1
Exhibit 13
[PRBC LOGO]
PRESTIGE BANCORP, INC.
2000 ANNUAL REPORT
2
TABLE OF CONTENTS
SECTION I
Financial Highlights.................................................. 2
Letter from the Chairman.............................................. 3
General Information................................................... 4
Selected Consolidated Financial and Other Data........................ 5
Management's Discussion and Analysis of
Financial Condition and Results of Operations...................... 8
Business of the Company................................................ 22
Regulatory Capital Requirements........................................ 42
Report of Independent Public Accountant and
Audited Consolidated Financial Statements........................... 43
SECTION II
Form 10-K............................................................. 1
Corporate Information................................... Inside Back Cover
3
FINANCIAL HIGHLIGHTS
AS OF THE YEAR ENDED DECEMBER 31, 2000 1999 1998
- -------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Total assets $201,775 $200,572 $177,374
Loans receivable, net 153,417 150,962 123,917
Deposits 121,793 120,491 109,698
FHLB of Pittsburgh advances 66,300 62,977 50,977
Stockholders' equity 11,550 14,953 14,760
Book value per share 12.21 15.10 14.80
FOR THE YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------
Net interest income $ 5,821 $ 5,662 $ 4,987
Net (loss) income (2,964) 851 743
Basic (loss) earnings per share (3.37) .93 .75
Diluted (loss) earnings per share (3.37) .93 .74
SELECTED RATIOS
- -------------------------------------------------------------------------------------
Return on average equity (20.76)% 5.70% 4.79%
Return on average assets (1.44) .45 .45
Interest rate spread 2.60 2.82 2.76
Net interest margin 2.89 3.10 3.10
Operating expenses as a percent of average assets 2.53 2.51 2.47
Nonperforming assets as a percent of total assets 2.91 .67 .51
Allowance for loan losses as a percent of total
loans 2.16 .64 .45
On April 15, 1998, the Board of Directors declared a stock dividend of 15%
to shareholders of record of June 2, 1998 which was paid on June 19, 1998. In
addition, 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 dividends.
2
4
PRESTIGE BANCORP, INC.
710 Old Clairton Road, Pittsburgh, PA 15236-4300 - 412-655-1190 -
(Fax) 412-655-2114
To our Stockholders, Customers and Friends:
The year 2000 brought challenges that affected our growth and performance.
As a result, we saw a net loss for the year ended December 31, 2000. This was
due mainly to the provision for loan loss reserve relating to the commercial
loan portfolio. Additionally, we were faced with issues concerning the execution
and focus of our commercial loan portfolio. Also, in the later portion of the
year, the Board of Directors concluded that a different set of skills was needed
to address the challenges facing our organization and to move ahead in a
positive direction. I agreed to assume the duties of Chairman of the Board and
later Chief Executive Officer to commit to immediately addressing those
challenges with the Board and Senior Management.
During this same time period, the Board of Directors engaged several
outside firms for additional expertise in the areas of financial and business
planning, strategic management assessment, and commercial loan analysis and
business practices. In addition, we added new-experienced members to the Board
to assist in key decision-making and guidance in the areas of audit, finance and
commercial loans.
With the additional assistance, we quickly embarked on a new tactical and
strategic business plan to correct and improve the position of the Bank. Along
with this action, we made key changes in the reporting structure of the
organization to streamline the daily operations and to continue to administer,
monitor and improve key areas of the Bank and holding company. In a parallel
move, we took steps to improve our expense and income management activities. We
also began to devote more activities to capital management and interest rate
risk management and examined various lines of businesses for efficiency
opportunities.
For 2001, this is a time to look forward and not backward. We have positive
strengths and opportunities for the business within the marketplace. We have
made key adjustments and additions to help improve our business and move forward
to positive results in 2001.
Prestige Bank has served its community well for over 65 years. The Bank has
a solid residential and consumer loan portfolio as well as a strong deposit
base. We will continue to focus in these areas and work on improving our market
share in each of our branches. We will continue to work with the regulators so
that we can re-enter the real estate backed commercial loan business in a
profitable manner. In other aspects of the business, we will continue to monitor
our expense management in detail and strive to establish ourselves as one of the
most efficient banks in the area. In the area of business development, we will
have a strong emphasis on relationship management and cross selling of other
bank-related products. We have recently taken steps that will help us to focus
on key business development opportunities that we feel will bring in additional
business and associated revenues and income. With the improved expertise of
Management and the Board, we are in a better position to measure, review and
make the necessary tactical and strategic decisions to manage interest rate
risk, investment decisions and business planning on an ongoing basis.
With these changes, we are positioned to take advantage of opportunities in
2001. We continue to remain well capitalized. We are improving, rebuilding and
refocusing our efforts to maintain and improve various aspects of the business
and are encouraged with our results and several developments that have already
occurred. We are confident that the various challenges that impacted our
profitability in 2000 are behind us, and we have set the Company on course for a
positive earnings outlook in the short term. We remain committed to building our
core franchise to succeed in creating a profitable bank.
We are building a culture of value, commitment and trust. We have regained
momentum and will step up the pace to continue to serve our communities and
shareholders. The Employees, Management and Board of Prestige Bank remain
dedicated to building a strong franchise. On behalf of the Board of Directors,
Management and Employees of Prestige Bancorp, Inc. and Prestige Bank, I ask for
your support as we move forward.
Sincerely,
/s/ Mark R. Schoen
Mark R. Schoen
Chairman, Chief Executive Officer and President
3
5
GENERAL INFORMATION
Prestige Bancorp, Inc. (the "Company") was formed in March, 1996 in
connection with the conversion of Prestige Bank, A Federal Savings Bank (the
"Savings Bank") from a mutual chartered savings association to a stock chartered
savings association (the "Conversion"). Upon completion of the Conversion on
June 27, 1996, the Company commenced operations as the holding company of the
Savings Bank, then existing as a stock-chartered federal savings association.
The Company is organized as a Pennsylvania corporation. Any comparison herein of
the Company's and the Savings Bank's performance to any period prior to June 27,
1996 is assumed to be a comparison to the performance of the Savings Bank for
such period.
The Savings Bank is a stock-chartered savings bank organized under the laws
of the United States of America, which conducts business from offices located in
Allegheny and Washington Counties, Pennsylvania. The Savings Bank's operations
date back to 1935 with the incorporation of First Federal Savings and Loan
Association of Mt. Oliver in Allegheny County, Pennsylvania. In March 1991, the
Savings Bank converted its charter from a federal mutual savings and loan
association to a federal mutual savings bank and took the name Prestige Bank, A
Federal Savings Bank. On June 27, 1996, the Savings Bank converted to a
stock-chartered savings bank. The Savings Bank's deposits are insured by the
Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC") to the maximum extent permitted by law.
The consolidated operating results of the Company and the Savings Bank
depend primarily upon net interest income, which is determined by the difference
between interest and dividend income on earning assets, principally loans,
investment securities and other investments and mortgage-backed securities and
interest expense on interest-bearing liabilities, which consist of deposits and
advances from the Federal Home Loan Bank of Pittsburgh. Other than the stock of
the Savings Bank, at December 31, 2000 the Company was holding only a loan
receivable from the Prestige Bank Employee Stock Ownership Plan (the "ESOP"), a
loan to a director totaling $217,000, debt and equity securities with a market
value totaling $919,000 at December 31, 2000, other assets of $175,000 and a
money-market and checking account with the Savings Bank. At December 31, 2000,
the Company had borrowed $340,000 from the Savings Bank to support cash levels.
The loan is adequately secured in accordance with applicable law. The
consolidated net income of the Company also is affected by the Savings Bank's
provision for loan losses, as well as the level of other consolidated income,
including late charges, and other expenses, such as salaries and employee
benefits, net occupancy and equipment expense, Federal deposit insurance and
miscellaneous other expenses, and income taxes.
The Board of Directors of the Company suspended its cash dividend in order
to preserve capital due to the net loss for the year ended December 31, 2000 of
$3.0 million. They will continue to review paying cash dividends on a quarterly
basis. The common stock of the Company is traded on the National Association of
Securities Dealers Automated Quotations ("NASDAQ") system (symbol "PRBC"). On
February 17, 1999, the Board of Directors last declared a stock dividend of 5%
to shareholders of record of March 2, 1999 which was paid on March 19, 1999.
Information as to the high and low stock prices for each quarter of fiscal
years 2000 and 1999 is included on page 7 of this Report.
4
6
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected financial and other data of the Company and the Savings Bank
set forth below does not purport to be complete and should be read in
conjunction with, and is qualified in its entirety by, the more detailed
information, including the Financial Statements and related Notes, appearing
elsewhere herein.
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2000 1999 1998 1997 1996(5)
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
SELECTED FINANCIAL DATA:
Total assets............................... $201,775 $200,572 $177,374 $143,263 $114,640
Investment securities...................... 21,737 23,808 22,929 28,228 18,386
Mortgage-backed securities................. 9,418 11,538 12,457 10,531 13,519
Loans receivable, net...................... 153,417 150,962 123,917 96,181 76,545
Cash and cash equivalents.................. 5,871 5,198 10,153 2,213 2,148
Deposits................................... 121,793 120,491 109,698 91,156 83,821
FHLB of Pittsburgh advances................ 66,300 62,977 50,977 34,677 14,477
Stockholders' equity....................... 11,550 14,953 14,760 15,630 15,430
Nonperforming assets(1).................... 5,867 1,334 903 611 391
SELECTED OPERATING DATA:
Interest income............................ $ 14,837 $ 13,194 $ 11,672 $ 9,371 $ 6,748
Interest expense........................... 9,016 7,532 6,685 5,240 3,683
-------- -------- -------- -------- --------
Net interest income........................ $ 5,821 $ 5,662 $ 4,987 $ 4,131 $ 3,065
Provision for loan losses.................. 6,383 438 209 104 44
-------- -------- -------- -------- --------
Net interest (loss) income after provision
for loan losses.......................... $ (562) $ 5,224 $ 4,778 $ 4,027 $ 3,021
Other income............................... 921 870 534 373 297
Other expenses............................. 5,204 4,715 4,096 3,123 3,102(6)
-------- -------- -------- -------- --------
(Loss) income before income tax expense.... $ (4,845) $ 1,379 $ 1,216 $ 1,277 $ 216
Income tax (benefit) expense............... (1,881) 528 473 493 70
-------- -------- -------- -------- --------
Net (loss) income.......................... $ (2,964) $ 851 $ 743 $ 784 $ 146(7)
======== ======== ======== ======== ========
SELECTED OPERATING RATIOS(2):
Return on average assets................... (1.44)% .45% .45% .59% .14%
Return on average equity................... (20.76) 5.70 4.79 5.13 1.22
Average yield earned on interest-earning
assets................................... 7.37 7.22 7.26 7.21 6.93
Average rate paid on interest-bearing
liabilities.............................. 4.77 4.40 4.50 4.47 4.21
Average interest rate spread(3)............ 2.60 2.82 2.76 2.74 2.72
Net interest margin(3)..................... 2.89 3.10 3.10 3.18 3.15
Ratio of interest-earning assets to
interest-bearing liabilities............. 106.45 106.75 108.34 110.99 111.31
Operating expenses as a percent of average
assets................................... 2.53 2.51 2.47 2.33 3.09
Average equity to average assets........... 6.93 7.94 9.35 11.42 11.86
Dividend payout ratio...................... N/A 27.77 25.78 13.04 N/A
ASSET QUALITY RATIOS(2):
Nonperforming loans as a percent of total
loans.................................... 3.63% .74% .56% .63% .44%
Nonperforming assets as a percent of total
assets................................... 2.91 .67 .51 .43 .34
Allowance for loan losses as a percent of
total loans.............................. 2.16 .64 .45 .42 .40
Charge-offs to average loans receivable
outstanding during the period............ 2.49 .02 .04 .01 .04
PER SHARE DATA (4):
Basic (Loss) Earnings Per Share............ $ (3.37) $ 0.93 $ 0.75 $ 0.76 $ 0.00(8)
Diluted (Loss) Earnings Per Share.......... (3.37) 0.93 0.74 0.76 0.00(8)
Per Share Book Value....................... 12.21 15.10 14.80 14.14 13.27
Per Share Market Value..................... 7.75 11.00 12.14 16.56 11.18
NUMBER OF OFFICES:
Full-service offices at period end......... 5 5 5 4 3
5
7
- ---------------
(1) Nonperforming assets consist of nonperforming loans and real estate owned
("REO"). Nonperforming loans consist of non-accrual loans, while REO
consists of real estate acquired through foreclosure and real estate
acquired by acceptance of a deed-in-lieu of foreclosure.
(2) Asset Quality Ratios are end of period ratios, except for charge-offs to
average loans. With the exception of end of period ratios, all ratios are
based on average monthly balances during the indicated periods and are
annualized where appropriate.
(3) Interest rate spread represents the difference between the weighted average
yield on average interest-earning assets and the weighted average cost of
average interest-bearing liabilities, and net interest margin represents net
interest income as a percent of average interest-earning assets.
(4) On April 15, 1998, the Board of Directors declared a stock dividend of 15%
to shareholders of record of June 2, 1998 which was paid on June 19, 1998.
In addition, 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
dividends.
(5) Based on the business activities of the Savings Bank prior to June 27, 1996,
and on the business activities of the Savings Bank and the Company on and
after June 27, 1996.
(6) But for the impact of the special assessment imposed by the Federal Deposit
Insurance Corporation ("FDIC") on deposits of the Savings Bank as of March
31, 1995, the other expenses of the Company for 1996 would have been $2.6
million.
(7) But for the impact of the special assessment described in Note 6 above, the
net income of the Company would have been $454,000.
(8) Earnings per share of the Company for the period from June 27, 1996 (date of
conversion) to December 31, 1996, was less than one-half of one cent per
share. But for the impact of the special assessment described in Note 7
above, the earnings per share of the Company would have been $.29 per share
for the same period. On a weighted average share basis for the period from
June 27, 1996 to December 31, 1996 the earnings per share of the Company was
$3,070 (net income) divided by 1,070,756 (weighted average shares for such
period) or $0.00301.
6
8
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
The following table sets forth certain unaudited quarterly consolidated
financial data regarding the Company:
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 QUARTER ENDED (1)
Interest income............................... $ 3,615 $ 3,757 $ 3,793 $ 3,671
Non-interest income........................... 220 227 260 215
---------- ---------- ---------- --------
Total operating income........................ 3,835 3,984 4,053 3,886
Interest expense.............................. 2,099 2,198 2,335 2,384
Provision for loan losses..................... 120 422 1,898 3,942
Non-interest expense.......................... 1,225 1,259 1,259 1,462
---------- ---------- ---------- --------
Income (loss) before income taxes............. 391 105 (1,439) (3,902)
Provision (benefit) for income taxes.......... 151 37 (563) (1,506)
---------- ---------- ---------- --------
Net income (loss)............................. $ 240 $ 68 $ (876) $ (2,396)
========== ========== ========== ========
Basic earnings (loss) per common share........ $ .26 $ .08 $ (1.01) $ (2.75)
Basic average number of common shares
outstanding................................. 906,327 869,639 869,807 870,998
Diluted earnings (loss) per common share...... $ .26 $ .08 $ (1.01) $ (2.75)
Diluted average number of common shares
outstanding................................. 906,327 869,639 869,807 870,998
Stock prices(2)
High........................................ $ 11.88 $ 10.75 $ 9.50 $ 9.25
Low......................................... $ 9.81 $ 8.00 $ 7.56 $ 7.25
Cash dividends declared per common share...... $ .07 $ .07 $ .07 $ --
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 QUARTER ENDED (1)
Interest income............................... $ 3,101 $ 3,171 $ 3,386 $ 3,536
Non-interest income........................... 206 202 218 243
---------- ---------- ---------- --------
Total operating income........................ 3,307 3,373 3,604 3,779
Interest expense.............................. 1,777 1,789 1,916 2,050
Provision for loan losses..................... 90 105 120 123
Non-interest expense.......................... 1,111 1,177 1,180 1,245(3)
---------- ---------- ---------- --------
Income before income taxes.................... 329 302 388 361
Provision for income taxes.................... 125 117 148 139
---------- ---------- ---------- --------
Net income.................................... $ 204 $ 185 $ 240 $ 222
========== ========== ========== ========
Basic earnings per common share............... $ .22 $ .20 $ .26 $ .24
Basic average number of common shares
outstanding................................. 913,971 915,041 916,119 916,101
Diluted earnings per common share............. $ .22 $ .20 $ .26 $ .24
Diluted average number of common shares
outstanding................................. 914,577 915,041 916,119 916,101
Stock prices(2)
High........................................ $ 13.44 $ 12.63 $ 12.38 $ 12.25
Low......................................... $ 12.14 $ 11.25 $ 11.38 $ 10.56
Cash dividends declared per common share...... $ .06 $ .06 $ .06 $ .06
- ---------------
(1) 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 dividends.
(2) Stock prices are based on the closing bid prices reported on NASDAQ.
(3) The increase in non-interest expense from $1.18 million for the quarter
ended September 30, 1999 to $1.25 million for the quarter ended December 31,
1999 was primarily attributable to a one-time charge of $112,000 in
connection with the fourth quarter retirement of former Savings Bank and
Company President Robert S. Zyla due to a physical disability.
7
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company completed the conversion of the Savings Bank to a federally
stock chartered savings bank on June 27, 1996. The results of operations of the
Company and the Savings Bank are consolidated and presented on a continuing
historical entity basis. Any comparisons set forth in this Annual Report to any
fiscal year ending prior to January 1, 1996 or to any date or any period ending
prior to June 27, 1996 should be understood to be a comparison to the activities
or results of the Savings Bank operating as a mutual chartered savings bank.
REGULATORY AGREEMENTS
The Company announced on September 25, 2000 that the Savings Bank 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
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, among other things, places 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. This restriction on the extension of new loans for a
business purpose also extends to renewals of business loans with revolving
credit or balloon loan features at maturity. The Bank may request that the
Regional Director waive this limitation on the extension of an individual
commercial loan to a customer, including any revised terms or renewal of a
business loan. The restrictions on the Bank's operations were immediately
effective and the Supervisory Agreement will remain in place until terminated by
the OTS.
The Company 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 remains 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.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
In addition to historical information, forward-looking statements are
contained herein that are subject to risks and uncertainties that could cause
actual results to differ materially from those reflected in the forward-looking
statements. Factors that could cause future results to vary from current
expectations, include, but are not limited to, the impact of economic conditions
(both generally and more specifically in the markets in which the Company and
the Savings Bank operate), the impact of competition for the customers of the
Savings Bank from other providers of financial services, the impact of
government legislation and regulation (which changes from time to time and over
which the Company and the Savings Bank have no control), and other risks
detailed in this Annual Report and in the Company's other Securities and
Exchange Commission filings. Readers are cautioned not to place undue reliance
on these forward-looking statements, which reflect management's analysis only as
of the date hereof. The Company undertakes no obligation to publicly revise
these forward-looking statements, to reflect events or circumstances that arise
after the date hereof. Readers should carefully review the risk factors
8
10
described in other documents the Company files from time to time with the
Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q
to be filed by the Company in 2001 and any Current Reports on Form 8-K filed by
the Company.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO
YEAR ENDED DECEMBER 31, 1999
FINANCIAL CONDITION
The Company's consolidated assets increased by $1.2 million or .60% from
$200.6 million at December 31, 1999 to $201.8 million at December 31, 2000. The
increase in total assets was primarily attributable to a $2.5 million increase
in total net loans receivable and an increase in cash and cash equivalents of
$673,000 that was partially offset by reductions in investment securities of
$4.2 million. The increase in total assets was funded by an increase in deposits
and advances from the Federal Home Loan Bank of Pittsburgh ("FHLB of
Pittsburgh"). Total deposits increased from $120.5 million at December 31, 1999
to $121.8 million at December 31, 2000, and advances from the FHLB of Pittsburgh
rose from $63.0 million at December 31, 1999 to $66.3 million at December 31,
2000. This increase in asset funding from deposits and FHLB of Pittsburgh
advances was partially offset by a net loss for the year ended December 31, 2000
of $3.0 million.
The Savings Bank's net loans receivable increased by $2.5 million or 1.6%
from $151.0 million at December 31, 1999 to $153.4 million at December 31, 2000.
This rise in total net loan receivables can be traced to two main areas of
growth. One-to-four family residential mortgages increased $7.2 million or 7.4%,
as the Savings Bank expanded its efforts to contact realtors and priced its
mortgage rates competitively. Consumer loans increased $2.6 million or 14.9%, as
the Savings Bank intensified its efforts to attract consumer loans through
expanded marketing and competitive rate pricing. Commercial business and
commercial real estate loans decreased from $37.0 million at December 31, 1999
to $32.1 million at December 31, 2000. This reduction in commercial business and
real estate loans occurred as a part of (i) management's re-evaluation of its
commercial loan portfolio and (ii) compliance with the Supervisory Agreement.
Cash and cash equivalents increased from $5.2 million at December 31, 1999
to $5.9 million at December 31, 2000. The increase of $673,000 in cash and cash
equivalents during fiscal 2000 was primarily attributable to the $4.2 million
reduction in investment securities and the $3.3 million and $1.3 million
increases in FHLB of Pittsburgh loans and deposits, respectively. This was
partially offset by the $2.5 million growth in total net loans receivable and
the net loss for the year ended of $3.0 million.
The Savings Bank's total deposits increased $1.3 million or 1.1% from
$120.5 million at December 31, 1999 to $121.8 million at December 31, 2000. The
growth in deposits during fiscal 2000 was primarily a result of competitive
rates and fees that continue to be offered by the Savings Bank. Certificate of
deposit and transaction accounts grew $2.2 million and $1.9 million,
respectively, for the year ended December 31, 2000. These increases were
partially offset by a decrease of $2.8 million in money market and passbook
savings accounts. Borrowings by the Savings Bank from the FHLB of Pittsburgh
rose by $3.3 million, or 5.3%, from $63.0 million at December 31, 1999 to $66.3
million at December 31, 2000. Total equity decreased $3.4 million or 22.8%,
during fiscal 2000, to $11.5 million at December 31, 2000. The primary reasons
for this decrease were a net loss for fiscal 2000 of $3.0 million and treasury
stock purchases of $453,000 which occurred between January 1, 2000 and June 30,
2000. On March 30, 2000, the Company initiated plans to repurchase, at market
value, up to 5% of its outstanding shares, or 47,356 shares, of common stock
through the use of its existing cash and cash equivalents. At December 31, 2000,
1,000 shares had been repurchased under this repurchase plan at a total cost of
$8,375. This additional buy back program expired March 30, 2001.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO
YEAR ENDED DECEMBER 31, 1998
FINANCIAL CONDITION
The Company's consolidated assets increased by $23.2 million or 13.1% from
$177.4 million at December 31, 1998 to $200.6 million at December 31, 1999. The
increase in total assets was primarily attributable to a $27.1 million increase
in total net loans receivable which was partially offset by a decrease in
9
11
cash and cash equivalents of $5.0 million. The increase in total assets was
funded by an increase in deposits and the leverage of the balance sheet through
loans from the Federal Home Loan Bank of Pittsburgh ("FHLB of Pittsburgh").
Total deposits increased from $109.7 million at December 31, 1998 to $120.5
million at December 31, 1999, and advances from the FHLB of Pittsburgh rose from
$51.0 million at December 31, 1998 to $63.0 million at December 31, 1999.
The Savings Bank's net loans receivable increased by $27.1 million or 21.9%
from $123.9 million at December 31, 1998 to $151.0 million at December 31, 1999.
This rise in total net loan receivables can be traced to three main areas of
growth. One-to-four family residential mortgages increased $15.1 million or
18.5%, as the Savings Bank expanded its efforts to contact realtors and priced
its mortgage rates competitively. Consumer loans increased $1.6 million or
10.4%, as the Savings Bank strove to attract consumer loans through expanded
marketing and competitive rate pricing. Commercial business and commercial real
estate loans increased from $27.0 million at December 31, 1998 to $37.8 million
at December 31, 1999. The increase in commercial business and commercial real
estate loans was accomplished essentially through referrals.
Cash and cash equivalents decreased from $10.2 million at December 31, 1998
to $5.2 million at December 31, 1999. The decrease of $5.0 million in cash and
cash equivalents during fiscal 1999 was primarily attributable to the $27.1
million growth in net loans receivable. This was partially offset by a $10.8
million and $12.0 million growth in total deposits and FHLB of Pittsburgh
advances, respectively.
The Savings Bank's total deposits increased $10.8 million or 9.8% from
$109.7 million at December 31, 1998 to $120.5 million at December 31, 1999. The
growth in deposits during fiscal 1999 was primarily a result of competitive
rates and fees that were offered by the Savings Bank. In addition, the two
newest branches opened in 1997 and 1998 accounted for 54.5% of the increase in
total deposits. At December 31, 1999, our supermarket branch in Washington, PA,
which opened in October 1997, had deposits totaling $6.5 million while the
Elizabeth Township office, which opened in February 1998, had deposits totaling
$6.7 million. Borrowings by the Savings Bank from the FHLB of Pittsburgh rose by
$12.0 million, or 23.5%, from $51.0 million at December 31, 1998 to $63.0
million at December 31, 1999. Total equity increased $193,000 or 1.3%, during
fiscal 1999, to $15.0 million at December 31, 1999. The primary reasons for this
increase were net income for fiscal 1999 of $851,000 which was partially offset
by a decrease in accumulated other comprehensive income of $391,000 and
dividends paid of $236,000. 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. In addition, on October 26, 1999, the Company had
initiated a plan to repurchase, at market value, up to 5% of its outstanding
shares, or 49,848 shares, of common stock through the use of its existing cash
and cash equivalents. At December 31, 1999, 7,000 shares had been repurchased
under this repurchase plan at a total cost of $85,000.
OPERATING STRATEGY
The Company and Savings Bank intend to reduce operating expenses, increase
the deposit customer base, and continue an emphasis on residential mortgage
loans. In addition, management is committed to working closely with various
financial consultants to improve business operations and to working closely with
the OTS concerning issues raised in the Supervisory Agreement. The Company
continues to improve and comply with all terms of the Supervisory Agreement. To
date the Company has increased the staff and expertise of the commercial loan
department and put in place a new reporting structure. With these changes, the
Company has continued to adjust and improve procedures and continue to monitor
closely all policy controls. It is the intent of the Company to continue to work
towards a favorable examination from the OTS in the future and have the ability
to re-enter the real estate backed commercial loan business.
The Savings Bank continued to experience increased competition from
mortgage brokers and other financial entities for its one-to-four family
residential real estate lending activities in the early 1990s. This increased
competition has led to a reduction in margins for residential real estate
lending. The Savings Bank's total loans receivable attributable to one-to-four
family residential loans, which amounted to $65.1 million or 56.8% of total
assets at December 31, 1996, was $103.3 million at December 31, 2000 but had
declined as a percentage of total assets to 51.2%. During the same period, the
Savings Bank's total loans receivable attributable to commercial business,
commercial real estate, construction and consumer loans, which amounted to $12.2
million or 10.7% of total assets at December 31, 1996, had increased to $53.6
million at December 31, 2000 or 26.6% of total assets.
10
12
Management attributes this shift in asset composition to an increase in deposits
and borrowings over the same period (from $98.3 million at December 31, 1996 to
$188.1 million at December 31, 2000) and increased efforts on the part of
management to find customers with various loan needs. In addition, management
desires to increase the Savings Bank's commercial and consumer loans to offset
its exposure to interest rate risk associated with long term fixed rate
residential mortgages in excess of 15 years.
The Savings Bank's percentage of adjustable-rate mortgages in its mortgage
portfolio had been declining due to lack of demand. As fixed-loan rates had
remained affordable, the adjustable-rate mortgage had become less attractive to
potential customers. However, in fiscal year 2000, with fixed-rate one-to-four
family residential mortgage market rates elevated, the Savings Bank introduced a
five-year adjustable product. At December 31, 2000, total balances in this new
product were $7.3 million. Adjustable-rate mortgages constituted 20.7% of the
Savings Bank's one-to-four family residential mortgage portfolio as of December
31, 2000 compared to 16.7% as of December 31, 1999. Fixed-rate mortgages made up
the remaining portion of the Savings Bank's one-to-four family residential
mortgage portfolio at December 31, 2000 and December 31, 1999. Management
realizes the importance of adjustable-rate mortgages to interest rate risk
management and presently intends to continue to emphasis the five-year
adjustable-rate mortgage product. However, management realizes that it will have
to provide fixed-rate one-to-four family residential mortgages but will provide
a broad range of mortgage products with varying maturities.
The Savings Bank strives to maintain deposits as its primary source of
funds to meet loan demand and to maintain outstanding loan balances. However,
during periods of strong loan growth, the Savings Bank will fund the growth in
assets with borrowings from the FHLB of Pittsburgh. Investment securities and
mortgage-backed securities are acquired based on the decisions of
Investment/Asset and Liability Committee ("ALCO"). When the Savings Bank has
excess cash and when management believes the yields and the maturities are
attractive, investment and mortgaged-backed securities are purchased. Excess
cash (cash in excess of vault cash and other operating cash needs) is primarily
deposited in an interest bearing demand deposit account with the FHLB of
Pittsburgh. Cash and cash equivalents typically decline in periods of high loan
demand and increase in periods of reduced loan demand. As of December 31, 1999,
outstanding borrowings from the FHLB of Pittsburgh stood at $63.0 million and as
of December 31, 2000 such borrowings had increased to $66.3 million. This
increased borrowing occurred due to loan growth exceeding deposit growth.
Management's strategy in the past few years has been to immediately invest
funds received from prepayments and repayments of loans and associated
mortgage-backed securities into short-term liquid investments. For the longer
term it was anticipated that a significant portion of these funds would be used
to fund fixed-rate or adjustable-rate mortgage loans with various maturities.
Depending upon then current interest rates and management's estimate of how such
rates merit change to the portfolio, the Company also purchased investment
securities with various maturities. Also prior to 2000, the Bank promoted
30-year fixed rate mortgages.
The prior strategy increased interest rate risk exposure due by funding
primarily fixed-rate mortgages and longer-term investment securities. At this
time, management continues to take action to reduce exposure to changing
interest rates. Some of these actions include reducing originations of 30-year
fixed-rate one-to-four family residential mortgages, entering into agreement(s)
for secondary lending, highlighting 5-year adjustable one-to-four family
residential mortgages, strongly managing selected asset growth, strategically
extending the terms of certificate of deposits and borrowings and maintaining
effective interest rate spreads.
The Supervisory Agreement entered into with the OTS places restrictions on
the Bank's growth and commercial lending opportunities. Management has worked
closely with the OTS to implement the Supervisory Agreement and believes it has
materially complied with the Supervisory Agreement to date. Future investment
strategies will be limited until the restrictions under the Supervisory
Agreement are eased or removed. The investment strategy is also based on
management's assessment of future economic conditions and is subject to change.
ASSET AND LIABILITY MANAGEMENT
The principal objective of the Company's asset and liability management
function is to evaluate the interest-rate risk included in its asset and
liability mix, to determine the level of risk appropriate given the Company's
business focus, operating environment, capital and liquidity requirements and
performance objectives, to establish
11
13
prudent asset concentration guidelines and to manage the risk consistent with
Board approved guidelines. The Savings Bank concentrates on maintaining a
sufficient deposit base to fund loan activities and securities investments. A
large core deposit base (defined as transaction accounts, passbook savings
accounts and money market savings accounts) provides the Savings Bank with a
lower cost source of funds relative to its alternative principal borrowing
sources, i.e., advances from the FHLB of Pittsburgh. Management calculates its
cost of funds and chooses interest-bearing assets in excess of its average cost
of funds or its marginal cost of funding. In periods of relatively low interest
rates, the Savings Bank may price its certificates of deposit in excess of its
competition to attract and maintain deposits (i) to avoid increased borrowing,
or to reduce the outstanding borrowings, from the FHLB of Pittsburgh or (ii) to
avoid selling investment securities to maintain liquidity needs. This strategy
will result in periods of reduced net interest income and net income if the
Savings Bank is unable to invest deposits in interest-bearing assets with
sufficient yield to maintain its average interest rate spread between its assets
and liabilities.
The Company seeks, through the ALCO, to reduce the vulnerability of its
operations to changes in interest rates and to manage the difference between
amounts of interest-rate sensitive assets and interest-rate sensitive
liabilities within specified maturities or repricing dates. The difference, or
the interest rate repricing "gap," provides an indication of the extent to which
an institution's interest rate spread will be affected by changes in interest
rates. A gap is considered positive when the amount of interest-rate sensitive
assets exceeds the amount of interest-rate sensitive liabilities and is
considered negative when the amount of interest-rate sensitive liabilities
exceeds the amount of interest-rate sensitive assets during a given time period.
Generally, during a period of rising interest rates, a negative gap within
shorter maturities would adversely affect net interest income, while a positive
gap within shorter maturities would result in an increase in net interest
income. During a period of falling interest rates, a negative gap within shorter
maturities would result in an increase in net interest income while a positive
gap within shorter maturities would have the opposite effect. As of December 31,
2000, the amount of the Savings Bank's interest-bearing liabilities that were
estimated to mature or reprice within one year exceeded the Savings Bank's
interest-earning assets with the same characteristics by $22.0 million or 10.9%
of the Savings Bank's total assets. This compares to $31.2 million or 15.7% of
the Savings Bank's total assets at December 31, 1999. The Board of Governors of
the Federal Reserve System lowered the discount rate twice in January 2001 by 50
basis points each and an additional 50 basis points in March 2001. However, the
Board of Governors of the Federal Reserve System could reverse this lowering and
raise the discount rate charged to member banks during 2001, and thus interest
rates within the United States' economy will rise. The Savings Bank's net income
could be negatively affected by such increases in the discount rate. In
addition, ALCO reviews, among other things, the sensitivity of the Savings
Bank's assets, liabilities, and net interest income to interest rate changes,
unrealized gains and losses, purchase activity and maturities of all interest
bearing assets and liabilities. In connection therewith, the ALCO generally
reviews and manages the Savings Bank's liquidity, cash flow needs, capital
planning, maturities of investments, deposits and borrowings, current market
conditions and interest rates, and pricing of its deposit and loan products. The
Chief Executive Officer, Chief Financial Officer and President of the Savings
Bank have authority to adjust pricing weekly with respect to the Savings Bank's
retail deposits.
The Office of Thrift Supervision ("OTS") requires all regulated thrift
institutions to calculate the estimated change in the Bank's net portfolio value
(NPV) assuming instantaneous, parallel shifts in the Treasury yield curve of 100
to 300 basis points either up or down in 100 basis point increments. The NPV is
defined as the present value of expected cash flows from existing assets less
the present value of expected cash flows from existing liabilities plus the
present value of net expected cash inflows from existing off-balance sheet
contracts.
The OTS provides all institutions that file a schedule titled the
Consolidated Maturity & Rate Schedule ("CMR") as a part of their quarterly
Thrift Financial Report with an interest rate sensitivity report of NPV. The OTS
simulation model uses a discounted cash flow analysis and an option-based
pricing approach to measuring the interest rate sensitivity of NPV. The OTS
model estimates the economic value of each type of asset, liability and
off-balance sheet contract under the assumption that the Treasury yield curve
shifts instantaneous and parallel up and down 100 to 300 basis points in 100
basis points increments. The OTS allows savings associations under $500 million
in total assets to use the results of their interest rate sensitivity model,
which is based on information provided by the savings association, to estimate
the sensitivity of NPV.
12
14
The OTS model utilizes an option-based pricing approach to estimate the
sensitivity of mortgage loans. The most significant embedded option in these
types of assets is the prepayment option of the borrowers. The OTS model uses
various price indications and prepayment assumptions to estimate the sensitivity
of mortgage loans.
In the OTS model, the value of deposit accounts appears on the asset and
liability side of the NPV analysis. In estimating the value of certificate of
deposit accounts, the liability portion of the CD is represented by the implied
value when comparing the difference between the CD face rate and available
wholesale CD rates. On the asset side of the NPV calculation, the value of the
"customer relationship" due to the rollover of retail CD deposits represents an
intangible asset in the NPV calculation.
Other deposit accounts such as transaction accounts, money market deposit
accounts, passbook accounts, and non-interest bearing accounts also are included
on the asset and liability side of the NPV calculation in the OTS model. The
accounts are valued at 100% of the respective account balances on the liability
side. On the assets side of the analysis, the value of the "customer
relationship" of the various types of deposit accounts is reflected as a deposit
intangible.
The NPV sensitivity of borrowed funds is estimated by the OTS model based
on a discounted cash flow approach. The cash flows are assumed to consist of
monthly interest payments with principal paid at maturity.
The following table presents the Savings Bank's NPV as of December 31,
2000, as calculated by the OTS in accordance with its model, based on
information provided to the OTS by the Savings Bank. The chart does not include
the impact of any interest or dividend earning assets held at the Company level.
The effect of market rate shifts on these assets need not be reported to the
OTS.
(DOLLARS IN THOUSANDS)
-----------------------------------
NET PORTFOLIO VALUE (NPV)
-----------------------------------
PERCENT
CHANGE IN RATES NPV CHANGE OF
(EXPRESSED AS EXPRESSED ESTIMATED
BASIS POINTS) IN $ $ CHANGE(1) NPV(2) NPV RATIO(3) CHANGE(4)
--------------- --------- ----------- --------- ------------ ---------
+300.................................. 3,979 -8,934 -69 2.10 -423 bp
+200.................................. 6,957 -5,956 -46 3.58 -275 bp
+100.................................. 10,010 -2,903 -22 5.03 -130 bp
0.................................... 12,913 6.33
- -100.................................. 13,830 917 +7 6.69 +36 bp
- -200.................................. 13,749 836 +6 6.59 +26 bp
- -300.................................. 14,041 1,128 +9 6.65 +32 bp
- ---------------
(1) Represents the (deficiency) excess of the estimated NPV assuming the
indicated change in interest rates minus the estimated NPV assuming no
change in interest rates.
(2) Calculated as the amount of change in the estimated NPV divided by the
estimated NPV assuming no change in interest rates.
(3) Calculated as the estimated NPV divided by the present value of the Savings
Bank's assets.
(4) Calculated as the (deficiency) excess of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming no
change in interest rates.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require the making of
certain assumptions that may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the NPV model presented assumes that the composition of the Savings Bank's
interest sensitive assets and liabilities existing at the beginning of a period
remains constant over the period being measured and also assumes that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the NPV measurements and net interest income
models provide an indication of the Savings Bank's interest rate risk exposure
at a particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
the Savings Bank's net interest income and will differ from actual results.
13
15
Based upon the above calculations, the percent change of estimated NPV for
a 200 basis point increase in prevailing rates changed from a negative 51 at
December 31, 1999 to a negative 46 at December 31, 2000. In addition, after a
200 basis point increase in prevailing rates, the resulting NPV ("Post-Shock
Ratio") was 3.58% and the change in the NPV ("Sensitivity Measure") was -275
basis points at December 31, 2000. This compares to an 3.53% post-shock ratio
and a -337 basis point sensitivity measure at December 31, 1999. The decrease in
interest rate risk at December 31, 2000 compared to the prior year was the
result of specific strategies undertaken by the Savings Bank during fiscal 2000
and falling market rates toward the end of 2000. Specific strategies include
reducing originations of 30-year fixed-rate one-to-four family residential
mortgages, highlighting 5-year adjustable one-to-four family residential
mortgages, strongly managing selected asset growth, strategically extending the
terms of certificate of deposits and borrowings and maintaining effective
spreads. ALCO realizes the importance in managing interest rate risk and will
continue to implement strategies to reduce interest rate risk to more
appropriate levels established by the Savings Bank's Board of Directors.
Management will continue to review the NPV and Interest Rate Risk ("IRR")
measurements and make necessary strategic decisions to manage interest rate risk
effectively.
14
16
RESULTS OF OPERATIONS
AVERAGE BALANCES, INTEREST INCOME, INTEREST EXPENSE AND YIELDS EARNED AND
RATES PAID. The following table sets forth, for the periods and at the date
indicated, information regarding the Company's average consolidated balance
sheet. Information is based on average daily balances during the periods
presented.
AT YEAR ENDED DECEMBER 31,
DECEMBER 31, -------------------------------------------------------------
2000 2000 1999
------------ ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------------ -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Investment
securities(1)....... 6.66% $ 27,232 $ 1,739 6.39% $ 26,766 $ 1,634 6.11%
Loans receivable(2)
Commercial.......... 10.44 21,418 2,158 10.08 20,132 1,881 9.34
Real estate loans... 7.53 119,515 8,606 7.20 101,421 7,421 7.32
Consumer............ 8.48 18,796 1,557 8.28 16,585 1,281 7.72
-------- ------- -------- -------
Total Loans
Receivable........ 8.02 159,729 12,321 7.71 138,138 10,583 7.66
Mortgage-backed
securities(1)....... 6.34 10,486 662 6.31 12,416 761 6.13
Other interest-earning
assets.............. 6.40 3,956 115 2.91 5,431 216 3.97
-------- ------- -------- -------
Total
interest-earning
assets............ 7.67% $201,403 $14,837 7.37% $182,751 $13,194 7.22%
Non-interest-earning
assets................ 4,504 5,352
-------- --------
Total assets........ $205,907 $188,103
======== ========
Interest-bearing
liabilities:
Deposits.............. 4.23% $122,079 $ 4,893 4.01% $117,163 $ 4,525 3.86%
FHLB advances......... 6.28 67,116 4,123 6.14 54,040 3,007 5.56
-------- ------- -------- -------
Total
interest-bearing
liabilities....... 4.95% $189,195 $ 9,016 4.77% $171,203 $ 7,532 4.40%
Non-interest-bearing
liabilities........... $ 2,433 $ 1,956
-------- --------
Total liabilities... $191,628 $173,159
Equity.................. 14,279 14,944
-------- --------
Total liabilities
and equity........ $205,907 $188,103
======== ========
Net interest-earning
assets................ $ 12,208 $ 11,548
======== ========
Net interest
income/interest rate
spread................ 2.72% $ 5,821 2.60% $ 5,662 2.82%
==== ======= ====== ======= ======
Net yield on
interest-earning
assets(3)............. 2.89% 3.10%
====== ======
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities........... 106.45% 106.75%
====== ======
YEAR ENDED DECEMBER 31,
-----------------------------
1998
-----------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST RATE
-------- -------- -------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Investment
securities(1)....... $ 33,783 $ 2,137 6.33%
Loans receivable(2)
Commercial.......... 19,265 1,374 9.42
Real estate loans... 77,854 6,135 7.31
Consumer............ 14,690 1,180 8.03
-------- -------
Total Loans
Receivable........ 111,809 8,689 7.77
Mortgage-backed
securities(1)....... 9,295 590 6.34
Other interest-earning
assets.............. 5,988 256 4.27
-------- -------
Total
interest-earning
assets............ $160,875 $11,672 7.26%
Non-interest-earning
assets................ 5,116
--------
Total assets........ $165,991
========
Interest-bearing
liabilities:
Deposits.............. $ 99,343 $ 3,976 4.00%
FHLB advances......... 49,144 2,709 5.51
-------- -------
Total
interest-bearing
liabilities....... $148,487 $ 6,685 4.50%
Non-interest-bearing
liabilities........... $ 1,987
--------
Total liabilities... $150,474
Equity.................. 15,517
--------
Total liabilities
and equity........ $165,991
========
Net interest-earning
assets................ $ 12,388
========
Net interest
income/interest rate
spread................ $ 4,987 2.76%
======= ======
Net yield on
interest-earning
assets(3)............. 3.10%
======
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities........... 108.34%
======
- ---------------
(1) The average yield for investment securities including held to maturity and
available for sale is based upon historical amortized cost balances
(2) Includes non-performing loans
(3) Net interest income divided by interest-earning assets
RATE/VOLUME ANALYSIS. The Savings Bank typically acquires funds in the form
of customer deposits or borrowings from the FHLB of Pittsburgh in which it is a
member. The Savings Bank then pays interest on such deposits and advances. In
turn, a savings association will lend these funds to third parties or purchase
investment securities that generate interest income for the savings association.
The Savings Bank also operates in an environment of changing interest rates and
fluctuating volumes of deposits, advances from third parties, loans
15
17
made to third parties and securities bought, sold or repaid. The following table
describes the extent to which changes in interest rates and changes in volume of
interest-related assets and liabilities have affected the Company's consolidated
interest income and expense during the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (change in volume
multiplied by prior year rate), (ii) changes in rate (change in rate multiplied
by prior year volume), and (iii) total change in rate and volume.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
2000 VS. 1999 1999 VS. 1998
------------------------------------- -------------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO TOTAL DUE TO TOTAL
-------------- RATE/ INCREASE -------------- RATE/ INCREASE
RATE VOLUME VOLUME (DECREASE) RATE VOLUME VOLUME (DECREASE)
----- ------ ------- ---------- ----- ------ ------- ----------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable, net......... $ 118 $1,615 $ 5 $1,738 $ (57) $2,071 $(120) $1,894
Mortgage-backed securities.... 22 (118) (3) (99) (20) 198 (7) 171
Investment securities......... 75 28 2 105 (74) (444) 15 (503)
Other interest-earning
assets...................... (58) (59) 16 (101) (18) (24) 2 (40)
----- ------ ---- ------ ----- ------ ----- ------
Total interest-earning
assets.................... $ 157 $1,466 $ 20 $1,643 $(169) $1,801 $(110) $1,522
----- ------ ---- ------ ----- ------ ----- ------
Interest-bearing liabilities:
Deposits...................... $ 176 $ 190 $ 2 $ 368 $(139) $ 713 $ (25) $ 549
FHLB advances................. 313 727 76 1,116 25 270 3 298
----- ------ ---- ------ ----- ------ ----- ------
Total interest-bearing
liabilities............... 489 917 78 1,484 (114) 983 (22) 847
----- ------ ---- ------ ----- ------ ----- ------
(Decrease) increase in net
interest income............... $(332) $ 549 $(58) $ 159 $ (55) $ 818 $ (88) $ 675
===== ====== ==== ====== ===== ====== ===== ======
NET INCOME. The Company reported a consolidated net loss of $3.0 million
for fiscal 2000 and consolidated net income of $851,000 and $743,000 for the
fiscal years ended December 31, 1999 and 1998, respectively. The net loss of
$3.0 million for the year ended December 31, 2000 represented a $3.8 million
decrease from the $851,000 net income for the same period in 1999. This decrease
was primarily the result of increases in the provision for losses on loans of
$5.9 million and increases in total other expenses of $489,000. This was
partially offset by an income tax benefit of $1.9 million for the year ended
December 31, 2000 compared to an income tax expense of $528,000 for the same
period in 1999. In addition, net interest income before provision for loan
losses increased 2.8% or $159,000.
The $108,000 or 14.5% increase in net income for fiscal 1999 when compared
to fiscal 1998 was attributable to an increase of $676,000 or 13.6% increase in
net interest income and a $267,000 or 52.3% increase in fees and service charges
which was partially offset by a $619,000 or 15.1% increase in non-interest
expense and an increase of $229,000 in provision for loan losses.
NET INTEREST INCOME. Net interest income before provision for loan losses
amounted to $5.8 million during fiscal 2000, compared to $5.7 million during
fiscal 1999 and compared to $5.0 million during fiscal 1998. During fiscal 2000,
the $159,000 or 2.8%, increase in net interest income compared with fiscal 1999
was primarily attributable to an increase in total loans receivable. An increase
of $21.6 million occurred in average total loans receivable for fiscal 2000
compared to fiscal 1999 of which $13.6 million was attributable to one-to-four
family residential loans. Average balances of interest-earning assets increased
$18.7 million or 10.2% while average interest-bearing liabilities increased
$18.0 million, or 10.5%. The growth in average balances on interest-earning
assets was the primary reason for the increased interest income of $1.6 million
or 12.5% while the increased interest expense of $1.5 million or 19.7% occurred
due to higher volume and rates.
The $1.6 million increase in total interest income during the year ended
December 31, 2000 over the prior comparable period was primarily due to a $1.7
million or 16.4% increase in interest and fees on loans. The increase in
interest earned on loans during fiscal 2000 was primarily due to a rise in
average balances of loans receivable of $21.6 million or 15.6%. Management
continued to grow its traditional one-to-four family residential loans from
$96.2 million at December 31, 1999 to $103.3 million at December 31, 2000.
16
18
The increase in interest expense in 2000, compared with 1999, was primarily
a result of an increase in the Savings Bank's average interest-bearing
liabilities from $171.2 million to $189.2 million. This increase resulted from
an increased volume of average deposits of $4.9 million or 4.2% and a $13.1
million or 24.2% increase in average borrowings. The increase in average
borrowings developed to fund the growth in assets, primarily loans, of the
Savings Bank. In addition, interest expense rose due to an increase in the
average rate paid on interest-bearing liabilities from 4.40% during fiscal 1999
to 4.77% during fiscal 2000.
During fiscal 1999, the $676,000 or 13.6%, increase in net interest income
compared with fiscal 1998 was primarily attributable to an increase in loan
originations. Average balances of interest-earning assets increased $21.9
million, or 13.6% while average interest-bearing liabilities increased $22.7
million, or 15.3%. The increase in both average assets and liabilities was due
directly to management's intent to leverage the Company's capital by funding the
growth in assets, particularly loans, with deposits and FHLB advances. The
growth in average balances on interest-earning assets and interest-bearing
liabilities, during fiscal 1999, were the primary reasons for the increased
interest income of $1.5 million or 13.0% and increased interest expense of
$847,000 or 12.7%, respectively.
The $1.5 million increase in total interest income during the year ended
December 31, 1999 over the prior comparable period was primarily due to a $1.9
million or 21.8% increase in interest and fees on loans which was partially
offset by a $503,000 or 23.5% reduction in interest and dividends on other
investment securities. The increase in interest earned on loans and interest and
dividends on other investment securities during fiscal 1999 was primarily due to
a rise in average balances of loans receivable of $26.3 million or 23.5%.
Management continued to grow its traditional one-to-four family residential
loans from $81.3 million at December 31, 1998 to $96.2 million at December 31,
1999. In addition, management increased its commercial business and real estate
loans from $18.7 million and $7.6 million at December 31, 1998, respectively, to
$20.9 million and $16.1 million at December 31, 1999, respectively.
The increase in interest expense in 1999, compared with 1998, was primarily
a result of an increase in the Savings Bank's average interest bearing
liabilities from $148.5 million to $171.2 million. This increase resulted from
an increased volume of average deposits of $17.8 million or 17.9% and a $4.9
million or 10.0% increase in average borrowings. The increase in average
borrowings arose to fund the growth in assets, primarily loans, of the Savings
Bank.
PROVISION FOR LOAN LOSSES. For the year ended December 31, 2000, the
provision for loan losses was $6.4 million. For the two years ended December 31,
1999 and 1998, provisions for loan losses were $438,000 and $209,000,
respectively. The increase in provision for loan losses of $5.9 million for
fiscal 2000 when compared to fiscal 1999 was primarily a result of commercial
business and commercial real estate loan reviews. The Savings Bank 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 appropriate based upon a
comprehensive methodology that is to be updated on a monthly basis. This
methodology includes:
- 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.
- 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.
- 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.
- 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
17
19
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, management evaluates the adequacy of the
existing reserve and establishes the provision level for the next month. The OTS
has noted weaknesses in the loan classification process and the Savings Bank 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 year ended December 31, 2000, the Savings Bank charged off three commercial
real estate loans totaling $989,000, thirty-one commercial business loans
totaling $3.0 million, one one-to-four family residential loan totaling $5,000
and eight consumer loans totaling $16,000.
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 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. 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.
OTHER INCOME. Total other income amounted to $921,000 for the year ended
December 31, 2000, an increase of $51,000 or 5.9% from the $870,000 earned in
fiscal 1999. Increased transaction fees of $131,000 accounted for the rise in
total other income. The increase in transaction fees occurred due to an increase
in transaction accounts, which include interest bearing and non-interest bearing
checking accounts, from $21.0 million at December 31, 1999 to $22.9 million at
December 31, 2000. The additional transaction accounts have also resulted in
increased costs due to higher employee manhours to administer such transactions.
Total other income amounted to $870,000 for the year ended December 31,
1999, an increase of $336,000 or 62.9% from the $534,000 earned in fiscal 1998.
Increased transaction fees of $266,000 primarily accounted for the rise in total
other income. The increase in transaction fees occurred due to an increase in
transaction accounts, which include interest-bearing and non-interest bearing
checking accounts, from $17.5 million at December 31, 1998 to $21.0 million at
December 31, 1999. In addition, other income benefited from a $73,000 gain on
sale of investments during fiscal 1999 as compared to a $7,000 loss on sale of
investments during fiscal 1998.
OTHER EXPENSES. Total other expenses amounted to $5.2 million for the year
ended December 31, 2000, an increase of $489,000 or 10.4% from the $4.7 million
incurred in fiscal 1999. The major factors for this increase were legal and
consulting fees associated with rectifying asset quality concerns and regulatory
matters raised in the Supervisory Agreement entered into with the OTS. Legal
fees and consulting fees rose $140,000 and $122,000, respectively, in fiscal
2000 as compared to fiscal 1999. Another reason for the increases in total other
expenses was a $78,000 or 3.2% rise in salaries and employee benefits. This
increase occurred due to the hiring of two additional full-time employees in
order to strengthen the commercial loan area and approved salary increases for
its existing employees.
Total other expenses amounted to $4.7 million for the year ended December
31, 1999, an increase of $619,000 or 15.1% from the $4.1 million incurred in
fiscal 1998. One of the reasons for the increase was a $455,000 or 22.5%
increase in salaries and employee benefits. This was attributable to a one-time
charge of $112,000 in connection with the fourth quarter retirement of former
Savings Bank and Company President Robert S. Zyla due to a physical disability,
an additional employee hired for operations due to increased services provided
by the Savings Bank, an additional employee hired for commercial loan expansion,
and approved salary and bonus increases for its existing employees. Another
reason for the increase in other expenses was a rise in premises and occupancy
costs of $54,000 or 10.2% primarily due to higher depreciation expenses
associated with
18
20
furniture and equipment. Lastly, transaction processing costs rose $55,000 or
21.7% during 1999. The rise in transaction processing costs was primarily the
result of the growth in transaction accounts and the associated costs of
administering these types of accounts.
INCOME TAXES. For the fiscal year ended December 31, 2000, the Company had
an income tax benefit of $1.9 million as compared to an income tax expense of
$528,000 and $473,000 for the fiscal years ended December 31, 1999 and 1998,
respectively. The effective tax rate was 38.8% during the year ended December
31, 2000, compared to 38.3% during the year ended 1999, and 38.9% in fiscal
1998. The Company recognized a loss before income taxes of $4.8 million compared
to income before income taxes of $1.4 million and this loss resulted in a
decrease in income taxes in fiscal 2000 compared to fiscal 1999. For further
information, see Note 11 of the Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows are categorized as to whether they relate to the operating,
investing or financing activities of the Company or the Savings Bank. Cash flow
from operating activities includes net income plus or minus non-cash income
statement items. Cash flow from investing activities includes proceeds from the
sale or maturity of investment securities, principal payments collected on loans
and mortgage-backed and related securities, loan originations and purchases of
investments and mortgage-backed and related securities. Cash flow from financing
activities includes the increase or decrease in deposits, borrowings and
escrows.
During the years ended December 31, 2000 and 1999, the Company's operating
activities provided net cash of approximately $1.4 million and $1.9 million,
respectively. The $1.4 million net cash provided during the year ended December
31, 2000 was primarily due to $6.4 million in provision for loan losses and
$317,000 in depreciation of premises and equipment that was partially offset by
a net loss of $3.0 million and an increase in deferred income taxes of $2.0
million. The $1.9 million net cash provided during the year ended December 31,
1999 was primarily due to $851,000 in net income, $438,000 in provision for loan
losses, and $344,000 in depreciation of premises and equipment. The primary
reasons for the $890,000 net cash provided during the year ended December 31,
1998 was $743,000 in net income, $209,000 in provision for loan losses, and
$306,000 in depreciation of premises and equipment, which was partially offset
by a $398,000 increase in other assets.
Net cash used by investing activities was $4.6 million for the year ended
December 31, 2000. During the year ended December 31, 2000, the Savings Bank
originated $8.8 million in new loans in excess of principal payments received on
existing loans which was partially offset by $1.7 million of principal payments
on mortgaged-backed securities and a maturity of $1.0 million held to maturity
security. Net cash used by investing activities was $29.4 million for the year
ended December 31, 1999. The primary reason for the $29.4 million net cash used
by investing activities was that the Savings Bank originated $27.5 million in
new loans in excess of principal payments received on existing loans. Net cash
used by investing activities was $25.8 million for the year ended December 31,
1998. During the year ended December 31, 1998, the Savings Bank originated $27.9
million in new loans in excess of principal payments received on existing loans.
The Savings Bank purchased $16.7 million of investment and mortgage-backed
securities designated held to maturity due to their longer-term maturity
structure and purchased $6.7 million of investment and mortgage-backed
securities designated available for sale. In addition, $17.0 and $5.6 million
held to maturity and available for sale securities, respectively, were called
during fiscal 1998.
During fiscal 2000, the Savings Bank experienced a $3.8 million increase in
net cash provided by financing activities primarily due to increases in
certificate accounts of $2.2 million and increases in net Federal Home Loan Bank
advances of $3.3 million. This was partially offset by a decrease in money
market, NOW and passbook savings accounts ("Core Deposits") of $893,000,
purchases of treasury stock of $453,000 and cash dividends of $202,000. Net cash
provided by financing activities for the year ended December 31, 1999, was $22.5
million, attributable to increases in core deposits and certificate accounts of
$8.9 million and $1.9 million, respectively, and increases in net Federal Home
Loan Bank advances of $12.0 million. This was partially offset by cash dividends
paid of $236,000 and treasury stock purchases of $85,000. Net cash provided by
financing activities for the year ended December 31, 1998, was $32.8 million,
attributable to increases in core deposits and certificate accounts of $8.4
million and $10.1 million, respectively, and increases in net Federal Home Loan
Bank advances of $16.3 million. In addition, the Company purchased $1.4 million
of treasury stock during fiscal 1998.
19
21
The primary sources of funds for the Savings Bank are deposits, advances
from the FHLB of Pittsburgh, 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.
The primary sources of funds for the Company are dividends from the Savings
Bank, repayments by the ESOP of the loan it received from the Company, loan
repayments from officer for loan made by the Company, interest and dividends on
debt and equity investments in other companies and interest earned on deposits
of the Company held at Savings Bank and short-term investments. While scheduled
loan and mortgage-backed securities repayments and maturing investment
securities and short-term investments are relatively predictable sources of
funds, deposit flows, loan and mortgage-backed securities prepayments, and
investment securities with callable features are greatly influenced by the
movement of interest rates in general, economic conditions or competition. The
Savings Bank manages the pricing of its deposits to maintain a deposit balance
deemed appropriate and desirable by the ALCO. In addition, the Savings Bank
invests in short-term interest-earning assets, which provides liquidity to meet
lending requirements. The Savings Bank has also utilized advances from the FHLB
of Pittsburgh. At December 31, 2000, the Savings Bank's maximum borrowing
capacity with the FHLB of Pittsburgh was $124.1 million of which $66.3 million
was borrowed pursuant to various term loans with maturities of less than ten
years.
Liquidity management is both a daily and long-term function. Excess
liquidity is generally invested in short-term investments such as cash and cash
equivalents, interest bearing deposits with other institutions (including the
FHLB of Pittsburgh), U.S. Government, U.S. Government agencies and other
qualified investments. On a longer-term basis, the Company, through the
operation of the Savings Bank, maintains a strategy of investing in various
mortgage-backed securities and other investment securities and lending products
as described in greater detail under the heading "Business of the Company,"
which is hereinafter set forth. During the year ended December 31, 2000, the
Savings Bank used its sources of funds primarily to meet its ongoing
commitments, to pay maturing savings certificates and savings withdrawals, to
fund loan commitments, and to increase the Savings Bank's one-to-four family
mortgage loan and consumer loan portfolios. The Savings Bank has outstanding
loan commitments (i.e. one-to-four family and home equity loan commitments,
credit card limits and commercial loan commitments) to extend credit
approximating $9.9 million as of December 31, 2000. Certificates of deposit
scheduled to mature in one year or less at December 31, 2000 totaled $35.6
million.
Consolidated cash and cash equivalents increased by $673,000 between
December 31, 1999 and December 31, 2000. As of December 31, 2000, the
consolidated cash and cash equivalents of the Company amounted to $5.9 million
or 2.9% of assets, of which $4.6 million was invested in interest bearing
accounts with the FHLB of Pittsburgh withdrawable on demand. The investment
securities (including mortgage-backed securities) of the Company and the Savings
Bank was $31.2 million or 15.4% of assets at December 31, 2000. As of December
31, 2000, $502,000 of such investment securities (including mortgage-backed
securities) of the Company and the Savings Bank mature within one year or less
and $3.5 million have maturities of one to five years. The Company's
consolidated net interest margin was 2.89% for the year ended December 31, 2000
compared to 3.10% for the same period in 1999.
Consolidated cash and cash equivalents decreased by $5.0 million between
December 31, 1998 and December 31, 1999. As of December 31, 1999, the
consolidated cash and cash equivalents of the Company amounted to $5.2 million
or 2.6% of assets, of which $3.8 million was invested in interest bearing
accounts with the FHLB of Pittsburgh withdrawable on demand. The investment
securities (including mortgage-backed securities) of the Company and the Savings
Bank was $35.3 million or 17.6% of assets at December 31, 1999. As of December
31, 1999, $1.6 million of such investment securities (including mortgage-backed
securities) of the Company and the Savings Bank mature within one year or less
and $5.2 million have maturities of one to five years. The Company's
consolidated net interest margin remained at 3.10% for the year ended December
31, 1999 compared to the same period in 1998.
Management of the Savings Bank believes that the Savings Bank has adequate
resources, including principal prepayments and repayments of loans,
mortgage-backed securities and maturing investments and access to loans from the
FHLB of Pittsburgh, to fund all of its commitments to the extent required and to
maintain flexibility to meet other market changes. Management believes that a
significant portion of maturing deposits will remain with the Savings Bank. See
Note 8 of the Notes to Consolidated Financial Statements.
20
22
The Savings Bank is required by the OTS to maintain average daily balances
of liquid assets (as defined in OTS regulations) in an amount equal to 4.0% of
net withdrawable deposits and borrowings payable in one year or less to assure
its ability to meet demand for withdrawals and repayment of short-term
borrowings. The liquidity requirements may vary from time to time at the
direction of the OTS depending upon economic conditions and deposit flows. The
Savings Bank's average monthly liquidity ratio at December 31, 2000 was 28.4%.
The Company, as a separately incorporated holding company, has no
significant operations other than serving as sole stockholder of the Savings
Bank. On an unconsolidated basis, the Company has no paid employees. The Company
has entered into a reimbursement agreement with the Savings Bank pursuant to
which the Company will reimburse the Savings Bank for certain work performed by
Savings Bank employees at the Company level. At December 31, 2000, the Company's
assets consist of its investment in the Savings Bank, its receivable from the
ESOP, a loan to a director totaling $217,000, debt and equity investments with
an aggregate market value of $919,000 at December 31, 2000, other assets of
$175,000 and deposits maintained with the Savings Bank. At December 31, 2000,
the Company had borrowed $340,000 from the Savings Bank to support cash levels.
The loan is adequately secured in accordance with applicable law. Its sources of
income will consist of earnings from the investment in such debt and equity
securities, interest on such deposits and interest from the ESOP obligation and
officer loan. The only expenses of the Company relate to its reporting
obligations to the OTS, its reporting obligations under the Exchange Act and
related expenses to operate as a publicly traded company. Management believes
that the Company and the Savings Bank currently have adequate liquidity
available to respond to its obligations.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements of the Company and related notes
presented herein have been prepared in accordance with accounting principles
generally accepted in the United States which require the measurement of
financial position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services, since such prices are affected by inflation to a
larger extent than interest rates. In the current interest rate environment,
liquidity and the maturity structure of the Company's consolidated assets and
liabilities are critical to the maintenance of acceptable performance levels.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("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 Company 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 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 Company's financial condition or results of operations.
21
23
EARNINGS PER COMMON SHARE
The Company 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.
The following table reflects the calculation of earnings per share under
SFAS No. 128.
YEAR ENDED DECEMBER 31,
-------------------------------------
2000 1999 1998
----------- -------- ----------
Basic (loss) earnings per share(1):
Net (loss) income............................. $(2,964,160) $851,314 $ 743,087
Average shares outstanding.................... 879,144 915,316 991,452
(Loss) earnings per share..................... $ (3.37) $ 0.93 $ 0.75
Diluted (loss) earnings per share(1):
Net (loss) income............................. $(2,964,160) $851,314 $ 743,087
Average shares outstanding.................... 879,144 915,316 991,452
Stock options................................. -- 151 9,493
----------- -------- ----------
Diluted average shares outstanding............ 879,144 915,467 1,000,945
(Loss) earnings per share..................... $ (3.37) $ 0.93 $ 0.74
- ---------------
(1) On April 15, 1998, the Board of Directors declared a stock dividend of 15%
to shareholders of record of June 2, 1998 which was paid on June 19, 1998.
In addition, 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
dividends.
Options to purchase 106,210 94,826 and 14,315 shares of common stock were
outstanding during fiscal 2000, 1999 and 1998, respectively, but were not
included in the computation of diluted earnings per common share as the option's
exercise price was greater than the average market price of the common stock for
the respective periods.
BUSINESS OF THE COMPANY
GENERAL
The Company is a savings and loan holding company that holds the capital
stock of one subsidiary, the Savings Bank. As of December 31, 2000, the Company
also owns a loan receivable from the ESOP, a loan to a director totaling
$217,000, holds debt and equity investments with a market value totaling
$919,000 at December 31, 2000, other assets of $175,000 and maintains deposit
accounts with the Savings Bank. At December 31, 2000, the Company had borrowed
$340,000 from the Savings Bank to support cash levels. The loan is adequately
secured in accordance with applicable law. The principal business operations of
the Company are conducted through the Savings Bank.
LENDING ACTIVITIES
GENERAL. The Savings Bank's lending operations follow the traditional
pattern of primarily emphasizing the origination of one-to-four family
residential loans for portfolio retention. However, since 1996, the Savings Bank
has expanded its loan products by emphasizing other types of lending in order to
meet its customer's demands. These include commercial business loans, commercial
real estate loans, construction loans, and consumer loans, including home equity
or home improvement loans, automobile loans, student loans, credit card loans,
cash collateral personal loans and unsecured personal loans.
At December 31, 2000, the Savings Bank's total loan portfolio amounted to
$156.9 million, or 77.8% of total assets at that date. The Savings Bank has
traditionally concentrated its lending activities on one-to-four family
residential mortgages in its primary market. Consistent with this lending
orientation, $103.3 million or
22
24
65.9% of the Savings Bank's total loan portfolio consisted of one-to-four family
residential loans at December 31, 2000.
Management intends that one-to-four family residential mortgage loans will
be the primary lending activity of the Savings Bank. One-to-four family
residential mortgages advanced by the Savings Bank have increased from $81.3
million at December 31, 1998, to $96.2 million at December 31, 1999, to $103.3
million at December 31, 2000. The percentage of one-to-four family mortgages to
total loan portfolio has stabilized from 64.7% at December 31, 1998, to 62.8% at
December 31, 1999 to 65.9% at December 31, 2000. Management is committed to
aggressively market the residential mortgage products of the Savings Bank, but
management realizes that it can no longer hold for its own portfolio all of the
one-to-four family residential mortgages originated by the Bank. This is due to
smaller profit margins and often higher interest rate risk concerns. To mitigate
these risks, management intends in fiscal year 2001 to sell excess one-to-four
family residential mortgage demand originated in fiscal year 2001 in the
secondary market. Although such mortgage loans may be sold, the Savings Bank may
retain the servicing of such loans and would earn a fee for such activities.
Consumer loans, which are of shorter maturity and at higher margins above
cost of funds, have risen from $15.7 million at December 31, 1998, to $17.3
million at December 31, 1999, to $19.9 million at December 31, 2000. Each of the
foregoing figures shows gross loan receivables with no allocation for bad debt
reserve or other contra accounts. Management decided to increase home equity
loans primarily because this type of loan is secured by real estate through a
first or second lien. As a result, home equity loans have risen from $9.8
million at December 31, 1998, to $10.9 million at December 31, 1999 to $12.9
million at December 31, 2000. Management has also sought through the promotion
of automobile, student and credit card loans to increase consumer loans. The
percentage of consumer loans against total loan receivables went from 12.5% at
December 31, 1998, to 11.3% at December 31, 1999, to 12.7% at December 31, 2000.
Management is committed to further increases in consumer loan balances.
The Savings Bank pursued a policy prior to fiscal 2000 to grow its
commercial business loan and commercial real estate loan portfolio. Commercial
business loans and commercial real estate loans balances were $26.3 million at
December 31, 1998, $37.0 million at December 31, 1999 and $32.1 million at
December 31, 2000 Each of the foregoing figures shows gross loan receivables
with no allocation for bad debt reserve or other contra accounts. The percentage
of commercial business loans and commercial real estate loans against total
loans receivable has changed from 21.0% at December 31, 1998, to 24.1% at
December 31, 1999 to 20.5% at December 31, 2000. Pursuant to the Supervisory
Agreement, the Savings Bank currently has limited opportunities to expand its
loans for a business purpose. The Savings Bank continues to review its existing
portfolio of commercial business loans, construction loans and commercial real
estate loans. Some customers will be asked to seek other lenders at the maturity
of their respective loan commitments. To date the Company has increased the size
and expertise of the commercial loan department and has implemented new
reporting structures. With these changes, the Company has continued to adjust
and improve procedures and continues to closely monitor all policy controls. It
is the intent of the Company to work towards a favorable examination from the
OTS in the future and have the ability to re-enter the real estate backed
commercial loan business.
By statute, the Savings Bank must limit its commercial business loans to
20% of its total assets provided that amounts in excess of 10% of total assets
may be used only for small business loans. As of December 31, 2000, the total
asset size of the Savings Bank was $200.8 million and 20% of such number is
$40.2 million and 10% of such number is $20.1 million. At December 31, 2000, the
Savings Bank had $17.0 million in commercial business loans of which $6.5
million was considered small business loans. The statutory ceiling on commercial
real estate loans is substantially higher, i.e. 400% of the Savings Bank's
unimpaired capital and surplus, or at December 31, 2000, $55.4 million. At
December 31, 2000, the Savings Bank had $15.1 million in commercial real estate
loans. Management has underwritten commercial loans that carry a partial U.S.
Government guarantee of the payment of principal and interest. Included in the
Savings Bank's loan portfolio at December 31, 2000 are $6.8 million of
commercial loans that are guaranteed by the U.S. Government.
The Savings Bank's primary market area consists of southern and
southwestern portions of Allegheny County and, to a lesser extent, Washington
and Westmoreland Counties. The Savings Bank's residential mortgage loans are
primarily secured by properties located in Pennsylvania, and a substantial
portion of the real estate mortgage loans are secured by properties located
within the Savings Bank's primary market area.
23
25
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of the Savings Bank's loan portfolio by type of loan at the dates indicated.
AS OF DECEMBER 31,
--------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------- ---------------- ---------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ - ------ - ------ - ------ - ------ -
(DOLLARS IN THOUSANDS)
Real estate loans
One-to-four
family(1)............ $103,332 65.85% $ 96,182 62.78% $ 81,284 64.71% $72,198 73.34% $65,117 84.17%
Construction........... 1,551 .99 2,714 1.77 2,270 1.81 2,449 2.49 925 1.20
Commercial real
estate(1)............ 15,086 9.61 16,061 10.48 7,632 6.08 1,425 1.45 1,023 1.32
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Total................ $119,969 76.45% $114,957 75.03% $ 91,186 72.60% $76,072 77.28% $67,065 86.69%
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Commercial business
loans(1)............... $ 17,046 10.86% $ 20,920 13.66% $ 18,712 14.90% $ 9,565 9.72% $ 1,010 1.30%
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Consumer loans
Home equity loans &
lines(1)............. $ 12,908 8.22% $ 10,936 7.14% $ 9,834 7.83% $ 7,535 7.66% $ 4,562 5.90%
Student loans.......... 2,419 1.54 2,411 1.57 2,263 1.80 2,215 2.25 2,228 2.88
Automobile loans (1)... 2,739 1.75 2,427 1.58 2,405 1.92 1,967 2.00 1,515 1.96
Other consumer
loans(1)............. 1,856 1.18 1,559 1.02 1,191 .95 1,076 1.09 984 1.27
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Total................ $ 19,922 12.69% $ 17,333 11.31% $ 15,693 12.50% $12,793 13.00% $ 9,289 12.01%
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Total loans
receivable(1).......... $156,937 100% $153,210 100% $125,591 100% $98,430 100% $77,364 100%
======== ===== ======== ===== ======== ===== ======= ===== ======= =====
Less:
Allowance for loan
losses............... $ 3,387 $ 983 $ 571 $ 403 $ 307
Loans in process....... 148 1,258 1,106 1,857 515
Deferred loan (costs)
fees................. (15) 7 (3) (11) (3)
-------- -------- -------- ------- -------
Loans receivable, net.... $153,417 $150,962 $123,917 $96,181 $76,545
======== ======== ======== ======= =======
- ---------------
(1) Includes non-performing loans.
CONTRACTUAL MATURITIES. The following table sets forth the scheduled
contractual maturities of the Savings Bank's loan portfolio at December 31,
2000. Demand loans, credit card loans and overdraft loans are reported as due in
one year or less. The amounts shown for each period do not take into account
loan prepayments and normal amortization of the Savings Bank's loan portfolio.
AT DECEMBER 31, 2000
---------------------------------------------------------------
ONE-TO-FOUR COMMERCIAL COMMERCIAL
FAMILY(1) REAL ESTATE(2) BUSINESS CONSUMER TOTAL
----------- -------------- ---------- -------- --------
(IN THOUSANDS)
1 year or less....................... $ 26 $ 548 $ 3,274 $ 1,643 $ 5,491
After 1 year through 5 years......... 7,375 1,357 5,106 5,384 19,222
More than 5 years.................... 96,732 13,931 8,666 12,895 132,224
-------- ------- ------- ------- --------
Total amounts due.................... $104,133 $15,836 $17,046 $19,922 $156,937
======== ======= ======= ======= ========
Interest rate terms on amounts due
after 1 year:
Fixed........................... $ 82,464 $ 5,064 $ 3,720 $11,792 $103,040
Adjustable/Floating............. $ 21,643 $10,224 $10,052 $ 6,487 $ 48,406
- ---------------
(1) Includes construction loans of $801,000 for the construction of one-to-four
family homes. At the completion of the construction period (scheduled to be
less than one year), the loans will convert automatically to a traditional
mortgage with maturities in excess of five years.
(2) Includes a construction loan of $750,000 for the construction of a
commercial real estate property.
Scheduled contractual repayment of loans does not reflect the expected term
of the Savings Bank's loan portfolio. The expected average life of loans is
substantially less than their contractual terms because of
24
26
scheduled amortization of principal, prepayments and due-on-sale clauses, which
give the Savings Bank the right to declare a conventional loan immediately due
and payable in the event, among other things, that the borrower sells the real
property subject to the mortgage and the loan is not repaid. The average life of
mortgage loans tends to increase when current mortgage loan rates are higher
than rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgage loans are lower than current mortgage loan rates (due to
refinancings of adjustable-rate and fixed-rate loans at lower rates). Under the
latter circumstance, the weighted average yield on loans decreases as
higher-yielding loans are repaid or refinanced at lower rates.
LOAN ORIGINATION, PURCHASE AND SALES ACTIVITY. The following table shows
the loan origination, purchase and sale activity of the Savings Bank during the
periods indicated.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
Total loans at beginning of period........ $153,210 $125,591 $ 98,430 $ 77,364 $ 61,737
Loan originations(1):
Real estate
One-to-four family.................... $ 14,613 $ 27,543 $ 25,685 $ 13,982 $ 17,100
Construction.......................... 1,313 1,964 2,466 2,948 512
Commercial real estate (1)............ 1,030 9,738 5,511 475 925
-------- -------- -------- -------- --------
Total real estate loans originated.... $ 16,956 $ 39,245 $ 33,662 $ 17,405 $ 18,537
-------- -------- -------- -------- --------
Commercial business loans (1)........... $ 22,885 $ 24,158 $ 21,872 $ 14,174 $ 1,173
-------- -------- -------- -------- --------
Consumer loans
Home equity loans and lines of credit
(1)................................. $ 7,195 $ 6,276 $ 6,987 $ 5,762 $ 3,868
Student loans......................... 432 515 397 353 482
Automobile loans...................... 1,646 1,237 1,633 1,323 1,242
Other consumer loans (1).............. 2,323 2,052 1,447 1,267 1,284
-------- -------- -------- -------- --------
Total consumer loans originated..... $ 11,596 $ 10,080 $ 10,464 $ 8,705 $ 6,876
-------- -------- -------- -------- --------
Total loans originated................ $ 51,437 $ 73,483 $ 65,998 $ 40,284 $ 26,586
-------- -------- -------- -------- --------
Deduct:
Loan principal reductions............... $(47,531) $(45,864) $(38,587) $(19,218) $(10,949)
Transferred to real estate owned........ (179) -- (250) (0) (10)
-------- -------- -------- -------- --------
Subtotal:................................. $(47,710) $(45,864) $(38,837) $(19,218) $(10,959)
-------- -------- -------- -------- --------
Net increase in loans................... $ 3,727 $ 27,619 $ 27,161 $ 21,066 $ 15,627
-------- -------- -------- -------- --------
Total loans at end of period.............. $156,937 $153,210 $125,591 $ 98,430 $ 77,364
======== ======== ======== ======== ========
- ---------------
(1) Line of Credit draws are treated as originations.
Applications for residential mortgage and consumer loans are taken at any
of the Savings Bank's offices, while commercial business loan, commercial real
estate loan and construction loan applications are referred to the appropriate
loan officer of the Savings Bank. The Supervisory Agreement continues the
restriction imposed on the Bank by the informal directive issued by the OTS on
May 17, 2000 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. Residential mortgage loan applications are primarily developed from
referrals from real estate brokers and builders, existing customers and walk-in
customers. Commercial real estate loan and construction loan applications are
obtained primarily from previous borrowers as well as referrals. Commercial loan
applications arise primarily from referrals.
The Savings Bank's lending policies allow all one-to-four residential
mortgage loans $75,000 or less to be approved with two signatures of the Chief
Executive Officer, President, and/or the Chief Financial Officer. One-to-four
residential mortgage loans in excess of $75,000 are presented to the Loan
Committee that consists of members of management and two outside directors. The
former Chief Executive Officer had authority to authorize commercial loans up to
and including $150,000. The Loan Committee has been authorized by the
25
27
Board to grant loans up to $500,000, with loans in excess of this amount
required to be presented to the full Board for review and approval. It has been
the policy of the Savings Bank's management to present all mortgage loans that
are not one-to-four family residential loans to the Loan Committee and/or the
Board of Directors for review and approval, and to have the Board of Directors
review any loan application which would exceed $500,000. Under applicable
regulations, the maximum amount of loans that the Savings Bank may make to any
one borrower, including related entities, is limited to 15% of unimpaired
capital and surplus, which the legal lending limit amounted to $2.1 million at
December 31, 2000. The Savings Bank established in 2001 a new internal policy on
loans to any one borrower of $1.2 million or 10% of the Savings Bank's net worth
whichever is less.
The Savings Bank currently is not a purchaser of residential or consumer
loans. There are no current intentions to begin purchasing such loans. At
December 31, 2000, one of the Savings Bank's commercial real estate loans was
50% participated by another lender. This loan totaled $1.9 million of which
$940,000 was sold to the other lender.
REAL ESTATE LENDING STANDARDS. Effective March 19, 1993, all financial
institutions were required to adopt and maintain comprehensive written real
estate lending policies that are consistent with safe and sound banking
practices. These lending policies must reflect consideration of the Interagency
Guidelines or Real Estate Lending Policies adopted by the Federal banking
agencies in December 1992 ("Real Estate Lending Guidelines"). The Real Estate
Lending Guidelines set forth uniform regulations prescribing standards for real
estate lending. Real estate lending is defined as the extension of credit
secured by liens on interests in real estate or made for the purpose of
financing the construction of a building or other improvements to real estate,
regardless of whether a lien has been taken on the property.
The policies must address certain lending considerations set forth in the
Real Estate Lending Guidelines, including loan-to-value ("LTV") limits, loan
administration procedures, underwriting standards, portfolio diversification
standards, and documentation, approval and reporting requirements. These
policies must also be appropriate to the size of the institution and the nature
and scope of its operations, and must be reviewed and approved by the
institution's board of directors at least annually. The LTV ratio framework,
with a LTV ratio being the total amount of credit to be extended divided by the
appraised value of the property at the time the credit is originated, must be
established for each category of real estate loans. If not a first lien, the
lender must combine all senior liens when calculating this ratio. The Real
Estate Lending Guidelines, among other things, establish the following
supervisory LTV limits: land development (75%); construction, commercial and
non-residential (80%); improved property (80%) and one-to-four family
residential (owner occupied) (no maximum ratio; however any LTV ratio in excess
of 90% should require appropriate insurance or readily marketable collateral).
Consistent with its lending philosophy, the Savings Bank's LTV limits are;
construction (80%); land development (75%); residential properties (95% in the
case of one-to-four family owner-occupied residences); and commercial real
estate (75%). The Savings Bank requires private mortgage insurance on any
residential conventional mortgage loan that exceeds a 90% LTV ratio. While the
ratios reflected above reflect the range of desired LTV ratio coverages, the
Savings Bank will evaluate each applicant and the collateral to secure the loan
on a case-by-case basis.
ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LOANS. The Savings Bank has
historically concentrated its lending activities on the origination of loans
secured primarily by first mortgage liens on existing one-to-four family
residences located within its market. At December 31, 2000, $103.3 million or
65.9% of the Savings Bank's total loan portfolio consisted of one-to-four family
residential real estate loans, substantially all of which are conventional
loans.
The Savings Bank historically has and continues to emphasize the
origination of fixed-rate mortgage loans with terms of up to 30 years and
adjustable rate mortgage loans ("ARMs") up to 30 years which provide for
periodic adjustments to the interest rate applicable to the loan. The ARMs
currently held by the Savings Bank have up to 30-year terms and an interest rate
which adjusts every one to five years in accordance with a designated index.
Such loans have a 2% cap on any increase or decrease in the interest rate per
adjustment period, and there is currently a limit of 4% to 6% on the amount that
the interest rate can change over the life of the loan. To attract ARMs from
time to time, the Savings Bank will offer initial interest rates below market
loan rates.
26
28
ARMs generally pose greater credit risk than fixed loans primarily because as
interest rates rise, the required periodic payment by the borrower will rise,
increasing the potential for default.
At December 31, 2000, approximately $81.9 million or 79.3% of the
one-to-four family residential loans in the Savings Bank's loan portfolio
consisted of loans that provide for fixed rates of interest. Although these
loans generally provide for repayments of principal over a fixed period of 5 to
30 years, it is the Savings Bank's experience that because of prepayments and
due-on-sale clauses, such loans generally remain outstanding for a substantially
shorter period of time.
Independent appraisers approved by the Savings Bank's Board of Directors
make property appraisals on the real estate and improvements securing the
Savings Bank's one-to-four family residential loans. Appraisals are performed in
accordance with Federal regulations and policies. The Savings Bank obtains title
insurance policies on most first mortgage real estate loans it originates. If
title insurance is not obtained or is unavailable, the Savings Bank obtains an
abstract of title and title opinion. Borrowers also must obtain hazard insurance
prior to closing and flood insurance when required by the United States
Department of Housing and Urban Development as researched by a third party
vendor. Borrowers are not required to escrow funds for real estate taxes but may
elect to escrow funds with each monthly payment of principal and interest to a
loan escrow account from which the Savings Bank makes disbursements for items
such as real estate taxes as they become due.
As of December 31, 2000 and 1999, the Savings Bank had $16,000 and $327,000
of non-performing one-to-four family residential loans, respectively. During
2000, the Savings Bank charged off $5,000 of one-to-four family residential
loans.
COMMERCIAL REAL ESTATE LOANS. The Savings Bank originates mortgage loans
for the acquisition and refinancing of commercial real estate properties
(including multi-family complexes). At December 31, 2000, $15.1 million or 9.6%
of the Savings Bank's total loan portfolio consisted of loans secured by
existing commercial real estate properties. At December 31, 2000, the Savings
Bank's commercial real estate loan portfolio consisted of forty loans with an
average principal balance of approximately $377,000.
The Savings Bank's commercial real estate loans are secured by apartment
complexes, developed residential lots and small retail establishments primarily
located in Pennsylvania. The Savings Bank requires appraisals of all properties.
Appraisals are performed by an independent appraiser designated by the Savings
Bank, all of which are reviewed by management. The Savings Bank considers the
quality and location of the real estate, the credit of the borrower, the cash
flow of the project and the quality of management involved with the property.
Although terms vary, commercial real estate loans generally are amortized
over a maximum period of 15 years. The Savings Bank originates these loans
either with fixed interest rates or with interest rates that adjust in
accordance with a designated index, which generally is negotiated at the time of
origination. It is also the Savings Bank's general policy to obtain personal
guarantees on its commercial real estate loans from the principals of the
borrower and, when this cannot be obtained, to impose more conservative
loan-to-value and other underwriting requirements.
As of December 31, 2000 and 1999, the Savings Bank had $3.1 million and
$458,000 of non-performing commercial real estate loans, respectively. This
constituted 20.79% and 2.85% of the commercial real estate loan category for
December 31, 2000 and 1999, respectively. During 2000, the Savings Bank charged
off $989,000 of commercial real estate loans that amounted to 5.99% of the
average outstanding commercial real estate loan balance for 2000. See Delinquent
Loans and Non-Performing Assets under the Asset Quality section for more
details.
COMMERCIAL BUSINESS LOANS. At December 31, 2000, $17.0 million or 10.9% of
the Savings Bank's total loan portfolio consisted of loans classified as
commercial business loans. The Savings Bank's commercial business loans can be
secured or unsecured depending upon the size of the loan and the credit analysis
by the Savings Bank of the potential borrower. Lines of credit in excess of
$25,000 are generally secured by a pledge of accounts receivable, inventory,
equipment and personal guarantees. The Savings Bank's commercial loan portfolio
consists of borrowers primarily located in Western Pennsylvania.
Commercial business loans generally have shorter terms and higher interest
rates than residential mortgage loans but generally involve more credit risk
than residential mortgage loans because of the type and nature of the collateral
and, in certain cases, the absence of collateral. Fixed equipment may depreciate
in value quicker than
27
29
the principal repayment of the loan. Accounts receivable may prove to be
difficult or impossible to collect in sufficient amounts to repay a line of
credit. Inventory may disappear due to loss or theft or may decline in value due
to age or change in market conditions or technology. The Savings Bank's
evaluation of the creditworthiness of a borrower, or the value of a borrower's
collateral, may fail to fully assess the risk of the loan in question and lead
to a loss.
As of December 31, 2000 and 1999, the Savings Bank had $2.2 million and
$131,000 of non-performing commercial business loans, respectively. This
constituted 13.0% and .63% of the commercial business loan category for December
31, 2000 and 1999, respectively. One non-performing loan for $1.6 million
carries an U.S. Government guarantee of the payment of principal and interest.
During 2000, the Savings Bank charged off $3.0 million of commercial business
loans that amounted to 13.9% of the average outstanding commercial business loan
balance for 2000. See Delinquent Loans and Non-Performing Assets under the Asset
Quality section for more details.
CONSTRUCTION LOANS. The Savings Bank will occasionally originate loans to
construct primarily one-to-four family residences, and, to a much lesser extent,
loans to acquire and develop real estate for construction of residential and
commercial properties. These construction lending activities generally are
limited to the Savings Bank's primary market area. At December 31, 2000, $1.6
million or 1.0% of the Savings Bank's total loan portfolio consisted of loans
classified as construction loans.
Prior to making a commitment to fund a construction loan, the Savings
Bank's policy requires an appraisal of the property by independent appraisers
approved by the Board of Directors. The Savings Bank uses qualified appraisers
on all of its construction loans. Designated employees of the Savings Bank also
review and inspect each project at the commencement of construction. In
addition, the project is inspected by designated inspectors of the Savings Bank
prior to every disbursement of funds during the term of the construction loan.
Such inspection includes a review for compliance with the construction plan,
including materials specifications.
Construction lending is generally considered to involve a higher level of
risk as compared to one-to-four family residential lending for existing units,
due to the concentration of principal in a limited number of loans and borrowers
and the effects of general economic conditions on real estate developers and
managers. Moreover, a construction loan can involve additional risks because of
the inherent difficulty in estimating both a property's value at completion of
the project and the estimated cost (including interest) of the project. The
nature of these loans is such that they are generally more difficult to evaluate
and monitor. The Savings Bank has adopted underwriting guidelines which impose
stringent loan-to-value, debt service and other requirements for loans which are
believed to involve higher elements of credit risk, by limiting the geographic
area in which the Savings Bank will do business and by working with builders
with whom it has established relationships or which have quality reputations. As
of December 31, 2000, the Savings Bank did not have any non-performing
construction loans and as of December 31, 1999 it had $49,000 non-performing
construction loans. During 2000, the Savings Bank did not have any charged off
construction loans.
CONSUMER LOANS. The Savings Bank also offers automobile loans, home equity
loans and lines of credit, student loans, deposit account secured loans and
unsecured consumer loans. Automobile loans amounted to $2.7 million or 1.8% of
the total loans receivable at December 31, 2000. Home equity loans and lines of
credit amounted to $12.9 million or 8.2% of the total loans receivable at
December 31, 2000. The student loan balance amounted to $2.4 million or 1.5% of
the total loans receivable as of such date, deposit account secured loans had
outstanding balances of $729,000 or .5% of total loans receivable as of such
date and unsecured personal loans (including credit card balances outstanding)
stood at $910,000 or .6% of total loans receivable as of such date. At December
31, 2000, there was one loan to a Company Director totaling $217,000 or .1% of
total loans receivable.
Automobile loans are secured by a lien on the title of the financed
vehicle. The terms of the loan may not exceed 60 months. Rates on automobile
loans may be fixed or floating. As of December 31, 2000, the entire automobile
loan portfolio had fixed rate contracts. Automobile loans involve higher risk
since the collateral rapidly depreciates. Defaults during the early months of
the loan will likely result in a loss of principal due to the reduced value of
the vehicle and the costs of repossession and sale. Automobile loans may be
granted for up to 100% of the purchase price including transfer fees and taxes.
28
30
The Savings Bank's home equity loans and lines of credit are secured by the
underlying equity in the borrower's home. Home equity loans generally have fixed
interest rates and terms of 5 to 15 years. Home equity lines of credit generally
have variable interest rates based on the prime rate and terms of 5 to 15 years.
The Savings Bank's home equity loans and home equity lines of credit require
loan-to-value ratios of 100% or less after taking into consideration the first
mortgage loan.
The student loans made by the Savings Bank are guaranteed and serviced by
the Pennsylvania Higher Education Assistance Agency. A deposit account secured
loan is collateralized by deposits equal to no more than 90% of the principal
balance of the loans. Unsecured personal loans depend solely on the
creditworthiness of the borrower.
In December 1995, the Savings Bank began issuing consumer credit cards to
its existing customer base. Credit card loans outstanding amounted to $608,000
or .4% of the total loans receivable at December 31, 2000.
Consumer loans generally have shorter terms and higher interest rates than
mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. During 2000, the Savings Bank charged off $16,000 of
consumer loans that amounted to .09% of the average outstanding consumer loan
balance for 2000. At December 31, 2000, $318,000 of the remaining consumer
loans, including home equity loans, were classified as non-performing. The
$318,000 was comprised of $256,000 home equity loans, $38,000 automobile loans,
$18,000 credit card loans and $6,000 personal loans.
ASSET QUALITY
When a borrower fails to make a required payment on a loan, the Savings
Bank attempts to cure the deficiency by contacting the borrower and seeking the
payment. Late notices are sent and/or personal contacts are made. While the
Savings Bank generally prefers to work with borrowers to resolve such problems,
when a loan becomes 60 days delinquent, the loan is normally classified as
substandard and presented to the Classification Committee for evaluation.
Following such evaluation if the loan continues to be delinquent past 90 days
the Savings Bank generally institutes foreclosure, repossession, setoff or other
legal proceedings, as necessary, to minimize any potential loss.
Loans are placed on non-accrual status when, in the judgment of management,
the probability of collection of interest is deemed to be insufficient to
warrant further accrual. When a loan is placed on non-accrual status, previously
accrued but unpaid interest is deducted from interest income. The Savings Bank
does not accrue interest on loans past due 90 days or more.
Real estate acquired by the Savings Bank as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until it is sold.
When a property is acquired, it is recorded at the lower of cost or fair value
minus estimated cost to sell the property. Fair value is generally determined
through the use of independent appraisals. Any write-downs resulting at
acquisition are charged to the allowance for loan losses. All costs incurred in
maintaining the Savings Bank's interest in the property are capitalized between
the date the loan becomes delinquent and the date of acquisition. After the date
of acquisition, all costs incurred in maintaining the property are expensed and
costs incurred for the improvement or development of such property are
capitalized.
Under accounting principles generally accepted in the United States, the
Savings Bank is required to account for certain loan modifications or
restructurings as "troubled debt restructurings." In general, the modification
or restructuring of a debt constitutes a troubled debt restructuring if the
Savings Bank for economic or legal reasons related to the borrower's financial
difficulties grants a concession to the borrower that the Savings Bank would not
otherwise consider. Debt restructurings or loan modifications for a borrower do
not necessarily always constitute troubled debt restructurings, however, and
troubled debt restructurings do not necessarily result in non-accrual loans. For
the year ended December 31, 2000, the Savings Bank had no troubled debt
restructurings and had no interest income arising from troubled debt
restructuring. It is anticipated that in fiscal 2001 there will be troubled debt
restructurings relating to our commercial business loans and commercial real
estate loans. According to the Supervisory Agreement, the OTS must approve all
troubled debt restructurings.
DELINQUENT LOANS. The following table sets forth information concerning
delinquent loans at the dates indicated, in dollar amounts and as a percentage
of each category of the Savings Bank's loan portfolio. The
29
31
amounts presented represent the total outstanding principal balances of the
related loans, rather than the actual payment amounts that are past due.
DECEMBER 31, 2000 DECEMBER 31, 1999
--------------------------------------------------------- -----------------
90 DAYS OR
30-59 DAYS 60-89 DAYS GREATER 30-59 DAYS
----------------- ----------------- ----------------- -----------------
PERCENT PERCENT PERCENT PERCENT
OF LOAN OF LOAN OF LOAN OF LOAN
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
------ -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
Real estate loans:
One-to-four family
residences............. $2,778 2.69% $470 .45% $ 16 .02% $ 708 .74%
Construction............. -- -- -- -- -- -- -- --
Commercial real estate... 764 5.06 128 .85 3,136 20.79 1,589 9.89
Commercial business
loans.................. 5,301 31.10 -- -- 2,221 13.03 765 3.66
Consumer loans........... 16 .08 10 .05 318 1.60 139 .80
------ ---- ------ ------
Total.................. $8,859 $608 $5,691 $3,201
====== ==== ====== ======
DECEMBER 31, 1999
-------------------------------------
90 DAYS OR
60-89 DAYS GREATER
----------------- -----------------
PERCENT PERCENT
OF LOAN OF LOAN
AMOUNT CATEGORY AMOUNT CATEGORY
------ -------- ------ --------
(DOLLARS IN THOUSANDS)
Real estate loans:
One-to-four family
residences............. $166 .17% $ 327 .34%
Construction............. 128 4.72 49 1.81
Commercial real estate... 406 2.53 458 2.85
Commercial business
loans.................. 26 .12 131 .63
Consumer loans........... 9 .05 162 .93
---- ------
Total.................. $735 $1,127
==== ======
DECEMBER 31, 1998
---------------------------------------------------------
90 DAYS OR
30-59 DAYS 60-89 DAYS GREATER
----------------- ----------------- -----------------
PERCENT PERCENT PERCENT
OF LOAN OF LOAN OF LOAN
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
Real estate loans:
One-to-four family residences............................... $ 914 1.12% $123 .15% $483 .59%
Construction................................................ -- -- 430 18.94 -- --
Commercial real estate...................................... 859 4.59 -- -- 99 1.30
Commercial business loans................................... -- -- -- -- -- --
Consumer loans.............................................. 95 .61 124 .79 116 .74
------ ---- ----
Total..................................................... $1,868 $677 $698
====== ==== ====
At December 31, 2000, the $5.3 million of commercial business loan
delinquencies 30-59 days primarily consisted of one loan totaling $4.9 million.
This loan carries an 80% U.S. Government guarantee of the payment of principal
and interest. The increase in payment delinquencies since 1998 has greatly
contributed to the increases in loan loss reserves, legal expenses and
consultant expenses.
NON-PERFORMING ASSETS. The following table sets forth the amounts and
categories of the Savings Bank's non-performing assets at the dates indicated.
The Savings Bank had no loans during the periods indicated below which should be
classified as troubled debt restructurings.
DECEMBER 31,
----------------------------------------
2000 1999 1998 1997 1996
------ ------ ---- ---- ----
(DOLLARS IN THOUSANDS)
Non-accruing loans:
One-to-four family residential(1).................... $ 16 $ 327 $483 $589 $339
Construction loans(2)................................ -- 49 -- -- --
Commercial real estate(3)............................ 3,136 458 99 -- --
Commercial business loans(4)......................... 2,221 131 -- 7 --
Consumer loans(5).................................... 318 162 116 15 2
------ ------ ---- ---- ----
Total nonperforming loans........................ 5,691 1,127 698 611 341
Real estate owned.................................... 176 207 205 -- 50
------ ------ ---- ---- ----
Total nonperforming assets....................... $5,867 $1,334 $903 $611 $391
====== ====== ==== ==== ====
Total nonperforming loans as a percentage of total
loans.............................................. 3.63% .74% .56% .63% .44%
====== ====== ==== ==== ====
Total nonperforming assets as a percentage of total
assets............................................. 2.91% .67% .51% .43% .34%
====== ====== ==== ==== ====
- ---------------
(1) Consists of an aggregate of two, ten, seven, eleven and six loans at
December 31, 2000, 1999, 1998, 1997 and 1996, respectively.
30
32
(2) Consists of one loan at December 31, 1999.
(3) Consists of five loans at December 31, 2000 and one loan each at December
31, 1999 and December 31, 1998, respectively.
(4) Consists of eight and six loans at December 31, 2000 and December 31, 1999,
respectively. Consists of one loan at December 31, 1997.
(5) Consists of sixteen loans at December 31, 2000, nine loans at December 31,
1999, five loans at December 31, 1998, nine loans at December 31, 1997 and
one loan at December 31, 1996.
The Savings Bank's total non-performing assets have increased from $1.3
million or .67% of total assets at December 31, 1999 to $5.9 million or 2.9% of
total assets at December 31, 2000. The $4.6 million increase in total
non-performing assets between December 31, 1999 and 2000 principally reflects an
increase in non-performing commercial real estate loans of $2.7 million and in
commercial business loans of $2.1 million. One non-performing commercial
business relationship accounts for $1.6 million or 73.3% of the total
non-performing commercial business loans. The $1.6 million has an U.S.
Government guarantee of the payment of principal and interest. Currently, this
commercial business is in bankruptcy and management is working closely in the
bankruptcy proceedings to protect its interests. Measures continue to be taken
to address the remaining $594,000 non-performing commercial business loans.
However, these loans continue to be monitored and reserved under the allowance
for loan losses. Of the five commercial real estate non-performing loans, two
totaling $800,000 have been written down to estimated realized collateral
values. The remaining three totaling $2.3 million have appraisals supporting the
balances. Management recognizes actual workout of these loans may differ from
these estimates and appraisals.
The Savings Bank's total non-performing assets increased from $903,000 or
.51% of total assets at December 31, 1998 to $1.3 million or .67% of total
assets at December 31, 1999. The $431,000 increase in total non-performing
assets between December 31, 1998 and 1999 principally reflects an increase in
non-performing commercial real estate loans of $359,000 and in commercial
business loans of $131,000. The one non-performing commercial real estate loan
of $458,000 at December 31, 1999 is backed by a 75% guarantee from the Small
Business Administration ("SBA").
At December 31, 2000, 1999, and 1998 approximately $359,000, $65,000, and
$43,000 in interest income, respectively, would have been recorded in the period
then ended on loans accounted for on a non-accrual basis if such loans had been
current in accordance with their original terms and had been outstanding
throughout the period or since origination if held for part of the period. The
Savings Bank had no accruing loans greater than 90 days delinquent.
ALLOWANCE FOR LOAN LOSSES. An allowance for loan losses is maintained at a
level which is deemed to be appropriate based upon a comprehensive methodology
and procedural discipline that is updated on a monthly basis. The calculation
methodology for this allowance is described in the Results of Operations section
under Provision for Loan Losses on page 17. Provisions for loan losses that are
charged against income increase the allowance. 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 further developments with higher risk commercial and
consumer loans, future changes in the economy or for other adverse reasons that
are discovered from the loan loss analysis performed monthly. 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 other non-performing assets based on their judgments from
information available at the time of their examination. There can be no
assurance that bank regulators will agree with the Savings Bank on the
systematic methodology for determining the adequacy of the allowance for loan
losses during future examinations. The Savings Bank could be required by bank
regulators to increase its allowance for loan losses in addition to the loan
loss reserves set by management, thereby negatively affecting the Savings Bank's
financial condition and earnings at that time. The Savings Bank was last
examined by the OTS as of March 31, 2000. Pursuant to such review and after
consultation with the OTS, the Savings Bank increased its loan loss reserve by
$380,000.
Effective December 21, 1993, the OTS, in conjunction with the Office of the
Comptroller of the Currency, the FDIC and the Federal Reserve Board, issued an
Interagency Policy Statement on the Allowance for Loan and
31
33
Lease Losses ("Policy Statement"). The Policy Statement, which effectively
supersedes previous OTS proposed guidance, includes guidance (i) on the
responsibilities of management for the assessment and establishment of an
adequate allowance and (ii) for the agencies' examiners to use in evaluating the
adequacy of such allowance and the policies utilized to determine such
allowance. The Policy Statement also sets forth quantitative measures for the
allowance with respect to assets classified substandard and doubtful, described
below, and with respect to the remaining portion of an institution's loan
portfolio. Specifically, the Policy Statement sets forth the following
quantitative measures which examiners may use to determine the reasonableness of
an allowance: (i) 50% of the dollar value of the portfolio that is classified
doubtful must be accounted for in the allowance of the institution; (ii) 15% of
the dollar value of the portfolio that is classified substandard must be
accounted for in the allowance of the institution; (iii) for the portions of the
portfolio that have not been classified (including loans designated special
mention), estimated credit losses over the upcoming twelve months based on facts
and circumstances available on the evaluation date must be accounted for in the
allowance of the institution, and (iv) in the cases where the institution has an
insufficient basis for determining this amount, an examiner may use industry
average net charge-off rate for nonclassified loans and leases (based on a study
of the Federal Reserve Board a rate of .50% for risk-weighted "pass" loans and
3% for special mention loans is acceptable). While the Policy Statement sets
forth this quantitative measure, such guidance is not intended as a "floor" or
"ceiling."
Federal regulations require that each insured savings institution classify
its assets on a regular basis. In addition, in connection with examinations of
insured institutions, federal examiners have authority to identify problem
assets and, if appropriate, classify them. There are three classifications for
problem assets: "substandard," "doubtful" and "loss." Substandard assets have
one or more defined weaknesses and are characterized by the distinct possibility
that the insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of those classified as
substandard with the added characteristic that the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions and
values questionable, and there is a high possibility of loss. An asset
classified as loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. Assets classified
as substandard or doubtful require the institution to establish general
allowances for loan losses. If an asset or portion thereof is classified as
loss, the insured institution must either establish specific allowances for loan
losses in the amount of 100% of the portion of the asset classified as a loss or
charge-off such amount. General loss allowances established to cover possible
losses related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses do not qualify as regulatory capital. At December 31,
2000, the Savings Bank had $5.3 million assets classified as "substandard" and
$2.4 million of assets that were classified as "doubtful" and no loans
classified as "loss."
The following table summarizes changes in the allowance for loan losses and
other selected statistics for the periods presented.
DECEMBER 31,
------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
Average total loans...................... $159,729 $138,138 $111,809 $89,303 $69,258
======== ======== ======== ======= =======
Allowance for loan losses, beginning of
year................................... $ 983 $ 571 $ 403 $ 307 $ 287
Charged-off loans(1)..................... (3,983) (26) (41) (8) (24)
Recoveries on loans previously charged
off.................................... 4 -- -- -- --
Provision for loan losses................ 6,383 438 209 104 44
-------- -------- -------- ------- -------
Allowance for loan losses, end of
period................................. $ 3,387 $ 983 $ 571 $ 403 $ 307
======== ======== ======== ======= =======
Net loans charged-off to average loans... 2.49% .02% .04% .01% .04%
======== ======== ======== ======= =======
Allowance for loan losses to total
loans.................................. 2.16% .64% .45% .42% .40%
======== ======== ======== ======= =======
Allowance for loan losses to
nonperforming loans.................... 59.52% 87.22% 81.81% 65.96% 89.88%
======== ======== ======== ======= =======
- ---------------
(1) Consists of $3.0 million of commercial business loans, $989,000 of
commercial real estate loans, $16,000 of consumer loans and $5,000 of
one-to-four family residential mortgage loans in 2000; consists of $26,000
of
32
34
consumer loans in 1999; consists of $22,000 of one-to-four family
residential mortgage loans and $19,000 of consumer loans in 1998; consists
of $8,000 of consumer loans in 1997; and consists of $18,000 of one-to-four
family residential mortgage loans and $6,000 of consumer loans in 1996.
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.
DECEMBER 31,
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------- ----------------- ----------------- ----------------- -----------------
% OF % OF % OF % OF % OF
LOANS IN LOANS IN LOANS IN LOANS IN LOANS IN
EACH EACH EACH EACH EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
One-to-four family
residential............. $ 179 65.85% $169 62.78% $150 64.71% $108 73.34% $ 98 84.17%
Construction.............. 29 .99 16 1.77 5 1.81 4 2.49 1 1.20
Commercial business and
commercial real
estate.................. 2,876 20.47 638 24.14 346 20.98 224 11.17 133 2.62
Consumer:
Automobile, home equity,
student, share and
other consumer........ 91 12.69 72 11.31 70 12.50 67 13.00 75 12.01
Allocation to general
risk.................. 212 -- 88 -- -- -- -- -- -- --
------ ------ ---- ------ ---- ------ ---- ------ ---- ------
Total................. $3,387 100.00% $983 100.00% $571 100.00% $403 100.00% $307 100.00%
====== ====== ==== ====== ==== ====== ==== ====== ==== ======
INVESTMENT ACTIVITIES
GENERAL. The Company's Board of Directors has given authority to the
Investment Committee of the Savings Bank to manage the investment activities of
the Company. Investment activity at the Company is minimal. The Company has
chosen to invest in several debt and equity securities. The aggregate market
value of these investments, at December 31, 2000, is $919,000. These investments
were selected on management's belief that the value would appreciate. These debt
and equity investments represent .5% of the total consolidated assets of the
Company and 2.9% of the total consolidated investment securities of the Company.
Excess funds at the Company level are deposited into a money market account
maintained at the Savings Bank.
The Savings Bank's investment activities are managed by the Investment
Committee designated by the Board of Directors of the Savings Bank. These
activities are conducted in accordance with a written investment policy that is
reviewed and approved by the Board of Directors at least annually. The Savings
Bank's Asset and Liability Committee has been designated to work with management
and the Board to implement and achieve investment plan goals and to report at
least quarterly to the Board in conjunction with its review of the Savings
Bank's overall gap and interest rate risk position. As reflected in its
investment policy, the Savings Bank's primary investment objective is to
maximize income while providing an appropriate balance of high quality,
diversified investments and be consistent with the Bank's liquidity and safety
requirements. Accordingly, the Savings Bank seeks a competitive return from its
investments, but the rate of return is only one consideration which is weighed
against the Savings Bank's other goals and objectives of liquidity and operating
in a manner deemed by the Board to reflect safety and soundness.
CASH AND CASH EQUIVALENTS. From December 31, 1999 to December 31, 2000,
cash and cash equivalents of the Savings Bank increased by $673,000. At December
31, 2000, cash and cash equivalents of the Savings Bank amounted to $5.9 million
or 2.9% of total assets. The largest component in this category is
interest-bearing deposits in banks, which amounted to $4.6 million at December
31, 2000. The majority of such deposits were made with the FHLB of Pittsburgh.
The $673,000 increase in cash and cash equivalents during fiscal 2000 was
primarily attributable to a $4.2 million reduction in investment securities and
$3.3 million and $1.3 million
33
35
increases in FHLB of Pittsburgh advances and deposits, respectively. This was
partially offset by the $2.5 million growth in net loans receivable and the net
loss for the year ended of $3.0 million.
Cash and cash equivalents of the Savings Bank decreased by $5.0 million
from fiscal 1998 to fiscal 1999. At December 31, 1999, cash and cash equivalents
of the Savings Bank amounted to $5.2 million or 2.6% of total assets. The
largest component in this category is interest-bearing deposits in banks, which
amounted to $3.8 million at December 31, 1998. The majority of such deposits
were made with the FHLB of Pittsburgh. The $5.0 million decrease in cash and
cash equivalents during fiscal 1999 was primarily attributable to $27.1 million
growth in net loans receivable. This was partially offset by a $10.8 million and
$12.0 million growth in total deposits and FHLB of Pittsburgh advances,
respectively.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES. As a savings and loan
holding company, with majority ownership in one savings association that meets
the requirement of a qualified thrift lender due to the level of its residential
mortgage lending activities, the Company has broad investment powers. Other than
100% ownership of the Savings Bank, the Company has chosen only to maintain the
loan to the ESOP, a loan to a director totaling $217,000, to invest in debt and
equity securities with a market value totaling $919,000 at December 31, 2000 and
to deposit the majority of the remaining funding of the Company in a money
market and checking account maintained at the Savings Bank. Funds on deposit
with the Savings Bank are used for either loans or investment securities as
determined by the Savings Bank.
The Savings Bank has authority to invest in various types of assets. The
Savings Bank's Investment Committee appointed by the Board is authorized by the
Board to: purchase or sell U.S. Government securities and securities issued by
agencies thereof; purchase, sell or trade any securities qualifying as eligible
liquidity; purchase mortgage-related securities; purchase participations in the
secondary mortgage market; purchase whole loan packages eligible for investment
by the Savings Bank; invest in repurchase agreements secured by securities
eligible for investment by the Savings Bank; invest in mutual funds restricted
to authorized investments; invest in state, county or municipal securities
eligible for investment by the Savings Bank; invest in domestic certificates of
deposits with only institutions with FDIC insurance coverage; invest in deposits
with the FHLB of Pittsburgh and other authorized investments; invest in various
corporate securities and bonds that have at least an "AA" rating by Standard &
Poor's; and invest in various other mutual funds and certain equity issues as
authorized by the Board. The Board of the Savings Bank does not permit
investments in highly speculative securities.
The Savings Bank's investments are all classified as "held to maturity" or
"available for sale" upon acquisition based upon the Savings Bank's intent and
ability to hold such investments to maturity at the time of investment in
accordance with generally accepted accounting principles. The investment
securities and mortgage-backed securities of the Savings Bank which are
classified as "held to maturity" are carried at amortized cost, with any
discount or premium amortized to maturity. The investment securities and
mortgage-backed securities of the Savings Bank which are classified as
"available for sale" are carried at fair value and are repriced monthly. All
mutual fund investments are classified as investments available for sale.
The Savings Bank maintains a portfolio of mortgage-backed securities as a
means of investing in housing-related mortgage instruments without the costs
associated with originating mortgage loans for portfolio retention and with
limited credit risk of default which arises in holding a portfolio of loans to
maturity. Mortgage related securities (which also are known as mortgage
participation certificates or pass-through certificates) represent a
participation interest in a pool of single-family or multi-family mortgages, the
principal and interest payments on which are passed from the mortgage
originators, through intermediaries (generally U.S. Government agencies and
government sponsored enterprises) that pool and repackage the participation
interests in the form of securities, to investors such as the Savings Bank. Such
U.S. Government agencies and government sponsored enterprises, which guarantee
the payment of principal and interest to investors, primarily include the
Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal National Mortgage
Association ("FNMA") and the Government National Mortgage Association ("GNMA").
The FHLMC is a public corporation chartered by the U.S. Government and
owned by the 12 Federal Home Loan Banks and Federally insured savings
institutions. The FHLMC issues participation certificates backed principally by
conventional mortgage loans. The FHLMC guarantees the timely payment of interest
and the ultimate return of principal. The FNMA is a private corporation
chartered by the U.S. Congress with a mandate to establish a secondary market
for conventional mortgage loans. The FNMA guarantees the timely payment of
34
36
principal and interest on FNMA securities. The full faith and credit of the
United States does not back FHLMC and FNMA securities, but because the FHLMC and
FNMA are U.S. Government sponsored enterprises, these securities are considered
to be among the highest quality investments with minimal credit risks. The GNMA
is a government agency within the Department of Housing and Urban Development
that is intended to help finance government-assisted housing programs. GNMA
securities are backed by FHA-insured and VA-guaranteed loans, and the timely
payment of principal and interest on GNMA securities are guaranteed by the GNMA
and backed by the full faith and credit of the U.S. Government. Because the
FHLMC, the FNMA and the GNMA were established to provide support for low-and
middle-income housing, there are limits to the maximum size of loans that
qualify for these programs.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages, i.e., fixed rate or adjustable rate, as well as
repayment risk, are passed on to the certificate holder. The life of a
mortgage-backed pass-through security thus approximates the life of the
underlying mortgages.
Mortgage-backed securities generally yield less than the loans that
underlie such securities because of their payment guarantees or credit
enhancements that offer nominal credit risk. In addition, mortgage-backed
securities are more liquid than individual mortgage loans. Mortgage-backed
securities issued or guaranteed by FNMA or FHLMC (except interest-only
securities or the residual interests in collateralized mortgage obligations) are
weighted at no more than 20% for risk-based capital purposes, compared to a
weight of 50% to 100% for residential loans.
35
37
The following tables set forth certain information relating to the
Company's and Savings Bank's investment and mortgage-backed securities portfolio
at the dates indicated:
DECEMBER 31,
-----------------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
AMORTIZED % OF AMORTIZED % OF AMORTIZED % OF
COST TOTAL COST TOTAL COST TOTAL
---------- ------ ---------- ------ ---------- ------
(DOLLARS IN THOUSANDS)
HELD TO MATURITY
Investment securities:
U.S. Government securities.... $ -- --% $ 1,001 5.93% $ 2,001 12.30%
Federal agency obligations.... 15,805 100.00 15,874 94.07 14,263 87.70
---------- ------ ---------- ------ ---------- ------
Total investment
securities............... $ 15,805 100.00% $ 16,875 100.00% $ 16,264 100.00%
========== ====== ========== ====== ========== ======
Average remaining contractual
life of investment
securities.................... 11.03 yrs 11.61 yrs. 9.53 yrs.
========== ========== ==========
Mortgage-backed securities:
GNMA.......................... $ 1,516 23.55% $ 1,738 23.22% $ 1,951 21.17%
FHLMC......................... 3,195 49.63 3,862 51.59 5,259 57.08
FNMA.......................... 1,727 26.82 1,886 25.19 2,004 21.75
---------- ------ ---------- ------ ---------- ------
Total mortgage-backed
securities............... $ 6,438 100.00% $ 7,486 100.00% $ 9,214 100.00%
========== ====== ========== ====== ========== ======
DECEMBER 31,
-----------------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
AMORTIZED % OF AMORTIZED % OF AMORTIZED % OF
COST TOTAL COST TOTAL COST TOTAL
---------- ------ ---------- ------ ---------- ------
(DOLLARS IN THOUSANDS)
AVAILABLE FOR SALE
Investment securities:
Federal agency obligations.... $ 4,000 63.12% $ 4,000 53.49% $ 3,000 44.52%
U.S. Government securities.... -- -- 1,001 13.38 504 7.48
Corporate debentures.......... 494 7.80 494 6.60 494 7.33
Marketable equity
securities................. 1,843 29.08 1,984 26.53 2,740 40.67
---------- ------ ---------- ------ ---------- ------
Total investment
securities............... $ 6,337 100.00% $ 7,479 100.00% $ 6,738 100.00%
========== ====== ========== ====== ========== ======
Average remaining contractual
life of investment
securities(1)................. 6.93 yrs 5.24 yrs. 8.14 yrs.
========== ========== ==========
Mortgage-backed securities:
FHLMC......................... $ 1,788 59.32% $ 1,981 46.85% $ 2,215 68.36%
FNMA.......................... 1,226 40.68 2,248 53.15 1,025 31.64
---------- ------ ---------- ------ ---------- ------
Total mortgage-backed
securities............... $ 3,014 100.00% $ 4,229 100.00% $ 3,240 100.00%
========== ====== ========== ====== ========== ======
- ---------------
(1) Marketable equity securities have no stated maturity, therefore, are
excluded from the average remaining contractual life calculation.
36
38
The composition and maturities of the investment securities portfolio by
contractual maturity at December 31, 2000, are indicated in the following table:
DUE IN
---------------------------------------------
LESS THAN 1 TO 3 3 TO 5 OVER TOTALS
1 YEAR YEARS YEARS 5 YEARS DECEMBER 31, 2000
--------- --------- --------- --------- ------------------------------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED FAIR CARRYING
COST COST COST COST COST VALUE VALUE
--------- --------- --------- --------- --------- ------- --------
(DOLLARS IN THOUSANDS)
U.S. Government securities and
Federal agency obligations......... $ 502 $2,000 $1,500 $15,803 $19,805 $19,481 $19,778
Corporate debentures................. -- -- -- 494 494 454 454
Marketable equity securities......... 1,843 -- -- -- 1,843 1,504 1,504
------ ------ ------ ------- ------- ------- -------
Total investment securities.......... $2,345 $2,000 $1,500 $16,297 $22,142 $21,439 $21,736
====== ====== ====== ======= ======= ======= =======
Weighted average yield............... 3.97% 5.62% 6.22% 6.66% 6.24% N/A N/A
====== ====== ====== ======= ======= ======= =======
The weighted yield for investment securities including held to maturity and
available for sale is based upon historical amortized cost balances.
The actual maturity of the Company's consolidated investment securities may
differ from contractual maturity since certain of the Company's consolidated
investment securities are subject to call provisions that allow the issuer to
accelerate the maturity date of the security.
The Savings Bank's investment securities portfolio at December 31, 2000 did
not contain securities of any issuer with an aggregate book value in excess of
10% of the Savings Bank's equity, excluding those issued by the U. S. Government
or its agencies.
The following table sets forth the contractual maturities of the Company's
and the Savings Bank's mortgage-backed securities at December 31, 2000.
DUE IN
---------------------------------------------------------------------
LESS THAN 1 TO 3 3 TO 5 5 TO 10 10 TO 20 OVER 20 TOTALS
1 YEAR YEARS YEARS YEARS YEARS YEARS DECEMBER 31, 2000
--------- --------- --------- --------- --------- --------- ------------------------------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED FAIR CARRYING
COST COST COST COST COST COST COST VALUE VALUE
--------- --------- --------- --------- --------- --------- --------- ------- --------
(DOLLARS IN THOUSANDS)
GNMA................. $ -- $ -- $-- $ -- $ 644 $ 872 $ 1,516 $ 1,510 $ 1,516
FHLMC................ -- -- -- 2,296 2,554 133 4,983 4,980 4,965
FNMA................. -- -- -- -- 2,953 -- 2,953 2,907 2,937
------ ---- --- ------ ------ ------ ------- ------- -------
Total............ $ -- $ -- $-- $2,296 $6,151 $1,005 $ 9,452 $ 9,397 $ 9,418
====== ==== === ====== ====== ====== ======= ======= =======
Weighted Average
Yield.............. N/A N/A N/A 6.13% 6.48% 6.70% 6.41% N/A N/A
====== ==== === ====== ====== ====== ======= ======= =======
The weighted yield for investment securities including held to maturity and
available for sale is based upon historical amortized cost balances.
The following table sets forth the contractual maturities of the Company's
and the Savings Bank's securities classified as held to maturity at December 31,
2000.
DUE IN
----------------------------------------------------------------------
DUE 1 YEAR 1 TO 3 3 TO 5 5 TO 10 10 TO 20 OVER 20 TOTALS
OR LESS YEARS YEARS YEARS YEARS YEARS DECEMBER 31, 2000
---------- --------- --------- --------- --------- --------- ------------------------------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED FAIR CARRYING
COST COST COST COST COST COST COST VALUE VALUE
---------- --------- --------- --------- --------- --------- --------- ------- --------
(DOLLARS IN THOUSANDS)
U.S. Gov't & Agency
Securities......... $ 502 $-- $-- $ 8,496 $ 6,807 $ -- $15,805 $15,508 $15,805
FHLMC Certificates... -- -- -- 2,296 899 -- 3,195 3,210 3,195
GNMA Certificates.... -- -- -- -- 644 872 1,516 1,510 1,516
FNMA Certificates.... -- -- -- -- 1,727 -- 1,727 1,697 1,727
----- --- --- ------- ------- ----- ------- ------- -------
Total............ $ 502 $-- $-- $10,792 $10,077 $ 872 $22,243 $21,925 $22,243
===== === === ======= ======= ===== ======= ======= =======
Weighted Average
Yield.............. 6.47% N/A N/A 6.50% 6.85% 6.50% 6.66% N/A N/A
===== === === ======= ======= ===== ======= ======= =======
37
39
The weighted yield for investment securities including held to maturity and
available for sale is based upon historical amortized cost balances.
The actual maturity of the Company's consolidated investment securities may
differ from contractual maturity since certain of the Company's consolidated
investment securities are subject to call provisions that allow the issuer to
accelerate the maturity date of the security.
The following table sets forth the contractual maturities of the Company's
and the Savings Bank's securities classified as available for sale at December
31, 2000.
DUE IN
----------------------------------------------------------------------
DUE 1 YEAR 1 TO 3 3 TO 5 5 TO 10 10 TO 20 OVER 20 TOTALS
OR LESS YEARS YEARS YEARS YEARS YEARS DECEMBER 31, 2000
---------- --------- --------- --------- --------- --------- -----------------------------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED FAIR CARRYING
COST COST COST COST COST COST COST VALUE VALUE
---------- --------- --------- --------- --------- --------- --------- ------ --------
(DOLLARS IN THOUSANDS)
Marketable Equity
Securities......... $1,843 $ -- $ -- $ -- $ -- $ -- $1,843 $1,504 $1,504
U.S. Gov't & Agency
Securities......... -- 2,000 1,500 500 -- -- 4,000 3,973 3,973
Corporate
debentures......... -- -- -- -- -- 494 494 454 454
FHLMC Certificates... -- -- -- -- 1,655 133 1,788 1,770 1,770
FNMA Certificates.... -- -- -- -- 1,226 -- 1,226 1,210 1,210
------ ------ ------ ----- ------ ----- ------ ------ ------
Total............ $1,843 $2,000 $1,500 $ 500 $2,881 $ 627 $9,351 $8,911 $8,911
====== ====== ====== ===== ====== ===== ====== ====== ======
Weighted Average
Yield.............. 3.31% 5.62% 6.22% 6.04% 6.00% 6.30% 5.43% N/A N/A
====== ====== ====== ===== ====== ===== ====== ====== ======
The weighted yield for investment securities including held to maturity and
available for sale is based upon historical amortized cost balances.
The actual maturity of the Company's consolidated investment securities may
differ from contractual maturity since certain of the Company's consolidated
investment securities are subject to call provisions that allow the issuer to
accelerate the maturity date of the security.
At December 31, 2000, the weighted average contractual maturity of all of
the Savings Bank's mortgage-backed securities was approximately 15 years and the
weighted average yield on the mortgage-backed securities portfolio was 6.41%.
The actual maturity of a mortgage-backed security is less than its stated
maturity due to prepayments of the underlying mortgages. Prepayments that are
faster than anticipated may shorten the life of the security and adversely
affect its yield to maturity. The yield is based upon the interest income and
the amortization of any premium or discount related to the mortgage-backed
security. Although prepayments of underlying mortgages depend on many factors,
including the type of mortgages, the coupon rate, the age of mortgages, the
geographical location of the underlying real estate collateralizing the
mortgages and general levels of market interest rates, the difference between
the interest rates on the underlying mortgages and the prevailing mortgage
interest rates generally is the most significant determinant of the rate of
prepayments. During periods of falling mortgage interest rates, if the coupon
rate of the underlying mortgages exceeds the prevailing market interest rates
offered for mortgage loans, refinancing generally increases and accelerates the
prepayment of the underlying mortgages and the related security. Under such
circumstances, the Savings Bank may be subject to reinvestment risk because to
the extent that the Savings Bank's mortgage-backed securities amortize or prepay
faster than anticipated, the Savings Bank may not be able to reinvest the
proceeds of such repayments and prepayments at a comparable rate. At December
31, 2000, of the $9.4 million of mortgage-backed securities, an aggregate of
$7.9 million were secured by fixed-rate mortgage loans and an aggregate of $1.5
million were secured by adjustable-rate mortgage loans.
In February 1992, the OTS adopted a policy statement which states, among
other things, that mortgage derivative products (including CMOs and CMO
residuals and stripped mortgage-backed securities) which possess average life or
price volatility in excess of a benchmark fixed rate 30-year mortgage-backed
pass-through security are "high-risk" mortgage securities, are not suitable
investments for depository institutions, must be carried in the institution's
trading account or as assets held for sale, and must be marked to market on a
regular basis. The Savings Bank has no "high-risk" mortgage securities at
December 31, 2000 and has no present intention to invest in such products.
38
40
SOURCES OF FUNDS
GENERAL. The principal source of funds for the Company is the repayment of
the loan to the ESOP, repayment of the officer loan, interest and dividends on
its debt and equity investments (including its ownership of all of the capital
stock of the Savings Bank) and interest paid on deposits maintained at the
Savings Bank. The Savings Bank's principal source of funds for use in lending
and for other general business purposes has traditionally come from deposits
obtained through the Savings Bank's branch offices. The Savings Bank also
derives funds from amortization and prepayments of outstanding loans and
mortgage-backed securities and from maturing investment securities. The Savings
Bank has also borrowed from the FHLB of Pittsburgh. Loan contractual payments
are a relatively stable source of funds, while loan prepayments and deposits
inflows and outflows are significantly influenced by general interest rates and
money market conditions.
DEPOSITS. The Savings Bank's current deposit products include passbook
accounts, negotiable order of withdrawal ("NOW") accounts, non-interest bearing
demand deposit accounts, tiered money market deposit accounts and certificates
of deposit ranging in terms from six months to five years. The Savings Bank's
deposit products also include Individual Retirement Account ("IRA") and Keogh
certificates.
The Savings Bank's deposits are obtained primarily from residents in its
primary market area of Allegheny County and portions of Washington County and
Westmoreland County, all of which are located in Western Pennsylvania. The
Savings Bank to a lesser extent obtains deposits from other locations in the
greater Pittsburgh metropolitan area. The Savings Bank attracts deposit accounts
by offering a wide variety of accounts, competitive interest rates and fee
structures on transaction accounts, and convenient branch office locations and
service hours. The Savings Bank primarily utilizes print and broadcast media to
attract new customers and savings deposits. The Savings Bank has never utilized
the services of deposit brokers and had no brokered deposits at December 31,
2000. The Savings Bank presently operates six automated teller machines
("ATMs"), one at each of the branch offices maintained by the Savings Bank as of
December 31, 2000 and one off-site ATM at a local convenience store. The Savings
Bank is affiliated with a regional ATM network.
The Savings Bank has been competitive in the types of accounts and in
interest rates it has offered on its deposit products but does not necessarily
seek to match the highest rates paid by competing institutions. At times of
declining interest rates, the Savings Bank has chosen to aggressively price
certificate of deposit rates to discourage disintermediation of deposits into
competing investment products offered by other institutions.
The following table shows the distribution of, and certain other
information relating to, the Savings Bank's deposits by type of deposit as of
the dates indicated.
DECEMBER 31,
--------------------------------------------------------------
2000 1999 1998
------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Passbook and club accounts......... $ 15,862 13.02% $ 16,539 13.73% $ 16,372 14.93%
Money market....................... 23,008 18.89 25,111 20.84 19,857 18.10
Certificates of deposit............ 60,015 49.28 57,819 47.99 55,939 50.99
NOW accounts....................... 14,885 12.22 13,485 11.19 11,799 10.76
Non-interest bearing............... 8,023 6.59 7,537 6.25 5,731 5.22
-------- ------ -------- ------ -------- ------
Total deposits................ $121,793 100.00% $120,491 100.00% $109,698 100.00%
======== ====== ======== ====== ======== ======
39
41
The following table presents, by various interest rate categories, the
amount of certificates of deposit at December 31, 2000 and the amounts at
December 31, 2000 that mature during the periods indicated.
TOTAL AS OF
DECEMBER 31, AMOUNTS AT DECEMBER 31, 2000
2000 MATURING WITHIN
------------ -------------------------------------
AFTER ONE
ONE BUT WITHIN
CERTIFICATES OF DEPOSIT YEAR THREE YEARS THEREAFTER
----------------------- ------- ------------ ----------
(DOLLARS IN THOUSANDS)
4.01% to 6.00%............................... $38,952 $28,329 $ 6,433 $4,190
6.01% to 8.00%............................... 21,063 7,305 12,702 1,056
------- ------- ------- ------
Total certificate accounts.............. $60,015 $35,634 $19,135 $5,246
======= ======= ======= ======
The following table presents the average balance of each deposit type and
the average rate paid on each deposit type, net of early withdrawal penalties
for the periods indicated.
DECEMBER 31,
-------------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- -------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE PAID BALANCE RATE PAID BALANCE RATE PAID
-------- --------- -------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
Passbook and club accounts...... $ 16,330 2.54% $ 16,730 2.53% $16,119 2.53%
Money market.................... 24,828 4.20 23,895 3.72 17,834 3.71
Certificates of deposit......... 58,893 5.46 58,219 5.20 50,089 5.48
NOW accounts.................... 14,462 1.51 12,256 1.51 10,455 1.56
Non-interest bearing............ 7,566 -- 6,063 -- 4,846 --
-------- ---- -------- ---- ------- ----
Total deposits............. $122,079 4.01% $117,163 3.86% $99,343 4.00%
======== ==== ======== ==== ======= ====
The following table sets forth the Savings Bank's net savings flows during
the periods indicated.
YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Beginning balance.......................................... $120,491 $109,698 $ 91,156
(Decrease) increase before interest credited............... (3,593) 6,268 14,566
Interest credited.......................................... 4,895 4,525 3,976
-------- -------- --------
Net savings increase....................................... 1,302 10,793 18,542
-------- -------- --------
Ending balance............................................. $121,793 $120,491 $109,698
======== ======== ========
The following table sets forth maturities of the Savings Bank's
certificates of deposit of $100,000 or more at December 31, 2000 by time
remaining to maturity.
IN THOUSANDS
------------
Three months or less........................................ $ 910
Over three months through six months........................ 2,693
Over six months through 12 months........................... 3,430
Over 12 months.............................................. 3,733
-------
Total.................................................. $10,766
=======
40
42
BORROWINGS FROM FHLB OF PITTSBURGH AS OF DECEMBER 31. The following table
sets forth the borrowing history of the Savings Bank from the FHLB of Pittsburgh
for the last three years.
AT DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN THOUSANDS)
Amount Outstanding At Year End.............................. $66,300 $62,977 $50,977
======= ======= =======
Maximum Balance............................................. $70,577 $62,977 $50,977
======= ======= =======
Average Balance............................................. $67,116 $54,040 $49,144
======= ======= =======
Weighted Average Interest Rate:
At end of year............................................ 6.28% 5.72% 5.55%
======= ======= =======
During Year............................................... 6.14% 5.56% 5.51%
======= ======= =======
The Savings Bank utilized the increased borrowings during 2000 to primarily
meet increased one-to-four family residential loan demand. To secure the
repayment of any outstanding borrowings from the FHLB of Pittsburgh and any
other credit product offered by the FHLB of Pittsburgh, the Savings Bank has
pledged to the FHLB of Pittsburgh investments of the Savings Bank in U.S.
Government and U.S. agency securities and U.S. Government and U.S. agency
mortgage-backed securities and 100% of its unencumbered home loan mortgages.
41
43
REGULATORY CAPITAL REQUIREMENTS
Federally insured savings institutions are required to maintain minimum
levels of regulatory capital. Pursuant to Federal regulations, the OTS has
established capital standards applicable to all savings institutions. These
standards generally must be as stringent as the comparable capital requirements
imposed on national banks. The OTS also is authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
At December 31, 2000, the Savings Bank exceeded all of the capital
requirements applicable to it. Set forth below is a summary of the Savings
Bank's compliance with the applicable capital standards as of December 31, 2000
and as of December 31 of each of the preceding four years.
AS OF AS OF AS OF
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------- -------------------- --------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
Tangible capital:(1)
Requirement......... $ 3,014 1.50% $ 2,992 1.50% $ 2,638 1.50%
Actual.............. 10,518 5.24 13,753 6.89 12,950 7.36
Excess.............. $ 7,504 3.74% $10,761 5.39% $10,312 5.86%
Core capital:(1)(2)
Requirement......... $ 8,036 4.00% $ 7,979 4.00% $ 5,276 3.00%
Actual.............. 10,518 5.24 13,753 6.89 12,950 7.36
Excess.............. $ 2,482 1.24% $ 5,774 2.89% $ 7,674 4.36%
Risk-based capital:(1)
Requirement (3)..... $ 8,753 8.00% $ 8,521 8.00% $ 7,286 8.00%
Actual (4).......... 11,886 10.86 14,736 13.83 13,521 14.85
Excess.............. $ 3,133 2.86% $ 6,215 5.83% $ 6,235 6.85%
AS OF AS OF
DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------- --------------------
PERCENT OF PERCENT OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2)
------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
Tangible capital:(1)
Requirement......... $ 2,139 1.50% $ 1,719 1.50%
Actual.............. 12,592 8.83 11,787 10.28
Excess.............. $10,453 7.33% $10,068 8.78%
Core capital:(1)(2)
Requirement......... $ 4,279 3.00% $ 3,438 3.00%
Actual.............. 12,592 8.83 11,787 10.28
Excess.............. $ 8,313 5.83% $ 8,349 7.28%
Risk-based capital:(1)
Requirement (3)..... $ 5,537 8.00% $ 4,064 8.00%
Actual (4).......... 12,995 18.78 12,094 23.81
Excess.............. $ 7,458 10.78% $ 8,030 15.81%
- ---------------
(1) Tangible capital levels are shown as a percentage of tangible assets. Core
capital levels are shown as a percentage of adjusted assets. Risk-based
capital levels are shown as a percentage of risk-weighted assets. As of
December 31, 2000, the difference between capital under generally accepted
accounting principles ("GAAP") and regulatory tangible and core capital is
attributable to $60,000 for the Savings Bank's net unrealized holding losses
on available-for-sale securities to arrive at regulatory tangible and core
capital of $10,518,000.
(2) To be "adequately capitalized" for purposes of the OTS' Prompt Corrective
Action regulations, core capital generally must be at least 4.0%.
(3) Calculated based on the OTS requirement of 8.0% of risk-weighted assets.
(4) As of December 31, 2000, the difference between capital under generally
accepted accounting principles and regulatory risk-based capital is
attributable to an addition to generally accepted accounting principles
capital of $1,368,000 for the allowable allowance for loan loss and $60,000
for the Savings Bank's net unrealized holding gains (losses) on
available-for-sale securities to arrive at regulatory risk-based capital of
$11,886,000.
42
44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board
of Directors of Prestige Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Prestige
Bancorp, Inc. (the Corporation) and Subsidiary as of December 31, 2000 and 1999,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2000.
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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Prestige
Bancorp, Inc. and Subsidiary as of December 31, 2000 and 1999, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
March 21, 2001
43
45
PRESTIGE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
------------ ------------
ASSETS
ASSETS:
Cash and due from banks................................... $ 1,223,252 $ 1,411,002
Interest-bearing deposits with banks...................... 4,647,771 3,787,311
Investment securities-
Available for sale..................................... 8,911,314 10,985,172
Held to maturity (market value $21,924,761 and
$23,027,655, respectively)........................... 22,243,491 24,361,002
Loans..................................................... 156,937,253 153,209,558
Less--Deferred (costs) fees, net....................... (15,244) 6,715
Allowance for loan losses....................... 3,387,779 982,588
Loans in process................................ 148,120 1,257,902
------------ ------------
Net loans......................................... 153,416,598 150,962,353
------------ ------------
Federal Home Loan Bank stock, at cost..................... 3,689,900 3,648,900
Premises and equipment, net............................... 2,343,491 2,503,345
Accrued interest receivable............................... 1,301,026 1,177,480
Deferred tax asset, net................................... 2,411,016 548,118
Other assets.............................................. 1,587,097 1,187,636
------------ ------------
Total assets...................................... $201,774,956 $200,572,319
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits--
Noninterest-bearing deposits........................... $ 8,023,201 $ 7,537,107
Interest-bearing deposits.............................. 113,770,089 112,953,650
------------ ------------
Total deposits.................................... 121,793,290 120,490,757
Federal Home Loan Bank advances........................... 66,300,000 62,977,000
Advance payments by borrowers for taxes and insurance..... 884,319 1,068,008
Income taxes payable...................................... -- 163,736
Accrued interest payable.................................. 648,145 422,971
Other liabilities......................................... 599,270 496,558
------------ ------------
Total liabilities................................. 190,225,024 185,619,030
------------ ------------
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 December 31,
2000 and December 31, 1999............................. 1,162,313 1,162,313
Treasury stock at cost; 216,197 and 172,349 shares at
December 31, 2000 and December 31, 1999,
respectively........................................... (2,699,348) (2,246,618)
Additional paid in capital................................ 11,588,778 11,581,741
Unearned ESOP shares...................................... (615,670) (654,310)
Retained earnings......................................... 2,377,690 5,543,671
Accumulated other comprehensive (loss) income............. (263,831) (433,508)
------------ ------------
Total stockholders' equity............................. 11,549,932 14,953,289
------------ ------------
Total liabilities and stockholders' equity............. $201,774,956 $200,572,319
============ ============
The accompanying notes are an integral part of these statements.
44
46
PRESTIGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
----------- ----------- ----------
INTEREST INCOME:
Interest and fees on loans............................. $12,321,324 $10,582,966 $8,689,218
Interest on mortgage-backed securities................. 661,392 761,098 589,328
Interest and dividends on other investment
securities........................................... 1,738,795 1,634,498 2,137,413
Interest on deposits in other financial institutions... 115,176 215,844 255,738
----------- ----------- ----------
Total interest income........................... 14,836,687 13,194,406 11,671,697
----------- ----------- ----------
INTEREST EXPENSE:
Interest on deposits................................... 4,892,599 4,525,058 3,976,159
Advances from Federal Home Loan Bank................... 4,123,462 3,006,736 2,708,619
----------- ----------- ----------
Total interest expense.......................... 9,016,061 7,531,794 6,684,778
Net interest income............................. 5,820,626 5,662,612 4,986,919
----------- ----------- ----------
PROVISION FOR LOAN LOSSES................................ 6,382,865 438,000 209,000
----------- ----------- ----------
Net interest (loss) income after provision for
loan losses................................... (562,239) 5,224,612 4,777,919
----------- ----------- ----------
OTHER INCOME:
Fees and service charges............................... 909,201 777,948 511,954
Gain (loss) on sale of investments..................... 9,491 72,789 (6,703)
Gain on sale of fixed assets........................... 2,660 5,370 27,354
Loss on sale of foreclosed property.................... (16,978) -- (18,500)
Other income, net...................................... 16,486 13,684 20,327
----------- ----------- ----------
Total other income.............................. 920,860 869,791 534,432
----------- ----------- ----------
OTHER EXPENSES:
Salaries and employee benefits......................... 2,556,030 2,478,436 2,023,378
Premises and occupancy costs........................... 592,781 584,211 529,950
Federal deposit insurance premiums..................... 24,864 65,151 57,718
Data processing costs.................................. 276,642 257,581 265,707
Advertising costs...................................... 130,024 118,764 122,802
Transaction processing costs........................... 350,280 309,491 253,833
ATM transaction fees................................... 184,132 151,817 110,408
Other expenses......................................... 1,088,749 749,379 732,536
----------- ----------- ----------
Total other expenses............................ 5,203,502 4,714,830 4,096,332
----------- ----------- ----------
(Loss) income before income tax (benefit)
expense....................................... (4,844,881) 1,379,573 1,216,019
INCOME TAX (BENEFIT) EXPENSE............................. (1,880,721) 528,259 472,932
----------- ----------- ----------
NET (LOSS) INCOME........................................ $(2,964,160) $ 851,314 $ 743,087
=========== =========== ==========
PER COMMON SHARE DATA(1):
Basic:
Net (loss) income.................................... $ (3.37) $ 0.93 $ 0.75
=========== =========== ==========
Average number of common shares outstanding.......... 879,144 915,316 991,452
----------- ----------- ----------
Diluted:
Net (loss) income.................................... $ (3.37) $ 0.93 $ 0.74
=========== =========== ==========
Average number of common shares outstanding.......... 879,144 915,467 1,000,945
----------- ----------- ----------
Cash dividends declared................................ $ 0.21 $ 0.24 $ 0.18
=========== =========== ==========
- ---------------
(1) On April 15, 1998, the Board of Directors declared a stock dividend of 15%
to shareholders of record of June 2, 1998 payable on June 19, 1998. In
addition, on February 17, 1999, the Board declared a 5% stock dividend to
shareholders of record of March 2, 1999 payable on March 19, 1999. All per
share data have been restated to reflect the stock dividends.
The accompanying notes are an integral part of these statements.
45
47
PRESTIGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
COMMON ACCUMULATED
STOCK ADDITIONAL UNEARNED OTHER
COMPREHENSIVE $1.00 PAR TREASURY PAID-IN ESOP RETAINED COMPREHENSIVE
INCOME (LOSS) VALUE STOCK CAPITAL SHARES EARNINGS INCOME (LOSS)
------------- ---------- ----------- ----------- --------- ----------- -------------
BALANCE, December 31, 1997...... $ 963,023 $ (775,881) $ 8,033,296 $(724,050) $ 8,064,202 $ 69,221
Allocation of 4,066 ESOP
shares...................... -- -- 44,976 33,670 -- --
Cash dividends declared....... -- -- -- -- (191,600) --
Treasury stock purchases,
107,716 shares.............. -- (1,392,128) -- -- -- --
Stock dividend declared:
Common stock (15% per
share).................... 137,067 -- 2,648,956 -- (2,786,023) --
Cash in lieu of stock....... -- -- -- -- (3,484) --
Common stock issued upon
exercise of stock options -
507 shares.................. -- 6,766 449 -- -- --
Net income.................... $ 743,087 -- -- -- -- 743,087 --
Net unrealized losses on
available for sale
securities, net of tax of
$74,595..................... (116,066) -- -- -- -- -- (116,066)
Reclassification adjustment
for losses realized in net
income net of tax of
2,279....................... 4,424 -- -- -- -- -- 4,424
-----------
Comprehensive income.......... $ 631,445
=========== ---------- ----------- ----------- --------- ----------- ---------
BALANCE, December 31, 1998...... 1,100,090 (2,161,243) 10,727,677 (690,380) 5,826,182 (42,421)
Allocation of 4,355 ESOP
shares...................... -- -- 23,743 36,070 -- --
Cash dividends declared....... -- -- -- -- (236,380) --
Treasury stock purchases,
7,000 shares................ -- (85,375) -- -- -- --
Stock dividend declared:
Common stock (5% per
share).................... 62,223 -- 830,321 -- (892,544) --
Cash in lieu of stock....... -- -- -- -- (4,901) --
Net income.................... $ 851,314 -- -- -- -- 851,314 --
Net unrealized losses on
available for sale
securities, net of tax of
$228,698.................... (343,047) -- -- -- -- -- (343,047)
Reclassification adjustment
for gains realized in net
income net of tax of
$24,749..................... (48,040) -- -- -- -- -- (48,040)
-----------
Comprehensive income.......... $ 460,227
=========== ---------- ----------- ----------- --------- ----------- ---------
BALANCE, December 31, 1999...... 1,162,313 (2,246,618) 11,581,741 (654,310) 5,543,671 (433,508)
Allocation of 4,666 ESOP
shares...................... -- -- 7,037 38,640 -- --
Cash dividends declared....... -- -- -- -- (201,821) --
Treasury stock purchases,
43,848 shares............... -- (452,730) -- -- -- --
Net loss...................... $(2,964,160) -- -- -- -- (2,964,160) --
Net unrealized gains on
available for sale
securities, net of tax of
$109,259.................... 163,888 -- -- -- -- -- 163,888
Reclassification adjustment
for gains realized in net
income net of tax of
$3,702...................... 5,789 -- -- -- -- -- 5,789
-----------
Comprehensive loss............ $(2,794,483)
=========== ---------- ----------- ----------- --------- ----------- ---------
BALANCE, December 31, 2000...... $1,162,313 $(2,699,348) $11,588,778 $(615,670) $ 2,377,690 $(263,831)
========== =========== =========== ========= =========== =========
TOTAL
-----------
BALANCE, December 31, 1997...... $15,629,811
Allocation of 4,066 ESOP
shares...................... 78,646
Cash dividends declared....... (191,600)
Treasury stock purchases,
107,716 shares.............. (1,392,128)
Stock dividend declared:
Common stock (15% per
share).................... --
Cash in lieu of stock....... (3,484)
Common stock issued upon
exercise of stock options -
507 shares.................. 7,215
Net income.................... 743,087
Net unrealized losses on
available for sale
securities, net of tax of
$74,595..................... (116,066)
Reclassification adjustment
for losses realized in net
income net of tax of
2,279....................... 4,424
Comprehensive income..........
-----------
BALANCE, December 31, 1998...... 14,759,905
Allocation of 4,355 ESOP
shares...................... 59,813
Cash dividends declared....... (236,380)
Treasury stock purchases,
7,000 shares................ (85,375)
Stock dividend declared:
Common stock (5% per
share).................... --
Cash in lieu of stock....... (4,901)
Net income.................... 851,314
Net unrealized losses on
available for sale
securities, net of tax of
$228,698.................... (343,047)
Reclassification adjustment
for gains realized in net
income net of tax of
$24,749..................... (48,040)
Comprehensive income..........
-----------
BALANCE, December 31, 1999...... 14,953,289
Allocation of 4,666 ESOP
shares...................... 45,677
Cash dividends declared....... (201,821)
Treasury stock purchases,
43,848 shares............... (452,730)
Net loss...................... (2,964,160)
Net unrealized gains on
available for sale
securities, net of tax of
$109,259.................... 163,888
Reclassification adjustment
for gains realized in net
income net of tax of
$3,702...................... 5,789
Comprehensive loss............
-----------
BALANCE, December 31, 2000...... $11,549,932
===========
The accompanying notes are an integral part of these statements.
46
48
PRESTIGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------------- ------------ ------------
OPERATING ACTIVITIES:
Net (loss) income......................................... $ (2,964,160) $ 851,314 $ 743,087
------------- ------------ ------------
Adjustments to reconcile net income to net cash provided
(used) by operating activities-
Depreciation of premises and equipment.................. 317,403 344,145 306,143
Amortization of premiums and discounts, net............. (257) 16,821 (28,174)
Non cash compensation expense related to MRP Plan....... 135,172 223,990 134,136
Non cash compensation expense related to ESOP benefit... 58,397 75,098 96,336
Loss on sale of mutual funds............................ -- 17,625 14,700
Loss on sale of available for sale investment
securities............................................ 8,877 -- --
Loss on sale of available for sale mortgage-backed
securities............................................ 2,270 -- --
Gain on sale of equity securities....................... (20,637) (90,414) (5,834)
Gain on sale of premises and equipment.................. -- -- (38,023)
Provision for loan losses............................... 6,382,865 438,000 209,000
Increase (decrease) in other liabilities................ 89,992 (27,926) (42,353)
Increase in accrued interest payable.................... 225,174 188,529 81,106
Decrease in income taxes payable........................ (163,736) (8,350) (5,982)
Increase in deferred income taxes, net.................. (1,976,017) (197,130) (93,044)
Increase in accrued interest receivable................. (123,546) (60,920) (83,299)
(Increase) decrease in other assets..................... (532,783) 116,590 (397,700)
------------- ------------ ------------
Total adjustments....................................... 4,403,174 1,036,058 147,012
------------- ------------ ------------
Net cash provided by operating activities............. 1,439,014 1,887,372 890,099
------------- ------------ ------------
INVESTING ACTIVITIES:
Loan originations......................................... (52,152,380) (73,366,281) (66,773,023)
Principal payments on loans............................... 43,315,270 45,882,762 38,828,150
Proceeds from calls and maturities of held to maturity
investment securities................................... 1,000,000 3,500,000 17,000,000
Proceeds from sale of available for sale mutual funds..... -- 733,931 660,500
Proceeds from sale of available for sale mortgaged-backed
securities.............................................. 593,798 -- --
Proceeds from sale and calls of available for sale
investment securities................................... 991,126 1,000,000 5,600,000
Proceeds from sale of equity securities................... 197,939 199,690 19,800
Return of capital on investment securities................ -- 10,530 2,225
Purchases of held to maturity investment securities....... -- (4,500,000) (13,727,081)
Purchases of available for sale investment securities..... (36,307) (2,614,983) (4,650,561)
Principal payments on available for sale mortgage-backed
securities.............................................. 625,772 514,078 1,289,713
Principal payments on held to maturity mortgage-backed
securities.............................................. 1,049,212 1,727,584 1,818,659
Principal payments on held to maturity investment
securities.............................................. 62,372 372,797 193,529
Purchases of available for sale mortgage-backed
securities.............................................. -- (1,500,000) (2,000,000)
Purchases of held to maturity mortgage-backed
securities.............................................. -- -- (3,000,000)
Purchases of premises and equipment....................... (157,549) (212,881) (435,343)
Proceeds from sale of premises and equipment.............. -- -- 206,408
Purchase of Federal Home Loan Bank stock.................. (41,000) (1,100,000) (800,000)
------------- ------------ ------------
Net cash used by investing activities................. (4,551,747) (29,352,773) (25,767,024)
------------- ------------ ------------
FINANCING ACTIVITIES:
(Decrease) increase in advance payments by borrowers for
taxes and insurance..................................... (183,689) 44,778 166,349
Purchases of MRP shares................................... (1,850) -- (611,575)
Proceeds from Federal Home Loan Bank advances............. 180,250,000 51,100,000 21,000,000
Payments on Federal Home Loan Bank advances............... (176,927,000) (39,100,000) (4,700,000)
Net (decrease) increase in money market, NOW and passbook
savings accounts........................................ (893,453) 8,912,540 8,406,498
Net increase in certificate accounts...................... 2,195,986 1,880,095 10,135,799
Purchases of treasury stock............................... (452,730) (85,375) (1,392,128)
Common stock cash dividends paid.......................... (201,821) (236,380) (191,600)
Proceeds from exercise of stock options................... -- -- 6,562
Cash in lieu of stock dividend on fractional shares....... -- (4,901) (3,484)
------------- ------------ ------------
Net cash provided by financing activities............. 3,785,443 22,510,757 32,816,421
------------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents......................................... 672,710 (4,954,644) 7,939,496
CASH AND CASH EQUIVALENTS, beginning of year................ 5,198,313 10,152,957 2,213,461
------------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of year...................... $ 5,871,023 $ 5,198,313 $ 10,152,957
============= ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes................ $ 801,100 $ 700,600 $ 570,000
============= ============ ============
Cash paid during the year for interest on deposits and
borrowings.............................................. $ 8,790,886 $ 7,343,265 $ 6,603,672
============= ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITY:
Loans transferred to real estate owned.................... $ 179,149 $ -- $ 250,000
============= ============ ============
The accompanying notes are an integral part of these statements.
47
49
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS
Prestige Bancorp, Inc. through its wholly-owned subsidiary, the Bank, is
primarily engaged in the business of attracting deposits in the form of savings
accounts and investing such funds in the origination or purchase of commercial
loans, residential mortgage loans and consumer loans, including credit card
services, and in mortgage-backed and other securities. The Bank conducts its
business through five offices located in the greater Pittsburgh metropolitan
area.
REGULATIONS
The Corporation announced on September 25, 2000 that the Savings Bank
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
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, among other things, places 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. This restriction on the extension of new loans for a
business purpose also extends to renewals of business loans with revolving
credit or balloon loan features at maturity. The Bank may request that the
Regional Director waive this limitation on the extension of an individual
commercial loan to a customer, including any revised terms or renewal of a
business loan. 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 has worked closely with the OTS to implement the
Supervisory Agreement and it believes it has materially complied with the
Agreement to date.
48
50
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--CONTINUED
The following comprise the significant accounting policies that the
Corporation follows in preparing and presenting its financial statements:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Corporation and its wholly owned subsidiary, the Bank. All significant
intercompany accounts and transactions have been eliminated in preparing the
consolidated financial statements.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents in the accompanying statements of cash flows
include cash and due from banks and interest-bearing deposits primarily with
banks. Interest-bearing deposits are on deposit with domestic banks and are due
within three months. The Corporation had no deposits in foreign banks or in
foreign branches of United States banks. In addition, cash and due from banks at
December 31, 2000 and 1999 included $492,000 and $323,000, respectively, of
reserves required to be maintained under Federal Reserve Bank regulations.
INVESTMENT SECURITIES
Securities are classified at the time of purchase as investment securities
held to maturity if it is management's intent and the Corporation has the
ability to hold the securities until maturity. Debt securities classified as
held to maturity are carried on the Corporation's books at cost, adjusted for
amortization of premium and accretion of discount using the interest method.
Alternatively, investments are classified as available for sale if it is
management's intent at the time of purchase to hold the securities for an
indefinite period of time and/or to use the investments as part of the
Corporation's asset/liability management strategy. Investments classified as
available for sale include securities that may be sold to effectively manage
interest rate risk exposure, prepayment risk and other factors (such as
liquidity requirements). These available for sale securities are reported at
fair value with unrealized aggregate appreciation (depreciation) excluded from
income and credited (charged) to a separate component of equity on a net of tax
basis. Gains or losses on the sale of available for sale securities are
recognized in income upon realization using the specific identification method.
The Corporation presently is not authorized by its Board of Directors and does
not engage in trading activity.
LOANS RECEIVABLE
Loans receivable are stated at their unpaid principal balances, including
any allowances for anticipated loss.
Interest on loans is credited to income as earned. Accrual of interest
income is discontinued when reasonable doubt exists regarding collectability,
generally when payment of principal or interest is 90 days or more past due and
repayment is less than assured. For loans that have been placed on a nonaccrual
basis, previously accrued but unpaid interest is reversed and subsequently
recognized only to the extent payment is received and recovery of principal is
assured.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on estimates, and ultimate losses
may vary from current estimates. These estimates are continually reviewed and,
as adjustments become necessary, they are reported in earnings in the period in
which they become known. The allowance for loan losses is established through a
provision charged to expense and recoveries.
The Bank follows SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," which was subsequently amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan -- Income Recognition and Disclosures." SFAS No. 114
addresses the treatment and disclosure of certain loans where it is probable
that the creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. This standard defines the term
"impaired loan" and indicates the method used to measure the
49
51
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--CONTINUED
impairment. The measurement of impairment may be based upon (a) the present
value of expected future cash flows discounted at the loan's effective interest
rate; (b) the observable market price of the impaired loan; or (c) the fair
value of the collateral of a collateral dependent loan.
The Corporation's policy is to review separately each of its commercial
business, commercial real estate and commercial real estate construction loans
in order to determine if a loan is impaired. The Corporation also has identified
two pools of small-dollar-value homogeneous loans for one-to-four family real
estate/construction loans and for consumer loans that are evaluated collectively
for impairment. As facts such as a significant delinquency in payments of 90
days or more, a bankruptcy or other circumstances become known on specific loans
within either loan pool, individual loans are reviewed and are removed from the
pool if deemed to be impaired.
The Corporation considers its specifically identified impaired loans to be
collateral dependent; therefore, the fair value of the collateral of the
impaired loans is evaluated in measuring the impairment. For its two loan pools,
the Corporation calculates expected loan losses using a formula approach based
upon historical experience and qualitative factors, which include but are not
limited to, economic trends, delinquencies, concentrations of credit, trends in
loan volume, experience and depth of management, examination and audit results,
effects of any changes in lending policies and trends in policy exceptions. The
Corporation's policy is to recognize interest on a cash basis for impaired loans
and to charge off impaired loans when deemed uncollectable.
ORIGINATION FEES AND COSTS
The Corporation defers all nonrefundable fees and capitalizes all material
direct costs associated with each loan originated. The deferred fees and
capitalized costs are accreted or amortized as an adjustment to interest income
using the interest method over the contractual life of the loans, adjusted for
estimated prepayments based on the Corporation's historical prepayment
experience.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization, which is computed using the straight-line method over the
estimated useful lives of the related assets that are from 2 to 50 years.
Repairs and maintenance are charged to expense as incurred.
DEPOSITS
Interest on deposits is accrued and charged to expense monthly and is paid
or credited in accordance with the terms of the respective accounts.
EMPLOYEE BENEFITS
The Corporation has a noncontributory defined benefit pension plan covering
substantially all employees of the Bank. Pension cost is charged to expense.
Additionally, the Bank maintains a 401(k) plan for employees. The Bank does not
match any employee contributions.
Effective June 27, 1996, the Corporation established the ESOP plan, which
acquired 77,041 shares, or 93,027 shares adjusted for the 15% stock dividend in
the second quarter of 1998 and 5% stock dividend in the first quarter of 1999,
in connection with the Plan of Conversion. As of December 31, 2000 and 1999,
74,341 and 79,007 shares, respectively, remain unearned.
On April 23, 1997, 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).
See notes 12, 13 and 14 for additional information.
50
52
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--CONTINUED
INCOME TAXES
Deferred tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases of assets and liabilities
using the enacted marginal tax rate. Deferred income tax expenses or credits are
based on the changes in the asset or liability from period to period.
EARNINGS PER COMMON SHARE
The Company 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 is computed based upon only the
weighted average common shares outstanding. Diluted earnings per share is
computed based upon the weighted average common shares outstanding and any
dilutive effect of common stock equivalent shares and other convertible
securities in the calculation. Treasury shares are treated as retired for
earnings per share purposes.
The following table reflects the calculation of earnings per share under
SFAS No. 128.
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
----------- -------- ----------
Basic (loss) earnings per share(1):
Net (loss) income............................ $(2,964,160) $851,314 $ 743,087
Average shares outstanding................... 879,144 915,316 991,452
(Loss) earnings per share.................... $ (3.37) $ .93 $ .75
Diluted (loss) earnings per share(1):
Net (loss) income............................ $(2,964,160) $851,314 $ 743,087
Average shares outstanding................... 879,144 915,316 991,452
Stock options................................ -- 151 9,493
----------- -------- ----------
Diluted average shares outstanding........... 879,144 915,467 1,000,945
(Loss) earnings per share.................... $ (3.37) $ .93 $ .74
--------------------
(1) On April 15, 1998, the Board of Directors declared a stock dividend of
15% to shareholders of record of June 2, 1998 payable on June 19, 1998.
In addition, on February 17, 1999, the Board of Directors declared a
stock dividend of 5% to shareholders of record of March 2, 1999 payable
on March 19, 1999. All per share data have been restated to reflect the
stock dividends.
Options to purchase 106,210 94,826 and 14,315 shares of common stock were
outstanding during 2000, 1999 and 1998, respectively, but were not included in
the computation of diluted earnings per common share as the option's exercise
price was greater than the average market price of the common stock for the
respective periods.
COMPREHENSIVE INCOME
During the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." Under SFAS No. 130, the reporting is required
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 a statement of financial position.
BUSINESS SEGMENTS
Financial Accounting Standards No. 131, "Disclosures about Segments of a
Business Enterprise and Related Information" ("SFAS 131") requires certain
information to be reported about operating segments on a basis
51
53
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--CONTINUED
consistent with the Company's internal organizational structure. The Company is
operated as a single segment which is community banking. As such, financial
information for this segment does not differ materially from the information
provided in the consolidated financial statements.
RISK MANAGEMENT OVERVIEW
Risk identification and management are essential elements for the
successful management of the Corporation. In the normal course of business, the
Bank is subject to various types of risk, including interest rate, credit and
liquidity risk. The Corporation strives to control and monitor these risks with
policies, procedures and various levels of managerial and Board oversight.
Interest rate risk is the sensitivity of net interest income and the market
value of financial instruments to the magnitude, direction and frequency of
changes in interest rates. Interest rate risk results from various repricing
frequencies and the maturity structure of assets and liabilities. The
Corporation strives to manage its interest rate risk using its asset liability
management policy.
Credit risk represents the possibility that a customer may not perform in
accordance with contractual terms. Credit risk results from extending credit to
customers and purchasing securities. The Corporation's primary credit risk
occurs in the loan portfolio. The Corporation uses its credit policy and
evaluation of the adequacy of the allowance for loan losses to strive to control
and manage credit risk. The Corporation's investment policy indicates the amount
of credit risk that may be assumed in the investment portfolio.
Liquidity risk represents the inability to generate cash or otherwise
obtain funds at reasonable rates to satisfy commitments to borrowers, as well as
the obligations to depositors and the Federal Home Loan Bank (FHLB). The
Corporation uses its asset liability management policy and its FHLB borrowing
capacity to strive to manage liquidity risk.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ from these
estimates.
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 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.
52
54
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
3. INVESTMENT SECURITIES:
The cost and market values of investment securities are summarized as
follows:
Investment securities available for sale:
DECEMBER 31, 2000
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
U.S. government and government agency
obligations:
Due after one and within five years.... $3,500,000 $3,750 $ 23,305 $3,480,445
Due after five and within ten years.... 500,000 -- 6,560 493,440
Corporate Debentures:
Due after ten years.................... 494,060 -- 40,415 453,645
Federal Home Loan Mortgage Corporation
(FHLMC) certificates:
Due after ten years.................... 1,787,580 5,077 22,762 1,769,895
Federal National Mortgage Association (FNMA)
certificates:
Due after ten years.................... 1,226,258 -- 16,217 1,210,041
Mutual fund investment...................... 589,094 -- 4,435 584,659
Common stock portfolio...................... 1,254,040 -- 334,851 919,189
---------- ------ -------- ----------
$9,351,032 $8,827 $448,545 $8,911,314
========== ====== ======== ==========
53
55
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
3. INVESTMENT SECURITIES:--CONTINUED
The maturities within the table above are based upon contractual maturity.
Investment securities held to maturity:
DECEMBER 31, 2000
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
U.S. government and government agency
obligations:
Due within one year.................. $ 501,664 $ -- $ 4,615 $ 497,049
Due after five and within ten
years.............................. 8,495,957 -- 100,122 8,395,835
Due after ten years.................. 6,808,228 -- 193,754 6,614,474
Federal Home Loan Mortgage Corporation
(FHLMC) certificates:
Due after five and within ten
years.............................. 2,295,845 27,701 -- 2,323,546
Due after ten years.................. 898,979 -- 13,013 885,966
Government National Mortgage Association
(GNMA) certificates:
Due after ten years.................. 1,516,240 9,654 15,463 1,510,431
Federal National Mortgage Association
(FNMA) certificates:
Due after ten years.................. 1,726,578 -- 29,118 1,697,460
----------- ------- -------- -----------
$22,243,491 $37,355 $356,085 $21,924,761
=========== ======= ======== ===========
The maturities within the table above are based upon contractual maturity.
54
56
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
3. INVESTMENT SECURITIES:--CONTINUED
Investment securities available for sale:
DECEMBER 31, 1999
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
U.S. government and government agency
obligations:
Due within one year.................. $ 501,608 $ -- $ 2,858 $ 498,750
Due after one and within five
years.............................. 3,998,900 -- 142,170 3,856,730
Due after five and within ten
years.............................. 500,000 -- 29,060 470,940
Corporate Debentures:
Due after ten years.................. 493,843 -- 33,328 460,515
Federal Home Loan Mortgage Corporation
(FHLMC) certificates:
Due after ten years.................. 1,981,307 2,349 93,452 1,890,204
Federal National Mortgage Association
(FNMA) certificates:
Due within one year.................. 91,335 -- 1,543 89,792
Due after one and within five
years.............................. 711,004 -- 11,169 699,835
Due after ten years.................. 1,445,558 -- 73,160 1,372,398
Mutual fund investment.................... 553,146 -- 7,383 545,763
Common stock portfolio.................... 1,430,985 -- 330,740 1,100,245
----------- ------ -------- -----------
$11,707,686 $2,349 $724,863 $10,985,172
=========== ====== ======== ===========
The maturities within the table above are based upon contractual maturity.
55
57
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
3. INVESTMENT SECURITIES:--CONTINUED
Investment securities held to maturity:
DECEMBER 31, 1999
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
U.S. government and government agency
obligations:
Due within one year................. $ 1,000,641 $ -- $ 6,581 $ 994,060
Due after one and within five
years............................. 506,516 -- 29,914 476,602
Due after five and within ten
years............................. 8,495,427 -- 496,286 7,999,141
Due after ten years................. 6,872,254 -- 575,447 6,296,807
Federal Home Loan Mortgage Corporation
(FHLMC) certificates:
Due after five and within ten
years............................. 2,423,138 -- 45,326 2,377,812
Due after ten years................. 1,439,343 -- 15,129 1,424,214
Government National Mortgage Association
(GNMA) certificates:
Due after ten years................. 1,737,895 7,612 63,520 1,681,987
Federal National Mortgage Association
(FNMA) certificates:
Due after ten years................. 1,885,788 -- 108,756 1,777,032
----------- ------ ---------- -----------
$24,361,002 $7,612 $1,340,959 $23,027,655
=========== ====== ========== ===========
The maturities within the table above are based upon contractual maturity.
Mortgage-backed securities include net unamortized premiums and discounts
of $4,303 and $2,567 at December 31, 2000 and 1999, respectively.
56
58
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
4. LOANS RECEIVABLE:
Loans receivable at December 31, 2000 and 1999, are summarized as follows:
2000 1999
------------ ------------
Real estate loans:
1-4 family........................................... $103,332,185 $ 96,182,460
Construction......................................... 1,550,454 2,713,594
Commercial real estate............................... 15,085,413 16,060,864
------------ ------------
119,968,052 114,956,918
Less--Undisbursed loan proceeds...................... 148,120 1,257,902
------------ ------------
119,819,932 113,699,016
Commercial business loans:............................. 17,046,757 20,919,709
Consumer loans:
Home equity.......................................... 12,908,169 10,935,728
Student.............................................. 2,419,454 2,410,853
Automobile........................................... 2,738,721 2,427,168
Collateral........................................... 729,124 615,279
Credit cards......................................... 608,438 463,902
Personal unsecured/other............................. 518,538 480,001
------------ ------------
19,922,444 17,332,931
------------ ------------
156,789,133 151,951,656
Less--Allowance for loan losses...................... 3,387,779 982,588
Deferred loan (costs) fees........................... (15,244) 6,715
------------ ------------
$153,416,598 $150,962,353
============ ============
The credit cards and student loans are currently being serviced by a third
party.
At December 31, 2000 and 1999, the majority of the loan portfolio was
secured by properties located in Western Pennsylvania. As of December 31, 2000,
loans to customers engaged in similar business activities and having similar
economic characteristics, as defined by standard industrial classifications, did
not exceed 10% of total loans. As of December 31, 2000 and 1999, the Bank had
approximately $5,691,000 and $1,127,000 of non-accrual loans. The Bank does not
have any other significant off-balance sheet risk except for the commitments
referenced in Note 17.
5. ALLOWANCE FOR LOAN LOSSES:
>Activity with respect to the allowance for loan losses is summarized as
follows:
2000 1999 1998
----------- -------- --------
Balance at beginning of year..................... $ 982,588 $571,183 $402,964
Provision for loan losses........................ 6,382,865 438,000 209,000
Charge-offs...................................... (3,982,158) (26,595) (40,841)
Recoveries....................................... 4,484 -- 60
----------- -------- --------
Balance at end of year........................... $ 3,387,779 $982,588 $571,183
=========== ======== ========
The Bank had loans totaling $5,691,000 and $1,127,000 being specifically
identified as impaired and a corresponding allocation reserve of $1,196,000 and
$120,000 at December 31, 2000 and 1999, respectively.
The average recorded balances for impaired loans during 2000 and 1999 were
$2,886,000 and $1,034,000, respectively. Interest income recognized during the
time within the period that the loans were impaired was not
57
59
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
5. ALLOWANCE FOR LOAN LOSSES:--CONTINUED
significant. For these same loans, the interest income recognized on a cash
basis during the period of impairment was not significant.
The Corporation records real estate owned at the lower of carrying cost or
fair value based upon appraisals less estimated cost to sell. The Corporation
had real estate owned assets of $163,000 at December 31, 2000 and $207,000 at
December 31, 1999.
6. FEDERAL HOME LOAN BANK STOCK:
The Bank is a member of the Federal Home Loan Bank System. As a member, the
Bank maintains an investment in the capital stock of the Federal Home Loan Bank
of Pittsburgh, at cost, in an amount not less than 1% of its outstanding
mortgage loans or 1/20 of its outstanding notes payable, if any, to the Federal
Home Loan Bank of Pittsburgh, whichever is greater, as calculated at December 31
of each year.
7. PREMISES AND EQUIPMENT:
Office premises and equipment at December 31, 2000 and 1999, are summarized
by major classification as follows:
2000 1999
---------- ----------
Land....................................................... $ 224,817 $ 224,817
Building and improvements.................................. 2,154,914 2,139,289
Furniture, fixtures and equipment.......................... 1,968,708 1,837,329
---------- ----------
Total, at cost........................................ 4,348,439 4,201,435
Less--Accumulated depreciation............................. 2,004,948 1,698,090
---------- ----------
Premises and equipment, net................................ $2,343,491 $2,503,345
========== ==========
Depreciation expense was $317,403, $344,145 and $306,143 for the fiscal
years ended December 31, 2000, 1999 and 1998, respectively.
The Corporation has entered into various operating leases expiring, with
options to renew by the Corporation, at various dates through October 31, 2009
for office space for three of its branch operations. During the years ended
December 31, 2000, 1999 and 1998, rental expense included in the statement of
operations was $51,000 $50,400, and $42,000, respectively.
Future minimum lease commitments for all leases as of December 31, 2000,
are as follows:
YEAR ENDING DECEMBER 31,
- ------------------------
2001................................................. $ 63,200
2002................................................. 64,200
2003................................................. 47,100
2004................................................. 17,750
2005................................................. 15,000
Thereafter........................................... 66,500
--------
Total Payments.................................. $273,750
========
58
60
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
8. DEPOSITS:
The aggregate amount of short-term jumbo certificates of deposit, each with
a minimum denomination of $100,000, was approximately $10,766,000 and
$10,022,000 at December 31, 2000, and 1999, respectively. At December 31, 2000,
the scheduled maturities of the certificate accounts are as follows:
2001................................................. $35,633,949
2002................................................. 12,515,626
2003................................................. 6,619,568
2004................................................. 1,347,742
2005 and thereafter.................................. 3,898,194
-----------
$60,015,079
===========
Interest expense associated with deposits for each of the years ended is as
follows:
2000 1999 1998
---------- ---------- ----------
Interest on certificates of deposit............... $3,237,380 $3,037,831 $2,754,876
Interest on savings accounts...................... 414,023 423,339 407,967
Money market accounts............................. 1,042,739 888,316 661,498
Interest on NOW accounts.......................... 219,315 184,640 163,504
Early withdrawal penalties........................ (20,858) (9,068) (11,686)
---------- ---------- ----------
$4,892,599 $4,525,058 $3,976,159
========== ========== ==========
9. FEDERAL HOME LOAN BANK ADVANCES:
Advances from the Federal Home Loan Bank consist of the following:
DECEMBER 31, 2000
- ------------------------------------
WEIGHTED
MATURITY AVERAGE RATE BALANCE
- -------- ------------ -----------
2001 6.77% $10,500,000
2002 6.41 6,500,000
2003 6.58 19,300,000
2004 6.57 2,500,000
2005 6.36 7,000,000
2008 5.49 9,000,000
2009 5.70 10,000,000
2010 6.05 1,500,000
-----------
$66,300,000
===========
DECEMBER 31, 1999
- ------------------------------------
WEIGHTED
MATURITY AVERAGE RATE BALANCE
- -------- ------------ -----------
2000 5.83% $19,977,000
2001 5.27 1,000,000
2002 5.81 16,000,000
2003 5.68 1,500,000
2005 5.55 1,000,000
2008 5.49 9,000,000
2009 5.64 14,500,000
-----------
$62,977,000
===========
59
61
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
9. FEDERAL HOME LOAN BANK ADVANCES:--CONTINUED
The Bank relies on cash management advances offered by the Federal Home
Loan Bank of Pittsburgh for their liquidity needs. At December 31, 2000 the
Bank's maximum borrowing capacity was $124.1 million of which $66.3 million had
been borrowed.
The Bank has a "blanket" agreement with the Federal Home Loan Bank of
Pittsburgh whereby the Bank pledged as collateral for these advances its
investments in U.S. government and agency securities and U.S. government and
agency mortgage-backed securities and 100% of its unencumbered home mortgage
loan portfolio.
Of the outstanding FHLB advances, $3,000,000 was adjustable rate notes with
a weighted average rate 6.73%. At December 31, 2000, there were $32.5 million of
advances that are convertible to quarterly adjustable rate advances at varying
conversion dates within the next five years. The $32.5 million convertible
advances have final maturity dates of $5.0 million in 2003, $7.0 million in
2005, $9.0 million in 2008, $10.0 million in 2009 and $1.5 million in 2010.
10. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires all entities to disclose the estimated fair value of its financial
instrument assets and liabilities. For the Corporation, as for most financial
institutions, approximately 97% of its assets and liabilities are considered
financial instruments, as defined in SFAS No. 107. Many of the Corporation's
financial instruments, however, lack an available trading market as
characterized by a willing buyer and willing seller engaging in an exchange
transaction. Therefore, significant estimations and present value calculations
were used for the purpose of this disclosure.
Estimated fair values have been determined using the best available data
and an estimation methodology suitable for each category of financial
instruments.
The following methods and assumptions were used in estimating the fair
value of financial instruments:
CASH AND SHORT TERM DEPOSITS
The carrying amounts reported in the balance sheets for cash, due from
banks and various interest-bearing deposits with banks approximates those
assets' fair values.
INVESTMENT SECURITIES
Fair values for investment securities are based on quoted market prices
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
NET LOANS AND ACCRUED INTEREST RECEIVABLE
The fair values for the loans are estimated using a discounted cash flow
analysis, using interest rates reported in various government releases and
competitive market rate surveys where appropriate. The prepayment speeds
utilized were taken from the December 31, 2000 OTS Selected Asset and Liability
Price Tables and market estimations. The carrying amount of accrued interest
approximates its fair value.
DEPOSIT LIABILITIES
The fair value for deposits with no stated maturities (e.g., passbooks)
are, by definition, equal to the amount payable on demand at the repricing date
(i.e., their carrying amounts). Fair values on deposits with stated maturities
(e.g., certificates of deposit) are estimated using a discounted cash flow
calculation that applies the median rate for a comparable term certificate of
deposit obtained from a local deposit offering rate survey.
60
62
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
10. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:--CONTINUED
FEDERAL HOME LOAN BANK ADVANCES
Fair values on Federal Home Loan Bank advances are estimated using a
discounted cash flow calculation that applies a comparable Federal Home Loan
Bank advance rate for borrowings of similar maturities.
The estimated fair values and recorded book balances at December 31, 2000
and 1999 are as follows:
2000 1999
--------------------------- ---------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BALANCE FAIR VALUE BALANCE
------------ ------------ ------------ ------------
Cash and short term deposits.... $ 5,871,023 $ 5,871,023 $ 5,198,313 $ 5,198,313
Investment securities........... 30,836,075 31,154,805 34,012,827 35,346,174
Net loans....................... 152,342,682 153,416,598 149,086,000 150,962,353
Accrued interest receivable..... 1,301,026 1,301,026 1,177,480 1,177,480
Deposits with no stated
maturities.................... 61,778,211 61,778,211 62,671,664 62,671,664
Deposits with stated
maturities.................... 59,686,009 60,015,079 57,104,000 57,819,093
Federal Home Loan Bank
advances...................... 66,472,358 66,300,000 62,664,000 62,977,000
Commitments to originate
loans......................... 9,910,000 9,910,000 10,623,000 10,623,000
11. INCOME TAXES:
The (benefit) provision for income taxes for each of the years ended
December 31, are as follows:
2000 1999 1998
----------- --------- --------
Federal:
Current....................................... $ 434,015 $ 628,135 $481,170
Deferred...................................... (1,976,020) (197,178) (93,696)
----------- --------- --------
(1,542,005) 430,957 387,474
State:
Current....................................... (338,716) 97,302 85,458
----------- --------- --------
Total income tax (benefit) expense....... $(1,880,721) $ 528,259 $472,932
=========== ========= ========
Deferred income taxes result from timing differences in the recognition of
revenue and expense for tax and financial reporting purposes. The following
table presents the impact on income tax expense of the principal timing
differences and the tax effect of each for the years ended:
2000 1999 1998
----------- --------- --------
Deferred tax expense (benefit)--
Prepaid pension................................... $ 16,404 $ 11,821 $ (4,272)
Deferred loan costs/fees.......................... -- -- (10,259)
Vacation accrual.................................. (266) (4,863) (6,127)
MRP accrual....................................... (22,319) (13,842) --
Provision for loan losses......................... (2,016,833) (148,920) (71,060)
Tax depreciation (less than) in excess of book
depreciation................................... (578) (16,086) 10,200
Other, net........................................ 47,572 (25,288) (12,178)
----------- --------- --------
$(1,976,020) $(197,178) $(93,696)
=========== ========= ========
The special tax benefit afforded to thrift institutions that allowed a bad
debt deduction based upon 8% of taxable income was repealed in 1996. A small
thrift with assets of less than $500 million may maintain a bad debt reserve
equal to the greater of the allowable base year reserve (i.e. the thrift bad
debt reserve at December 31, 1987) or the experience method reserve (six year
moving average ratio of charge-offs to loans applied to year end loan balances).
The portion of the bad debt reserve under the former (percentage of taxable
income) method
61
63
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
11. INCOME TAXES:--CONTINUED
which exceeds the bad debt reserve under the present (base year or experience)
method must be recaptured by recognizing such excess in taxable income ratably
over a six year period. The six-year recapture period generally started in 1996,
but may have been delayed until 1997 or 1998 if certain residential loan
origination tests were met in 1997 and 1998. The Bank had maintained the
applicable residential loan requirement and the recapture commenced with the
taxable year beginning January 1, 1998. As of December 31, 2000, the Savings
Bank had an applicable excess reserve balance remaining of approximately
$64,000. Approximately $21,300 will be recaptured on an annual basis over the
next three fiscal years.
The base year (i.e. December 31, 1987) bad debt reserve under the former
method is permanently suspended, and therefore not subject to recapture, unless
a base year loan contraction occurs in a subsequent year. A base year loan
contraction occurs when the total loans at the end of the year are less than the
total loans at December 31, 1987. In such cases, a proportionate reduction to
the base year bad debt reserve at December 31, 1987 is required and the
reduction to the reserve is recaptured. Furthermore, the base year bad debt
reserve constitutes a restriction for tax purposes of the Bank's use of retained
earnings for distributions or redemptions.
In accordance with FASB Statement No. 109, the Bank has recorded deferred
income tax associated with the temporary differences related to the portion of
the bad debt reserve arising in tax years after December 31, 1987. For the
period before December 31, 1987, there is an unrecognized deferred tax liability
of approximately $565,000 at December 31, 2000. If the suspended base year bad
debt reserve at December 31, 1987 is reduced by certain excess distributions,
redemptions or a base year loan contraction, income tax expense will be
recognized at the prevailing tax rate.
A reconciliation from the expected federal statutory income tax rate to the
effective rate expressed as a percentage of pretax income for each of the years
ended is as follows:
2000 1999 1998
---- ---- ----
Statutory federal tax rate.................................. 34.0% 34.0% 34.0%
State income taxes, net of Federal income tax benefit....... 7.0 7.1 7.0
Effect of graduated federal tax rates....................... (2.4) (2.1) (1.3)
Other....................................................... .2 (.7) (.8)
---- ---- ----
38.8% 38.3% 38.9%
==== ==== ====
Net deferred tax liabilities (assets) as of December 31, 2000 and 1999 are
as follows:
2000 1999
----------- ---------
Prepaid pension............................................ $ 44,439 $ 28,035
Vacation accrual........................................... (27,236) (26,970)
Allowance for loan losses.................................. (2,410,679) (240,505)
Valuation allowance for investments........................ (175,887) (289,006)
Tax depreciation in excess of book depreciation............ 61,836 63,536
Deferred loan costs/fees................................... 1,845 1,845
MRP accrual................................................ (66,185) (43,866)
Other, net................................................. 160,851 (41,187)
----------- ---------
Net deferred tax asset..................................... $(2,411,016) $(548,118)
=========== =========
No valuation allowance has been provided for the net deferred tax asset as
it is more likely than not that it will be realized through future taxable
interest income.
62
64
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
12. PENSION PLAN:
The Bank maintains a noncontributory defined benefit pension plan covering
all eligible employees. The following table sets forth the plan's fund status
and amounts recognized in the Corporation's balance sheets at December 31, 2000
and 1999, respectively.
2000 1999
---------- ----------
Change in benefit obligation:
Benefit obligation at beginning of year.................. $1,098,969 $1,170,869
Service cost............................................. 165,145 123,290
Interest cost............................................ 82,423 79,034
Actuarial gain........................................... (44,672) (87,724)
Benefits paid............................................ (8,769) (186,500)
---------- ----------
Benefit obligation at end of year........................ 1,293,096 1,098,969
---------- ----------
Change in plan assets Fair value of plan assets at
beginning of year........................................ 1,179,659 1,062,744
Actual return on plan assets............................. (21,976) 144,507
Employer contribution.................................... 193,502 158,908
Benefits paid............................................ (8,769) (186,500)
---------- ----------
Fair value of plan assets at end of year................. 1,342,416 1,179,659
---------- ----------
Funded status............................................ 49,320 80,690
Unrecognized net obligation at transition................ 40,112 44,884
Unrecognized net loss (gain)............................. 41,272 (43,117)
---------- ----------
Prepaid benefit cost..................................... $ 130,704 $ 82,457
========== ==========
Approximately 92% of the plan's assets are primarily invested either
directly or through mutual funds in common stocks, bonds, U.S. government and
agency, and foreign securities. The remaining plan assets are on deposit with
the Bank or in a cash management account. The Bank's past funding policy is to
contribute annually the maximum amount that can be deducted for federal income
tax purposes. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future.
The components of pension expense are as follows for each of the years
ended December 31:
2000 1999 1998
-------- -------- ---------
Service cost...................................... $165,145 $123,290 $ 84,055
Interest cost..................................... 82,423 79,034 66,813
Actual loss (return) on plan assets............... 21,976 (144,507) (179,024)
Amortization of transition asset.................. (124,289) 66,321 122,226
-------- -------- ---------
Net periodic pension cost......................... $145,255 $124,138 $ 94,070
======== ======== =========
For all reported periods, the rate of increase in future compensation
levels was assumed to be 4.75%. The weighted average discount rate used in
determining the actuarial present value of the projected benefit obligation was
7.50% for the year ended December 31, 2000, 6.75% for the year ended December
31, 1999 and 7.25% for the year ended December 31, 1998. The expected long-term
rate of return on assets was 8.00% for the year ended December 31, 2000 and
7.25% for each of the years ended December 31, 1999 and 1998.
Additionally, the Bank maintains a 401(k) plan for employees. The Bank does
not match any employee contributions.
63
65
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
13. EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST (ESOP):
In 1996, the Company established the ESOP to enable employees to obtain
ownership interests in the Corporation.
In connection with the conversion described in Note 1, the Corporation made
a $770,410 loan to the ESOP that was used to purchase 77,041 shares, or 93,027
shares adjusted for the 15% stock dividend in the second quarter of 1998 and 5%
stock dividend in the first quarter of 1999, of the Corporation's common stock.
The ESOP loan has a term of 15 years and bears interest at 7.0%. This loan is
collateralized by the shares purchased by the ESOP. The Bank's contributions to
the ESOP will be used to repay the ESOP loan, which requires semi-annual
payments of $41,888 (includes principal and interest) which began on December
27, 1996. The Bank is obligated to contribute amounts sufficient to repay the
ESOP loan. The ESOP uses such contributions to repay the loan made to the ESOP
by the Corporation. These transactions occur simultaneously and, for accounting
and reporting purposes, offset each other. The effect of the ESOP on the
Corporation's financial statements is that the amount of the unearned ESOP
shares of $615,670 and $654,310 at December 31, 2000 and 1999, respectively, as
reflected in shareholders' equity, will be amortized to compensation over the
remaining period of the ESOP loan. In addition, any difference between the
market price of the Corporation's common stock and the $10 per share (the
purchase price paid by the ESOP), or $8.28 adjusted for the 15% stock dividend
in the second quarter of 1998 and 5% stock dividend in the first quarter of
1999, will also be charged or credited to compensation expense (with the offset
to additional paid-in capital) based on the semi-annual allocation to ESOP
participants of approximately 3,100 shares. Total compensation expense incurred
in 2000, 1999 and 1998 for allocated ESOP shares was $58,397, $75,098 and
$96,336, respectively.
14. CAPITAL STOCK PLANS:
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 the Management Recognition and Retention Plan and Trust
(the MRP Plan; the Option Plan and MRP Plan herein are collectively referred to
as the Plans).
On April 15, 1998, the Board of Directors declared a stock dividend of 15%
to shareholders of record of June 2, 1998 payable June 19, 1998. In addition, on
February 17, 1999, the Board of Directors declared a stock dividend of 5% to
shareholders of record of March 2, 1999 payable on March 19, 1999. All share
data have been restated to reflect the stock dividend.
The aforementioned approval of the MRP Plan made 38,521 shares, or 46,513
shares adjusted for the stock dividends in 1998 and 1999, of common stock
available for awards to officers, key employees of the Corporation and Bank and
non-employee directors thereof. As of December 31, 2000, the Corporation had
granted 44,748 shares of which 241 shares have been forfeited. However, such
shares are vested over a five-year period and as of December 31, 2000, 15,204
shares remain unvested.
In connection with the MRP Plan's approval, the Bank established a trust
whose purpose is to purchase shares on the open market. During the year ended
December 31, 2000, the Corporation incurred compensation expense of $135,172
based on the cost incurred to purchase the currently vesting or previously
vested shares in the open market. As of December 31, 2000, the trust had
purchased 46,513 shares.
The aforementioned approval of the Option Plan made 96,302 options, or
116,285 options adjusted for the stock dividends in 1998 and 1999, available for
grant to employees and others who perform substantial services to the
Corporation. As of December 31, 2000, the corporation had granted 112,929
options of which 27,325 shares have been forfeited.
As permitted by Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," the Corporation accounts for the
Option Plan under the intrinsic value of APB Opinion No. 25, "Accounting for
Stock Issued to Employees" under which no compensation cost has been recorded,
rather than under the fair value method. Had the fair value method been used in
connection with the Option Plan and had compensation per share for the MRP Plan
been set on the date of grant, the Corporation's net income and
64
66
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
14. CAPITAL STOCK PLANS:--CONTINUED
earnings per share would have had a net reduction to the following pro forma
amounts for the years ended December 31, 2000, 1999 and 1998:
2000 1999 1998
----------- -------- --------
Net (loss) income:
As reported.................................... $(2,964,160) $851,314 $743,087
Pro forma...................................... (2,978,429) 802,616 712,072
Basic (loss) earnings per share:
As reported.................................... $ (3.37) $ .93 $ .75
Pro forma...................................... (3.39) .88 .72
Diluted (loss) earnings per share:
As reported.................................... $ (3.37) $ .93 $ .74
Pro forma...................................... (3.39) .88 .71
A summary of the status of the Corporation's Stock Option Plan at December
31, 2000, and changes during the year ended is presented in the table and
narrative following:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
Outstanding at beginning of period....................... 107,426 $13.63
Granted................................................ 3,850 9.63
Exercised.............................................. -- --
Forfeited.............................................. 26,179 12.56
--------
Outstanding at end of period............................. 85,097 13.78
--------
Exercisable at end of period............................. 54,613
Weighted average fair value of options granted during the
year................................................... $ 4.48
The options are exercisable beginning one year from the grant date in equal
annual installments over a period of five years. The maximum term of any option
granted under the Plan cannot exceed 10 years.
The 85,097 options outstanding at December 31, 2000 had a weighted average
exercise price of $13.78 and a weighted average remaining contractual life of
6.3 years. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions used
for grants in 2000: weighted average risk-free interest rate of 6.50%, expected
life of 7.0 years and expected volatility of 29.00%.
A summary of the status of the Corporation's Stock Option Plan at December
31, 1999, and changes during the year ended is presented in the table and
narrative following:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
Outstanding at beginning of period....................... 105,326 $13.66
Granted................................................ 2,100 12.25
Exercised.............................................. -- --
Forfeited.............................................. -- --
--------
Outstanding at end of period............................. 107,426 13.63
--------
Exercisable at end of period............................. 56,405
Weighted average fair value of options granted during the
year................................................... $ 4.14
The options are exercisable beginning one year from the grant date in equal
annual installments over a period of five years. The maximum term of any option
granted under the Plan cannot exceed 10 years.
65
67
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
14. CAPITAL STOCK PLANS:--CONTINUED
The 107,426 options outstanding at December 31, 1999 had a weighted average
exercise price of $13.63 and a weighted average remaining contractual life of
6.1 years. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions used
for grants in 1999: weighted average risk-free interest rate of 5.46%, weighted
average expected dividend yield of 1.96%, expected life of 7.0 years and
expected volatility of 29.00%.
A summary of the status of the Corporation's Stock Option Plan at December
31, 1998, and changes during the year ended is presented in the table and
narrative following:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
Outstanding at beginning of period....................... 92,665 $13.74
Granted................................................ 14,314 13.15
Exercised.............................................. 507 12.94
Forfeited.............................................. 1,146 14.29
--------
Outstanding at end of period............................. 105,326 13.66
--------
Exercisable at end of period............................. 16,879
Weighted average fair value of options granted during the
year................................................... $ 4.82
The options are exercisable beginning one year from the grant date in equal
annual installments over a period of five years. The maximum term of any option
granted under the Plan cannot exceed 10 years.
The 105,326 options outstanding at December 31, 1998 had a weighted average
exercise price of $13.66 and a weighted average remaining contractual life of
9.9 years. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions used
for grants in 1998: weighted average risk-free interest rate of 4.68%, weighted
average expected dividend yield of 1.41%, expected life of 7.0 years and
expected volatility of 29.00%.
15. RETAINED EARNINGS AND REGULATORY CAPITAL:
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the Corporation's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined) and of Tier I capital (as defined) to average assets (as
defined). Management believes, as of December 31, 2000, that the Corporation and
the Bank met all capital adequacy requirements to which it is subject. To be
categorized as well capitalized, the Bank must maintain minimum total
risk-based, Tier I risk based, Tier I leverage ratios as set forth in the table
below. As of December 31, 2000, the Bank was well capitalized under the
regulatory framework for prompt corrective action.
66
68
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
15. RETAINED EARNINGS AND REGULATORY CAPITAL:--CONTINUED
The Bank's actual capital amounts and ratios are also presented in the
table. There was no deduction from capital for interest-rate risk.
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
--------------- -------------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ---------- ------- --------- ------
(DOLLARS IN THOUSANDS)
Total Capital (to Risk Weighted Assets):
As of December 31, 2000......... $11,886 10.86% >$8,753 > 8.0% >$10,941 >10.0%
As of December 31, 1999......... $14,736 13.83% >$8,521 > 8.0% >$10,652 >10.0%
Tier 1 Capital (to Risk Weighted Assets):
As of December 31, 2000......... $10,518 9.61% >$4,377 > 4.0% >$ 6,565 > 6.0%
As of December 31, 1999......... $13,753 12.91% >$4,261 > 4.0% >$ 6,391 > 6.0%
Tier 1 Capital (to Average Assets):
As of December 31, 2000......... $10,518 5.13% >$8,195 > 4.0% >$10,244 > 5.0%
As of December 31, 1999......... $13,753 7.38% >$7,459 > 4.0% >$ 9,324 > 5.0%
16. RELATED PARTY TRANSACTIONS:
Certain directors and executive officers of the Corporation, including
their immediate families and companies in that 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 December 31, 2000
and 1999, amounted to $894,683 and $634,845 respectively.
An analysis of these related party loans is as follows:
2000 1999
-------- --------
Balance at January 1........................................ $634,845 $301,801
New loans................................................... 318,009 556,305
Payments.................................................... (58,171) (223,261)
-------- --------
Balance at December 31...................................... $894,683 $634,845
======== ========
In addition, the Corporation from time to time has conducted business with
certain directors, officers or companies to which they are related. During 2000,
1999 and 1998, such activity was as follows:
- A business owned by a member of the Corporation's Board of Directors
leases office space from the Corporation. The rental income was $13,800,
$11,100 and $11,100 for the years ended December 31, 2000, 1999 and 1998,
respectively. A business owned by a member of the Corporation's Board of
Directors provided professional services to the Bank and his fees were
$5,900, $5,850, $5,700 for the years ended December 31, 2000, 1999 and
1998, respectively.
- A member of the Board of Directors is employed by a law firm retained by
the Corporation. Fees paid in fiscal 2000, 1999 and 1998 relative to
various bank and corporate matters totaled $148,945, $52,336 and $57,133,
respectively. The firm's real estate closing service collected gross
proceeds for the settlement of loans of approximately $146,560, $337,635
and $341,787, respectively, during fiscal 2000, 1999 and 1998 as closing
agent from third party borrowers pursuant to closings on Bank loans. A
portion of this amount was used to purchase title insurance and pay
miscellaneous closing fees relative to these closings.
67
69
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
16. RELATED PARTY TRANSACTIONS:--CONTINUED
- The Corporation retained media services from a company owned by a
relative of one of the Corporation's officers and directors. The total
costs for such services in 2000, 1999 and 1998 were $50,348, $42,740 and
$30,249, respectively.
- An officer and director of the Corporation executed under his signature a
Letter of Credit of the Savings Bank in the amount of $645,000 for a
company for which he is the owner and CEO.
- The former Chairman of the Board of Directors was paid a fee of $10,000
per month for a total of $120,000 in 1998 for providing advice and
assistance to the officers of the Bank with respect to the operations and
management of the Bank.
17. 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 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 $9,910,000 and $10,623,000 as of
December 31, 2000 and 1999, respectively. As of December 31, 2000 and 1999,
these commitments had fixed and variable rates which ranged from 7.8% to 13.9%
and 6.8% to 12.9%, respectively. 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.
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.
68
70
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
18. PARENT COMPANY FINANCIAL INFORMATION:
Prestige Bancorp, Inc. (the Parent Company) began operations on June 27,
1996 and functions primarily as a holding company for its sole subsidiary, the
Bank. The Parent Company's balance sheets as of December 31, 2000 and 1999 and
related statements of income and cash flows are as follows:
BALANCE SHEETS
December 31, 2000 AND 1999
2000 1999
----------- -----------
ASSETS
Cash and cash equivalents................................ $ 68,239 $ 22,084
Investments securities available for sale................ 919,189 1,100,245
Investment in Prestige Bank, F.S.B....................... 10,571,048 13,628,561
Loan to Director......................................... 217,029 235,890
Other assets............................................. 174,572 143,102
----------- -----------
Total Assets........................................ $11,950,077 $15,129,882
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Loans Payable............................................ $ 340,000 $ 150,000
Other Liabilities........................................ 60,145 26,593
----------- -----------
Total Liabilities........................................ $ 400,145 $ 176,593
=========== ===========
Total Stockholders' Equity, net of ESOP loan of $615,670
at December 31, 2000; $654,310 at December 31, 1999.... 11,549,932 14,953,289
----------- -----------
Total Liabilities and Stockholders' Equity.......... $11,950,077 $15,129,882
=========== ===========
STATEMENTS OF INCOME
For The Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
----------- -------- --------
Interest income.................................. $ 109,222 $108,137 $142,579
Gain on sale of investments...................... 20,638 90,413 7,834
----------- -------- --------
Total income................................ 129,860 198,550 150,413
Expenses:
Interest expense............................ 35,416 -- --
Legal fees.................................. 4,972 34,000 61,851
Other....................................... 136,388 95,745 90,799
----------- -------- --------
Total expenses.............................. 176,776 129,745 152,650
(Loss) income before income taxes and equity in
(losses) earnings of subsidiary................ (46,916) 68,805 (2,237)
Income tax (benefit) expense..................... (19,452) 19,148 (3,546)
Equity in (losses) earnings of subsidiary........ (2,936,696) 801,657 741,778
----------- -------- --------
Net (loss) income................................ $(2,964,160) $851,314 $743,087
=========== ======== ========
69
71
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
18. PARENT COMPANY FINANCIAL INFORMATION:--CONTINUED
STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
----------- -------- -----------
Operating Activities:
Net (loss) income........................... $(2,964,160) $851,314 $ 743,087
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in losses (earnings) of subsidiary... 2,936,696 (801,657) (741,778)
Dividends paid from subsidiary.............. 300,000 -- 400,000
Gain on sale of equity securities........... (20,638) (90,413) (7,834)
Change in other assets and liabilities...... 193,726 147,906 (8,591)
----------- -------- -----------
Net cash provided by operating
activities.......................... 445,624 107,150 384,884
Investing Activities:
Loan originations........................... -- (250,000) --
Principal payments on loans................. 18,861 14,110 --
Return of capital on investment
securities............................... -- 10,530 2,226
Proceeds from sale of equity securities..... 197,581 199,690 71,800
Purchase of available for sale investment
securities............................... -- (83,722) (1,077,833)
----------- -------- -----------
Net cash provided (used) by investing
activities.......................... 216,442 (109,392) (1,003,807)
Financing Activities:
Common stock dividends paid................. (201,821) (236,380) (191,600)
Proceeds from exercise of stock options..... -- -- 6,562
Cash in lieu of stock dividend on fractional
shares................................... -- (4,901) (3,484)
Purchase of treasury stock.................. (452,730) (85,375) (1,392,128)
Repayment received from ESOP................ 38,640 36,070 33,670
----------- -------- -----------
Net cash used by financing
activities.......................... (615,911) (290,586) (1,546,980)
----------- -------- -----------
Net increase (decrease) in cash and cash
equivalents................................. 46,155 (292,828) (2,165,903)
Cash and Cash Equivalents, Beginning.......... 22,084 314,912 2,480,815
----------- -------- -----------
Cash and Cash Equivalents, Ending............. $ 68,239 $ 22,084 $ 314,912
=========== ======== ===========
The ability of the Bank to upstream cash to the Parent Company is
restricted by regulations. Federal law prevents the Parent Company from
borrowing from its subsidiary bank unless the loans are secured by specific
assets. Further, such secured loans are limited in amount to ten percent of the
subsidiary bank's capital and surplus. At December 31, 2000, the Parent Company
had borrowed $340,000 from the Bank to support cash levels. The loan is
adequately secured in accordance with applicable law. In addition, the
subsidiary bank is subject to legal limitations on the amount of dividends that
can be paid to their shareholder.
On the date of the conversion, as required by regulatory pronouncements,
the Bank established a liquidation account in the amount of $7,085,000 that was
equal to retained earnings reflected in the Bank's statement of financial
condition at that date. The liquidation account will be maintained for the
benefit of eligible savings account holders and supplemental eligible account
holders who continue to maintain their accounts at the Bank after the conversion
in accordance with supervisory regulations. In the event of a complete
liquidation (and only in such event), each eligible savings account holder will
be entitled to receive a liquidation distribution from the liquidation account
in the amount of the then current adjusted balance of deposit accounts held,
before any liquidation distribution may be made with respect to the common
shares. Except for the repurchase of stock and payment of dividends by the Bank,
the existence of the liquidation account will not restrict the use or further
application of such retained earnings.
70
72
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
18. PARENT COMPANY FINANCIAL INFORMATION:--CONTINUED
The Bank may not declare or pay a cash dividend on, or repurchase any of
its common shares if the effect thereof would cause the Bank's equity to be
reduced below either the amount required for the liquidation account or the
regulatory capital requirements for insured institutions.
71
73
OFFICES
CORPORATE
710 Old Clairton Road
Pittsburgh, Pennsylvania 15236
412-655-1190
Fax 412-655-2114
www.prestigebank.com
PLEASANT HILLS
710 Old Clairton Road
Pittsburgh, Pennsylvania
412-655-2110
Roxine Hodgson, Manager
BETHEL PARK
6257 Library Road
Bethel Park, Pennsylvania 15102
412-831-8440
Roxanne Lampo, Manager
ELIZABETH TOWNSHIP
603 Scenery Drive
Elizabeth, Pennsylvania 15037
412-754-2661
Shirley Maglicco, Manager
MT. OLIVER
543 Brownsville Road
Pittsburgh, Pennsylvania 15210
412-431-3374
Patricia Lewin, Manager
WASHINGTON
Located in Shop 'n Save
125 West Beau Street
Washington, Pennsylvania 15301
724-228-1314
James McMichael, Manager
74
NOTES
75
CORPORATE INFORMATION
BOARD OF DIRECTORS
MARK R. SCHOEN
Chairman of the Board, CEO & President
Prestige Bancorp, Inc.
Chairman of the Board & CEO
Prestige Bank, A Federal Savings Bank
PATRICIA A. WHITE
Executive Vice President & Treasurer
Prestige Bancorp, Inc.
President & Treasurer
Prestige Bank, A Federal Savings Bank
MARTIN W. DOWLING
Director
Jefferson Hills Real Estate, Inc.
MICHAEL R. MACOSKO
Pharmacist
Eckerd Drug, Inc.
CHARLES P. MCCULLOUGH
Attorney at Law
Tucker Arensberg, P.C.
JAMES A. NANIA
Executive Vice President & CFO
South Hills Health System
JOHN A. STIVER
Owner, John A. Stiver CPA
President & Owner, C&J Leasing Co.
CEO & Sole Owner, MS Supply, LLC
President & Owner, Miller Mini Storage
President & Owner, Jackson Group, LTD.
OFFICERS
PRESTIGE BANCORP, INC.
MARK R. SCHOEN
Chairman, Chief Executive Officer &
President
PATRICIA A. WHITE
Executive Vice President & Treasurer
JAMES M. HEIN
Chief Financial Officer
VICTORIA A. BROWN
Corporate Secretary
MARKET MAKERS
Friedman Billings Ramsey & Co.
Tucker Anthony Cleary Gull
Herzog Heine Geduld
Sandler O'Neill & Partners
Ryan Beck & Co. Inc.
Legg Mason Wood Walker Inc.
Parker/Hunter Inc.
TRANSFER AGENT
Registrar & Transfer Company
Cranford, New Jersey
CORPORATE COUNSEL
Tucker Arensberg, P.C.
Pittsburgh, Pennsylvania
OFFICERS
PRESTIGE BANK,
A FEDERAL SAVINGS BANK
MARK R. SCHOEN
Chairman & Chief Executive Officer
PATRICIA A. WHITE
President & Treasurer
JAMES M. HEIN
Chief Financial Officer
VICTORIA A. BROWN
Corporate Secretary
INDEPENDENT PUBLIC
ACCOUNTANTS
Arthur Andersen LLP
Pittsburgh, Pennsylvania
STOCK LISTING
NASDAQ Stock Market Symbol: PRBC
GENERAL INQUIRIES & REPORTS
Prestige Bancorp, Inc. is required to file an annual report on Form 10-K for its
fiscal year ended December 31, 2000, with the Securities and Exchange
Commission. Copies of this annual report and quarterly reports may be obtained
without charge by contacting:
James M. Hein
Chief Financial Officer
412-655-1190
Corporate Office
76
[PRBC LOGO]
PRESTIGE BANCORP, INC.
710 Old Clairton Road, Pittsburgh, PA 15236-4300
412-655-1190 o (Fax) 412-655-1772
www.prestigebank.com