ ------
Capital in excess of
regulatory minimum
requirements $11,971 $8,182 $8,652
------- ------ ------
------- ------ ------
Regulatory asset base $151,578 $151,578 $75,291
-------- -------- -------
-------- -------- -------
Accordingly, it is management's opinion that the capital requirements are met.
The Qualified Thrift Lender (QTL) test requires that 65% of the Bank's assets
be maintained in housing-related finance and other specified assets. If the
QTL test is not met, limits are placed on growth, branching, new investments,
FHLB advances, and dividends, or the institution must convert to a commercial
bank charter. It is management's opinion that the Bank meets the QTL test.
(Continued)
D-24
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 12 - STOCK REPURCHASE PROGRAMS
During the year ended June 30, 1996, the Corporation received regulatory
approval to repurchase up to 9% or 85,698 shares of its common stock. Through
June 30,1996, 35,000 shares have been repurchased at an average price of
$20.12 and thereby the Corporation has remaining approval to repurchase up to
50,698 additional shares. Approval to repurchase these shares expires on
March 1, 1997. Subsequent to June 30, 1996, and through August 2, 1996, the
Corporation has repurchased 34,000 additional shares.
Repurchased shares are treated as treasury shares and are available for
general corporate purposes, including issuance in connection with stock-based
compensation plans.
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONTINGENCIES
The Corporation is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet financing needs of its
customers. These financial instruments include commitments to make loans,
commitments to purchase mortgage-backed certificates and unused lines of
credit. The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments
to make loans and purchase mortgage-backed certificates is represented by the
contractual amount of those instruments. The Corporation follows the same
credit policy to make such commitments as is followed for those loans and
investments recorded in the financial statements.
As of June 30 the Corporation had the following:
1996 1995
---- ----
Commitments to make loans $5,546,920 $3,184,913
Unused lines of credit 3,325,032 1,908,898
As of June 30, 1996, all commitments to make loans were at fixed rates
ranging from 6.50% to 9.25% with a weighted average rate of 7.94%. The terms
on these commitments do not extend beyond 90 days. All unused lines of
credits were at variable rates adjusting monthly and quarterly. The rates on
these lines of credit ranged from 7.00% to 14.52% at June 30, 1996.
The Corporation does not anticipate any losses as a result of these
commitments. In addition, commitments to extend credit are agreements to
lend to a customer as long as there is no violation of any condition
established in the contract. Collateral obtained upon exercise of the
commitment is determined using the Corporation's credit evaluation of the
borrower, and may include business assets, real estate and other items. Since
many commitments to make loans expire without being used, the amount does not
necessarily represent future cash commitments.
(Continued)
D-25
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONTINGENCIES
(Continued)
The Corporation has entered into employment agreements with four of its
officers. Under the terms of the agreements, certain events leading to
separation from the Corporation could result in cash payments aggregating
approximately $735,000 for the four individuals.
The Corporation and its subsidiary are subject to certain claims and legal
actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition
of these matters is not expected to have a material adverse effect on the
consolidated financial condition of the Corporation.
The deposits of savings associations such as SJS Federal Savings Bank are
presently insured by the Savings Association Insurance Fund (SAIF) which is
administered by the FDIC. A recapitalization plan for the SAIF under
consideration by Congress provides for a special assessment of up to 0.90% of
deposits to be imposed on all SAIF insured institutions to enable the SAIF to
achieve its required level of reserves. If the proposed assessment of 0.70%
was effected based on deposits as of March 31, 1995 (as proposed), the
special assessment would decrease net income and shareholder's equity by
approximately $494,000.
NOTE 14 - FEDERAL INCOME TAXES
The provision for federal taxes on income consists of the following for year
ended June 30:
1996 1995 1994
---- ---- ----
Current income tax expense $317,813 $342,295 $230,444
Deferred income tax benefit (56,276) (54,529) (168,782)
-------- -------- --------
Tax expense allocated to
continuing operations 261,537 287,766 61,662
Extraordinary item - debt
extinguishment (Note 9) 158,330
-------
$261,537 $287,766 $219,992
-------- -------- --------
-------- -------- --------
(Continued)
D-26
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 14 - FEDERAL INCOME TAXES (Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30
are as follows:
1996 1995
---- ----
Deferred tax assets
Deferred loan fees $20,507 $58,830
Fixed assets 17,680 16,663
Accrued vacation 9,141 12,685
Unrealized loss on securities 284,681 309,125
Allowance for loan losses 69,051
Other 8,225 4,320
----- -----
409,285 401,623
Deferred tax liabilities
Unrealized gain on loans held for sale 11,586 22,171
Allowance for loan losses 13,585
------
11,586 35,756
------ ------
Net deferred tax assets $397,699 $365,867
-------- --------
-------- --------
No valuation allowance was provided on deferred tax assets.
The provision for federal income taxes differs from that computed at the
statutory corporate tax rate as follows:
1996 1995 1994
---- ---- ----
Statutory rate 34% 34% 34%
---- ----- -----
---- ----- -----
Tax expense at statutory rate $375,666 $332,333 $205,395
Change in adjusted base year tax
reserve for loan loss (132,600) (48,251)
Other 18,471 3,684 14,597
-------- -------- --------
$261,537 $287,766 $219,992
-------- -------- --------
-------- -------- --------
Effective tax rate 23.7% 29.4% 36.4%
-------- -------- --------
-------- -------- --------
Retained earnings at June 30, 1996 and 1995 includes approximately $2,330,000
and $1,940,000 for which no federal income tax liability has been recorded.
These amounts represent an allocation of income to bad debt deductions for
tax purposes alone. Reduction of amounts so allocated for purposes other
than tax bad debt losses or adjustments from carryback of net operating
losses would create income for tax purposes only, which would be subject to
current tax. The unrecorded deferred tax liability on the above amount at
June 30, 1996 and 1995 was approximately $792,200 and $659,600, respectively.
(Continued)
D-27
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate
that value:
Cash and cash equivalents
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Securities
Fair values for securities are based on quoted market prices or dealer
quotes. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar instruments.
Federal Home Loan Bank stock
The carrying amount of this stock is a reasonable estimate of fair value.
Loans
The fair value of fixed and variable rate loans is principally estimated by
discounting future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities, and using prepayment assumptions. The carrying value
of the allowance for loan losses is a reasonable estimate of fair value.
Accrued interest receivable and payable
For these items, the carrying amount is a reasonable estimated of fair value.
Deposit liabilities
The fair value of demand deposits, savings accounts and money market deposits
is the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated by discounting future
cash flows using the rates currently offered for deposits of similar
remaining maturities.
Federal Home Loan Bank advances
The fair values for these advances are determined by discounting cash flows
using rates currently offered for advances of similar remaining maturities.
Other Borrowings
Other borrowings consist of demand balances with banks and therefore the fair
value is the amount payable on demand at the reporting date.
(Continued)
D-28
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Commitments to extend credit
The fair value of commitments is estimated using the fees currently charged
to enter similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
commitments was immaterial at the reporting date presented.
The estimated fair values of the Corporation's financial instruments are as
follows:
1 9 9 6
----------------------
Carrying Fair
Value Value
----- -----
Financial assets
Cash and cash equivalents $3,131 $3,131
Securities available for sale 32,462 32,462
Securities held to maturity 13,047 12,982
Federal Home Loan Bank stock 1,188 1,188
Loans, net 98,862 99,050
Accrued interest receivable 1,070 1,070
Financial liabilities
Deposits 107,928 108,161
Federal Home Loan Bank advances 23,750 23,444
Other Borrowings 1,357 1,357
Accrued interest payable 251 251
(Continued)
D-29
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of SJS Bancorp, Inc. is as follows as of June
30:
CONDENSED BALANCE SHEET
1996 1995
---- ----
ASSETS
Cash and due from financial institutions $2,307,436 $3,275,234
Securities 533,367 805,932
Accrued interest receivable 3,148 5,305
Loans receivable from Employee Stock Ownership
Plan 333,270 365,010
Investment in subsidiary bank 13,687,144 12,584,542
Other assets 52,111 2,000
------ -----
Total assets $16,916,476 17,038,023
----------- ----------
----------- ----------
LIABILITIES
Other liabilities $6,090 $20,810
SHAREHOLDERS' EQUITY 16,910,386 17,017,213
---------- ----------
Total liabilities and shareholders'
equity $16,916,476 17,038,023
----------- ----------
----------- ----------
(Continued)
D-30
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENT OF INCOME
February 15, 1995
Year ended through
June 30, 1996 June 30, 1995
------------- -----------------
Interest and dividend income
Securities $46,695 $38,251
Loan to Employee Stock Ownership
Plan 28,642 11,298
------- --------
Total interest and dividend
income 75,337 49,549
Noninterest income 12,935 9,090
Operating expenses 270,468 21,744
------- ------
Income (loss) before federal income
taxes and equity in undistributed
earnings of subsidiary bank (182,196) 36,895
Federal income tax expense (benefit) (61,066) 11,597
-------- ------
Income (loss) before equity in
undistributed earnings of subsidiary
bank (121,130) 25,298
Equity in undistributed earnings of
subsidiary bank 964,494 325,065
-------- -------
Net income $843,364 $350,363
-------- --------
-------- --------
(Continued)
D-31
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENT OF CASH FLOWS
February 15, 1995
Year ended through
June 30, 1996 June 30, 1995
------------- -------------
Cash flows from operating activities
Net income $843,364 $350,363
Adjustments to reconcile net income
to cash provided by operations
Equity in undistributed
earnings of subsidiary bank (964,494) (325,065)
Gain on sale of securities (9,090)
Amortization 4,583
Change in
Interest receivable 2,157 (5,305)
Other assets (50,055) (2,000)
Other liabilities (14,720) 18,112
-------- --------
Net cash provided by
operating activities (179,165) 27,015
Cash flows from investing activities
Purchases of securities available
for sale (1,821,815)
Proceeds from sales of
securities available for sale 1,032,917
Principal on mortgage backed
securities 267,818
Origination of loan receivable
from ESOP (380,880)
Repayments on loan receivable
from ESOP 31,740 15,870
Investment in subsidiary (14,502)
Purchase of stock in subsidiary bank (4,030,123)
-----------
Net cash used in investing
activities 285,056 (5,184,031)
Cash flows from financing activities
Proceeds from issuance of common
stock, net of conversion costs 8,432,250
Dividends paid (369,439)
Treasury stock purchased (704,250)
---------
Net cash from financing
activities (1,073,689) 8,432,250
----------- ---------
Net change in cash (967,798) 3,275,234
Cash at beginning of period 3,275,234
----------
Cash at end of period $2,307,436 $3,275,234
---------- ----------
---------- ----------
(Continued)
D-32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
SJS Bancorp, Inc. (the "Company") is a Delaware corporation which was formed
in connection with the conversion of SJS Federal Savings Bank (the "Bank")
from a mutual to a stock savings bank on February 15, 1995 (the
"Conversion"). Unless the context otherwise requires, all references herein
to the Company or the Bank include the Company and the Bank on a consolidated
basis. Proceeds from the Conversion, net of conversion cost of $708,870 and
the issuance of 38,088 shares for the Employee's Stock Ownership Plan
("ESOP"), were $8,803,608. The Company issued 952,200 shares of common stock,
par value $.01 per share in the Conversion. The Company retained
approximately 50% of the net Conversion proceeds with the remaining net
proceeds used to purchase all of the outstanding stock of the Bank.
The Bank has been and intends to continue to be, a retail oriented financial
institution, offering a variety of financial services to meet the needs of
the communities it serves. The Bank serves communities located in Berrien,
Van Buren, Allegan and Cass counties through its four full-service offices.
The main office of the Company and the Bank is located at 301 State Street,
St. Joseph, Michigan 49085.
FINANCIAL CONDITION
Total assets of the Company were $151.9 million at June 30, 1996, compared to
$129.5 million at June 30, 1995, an increase of $22.4 million or 17.3%. The
increase in assets was primarily the result of a $27.0 million increase in
net loans, offset partially by a $4.6 million reduction in investment
securities. The funding for the asset growth came from Federal Home Loan
Bank ("FHLB") advances of $19.3 million, increases in deposits of $1.6
million, and increases in other liabilities of $1.6 million.
The Company's mortgage-backed securities and other securities available for
sale increased to $32.4 million at June 30, 1996 from $15.2 million at June
30, 1995. The change was primarily the result of a transfer and
reclassification of mortgage-backed and other securities with an amortized
cost of $24.4 million and fair value of $24.0 million from the held to
maturity portfolio to the available for sale portfolio. The reclassification
of securities occurred on December 31, 1995 in accordance with the Financial
Standards Board Special Report, "A Guide to Implementation of Statement no.
115 on Accounting for Certain Investments in Debt Securities." The change in
security classification provides greater flexibility in managing liquidity
and interest rate risk. The remaining change was the net result of
purchases, sales, maturities and principal paydowns on these securities. The
purchases and sales of these securities were a part of the Company's
investment program which consisted of diversifying the portfolio for the
specific purpose of reducing interest rate risk in either an upward or
downward interest rate environment and enhancing the yield on
interest-earning assets while maintaining an average overall investment
portfolio life of approximately 5 years. As indicated in Notes 3 and 4 of
the Notes to Consolidated Financial Statements included elsewhere in this
report, available for sale securities have gross unrealized losses of
$823,000 and gross unrealized gains of $64,000 at June 30, 1996.
Mortgage-backed and other securities held to maturity decreased by $21.9
million to $13.0 million at June 30, 1996 from $34.9 million at June 30,
1995. This portfolio change was primarily the result of the above mentioned
transfer from the held to maturity to the available for sale category. The
held to maturity securities and mortgage-backed securities as indicated in
Notes 3 and 4 of the Notes to Consolidated Financial Statements have gross
unrealized losses of $125,000 and gross unrealized gains of $60,000 at June
30, 1996.
Net unrealized losses for both mortgage-backed and other securities decreased
$496,000 primarily as a result of the aforementioned transfer from held to
maturity to the available for sale category. The transfer resulted in a
$207,000 reduction in the unrealized losses, net of $107,000 of deferred tax
assets. Increases in market interest rates from June
D-33
<PAGE>
30, 1995 to June 30, 1996 and portfolio changes offset the transfer amounts
and account for the balance of the net change. The yields on these securities
are relatively fixed over their term causing market values to increase in
lowering interest rate environments and correspondingly decrease in rising
interest rate environments. When market conditions allowed, the Company
restructured its investment portfolio through selective sales and purchases
to enhance yield and mitigate interest rate risk under varying rate scenarios.
The $27.0 million increase in the loan portfolio consisted primarily of loans
secured by one- to four-family residences which accounted for $23.7 million
of the increase. During the fiscal year ended June 30, 1996, the Company
originated $60.0 million in loans. Of this total $5.0 million were
adjustable-rate and $55.0 million were fixed-rate loans, which included $30.5
million of two to nine year fixed rate, no reset, balloon products. At June
30, 1996 the loan portfolio mix consisted of $29.1 million adjustable-rate
and $69.8 million fixed-rate products. All loans originated in fiscal 1996,
except $5.9 million, were retained for the Company's own portfolio.
Origination during the fiscal year ended June 30, 1995 amounted to $39.5
million. Adjustable-rate loans totaled $15.2 million and fixed-rate loans
totaled $24.3 million of which $2.5 million of the total originated were sold
in the secondary market. The retention of loans was consistent with the
Company's business plan objectives for achieving asset growth and shifting
the Company's asset mix from investments to loans for the purpose of earnings
enhancement.
At June 30, 1996, deposits totaled $107.9 million compared to $106.3 million
at June 30, 1995, an increase of $1.6 million. Certificates of deposit
accounted for $2.2 million of the increase, partially offset by a $600,000
decline in savings and checking products. Management believes, based on
prior experience and by remaining an active participant in the very
competitive deposit market, that deposit levels will remain consistent over
the next year.
Average FHLB advances for the year ended June 30, 1996 were $15.7 million at
a cost of 6.11% compared to average advances for the year ended June 30, 1995
of $3.1 million at a cost of 6.37%. Outstanding FHLB advances at June 30,
1996 were $23.8 million compared to $4.5 million at June 30, 1995. Proceeds
from these advances were used to fund loan growth.
Shareholder's equity decreased $107,000 to $16.9 million at June 30, 1996
from $17.0 million at June 30, 1995. The decrease was the result of
dividends paid of $369,000 and stock repurchases of $704,000 offset by net
income of $843,000, ESOP allocations of $76,000 and a change in net
unrealized gain on securities of $47,000. On February 28, 1996, the Company
issued 34,422 common shares under its Management Recognition Plan ("MRP").
The Company also instituted a Stock Option Plan. Neither the MRP nor the
Stock Option Plan had any effect on shareholders' equity. The $704,000
treasury stock purchases were primarily made to accommodate MRP vesting and
to enhance return on equity.
RESULTS OF OPERATIONS
Net Income
The Company had net income of $843,000 for the year ended June 30, 1996
compared to $690,000 for the year ended June 30, 1995. The increase in net
income of $154,000, or 22.3%, was primarily due to increased net interest
income after provision for loan losses of $255,000. Non-interest income
increased by $113,000 and Federal income tax expense decreased by $26,000.
Offsetting these gains was an increase in non-interest expense of $240,000.
Net Interest Income
The Company's net income is primarily dependent upon net interest income.
Net interest income is the difference ("spread") between the average yield
earned on loans and investment securities and the average rate paid on
deposits and other borrowings. Net interest income is also affected by the
volume of such assets and liabilities. The interest rate spread is affected
by economic and competitive factors that influence interest rates, loan
demand and deposit flows.
Net interest income before the provision for loan losses increased 13.4% to
$4.0 million in fiscal 1996 compared to $3.5 million in fiscal 1995. The
increase in net interest income during fiscal 1996 was attributable to the
$23.4
D-34
<PAGE>
million increase in the average net outstanding balance of loans receivable
and the 24 basis point increase in the yield earned on such loans. The
interest expense associated with a $12.6 million increase in average
outstanding borrowings and a 70 basis point increase in the rate paid on the
Company's certificates of deposit during fiscal 1996 partially offset the
$10.4 million increase in interest income.
Consistent with the Bank's strategic plan, management continued its focus on
the shift in the makeup of assets from concentrating on investments and
mortgage-backed securities to the emphasis on loans.
Average balances of interest-earning assets increased $18.2 million to $136.8
million in fiscal 1996 from $118.6 million in fiscal 1995. Average balances
of loans receivable increased $23.4 million from $63.1 million in 1995 to
$86.5 million in 1996. Concurrently, the loan portfolio weighted average
yield increased 24 basis points from 8.18% to 8.42%. Emphasis on the Bank's
strategic plan is most reflected in the average yield on total
interest-earning assets increasing 49 basis points from 7.13% in fiscal 1995
to 7.62% in fiscal 1996.
AVERAGE BALANCES, INTEREST RATES AND YIELDS
The following table represents for the periods indicated the total dollar
amount of interest income from average-interest earning assets and the
resultant yields, as well as the interest expensed on average-interest
bearing liabilities, expressed both in dollars and rates. All average
balances are daily average balances.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------
1996 1995
-------------------------------- -----------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- -------- ------ ----------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1)................... $ 86,517 $7,284 8.42% $ 63,053 $5,160 8.18%
Mortgage-backed securities............ 35,566 2,184 6.14% 38,465 2,270 5.90%
Investment securities................. 12,686 732 5.77% 13,861 802 5.79%
FHLB stock............................ 959 75 7.82% 864 61 7.06%
Other interest-bearing deposits....... 1,052 153 14.54% 2,747 195 7.10%
-------- ------ -------- ------
Total interest-earning assets(1).. $136,780 10,428 7.62% $118,990 8,488 7.13%
-------- ------ -------- ------
-------- ------ -------- ------
Interest-Bearing Liabilities:
Savings deposits...................... $ 11,211 281 2.51% $ 12,292 302 2.46%
MMDA & NOW deposits................... 15,475 456 2.95% 16,222 434 2.68%
Certificate accounts.................. 80,967 4,770 5.89% 78,250 4,059 5.19%
Borrowings............................ 15,679 958 6.11% 3,106 198 6.37%
-------- ------ -------- ------
Total interest-bearing liabilities. $123,332 6,465 5.24% $109,870 4,993 4.54%
-------- ------ -------- ------
-------- ------ -------- ------
Net Interest Income................... $3,963 $3,495
------ ------
------ ------
Net Interest Rate Spread.............. 2.38% 2.59%
Net yield on average-interest
earning assets...................... 2.90% 2.94%
Average interest-earning assets to
Average Interest-bearing liabilities 1.11x 1.08x
</TABLE>
- ----------
(1) Calculated net of deferred loan fees, loan discounts, loans in process
and loss reserves.
D-35
<PAGE>
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets
and interest-bearing liabilities. It distinguishes between the change
related changes in outstanding balances and that due to interest rate
movements. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes
in volume (i.e., changes in volume multiplied by old rate) and (ii) changes
in rate (i.e., changes in rate multiplied by old volume) for purposes of this
table, changes attributable to both rate and volume which can not be
segregated have been allocated proportionately to the change due to volume
and the change due to rate.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------
1996 vs. 1995
----------------------------------------
Total Total
Increase Increase
(Decrease) (Decrease) Total
due to due to Increase
Volume Rate (Decrease)
--------- --------- ----------
<S> <C> <C> <C>
Interest-Earning Assets:
Loans receivable...................... $1,972 $152 $2,124
Mortgage-backed securities............ (176) 90 (86)
Investment securities................. (68) (2) (70)
FHLB stock............................ 7 7 14
Other................................. (167) 125 (42)
------ ---- ------
Total interest-earning assets........ $1,568 $372 $1,940
------ ---- ------
------ ---- ------
Interest-Bearing Liabilities:
Savings deposits..................... $ (27) 6 (21)
MMDA and NOW deposits................ (21) 43 22
Certificate accounts................. 145 566 711
Borrowings........................... 769 (9) 760
------ ---- ------
Total interest-bearing liabilities.. $866 $606 $1,472
------ ---- ------
------ ----
Net Interest Earnings................... $ 468
------
------
</TABLE>
Provision (Credit) for Loan Losses
The Company's provision (credit) for loan losses of $175,000 for fiscal 1996
is an increase of $213,000 over the ($38,000) for fiscal 1995. The increased
provision is consistent with growth in the loan portfolio. Loans charged-off
during fiscal 1996 and fiscal 1995 totaled $126,000 and $26,000,
respectively. Recoveries during the same respective periods were $38,000 and
$51,000. Non-accruing loans increased to $311,000 in fiscal 1996 from
$67,000 in fiscal 1995 as a result of softer economic conditions and
increased levels of personal bankruptcy filings affecting the consumer loan
portfolio. While increased levels of charge-offs and non-performing loans
occurred in 1996, management does not feel that a trend toward reduced asset
quality is developing. Asset quality, as discussed below, is reflected in
delinquency percentages that are well below the Company's peer group. The
current allowance for loan losses is $646,000 or approximately .65% of total
gross loans. The current allowance, after a review of charge-offs and
recoveries, non-performing loans, analysis of loan loss risk including credit
concentrations, general economic
D-36
<PAGE>
conditions, loan portfolio composition, collateral values and other factors
is considered by management to be adequate to cover possible loan losses.
At June 30, 1996, the Company's allowance for loan losses was 208% of total
non-performing loans. Delinquent loans 60 days and over as a percentage of
total loans amounted to .48% at June 30, 1996 and .17% at June 30, 1995.
Additionally, at June 30, 1996 non-performing assets totaled $424,000
compared to $256,000 at June 30, 1995, representing .28% and .20% ,
respectively, of total assets. Included in the $424,000 of non-performing
assets at June 30, 1996 was an $83,000 one- to four-family foreclosed
property which currently has a sale pending to a qualified buyer. Management
anticipates that as the loan portfolio growth continues, provisions for loan
losses will continue to be made to maintain adequate loss reserve levels.
Non-Interest Income
Non-interest income increased $112,000 or 25.2% to $556,000 in fiscal 1996,
compared to $444,000 in fiscal 1995. The primary reason for the improvement
was rate increases in service charges and loan charges.
Non-Interest Expense
Non-interest expense increased $240,000, to $3.2 million for fiscal 1996 from
$3.0 million for fiscal 1995. Other operating expenses increased by $239,000
due primarily to increased legal, accounting and other expenses associated
with operating as a public company, loan processing expenses and sundry
operating items. Data processing expenses increased by $40,000 due primarily
to loan portfolio growth. Compensation expenses declined $52,000 during
fiscal 1996 despite ESOP expenses of $76,000 in fiscal 1996 compared to
$24,000 in fiscal 1995 and the addition of three full time equivalent
employees in connection with the growth of the Company's loan portfolio.
Compensation expense as a percent of total average asset was .95% for 1996
and 1.12% for 1995 and represents 41.8% of total non-interest expenses for
1996 and 46.8% for the 1995 period. Overall non-interest expense as a
percent of average total assets decreased to 2.26% for fiscal 1996 from 2.32%
for fiscal 1995. Management does not expect a significant adverse impact on
current expenditure levels as asset growth continues, although compensation
expense may increase with the Company's granting of benefits under the stock
benefit programs. See "Regulatory Developments".
Income Tax Expense
The effective income tax rate for the fiscal year ended June 30,1996 was
23.7% compared to 29.4% for the fiscal year ended 1995. The decrease in the
effective tax rate is the result of an adjustment in deferred taxes relating
to the bad debt deduction for thrift institutions. Due to strong loan
portfolio growth during fiscal 1996, total loans reached statutory June 30,
1988 base-year loan levels thereby reducing the deferred tax liability
relative to bad debts. The effective tax rate in future periods is expected
to return to more normal levels.
ASSET/LIABILITY MANAGEMENT
The Bank, like other financial institutions, is subject to interest rate risk
to the extent that its interest-bearing liabilities reprice on a different
basis than its interest-earning assets. Management believes it is critical
to manage the relationship between interest rates and the effect on the
Bank's net portfolio value ("NPV"). This approach calculates the difference
between the present value of expected cash flows from assets and the present
value of expected cash flows from liabilities, as well as cash flows from any
off-balance sheet contracts. Management of the Bank's assets and liabilities
is done within the context of the marketplace, but also within limits
established by the Board of Directors on the amount of change in NPV which is
acceptable given certain interest rate changes.
The OTS has adopted a regulation which uses a net market value methodology to
measure the interest rate risk exposure of thrift institutions. Under OTS
regulations, an institution's "normal" level of interest rate risk in the
event of an assumed change in interest rates is a decrease in the
institution's NPV in an amount not exceeding 2% of the present value of its
assets. Thrift institutions with greater than "normal" interest rate
exposure will be required to take a deduction from their total capital
available to meet their risk-based capital requirement. The amount of that
D-37
<PAGE>
deduction is one-half of the difference between (a) the institution's actual
calculated exposure to a 200 basis point (100 basis points equals 1.0%)
interest rate increase or decrease (whichever results in the greater pro
forma decrease in NPV) and (b) its "normal" level of exposure which is 2% of
the present value of its assets. The regulation, however, will not become
effective until the OTS evaluates the process by which savings associations
may appeal an interest rate risk deduction determination. Furthermore, the
Bank due to its asset size and level of risk-based capital is exempt from
this requirement. Nevertheless, utilizing this measuring concept, based on
the Bank's June 30, 1996 interest rate risk report from the OTS, the Bank
would have been required to reduce its risk-based capital by $720,000 if the
regulation applied to the Bank. However, even if such a deduction was
applied, the Bank would still be considered "well capitalized" under current
regulatory guidelines.
Presented below, as of June 30, 1996 and 1995, is analysis of the Bank's
interest rate risk measured by changes in NPV for instantaneous and sustained
parallel shifts in the yield curve, in 100 basis point increments, up and
down 400 basis points and compared to policy limits set by the Board of
Directors and in accordance with OTS regulations. Such limits have been
established with consideration of the dollar impact of various rate changes
and the Bank's capital position.
<TABLE>
<CAPTION>
Change in At June 30, 1996 At June 30, 1995
Interest Rate Board Limit --------------------- --------------------
(Basis Points) % Change $ Change % Change $ Change $ Change
- -------------- ----------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+400 (85) $(9,980) (62) $(5,425) (38)
+300 (65) (7,222) (45) (3,550) (25)
+200 (45) (4,510) (28) (1,829) (13)
+100 (20) (2,086) (13) (864) (06)
0
- -100 (20) 1,573 10 514 04
- -200 (45) 2,375 15 902 06
- -300 (65) 3,015 19 1,216 09
- -400 (85) 4,095 26 1,675 12
</TABLE>
In the above table the first column on the left presents the basis point
increments of yield curve shifts. The second column presents the board
policy limits of each 100 basis point increment for the Bank's percent change
in NPV. For example, the Board's policy limit for a 100 basis point shift in
the yield curve up or down indicates that NPV should not decrease by more
than 20%. The remaining columns present the Bank's actual position in dollar
change and percent change in NPV at each basis point increment at the dates
indicated.
As is indicated in the table above, the Bank's interest rate risk position as
of June 30, 1996 changed from June 30, 1995 as follows: The Bank's NPV based
on a rise in interest rates of 2.0% is a 28% decrease representing a dollar
decrease in equity value of approximately $4.5 million at June 30, 1996
compared to a 13% decrease representing a $1.8 million decrease in equity
value at June 30, 1995. Conversely, on a decline in interest rates of 2.0%,
the Bank's NPV is estimated to increase 15% or an increase in equity value of
$2.4 million at June 30, 1996 compared to an increase of 6% or an increase in
equity value of $900,000. The primary reason for the change in the interest
rate risk position was growth in the loan portfolio of seven and nine year
fixed-rate mortgage balloon products along with increased unfunded loan
commitments at June 30, 1996.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities
or periods to repricing, they may react in different degrees to changes in
market interest rates. Also, the interest rates
D-38
<PAGE>
on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Additionally, certain assets, such as ARM
loans, have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. Further, in the event of a change in
interest rates, expected rates of prepayments on loans, and early withdrawals
from certificates could likely deviate significantly from those assumed in
calculating the table.
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required to maintain minimum levels of liquid assets as defined
by the OTS. This requirement is based upon a percentage of deposits and
short-term borrowings and is currently 5.0%. The Bank has consistently
maintained liquidity in excess of its required levels. The Bank's liquidity
ratio for June 1996 was 5.64 %. The Banks principal sources of funds are
deposits, principal and interest payments on loans and securities, sales of
loans, maturities of securities, sales of securities available for sale, and
borrowings, primarily FHLB advances. While scheduled loan repayments and
maturing investments are relatively predictable, deposit flows and early loan
repayments are more influenced by interest rates, general economic conditions
and competition. Strong loan demand, particularly consumer lending, utilized
the majority of the net proceeds of the Conversion.
Liquidity management is both a daily and long-term responsibility of
management. The Bank adjusts its investments in liquid assets based upon
management assessment of expected loan demand, expected deposit flows, FHLB
advances as needed, yield available on interest-earning deposits and
investment securities, and the objective of its asset/liability management
program. Excess liquidity is invested generally in interest-earning
overnight deposits of the FHLB of Indianapolis. Other investments include
mortgage-related securities, insured or guaranteed by federal agencies, and
securities issued by agencies of the U.S. Government.
The Bank utilized the FHLB of Indianapolis for a wholesale funding source.
The Bank had $23.8 million in outstanding FHLB advances as of June 30, 1996
with a current board authorized limit established at $25.0 million. It is
anticipated that the current FHLB advance borrowing limit of $25 million will
be increased to accommodate further asset growth.
While the Bank anticipates it will have sufficient funds available to meet
current loan commitments, the business plan provides for increased use of
wholesale funding sources which may allow the Bank to obtain a lower cost of
funding and create a more efficient liability match to the asset being
funded. As of June 30, 1996, the Bank had $5.5 million in loan commitments
and unused lines of credit in its home equity and credit card program of $3.3
million. Funding for these commitments will be through additional FHLB
advances, loan and investment amortizations, maturities, calls and security
sales.
The Bank is subject to three capital to asset requirements in accordance with
OTS regulations. The following table summarizes the Bank's regulatory
capital requirements versus actual capital.
<TABLE>
<CAPTION>
June 30, 1996
-----------------------------------------------------------------------------
Actual Amount Required Amount Actual Excess Actual Ratio Required Ratio
------------- --------------- ------------- ------------ --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Tangible Capital $14,255 $2,274 $11,981 9.4% 1.5%
Core Capital 14,255 6,063 8,192 9.4 4.0
Risk-based Capital 14,685 6,023 8,662 19.5 8.0
</TABLE>
D-39
<PAGE>
IMPACT OF ACCOUNTING STANDARDS
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 114, "Accounting by
Creditors for Impairment of a Loan." SFAS No. 114 is effective for fiscal
years beginning after December 15, 1994. The statement establishes
accounting measurement, recognition and reporting standards for impaired
loans. SFAS No. 114 was amended in October 1994 by SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures."
SFAS No. 118 amended SFAS No. 114 primarily to remove its income recognition
requirements and add some disclosure requirements. The adoption of SFAS No.
114, as amended by SFAS No. 118, was not material to the Company's 1996
consolidated financial condition or results of operations.
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of," will require the Company to
periodically consider whether an impairment loss should be recognized on
long-lived assets and other certain intangible assets based on an estimate of
future cash flows. SFAS No. 121 is effective for fiscal year beginning after
December 15, 1995, and earlier adoption is encouraged. Adoption of this
Statement is not expected to have a material impact on the Company's
consolidated financial condition and results of operations.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights," which is effective for fiscal years beginning after December 15,
1995. SFAS No. 122 amends certain provisions of SFAS No. 65 to allow the
separate capitalization of rights to service mortgage loans that are acquired
through loan origination activity. The total cost of the mortgage loans
originated is allocated to the mortgage servicing rights and the loans
(without the mortgage servicing rights) based on their relative fair values.
The impact of SFAS No. 122 on the Company's consolidated financial position
and results of operations is not expected to be significant when adopted.
SFAS No. 123, "Accounting for Stock Based Compensation" establishes a fair
value based method of accounting for employee stock options and similar
equity instruments which the FASB encourages companies to adopt for their
employee stock compensation plans. However, SFAS No. 123 allows companies to
continue measuring compensation cost for such plans using accounting guidance
in place prior to SFAS No. 123. Companies that elect to remain with the
former method of accounting must make pro-forma disclosures of net income and
earnings per share as if the fair value method provided for in SFAS No. 123
had been adopted. This Statement is effective for the Company at the
beginning of its fiscal year ending June 30, 1997. Management has concluded
that the Company will not adopt the fair value accounting provisions of SFAS
No. 123 and will continue to apply its current method of accounting.
Accordingly, adoption of SFAS No. 123 will have no impact on the Company's
consolidated financial position or results of operations.
D-40
<PAGE>
APPENDIX E
INTERIM FINANCIAL STATEMENTS AND MANAGEMENT'S
DISCUSSION AND ANALYSIS
December 31, 1996
SJS BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1996 June 30, 1996
----------------- -------------
<S> <C> <C>
ASSETS
Cash and due from financial institutions $ 3,563,966 $ 3,116,085
Interest-bearing demand deposits in other financial institutions 241,767 14,832
------------ -----------
Total cash and cash equivalents 3,805,733 3,130,917
Interest-bearing deposits in other financial institutions 190,000 190,000
Mortgage-backed securities available for sale 17,691,278 26,831,702
Mortgage-backed securities held to maturity
(estimated fair value on December 31, 1996
$9,078,692; June 30, 1996 $9,351,120) 9,176,476 9,379,310
Equity securities available for sale 8,300 63,280
Investment securities available for sale 4,195,593 5,566,705
Investment securities held to maturity
(estimated fair value on December 31, 1996
$3,169,166; June 30, 1996 $3,630,989) 3,167,901 3,667,929
Federal Home Loan Bank stock 1,187,500 1,187,500
Loans, net 108,960,129 98,861,649
Accrued interest receivable 1,028,175 1,069,562
Premises and equipment 1,133,198 1,152,526
Other assets 825,079 795,564
------------ ------------
Total $151,369,362 $151,896,644
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $111,369,070 $107,927,968
Federal Home Loan Bank Advances 21,887,762 23,750,000
Advance payments by borrowers for taxes and insurance 834,903 1,249,689
Accrued interest payable on deposits 234,982 251,385
Accrued expenses and other liabilities 931,483 1,807,216
------------ ------------
Total liabilities 135,258,200 134,986,258
Common Stock 9,866 9,866
Paid in Surplus 9,543,524 9,519,762
Retained earnings 9,294,399 9,635,294
Net unrealized gain(loss) on available-for-sale securities
(Applicable deferred income taxes on December 31,
1996 $159,600; June 30, 1996 $257,903) (309,811) (500,635)
Net unrealized gain(loss) on held-to-maturity securities
(Applicable deferred income taxes on December 31,
1996 $25,331; June 30, 1996 $26,777) (49,173) (51,979)
Employee Stock Ownership Plan (ESOP) (unallocated shares) (302,686) (322,140)
Management Recognition Plan (MRP)(unearned shares) (675,532) (675,532)
Treasury stock (December 31, 1966 69,000 shares;
June 30,1996 35,000 shares) (1,399,425) (704,250)
------------ ------------
Total Shareholders' Equity 16,111,162 16,910,386
------------ ------------
Total Liabilities and Shareholders' Equity $151,369,362 $151,896,644
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
E-1
<PAGE>
SJS BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended December 31 Six months ended December 31
------------------------------ ----------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income
Loans $2,200,249 $1,828,430 $4,285,644 $3,435,735
Investment securities 112,558 198,686 249,468 385,682
Mortgage-backed securities 445,024 537,006 954,297 1,092,611
Other interest income 64,810 60,106 118,350 119,969
---------- --------- ---------- ----------
2,822,641 2,624,228 5,607,759 5,033,997
Interest Expenses
Deposits 1,419,495 1,388,391 2,805,585 2,743,981
Federal Home Loan Bank advances 336,727 238,244 693,516 339,965
---------- ---------- ---------- ----------
1,756,222 1,626,635 3,499,101 3,083,946
Net interest income 1,066,419 997,593 2,108,658 1,950,051
Provision for loan losses 91,000 160,609 146,000 162,609
--------- ---------- ---------- ----------
Net interest income after provision for loan losses 975,419 836,984 1,962,658 1,787,442
--------- ---------- ---------- ----------
Non-interest Income
Service charges and other fees 97,784 104,371 199,840 208,139
Gain on sale of loans 24,079 16,460 26,042 15,996
Loss on sale of investment securities (15,904) (3,738) (33,065) (3,738)
Other 75,475 31,495 115,440 62,349
-------- --------- ---------- ---------
181,434 148,588 308,257 282,746
Non-interest expense
Compensation and benefits 373,126 321,484 777,775 658,056
Occupancy 53,162 52,162 106,788 107,752
Furniture, fixtures and equipment 21,421 17,655 44,554 36,005
Federal insurance premium 60,815 80,896 839,204 158,861
Data processing expense 83,440 73,633 158,345 148,766
Other operating expense 209,832 249,520 547,381 449,381
-------- -------- ---------- ---------
801,796 795,350 2,474,047 1,558,821
Income before federal income tax expense (benefit) 355,057 190,222 (203,132) 511,367
Federal income tax expense (benefit) 132,933 (51,936) (57,029) 50,857
-------- -------- ---------- ---------
Net income (loss) $222,124 $242,158 ($146,103) $ 460,510
-------- -------- ---------- ---------
-------- -------- ---------- ---------
Earnings (loss) per share:
Primary $.25 $.26 ($.16) $.50
---- ---- ----- ----
---- ---- ----- ----
Fully diluted $.25 $.26 ($.16) $.50
---- ---- ----- ----
---- ---- ----- ----
Dividends per common share $.11 $.10 $.22 $.20
---- ---- ----- ----
---- ---- ----- ----
</TABLE>
See accompanying notes to consolidated financial statements.
E-2
<PAGE>
SJS BANCORP , INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Additional Net Unrealized Unallocated Unearned Total
Common Paid-In Retained Gain (Loss) ESOP MRP Treasury Shareholders'
Stock Capital Earnings on Securities Shares Shares Stock Equity
------- ---------- -------- -------------- ----------- -------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1996 $9,866 $9,519,762 $9,635,294 $(552,614) $(322,140) $(675,532) $ (704,250) $16,910,386
Net loss for the six
months ended
December 31, 1996 (146,103) (146,103)
Cash dividends (194,792) (194,792)
Shares committed to
be released
under the ESOP 23,762 19,454 43,216
Acquisition of
treasury shares
(at cost) (695,175) (695,175)
Change in net
unrealized gain
(loss) on
securities net
of tax 193,630 193,630
Balance at
December 31, 1996 $9,866 $9,543,524 $9,294,399 $(358,984) $(302,686) $(675,532) $(1,399,425) $16,111,162
------- ---------- -------- -------------- ----------- -------- --------- --------------
------- ---------- -------- -------------- ----------- -------- --------- --------------
</TABLE>
See accompanying notes to consolidated financial statements
E-3
<PAGE>
SJS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
Six months ended December 31
----------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (146,103) $ 460,510
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation 44,298 40,209
Amortization 104,128 36,768
Provision for loan losses 146,000 162,609
ESOP expense 43,216 36,335
Gain on sale of loans (26,042) (15,996)
Loss on sale of securities and
mortgage-backed securities 33,065 3,738
Proceeds from sale of loans 1,270,800 5,855,166
Loans originated for sale (1,194,858) (5,894,323)
Changes in assets and liabilities
Changes in assets (184,785) (60,418)
Changes in liabilities (892,136) 416,525
------------ -----------
Net cash from operating activities (802,417) 1,041,123
------------ -----------
Cash flows from investing activities
Purchases of equity securities (280) (800)
Proceeds from sales of equity securities 101,636
Purchases of FHLB stock (23,900)
Purchase of securities held to maturity (1,450,000)
Proceeds from sales of securities available for sale 1,475,500
Proceeds from calls and maturities of securities
held to maturity 500,156 1,000,000
Purchase of mortgage-backed securities
available for sale (2,492,546) (3,164,808)
Proceeds from sales of mortgage-backed
securities available for sale 10,518,621 3,505,022
Principal payments on investment securities 1,322,478 1,863,181
Loans purchased (500,000)
Loan originations and principal payments
on loans, net (10,197,473) (15,581,547)
Premises and equipment expenditures (24,970) (12,068)
------------ -----------
Net cash from investing activities 1,203,122 (14,364,920)
------------ -----------
Cash flows from financing activities
Net change in deposits $ 3,441,102 $ 2,578,910
FHLB borrowing 2,700,000 14,250,000
Repayment of FHLB advances (4,562,238) (3,000,000)
Net change in advance payments by borrowers (414,786) (502,070)
Dividends paid (194,792) (190,440)
Treasury stock purchase (695,175) 0
------------ -----------
Net cash from financing activities 274,111 13,136,400
------------ -----------
Net change in cash and cash equivalents 674,816 (187,397)
Cash and cash equivalents at beginning of year 3,130,917 3,515,180
------------ -----------
Cash and cash equivalents at end of year $ 3,805,733 $ 3,327,783
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
SJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quarter ended December 31, 1996
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of
SJS Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, SJS
Federal Savings Bank (the "Bank"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
These interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of management, are necessary to present
fairly the consolidated financial position of the Company at December 31,
1996, and its results of operations and statement of cash flows for the
periods presented. All such adjustments are normal and recurring in nature.
The results of the periods presented are not necessarily representative of
the results of operations and cash flows which may be expected for the entire
year. The accompanying consolidated financial statements do not purport to
contain all the necessary financial disclosures required by generally
accepted accounting principles that might otherwise be necessary in the
circumstances and should be read in conjunction with the consolidated
financial statements and notes thereto of SJS Bancorp, Inc. for the fiscal
year ended June 30, 1996.
Earnings per Share:
Earnings per common share for the periods presented was computed by dividing
net income (loss) by the average number of shares outstanding during the
period. Employee and director stock options are considered common share
equivalents. At December 31, 1996 the Company had 30,265 unallocated ESOP
shares which were excluded from the weighted number of shares outstanding
used to calculate the earnings per common and common share equivalent. The
weighted number of shares outstanding for the calculation of primary earnings
per common and common share equivalent for three months and six month period
ended December 31, 1996 was 902,419 and 897,519 respectively. The weighted
number of shares outstanding for the calculation of fully-diluted earnings
per common share was 896,876 for the three month period ended December
31,1995 and 901,330 for the six month period ended December 31, 1996. The
corresponding 1995 weighted outstanding shares for both the calculation of
primary earnings and fully-diluted earnings per share was 917,586 for the
three month period ended December 31, 1995 and 917,038 for the six month
period ended December 31, 1995. Net income was $222,124 for the three months
ended December 31,1996 and $242,158 for the three months ended December 31,
1995. Net income (loss) for the six months ended December 31, 1996 was
($146,103) and $460,510 for the six months ended December 31, 1995.
NOTE 2 - PENDING MERGER
SJS Bancorp, Inc. on November 6, 1996 signed a plan of merger under which SJS
Bancorp, Inc. would merge with and into Shoreline Financial Corporation.
Under the agreement, which is subject to SJS Bancorp, Inc. shareholder and
regulatory approvals, SJS Bancorp, Inc. shareholders would receive $27.00
cash for each share of SJS Bancorp, Inc. common stock, for a total value of
approximately $25.4 million. The transaction is expected to be completed in
the first half of 1997.
NOTE 3 - IMPACT OF NEW ACCOUNTING STANDARDS
Several new accounting standards have been issued by the Financial Accounting
Standards Board that were adopted in fiscal 1996. Statement of Financial
Accounting Standards. No. 121, "Accounting for the impairment of long-
E-5
<PAGE>
lived assets", requires a review of long-term assets for impairment of
recorded value and resulting write-downs if value is impaired. Statement of
Financial Accounting Standards No. 122, "Accounting for mortgage servicing
rights", requires recognition of an asset when servicing rights are retained
on in-house originated loans that are sold. Statement of Financial
Accounting Standards No. 123, "Accounting for stock-based compensation ",
requires proforma disclosure of the effect on net income of valuing future
option grants at estimated fair value of the option granted. These
statements did not have a material effect on the Company's financial position
or results of operations for the three months ended December 31, 1996 nor for
the six months ended December 31, 1996.
NOTE 4 - LOANS
<TABLE>
<CAPTION>
Loans are classified as follows: December 31, 1996 June 30,1996
----------------- ------------
<S> <C> <C>
First mortgage loans (principally conventional):
Secured by one-to-four family residences $ 79,416,119 $ 70,034,958
Secured by other properties 2,568,996 1,945,655
Construction loans 5,058,945 6,747,880
---------------- ------------
87,044,060 78,728,493
Less:
Undisbursed portion of construction loans (2,315,764) (4,029,790)
Deferred fees and costs (85,085) (60,318)
---------------- ------------
Total first mortgage loans 84,643,211 74,638,385
Consumer and other loans:
Auto loans 15,355,255 16,117,610
Home equity 2,445,786 2,299,820
Other 7,224,346 6,451,925
---------------- ------------
25,025,387 24,869,355
---------------- ------------
109,668,598 99,507,740
Less allowance for loan losses (708,469) (646,091)
---------------- ------------
Total loans, net $ 108,960,129 $ 98,861,649
---------------- ------------
---------------- ------------
Allowance for loan losses:
Activity in the allowance for loan losses is summarized as
follows for the six months ended December 31: 1996 1995
---- ----
Balance - July 1, $ 646,091 $ 558,654
Provisions charged to income 146,000 162,609
Loans charged-off (99,847) (21,572)
Recoveries 16,225 16,038
---------- ----------
Balance - December 31, $ 708,469 $ 715,729
---------- ----------
---------- ----------
The Company had no impaired loans at December 31, 1996 or December 31, 1995.
</TABLE>
NOTE 5 - SAIF SPECIAL ASSESSMENT
On September 30, 1996, federal legislation was enacted that requires the SAIF
to be recapitalized with a one-time assessment on virtually all SAIF-insured
institutions, such as the Bank, equal to 65.7 basis points on SAIF-insured
E-6
<PAGE>
deposits maintained by those institutions as of March 31, 1995. The SAIF
assessment, was paid to the FDIC on November 27, 1996 in the amount of
$702,736 and expensed by the Bank at September 30, 1996.
As a result of the SAIF recapitalization, the FDIC amended its regulation
concerning the insurance premiums payable by SAIF-insured institutions. For
the period October 1, 1996 through December 31, 1996, the FDIC charge to the
Bank for the SAIF insurance premium was reduced to 18 basis points from 23
basis points per $100 of domestic deposits. The Bank currently qualifies for
the minimum SAIF insurance premium. Under the amendment the FDIC further
reduced the SAIF insurance premium for the Bank to 6.48 basis points per $100
of domestic deposits, effective January 1, 1997.
NOTE 6 - INCOME TAXES
The effective income tax (benefit) rate for the six month period ended
December 31, 1996 is (28%) compared to 10% for the comparative period ended
December 31, 1995. The income tax benefit for the six months ended December
31,1996 is due to the net loss resulting primarily from the aforementioned
SAIF special assessment and an additional $151,000 of expense related to the
sale of the Company. The six month period ended December 31, 1995 effective
tax rate of 10% was the result of an adjustment in deferred taxes relating to
the bad debt deduction for thrift institutions. Loan portfolio balances at
December 31, 1995 exceeded statutory June 30, 1988 base year loan levels
thereby reducing the deferred tax liability relative to bad debts.
With the discontinuance of the special bad debts deduction for thrift
institutions, the Bank as of July 1, 1996 uses the actual net-charge-off
method for tax purposes and has elected to defer the bad debt recapture over
the allowed six year statutory period. For the quarter ended December 31,
1996 taxes of $132,933 were within normal effective tax rates. Additionally
future quarterly period tax rates are also expected to be at normal levels.
NOTE 7 - FHLB ADVANCES
At June 30, 1996 the Company had advances from the Federal Home Loan Bank of
Indianapolis totaling $23,750,000 with variable and fixed interest rates
ranging from 5.23% to 6.61%, respectively. At December 31, 1996, FHLB
advances totaled $21,887,762 with variable and fixed interest rates ranging
from 5.23% to 6.61%, respectively.
Maturities of Advances outstanding are as follows:
December 31, 1996 June 30, 1996
1996 $ 0 $ 3,650,000
1997 6,450,000 4,250,000
1998 8,050,000 8,050,000
2000 6,387,762 6,800,000
2001 1,000,000 1,000,000
----------- -------------
$ 21,887,762 $ 23,750,000
These advances are collateralized by Federal Home Loan Bank Stock and
specific securities with a carrying value of $25,843,334 for the period ended
December 31, 1996 and $28,505,243 for the period ended June 30, 1996.
NOTE 8 - STOCK OPTION AND INCENTIVE PLAN ("SOP") AND MANAGEMENT RECOGNITION
PLAN ("MRP")
The Company's Board of Directors adopted a SOP and a MRP. The SOP and MRP
are administered by a Committee of directors of the Company. This Committee
selects recipients and terms of awards pursuant to the Plan. Total shares
available under the SOP and MRP plans were 95,220 and 38,088, respectively.
The Committee to-date has awarded under the SOP options to purchase 79,509
shares of restricted common stock at an exercise price of $19.625 per share
and awarded under the MRP 34,422 shares of common stock. The SOP options
granted vest ratably over a five year period with a first award having vested
October 1, 1996. The MRP awards vest in
E-7
<PAGE>
ten equal annual installments with the first award to have vested on October
1, 1996, subject to the continuous employment of the recipients and the
achievement of specific performance criteria as defined under such plans. No
MRP awards vested on October 1, 1996 as the Company did not meet the
performance criteria under the plan. Accordingly, no compensation expense was
recorded during the fiscal 1996 period in connection with the MRP award. For
the six month period ended December 31, 1996, the Company has not accrued any
compensation expense under the MRP as performance criteria is not expected to
be attained primarily because of added expense relating to the sale of the
Company.
NOTE 9 - STOCK REPURCHASE PROGRAMS
During 1996, SJS Bancorp, Inc. received regulatory approval to repurchase up
to 85,698 shares of its common stock. Through December 31, 1996, 69,000
shares had been repurchased. The repurchase approval expires on March 1,
1997, however, due to the pending merger the Company has ceased repurchasing
stock under the stock repurchase program.
Repurchased shares are treated as treasury shares and are available for
general company purposes, including issuance in connection with stock based
compensation plans.
NOTE 10 - MORTGAGE SERVICING RIGHTS (MSRs)
Under Statement of Financial Accounting Standard (SFAS) No. 122 , implemented
as of the fiscal year beginning July 1, 1996, the Bank allocated $11,172 of
basis to mortgage servicing right assets. Estimated fair value of the
servicing rights at December 31, 1996 was $11,375. Fair value was determined
by using discounted cash flows over the projected estimated lives with a
discount factor based on similar market yield for like assets. The servicing
rights retained were stratified primarily on the basis of expected life and
stated loan rates.
Loans sold during the six month period ended December 31, 1996, had an
allocated basis of $1,240,598 exclusive of MSRs. Amortization calculated on
estimated life of the MSRs for the six month period was negligible. No
impairment exists on the MSRs and no expense or valuation allowance has been
recorded for the MSR asset as of December 31, 1996. It is, however,
difficult to assess the impact on future periods as SFAS No. 122 results in
larger gains on loans sold when recognition of the MSR assets takes place.
Subsequent periods are negatively impacted by the MSR amortization.
Additionally, origination and sales volume of retained servicing along with
impairment and market fluctuations affecting valuation of the MSRs may be
significant and difficult to predict.
E-8
<PAGE>
SJS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion compares the financial condition of SJS Bancorp,
Inc. (the "Company") and its wholly owned subsidiary, SJS Federal Savings
Bank (the "Bank") at December 31, 1996 to June 30, 1996 and the results of
operations for the three and six month periods ended December 31, 1996 with
the same periods in 1995. This discussion should be read in conjunction with
the interim consolidated condensed financial statements and notes thereto of
SJS Bancorp for the period ended December 31, 1996 included herein.
FINANCIAL CONDITION
Total assets of the Company decreased $527,282 from $151,896,644 at June 30,
1996 to $151,369,362 at December 31, 1996. Consistent with the Company's
strategic plan's focus on asset mix, net loans increased 10.2% from
$98,861,649 at June 30, 1996 to $108,960,129 at December 31, 1996. Growth of
the mortgage and consumer loan portfolios during this six month period
amounted to $10,004,826 and $156,032, respectively. The utilization of
commissioned loan originators and on going sales and marketing efforts
continue to create increased visibility and demand for the Company's mortgage
loan products. During the six month period ended December 31, 1996, the
Company continued to fund loan growth by decreasing its net holdings in
mortgage-backed and investment securities, whereas in the prior fiscal period
the primary source of funds were Federal Home Loan Bank advances. The
Company will continue to focus on its business plan and pursue additional
loan growth.
Securities, consisting of mortgage-backed, equity and investment securities
classified as available for sale and held to maturity, decreased $11,269,378
from $45,508,926 at June 30, 1996 to $34,239,548 as of December 31, 1996. As
indicated previously, these proceeds were deployed primarily into loans to
attain higher yields on interest earning assets.
Deposits increased $3,441,102 from $107,927,968 at June 30, 1996 to
$111,369,070 at December 31, 1996, a 3.2% increase for the six month period.
Growth in the deposit area was focused on short and intermediate term
certificates through competitive pricing in the market area. Competition
from other financial and non-financial entities continues to limit deposit
growth. The Bank will continue to offer competitive interest rates on its
products while continuing to concentrate marketing efforts on establishing
multiple deposit relationships with individual customers.
Total shareholders' equity decreased by $799,224 from $16,910,386 at June 30,
1996 to $16,111,162 at December 31, 1996. This decrease was principally the
result of the net loss of $146,103, repurchases of common stock at a cost of
$695,175 and cash dividends of $194,792 paid on common stock offset by
$193,630 of net unrealized market investment portfolio gains.
RESULTS OF OPERATIONS
Net Income : Net income for the three months ended December 31, 1996
decreased by $20,034 or 8.3% compared to the three month period ended
December 31, 1995. The Company experienced a net loss for the six months
ended December 31, 1996 of $146,103 compared to net income of $460,510 for
the six months ended December 31, 1995, a decrease of $606,613 over the prior
six month period.
The loss for the six month period ended December 31, 1996 was the result of
$151,171 of expense associated with the pending sale of the Company along
with the one-time special SAIF recapitalization assessment of $702,736.
Adjusted for these two items, pre-federal income and state tax for the six
month period ended December 31, 1996 amounted to $631,133 compared to
$511,367 for the six month period, in 1995 an increase of $119,766 or 23.4%.
E-9
<PAGE>
Additionally, net income was significantly impacted by the varying effective
tax rates for these two periods. Federal income tax related to the $631,133
for the current six month period ended December 31, 1996 was $226,621, an
effective rate of 36% while federal income tax related to the $511,367 for
the prior six month period ended December 31, 1995 was $50,857, an effective
rate of 10%. The 1995 effective tax rate of 10% was the result of the
deferred tax adjustment related to bad debts for thrift institutions
discussed in "Note 6 - Income Taxes" of "Notes to Consolidated Financial
Statements" for the period ended December 31, 1996 included herein.
Net Interest Income: Net interest income for the three month period ended
December 31, 1996 increased $68,826, or 6.9% over the same three month period
ended December 31, 1995. Net interest income increased $158,607 or 8.1%, from
$1,950,051 for the six month period ended December 31, 1995 to $2,108,658 for
the six month period ended December 31, 1996. Interest income increased
$573,762, or 11.4% , from $5,033,997 for the six month period ended December
31, 1996 to $5,607,759 for the same period ended December 31, 1996. This
improvement is attributable to a shift in the Company's interest earning
assets to loans which increased $21.2 million from $87.8 million at December
31, 1995 to $109.0 million at December 31, 1996 from the lower yielding
security portfolio which decreased by $14.4 million. The interest income
increase was partially offset by a $415,155 or 13.5% increase in total
interest expense attributable to higher levels of FHLB advances and deposits
during the period.
Provision (credit) for Loan Losses: The Company's provision for loan losses
decreased by $69,609 for the three month period ended December 31, 1996
compared to the three month period ended December 31, 1995. The Company's
provision for the three month period ended December 31, 1996 was $91,000
compared to $160,609 for the three month period ended December 31, 1995.
Provision for the six month period ended December 31, 1996 of $146,000 was
$16,609 less than the provision for the comparable 1995 period. Current
charge-offs (net of current recoveries) for the three months ended December
31, 1996 amounted to $75,711 and for the six month period ended December
31,1996 totaled $83,622. Continued strong loan growth of 10.2% for the six
month period ended December 31, 1996 totaling $10,098,480 accounted for
approximately $66,000 of the current fiscal year loan loss provision.
Current year net charge-offs are attributable primarily to consumer
installment debt levels and bankruptcy filings mirroring national trends.
Management reviews the adequacy of the loan loss reserve and credit risk
within the Company's loan portfolio on a quarterly basis. As of December 31,
1996, the allowance for loan losses totaled $708,469 representing .65% of
gross loans receivable and 252.3% of total non-performing loans. The Company
anticipates that as loan portfolio growth continues, provisions for loan
losses will continue to be made to maintain adequate loss reserves.
Non-Interest Income: Non-interest income for the three month period ended
December 31, 1996 increased $32,846, or 22.1% , to $181,434 from $148,588 for
the three month period ended December 31, 1995. Non-interest income for the
six month period ended December 31, 1996 increased $25,551, or 9.0% to
$308,257 from $282,746 at December 31, 1995. The primary reason for these
increases was a dividend of prior years credit life insurance in the amount
of $57,259 received during the second quarter ended December 31, 1996 along
with increased gains on the sale of loans of $10,046 over the six month
period ended December 31, 1996 offset in part by losses of $29,327 on
investment securities and a reduction of $8,299 in service charges and other
fee income.
Non-interest expense: Non-interest expense increased $6,446 for the three
months ended December 31, 1996 to $801,796 from $795,350 for the three months
ended December 31, 1995. For the six month period ended December 31, 1996,
non-interest expense increased $915,226 to $2,474,047 from $1,558,821 for the
six month period ended December 31, 1995. The major items of increase during
the six month 1996 period were from the one-time SAIF recapitalization charge
of $702,736 expensed on September 30, 1996, expenses associated with the sale
of the Company of $151,171 ( additional costs of $106,142 were capitalized
pending close of the merger) and increased compensation and benefits expense.
Compensation and benefit expenses increased $51,642 from $321,484 for the
three month period ended December 31, 1995 to $373,126 for the three month
period ended December 31, 1996. For the six month period ended December 31
,1996 expense increased $119,719 from $658,056 at December 31, 1995 to
$777,775 at December 31, 1996. The increase for the six month period is
primarily attributable to increases of $32,024 of directors' expense
resulting from the addition of four members to the board, ESOP expense of
$6,880 resulting from the
E-10
<PAGE>
Company's higher common share price, increased employee compensation of
$18,020, reduced deferred loan origination costs of $54,957 the result of
lower loan origination volume and net other sundry items totaling $7,838.
Non-interest expense annualized as a percent of end-of-period assets for the
three month period ended December 31, 1996 was 2.12% compared to 2.21% for
the three months ended December 31, 1995. Corresponding six month annualized
non-interest expense as a percent of end-of period-assets was 3.27% and 2.17%
respectively. The SAIF special assessment ($702,736) and expenses for sale
of the Company ($151,171) account for 1.13% of the 3.27% six month 1996
annualized non-interest expense. The Company does not expect any significant
increases in normal operating non-interest expenditure levels. The Company
does, however, expect additional cost relating to the completion of the sale
of the Company.
Income Tax Expense (Benefit): The effective income tax (benefit) rate for
the six month period ended December 31, 1996 was (28%) compared to 10% for
the period ended December 31, 1995. The tax benefit is due to the net loss
resulting from the one-time SAIF assessment and expenses associated with the
sale of the Company.
LIQUIDITY
The Company's principal sources of funds are deposits, principal and interest
payments on loans, interest-bearing deposits and securities classified as
available for sale. While scheduled loan repayments and maturing investments
are relatively predictable, deposit flows and early loan prepayments are more
influenced by interest rates, general economic conditions and competition.
Additional sources of funds may be obtained from the Federal Home Loan Bank
(the "FHLB") of Indianapolis by utilizing an array of available products to
meet funding needs. Management anticipates that it will have sufficient
funds available to meet current loan commitments.
The Bank is required to maintain minimum levels of liquid assets as defined
by Bank regulators. The required percentage has varied from time to time
based upon economic conditions and savings flows and is currently 5% of net
withdrawal savings deposits and borrowings payable on demand or in one year
or less during the preceding calendar month. The Bank's average liquidity
ratio for the six month period ended December 31, 1996 was 5.63%. The $11.3
million net reduction of securities along with deposit growth of $3.4 million
were used to fund loan demand.
Although management believes that deposit flows will continue to be a stable
source of funds, ongoing use of wholesale funding sources may be utilized to
meet demand in accordance with the Company's strategic plan. Wholesale
funding sources may allow the Company to obtain a lower cost of funds and
create a more efficient liability match to the asset being funded.
CAPITAL RESOURCES
The Bank is subject to three capital to asset requirements in accordance with
OTS regulations. The following table is a summary of the Bank's regulatory
capital requirements versus actual capital at December 31, 1996:
Capital Requirements:
Actual Required Excess
Amount/Percent Amount/Percent Amount/Percent
(Dollars in Thousands)
Tangible $14,292 9.43% $ 2,273 1.50% $12,019 7.93%
Core Leverage
Capital 14,292 9.43% 6,061 4.00% 8,231 5.43%
Risk-Based
Capital 14,545 18.56% 6,270 8.00% 8,275 10.56%
E-11
<PAGE>
[FRONT]
SJS BANCORP, INC.
P R O X Y 301 State Street
St. Joseph, Michigan 49085
Special Meeting of Stockholders - [date]
This proxy is solicited by the Board of Directors. If this proxy
is properly executed and delivered, the shares represented by this proxy will
be voted as specified. If no specification is made, the shares will be voted
for adoption of the Agreement and Plan of Merger between SJS and Shoreline
Financial Corporation. The shares represented by this proxy will be voted in
the discretion of the proxies on any other matters that may come before the
meeting or any adjournment of the meeting.
1. Adoption of the Agreement and Plan of Merger
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Your Board of Directors recommends that you
vote FOR adoption of the Agreement and Plan of Merger
IMPORTANT! - PLEASE DATE AND SIGN THE OTHER SIDE
[BACK]
The undersigned shareholder appoints the Board of Directors with
the power to appoint its substitute, attorneys and proxies to represent the
stockholder and to vote and act, with respect to all shares that the
stockholder would be entitled to vote at the special meeting of stockholders
of SJS Bancorp, Inc. referred to above and at any adjournment of that
meeting, on all matters that come before the meeting. The affirmative vote
of a majority of the shares represented at the such meeting may authorize the
adjournment of the meeting; provided, however, that no proxy which is voted
against the Merger will be voted in favor of adjournment to solicit further
proxies for the Merger.
Please sign exactly as your name appears
on this proxy. If signing for estates,
trusts or corporations, title or capacity
should be stated. If shares are held
jointly, each holder should sign.
X___________________________________________
Signature
X___________________________________________
Signature if held jointly
Dated: _____________________________, 1997
