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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number 000-20715
PRESTIGE BANCORP, INC.
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1785128
- --------------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
710 Old Clairton Road
Pleasant Hills, Pennsylvania 15236
- -------------------------------------- -------------------------------
(Address of principal executive office) (Zip Code)
(412) 655-1190
---------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of August 22, 2002 there
were 1,059,371 shares of the registrant's common stock outstanding, par value
$1.00 per share.
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PRESTIGE BANCORP, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets of Prestige Bancorp, Inc. as of
June 30, 2002 and December 31, 2001 (unaudited) 1
Consolidated Statements of Income of Prestige Bancorp, Inc. for the three
months ended June 30, 2002 and 2001 (unaudited) 2
Consolidated Statements of Income of Prestige Bancorp, Inc. for the six
months ended June 30, 2002 and 2001 (unaudited) 3
Consolidated Statements of Stockholders' Equity of Prestige Bancorp, Inc.
for the six months ended June 30, 2002 and 2001 (unaudited) 4
Consolidated Statements of Cash Flows of Prestige Bancorp, Inc. for the six
months ended June 30, 2002 and 2001 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 15-21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security-Holders 22
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
- ----------
PRESTIGE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2002 2001
------------- -------------
ASSETS
Cash and due from banks $ 803,158 $ 1,242,333
Interest-bearing deposits with banks 17,555,240 14,479,347
Investment securities:
Available for sale 23,975,916 25,045,805
Held to maturity (market value $5,358,491 and
$6,240,703 respectively) 5,397,613 6,173,341
Net loans (net of allowance for loan losses of $1,184,097 and
$1,166,606 respectively) 132,299,443 137,500,075
Federal Home Loan Bank stock, at cost 2,640,000 2,790,000
Premises and equipment, net 2,072,833 2,149,562
Accrued interest receivable 876,680 942,307
Other assets 4,526,295 4,462,781
------------- -------------
Total assets $ 190,147,178 $ 194,785,551
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Non-interest-bearing deposits $ 6,858,874 $ 6,640,440
Interest-bearing deposits 115,357,343 117,810,263
------------- -------------
Total deposits 122,216,217 124,450,703
Federal Home Loan Bank advances 52,800,000 55,800,000
Advance payments by borrowers for taxes and insurance 1,117,957 734,813
Accrued interest payable 319,023 333,043
Other liabilities 1,986,603 1,709,744
------------- -------------
Total liabilities 178,439,800 183,028,303
------------- -------------
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 June 30, 2002 and December 31, 2001,
respectively 1,301,511 1,301,511
Treasury stock at cost: 242,140 shares at June 30, 2002
and December 31, 2001, respectively (2,699,348) (2,699,348)
Additional paid-in-capital 12,795,970 12,780,907
Unearned ESOP shares: 74,718 and 77,664 shares at June 30, 2002
and December 31, 2001, respectively (552,490) (574,280)
Retained earnings - substantially restricted 866,665 1,085,469
Accumulated other comprehensive loss (4,930) (137,011)
------------- -------------
Total stockholders' equity 11,707,378 11,757,248
------------- -------------
Total liabilities and stockholders' equity $ 190,147,178 $ 194,785,551
============= =============
The accompanying unaudited notes are an integral part of these consolidated
financial statements.
1
PRESTIGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
June 30,
--------------------------
2002 2001
----------- -----------
Interest income:
Interest and fees on loans $ 2,315,642 $ 2,788,417
Interest on mortgage-backed securities 213,875 139,711
Interest and dividends on other investment securities 105,512 319,047
Interest on deposits in other financial institutions 54,799 116,292
----------- -----------
Total interest income 2,689,828 3,363,467
----------- -----------
Interest expense:
Interest on deposits 906,486 1,279,583
Advances from Federal Home Loan Bank 814,271 897,903
----------- -----------
Total interest expense 1,720,757 2,177,486
----------- -----------
Net interest income 969,071 1,185,981
Provision for loan losses 30,000 90,000
----------- -----------
Net interest income after provision for loan losses 939,071 1,095,981
----------- -----------
Other income:
Fees and service charges 182,957 209,077
Gain on sale of investments 30,668 --
Other income, net 3,883 3,833
----------- -----------
Total other income 217,508 212,910
----------- -----------
Other expenses:
Salaries and employee benefits 554,131 617,347
Gain on curtailment of pension plan -- (478,804)
Premises and occupancy costs 124,299 134,326
Federal deposit insurance premiums 14,666 14,798
Data processing costs 92,617 72,700
Advertising costs 15,067 28,660
Transaction processing costs 67,428 89,168
ATM transaction fees 42,400 41,783
Legal and professional expenses 248,794 168,640
Other expenses 144,527 131,688
----------- -----------
Total other expenses 1,303,929 820,306
----------- -----------
(Loss) income before income tax (benefit) expense (147,350) 488,585
Income tax (benefit) expense (48,424) 189,644
----------- -----------
Net (loss) income $ (98,926) $ 298,941
=========== ===========
Basic (loss) earnings per share:
Net (loss) income $ (0.10) $ 0.31
Weighted average number of common shares outstanding 983,687 977,958
Diluted (loss) earnings per share:
Net (loss) income $ (0.10) $ 0.31
Weighted average number of common shares outstanding 989,680 977,968
The accompanying unaudited notes are an integral part of these consolidated
financial statements.
2
PRESTIGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six Months Ended
June 30,
--------------------------
2002 2001
----------- -----------
Interest income:
Interest and fees on loans $ 4,678,022 $ 5,704,219
Interest on mortgage-backed securities 439,448 287,800
Interest and dividends on other investment securities 221,874 706,774
Interest on deposits in other financial institutions 105,041 187,506
----------- -----------
Total interest income 5,444,385 6,886,299
----------- -----------
Interest expense:
Interest on deposits 1,857,600 2,587,670
Advances from Federal Home Loan Bank 1,661,383 1,852,934
----------- -----------
Total interest expense 3,518,983 4,440,604
----------- -----------
Net interest income 1,925,402 2,445,695
Provision for loan losses 60,000 180,000
----------- -----------
Net interest income after provision for loan losses 1,865,402 2,265,695
----------- -----------
Other income:
Fees and service charges 385,470 414,022
Gain on sale of investments 32,183 30,535
Loss on disposal of assets (1,245) --
Other income, net 7,833 7,639
----------- -----------
Total other income 424,241 452,196
----------- -----------
Other expenses:
Salaries and employee benefits 1,111,510 1,229,210
Gain on curtailment of pension plan -- (478,804)
Premises and occupancy costs 261,209 275,051
Federal deposit insurance premiums 29,958 29,944
Data processing costs 166,117 142,971
Advertising costs 39,871 63,918
Transaction processing costs 136,402 175,075
ATM transaction fees 83,415 81,148
Legal and professional expenses 506,560 369,042
Other expenses 283,065 285,647
----------- -----------
Total other expenses 2,618,107 2,173,202
----------- -----------
(Loss) income before income tax (benefit) expense (328,464) 544,689
Income tax (benefit) expense (109,660) 212,598
----------- -----------
Net (loss) income $ (218,804) $ 332,091
=========== ===========
Basic (loss) earnings per share:
Net (loss) income $ (0.22) $ 0.34
Weighted average number of common shares outstanding 982,955 977,274
Diluted (loss) earnings per share:
Net (loss) income $ (0.22) $ 0.34
Weighted average number of common shares outstanding 986,138 977,279
The accompanying unaudited notes are an integral part of these consolidated
financial statements.
3
PRESTIGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Unaudited)
Common
Stock Additional
Comprehensive $1.00 par Treasury Paid-in Unearned
(Loss) Income value Stock Capital ESOP Shares
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 2001 $ 1,301,511 $ (2,699,348) $ 12,780,907 $ (574,280)
Allocation of 2,946 ESOP shares -- -- 15,063 21,790
Net loss $ (218,804) -- -- -- --
Net unrealized gains on available
for sale securities, net of tax
of $100,927 151,391 -- -- -- --
Reclassification adjustment for
gains realized in net loss net
of tax of $12,873 (19,310) -- -- -- --
------------
Comprehensive loss $ (86,723)
============ ------------ ------------ ------------ ------------
BALANCE, June 30, 2002 $ 1,301,511 $ (2,699,348) $ 12,795,970 $ (552,490)
============ ============ ============ ============
BALANCE, December 31, 2000 $ 1,162,313 $ (2,699,348) $ 11,588,778 $ (615,670)
Allocation of 2,750 ESOP shares -- -- 3,543 20,340
Net income $ 332,091 -- -- -- --
Net unrealized gains on available
for sale securities, net of tax
of $79,767 119,651 -- -- -- --
Reclassification adjustment for
gains realized in net income net
of tax of $12,495 18,040 -- -- -- --
Stock dividend declared:
Common stock (12% per share) 139,198 -- 1,183,183 --
Cash in lieu of stock -- -- -- --
Comprehensive income $ 469,782
============ ------------ ------------ ------------ ------------
BALANCE, June 30, 2001 $ 1,301,511 $ (2,699,348) $ 12,775,504 $ (595,330)
============ ============ ============ ============
Accumulated
Other
Retained Comprehensive
Earnings (Loss) Income Total
------------ ------------ ------------
BALANCE, December 31, 2001 $ 1,085,469 $ (137,011) $ 11,757,248
Allocation of 2,946 ESOP shares -- -- 36,853
Net loss (218,804) -- (218,804)
Net unrealized gains on available
for sale securities, net of tax
of $100,927 -- 151,391 151,391
Reclassification adjustment for
gains realized in net loss net
of tax of $12,873 -- (19,310) (19,310)
Comprehensive loss
------------ ------------ ------------
BALANCE, June 30, 2002 $ 866,665 $ (4,930) $ 11,707,378
============ ============ ============
BALANCE, December 31, 2000 $ 2,377,690 $ (263,831) $ 11,549,932
Allocation of 2,750 ESOP shares -- -- 23,883
Net income 332,091 -- 332,091
Net unrealized gains on available
for sale securities, net of tax -- 119,651 119,651
of $79,767
Reclassification adjustment for
gains realized in net income net
of tax of $12,495 -- 18,040 18,040
Stock dividend declared:
Common stock (12% per share) (1,322,381) -- --
Cash in lieu of stock (2,656) -- (2,656)
Comprehensive income
------------ ------------ ------------
BALANCE, June 30, 2001 $ 1,384,744 $ (126,140) $ 12,040,941
============ ============ ============
The accompanying unaudited notes are an integral part of these consolidated
financial statements.
4
PRESTIGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
--------------------------------
2002 2001
------------ ------------
Operating activities:
Net (loss) income $ (218,804) $ 332,091
------------ ------------
Adjustments to reconcile net (loss) income to net cash
provided by operating activities
Depreciation of premises and equipment 112,638 136,211
Amortization of premiums and discounts, net 4,604 2,540
Non cash compensation expense related to MRP Plan 38,583 51,975
Non cash compensation expense related to ESOP benefit 40,743 29,223
Gain on sale of equity securities (32,183) (28,967)
Gain on calls of held to maturity securities -- (1,568)
Loss on disposal of assets 1,245 --
Provision for loan losses 60,000 180,000
Increase in other liabilities 272,969 54,385
Decrease in accrued interest payable (14,020) (314,678)
Increase in deferred income taxes (72,128) (55,095)
Decrease in accrued interest receivable 65,627 207,430
Gain on curtailment of pension plan -- (478,804)
(Increase) decrease in other assets (119,692) 349,042
------------ ------------
Total adjustments 358,386 131,694
------------ ------------
Net cash provided by operating activities 139,582 463,785
------------ ------------
Investing activities:
Loan originations (17,873,373) (15,678,364)
Principal payments on loans 23,014,005 20,464,766
Principal payments on mortgage-backed securities available for sale 595,551 177,739
Principal payments on mortgage-backed securities held to maturity 759,308 659,400
Principal payments on investment securities held to maturity 13,847 50,531
Proceeds from calls of held to maturity investment securities -- 6,500,000
Proceeds from calls of available for sale investment
securities 500,000 3,000,000
Proceeds from sale of equity securities 326,667 118,768
Purchases of available for sale investment securities (100,373) (10,051,372)
Purchases of premises and equipment (37,154) (15,243)
Redemption of Federal Home Loan Bank stock 150,000 899,900
------------ ------------
Net cash provided by investing activities 7,348,478 6,126,125
------------ ------------
Financing activities:
Net change in advance payments by borrowers for taxes and
insurance 383,144 273,873
Payments on Federal Home Loan Bank advances (3,000,000) (10,500,000)
Net increase in Money Market, NOW and Passbook savings accounts 2,020,098 4,261,863
Net (decrease) increase in certificate accounts (4,254,584) 3,692,912
Cash paid in lieu of stock dividend -- (2,657)
------------ ------------
Net cash used by financing activities (4,851,342) (2,274,009)
------------ ------------
Net increase in cash and cash equivalents 2,636,718 4,315,901
Cash and cash equivalents at beginning of period 15,721,680 5,871,023
------------ ------------
Cash and cash equivalents at end of period $ 18,358,398 $ 10,186,924
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes $ -- $ 21,400
Cash paid during the period for interest on deposits and
borrowings 3,533,003 4,755,281
The accompanying unaudited notes are an integral part of these consolidated
financial statements.
5
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
1. BASIS OF ORGANIZATION:
On February 14, 1996, the Board of Directors of Prestige Bank, F.S.B. (the Bank)
adopted a Plan of Conversion (the Plan) from a federally chartered mutual
savings bank to a federally chartered stock savings bank and the issuance of its
stock to Prestige Bancorp, Inc., (the Corporation), a Pennsylvania corporation.
The Corporation sold 963,023 shares of its common stock (including 77,041 shares
to its newly formed Employee Stock Ownership Trust (the ESOP)), at $10.00 per
share. Simultaneously there was a corresponding exchange of all of the Bank's
stock for approximately 50% of the net offering proceeds. The remaining portion
of the net proceeds was retained by the Corporation net of $770,410, which was
loaned to the ESOP for its purchase. The conversion and public offering was
completed on June 27, 1996 with net proceeds from the offering, net of the ESOP
loan, totaling $8,188,394, after offering expenses.
2. BASIS OF PRESENTATION:
The following unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to those rules and
regulations, although the Corporation believes that the disclosures made are
adequate to make the information presented not misleading. However, such interim
information reflects all adjustments (consisting solely of normal recurring
adjustments), which are, in the opinion of management, necessary for a fair
presentation of financial position and results of operations for the periods
presented. The results of operations for the three and six month periods ended
June 30, 2002, are not necessarily indicative of the results to be expected for
the year ending December 31, 2002.
The unaudited financial statements and notes hereto should be read in
conjunction with the audited financial statements and notes thereto for the year
ended December 31, 2001, contained in the Corporation's Annual Report and Form
10-K.
EARNINGS PER COMMON SHARE
The Corporation follows Statement of Financial Accounting Standards ("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.
6
The following tables reflect the calculation of earnings per share under SFAS
No. 128.
Three Months Ended
-------------------------------------------------------
June 30, 2002 June 30, 2001
------------------------- ------------------------
Basic (loss) earnings per share:
Net (loss) income $ (98,926) $ 298,941
Average shares outstanding 983,687 977,958
(Loss) earnings per share $ (0.10) $ 0.31
Diluted (loss) earnings per share:
Net (loss) income $ (98,926) $ 298,941
Average shares outstanding 983,687 977,958
Stock options 5,993 10
------------------------- ------------------------
Diluted average shares outstanding 989,680 977,968
(Loss) earnings per share $ (0.10) $ 0.31
For the three months ended June 30, 2002 and 2001, options to purchase 1,651 and
96,866 shares of common stock, respectively, were outstanding but not included
in the computation of diluted earnings per share because the options' exercise
price was greater than the average market price of the Corporation's common
shares for the period.
Six Months Ended
-------------------------------------------------------
June 30, 2002 June 30, 2001
-------------------- ---------------------
Basic (loss) earnings per share:
Net (loss) income $ (218,804) $ 332,091
Average shares outstanding 982,955 977,274
(Loss) earnings per share $ (0.22) $ 0.34
Diluted (loss) earnings per share:
Net (loss) income $ (218,804) $ 332,091
Average shares outstanding 982,955 977,274
Stock options 3,183 5
-------------------- ---------------------
Diluted average shares outstanding 986,138 977,279
(Loss) earnings per share $ (0.22) $ 0.34
For the six months ended June 30, 2002 and 2001, options to purchase 1,651 and
95,415 shares of common stock, respectively, were outstanding but not included
in the computation of diluted earnings per share because the options' exercise
price was greater than the average market price of the Corporation's common
shares for the period.
On 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 dividend.
COMPREHENSIVE INCOME
The Corporation follows SFAS No. 130, "Reporting Comprehensive Income." This
accounting standard requires the reporting of all changes in the equity of an
enterprise that result from recognized transactions and other economic events of
the period other than transactions with owners in their capacity as owners.
Prior to the issuance of this standard, some of those changes in equity were
displayed in the income statement, while others were included directly in
balances within a separate component of equity in the balance sheet.
7
The following tables reflect the calculation of comprehensive income under SFAS
No. 130.
Three Months Ended June 30,
---------------------------------------------------------------------------
2002 2001
-------------------------------------- ---------------------------------
Net (loss) income $ (98,926) $ 298,941
Other comprehensive (loss) income:
Unrealized gains on available for
sale securities $ 168,491 $ 101,460
Less: Reclassification adjustment
for gain included in net
income (30,668) 0
-------------------------------------- ---------------------------------
Other comprehensive income
before tax 137,823 101,460
Income tax expense related to other
comprehensive income 55,129 40,584
------------------ --------------
Other comprehensive income,
net of tax 82,694 60,876
------------------ --------------
Comprehensive (loss) income $ 16,232 $ 359,817
================== ==============
Six Months Ended June 30,
---------------------------------------------------------------------------
2002 2001
-------------------------------------- ---------------------------------
Net (loss) income $ (218,804) $ 332,091
Other comprehensive (loss) income:
Unrealized gains on available for
sale securities $ 252,318 $ 260,020
Less: Reclassification adjustment
for gain included in net
(loss) income (32,183) (30,535)
-------------------------------------- ---------------------------------
Other comprehensive income
before tax 220,135 229,485
Income tax expense related to other
comprehensive income 88,054 91,794
------------- -------------
Other comprehensive income,
net of tax 132,081 137,691
------------- -------------
Comprehensive (loss) income $ (86,723) $ 469,782
============= =============
8
OFFICE OF THRIFT SUPERVISION
The Corporation announced on September 25, 2000 that the Savings Bank entered
into a Supervisory Agreement with the Office of Thrift Supervision (the "OTS").
This Supervisory Agreement formalized the understandings of the OTS and the Bank
pursuant to an informal directive issued by the OTS to the Bank on May 17, 2000.
In conjunction with a routine regulatory examination of the Bank by the OTS, the
OTS requested the Bank to enter into the Supervisory Agreement. The Supervisory
Agreement was signed on September 20, 2000, (the "Effective Date") and, among
other things, places restrictions on the Bank's growth. The Bank may seek
modification of this limitation on growth by submission of a written request to
the Regional Director of the OTS ("Regional Director") and by obtaining the
prior written approval of the Regional Director. Under the Supervisory
Agreement, the Bank may not increase its assets in an amount exceeding net
interest credited on deposit liabilities (or earnings credited on share
accounts) during any calendar quarter, without prior written approval of the
Regional Director. Additionally, the Supervisory Agreement requires the Bank or
its Board of Directors to review and revise various policies including 1)
interest rate risk management, 2) strategic planning to direct the operations
and affairs of the Bank and in managing and reducing the interest rate risk of
the Bank, 3) investment and underwriting policies, 4) transactions with the
affiliates of the Bank, and 5) internal loan and asset classifications policies.
The Supervisory Agreement continues the restriction imposed on the Bank by the
directive not to extend loans for a business purpose except for those business
loans which the Bank was committed to extend on or before May 17, 2000 or which
were loans in process. This restriction on the extension of new loans for a
business purpose also extends to renewals of business loans with revolving
credit or balloon loan features at maturity. The Bank may request that the
Regional Director waive this limitation on the extension of an individual
commercial loan to a customer, including any revised terms or renewal of a
business loan. The restrictions on the Bank's operations were immediately
effective and the Supervisory Agreement will remain in place until terminated by
the OTS.
The Corporation has worked closely with the OTS to implement the Supervisory
Agreement and believes it has materially complied with the Agreement to date.
MERGER AGREEMENT
On February 7, 2002, Northwest Bancorp, Inc., the holding company for Northwest
Savings Bank (and certain affiliated entities), and Prestige Bancorp, Inc. and
Prestige Bank entered into a definitive agreement under which Northwest Bancorp
and Northwest Savings Bank would acquire the Corporation and the 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 shareholders have approved this transaction.
Prestige Bancorp and Northwest Bancorp have received regulatory approval for
this merger transaction from all applicable banking regulators. The applicable
banking regulators include the Pennsylvania State Department of Banking, the
FDIC and the Office of Thrift Supervision. The merger transaction is expected to
be completed before the close of the third quarter 2002 and in connection
therewith the Corporation and the Bank will be merged out of existence.
9
3. INVESTMENT SECURITIES:
The cost and market values of investment securities are summarized as follows:
Investment securities available for sale:
June 30, 2002
----------------------------------------
Amortized Market
Cost Value
------------------ ------------------
Corporate Debentures $ 494,385 $ 418,280
Federal Home Loan Mortgage
Corporation (FHLMC) certificates:
Due after ten years 1,356,421 1,396,032
Government National Mortgage Association
(GNMA) certificates
Due after ten years 9,492,967 9,562,302
Federal National Mortgage Association
(FNMA) certificates:
Due after ten years 1,008,593 1,037,203
Mutual fund investment 10,901,210 10,900,415
Common stock portfolio 728,887 661,684
------------------ ------------------
$ 23,982,463 $ 23,975,916
================== ==================
Investment securities held to maturity:
June 30, 2002
----------------------------------------
Amortized Market
Cost Value
------------------ ------------------
U.S. government and government
agency obligations:
Due after ten years $ 1,092,285 $ 1,106,738
Federal Home Loan Mortgage
Corporation (FHLMC) certificates:
Due after five and within ten years 1,448,262 1,527,217
Due after ten years 595,126 411,096
Government National Mortgage
Association (GNMA) certificates:
Due after ten years 980,229 1,004,686
Federal National Mortgage
Association (FNMA) certificates:
Due after ten years 1,281,711 1,308,754
------------------ ------------------
$ 5,397,613 $ 5,358,491
================== ==================
10
4. LOANS RECEIVABLE:
-----------------
Loans receivable are summarized as follows:
June 30,
2002
-------------------
Real estate loans:
1-4 family $ 99,304,507
Construction 479,900
Commercial real estate 7,026,223
-------------------
106,810,630
Less- Undisbursed loan proceeds 307,662
-------------------
106,502,968
Commercial business loans: 8,902,236
Consumer loans:
Home equity 13,157,787
Student 2,324,052
Automobile 1,342,799
Collateral 508,225
Credit cards 362,541
Personal unsecured/other 321,189
-------------------
18,016,593
-------------------
133,421,797
Less- Allowance for loan losses 1,184,097
Deferred loan costs (61,743)
-------------------
$ 132,299,443
===================
5. ALLOWANCE FOR LOAN LOSSES:
Activity with respect to the allowance for loan losses is summarized as follows:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------- ------------------------------------
2002 2001 2002 2001
----------------- ------------------- ---------------- ----------------
Balance at beginning of period $ 1,199,222 $ 3,432,873 $ 1,166,606 $ 3,387,779
Provision for loan losses 30,000 90,000 60,000 180,000
Charge-offs (45,965) (232,306) (51,386) (303,864)
Recoveries 840 17,279 8,877 43,931
----------------- ------------------- ---------------- ----------------
Balance at end of period $ 1,184,097 $ 3,307,846 $ 1,184,097 $ 3,307,846
================= =================== ================ ================
11
6. DEPOSITS:
The scheduled maturities of the Bank's certificate accounts as of June 30, 2002
are as follows (amounts approximate):
July 1, 2002 to June 30, 2003 $ 35,403,014
July 1, 2003 to June 30, 2004 9,017,168
July 1, 2004 to June 30, 2005 5,400,093
July 1, 2005 to June 30, 2006 4,186,022
July 1, 2006 and thereafter 2,450,889
--------------------
TOTAL $ 56,457,186
====================
Certificates of $100,000 or more $ 10,795,536
====================
7. INCOME TAXES:
-------------
The income tax (benefit) expense was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------- ------------------------------------
2002 2001 2002 2001
----------------- ------------------ ----------------- ---------------
Federal $ (46,875) $ 152,925 $ (107,069) $ 171,050
State (1,549) 36,719 (2,591) 41,548
----------------- ------------------ ----------------- ---------------
$ (48,424) $ 189,644 $ (109,660) $ 212,598
================= ================== ================= ===============
8. RELATED PARTY TRANSACTIONS:
Certain directors and executive officers of the Bank, including their immediate
families and companies in which they are principal owners, are loan customers of
the Bank. In management's opinion, such loans are made in the normal course of
business and were granted on substantially the same terms and conditions as
loans to other individuals and businesses of comparable creditworthiness at the
time. Total loans to these persons at June 30, 2002, and December 31, 2001,
amounted to $28,160 and $7,502 respectively.
9. CAPITAL STOCK:
On April 23, 1997, at the annual stockholders meeting, the Board of Directors
and stockholders formally approved the Corporation's Stock Option Plan (the
Option Plan) and Management Recognition and Retention Plan and Trust (the MRP
Plan; the Option Plan and the MRP Plan herein are referred to as the Plans) as
fully described in the Corporation's proxy statement dated March 31, 1997. In
connection with the MRP Plan, the Corporation incurred compensation expense of
approximately $33,000 and $39,000 during the three and six months ended June 30,
2002, respectively, compared to $16,000 and $52,000 for the comparable periods
of 2001.
The aforementioned approval of the Option Plan made 130,239 options available
for grant to employees and others who perform substantial services for the
Corporation. As of June 30, 2002, the Corporation had granted 130,239 options of
which 33,635 shares had been forfeited. The options are exercisable one year
from the grant date and vest in equal installments over a period of five years.
As of June 30, 2002, there had been 568 options exercised. The maximum term of
any option granted under the Plan cannot exceed 10 years. In connection with the
merger agreement with Northwest Bancorp, Inc., all of the in-the-money options
will be purchased and canceled, and any out-of-money options canceled.
12
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 option data
above have been restated to reflect the stock dividends.
For a more detailed description of the MRP Plan and Option Plan as it relates to
the merger agreement with Northwest Bancorp, Inc., please see the information
under "Proposal I" of the Proxy Statement filed with the Securities and Exchange
Commission on April 26, 2002, which accompanied the Corporation's Annual Report
for the period ended December 31, 2001. A copy of the merger agreement is
attached as an exhibit to the Proxy Statement.
10. RETAINED EARNINGS AND REGULATORY CAPITAL:
The Savings Bank's actual capital amounts and ratios are presented below in the
following table. There was no deduction from capital for interest-rate risk
(amounts in thousands).
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
------------------ -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total Capital (to Risk
Weighted Assets):
As of June 30, 2002 $11,781 12.37% > $7,619 > 8.0% > $9,524 > 10.0%
- - - -
Tier 1 Capital (to Risk
Weighted Assets):
As of June 30, 2002 $10,597 11.13% > $3,809 > 4.0% > $5,714 > 6.0%
- - - -
Tier 1 Capital (to
Average Assets):
As of June 30, 2002 $10,597 5.57% > $7,611 > 4.0% > $9,514 > 5.0%
- - - -
11. COMMITMENTS AND CONTINGENT LIABILITIES:
The Corporation incurs off-balance sheet risks in the normal course of business
in order to meet the financing needs of its customers. These risks derive from
commitments to extend or receive credit. Such commitments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
financial statements.
Commitments to extend credit are obligations to lend to a customer as long as
there is no violation of any condition established in the loan agreement.
Commitments generally have fixed expiration dates or other termination clauses.
In some instances, 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 Corporation'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 Corporation uses the same credit and collateral
policies in making commitments as for all other lending. The Corporation has
outstanding various commitments to extend credit approximating $7.9 million as
of June 30, 2002. In the opinion of management, the funding of the credit
commitments will not have a material adverse effect on the Corporation's
financial position or results of operations.
13
The Bank is involved in one case of alleged 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 a claim for their damages
has not been quantified within the judicial process. The parties to the
litigation have been unsuccessful in effecting an amicable resolution of the
claims. 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.
Please refer to Part II - Item 1. for a description of an additional potential
legal contingency.
Additionally, the Bank is also subject to asserted and unasserted potential
claims encountered in the normal course of business. In the opinion of
management and legal counsel, the resolution of these claims will not have a
material adverse effect on the Bank's financial position or results of
operations.
12. FUTURE ACCOUNTING STANDARDS:
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (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
impact and adoption of this standard is not expected to materially affect the
Corporation's financial condition or results of operations.
The FASB has also issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This
Statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment
of Debt", and an amendment of that Statement, SFAS No. 64, "Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements". This Statement also rescinds
SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers". This
Statement amends SFAS No. 13, "Accounting for Leases", to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The provisions of this Statement were required to be applied
starting with fiscal years beginning after May 15, 2002. The impact and adoption
of this standard is not expected to materially affect the Corporation's
financial condition or results of operations.
The FASB has issued Statement No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities." The standard requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. The new requirements
are effective prospectively for exit or disposal activities after December 31,
2002. Earlier adoption is encouraged. A company may not restate its previously
issued financial statements. The new Statement grandfathers the accounting for
liabilities that a company had previously recorded under EITF Issue 94-3. The
impact and adoption of this standard is not expected to materially affect the
Corporation's financial condition or results of operations.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
"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 Corporation
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 Corporation and the Savings Bank have no control), and other risks
detailed in this Form 10-Q and in the Corporation'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 Corporation 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 Corporation files from time to time with the
Securities and Exchange Commission.
SUPERVISION AND REGULATION
The Corporation announced on September 25, 2000 that the Savings Bank
entered into a Supervisory Agreement with the Office of Thrift Supervision (the
"OTS"). This Supervisory Agreement formalized the understandings of the OTS and
the Bank pursuant to an informal directive issued by the OTS to the Bank on May
17, 2000.
In conjunction with a routine regulatory examination of the Bank by the OTS,
the OTS requested the Bank to enter into the Supervisory Agreement. The
Supervisory Agreement was signed on September 20, 2000, (the "Effective Date")
and, among other things, places restrictions on the Bank's growth. The Bank may
seek modification of this limitation on growth by submission of a written
request to the Regional Director of the OTS ("Regional Director") and by
obtaining the prior written approval of the Regional Director. Under the
Supervisory Agreement, the Bank may not increase its assets in an amount
exceeding net interest credited on deposit liabilities (or earnings credited on
share accounts) during any calendar quarter, without prior written approval of
the Regional Director. Additionally, the Supervisory Agreement requires the Bank
or its Board of Directors to review and revise various policies including 1)
interest rate risk management, 2) strategic planning to direct the operations
and affairs of the Bank and in managing and reducing the interest rate risk of
the Bank, 3) investment and underwriting policies, 4) transactions with the
affiliates of the Bank, and 5) internal loan and asset classifications policies.
The Supervisory Agreement continues the restriction imposed on the Bank by the
directive not to extend loans for a business purpose except for those business
loans which the Bank was committed to extend on or before May 17, 2000 or which
were loans in process. This restriction on the extension of new loans for a
business purpose also extends to renewals of business loans with revolving
credit or balloon loan features at maturity. The Bank may request that the
Regional Director waive this limitation on the extension of an individual
commercial loan to a customer, including any revised terms or renewal of a
business loan. The restrictions on the Bank's operations were immediately
effective and the Supervisory Agreement will remain in place until terminated by
the OTS.
The Corporation has worked closely with the OTS to implement the Supervisory
Agreement and believes it has materially complied with the Agreement to date.
15
MERGER AGREEMENT
On February 7, 2002, Northwest Bancorp, Inc., the holding company for
Northwest Savings Bank (and certain affiliated entities), and Prestige Bancorp,
Inc. and Prestige Bank entered into a definitive agreement under which Northwest
Bancorp and Northwest Savings Bank would acquire the Corporation and the 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 shareholders have approved this transaction.
Prestige Bancorp and Northwest Bancorp have received regulatory approval for
this merger transaction from all applicable banking regulators. The applicable
banking regulators include the Pennsylvania State Department of Banking, the
FDIC and the Office of Thrift Supervision. The merger transaction is expected to
be completed before the close of the third quarter 2002 and in connection
therewith the Corporation and the Bank will be merged out of existence.
As part of the terms of the merger agreement, the Corporation has agreed
that from the date of the merger agreement until the completion of the merger it
will not make significant changes to its operations or make other decisions
which may have a material affect on the operations or assets of the Corporation
and the Savings Bank without the consent of Northwest Bancorp.
If the merger takes place, the Corporation and the Bank will cease to exist
as separate entities.
For a more detailed description of the merger agreement, including certain
provisions relating to restrictions on the Corporation's considering competing
proposals, liquidated damage provisions and additional representations,
conditions and covenants, please see the information under "Proposal I" of the
Proxy Statement filed with the Securities and Exchange Commission on April 26,
2002, which accompanied the Corporation's Annual Report for the period ended
December 31, 2001. A copy of the merger agreement is attached as an exhibit to
the Proxy Statement.
FINANCIAL CONDITION
Assets held directly by the Corporation include all of the outstanding
capital stock of the Savings Bank, a loan receivable from the Prestige Bancorp
Employee Stock Ownership Trust (the "ESOP"), one loan to a former CEO and
director, deposits maintained at the Savings Bank, common stock of mostly
savings associations or savings and loan holding companies and other assets
(collectively the "Directly Held Assets"). Each stock ownership interest in the
unrelated savings associations or savings and loan holding companies amounts to
less than a 1.25% interest in such entities. As of June 30, 2002, the
Corporation had outstanding borrowings of $240,000 from the Savings Bank to
support cash levels. The loan is adequately secured in accordance with
applicable law.
The following discussion of the financial condition and activities of the
Corporation should be read as the consolidated activities of the Corporation and
the Savings Bank. Unless the following discussion specifically identifies an
activity, event or condition as relating to the Directly Held Assets, it is
assumed that such activity, event or condition occurred as a result of a direct
action of the Savings Bank and an indirect action of the Corporation.
At June 30, 2002, the Corporation's total assets amounted to $190.1 million
compared with $194.8 million at December 31, 2001. During the six months ended
June 30, 2002, net loans were reduced $5.2 million while total investment
securities decreased $1.8 million. The net loan decrease of $5.2 million was
primarily attributable to decreases in commercial business and commercial real
estate loans of $2.3 million or 12.7% and one-to-four family real estate loans
of $1.9 million or 1.9%. Total cash and cash equivalents increased $2.6 million.
The $2.6 million or 16.8% increase in cash and cash equivalents was primarily
attributable to the decrease in net loans of $5.2 million which was partially
offset by a $3.0 million decrease
16
in Federal Home Loan Bank advances. Total stockholders' equity amounted to $11.7
million or 6.16% of total assets at June 30, 2002, compared to equity of $11.8
million or 6.04% of total assets at December 31, 2001. During 2000, the Board of
Directors suspended its cash dividend to preserve capital due to net losses
recognized by the Corporation. The merger agreement between the Corporation and
Northwest Bancorp, Inc. described above restricts the Corporation's power to
declare and pay dividends.
The Corporation's nonperforming assets decreased $49,000 to $2.5 million at
June 30, 2002, compared to $2.6 million at December 31, 2001. The decrease was
primarily due to a decrease in nonperforming consumer loans from $203,000 at
December 31, 2001 to $154,000 at June 30, 2002. At June 30, 2002, the $1.5
million of nonperforming commercial business loans was comprised of four loans.
One nonperforming commercial business relationship accounts for $1.3 million or
86.7% of the total nonperforming commercial business loans. The $1.3 million has
an U.S. Government guarantee of the payment of principal. Currently, this
commercial business is in bankruptcy, and management is working closely with the
Bank's counsel in the bankruptcy proceedings to protect the Bank's interests.
Non-performing assets decreased $3.7 million when comparing June 30, 2002 to
June 30, 2001. A majority of the $3.7 million decrease was due to the commercial
loan sale that occurred during the fourth quarter 2001. This sale resulted in a
$2.6 million reduction in non-performing commercial business and commercial real
estate loans.
The following table sets forth the amounts and categories of the Savings
Bank's nonperforming assets at the dates indicated. The Savings Bank had no
loans classified as troubled debt restructurings during the periods indicated
below.
JUNE 30, DECEMBER 31, JUNE 30,
2002 2001 2001
---- ---- ----
(DOLLARS IN THOUSANDS)
Non-accruing loans:
One-to-four family residential......................................... $ 502 $ 496 $ 106
Consumer loans......................................................... 154 203 147
Commercial real estate................................................. 59 20 3,451
Commercial business loans.............................................. 1,544 1,589 2,175
-------- -------- ---------
Total nonperforming loans............................................ 2,259 2,308 5,879
Real estate owned...................................................... 271 271 304
-------- -------- ---------
Total nonperforming assets........................................... $ 2,530 $ 2,579 $ 6,183
======== ======== =========
Total nonperforming loans as a
percentage of total loans.......................................... 1.69% 1.66% 3.86%
======= ======== ==========
Total nonperforming assets as a
percentage of total assets......................................... 1.33% 1.32% 3.05%
======= ======== =========
RESULTS OF OPERATIONS
GENERAL--The Corporation realized a net loss for the quarter ended June
30, 2002 of $99,000 or ($.10) per diluted share and a net loss for the six
months ended June 30, 2002 of $219,000 or ($.22) per diluted share. Exclusive of
merger-related expenses of $75,000 and $152,000 for the three and six-month
periods ended June 30, 2002, net of tax, the net loss would have been $24,000
and $67,000 respectively. This compares to net income of $299,000 or $.31 per
diluted share and $332,000 or $.34 per diluted share for the three and six month
periods ended June 30, 2001, respectively. Excluding a curtailment gain realized
by terminating the Bank's pension plan in 2001 of $292,000, net of taxes, net
income was $7,000 or $.01 per diluted share for the quarter ended June 30, 2001
and $40,000 or $.04 per diluted share for the six months ended June 30, 2001.
The net loss of $24,000 for the quarter ended June 30, 2002, exclusive of
merger-related expenses, net of tax, represented a $31,000 decrease from the
$7,000 net income for the same period in 2001, excluding the curtailment gain of
$292,000, net of taxes. This $31,000 decrease was primarily attributable to a
$157,000
17
decrease in net interest income after provision for losses on loans. This was
partially offset by a reduction in other expenses of $106,000, exclusive of the
merger related expenses.
The net loss of $67,000 for the six months ended June 30, 2002, exclusive of
merger-related expenses, net of tax, represented a $107,000 decrease from the
$40,000 net income for the same period in 2001, excluding the curtailment gain
of $292,000, net of taxes. This $107,000 decrease was primarily attributable to
a $401,000 decrease in net interest income after provision for losses on loans.
This was partially offset by a reduction in other expenses of $260,000,
exclusive of the merger-related expenses.
INTEREST INCOME--The Corporation reported interest income of $2.7 million
for the three months ended June 30, 2002, as compared to $3.4 million for the
three months ended June 30, 2001. The interest income decrease of $674,000 or
20.0% for the quarter ended June 30, 2002, compared to the same period in the
prior year can be attributed to a $472,000 or 16.9% decrease in interest and
fees on loans and a decrease of $213,000 or 66.8% in interest and dividends on
other investment securities. The decrease of $472,000 in interest and fees on
loans was the result of a decrease in the average yield earned on loans
receivable and a decrease in average loan balances. The average yield earned on
loans receivable, during the quarter ended June 30, 2002, was 6.86% compared to
7.33% for the same period in 2001. Average loan balances for the second quarter
2002 were $135.0 million compared to $152.2 million for the same period in 2001.
The Corporation reported interest income of $5.4 million for the six months
ended June 30, 2002, as compared to $6.9 million for the six months ended June
30, 2001. The interest income decrease of $1.4 million or 20.9% for the six
months ended June 30, 2002, compared to the same period in the prior year can be
attributed to a $1.0 million or 18.0% decrease in interest and fees on loans and
a decrease of $485,000 or 68.6% in interest and dividends on other investment
securities. The decrease of $1.0 million in interest and fees on loans was the
result of a decrease in the average yield earned on loans receivable and a
decrease in average loan balances. The average yield earned on loans receivable,
during the six months ended June 30, 2002, was 6.86% compared to 7.43% for the
same period in 2001. Average loan balances for the first six months of 2002 were
$136.4 million compared to $153.5 million for the same period in 2001.
INTEREST EXPENSE--Interest expense decreased $456,000 or 20.9% during the
three months ended June 30, 2002 as compared to the same period last year. This
decrease was due to a reduction in average interest-bearing liabilities and a
decrease in the weighted average interest rate paid on interest-bearing
liabilities. Average deposits and Federal Home Loan Bank (FHLB) of Pittsburgh
advances during the second quarter of 2002 were $122.4 million and $52.8
million, respectively, compared to $129.4 million and $56.8 million,
respectively, for the same period in 2001. The weighted average interest rate on
interest-bearing liabilities during the second quarter of 2002 was 3.93%
compared to 4.68% for the same period in 2001.
Interest expense decreased $922,000 or 20.8% during the six months ended
June 30, 2002 as compared to the same period last year. This decrease was due to
a reduction in average interest-bearing liabilities and a decrease in the
weighted average interest rate paid on interest-bearing liabilities. Average
deposits and Federal Home Loan Bank (FHLB) of Pittsburgh advances during the
first six months of 2002 were $122.7 million and $53.8 million, respectively,
compared to $127.6 million and $58.6 million, respectively, for the same period
in 2001. The weighted average interest rate on interest-bearing liabilities
during the first six months of 2002 was 3.99% compared to 4.77% for the same
period in 2001.
PROVISION FOR LOAN LOSSES--During the three and six months ended June 30,
2002, the Corporation recorded provisions for losses on loans of $30,000 and
$60,000, respectively, compared to $90,000 and $180,000 for the comparable
periods in 2001. The Corporation establishes a provision for loan losses that is
charged to operations. The allowance for loan losses is maintained at a level
that is deemed to be appropriate based upon a comprehensive methodology that is
to be updated on a monthly basis. This methodology includes:
18
- 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 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 Corporation'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 quarter
ended June 30, 2002, the Corporation charged off six consumer loans totaling
approximately $46,000 and for the six months ended June 30, 2002 the Corporation
charged off nine loans totaling $51,000.
Although management utilizes its best judgment in providing for losses,
there can be no assurance that the Savings Bank will not have to increase its
provision for loan losses in the future as a result of 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.
The Corporation'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.
19
JUNE 30, 2002 DECEMBER 31, 2001 JUNE 30, 2001
------------------ ------------------ ------------------
% OF % OF % OF
LOANS IN LOANS IN LOANS IN
EACH EACH EACH
CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
One-to-four family residential...... $ 206 74.26% $ 196 72.68% $ 168 68.65%
Construction........................ -- 0.36 38 0.82 23 0.81
Commercial business and
commercial real estate............ 701 11.91 716 13.10 2,719 18.02
Consumer:
Automobile, home equity, student,
share and other consumer......... 89 13.47 117 13.40 79 12.52
Allocation to general risk......... 188 -- 100 -- 319 --
------ ------ ------ ------ ------ ------
Total........................... $1,184 100.00% $1,167 100.00% $3,308 100.00%
====== ====== ====== ====== ====== ======
OTHER INCOME--Total other income decreased $26,000 and $29,000, excluding
net gains on sales of investments and losses on disposal of assets, for the
three and six months ended June 30, 2002, respectively, compared to the same
periods in 2001. These decreases were the result of lower fees and service
charges earned. The primary reason for these decreases was a reduction in total
transaction accounts which resulted when Prestige Bancorp, Inc. sold its
Washington branch to Northwest Bancorp, Inc. in the fourth quarter 2001.
OTHER EXPENSES--Total other expenses increased $5,000 or .38% for the
quarter ended June 30, 2002, as compared to the same period ended June 30, 2001,
excluding the pension plan curtailment gain of $479,000. The major factor for
the increase in total other expenses was an increase in legal and professional
fees of $80,000. Included in legal and professional fees during the quarter
ended June 30, 2002 was $102,000 in merger related costs associated with the
pending merger with Northwest Bancorp, Inc. This was partially offset by a
reduction of $63,000 in salaries and employee benefits.
Total other expenses decreased $34,000 or 1.3% for the six months ended June
30, 2002, as compared to the same period ended June 30, 2001, excluding the
pension plan curtailment gain of $479,000. Major factors for the decrease were
decreases of $117,000 in salaries and employee benefits, $39,000 in transaction
processing costs and $24,000 in advertising costs. This was partially offset by
an increase in legal and professional fees of $138,000. Included in legal and
professional fees during the six months ended June 30, 2002 was $218,000 in
merger related costs associated with the pending merger with Northwest Bancorp,
Inc.
INCOME TAXEs--The Corporation recorded an income tax benefit of $48,000 and
$109,000 for the three and six months ended June 30, 2002, respectively. This
compares to an income tax expense of $190,000 and $213,000 for the same periods
in the prior year. Such decreases in income taxes were due to the Corporation
recognizing a loss before income taxes of $147,000 and $328,000 for the three
and six months ended June 30, 2002, compared to income before income taxes of
$489,000 and $545,000, for the same period in 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's primary sources of funds are dividends from the Savings
Bank, repayments by the ESOP of the loan it received from the Corporation, loan
repayments, interest and dividends on debt and equity investments in other
companies and interest earned on deposits of the Corporation held at Savings
Bank and short-term investments. 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-
20
backed securities, maturities of investment securities and other short-term
investments, and funds provided from operations. 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 Investment/Asset and Liability Committee
("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 June 30, 2002, the
Savings Bank had $52.8 million borrowed from the FHLB of Pittsburgh pursuant to
various term loans with maturities of less than ten years.
During the six months ended June 30, 2002, the Corporation's operating
activities provided net cash of approximately $140,000. The primary reasons for
the $140,000 cash provided by operating activities were a $273,000 increase in
other liabilities, $113,000 in depreciation of premises and equipment and a
$66,000 decrease in accrued interest receivable. These were partially offset by
a net loss of $219,000 and an increase in other assets of $120,000. During the
six months ended June 30, 2001, the Corporation's operating activities provided
net cash of approximately $464,000. The primary reasons for the $464,000 net
cash provided by operating activities during the six months ended June 30, 2001
were $332,000 in net income, a $207,000 decrease in accrued interest receivable
and $180,000 in provision for loan losses which was partially offset by a
$315,000 decrease in accrued interest payable.
Net cash provided by investing activities was $7.3 million for the six
months ended June 30, 2002. The primary reason for the $7.3 million net cash
provided by investing activities was the Corporation had $23.0 million and $1.4
million in principal payments on loans and mortgage-backed securities,
respectively. This was partially offset by $17.9 million in loan originations.
Net cash provided by investing activities was $6.1 million for the six months
ended June 30, 2001. The primary reason for the $6.1 million net cash provided
by investing activities was the Corporation received $4.8 million in principal
payments on existing loans in excess of new loans originated.
Net cash used by financing activities for the six months ended June 30,
2002, was $4.9 million. This was primarily attributable to a reduction in
certificate accounts of $4.3 million and a decrease in FHLB advances of $3.0
million. This was partially offset by a $2.0 million increase in non-certificate
deposit accounts. Net cash used by financing activities for the six months ended
June 30, 2001 was $2.3 million. This was attributable to decreases in net FHLB
advances of $10.5 million that was partially offset by increases in total
deposits of $8.0 million.
The Savings Bank is required to maintain specified amounts of capital
pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of
1989 and regulations thereunder. Savings associations are required to maintain
tangible capital of 1.5%, core capital of 4.00% and risk-based capital of 8.00%.
At June 30, 2002, the Savings Bank's tangible, core, and risk-based capital
ratios amounted to 5.60%, 5.60%, and 12.37%, respectively, which exceeded
applicable requirements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes in information relating to quantitative and qualitative
disclosures about market risk has occurred from the preceding fiscal year to
the date of the interim balance sheet contained in this report. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Asset and Liability Management." of the December 31, 2001 Form
10-K of Prestige Bancorp, Inc. for further details.
21
PRESTIGE BANCORP, INC.
PART II
Item 1. LEGAL PROCEEDINGS
On March 19, 2002, a writ of summons was filed in the Court of Common
Pleas of Allegheny County against Prestige Bank, the Bank's Chief Executive
Officer and its President by Donald A. and Carol L. Miller. On April 24, 2002, a
complaint was filed by the Millers in the same court against the defendants
named in the previous filing. The complaint demanded approximately $389,000 in
damages resulting from the alleged breach of a certain real estate lease of
approximately 1,800 square feet of space in connection with Prestige Bank's
previous Bethel Park branch office. The Bank subsequently filed a motion to
dismiss the action, and on June 26, 2002, prior to a hearing on this motion, the
Millers discontinued their lawsuit against all parties. Since the statute of
limitations on the Millers' alleged claims has not expired, it is possible that
they could re-file a complaint in the future. The Bank has no indication that
the Millers intend to re-file their complaint, and plans no further activity in
this matter.
Other than the legal claim described above and in Note 11 of the
Financial Statements, neither the Corporation nor the Bank is involved in any
pending legal proceedings other than nonmaterial legal proceedings occurring in
the ordinary course of business.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
a) An annual meeting of stockholders of the Corporation was held
on May 30, 2002 ("Annual Meeting").
b) 1. Mark R. Schoen, elected to new three year term
2. Martin W. Dowling, elected to new three year term
3. Morris Propp
4. James A. Nania
5. Patricia A. White
6. Charles P. McCullough
7. Michael R. Macosko
c) There were 1,059,371 shares of Common Stock of the Corporation
eligible to be voted at the Annual Meeting and 954,962 shares
were represented at the meeting by the holders thereof, which
constituted a quorum. The items voted upon at the Annual
Meeting and the vote for each proposal were as follows:
1. Adoption of the Agreement & Plan of Merger, dated
February 7, 2002, between Northwest Bancorp, Inc.,
Northwest Bancorp, MHC, Northwest Merger Subsidiary,
Inc., Northwest Savings Bank, Prestige Bancorp, Inc.
and Prestige Bank.
FOR AGAINST ABSTAIN BROKER NON-VOTES*
--- ------- ------- -----------------
710,334 85,392 433 158,803
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Election of directors for a three-year term.
FOR WITHHELD
Mark R. Schoen................776,580 178,382
Martin W. Dowling.............778,227 176,735
3. Postponement of Meeting if necessary to solicit more
proxies. It was not necessary to call for a vote on
this matter.
Proposals 1 and 2 were adopted by the stockholders of the
Corporation.
*When no voting instructions are received and the item is one
that may not be voted on by brokers, such as a merger, brokers
deliver so-called "broker non-votes." Broker Non-Votes are not
counted as votes for purposes of determining a majority of the
votes cast.
d) Not applicable.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
The Corporation filed a Form 8-K on August 7, 2002 and
August 20, 2002.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRESTIGE BANCORP, INC.
Dated: August 22, 2002 By: /s/ Mark R. Schoen
------------------
Mark R. Schoen,
Chairman of the Board of Directors,
Chief Executive Officer and President
Dated: August 22, 2002 By: /s/ James M. Hein
-----------------
James M. Hein,
Chief Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER OF
PRESTIGE BANCORP, INC. PURSUANT TO 18 U.S.C. SECTION 1350
We certify that, to the best of our knowledge and belief, the Quarterly Report
on Form 10-Q of Prestige Bancorp, Inc. for the period ending June 30, 2002:
(1) complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of Prestige Bancorp, Inc.
By: /s/ Mark R. Schoen By: /s/ James M. Hein
------------------ -----------------
Mark R. Schoen, James M. Hein
Chairman of the Board of Directors, Chief Financial Officer
Chief Executive Officer and President August 22, 2002
August 22, 2002
24