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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Act of
1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 2001
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
[NO FEE REQUIRED]
COMMISSION FILE NUMBER: 333-2692
PRESTIGE BANCORP, INC.
(Exact name of registrant as specified in its charter)
<Table>
PENNSYLVANIA 25-1785128
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
</Table>
710 OLD CLAIRTON ROAD, PLEASANT HILLS, PENNSYLVANIA 15236
(Address of principal executive offices)
Registrant's telephone number, including area code: (412) 655-1190
Securities Registered Pursuant to Section 12(b) of the Act: _______
Securities Registered Pursuant to Section 12(g) of the Act: X
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COMMON STOCK, PAR VALUE $1.00 PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 21, 2002, the aggregate market value of the Common Stock of the
Registrant held by non-affiliates was $10.4 million. This figure is based on the
reported closing bid in the NASDAQ system of $13.45 per share of the
Registrant's Common Stock as of March 21, 2002. Although directors and executive
officers were assumed to be "affiliates" of the Registrant for purposes of this
calculation, the classification is not to be interpreted as an admission of such
status.
As of March 21, 2002, there were outstanding 1,059,371 shares of the
Registrant's Common Stock.
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PART I
ITEM 1. BUSINESS
GENERAL
PRESTIGE BANCORP, INC.
Prestige Bancorp, Inc. (the "Company" or the "Corporation") was organized
as a corporation under the laws of the Commonwealth of Pennsylvania in March
1996 at the direction of the Board of Directors of Prestige Bank, a Federal
Savings Bank (the "Savings Bank" or the "Bank") for the purpose of acquiring all
of the capital stock to be issued by the Savings Bank in a conversion under and
pursuant to the applicable rules and regulations of the Office of Thrift
Supervision, Department of the U.S. Treasury (the "OTS") of the charter of the
Savings Bank from a federal mutual chartered savings association to a federal
stock chartered savings association (the "Conversion"). The Company has received
the approval of the OTS to be a savings and loan holding company. 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. 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 Company currently conducts business as a unitary savings and loan
holding company. As of December 31, 2001, the Company holds the shares of the
Savings Bank's common stock acquired in the Conversion, a loan receivable from
the Prestige Bancorp Employee Stock Ownership Plan (the "ESOP"), a loan totaling
$200,000, debt and equity investments of $854,000, and deposits maintained at
the Savings Bank. The Company has borrowed $314,000 from the Savings Bank to
support cash levels. The loan is secured in accordance with applicable law. The
Company is engaged principally in community banking activities through its
savings association subsidiary. At December 31, 2001, the Company had total
consolidated assets of $194.8 million, total consolidated deposits of $124.5
million, total consolidated liabilities (including deposits) of $183.0 million
and total consolidated equity of $11.8 million.
The Company neither owns nor leases any property, but instead uses the
premises, equipment and furniture of the Savings Bank. The Company does not
employ any persons other than officers who are also officers of the Savings
Bank. The Company utilizes the support staff of the Savings Bank from time to
time. The profitability of the Company is highly dependent on the profitability
of the Savings Bank. The Company's executive office is located at the home
office of the Savings Bank at 710 Old Clairton Road, Pleasant Hills,
Pennsylvania 15236, and its telephone number is (412) 655-1190.
PRESTIGE BANK, A FEDERAL SAVINGS BANK
The Savings Bank is a federally chartered savings bank that was organized
under the laws of the United States in 1935. The deposits of the Savings Bank
are insured by the Savings Association Insurance Fund (the "SAIF") administered
by the Federal Deposit Insurance Corporation (the "FDIC"). The Savings Bank
conducts business from its executive offices located in Pleasant Hills,
Pennsylvania and 4 full-service offices located in Allegheny County. In October
2001, the Savings Bank consummated sale of its Washington in-store branch
office, located in Washington County, Pennsylvania, to Northwest Savings Bank.
Total deposits at this in-store branch office at the time of the sale were
approximately $4.6 million. At December 31, 2001, the Savings Bank had total
assets of $193.9 million, total deposits of $124.6 million, total liabilities
(including deposits) of $183.3 million and total equity of $10.6 million.
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 expanded its loan
products by promoting other types of lending in order to meet its customer's
demands. These loan products 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. The loan portfolio
contains no loans to foreign governments, foreign enterprises or foreign
operations of domestic companies. Deposit services offered by the
2
Savings Bank include passbook savings accounts, tiered money market savings
accounts, NOW accounts, non-interest bearing checking accounts and certificates
of deposit with a minimum maturity of 6 months and a maximum maturity of 5
years. The Savings Bank does not utilize the services of deposit brokers.
The gross earnings of the Company on a consolidated basis for the fiscal
year ending December 31, 2001, by loan category and investment securities are
shown on page 53. The gross interest expense of the Company on a consolidated
basis for the fiscal year ending December 31, 2001 is shown on page 42. The
amounts of the various deposit products of the Company (through its sole
subsidiary, the Savings Bank) by category for the fiscal year ending December
31, 2001 are shown on pages 23 through 25.
The Company's and the Savings Bank's profitability is highly dependent on
the Savings Bank's net interest income which is the difference between income
earned on interest-earning assets less interest paid on interest-bearing
liabilities. The Company and Savings Bank are subject to interest rate risk and
attempt to minimize that risk by matching asset and liability maturities and
rates.
The business of each of the Company and the Savings Bank is influenced by
prevailing economic conditions and governmental policies, both foreign and
domestic. The actions and policy directives of the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") determine to a significant
degree the cost and the availability of funds obtained from money market sources
for lending and investing. The Federal Reserve Board's policies and regulations
also influence, directly and indirectly, the rates of interest paid by thrift
institutions on their time and savings deposits. The nature and impact on the
Company and the Savings Bank of future changes in economic conditions and
monetary and fiscal policies, both foreign and domestic, are not predictable.
The Bank completed the sale of its Washington in-store branch office to
Northwest Savings Bank in October 2001. The office was located within the Shop
'n Save supermarket at 125 West Beau Street in Washington, Pennsylvania.
Northwest Savings Bank retained the employees of this office to provide
continuity of customer service. The sale included $4.6 million in deposits, as
well as the fixed assets at such branch location. All deposits of such branch
continued to be FDIC insured subject to FDIC rules and regulations. The sale
follows the Bank's determination that the Washington, Pennsylvania branch was
outside of its targeted geographic market. The Bank expects to save
approximately $123,000 annually in compensation and benefits from the sale of
this branch.
The Savings Bank operates five automated teller machines ("ATMs"), one at
each of the branch offices and one off-site ATM at a local convenience store.
The Savings Bank is affiliated with a regional ATM network.
As of December 31, 2001, the Savings Bank had a staff of 52 employees that
consisted of 43 full-time and 9 part-time employees. Full-time equivalent
employees averaged 52 in 2001.
The Savings Bank's principal executive offices are located at 710 Old
Clairton Road, Pleasant Hills, Pennsylvania 15236 and its telephone number is
(412) 655-1190.
MERGER AGREEMENT
On February 7, 2002, Northwest Bancorp, Inc., the holding company for
Northwest Savings Bank, and Prestige Bancorp, Inc. entered into a definitive
agreement under which Northwest Bancorp and Northwest Savings Bank would acquire
Prestige Bancorp and Prestige Bank, respectively. Under the terms of the
agreement, the shareholders of Prestige Bancorp will receive $13.75 in cash for
each share of Prestige Bancorp, resulting in a cash payment by Northwest of
approximately $14.7 million. Each of the Boards of Directors has approved the
transaction. Due diligence has been completed. Prestige Bancorp and Northwest
Bancorp are in the process of obtaining regulatory approval from applicable
banking regulators to complete the merger. The transaction is expected to be
completed by the end of the second calendar quarter of 2002 or the beginning of
the third quarter 2002 and is subject to approval by the Prestige Bancorp
shareholders and applicable regulatory authorities.
3
As part of the terms of the merger agreement, the Company has agreed that
from the date of the merger agreement until the completion of the merger it
will:
- generally conduct business in the ordinary course,
- use reasonable good faith efforts, to (i) preserve the organization, (ii)
maintain good relationships with customers and employees, and (iii)
preserve its goodwill.
The Company has also agreed that it will not, without the consent of
Northwest Bancorp, Inc.:
- amend any provision of its basic corporate documents;
- suffer the imposition of a lien on any share of stock;
- waive or release any material right or cancel or compromise any material
debt or claim;
- make any changes in its stock;
- pay dividends;
- change compensation levels except for normal increases in the ordinary
course of business;
- hire any new employees without consulting with Northwest Bancorp prior to
such hiring;
- add or change any employee benefit plans or increase payments to the
plans;
- merge with any other corporation;
- sell or lien any substantial assets out of the ordinary course of
business or buy a substantial part of another; business, or agree to, or
grant an option to any such transaction;
- add or relocate branches, except for the planned relocation of its Bethel
Park branch;
- borrow money except in the ordinary course of business;
- change bank policies;
- acquire any new loan participation or servicing rights;
- make any new loan, or increase any loan, in excess of $300,000;
- make a loan or increase a loan if its exposure to any one borrower or
affiliated borrowers would exceed $750,000;
- renew or extend any lease;
- make capital expenditures over $10,000 individually or $50,000 in the
aggregate;
- generally, purchase any security not rated "A" or higher or with a
remaining term of more than five (5) years;
- make a new loan to an officer or director;
- materially change the pricing of its deposit or loan accounts;
- enter into any arrangement not in the ordinary course of business;
- change its method of accounting;
- enter into any hedging, futures or other derivative or high risk
investments;
- discharge any lien or pay any obligation other than when due or in the
ordinary course of business;
- take any action that would cause any of its representations in the merger
agreement not to be true as of the merger or that could delay the merger;
- acquire real property (other than foreclosing on residential property)
without obtaining a phase one environmental report;
- settle any claim involving in excess of $50,000 or which involves a
precedent which could be material to us;
- agree to do any of the above.
The Company agreed to give Northwest Bancorp and its representatives
reasonable access to its properties and records and will make its
representatives available. The records would be kept confidential and each party
will destroy any records obtained from the other if the merger doesn't take
place.
4
Northwest Bancorp and Northwest Savings Bank will prepare all applications
for all necessary Regulatory Approvals will and use their best efforts to obtain
as promptly as practicable after the date hereof all Regulatory Approvals
necessary or advisable to consummate the transactions contemplated by this
Agreement. The Company will furnish Northwest Bancorp with all appropriate
accurate information when needed for the applications. The parties will
cooperate and consult on such applications and will share copies of all
application materials.
Prestige has also agreed that, after the date of the merger agreement and
until it terminates, neither Prestige, nor any of its employees or
representatives will, directly or indirectly, initiate, solicit or encourage any
inquiries, or have any discussions, concerning an alternate acquisition proposal
and it will notify Northwest of all inquiries and proposals that are received.
However, the board of directors may furnish information to, or have discussions
with, anyone that makes an unsolicited alternate acquisition proposal before the
shareholder meeting if the board of directors receives an opinion from its
financial advisor that the proposal may be superior to the merger and the advice
of independent legal counsel that such action is necessary for the board of
directors to comply with its fiduciary duty under applicable law.
The merger agreement further provides that a liquidated damages fee in the
amount of $1.0 million is payable to Northwest by Prestige following the
occurrence of:
- either party's termination of this agreement as a result of Prestige's
receipt of a superior offer from a third party and its resulting
acceptance thereof or the resulting withdrawal of its recommendation of
the Northwest merger agreement, or
- Prestige's termination of the merger agreement for any reason prior to
the date of the special meeting of stockholders to vote on the merger,
unless Northwest has materially breached any of its covenants, agreements
or representations and warranties and the breach is not timely cured, or
unless any government entity issues a nonappealable order prohibiting the
merger or regulatory approval is denied or withdrawn at the request of
the regulatory authority; provided that the denial or withdrawal is not
due to a breach of the merger agreement by Prestige, or
- Prestige's entering into an agreement with a third party relating to an
alternative proposal to acquire the Company or Prestige Bank or the
consummation of such an agreement within one (1) year after (1) the
termination of the merger agreement by Northwest due to Prestige's
material breach of any of its covenants, agreements or representations
and warranties and the breach is not timely cured; (2) the failure of the
stockholders of Prestige to adopt the merger agreement after the receipt
of a competing acquisition proposal; or (3) October 1, 2002 if a meeting
of Prestige's stockholders has not been held to vote on the adoption of
the merger agreement, or
- Northwest's termination of the agreement as a result of Prestige's
willful breach of any provision of the merger agreement.
A liquidated damages fee in the amount of $1.0 million is payable to
Prestige by Northwest if Northwest Bancorp willfully breaches the merger
agreement.
If demand is made to pay liquidated damages and such damages are timely
paid, then the paying party is not liable for any other damages under the merger
agreement.
If the merger takes place, the Company and the Bank will cease to exist as
separate entities.
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 promoting 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.
5
At December 31, 2001, the Savings Bank's total loan portfolio amounted to
$139.2 million, or 71.5% 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, $101.2 million or 72.7% of the Savings Bank's total loan portfolio
consisted of one-to-four family residential loans at December 31, 2001.
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 were $96.2 million, $103.3
million and $101.2 million at December 31, 1999, 2000 and 2001, respectively.
The percentage of one-to-four family mortgages to total loan portfolio, which
had been stabilizing in recent years, grew from 65.9% at December 31, 2000, to
72.7% at December 31, 2001. 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 2002 to continue to sell excess one-to-four
family residential mortgage demand originated in fiscal year 2002 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 gone from $17.3 million at December 31, 1999, to $19.9
million at December 31, 2000, to $18.7 million at December 31, 2001. 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 to $10.9
million at December 31, 1999 to $12.9 million at December 31, 2000 and 2001.
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 11.3% at December 31, 1999, to 12.7% at
December 31, 2000, to 13.4% at December 31, 2001. 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 $37.0 million at
December 31, 1999, $32.1 million at December 31, 2000 and $18.2 million at
December 31, 2001. 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 24.1% at December 31, 1999, to 20.5% at
December 31, 2000 to 13.1% at December 31, 2001. Management attributes this
shift in loan composition to increased efforts to reduce the commercial business
and commercial real estate loans in response to asset quality issues within
these portfolios. In addition, this loan composition change occurred due to the
restrictions placed upon the Savings Bank in the Supervisory Agreement with the
OTS whereby limiting new underwriting of commercial business and commercial real
estate loans. In the fourth quarter of 2001, the Bank completed a packaged
commercial loan sale of approximately forty-nine loans to a third party. The
total face amount of the loans was $6.35 million of which $2.0 million had been
charged-off prior to the sale. This sale resulted in a $1.9 million reduction of
the allowance for loan loss. 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 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, 2001, the total
asset size of the Savings Bank was $193.9 million and 20% of such number is
$38.8 million and 10% of such number is $19.4 million. At December 31, 2001, the
Savings Bank had $10.8 million in commercial business loans of which $3.2
million was considered small business loans. The statutory ceiling on commercial
6
real estate loans is substantially higher, i.e. 400% of the Savings Bank's
unimpaired capital and surplus, or at December 31, 2001, $47.0 million. At
December 31, 2001, the Savings Bank had $7.4 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, 2001 are $6.4 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.
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.
<Table>
<Caption>
AS OF DECEMBER 31,
--------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------------- ---------------- ---------------- ----------------- ---------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- ----- --------- ----- ------- -----
(DOLLARS IN THOUSANDS)
Real estate loans
One-to-four
family(1)........... $101,203 72.68% $103,332 65.85% $ 96,182 62.78% $ 81,284 64.71% $72,198 73.34%
Construction.......... 1,140 .82 1,551 .99 2,714 1.77 2,270 1.81 2,449 2.49
Commercial real
estate(1)........... 7,428 5.33 15,086 9.61 16,061 10.48 7,632 6.08 1,425 1.45
-------- ----- -------- ----- -------- ----- --------- ----- ------- -----
Total............... $109,771 78.83% $119,969 76.45% $114,957 75.03% $ 91,186 72.60% $76,072 77.28%
-------- ----- -------- ----- -------- ----- --------- ----- ------- -----
Commercial business
loans(1).............. $ 10,815 7.77% $ 17,046 10.86% $ 20,920 13.66% $ 18,712 14.90% $ 9,565 9.72%
-------- ----- -------- ----- -------- ----- --------- ----- ------- -----
Consumer loans
Home equity loans &
lines(1)............ $ 12,894 9.26% $ 12,908 8.22% $ 10,936 7.14% $ 9,834 7.83% $ 7,535 7.66%
Student loans......... 2,490 1.79 2,419 1.54 2,411 1.57 2,263 1.80 2,215 2.25
Automobile loans(1)... 1,771 1.27 2,739 1.75 2,427 1.58 2,405 1.92 1,967 2.00
Other consumer
loans(1)............ 1,508 1.08 1,856 1.18 1,559 1.02 1,191 .95 1,076 1.09
-------- ----- -------- ----- -------- ----- --------- ----- ------- -----
Total............... $ 18,663 13.40% $ 19,922 12.69% $ 17,333 11.31% $ 15,693 12.50% $12,793 13.00%
-------- ----- -------- ----- -------- ----- --------- ----- ------- -----
Total loans
receivable(1)......... $139,249 100% $156,937 100% $153,210 100% $ 125,591 100% $98,430 100%
======== ===== ======== ===== ======== ===== ========= ===== ======= =====
Less:
Allowance for loan
losses.............. $ 1,167 $ 3,387 $ 983 $ 571 $ 403
Loans in process...... 630 148 1,258 1,106 1,857
Deferred loan (costs)
fees................ (48) (15) 7 (3) (11)
-------- -------- -------- --------- -------
Loans receivable, net... $137,500 $153,417 $150,962 $ 123,917 $96,181
======== ======== ======== ========= =======
</Table>
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(1) Includes non-performing loans.
7
Contractual Maturities. The following table sets forth the scheduled
contractual maturities of the Savings Bank's loan portfolio at December 31,
2001. 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.
<Table>
<Caption>
AT DECEMBER 31, 2001
------------------------------------------------------------
ONE-TO-FOUR COMMERCIAL COMMERCIAL
FAMILY(1) REAL ESTATE BUSINESS CONSUMER TOTAL
----------- ----------- ---------- -------- --------
(IN THOUSANDS)
1 year or less........................ $ 165 $ 79 $ 2,036 $ 1,283 $ 3,563
After 1 year through 5 years.......... 5,445 259 1,536 4,916 12,156
More than 5 years..................... 96,733 7,090 7,243 12,464 123,530
-------- ------ ------- ------- --------
Total amounts due..................... $102,343 $7,428 $10,815 $18,663 $139,249
======== ====== ======= ======= ========
Interest rate terms on amounts
due after 1 year:
Fixed............................... $ 83,583 $2,884 $ 1,368 $11,940 $ 99,775
Adjustable/Floating................. $ 18,595 $4,465 $ 7,411 $ 5,440 $ 35,911
</Table>
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(1) Includes construction loans of $1.14 million 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.
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 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.
8
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.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
Total loans at beginning of period....... $156,937 $153,210 $125,591 $ 98,430 $ 77,364
Loan originations(1):
Real estate
One-to-four family.................. $ 23,406 $ 14,613 $ 27,543 $ 25,685 $ 13,982
Construction........................ 1,140 1,313 1,964 2,466 2,948
Commercial real estate(1)........... 203 1,030 9,738 5,511 475
-------- -------- -------- -------- --------
Total real estate loans
originated..................... $ 24,749 $ 16,956 $ 39,245 $ 33,662 $ 17,405
-------- -------- -------- -------- --------
Commercial business loans(1)........... $ 774 $ 22,885 $ 24,158 $ 21,872 $ 14,174
-------- -------- -------- -------- --------
Consumer loans
Home equity loans and lines of
credit(1)......................... $ 7,241 $ 7,195 $ 6,276 $ 6,987 $ 5,762
Student loans....................... 577 432 515 397 353
Automobile loans.................... 358 1,646 1,237 1,633 1,323
Other consumer loans(1)............. 1,955 2,323 2,052 1,447 1,267
-------- -------- -------- -------- --------
Total consumer loans originated... $ 10,131 $ 11,596 $ 10,080 $ 10,464 $ 8,705
-------- -------- -------- -------- --------
Total loans originated.............. $ 35,654 $ 51,437 $ 73,483 $ 65,998 $ 40,284
-------- -------- -------- -------- --------
Deduct:
Loan principal reductions.............. $(48,887) $(47,531) $(45,864) $(38,587) $(19,218)
Loans sold(2).......................... (4,455) -- -- -- --
Transferred to real estate owned....... -- (179) -- (250) --
-------- -------- -------- -------- --------
Subtotal:................................ $(53,342) $(47,710) $(45,864) $(38,837) $(19,218)
-------- -------- -------- -------- --------
Net (decrease) increase in loans....... $(17,688) $ 3,727 $ 27,619 $ 27,161 $ 21,066
-------- -------- -------- -------- --------
Total loans at end of period........... $139,249 $156,937 $153,210 $125,591 $ 98,430
======== ======== ======== ======== ========
</Table>
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(1) Line of Credit draws are treated as originations.
(2) Certain of these sold loans totaling $986,000 are accounted for as a
financing transaction as defined by SFAS No. 140 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities -- a
Replacement of SFAS No. 125." See Note 8 of the "Notes to Consolidated
Financial Statements" for further information.
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 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
9
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 $1.8
million at December 31, 2001. 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. In 2001,
the Savings Bank began servicing a residential portfolio totaling approximately
$5.2 million for a nominal monthly fee. At December 31, 2001, one of the Savings
Bank's commercial real estate loans was 50% participated by another lender. This
loan totaled $1.9 million of which $958,000 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, 2001, $101.2 million or
72.7% 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.
10
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, 2001, approximately $82.6 million or 81.6% 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, 2001 and 2000, the Savings Bank had $496,000 and $16,000
of non-performing one-to-four family residential loans, respectively. During
2001, the Savings Bank did not charge off any 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, 2001, $7.4 million or 5.3%
of the Savings Bank's total loan portfolio consisted of loans secured by
existing commercial real estate properties. At December 31, 2001, the Savings
Bank's commercial real estate loan portfolio consisted of twenty-three loans
with an average principal balance of approximately $323,000.
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, 2001 and 2000, the Savings Bank had $20,000 and $3.1
million of non-performing commercial real estate loans, respectively. This
constituted .27% and 20.79% of the commercial real estate loan category for
December 31, 2001 and 2000, respectively. During 2001, the Savings Bank charged
off $1.6 million of commercial real estate loans that amounted to 13.22% of the
average outstanding commercial real estate loan balance for 2001. See Delinquent
Loans and Non-Performing Assets under the Asset Quality section for more
details.
Commercial Business Loans. At December 31, 2001, $10.8 million or 7.8% 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.
11
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 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, 2001 and 2000, the Savings Bank had $1.6 million and
$2.2 million of non-performing commercial business loans, respectively. This
constituted 14.7% and 13.0% of the commercial business loan category for
December 31, 2001 and 2000, respectively. One non-performing loan for $1.4
million carries an U.S. Government guarantee of the payment of principal and
interest. During 2001, the Savings Bank charged off $731,000 of commercial
business loans that amounted to 5.2% of the average outstanding commercial
business loan balance for 2001. 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, 2001, $1.1
million or .82% 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, 2001 and December 31, 2000, the Savings Bank did not have any
non-performing construction loans. During 2001, 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 $1.7 million or 1.3% of
the total loans receivable at December 31, 2001. Home equity loans and lines of
credit amounted to $12.9 million or 9.3% of the total loans receivable at
December 31, 2001. The student loan balance amounted to $2.5 million or 1.8% of
the total loans receivable as of such date, deposit account secured loans had
outstanding balances of $616,000 or .4% of total loans receivable as of such
date and unsecured personal loans (including credit card balances outstanding)
stood at $692,000 or .5% of total loans receivable as of such date. The Company
has one personal loan totaling $200,000 or .1% of total loans receivable as of
December 31, 2001.
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, 2001, 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
12
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.
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 $456,000
or .3% of the total loans receivable at December 31, 2001.
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 2001, the Savings Bank charged off $275,000 of
consumer loans that amounted to .14% of the average outstanding consumer loan
balance for 2001. At December 31, 2001, $203,000 of the remaining consumer
loans, including home equity loans, was classified as non-performing. The
$203,000 was comprised of $184,000 home equity loans, $10,000 automobile loans,
$8,000 credit card loans and $1,000 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, 2001, the Savings Bank had no troubled debt
restructurings and had no interest income arising from troubled debt
restructuring. According to the Supervisory Agreement, the OTS must approve all
troubled debt restructurings.
13
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 amounts presented
represent the total outstanding principal balances of the related loans, rather
than the actual payment amounts that are past due.
<Table>
<Caption>
DECEMBER 31, 2001 DECEMBER 31, 2000
--------------------------------------------------------- -----------------
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........... $1,496 1.48% $ -- --% $ 496 .49% $2,778 2.69%
Construction loans..... -- -- -- -- -- -- -- --
Commercial real estate
loans................ -- -- -- -- 20 .27 764 5.06
Commercial business
loans................ 1,239 11.46 4,752 43.94 1,576 14.57 5,301 31.10
Consumer loans......... 31 .17 46 .25 203 1.09 16 .08
------ ------ ------ ------
Total................ $2,766 $4,798 $2,295 $8,859
====== ====== ====== ======
<Caption>
DECEMBER 31, 2000
-------------------------------------
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........... $470 .45% $ 16 .02%
Construction loans..... -- -- -- --
Commercial real estate
loans................ 128 .85 3,136 20.79
Commercial business
loans................ -- -- 2,221 13.03
Consumer loans......... 10 .05 318 1.60
---- ------
Total................ $608 $5,691
==== ======
</Table>
<Table>
<Caption>
DECEMBER 31, 1999
-----------------------------------------------------------
30-59 DAYS 60-89 DAYS 90 DAYS OR 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.......... $ 708 .74% $166 .17% $ 327 .34%
Construction........................... -- -- 128 4.72 49 1.81
Commercial real estate................. 1,589 9.89 406 2.53 458 2.85
Commercial business loans.............. 765 3.66 26 .12 131 .63
Consumer loans......................... 139 .80 9 .05 162 .93
------ ---- ------
Total................................ $3,201 $735 $1,127
====== ==== ======
</Table>
At December 31, 2001, the $4.8 million of commercial business loan
delinquencies 60-89 days primarily consisted of one loan totaling $4.7 million.
This loan carries an 80% U.S. Government guarantee of the payment of principal.
In the fourth quarter of 2001, the Bank completed a packaged commercial loan
sale of approximately forty-nine loans to a third party. The total face amount
of the loans was $6.35 million of which $2.0 million had been charged-off prior
to the sale. This sale resulted in a $1.9 million reduction of the allowance for
loan loss. Non-accrual loans fell from $6.6 million at September 30, 2001 to
$2.3 million at December 31, 2001. The increase in payment delinquencies since
1999 has greatly contributed to the increases in loan charge-offs, legal
expenses and consultant expenses.
14
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.
<Table>
<Caption>
DECEMBER 31,
--------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ---- ----
(DOLLARS IN THOUSANDS)
Non-accruing loans:
One-to-four family residential(1).................... $ 496 $ 16 $ 327 $483 $589
Construction loans(2)................................ -- -- 49 -- --
Commercial real estate(3)............................ 20 3,136 458 99 --
Commercial business loans(4)......................... 1,589 2,221 131 -- 7
Consumer loans(5).................................... 203 318 162 116 15
------ ------ ------ ---- ----
Total nonperforming loans.......................... 2,308 5,691 1,127 698 611
Real estate owned.................................... 271 176 207 205 --
------ ------ ------ ---- ----
Total nonperforming assets......................... $2,579 $5,867 $1,334 $903 $611
====== ====== ====== ==== ====
Total nonperforming loans as a percentage of total
loans.............................................. 1.66% 3.63% .74% .56% .63%
====== ====== ====== ==== ====
Total nonperforming assets as a percentage of total
assets............................................. 1.32% 2.91% .67% .51% .43%
====== ====== ====== ==== ====
</Table>
- ---------------
(1) Consists of five loans at December 31, 2001, two loans at December 31, 2000,
ten loans at December 31, 1999, seven loans at December 31, 1998 and eleven
loans at December 31, 1997.
(2) Consists of one loan at December 31, 1999.
(3) Consists of one loan at December 31, 2001, five loans at December 31, 2000,
one loan at December 31, 1999 and one loan at December 31, 1998.
(4) Consists of four loans at December 31, 2001, eight loans at December 31,
2000, six loans at December 31, 1999 and one loan at December 31, 1997.
(5) Consists of eleven loans at December 31, 2001, sixteen loans at December 31,
2000, nine loans at December 31, 1999, five loans at December 31, 1998 and
nine loans at December 31, 1997.
The Savings Bank's total non-performing assets have decreased from $5.9
million or 2.90% of total assets at December 31, 2000 to $2.6 million or 1.3% of
total assets at December 31, 2001. The $3.3 million decrease in total
non-performing assets between December 31, 2000 and 2001 principally reflects a
decrease in non-performing commercial real estate loans of $3.1 million and in
commercial business loans of $632,000. The aforementioned commercial loan sale
in the fourth quarter 2001 reduced nonperforming commercial business and real
estate loans by approximately $2.6 million. One non-performing commercial
business relationship accounts for $1.4 million or 85.2% of the remaining total
non-performing commercial business loans. The $1.4 million has an U.S.
Government guarantee of the payment of principal. Currently, this commercial
business is in bankruptcy and management is working closely in the bankruptcy
proceedings to protect its interests.
The Savings Bank's total non-performing assets 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 accounted 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.
At December 31, 2001, 2000, and 1999 approximately $230,000, $359,000, and
$65,000 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
15
period or since origination if held for part of the period. At December 31,
2001, 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 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 pages 55 and 56. 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 June 30, 2001.
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 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
16
as regulatory capital. At December 31, 2001, the Savings Bank had $5.3 million
assets classified as "substandard" and $1.1 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.
<Table>
<Caption>
DECEMBER 31,
---------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS)
Average total loans...................... $148,835 $159,729 $138,138 $111,809 $89,303
======== ======== ======== ======== =======
Allowance for loan losses, beginning of
year................................... $ 3,387 $ 983 $ 571 $ 403 $ 307
Charged-off loans(1)..................... (2,614) (3,983) (26) (41) (8)
Recoveries on loans previously charged
off.................................... 109 4 -- -- --
Provision for loan losses................ 285 6,383 438 209 104
-------- -------- -------- -------- -------
Allowance for loan losses, end of
period................................. $ 1,167 $ 3,387 $ 983 $ 571 $ 403
======== ======== ======== ======== =======
Net loans charged-off to average loans... 1.68% 2.49% .02% .04% .01%
======== ======== ======== ======== =======
Allowance for loan losses to total
loans.................................. .84% 2.16% .64% .45% .42%
======== ======== ======== ======== =======
Allowance for loan losses to
nonperforming loans.................... 50.56% 59.52% 87.22% 81.81% 65.96%
======== ======== ======== ======== =======
</Table>
- ---------------
(1) Consists of $1.6 million of commercial real estate loans, $731,000 of
commercial business loans and $275,000 of consumer loans in 2001; 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 consumer loans in
1999; consists of $22,000 of one-to-four family residential mortgage loans
and $19,000 of consumer loans in 1998; and consists of $8,000 of consumer
loans in 1997.
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.
<Table>
<Caption>
DECEMBER 31,
---------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------ ------------------ ----------------- ----------------- -----------------
% 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............... $ 196 72.68% $ 179 65.85% $169 62.78% $150 64.71% $108 73.34%
Construction................ 38 .82 29 .99 16 1.77 5 1.81 4 2.49
Commercial business and
commercial real estate.... 716 13.10 2,876 20.47 638 24.14 346 20.98 224 11.17
Consumer:
Automobile, home equity,
student, share and other
consumer................ 117 13.40 91 12.69 72 11.31 70 12.50 67 13.00
Allocation to general
risk.................... 100 -- 212 -- 88 -- -- -- -- --
------ ------ ------ ------ ---- ------ ---- ------ ---- ------
Total................... $1,167 100.00% $3,387 100.00% $983 100.00% $571 100.00% $403 100.00%
====== ====== ====== ====== ==== ====== ==== ====== ==== ======
</Table>
17
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, 2001, is $854,000. These investments
were selected on management's belief that the value would appreciate. These debt
and equity investments represent .4% of the total consolidated assets of the
Company and 2.7% 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. Consolidated cash and cash equivalents
increased by $9.8 million between December 31, 2000 and December 31, 2001. As of
December 31, 2001, the consolidated cash and cash equivalents of the Company
amounted to $15.7 million or 8.1% of assets, of which $14.5 million was invested
in interest-bearing accounts with the FHLB of Pittsburgh withdrawable on demand.
The increase of $9.8 million in cash and cash equivalents during fiscal 2001 was
primarily attributable to the $15.9 million reduction in net loans receivable
and the $2.7 million increase in deposits. This was partially offset by a $10.5
million decline in FHLB advances.
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
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.
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 totaling $200,000, to invest in
debt and equity securities with a market value totaling $854,000 at December 31,
2001, interest-bearing deposits of $29,000, other assets of $160,000 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
18
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
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.
19
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:
<Table>
<Caption>
DECEMBER 31,
---------------------------------------------------------------
2001 2000 1999
------------------- ------------------- -------------------
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%
Federal agency obligations...... 1,109 100.00 15,805 100.00 15,874 94.07
---------- ------ ---------- ------ ---------- ------
Total investment
securities................. $ 1,109 100.00% $ 15,805 100.00% $ 16,875 100.00%
========== ====== ========== ====== ========== ======
Average remaining contractual life
of investment securities........ 14.77 yrs. 11.03 yrs. 11.61 yrs.
========== ========== ==========
Mortgage-backed securities:
GNMA............................ $ 1,165 23.01% $ 1,516 23.55% $ 1,738 23.22%
FHLMC........................... 2,446 48.30 3,195 49.63 3,862 51.59
FNMA............................ 1,453 28.69 1,727 26.82 1,886 25.19
---------- ------ ---------- ------ ---------- ------
Total mortgage-backed
securities................. $ 5,064 100.00% $ 6,438 100.00% $ 7,486 100.00%
========== ====== ========== ====== ========== ======
</Table>
<Table>
<Caption>
DECEMBER 31,
---------------------------------------------------------------
2001 2000 1999
------------------- ------------------- -------------------
AMORTIZED % OF AMORTIZED % OF AMORTIZED % OF
COST TOTAL COST TOTAL COST TOTAL
---------- ------ ---------- ------ ---------- ------
(DOLLARS IN THOUSANDS)
AVAILABLE FOR SALE
Investment securities:
Federal agency obligations...... $ 500 3.90% $ 4,000 63.12% $ 4,000 53.49%
U.S. Government securities...... -- -- -- -- 1,001 13.38
Corporate debentures............ 494 3.85 494 7.80 494 6.60
Marketable equity securities.... 11,824 92.25 1,843 29.08 1,984 26.53
---------- ------ ---------- ------ ---------- ------
Total investment
securities................. $ 12,818 100.00% $ 6,337 100.00% $ 7,479 100.00%
========== ====== ========== ====== ========== ======
Average remaining contractual life
of investment securities(1)..... 14.48 yrs. 6.93 yrs. 5.24 yrs.
========== ========== ==========
Mortgage-backed securities:
GNMA............................ $ 9,940 79.80% $ -- --% $ -- --%
FHLMC........................... 1,447 11.62 1,788 59.32 1,981 46.85
FNMA............................ 1,069 8.58 1,226 40.68 2,248 53.15
---------- ------ ---------- ------ ---------- ------
Total mortgage-backed
securities................. $ 12,456 100.00% $ 3,014 100.00% $ 4,229 100.00%
========== ====== ========== ====== ========== ======
</Table>
- ---------------
(1) Marketable equity securities have no stated maturity, therefore, are
excluded from the average remaining contractual life calculation.
20
The composition and maturities of the investment securities portfolio by
contractual maturity at December 31, 2001, are indicated in the following table:
<Table>
<Caption>
DUE IN
---------------------------------------------
LESS THAN 1 TO 3 3 TO 5 OVER TOTALS
1 YEAR YEARS YEARS 5 YEARS DECEMBER 31, 2001
--------- --------- --------- --------- ------------------------------
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..... $ -- $500 $ -- $1,109 $ 1,609 $ 1,629 $ 1,620
Corporate debentures............. -- -- -- 494 494 456 456
Marketable equity securities..... 11,824 -- -- -- 11,824 11,653 11,653
------- ---- ---- ------ ------- ------- -------
Total investment securities...... $11,824 $500 $ -- $1,603 $13,927 $13,738 $13,729
======= ==== ==== ====== ======= ======= =======
Weighted average yield........... 3.42% 6.48% N/A 5.13% 3.90% N/A N/A
======= ==== ==== ====== ======= ======= =======
</Table>
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, 2001 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, 2001.
<Table>
<Caption>
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, 2001
--------- --------- --------- --------- --------- --------- ------------------------------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED FAIR CARRYING
COST COST COST COST COST COST COST VALUE VALUE
--------- --------- --------- --------- --------- --------- --------- ------- --------
(DOLLARS IN THOUSANDS)
GNMA................. $ -- $ -- $ -- $ -- $ 483 $10,622 $11,105 $11,070 $11,062
FHLMC................ -- -- -- 1,738 2,155 -- 3,893 3,957 3,901
FNMA................. -- -- -- -- 2,522 -- 2,522 2,522 2,527
---- ---- ---- ------ ------ ------- ------- ------- -------
Total................ $ -- $ -- $ -- $1,738 $5,160 $10,622 $17,520 $17,549 $17,490
==== ==== ==== ====== ====== ======= ======= ======= =======
Weighted Average
Yield.............. N/A N/A N/A 6.13% 6.36% 4.77% 5.37% N/A N/A
==== ==== ==== ====== ====== ======= ======= ======= =======
</Table>
The weighted yield for investment securities including held to maturity and
available for sale is based upon historical amortized cost balances.
21
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,
2001.
<Table>
<Caption>
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, 2001
--------- --------- --------- --------- --------- --------- -----------------------------
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......... $ -- $ -- $ -- $ -- $1,109 $ -- $1,109 $1,118 $1,109
FHLMC Certificates... -- -- -- 1,738 708 -- 2,446 2,502 2,446
GNMA Certificates.... -- -- -- -- 483 682 1,165 1,173 1,165
FNMA Certificates.... -- -- -- -- 1,453 -- 1,453 1,448 1,453
---- ---- ---- ------ ------ ---- ------ ------ ------
Total................ $ -- $ -- $ -- $1,738 $3,753 $682 $6,173 $6,241 $6,173
==== ==== ==== ====== ====== ==== ====== ====== ======
Weighted Average
Yield.............. N/A N/A N/A 6.13% 6.56% 6.50% 6.43% N/A N/A
==== ==== ==== ====== ====== ==== ====== ====== ======
</Table>
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, 2001.
<Table>
<Caption>
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, 2001
--------- --------- --------- --------- --------- --------- ------------------------------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED FAIR CARRYING
COST COST COST COST COST COST COST VALUE VALUE
--------- --------- --------- --------- --------- --------- --------- ------- --------
(DOLLARS IN THOUSANDS)
Marketable Equity
Securities......... $11,824 $ -- $ -- $ -- $ -- $ -- $11,824 $11,653 $11,653
U.S. Gov't & Agency
Securities......... -- 500 -- -- -- -- 500 511 511
Corporate
debentures......... -- -- -- -- -- 494 494 456 456
FHLMC Certificates... -- -- -- -- 1,447 -- 1,447 1,455 1,455
GNMA Certificates.... -- -- -- -- -- 9,940 9,940 9,897 9,897
FNMA Certificates.... -- -- -- -- 1,069 -- 1,069 1,074 1,074
------- ---- ---- ---- ------ ------- ------- ------- -------
Total................ $11,824 $500 $ -- $ -- $2,516 $10,434 $25,274 $25,046 $25,046
======= ==== ==== ==== ====== ======= ======= ======= =======
Weighted Average
Yield.............. 3.42% 6.48% N/A N/A 6.04% 4.54% 4.40% N/A N/A
======= ==== ==== ==== ====== ======= ======= ======= =======
</Table>
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, 2001, the weighted average contractual maturity of all of
the Savings Bank's mortgage-backed securities was approximately 23 years and the
weighted average yield on the mortgage-backed securities
22
portfolio was 5.37%. 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, 2001, of the $17.5 million of mortgage-backed securities, an
aggregate of $6.4 million were secured by fixed-rate mortgage loans and an
aggregate of $11.1 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, 2001 and has no present intention to invest in such products.
SOURCES OF FUNDS
General. The principal source of funds for the Company is the repayment of
the loan to the ESOP, loan repayments, 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,
2001. The Savings Bank presently operates five automated teller machines
("ATMs"), one at each of the branch offices maintained by the Savings Bank as of
December 31, 2001 and one off-site ATM at a local convenience store. The Savings
Bank is affiliated with a regional ATM network.
The Bank completed the sale of its Washington in-store branch office to
Northwest Savings Bank in October 2001. The office was located within the Shop
'n Save supermarket at 125 West Beau Street in Washington,
23
Pennsylvania. Northwest Savings Bank retained the employees of this office to
provide continuity of customer service. The sale included $4.6 million in
deposits, as well as the fixed assets at such branch location. All deposits of
such branch continued to be FDIC insured subject to FDIC rules and regulations.
The sale followed the Bank's determination that the Washington, Pennsylvania
branch was outside of its targeted geographic market. The Bank expects to save
approximately $123,000 annually in compensation and benefits from the sale of
this branch.
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.
<Table>
<Caption>
DECEMBER 31,
------------------------------------------------------------
2001 2000 1999
------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Passbook and club accounts.......... $ 16,251 13.06% $ 15,862 13.02% $ 16,539 13.73%
Money market........................ 24,776 19.91 23,008 18.89 25,111 20.84
Certificates of deposit............. 60,712 48.78 60,015 49.28 57,819 47.99
NOW accounts........................ 16,072 12.91 14,885 12.22 13,485 11.19
Non-interest bearing................ 6,640 5.34 8,023 6.59 7,537 6.25
-------- ------ -------- ------ -------- ------
Total deposits.................... $124,451 100.00% $121,793 100.00% $120,491 100.00%
======== ====== ======== ====== ======== ======
</Table>
The following table presents, by various interest rate categories, the
amount of certificates of deposit at December 31, 2001 and the amounts at
December 31, 2001 that mature during the periods indicated.
<Table>
<Caption>
TOTAL AS OF
DECEMBER 31, AMOUNTS AT DECEMBER 31, 2001
2001 MATURING WITHIN
------------ ---------------------------------
AFTER ONE
BUT WITHIN
ONE THREE
CERTIFICATES OF DEPOSIT YEAR YEARS THEREAFTER
----------------------- ------- ---------- ----------
(DOLLARS IN THOUSANDS)
Less than 4.01%........................... $18,658 $16,912 $ 1,689 $ 57
4.01% to 6.00%............................ 28,376 11,477 9,949 6,950
6.01% to 8.00%............................ 13,678 9,468 3,164 1,046
------- ------- ------- ------
Total certificate accounts.............. $60,712 $37,857 $14,802 $8,053
======= ======= ======= ======
</Table>
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.
<Table>
<Caption>
DECEMBER 31,
------------------------------------------------------------------
2001 2000 1999
-------------------- -------------------- --------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE PAID BALANCE RATE PAID BALANCE RATE PAID
-------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
Passbook and club accounts...... $ 16,308 2.34% $ 16,330 2.54% $ 16,730 2.53%
Money market.................... 25,015 3.20 24,828 4.20 23,895 3.72
Certificates of deposit......... 63,098 5.50 58,893 5.46 58,219 5.20
NOW accounts.................... 15,473 1.41 14,462 1.51 12,256 1.51
Non-interest bearing............ 7,342 -- 7,566 -- 6,063 --
-------- ---- -------- ---- -------- ----
Total deposits.................. $127,236 3.83% $122,079 4.01% $117,163 3.86%
======== ==== ======== ==== ======== ====
</Table>
24
The following table sets forth the Savings Bank's net savings flows during
the periods indicated.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Beginning balance............................ $121,793 $120,491 $109,698
(Decrease) increase before interest
credited................................... (2,212) (3,593) 6,268
Interest credited............................ 4,870 4,895 4,525
-------- -------- --------
Net savings increase......................... 2,658 1,302 10,793
-------- -------- --------
Ending balance............................... $124,451 $121,793 $120,491
======== ======== ========
</Table>
The following table sets forth maturities of the Savings Bank's
certificates of deposit of $100,000 or more at December 31, 2001 by time
remaining to maturity.
<Table>
<Caption>
IN THOUSANDS
------------
Three months or less........................................ $ 803
Over three months through six months........................ 3,590
Over six months through 12 months........................... 2,963
Over 12 months.............................................. 4,150
-------
Total..................................................... $11,506
=======
</Table>
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.
<Table>
<Caption>
AT DECEMBER 31,
---------------------------
2001 2000 1999
------- ------- -------
(DOLLARS IN THOUSANDS)
Amount Outstanding At Year End.................. $55,800 $66,300 $62,977
======= ======= =======
Maximum Balance................................. $66,300 $70,577 $62,977
======= ======= =======
Average Balance................................. $57,217 $67,116 $54,040
======= ======= =======
Weighted Average Interest Rate:
At end of year................................ 6.15% 6.28% 5.72%
======= ======= =======
During Year................................... 6.18% 6.14% 5.56%
======= ======= =======
</Table>
The Savings Bank utilized excess cash positions throughout 2001 to decrease
borrowings. 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.
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, 2001, 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, 2001
and as of December 31 of each of the preceding four years.
25
<Table>
<Caption>
AS OF AS OF AS OF
DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
-------------------- -------------------- --------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
Tangible capital:(1)
Requirement........ $ 2,908 1.50% $ 3,014 1.50% $ 2,992 1.50%
Actual............. 10,621 5.48 10,518 5.24 13,753 6.89
Excess............. $ 7,713 3.98% $ 7,504 3.74% $10,761 5.39%
Core capital:(1)(2)
Requirement........ $ 7,756 4.00% $ 8,036 4.00% $ 7,979 4.00%
Actual............. 10,621 5.48 10,518 5.24 13,753 6.89
Excess............. $ 2,865 1.48% $ 2,482 1.24% $ 5,774 2.89%
Risk-based
capital:(1)
Requirement(3)..... $ 7,908 8.00% $ 8,753 8.00% $ 8,521 8.00%
Actual(4).......... 11,788 11.93 11,886 10.86 14,736 13.83
Excess............. $ 3,880 3.93% $ 3,133 2.86% $ 6,215 5.83%
<Caption>
AS OF AS OF
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------- --------------------
PERCENT OF PERCENT OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2)
------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
Tangible capital:(1)
Requirement........ $ 2,638 1.50% $ 2,139 1.50%
Actual............. 12,950 7.36 12,592 8.83
Excess............. $10,312 5.86% $10,453 7.33%
Core capital:(1)(2)
Requirement........ $ 5,276 3.00% $ 4,279 3.00%
Actual............. 12,950 7.36 12,592 8.83
Excess............. $ 7,674 4.36% $ 8,313 5.83%
Risk-based
capital:(1)
Requirement(3)..... $ 7,286 8.00% $ 5,537 8.00%
Actual(4).......... 13,521 14.85 12,995 18.78
Excess............. $ 6,235 6.85% $ 7,458 10.78%
</Table>
- ---------------
(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, 2001, the difference between capital under generally accepted
accounting principles ("GAAP") and regulatory tangible and core capital is
attributable to $35,000 for the Savings Bank's net unrealized holding losses
on available-for-sale securities to arrive at regulatory tangible and core
capital of $10,621,000.
(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, 2001, 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 $1,167,000 for the allowable allowance for loan loss and $35,000
for the Savings Bank's net unrealized holding gains (losses) on
available-for-sale securities to arrive at regulatory risk-based capital of
$11,788,000.
COMPETITION
The Savings Bank's market area is primarily located in the southern portion
of the Pittsburgh metropolitan area. The largest employers in the Pittsburgh
area include the U.S. Government, the Pennsylvania State Government, USAir
Group, Inc., the University of Pittsburgh Medical Center, the University of
Pittsburgh, PNC Financial Services Group, Inc., and Mellon Financial Corp. With
the contraction of the steel industry in the Pittsburgh area over the last 25
years, the number of manufacturing jobs in the Pittsburgh area has declined, as
has the overall population for the Pittsburgh area. The Savings Bank's business
and operating results are affected significantly by the general economic
conditions prevalent in its primary market area including population levels.
The Savings Bank experiences significant competition in its local market
area in both originating loans and attracting deposits. Its most direct
competition comes from commercial banks, other thrift institutions and mortgage
banking companies. Many of these institutions maintain a statewide or regional
presence and, in some cases, a national presence. Technological innovations have
also led to greater competition as well. With the advent of automated transfer
payment systems, competition between depository and nondepository institutions
has increased. These changes have led to even greater competition among
commercial banks, thrift institutions, credit unions, brokerage firms, money
market mutual funds, mutual bond funds, finance and insurance companies,
mortgage banking firms and retail establishments.
Federal legislation in recent years has eliminated many of the distinctions
between commercial banks and thrift institutions and holding companies and
allowed bank holding companies to acquire thrift institutions. Such legislation
has generally resulted in an increase in the competition encountered by thrift
institutions and has resulted in a decrease in both the number of thrift
institutions and the aggregate size of the thrift industry.
Commercial banks and thrift institutions have recently experienced
increasing consolidation. In the event of a downturn in the economy or
competitive pressures resulting from increasing consolidation, the Savings Bank
26
may experience reduced demand for mortgage loans. Interstate branch banking is
now permitted under Federal law. Such interstate branch banking will result in
increased competition for deposits. The Savings Bank may have difficulty
attracting deposits in an environment of economic downturn, increased
consolidation or interstate branch banking. To date, the Savings Bank has not
experienced increased competition from an out-of-state financial institution
that has established a new branch in the Greater Pittsburgh area. Management of
the Savings Bank and the Company cannot predict if out-of-state financial
institutions will choose to open new branches in the primary market of the
Savings Bank.
SUPERVISION AND REGULATION
PRESTIGE BANCORP. INC.
General. The Company, as a savings and loan holding company within the
meaning of Home Owners' Loan Act of 1933, as amended ("HOLA"), is registered
with the OTS and is subject to OTS regulations, examinations, supervision and
reporting requirements. In addition, if the Company acquires any non-savings
institution subsidiaries, the OTS will have enforcement authority over such
subsidiaries. As a subsidiary of a savings and loan holding company, the Savings
Bank is subject to certain restrictions in its dealings with the Company and any
other affiliates thereof. This regulatory authority granted to the OTS is
intended primarily for the protection of the depositors of the Savings Bank and
not for the benefit of the stockholders of the Company.
Federal Activities Restrictions. There are few restrictions on the
activities of a savings and loan holding company which holds only one subsidiary
savings association as long as such savings association meets the "qualified
thrift lender" test (the "QTL Test"). No savings and loan holding company and no
non-savings association subsidiary of a savings and loan holding company may
engage in any activity or render any service for or on behalf of any savings
association for the purpose, or with the effect of, evading any law or
regulation applicable to the related savings association. In addition, if the
Director of the OTS determines that there is reasonable cause to believe that
the continuation by a savings and loan holding company of an activity
constitutes a serious risk to the financial safety, soundness or stability of
its subsidiary savings association, the Director may impose such restrictions as
deemed necessary to address such risk, including limiting (i) payment of
dividends by the savings association; (ii) transactions between the savings
association and its affiliates; and (iii) any activities of the savings
association that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings association.
Notwithstanding the above rules as to permissible business activities of unitary
savings and loan holding companies, under OTS regulations, any savings and loan
holding company is required to register as a bank holding company within one
year of the failure of the QTL Test by its subsidiary insured institution. Under
such circumstances, the holding company would become subject to all of the
provisions of the Bank Holding Company Act of 1956, as amended ("BHC Act"), and
other statutes applicable to bank holding companies, in the same manner and to
the same extent as if the company were a bank holding company. The Savings Bank
currently satisfies the QTL Test.
If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Savings Bank,
the Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
Test, as set forth below, the activities of the Company and any of its
subsidiaries (other than the Savings Bank or other subsidiary savings
associations) would thereafter be subject to further restrictions. No multiple
savings and loan holding company or subsidiary thereof which is not a savings
association shall commence or continue for a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof any
business activity, other than: (i) furnishing or performing management services
for a subsidiary savings association; (ii) conducting an insurance agency or
escrow business; (iii) holding, managing, or liquidating assets owned by or
acquired from a subsidiary savings association; (iv) holding or managing
properties used or occupied by a subsidiary savings association; (v) acting as
trustee under deeds of trust; (vi) those activities authorized by regulation as
of March 5, 1987 to be engaged in by multiple savings and loan holding
companies; or (vii) unless the Director of the OTS by regulation prohibits or
limits such activities for savings and loan holding companies, those activities
authorized by the Federal Reserve Board as permissible for bank holding
companies. The activities described in (i) through (vi) above may only be
engaged in after giving the OTS prior notice and being informed that the OTS
does not object to such activities.
27
In addition, the activities described in (vii) above also must be approved by
the Director of the OTS prior to being engaged in by a multiple savings and loan
holding company.
Limitations on Transactions with Affiliates. Transactions between savings
associations and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act ("FRA"). An affiliate of a savings association is any
company or entity that controls, is controlled by or is under common control
with the savings association. In a holding company context, the parent holding
company of a savings association (such as the Company) and any companies which
are controlled by such parent holding company are affiliates of the savings
association. Generally, Sections 23A and 23B (i) limit the extent to which the
savings association or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such association's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the association or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar transactions. In
addition to the restrictions imposed by Sections 23A and 23B, no savings
association may (i) loan or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings association.
In addition, Sections 22(h) and (g) of the FRA places restrictions on loans
to executive officers, directors and principal stockholders. Under Section
22(h), loans to a director, an executive officer and to a greater than 10%
stockholder of a savings institution (a "principal stockholder"), and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons and also requires prior board approval for certain loans. In addition,
the aggregate amount of extensions of credit by a savings institution to all
insiders cannot exceed the institution's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers. At December 31, 2001, the Savings Bank was in compliance with the
above restrictions.
Restrictions on Acquisitions. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings association or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5% of the voting shares of a savings association or holding company
thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may acquire control of any savings association, other than
a subsidiary savings association, or of any other savings and loan holding
company.
Restrictions on Dividends from Subsidiary Savings Bank. Every subsidiary
savings association must give the Director of the OTS not less than thirty days
notice of the proposed declaration by the board of directors of such savings
association of a dividend on the stock of such savings association held by its
parent holding company. Thus, the Savings Bank must notify the OTS thirty days
before declaring any dividend to the Company.
Federal Securities Laws. The Company's Common Stock is registered with the
SEC under the Exchange Act. The Company is subject to the information, proxy
solicitation, insider trading restrictions and other requirements under the
Exchange Act.
Financial Modernization. On November 12, 1999, President Clinton signed
into law the Gramm-Leach-Bliley Act which, among other things, effective March
11, 2000, permitted bank holding companies to become financial holding companies
and thereby affiliate with securities firms and insurance companies and engage
in other activities that are financial in nature. A bank holding company may
become a financial holding company if each of its subsidiary banks is well
capitalized under the Federal Deposit Insurance Corporation Improvement Act of
1991 prompt corrective action provisions, is well managed and has at least a
satisfactory rating under the Community Reinvestment Act by filing a declaration
that the bank holding company wishes to become a financial
28
holding company. No regulatory approval will be required for a financial holding
company to acquire a company, other than a bank or savings association, engaged
in activities that are financial in nature or incidental to activities that are
financial in nature, as determined by the Federal Reserve Board.
The Gramm-Leach-Bliley Act (the "GLB Act") defined "financial in nature" to
include securities underwriting, dealing and market making; sponsoring mutual
funds and investment companies; insurance underwriting and agency; merchant
banking activities; and activities that the Federal Reserve Board has determined
to be closely related to banking. A qualifying national bank also may engage,
subject to limitations on investment, in activities that are financial in
nature, other than insurance underwriting, insurance company portfolio
investment, real estate development, and real estate investment, through a
financial subsidiary of the bank. Subsidiary banks of a financial holding
company or national banks with financial subsidiaries must continue to be well
capitalized and well managed in order to continue to engage in activities that
are financial in nature without regulatory actions or restrictions, which could
include divestiture of the financial in nature subsidiary or subsidiaries. In
addition, a financial holding company or a bank may not acquire a company that
is engaged in activities that are financial in nature unless each of the
subsidiary banks of the financial holding company or the bank has a Community
Reinvestment Act rating of satisfactory or better.
Under current law, so-called "unitary savings and loan holding companies"
(i.e., those that control only one savings association and have no other
depository institution subsidiaries) are not generally subject to any
restrictions on the non-banking activities in which they may engage (either
directly or through a subsidiary). The GLB Act limits the nonbanking activities
of unitary savings and loan holding companies by generally prohibiting any
savings and loan holding company from engaging in any activity other than
activities that (i) are currently permitted for multiple savings and loan
holding companies or (ii) are permissible for financial holding companies (as
described above) (collectively "permissible activities"). The GLB Act also
generally prohibits any company from acquiring control of a savings association
or savings and loan holding company unless the acquiring company engages solely
in permissible activities. The GLB Act creates an exemption from the general
prohibitions for unitary savings and loan holding companies in existence, or
formed pursuant to an application pending before the Office of Thrift
Supervision, on or before May 4, 1999. As a grandfathered unitary thrift holding
company, the Company will retain its authority to engage in nonfinancial
activities.
One significant change in the law which could indirectly affect the Company
is a change in the ability to become a unitary savings and loan holding company.
In general, the Company, as a unitary savings and loan holding company, may
engage, through non-banking subsidiaries, in whatever activities it wants to
engage.
The new law protects the existing rights of the Company to engage in a wide
range of activities. However, there can be no new unitary savings and loan
holding companies and existing companies cannot take advantage of the old law by
acquiring a pre-existing unitary savings and loan holding company. This could
adversely affect the market price of the stock of existing savings and loan
holding companies because acquisitions of them could cause them to lose their
broad powers to engage in non-banking activities.
The privacy requirements of the GLB Act are to be enforced through
regulations implemented by the various federal regulatory agencies, along with
state insurance agencies and the Federal Trade Commission. The FDIC and OTS have
issued regulations that took effect on July 1, 2001. The Savings Bank has
complied with these regulation requirements.
The Company has reviewed the proposed rules and does not believe compliance
with these rules will have any material adverse effect on the current operations
of the Savings Bank.
PRESTIGE BANK, A FEDERAL SAVINGS BANK
General. The Savings Bank is subject to examination and comprehensive
regulation by the OTS that is the Savings Bank's chartering authority. The
Savings Bank is also regulated by the FDIC, the administrator of the SAIF that
provides insurance for the deposits of the Savings Bank. The Savings Bank is
subject to certain reserve requirements established by the Board of Governors of
the Federal Reserve System ("FRB") and is a member of the Federal Home Loan Bank
("FHLB") of Pittsburgh, which is one of the 12 regional banks comprising the
Federal Home Loan Bank System (the "FHLB System").
29
The Savings Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other financial institutions. There are periodic examinations
by the OTS and the FDIC to test the Savings Bank's compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the SAIF and depositors. The regulatory
structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or the Congress, could
have a material adverse impact on the Company, the Savings Bank and their
operations. Certain of the regulatory requirements applicable to the Savings
Bank are referred to below or elsewhere herein.
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 feature 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.
Business Activities. The activities of savings institutions are governed
by HOLA, and in certain respects, the Federal Deposit Insurance Act ("FDI Act").
The Federal banking statutes, as amended by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") and Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") (1) restrict the solicitation of
brokered deposits by savings institutions that are troubled or not
well-capitalized, (2) prohibit the acquisition of any corporate debt security
that is not rated in one of the four highest rating categories, (3) restrict the
aggregate amount of loans secured by non-residential real estate property to
400% of capital, (4) permit savings and loan holding companies to acquire up to
5% of the voting shares of non-subsidiary savings institutions or savings and
loan holding companies without prior approval, and (5) permit bank holding
companies to acquire healthy savings institutions.
30
Under the terms of the Supervisory Agreement, the Savings Bank is
designated in "troubled condition", and therefore its access to brokered
deposits is restricted. The Savings Bank has not historically utilized brokerage
deposits, and management does not view this restriction on business activity as
significant.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limits on loans to one borrower. Generally, savings
institutions may not make a loan or extend credit to a single or related group
of borrowers in excess of 15% of the Savings Bank's unimpaired capital and
surplus. An additional amount may be loaned, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain securities and bullion, but generally does not
include real estate. At December 31, 2001, the Savings Bank's largest aggregate
amount of loans to any one borrower consisted of $1.35 million that was below
the Savings Bank's loans to one borrower limit of $1.8 million at such date. 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.
QTL Test. The HOLA requires savings institutions to meet a QTL Test. Under
the QTL Test, a savings association is required to maintain at least 65% of its
"portfolio assets" (total assets less (i) specified liquid assets up to 20% of
total assets, (ii) intangibles, including goodwill, and (iii) the value of
property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed and related securities) on a monthly basis in 9 out of every 12
months.
A savings association that fails the QTL Test must either convert to a bank
charter or operate under certain restrictions. As of December 31, 2001, the
Savings Bank maintained 95.75% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL Test.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Association") and has not been advised by the OTS that it
is in need of more than normal supervision, could, after prior notice but
without the approval of the OTS, make capital distributions during a calendar
year equal to the greater of (i) 100% of its net earnings to date during the
calendar year plus the amount that would reduce by one-half its "surplus capital
ratio" (the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year; or (ii) 75% of its net earnings for the previous
four quarters; provided that the institution would not be undercapitalized, as
that term is defined in the OTS Prompt Corrective Action regulations, following
the capital distribution. Any additional capital distributions would require
prior regulatory approval. In the event the Savings Bank's capital fell below
its fully-phased in requirement or the OTS notified it that it was in need of
more than normal supervision, the Savings Bank's ability to make capital
distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
Liquidity. On November 24, 1997, the OTS published its final rule on
changes to liquidity requirement calculations in order to conform with
provisions of FIRREA, and reduced the liquidity base by modifying the definition
of net withdrawable account to exclude accounts with maturities exceeding one
year. Under the new rule, the Savings Bank is required to maintain an average
daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances, specified U.S. Government, state or Federal agency obligations,
shares of certain mutual funds and certain corporate debt securities and
commercial paper) equal to a monthly average of not less than 4.0% of its net
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4.0% to 10% depending upon economic conditions and the savings flow of
member institutions. The rule eliminates a separate limit that required each
savings institution to maintain an average daily balance of short-term liquid
assets equal to 1.0% of the total of its net withdrawable deposit accounts and
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet these liquidity requirements. The Savings Bank's average monthly
liquidity ratio at December 31, 2001 was 39.55%, which exceeded the new
applicable requirements. The Savings Bank has
31
never been subject to monetary penalties for failure to meet its liquidity
requirements. Simply meeting the minimum liquidity requirement does not
automatically mean a thrift institution has sufficient liquidity for safe and
sound operation. The new final rule includes a separate requirement that each
thrift must maintain sufficient liquidity to ensure safe and sound operation.
Adequate liquidity may vary from institution to institution depending on a
thrift's overall asset/liability structure, market conditions, the activities of
financial service competitors and the requirements of its own deposit and loan
customers.
Assessments. Savings institutions are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
the institution's latest quarterly thrift financial report. The assessments paid
by the Savings Bank for the years ended December 31, 2001, 2000 and 1999 totaled
$73,000, $45,000 and $45,000, respectively.
Branching. Under OTS regulations, Federally chartered savings associations
are permitted, subject to OTS approval, to branch nationwide to the extent
allowed by Federal statute. This permits Federal savings associations with
interstate networks to diversify their loan portfolios and lines of business.
The OTS authority preempts any state law purporting to regulate branching by
Federal savings associations. The OTS will evaluate a branching applicant's
record of compliance with the Community Reinvestment Act, as amended ("CRA") as
part of any grant of permission to establish a new branch. A poor CRA record may
be the basis for denial of a branching application.
Community Reinvestment. Under the CRA, as implemented by OTS regulations,
a savings institution has a continuing and affirmative obligation consistent
with its safe and sound operation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with its
examination of a savings institution, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such institution. The CRA rating
system identifies four levels of performance that may describe an institution's
record of meeting community needs: "outstanding," "satisfactory," "needs to
improve" and "substantial noncompliance." The CRA also requires all institutions
to make public disclosure of their CRA ratings. The Savings Bank received a
"Satisfactory" CRA rating in its most recent Federal examination by the OTS.
Failure to maintain a satisfactory rating may establish a basis for the OTS to
deny the application of the Savings Bank to open new branch offices or an
application of the Savings Bank or the Company to undertake some other business
opportunity.
Brokered Deposits. Under FDIC regulations, well-capitalized institutions
that are not troubled are subject to no brokered deposit limitations, while
adequately capitalized institutions are able to accept, renew or roll over
brokered deposits only (i) with a waiver from the FDIC and (ii) subject to the
limitation that they do not pay an effective yield on any such deposit which
exceeds by more than (a) 75 basis points of the effective yield paid on deposits
of comparable size and maturity in such institution's normal market area for
deposits accepted in its normal market area or (b) 120 basis points for retail
deposits and 130 basis points for wholesale deposits, respectively, of the
current yield on comparable maturity U.S. treasury obligations for deposits
accepted outside the institution's normal market area. Undercapitalized
institutions are not permitted to accept brokered deposits and may not solicit
deposits by offering an effective yield that exceeds by more than 75 basis
points of the prevailing effective yields on insured deposits of comparable
maturity in the institution's normal market area or in the market area in which
such deposits are being solicited. As a well-capitalized institution in troubled
condition, the Savings Bank's use of brokered deposits is restricted under FDIC
regulations. However, the Savings Bank does not solicit or accept, and has not
historically solicited or accepted, brokered deposits. The Savings Bank does not
currently intend to change this policy.
Transactions with Related Parties. The Savings Bank's authority to engage
in transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) or to make loans to certain
insiders, is limited by Sections 23A and 23B of the FRA. Section 23A limits the
aggregate amount of transactions with any individual
32
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with nonaffiliated companies. In the absence of comparable
transactions, such transactions may only occur under terms and circumstances,
including credit standards, that in good faith would be offered to or would
apply to nonaffiliated companies. Notwithstanding Sections 23A and 23B, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies under Section
4(c) of the BHC Act. Further, no savings institution may purchase the securities
of any affiliate other than a subsidiary.
The Savings Bank's authority to extend credit to executive officers,
directors and 10% stockholders, as well as entities controlled by such persons,
is currently governed by Sections 22(g) and 22(h) of the FRA, and Regulation O
thereunder. Among other things, these regulations require such loans to be made
on terms substantially the same as those offered to unaffiliated individuals and
do not involve more than the normal risk of repayment, place limits on the
amount of loans the Savings Bank may make to such persons based, in part, on the
Savings Bank's capital position, and require certain approval procedures to be
followed. The OTS regulations, with certain minor variances, apply Regulation O
to savings institutions.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Civil penalties cover a wide range of violations and
actions and range up to $25,000 per day unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Criminal
penalties for most financial institution crimes include fines of up to $1
million and imprisonment for up to 30 years. In addition, regulators have
substantial discretion to impose enforcement action on an institution that fails
to comply with its regulatory requirements, particularly with respect to the
capital requirements. Possible enforcement action ranges from the imposition of
a capital plan and capital directive to receivership, conservatorship or the
termination of deposit insurance. Under the FDI Act, the FDIC has the authority
to recommend to the Director of OTS that enforcement action be taken with
respect to a particular savings institution. If the director does not take
action, the FDIC has authority to take such action under certain circumstances.
Standards for Safety and Soundness. The FDI Act, as amended by FDICIA,
requires each Federal banking agency to prescribe for all insured depository
institutions and their holding companies standards relating to, among other
things, internal controls, information systems and audit systems, loan
documentation, credit underwriting, interest rate risk exposure, asset growth,
asset quality, liquidity, capital levels and compensation, fees and benefits and
such other operational and managerial standards as the agency deems appropriate.
Under the FDI Act, if an insured depository institution or its holding company
fails to meet any of its standards described above, it will be required to
submit to the appropriate Federal banking agency a plan specifying the steps
that will be taken to cure the deficiency. If an institution fails to submit an
acceptable plan or fails to implement the plan, the appropriate Federal banking
agency will require the institution or holding company, to correct the
deficiency and until corrected, may impose restrictions on the institution or
the holding company including any of the restrictions applicable under the
prompt corrective action regulations.
The Federal banking agencies have adopted a final regulation and
Interagency Guidelines Prescribing Standards for Safety and Soundness ("Safety
and Soundness Guidelines") and a final rule which implements the safety and
soundness standards established by FDICIA. The Safety and Soundness Guidelines
and the final rule set forth the safety and soundness standards that the Federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. The standards set forth in the
Safety and Soundness Guidelines address internal controls and information
systems: internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; and compensation, fees and benefits.
The agencies have also adopted guidelines relating to asset quality and earnings
standards. These standards are
33
now part of the Safety and Soundness Guidelines applicable to the Savings Bank.
If the appropriate Federal banking agency determines that an institution fails
to meet any standard prescribed by the Safety and Soundness Guidelines, the
agency may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final rule
establishes deadlines for the submission and review of such safety and soundness
compliance plans.
As part of the Supervisory Agreement, the OTS has directed that the Savings
Bank improve its interest rate risk management, its credit underwriting
policies, its investment policies and its loan classification policies. The OTS
mandated these actions in part under its authority to correct any safety and
soundness issues at an insured institution. Management believes it has
materially complied with the request of the OTS in this matter.
Capital Requirements. OTS capital regulations require savings institutions
to meet three capital standards: (1) tangible capital equal to 1.5% of total
adjusted assets, (2) a leverage ratio (core capital) equal to at least 4% of
total adjusted assets and (3) a risk-based capital requirement equal to 8.0% of
total risk-weighted assets.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), plus purchased mortgage servicing rights
valued at the lower of the maximum percentage established by the OTS or the
amount includable in core capital. Core capital is defined as common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and minority interests in the equity accounts of consolidated
subsidiaries, and qualifying supervisory goodwill, less nonqualifying intangible
assets.
The OTS requires that only those savings associations rated a composite one
(the highest rating) under the CAMEL rating system for savings associations will
be permitted to operate at or near the regulatory minimum leverage ratio of 3%.
All other savings associations will be required to maintain a minimum leverage
ratio of 4% to 5%. The OTS will assess each individual savings association
through the supervisory process on a case-by-case basis to determine the
applicable requirement.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8.0% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock and the allowance for loan and lease losses.
The portion of the allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted assets.
Overall, supplementary capital is limited to 100% of core capital. A savings
association must calculate its risk-weighted assets by multiplying each asset
and off-balance sheet item by various risk factors as determined by the OTS,
which range from 0% for cash to 100% for delinquent loans, property acquired
through foreclosure, commercial loans and other assets.
In August, 1995, the OTS and Federal Financial Institutions Examination
Council ("FFIEC") announced that effective October 1, 1995, they would not
require institutions to include unrealized gains and losses on available for
sale debt securities when calculating regulatory capital. This announcement
reversed prior OTS policy concerning the implementation of SFAS No. 115. As a
result, institutions must now value available for sale debt securities at
amortized cost, rather than at fair value, for purposes of calculating
regulatory capital. Institutions are still required to comply with SFAS No. 115
for financial reporting purposes.
The risk-based capital standards of the OTS generally require savings
institutions with more than a "normal" level of interest rate risk to maintain
additional total capital. An institution's interest rate risk will be measured
in terms of the sensitivity of its "net portfolio value" to changes in interest
rates. Net portfolio value is defined, generally, as the present value of
expected cash inflows from existing assets and off-balance sheet contracts less
the present value of expected cash outflows from existing liabilities. A savings
institution will be considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. An institution with a greater than normal interest rate
risk will be required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest rate risk
component") equal to one-half the difference between the institution's measured
interest rate risk and the normal level of interest rate risk, multiplied by the
economic value of its total assets.
34
The OTS calculates the sensitivity of an institution's net portfolio value
based on data submitted by the institution in a schedule to its quarterly Thrift
Financial Report and using the interest rate risk measurement model adopted by
the OTS. The amount of the interest rate risk component, if any, to be deducted
from an institution's total capital will be based on the institution's Thrift
Financial Report filed two quarters earlier. Savings institutions with less than
$300 million in assets and a risk-based capital ratio above 12% are generally
exempt from filing the interest rate risk schedule with their Thrift Financial
Reports. However, the OTS may require any exempt institution that it determines
may have a high level of interest rate risk exposure to file such schedule on a
quarterly basis and may be subject to an additional capital requirement based
upon its level of interest rate risk as compared to its peers. Although the
Savings Bank does not qualify for the exemption due to its risk-based capital
level, the OTS has not made any additional capital requirements based upon
Savings Bank's interest rate risk profile.
At December 31, 2001, the Savings Bank met each of its capital
requirements. For further information on the Savings Bank capital levels, see
pages 25 and 26. For further information on interest rate risk, see pages 49
through 52.
Prompt Corrective Regulatory Action. Under the OTS Prompt Corrective
Action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of capitalization. Generally, a savings institution that
has total risk-based capital of less than 8.0% or a leverage ratio or a Tier 1
capital ratio that is less than 4.0% is considered to be undercapitalized. A
savings institution that has total risk-based capital less than 6.0%, a Tier 1
risk-based capital ratio of less than 3% or a leverage ratio that is less than
3.0% is considered to be "significantly undercapitalized" and a savings
institution that has a tangible capital to assets ratio equal to or less than 2%
is deemed to be "critically undercapitalized." Subject to a narrow exception,
the banking regulator is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also provides
that a capital restoration plan must be filed with the OTS within 45 days of the
date an institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." In addition,
numerous mandatory supervisory actions become immediately applicable to the
institution, including, but not limited to, restrictions on growth, investment
activities, capital distributions, and affiliate transactions. The OTS could
also take any one of a number of discretionary supervisory actions, including
the issuance of a capital directive and the replacement of senior executive
officers and directors.
As of December 31, 2001, the Savings Bank was classified as a
"well-capitalized" institution (an institution with 10% or more total risk-based
capital ratio, a Tier I risk-based capital ratio of 6% or more, and a leverage
capital ratio of 5.0% or more), and is not subject to any order or final capital
directive to meet and maintain a specific capital level for any capital measure
and as such is not subject to any prompt corrective action measures.
Insurance of Deposit Accounts. The FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as of
the reporting period ending seven months before the assessment period,
consisting of 1) well capitalized, 2) adequately capitalized or 3)
undercapitalized, and one of three supervisory subcategories within each capital
group. The supervisory subgroup to which an institution is assigned is based on
a supervisory evaluation provided to the FDIC by the institution's primary
Federal regulator and information which the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance funds. An institution's assessment rate depends on the capital
category and supervisory category to which it is assigned. There are nine
assessment risk classifications (i.e., combinations of capital groups and
supervisory subgroups) to which different assessment rates are applied. Prior to
October 1, 1996, assessment rates for members of the SAIF ranged from 23 basis
points for an institution in the highest category (i.e., well-capitalized and
healthy) to 31 basis points for an institution in the lowest category (i.e.,
undercapitalized and substantial supervisory concern). After September 30, 1996,
assessment rates varied from 0 basis points for an institution rated in the
highest category to 27 basis points for an institution rated in the lowest
category. For the fiscal year ended December 31, 2001, the insurance fund
assessment paid by the Savings Bank was approximately 5.0 basis points.
The FDIC sets the assessment rate for institutions on a semi-annual basis.
The FDIC is authorized to raise the assessment rates in certain circumstances.
If the FDIC determined to increase the assessment rates for all
35
institutions, institutions in all risk categories could be affected. The FDIC
has exercised this authority several times in the past and may raise insurance
premiums in the future.
Pursuant to the Deposit Insurance Funds Act of 1996, the FDIC imposed a
one-time special assessment of 65.7 basis points against insured deposits of the
Savings Bank as of March 31, 1995. This special assessment was charged against
all financial institutions with deposits insured by the SAIF. This special
assessment was used to provide a capital infusion into the SAIF. The money
collected was used to capitalize the thrift fund and to let thrift premiums be
brought in line with those of commercial banks. Parity of assessment rates
between similarly situated commercial banks and thrifts has been achieved.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Savings Bank does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
Federal Home Loan Bank System. The Savings Bank is a member of the FHLB
System, which consists of 12 regional FHLBs. The FHLB provides a central credit
facility primarily for member institutions. The Savings Bank, as a member of the
FHLB, is required to acquire and hold shares of capital stock in the FHLB in an
amount at least equal to 1% of the aggregate principal amount of its unpaid
residential mortgage loans and similar obligations at the beginning of each
year, or 1/20 of its advances (borrowings) from the FHLB, whichever is greater.
The Savings Bank was in compliance with this requirement with an investment in
FHLB stock at December 31, 2001, of $2.8 million.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended December 31, 2001, 2000 and 1999,
dividends from the FHLB to the Savings Bank amounted to $209,000, $258,000 and
$200,000 respectively. If dividends were reduced, or interest on future FHLB
advances increased, the Savings Bank's net interest income would likely also be
reduced. Further, there can be no assurance that the impact of FDICIA and the
FIRREA on the FHLBs will not also cause a decrease in the value of the FHLB
stock held by the Savings Bank.
Federal Reserve System. The Federal Reserve Board regulations require
savings institutions to maintain non-interest-earning reserves against their
transaction accounts (primarily NOW and regular checking accounts). The Federal
Reserve Board regulations in fiscal 2001 generally required that reserves be
maintained against aggregate transaction accounts as follows: For accounts
aggregating $42.8 million or less (subject to adjustment by the Federal Reserve
Board) the reserve requirement was 3%; and for accounts greater than $42.8
million, the reserve requirement was $1.3 million plus 10% (subject to
adjustment by the Federal Reserve Board between 8% and 14%) against that portion
of total transaction accounts in excess of $42.8 million. The first $5.5 million
of otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) were exempted from the reserve requirements. The Savings Bank was in
compliance with the foregoing requirements. The balances maintained to meet the
reserve requirements imposed by the FRB may be used to satisfy liquidity
requirements imposed by the OTS. Because required reserves must be maintained in
the form of either vault cash, a non-interest-bearing account at a Federal
Reserve Bank or a pass-through account as defined by the FRB, the effect of this
reserve requirement is to reduce the Savings Bank's interest-earning assets.
FHLB System members are also authorized to borrow from the Federal Reserve
"discount window," but Federal Reserve Board regulations require institutions to
exhaust all FHLB sources before borrowing from a Federal Reserve Bank.
FIRREA requires the OTS to establish accounting standards to be applicable
to all savings associations for purposes of complying with regulations, except
to the extent otherwise specified in the capital standards. Such standards must
incorporate generally accepted accounting principles to the same degree as is
prescribed by the Federal banking agencies for banks or may be more stringent
than such requirements.
On September 2, 1992, the OTS amended a number of its accounting
regulations and reporting requirements (effective October 2, 1992). The
amendments reflected the adoption by the OTS of the following standards:
36
(i) regulatory reports will incorporate accounting principles generally accepted
in the United States when generally accepted accounting principles are used by
Federal banking agencies; (ii) savings association transactions, financial
condition and regulatory capital must be reported and disclosed in accordance
with OTS regulatory reporting requirements that will be at least as stringent as
for national banks; and (iii) the director of the OTS may prescribe regulatory
reporting requirements more stringent than generally accepted accounting
principles whenever the director determines that such requirements are necessary
to ensure the safe and sound reporting and operation of savings associations.
The OTS anticipates further similar revisions to its regulations in the near
future.
The OTS adopted a statement of policy ("Statement") set forth in Thrift
Bulletin 52 concerning (i) procedures to be used in the selection of a
securities dealer, (ii) the need to document and implement prudent policies and
strategies for securities, whether held to maturity, trading or for sale, and to
establish systems and internal controls to ensure that securities activities are
consistent with the financial institution's policies and strategies, (iii)
securities trading and sales practices that may be unsuitable in connection with
securities held in an investment portfolio, (iv) high-risk mortgage securities
that are not suitable for investment portfolio holdings for financial
institutions, and (v) disproportionately large holdings of long-term,
zero-coupon bonds that may constitute an imprudent investment practice. The
Statement applies to investment securities, high-yield, corporate debt
securities, loans, mortgage-backed securities and derivative securities, and
provides guidance concerning the proper classification of, and accounting for,
securities held to maturity, sale, and trading. Securities held to maturity,
sale or trading may be differentiated based upon an institution's desire to earn
an interest yield (held to maturity), to realize a holding gain from assets held
for indefinite periods of time (held for sale), or to earn a dealer's spread
between the bid and asked prices (held for trading). Depository institution
investment portfolios are maintained to provide earnings consistent with the
safety factors of quality, maturity, marketability and risk diversification.
Securities that are purchased to accomplish these objectives may be reported at
their amortized cost only when the depository institution has both the intent
and ability to hold the assets for long-term investment purposes. Securities
held to maturity may be accounted for at amortized cost, securities held for
sale are to be accounted for at the lower of cost or market, and securities held
for trading are to be accounted for at market. The Savings Bank believes that
its investment activities have been and will continue to be conducted in
accordance with the requirements of OTS policies and accounting principles
generally accepted in the United States.
Special Liquidation Rights. In connection with the Conversion, a special
"liquidation account" was established for the benefit of the eligible account
holders and the supplemental eligible account holders of the Savings Bank
determined in accordance with the plan of conversion adopted by the Savings Bank
under applicable law governing the conversion of mutual savings banks. This
liquidation account is equal to the amount of the net worth of the Savings Bank
as of the date of its latest statement of financial condition contained in the
final prospectus used in connection with the Conversion. This amount is
$7,085,000. Each eligible account holder and supplemental eligible account
holder, if he were to continue to maintain his deposit account at the Savings
Bank, would be entitled, on a complete liquidation of the Savings Bank after
Conversion, to an interest in the liquidation account prior to any payment to
the stockholders of the Savings Bank. Each such eligible account holder or
supplemental eligible account holder of the Savings Bank will have a pro rata
interest in the total liquidation account for each of his, her or its, as the
case may be, deposit accounts based on the proportion that the balance of each
such deposit account on the eligibility record dates for such account holders
bore to the balance of all deposit accounts in the Savings Bank on each of the
such eligibility record date. Under certain circumstances the interests of an
eligible account holder or a supplemental eligible account holder may be
terminated.
Were a mutual savings bank to liquidate, all claims of creditors (including
those of depositors, to the extent of deposit balances) would be paid first.
Thereafter, if there were any assets remaining, depositors would receive such
remaining assets, pro rata, based upon the deposit balances in their deposit
accounts immediately prior to liquidation. These liquidation rules survived the
Conversion. In the event that the Savings Bank were to be liquidated after
Conversion, all claims of creditors (including those of depositors, to the
extent of their deposit balances) would also be paid first, followed by
distribution of the "liquidation account" to the eligible account holders and
the supplemental eligible account holders of the Savings Bank, with any assets
remaining thereafter
37
distributed to the Company as the holder of the Savings Bank's capital stock.
Pursuant to the rules and regulations of the OTS, a post-Conversion merger,
consolidation, sale of bulk assets or similar combination or transaction with
another insured savings institution would not be considered a liquidation and,
in such a transaction, the liquidation account would be required to be assumed
by the surviving institution.
FEDERAL AND STATE TAXATION
General. The Company and the Savings Bank are subject to the corporate tax
provisions of the Internal Revenue Code (the "Code"), as well as certain
additional provisions of the Code which apply to thrift and other types of
financial institutions. The following discussion of tax matters is intended only
as a summary and does not purport to be a comprehensive description of the tax
rules applicable to the Company and the Savings Bank.
Fiscal Year. The Company and the Savings Bank will file a consolidated
Federal income tax return on a December 31 year-end basis.
Method of Accounting. The Company maintains its books and records for
Federal income tax purposes using the accrual method of accounting. The accrual
method of accounting generally requires that items of income be recognized when
all events have occurred that establish the right to receive the income and the
amount of income can be determined with reasonable accuracy, and that items of
expense be deducted at the later of (i) the time when all events have occurred
that establish the liability to pay the expense and the amount of such liability
can be determined with reasonable accuracy or (ii) the time when economic
performance with respect to the item of expense has occurred.
Bad Debt Reserves. With a limited exception, effective for taxable years
beginning after 1995, the Small Business Job Protection Act of 1996 (the "1996
Act") repealed the reserve method of accounting for bad debts by savings
institutions. The reserve method permitted savings institutions to establish
reserves for bad debts and to make annual additions thereto that qualified as
deductions from taxable income for federal tax purposes. Prior to the effective
date of repeal, the bad debt deduction was generally based on a savings
institution's actual loss experience (the "Experience Method") or, if certain
definitional tests relating to the composition of assets and the nature of its
business were met, by reference to a percentage of the savings institution's
taxable income (the "Percentage Method").
The 1996 Act provides a limited exception to the repeal of the reserve
method by retaining the Experience Method for savings institutions, such as the
Savings Bank, which have assets with adjusted bases of $500 million or less. The
Percentage Method is no longer available for any savings institution. For
taxable years ended on or before December 31, 1995, the Savings Bank generally
had elected to use the Percentage Method to compute the amount of its bad debt
deduction.
Under the Experience Method, the deductible annual addition continues to be
the amount necessary to increase the balance of the reserve at the close of the
taxable year to the greater of (i) the amount which bears the same ratio to
loans outstanding at the close of the taxable year as the total net bad debts
sustained during the current and five preceding taxable years bear to the sum of
the loans outstanding at the close of those six years, or (ii) the lower of (x)
the balance in the reserve account at the close of the Savings Bank's "base
year," which was its tax year ended December 31, 1987, or (y) if the amount of
loans outstanding at the close of the current year is less than the amount of
loans outstanding at the close of the base year, the amount which bears the same
ratio to loans outstanding at the close of the current year as the balance of
the reserve at the close of the base year bears to the amount of loans
outstanding at the close of the base year.
Under the Percentage Method, the bad debt deduction with respect to
qualifying real property loans was computed as a percentage of the Savings
Bank's taxable income before such deduction, as adjusted for certain items (such
as capital gains and the dividends received deduction). Under the Percentage
Method, a qualifying institution such as the Savings Bank generally could deduct
8% of its taxable income.
The 1996 Act mandates that a savings institution required to change its
method of computing reserves for bad debts shall take into income ratably over a
six taxable year period its "applicable excess reserve," commencing with the
first taxable year beginning after 1995. Under a special rule that is applicable
only for taxable years that begin after December 31, 1995 and before January 1,
1998, if a savings institution meets the
38
"residential loan requirement" for a taxable year, the recapture of the
applicable excess reserve that would otherwise be required to be taken into
account will be suspended. The effect of this is that all savings institutions
will be required to recapture their applicable excess reserves within six, seven
or eight years after the effective date of the change. The Savings Bank will
meet the residential loan requirement if, for a taxable year, the principal
amount of residential loans made by it is generally not less than the average
principal amount of residential loans made by it during the six most recent
taxable years beginning before January 1, 1996.
The Savings Bank's "applicable excess reserves" would be the excess of (1)
the balance in its reserve account as of the close of its last taxable year
beginning before January 1, 1996, over (2) the greater of the balance of (a) its
pre-1988 reserves, or (b) what the Savings Bank's reserves would have been at
the close of its last taxable year beginning before January 1, 1996, had the
Savings Bank always used the Experience Method. The Savings Bank had maintained
the applicable residential loan requirement; and this recapture commenced with
the taxable year that began January 1, 1998. As of December 31, 2001, the
Savings Bank had an applicable excess reserve balance remaining of approximately
$43,000. Approximately $21,500 will be recaptured on an annual basis over the
next two fiscal years.
The base year (i.e. December 31, 1987) bad debt reserve under the
Percentage 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, 2001. 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.
Distributions. If the Savings Bank were to distribute cash or property to
its sole stockholder having a total fair market value in excess of its
accumulated tax-paid earnings and profits, or were to distribute cash or
property to its stockholder in redemption of its stock, the Savings Bank would
generally be required to recognize as income an amount which, when reduced by
the amount of Federal income tax that would be attributable to the inclusion of
such amount in income, is equal to the lesser of: (i) the amount of the
distribution or (ii) the sum of (a) the amount of the accumulated bad debt
reserve of the Savings Bank with respect to qualifying real property loans (to
the extent that additions to such reserve exceed the additions that would be
permitted under the Experience Method) and (b) the amount of the Savings Bank's
supplemental bad debt reserve. The Savings Bank will continue to deduct
additions to its bad debt reserves in the same manner as it has in past years.
Minimum Tax. The Code imposes an alternative minimum tax at a rate of 20%
on a base of regular taxable income plus certain tax preferences ("alternative
minimum taxable income" or "AMTI"). The alternative minimum tax is payable to
the extent such AMTI is in excess of an exemption amount. The Code provides that
items of tax preference that constitute AMTI include (a) tax exempt interest on
newly-issued (generally, issued on or after August 8, 1986) private activity
bonds other than certain qualified bonds and (b) for taxable years beginning
after 1989, 75% of the excess (if any) of (i) adjusted current earnings as
defined in the Code, over (ii) AMTI (determined without regard to this
preference and prior to reduction by net operating losses). Net operating losses
can offset no more than 90% of AMTI. Certain payments of alternative minimum tax
may be used as credits against regular tax liabilities in future years.
Federal Income Tax Returns. The Company's and the Savings Bank's Federal
income tax returns have been filed for taxable years through December 31, 2000
(a consolidated Federal income tax return has been filed by the Company and the
Savings Bank for the taxable year ended December 31, 1996; and a consolidated
return for the Company and the Savings Bank will be filed for each tax year
commencing on and after January 1, 1997). The Company and the Savings Bank's
corporate income tax returns have been examined by the IRS through December 31,
1997. There were no material findings.
39
Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Savings Bank as a member of
the same affiliated group of corporations. The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Savings Bank will not file a
consolidated tax return, except that if the Company owns more than 20% of the
stock of a corporation distributing a dividend, 80% of any dividends received
may be deducted.
State and Local Taxation. The Savings Bank is subject to the Mutual Thrift
Institutions Tax of the Commonwealth of Pennsylvania based on the Savings Bank's
financial net income determined in accordance with generally accepted accounting
principles with certain adjustments. The tax rate under the Mutual Thrift
Institutions Tax is 11.5%. Interest on Commonwealth of Pennsylvania and Federal
obligations is excluded from net income. An allocable portion of net interest
expense incurred to carry the obligations is disallowed as a deduction.
Three-year carryforwards of losses are allowed.
The Company is subject to the Corporate Net Income Tax and the Capital
Stock Tax of the Commonwealth of Pennsylvania.
STATISTICAL DISCLOSURE BY SAVINGS AND LOAN HOLDING COMPANIES
Information regarding statistical disclosure for a savings and loan holding
company required by the Securities Act Industry Guide 3 is set forth in the
portions of this Report which are incorporated herein by reference.
I.Distribution of Assets, Liabilities and Stockholders' Equity; Interest
Rates and Interest Differential.
Information required by this section is presented on pages 53 and 54.
II.
Investment Portfolio.
Information required by this section is presented on pages 18 through 23.
III.
Loan Portfolio.
Information required by this section is presented on pages 5 through 17.
IV.
Summary of Loan Loss Experience.
Information required by this section is presented on pages 13 through 17.
V.Deposits.
Information required by this section is presented on pages 23 through 25.
VI.
Return on Equity and Assets.
Information required by this section is presented on pages 42 and 43.
VII.
Short-Term Borrowing.
Information required by this section is presented on page 25.
40
ITEM 2. PROPERTIES
The following table sets forth certain information with respect to the
Savings Bank's branch offices and operations center at December 31, 2001.
<Table>
<Caption>
NET BOOK VALUE AMOUNT OF
DESCRIPTION/ADDRESS LEASED/OWNED OF PROPERTY DEPOSITS
------------------- ------------ -------------- ---------
(IN THOUSANDS)
Corporate and Main Office:
710 Old Clairton Road Owned $1,029 $47,768
Pleasant Hills, Pennsylvania 15236
Branch Offices:
543 Brownsville Road Owned $ 399 $43,477
Mt. Oliver, Pennsylvania 15210
6257 Library Road Leased N/A $24,393
Bethel Park, Pennsylvania 15102
603 Scenery Drive Leased N/A $ 8,813
Elizabeth Township, Pennsylvania 15037
</Table>
On January 22, 2002, the branch office located at 6257 Library Road was
relocated to 6284 Library Road. The Savings Bank leases this branch office.
In April 1996, the Savings Bank exercised its option to purchase a parcel
of land in Bethel Park, Pennsylvania located within 3/4 of a mile of the current
Bethel Park branch office of the Savings Bank. The purchase price for this
parcel was $250,000. The current book value of this property is $265,717. The
Company and the Savings Bank are currently attempting to sell this property.
ITEM 3. LEGAL PROCEEDINGS
The Bank is involved in one case of lender liability and related claims.
The Bank has available to it a number of potentially bona fide defenses to this
case. Absent a position not asserted at this time by the insurance company, an
insurance policy the Bank maintains, in all probability, will indemnify the Bank
for compensatory damages and for fees and expenses. This policy has a deductible
of $50,000. The plaintiffs have alleged damages, but discovery in this case has
not occurred due to possible settlement discussions with Plaintiffs. Therefore,
a claim for damages has not been quantified with the judicial system. At this
preliminary stage, based solely upon facts known to this point, the Bank's
management, after discussion with outside counsel, believes it has meritorious
defenses to the Plaintiffs' claims.
The Company is also involved in routine legal proceedings occurring in the
ordinary course of business that in the aggregate are believed by management to
be immaterial to the financial position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
During the fourth quarter of the fiscal year of the Company ending December
31, 2001, no matter was submitted to a vote of the security holders of the
Company through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
GENERAL
The Board of Directors of the Company continues to suspend its cash
dividend in order to preserve capital. The last cash dividend was paid in the
period ended September 30, 2000. 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
41
Securities Dealers Automated Quotations ("NASDAQ") system (symbol "PRBC"). On
May 16, 2001, the Board of Directors last declared a stock dividend of 12% to
shareholders of record of June 1, 2001 which was paid on June 15, 2001.
Information as to the high and low stock prices for each quarter of 2001
and 2000 is included on page 44.
As of March 1, 2002 there were approximately 541 shareholders of the
Company's common stock. The 541 shareholders include only registered
shareholders with Prestige Bancorp's transfer agent and does not reflect
shareholders whose stock is beneficially held by their brokers. The Company's
merger agreement with Northwest Bancorp, Inc. described under Item 1 -- Business
at page 3 requires the Company to obtain the consent of Northwest Bancorp before
it may declare and pay dividends on its stock. This restriction shall continue
through the date of the merger which is to take place no later than October 1,
2002.
The Company's merger agreement with Northwest Bancorp, Inc. prohibits the
Company's payment of dividends without the consent of Northwest Bancorp, Inc.
ITEM 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.
<Table>
<Caption>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
SELECTED FINANCIAL DATA:
Total assets............................ $194,786 $201,775 $200,572 $177,374 $143,263
Investment securities................... 13,728 21,737 23,808 22,929 28,228
Mortgage-backed securities.............. 17,490 9,418 11,538 12,457 10,531
Loans receivable, net................... 137,500 153,417 150,962 123,917 96,181
Cash and cash equivalents............... 15,722 5,871 5,198 10,153 2,213
Deposits................................ 124,451 121,793 120,491 109,698 91,156
FHLB of Pittsburgh advances............. 55,800 66,300 62,977 50,977 34,677
Stockholders' equity.................... 11,757 11,550 14,953 14,760 15,630
Nonperforming assets(1)................. 2,579 5,867 1,334 903 611
SELECTED OPERATING DATA:
Interest income......................... $ 12,897 $ 14,837 $ 13,194 $ 11,672 $ 9,371
Interest expense........................ 8,478 9,016 7,532 6,685 5,240
-------- -------- -------- -------- --------
Net interest income..................... $ 4,419 $ 5,821 $ 5,662 $ 4,987 $ 4,131
Provision for loan losses............... 285 6,383 438 209 104
-------- -------- -------- -------- --------
Net interest income (loss) after
provision for loan losses............. $ 4,134 $ (562) $ 5,224 $ 4,778 $ 4,027
Other income............................ 950 921 870 534 373
Other expenses.......................... 5,026 5,204 4,715 4,096 3,123
-------- -------- -------- -------- --------
Income (loss) before income tax expense
(benefit)............................. $ 58 $ (4,845) $ 1,379 $ 1,216 $ 1,277
Income tax expense (benefit)............ 25 (1,881) 528 473 493
-------- -------- -------- -------- --------
Net income (loss)....................... $ 33 $ (2,964) $ 851 $ 743 $ 784
======== ======== ======== ======== ========
</Table>
42
<Table>
<Caption>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
SELECTED OPERATING RATIOS(2):
Return on average assets................ .02% (1.44)% .45% .45% .59%
Return on average equity................ .28 (20.76) 5.70 4.79 5.13
Average yield earned on interest-earning
assets................................ 6.67 7.37 7.22 7.26 7.21
Average rate paid on interest-bearing
liabilities........................... 4.60 4.77 4.40 4.50 4.47
Average interest rate spread(3)......... 2.07 2.60 2.82 2.76 2.74
Net interest margin(3).................. 2.28 2.89 3.10 3.10 3.18
Ratio of interest-earning assets to
interest-bearing liabilities.......... 104.85 106.45 106.75 108.34 110.99
Operating expenses as a percent of
average assets........................ 2.53 2.53 2.51 2.47 2.33
Average equity to average assets........ 5.98 6.93 7.94 9.35 11.42
Dividend payout ratio................... N/A N/A 27.77 25.78 13.04
ASSET QUALITY RATIOS(2):
Nonperforming loans as a percent of
total
loans................................. 1.66% 3.63% .74% .56% .63%
Nonperforming assets as a percent of
total assets.......................... 1.32 2.91 .67 .51 .43
Allowance for loan losses as a percent
of total loans........................ .84 2.16 .64 .45 .42
Charge-offs to average loans receivable
outstanding during the period......... 1.76 2.49 .02 .04 .01
PER SHARE DATA(4):
Basic Earnings (Loss) Per Share......... $ .03 $ (3.01) $ 0.83 $ 0.67 $ 0.68
Diluted Earnings (Loss) Per Share....... .03 (3.01) 0.83 0.66 0.68
Per Share Book Value.................... 11.10 10.90 13.48 13.21 12.63
Per Share Market Value.................. 9.10 6.92 9.82 10.84 14.79
NUMBER OF OFFICES:
Full-service offices at period end...... 4 5 5 5 4
</Table>
- ---------------
(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, real estate acquired
by acceptance of a deed-in-lieu of foreclosure and properties owned by the
Bank more than three years.
(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.
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 May 16, 2001, the Board of Directors declared a stock
dividend of 12% to shareholders of record of June 1, 2001 which was paid on
June 15, 2001. All per share data have been restated to reflect the stock
dividends.
43
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
The following table sets forth certain unaudited quarterly consolidated
financial data regarding the Company:
<Table>
<Caption>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
---------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2001 QUARTER ENDED(1)
Interest income.............................. $ 3,523 $ 3,364 $ 3,146 $ 2,864
Non-interest income.......................... 239 213 211 287
---------- -------- -------- --------
Total operating income....................... 3,762 3,577 3,357 3,151
Interest expense............................. 2,263 2,178 2,087 1,950
Provision for loan losses.................... 90 90 30 75
Non-interest expense......................... 1,353 820(3) 1,227 1,626(4)
---------- -------- -------- --------
Income (loss) before income taxes............ 56 489 13 (500)
Provision (benefit) for income taxes......... 23 190 6 (194)
---------- -------- -------- --------
Net income (loss)............................ $ 33 $ 299 $ 7 $ (306)
========== ======== ======== ========
Basic earnings (loss) per common share....... $ .03 $ .31 $ .01 $ (.31)
Basic average number of common shares
outstanding................................ 976,862 977,958 979,345 980,773
Diluted earnings (loss) per common share..... $ .03 $ .31 $ .01 $ (.31)
Diluted average number of common shares
outstanding................................ 976,862 977,968 979,364 980,776
Stock prices(2)
High....................................... $ 8.98 $ 9.50 $ 9.15 $ 9.34
Low........................................ $ 7.14 $ 8.08 $ 8.45 $ 8.25
Cash dividends declared per common share..... $ -- $ -- $ -- $ --
</Table>
<Table>
<Caption>
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....... $ .23 $ .07 $ (.90) $ (2.46)
Basic average number of common shares
outstanding................................ 1,015,086 973,996 974,184 975,518
Diluted earnings (loss) per common share..... $ .23 $ .07 $ (.90) $ (2.46)
Diluted average number of common shares
outstanding................................ 1,015,086 973,996 974,184 975,518
Stock prices(2)
High....................................... $ 10.61 $ 9.60 $ 8.48 $ 8.26
Low........................................ $ 8.76 $ 7.14 $ 6.75 $ 6.47
Cash dividends declared per common share..... $ .07 $ .06 $ .06 $ --
</Table>
44
- ---------------
(1) On May 16, 2001, the Board of Directors declared a stock dividend of 12% to
shareholders of record of June 1, 2001 which was paid on June 15, 2001. 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 decrease in non-interest expense from $1.35 million for the quarter
ended March 31, 2001 to $820,000 for the quarter ended June 30, 2001 was
primarily attributable to a curtailment gain of $479,000 in connection with
the termination of the pension plan.
(4) The increase in non-interest expense from $1.23 million for the quarter
ended September 30, 2001 to $1.63 million for the quarter ended December 31,
2001 was primarily attributable to settlement charges of $383,000 in
connection with the termination of the pension plan.
ITEM 7. 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 feature 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.
45
"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
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 2002 and any Current Reports on Form 8-K filed by
the Company.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO
YEAR ENDED DECEMBER 31, 2000
FINANCIAL CONDITION
The Company's consolidated assets decreased by $7.0 million or 3.5% from
$201.8 million at December 31, 2000 to $194.8 million at December 31, 2001. The
decrease in total assets was primarily attributable to a $15.9 million decrease
in total net loans receivable that was partially offset by increase in cash and
cash equivalents of $9.8 million. Total deposits increased from $121.8 million
at December 31, 2000 to $124.5 million at December 31, 2001, and advances from
the FHLB of Pittsburgh declined from $66.3 million at December 31, 2000 to $55.8
million at December 31, 2001.
The Savings Bank's net loans receivable decreased by $15.9 million or 10.4%
from $153.4 million at December 31, 2000 to $137.5 million at December 31, 2001.
One-to-four family residential mortgages decreased $2.1 million or 2.1% during
fiscal 2001, as the Savings Bank's payments and prepayments on one-to-four
family residential mortgages exceeded mortgage originations. During fiscal 2001,
consumer loans decreased $1.3 million or 6.3% mainly due to a decline of $1.0
million in auto loans. Commercial business and commercial real estate loans
decreased from $32.1 million at December 31, 2000 to $18.2 million at December
31, 2001. 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. In addition, in the fourth
quarter of 2001, the Bank completed a packaged commercial loan sale of
approximately forty-nine loans to a third party. The total face amount of the
loans was $6.35 million of which $2.0 million had been charged-off prior to the
sale. This sale resulted in a $1.9 million reduction of the allowance for loan
loss, but the sale eliminated the exposure for future losses on the loans sold.
Cash and cash equivalents increased from $5.9 million at December 31, 2000
to $15.7 million at December 31, 2001. The increase of $9.8 million in cash and
cash equivalents during fiscal 2001 was primarily attributable to the $15.9
million reduction in net loans receivable and the $2.7 million increase in
deposits. This was partially offset by a $10.5 million decline in FHLB advances.
The Savings Bank's total deposits increased $2.7 million or 2.2% from
$121.8 million at December 31, 2000 to $124.5 million at December 31, 2001. The
growth in deposits during fiscal 2001 was primarily a result of competitive
rates and fees that continue to be offered by the Savings Bank. Certificate of
deposit and money market and passbook savings accounts grew $697,000 and $2.2
million, respectively, for the year ended December 31, 2001. Borrowings by the
Savings Bank from the FHLB of Pittsburgh declined by $10.5 million, or 15.8%,
from $66.3 million at December 31, 2000 to $55.8 million at December 31, 2001.
Management utilized excess cash positions throughout 2001 to reduce these
borrowings from the FHLB of Pittsburgh. Total equity increased $207,000 or 1.8%,
during fiscal 2001, to $11.8 million at December 31, 2001. The primary reasons
for this increase was primarily attributable to a $127,000 reduction in the
accumulated other comprehensive loss.
46
The Bank completed the sale of its Washington in-store branch office to
Northwest Savings Bank in October 2001. The office was located within the Shop
'n Save supermarket at 125 West Beau Street in Washington, Pennsylvania.
Northwest Savings Bank retained the employees of this office to provide
continuity of customer service. The sale included $4.6 million in deposits, as
well as the fixed assets at such branch location. All deposits of such branch
continued to be FDIC insured subject to FDIC rules and regulations. The sale
follows the Bank's determination that the Washington, Pennsylvania branch was
outside of its targeted geographic market. The Bank expects to save
approximately $123,000 annually in compensation and benefits from the sale of
this branch.
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 had 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.
47
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 believes it has materially complied with all terms of
the Supervisory Agreement. To date the Company has put in place a new reporting
structure, continues to adjust and improve procedures and continues 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. 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 $96.2 million or 48.0% of total assets at December 31,
1999, was $101.2 million or 52.0% of total assets at December 31, 2001. 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 $57.0 million or 28.4% of total assets at December 31, 1999,
had decreased to $38.0 million at December 31, 2001 or 19.5% of total assets.
Management attributes this shift in loan composition to increased efforts to
reduce the commercial business and commercial real estate loans in response to
asset quality issues within these portfolios. In addition, the loan composition
changes occurred due to the restrictions placed upon the Savings Bank in the
Supervisory Agreement with the OTS whereby limiting new underwriting of
commercial business and commercial real estate loans. Due to the total loans
receivable reduction from December 31, 2000 to December 31, 2001 of $17.7
million, cash and cash equivalents increased from $5.9 million at December 31,
2000 to $15.7 million at December 31, 2001. Management desires to utilize this
excess cash to continue to payoff Federal Home Loan Bank advances and/or
increase the Savings Bank's commercial real estate 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, 2001, total balances in this
product were $7.0 million. In fiscal year 2001, mortgage rates decreased which
made fixed rate mortgages more affordable. Adjustable-rate mortgages as a
percentage of the Savings Bank's one-to-four family residential mortgage
portfolio fell from 20.7% at December 31, 2000 to 18.4% as of December 31, 2001.
However, due to the introduction of the five-year adjustable product in 2000,
adjustable-rate mortgages as a percentage of the Savings Bank's one-to-four
family residential mortgage portfolio increased from 16.7% at December 31, 1999
to 18.4% as of December 31, 2001. Fixed-rate mortgages continue to make up the
remaining portion of the Savings Bank's one-to-four family residential mortgage
portfolio. 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, 2000,
outstanding borrowings from the FHLB of Pittsburgh stood at
48
$66.3 million and as of December 31, 2001 such borrowings had decreased to $55.8
million. This decreased borrowing occurred due management's decision to use
excess cash to pay down debt.
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 and
mortgage-backed securities with various maturities. In 2001, the Bank purchased
$10 million of one-year adjustable mortgage-backed securities. Also prior to
2000, the Bank promoted 30-year fixed rate mortgages.
The prior strategy increased interest rate risk exposure due to funding
primarily fixed-rate mortgages and longer-term investment securities with
shorter-term liabilities. 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, investing in short-term
mortgage-backed securities, strongly managing selected asset growth,
strategically extending the terms of certificate of deposits and borrowings and
maintaining effective interest rate spreads. These strategies have resulted in
the Bank improving its interest rate risk profile in 2001. For further
information on interest rate risk, please refer to Asset and Liability
Management Section of this report.
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 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
49
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, 2001, 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 $9.7 million or 5.0% of the Savings Bank's total
assets. This compares to $22.0 million or 10.9% of the Savings Bank's total
assets at December 31, 2000. The Board of Governors of the Federal Reserve
System increase and decrease the Federal Funds rate which has a major impact on
market interest rates within the United States' economy. Such increases and
decreases in the Federal Funds rate could negatively affect the Savings Bank's
net income. 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, President and
Executive Vice President of Business Development 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.
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,
2001, 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
50
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.
<Table>
<Caption>
NET PORTFOLIO VALUE (NPV)
-----------------------------------
(DOLLARS IN THOUSANDS)
-----------------------------------
PERCENT
CHANGE IN RATES NPV CHANGE OF
(EXPRESSED AS EXPRESSED ESTIMATED
BASIS POINTS) IN $ $ CHANGE(1) NPV(2) NPV RATIO(3) CHANGE(4)
--------------- --------- ----------- --------- ------------ ---------
+300.................................. 6,629 -7,627 -54 3.51 -358bp
+200.................................. 9,269 -4,987 -35 4.80 -229bp
+100.................................. 11,883 -2,373 -17 6.03 -106bp
0.................................... 14,256 7.09
- -100.................................. 14,972 716 +5 7.35 +26bp
- -200(5)............................... -- -- -- -- --
- -300(5)............................... -- -- -- -- --
</Table>
- ---------------
(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.
(5) Modeling for changes to rates at -200 and -300 basis points were not
calculated at December 31, 2001 due to the federal funds rate being 1.75% at
such date. A -200 and -300 basis point reduction to this federal funds rate
would mean negative interest rates and therefore not practical.
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.
Based upon the above calculations, the percent change of estimated NPV for
a 200 basis point increase in prevailing rates changed from a negative 46 at
December 31, 2000 to a negative 35 at December 31, 2001. In addition, after a
200 basis point increase in prevailing rates, the resulting NPV ("Post-Shock
Ratio") was 4.80% and the change in the NPV ("Sensitivity Measure") was -229
basis points at December 31, 2001. This compares to a 3.58% post-shock ratio and
a -275 basis point sensitivity measure at December 31, 2000. The decrease in
interest rate risk at December 31, 2001 compared to the prior year was the
result of specific strategies undertaken by the Savings Bank, falling market
rates and an increase in cash and cash equivalents of $9.8 million. Specific
strategies include reducing originations of 30-year fixed-rate one-to-four
family residential mortgages, controlling one-to-four family residential
mortgage demand by selling these loans in the secondary market, investing in
short-term mortgage-backed securities, strongly managing asset levels,
strategically extending the terms of certificate of deposits, reducing debt,
highlighting 5-year adjustable one-to-four family residential mortgages and
maintaining effective spreads. ALCO realizes the importance in managing interest
rate risk and will continue to implement strategies designed to reduce interest
rate risk to more appropriate levels established by the Savings
51
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.
RESULTS OF OPERATIONS
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, 2001 the Company was holding only a loan
receivable from the Prestige Bank Employee Stock Ownership Plan (the "ESOP"), a
loan totaling $200,000, debt and equity securities with a market value totaling
$854,000, interest-bearing deposits of $29,000, other assets of $160,000 and a
money-market and checking account with the Savings Bank. At December 31, 2001,
the Company had borrowed $314,000 from the Savings Bank to support cash levels.
The loan is 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.
52
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.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
AT DECEMBER -------------------------------------------------------------
31, 2001 2001 2000
------------ ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------------ -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Investment
securities(1)........ 3.02% $ 21,258 $ 1,173 5.52% $ 27,232 $ 1,739 6.39%
Loans receivable(2)
Commercial........... 6.70 14,137 1,097 7.76 21,418 2,158 10.08
Real estate loans.... 7.20 115,446 8,223 7.12 119,515 8,606 7.20
Consumer............. 6.34 19,252 1,451 7.54 18,796 1,557 8.28
-------- ------- -------- -------
Total Loans
Receivable........... 7.04 148,835 10,771 7.24 159,729 12,321 7.71
Mortgage-backed
securities(1)........ 5.84 10,816 611 5.65 10,486 662 6.31
Other interest-earning
assets............... 1.70 12,486 342 2.74 3,956 115 2.91
-------- ------- -------- -------
Total
interest-earning
assets............. 6.17% $193,395 $12,897 6.67% $201,403 $14,837 7.37%
Non-interest-earning
assets................. 5,004 4,504
-------- --------
Total assets......... $198,399 $205,907
======== ========
Interest-bearing
liabilities:
Deposits............... 3.30% $127,236 $ 4,870 3.83% $122,079 $ 4,893 4.01%
FHLB advances.......... 6.15 57,217 3,608 6.31 67,116 4,123 6.14
-------- ------- -------- -------
Total
interest-bearing
liabilities........ 4.18% $184,453 $ 8,478 4.60% $189,195 $ 9,016 4.77%
Non-interest-bearing
liabilities............ $ 2,071 $ 2,433
-------- --------
Total liabilities.... $186,524 $191,628
Equity................... 11,875 14,279
-------- --------
Total liabilities and
equity............. $198,399 $205,907
======== ========
Net interest-earning
assets................. $ 8,942 $ 12,208
======== ========
Net interest
income/interest rate
spread................. 1.99% $ 4,419 2.07% $ 5,821 2.60%
==== ======= ====== ======= ======
Net yield on
interest-earning
assets(3).............. 2.28% 2.89%
====== ======
Ratio of average
interest-earning assets
to average
interest-bearing
liabilities............ 104.85% 106.45%
====== ======
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------------
1999
-----------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST RATE
-------- -------- -------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Investment
securities(1)........ $ 26,766 $ 1,634 6.11%
Loans receivable(2)
Commercial........... 20,132 1,881 9.34
Real estate loans.... 101,421 7,421 7.32
Consumer............. 16,585 1,281 7.72
-------- -------
Total Loans
Receivable........... 138,138 10,583 7.66
Mortgage-backed
securities(1)........ 12,416 761 6.13
Other interest-earning
assets............... 5,431 216 3.97
-------- -------
Total
interest-earning
assets............. $182,751 $13,194 7.22%
Non-interest-earning
assets................. 5,352
--------
Total assets......... $188,103
========
Interest-bearing
liabilities:
Deposits............... $117,163 $ 4,525 3.86%
FHLB advances.......... 54,040 3,007 5.56
-------- -------
Total
interest-bearing
liabilities........ $171,203 $ 7,532 4.40%
Non-interest-bearing
liabilities............ $ 1,956
--------
Total liabilities.... $173,159
Equity................... 14,944
--------
Total liabilities and
equity............. $188,103
========
Net interest-earning
assets................. $ 11,548
========
Net interest
income/interest rate
spread................. $ 5,662 2.82%
======= ======
Net yield on
interest-earning
assets(3).............. 3.10%
======
Ratio of average
interest-earning assets
to average
interest-bearing
liabilities............ 106.75%
======
</Table>
- ---------------
(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
53
environment of changing interest rates and fluctuating volumes of deposits,
advances from third parties, loans 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.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
2001 VS. 2000 2000 VS. 1999
-------------------------------------------- -----------------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO TOTAL DUE TO TOTAL
----------------- INCREASE -------------- INCREASE
RATE VOLUME RATE/VOLUME (DECREASE) RATE VOLUME RATE/VOLUME (DECREASE)
------- ------- ----------- ---------- ----- ------ ----------- ----------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable,
net.................. $ (731) $ (988) $169 $(1,550) $ 118 $1,615 $ 5 $1,738
Mortgage-backed
securities........... (70) 21 (2) (51) 22 (118) (3) (99)
Investment
securities........... (237) (381) 52 (566) 75 28 2 105
Other interest-earning
assets............... (7) 249 (15) 227 (58) (59) 16 (101)
------- ------- ---- ------- ----- ------ ---- ------
Total interest-earning
assets............... $(1,045) $(1,099) $204 $(1,940) $ 157 $1,466 $ 20 $1,643
------- ------- ---- ------- ----- ------ ---- ------
Interest-bearing
liabilities:
Deposits............... $ (221) $ 207 $ (9) $ (23) $ 176 $ 190 $ 2 $ 368
FHLB advances.......... 111 (608) (18) (515) 313 727 76 1,116
------- ------- ---- ------- ----- ------ ---- ------
Total interest-bearing
liabilities.......... (110) (401) (27) (538) 489 917 78 1,484
------- ------- ---- ------- ----- ------ ---- ------
Increase (decrease) in
net interest income.... $ (935) $ (698) $231 $(1,402) $(332) $ 549 $(58) $ 159
======= ======= ==== ======= ===== ====== ==== ======
</Table>
Net Income. The Company reported consolidated net income of $33,000 for
fiscal 2001 and a consolidated net loss of $3.0 million and consolidated net
income of $851,000 for the fiscal years ended December 31, 2000 and 1999,
respectively. The net income of $33,000 for the year ended December 31, 2001
represented a $3.0 million increase from the $3.0 million net loss for the same
period in 2000. This increase was primarily the result of decreases in the
provision for losses on loans of $6.1 million and total other expenses of
$177,000. This was partially offset by an income tax expense of $25,000 for the
year ended December 31, 2001 compared to income tax benefit of $1.9 million for
the same period in 2000. In addition, net interest income before provision for
loan losses decreased 24.1% or $1.4 million. The primary reason for the decrease
of $177,000 in other expenses was a $96,000 gain on termination of the pension
plan, net of excise tax.
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.
Net Interest Income. Net interest income before provision for loan losses
amounted to $4.4 million during fiscal 2001, compared to $5.8 million during
fiscal 2000 and compared to $5.7 million during fiscal 1999. During fiscal 2001,
the $1.4 million or 24.1% decrease in net interest income compared with fiscal
2000 was primarily attributable to a decrease in average loans receivable and a
decrease in yields earned on average loans receivable. A decrease of $10.9
million occurred in average total loans receivable for fiscal 2001 compared to
fiscal 2000 of which $7.3 million and $4.1 million was attributable to
commercial business and one-to-four family residential loans, respectively.
Average rates earned on loans receivable fell from 7.71% in 2000 to 7.24% in
2001.
The $1.9 million decrease in total interest income during the year ended
December 31, 2001 over the prior comparable period was primarily due to a $1.6
million or 12.6% decrease in interest and fees on loans and a
54
$566,000 decrease in interest and dividends on other investment securities. The
decrease in interest earned on loans during fiscal 2001 was primarily due to a
decline in average balances of loans receivable of $10.9 million or 6.8%. In
addition, average rates earned on loans receivable fell from 7.71% in 2000 to
7.24% in 2001.
The decrease in interest expense in 2001, compared with 2000, of $538,000
was primarily a result of a decrease in the Savings Bank's average
interest-bearing FHLB advances from $67.1 million to $57.2 million. Management
utilized an excess cash position to decrease average borrowings in 2001. In
addition, interest expense fell due to a decrease in the average rate paid on
interest-bearing liabilities from 4.77% during fiscal 2000 to 4.60% during
fiscal 2001.
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.
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.
Provision for Loan Losses. For the year ended December 31, 2001, the
provision for loan losses was $285,000. For the two years ended December 31,
2000 and 1999, provisions for loan losses were $6.4 million and $438,000,
respectively. The decrease in provision for loan losses of $6.1 million for
fiscal 2001 when compared to fiscal 2000 primarily resulted from a reduction in
total and nonperforming commercial business and commercial real estate loans.
Total commercial business and commercial real estate loans fell from $32.1
million at December 31, 2000 to $18.2 million at December 31, 2001. Total
nonperforming commercial business and commercial real estate loans decreased
from $5.4 million at December 31, 2000 to $1.6 million at December 31, 2001.
These reductions occurred mainly due to the Bank completing a packaged
commercial loan sale of approximately forty-nine loans to a third party in the
fourth quarter 2001. The total face amount of the loans sold was $6.35 million
of which $2.0 million had been charged-off prior to the sale. This sale resulted
in a $1.9 million reduction in allowance for loan losses, but eliminated future
losses with respect to such sold loans. Certain of these sold loans totaling
$986,000 are accounted for as a financing transaction as defined by SFAS No. 140
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities -- a Replacement of SFAS No. 125." See Note 8 of the "Notes to
Consolidated Financial Statements" for further information. 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, except
commercial business and commercial real estate loans and certain unfunded
commitments is based upon review of historical losses
55
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 business and
commercial real estate loans are calculated by using a risk rating
system. All loans are assigned one of ten risk ratings based upon an
internal review. For those loans where specific reserves are not
established, reserve factors are applied to the outstanding loans in each
risk rating, for purposes of determining the required reserves.
- The maintenance of a general reserve occurs in order to provide for
management judgement and considers the impact of factors not fully
reflected in historical loss experience. It also considers the impact of
unknown events or circumstances that have occurred, but have not yet been
identified by the Savings Bank through its credit administration process.
It must be emphasized that a general unallocated reserve is prudent
recognition of the fact that reserve estimates, by definition, lack
precision.
After completion of this process, management evaluates the adequacy of the
existing reserve and establishes the provision level for the next month. 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, 2001, the Savings Bank charged off ten commercial real estate
loans totaling $1.6 million, thirty-one commercial business loans totaling
$731,000 and seventeen consumer loans totaling $275,000. These charged-off
amounts include the $1.9 million associated with the fourth quarter 2001
commercial loan sale.
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 future deterioration in
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 June 30, 2001. 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 $951,000 for the year ended
December 31, 2001, an increase of $30,000 or 3.3% from the $921,000 earned in
fiscal 2000. Total other income, excluding gain on sale of investments and fixed
assets and loss on foreclosed property, amounted to $871,000 for the year ended
December 31, 2001, a decrease of $54,000 or 5.8% from the $925,000 earned in
fiscal 2000. Decreased transaction fees of $53,000 accounted for this
difference.
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.
Other Expenses. Total other expenses amounted to $5.0 million for the year
ended December 31, 2001, a decrease of $177,000 or 3.4% from the $5.2 million
incurred in fiscal 2000. The major factors for this decrease were $143,000
reduction in salaries and employee benefits, a $60,000 decrease in premises and
occupancy costs and a $96,000 gain on termination of the pension plan, net of
excise tax. This was partially offset by a $145,000 increase in legal and
professional expenses associated with continuing to rectify asset quality
concerns. The
56
$143,000 decrease in salaries and employee benefits occurred mainly due to a
reduction in pension plan periodic 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.
Income Taxes. For the fiscal year ended December 31, 2001, the Company had
an income tax expense of $25,000 as compared to an income tax benefit of $1.9
million and an income tax expense of $528,000 for the fiscal years ended
December 31, 2000 and 1999, respectively. The effective tax rate was 43.0%
during the year ended December 31, 2001, compared to 38.8% during the year ended
2000, and 38.3% in fiscal 1999. For further information, see Note 12 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, 2001 and 2000, the Company's operating
activities provided net cash of approximately $1.2 million and $1.4 million,
respectively. The $1.2 million net cash provided during the year ended December
31, 2001 was primarily due to a $1.1 million increase in other liabilities,
$359,000 decrease in accrued interest receivable, $285,000 in provision for loan
losses and $262,000 in depreciation of premises and equipment that was partially
offset by a $788,000 increase in other assets and a $315,000 decrease in accrued
interest payable. 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.
Net cash provided by investing activities was $16.7 million for the year
ended December 31, 2001. The reasons for this $16.7 million increase were the
Savings Bank received $15.6 million in principal payments on existing loans in
excess of new loans originated and $18.0 million in proceeds from calls of
investment securities which were partially offset by $20.2 million purchases of
available for sale investment and mortgage-backed securities. 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.
During fiscal 2001, the Savings Bank experienced an $8.0 million decrease
in net cash provided by financing activities primarily due to $10.5 million in
payments on Federal Home Loan Bank advances. This was partially offset by an
increase in deposit accounts of $2.7 million. 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
57
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.
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 the 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, 2001, the Savings Bank's maximum borrowing capacity
with the FHLB of Pittsburgh was $103.8 million of which $55.8 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, 2001, 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, to purchase mortgage-backed securities 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 $10.0 million as of December 31,
2001. Certificates of deposit scheduled to mature in one year or less at
December 31, 2001 totaled $37.9 million.
Consolidated cash and cash equivalents increased by $9.8 million between
December 31, 2000 and December 31, 2001. As of December 31, 2001, the
consolidated cash and cash equivalents of the Company amounted to $15.7 million
or 8.1% of assets, of which $14.5 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 were $31.2 million or 16.0% of assets at December 31, 2001. As of December
31, 2001, $500,000 of such investment securities (including mortgage-backed
securities) of the Company and the Savings Bank mature within five years or
less. The Company's consolidated net interest margin was 2.28% for the year
ended December 31, 2001 compared to 2.89% for the same period in 2000.
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.
58
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 9 of the Notes to Consolidated Financial Statements.
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, 2001 was 39.6%.
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, 2001, the Company's
assets consist of its investment in the Savings Bank, its receivable from the
ESOP, a loan totaling $200,000, debt and equity investments with an aggregate
market value of $854,000 at December 31, 2001, interest-bearing deposits of
$29,000, other assets of $160,000 and deposits maintained with the Savings Bank.
At December 31, 2001, the Company had borrowed $314,000 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 the repayment from the one 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") No. 141, "Business Combinations". This
Statement addresses financial accounting and reporting for business combinations
and supersedes Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations", and FASB Statement No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." All business combinations in the scope
of this Statement are to be accounted for using one method, the purchase method.
The provisions of this Statement apply to all business combinations initiated
after June 30, 2001. This Statement also applies to all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001, or later.
The FASB has also issued SFAS No. 142, "Goodwill and Other Intangible
Assets". This Statement addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets." This statement addresses how intangible assets that are
acquired
59
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. This Statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. The provisions of this Statement are required to be
applied starting with fiscal years beginning after December 15, 2001 except for
goodwill and intangible assets acquired after June 30, 2001 which will be
subject immediately to the nonamortization and amortization provisions of this
Statement.
The FASB has also issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". This Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The provisions of this Statement are required
to be applied starting with fiscal years beginning after June 15, 2002.
The FASB has also issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets". This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." The provisions of this Statement are
required to be applied starting with fiscal years beginning after December 15,
2001.
The impact and adoption of these standards is not expected to materially
affect the Company's financial condition or results of operations.
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.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------------------
2001 2000 1999
-------- ----------- ----------
Basic earnings (loss) per share(1):
Net income (loss)....................... $ 32,816 $(2,964,160) $ 851,314
Average shares outstanding.............. 978,678 984,641 1,025,154
Earnings (loss) per share............... $ .03 $ (3.01) $ 0.83
Diluted earnings (loss) per share(1):
Net income (loss)....................... $ 32,816 $(2,964,160) $ 851,314
Average shares outstanding.............. 978,678 984,641 1,025,154
Stock options........................... 8 -- 169
-------- ----------- ----------
Diluted average shares outstanding...... 978,686 984,641 1,025,323
Earnings (loss) per share............... $ .03 $ (3.01) $ 0.83
</Table>
- ---------------
(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.
In addition, on May 16, 2001, the Board of Directors declared a stock
dividend of 12% to shareholders of record of June 1, 2001 which was paid on
June 15, 2001. All per share data have been restated to reflect the stock
dividends.
Options to purchase 96,759, 106,210 and 94,826 shares of common stock were
outstanding during fiscal 2001, 2000 and 1999, 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.
60
MERGER OF THE COMPANY
See a description of the Company's planned merger with Northwest Bancorp
under "Business of the Company" on page 3. The terms of such merger agreement
may have a significant effect on the assets, liabilities, operations and cash
flows of the Company under certain circumstances. For instance, the merger
agreement imposes significant restrictions on the discretionary authority of the
management of the Company to perform certain acts without the consent of
Northwest Bancorp, Inc. In addition, the Company may be required to pay a
penalty of $1 million upon certain circumstances if the merger is not
accomplished. See "Item 1. Business of the Company" on page 3 for more
information.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Asset and Liability Management."
ITEM 8. FINANCIAL STATEMENTS
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. (a Pennsylvania Corporation) (the Corporation) and Subsidiary as
of December 31, 2001 and 2000, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2001. 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, 2001 and 2000, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
February 18, 2002
61
PRESTIGE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
<Table>
<Caption>
2001 2000
------------ ------------
ASSETS
ASSETS:
Cash and due from banks................................... $ 1,242,333 $ 1,223,252
Interest-bearing deposits with banks...................... 14,479,347 4,647,771
Investment securities--
Available for sale..................................... 25,045,805 8,911,314
Held to maturity (market value $6,240,703 and
$21,924,761, respectively)........................... 6,173,341 22,243,491
Loans..................................................... 139,249,088 156,937,253
Less -- Deferred costs, net............................... (48,388) (15,244)
Allowance for loan losses............................ 1,166,606 3,387,779
Loans in process..................................... 630,795 148,120
------------ ------------
Net loans......................................... 137,500,075 153,416,598
------------ ------------
Federal Home Loan Bank stock, at cost..................... 2,790,000 3,689,900
Premises and equipment, net............................... 2,149,562 2,343,491
Accrued interest receivable............................... 942,307 1,301,026
Deferred tax asset, net................................... 2,152,870 2,411,016
Other assets.............................................. 2,309,911 1,587,097
------------ ------------
Total assets...................................... $194,785,551 $201,774,956
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits--
Noninterest-bearing deposits........................... $ 6,640,440 $ 8,023,201
Interest-bearing deposits.............................. 117,810,263 113,770,089
------------ ------------
Total deposits.................................... 124,450,703 121,793,290
Federal Home Loan Bank advances........................... 55,800,000 66,300,000
Advance payments by borrowers for taxes and insurance..... 734,813 884,319
Accrued interest payable.................................. 333,043 648,145
Other liabilities......................................... 1,709,744 599,270
------------ ------------
Total liabilities................................. 183,028,303 190,225,024
------------ ------------
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, 1,301,511 shares issued at December 31,
2001; 1,162,313 shares issued at December 31, 2000..... 1,301,511 1,162,313
Treasury stock at cost; 242,140 shares at December 31,
2001 and December 31, 2000, respectively............... (2,699,348) (2,699,348)
Additional paid in capital................................ 12,780,907 11,588,778
Unearned ESOP shares...................................... (574,280) (615,670)
Retained earnings......................................... 1,085,469 2,377,690
Accumulated other comprehensive loss...................... (137,011) (263,831)
------------ ------------
Total stockholders' equity........................ 11,757,248 11,549,932
------------ ------------
Total liabilities and stockholders' equity........ $194,785,551 $201,774,956
============ ============
</Table>
The accompanying notes are an integral part of these statements.
62
PRESTIGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
<Table>
<Caption>
2001 2000 1999
----------- ----------- -----------
INTEREST INCOME:
Interest and fees on loans.......................... $10,770,613 $12,321,324 $10,582,966
Interest on mortgage-backed securities.............. 610,849 661,392 761,098
Interest and dividends on other investment
securities....................................... 1,173,490 1,738,795 1,634,498
Interest on deposits in other financial
institutions..................................... 342,268 115,176 215,844
----------- ----------- -----------
Total interest income............................ 12,897,220 14,836,687 13,194,406
----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits................................ 4,869,998 4,892,599 4,525,058
Advances from Federal Home Loan Bank................ 3,607,974 4,123,462 3,006,736
----------- ----------- -----------
Total interest expense........................... 8,477,972 9,016,061 7,531,794
Net interest income.............................. 4,419,248 5,820,626 5,662,612
----------- ----------- -----------
PROVISION FOR LOAN LOSSES............................. 285,000 6,382,865 438,000
----------- ----------- -----------
Net interest income (loss) after provision for
loan losses.................................... 4,134,248 (562,239) 5,224,612
----------- ----------- -----------
OTHER INCOME:
Fees and service charges............................ 855,829 909,201 777,948
Gain on sale of investments......................... 34,395 9,491 72,789
Gain on sale of fixed assets........................ 46,434 2,660 5,370
Loss on sale of foreclosed property................. (1,205) (16,978) --
Other income, net................................... 15,336 16,486 13,684
----------- ----------- -----------
Total other income............................... 950,789 920,860 869,791
----------- ----------- -----------
OTHER EXPENSES:
Salaries and employee benefits...................... 2,412,918 2,556,030 2,478,436
Gain on termination of pension plan, net of excise
tax.............................................. (95,769) -- --
Premises and occupancy costs........................ 532,828 592,781 584,211
Federal deposit insurance premiums.................. 61,118 24,864 65,151
Data processing costs............................... 285,847 276,642 257,581
Advertising costs................................... 107,190 130,024 118,764
Transaction processing costs........................ 324,298 350,280 309,491
ATM transaction fees................................ 164,594 184,132 151,817
Legal and professional expenses..................... 666,979 522,418 252,324
Other expenses...................................... 567,447 566,331 497,055
----------- ----------- -----------
Total other expenses............................. 5,027,450 5,203,502 4,714,830
----------- ----------- -----------
Income (loss) before income tax expense
(benefit)...................................... 57,587 (4,844,881) 1,379,573
INCOME TAX EXPENSE (BENEFIT).......................... 24,771 (1,880,721) 528,259
----------- ----------- -----------
NET INCOME (LOSS)..................................... $ 32,816 $(2,964,160) $ 851,314
=========== =========== ===========
PER COMMON SHARE DATA(1):
Basic:
Net income (loss)................................ $ 0.03 $ (3.01) $ 0.83
=========== =========== ===========
Average number of common shares outstanding...... 978,678 984,641 1,025,154
----------- ----------- -----------
Diluted:
Net income (loss)................................ $ 0.03 $ (3.01) $ 0.83
=========== =========== ===========
Average number of common shares outstanding...... 978,686 984,641 1,025,323
----------- ----------- -----------
Cash dividends declared............................. $ -- $ 0.19 $ 0.21
=========== =========== ===========
</Table>
- ---------------
(1) On February 17, 1999, the Board of Directors declared a 5% stock dividend to
shareholders of record of March 2, 1999 payable on March 19, 1999. In
addition, on May 16, 2001, the Board declared a 12% stock dividend to
shareholders of record of June 1, 2001 payable on June 15, 2001. All per
share data have been restated to reflect the stock dividends.
The accompanying notes are an integral part of these statements.
63
PRESTIGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
<Table>
<Caption>
COMMON ACCUMULATED
STOCK ADDITIONAL UNEARNED OTHER
COMPREHENSIVE $1.00 PAR TREASURY PAID-IN ESOP RETAINED COMPREHENSIVE
INCOME (LOSS) VALUE STOCK CAPITAL SHARES EARNINGS (LOSS) INCOME
------------- ---------- ----------- ----------- --------- ----------- -------------
BALANCE, December 31, 1998.... 1,100,090 (2,161,243) 10,727,677 (690,380) 5,826,182 (42,421)
Allocation of 4,878 ESOP
shares.................... -- -- 23,743 36,070 -- --
Cash dividends declared..... -- -- -- -- (236,380) --
Treasury stock purchases,
7,840
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 5,226 ESOP
shares.................... -- -- 7,037 38,640 -- --
Cash dividends declared..... -- -- -- -- (201,821) --
Treasury stock purchases,
49,110 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)
Allocation of 5,598 ESOP
shares.................... -- -- 8,946 41,390 -- --
Net income.................. $ 32,816 -- -- -- -- 32,816 --
Net unrealized gains on
available for sale
securities, net of tax of
$71,715................... 107,572 -- -- -- -- -- 107,572
Reclassification adjustment
for gains realized in net
income net of tax of
$15,147................... 19,248 -- -- -- -- -- 19,248
Stock dividend declared:
Common stock (12% per
share)................ 139,198 -- 1,183,183 -- (1,322,381) --
Cash in lieu of stock... -- -- -- -- (2,656) --
----------- ---------- ----------- ----------- --------- ----------- ---------
Comprehensive income........ $ 159,636
===========
BALANCE, December 31, 2001.... $1,301,511 $(2,699,348) $12,780,907 $(574,280) $ 1,085,469 $(137,011)
========== =========== =========== ========= =========== =========
<Caption>
TOTAL
-----------
BALANCE, December 31, 1998.... 14,759,905
Allocation of 4,878 ESOP
shares.................... 59,813
Cash dividends declared..... (236,380)
Treasury stock purchases,
7,840
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 5,226 ESOP
shares.................... 45,677
Cash dividends declared..... (201,821)
Treasury stock purchases,
49,110 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
Allocation of 5,598 ESOP
shares.................... 50,336
Net income.................. 32,816
Net unrealized gains on
available for sale
securities, net of tax of
$71,715................... 107,572
Reclassification adjustment
for gains realized in net
income net of tax of
$15,147................... 19,248
Stock dividend declared:
Common stock (12% per
share)................ --
Cash in lieu of stock... (2,656)
-----------
Comprehensive income........
BALANCE, December 31, 2001.... $11,757,248
===========
</Table>
The accompanying notes are an integral part of these statements.
64
PRESTIGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
<Table>
<Caption>
2001 2000 1999
------------ ------------- ------------
OPERATING ACTIVITIES:
Net income (loss)......................................... $ 32,816 $ (2,964,160) $ 851,314
------------ ------------- ------------
Adjustments to reconcile net income to net cash provided
(used) by operating activities--
Depreciation of premises and equipment.................... 261,807 317,403 344,145
Amortization of premiums and discounts, net............... (29,312) (257) 16,821
Non cash compensation expense related to MRP Plan......... 64,688 135,172 223,990
Non cash compensation expense related to ESOP benefit..... 60,306 58,397 75,098
Loss on sale of mutual funds.............................. -- -- 17,625
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......................... (29,883) (20,637) (90,414)
Gain on calls of held to maturity investment securities... (2,741) -- --
Gain on sale of premises and equipment.................... (1,778) -- --
Provision for loan losses................................. 285,000 6,382,865 438,000
Increase (decrease) in other liabilities.................. 1,100,504 89,992 (27,926)
(Decrease) increase in accrued interest payable........... (315,102) 225,174 188,529
Decrease in income taxes payable.......................... -- (163,736) (8,350)
Decrease (increase) in deferred income taxes, net......... 173,600 (1,976,017) (197,130)
Decrease (increase) in accrued interest receivable........ 358,719 (123,546) (60,920)
(Increase) decrease in other assets....................... (787,502) (532,783) 116,590
------------ ------------- ------------
Total adjustments..................................... 1,138,306 4,403,174 1,036,058
------------ ------------- ------------
Net cash provided by operating activities............. 1,171,122 1,439,014 1,887,372
------------ ------------- ------------
INVESTING ACTIVITIES:
Loan originations......................................... (35,240,124) (52,152,380) (73,366,281)
Principal payments on loans............................... 48,340,003 43,315,270 45,882,762
Proceeds from loans sold.................................. 2,531,644 -- --
Proceeds from calls and maturities of held to maturity
investment securities................................... 14,500,000 1,000,000 3,500,000
Proceeds from calls of available for sale investment
securities.............................................. 3,500,000 -- --
Proceeds from sale of available for sale mutual funds..... -- -- 733,931
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
Proceeds from sale of equity securities................... 260,893 197,939 199,690
Return of capital on investment securities................ -- -- 10,530
Purchases of held to maturity investment securities....... -- -- (4,500,000)
Purchases of available for sale investment securities..... (10,213,002) (36,307) (2,614,983)
Principal payments on available for sale mortgage-backed
securities.............................................. 591,604 625,772 514,078
Principal payments on held to maturity mortgage-backed
securities.............................................. 1,373,744 1,049,212 1,727,584
Principal payments on held to maturity investment
securities.............................................. 196,023 62,372 372,797
Purchases of available for sale mortgage-backed
securities.............................................. (10,000,300) -- (1,500,000)
Purchases of premises and equipment....................... (103,100) (157,549) (212,881)
Proceeds from sale of premises and equipment.............. 37,000 -- --
Redemption (purchase) of Federal Home Loan Bank stock..... 899,900 (41,000) (1,100,000)
------------ ------------- ------------
Net cash provided (used) by investing activities...... 16,674,285 (4,551,747) (29,352,773)
------------ ------------- ------------
FINANCING ACTIVITIES:
(Decrease) increase in advance payments by borrowers for
taxes and insurance..................................... (149,506) (183,689) 44,778
Purchases of MRP shares................................... -- (1,850) --
Proceeds from Federal Home Loan Bank advances............. -- 180,250,000 51,100,000
Payments on Federal Home Loan Bank advances............... (10,500,000) (176,927,000) (39,100,000)
Net increase (decrease) in money market, NOW and passbook
savings accounts........................................ 1,960,722 (893,453) 8,912,540
Net increase in certificate accounts...................... 696,691 2,195,986 1,880,095
Purchases of treasury stock............................... -- (452,730) (85,375)
Common stock cash dividends paid.......................... -- (201,821) (236,380)
Cash in lieu of stock dividend on fractional shares....... (2,657) -- (4,901)
------------ ------------- ------------
Net cash (used) provided by financing activities...... (7,994,750) 3,785,443 22,510,757
------------ ------------- ------------
Net increase (decrease) in cash and cash
equivalents......................................... 9,850,657 672,710 (4,954,644)
CASH AND CASH EQUIVALENTS, beginning of year................ 5,871,023 5,198,313 10,152,957
------------ ------------- ------------
CASH AND CASH EQUIVALENTS, end of year...................... $ 15,721,680 $ 5,871,023 $ 5,198,313
============ ============= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes................ $ 21,400 $ 801,100 $ 700,600
============ ============= ============
Cash paid during the year for interest on deposits and
borrowings.............................................. $ 8,793,073 $ 8,790,886 $ 7,343,265
============ ============= ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITY:
Loans transferred to real estate owned.................... $ -- $ 179,149 $ --
============ ============= ============
</Table>
The accompanying notes are an integral part of these statements.
65
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
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 four 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.
66
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Corporation has worked closely with the OTS to implement the
Supervisory Agreement and believes it has materially complied with the Agreement
to date.
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. Cash and due from banks at December 31,
2001 and 2000 included $478,000 and $492,000, respectively, of reserves required
to be maintained under Federal Reserve Bank regulations. In addition, cash and
due from banks at December 31, 2001 and 2000 include $23,000 and $0,
respectively, of reserves required to be maintained under our credit card
program.
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 included in other comprehensive income (loss) 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 inherent 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. Generally, consumer loans are considered losses when 180 days past due.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained to provide for inherent losses
in the loan portfolio. It 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.
67
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
In 2001, the Corporation terminated its noncontributory defined benefit
pension plan covering substantially all employees of the Bank. Prior to the
termination of the Pension Plan, pension costs were charged to expense. 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 104,190 shares adjusted for the 15% stock dividend in
the second quarter of 1998, 5% stock dividend in the first quarter of 1999 and
12% stock dividend in the second quarter of 2001 in connection with the Plan of
Conversion. As of December 31, 2001 and 2000, 77,664 and 83,262 shares,
respectively, remain unearned.
68
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 13, 14 and 15 for additional information.
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.
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2001 2000 1999
- ----------------------- -------- ----------- ----------
Basic earnings (loss) per share(1):
Net income (loss)............................... $ 32,816 $(2,964,160) $ 851,314
Average shares outstanding...................... 978,678 984,641 1,025,154
Earnings (loss) per share....................... $ .03 $ (3.01) $ .83
Diluted earnings (loss) per share(1):
Net income (loss)............................... $ 32,816 $(2,964,160) $ 851,314
Average shares outstanding...................... 978,678 984,641 1,025,154
Stock options................................... 8 -- 169
-------- ----------- ----------
Diluted average shares outstanding.............. 978,686 984,641 1,025,323
Earnings (loss) per share....................... $ .03 $ (3.01) $ .83
</Table>
- ---------------
(1) 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. In
addition, on May 16, 2001, the Board of Directors declared a stock dividend
of 12% to shareholders of record of June 1, 2001 payable on June 15, 2001.
All per share data have been restated to reflect the stock dividends.
Options to purchase 96,759, 106,210 and 94,826 shares of common stock were
outstanding during 2001, 2000 and 1999, 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
The Company follows 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 adoption of this standard during the first quarter 1998, some of
those changes in equity were displayed in the
69
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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. The Corporation's most significant estimate is the allowance for loan
losses.
FUTURE ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations". This
Statement addresses financial accounting and reporting for business combinations
and supersedes Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations", and FASB Statement No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." All business combinations in the scope
of this Statement are to be accounted for using one method, the purchase method.
The provisions of this Statement apply to all business combinations initiated
after June 30, 2001. This Statement also applies to all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001, or later.
The FASB has also issued SFAS No. 142, "Goodwill and Other Intangible
Assets". This Statement addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes
70
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
APB Opinion No. 17, "Intangible Assets." This statement addresses how intangible
assets that are acquired individually or with a group of other assets (but not
those acquired in a business combination) should be accounted for in financial
statements upon their acquisition. This Statement also addresses how goodwill
and other intangible assets should be accounted for after they have been
initially recognized in the financial statements. The provisions of this
Statement are required to be applied starting with fiscal years beginning after
December 15, 2001 except for goodwill and intangible assets acquired after June
30, 2001 which will be subject immediately to the nonamortization and
amortization provisions of this Statement.
The FASB has also issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". This Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The provisions of this Statement are required
to be applied starting with fiscal years beginning after June 15, 2002.
The FASB has also issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets". This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." The provisions of this Statement are
required to be applied starting with fiscal years beginning after December 15,
2001.
The impact and adoption of these standards is not expected to materially
affect the Corporation's financial condition or results of operations.
3. INVESTMENT SECURITIES:
The cost and market values of investment securities are summarized as
follows:
Investment securities available for sale:
<Table>
<Caption>
DECEMBER 31, 2001
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
U.S. government and government agency
obligations:
Due after one and within five
years.......................... $ 500,000 $10,625 $ -- $ 510,625
Corporate Debentures:
Due after ten years.............. 494,276 -- 38,625 455,651
Federal Home Loan Mortgage Corporation
(FHLMC) certificates:
Due after ten years.............. 1,446,507 9,072 -- 1,455,579
Government National Mortgage
Association (GNMA) certificates:
Due after ten years.............. 9,939,871 1,751 45,020 9,896,602
Federal National Mortgage Association
(FNMA) certificates:
Due after ten years.............. 1,069,293 4,692 -- 1,073,985
Mutual fund investment................ 10,800,838 -- 851 10,799,987
Common stock portfolio................ 1,023,372 -- 169,996 853,376
----------- ------- -------- -----------
$25,274,157 $26,140 $254,492 $25,045,805
=========== ======= ======== ===========
</Table>
The maturities within the table above are based upon contractual maturity.
71
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investment securities held to maturity:
<Table>
<Caption>
DECEMBER 31, 2001
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
U.S. government and government agency
obligations:
Due after ten years................ $1,108,774 $12,204 $ 3,166 $1,117,812
Federal Home Loan Mortgage Corporation
(FHLMC) certificates:
Due after five and within ten
years............................ 1,737,631 59,505 -- 1,797,136
Due after ten years................ 709,067 22 4,379 704,710
Government National Mortgage Association
(GNMA) certificates:
Due after ten years................ 1,164,567 13,587 5,429 1,172,725
Federal National Mortgage Association
(FNMA) certificates:
Due after ten years................ 1,453,302 -- 4,982 1,448,320
---------- ------- ------- ----------
$6,173,341 $85,318 $17,956 $6,240,703
========== ======= ======= ==========
</Table>
The maturities within the table above are based upon contractual maturity.
Investment securities available for sale:
<Table>
<Caption>
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
========== ======= ======== ==========
</Table>
The maturities within the table above are based upon contractual maturity.
72
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investment securities held to maturity:
<Table>
<Caption>
DECEMBER 31, 2000
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES MARKET 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
=========== ======= ======== ===========
</Table>
The maturities within the table above are based upon contractual maturity.
Mortgage-backed securities include net unamortized premiums of $38,110 and
$4,303 at December 31, 2001 and 2000, respectively.
U.S. government and government agency obligations and mortgage-backed
securities were pledged to secure Federal Home Loan Bank advances.
73
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. LOANS RECEIVABLE:
Loans receivable at December 31, 2001 and 2000, are summarized as follows:
<Table>
<Caption>
2001 2000
------------ ------------
Real estate loans:
1-4 family............................................. $101,203,473 $103,332,185
Construction........................................... 1,139,900 1,550,454
Commercial real estate.............................. 7,427,791 15,085,413
------------ ------------
109,771,164 119,968,052
Less -- Undisbursed loan proceeds...................... 630,795 148,120
------------ ------------
109,140,369 119,819,932
Commercial business loans:............................... 10,815,379 17,046,757
Consumer loans:
Home equity............................................ 12,894,128 12,908,169
Student................................................ 2,490,353 2,419,454
Automobile............................................. 1,771,098 2,738,721
Collateral............................................. 615,482 729,124
Credit cards........................................... 455,510 608,438
Personal unsecured/other............................... 435,974 518,538
------------ ------------
18,662,545 19,922,444
------------ ------------
138,618,293 156,789,133
Less -- Allowance for loan losses...................... 1,166,606 3,387,779
Deferred loan costs.................................... (48,388) (15,244)
------------ ------------
$137,500,075 $153,416,598
============ ============
</Table>
The credit cards and student loans are currently being serviced by a third
party.
At December 31, 2001 and 2000, the majority of the loan portfolio was
secured by properties located in Western Pennsylvania. As of December 31, 2001,
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, 2001 and 2000, the Bank had
approximately $2,308,000 and $5,691,000 of non-accrual loans. The Bank does not
have any other significant off-balance sheet risk except for the commitments
referenced in Note 18.
One-to-four family residential loans were pledged to secure Federal Home
Loan Bank advances.
5. ALLOWANCE FOR LOAN LOSSES:
Activity with respect to the allowance for loan losses is summarized as
follows:
<Table>
<Caption>
2001 2000 1999
---------- ----------- --------
Balance at beginning of year...................... $3,387,779 $ 982,588 $571,183
Provision for loan losses......................... 285,000 6,382,865 438,000
Charge-offs....................................... (2,614,508) (3,982,158) (26,595)
Recoveries........................................ 108,335 4,484 --
---------- ----------- --------
Balance at end of year............................ $1,166,606 $ 3,387,779 $982,588
========== =========== ========
</Table>
74
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Of the $2.6 million in charged-off loans in 2001, $1.9 million was
associated with the fourth quarter 2001 commercial loan sale. The Bank had loans
totaling $2,308,000 and $5,691,000 being specifically identified as impaired and
a corresponding allocation reserve of $92,476 and $1,196,000 at December 31,
2001 and 2000, respectively. One non-performing commercial business relationship
accounts for $1.4 million or 58.7% of the total non-performing loans. The $1.4
million has an U.S. Government guarantee of the payment of principal. Currently,
this commercial business is in bankruptcy and management is working closely in
the bankruptcy proceedings to protect its interests.
The average recorded balances for impaired loans during 2001 and 2000 were
$5,298,000 and $2,886,000, respectively. Interest income recognized during the
time within the period that the loans were impaired was not 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 $271,000 at December 31, 2001 and $163,000 at
December 31, 2000.
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, 2001 and 2000, are summarized
by major classification as follows:
<Table>
<Caption>
2001 2000
---------- ----------
Land........................................................ $ 224,817 $ 224,817
Building and improvements................................... 2,171,341 2,154,914
Furniture, fixtures and equipment........................... 1,962,072 1,968,708
---------- ----------
Total, at cost............................................ 4,358,230 4,348,439
Less -- Accumulated depreciation............................ 2,208,668 2,004,948
---------- ----------
Premises and equipment, net................................. $2,149,562 $2,343,491
========== ==========
</Table>
Depreciation expense was $261,807, $317,403 and $344,145 for the fiscal
years ended December 31, 2001, 2000 and 1999, respectively.
The Corporation has entered into various operating leases expiring, with
options to renew by the Corporation, at various dates through November 30, 2011
for office space for two of its branch operations. During the years ended
December 31, 2001, 2000 and 1999, rental expense included in the statement of
operations was $66,640, $51,000, and $50,400, respectively.
75
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease commitments for all leases as of December 31, 2001,
are as follows:
<Table>
<Caption>
YEAR ENDING DECEMBER 31,
- ------------------------
2002........................................................ $ 49,200
2003........................................................ 31,600
2004........................................................ 37,000
2005........................................................ 42,000
2006........................................................ 43,000
Thereafter.................................................. 295,500
--------
Total Payments.............................................. $498,300
========
</Table>
8. OTHER ASSETS AND OTHER LIABILITIES
Included in other assets is $986,000 related to certain loans associated
with the commercial loan sale in the fourth quarter of 2001. The transfer of
these certain loans is accounted for as a financing transaction as defined by
SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - a Replacement of SFAS No. 125" due to the Bank
maintaining the sole right to repurchase them. The Bank has no continuing
involvement with these specific loans, nor any further risk of loss or other
forms of recourse from the buyer. There is an offsetting nonrecourse liability
of $986,000, from the sales proceeds, in other liabilities. As cash is collected
on the underlying loans, the other assets and other liabilities will be reduced,
with no ongoing impact to the Bank's earnings.
9. DEPOSITS:
The aggregate amount of short-term jumbo certificates of deposit, each with
a minimum denomination of $100,000, was approximately $11,506,000 and
$10,766,000 at December 31, 2001, and 2000, respectively. At December 31, 2001,
the scheduled maturities of all certificate accounts are as follows:
<Table>
2002........................................................ $37,857,269
2003........................................................ 10,863,724
2004........................................................ 3,937,860
2005........................................................ 4,682,881
2006 and thereafter......................................... 3,370,036
-----------
$60,711,770
===========
</Table>
Interest expense associated with deposits for each of the years ended is as
follows:
<Table>
<Caption>
2001 2000 1999
---------- ---------- ----------
Interest on certificates of deposit.............. $3,484,697 $3,237,380 $3,037,831
Interest on savings accounts..................... 381,667 414,023 423,339
Money market accounts............................ 800,618 1,042,739 888,316
Interest on NOW accounts......................... 218,040 219,315 184,640
Early withdrawal penalties....................... (15,024) (20,858) (9,068)
---------- ---------- ----------
$4,869,998 $4,892,599 $4,525,058
========== ========== ==========
</Table>
76
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. FEDERAL HOME LOAN BANK ADVANCES:
Advances from the Federal Home Loan Bank consist of the following:
<Table>
<Caption>
DECEMBER 31, 2001
- -----------------------------------------
WEIGHTED AVERAGE
MATURITY RATE BALANCE
- -------- ---------------- -----------
2002 6.41% $ 6,500,000
2003 6.48 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
-----------
$55,800,000
===========
</Table>
<Table>
<Caption>
DECEMBER 31, 2000
- -----------------------------------------
WEIGHTED AVERAGE
MATURITY 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
===========
</Table>
The Bank relies on cash management advances offered by the Federal Home
Loan Bank of Pittsburgh for their liquidity needs. At December 31, 2001 the
Bank's maximum borrowing capacity was $103.8 million of which $55.8 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, $2,000,000 was an adjustable rate note
with a weighted average rate 5.75%. At December 31, 2001, there were $32.5
million of advances that are convertible to quarterly adjustable rate advances
at varying conversion dates within the next two 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.
11. 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
77
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2001 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.
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, 2001
and 2000 are as follows:
<Table>
<Caption>
2001 2000
------------------------- ---------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BALANCE FAIR VALUE BALANCE
----------- ----------- ------------ ------------
Cash and short term deposits... $15,721,680 $15,721,680 $ 5,871,023 $ 5,871,023
Investment securities.......... 31,286,508 31,219,146 30,836,075 31,154,805
Net loans...................... 137,957,950 137,500,075 152,342,682 153,416,598
Accrued interest receivable.... 942,307 942,307 1,301,026 1,301,026
Deposits with no stated
maturities................... 63,738,933 63,738,933 61,778,211 61,778,211
Deposits with stated
maturities................... 62,247,778 60,711,770 59,686,009 60,015,079
Federal Home Loan Bank
advances..................... 57,384,720 55,800,000 66,472,358 66,300,000
Commitments to originate
loans........................ 10,016,000 10,016,000 9,910,000 9,910,000
</Table>
78
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. INCOME TAXES:
The provision (benefit) for income taxes for each of the years ended
December 31, are as follows:
<Table>
<Caption>
2001 2000 1999
--------- ----------- ---------
Federal:
Current........................................ $(160,380) $ 434,015 $ 628,135
Deferred....................................... 173,598 (1,976,020) (197,178)
--------- ----------- ---------
13,218 (1,542,005) 430,957
State:
Current........................................ 11,553 (338,716) 97,302
--------- ----------- ---------
Total income tax expense (benefit)..... $ 24,771 $(1,880,721) $ 528,259
========= =========== =========
</Table>
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:
<Table>
<Caption>
2001 2000 1999
--------- ----------- ---------
Deferred tax (benefit) expense-
Prepaid pension................................. $ (44,439) $ 16,404 $ 11,821
Vacation accrual................................ (4,501) (266) (4,863)
MRP accrual..................................... (22,077) (22,319) (13,842)
Provision for loan losses....................... (96,900) (2,016,833) (148,920)
Tax depreciation (less than) in excess of book
depreciation................................. (1,700) (578) (16,086)
Other, net...................................... 343,215 47,572 (25,288)
--------- ----------- ---------
$ 173,598 $(1,976,020) $(197,178)
========= =========== =========
</Table>
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 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,
2001, the Savings Bank had an applicable excess reserve balance remaining of
approximately $43,000. Approximately $21,500 will be recaptured on an annual
basis over the next two 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.
79
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2001. 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:
<Table>
<Caption>
2001 2000 1999
---- ---- ----
Statutory federal tax rate.................................. 34.0% 34.0% 34.0%
State income taxes, net of Federal income tax benefit....... 20.1 7.0 7.1
Effect of graduated federal tax rates....................... (6.8) (2.4) (2.1)
Other....................................................... (4.3) .2 (.7)
---- ---- ----
43.0% 38.8% 38.3%
==== ==== ====
</Table>
Net deferred tax liabilities (assets) as of December 31, 2001 and 2000 are
as follows:
<Table>
<Caption>
2001 2000
----------- -----------
Prepaid pension........................................... $ -- $ 44,439
Vacation accrual.......................................... (31,737) (27,236)
Allowance for loan losses................................. (2,507,579) (2,410,679)
Valuation allowance for investments....................... (91,339) (175,887)
Tax depreciation in excess of book depreciation........... 60,136 61,836
Deferred loan costs/fees.................................. 1,845 1,845
MRP accrual............................................... (88,262) (66,185)
Other, net................................................ 504,066 160,851
----------- -----------
Net deferred tax asset.................................... $(2,152,870) $(2,411,016)
=========== ===========
</Table>
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
income.
13. PENSION PLAN:
On May 16, 2001, the Board of Directors' of the Savings Bank ratified the
action of one of its committees that terminated its noncontributory defined
benefit pension plan and the curtailment of pension benefits to all eligible
employees. Termination notices were given to employees April 30, 2001 and
benefit accruals were frozen as of May 15, 2001. During the quarter ended June
30, 2001, the Bank recognized a pre-tax curtailment gain of approximately
$479,000. A settlement loss of approximately $334,000 was recorded during the
quarter ended December 31, 2001. Settlement distributions to participants
totaled approximately $1,025,000 while the Bank had a reversion of cash from the
pension plan settlement of approximately $246,000. From this reversion of
$246,000, the Bank paid excise taxes of approximately $49,000.
80
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2001
and 2000, respectively.
<Table>
<Caption>
2001 2000
----------- -----------
Change in benefit obligation:
Benefit obligation at beginning of year.................. $ 1,293,096 $ 1,098,969
Service cost............................................. 50,052 165,145
Interest cost............................................ 32,327 82,423
Curtailment gain......................................... (478,804) --
Settlement loss.......................................... 333,882 --
Actuarial gain........................................... (186,213) (44,672)
Benefit and settlement payments.......................... (1,044,340) (8,769)
----------- -----------
Benefit obligation at end of year........................ -- 1,293,096
----------- -----------
Change in plan assets:
Fair value of plan assets at beginning of year............. 1,342,416 1,179,659
Actual loss on plan assets............................... (52,311) (21,976)
Employer (reversion) contribution........................ (245,765) 193,502
Benefit and settlement payments.......................... (1,044,340) (8,769)
----------- -----------
Fair value of plan assets at end of year................. -- 1,342,416
----------- -----------
Funded status............................................ -- 49,320
Unrecognized net obligation at transition................ -- 40,112
Unrecognized net (gain) loss............................. -- 41,272
----------- -----------
Prepaid benefit cost..................................... $ -- $ 130,704
=========== ===========
</Table>
The components of pension expense are as follows for each of the years
ended December 31:
<Table>
<Caption>
2001 2000 1999
-------- --------- ---------
Service cost........................................ $ 50,052 $ 165,145 $ 123,290
Interest cost....................................... 32,327 82,423 79,034
Actual loss (return) on plan assets................. 52,311 21,976 (144,507)
Amortization of transition asset.................... (91,677) (124,289) 66,321
-------- --------- ---------
Net periodic pension cost........................... $ 43,013 $ 145,255 $ 124,138
======== ========= =========
</Table>
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 years ended December 31, 2001 and 2000, and 6.75% for the year
ended December 31, 1999. The expected long-term rate of return on assets was
8.00% for the years ended December 31, 2001 and 2000, and 7.25% for the year
ended December 31, 1999.
Additionally, the Bank maintains a 401(k) plan for employees. The Bank does
not match any employee contributions.
81
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. 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 104,190
shares adjusted for the 15% stock dividend in the second quarter of 1998, the 5%
stock dividend in the first quarter of 1999 and the 12% stock dividend in the
second quarter of 2001, 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 $574,280 and
$615,670 at December 31, 2001 and 2000, 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 $7.39 adjusted for the 15% stock dividend in the second quarter of
1998, the 5% stock dividend in the first quarter of 1999 and the 12% stock
dividend in the second quarter of 2001, 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 3,473 shares.
Total compensation expense incurred in 2001, 2000 and 1999 for allocated ESOP
shares was $60,306, $58,397 and $75,098, respectively.
15. 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. 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. In addition, on May 16, 2001,
the Board declared a 12% stock dividend to shareholders of record of June 1,
2001 payable on June 15, 2001. All share data have been restated to reflect the
stock dividends.
The aforementioned approval of the MRP Plan made 52,095 shares of common
stock available for awards to officers, key employees of the Corporation and
Bank and non-employee directors thereof. As of December 31, 2001, the
Corporation had granted 52,922 shares of which 870 shares have been forfeited.
Such shares are vested over a five-year period and as of December 31, 2001,
11,268 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, 2001, the Corporation incurred compensation expense of $64,688
based on the cost incurred to purchase the currently vesting or previously
vested shares in the open market. As of December 31, 2001, the trust had
purchased 52,095 shares.
The aforementioned approval of the Option Plan made 130,239 options
available for grant to employees and others who perform substantial services to
the Corporation. As of December 31, 2001, the Corporation had granted 132,338
options of which 34,894 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,
82
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 earnings per
share would have had a net reduction to the following pro forma amounts for the
years ended December 31, 2001, 2000 and 1999:
<Table>
<Caption>
2001 2000 1999
------- ----------- --------
Net income (loss):
As reported....................................... $32,816 $(2,964,160) $851,314
Pro forma......................................... 7,220 (2,978,429) 802,616
Basic earnings (loss) per share:
As reported....................................... $ .03 $ (3.01) $ .83
Pro forma......................................... .01 (3.03) .79
Diluted earnings (loss) per share:
As reported....................................... $ .03 $ (3.01) $ .83
Pro forma......................................... .01 (3.03) .79
</Table>
A summary of the status of the Corporation's Stock Option Plan at December
31, 2001, and changes during the year ended is presented in the table and
narrative following:
<Table>
<Caption>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
------- --------------
Outstanding at beginning of period.......................... 95,308 $12.30
Granted................................................... 5,858 8.30
Exercised................................................. -- --
Forfeited................................................. 4,290 11.70
-------
Outstanding at end of period................................ 96,876 12.08
-------
Exercisable at end of period................................ 69,268
Weighted average fair value of options granted during the
year...................................................... $ 4.34
</Table>
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 96,876 options outstanding at December 31, 2001 had a weighted average
exercise price of $12.08 and a weighted average remaining contractual life of
5.9 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 2001: weighted average risk-free interest rate of 5.15%, expected
life of 7.0 years and expected volatility of 41.6%.
83
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<Table>
<Caption>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
Outstanding at beginning of period.......................... 120,317 $12.17
Granted................................................... 4,312 8.60
Exercised................................................. -- --
Forfeited................................................. 29,321 11.21
--------
Outstanding at end of period................................ 95,308 12.30
--------
Exercisable at end of period................................ 61,167
Weighted average fair value of options granted during the
year...................................................... $ 4.00
</Table>
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 95,308 options outstanding at December 31, 2000 had a weighted average
exercise price of $12.30 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:
<Table>
<Caption>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
Outstanding at beginning of period................. 117,965 $12.20
Granted.......................................... 2,352 10.94
Exercised........................................ -- --
Forfeited........................................ -- --
--------
Outstanding at end of period....................... 120,317 12.17
--------
Exercisable at end of period....................... 63,174
Weighted average fair value of options granted
during the year.................................. $ 3.70
</Table>
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 120,317 options outstanding at December 31, 1999 had a weighted average
exercise price of $12.17 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%.
16. 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
84
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2001, 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, 2001, the Bank was well capitalized under the
regulatory framework for prompt corrective action.
The Bank's actual capital amounts and ratios are also presented in the
table. There was no deduction from capital for interest-rate risk.
<Table>
<Caption>
TO BE WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
---------------- ----------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- -------- ------ ----------- --------
(DOLLARS IN THOUSANDS)
Total Capital (to Risk Weighted
Assets):
As of December 31, 2001.......... $11,788 11.93% $$7,908 $8.0% $$9,885 $10.0%
As of December 31, 2000.......... $11,886 10.86% $$8,753 $8.0% $$10,941 $10.0%
Tier I Capital (to Risk Weighted
Assets):
As of December 31, 2001.......... $10,621 10.74% $$3,954 $4.0% $$5,931 $ 6.0%
As of December 31, 2000.......... $10,518 9.61% $$4,377 $4.0% $$6,565 $ 6.0%
Tier I Capital (to Average Assets):
As of December 31, 2001.......... $10,621 5.37% $$7,907 $4.0% $$9,884 $ 5.0%
As of December 31, 2000.......... $10,518 5.13% $$8,195 $4.0% $$10,244 $ 5.0%
</Table>
17. 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, 2001
and 2000, amounted to $7,502 and $894,683, respectively.
An analysis of these related party loans is as follows:
<Table>
<Caption>
2001 2000
--------- --------
Balance at January 1................................... $ 894,683 $634,845
Related party departure................................ (649,239) --
New loans.............................................. 11,073 318,009
Payments............................................... (249,015) (58,171)
--------- --------
Balance at December 31................................. $ 7,502 $894,683
========= ========
</Table>
85
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 member of the Board of Directors is employed by a law firm retained by
the Corporation. Fees paid in fiscal 2001, 2000 and 1999 relative to
various bank and corporate matters totaled $320,933, $148,945 and
$52,336, respectively. The firm's real estate closing service collected
gross proceeds for the settlement of loans of approximately $42,332,
$146,560 and $337,635, respectively, during fiscal 2001, 2000 and 1999 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.
- 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 2001, 2000 and 1999 were $45,366, $50,348 and
$42,740, respectively.
- A member of the Board of Directors is a financial consultant and the
owner of a financial services company which has been retained by the
Savings Bank with respect to certain financial matters on an ongoing
basis. The Company and the Savings Bank expect this relationship to
continue. The firm commenced consulting work for the Savings Bank on
October 16, 2000 and received payments of $16,265 for work in 2000. The
firm received consulting fees of $113,707 for the year ended December 31,
2001.
18. 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 $10,016,000 and $9,910,000 as of
December 31, 2001 and 2000, respectively. As of December 31, 2001 and 2000,
these commitments had fixed and variable rates which ranged from 4.8% to 13.9%
and 7.8% to 13.9%, 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.
The Bank is involved in one case of lender liability and related claims.
The Bank has available to it a number of potentially bona fide defenses to this
case. Absent a position not asserted at this time by the insurance company, an
insurance policy the Bank maintains, in all probability, will indemnify the Bank
for compensatory damages and for fees and expenses. This policy has a deductible
of $50,000. The plaintiffs have alleged damages, but discovery in this case has
not occurred due to possible settlement discussions with Plaintiffs. Therefore,
a claim for damages has not been quantified with the judicial system. At this
preliminary stage, based solely upon facts known to this point, the Bank's
management, after discussion with outside counsel, believes it has meritorious
defenses to the Plaintiffs' claims.
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.
86
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. 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, 2001 and 2000 and
related statements of income and cash flows are as follows:
BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
<Table>
<Caption>
2001 2000
----------- -----------
ASSETS
Cash and cash equivalents................................... $ 186,659 $ 68,239
Investments securities available for sale................... 853,375 919,189
Investment in Prestige Bank, F.S.B.......................... 10,708,366 10,571,048
Loan........................................................ 200,000 217,029
Other assets................................................ 159,673 174,572
----------- -----------
Total Assets................................................ $12,108,073 $11,950,077
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Loans Payable............................................... $ 314,186 $ 340,000
Other Liabilities........................................... 36,639 60,145
----------- -----------
Total Liabilities........................................... $ 350,825 $ 400,145
=========== ===========
Total Stockholders' Equity, net of ESOP loan of $574,280 at
December 31, 2001; $615,670 at December 31, 2000.......... 11,757,248 11,549,932
----------- -----------
Total Liabilities and Stockholders' Equity.................. $12,108,073 $11,950,077
=========== ===========
</Table>
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
<Table>
<Caption>
2001 2000 1999
--------- ----------- --------
Interest income........................................... $ 97,946 $ 109,222 $108,137
Gain on sale of investments............................... 29,883 20,638 90,413
--------- ----------- --------
Total income....................................... 127,829 129,860 198,550
Expenses:
Interest expense..................................... 23,788 35,416 --
Legal fees........................................... 81,043 4,972 34,000
Other................................................ 138,736 136,388 95,745
--------- ----------- --------
Total expenses..................................... 243,567 176,776 129,745
(Loss) income before income taxes and equity in earnings
(losses) of subsidiary.................................. (115,738) (46,916) 68,805
Income tax (benefit) expense.............................. (48,092) (19,452) 19,148
Equity in earnings (losses) of subsidiary................. 100,462 (2,936,696) 801,657
--------- ----------- --------
Net income (loss)......................................... $ 32,816 $(2,964,160) $851,314
========= =========== ========
</Table>
87
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
<Table>
<Caption>
2001 2000 1999
--------- ------------ ---------
Operating Activities:
Net income (loss)...................................... $ 32,816 $ (2,964,160) $ 851,314
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in (earnings) losses of subsidiary.............. (100,462) 2,936,696 (801,657)
Dividends paid from subsidiary......................... -- 300,000 --
Gain on sale of equity securities...................... (29,883) (20,638) (90,413)
Change in other assets and liabilities................. (100,366) 193,726 147,906
--------- ------------ ---------
Net cash (used) provided by operating
activities..................................... (197,895) 445,624 107,150
Investing Activities:
Loan originations...................................... -- -- (250,000)
Principal payments on loans............................ 17,029 18,861 14,110
Return of capital on investment securities............. -- -- 10,530
Proceeds from sale of equity securities................ 260,552 197,581 199,690
Purchase of available for sale investment securities... -- -- (83,722)
--------- ------------ ---------
Net cash provided (used) by investing
activities..................................... 277,581 216,442 (109,392)
Financing Activities:
Common stock dividends paid............................ -- (201,821) (236,380)
Cash in lieu of stock dividend on fractional shares.... (2,656) -- (4,901)
Purchase of treasury stock............................. -- (452,730) (85,375)
Repayment received from ESOP........................... 41,390 38,640 36,070
--------- ------------ ---------
Net cash provided (used) by financing
activities..................................... 38,734 (615,911) (290,586)
--------- ------------ ---------
Net increase (decrease) in cash and cash equivalents..... 118,420 46,155 (292,828)
Cash and Cash Equivalents, Beginning..................... 68,239 22,084 314,912
--------- ------------ ---------
Cash and Cash Equivalents, Ending........................ $ 186,659 $ 68,239 $ 22,084
========= ============ =========
</Table>
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 the Bank unless the loans are secured by specific assets.
Further, such secured loans are limited in amount to ten percent of the Bank's
capital and surplus. At December 31, 2001, the Parent Company had borrowed
$314,000 from the Bank to support cash levels. The loan is adequately secured in
accordance with applicable law. In addition, the Bank is subject to legal
limitations on the amount of dividends that can be paid to the Parent Company.
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
88
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payment of dividends by the Bank, the existence of the liquidation account will
not restrict the use or further application of such retained earnings.
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.
20. SUBSEQUENT EVENT:
On February 7, 2002, Northwest Bancorp, Inc. (Nasdaq: NWSB), the holding
company for Northwest Savings Bank, and Prestige Bancorp, Inc. (Nasdaq: PRBC),
announced jointly that they had entered into a definitive agreement under which
Northwest Bancorp and Northwest Savings Bank would acquire Prestige Bancorp and
Prestige Bank, respectively. Under the terms of the agreement, the shareholders
of Prestige Bancorp will receive $13.75 in cash for each share of Prestige
Bancorp, resulting in a cash payment by Northwest of approximately $14.7
million. Each of the Boards of Directors has approved the transaction. Due
diligence has been completed. Prestige Bancorp and Northwest Bancorp are in the
process of obtaining regulatory approval from applicable banking regulators to
complete the merger. The transaction is expected to be completed by the end of
the second calendar quarter of 2002 or the beginning of the third quarter 2002
and is subject to approval by the Prestige Bancorp shareholders and applicable
regulatory authorities.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no change in public accountants for the Company or the
Savings Bank during the last two fiscal years.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
INFORMATION WITH RESPECT TO DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the nominees, the Directors continuing in
office and the Company's executive officers, their respective names, ages, the
year each became a Director of the Company (or the Savings Bank, in the event
such individual served as a Director of the Savings Bank prior to the
Conversion), the expiration date of their current term as a Director, and the
number and percentage of shares of the Common Stock beneficially owned. The
table also sets forth the number of shares beneficially owned and aggregate
percentage of beneficial ownership by the Directors and Executive Officers as a
group. All executive officers serve at the will of the Board of Directors of the
Company. See the biographical information of each executive officer for
information on how long he or she has served as an executive officer.
89
DIRECTORS CONTINUING IN OFFICE, EXECUTIVE OFFICERS AND
BENEFICIAL OWNERSHIP OF COMMON STOCK
<Table>
<Caption>
PERCENT OF
CURRENT SHARES OF SHARES OF
TERM COMMON STOCK COMMON
DIRECTOR TO BENEFICIALLY STOCK
NAME AGE(1) SINCE(2) EXPIRE OWNED(3) OUTSTANDING
- ---- ------ -------- ------- ------------ -----------
Martin W. Dowling**........................ 75 1992 2002 10,593(4) *
Mark R. Schoen(5)**........................ 48 1994 2002 9,247(6) *
Charles P. McCullough...................... 47 1995 2003 10,336(7) *
James A. Nania............................. 54 2001 2003 649(8) *
James M. Hein, CFO......................... 38 N/A N/A 29,499(9) 2.76%
Patricia A. White(5)....................... 55 1989 2004 47,852(10) 4.43%
Michael R. Macosko......................... 50 1992 2004 20,144(11) 1.90%
Morris Propp............................... 57 2001 2004 100,985(12) 9.53%
All Directors, Nominees and Executive
Officers As a Group (8 Persons).......... -- -- -- 229,305(13) 20.91%
</Table>
- ---------------
* Does not exceed 1% of the Company's voting securities.
** Nominated for an additional three-year term.
(1) As of March 1, 2002.
(2) Prior to the Conversion on June 27, 1996, the Savings Bank was a federal
chartered mutual savings bank. The Company is a holding company that was
created as part of the Conversion. As part of the Conversion, the
then-directors of the Savings Bank were selected as Directors of the
Company.
(3) Beneficial ownership as of March 1, 2002.
(4) This figure also includes 589 shares of Common Stock awarded to Mr.
Dowling, but not yet vested, currently held by the Management Recognition
and Retention Plan and Trust over which shares Mr. Dowling possesses the
power to direct the exercise of voting rights. This figure does not include
81 shares of Common Stock of the Company covered by vested options to
purchase Common Stock of the Company held by Mr. Dowling because the
exercise price of such options was greater than the market price on March
1, 2002. This figure does include 1,580 shares which may be acquired upon
the exercise of vested stock options whose exercise price was below the
market price on March 1, 2002.
(5) Mark R. Schoen and Patricia A. White are also executive officers of the
Company. Mr. Schoen is Chief Executive Officer and President of the Company
and Chief Executive Officer of the Savings Bank. Mrs. White is Executive
Vice President and Treasurer of the Company and President and Treasurer of
the Savings Bank.
(6) This figure includes 702 shares of Common Stock held by Mr. Schoen or Mrs.
Schoen as custodian for minor children. This figure does not include shares
of Common Stock of the Company owned by the ESOP for which Mr. Schoen acts
as a co-trustee. This figure does not include shares of Common Stock of the
Company held in the Management Recognition and Retention Plan and Trust,
for which Mr. Schoen acts as co-trustee, which are not allocated to Mr.
Schoen. This figure also includes 534 shares of Common Stock awarded to Mr.
Schoen, but not yet vested, currently held by the Management Recognition
and Retention Plan and Trust over which shares Mr. Schoen possesses the
power to direct the exercise of voting rights. This figure does not include
81 shares of Common Stock of the Company covered by vested options to
purchase Common Stock of the Company held by Mr. Schoen because the
exercise price of such options was greater than the market price on March
1, 2002. This figure does include 1,252 shares which may be acquired upon
the exercise of vested stock options which exercise price is below such
market price.
(7) This figure includes 1,963 shares of Common Stock held individually by Mrs.
McCullough through an IRA account. This figure also includes 507 shares of
Common Stock awarded to Mr. McCullough, but not yet vested, currently held
by the Management Recognition and Retention Plan and Trust over which
shares Mr.
90
McCullough possesses the power to direct the exercise of voting rights.
This figure does not include 81 shares of Common Stock of the Company
covered by vested options to purchase Common Stock of the Company held by
Mr. McCullough because the exercise price of such options was greater than
the market price on March 1, 2002. This figure does include 1,257 shares
which may be acquired upon the exercise of vested stock options whose
exercise price is below such market price.
(8) On February 21, 2001, the Board of Directors appointed Mr. Nania to serve
the remainder of Mr. Hein's unexpired term until 2003. The 649 shares
common stock awarded to Mr. Nania, but not vested, are currently held by
the Management Recognition and Retention Plan and Trust over which shares
he possesses the power to direct the exercise of voting rights.
(9) This figure also includes 1,756 shares of Common Stock awarded to Mr. Hein,
but not yet vested currently held by the Management Recognition and
Retention Plan and Trust over which shares Mr. Hein possesses the power to
direct the exercise of voting rights. This figure also includes 2,668
shares of Common Stock allocated to the account of Mr. Hein established
under the terms of the ESOP over which shares Mr. Hein possesses the power
to direct the exercise of voting rights. This figure does not include
shares of Common Stock of the Company owned by the ESOP for which Mr. Hein
acts as co-trustee. This figure does not include shares of Common Stock of
the Company held in the Management Recognition and Retention Plan and
Trust, for which Mr. Hein acts as co-trustee, which are not allocated to
Mr. Hein. This includes 9,822 shares of Common Stock of the Company covered
by vested options to purchase Common Stock of the Company held by Mr. Hein.
(10) This figure also includes 2,026 shares of Common Stock awarded to Mrs.
White, but not yet vested currently held by the Management Recognition and
Retention Plan and Trust over which shares Mrs. White possesses the power
to direct the exercise of voting rights. This figure also includes 2,805
shares of Common Stock allocated to the account of Mrs. White established
under the terms of the ESOP over which shares Mrs. White possesses the
power to direct the exercise of voting rights. This figure includes 21,436
shares of Common Stock of the Company covered by vested options to purchase
Common Stock of the Company held by Mrs. White.
(11) This figure includes 616 shares of Common Stock awarded to Mr. Macosko, but
not yet vested, currently held by the Management Recognition and Retention
Plan and Trust over which shares Mr. Macosko possesses the power to direct
the exercise of voting rights. This figure does not include 81 shares of
Common Stock of the Company covered by vested options to purchase Common
Stock of the Company held by Mr. Macosko because the exercise price of such
options was greater than the market price on March 1, 2002. This figure
does include 1,689 shares which may be acquired upon the exercise of vested
stock options whose exercise price is below such market price.
(12) This figure is based on a Schedule 13D collectively filed on May 31, 2000
on behalf of Morris Propp and Melvin Heller. This figure includes 521
shares common stock awarded to Mr. Propp, but not vested, which are
currently held by the Management Recognition and Retention Plan and Trust
over which shares he possesses the power to direct the exercise of voting
rights.
(13) For purposes of this table, the term executive officers includes all
persons who were executive officers of the Company and the Prestige Bank on
March 1, 2002. This figure includes additional shares of Common Stock
described in above footnotes with respect to each individual Director and
Executive Officer. This figure also includes 2,665 shares of Common Stock
held by Directors in a fiduciary capacity (other than related to the ESOP
or the Management Retention and Recognition Plan and Trust) for another
person or held by or for the benefit of family members of executive
officers or directors. This figure includes unvested awards of 8,496 shares
of Common Stock which have been granted to directors and executive officers
of the Company and the Savings Bank under the Management Recognition and
Retention Plan and Trust over which shares the named individuals possess
the power to direct the exercise of voting rights and which such shares
have been acquired by and held in the Management Recognition and Retention
Plan and Trust. This figure also includes 5,473 shares of Common Stock
owned by the ESOP which are allocated to executive officers over which such
executive officers have the power to direct the exercise of voting rights.
This figure includes 37,036 exercisable stock option shares. Vested options
of this group to purchase an additional 324 shares of
91
Common Stock were outstanding on March 1, 2002, but such shares were not
included in this figure because the exercise price of such options was
greater than the market price on March 1, 2002.
DIRECTOR AND EXECUTIVE OFFICER BIOGRAPHICAL INFORMATION
Set forth below are the directors and executive officers of the Company and
the Savings Bank together with information concerning the principal occupations
during the last five years for such directors and executive officers.
GEORGE BRIKIS was elected a Director of the Savings Bank in 2001 for a
three-year term. Since 2000, he has been President of Brikis Financial Services,
which specializes in corporate finance and commercial banking. From 1998 to
2000, Mr. Brikis served as CFO of American Metals and Coal International in
Greenwich, CT. Mr. Brikis also has over 17 years corporate banking experience
where he served as Executive Vice President at PNC Bank.
MARTIN W. DOWLING has been a Director of the Company since its formation in
1996 and a Director of the Savings Bank since 1992. Mr. Dowling is a director of
Jefferson Hills Real Estate, Inc. and president of Dowling Properties, Inc. He
is also president of Town Hall Estates, Inc., a real estate development
business. Mr. Dowling also serves as an advisory committee member of Jefferson
Hospital and other healthcare-related organizations.
JAMES M. HEIN was elected a Director of the Company by the Shareholders on
April 26, 2000. On January 19, 2000, Mr. Hein was elected as a Director of the
Savings Bank and appointed Chief Financial Officer of the Company. Mr. Hein is
the Chief Financial Officer of the Savings Bank and has performed as such since
January 1996. Prior to that time, Mr. Hein acted as the Controller of the
Savings Bank. In connection with the formation of the Company and the Conversion
of the Savings Bank, Mr. Hein was appointed the Controller of the Company. On
February 21, 2001, Mr. Hein resigned as a Director of the Company, and James A.
Nania was elected by the remaining Directors of the Company to serve the
unexpired term of Mr. Hein.
MICHAEL R. MACOSKO has been a Director of the Company since its formation
in 1996 and a Director of the Savings Bank since 1992. Mr. Macosko is a
pharmacist with Eckerd Drug, Inc. and has performed as such since 1995 with
Eckerd Drug, Inc. and its predecessor Thrift Drug, Inc.
CHARLES P. MCCULLOUGH has been a Director of the Company since its
formation in 1996 and a Director of the Savings Bank since 1995. Mr. McCullough
is an attorney and a shareholder with Tucker Arensberg, P.C., and has performed
as an attorney at Tucker Arensberg, P.C. since November of 1995.
JOHN MEEGAN was elected a Director of the Savings Bank in 2001 for a
three-year term. He has been employed by Parker/Hunter, Inc since 1993 and
serves as Chief Financial Officer. Mr. Meegan is also a CPA and has over 20
years experience in finance and accounting.
JAMES A. NANIA was elected a Director of the Company, effective March 1,
2001, to serve the remainder of Mr. Hein's term which expires in 2003. Mr. Nania
was elected a Director of the Savings Bank on January 17, 2001 for a three-year
term. He became Senior Vice President and Chief Financial Officer with Hallmark
Health System in Melrose, MA in December 2001. Previously, he was employed by
the South Hills Health System since 1986 and has performed as the Executive Vice
President and Chief Financial Officer of South Hills Health System.
MORRIS PROPP was elected a Director of the Company at the 2001 Annual
Shareholders Meeting for a three-year term. He is a private investor.
MARK R. SCHOEN has been a Director of the Company since its formation in
1996 and a Director of the Savings Bank since 1994. Mr. Schoen was named
Chairman of the Company on November 15, 2000, and CEO of the Company on November
30, 2000 and President of the Company on February 21, 2001. He was elected
Chairman of the Savings Bank on September 20, 2000 and the CEO of the Savings
Bank on October 18, 2000. He commenced employment as the Savings Bank's CEO on
December 29, 2000. Previously, Mr. Schoen was Projects Executive at
e-Profile/Sanchez Corp., a provider of integrated, end-to-end operations and
technology solutions to enable top-tier financial institutions to offer
financial products and services. Mr. Schoen was also a senior manager of
investment products and technology for SEI Investments, a company servicing the
mutual fund
92
industry, in 1999 and 2000. In 1998, Mr. Schoen was senior manager of Strategic
Business Development with Pilgrim Baxter & Associates. He had been employed by
Federated Investors from 1992-1998 as Director of Business Development for
Financial Services and as AVP of Business and Technical Product Administration.
At Mellon Bank from 1991-1992, Mr. Schoen was AVP of Product and Technical
Services. He was also employed by NCR Corporation from 1979-1991. See also
"Director and Executive Transitions."
PATRICIA A. WHITE has been a Director of the Company since its formation in
1996 and a Director of the Savings Bank since 1989. On January 19, 2000, Mrs.
White was elected Executive Vice President and Treasurer of the Company, and
President and Treasurer of the Savings Bank. Prior to that time, she held the
positions with the Savings Bank of Executive Vice President since 1989 and
Corporate Secretary since 1986. Her main duties include oversight of the
marketing, compliance, security and residential and consumer loan origination
areas of the Savings Bank. In connection with the formation of the Company and
the Conversion, Mrs. White was also appointed Corporate Secretary of the
Company. Her appointment as the Corporate Secretary of the Company and the
Savings Bank concluded on January 18, 2000.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTORS' COMPENSATION
There is no separate Board of Directors' fee for the meetings of the Board
of Directors of the Company. Currently, external Directors of the Savings Bank
are paid $800 per meeting and internal Directors of the Savings Bank are paid
$500 per meeting. External Directors of the Company or the Savings Bank also
receive $250 for each committee meeting attended for the Company or the Savings
Bank. In addition, the Savings Bank and the Company each pays its Chairman of
the Board a chairman's fee of $500 per month. The aggregate amount of fees paid
to the Directors of the Company and the Savings Bank for the year ended December
31, 2001 for all board and committee meetings of the Company and the Savings
Bank was $99,600.
The Board of Directors of the Company adopted a Stock Option Plan and a
Management Recognition and Retention Plan for the fiscal years ending December
31, 1997 and thereafter. Under these plans, the non-employee directors are
awarded stock options and stock on a formula basis. See "Benefits -- Stock
Option Plan and Management Recognition and Retention Plan" below.
EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation paid by the
Company and the Savings Bank for services rendered in all capacities during the
year ended December 31, 2001 to the Chief Executive Officer of the Company and
Savings Bank and President of the Company. No other executive officer of the
Company or the Savings Bank received an annual salary plus bonuses during the
fiscal year in an amount exceeding $100,000.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG TERM COMPENSATION
AWARDS(1)
-----------------------
SECURITIES
RESTRICTED UNDERLYING
OTHER ANNUAL STOCK OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR(2) SALARY BONUS COMPENSATION AWARD(S) SARS(#)(3) COMPENSATION
- --------------------------- ------- -------- -------- ------------ ---------- ---------- ------------
Mark R. Schoen.......... 2001 $120,230 $ -- $21,000(4) $-- --(5) $17,500(6)
Chairman of the Board and 2000 $ 0(7) $ -- $-- --(5) $25,282(8)
Chief Executive Officer of
the Company and Savings
Bank and President of the
Company
</Table>
- ---------------
(1) The Company adopted a Stock Option Plan and a Management Recognition and
Retention Plan at the 1997 Annual Meeting.
(2) All compensation was paid by the Savings Bank. In 2001 and 2000, the Company
reimbursed the Savings Bank for services rendered by Bank employees on
behalf of the Company under a reimbursement agreement.
93
(3) No stock appreciation rights ("SARs") were granted. This column is the then
current number of shares of Common Stock which can be purchased upon the
exercise of vested stock options.
(4) Includes $3,000 in travel expenses and $18,000 in tuition reimbursement for
attending an executive masters program at the University of Pennsylvania.
(5) Mr. Schoen has received no stock appreciation rights or options since his
appointment as Chairman of the Board, Chief Executive Officer and President
of the Company and Chairman of the Board and Chief Executive Officer of the
Savings Bank. He does hold options to purchase 1,981 shares of Common Stock
of the Company (1,333 of which are vested) which were awarded to him under
the formula method described below prior to such appointment for service as
a Director. See "Benefits -- Stock Option Plan."
(6) Mr. Schoen received $5,500 from a monthly $500 inside board member fee for
the Savings Bank, $5,500 from a monthly fee as Savings Bank chairman, and
$3,500 from a monthly $500 fee for Company chairman. Mr. Schoen waived
further payment as Company chairman in July of 2001 and waived his future
Bank chairman and director fees in November. Mr. Schoen received $3,000 from
a $250 monthly travel allowance in 2001.
(7) Mr. Schoen's employment commenced on December 29, 2000, but on such date,
the last pay period for the Savings Bank and the Company for fiscal year
2000 had closed. The first pay drawn by Mr. Schoen was received on January
12, 2001.
(8) Mr. Schoen received board meeting fees and committee meeting fees of $7,550
prior to the time he was appointed Chairman of the Board of the Savings Bank
and board meeting fees and committee meeting fees of $7,000 after he was
appointed Chairman of the Board of the Savings Bank. In addition, Mr. Schoen
received aggregate fees as Chairman of the Boards of the Company and of the
Savings Bank for the months of September, October, November and December of
2000 of $3,000. Mr. Schoen received reimbursement for travel and moving
expenses during calendar year 2000 in the amount of $7,732.
OPTION/SAR GRANTS FOR 2001
There were no stock options granted to executive officers in 2001. In
addition, no shares were acquired as the result of exercising vested options by
either executive officers or directors in 2001.
AGGREGATED OPTION/SAR EXERCISED IN 2001/DECEMBER 31, 2001 OPTION/SAR VALUES
<Table>
<Caption>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FY-END(#) FY-END
SHARES --------------- ---------------
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED UNEXERCISABLE UNEXERCISABLE
- ---- ----------- -------- --------------- ---------------
Mark R. Schoen(1).......................... -- -- 1,333/648 $11/$46
Chairman of the Board and Chief Executive
Officer of the Company and the Savings Bank
and President of the Company
</Table>
- ---------------
(1) Mr. Schoen holds options to purchase 1,981 shares of Common Stock of the
Company (1,333 of which are vested) which were awarded to him under the
formula method described below prior to such appointment for service as a
Director prior to his executive appointment. See "Benefits -- Stock Option
Plan."
BENEFITS -- STOCK OPTION PLAN AND MANAGEMENT RECOGNITION AND RETENTION PLAN
STOCK OPTION PLAN
The shareholders of the Company, at the recommendation of the Board of
Directors, adopted a 1997 Stock Option Plan for the Company and its subsidiaries
at the Annual Meeting of the Company held on April 23, 1997 (the "Stock Option
Plan"). The Stock Option Plan provides for the grant of incentive stock options
("Incentive Stock Options") and non-incentive or compensatory stock options
("Non-Incentive Stock Options"); the Incentive Stock Options and the
Non-Incentive Stock Options are referred to herein collectively as "Stock Option
94
Awards" or "Options"). The Company may award Incentive Stock Options and/or
Non-Incentive Stock Options to acquire shares of Common Stock from time to time
to officers and key employees (excluding non-employee directors) of, and other
persons providing services to, the Company, the Savings Bank and certain
affiliates participating in the Stock Option Plan (collectively the
"Employees"). Incentive Stock Options may only be granted to Employees.
Non-employee directors of the Company or the Savings Bank participating in the
Stock Option Plan are not eligible to receive discretionary Incentive Stock
Options, but may only receive Non-Incentive Stock Options awarded pursuant to a
formula system. No recipient of a Stock Option Award shall have any rights of a
stockholder of the Company, including, without limitation, voting and dividend
rights, until shares of Common Stock are issued to him and he becomes the record
owner of such shares.
The Stock Option Plan is administered and interpreted by the Board of
Directors of the Company. The Board of Directors of the Company has the option
to appoint an advisory committee of two or more non-employee directors of the
Company (the "Committee") to make recommendations concerning the level of the
discretionary Stock Option Awards and other administrative issues that arise
during the operation of the Stock Option Plan. Under the Stock Option Plan, the
Board of Directors of the Company determines which Employees will be granted
options, whether such options will be Incentive Stock Options or Non-Incentive
Stock Options, the number of shares subject to each Option, the exercise price
(which must be at least fair market value at the time of the grant of the
Option), and whether such Options may be exercised by delivering other shares of
Common Stock and when such Options become exercisable. Each Non-Incentive Stock
Option and Incentive Stock Option will be evidenced by a stock option agreement.
Incentive Stock Options are further restricted by the terms of the Internal
Revenue Code.
Under the Stock Option Plan, non-employee directors of the Company and the
Savings Bank participating in the Stock Option Plan will receive Non-Incentive
Stock Options on a formula basis. Subject to availability of shares of Common
Stock allocated to formula awards, (i) each new non-employee director of the
Company or the Savings Bank participating in the Stock Option Plan, will receive
Non-Incentive Stock Options for 1,000 shares of Common Stock upon election to
the Board of Directors of the Company or the Savings Bank, and (ii) following
the annual meeting of the stockholders, each non-employee director of the
Company or the Savings Bank participating in the Stock Option Plan will receive
Non-Incentive Stock Options for 100 shares of Common Stock in consideration for
serving as a director, the chairperson of the Board of Directors of the Company
shall be awarded additional Non-Incentive Stock Options for 100 shares of Common
Stock. Any person serving in the capacity of a non-employee director for more
than one corporation participating in the Stock Option Plan (i.e. a person
serving as a non-employee director of the Company and the Savings Bank) will be
limited to receiving formula awards under the Stock Option Plan with respect to
the one directorship that provides the formula award offering the greatest
number of shares of Common Stock, and will be prohibited from receiving formula
awards with respect to any other directorship. All formula awards are subject to
availability.
The per share exercise price of Options will be at least equal to the fair
market value of a share of Common Stock on the date the option is granted. All
Options become vested and exercisable, subject to certain exceptions, at a rate
and subject to such limitations as may be determined by the Board at the time of
the grant, which vesting rate will be no greater than 20% per year beginning one
year from the date of the grant of the Stock Option Award. Under certain
circumstances, the Stock Option Awards may be revoked for misconduct.
A total of 130,239 (adjusted for stock dividends) shares of Common Stock
was reserved for issuance pursuant to the Stock Option Plan, which is 10% of the
Common Stock issued in connection with the Conversion. A total of 18,233
(adjusted for stock dividends) shares of Common Stock were reserved for purposes
of making Non-Incentive Stock Option formula awards to non-employee directors
under the Stock Option Plan, and all formula awards are subject to the
availability of shares of Common Stock from such reserves, including
forfeitures. As of December 31, 2001, the Company has granted unexercised and
outstanding Stock Option Awards to directors, officers and employees of the
Company and the Savings Bank to purchase an aggregate of 132,338 (adjusted for
stock dividends) shares of Common Stock at exercise prices ranging from $7.81
per share to $18.39 per share. This figure has been reduced as result of
forfeitures. Shares of Common Stock needed to satisfy exercises of options may
be acquired through open market purchases, or may be satisfied through the use
of authorized but unissued Common Stock. The current policy of the Board of
Trustees is to use treasury stock or to acquire Common Stock in the open market
to satisfy any exercised Options.
95
Under the terms of the merger agreement and prior to the merger effective
date, Prestige shall take all actions necessary to terminate the Stock Option
Plan. Each person who becomes entitled to a cash payment in cancellation of an
option award shall be required to enter into an agreement and release in
complete and full satisfaction of all liabilities and obligations of Prestige
Bancorp or Prestige Bank under such award and consideration of such cash
payment.
MANAGEMENT RECOGNITION AND RETENTION PLAN AND TRUST
The shareholders of the Company, at the recommendation of the Board of
Directors, adopted a Management Recognition and Retention Plan and Trust for the
Company and its subsidiaries (the "Recognition Plan") at the Annual Meeting of
the Company held on April 23, 1997. Officers and key employees of the Company
and the Savings Bank, as well as non-employee directors of the Company and the
Savings Bank, are eligible to receive benefits under the Recognition Plan.(1)
The Recognition Plan is administered and interpreted by the Board of
Directors of the Company. The Board of Directors of the Company has the option
to appoint an advisory committee of two or more non-employee directors of the
Company (the "Committee") to make recommendations concerning the award of Common
Stock under the Recognition Plan and other administrative issues that arise. The
Board of Directors of the Company has chosen Mark R. Schoen and James M. Hein as
Trustees for the Recognition Plan.
Awards under the Recognition Plan to officers and key employees are at the
complete discretion of the Board of Directors of the Company. Non-employee
directors of the Company and the Savings Bank have received, and will receive,
awards of Common Stock on a formula basis. Under the formula applicable to
non-employee directors on the date of the adoption of the Recognition Plan, each
non-employee director of the Company and each non-employee director of the
Savings Bank serving as a Director of the Company or the Savings Bank
immediately after the adoption of the Recognition Plan was granted in 1997 an
award of 1,000 shares of Common Stock plus 100 additional shares of Common Stock
for each full year of service as a non-employee director of the Savings Bank.
Subject to the availability of shares of Common Stock allocated to formula
awards, (i) each new non-employee director of the Company or the Savings Bank
participating in the Recognition Plan will receive an award of 1,000 shares of
Common Stock upon election to the Board of Directors of the Company or the
Savings Bank, and (ii) following the annual meeting of the stockholders, each
non-employee director of the Company or the Savings Bank participating in the
Recognition Plan will receive an award of Common Stock of 100 shares in
consideration for serving as a director, and the chairperson of the Board of
Directors of the Company shall be awarded an additional 100 shares of Common
Stock. Any person serving in the capacity of a non-employee director for more
than one corporation participating in the Recognition Plan (i.e. a person
serving as a non-employee director of the Company and the Savings Bank) will be
limited to receiving formula awards under the Recognition Plan with respect the
one directorship that provides the formula award offering the greatest number of
shares, and will be prohibited from receiving awards with respect to any other
directorship. All formula awards are subject to availability.
Shares of Common Stock granted pursuant to the Recognition Plan will be in
the form of restricted stock to be earned and distributed, subject to certain
exceptions, over a five-year period at a rate of 20% per year, beginning one
year from the date of the grant of the award. Under certain circumstances, the
awards may be revoked for misconduct.
Until shares awarded to a recipient under the Recognition Plan have been
earned and distributed, they may not be sold, pledged or otherwise disposed of
and are required to be held in the Recognition Plan Trust. Under the terms of
the Recognition Plan, all shares which have been awarded, but not yet been
earned and distributed, are required to be voted by the Trustees in accordance
with the directions of the recipients, and if no direction is provided by the
recipient, the shares will not be voted by the Trustees. The Trustees will vote
unawarded shares in the same proportion as they receive instructions from
recipients with respect to the awarded shares which have not yet been earned and
distributed. In the event that a tender offer is made, the Trustees shall tender
shares held by the Trustees which have not been earned and distributed in the
same proportion in which a recipient tenders
- ---------------
1 Under the terms of the Recognition Plan, affiliates of the Company may
participate in the Recognition Plan. At this time there are no eligible
affiliates of the Company except for the Savings Bank.
96
shares which have been earned and distributed. Any cash dividends or stock
dividends, declared in respect of each share held by the Recognition Plan Trust,
to the extent such dividends are attributable to vested and nonforfeitable
shares will be paid by the Recognition Plan Trust as soon as practicable after
the Recognition Plan Trust's receipt thereof to the recipient on whose behalf
such share is then held by the Recognition Plan Trust. To the extent such
dividends are attributable to shares that are not vested and nonforfeitable,
such dividends will be retained in the Recognition Plan's Trust and paid, as
soon as practical after the shares become vested and non-forfeitable, to the
recipient on whose behalf the shares are held in the Recognition Plan's Trust;
provided that if such shares so held are forfeited, such retained dividends will
be allocated to the Plan Share Reserve (as defined in the Recognition Plan).
A total of 52,095 shares of Common Stock (adjusted for stock dividends) has
been reserved for issuance pursuant to the Recognition Plan, which is 4% of the
Common Stock issued in connection with the Conversion. A total of 13,022
(adjusted for stock dividends) shares of Common Stock was reserved for purposes
of making formula awards under the Recognition Plan, and all formula awards are
subject to the availability of shares of Common Stock from such reserves,
including forfeitures. This figure has been reduced as a result of forfeitures.
Shares in the Recognition Plan were acquired through open market purchases. The
Company has available sufficient shares of Common Stock to satisfy the awards
outstanding as they vest. The Company granted outstanding shares of Common Stock
to directors, officers and employees of the Company and the Savings Bank under
the Recognition Plan in an aggregate of 52,922 (adjusted for stock dividends)
shares of Common Stock. This figure has been reduced as result of forfeitures.
Voting rights with respect to the held shares of the Recognition Plan Trust
have been allocated among the beneficiaries of such Trust pro rata in accordance
with the ratio of the awarded shares of a beneficiary to the total number of the
awarded shares. The merger agreement provides that the Recognition Plans be
terminated upon the merger.
EMPLOYMENT AGREEMENT/SEVERANCE PAYMENTS
Mr. Schoen has separate employment agreements with the Company and with the
Bank which are each to end December 28, 2002. The Terms of the agreements
collectively provide for the compensation set forth in the Summary Compensation
Table and otherwise described above. Mr. Schoen's employment agreements are
terminable with or without cause by the Employers. Mr. Schoen shall have no
right to compensation or other benefits pursuant to the employment agreements
for any period after voluntary termination or termination by the Employers for
cause, disability, retirement or death; provided, however, that for the
remaining term of the employment agreements, Mr. Schoen may be entitled to
supplemental disability benefits upon termination of employment due to
disability. If Mr. Schoen's employment agreements are terminated by the
Employers without cause, or for other that the disability, retirement or death
of Mr. Schoen, Mr. Schoen, or in the event of his death, his beneficiary or
estate, will be entitled to the continuation of the base salary and certain
fringe benefits that Mr. Schoen was receiving at the time of such termination
for the remaining term of the agreements. In the event Mr. Schoen's employment
is terminated by one of the Employers but he remains employed by the other
Employer, Mr. Schoen shall have no claim against the former Employer. Mr.
Schoen's employment agreements have been amended to provide that in the event of
a change in control of the company, he shall receive an amount not to exceed
twenty-four months base salary (i.e. no more than $240,000) as severance. This
same amount of severance is reflected in the merger agreement between the
Company and Northwest Bancorp described in "Business of the Company", above.
Each of Mr. Schoen's employment agreements provides that in the event that
any of the payments to be made upon termination of employment are deemed to
constitute "excess parachute payments" within the meaning of Section 280G of the
Internal Revenue Code, they will be reduced to the extent necessary to avoid
being constituted as such. Management has been advised that they are not "excess
parachute payments".
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation of the executive officers of the Company and the Savings
Bank is set annually by the Compensation Committee of the Company. Salaries of
the executive officers of the Savings Bank cover the services provided for both
the Savings Bank and the Company. There is no separate salary for service as an
officer of the Company. However, during 2001 the OTS required that the Company
and the Savings Bank,
97
implement a reimbursement program whereby the Savings Bank is reimbursed by the
Company for services rendered to the Company by Savings Bank employees. The
Compensation Committee of the Company consists entirely of external Directors.
For calendar year 2001, the Compensation Committee met twice. This Committee
consisted of Michael R. Macosko (chairman), Martin W. Dowling and Charles P.
McCullough. Each of these gentlemen participated in establishing executive
compensation for the officers of the Company and the Savings Bank. No raises in
executive compensation were recommended for fiscal year 2002. The Boards of
Directors of the Company and the Savings Bank concurred with this
recommendation.
REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
Salaried Executive Officers. The salaried executive officers of the
Company and the Savings Bank consist of Mr. Mark. R. Schoen (Chief Executive
Officer and President of the Company and Chief Executive Officer of the Savings
Bank), Mrs. Patricia A. White (Executive Vice President and Treasurer of the
Company and President and Treasurer of the Savings Bank) and Mr. James M. Hein
(Chief Financial Officer of the Company and the Savings Bank). The salaries of
Messrs. Schoen and Hein and Mrs. White are set at the Savings Bank level. No
separate salary is paid for service as an officer of the Company. However, the
Company and the Savings Bank have entered into a reimbursement agreement whereby
the Company reimburses the Savings Bank for such work performed by such officers
on matters of the Company.
Mr. Schoen, Chairman and Chief Executive Officer of both the Company and
the Savings Bank and President of the Company, became a full-time employee on
December 29, 2000 and received an annual base salary of $120,000 beginning
January 1, 2001. Mr. Schoen also receives travel expenses of $250 per month and
reimbursement for educational expenses, including tuition, for the executive
masters program he attends at the University of Pennsylvania. For calendar year
2001, such accrued educational expenses were $18,000. Mr. Schoen is paid a
monthly Chairman fee of $500 by both the Company and the Savings Bank. As an
internal Savings Bank Director, Mr. Schoen receives $500 per Savings Bank Board
Meeting, but he does not receive any committee fees.
Report of Compensation Committee. The Compensation Committee meets
annually to review compensation paid to senior management. The Compensation
Committee reviews various published surveys of compensation paid to employees
performing similar duties for depository institutions and their holding
companies, with a particular focus on the level of compensation paid by
comparable institutions in and around the Savings Bank market area, including
institutions with total assets of $200 million. Although the Compensation
Committee does not specifically set compensation levels for executive officers
based on whether particular financial goals have been achieved by the Savings
Bank, the Compensation Committee does consider the overall profitability of the
Savings Bank when making these decisions. With respect to each particular
employee, his or her particular contributions to the Savings Bank over the past
year are also evaluated. The Compensation Committee formulates a recommendation
on compensation and presents such recommendation to the Board of Directors of
the Savings Bank. The executive officers of the Company and the Savings Bank
abstain from board discussions with respect to executive compensation. No raises
in executive compensation were recommended for fiscal year 2002. The Board of
Directors of the Company and the Savings Bank concurred with this
recommendation.
Michael R. Macosko, Chairman
Martin W. Dowling
Charles P. McCullough
98
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Stockholders of record as of the close of business on March 1, 2002, are
entitled to one vote for each share of Common Stock of the Company then held. As
of March 1, 2002, the Company had 1,059,371 shares of its common stock ("Common
Stock") outstanding.
Persons and groups owning 5% or more of the Company's Common Stock are
required to file certain reports with the Securities and Exchange Commission
("SEC") regarding such ownership pursuant to the Securities Act of 1934, as
amended (the "1934 Act"). As of April 16, 2002, management knows of no person
who beneficially owns 5% or more of the Common Stock of the Company other than
those individuals and the entity shown on the table immediately below. The
following table sets forth as of March 1, 2002 certain information as to the
Common Stock beneficially owned by the Prestige Bancorp Employee Stock Ownership
Plan (the "ESOP") and each other 5% or greater stockholder of the Company and
all executive officers and directors of the Company and Prestige Bank as a
group.
<Table>
<Caption>
5% OR BETTER BENEFICIAL OWNERSHIP
- --------------------------------------------------------------------------------------------------------
AMOUNT AND NATURE OF PERCENT OF SHARES OF
BENEFICIAL OWNERSHIP OF COMMON STOCK
COMMON STOCK AS OF OUTSTANDING AS OF
NAME AND ADDRESS OF BENEFICIAL OWNER MARCH 1, 2002 MARCH 1, 2002
------------------------------------ ----------------------- --------------------
Morris Propp............................................ 100,985(1) 9.53%
366 Eagle Drive
Jupiter, FL 33477
Prestige Bancorp Employee Stock Ownership Plan.......... 100,613 9.50%
710 Old Clairton Road
Pleasant Hills, PA 15236
Jeffrey L. Gendell...................................... 82,036(2) 7.74%
Tontine Financial Partners, L.P., et al
200 Park Avenue, Suite 3900
New York, NY 10166
John A. Stiver.......................................... 76,364(3) 7.20%
710 Old Clairton Road
Pleasant Hills, PA 15236
</Table>
- ---------------
(1) Based on a Schedule 13D filed on May 31, 2000 on behalf of Morris Propp and
Melvin Heller.
(2) Based on a Schedule 13D filed on January 2, 2001 on behalf of Tontine
Financial Partners, L.P., Tontine Management, L.L.C. and Jeffrey L. Gendell.
(3) This figure includes 846 shares of Common Stock of the Company covered by
vested options to purchase Common Stock of the Company held by Mr. Stiver.
This figure is based on information on the Form 8-K filed by the Company on
May 17, 2001.
Information on the Ownership of Common Stock by Directors and Executive
Officers is set forth above. See "Item 10. Directors and Executive Officers."
Information on changes in control is set forth under "Merger Agreement" in Item
1. Business.
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Common Stock of the Company is registered pursuant to Section 12(g) of
the 1934 Act. The officers and directors of the Company and beneficial owners of
greater than 10% of the Common Stock ("10% beneficial owners") are required to
file reports on Forms 3, 4 and 5 with the SEC disclosing changes in beneficial
ownership of the Common Stock. Based on the Company's review of such ownership
reports, no officer, director or 10% beneficial owner of the Company failed to
file such ownership reports on a timely basis for the fiscal year ended December
31, 2001.
99
ITEM 13. CERTAIN TRANSACTIONS
The Board of Directors approved a mortgage on the personal residence of
Company and Savings Bank CEO Mr. Schoen for $191,000 at a rate of 5.875% for a
term of 15 years which was sold on the secondary market. The Board of Directors
believes that the terms of this loan are comparable to terms available to third
party borrowers of the Savings Bank.
The Board of Directors approved a mortgage on the personal residence of
Company and Savings Bank Director Mr. McCullough for $85,000 at a rate of 5.875%
for a term of 15 years which was sold on the secondary market. The Board of
Directors believes that the terms of this loan are comparable to terms available
to third party borrowers of the Savings Bank.
The Board of Directors approved a line of credit of $178,000 for Company
and Savings Bank Director Mr. Macosko secured by a first lien mortgage on the
personal residence of Mr. Macosko. The outstanding balance under this line of
credit bears interest at a variable rate based on the prime rate. All
outstandings under this line of credit shall be due and payable, if not
previously paid, on August 1, 2015. The outstanding principal balance of this
line of credit on December 31, 2001 was $7,502. The Board of Directors believes
that the terms of this loan are comparable to terms available to third party
borrowers of the Savings Bank.
Charles P. McCullough, a Director of the Company and Savings Bank, is an
attorney and a shareholder with the law firm of Tucker Arensberg, P.C., which
has been retained by the Savings Bank and the Company with respect to certain
legal matters on an ongoing basis. The Company and the Savings Bank expect this
relationship to continue.
The Savings Bank retained media services from a company owned by the
brother of one of the Savings Bank's officers. The total costs for such services
in 2001, 2000 and 1999 were $45,366, $50,347 and $42,740 respectively.
George Brikis became a Director of the Savings Bank on January 17, 2001.
Mr. Brikis is a financial consultant and the owner of Brikis Financial Services
Co., which has been retained by the Savings Bank with respect to certain
financial matters on an ongoing basis. The Company and the Savings Bank expect
this relationship to continue. Mr. Brikis commenced his consulting work for the
Savings Bank on October 16, 2000 and received payments of $16,265 for work in
2000. Mr. Brikis received consulting fees of $113,707 for 2001. He will receive
fees of negotiated hourly rates per project for interim commercial loan
consulting in 2002.
John Meegan became a Director of the Savings Bank on January 17, 2001. Mr.
Meegan has been a senior vice president at Parker/Hunter, Inc. Prestige and
Prestige Bank have accounts at Parker Hunter. Parker Hunter also makes a market
in the stock of Prestige.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following documents are filed as part of this report and are
incorporated herein by reference to Item 8 of this Annual Report on Form 10-K:
Independent Auditor's Report.
Consolidated Statements of Financial Condition as of December 31, 2001 and
2000.
Consolidated Statements of Operations for the Years Ended December 31,
2001, 2000 and 1999.
Consolidated Statements of Changes in Stockholder's Equity for the Years
Ended December 31, 2001, 2000 and 1999.
Consolidated Statements of Cash Flows for the Years Ended December 31,
2001, 2000 and 1999.
Notes to Consolidated Financial Statements.
100
(a)(2) FINANCIAL STATEMENT SCHEDULES
All financial schedules have been omitted as the required information is
inapplicable or has been included in the Notes to Consolidated Financial
Statements.
(a)(3) EXHIBITS REQUIRED BY ITEM 601
<Table>
<Caption>
PAGE # WHERE
ATTACHED EXHIBITS
REFERENCE TO ARE LOCATED IN THIS
PRIOR FILING OR FORM 10-K REPORT
REGULATION S-K EXHIBIT NUMBER OR THE INTEGRATED
EXHIBIT NUMBER DOCUMENT ATTACHED HERETO ANNUAL REPORT
- -------------- --------------------------------------- ------------------ -------------------
3.1 Certificate of Incorporation of * Not Applicable
Prestige Bancorp, Inc.
3.2 Bylaws of Prestige Bancorp, Inc. * Not Applicable
4 Rights of Security Holders **** Not Applicable
10.1 1997 Recognition and Retention Plan and *** Not Applicable
Trust for Officers, Directors and
Employees**
10.2 1997 Stock Option Plan for Officers, *** Not Applicable
Directors and Employees**
10.3 Employment Agreement among the Company, * Not Applicable
the Savings Bank and Patricia A. White
and James M. Hein, dated June 27,
1996**
10.4 Loan Documents with FHLB of Pittsburgh 10.4 (filed with SEC;
copy available from
Company on request)
10.5 Employment Agreement among the Company, 10.5 (filed with SEC,
the Savings Bank and John A. Stiver copy available from
dated as of December 30, 1998** Company on request)
10.6 Employment Agreement among the Company 10.6 (filed with SEC,
and Mark R. Schoen dated as of March copy available from
21, 2001 Company on request)
10.7 Employment Agreement among the Savings 10.7 (filed with SEC,
Bank and Mark R. Schoen dated as of copy available from
March 21, 2001 Company on request)
10.8 Agreement and Plan of Merger by and 10.8 (filed with SEC,
among Northwest Bancorp, MHC, Northwest copy available on
Bancorp, Inc., Northwest Merger request)
Subsidiary, Inc., Northwest Savings
Bank, Prestige Bancorp, Inc. and
Prestige Bank, A Federal Savings Bank
11 Statement re: Computation of Per Share Page 69 of this
Earnings Report
21 Subsidiaries of Registrant * Not Applicable
99 Auditor Representation Filed with this
report
</Table>
- ---------------
* Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-83666) filed by the Company with the SEC on May 9, 1996,
as amended.
** Management plan or compensatory plan or arrangement.
*** Incorporated by reference from the Company's definitive proxy statement for
its 1997 Annual Meeting filed by the Company with the SEC on April 4, 1997.
**** Articles 6 and 14 of the Articles of Incorporation of Prestige Bancorp,
Inc. Such Certificate of Incorporation can be found as an exhibit to the
Company's Registration Statement on Form S-1 (File
101
No. 33-83666) filed by the Company with the SEC on May 9, 1996, as amended.
A summary discussion on certain limitations on the rights of Stockholders
can be obtained at pages 16 and 17 and pages 98 through 108 of the final
prospectus filed by the Company with the SEC in connection with such Form
S-1.
(b) REPORTS ON FORM 8-K
No reports or Form 8-K were filed during the quarter ended December 31,
2001.
The Company's Annual Report to Shareholders and its Proxy Statement for the
Annual Meeting of Shareholders will be mailed after the filing of this Annual
Report. Copies of such items will be sent to the Commission when they are mailed
to Shareholders.
102
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be executed
on its behalf by the undersigned, thereunto duly authorized.
Date: April 3, 2002 PRESTIGE BANCORP, INC.
By: /s/ MARK R. SCHOEN
------------------------------------
Mark R. Schoen
Chairman of the Board,
Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<Table>
/s/ MARK R. SCHOEN /s/ MARTIN W. DOWLING
- -------------------------------------------- --------------------------------------------
Mark R. Schoen, Martin W. Dowling
Chairman of the Board of Directors, Director
Chief Executive Officer and President Date: April 3, 2002
(Principal Executive Officer
Date: April 3, 2002
/s/ PATRICIA A. WHITE /s/ MICHAEL R. MACOSKO
- -------------------------------------------- --------------------------------------------
Patricia A. White Michael R. Macosko
Executive Vice-President, Treasurer and Director
Director Date: April 3, 2002
Date: April 3, 2002
/s/ JAMES M. HEIN /s/ JAMES A. NANIA
- -------------------------------------------- --------------------------------------------
James M. Hein James A. Nania
Chief Financial Officer Director
(Principal Financial and Accounting Officer) Date: April 3, 2002
Date: April 3, 2002
/s/ CHARLES P. MCCULLOUGH /s/ MORRIS PROPP
- -------------------------------------------- --------------------------------------------
Charles P. McCullough Morris Propp
Director Director
Date: April 3, 2002 Date: April 3, 2002
</Table>
103