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Exhibit 13
PRESTIGE BANCORP, INC.
710 Old Clairton Road, Pittsburgh, PA 15236-4300 - 412-655-1190 -
(Fax) 412-655-1772
March 31, 1997
To Our Shareholders & Customers:
We are pleased to present our first Annual Report of Prestige Bancorp, Inc.
(the "Company"), the parent company of Prestige Bank, a Federal Savings Bank.
On June 27, 1996, Prestige Bancorp, Inc. became a public company by selling
963,023 shares of its common stock at $10.00 per share. Eight hundred
eighty-four (884) individuals or entities purchased the stock. The net proceeds
from this initial public offering provided Prestige Bancorp, Inc. with more than
$8 million in new capital.
We are proud of the Company's stock performance since becoming a public
company. The initial public offering sold at $10.00 per share, and the reported
closing price as of the close of trading on March 19, 1997 was $15.75 per share.
The Company's Board of Directors declared the first quarterly cash dividend at
$.03 per share for stockholders of record as of March 1, 1997, payable on March
21, 1997. In addition, the initiation of a 5% stock repurchase program was
announced in which the Company intends to repurchase 48,151 shares.
For the year ending December 31, 1996, the Company recorded net income of
$146,000 compared to $161,000 for 1995, a decrease of 9.3%. These earnings were
negatively impacted by a one-time charge of $502,000 ($308,000 after tax) that
the Bank was required to record as a result of legislation signed into law on
September 30, 1996 which recapitalized the Savings Association Insurance Fund
(SAIF) of the Federal Deposit Insurance Corporation (FDIC). The legislation
required all institutions whose deposits are insured by SAIF to pay a one-time
special assessment in the amount of 65.7 basis points on the aggregate amount of
deposits held as of March 31, 1995. Excluding this one-time charge, net income
for 1996 would have increased 182% to $454,000 as compared to the same period in
1995.
Our Strategic Business Plan will focus on the leveraging of our capital
position and asset growth. We are committed to building shareholder value and
providing the best financial service to our customers. We will continue to
explore new technologies so that we will be able to provide our customers with
the most up-to-date and reliable information on our products and services. We
invite you to use the 24-Hour Teller, our telephone voice response system, by
calling 655-1479 or 800-375-7667. You may also access information concerning the
Bank's products via our world wide web home page (Internet) at
http://www.prestigebank.com. By using technology, we hope to improve our
internal operations and achieve greater efficiency at a lower cost.
I would like to express my appreciation to my "teammates" for a job well
done over the past year. The continued growth and success of Prestige Bancorp,
Inc. are an attribute to the dedication, commitment and hard work of our
directors, officers and employees. On behalf of the directors, officers and
employees of Prestige Bancorp, Inc. and Prestige Bank, I would like to thank you
for your confidence.
Sincerely,
/s/ ROBERT S. ZYLA
Robert S. Zyla
President
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GENERAL INFORMATION
Prestige Bancorp, Inc. (the "Company") was formed in March, 1996 in
connection with the conversion of Prestige Bank, A Federal Savings Bank (the
"Savings Bank") from a mutual chartered savings association to a stock chartered
savings association (the "Conversion"). Upon completion of the Conversion on
June 27, 1996, the Company commenced operations as the holding company of the
Savings Bank, then existing as a stock chartered federal savings association.
The Company is organized as a Pennsylvania corporation.
The Savings Bank is a stock-chartered savings bank organized under the laws
of the United States of America which conducts business from offices located in
Allegheny County, Pennsylvania. The Savings Bank's operations date back to 1935
with the incorporation of First Federal Savings and Loan Association of Mt.
Oliver in Allegheny County, Pennsylvania which, in March, 1991, converted its
charter from a federal mutual savings and loan association to a Federal mutual
savings bank and took the name Prestige Bank, A Federal Savings Bank. On June
27, 1996, the Savings Bank converted to a stock-chartered savings bank. The
Savings Bank's deposits are insured by the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation ("FDIC") to the maximum
extent permitted by law.
The consolidated operating results of the Company and the Savings Bank
depend primarily upon net interest income, which is determined by the difference
between interest and dividend income on interest-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, the Company holds only a loan receivable
from the Prestige Bank Employee Stock Ownership Plan (the "ESOP"), less than 5%
equity interest in three unrelated savings associations or their respective
holding companies and a money-market account with the Savings Bank. The
consolidated net income of the Company also is affected by the Savings Bank's
provision for loan losses, as well as the level of other consolidated income,
including late charges, and other expenses, such as salaries and employee
benefits, net occupancy and equipment expense, Federal deposit insurance and
miscellaneous other expenses, and income taxes.
The common stock of the Company is traded on the National Association of
Securities Dealers Automated Quotations ("NASDAQ") system (symbol "PRBC"). The
approximate number of holders of record of the Company's Common Stock at March
20, 1997 was 668.
It is the policy of the Company to retain a substantial portion of its
earnings to finance its business. On January 15, 1997, the Company declared a
quarterly cash dividend and intends to consider the continued payment of
dividends on a regular basis; however, the declaration of dividends is
discretionary with the Board of Directors of the Company, and there is no
assurance regarding the payment of future dividends by the Company. The
quarterly dividend declared on January 15, 1997, was $.03 per share and was
payable on March 21, 1997 to shareholders of record March 1, 1997.
Information as to the high and low stock prices for each quarter of fiscal
years 1996 and 1995 is included on page 5 of this Report.
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected financial and other data of the Company and the Savings Bank
set forth below does not purport to be complete and should be read in
conjunction with, and is qualified in its entirety by, the more detailed
information, including the Financial Statements and related Notes, appearing
elsewhere herein.
AS OF OR FOR THE
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
SELECTED FINANCIAL DATA:
Total assets...................................... $114,640 $91,841 $87,745 $82,522 $78,269
Investment securities............................. 18,386 6,720 5,653 5,161 6,048
Mortgage-backed securities........................ 13,519 15,845 16,632 17,792 11,109
Loans receivable, net............................. 76,545 61,408 60,635 55,067 54,691
Cash and cash equivalents......................... 2,148 4,394 1,540 2,045 3,704
Deposits.......................................... 83,821 80,731 75,313 74,727 71,549
FHLB of Pittsburgh advances....................... 14,477 2,977 4,261 461 0
Stockholders' equity(1)........................... 15,430 7,178 7,049 6,521 5,823
Nonperforming assets(2)........................... 391 348 391 351 334
SELECTED OPERATING DATA:
Interest income................................... $ 6,748 $ 5,719 $ 5,314 $ 5,410 $ 6,162
Interest expense.................................. 3,683 3,406 2,620 2,634 3,191
-------- ------- ------- ------- -------
Net interest income............................... $ 3,065 $ 2,313 $ 2,694 $ 2,776 $ 2,971
Provision for loan losses......................... 44 36 36 36 44
-------- ------- ------- ------- -------
Net interest income after provision for loan
losses.......................................... $ 3,021 $ 2,277 $ 2,658 $ 2,740 $ 2,927
Other income...................................... 297 222 294 310 307
Other expenses.................................... 3,102(5) 2,255 2,058 1,913 1,849
-------- ------- ------- ------- -------
Income before income tax expense.................. $ 216 $ 244 $ 894 $ 1,137 $ 1,385
Income tax expense................................ 70 83 346 452 520
-------- ------- ------- ------- -------
Net income........................................ $ 146(6) $ 161 $ 548 $ 685 $ 865
======== ======= ======== ======= =======
SELECTED OPERATING RATIOS(3):
Return on average assets.......................... .14% .18% .64% .85% 1.12%
Return on average equity.......................... 1.22% 2.26% 8.08% 11.11% 15.96%
Average yield earned on interest-earning assets... 6.93 6.66 6.41 6.88 8.19
Average rate paid on interest-bearing
liabilities..................................... 4.21 4.22 3.38 3.58 4.50
Average interest rate spread(4)................... 2.72 2.44 3.03 3.30 3.69
Net interest margin(4)............................ 3.15 2.69 3.25 3.53 3.95
Ratio of interest-earning assets to
interest-bearing liabilities.................... 111.31 106.34 107.03 106.75 105.95
Operating expenses as a percent of average
assets.......................................... 3.09 2.54 2.41 2.37 2.39
Average equity to average assets.................. 11.86 8.02 7.97 7.63 7.00
ASSET QUALITY RATIOS(3):
Nonperforming loans as a percent of total loans... .44% .50% .64% .63% .52%
Nonperforming assets as a percent of total
assets.......................................... .34 .38 .45 .43 .43
Allowance for loan losses as a percent of total
loans........................................... .40 .46 .49 .48 .42
Charge-offs to average loans receivable
outstanding during the period................... .04 .09 .00 .01 .04
PER SHARE DATA:
Earnings Per Share................................ $ 0.00(7) N/A N/A N/A N/A
Per Share Book Value.............................. 16.02 N/A N/A N/A N/A
Per Share Market Value............................ 13.50 N/A N/A N/A N/A
NUMBER OF OFFICES:
Full-service offices at period end................ 3 3 3 3 3
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(1) For years ending December 31, 1995, 1994, 1993 and 1992 this category was
referred to as "Equity".
(2) Nonperforming assets consist of nonperforming loans and real estate owned
("REO"). Nonperforming loans consist of non-accrual loans, while REO
consists of real estate acquired through foreclosure and real estate
acquired by acceptance of a deed-in-lieu of foreclosure.
(3) 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.
(4) 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.
(5) But for the impact of the special assessment imposed by the Federal Deposit
Insurance Corporation ("FDIC") on deposits of the Savings Bank as of March
31, 1995 the other expenses of the Company for 1996 would have been $2.6
million.
(6) But for the impact of the special assessment described in Note 5 above, the
net income of the Company would have been $454,000.
(7) Earnings per share of the Company for the period from June 27, 1996 (date of
conversion) to December 31, 1996, was less than one-half of one cent per
share. But for the impact of the special assessment described in Note 5
above, the earnings per share of the Company would have been $.35 per share
for the same period. On a weighted average share basis for the period from
June 27, 1996 to December 1, 1996 the earnings per share of the Company was
3,070 (net income) divided by 886,755 (weighted average shares for such
period) or $0.00346.
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SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
The following table sets forth certain unaudited quarterly consolidated
financial data regarding the Company:
MARCH 31(1) JUNE 30(2) SEPTEMBER 30(3) DECEMBER 31(3)
----------- ---------- --------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 QUARTER ENDED
Interest income............................. $ 1,534 $ 1,631 $ 1,747 $ 1,837
Non-interest income......................... 70 78 73 77
------- -------- ------- --------
Total operating income...................... 1,604 1,709 1,820 1,914
Interest expense............................ 906 916 899 963
Provision for loan losses................... 9 9 11 15
Non-interest expense........................ 595 649 1,151 708
------- -------- ------- --------
Income (loss) before income taxes........... 94 135 (241) 228
Provision for income taxes.................. 36 50 (96) 80
------- -------- ------- --------
Net income (loss)........................... $ 58 $ 85 $ (145) $ 148
======= ======== ======= ========
Primary Earnings (loss) Per Common Share.... N/A N/A (.16)(7) .17
Stock Prices(4)
High...................................... N/A $ 10.75(5) $ 12.25 $ 13.75
Low....................................... N/A $ 10.00(5) $ 9.75 $ 11.875
Cash Dividends Declared Per Common
Share(6).................................. N/A None None None
MARCH 31(1) JUNE 30(1) SEPTEMBER 30(1) DECEMBER 31(1)
----------- ---------- --------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1995 QUARTER ENDED
Interest income............................. $ 1,377 $ 1,407 $ 1,452 $ 1,483
Non-interest income......................... 30 58 73 61
------- -------- ------- --------
Total operating income...................... 1,407 1,465 1,525 1,544
Interest expense............................ 779 850 876 901
Provision for loan losses................... 9 9 9 9
Non-interest expense........................ 567 543 556 589
------- -------- ------- --------
Income before income taxes.................. 52 63 84 45
Provision for income taxes.................. 18 21 29 15
------- -------- ------- --------
Net income.................................. $ 34 $ 42 $ 55 $ 30
======= ======== ======= ========
Primary Earnings Per Common Share(6)........ N/A N/A N/A N/A
Stock Prices(6)
High...................................... N/A N/A N/A N/A
Low....................................... N/A N/A N/A N/A
Cash Dividends Declared Per Common
Share(6).................................. N/A N/A N/A N/A
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(1) Applies solely to business operations of the Savings Bank.
(2) Reflects business activity of the Savings Bank and activities of the Company
since June 27, 1996.
(3) Reflects business activities of the Savings Bank and the Company for such
quarter.
(4) Stock prices are based on the closing bid prices reported on NASDAQ.
(5) The common stock of the Company commenced trading on June 27, 1996 with an
opening price of $10.00.
(6) For each quarter ending before June 27, 1996 the Savings Bank operated
business as a mutual chartered savings association and thus dividend
payments and per share information is not applicable.
(7) But for the impact of the special assessment imposed by the FDIC on the
deposits of the Savings Bank as of March 31, 1995, the earnings per share of
the Company for the third quarter of 1996 would have been $.18 per share.
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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.
CHANGES IN FINANCIAL CONDITION
The Company's consolidated assets increased by $22.8 million or 24.8% from
$91.8 million at December 31, 1995 to $114.6 million at December 31, 1996. The
increase in total assets was primarily attributable to an increase in total
loans receivable and investment securities which were partially offset by a
reduction in cash and cash equivalents. The increase in total assets was funded
by the proceeds of stock conversion of the Savings Bank, an increase in deposits
and the leverage of the balance sheet through loans from the Federal Home Loan
Bank of Pittsburgh ("FHLB of Pittsburgh"). Net proceeds of the Conversion
available for investment was $8.2 million, total deposits increased by $3.1
million in 1996 and advances from the FHLB of Pittsburgh rose by $11.5 million
during 1996.
The Company's total loans receivable increased by $15.7 million or 25.4%
from $61.7 million at December 31, 1995 to $77.4 million at December 31, 1996.
This rise in total loan receivables can be traced to three main areas of growth.
One-to-four family residential mortgages increased $9.8 million or 17.6%, as the
Savings Bank expanded its efforts to contact realtors and priced its mortgage
rates to attract new business. Consumer loans increased $3.7 million or 67.2%,
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 increased 149.4% from $815,000 at December 31, 1995
to $2.0 million at December 31, 1996 as the Savings Bank used contacts and
referrals to build its commercial and commercial real estate loan portfolio.
Investment securities increased from $22.6 million at December 31, 1995 to
$31.9 million at December 31, 1996. The increase occurred as the Company
invested in U.S. Government agency securities with funds received by the FHLB of
Pittsburgh. Cash and cash equivalents decreased by $2.2 million, or 51.1%,
between December 31, 1995 and 1996, attributable to the investment of available
funds in loan originations and in securities issued by the U.S. Government
Agencies which were offset by funds received in connection with the conversion,
and deposit and borrowing growth.
The Savings Bank's total deposits increased $3.1 million or 3.8% from $80.7
million at December 31, 1995 to $83.8 million at December 31, 1996. The growth
in deposits during fiscal 1996 was primarily a result of competitive rates that
continue to be offered by the Savings Bank. Borrowings by the Savings Bank from
the FHLB of Pittsburgh rose by $11.5 million, or 386.3%, from $3.0 million at
December 31, 1995 to $14.5 million at December 31, 1996 as the Company proceeded
to leverage the balance sheet following the influx of equity pursuant to the
Conversion. Total equity increased $8.3 million or 115.0% to $15.4 million at
December 31, 1996, a result of the sale of stock of the Company in connection
with the Conversion and the consolidated net income for fiscal 1996 less the
impact of the valuation of available-for-sale securities pursuant to Statement
of Financial Accounting Standards ("SFAS") No. 115.
The Savings Bank's assets increased by $4.1 million or 4.7% from $87.7
million at December 31, 1994 to $91.8 million at December 31, 1995. The increase
in total assets was primarily attributable to an increase in consumer loan
originations, and an increase in cash and cash equivalents held by the Savings
Bank. The Savings Bank's total loans receivable increased by $515,000 or .84%
from $61.2 million at December 31, 1994 to $61.7 million at December 31, 1995,
mainly attributable to consumer loans, which increased $1.1 million or 24.3%.
Cash and cash equivalents increased by $2.9 million or 185.3% between December,
1994 and 1995, attributable to repayments of loans and investments and increased
deposits. The Savings Bank's total deposits
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increased $5.4 million or 7.2% from $75.3 million at December 31, 1994 to $80.7
million at December 31, 1995. The increase in deposits during fiscal 1995 was
primarily as a result of competitive rates offered by the Savings Bank. Total
equity increased $129,000 or 1.8% to $7.2 million at December 31, 1995, as a
result of the Savings Bank's net income for fiscal 1995 less the impact of the
valuation of available-for-sale securities pursuant to SFAS No. 115.
OPERATING STRATEGY
The Company and the Savings Bank have experienced a decline in net income
since 1992 primarily as a result of general economic conditions and increased
competition. Although the Company's net income for the year ended December 31,
1996 declined from $161,000 for the year ended December 31, 1995 to $146,000 for
the year ended December 31, 1996, net income for the fiscal year ended December
31, 1996 would have been $454,000 but for the impact of the special assessment
imposed by the Federal Deposit Insurance Corporation ("FDIC") on the insured
deposits of the Savings Bank. This special assessment was imposed on all
commercial banks and savings associations with deposits insured by the Savings
Association Insurance Fund pursuant to the mandates of the Deposit Insurance
Funds Act of 1996.
As described in greater detail below, the Company and Savings Bank intend
to continue an emphasis on residential mortgage loans. However, as part of the
business strategy to increase profitability, the Savings Bank will continue to
widen its range of lending activities to include small business commercial
loans, commercial real estate loans and consumer loans. Although such lending
activities entail greater risk than residential mortgage lending, management is
willing to accept such risks because of its belief that there are lending
opportunities in its market area which are not being currently fulfilled by
other financial institutions and management believes it can properly manage the
risks of greater consumer and commercial lending.
The Savings Bank experienced increased competition from mortgage brokers
and other financial entities for its one-to-four family residential real estate
lending activities in the early 1990s. The Savings Bank's total loans receivable
attributable to one-to-four family residential loans, which amounted to $50.9
million or 65.1% of assets at December 31, 1992, was $65.1 million at December
31, 1996 but had declined as a percentage of assets to 56.8%. During the same
period, the Savings Bank's total loans receivable attributable to commercial,
commercial real estate, construction and consumer loans, which amounted to $4.1
million or 5.2% of assets at December 31, 1992, had increased to $12.2 million
at December 31, 1996 or 10.7% of assets. At the same time, investment
securities, which amounted to $17.2 million, or 21.9% of assets, at December 31,
1992 had increased to $31.9 million, or 27.8% of assets, at December 31, 1996.
Management attributes this shift in asset composition to an increase in deposits
and borrowings over the same period (from $71.5 million at December 31, 1992 to
$98.3 million at December 31, 1996) and the need to invest such funds in
interest-bearing assets. In addition, management desires to increase the Savings
Bank's commercial and consumer loans and investment securities to offset its
exposure to interest rate risk associated with long term fixed rate residential
mortgages in excess of 15 years.
The Savings Bank has reduced the percentage of adjustable rate mortgages in
its mortgage portfolio. As of December 31, 1996, adjustable rate mortgages
constituted 42.0% of the Savings Bank's one-to-four family residential mortgage
portfolio and fixed rate mortgages made up the remaining portion of the Savings
Bank's one-to-four family residential mortgage portfolio. In contrast as of
December 31, 1995, adjustable rate mortgages composed 54.0% of the Savings
Bank's one-to-four residential mortgage portfolio and fixed rate mortgages
comprised the remaining portion of the Savings Bank's one-to-four family
residential mortgage portfolio. Management presently intends to continue to
reduce its emphasis on adjustable rate mortgages by providing 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, in
light of the increased equity of the Company which arose through the Conversion,
management has taken a more aggressive approach to leverage the balance sheet of
the Company and to fund the immediate growth in assets of the Savings Bank
through increased borrowings from the FHLB of Pittsburgh. Investment securities
and mortgage-backed securities are acquired based on Investment/Asset and
Liability Committees ("ALCO") decisions when the Savings Bank has excess cash
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and when management believes the yields and the maturities are attractive.
Excess cash (cash in excess of vault cash and other operating cash needs) are
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. In periods of heavy loan
demand the Savings Bank will borrow from the FHLB of Pittsburgh to satisfy loan
demand and repay such borrowings from subsequent loan payments or increased
deposits. As of December 31, 1995 outstanding borrowings from the FHLB of
Pittsburgh stood at $3.0 million and as of December 31, 1996 such borrowings
have increased to $14.5 million. This increased borrowing occurred as part of
the Management's plan to increase the assets of the Savings Bank and increase
the debt to equity leverage ratio in light of the increased equity that arose
through the Conversion.
Management's strategy in the past few years has been to invest the funds
received from the repayments and prepayments of loans and mortgage-backed
securities immediately into short-term, liquid investments. In the longer term,
the Company anticipates the use of a significant portion of these funds to fund
fixed-rate or adjustable-rate mortgage loans with various maturities and,
depending upon then current interest rates and management's estimate of how such
rates merit change, purchasing investment securities with various maturities.
Although this strategy will have the effect of increasing the Savings Bank's
interest rate exposure of the Company and the Savings Bank, management believes
that the increased earnings potential offsets this increased interest rate risk.
In the event the Savings Bank needs cash to fund additional consumer loans,
commercial loans or commercial real estate loans, the Savings Bank will borrow
funds from the FHLB of Pittsburgh. This strategy will increase interest expense
but management feels the increased yields available through the extension of
consumer, commercial and commercial real estate loans justify such increased
interest expense.
Management has promoted one-to-four family residential mortgage loans with
fixed interest rates to 15 year terms or less whenever possible. Management
continues to offer adjustable rate mortgage loans ("ARMs") for one-to-four
family residential mortgages. U.S. Government and U.S. Government agency
securities and mortgage-backed securities are purchased with contract maturities
generally up to 15 years upon terms which management believes are attractive
because of yield, call features to the security or market conditions. The
Savings Bank has increased its exposure to consumer loans and commercial loans
which combine higher yields and a shorter loan term. Management intends to
continue the strategy set forth above and will also attempt to increase
commercial and consumer loans. The foregoing investment strategy is based on
management's assessment of future economic conditions and is necessarily 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, establish prudent asset concentration guidelines and
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 demand deposit
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. In light of the increased equity
of the Company as a result of the Conversion, management currently is striving
to grow the assets of the Savings Bank. This management decision has lead to
additional borrowings from the FHLB of Pittsburgh.
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The Company seeks, through ALCO, to reduce the vulnerability of its
operations to changes in interest rates and to manage the ratio of interest-rate
sensitive assets to interest-rate sensitive liabilities within specified
maturities or repricing dates. The ALCO reviews, among other things, the
sensitivity of the Savings Bank's asset and liabilities 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 the Savings Bank's liquidity, cash flow needs, maturities of
investments, deposits and borrowings and current market conditions and interest
rates. The Chief Financial Officer and President of the Savings Bank have
authority to adjust pricing weekly with respect to the Savings Bank's retail
deposits.
The OTS is in the process of implementing an interest rate risk component
("IRR") into its risk-based capital rules, which is designed to calculate on a
quarterly basis the extent to which the value of an institution's assets and
liabilities would change if interest rates increase or decrease. The IRR
component has been proposed to be a dollar amount that will be deducted from
total capital for the purpose of calculating an institution's risk-based capital
requirement and is measured in terms of the sensitivity of its net portfolio
value ("NPV") to changes in interest rates. NPV is the difference between
incoming and outgoing discounted cash flows from assets, liabilities, and
off-balance sheet contracts. An institution's IRR is measured as the change to
its NPV as a result of a hypothetical 200 basis point change in market interest
rates. A resulting change in NPV of more than 2% of the estimated market value
of its assets would have required the institution to deduct from its capital 50%
of that excess change. The following table presents the Savings Bank's NPV as of
December 31, 1996, as calculated by the OTS in accordance with its model, based
on information provided to the OTS by the Savings Bank. The chart does not
include the impact of any interest or dividend earning assets held at the
Company level. The effect of market rate shifts on these assets need not be
reported to the OTS.
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)
- --------------------------------------- --------- ----------- --------- ------------ ---------
+400................................... $ 5,789 $ -8,461 -59% 5.43% -672bp
+300................................... 7,978 -6,273 -44 7.30 -486
+200................................... 10,180 -4,071 -29 9.08 -307
+100................................... 12,290 -1,960 -14 10.71 -144
0..................................... 14,250 12.15
- -100................................... 15,995 1,745 +12 13.38 +122
- -200................................... 17,427 3,177 +22 14.33 +218
- -300................................... 18,620 4,370 +31 15.09 +293
- -400................................... $20,186 $ 5,936 +42% 16.07% +392bp
- ---------
(1) Represents the excess (deficiency) 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 excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming no
change in interest rates.
Any IRR deduction imposed against the capital of a savings association by
regulations of the OTS does not take effect until the last day of the third
quarter following the reporting date on which the reported IRR exceeds 200 basis
points. Savings associations with assets under $300 million and risk based
capital ratios in excess of 12% are exempt from reporting the NPV and IRR of
such a savings association, but will be requested to supply selected information
to the OTS. The OTS has issued a directive that it will not yet impose any
deductions from regulatory capital for an IRR component.
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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 which 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 increasing in prevailing rates changed from a negative 12 at
December 31, 1995 to a negative 29 at December 31, 1996. This increase was a
direct result of ALCO's recommendation. Management will continue to review the
NPV and IRR measurements.
Based on the asset size of the Savings Bank and its strong risk based
capital ratios, the Company believes that the Savings Bank does not have to
deduct any amount from the regulatory capital of the Savings Bank as of December
31, 1996. Management uses the NPV and the IRR rule as an additional tool to
evaluate the Savings Bank's asset and liability position.
RESULTS OF OPERATIONS
AVERAGE BALANCES, INTEREST INCOME, INTEREST EXPENSE AND YIELDS EARNED AND
RATES PAID. The following table sets forth, for the periods and at the date
indicated, information regarding the Company's average consolidated balance
sheet. Information is based on average daily balances during the periods
presented. For 1995 and 1994, all information presented is based solely on the
business operations of the Savings Bank.
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YEAR ENDED DECEMBER 31,
AT -----------------------------------------------------------------------------------------
DECEMBER 31,
1996 1996 1995 1994
------------ --------------------------- -------------------------- --------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
RATE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------------ -------- -------- ------- ------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Investment securities
(1).................. 6.73% $ 11,609 $ 657 5.66% $6,562 $ 335 5.11% $6,277 $ 290 4.62%
Loans receivable (2)
Commercial........... 9.35 $ 574 $ 51 8.89
Real estate loans.... 7.37 62,537 4,568 7.31 56,655 3,937 6.95 54,664 3,734 6.83
Consumer............. 7.93 6,147 459 7.47 4,983 352 7.06 3,838 246 6.41
-------- ------ ------- ------ ------ ------
Total Loans
Receivable........... 7.48 69,258 5,078 7.33 61,638 4,289 6.96 58,502 3,980 6.80
Mortgage-backed
securities (1)....... 6.22 14,619 922 6.31 16,363 1,015 6.20 17,495 1,023 5.85
Other interest-earning
assets............... 5.38 1,867 91 4.87 1,345 80 5.95 681 21 3.08
-------- ------ ------- ------ ------ ------
Total
interest-earning
assets............. 7.08% $ 97,353 $6,748 6.93% $85,908 $5,719 6.66% $82,955 $5,314 6.41%
Non-interest-earning
assets................. $ 3,086 $ 2,962 $ 2,272
Total assets......... $100,439 $88,870 $85,227
======== ======= =======
Interest-bearing
liabilities:
Deposits............... 4.08% $ 82,294 $3,407 4.14% $77,711 $3,214 4.14% $74,315 $2,464 3.32%
FHLB advances.......... 5.96 5,169 276 5.34 3,078 192 6.24 3,194 156 4.88
-------- ------ ------- ------ ------ ------
Total
interest-bearing
liabilities........ 4.22% $ 87,463 $3,683 4.21% $80,789 $3,406 4.22% $77,509 $2,620 3.38%
Non-interest-bearing
liabilities:........... $ 1,067 $ 952 $ 922
-------- ------- -------
Total liabilities.... $ 88,530 $81,741 $78,431
Equity................... $ 11,909 $ 7,129 $ 6,796
-------- ------- -------
Total liabilities and
equity............. $100,439 $88,870 $85,227
======== ======= =======
Net interest-earning
assets................. $ 9,980 $ 5,119 $ 5,546
======== ======= =======
Net interest
income/interest rate
spread................. 2.86% $3,065 2.72% $2,313 2.44% $2,694 3.03%
==== ====== ==== ====== ==== ====== ====
Net yield on
interest-earning assets
(3).................... 3.15% 2.69% 3.25%
==== ==== ====
Ratio of average
interest-earning assets
to average interest-
bearing liabilities.... 111.31% 106.34% 107.03%
====== ====== ======
- ---------
(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 which generate interest income for the savings
association. The Savings Bank also operates in an environment of changing
interest rates and fluctuating volumes of deposits, advances from third parties,
loans 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
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attributable to (i) changes in volume (change in volume multiplied by prior year
rate), (ii) changes in rate (change in rate multiplied by prior year volume),
and (iii) total change in rate and volume.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
1996 VS. 1995 1995 VS. 1994
------------------------------------------- --------------------------------------------
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.................. $222 $491 $ 76 $ 789 $ 90 $209 $ 10 $ 309
Mortgage-backed
securities........... 17 (108) (2) (93) 62 (66) (4) (8)
Investment
securities........... 36 258 28 322 30 13 2 45
Other interest-earning
assets............... (15) 31 (5) 11 19 21 19 59
---- ---- ----- ------ ----- ---- ----- ------
Total interest-earning
assets............... 260 $672 $ 97 $1,029 $ 201 $177 $ 27 $ 405
---- ---- ----- ------ ----- ---- ----- ------
Interest-bearing
liabilities:
Deposits............... 3 $190 $ 0 $ 193 $ 609 $113 $ 28 $ 750
FHLB advances.......... (27) 130 (19) 84 44 (6) (2) 36
---- ---- ----- ------ ----- ---- ----- ------
Total interest-bearing
liabilities............ (24) 320 (19) 277 653 107 26 786
---- ---- ----- ------ ----- ---- ----- ------
Increase (decrease) in
net interest income.... 284 $352 $ 116 $ 752 ($452) $ 70 $ 1 ($ 381)
==== ==== ===== ====== ====== ==== ===== ======
NET INCOME. The Company reported consolidated net income of $146,000,
$161,000 and $548,000 for the fiscal years ended December 31, 1996, 1995 and
1994, respectively. For fiscal 1996, the $15,000 decrease in net income compared
with fiscal 1995 was attributable to a $752,000 or 32.5% increase in net
interest income and a $75,000 or 33.9% increase in other income and a $847,000
or 37.6% increase in other expenses. The 847,000 increase in total non-interest
expense included a $502,000 special assessment imposed by the FDIC to promote
the recapitalization of the Savings Association Insurance Fund ("SAIF") as
required by the Deposit Insurance Funds Act of 1996. The special assessment by
the FDIC affected all banking institutions with SAIF insured deposits. But for
this special assessment, the Company's net income for the fiscal year ended
December 31, 1996, would have been $454,000. The increased borrowings from the
FHLB of Pittsburgh reduced the net margin on interest-earning assets for fiscal
1996. Non-interest expense also rose due to the additional professional fees
related to operating the Company as a public reporting entity, the additional
hiring of personnel and the implementation of an employee stock ownership plan.
For fiscal 1995, the $387,000 decrease in net income compared with fiscal
1994 is primarily attributable to a $381,000 or 14.1% decrease in net interest
income, a $72,000 or 24.5% decrease in other income and a $197,000 or a 9.6%
increase in other expenses which was partially offset by a $263,000 or a 76.0%
decrease in income tax expense.
NET INTEREST INCOME. Net interest income before provision for loan losses
amounted to $3.1 million during fiscal 1996, compared to $2.3 million during
fiscal 1995 and compared to $2.7 million during fiscal 1994. During fiscal 1996,
the $752,000, or 32.5%, increase in net interest income compared with fiscal
1995 was attributable to a $11.4 million, or 13.3%, increase in the average
balance of interest-earning assets which was partially offset by an increase of
$6.7 million, or 8.3%, increase in average interest-bearing liabilities. This
increase in average interest-earning assets over average interest-bearing
liabilities in 1996 was primarily attributable to the proceeds from the
Company's stock offering. Another contributing factor was an increase in the
average yield earned on interest-earning assets to 6.93% in 1996 from 6.66% in
1995, due primarily to increases in yields earned on loans receivable. The
increases in both average balances and yield on earning assets, during fiscal
1996, increased interest income $1.0 million, or 18.0%, which more than offset a
$277,000,
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or 8.1%, increase in total interest expense. During fiscal 1995, the $381,000,
or 14.1%, decrease from fiscal 1994 was attributable to a $786,000, or 30%,
increase in total interest expense, which was partially offset by a $405,000, or
7.6%, increase in total interest income.
The $1.0 million increase in total interest income during the year ended
December 31, 1996 over the prior comparable period was primarily due to a
$789,000, or 18.4%, increase in interest and fees on loans and a $322,000, or
96.1%, increase in interest and dividends on other investment securities. The
increase in interest earned on loans and interest and dividends on other
investment securities during fiscal 1996 was primarily due to a rise in average
balances of loans receivable and on investment securities of $7.6 million, or
12.4%, and $5.0 million, or 76.9%, respectively. In addition, an increase in the
average yield earned on loans receivables from 6.96% in 1995 to 7.33% in 1996
accounted for a portion of the increase in interest income.
The increase in interest expense in 1996, compared with 1995, was primarily
a result of an increase in the Savings Bank's average interest bearing
liabilities from $80.8 million to $87.5 million. This increase resulted from an
increased volume of average deposits of $4.6 million or 5.9% and a $2.1 million
increase in average borrowings or 67.9%.
The $381,000 reduction in net interest income during the year ended
December 31, 1995 over the prior comparable period was primarily due to a
$786,000 or 30% increase in total interest expense incurred by the Savings Bank
for the fiscal year ending December 31, 1995. This increase was caused by a
$750,000 or 30.4% increase in interest paid on deposits. While average daily
deposits for the Savings Bank rose from $74.3 million in 1994 to $77.7 million
in 1995, the average daily yield earned by depositors increased from 3.32% to
4.14%. In addition, during fiscal 1995, the Savings Bank decreased borrowings
from the FHLB of Pittsburgh by $1.3 million by year end, however due to the
increased rates offered by the FHLB of Pittsburgh during 1995, the Savings Bank
incurred $36,000 of additional interest expense on FHLB of Pittsburgh advances
as compared to fiscal 1994.
The increase in interest expense in 1995, compared with 1994, was primarily
a result of an increase in the Savings Bank's cost of funds from 3.38% to 4.22%.
This increase of 84 basis points resulted from an increase in general market
rates on deposits and advances from the FHLB of Pittsburgh and a shift to
certificates of deposits from passbook and money market accounts. This increase
was the primary reason for the decline in the net interest rate spread and net
interest margin to 2.44% and 2.69%, respectively, for the year ended December
31, 1995 compared with a net interest rate spread and net interest margin of
3.02% and 3.25%, respectively, for the year ended December 31, 1994.
PROVISION FOR LOAN LOSSES. The Savings Bank establishes provisions for
loan losses, which are charged to operations, in order to maintain the allowance
for loan losses at a level which is deemed to be appropriate based upon an
assessment of prior loss experience, the volume and type of lending presently
being conducted by the Savings Bank, industry standards, past due loans,
economic conditions in the Savings Bank's market area generally and other
factors related to the collectibility of the Savings Bank's loan portfolio. For
the year ended December 31, 1996, the provisions for loan losses was $44,000.
For each of the two years ended December 31, 1995 and 1994, provisions for loan
losses were $36,000. During fiscal 1996, the Savings Bank charged $24,000
against the allowance for loan losses to reduce the carrying value of the
Savings Bank's interest in a one-to-four family mortgage and to write off two
credit card balances. At December 31, 1996, the Savings Bank's allowance for
loan losses amounted to 89.88% of total non-performing loans and .40% of total
loans receivable. Management and the directors of the Company and the Savings
Bank believe that the provisions for loan losses are adequate. In light of the
recent additional consumer and commercial loans management recognizes that it
must pay heighten attention to any increases in delinquencies in these loans in
evaluating the provision for loan losses.
The Savings Bank calculates expected loan losses using an approach based
primarily upon historical experience and current economic conditions. 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 provisions for
loan losses in the future as a result of increases in higher risk commercial and
consumer loans, future changes in the economy or for other reasons, which could
adversely affect the Savings Bank's results of operations. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the
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Savings Bank's provision for loan losses and the carrying value of its other
non-performing assets based on their judgments about information available to
such regulatory agencies at the time of their examination. The Savings Bank was
last examined by the OTS as of September 30, 1995.
OTHER INCOME. Total other income amounted to $297,000 for the year ended
December 31, 1996, an increase of $75,000 or 33.9% from the $222,000 earned in
fiscal 1995. Increased loan application and transaction fees accounted primarily
for the rise in total other income. The additional loan application and
transaction fees have resulted in increased costs due to higher employee
manhours to process such loan applications and to administer such transactions
and loans.
Total other income amounted to $222,000 for the year ended December 31,
1995, a decrease of $72,000 or 24.5% from the $294,000 earned in fiscal 1994.
The primary reason for the decrease was a $28,000 one-time charge for a loss on
the sale of the former Mt. Oliver office and a $7,000 write off of equipment and
other assets. In addition, 1994 other income, net included a gain of $35,000 as
the result of a legal settlement. Excluding these items, core other income
remained relatively stable for the fiscal year ending December 31, 1995.
OTHER EXPENSES. Total other expenses amounted to $3.1 million for the year
ended December 31, 1996, an increase of $848,000 or 37.6% from the $2.3 million
incurred in fiscal 1995. The SAIF special assessment accounted for $502,000 or
59.2% of this increase in 1996. Another reason for the increase was a $205,000
or 20.2% increase in salaries and employee benefits. This is attributable to the
hiring of two employees to staff the newly formed mortgage service area and the
hiring of a management information system employee along with the implementation
of a employee stock ownership plan. The increase is also attributable to a rise
in other expenses which increased $95,000 or 34.5% during 1996. The rise in
other expenses was primarily the result of increased professional fees and other
costs associated with operating the company as a public reporting entity.
Total other expenses amounted to $2.3 million for the year ended December
31, 1995, an increase of $197,000 or 9.6% from the $2.1 million incurred in
fiscal 1994. The increase is primarily attributable to increases in salaries and
employee benefits, which increased by $82,000 or 8.8%. Approximately $60,000 of
this increase was due to salary costs which increased due to the hiring of three
additional employees and the annual wage increases provided to the Savings
Bank's employees. The increase is also attributable to increases in premises and
occupancy costs, which increased during 1995 by $54,000 or 20.7%. The rise in
premises and occupancy costs during 1995 was due primarily to increased
depreciation for equipment. Data processing costs climbed in 1995 by $21,000 to
$154,000 for a total percentage increase of 15.8% over 1994 costs due mainly to
the addition of monthly wide area network telephone line charges.
INCOME TAXES. For the fiscal years ended December 31, 1996, 1995 and 1994,
the Savings Bank incurred income tax expense of $69,000, $83,000 and $346,000.
The effective tax rate was 32.3% during the year ended December 31, 1996,
compared to 34.1% during the year ended 1995, and 38.7% in fiscal 1994. For
further information, see Note 11 of the Notes to Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows are categorized as to whether they relate to the operating,
investing or financing activities of the Company or the Savings Bank. Cash flow
from operating activities includes net income plus or minus non-cash income
statement items. Cash flow from investing activities includes proceeds from the
sale or maturity of investment securities, principal payments collected on loans
and mortgage-backed and related securities, loan originations and purchases of
investments and mortgage backed and related securities. Cash flow from financing
activities includes the increase or decrease in deposits, borrowings and
escrows. The amount of principal repayments on loans and mortgage-backed and
related securities are heavily influenced by the general level of interest rates
in the economy. During periods in which the Savings Bank is unable to originate
a sufficient amount of loans that it intends to retain, such as adjustable rate
mortgage loans and other loans with shorter terms and during periods of high
principal repayments, the Savings Bank will increase liquid assets, with
remaining amounts invested in U.S. Government and federal agency securities and
mortgage-backed and related securities.
14
15
Net cash used by operating activities for the year ended December 31, 1996
was approximately $207,000 whereas for year ended December 31, 1995, the cash
used by operations was $5,000. The decrease of $202,000 in cash provided from
operations during 1996 was primarily due to the $173,000 increase in accrued
interest receivable and the $176,000 increase in other assets which was
partially offset by a 138,000 increase in other liabilities.
Net cash used by investing activities increased from $1.3 million in 1995
to $25.2 million in 1996. The primary reason for this $23.9 million increase was
due to $17.2 million increase in loan originations and $10.9 million increase in
purchases of investment and mortgage-backed securities. During 1996 the Savings
Bank's new loan originations were $15.2 million in excess of their loan
payments, while in 1995, the Savings Bank's loan originations exceeded the loan
payments by $795,000. This increase in loan originations was a combination of
increased loan demand, competitive rates offered by the Savings Bank and
aggressive marketing efforts.
Net cash provided by financing activities increased $18.6 million from $4.2
million in 1995 to $22.8 million in 1996. This net cash from financing activity
is derived from three sources. First, the Company and the Savings Bank had
access to the net proceeds of the Conversion for investment in securities and
loan receivables. Second, during 1996, the Savings Bank's deposits rose by $3.1
million while there was a shift from certificates of deposit to core deposits.
Third, the Company undertook to further leverage the Company in light of the
influx of equity from the Conversion. In the process of such leveraging, the
Savings Bank increased advances from the FHLB of Pittsburgh from $3.0 million as
of December 31, 1995 to $14.5 million as of December 31, 1996.
Absent the equity derived from the Conversion and the funds acquired in the
leveraging of the Company that occurred in 1996, the primary sources of funds
for the Savings Bank are deposits, repayments, prepayments and maturities of
outstanding loans and mortgage-backed securities, maturities of investment
securities and other short-term investments, and funds provided from operations.
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, dividends
on the 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 and loan prepayments are greatly influenced by the movement
of interest rates in general, economic conditions and competition. The Savings
Bank manages the pricing of its deposits to maintain a deposit balance deemed
appropriate and desirable by its Board of Directors. 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, and currently maintains a total line of credit of $8.2
million with the FHLB of Pittsburgh, which line of credit will expire March 24,
1998 absent further extension. Although at December 31, 1996, there were no
outstanding borrowings under this line of credit, at December 31, 1996, the
Savings Bank has borrowed $14.4 million from the FHLB of Pittsburgh pursuant to
various term loans with maturities of less than five 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, 1996, 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 fund purchases of additional investment securities for its
portfolio and to increase the Savings Bank's commercial loan and consumer loan
portfolios. The Company has no outstanding loan or purchase commitments. The
Savings Bank has outstanding various commitments (i.e. one-to-four family loan
commitments, credit card limits and commercial loans commitments) to extend
credit approximating $5.4 million as of December 31, 1996. Certificates of
deposit scheduled to mature in one year or less at December 31, 1996 totalled
$28.4 million.
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16
The Company and the Savings Bank experienced a decline in liquid assets
during the past year as a result of increased loan originations and purchases of
additional investment securities. Cash and cash equivalents have decreased by
$2.2 million or 51.1% between December 31, 1995 and December 31, 1996. As of
December 31, 1996, the consolidated cash and cash equivalents of the Company
amounted to $2.1 million or 1.9% of assets, of which $1.4 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 have an increase in dollar amount over the last few years,
from $22.6 million or 24.6% of assets at December 31, 1995 to $31.9 million or
27.8% of assets at December 31, 1996. As of December 31, 1996, $341,000 of such
investment securities (including mortgage-backed securities) of the Company and
the Savings Bank mature within one year or less and $8.3 million have maturities
of five years or less. The Company's consolidated net interest margin has
increased from 2.69% for the year ended December 31, 1995 to 3.15% for the year
ended December 31, 1996.
Management of the Savings Bank believes that the Savings Bank has adequate
resources, including principal prepayments and repayments of loans,
mortgage-backed securities and maturing investments and access to loans from the
FHLB of Pittsburgh, to fund all of its commitments to the extent required and to
maintain flexibility to meet other market changes. Management believes that a
significant portion of maturing deposits will remain with the Savings Bank. See
Note 8 of the Notes to Consolidated Financial Statements.
The Savings Bank is required by the OTS to maintain average daily balances
of liquid assets and short-term liquid assets (as defined in OTS regulations) in
amounts equal to 5% and 1%, respectively, 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
and short-term liquid assets at December 31, 1996 was 13.4% and 4.4%,
respectively.
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's assets consist of its investment in the Savings Bank, its receivable
from the ESOP, an equity investment with an aggregate market value of $200,000
in three savings associations or their holding companies and deposits maintained
with the Savings Bank. Its sources of income will consist of earnings from the
investment in such equities, interest or such deposits and interest from the
ESOP obligation. The only expenses of the Company relate to its reporting
obligations to the OTS, under the Exchange Act and related expenses as a
publicly traded company. Management believes that the Company and the Savings
Bank currently has 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 generally accepted
accounting principles 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
In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," which provides for
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17
standardized accounting for transfers and servicing of financial assets and
extinguishment of liabilities. This statement is effective for related
transactions occurring after December 31, 1996, however, the FASB has
indefinitely delayed the effective date for certain portions of this statement
pending further clarification. Management does not believe the effect of
adoption of this standard will be material.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", establishing financial accounting and reporting standards for
stock-based employee compensation plans. This statement encourages all entities
to adopt a new method of accounting to measure compensation cost of all employee
stock compensation plans based on the estimated fair value of the award at the
date it is granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting, which generally does not result in compensation expense recognition
for many plans. Companies that elect to remain with the existing accounting
principles under Accounting Principles Board ("APB") Opinion No. 25 are required
to disclose in a footnote to the financial statements pro forma net income and
earnings per share, as if this statement had been adopted. The accounting
requirements of this statement are effective for transactions entered into for
fiscal years that begin after December 15, 1995. Management of the Company has
not yet determined whether to adopt the new accounting method under SFAS No. 123
or the existing method under APB Opinion No. 25 for stock-based compensation
plans if any such plans are adopted by the Company.
BUSINESS OF THE COMPANY
GENERAL
The Company is a savings and loan holding company that holds the capital
stock of one subsidiary, the Savings Bank. The Company owns a loan receivable
from the ESOP and holds an equity investment in three savings associations or
their holding companies and deposits maintained with the Savings Bank. The
principal business operations of the Company are conducted through the Savings
Bank.
LENDING ACTIVITIES
General. The Savings Bank's lending operations follow the traditional
pattern of primarily emphasizing the origination of one-to-four family
residential loans for portfolio retention and to a substantially lesser degree,
the origination of commercial loans, commercial real estate loans, construction
loans on residential properties and consumer loans, including home equity or
home improvement loans, automobile loans, student loans, credit card loans, cash
collateral personal loans and unsecured personal loans.
At December 31, 1996, the Savings Bank's total loan portfolio amounted to
$77.4 million, or 67.5% 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 its lending
orientation, $65.1 million or 84.2% of the Savings Bank's total loan portfolio
consisted of one-to-four family residential loans at December 31, 1996.
Management intends that one-to-four family residential mortgage loans will be
the primary lending activity of the Savings Bank.
Consumer loans, which are of shorter maturity and at higher margins above
cost of funds, have risen from $5.6 million at December 31, 1995, to $9.3
million at December 31, 1996. 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 $2.1 million at December 31, 1995 to $4.6 million
at December 31, 1996. Management has also sought through the promotion of
automobile, student and credit card loans to increase outstanding consumer
loans. The percentage of consumer loans against total loan receivables has
changed from 9.0% at December 31, 1995, to 12.0% at December 31, 1996.
Management is committed to increase consumer loans.
The Savings Bank is pursuing a policy to further grow its commercial loan
and commercial real estate loan portfolio. Commercial loans and commercial real
estate loans have risen from $815,000 at December 31,
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1995, to $2 million at December 31, 1996 and is expected to continue to increase
in 1997. Each of the foregoing figures shows gross loan receivables with no
allocation for bad debt reserve or other contra accounts. Management has worked
with existing contacts to seek out commercial loan and commercial real estate
loans opportunities. The percentage of commercial loans and commercial real
estate loans against total loan receivables has changed from 1.3% at December
31, 1995 to 2.6% at December 31, 1996. Management has set a goal to grow the
commercial loan portfolio to $10 million by December 31, 1997. No special goals
have been set on the growth of the commercial real estate portfolio.
By statute, the Savings Bank must limit its commercial loans to no more
than 10% of its assets. As of December 31, 1996, the total asset size of the
Savings Bank was $114.4 million and 10% of such number is $11.4 million. The
statutory ceiling on commercial real estate loans is substantially higher, i.e.
400% of the Savings Bank's capital, or at December 31, 1996 $46.6 million.
Management intends to explore extending some commercial loans that carry a
partial U.S. Government guarantee of the payment of principal and interest.
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. All of the Savings Bank's residential mortgage loans
are 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.
AS OF DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994
----------------- ------------------ -----------------
AMOUNT % AMOUNT % AMOUNT %
------- ----- ------- ------ ------- ------
(DOLLARS IN THOUSANDS)
Real estate loans
One-to-four family (1)..... $65,117 84.17% $55,367 89.68% $55,304 90.33%
Construction............... 925 1.20 0 0.00 715 1.17
Commercial real estate..... 1,023 1.32 793 1.28 733 1.20
------- ----- ------- ------ ------- ------
Total................... $67,065 86.69% $56,160 90.96% $56,752 92.70%
------- ----- ------- ------ ------- ------
Commercial loans............. $ 1,010 1.30% $ 22 0.04% $ 0 0.00%
------- ----- ------- ------ ------- ------
Consumer loans
Home equity loans &
lines................... $ 4,562 5.90% $ 2,053 3.33% $ 1,694 2.77%
Student loans.............. 2,228 2.88% 2,220 3.60% 2,080 3.40%
Automobile loans........... 1,515 1.96 713 1.15 253 0.41
Other consumer loans(1).... 984 1.27 569 0.92 443 0.72
------- ----- ------- ------ ------- ------
Total................... $ 9,289 12.01% $ 5,555 9.00% $ 4,470 7.30%
------- ----- ------- ------ ------- ------
Total loans receivable(1).... $77,364 100% $61,737 100.00% $61,222 100.00%
======= ===== ======= ====== ======= ======
Less:
Allowance for loan
losses.................. $ 307 $ 287 $ 303
Loans in process........... 515 0 232
Deferred loan (costs)
fees.................... (3) 42 52
------- ------- -------
Loans receivable, net........ $76,545 $61,408 $60,635
======= ======= =======
- ---------
(1) Includes non-performing loans.
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CONTRACTUAL MATURITIES. The following table sets forth the scheduled
contractual maturities of the Savings Bank's loan portfolio at December 31,
1996. Demand loans, loans having no stated schedule of repayments and no stated
maturity and overdraft loans are reported as due in one year or less. The
amounts shown for each period do not take into account loan prepayments and
normal amortization of the Savings Bank's loan portfolio.
AT DECEMBER 31, 1996
--------------------------------------------------------------
COMMERCIAL
ONE-TO-FOUR REAL
FAMILY (1) ESTATE COMMERCIAL CONSUMER TOTAL
----------- ---------- ---------- -------- -------
(IN THOUSANDS)
1 year or less............................ $ 84 $ 0 $ 25 $ 459 $ 568
After 1 year through 5 years.............. 5,901 145 895 4,414 11,355
More than 5 years......................... 60,057 878 90 4,416 65,441
------- ------ ------ ------ -------
Total amounts due......................... $66,042 $1,023 $1,010 $9,289 $77,364
======= ====== ====== ====== =======
Interest rate terms on amounts due
after 1 year:
Fixed................................... $38,635 $ 367 $ 348 $5,268 $44,618
======= ====== ====== ====== =======
Adjustable/Floating..................... $27,323 $ 656 $ 637 $3,562 $32,178
======= ====== ====== ====== =======
- ---------
(1) Includes construction loans of $925,000 for the construction of one-to-four
family homes. At the completion of the construction period (usually less
than one year) the loan will convert automatically to a traditional mortgage
with a maturity 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.
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LOAN ORIGINATION, PURCHASE AND SALES ACTIVITY. The following table shows
the loan origination, purchase and sale activity of the Savings Bank during the
periods indicated.
YEAR ENDED
DECEMBER 31,
---------------------
1996 1995
-------- -------
(IN THOUSANDS)
Total loans at beginning of period.................................... $ 61,737 $61,222
Loan originations:
Real estate
One-to-four family............................................... $ 17,100 $ 5,852
Commercial real estate........................................... 512 0
Construction..................................................... 925 0
-------- -------
Total real estate loans originated............................. $ 18,537 $ 5,852
-------- -------
Commercial loans.................................................... $ 1,173 $ 23
-------- -------
Consumer loans
Home equity loans and lines of credit............................ $ 3,868 $ 1,079
Student loans.................................................... 482 473
Automobile loans................................................. 1,242 652
Other consumer loans............................................. 1,284 524
-------- -------
Total consumer loans originated................................ $ 6,876 $ 2,728
-------- -------
Total loans originated........................................... $ 26,586 $ 8,603
-------- -------
Deduct:
Principal loan repayments and prepayments........................... $(10,949) $(7,960)
Transferred to real estate owned.................................... (10) (128)
-------- -------
Subtotal:............................................................. $(10,959) $(8,088)
-------- -------
Net increase in loans............................................... $ 15,627 $ 515
-------- -------
Total loans at end of period........................................ $ 77,364 $61,737
======== =======
Applications for residential mortgage and consumer loans are taken at any
of the Savings Bank's offices, while commercial loan, commercial real estate
loan and construction loan applications are referred to the President of the
Savings Bank. 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 from referrals at this time.
The Savings Bank's lending policies allow all one-to-four residential
mortgage loans $50,000 or less to be approved with two signatures of the
President, Executive Vice President and/or the Chairman of the Board.
One-to-four residential mortgage loans in excess of $50,000 are presented to the
Loan Committee which consists of a member of management and two outside
directors. Commercial loan applications under $25,000 may be approved with the
signatures of two of the loan officers designated by the President or the Loan
Committee. The Loan Committee has been authorized by the Board to grant loans up
to $250,000, with loans in excess of this amount required to be presented to the
full Board for review and approval. It has been the policy of the Savings Bank's
management to present all mortgage loans which are not single-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 $250,000. 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 legal lending limit
amounted to $1.7 million at December 31, 1996.
The Savings Bank currently is not a purchaser of residential or consumer
loans. There are no current intentions to begin purchasing such loans. The
Savings Bank has previously purchased loan participations secured primarily by
commercial real estate located in Pennsylvania and Ohio. Such loans were
presented to the Savings Bank from contacts primarily at other financial
institutions, particularly those which have
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previously done business with the Savings Bank. At December 31, 1996, none of
the Savings Bank's total loans receivable consisted of participation interests.
During 1995, the Savings Bank wrote-off one commercial loan participation and
transferred the interest to the classification "other real estate owned" and
valued the asset in accordance with an appraisal at $39,000.
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
generally more restrictive than those in the Real Estate Lending Guidelines;
construction and land development (75%); residential properties (90% 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 an 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, 1996, $65.1 million or
84.2% 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 or three years in accordance with a designated index.
Such loans have a 2% cap on any increase or decrease in the interest rate per
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. 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, 1996, approximately $37.8 million or 58% of the one-to-four
family residential loans in the Savings Bank's loan portfolio consisted of loans
which 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.
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Property appraisals on the real estate and improvements securing the
Savings Bank's one-to-four family residential loans are made by independent
appraisers approved by the Savings Bank's Board of Directors. Appraisals are
performed in accordance with Federal regulations and policies. The Savings Bank
obtains title insurance policies on most first mortgage real estate loans
originated by it. 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, when required by the United States
Department of Housing and Urban Development, flood insurance. 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.
COMMERCIAL REAL ESTATE LOANS. On a limited basis, the Savings Bank
originates mortgage loans for the acquisition and refinancing of commercial real
estate properties (including multi-family complexes). At December 31, 1996, $1.0
million or 1.32% of the Savings Bank's total loan portfolio consisted of loans
secured by existing commercial real estate properties. At December 31, 1996, the
Savings Bank's commercial real estate loan portfolio consisted of 6 loans with
an average principal balance of $171,000.
The Savings Bank's commercial real estate loans are secured by apartment
complexes, developed residential lots and small retail establishments. The
Savings Bank's commercial real estate loan portfolio consists primarily of loans
secured by properties located in Pennsylvania.
Although terms vary, commercial real estate loans generally are amortized
over a period of 10 to 15 years. The Savings Bank's commercial real estate loans
have a weighted average maturity of approximately 13 years at December 31, 1996.
The Savings Bank will originate these loans either with fixed interest rates or
with interest rates which 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 stringent loan-to-value and other underwriting
requirements.
COMMERCIAL LOANS. At December 31, 1996, $1.0 million or 1.31% of the
Savings Bank's total loan portfolio consisted of loans classified as commercial
loans. The Savings Bank's commercial 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 and inventory. The Savings Bank's commercial
loan portfolio consists of borrowers primarily located in Western Pennsylvania.
Commercial 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.
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, 1996,
$925,000 or 1.2% 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
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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 attempted to minimize the foregoing risks by,
among other things, limiting the extent of its construction lending generally,
by limiting its construction lending to residential properties and by
emphasizing construction loans for residences extended to the individuals who
will occupy the constructed home. In addition, 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.
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 $1.5 million or 2.0% of
the total loans receivable at December 31, 1996. Home equity loans and lines of
credit amounted to $4.6 million or 5.9% of the total loans receivable at
December 31, 1996. The student loan balance amounted to $2.2 million or 2.9% of
the total loans receivable as of such date, deposit account secured loans had
outstanding balances of $487,000 or .6% of total loans receivables as of such
date and unsecured personal loans (including credit card balances outstanding)
stood at $497,000 or .6% of total loans receivables as of such date.
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, 1996, the entire automobile
loan portfolio had fixed rate contracts. Automobile loans involve higher risk
since the collateral rapidly depreciates. Defaults during the early months of
the loan will likely result in a loss of principal due to the reduced value of
the vehicle and the costs of repossession and sale. Automobile loans may be
granted for up to 100% of the purchase price.
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 $399,000
or .5% of the total loans receivable at December 31, 1996.
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 1996, the Savings Bank wrote-off two credit card
loan balances with aggregate outstandings of $6,000. At December 31, 1996,
$2,000 of the remaining consumer loans were classified as non-performing.
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
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are made. In most cases, deficiencies are cured promptly. While the Savings Bank
generally prefers to work with borrowers to resolve such problems, when a loan
becomes 60 days delinquent the loan is 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 institutes
foreclosure, repossession, setoff or other 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 expenses and
costs incurred for the improvement or development of such property are
capitalized.
Under generally accepted accounting principles, 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, 1996, the Savings Bank had no troubled debt
restructurings and had no interest income arising from troubled debt
restructuring.
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 which are past due.
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------------------------------ ------------------------------------------------------
90 DAYS OR 90 DAYS OR
30-59 DAYS 60-89 DAYS GREATER 30-59 DAYS 60-89 DAYS GREATER
---------------- ---------------- ---------------- ---------------- ---------------- ----------------
PERCENT PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOAN OF LOAN OF LOAN OF LOAN OF LOAN OF LOAN
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
Real estate
loans:
One-to-four
family
residences... $1,738 2.67% $ 75 .12% $ 339 .52% $2,076 3.75% $ 621 1.12% $ 306 .55%
Commercial... 0 0 0 0 0 0 0 0 0 0 0 0
Consumer
loans:....... $ 6 .06% $ 15 .16% $ 2 .02% $ 86 1.55% $ 1 .02% $ 0 0%
------ ----- ----- ------ ----- -----
Total...... $1,744 $ 90 $ 341 $2,162 $ 622 $ 306
====== ===== ===== ====== ===== =====
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NON-PERFORMING ASSETS. The following table sets forth the amounts and
categories of the Savings Bank's non-performing assets at the dates indicated.
The Savings Bank had no loans during the periods indicated below which should be
classified as troubled debt restructurings.
DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
Non-accruing loans:
One-to-four family residential(1)......................... $339 $306 $338
Consumer Loans(2)......................................... 2 0 0
Commercial participations(3).............................. 0 0 53
---- ---- ----
Total nonperforming loans............................... 341 306 391
Real estate owned......................................... 50 42 0
---- ---- ----
Total nonperforming assets.............................. $391 $348 $391
==== ==== ====
Total nonperforming loans as a percentage of total
loans................................................... .44% .50% .64%
==== ==== ====
Total nonperforming assets as a percentage of total
assets.................................................. .34% .38% .45%
==== ==== ====
- ---------
(1) Consists of an aggregate of 6, 8 and 12 loans at December 31, 1996, 1995 and
1994, respectively.
(2) Consists of one loan at December 31, 1996.
(3) Consists of 1 loan at December 31, 1994.
The Savings Bank's total non-performing assets have increased from $348,000
or .38% of total assets at December 31, 1995 to $391,000 or .34% of total assets
at December 31, 1996. The $43,000 increase in total non-performing assets
between December 31, 1995 and 1996 principally reflects increases in
non-performing loans.
At December 31, 1996 and at December 31, 1995, approximately $15,000 and
$22,000 in interest income, respectively, would have been recorded in the period
then ended on loans accounted for on a non-accrual basis if such loans had been
current in accordance with their original terms and had been outstanding
throughout the period or since origination if held for part of the period. The
Savings Bank had no accruing loans greater than 90 days delinquent.
ALLOWANCE FOR LOAN LOSSES. An allowance for loan losses is maintained at a
level that management considers adequate to provide for potential losses based
upon an evaluation of known and inherent risks in the loan portfolio. Allowances
for loan losses are based on estimated net realizable value. Management's
periodic evaluation is based upon examination of the loan portfolio, past loss
experience, current economic conditions, the results of the most recent
regulatory examinations, and other relevant factors. The allowance is increased
by provisions for loan losses which are charged against income. While management
uses the best information available to make such evaluations, future adjustments
to the allowance may be necessary if economic conditions differ substantially
from the assumptions used in making the evaluations. In addition, 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 examination. The Savings Bank could be required to increase
its allowance for loan losses, thereby negatively affecting the Savings Bank's
financial condition and earnings at that time.
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The following table summarizes changes in the allowance for loan losses and
other selected statistics for the periods presented.
DECEMBER 31,
---------------------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
Average total loans................................ $69,258 $61,638 $58,502
======= ======= =======
Allowance for loan losses, beginning of year....... $ 287 $ 303 $ 268
Charged-off loans(1)............................... (24) (53) (1)
Recoveries on loans previously charged off......... 0 1 0
Provision for loan losses.......................... 44 36 36
Allowance for loan losses, end of period........... $ 307 $ 287 $ 303
======= ======= =======
Net loans charged-off to average loans............. .04% .09% 0.00%
======= ======= =======
Allowance for loan losses to total loans........... .40% .46% .49%
======= ======= =======
Allowance for loan losses to nonperforming loans... 89.88% 93.79% 77.49%
======= ======= =======
- ---------
(1) Consists of $18,000 of one-to-four family residential mortgage loans and
$6,000 of consumer loans in 1996; consists of $23,000 of commercial real
estate loans and $30,000 of one-to-four family residential loans in 1995;
and consists of $1,000 of consumer loans in 1994.
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. This
allocation is based upon historical experience. The entire allowance for loan
losses is available to absorb future loan losses in any loan category.
DECEMBER 31,
-----------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
% 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)
Real Estate:
One-to-four family, commercial real estate,
participation, construction and other real
estate...................................... $227 73.94% $207 72.13% $224 73.93%
Commercial Loan:
Working capital and term loans for business
uses........................................ 5 1.63 0 0 0 0
Consumer:
Automobile, home equity, student, share and
other consumer.............................. 75 24.43 80 27.87 79 26.07
---- ------ ---- ------ ---- ------
Total.................................... $307 100.00% $287 100.00% $303 100.00%
==== ====== ==== ====== ==== ======
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
26
27
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 loss, or
charge-off such amount. General loss allowances established to cover possible
losses related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses do not qualify as regulatory capital. At December 31,
1996, the Savings Bank had $341,000 of assets classified as "substandard" (all
of which are set forth under "Non-Performing Assets" above) and no assets
classified as "doubtful", "loss" or "special mention".
INVESTMENT ACTIVITIES
GENERAL. The investment activities of the Company are managed by the Board
of Directors of the Company. Investment activity at the Company is minimal. The
Company has chosen to take equity positions in three savings associations or
their respective holding companies. The aggregate value of these investments is
$200,000. These investments were selected on management's belief that the value
of these institutions would appreciate. This equity investment represents .2% of
the total consolidated assets of the Company and 1.1% 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 President with
the assistance of other senior officers designated by the Board of Directors of
the Savings Bank. These activities are conducted in accordance with a written
investment policy which 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 the
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
investment objective is to maintain a balance of high quality and diversified
investments with a minimum of credit risk. 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. Cash and cash equivalents of the Savings Bank
decreased by $2.2 million or 51.1% from fiscal 1995 to fiscal 1996. At December
31, 1996, cash and cash equivalents of the Savings Bank amounted to $2.1 million
or 1.9% of total assets. The largest component in this category, which accounted
for
27
28
the majority decrease during the period, is interest bearing deposits in banks,
which amounted to $1.4 million at December 31, 1996. All such deposits were made
with the FHLB of Pittsburgh.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES. As a savings and
loan holding company, with majority ownership in one savings association which
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, to invest in three known savings
associations or their holding companies and to deposit the remaining funding of
the Company in a money market 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 are 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; invest in repurchase agreements secured by securities
eligible for investment by the Savings Bank; invest in mutual funds restricted
to authorized investments; 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 quarterly. 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 FHLMC,
the 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. FHLMC and FNMA securities are not
backed by the full faith and credit of the United States, 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 which 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.
28
29
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 which
underlie such securities because of their payment guarantees or credit
enhancements which 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.
The following tables set forth certain information relating to the
Company's and Savings Bank's investment and mortgage-backed securities portfolio
at the dates indicated:
DECEMBER 31,
-------------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
AMORTIZED % OF AMORTIZED % OF AMORTIZED % OF
COST TOTAL COST TOTAL COST TOTAL
--------- ------ --------- ------ --------- ------
(DOLLARS IN THOUSANDS)
HELD TO MATURITY
Investment securities:
U.S. Government securities........ $ 2,002 19.00% $ 3,502 100.00% $ 2,497 55.55%
Federal agency obligations........ 8,533 81.00 0 0 1,998 44.45
Marketable equity securities...... 0 0 0 0 0 0
--------- ------ --------- ------ --------- ------
Total investment securities.... 10,535 100.00% $ 3,502 100.00% $ 4,495 100.00%
======== ====== ======== ====== ======== ======
Average remaining contractual life
of investment securities.......... 8.01 yrs. 2.50 yrs. 2.54 yrs.
==== ==== ====
Mortgage-backed securities:
GNMA.............................. $ 1,361 13.71% $ 1,584 13.69% $ 1,783 10.72%
FHLMC............................. 8,453 85.16 9,841 85.04 13,221 79.49
FNMA.............................. 113 1.13 147 1.27 1,628 9.79
--------- ------ --------- ------ --------- ------
Total mortgage-backed
securities................... $ 9,927 100.00% $ 11,572 100.00% $ 16,632 100.00%
======== ====== ======== ====== ======== ======
DECEMBER 31,
-------------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
AMORTIZED % OF AMORTIZED % OF AMORTIZED % OF
COST TOTAL COST TOTAL COST TOTAL
--------- ------ --------- ------ --------- ------
(DOLLARS IN THOUSANDS)
AVAILABLE FOR SALE
Investment securities:
Federal agency obligations........ $ 6,503 80.91% $ 1,999 60.83% $ 0 0%
Marketable equity securities(1)... 1,535 19.09 1,287 39.17 1,219 100.00
--------- ------ --------- ------ --------- ------
Total investment securities.... $ 8,038 100.00% $ 3,286 100.00% $ 1,219 100.00%
======== ====== ======== ====== ======== ======
Average remaining contractual life
of investment securities.......... 8.31 yrs. 2.75 yrs. N/A
==== ==== =====
Mortgage-backed securities:
FHLMC............................. $ 2,356 63.93% $ 2,930 67.87% $ 0 0%
FNMA.............................. 1,329 36.07 1,387 32.13 0 0
--------- ------ --------- ------ --------- ------
Total mortgage-backed
securities................... $ 3,685 100.00% $ 4,317 100.00% $ 0 0%
======== ====== ======== ====== ======== ======
29
30
- ---------
(1) Consists of (i) 130,888 shares in the Tocqueville Governmental Fund
(formerly known as the Ivy Short-Term Bond Fund), a registered open-end
diversified investment company for each of years ended December 31, 1996,
1995 and 1994, (ii) 5,000 shares of common stock of Pittsburgh Home
Financial Corp, a savings and loan holding company for year ended December
31, 1996, (iii) 5,000 shares of common stock of Great American Financial
Corp., a savings and loan holding company, for year ended December 31, 1996,
and (iv) 5,000 shares of common stock of 1st Bergan Bancorp, Inc., a savings
and loan holding company, for year ended December 31, 1996.
The composition and maturities of the investment securities portfolio by
contractual maturity are indicated in the following table:
DECEMBER 31, 1996
------------------------------------------------------------------------------------
LESS THAN 1 TO 3 3 TO 5 OVER TOTAL INVESTMENT CARRYING
1 YEAR YEARS YEARS 5 YEARS SECURITIES VALUE
--------- --------- --------- --------- -------------------- --------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED FAIR
COST COST COST COST COST VALUE
--------- --------- --------- --------- --------- -------
(DOLLARS IN THOUSANDS)
U.S. government securities and
federal agency obligations...... $ 0 $ 2,999 $ 1,003 $13,036 $17,038 $16,803 $16,868
Marketable equity securities
(1)............................. 1,535 0 0 0 1,535 1,518 1,518
------- ------- ------- ------- ------- ------- -------
Total investment securities....... $ 1,535 $ 2,999 $ 1,003 $13,036 $18,573 $18,321 $18,386
======= ======= ======= ======= ======= ======= =======
Weighted average yield............ 5.50% 5.22% 5.50% 7.24% 6.68% N/A N/A
======= ======= ======= ======= ======= ======= =======
The weighted yield for investment securities including held to maturity and
available for sale is based upon historical amortized cost balances.
- ---------
(1) Consists of (i) 130,888 shares in the Tocqueville Government Fund (formerly
known as the Ivy Short-Term Bond Fund), a registered open-end diversified
investment company, (ii) 5,000 shares of common stock of Pittsburgh Home
Financial Corp, a savings and loan holding company, for year ended December
31, 1996, (iii) 5,000 shares of common stock of Great American Financial
Corp., a savings and loan holding company, for year ended December 31, 1996,
and (iv) 5,000 shares of common stock of 1st Bergan Bancorp, Inc., a savings
and loan company for year ended December 31, 1996.
The Bank's investment securities portfolio at December 31, 1996 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 United States
Government or its agencies.
The following table sets forth the contractual maturities of the Savings
Bank's mortgage-backed securities at December 31, 1996.
DUE IN
----------------------------------------------------------------------------------------------------------------
LESS THAN 1 TO 3 3 TO 5 5 TO 10 10 TO 20 OVER 20 DECEMBER 31, 1996 CARRYING
1 YEAR YEARS YEARS YEARS YEARS YEARS AMORTIZED COST VALUE
--------- ------------ ------------ ------------- --------- --------- ------------------- --------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED FAIR
COST COST COST COST COST COST VALUE
------------ ------------ ------------- --------- --------- --------- -------
(DOLLARS IN THOUSANDS)
GNMA.......... $ 0 $ 0 $ 0 $ 0 $ 0 $ 1,361 $ 1,361 $ 1,398 $ 1,361
FHLMC......... 341 2,105 723 0 6,659 981 10,809 10,699 10,771
FNMA.......... 0 113 1,329 0 0 0 1,442 1,390 1,387
------- ------ ------ ------ -------- ------- ------- ------- -------
Total......... $ 341 $2,218 $2,052 0 $ 6,659 $ 2,342 $13,612 $13,487 $13,519
======= ====== ====== ====== ======= ======= ======= ======= =======
Weighted
Average
Yield....... 6.50% 5.67% 5.28% N/A 6.44% 7.18% 6.27% N/A N/A
======= ====== ====== ====== ======= ======= ======= ======= =======
The weighted yield for investment securities including held to maturity and
available for sale is based upon historical amortized cost balances.
30
31
The following table sets forth the contractual maturities of the Savings
Bank's securities classified as held-to-maturity at December 31, 1996.
DUE IN DECEMBER 31, 1996
------------------------------------------------------------------------------------------- TOTAL MORTGAGE-
DUE 1 BACKED
YEAR OR 10 TO 20 OVER 20 SECURITIES
LESS 1 TO 3 YEARS 3 TO 5 YEARS 5 TO 10 YEARS YEARS YEARS ------------------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED FAIR CARRYING
COST COST COST COST COST COST COST VALUE VALUE
--------- ------------ ------------ ------------- --------- --------- --------- ------- --------
U.S. Gov't &
Agency
Securities... $ 0 $ 999 $1,003 $ 8,033 $ 500 $ 0 $10,535 $10,470 $10,535
FHLMC
Certificates... 341 762 0 0 6,659 691 8,453 8,381 8,453
GNMA
Certificates... 0 0 0 0 0 1,361 1,361 1,398 1,361
FNMA
Certificates... 0 113 0 0 0 0 113 116 113
------- ------ ------ ------- ------- ------- ------- ------- -------
Total......... $ 341 $1,874 $1,003 $ 8,033 $ 7,159 $ 2,052 $20,462 $20,365 $20,462
======= ====== ====== ======= ======= ======= ======= ======= =======
Weighted
Average
Yield....... 6.50% 6.46% 5.50% 7.39% 6.55% 7.06% 6.87%
======= ====== ====== ======= ======= ======= =======
The weighted yield for investment securities including held to maturity and
available for sale is based upon historical amortized cost balances.
The following table sets forth the contractual maturities of the Savings
Bank's securities classified as available-for-sale at December 31, 1996.
DUE IN
------------------------------------------------------------------------------------------- DECEMBER 31, 1996
DUE 1 TOTAL MORTGAGE-
YEAR OR 10 TO 20 OVER 20 BACKED SECURITIES
LESS 1 TO 3 YEARS 3 TO 5 YEARS 5 TO 10 YEARS YEARS YEARS ------------------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED FAIR CARRYING
COST COST COST COST COST COST COST VALUE VALUE
--------- ------------ ------------ ------------- --------- --------- --------- ------- --------
Marketable
Equity
Securities... $ 1,535 $ 0 $ 0 $ 0 $ 0 $ 0 $ 1,535 $ 1,518 $ 1,518
U.S. Gov't &
Agency
Securities... 0 2,000 0 2,503 2,000 0 6,503 6,333 6,333
FHLMC
Certificates... 0 1,343 723 0 0 290 2,356 2,318 2,318
GNMA
Certificates... 0 0 0 0 0 0 0 0 0
FNMA
Certificates... 0 0 1,329 0 0 0 1,329 1,274 1,274
------- ------ ------ ------- ------- ------- ------- ------- -------
Total......... $ 1,535 $3,343 $2,052 $ 2,503 $ 2,000 $ 290 11,723 $11,443 $11,443
======= ====== ====== ======= ======= ======= ======= ======= =======
Weighted
Average
Yield....... 5.50% 4.82% 5.28% 6.89% 7.05% 8.00% 5.89%
======= ====== ====== ======= ======= ======= =======
The weighted yield for investment securities including held to maturity and
available for sale is based upon historical amortized cost balances.
At December 31, 1996, the weighted average contractual maturity of all of
the Savings Bank's mortgage-backed securities was approximately 11 years and the
weighted average yield on the mortgage-backed securities portfolio was 6.27%.
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
31
32
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, 1996, of the
$13.6 million of mortgage-backed securities, an aggregate of $10.1 million were
secured by fixed-rate mortgage loans and an aggregate of $3.5 million were
secured by adjustable-rate mortgage loans.
In February 1992, the OTS adopted a policy statement which states, among
other things, that mortgage derivative products (including CMOs and CMO
residuals and stripped mortgage backed securities) which possess average life or
price volatility in excess of a benchmark fixed rate 30-year mortgage-backed
pass-through security are "high-risk mortgage securities," are not suitable
investments for depository institutions, must be carried in the institution's
trading account or as assets held for sale, and must be marked to market on a
regular basis. The Savings Bank has no "high risk" mortgage securities at
December 31, 1996 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, dividends on its 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 time to time, from the FHLB
of Pittsburgh. Loan repayments are a relatively stable source of funds, while
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, 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
convenient branch office locations and service hours. The Savings Bank primarily
utilizes print 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, 1996. The Savings Bank presently operates three
automated teller machines ("ATMs"), one at each of the branch offices. The
Savings Bank is affiliated with a regional ATM network.
The Savings Bank has been competitive in the types of accounts and in
interest rates it has offered on its deposit products but does not necessarily
seek to match the highest rates paid by competing institutions. At times of
declining interest rates, the Savings Bank has chosen to aggressively price
certificate of deposit rates to discourage disintermediation of deposits into
competing investment products offered by other institutions.
32
33
The following table shows the distribution of, and certain other
information relating to, the Savings Bank's deposits by type of deposit as of
the dates indicated.
DECEMBER 31,
----------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Passbook and club accounts............. $15,476 18.46% $16,396 20.32% $18,053 23.97%
Money market........................... 13,513 16.12 9,085 11.25 10,663 14.16
Certificates of deposit................ 43,683 52.12 45,842 56.78 37,905 50.33
NOW accounts........................... 8,595 10.25 7,325 9.07 7,382 9.80
Non-interest bearing................... 2,554 3.05 2,083 2.58 1,310 1.74
------- ------ ------- ------ ------- ------
Total deposits....................... $83,821 100.00% $80,731 100.00% $75,313 100.00%
======= ====== ======= ====== ======= ======
The following table presents, by various interest rate categories, the
amount of certificates of deposit at December 31, 1996 and the amounts at
December 31, 1996 which mature during the periods indicated.
TOTAL AS OF
DECEMBER 31,
1996
------------
AMOUNTS AT DECEMBER 31, 1996
MATURING WITHIN
------------------------------------
AFTER ONE
BUT WITHIN
ONE THREE
CERTIFICATES OF DEPOSIT YEAR YEARS THEREAFTER
- ------------------------------------------------- ------- ---------- ----------
(DOLLARS IN THOUSANDS)
4.01% to 6.00%................................... $ 33,528 $27,311 $ 4,261 $1,956
6.01% to 8.00%................................... 10,155 1,054 6,477 2,624
-------- ------- -------- ------
Total certificate accounts..................... $ 43,683 $28,365 $ 10,738 $4,580
======== ======= ======== ======
The following table presents the average balance of each deposit type and
the average rate paid on each deposit type, net of early withdrawal penalties
for the periods indicated.
DECEMBER 31,
----------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE PAID BALANCE RATE PAID BALANCE RATE PAID
------- --------- ------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
Passbook and club accounts......... $16,112 2.55% $16,882 2.54% $20,141 2.57%
Money market....................... 10,649 3.15 9,914 2.97 11,204 2.77
Certificates of deposit............ 45,522 5.54 42,456 5.58 34,858 4.34
NOW accounts....................... 8,009 1.73 7,017 1.72 7,137 1.73
Non-interest bearing............... 2,002 0.00 1,442 0.00 975 0.00
------- ---- ------- ---- ------- ----
Total deposits..................... $82,294 4.14% $77,711 4.14% $74,315 3.32%
======= ==== ======= ==== ======= ====
The following table sets forth the Savings Bank's net savings flows during
the periods indicated.
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
Beginning balance............................................. $80,731 $75,313 $74,727
(Decrease) Increase before interest credited.................. (317) 2,201 (1,875)
Interest credited............................................. 3,407 3,217 2,461
Net savings increase.......................................... 3,090 5,418 586
------- ------- -------
Ending balance................................................ $83,821 $80,731 $75,313
======= ======= =======
33
34
The following table sets forth maturities of the Savings Bank's
certificates of deposit of $100,000 or more at December 31, 1996 by time
remaining to maturity.
IN THOUSANDS
------------
Three months or less............................................................ $ 410
Over three months through six months............................................ 2,368
Over six months through 12 months............................................... 1,013
Over 12 months.................................................................. 640
------
Total......................................................................... $4,431
======
BORROWINGS FROM FHLB OF PITTSBURGH AS OF DECEMBER 31. The following table
sets forth the borrowing history of the Savings Bank from the FHLB of Pittsburgh
for the last three years.
AT DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------ ------
(DOLLARS IN THOUSANDS)
Amount Outstanding At Year End................................ $14,477 $2,977 $4,261
======= ====== ======
Maximum Balance............................................... $15,077 $4,861 $5,161
======= ====== ======
Average Balance............................................... $ 5,169 $3,078 $3,194
======= ====== ======
Weighted Average Interest Rate:
At end of year.............................................. 5.96% 6.25% 6.19%
======= ====== ======
During Year................................................. 5.34% 6.24% 4.88%
======= ====== ======
The Savings Bank utilized the increased borrowings during 1996 to meet increased
loan demand. As of December 31, 1996, the Savings Bank also had a revolving
credit commitment from the FHLB of Pittsburgh of $6.5 million all of which
remained available for borrowing. This revolving credit commitment now expires
on March 25, 1997 unless the Savings Bank and FHLB of Pittsburgh negotiate an
extension. Management has no indication at this time the FHLB of Pittsburgh will
be unwilling to, or has any reason not to, agree to an extension of this
revolving credit commitment. To secure the repayment of any outstanding
borrowings from the FHLB of Pittsburgh and any borrowings under this revolving
credit commitment or 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.
34
35
At December 31, 1996, 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, 1996
and as of December 31 of each of the preceding four years.
AS OF AS OF AS OF AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993 DECEMBER 31, 1992
------------------- ------------------ ------------------ ------------------ ------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
------- ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(DOLLARS IN THOUSANDS)
Tangible capital: (1)
Requirement........ $ 1,719 1.50% $1,378 1.50% $1,316 1.50% $1,238 1.50% $1,174 1.50%
Actual............. 11,787 10.28 7,228 7.87 7,049 8.03 6,500 7.90 5,823 7.44
Excess............. $10,068 8.78% $5,850 6.37% $5,733 6.53% $5,262 6.40% $4,649 5.94%
Core capital: (2)
Requirement........ $3,438 3.00% $2,757 3.00% $2,632 3.00% $2,476 3.00% $2,348 3.00%
Actual............. 11,787 10.28 7,228 7.87 7,049 8.03 6,500 7.90 5,823 7.44
Excess............. $8,349 7.28% $4,471 4.87% $4,417 5.03% $4,024 4.90% $3,475 4.44%
Risk-based capital:
Requirement (4).... $ 4,064 8.00% $3,101 8.00% $2,985 8.00% $2,682 8.00% $2,676 8.00%
Actual (3)......... 12,094 23.81 7,515 19.39 7,352 19.70 6,800 20.30 6,073 18.20
Excess............. $ 8,030 15.81% $4,414 11.39% $4,367 11.70% $4,118 12.30% $3,397 10.20%
- ---------
(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. The
difference between capital under generally accepted accounting principles
("GAAP") and regulatory tangible and core capital is attributable to
$158,000 for the Company's net unrealized holding losses on
available-for-sale securities to arrive at regulatory tangible and core
capital of $11,787,000.
(2) To be "adequately capitalized" for purposes of the OTS' Prompt Corrective
Action regulations, core capital generally must be at least 4.0%.
(3) 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 $307,000 for the
allowance for loan loss and $158,000 for the Savings Bank's net unrealized
holding gains (losses) on available-for-sale securities to arrive at
regulatory risk-based capital of $12,094.
(4) Calculated based on the OTS requirement of 8.0% of risk-weighted assets.
35
36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board
of Directors of Prestige Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Prestige
Bancorp, Inc. (the Corporation) and Subsidiary as of December 31, 1996 and 1995,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Prestige Bancorp, Inc. and
Subsidiary as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
As explained in Note 2 to the consolidated financial statements, effective
January 1, 1995, the Corporation changed its method of accounting for loan
losses. In addition, as also discussed in Note 2 to the consolidated financial
statements, effective January 1, 1994, the Corporation changed its method of
accounting for investments in debt and equity securities.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
January 14, 1997
(except with respect to the
matters discussed in Note 18,
as to which the date is
March 3, 1997)
36
37
PRESTIGE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
------------ -----------
ASSETS
Cash and due from banks......................................... $ 735,951 $ 779,397
Interest-bearing deposits with banks............................ 1,411,727 3,614,270
Investment securities:
Available for sale............................................ 11,442,549 7,491,045
Held to maturity (market value $20,364,934 and $15,193,150,
respectively).............................................. 20,461,927 15,074,601
Loans........................................................... 77,364,459 61,737,509
Less--Unearned income (deferred costs), net..................... (2,735) 42,204
Allowance for loan losses................................ 306,926 287,060
Loans in process......................................... 515,115 --
------------ -----------
Net loans............................................. 76,545,153 61,408,245
------------ -----------
Federal Home Loan Bank stock, at cost........................... 753,900 733,700
Premises and equipment, net..................................... 1,880,919 1,868,569
Accrued interest receivable..................................... 810,884 573,548
Deferred tax asset.............................................. 35,726 --
Other assets.................................................... 561,413 297,280
------------ -----------
Total assets.................................................... $114,640,149 $91,840,655
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Noninterest-bearing deposits.................................. $ 2,554,148 $ 2,082,444
Interest-bearing deposits..................................... 81,267,320 78,648,228
------------ -----------
Total deposits........................................ 83,821,468 80,730,672
Federal Home Loan Bank advances............................... 14,477,000 2,977,000
Advance payments by borrowers for taxes and insurance......... 622,057 571,780
Income taxes payable.......................................... 24,360 71,149
Deferred tax liability........................................ -- 45,317
Other liabilities............................................. 265,064 266,762
------------ -----------
Total liabilities..................................... 99,209,949 84,662,680
------------ -----------
Stockholders' Equity:
Preferred stock, $1.00 par value; 5,000,000 shares authorized,
none issued................................................ -- --
Common stock--Par $1.00 value; 10,000,000 shares authorized,
963,023 shares issued and outstanding...................... 963,023 --
Additional paid in capital.................................... 8,000,176 --
Unearned ESOP shares.......................................... (755,490) --
Retained earnings............................................. 7,390,945 7,245,432
Net unrealized holding gains (losses) on available for sale
securities, net of taxes................................... (168,454) (67,457)
------------ -----------
Total stockholders' equity............................ 15,430,200 7,177,975
------------ -----------
Total liabilities and stockholders' equity...................... $114,640,149 $91,840,655
============ ===========
The accompanying notes are an integral part of these statements
37
38
PRESTIGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
---------- ---------- ----------
INTEREST INCOME:
Interest and fees on loans............................ $5,078,301 $4,289,258 $3,980,325
Interest on mortgage-backed securities................ 922,491 1,014,922 1,023,267
Interest and dividends on other investment
securities.......................................... 656,991 334,581 289,944
Interest on deposits in other financial
institutions........................................ 90,584 80,180 20,751
---------- ---------- ----------
Total interest income.......................... 6,748,367 5,718,941 5,314,287
---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits.................................. 3,406,804 3,213,488 2,463,689
Advances from Federal Home Loan Bank.................. 276,022 192,148 156,513
---------- ---------- ----------
Total interest expense......................... 3,682,826 3,405,636 2,620,202
---------- ---------- ----------
Net interest income............................ 3,065,541 2,313,305 2,694,085
---------- ---------- ----------
PROVISION FOR LOAN LOSSES............................. 44,000 36,000 36,000
---------- ---------- ----------
Net interest income after provision for loan
losses...................................... 3,021,541 2,277,305 2,658,085
---------- ---------- ----------
OTHER INCOME:
Fees and service charges.............................. 260,685 217,937 219,035
Other income, net..................................... 36,327 3,893 75,010
---------- ---------- ----------
Total other income............................. 297,012 221,830 294,045
---------- ---------- ----------
OTHER EXPENSES:
Salaries and employee benefits........................ 1,221,432 1,016,382 934,035
Premises and occupancy costs.......................... 326,200 314,513 261,098
Federal deposit insurance premiums.................... 175,984 174,225 170,684
Special SAIF assessment............................... 501,727 -- --
Data processing costs................................. 171,485 154,063 132,832
Advertising costs..................................... 86,157 93,740 102,208
Transaction processing costs.......................... 159,213 141,418 128,853
ATM transaction fees.................................. 92,174 86,243 69,012
Other expenses........................................ 369,282 274,623 258,857
---------- ---------- ----------
Total other expenses........................... 3,103,654 2,255,207 2,057,579
---------- ---------- ----------
Income before income tax expense...................... 214,899 243,928 894,551
INCOME TAX EXPENSE.................................... 69,386 83,069 346,123
---------- ---------- ----------
NET INCOME............................................ $ 145,513 $ 160,859 $ 548,428
========== ========== ==========
Earnings per share (for period subsequent to initial
issuance of common stock on June 27, 1996--Note
2).................................................. $ --
==========
Weighted average shares outstanding from June 27, 1996
to December 31, 1996................................ 886,755
==========
The accompanying notes are an integral part of these statements
38
39
PRESTIGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NET UNREALIZED
HOLDING GAINS
(LOSSES) ON
ADDITIONAL AVAILABLE FOR
COMMON STOCK PAID-IN UNEARNED RETAINED SALE SECURITIES,
$1.00 PAR VALUE CAPITAL ESOP SHARES EARNINGS NET OF TAXES TOTAL
--------------- ---------- ----------- ---------- ---------------- -----------
BALANCE, December 31, 1993....... $ -- $ -- $ -- $6,536,145 $ (15,287) $ 6,520,858
Net income....................... -- -- -- 548,428 -- 548,428
Increase in net unrealized
(losses) on available for sale
securities, net of tax......... -- -- -- -- (20,176) (20,176)
--------- ---------- --------- ---------- ---------- -----------
BALANCE, December 31, 1994....... -- -- -- 7,084,573 (35,463) 7,049,110
Net income....................... -- -- -- 160,859 -- 160,859
Increase in net unrealized
(losses) on available for sale
securities, net of tax......... -- -- -- -- (31,994) (31,994)
--------- ---------- --------- ---------- ---------- -----------
BALANCE, December 31, 1995....... -- -- -- 7,245,432 (67,457) 7,177,975
Net income....................... -- -- -- 145,513 -- 145,513
Issuance and exchange of 963,023
shares of common stock as a
result of the conversion....... 963,023 7,995,781 -- -- -- 8,958,804
77,014 shares acquired for
ESOP........................... -- -- (770,410) -- -- (770,410)
Allocation of 1,492 ESOP
shares......................... -- 4,395 14,920 -- -- 19,315
Increase in net unrealized
(losses) on available for sale
securities, net of tax......... -- -- -- -- (100,997) (100,997)
--------- ---------- --------- ---------- ---------- -----------
BALANCE, December 31, 1996....... $ 963,023 $8,000,176 $(755,490) $7,390,945 $ (168,454) $15,430,200
========= ========== ========= ========== ========== ===========
The accompanying notes are an integral part of these statements
39
40
PRESTIGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ----------- -----------
OPERATING ACTIVITIES:
Net income.............................................................. $ 145,513 $ 160,859 $ 548,428
------------ ----------- -----------
Adjustments to reconcile net income to net cash (used) provided by
operating activities--
Depreciation of premises and equipment.............................. 171,044 155,618 112,641
Amortization of premiums and discounts, net......................... (4,354) (2,791) (44,230)
Non cash compensation expense related to ESOP benefit............... 30,071 -- --
Loss on sale of premises and equipment.............................. -- 32,675 --
Provision for loan losses........................................... 44,000 36,000 36,000
(Decrease) increase in other liabilities............................ (12,454) (139,473) 280,093
(Decrease) increase in income taxes payable......................... (60,524) (81,736) 60,928
Increase in accrued interest receivable............................. (237,334) (63,991) (14,745)
Decrease (increase) in other assets................................. 1,584 (88,230) (67,896)
Other, net.......................................................... 1,783 (13,862) 8,626
------------ ----------- -----------
Total adjustments.............................................. (66,184) (165,790) 371,417
------------ ----------- -----------
Net cash provided (used) by operating activities............... 79,329 (4,931) 919,845
------------ ----------- -----------
INVESTING ACTIVITIES:
Loan originations....................................................... (26,118,053) (8,875,462) (15,090,193)
Principal payments on loans............................................. 10,935,360 8,080,275 9,513,168
Proceeds from maturity of held to maturity investment securities........ 1,700,000 500,000 2,000,000
Purchases of held to maturity investment securities..................... (8,735,000) (1,502,422) (2,479,184)
Purchases of available for sale securities.............................. (4,747,900) (67,785) (48,261)
Principal payments on available for sale mortgage-backed securities..... 637,010 -- --
Principal payments on held to maturity mortgage-backed securities....... 1,643,112 1,719,761 2,147,600
Purchases of mortgage-backed securities................................. -- (978,469) (989,688)
Purchases of premises and equipment..................................... (183,397) (275,007) (791,266)
Proceeds from sale of premises and equipment............................ -- 90,053 --
Purchase of land........................................................ (265,717) -- --
Purchase of Federal Home Loan Bank stock................................ (20,200) (40,000) (66,700)
------------ ----------- -----------
Net cash used by investing activities.......................... (25,154,785) (1,349,056) (5,804,524)
------------ ----------- -----------
FINANCING ACTIVITIES:
Net change in advance payments by borrowers for taxes and insurance..... 50,277 74,635 (7,158)
Proceeds from Federal Home Loan Bank advances........................... 44,850,000 2,027,000 9,700,000
Payments on Federal Home Loan Bank advances............................. (33,350,000) (3,311,400) (5,900,000)
Net increase (decrease) in money market, NOW and passbook savings
accounts.............................................................. 5,249,401 (2,519,341) (2,446,269)
Net (decrease) increase in certificate accounts......................... (2,158,605) 7,936,529 3,033,140
Net proceeds from stock offering........................................ 8,188,394 -- --
------------ ----------- -----------
Net cash provided by financing activities...................... 22,829,467 4,207,423 4,379,713
------------ ----------- -----------
Net (decrease) increase in cash and cash equivalents........... (2,245,989) 2,853,436 (504,966)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.......................... 4,393,667 1,540,231 2,045,197
------------ ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR................................ $ 2,147,678 $ 4,393,667 $ 1,540,231
============ =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes.............................. $ 132,000 $ 129,770 $ 290,000
============ =========== ===========
Cash paid during the year for interest on deposits and borrowings....... $ 3,682,828 $ 3,408,936 $ 2,619,414
============ =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITY:
Loans transferred to real estate owned.................................. $ 10,000 $ 80,716 $ 9,156
============ =========== ===========
Investment securities transferred from held to maturity to available for
sale.................................................................. $ -- $ 6,316,596 $ 1,155,506
============ =========== ===========
The accompanying notes are an integral part of these statements
40
41
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. PLAN OF CONVERSION:
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., a newly formed Pennsylvania corporation (the
Corporation). The Plan provided that the holding company offer nontransferable
subscription rights to purchase common stock of the holding company. The rights
were offered first to eligible account holders of record, a tax-qualified
employee stock ownership plan to be adopted by the Bank, supplemental eligible
account holders, certain other depositors and borrowers, and directors, officers
and employees.
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 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 three offices located in the Greater Pittsburgh Metropolitan
Area.
The following comprise the significant accounting policies which 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 with banks.
Interest-bearing deposits are on deposit with domestic banks and are due within
three months. The Corporation had no deposits in foreign banks or in foreign
branches of United States banks. In addition, cash and due from banks at
December 31, 1996 and 1995, included $77,000 and $117,000, respectively, of
reserves required to be maintained under Federal Reserve Bank regulations.
INVESTMENT SECURITIES
Effective January 1, 1994, the Bank adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," which specifies a methodology for the classification of
such securities as either held to maturity, available for sale or as trading
assets. 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
41
42
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--CONTINUED
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 which
may be sold to effectively manage interest rate risk exposure, prepayment risk
and other factors (such as liquidity requirements). These available for sale
securities are reported at fair value with unrealized aggregate appreciation
(depreciation) excluded from income and credited (charged) to a separate
component of equity on a net of tax basis. The Corporation presently is not
authorized to and does not engage in trading activity. Gains or losses on the
sale of available for sale securities are recognized in income upon realization
using the specific identification method.
LOANS RECEIVABLE
Loans receivable are stated at their unpaid principal balances, including
any allowances for anticipated loss.
Interest on loans is credited to income as earned. Accrual of interest
income is discontinued when reasonable doubt exists regarding collectibility,
generally when payment of principal or interest is 90 days or more past due and
repayment is less than assured. For loans which have been placed on a nonaccrual
basis, previously accrued but unpaid interest is reversed and subsequently
recognized only to the extent payment is received and recovery of principal is
assured.
ALLOWANCE FOR LOAN LOSSES AND REAL ESTATE OWNED
The allowance for loan losses is based on estimates, and ultimate losses
may vary from current estimates. These estimates are continually reviewed and,
as adjustments become necessary, they are reported in earnings in the period in
which they become known. The allowance for possible loan losses is established
through a provision charged to expense and recoveries. Effective January 1,
1995, the Bank adopted 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. Additionally, these statements
require disclosure of how the creditor recognizes the interest income related to
these impaired loans. The adoption of these statements did not have a material
impact on the financial statements.
The Corporation's policy is to review separately each of its commercial
loans in order to determine if a loan is impaired. The Corporation also has
identified two pools of small-dollar-value homogeneous loans which are evaluated
collectively for impairment. These separate pools are for residential mortgage
loans and for consumer loans. 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
primarily upon historical experience and current economic conditions. The
Corporation's policy is to recognize interest on a cash basis for impaired loans
and to charge off impaired loans when deemed uncollectible.
42
43
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--CONTINUED
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 which are from 2 to 50 years.
DEPOSITS
Interest on deposits is accrued and charged to expense monthly and is paid
or credited in accordance with the terms of the respective accounts.
EMPLOYEE BENEFITS
The Corporation has a noncontributory pension plan covering substantially
all employees of the Bank. Pension cost is charged to expense. Additionally, the
Bank maintains a 401(k) plan for employees. The Bank does not match any employee
contributions.
Effective June 27, 1996, the Corporation established the ESOP plan, which
acquired 77,041 shares in connection with the Plan of Conversion. As of December
31, 1996, 75,549 shares remain unearned.
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 SHARE
Earnings per share of common stock for 1996 was computed by dividing net
income subsequent to conversion by the weighted average number of shares
outstanding subsequent to conversion on June 27, 1996. Earnings per share of the
Corporation for the period from June 27, 1996, to December 31, 1996, was less
than one-half of one cent per share.
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 controls and monitors 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 uses its asset liability management policy to manage interest rate
risk.
43
44
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--CONTINUED
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 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 line of
credit to manage liquidity risk.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from these estimates.
FUTURE ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which provides for standardized accounting for
transfers and servicing of financial assets and extinguishments of liabilities.
This statement is effective for related transactions occurring after December
31, 1996, however, the FASB has indefinitely delayed the effective date for
certain portions of this statement pending further clarification. Management
does not believe the effect of adoption of this standard will be material.
3. INVESTMENT SECURITIES:
The cost and market values of investment securities are summarized as
follows:
44
45
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
3. INVESTMENT SECURITIES:--CONTINUED
Investment securities held to maturity:
DECEMBER 31, 1996
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
U.S. government and government agency
obligations:
Due after one and within five
years......................... $ 2,001,817 $18,585 $ 34,157 $ 1,986,245
Due within ten years............ 8,033,495 -- 44,595 7,988,900
Due after ten years............. 500,000 -- 4,750 495,250
Federal Home Loan Mortgage
Corporation (FHLMC) certificates:
Due within one year............. 341,450 5,365 -- 346,815
Due after one and within five
years......................... 762,019 2,372 -- 764,391
Due after ten years............. 7,349,663 3,882 83,648 7,269,897
Government National Mortgage
Association (GNMA) certificates due
after 10 years..................... 1,360,819 36,582 -- 1,397,401
Federal National Mortgage Association
(FNMA) certificates due after one
and within five years.............. 112,664 3,371 -- 116,035
----------- ------- -------- -----------
$20,461,927 $70,157 $167,150 $20,364,934
=========== ======= ======== ===========
The maturities within the table above are based upon contractual maturity.
Investment securities available for sale:
DECEMBER 31, 1996
------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
U.S. government and government agency
obligations:
Due after one and within five
years......................... $ 2,000,000 -- $ 41,260 $ 1,958,740
Due within ten years............ 2,503,498 -- 56,323 2,447,175
Due after ten years............. 2,000,000 -- 73,440 1,926,560
Federal Home Loan Mortgage
Corporation (FHLMC) certificates:
Due after one and within five
years......................... 2,065,943 163 45,028 2,021,078
Due after ten years............. 289,776 6,704 -- 296,480
Federal National Mortgage Association
(FNMA) certificates due after one
and within five years.............. 1,329,314 -- 54,837 1,274,477
Mutual fund investment............... 1,363,213 -- 45,174 1,318,039
Common stock portfolio............... 171,500 28,500 -- 200,000
----------- ------- -------- -----------
$11,723,244 $35,367 $316,062 $11,442,549
=========== ======= ======== ===========
The maturities within the table above are based upon contractual maturity.
45
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PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
3. INVESTMENT SECURITIES:--CONTINUED
Investment securities held to maturity:
DECEMBER 31, 1995
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
U.S. government and government agency
obligations........................ $ 3,502,280 $ 37,581 $ 8,064 $ 3,531,797
Federal Home Loan Mortgage
Corporation (FHLMC) certificates... 9,840,500 78,425 20,706 9,898,219
Government National Mortgage
Association (GNMA) certificates.... 1,584,387 27,971 -- 1,612,358
Federal National Mortgage Association
(FNMA) certificates................ 147,434 3,342 -- 150,776
----------- -------- ------- -----------
$15,074,601 $147,319 $28,770 $15,193,150
=========== ======== ======= ===========
Investment securities available for sale:
DECEMBER 31, 1995
----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
U.S government and government agency
obligations.......................... $1,998,958 $ -- $ 38,646 $1,960,312
Federal Home Loan Mortgage Corporation
(FHLMC) certificates................. 2,930,459 18,287 20,403 2,928,343
Federal National Mortgage Association
(FNMA) certificates.................. 1,387,217 -- 42,322 1,344,895
Mutual fund investment................. 1,286,839 -- 29,344 1,257,495
---------- ------- -------- ----------
$7,603,473 $18,287 $130,715 $7,491,045
========== ======= ======== ==========
In the fourth quarter of 1995, concurrent with the adoption of its
implementation guide on SFAS No. 115, the Financial Accounting Standards Board
allowed a one-time reassessment of the SFAS No. 115 classifications of all
securities currently held. The Corporation used the opportunity under this
one-time reassessment to reclassify $6,316,596 in mortgage-backed and other
securities from the held to maturity portfolio to the available for sale
portfolio. In connection with this reclassification, gross unrealized gains of
$18,329 and gross unrealized losses of $107,180 were recorded in available for
sale securities and in equity on a net of tax basis.
46
47
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
3. INVESTMENT SECURITIES:--CONTINUED
The activity of the net unrealized holding gains (losses) (net of tax
basis) on available for sale securities for the years ended December 31, 1996
and 1995, respectively, are as follows:
1996 1995
--------- --------
Beginning balance in equity.................................. $ (67,457) $(35,463)
Unrealized gains (losses) on securities transferred into
available for sale during the reassessment period.......... -- (53,311)
Net change in unrealized gains (losses) on securities held as
available for sale during the period....................... (100,997) 21,317
-------- --------
Ending balance in equity..................................... $(168,454) $(67,457)
========= ========
Mortgage-backed securities include net unamortized discounts of $48,910 and
$50,716 at December 31, 1996 and 1995, respectively.
4. LOANS RECEIVABLE:
Loans receivable at December 31, 1996 and 1995, are summarized as follows:
1996 1995
----------- -----------
Commercial, including commercial secured by real
estate................................................. $ 2,032,794 $ 814,893
Real estate loans:
1-4 family............................................. 65,117,008 55,366,847
Construction........................................... 925,100 --
----------- -----------
66,042,108 55,366,847
Less--Undisbursed loan proceeds........................ 515,115 --
Deferred loan (costs)/fees...................... (2,735) 42,204
----------- -----------
65,529,728 55,324,643
----------- -----------
Consumer loans:
Home equity............................................ $ 4,562,094 $ 2,052,826
Student................................................ 2,228,756 2,220,329
Automobile............................................. 1,515,015 713,435
Share.................................................. 486,695 477,793
Credit cards........................................... 398,840 90,557
Personal unsecured/other............................... 98,157 829
----------- -----------
9,289,557 5,555,769
----------- -----------
76,852,079 61,695,305
Less--Allowance for loan losses........................ 306,926 287,060
----------- -----------
$76,545,153 $61,408,245
=========== ===========
The credit cards are currently being serviced by a third party.
At December 31, 1996 and 1995, the majority of the loan portfolio was
secured by properties located in Western Pennsylvania. As of December 31, 1996,
loans to customers engaged in similar activities and having similar economic
characteristics, as defined by standard industrial classifications, did not
exceed 10% of total loans. As of December 31, 1996 and 1995, the Bank had
approximately $341,000 and $306,000 of nonaccrual loans. The Bank does not have
any other significant off-balance sheet risk except for the commitments
47
48
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
4. LOANS RECEIVABLE:--CONTINUED
referenced in Note 16. Deferred loan costs in 1996 occurred due to the Bank
incurring direct costs in excess of loan origination fees received on certain
new commercial loans.
5. ALLOWANCE FOR LOAN LOSSES:
Activity with respect to the allowance for loan losses is summarized as
follows:
1996 1995 1994
-------- -------- --------
Balance at beginning of year....................... $287,060 $303,312 $267,811
Provision for loan losses.......................... 44,000 36,000 36,000
Charge-offs........................................ (24,294) (52,884) (1,192)
Recoveries......................................... 160 632 693
-------- -------- --------
Balance at end of year............................. $306,926 $287,060 $303,312
======== ======== ========
The adoption of SFAS No. 114 at January 1, 1995, resulted in loans totaling
$391,000 being specifically identified as impaired and an allocation being made
of the existing allowance for loan losses of approximately $27,000. At December
31, 1996 and 1995, the Bank had loans totaling $341,000 and $306,000,
respectively, specifically identified as impaired. No specific allocation of the
allowance for loan losses was deemed necessary for these impaired loans at these
dates.
The average recorded balances for impaired loans during 1996 and 1995 were
$267,000, and $406,000, 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 fair value or
carrying cost based upon appraisals less estimated cost to sell. The Corporation
had real estate owned assets of $49,872 and $41,872 at December 31, 1996 and
1995, respectively.
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, 1996 and 1995, are summarized
by major classification as follows:
1996 1995
---------- ----------
Land....................................................... $ 224,817 $ 224,817
Building and improvements.................................. 1,776,892 1,694,348
Furniture, fixtures and equipment.......................... 876,264 775,414
---------- ----------
Total, at cost........................................ 2,877,973 2,694,579
Less--Accumulated depreciation............................. 997,054 826,010
---------- ----------
Premises and equipment, net................................ $1,880,919 $1,868,569
========== ==========
48
49
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
7. PREMISES AND EQUIPMENT:--CONTINUED
Depreciation and amortization expense was $171,044, $155,618 and $112,641
for the fiscal years ended December 31, 1996, 1995 and 1994, respectively.
8. DEPOSITS:
The aggregate amount of short-term jumbo certificates of deposit, each with
a minimum denomination of $100,000, was approximately $4,431,000 and $6,071,000
at December 31, 1996, and 1995, respectively. At December 31, 1996 the scheduled
maturities of the certificate accounts are as follows:
1997......................................... $28,365,781
1998......................................... 8,140,174
1999......................................... 2,597,409
2000......................................... 3,847,330
2001 and thereafter.......................... 732,500
-----------
$43,683,194
===========
Interest expense associated with deposits for each of the years ended is as
follows:
1996 1995 1994
---------- ---------- ----------
Interest on certificates of deposit........... $2,530,750 $2,379,871 $1,523,005
Interest on savings accounts.................. 410,460 428,583 517,943
Money market demand accounts.................. 334,873 294,353 309,890
Interest on NOW accounts...................... 138,772 121,322 123,560
Early withdrawal penalties.................... (8,051) (10,641) (10,709)
---------- ---------- ----------
$3,406,804 $3,213,488 $2,463,689
========== ========== ==========
During the third quarter of 1996, the Bank recorded a one-time special
assessment of 65.7 basis points on deposits of record as of March 31, 1995. This
assessment, in the amount of $501,727 before tax (approximately $308,000 after
tax) charged by the Federal Deposit Insurance Corporation, was to provide
additional capital for the savings association insurance fund.
9. FEDERAL HOME LOAN BANK ADVANCES:
Advances from the Federal Home Loan Bank consist of the following:
DECEMBER 31, 1996
----------------------------------------
WEIGHTED
MATURITY AVERAGE RATE BALANCE
--------- ------------ ----------
1997 5.99% $ 3,000,000
1999 5.95 5,000,000
2000 6.11 977,000
2001 4.97 5,500,000
-----------
$14,477,000
===========
49
50
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
9. FEDERAL HOME LOAN BANK ADVANCES:--CONTINUED
DECEMBER 31, 1995
-----------------------------------------
WEIGHTED
MATURITY AVERAGE RATE BALANCE
--------- ------------ -----------
1996 6.04% $1,000,000
1997 6.60 1,000,000
2000 6.11 977,000
----------
$2,977,000
==========
As of December 31, 1996 and 1995, the Bank had an available balance under
its line of credit of approximately $6,512,000 and $8,605,600, respectively, in
connection with the Federal Home Loan Bank of Pittsburgh's Cash Management
Advance Program. Of the total advances above, there were no previous borrowings
against the line of credit as of December 31, 1996 and 1995.
The Bank had 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.
The $5.5 million advance that matures in 2001 at 4.97% is a convertible
5-year maturity with a 3 month repricing structure. If the advance converts from
the 4.97% to a quarterly adjustable rate advance, the Bank has the option of
repaying the advance.
10. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires all entities to disclose the estimated fair value of its financial
instrument assets and liabilities. For the Corporation, as for most financial
institutions, approximately 98% of its assets and liabilities are considered
financial instruments, as defined in SFAS No. 107. Many of the Corporation's
financial instruments, however, lack an available trading market as
characterized by a willing buyer and willing seller engaging in an exchange
transaction. Therefore, significant estimations and present value calculations
were used for the purpose of this disclosure.
Estimated fair values have been determined using the best available data
and an estimation methodology suitable for each category of financial
instruments.
The following methods and assumptions were used in estimating its fair
value disclosures for 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 approximate fair value
due to their short-term maturity.
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 one-to-four family residential loans are estimated
using discounted cash flow analyses, using yields from similar products in the
secondary markets. The carrying amount of construction loans
50
51
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
10. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:--CONTINUED
approximates its fair value given their short-term nature. The fair values of
consumer and commercial loans are estimated using discounted cash flow analyses,
using interest rates reported in various government releases and the Bank's own
product pricing schedule for loans with terms similar to the Bank's. The fair
values of multi-family and nonresidential mortgages are estimated using
discounted cash flow analysis, using interest rates based on a national survey
of similar loans. The carrying amount of accrued interest approximates its fair
value.
DEPOSIT LIABILITIES
The fair values disclosed for deposits with no stated maturities (e.g.,
passbook savings accounts) are, by definition, equal to the amount payable on
demand at the repricing date (i.e., their carrying amounts). Fair values of
deposits with stated maturities (e.g., certificates of deposit) are estimated
using a discounted cash flow calculation that applies a comparable Federal Home
Loan Bank advance rate to the aggregated weighted average maturity on time
deposits.
FEDERAL HOME LOAN BANK ADVANCES
The fair values disclosed for Federal Home Loan Bank advances are estimated
using a discounted cash flow calculation that applies a comparable Federal Home
Loan Bank advance rate to the aggregated weighted average maturity on advances.
The estimated fair values and recorded book balances at December 31, 1996
and 1995 are as follows:
1996 1995
--------------------------- ---------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BALANCE FAIR VALUE BALANCE
----------- ----------- ----------- -----------
Cash and short term deposits......... $ 2,147,678 $ 2,147,678 $ 4,393,667 $ 4,393,667
Investment securities................ 31,807,483 31,904,476 22,684,195 22,565,646
Net loans............................ 76,278,000 76,545,153 61,830,000 61,408,245
Accrued interest receivable.......... 810,884 810,884 573,548 573,548
Deposits with no stated maturities... 40,138,273 40,138,272 34,888,874 34,888,874
Deposits with stated maturities...... 43,590,000 43,683,196 46,122,000 45,841,798
Federal Home Loan Bank advances...... 14,457,000 14,477,000 3,012,000 2,977,000
Commitments to originate loans....... 1,650,000 1,650,000 1,500,000 1,500,000
11. INCOME TAXES:
The provision (benefit) for income taxes for each of the years ended is as
follows:
1996 1995 1994
-------- ------- --------
Federal:
Current........................................... $ 67,249 $30,940 $265,695
Deferred.......................................... (13,735) 43,615 17,359
-------- ------- --------
53,514 74,555 283,054
State:
Current........................................... 15,872 8,514 63,069
-------- ------- --------
Total income tax expense............................ $ 69,386 $83,069 $346,123
======== ======= ========
51
52
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
11. INCOME TAXES:--CONTINUED
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:
1996 1995 1994
-------- ------- -------
Deferred tax expense (benefit):
Deferred loan costs/fees........................... $ 1,845 $17,706 $ 6,381
Prepaid pension.................................... (796) 35,206 9,985
Vacation accrual................................... (700) (3,670) (381)
Deferred lease accrual............................. -- -- 5,304
Provision for loan losses.......................... (14,960) (8,097) 8,251
Tax depreciation in excess of book depreciation.... 5,950 5,192 (2,290)
ESOP compensation.................................. (5,074) -- --
Other, net......................................... -- (2,722) (9,891)
-------- ------- -------
$(13,735) $43,615 $17,359
======== ======= =======
The special tax benefit afforded to thrift institutions which 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
starts in 1996, but may be delayed until 1997 or 1998 if certain residential
loan origination tests are met in 1997 and 1998.
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 is 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, 1996. 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.
52
53
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
11. INCOME TAXES:--CONTINUED
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:
1996 1995 1994
---- ---- ----
Statutory federal tax rate................................. 34.0% 34.0% 34.0%
State income taxes, net of federal income tax benefit...... 7.4 2.3 4.7
Effect of graduated federal tax rates...................... (5.6) (2.2) --
Other...................................................... (3.5) -- --
----- ---- ----
32.3% 34.1% 38.7%
==== ==== ====
Net deferred tax (assets) liabilities as of December 31, 1996 and 1995, are
as follows:
1996 1995
-------- --------
Prepaid pension............................................... $ 27,088 $ 27,884
Vacation accrual.............................................. (14,563) (13,863)
Allowance for loan losses..................................... 14,835 29,795
Valuation allowance for investments........................... (112,279) (44,971)
Tax depreciation in excess of book depreciation............... 52,422 46,472
ESOP compensation............................................. (5,074) --
Other, net.................................................... 1,845 --
-------- --------
Net deferred tax (asset) liability............................ $(35,726) $ 45,317
======== ========
12. PENSION PLAN:
The Bank maintains a noncontributory defined benefit pension plan covering
all eligible employees. The following table sets forth the plan's fund status
and amounts recognized in the Corporation's statements of financial condition at
December 31, 1996 and 1995, respectively.
1996 1995
--------- ---------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $372,130 and $310,409.................... $ 380,136 $ 314,005
========= =========
Projected benefit obligation for service rendered to date... $(746,125) $(623,455)
Plan assets at fair value................................... 619,396 482,870
--------- ---------
Projected benefit obligation in excess of plan assets....... (126,729) (140,585)
Unrecognized net obligation at transition................... 59,200 63,972
Unrecognized net loss....................................... 147,201 158,625
--------- ---------
Prepaid pension cost........................................ $ 79,672 $ 82,012
========= =========
Approximately 98% of the plan's assets is primarily invested either
directly or through mutual funds in common stocks, bonds, U.S. government and
agency, and foreign securities. The remaining plan assets are on deposit with
the Bank or in a cash management account.
The Bank's funding policy is to contribute annually the maximum amount that
can be deducted for federal income tax purposes. Contributions are intended to
provide not only for benefits attributed to service to date but also for those
expected to be earned in the future.
53
54
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
12. PENSION PLAN:--CONTINUED
The components of pension expense are as follows for each of the years
ended:
1996 1995 1994
-------- -------- --------
Service cost....................................... $ 51,209 $ 43,078 $ 42,076
Interest cost...................................... 45,200 39,991 36,197
Actual return on plan assets....................... (84,273) (63,071) 10,907
Amortization of transition asset................... 52,325 49,037 (22,148)
-------- -------- --------
Net periodic pension cost.......................... $ 64,461 $ 69,035 $ 67,032
======== ======== ========
For both 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
7.25% for each of the years ended December 31, 1996 and 1995. The expected
long-term rate of return on assets was 7.25% for each of the years ended
December 31, 1996 and 1995.
Additionally, the Bank maintains a 401(k) plan for employees. The Bank does
not match any employee contributions.
13. EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST (ESOP):
In 1996, the Company established the ESOP to enable employees to obtain
ownership interests in the Corporation.
In connection with the conversion described in Note 1, the Corporation made
a $770,410 loan to the ESOP which was used to purchase 77,041 shares 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 $755,490 at December 31, 1996, as
reflected in shareholders' equity, will be amortized to compensation over the
15-year 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) 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 2,568 shares. Total
compensation expense recorded in 1996 for ESOP shares was $30,071.
14. RETAINED EARNINGS AND REGULATORY CAPITAL:
The Bank is subject to various regulator 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
consolidated financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total Tier I capital (as defined in the
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PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
14. RETAINED EARNINGS AND REGULATORY CAPITAL:--CONTINUED
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,
1996, that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 1996, the most recent notification from the Office of
Thrift Supervision categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. 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. There are no conditions or events
since that notification that management believes have changed the institution's
category.
The Bank's actual capital amounts and ratios are also presented in the
table. There was no deduction from capital for interest-rate risk.
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------- ----------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- ------
(DOLLARS IN THOUSANDS)
Total Capital (to Risk Weighted Assets):
As of December 31, 1996.............. $12,094 23.81% =>4,064 =>8.0% =>5,080 =>10.0%
As of December 31, 1995.............. $ 7,515 19.39% =>3,101 =>8.0% =>3,876 =>10.0%
Tier 1 Capital (to Risk Weighted Assets):
As of December 31, 1996.............. $11,787 23.20% =>2,032 =>4.0% =>3,048 => 6.0%
As of December 31, 1995.............. $ 7,228 18.65% =>1,550 =>4.0% =>2,325 => 6.0%
Tier 1 Capital (to Average Assets):
As of December 31, 1996.............. $11,787 11.74% =>4,016 =>4.0% =>5,019 => 5.0%
As of December 31, 1995.............. $ 7,228 8.13% =>3,555 =>4.0% =>4,444 => 5.0%
15. RELATED PARTY TRANSACTIONS:
Certain directors and executive officers of the Corporation, 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 December 31, 1996
and 1995, amounted to $419,236 and $192,018, respectively.
An analysis of these related party loans is as follows:
1996 1995
--------- ---------
Balance at January 1........................................ $ 192,018 $ 178,646
New loans................................................... 379,747 132,249
Payments.................................................... (152,529) (118,877)
--------- ---------
Balance at December 31...................................... $ 419,236 $ 192,018
========= =========
Additionally, the Bank has an unfunded loan commitment for a director in
the amount of $93,000.
In addition, the Corporation from time to time has conducted business with
certain directors, officers or companies in which they are related. During 1996,
1995 and 1994, such activity was as follows:
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PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
15. RELATED PARTY TRANSACTIONS:--CONTINUED
- A member of the Board of Directors leases office space from the
Corporation. The rental income was $11,100, $11,100 and $8,500 for the
years ended December 31, 1996, 1995 and 1994, respectively. This director
also provides professional services to the Bank and his fees were $4,950
for each of the three years ended December 31, 1996.
- A member of that Board of Directors is employed by a law firm retained by
the Corporation. Fees paid in 1996 approximated $156,000 relative to the
stock conversion and another $38,300 for various bank and corporate legal
matters. The firm's real estate closing service received approximately
$109,700 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 the
brother of one of the Corporation's officers. The total costs for such
services in 1996, 1995 and 1994 was $21,950, $24,765 and $26,320,
respectively.
- The Chairman of the Board of Directors is paid a fee of $2,500 per month,
for a total fee of $30,000 paid in 1996 for providing from time to time
advice and assistance to the officers of the Bank with respect to the
operations and management of the Bank.
16. 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 $5,400,000 and $1,500,000 as of
December 31, 1996 and 1995, respectively. As of December 31, 1996, these
commitments had fixed and variable rates which ranged from 8.00% to 10.00%,
while as of December 31, 1995, $292,000 of these commitments had fixed rates
which ranged from 6.75% to 8.00%. In the opinion of management, the funding of
these credit commitments will not have a material adverse effect on the
financial position or results of operations.
Additionally, the Bank is also subject to asserted and unasserted potential
claims encountered in the normal course of business. In the opinion of
management and legal counsel, the resolution of these claims will not have a
material adverse effect on the financial position or results of operations.
56
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PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
17. PARENT COMPANY FINANCIAL INFORMATION:
Prestige Bancorp, Inc. (the Parent Company) functions primarily as a
holding company for its sole subsidiary, the Bank. The following financial
information relates only to the Parent Company activity from June 27, 1996 (date
commencement of operations) to December 31, 1996:
BALANCE SHEET
December 31, 1996
ASSETS
Cash and cash equivalents.............................................. $ 3,631,611
Investments securities available for sale.............................. 200,000
Investment in Prestige Bank, F.S.B..................................... 11,650,987
Other assets........................................................... 2,500
-----------
Total Assets........................................................... $15,485,098
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses....................................................... $ 21,859
Income taxes payable................................................... 21,639
Deferred income tax payable............................................ 11,400
-----------
Total Liabilities...................................................... 54,898
Total Stockholders' Equity, net of ESOP loan of $755,490............... $15,430,200
-----------
Total Liabilities and Stockholders' Equity............................. $15,485,098
===========
STATEMENT OF INCOME
For The Period From June 27, 1996 to December 31, 1996
Interest income........................................................ $ 93,695
-----------
Expenses:
Legal fees........................................................... 24,262
Other................................................................ 8,988
-----------
Total Expenses......................................................... 33,250
Income before income taxes and equity in undistributed loss of
subsidiary........................................................... 60,445
Provision for income taxes............................................. 21,639
Equity in undistributed loss of subsidiary............................. (35,736)
-----------
Net income............................................................. $ 3,070
===========
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PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
17. PARENT COMPANY FINANCIAL INFORMATION:--CONTINUED
STATEMENT OF CASH FLOWS
For The Period From June 27, 1996 to December 31, 1996
Operating Activities:
Net income........................................................... $ 3,070
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed loss of subsidiary........................... 35,736
Change in other assets and liabilities............................ 45,389
-----------
Net cash provided by operating activities....................... 84,195
Investing and Financing Activities:
Net proceeds from sale of stock, net of ESOP loan of $770,410........ 8,188,394
Repayment received from ESOP......................................... 14,924
Purchase of available for sale investment securities................. (171,500)
Investment in Prestige Bank, F.S.B................................... (4,484,402)
-----------
Net cash provided by investing and financing activities......... 3,547,416
-----------
Ending Cash and Cash Equivalents....................................... $ 3,631,611
===========
The ability of the Bank to upstream cash to the Parent Company is
restricted by regulations. Federal law prevents the Parent Company from
borrowing from its subsidiary banks unless the loans are secured by specific
assets. Further such secured loans are limited in amount to ten percent of the
subsidiary bank's capital and surplus. In addition, the subsidiary bank is
subject to legal limitations on the amount of dividends that can be paid to
their shareholder.
On the date of the conversion, as required by regulatory pronouncements,
the Bank established a liquidation account in the amount of $7,085,000 which is
equal to retained earnings reflected in the Bank's statement of financial
condition. The liquidation account will be maintained for the benefit of
eligible savings account holders and supplemental eligible account holders who
continue to maintain their accounts at the Bank after the conversion in
accordance with supervisory regulations. In the event of a complete liquidation
(and only in such event), each eligible savings account holder will be entitled
to receive a liquidation distribution from the liquidation account in the amount
of the then current adjusted balance of deposit accounts held, before any
liquidation distribution may be made with respect to the common shares. Except
for the repurchase of stock and payment of dividends by the Bank, the existence
of the liquidation account will not restrict the use or further application of
such retained earnings.
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.
18. SUBSEQUENT EVENT:
On March 3, 1997, the Corporation announced a plan to repurchase at market
value by the Corporation of up to 5% of its outstanding shares of common stock
through the use of its existing cash and cash equivalents. This stock repurchase
program is to be completed by June 27, 1997.
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CORPORATE INFORMATION
CORPORATE OFFICERS
ROBERT S. ZYLA
President
PATRICIA A. WHITE
Treasurer and Secretary
JAMES M. HEIN
Controller
BOARD OF DIRECTORS
JOHN A. STIVER
Chairman of the Board
Certified Public Accountant
John A. Stiver, C.P.A.
ROBERT S. ZYLA
President
Prestige Bancorp, Inc.
President and Chief Executive Officer
Prestige Bank, A Federal Savings Bank
PATRICIA A. WHITE
Treasurer and Secretary
Prestige Bancorp, Inc.
Executive Vice President and Secretary
Prestige Bank, A Federal Savings Bank
MARTIN W. DOWLING
President and Owner
Jefferson Hills Real Estate, Inc.
MICHAEL R. MACOSKO
Pharmacist
Thrift Drug, Inc.
CHARLES P. MCCULLOUGH
Attorney at Law
Tucker Arensberg, P.C.
MARK R. SCHOEN
Assistant Vice President
Federated Investors
CORPORATE OFFICE
710 Old Clairton Road
Pittsburgh, Pennsylvania 15236
412-655-1190
BRANCH OFFICES
Pleasant Hills
710 Old Clairton Road
Pittsburgh, Pennsylvania 15236
412-655-2110
Bethel Park
6257 Library Road
Bethel Park, PA 15102
412-831-8440
Mt. Oliver
543 Brownsville Road
Pittsburgh, PA 15210
412-431-3374
MARKET MAKERS
Friedman Billings Ramsey & Co.
Rodman & Renshaw Inc.
Herzog, Heine, Geduld, Inc.
Sandler O'Neill & Partners
Ryan Beck & Co. Inc.
Legg Mason Wood Walker Inc.
Parker/Hunter Inc.
TRANSFER AGENT
ChaseMellon Shareholder Services LLC
CORPORATE COUNSEL
Tucker Arensberg, P.C.
Pittsburgh, Pennsylvania
INDEPENDENT AUDITORS
Arthur Andersen LLP
Pittsburgh, Pennsylvania
STOCK LISTING
NASDAQ Stock Market Symbol: PRBC
GENERAL INQUIRIES & REPORTS
Prestige Bancorp is required to file an annual report on Form 10-K for its
fiscal year ended December 31, 1996, with the Securities and Exchange
Commission. Copies of this annual report and quarterly reports may be obtained
without charge by contacting:
James M. Hein
Controller
412-655-1190
Corporate Office