1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Number 0-27522
PRESTIGE BANCORP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1785128
- ------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
710 Old Clairton Road
Pleasant Hills, Pennsylvania 15236
- --------------------------------------- ---------
(Address of principal executive office) (Zip Code)
(412) 655-1190
---------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of November 20, 2000 there
were 946,116 shares of the registrant's common stock outstanding, par value
$1.00 per share.
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2
PRESTIGE BANCORP, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets of Prestige Bancorp, Inc. as of
September 30, 2000 (unaudited) and December 31, 1999 1
Consolidated Statements of Income of Prestige Bancorp, Inc. for the three
months ended September 30, 2000 and 1999 (unaudited) 2
Consolidated Statements of Income of Prestige Bancorp, Inc. for the nine
months ended September 30, 2000 and 1999 (unaudited) 3
Consolidated Statements of Stockholders' Equity of Prestige Bancorp, Inc.
for the nine months ended September 30, 2000 and 1999 (unaudited) 4
Consolidated Statements of Cash Flows of Prestige Bancorp, Inc. for the nine
months ended September 30, 2000 and 1999 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security-Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
3
PRESTIGE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2000 1999
------------- -------------
(Unaudited)
ASSETS
Cash and due from banks $ 1,039,089 $ 1,411,002
Interest-bearing deposits with banks 6,574,156 3,787,311
Investment securities:
Available for sale 9,055,101 10,985,172
Held to maturity (market value $22,554,459 and
$23,027,655 respectively) 23,513,354 24,361,002
Net loans 160,146,895 150,962,353
Federal Home Loan Bank stock, at cost 3,648,900 3,648,900
Premises and equipment, net 2,365,374 2,503,345
Accrued interest receivable 1,412,940 1,177,480
Deferred tax asset 1,361,181 548,118
Other assets 1,163,618 1,187,636
------------- -------------
Total assets $ 210,280,608 $ 200,572,319
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Non-interest-bearing deposits $ 9,581,556 $ 7,537,107
Interest-bearing deposits 114,665,357 112,953,650
------------- -------------
Total deposits 124,246,913 120,490,757
Federal Home Loan Bank advances 70,577,000 62,977,000
Advance payments by borrowers for taxes and insurance 476,467 1,068,008
Income taxes payable 72,088 163,736
Accrued interest payable 657,400 422,971
Other liabilities 396,571 496,558
------------- -------------
Total liabilities 196,426,439 185,619,030
------------- -------------
Stockholders' Equity:
Preferred stock, $1.00 par value;
5,000,000 shares authorized, none issued -- --
Common stock, $1.00 par value; 10,000,000 shares authorized,
1,162,313 shares issued at September 30, 2000 and December 31, 1999 1,162,313 1,162,313
Treasury stock at cost: 216,197 and 172,349 shares at
September 30, 2000 and December 31, 1999, respectively (2,699,348) (2,246,618)
Additional paid-in-capital 11,589,770 11,581,741
Unearned ESOP shares: 75,527 and 79,007 shares at
September 30, 2000 and December 31, 1999, respectively (635,320) (654,310)
Retained earnings - substantially restricted 4,773,485 5,543,671
Accumulated other comprehensive income (336,731) (433,508)
------------- -------------
Total stockholders' equity 13,854,169 14,953,289
------------- -------------
Total liabilities and stockholders' equity $ 210,280,608 $ 200,572,319
============= =============
The accompanying notes are an integral part of these financial statements.
1
4
PRESTIGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
September 30,
--------------------------------
2000 1999
----------- ----------
Interest income:
Interest and fees on loans $ 3,186,168 $2,739,390
Interest on mortgage-backed securities 158,983 190,551
Interest and dividends on other investment securities 432,624 440,971
Interest on deposits in other financial institutions 15,059 14,885
----------- ----------
Total interest income 3,792,834 3,385,797
----------- ----------
Interest expense:
Interest on deposits 1,246,693 1,162,508
Advances from Federal Home Loan Bank 1,087,946 753,233
----------- ----------
Total interest expense 2,334,639 1,915,741
----------- ----------
Net interest income 1,458,195 1,470,056
Provision for loan losses 1,898,500 120,000
----------- ----------
Net interest (loss) income after provision for
loan losses (440,305) 1,350,056
----------- ----------
Other income:
Fees and service charges 237,306 212,608
Net gain on sale of investments 18,362
----------
Gain on sale of assets -- 1,995
Other income, net 4,161 3,633
----------- ----------
Total other income 259,829 218,236
----------- ----------
Other expenses:
Salaries and employee benefits 623,152 617,454
Premises and occupancy costs 152,457 146,040
Federal deposit insurance premiums 6,263 16,488
Data processing costs 67,714 63,646
Advertising costs 22,557 25,435
Transaction processing costs 89,891 76,831
ATM transaction fees 47,605 41,859
Other expenses 248,666 192,362
----------- ----------
Total other expenses 1,258,305 1,180,115
----------- ----------
(Loss) income before income tax expense (1,438,781) 388,177
Income tax (benefit) expense (562,825) 147,767
----------- ----------
Net (loss) income $ (875,956) $ 240,410
=========== ==========
Basic (loss) earnings per share:
Net (loss) income $ (1.01) $ 0.26
Weighted average number of common shares outstanding 869,807 916,119
Diluted (loss) earnings per share:
Net (loss) income $ (1.01) $ 0.26
Weighted average number of common shares outstanding 869,807 916,119
The accompanying notes are an integral part of these financial statements.
2
5
PRESTIGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended
September 30,
---------------------------------
2000 1999
------------ ----------
Interest income:
Interest and fees on loans $ 9,284,200 $7,725,428
Interest on mortgage-backed securities 509,238 577,829
Interest and dividends on other investment securities 1,304,756 1,190,253
Interest on deposits in other financial institutions 67,586 164,705
------------ ----------
Total interest income 11,165,780 9,658,215
------------ ----------
Interest expense:
Interest on deposits 3,632,566 3,360,641
Advances from Federal Home Loan Bank 3,000,049 2,120,933
------------ ----------
Total interest expense 6,632,615 5,481,574
------------ ----------
Net interest income 4,533,165 4,176,641
Provision for loan losses 2,440,500 315,000
------------ ----------
Net interest income after provision for loan losses 2,092,665 3,861,641
------------ ----------
Other income:
Fees and service charges 678,058 564,107
Net gain on sale of investments 10,398 48,559
Gain on sale of assets 2,660 3,375
Gain on sale of foreclosed real estate 2,488 --
Other income, net 12,585 10,436
------------ ----------
Total other income 706,189 626,477
------------ ----------
Other expenses:
Salaries and employee benefits 1,892,081 1,792,647
Premises and occupancy costs 454,905 437,469
Federal deposit insurance premiums 18,701 48,076
Data processing costs 205,846 190,549
Advertising costs 106,560 86,076
Transaction processing costs 263,069 230,288
ATM transaction fees 129,267 111,816
Other expenses 671,217 572,045
------------ ----------
Total other expenses 3,741,646 3,468,966
------------ ----------
(Loss) income before income tax expense (942,792) 1,019,152
Income tax (benefit) expense (374,427) 389,342
------------ ----------
Net (loss) income $ (568,365) $ 629,810
============ ==========
Basic (loss) earnings per share:
Net (loss) income $ (0.64) $ 0.69
Weighted average number of common shares outstanding 881,880 915,051
Diluted (loss) earnings per share:
Net (loss) income $ (0.64) $ 0.69
Weighted average number of common shares outstanding 881,880 915,253
The accompanying notes are an integral part of these financial statements.
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6
PRESTIGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
Accum-
ulated
Common Other
Stock Additional Compre-
Comprehensive $1.00 par Treasury Paid-in Unearned Retained hensive
Income value Stock Capital ESOP Shares Earnings Income Total
------ ----- ----- ------- ----------- -------- ------ -----
BALANCE, December 31, 1999 $1,162,313 $(2,246,618) $11,581,741 $(654,310) $5,543,671 $(433,508) $14,953,289
Allocation of 3,480
ESOP shares -- -- 8,029 18,990 -- -- 27,019
Cash dividends declared:
Common stock ($.21 per
share) -- -- -- -- (201,821) -- (201,821)
Treasury stock purchases,
43,848 shares -- (452,730) -- -- -- -- (452,730)
Net loss $(568,365) -- -- -- -- (568,365) -- (568,365)
Net unrealized gains on
available for sale
securities, net of tax
of $60,031 90,046 -- -- -- -- -- 90,046 90,046
Reclassification
adjustment for gains
realized in net income
net of tax of $3,667 6,731 -- -- -- -- -- 6,731 6,731
---------
Comprehensive loss $(471,588)
========= ---------- ----------- ----------- --------- ---------- --------- -----------
BALANCE, September 30, 2000 $1,162,313 $(2,699,348) $11,589,770 $(635,320) $4,773,485 $(336,731) $13,854,169
========== =========== =========== ========= ========== ========= ===========
BALANCE, December 31, 1998 $1,100,090 $(2,161,243) $10,727,677 $(690,380) $5,826,182 $ (42,421) $14,759,905
Allocation of 3,248 ESOP
shares -- -- 18,277 17,720 -- -- 35,997
Cash dividends declared:
Common stock ($.18 per
share) -- -- -- -- (176,622) -- (176,622)
Stock dividend declared:
Common stock (5% per
share) 62,223 -- 830,321 -- (892,544) -- --
Cash in lieu of stock -- -- -- -- (4,901) -- (4,901)
Net income $ 629,810 -- -- -- -- 629,810 -- 629,810
Net unrealized losses on
available for sale
securities, net of tax
of $204,416 (306,624) -- -- -- -- -- (306,624) (306,624)
Reclassification
adjustment for gains
realized in net income
net of tax of $18,591 29,968 -- -- -- -- -- 29,968 29,968
---------
Comprehensive income $ 353,154
========= ---------- ----------- ------------ --------- ---------- --------- -----------
BALANCE, September 30, 1999 $1,162,313 $(2,161,243) $ 11,576,275 $(672,660) $5,381,925 $(319,077) $14,967,533
========== =========== ============ ========= ========== ========= ===========
The accompanying notes are an integral part of these statements.
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7
PRESTIGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
------------------------------------
2000 1999
------------- ------------
Operating activities:
Net (loss) income $ (568,365) $ 629,810
------------- ------------
Adjustments to reconcile net (loss) income to net cash
provided by operating activities
Depreciation of premises and equipment 244,819 259,148
Amortization of premiums and discounts, net (2,550) 15,683
Non cash compensation expense related to MRP Plan 99,369 107,469
Non cash compensation expense related to ESOP benefit 46,549 56,792
Loss on sale of mutual funds -- 17,625
Gain on sale of equity securities (21,544) (66,184)
Loss on sale of available for sale investment 8,877 --
securities
Loss on sale of available for sale mortgage backed 2,270 --
securities
Provision for loan losses 2,440,500 315,000
Decrease in other liabilities (119,517) (36,357)
Increase in accrued interest payable 234,429 26,612
Decrease in income taxes payable (91,648) (14,768)
Increase in deferred income taxes (877,582) (134,553)
Increase in accrued interest receivable (235,460) (200,936)
(Increase) decrease in other assets (73,501) 110,639
------------- ------------
Total adjustments 1,655,011 456,170
------------- ------------
Net cash provided by operating activities 1,086,646 1,085,980
------------- ------------
Investing activities:
Loan originations (44,464,165) (54,260,762)
Principal payments on loans 32,839,123 34,061,389
Principal payments on mortgage-backed securities available for 388,190 450,275
sale
Principal payments on mortgage-backed securities held to maturity 786,931 1,248,528
Principal payments on investment securities held to maturity 56,737 337,202
Proceeds from calls of held to maturity investment -- 3,000,000
securities
Proceeds from sale of available for sale mutual funds -- 733,931
Proceeds from sale of available for sale investment 991,126 --
securities securities
Proceeds from sale of available for sale mortgage backed 593,798 --
securities
Proceeds from sale of equity securities 161,799 129,480
Proceeds from calls of available for sale investment -- 1,000,000
securities
Purchases of available for sale mortgage backed -- (1,500,000)
securities
Purchases of available for sale investment securities (26,619) (2,583,870)
Purchases of held to maturity investment securities -- (4,500,000)
Purchases of premises and equipment (106,848) (181,792)
Purchase of Federal Home Loan Bank stock -- (900,000)
------------- ------------
Net cash used by investing activities (8,779,928) (22,965,619)
------------- ------------
Financing activities:
Net change in advance payments by borrowers for taxes and
insurance (591,541) (471,753)
Purchases of MRP shares (1,850) --
Proceeds from Federal Home Loan Bank advances 147,850,000 25,600,000
Payments on Federal Home Loan Bank advances (140,250,000) (19,600,000)
Net increase in Money Market, NOW and Passbook savings accounts 2,412,689 7,024,372
Net increase in certificate accounts 1,343,467 2,287,262
Purchases of treasury stock (452,730) --
Cash in lieu of stock dividend on fractional shares -- (4,901)
Common stock cash dividends paid (201,821) (176,622)
------------- ------------
Net cash provided by financing activities 10,108,214 14,658,358
------------- ------------
Net increase (decrease) in cash and cash equivalents 2,414,932 (7,221,281)
Cash and cash equivalents at beginning of period 5,198,313 10,152,957
------------- ------------
Cash and cash equivalents at end of period $ 7,613,245 $ 2,931,676
============= ============
Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes $ 590,825 $ 500,400
Cash paid during the period for interest on deposits and 6,398,186 5,454,962
borrowings
Supplemental schedule of noncash investing activity:
Loans transferred to real estate owned $ 179,149 $ --
The accompanying notes are an integral part of these financial statements.
5
8
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
1. BASIS OF ORGANIZATION:
On February 14, 1996, the Board of Directors of Prestige Bank, F.S.B. (the Bank)
adopted a Plan of Conversion (the Plan) from a federally chartered mutual
savings bank to a federally chartered stock savings bank and the issuance of its
stock to Prestige Bancorp, Inc., (the Corporation), a Pennsylvania corporation.
The Corporation sold 963,023 shares of its common stock (including 77,041 shares
to its newly formed Employee Stock Ownership Trust (the ESOP)), at $10.00 per
share. Simultaneously there was a corresponding exchange of all of the Bank's
stock for approximately 50% of the net offering proceeds. The remaining portion
of the net proceeds were retained by the Corporation net of $770,410, which was
loaned to the ESOP for its purchase. The conversion and public offering was
completed on June 27, 1996 with net proceeds from the offering, net of the ESOP
loan, totaling $8,188,394, after offering expenses.
2. BASIS OF PRESENTATION:
The following unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to those rules and
regulations, although the Corporation believes that the disclosures made are
adequate to make the information presented not misleading. However, such interim
information reflects all adjustments (consisting solely of normal recurring
adjustments), which are, in the opinion of management, necessary for a fair
presentation of financial position and results of operations for the periods
presented. The results of operations for the three and nine month periods ended
September 30, 2000, are not necessarily indicative of the results to be expected
for the year ending December 31, 2000.
The unaudited financial statements and notes hereto should be read in
conjunction with the audited financial statements and notes thereto for the year
ended December 31, 1999, contained in the Corporation's Annual Report and Form
10-K.
Earnings Per Common Share
The Corporation follows SFAS No. 128, "Earnings Per Share." Under SFAS No. 128,
earnings per share are classified as basic earnings per share and diluted
earnings per share. Basic earnings per share includes only the weighted average
common shares outstanding. Diluted earnings per share includes the weighted
average common shares outstanding and any dilutive common stock equivalent
shares in the calculation. Treasury shares are treated as retired for earnings
per share purposes.
6
9
The following tables reflect the calculation of (loss) earnings per share under
SFAS No. 128.
Three Months Ended
-----------------------------------------
September 30, 2000 September 30, 1999
------------------ ------------------
Basic (loss) earnings per share:
Net (loss) income $(875,956) $240,410
Average shares outstanding 869,807 916,119
(Loss) earnings per share $ (1.01) $ .26
Diluted (loss) earnings per share:
Net (loss) income $(875,956) $240,410
Average shares outstanding 869,807 916,119
--------- --------
Diluted average shares outstanding 869,807 916,119
(Loss) earnings per share $ (1.01) $ .26
For the three months ended September 30, 2000 and 1999, options to purchase
111,026 and 105,325 shares of common stock, respectively, were outstanding but
not included in the computation of diluted (loss) earnings per share because the
options' exercise price was greater than the average market price of the
Corporation's common shares for the period.
Nine Months Ended
----------------------------------------
September 30, 2000 September 30, 1999
------------------ ------------------
Basic (loss) earnings per share:
Net (loss) income $(568,365) $629,810
Average shares outstanding 881,880 915,051
(Loss) earnings per share $ (.64) $ .69
Diluted (loss) earnings per share:
Net (loss) income $(568,365) $629,810
Average shares outstanding 881,880 915,051
Stock options -- 202
--------- --------
Diluted average shares outstanding 881,880 915,253
(Loss) earnings per share $ (.64) $ .69
For the nine months ended September 30, 2000 and 1999, options to purchase
111,026 and 92,725 shares of common stock, respectively, were outstanding but
not included in the computation of diluted (loss) earnings per share because the
options' exercise price was greater than the average market price of the
Corporation's common shares for the period.
On February 17, 1999 the Board of Directors declared a stock dividend of 5% to
shareholders of record of March 2, 1999, which was paid on March 19, 1999. All
per share data have been restated to reflect the stock dividend.
Comprehensive Income
The Corporation follows SFAS No. 130, "Reporting Comprehensive Income." This
accounting standard requires the reporting of all changes in the equity of an
enterprise that result from recognized transactions and other economic events of
the period other than transactions with owners in their capacity as owners.
Prior to the issuance of this standard, some of those changes in equity were
displayed in the income statement, while others were included directly in
balances within a separate component of equity in the balance sheet.
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10
3. INVESTMENT SECURITIES:
The cost and market values of investment securities are summarized as follows:
Investment securities available for sale:
September 30, 2000
-------------------------------
Amortized Market
Cost Value
---------- ----------
U.S. government and government
agency obligations:
Due after one and within five years $3,500,000 $3,414,875
Due after five and within ten years 500,000 480,625
Corporate Debentures 494,006 458,430
Federal Home Loan Mortgage
Corporation (FHLMC) certificates:
Due after ten years 1,858,951 1,796,715
Federal National Mortgage Association
(FNMA) certificates:
Due within one year 36,130 35,431
Due after ten years 1,356,739 1,305,438
Mutual fund investment 579,407 572,048
Common stock portfolio 1,291,087 991,539
---------- ----------
$9,616,320 $9,055,101
========== ==========
Investment securities held to maturity:
--------------------------------
September 30, 2000
--------------------------------
Amortized Market
Cost Value
----------- -----------
U.S. government and government
agency obligations:
Due within one year $ 1,503,078 $ 1,481,117
Due after five and within ten years 8,495,824 8,156,370
Due after ten years 6,814,237 6,349,533
Federal Home Loan Mortgage
Corporation (FHLMC) certificates:
Due after five and within ten years 2,395,505 2,380,763
Due after ten years 958,165 942,591
Government National Mortgage
Association (GNMA) certificates:
Due after ten years 1,577,458 1,544,203
Federal National Mortgage
Association (FNMA) certificates:
Due after ten years 1,769,087 1,699,882
----------- -----------
$23,513,354 $22,554,459
=========== ===========
8
11
4. LOANS RECEIVABLE:
Loans receivable are summarized as follows:
September 30,
2000
-------------
Real estate loans:
1-4 family $ 104,060,484
Construction 2,062,841
Commercial real estate 15,874,749
-------------
121,998,074
Less- Undisbursed loan proceeds 695,390
-------------
121,302,684
Commercial business loans: 22,078,095
Consumer loans:
Home equity 12,015,050
Student 2,485,070
Automobile 2,832,916
Collateral 799,281
Credit cards 629,874
Personal unsecured/other 539,422
-------------
19,301,613
-------------
162,682,392
Less- Allowance for loan losses 2,545,257
Deferred loan costs (9,760)
-------------
$ 160,146,895
=============
5. ALLOWANCE FOR LOAN LOSSES:
Activity with respect to the allowance for loan losses is summarized as follows:
Nine Months Ended
September 30,
-------------------------------
2000 1999
----------- ---------
Balance at beginning of period $ 982,588 $ 571,183
Provision for loan losses 2,440,500 315,000
Charge-offs (878,186) (25,586)
Recoveries 355 --
----------- ---------
Balance at end of period $ 2,545,257 $ 860,597
=========== =========
9
12
6. DEPOSITS:
The scheduled maturities of the Bank's certificate accounts as of September 30,
2000 are as follows (amounts approximate):
October 1, 2000 to September 30, 2001 $35,811,447
October 1, 2001 to September 30, 2002 10,412,430
October 1, 2002 to September 30, 2003 7,527,311
October 1, 2003 to September 30, 2004 1,973,943
October 1, 2004 and thereafter 3,437,429
-----------
TOTAL $59,162,560
===========
Certificates of $100,000 or more $10,537,062
===========
7. INCOME TAXES:
The (benefit) provision for income taxes is as follows:
Nine Months Ended
September 30,
------------------------
2000 1999
--------- --------
Federal $(307,100) $317,382
State (67,327) 71,960
--------- --------
$(374,427) $389,342
========= ========
8. RELATED PARTY TRANSACTIONS:
Certain directors and executive officers of the Bank, including their immediate
families and companies in which they are principal owners, are loan customers of
the Bank. In management's opinion, such loans are made in the normal course of
business and were granted on substantially the same terms and conditions as
loans to other individuals and businesses of comparable creditworthiness at the
time. Total loans to these persons at September 30, 2000, and December 31, 1999,
amounted to $687,913 and $634,845, respectively.
9. CAPITAL STOCK:
On April 23, 1997, at the annual stockholders meeting, the Board of Directors
and shareholders formally approved the Corporation's Stock Option Plan (the
Option Plan) and Management Recognition and Retention Plan and Trust (the MRP
Plan; the Option Plan and the MRP Plan herein are referred to as the Plans) as
fully described in the Corporation's proxy statement dated March 31, 1997. In
connection with the MRP Plan, the Corporation incurred compensation expense of
approximately $36,000 and $99,000 during the three and nine months ended
September 30, 2000, respectively, compared to $37,000 and $107,000 for the
comparable periods of 1999.
The aforementioned approval of the Option Plan made 116,285 options available
for grant to employees and others who perform substantial services for the
Corporation. As of September 30, 2000, the Corporation had granted 112,679
options of which 1,146 shares had been forfeited. The options are exercisable
one year from the grant date and vest in equal installments over a period of
five years. As of September 30, 2000, there had been 507 options exercised. The
maximum term of any option granted under the Plan cannot exceed 10 years.
10
13
On February 17, 1999 the Board of Directors declared a stock dividend of 5% to
shareholders of record of March 2, 1999, which was paid on March 19, 1999. All
option data above have been restated to reflect the stock dividend.
10. RETAINED EARNINGS AND REGULATORY CAPITAL:
The Savings Bank's actual capital amounts and ratios are presented below in the
following table. Based on the asset size of the Savings Bank and its risk based
capital ratios, the Corporation believes although the Savings Bank exhibits a
high interest rate risk profile under the OTS model the Savings Bank at this
point does not have to deduct any amount from capital for interest-rate risk
(amounts in thousands).
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
--------------- ------------------------------- ----------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total Capital (to Risk
Weighted Assets):
As of greater than or greater than or greater than or greater than or
September 30, 2000 $14,307 12.52% equal to $9,141 equal to 8.0% equal to $11,426 equal to 10.0%
Tier 1 Capital (to Risk
Weighted Assets):
As of greater than or greater than or greater than or greater than or
September 30, 2000 $12,879 11.27% equal to $4,570 equal to 4.0% equal to $6,855 equal to 6.0%
Tier 1 Capital (to
Average Assets):
As of greater than or greater than or greater than or greater than or
September 30, 2000 $12,879 6.27% equal to $8,211 equal to 4.0% equal to $10,264 equal to 5.0%
11. COMMITMENTS AND CONTINGENT LIABILITIES:
The Corporation incurs off-balance sheet risks in the normal course of business
in order to meet the financing needs of its customers. These risks derive from
commitments to extend or receive credit. Such commitments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
financial statements.
Commitments to extend credit are obligations to lend to a customer as long as
there is no violation of any condition established in the loan agreement.
Commitments generally have fixed expiration dates or other termination clauses.
A portion of the commitments is not expected to be drawn upon; thus, the total
commitment amounts do not necessarily represent future cash requirements. Each
customer's creditworthiness is evaluated on a case-by-case basis.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to these commitments to extend credit is represented by their contractual
amounts. The Bank uses the same credit and collateral policies in making
commitments as for all other lending. The Bank has outstanding various
commitments to extend credit approximating $10.1 million as of September 30,
2000. In the opinion of management, the funding of the credit commitments will
not have a material adverse effect on the Bank's financial position or results
of operations.
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Additionally, the Bank is also subject to asserted and unasserted potential
claims encountered in the normal course of business. In the opinion of
management and legal counsel, the resolution of these claims will not have a
material adverse effect on the Bank's financial position or results of
operations.
12. FUTURE ACCOUNTING STANDARDS:
The Financial Accounting Standards Board ("FASB") has issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. As amended by SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133-an Amendment of FASB Statement No. 133," the standard is
effective for fiscal years beginning after June 15, 2000, and will be adopted by
the Corporation for the year ending December 31, 2001.
The FASB has also issued SFAS 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities-an Amendment of FASB Statement No.
133," which amends the accounting and reporting standards of Statement 133 for
certain derivative instruments and certain hedging activities. The impact of
adoption of these standards is not expected to materially affect the
Corporation's financial condition or results of operations.
The FASB has additionally issued SFAS 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities - a Replacement
of FASB Statement No. 125." effective for transfers and extinguishments after
March 31, 2001. The impact and adoption of these standards is not expected to
materially affect the Corporation's financial condition or results of
operations.
13. OFFICE OF THRIFT SUPERVISION:
The Corporation announced on September 25, 2000 that it entered into a
Supervisory Agreement with the Office of Thrift Supervision (the "OTS"). This
Supervisory Agreement formalized the understandings of the OTS and the Bank
pursuant to an informal directive issued by the OTS to the Bank on May 17, 2000.
In conjunction with a routine regulatory examination of the "Bank by the Office
of Thrift Supervision (the "OTS"), the OTS requested the Bank to enter into the
Supervisory Agreement. The Supervisory Agreement was signed on September 20,
2000, (the "Effective Date") and will, among other things, place restrictions on
the Bank's growth. The Bank may seek modification of this limitation on growth
by submission of a written request to the Regional Director of the OTS
("Regional Director") and by obtaining the prior written approval of the
Regional Director. Under the Supervisory Agreement, the Bank may not increase
its assets in an amount exceeding net interest credited on deposit liabilities
(or earnings credited on share accounts) during any calendar quarter, without
prior written approval of the Regional Director. Additionally, the Supervisory
Agreement requires the Bank or its Board of Directors to review and revise
various policies including 1) interest rate risk management, 2) strategic
planning to direct the operations and affairs of the Bank and in managing and
reducing the interest rate risk of the Bank, 3) investment and underwriting
policies, 4) transactions with the affiliates of the Bank, and 5) internal loan
and asset classifications policies. The Supervisory Agreement continues the
restriction imposed on the Bank by the directive not to extend loans for a
business purpose except for those business loans which the Bank was committed to
extend on or before May 17, 2000 or which were loans in process. The Bank may
request that the Regional Director waive this limitation on the extension of an
individual commercial loan to a customer. The restrictions on the Bank's
operations were immediately effective and the Supervisory Agreement will remain
in place until terminated by the OTS.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUPERVISION AND REGULATION
Prestige Bancorp, Inc. (the "Corporation") announced on September 25,
2000 that Prestige Bank, a Federal Savings Bank (the "Bank"), a wholly owned
subsidiary of the Corporation, entered into a Supervisory Agreement with the
Office of Thrift Supervision (the "OTS"). This Supervisory Agreement formalized
the understandings of the OTS and the Bank pursuant to an informal directive
issued by the OTS to the Bank on May 17, 2000.
In conjunction with a routine regulatory examination of the "Bank by
the Office of Thrift Supervision (the "OTS"), the OTS requested the Bank to
enter into the Supervisory Agreement. The Supervisory Agreement was signed on
September 20, 2000, (the "Effective Date") and will, among other things, place
restrictions on the Bank's growth. The Bank may seek modification of this
limitation on growth by submission of a written request to the Regional Director
of the OTS ("Regional Director") and by obtaining the prior written approval of
the Regional Director. Under the Supervisory Agreement, the Bank may not
increase its assets in an amount exceeding net interest credited on deposit
liabilities (or earnings credited on share accounts) during any calendar
quarter, without prior written approval of the Regional Director. Additionally,
the Supervisory Agreement requires the Bank or its Board of Directors to review
and revise various policies including 1) interest rate risk management, 2)
strategic planning to direct the operations and affairs of the Bank and in
managing and reducing the interest rate risk of the Bank, 3) investment and
underwriting policies, 4) transactions with the affiliates of the Bank, and 5)
internal loan and asset classifications policies. The Supervisory Agreement
continues the restriction imposed on the Bank by the directive not to extend
loans for a business purpose except for those business loans which the Bank was
committed to extend on or before May 17, 2000 or which were loans in process.
The Bank may request that the Regional Director waive this limitation on the
extension of an individual commercial loan to a customer. The restrictions on
the Bank's operations were immediately effective and the Supervisory Agreement
will remain in place until terminated by the OTS.
The Corporation agrees with the OTS that the foregoing measures will
assist the Bank in managing asset quality and interest rate risk. The
Corporation has worked closely with the OTS to implement the Supervisory
Agreement and it believes it has materially complied with the agreement to date.
The Bank is a well-capitalized institution and the Supervisory
Agreement does not result in any interruption of the Bank's day-to-day
operations. Management anticipates that compliance with the Supervisory
Agreement will not alter the Bank's classification as a well-capitalized
institution.
FINANCIAL CONDITION
Assets held directly by the Corporation include all of the outstanding
capital stock of the Savings Bank, a loan receivable from the Prestige Bancorp
Employee Stock Ownership Trust (the "ESOP"), an officer loan, deposits
maintained at the Savings Bank, common stock of mostly savings associations or
savings and loan holding companies and other assets (collectively the "Directly
Held Assets"). Each stock ownership interest in the unrelated savings
associations or savings and loan holding companies amounts to less than a 1.25%
interest in such entities. As of September 30, 2000, the Corporation had
outstanding borrowings of $358,000 from the Savings Bank to support cash levels.
The loan is adequately secured in accordance with applicable regulations.
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The following discussion of the financial condition and activities of
the Corporation should be read as the consolidated activities of the Corporation
and the Savings Bank. Unless the following discussion specifically identifies an
activity, event or condition as relating to the Directly Held Assets, it is
assumed that such activity, event or condition occurred as a result of a direct
action of the Savings Bank and an indirect action of the Corporation.
At September 30, 2000, the Corporation's total assets amounted to
$210.3 million compared with $200.6 million at December 31, 1999. The $9.7
million or 4.8% increase was primarily due to increases of $9.2 million or 6.1%
in net loans receivable and cash and cash equivalents of $2.4 million that was
partially offset by reductions in total investment securities of $2.8 million or
7.9%. The growth in net loans receivable was attributed to increases in
commercial business and commercial real estate of $1.0 million or 2.6%, $7.9
million or 8.2% in one-to-four family residential real estate loans and $2.0
million or 11.4% in consumer loans. These increases in assets occurred in
compliance with the terms of the Supervisory Agreement. The decrease in total
investment securities of $2.8 million was due to $1.7 million in sales of
investment, mortgage backed and equity securities and $1.2 million in principal
payments on mortgage backed securities. Increased cash and cash equivalents of
$2.4 million were primarily attributable to an increase in deposits and Federal
Home Loan Bank ("FHLB") advances of $3.8 million and $7.6 million, respectively,
and $1.7 million in sales of investment, mortgage backed and equity securities.
This was partially offset by $11.6 million in new loans in excess of principal
payments received on existing loans. Total stockholders' equity amounted to
$13.9 million or 6.59% of total assets at September 30, 2000, compared to equity
of $15.0 million or 7.46% of total assets at December 31, 1999. The $1.1 million
decrease in stockholders' equity was primarily attributable to stock repurchases
of $453,000, cash dividends of $202,000 and a net loss of $568,000 for the nine
months ended September 30, 2000. The Corporation paid a quarterly dividend $.07
per share during the first, second, and third quarters of 2000 compared to $.06
per share for the same periods in 1999. On November 6, 2000, the Board of
Directors suspended its fourth quarter cash dividend to preserve capital due to
the net loss of for the nine months ended September 30, 2000. The Board of
Directors of Prestige Bancorp will continue to review paying cash dividends on a
quarterly basis.
The Corporation's nonperforming assets increased $2.2 million to $3.5
million at September 30, 2000, compared to $1.3 million at December 31, 1999.
The increase was primarily due to a rise in nonperforming commercial business
and commercial real estate loans from $131,000 and $458,000 at December 31,
1999, respectively, compared to $702,000 and $2.3 million, respectively, at
September 30, 2000. The $702,000 of nonperforming commercial business loans was
comprised of twelve loans and the $2.3 million of nonperforming commercial real
estate loans was comprised of five loans. Management continues to take measures
to address these deficiencies. However, these loans continue to be monitored and
reserved under the allowance for loan losses.
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The following table sets forth the amounts and categories of the
Savings Bank's nonperforming assets at the dates indicated. The Savings Bank had
no loans classified as troubled debt restructurings during the periods indicated
below.
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2000 1999 1999
---- ---- ----
(DOLLARS IN THOUSANDS)
Non-accruing loans:
One-to-four family residential .... $ 85 $ 327 $253
Construction loans ................ -- 49 --
Consumer loans .................... 244 162 157
Commercial real estate ............ 2,340 458 --
Commercial business loans ......... 702 131 50
------ ------ ----
Total nonperforming loans ....... 3,371 1,127 460
Real estate owned ................. 179 207 205
------ ------ ----
Total nonperforming assets ...... $3,550 $1,334 $665
====== ====== ====
Total nonperforming loans as a
percentage of total loans ....... 2.06% .74% .32%
====== ====== ====
Total nonperforming assets as a
percentage of total assets ...... 1.69% .67% .35%
====== ====== ====
RESULTS OF OPERATIONS
General--The Corporation's net loss for the quarter ended September 30,
2000 was $876,000 or ($1.01) per diluted share compared to net income of
$240,000 or $.26 per diluted share for the same quarter in the prior year. The
third quarter earnings for 2000 included a provision for loan loss of $1.9
million that primarily resulted from an on-going review of commercial and
commercial real estate loans. As part of its process, the Bank performs periodic
reviews of individual commercial credits based on risk classification,
collateral and performance. Credits identified as criticized or non-performing
assets are reviewed quarterly while the majority of the Bank's other commercial
credits are evaluated annually. This provision represents an increase of $1.8
million over the same period in 1999 and was the primary result of commercial
real estate loans and commercial business loans for which credit deterioration
became apparent during the third quarter 2000.
The net loss of $876,000 for the quarter ended September 30, 2000
represents a $1.1 million decrease from the $240,000 net income for the same
period in 1999. This decrease was due mainly to increases in provision for
losses on loans of $1.8 million and total other expenses of $78,000. This was
partially offset by an income tax benefit of $563,000 for the quarter ended
September 30, 2000 compared to an income tax expense of $148,000 for the same
period in 1999.
Net loss for the nine months ended September 30, 2000 was $568,000 or
($.64) per diluted share compared to net income of $630,000 or $.69 per diluted
share for the comparable period of 1999. Excluding gain on sale of investments
of $6,000, net of tax, net loss for the nine months ended September 30, 2000 was
$574,000 or ($.65) per diluted share. This compares to net income after
excluding gain on sale of investments of $30,000, net of tax, of $600,000 or
$.66 per diluted share for the nine months ended September 30, 1999. The net
loss of $574,000 for the nine months ended September 30, 2000, after excluding
gain on sale of investments, net of tax, represents a $1.2 million decrease from
the $600,000 net income after excluding gain on sale of investments, net of tax,
for the same period in 1999. This decrease was primarily the result of increases
in provision for losses on loans of $2.1 million and total other expenses of
$273,000. This was partially offset by an income tax benefit of $375,000 for the
nine months ended
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September 30, 2000 compared to an income tax expense of $389,000 for the same
period in 1999. In addition, net interest income before provision for loan
losses increased 8.5% or $356,000 and fees and service charges increased
$114,000 or 20.2% during the nine months ended September 30, 2000 compared to
the same period in 1999.
INTEREST INCOME--The Corporation reported interest income of $3.8
million for the three months ended September 30, 2000, as compared to $3.4
million for the three months ended September 30, 1999. The increase of $407,000
or 12.0% for the quarter ended September 30, 2000, compared to the same period
in the prior year can be attributed to a $447,000 or 16.3% increase in interest
and fees on loans. The increase of $447,000 in interest and fees on loans was
the result of loan growth and an increase in the average yield earned on loans
receivable. Average balances for loan receivables, net of undisbursed loan
proceeds, during the third quarter of 2000 were $163.3 million, compared to
$142.3 million for the same period in 1999. The average yield earned on loans
receivable, during the quarter ended September 30, 2000, was 7.8% compared to
7.7% for the same period in 1999.
The Corporation reported interest income of $11.2 million for the nine
months ended September 30, 2000, as compared to $9.7 million for the nine months
ended September 30, 1999. The increase of $1.5 million or 15.6% for the nine
months ended September 30, 2000, compared to the same period in the prior year
can be attributed to a $1.6 million or 20.2% increase in interest and fees on
loans. The increase of $1.6 million in interest and fees on loans was the result
of loan growth and an increase in the average yield earned on loans receivable.
Average balances for loan receivables, net of undisbursed loan proceeds, during
the nine months ended September 30, 2000 were $159.7 million, compared to $134.7
million for the same period in 1999. The average yield earned on loans
receivable during the nine months ended September 30, 2000 was 7.8% compared to
7.7% for the same period in 1999.
INTEREST EXPENSE--Interest expense increased $419,000 or 21.9% during
the three months ended September 30, 2000 as compared to the same period last
year. This increase was due to growth in average interest-bearing liabilities
and a rise in the weighted average interest rate paid on interest-bearing
liabilities. Average deposits and Federal Home Loan Bank (FHLB) of Pittsburgh
advances during the third quarter of 2000 were $123.4 million and $69.6 million,
respectively, compared to $119.5 million and $54.5 million, respectively, for
the same period in 1999. The weighted average interest rate on interest-bearing
liabilities during the third quarter of 2000 was 4.8% compared to 4.4% for the
same period in 1999.
Interest expense increased $1.2 million or 21.0% during the nine months
ended September 30, 2000 as compared to the same period last year. This increase
was due to growth in average interest-bearing liabilities and a rise in the
weighted average interest rate paid on interest-bearing liabilities. Average
deposits and Federal Home Loan Bank (FHLB) of Pittsburgh advances during the
nine months ended September 30, 2000 were $122.5 million and $66.6 million,
respectively, compared to $116.3 million and $51.4 million, respectively, for
the same period in 1999. The weighted average interest rate on interest-bearing
liabilities during the nine months ended September 30, 2000 was 4.7% compared to
4.4% for the same period in 1999.
PROVISION FOR LOAN LOSSES--During the three and nine months ended
September 30, 2000 the Corporation recorded provisions for losses on loans of
$1.9 million and $2.4 million, respectively, compared to $120,000 and $315,000,
respectively, for the comparable period in 1999. The increases in provisions for
losses on loans of $1.8 million and $2.1 million for the three and nine months
ended September 30, 2000, respectively, compared to the same periods in 1999
were due to results of commercial business and commercial real estate loan
reviews. The Corporation establishes a provision for loan losses that is charged
to operations. The allowance for loan losses is maintained at a level that is
deemed to be
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appropriate based upon a comprehensive methodology that is to be updated on a
monthly basis. This methodology includes:
o A detailed review of all criticized and impaired loans is performed to
determine if any specific reserve allocations are required on an
individual loan basis. The specific reserve established for these
criticized and impaired loans is based on analysis of the loan's
performance, the related collateral value, cash flow considerations
and the financial capability of any guarantor.
o The application of reserve allocations to all outstanding loans and
certain unfunded commitments is based upon review of historical losses
and qualitative factors, which include but are not limited to,
economic trends, delinquencies, concentrations of credit, trends in
loan volume, borrowers' experience and depth of management,
examination and audit results, effects of any changes in lending
policies and trends in policy exceptions.
o The application of reserve allocations for all commercial and
commercial real estate loans are calculated by using a risk rating
system. All loans are assigned risk ratings based upon an internal
review. There are ten risk ratings, and each rating has a
corresponding reserve factor that is used to calculate the required
reserve.
o The maintenance of a general unallocated reserve occurs in order to
provide conservative positioning and protection against unknown events
or circumstances that have occurred, but have not yet been identified
by the Savings Bank through its credit administration process. It must
be emphasized that a general unallocated reserve is prudent
recognition of the fact that reserve estimates, by definition, lack
precision.
After completion of this process, evaluation of the adequacy of the reserve
and the establishment of the provision level for the next month are performed.
The OTS has noted a weakness in the loan classification process and the
Corporation is continuing to take steps to rectify these weaknesses.
When it is determined that the prospects for recovery of the principal of a
loan have significantly diminished, the loan is charged against the allowance
account; subsequent recoveries, if any, are credited to the allowance account.
In addition, nonperforming, delinquent loans greater than ninety days and
problem loans are to be reviewed monthly to determine potential losses.
Generally, consumer loans are considered losses when 180 days past due. The
Savings Bank's management is unable to determine in what loan category future
charge-offs and recoveries may occur. Therefore, the entire allowance for loan
losses is available to absorb future loan losses in any loan category. During
the nine months ended September 30, 2000, the Corporation charged off two
commercial real estate loans totaling $554,000, seven commercial business loans
totaling $308,000, one one-to-four family residential loan totaling $5,000 and
seven consumer loans totaling $11,000.
Although management utilizes its best judgment in providing for losses,
there can be no assurance that the Savings Bank will not have to increase its
provision for loan losses in the future as a result of commercial and consumer
loans, future changes in the economy or for other adverse reasons discovered
from the comprehensive methodology described above. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Savings Bank's provision for loan losses and the
carrying value of its nonperforming assets based on their judgments from
information available at the time of their examination. The OTS last examined
the Savings Bank as of March 31, 2000. Management and the directors of the
Corporation and the Savings Bank believe that the allowance for loan losses is
currently adequate. The Savings Bank will continue its review of the commercial
loan portfolio for any further developments and the allowance for loan loss will
be adjusted accordingly.
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The Savings Bank's management is unable to determine in what loan category
future charge-offs and recoveries may occur. The following schedule sets forth
the allocation of the allowance for loan losses among various categories. The
entire allowance for loan losses is available to absorb future loan losses in
any loan category.
SEPTEMBER 30, 2000 DECEMBER 31, 1999 SEPTEMBER 30, 1999
-------------------- -----------------------------------------
% OF % OF % OF
LOANS IN LOANS IN LOANS IN
EACH EACH EACH
CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
One-to-four family residential.................... $ 160 63.69% $ 169 62.78% $ 161 62.96%
Construction...................................... 29 1.26 16 1.77 9 1.62
Commercial business and
commercial real estate.......................... 2,042 23.23 638 24.14 531 23.44
Consumer:
Automobile, home equity, student,
share and other consumer........................ 90 11.81 72 11.31 73 11.98
Allocation to general risk........................ 224 -- 88 -- 87 --
-------- ------ ----- ------ ---- ------
Total.......................................... $ 2,545 100.00% $ 983 100.00% $861 100.00%
======== ====== ===== ====== ==== ======
OTHER INCOME--Total other income increased $25,000 and $116,000, net of
gains and losses on sales of investments, assets and foreclosed real estate, for
the three and nine months ended September 30, 2000, respectively, compared to
same periods in 1999. This income was attributed to increases in fees and
service charges generated from total transaction accounts.
OTHER EXPENSES--Total other expenses increased $78,000 or 6.6% for the
quarter ended September 30, 2000, as compared to the quarter ended September 30,
1999. The rise in total other expenses occurred as a result of a $56,000
increase in other expenses. This increase of $56,000 was primarily due to
temporary staffing for commercial loan reviews and legal fees.
Total other expenses increased $273,000 or 7.9% for the nine months
ended September 30, 2000, as compared to the nine months ended September 30,
1999. The increase in total other expenses occurred as a result of a $99,000 or
5.6% increase in salaries and employee benefits primarily attributable to two
additional employees hired as a result of the commercial loan expansion and
approved salary increases. Additionally, there was an increase of $99,000 in
other expenses primarily due to increases in temporary staffing for commercial
loan reviews, legal fees and general operating expenses.
INCOME TAXES--The Corporation recorded an income tax benefit of
$563,000 and $375,000 for the three and nine months ended September 30, 2000,
respectively, as compared to an income tax expense of $148,000 and $389,000,
respectively, for the same periods in the prior year. Such decreases in income
taxes were due to the Corporation recognizing a loss before income taxes of $1.4
million and $943,000 for the three and nine months ended September 30, 2000,
respectively, compared to income before income taxes of $388,000 and $1.0
million, respectively, for the same periods in 1999.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Corporation's primary sources of funds are deposits, repayments,
prepayments and maturities of outstanding loans and mortgage-backed securities,
maturities of investment securities and other short-term investments, and funds
provided from operations. While scheduled loan and mortgage-backed
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securities repayments and maturing investment securities and short-term
investments are relatively predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by the movement of interest rates in general,
economic conditions and competition. The Corporation manages the pricing of its
deposits to maintain a deposit balance deemed appropriate and desirable by its
Board of Directors. In addition, the Corporation invests in short-term,
interest-earning assets that provide liquidity to meet lending requirements.
Although the Corporation had historically relied on deposits for funding, the
Corporation in 1996 began to use advances from the Federal Home Loan Bank
("FHLB") of Pittsburgh to leverage its capital position. As of September 30,
2000, the Corporation had $70.6 million of outstanding advances from the FHLB of
Pittsburgh.
During the nine months ended September 30, 2000 and September 30, 1999,
the Corporation's operating activities provided net cash of approximately $1.1
million. The primary reasons for the $1.1 million net cash provided during the
nine months ended September 30, 2000 were $2.4 million in provision for loan
losses and $234,000 increase in accrued interest payable which was partially
offset by a $878,000 increase in deferred income taxes and a net loss for the
nine months ended September 30, 2000 of $568,000. During the nine months ended
September 30, 1999, net cash provided by operating activities was the result of
$630,000 in net income, $259,000 in depreciation of premises and equipment, and
$315,000 in provision for loan losses, which was partially offset by a $201,000
increase in accrued interest receivable and a $135,000 decrease in income taxes
payable.
Net cash used by investing activities was $8.8 million for the nine
months ended September 30, 2000. The primary reason for the $8.8 million net
cash used by investing activities was the Corporation originated $11.6 million
in new loans in excess of principal payments received on existing loans. This
was offset by $1.7 million in sales of investment, mortgage backed and equity
securities. This compares with net cash used by investing activities of $23.0
million for the nine months ended September 30, 1999. During the nine months
ended September 30, 1999, the Corporation originated $20.2 million in new loans
in excess of principal payments received on existing loans and purchased $4.5
million and $2.6 million of investment securities designated held to maturity
and available for sale, respectively. These uses of cash by investing activities
were partially offset by $3.0 million and $1.0 million of held to maturity
securities and available for sale securities, respectively, that were called.
Net cash provided by financing activities for the nine months ended
September 30, 2000, was $10.1 million. This was attributable to increases in
Money Market, Passbook Savings and Transaction accounts of $2.4 million and $7.6
million in net FHLB advances. During the same period last year, the Corporation
experienced a $14.7 million increase in net cash provided by financing
activities primarily due to a $9.3 million increase in core deposits and
certificates and an increase in net FHLB advances of $6.0 million.
The Savings Bank is required to maintain specified amounts of capital
pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of
1989 and regulations thereunder. Savings associations are required to maintain
tangible capital of 1.5%, core capital of 4.00% and risk-based capital of 8.00%.
At September 30, 2000, the Savings Bank's tangible, core, and risk-based capital
ratios amounted to 6.15%, 6.15%, and 12.52%, respectively, which substantially
exceeded applicable requirements.
YEAR 2000 ISSUES
- ----------------
The Year 2000 issue arose from the fact that many existing information
technology ("IT") hardware and software systems and non-information technology
("non-IT") products containing embedded microchip processors were originally
programmed to represent any date with six digits (e.g., 12/31/99), as opposed to
eight digits (e.g., 12/31/1999). Accordingly, problems were anticipated for many
such products and systems when attempting to process information containing
dates that fall after December 31, 1999. These concerns
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were commonly referred to as the "Year 2000" problems, and the acronym "Y2K" was
commonly substituted for the phrase "Year 2000."
The Corporation and the Savings Bank began a process in 1997 that
assigned an individual to begin investigating the Y2K issues. It was determined
that the Savings Bank relies on external processing vendors for all of its
mission critical core application processing, and its approach would be based on
the five-phase approach recommended by the Federal Financial Institutions
Examination Council ("FFIEC"). The Board of Directors and senior management were
apprised of the Year 2000 issues.
In 1997, a Y2K team was formed consisting of the President, Chief
Financial Officer, two employees of the Savings Bank and a member of the Board
of Directors. The initial focus of the team was to identify all issues that may
be affected by the date problem. This included computer hardware and software,
third party processing vendors, environmental factors (i.e., vaults, security
systems, etc.), and miscellaneous items such as preprinted forms, checkwriters,
date stamps, etc. The issues were then categorized as to their potential impact
on the ability of the Savings Bank to service its customers and ensure business
continuity for its shareholders, customers and employees. Communication was
initiated with all of the Savings Bank's vendors; for some vendors (i.e., PC and
network vendors) Year 2000 information was available via the Internet.
Due to Corporation's Y2K preparation, the Corporation did not
experience any significant Y2K problems. Although the Corporation is unable at
this time to assess any future impact of any other dates which might cause Y2K
failures, management does not believe at the current time that the cost of
remediating these Y2K problems will have a material adverse impact upon its
business, results of operations, liquidity or financial condition.
The Corporation's costs associated with Year 2000 included replacement
of non-compliant computer, telephone, software, and related equipment. Excluding
costs of Corporation's personnel time, the Corporation estimated that the total
Year 2000 project costs would not exceed $131,000 (pre-tax). As of September 30,
2000, the Corporation estimated that it had incurred $116,000 in connection with
its Y2K project plan. Most of these costs related to equipment acquisitions and
accordingly have been capitalized.
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PRESTIGE BANCORP, INC.
PART II
Item 1. Legal Proceedings
-----------------
Neither the Corporation nor the Bank is involved in any pending
legal proceedings other than nonmaterial legal proceedings
occurring in the ordinary course of business.
Item 2. Changes in Securities
---------------------
Not applicable.
Item 3. Defaults upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security-Holders
---------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
The Corporation filed a Form 8-K on September 25, 2000 and
November 17, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRESTIGE BANCORP, INC.
Dated: November 20, 2000 By: /s/ Patricia A. White
---------------------
Patricia A. White,
Executive Vice President and
Treasurer
Dated: November 20, 2000 By: /s/ James M. Hein
-----------------
James M. Hein,
Chief Financial Officer
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