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Exhibit 13
PRBC
PRESTIGE BANCORP, INC.
1998 ANNUAL REPORT
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PRESTIGE BANCORP, INC.
710 Old Clairton Road, Pittsburgh, PA 15236-4300
412-655-1190 - (Fax) 412-655-2114
March 24, 1999
To Our Stockholders, Customers and Friends:
I am pleased to present the 1998 Annual Report for Prestige Bancorp, Inc.,
the parent company of Prestige Bank, A Federal Savings Bank.
Some of our achievements include an increase in net interest income after
provision for loan losses of $751,000, an increase in net loans of almost $27.7
million, and an increase in deposits in excess of $18.5 million. On February 18,
1998, we opened our fifth branch located at 603 Scenery Drive, Elizabeth
Township, PA.
In August 1998, we announced a 5% stock repurchase. This buy-back was
completed September 15, 1998 which resulted in 52,597 shares being purchased at
a cost of $720,201 or an average cost of $13.69 per share. In October 1998, we
announced another 5% stock repurchase that was completed October 21, 1998. The
second buy-back resulted in 49,990 shares purchased at a cost of $671,927 or
$13.44 per share.
Net income for the year ended December 31, 1998 was $743,000 as compared to
$784,000 for 1997. Our two newest branches continued their growth but additional
costs associated with the new branches were the primary cause for the overall
decline in net income.
Assets increased to $177.4 million at December 31, 1998 which represents an
increase of $34.1 million over the assets of $143.3 million at December 31,
1997. This increase in asset growth reflects management's strategy of leveraging
the balance sheet. Future asset growth will not likely proceed at the 1998 pace
due to management's belief that capital levels are currently adequate.
Management realizes the importance of utilizing capital efficiently and will
continue to evaluate its capital levels.
Cash dividends of $191,600 were distributed to shareholders during 1998
compared to $111,230 for 1997. It is the Company's intent to continue to pay
cash dividends. In addition, the Board of Directors of Prestige Bancorp, Inc.,
declared a 15% stock dividend on April 15, 1998 to shareholders of record of
June 2, 1998 paid on June 19, 1998.
Corporate offices were completed in January 1998, providing an additional
5,000 square feet of space. The Bank sold its Bethel Park facility and will
lease the same facility under an agreement that will enable the branch to remain
in its present location until May 2003.
The Bank has continued working toward completing the implementation of new
hardware and software to bring all systems compliant with the year 2000
requirements. The total anticipated cost to become 100% year 2000 compliant,
excluding costs of Company's personnel time, is $131,000.
In the fourth quarter 1998, the Savings Bank introduced a debit card
program. Management believes that this program will be widely accepted by our
customers based on past survey results and customer requests.
Management eagerly looks forward to the challenges of 1999. Shrinking
margins from the traditional core business of our industry make it necessary to
consider expanding the menu of financial services now offered.
On behalf of the Board of Directors, management, and employees of Prestige
Bancorp, Inc. and Prestige Bank, I would like to thank you for your continued
support and confidence.
Sincerely,
/s/ John Stiver
John A. Stiver
Chairman of the Board and Chief Executive Officer
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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. Any comparison herein of
the Company's and the Savings Bank's performance to any period prior to June 27,
1996 is assumed to be a comparison to the performance of the Savings Bank for
such period.
The Savings Bank is a stock-chartered savings bank organized under the laws
of the United States of America, which conducts business from offices located in
Allegheny and Washington Counties, Pennsylvania. The Savings Bank's operations
date back to 1935 with the incorporation of First Federal Savings and Loan
Association of Mt. Oliver in Allegheny County, Pennsylvania 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 earning assets, principally loans,
investment securities and other investments and mortgage-backed securities and
interest expense on interest-bearing liabilities, which consist of deposits and
advances from the Federal Home Loan Bank of Pittsburgh. Other than the stock of
the Savings Bank, at December 31, 1998 the Company was holding only a loan
receivable from the Prestige Bank Employee Stock Ownership Plan (the "ESOP"),
debt and equity securities with a market value totaling $1.4 million at December
31, 1998, and a money-market and checking 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 Company has paid consecutive quarterly dividends since the first
quarter of 1997. On January 20, 1999, the Company increased its quarterly cash
dividend from $.05 per share to $.06 per share 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 20, 1999, was $.06 per share and payable
on March 19, 1999 to shareholders of record March 1, 1999. The common stock of
the Company is traded on the National Association of Securities Dealers
Automated Quotations ("NASDAQ") system (symbol "PRBC").
On April 15, 1998, the Board of Directors declared a stock dividend of 15%
to shareholders of record of June 2, 1998 payable on June 19, 1998. In addition,
on February 17, 1999, the Board of Directors declared a stock dividend of 5% to
shareholders of record of March 2, 1999 payable on March 19, 1999.
Information as to the high and low stock prices for each quarter of fiscal
years 1998 and 1997 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,
--------------------------------------------------------
1998 1997 1996(6) 1995(10) 1994(10)
---- ---- ------- -------- --------
(DOLLARS IN THOUSANDS)
SELECTED FINANCIAL DATA:
Total assets............................... $177,374 $143,263 $114,640 $91,841 $87,745
Investment securities...................... 22,929 28,228 18,386 6,720 5,653
Mortgage-backed securities................. 12,457 10,531 13,519 15,845 16,632
Loans receivable, net...................... 123,917 96,181 76,545 61,408 60,635
Cash and cash equivalents.................. 10,153 2,213 2,148 4,394 1,540
Deposits................................... 109,698 91,156 83,821 80,731 75,313
FHLB of Pittsburgh advances................ 50,977 34,677 14,477 2,977 4,261
Stockholders' equity(1).................... 14,760 15,630 15,430 7,178 7,049
Nonperforming assets(2).................... 903 611 391 348 391
SELECTED OPERATING DATA:
Interest income............................ $ 11,672 $ 9,371 $ 6,748 $ 5,719 $ 5,314
Interest expense........................... 6,685 5,240 3,683 3,406 2,620
-------- -------- -------- ------- -------
Net interest income........................ $ 4,987 $ 4,131 $ 3,065 $ 2,313 $ 2,694
Provision for loan losses.................. 209 104 44 36 36
-------- -------- -------- ------- -------
Net interest income after provision for
loan losses.............................. $ 4,778 $ 4,027 $ 3,021 $ 2,277 $ 2,658
Other income............................... 534 373 297 222 294
Other expenses............................. 4,096 3,123 3,102(7) 2,255 2,058
-------- -------- -------- ------- -------
Income before income tax expense........... $ 1,216 $ 1,277 $ 216 $ 244 $ 894
Income tax expense......................... 473 493 70 83 346
-------- -------- -------- ------- -------
Net income................................. $ 743 $ 784 $ 146(8) $ 161 $ 548
======== ======== ======== ======= =======
SELECTED OPERATING RATIOS(3):
Return on average assets................... .45% .59% .14% .18% .64%
Return on average equity................... 4.79 5.13 1.22 2.26 8.08
Average yield earned on interest-earning
assets................................... 7.26 7.21 6.93 6.66 6.41
Average rate paid on interest-bearing
liabilities.............................. 4.50 4.47 4.21 4.22 3.38
Average interest rate spread(4)............ 2.76 2.74 2.72 2.44 3.03
Net interest margin(4)..................... 3.10 3.18 3.15 2.69 3.25
Ratio of interest-earning assets to
interest-bearing liabilities............. 108.34 110.99 111.31 106.34 107.03
Operating expenses as a percent of average
assets................................... 2.47 2.33 3.09 2.54 2.41
Average equity to average assets........... 9.35 11.42 11.86 8.02 7.97
Dividend payout ratio...................... 25.78 13.04 N/A N/A N/A
ASSET QUALITY RATIOS(3):
Nonperforming loans as a percent of total
loans.................................... .56% .63% .44% .50% .64%
Nonperforming assets as a percent of total
assets................................... .51 .43 .34 .38 .45
Allowance for loan losses as a percent of
total loans.............................. .45 .42 .40 .46 .49
Charge-offs to average loans receivable
outstanding during the period............ .04 .01 .04 .09 .00
PER SHARE DATA(5):
Basic Earnings Per Share................... $ 0.79 $ 0.80 $ 0.00(9) N/A N/A
Diluted Earnings Per Share................. 0.78 0.80 0.00(9) N/A N/A
Per Share Book Value....................... 15.54 14.85 13.93 N/A N/A
Per Share Market Value..................... 12.75 17.39 11.74 N/A N/A
NUMBER OF OFFICES:
Full-service offices at period end......... 5 4 3 3 3
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(1) For years ending December 31, 1995 and 1994 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) On April 15, 1998, the Board of Directors declared a stock dividend of 15%
to shareholders of record of June 2, 1998 payable on June 19, 1998. All per
share data have been restated to reflect the stock dividend.
(6) Based on the business activities of the Savings Bank prior to June 27,
1996, and on the business activities of the Savings Bank and the Company on
and after June 27, 1996.
(7) 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.
(8) But for the impact of the special assessment described in Note 7 above, the
net income of the Company would have been $454,000.
(9) Earnings per share of the Company for the period from June 27, 1996 (date
of conversion) to December 31, 1996, was less than one-half of one cent per
share. But for the impact of the special assessment described in Note 7
above, the earnings per share of the Company would have been $.31 per share
for the same period. On a weighted average share basis for the period from
June 27, 1996 to December 31, 1996 the earnings per share of the Company
was $3,070 (net income) divided by 1,019,768 (weighted average shares for
such period) or $0.00301.
(10) Based solely on the business activities of the Savings Bank.
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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 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 QUARTER ENDED(1)
Interest income................................... $2,688 $2,902 $3,022 $3,060
Non-interest income............................... 101 143 126 164
------ ------ ------ ------
Total operating income............................ 2,789 3,045 3,148 3,224
Interest expense.................................. 1,532 1,658 1,717 1,778
Provision for loan losses......................... 38 42 42 87
Non-interest expense.............................. 968 1,024 1,049 1,055
------ ------ ------ ------
Income before income taxes........................ 251 321 340 304
Provision for income taxes........................ 98 126 132 117
------ ------ ------ ------
Net income........................................ $ 153 $ 195 $ 208 $ 187
====== ====== ====== ======
Basic earnings per common share................... $ .16 $ .20 $ .22 $ .21
Basic average number of common shares
outstanding..................................... 969,166 969,788 958,313 880,218
Diluted earnings per common share................. $ .16 $ .20 $ .22 $ .21
Diluted average number of common shares
outstanding..................................... 979,430 989,988 963,872 880,218
Stock prices(2)
High............................................ $17.42 $23.50 $18.25 $14.00
Low............................................. $16.30 $16.00 $12.75 $12.50
Cash dividends declared per common share.......... $ .05 $ .05 $ .05 $ .05
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 QUARTER ENDED(1)
Interest income................................... $2,133 $2,303 $2,467 $2,468
Non-interest income............................... 74 96 84 120
------ ------ ------ ------
Total operating income............................ 2,207 2,399 2,551 2,588
Interest expense.................................. 1,152 1,265 1,401 1,423
Provision for loan losses......................... 17 27 30 30
Non-interest expense.............................. 709 746 795 873(4)
------ ------ ------ ------
Income before income taxes........................ 329 361 325 262
Provision for income taxes........................ 125 137 123 108
------ ------ ------ ------
Net income........................................ $ 204 $ 224 $ 202 $ 154
====== ====== ====== ======
Basic earnings per common share................... $ .20 $ .23 $ .21 $ .16
Basic average number of common shares
outstanding.....................................1,017,732 967,070 967,009 967,968
Diluted earnings per common share(3).............. $ .20 $ .23 $ .21 $ .16
Diluted average number of common shares
outstanding.....................................1,017,732 967,470 969,148 978,652
Stock prices(2)
High............................................ $14.35 $14.35 $16.42 $17.39
Low............................................. $11.30 $13.48 $13.59 $15.65
Cash dividends declared per common share.......... $ .03 $ .03 $ .03 $ .03
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(1) On April 15, 1998, the Board of Directors declared a stock dividend of 15%
to shareholders of record of June 2, 1998 payable on June 19, 1998. All per
share data have been restated to reflect the stock dividend.
(2) Stock prices are based on the closing bid prices reported on NASDAQ.
(3) Prior to April 23, 1997, the Company had a simple capital structure with no
difference between basic and diluted earnings per share.
(4) The increase in non-interest expense from $795,000 for the quarter ended
September 30, 1997 to $873,000 for the quarter ended December 31, 1997 was
primarily attributable to the opening of our supermarket branch located in
Washington, PA.
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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.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
In addition to historical information, forward-looking statements are
contained herein that are subject to risks and uncertainties that could cause
actual results to differ materially from those reflected in the forward-looking
statements. Factors that could cause future results to vary from current
expectations, include, but are not limited to, the impact of economic conditions
(both generally and more specifically in the markets in which the Company and
the Savings Bank operate), the impact of competition for the customers of the
Savings Bank from other providers of financial services, the impact of
government legislation and regulation (which changes from time to time and over
which the Company and the Savings Bank have no control), and other risks
detailed in this Annual Report and in the Company's other Securities and
Exchange Commission filings. Readers are cautioned not to place undue reliance
on these forward-looking statements, which reflect management's analysis only as
of the date hereof. The Company undertakes no obligation to publicly revise
these forward-looking statements, to reflect events or circumstances that arise
after the date hereof. Readers should carefully review the risk factors
described in other documents the Company files from time to time with the
Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q
to be filed by the Company in 1999 and any Current Reports on Form 8-K filed by
the Company.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO
YEAR ENDED DECEMBER 31, 1997
FINANCIAL CONDITION
The Company's consolidated assets increased by $34.1 million or 23.8% from
$143.3 million at December 31, 1997 to $177.4 million at December 31, 1998. The
increase in total assets was primarily attributable to an increase in total net
loans receivable and cash and cash equivalents. The increase in total assets was
funded by an increase in deposits and the leverage of the balance sheet through
loans from the Federal Home Loan Bank of Pittsburgh ("FHLB of Pittsburgh").
Total deposits increased from $91.2 million at December 31, 1997 to $109.7
million at December 31, 1998, and advances from the FHLB of Pittsburgh rose from
$34.7 million at December 31, 1997 to $51.0 million at December 31, 1998.
The Savings Bank's net loans receivable increased by $27.7 million or 28.8%
from $96.2 million at December 31, 1997 to $123.9 million at December 31, 1998.
This rise in total net loan receivables can be traced to three main areas of
growth. One-to-four family residential mortgages increased $9.2 million or
12.6%, as the Savings Bank expanded its efforts to contact realtors and priced
its mortgage rates competitively. Consumer loans increased $2.9 million or
22.8%, 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 from $11.1 million at December 31, 1997
to $27.0 million at December 31, 1998. The increase in commercial business and
commercial real estate loans was accomplished through referrals.
Investment securities decreased from $38.8 million at December 31, 1997 to
$35.4 million at December 31, 1998. The decrease occurred as investments with
callable features were called due to the low rate environment. These funds
received from the called investments along with increased principal payments on
loans and increases in total deposits primarily account for the increase in cash
and cash equivalents from $2.2 million at December 31, 1997 to $10.2 million at
December 31, 1998.
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On April 30, 1998, the Savings Bank completed the sale of the land and
building situated in Bethel Park, Pennsylvania, on which the Savings Bank's
Bethel Park branch is located. The Bank has entered into a two year lease with
the new owner that includes three one year options concerning the continued
operation of the Bethel Park branch of the bank at such location. The Company
will recognize a gain of $37,914 on the sale of the property over the life of
the lease.
The Savings Bank's total deposits increased $18.5 million or 20.3% from
$91.2 million at December 31, 1997 to $109.7 million at December 31, 1998. The
growth in deposits during fiscal 1998 was primarily a result of competitive
rates and fees that continue to be offered by the Savings Bank. The Savings Bank
opened its fifth branch located at 603 Scenery Drive, Elizabeth Township, PA in
the first quarter of 1998. To attract customers to this location along with our
supermarket branch in Washington, PA, that opened in October 1997, slightly
higher than market rate certificates were offered. At December 31, 1998, our
supermarket branch had deposits totaling $2.4 million while the Elizabeth
Township office had deposits totaling $4.9 million. Borrowings by the Savings
Bank from the FHLB of Pittsburgh rose by $16.3 million, or 47.0%, from $34.7
million at December 31, 1997 to $51.0 million at December 31, 1998. Total equity
decreased $870,000 or 5.6% to $14.8 million at December 31, 1998. The primary
reasons for this decrease were two 5% stock buyback programs initiated and
completed during 1998 totaling $1.4 million and dividends paid of $192,000 which
was partially offset by net income for fiscal 1998 of $743,000. In addition, on
April 15, 1998, the Board of Directors declared a stock dividend of 15% to
shareholders of record of June 2, 1998 payable on June 19, 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO
YEAR ENDED DECEMBER 31, 1996
FINANCIAL CONDITION
The Company's consolidated assets increased by $28.7 million or 25.0% from
$114.6 million at December 31, 1996 to $143.3 million at December 31, 1997. The
increase in total assets was primarily attributable to an increase in total
loans receivable and investment securities. Premises and equipment increased
$793,000 in 1997 primarily due to the expansion of the corporate office. The
increase in total assets was funded by an increase in deposits and the leverage
of the balance sheet through loans from the Federal Home Loan Bank of Pittsburgh
("FHLB of Pittsburgh"). Total deposits increased from $83.8 million at December
31, 1996 to $91.2 million at December 31, 1997, and advances from the FHLB of
Pittsburgh rose from $14.5 million at December 31, 1996 to $34.7 million at
December 31, 1997.
The Savings Bank's total loans receivable increased by $21.0 million or
27.1% from $77.4 million at December 31, 1996 to $98.4 million at December 31,
1997. This rise in total loan receivables can be traced to three main areas of
growth. One-to-four family residential mortgages increased $7.1 million or
10.9%, as the Savings Bank expanded its efforts to contact realtors and priced
its mortgage rates to attract new business. Consumer loans increased $3.5
million or 37.7%, 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 from $2.0 million
at December 31, 1996 to $11.1 million at December 31, 1997. The increase in
commercial business and commercial real estate loans was accomplished through
referrals.
Investment securities increased from $31.9 million at December 31, 1996 to
$38.8 million at December 31, 1997. The increase occurred as the Company
proceeded to leverage its strong capital position by primarily investing in U.S.
Government agency securities with funds received by the FHLB of Pittsburgh.
The Savings Bank's total deposits increased $7.4 million or 8.8% from $83.8
million at December 31, 1996 to $91.2 million at December 31, 1997. The growth
in deposits during fiscal 1997 was primarily a result of competitive rates and
fees that continue to be offered by the Savings Bank. Borrowings by the Savings
Bank from the FHLB of Pittsburgh rose by $20.2 million, or 139.3%, from $14.5
million at December 31, 1996 to $34.7 million at December 31, 1997. Total equity
increased $200,000 or 1.3% to $15.6 million at December 31, 1997, a result of
the net income for fiscal 1997 and the impact of the valuation of
available-for-sale securities pursuant to Statement of Financial Accounting
Standards ("SFAS") No. 115 which was offset by a 5% stock buyback program
initiated and completed during 1997 in the amount of $776,000 and dividends paid
of $111,000.
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OPERATING STRATEGY
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 commercial business 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 continued to experience increased competition from
mortgage brokers and other financial entities for its one-to-four family
residential real estate lending activities in the early 1990s. This increased
competition has led to a reduction in margins for residential real estate
lending. The Savings Bank's total loans receivable attributable to one-to-four
family residential loans, which amounted to $55.3 million or 63.0% of total
assets at December 31, 1994, was $81.3 million at December 31, 1998 but had
declined as a percentage of total assets to 45.8%. During the same period, the
Savings Bank's total loans receivable attributable to commercial business,
commercial real estate, construction and consumer loans, which amounted to $5.9
million or 6.7% of total assets at December 31, 1994, had increased to $44.3
million at December 31, 1998 or 25.0% of total assets. At the same time,
investment and mortgage-backed securities, which amounted to $22.3 million, or
25.4% of total assets, at December 31, 1994 had increased to $35.4 million, or
19.9% of total assets, at December 31, 1998. Management attributes this shift in
asset composition to an increase in deposits and borrowings over the same period
(from $79.6 million at December 31, 1994 to $160.7 million at December 31, 1998)
and increased efforts on the part of management to find customers with various
loan needs. In addition, management desires to increase the Savings Bank's
commercial and consumer loans 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's percentage of adjustable rate mortgages in its mortgage
portfolio has declined due to lack of demand. As fixed loan rates have fallen
recently, the adjustable rate mortgage has become less attractive to potential
customers. As of December 31, 1998, adjustable rate mortgages constituted 22.9%
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, 1997, adjustable rate mortgages composed 33.7% 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 realizes the importance of adjustable rate
mortgages to interest rate risk management but believes that under this current
rate environment it would be difficult to profitably produce adjustable rate
mortgages. Therefore, 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. In striving to increase deposit balances, the Savings Bank has
opened its fifth branch in February 1998 located at 603 Scenery Drive, Elizabeth
Township, PA 15037. However, due to 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 and when management believes the yields and the
maturities are attractive. Excess cash (cash in excess of vault cash and other
operating cash needs) is primarily deposited in an interest bearing demand
deposit account with the FHLB of Pittsburgh. Cash and cash equivalents typically
decline in periods of high loan demand and increase in periods of reduced loan
demand. In periods of heavy loan demand, the Savings Bank will borrow from the
FHLB of Pittsburgh to satisfy the loan demand. As of December 31, 1997,
outstanding borrowings from the FHLB of Pittsburgh stood at $34.7 million and as
of December 31, 1998 such borrowings have increased to $51.0 million. This
increased borrowing occurred as part of Management's plan to increase the assets
of the Savings Bank and increase the debt to equity leverage ratio due to the
increased equity that arose through the Conversion.
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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 rate risk. In the
event the Savings Bank needs cash to fund additional consumer loans, commercial
business 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 business 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. However, due to
the heavy demand for 30 year fixed rate mortgages, management has had to promote
this product. Management is cognizant of the increased interest rate risk this
product presents and takes necessary steps to control the risk. Such steps
include limiting new loan volume and funding the loans with longer-term
borrowings. Adjustable rate mortgage loans ("ARMs") for one-to-four family
residential mortgages continue to be offered. 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 that combine higher yields and a shorter loan term.
Consumer and commercial business loans have grown from $12.8 million and $9.6
million, respectively, at December 31, 1997 to $15.7 million and $18.7 million,
respectively, at December 31, 1998. Management intends to continue the strategy
set forth above. The foregoing investment strategy is based on management's
assessment of future economic conditions and is subject to change.
ASSET AND LIABILITY MANAGEMENT
The principal objective of the Company's asset and liability management
function is to evaluate the interest-rate risk included in its asset and
liability mix to determine the level of risk appropriate given the Company's
business focus, operating environment, capital and liquidity requirements and
performance objectives, 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.
The Company seeks, through the Asset Liability Committee ("ALCO"), to
reduce the vulnerability of its operations to changes in interest rates and to
manage the difference between amounts of interest-rate sensitive assets and
interest-rate sensitive liabilities within specified maturities or repricing
dates. The difference, or the interest rate repricing "gap," provides an
indication of the extent to which an institution's interest rate spread will be
affected by changes in interest rates. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities, and is considered negative when the amount of
interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets during a given time period. Generally, during a period of
rising interest rates, a negative gap within shorter maturities would adversely
affect net interest income, while a positive gap within shorter maturities would
result in an increase in net interest income, and during a period of falling
interest rates, a negative gap within shorter maturities would result in an
9
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increase in net interest income while a positive gap within shorter maturities
would have the opposite effect. As of December 31, 1998, the amount of the
Savings Bank's interest-bearing liabilities that were estimated to mature or
reprice within one year exceeded the Savings Bank's interest-earning assets with
the same characteristics by $19.1 million or 10.9% of the Savings Bank's total
assets. If the Board of Governors of the Federal Reserve System raises the
discount rate charged to member banks during 1999, interest rates within the
United States' economy will rise and the Savings Bank's net income is likely to
be adversely effected. In addition, ALCO reviews, among other things, the
sensitivity of the Savings Bank's assets, liabilities, and net interest income
to interest rate changes, unrealized gains and losses, purchase activity and
maturities of all interest bearing assets and liabilities. In connection
therewith, the ALCO generally reviews the Savings Bank's liquidity, cash flow
needs, maturities of investments, deposits and borrowings, current market
conditions and interest rates, and pricing of its deposit and loan products. The
Chief Executive Officer, Chief Financial Officer and President of the Savings
Bank have authority to adjust pricing weekly with respect to the Savings Bank's
retail deposits.
The Office of Thrift Supervision ("OTS") 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, 1998, 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............................. $10,724 $-6,713 -38% 6.46% -315bp
+300............................. 12,619 -4,818 -28 7.43 -219bp
+200............................. 14,489 -2,948 -17 8.33 -128bp
+100............................. 16,193 -1,244 -7 9.11 -51bp
0............................... 17,437 9.61
- -100............................. 17,945 508 +3 9.74 +12bp
- -200............................. 18,144 707 +4 9.70 +8bp
- -300............................. 18,737 1,300 +7 9.84 +23bp
- -400............................. 19,332 1,895 +11 9.98 +36bp
- ---------------
(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
10
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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.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require the making of
certain assumptions that may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the NPV model presented assumes that the composition of the Savings Bank's
interest sensitive assets and liabilities existing at the beginning of a period
remains constant over the period being measured and also assumes that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the NPV measurements and net interest income
models provide an indication of the Savings Bank's interest rate risk exposure
at a particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
the Savings Bank's net interest income and will differ from actual results.
Based upon the above calculations, the percent change of estimated NPV for
a 200 basis point increase in prevailing rates changed from a negative 28 at
December 31, 1997 to a negative 17 at December 31, 1998. This decrease was a
direct result of ALCO's recommendation and the increase in liquidity. 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, 1998. Management uses the NPV and the IRR rule as an additional tool to
evaluate the Savings Bank's asset and liability position.
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RESULTS OF OPERATIONS
AVERAGE BALANCES, INTEREST INCOME, INTEREST EXPENSE AND YIELDS EARNED AND
RATES PAID. The following table sets forth, for the periods and at the date
indicated, information regarding the Company's average consolidated balance
sheet. Information is based on average daily balances during the periods
presented.
AT YEAR ENDED DECEMBER 31,
DECEMBER 31, -------------------------------------------------------------
1998 1998 1997
------------ ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---- -------- ------- ------ -------- ------ ------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Investment
securities(1)....... 6.03% $ 33,783 $ 2,137 6.33% $ 25,918 $1,706 6.58%
Loans receivable(2)
Commercial.......... 9.34 19,265 1,814 9.42 7,680 737 9.60
Real estate loans... 7.26 77,854 5,695 7.31 70,445 5,160 7.32
Consumer............ 7.69 14,690 1,180 8.03 11,178 889 7.95
-------- ------- -------- ------
Total Loans
Receivable.......... 7.73 111,809 8,689 7.77 89,303 6,786 7.60
Mortgage-backed
securities(1)....... 6.29 9,295 590 6.34 12,080 773 6.40
Other interest-earning
assets.............. 4.87 5,988 256 4.27 2,750 106 3.85
-------- ------- -------- ------
Total
interest-earning
assets............ 7.22% $160,875 $11,672 7.26% $130,051 $9,371 7.21%
Non-interest-earning
assets................ 5,116 3,896
-------- --------
Total assets........ $165,991 $133,947
======== ========
Interest-bearing
liabilities:
Deposits.............. 3.97% $ 99,343 $ 3,976 4.00% $ 88,617 $3,650 4.12%
FHLB advances......... 5.50 49,144 2,709 5.51 28,554 1,590 5.57
-------- ------- -------- ------
Total
interest-bearing
liabilities....... 4.46% $148,487 $ 6,685 4.50% $117,171 $5,240 4.47%
Non-interest-bearing
liabilities........... $ 1,987 $ 1,480
-------- --------
Total liabilities... $150,474 $118,651
Equity.................. $ 15,517 $ 15,296
-------- --------
Total liabilities
and equity........ $165,991 $133,947
======== ========
Net interest-earning
assets................ $ 12,388 $ 12,880
======== ========
Net interest
income/interest rate
spread................ 2.76% $ 4,987 2.76% $4,131 2.74%
==== ======= ====== ====== ======
Net yield on interest-
earning assets(3)..... 3.10% 3.18%
====== ======
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities........... 108.34% 110.99%
====== ======
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST RATE
-------- ------ ------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Investment
securities(1)....... $ 11,609 $ 657 5.66%
Loans receivable(2)
Commercial.......... 574 51 8.89
Real estate loans... 62,537 4,568 7.31
Consumer............ 6,147 459 7.47
-------- ------
Total Loans
Receivable.......... 69,258 5,078 7.33
Mortgage-backed
securities(1)....... 14,619 922 6.31
Other interest-earning
assets.............. 1,867 91 4.87
-------- ------
Total
interest-earning
assets............ $ 97,353 $6,748 6.93%
Non-interest-earning
assets................ 3,086
--------
Total assets........ $100,439
========
Interest-bearing
liabilities:
Deposits.............. $ 82,294 $3,407 4.14%
FHLB advances......... 5,169 276 5.34
-------- ------
Total
interest-bearing
liabilities....... $ 87,463 $3,683 4.21%
Non-interest-bearing
liabilities........... $ 1,067
--------
Total liabilities... $ 88,530
Equity.................. $ 11,909
--------
Total liabilities
and equity........ $100,439
========
Net interest-earning
assets................ $ 9,890
========
Net interest
income/interest rate
spread................ $3,065 2.72%
====== ======
Net yield on interest-
earning assets(3)..... 3.15%
======
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities........... 111.31%
======
- ---------------
(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
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securities that generate interest income for the savings association. The
Savings Bank also operates in an environment of changing interest rates and
fluctuating volumes of deposits, advances from third parties, loans made to
third parties and securities bought, sold or repaid. The following table
describes the extent to which changes in interest rates and changes in volume of
interest-related assets and liabilities have affected the Company's consolidated
interest income and expense during the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (change in volume
multiplied by prior year rate), (ii) changes in rate (change in rate multiplied
by prior year volume), and (iii) total change in rate and volume.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1998 VS. 1997 1997 VS. 1996
------------------------------------------ ----------------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO TOTAL DUE TO TOTAL
-------------- RATE/ INCREASE ------------- RATE/ INCREASE
RATE VOLUME VOLUME (DECREASE) RATE VOLUME VOLUME (DECREASE)
----- ------ ----------- ---------- ---- ------ ----------- ----------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable, net...... $ (12) $1,934 $(19) $1,903 $ 46 $1,586 $ 76 $1,708
Mortgage-backed
securities............... (7) (178) 2 (183) 14 (160) (2) (148)
Investment securities...... (66) 517 (20) 431 107 810 132 1,049
Other interest-earning
assets................... 12 125 13 150 (19) 43 (9) 15
----- ------ ---- ------ ---- ------ ---- ------
Total interest-earning
assets................. $ (73) $2,398 $(24) $2,301 $148 $2,279 $197 $2,624
----- ------ ---- ------ ---- ------ ---- ------
Interest-bearing liabilities:
Deposits................... $(103) $ 441 $(12) $ 326 $(17) $ 262 $ (1) $ 244
FHLB advances.............. (16) 1,147 (12) 1,119 12 1,249 53 1,314
----- ------ ---- ------ ---- ------ ---- ------
Total interest-bearing
liabilities............ (119) 1,588 (24) 1,445 (5) 1,511 52 1,558
----- ------ ---- ------ ---- ------ ---- ------
Increase in net interest
income..................... $ 46 $ 810 $ 0 $ 856 $153 $ 768 $145 $1,066
===== ====== ==== ====== ==== ====== ==== ======
NET INCOME. The Company reported consolidated net income of $743,000,
$784,000 and $146,000 for the fiscal years ended December 31, 1998, 1997 and
1996, respectively. The $41,000 or 5.2% decrease in net income for fiscal 1998
when compared to fiscal 1997 was attributable to a $974,000 or 31.2% increase in
non-interest expense and an increase of $105,000 in provision for loan losses,
which was partially offset by an increase of $856,000 or 20.7% increase in net
interest income and a $162,000 or 43.5% increase in other income.
Results for fiscal 1996 were affected by a $502,000 before tax ($308,000
after tax) FDIC special assessment to recapitalize the Savings Association
Insurance Fund ("SAIF"). But for this special assessment, earnings for the year
ended December 31, 1996 would have been $454,000. The $330,000 or 72.7% increase
in net income for fiscal 1997 when compared to fiscal 1996, without the special
assessment, was attributable to a $1.1 million or 34.7% increase in net interest
income and a $75,000 or 25.3% increase in other income, which was partially
offset by an increase of $520,000 or 20.0% in non-interest expense and an
increase of $230,000 in income tax expense, net of the benefit from the SAIF
assessment.
NET INTEREST INCOME. Net interest income before provision for loan losses
amounted to $5.0 million during fiscal 1998, compared to $4.1 million during
fiscal 1997 and compared to $3.1 million during fiscal 1996. During fiscal 1998,
the $856,000 million or 20.7%, increase in net interest income compared with
fiscal 1997 was attributable to an increase in loan originations and investment
purchases. Average balances of interest-earning assets increased $30.8 million,
or 23.7% while average interest-bearing liabilities increased $31.3 million, or
26.7%. The increase in both average assets and liabilities was due directly to
management's intent to leverage the Company's excess capital by funding the
accelerated growth in assets with primarily FHLB advances. Another contributing
factor was an increase in the average yield earned on interest-earning assets to
7.26% in 1998 from 7.21% in 1997, due primarily to increases in average yields
earned on loans receivable. The increases in both average balances and average
yields on earning assets, during fiscal 1998, increased interest income $2.3
million, or 24.6%, which was partially offset by a $1.4 million or 27.8%
increase in total interest expense.
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The $2.3 million increase in total interest income during the year ended
December 31, 1998 over the prior comparable period was primarily due to a $1.9
million or 28.0% increase in interest and fees on loans and a $431,000 or 25.3%,
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 1998 was primarily due to a rise in average balances of
loans receivable and on investment securities of $22.5 million, or 25.2%, and
$7.9 million, or 30.3%, respectively. Management continued to grow its
traditional one-to-four family residential loans from $72.2 million at December
31, 1997 to $81.3 million at December 31, 1998, but in addition was able to grow
its commercial business loans from $9.6 million at December 31, 1997 to $18.7
million at December 31, 1998. In addition, an increase in the average yield
earned on loans receivable from 7.60% in 1997 to 7.77% in 1998 accounted for a
portion of the increase in interest income.
The increase in interest expense in 1998, compared with 1997, was primarily
a result of an increase in the Savings Bank's average interest bearing
liabilities from $117.2 million to $148.5 million. This increase resulted from
an increased volume of average deposits of $10.7 million or 12.1% and a $20.6
million or 72.1% increase in average borrowings. The increase in average
borrowings was due to funding the accelerated growth in assets of the Company.
During fiscal 1997, the $1.0 million or 32.3%, increase in net interest
income compared with fiscal 1996 was attributable to a $32.7 million, or 33.6%,
increase in the average balance of interest-earning assets which was partially
offset by an increase of $29.7 million, or 33.9%, increase in average
interest-bearing liabilities. The increase in both average assets and
liabilities was due directly to management's intent to leverage the Company's
excess capital by funding the accelerated growth in assets with primarily FHLB
advances. The increase in average interest-earning assets over average
interest-bearing liabilities of $3.0 million in 1997 was primarily attributable
from having the proceeds from the Company's stock offering on June 27, 1996 for
a full year. Another contributing factor was an increase in the average yield
earned on interest-earning assets to 7.21% in 1997 from 6.93% in 1996, due
primarily to increases in yields earned on loans receivable and investment
securities. The increases in both average balances and yield on earning assets,
during fiscal 1997, increased interest income $2.6 million, or 38.9%, which more
than offset a $1.6 million or 42.3% increase in total interest expense.
The $2.6 million increase in total interest income during the year ended
December 31, 1997 over the prior comparable period was primarily due to a $1.7
million or 33.6% increase in interest and fees on loans and a $1.0 million or
159.7%, 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 1997 was primarily due to a rise in average
balances of loans receivable and on investment securities of $20.0 million, or
28.9%, and $14.3 million, or 123.3%, respectively. Management continued to grow
its traditional one-to-four family residential loans from $65.1 million at
December 31, 1996 to $72.2 million at December 31, 1997, but in addition was
able to grow its commercial business loans from $1.0 million at December 31,
1996 to $9.6 million at December 31, 1997. In addition, an increase in the
average yield earned on loans receivable and investment securities from 7.33%
and 5.66%, respectively, in 1996 to 7.60% and 6.58%, respectively, in 1997
accounted for a portion of the increase in interest income.
The increase in interest expense in 1997, compared with 1996, was primarily
a result of an increase in the Savings Bank's average interest bearing
liabilities from $87.5 million to $117.2 million. This increase resulted from an
increased volume of average deposits of $6.3 million or 7.7% and a $23.4 million
increase in average borrowings. The increase in average borrowings was due to
funding the accelerated growth in assets of the Company through increased
borrowings provided by the FHLB of Pittsburgh.
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, 1998, the provision for loan losses was $209,000.
For the two years ended December 31, 1997 and 1996, provisions for loan losses
were $104,000 and $44,000, respectively. The increase in provision for loan
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losses in 1998 represents management's intent to raise the level of provision in
relation to the increased loan types and volume during fiscal 1998.
Specifically, during the fourth quarter 1998, management increased its provision
for loan loss expense to $87,000 from $42,000 in the third quarter 1998. This
increase represents management's intent to grow the loan loss provision in
relation to the growth in commercial business and commercial real estate loans,
which grew from $16.8 million at June 30, 1998 to $27.0 million at December 31,
1998. During fiscal 1998, the Savings Bank charged off $22,000 and $19,000 in
one-to-four family and credit card loans, respectively. At December 31, 1998,
the Savings Bank's allowance for loan losses amounted to 81.8% of total
non-performing loans and .45% of total loans receivable. Management and the
directors of the Company and the Savings Bank believe that the allowance for
loan losses is currently adequate. In addition, management and the directors of
the Company and the Savings Bank propose to continue to evaluate its loan loss
reserve in relation to its commercial business and commercial real estate loan
portfolios and make necessary adjustments to reserves as needed.
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 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 is in the process of being examined by the OTS as
of December 31, 1998 and a final report is forthcoming. Prior to this exam, the
Savings Bank was last examined by the OTS as of March 31, 1997.
OTHER INCOME. Total other income amounted to $534,000 for the year ended
December 31, 1998, an increase of $162,000 or 43.5% from the $372,000 earned in
fiscal 1997. Increased transaction fees accounted primarily for the rise in
total other income. The increase in transaction fees occurred due to an increase
in transaction accounts, which include NOW and non-interest bearing accounts,
from $13.9 million at December 31, 1997 to $17.5 million at December 31, 1998.
The additional transaction fees have resulted in increased costs due to higher
employee manhours to administer such transactions.
Total other income amounted to $372,000 for the year ended December 31,
1997, an increase of $75,000 or 25.3% from the $297,000 earned in fiscal 1996.
Increased transaction fees accounted primarily for the rise in total other
income. The increase in transaction fees occurred due to an increase in
transaction accounts, which include NOW and non-interest bearing accounts, from
$11.1 million at December 31, 1996 to $13.9 million at December 31, 1997. The
additional transaction fees have resulted in increased costs due to higher
employee manhours to administer such transactions.
OTHER EXPENSES. Total other expenses amounted to $4.1 million for the year
ended December 31, 1998, an increase of $974,000 or 23.8% from the $3.1 million
incurred in fiscal 1997. One of the reasons for the increase was a $455,000 or
29.0% increase in salaries and employee benefits. This is attributable to the
hiring of four full time equivalent employees to staff the newly formed
Elizabeth Township branch, a full year of six full time equivalent employees at
our Washington supermarket branch, an increase of $46,000 in costs associated
with the Management Recognition and Retention plan, an increase in expenses
related to commercial loan administration, and salary increases for its existing
employees. The increase is also attributable to a rise in premises and occupancy
costs of $197,000 or 59.2% primarily due to the higher depreciation expenses
associated with furniture and equipment needed for the expansion of the
corporate office and the two new branch locations. Lastly, the increase was
caused by other expenses, which increased $166,000 or 29.3% during 1998. The
rise in other expenses was primarily the result of increased consulting expenses
as the Company has outsourced some job functions and increased general operating
expenses.
Total other expenses amounted to $3.1 million for the year ended December
31, 1997, an increase of $520,000 or 20.0% from the $2.6 million incurred in
fiscal 1996, without the SAIF special assessment. One of the reasons for the
increase was a $347,000 or 28.4% increase in salaries and employee benefits.
This is attributable to the hiring of five full time equivalent employees to
staff the newly formed supermarket branch, an $88,000
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expense associated with the implementation of a Management Recognition and
Retention plan, additional ESOP compensation expense of $54,000, an increase in
expenses related to commercial loan administration, and salary increases for its
existing employees. The increase is also attributable to a rise in other
expenses, which increased $198,000 or 53.6% during 1997. 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 for an entire
year and additional costs associated with the first annual meeting.
INCOME TAXES. For the fiscal years ended December 31, 1998, 1997 and 1996,
the Company incurred income tax expense of $473,000, $493,000 and $69,000. The
effective tax rate was 38.9% during the year ended December 31, 1998, compared
to 38.6% during the year ended 1997, and 32.3% in fiscal 1996. The decreased
income tax expense incurred in 1998 was due to decreased taxable income. For
further information, see Note 11 of the Notes to Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows are categorized as to whether they relate to the operating,
investing or financing activities of the Company or the Savings Bank. Cash flow
from operating activities includes net income plus or minus non-cash income
statement items. Cash flow from investing activities includes proceeds from the
sale or maturity of investment securities, principal payments collected on loans
and mortgage-backed and related securities, loan originations and purchases of
investments and mortgage-backed and related securities. Cash flow from financing
activities includes the increase or decrease in deposits, borrowings and
escrows.
During the years ended December 31, 1998 and 1997, the Company's or the
Savings Bank's operating activities provided net cash of approximately $890,000
and $1.5 million, respectively. The $890,000 net cash provided during the year
ended December 31, 1998 was primarily due to $743,000 in net income, $209,000 in
provision for loan losses, and $306,000 in depreciation of premises and
equipment, which was partially offset by a $398,000 increase in other assets.
The primary reasons for the $1.5 million net cash provided during the year ended
December 31, 1997 were $784,000 in net income, a $287,000 increase in other
liabilities, and $189,000 in depreciation of premises and equipment, which was
partially offset by a $222,000 increase in accrued interest receivable.
Net cash used by investing activities was $25.8 million for the year ended
December 31, 1998. During the year ended December 31, 1998, the Savings Bank
originated $27.9 million in new loans in excess of principal payments received
on existing loans. The Savings Bank purchased $16.7 million of investment and
mortgage-backed securities designated held to maturity due to their longer term
maturity structure and purchased $6.7 million of investment and mortgage-backed
securities designated available for sale. In addition, $17.0 and $5.6 million
held to maturity and available for sale securities, respectively, were called
during fiscal 1998. Net cash used by investing activities was $28.1 million for
the year ended December 31, 1997. During the year ended December 31, 1997, the
Savings Bank originated $19.7 million in new loans in excess of principal
payments received on existing loans and purchased $17.7 million of investment
securities designated held to maturity due to their longer term maturity
structure. In addition, $8.5 million held to maturity securities were called
during fiscal 1997.
Net cash provided by financing activities for the year ended December 31,
1998, was $32.8 million, attributable to increases in core deposits and
certificate accounts of $8.4 million and $10.1 million, respectively, and
increases in net Federal Home Loan Bank advances of $16.3 million. In addition,
the Company purchased $1.4 million of treasury stock during fiscal 1998. During
the same period for 1997, the Savings Bank experienced a $26.7 million increase
in net cash provided by financing activities primarily due to increases in core
deposits and certificate accounts of $5.2 million and $2.1 million,
respectively, and increases in net Federal Home Loan Bank advances of $20.2
million
The primary sources of funds for the Savings Bank are deposits, advances
from the FHLB of Pittsburgh, repayments, prepayments and maturities of
outstanding loans and mortgage-backed securities, maturities of investment
securities and other short-term investments, and funds provided from operations.
The primary sources of funds for the Company are dividends from the Savings
Bank, repayments by the ESOP of the loan it received from the Company, interest
and dividends on debt and equity investments in other companies and interest
earned
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on deposits of the Company held at Savings Bank and short-term investments.
While scheduled loan and mortgage-backed securities repayments and maturing
investment securities and short-term investments are relatively predictable
sources of funds, deposit flows, loan and mortgage-backed securities
prepayments, and investment securities with callable features are greatly
influenced by the movement of interest rates in general, economic conditions or
competition. The Savings Bank manages the pricing of its deposits to maintain a
deposit balance deemed appropriate and desirable by 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. At December 31, 1998, the Savings
Bank's maximum borrowing capacity with the FHLB of Pittsburgh was $93.1 million
of which $51.0 million was borrowed pursuant to various term loans with
maturities of less than ten years.
Liquidity management is both a daily and long-term function. Excess
liquidity is generally invested in short-term investments such as cash and cash
equivalents, interest bearing deposits with other institutions (including the
FHLB of Pittsburgh), U.S. Government, U.S. Government agencies and other
qualified investments. On a longer-term basis, the Company, through the
operation of the Savings Bank, maintains a strategy of investing in various
mortgage-backed securities and other investment securities and lending products
as described in greater detail under the heading "Business of the Company,"
which is hereinafter set forth. During the year ended December 31, 1998, 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 one-to-four family mortgage loan,
commercial loan and consumer loan portfolios. The Savings Bank has outstanding
loan commitments (i.e. one-to-four family and home equity loan commitments,
credit card limits and commercial loan commitments) to extend credit
approximating $13.1 million as of December 31, 1998. Certificates of deposit
scheduled to mature in one year or less at December 31, 1998 totaled $34.8
million.
Consolidated cash and cash equivalents increased by $7.9 million between
December 31, 1997 and December 31, 1998. As of December 31, 1998, the
consolidated cash and cash equivalents of the Company amounted to $10.2 million
or 5.7% of assets, of which $9.1 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 decreased from $38.8 million or 27.1% of total assets at December 31, 1997
to $35.4 million or 19.9% of assets at December 31, 1998. As of December 31,
1998, $1.3 million of such investment securities (including mortgage-backed
securities) of the Company and the Savings Bank mature within one year or less
and $6.5 million have maturities of five years or less. The Company's
consolidated net interest margin has decreased from 3.18% for the year ended
December 31, 1997 to 3.10% for the year ended December 31, 1998.
Consolidated cash and cash equivalents increased by $65,000 or 3.0% between
December 31, 1996 and December 31, 1997. As of December 31, 1997, the
consolidated cash and cash equivalents of the Company amounted to $2.2 million
or 1.5% of assets, of which $1.3 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 had an increase in dollar amount over the last few years, from $31.9
million or 27.8% of total assets at December 31, 1996 to $38.8 million or 27.1%
of assets at December 31, 1997. As of December 31, 1997, $3.1 million of such
investment securities (including mortgage-backed securities) of the Company and
the Savings Bank mature within one year or less and $8.0 million have maturities
of five years or less. The Company's consolidated net interest margin has
increased from 3.15% for the year ended December 31, 1996 to 3.18% for the year
ended December 31, 1997.
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 (as defined in OTS regulations) in an amount equal to 4.0% of
net withdrawable deposits and borrowings payable in one year or
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less to assure its ability to meet demand for withdrawals and repayment of
short-term borrowings. The liquidity requirements may vary from time to time at
the direction of the OTS depending upon economic conditions and deposit flows.
The Savings Bank's average monthly liquidity ratio at December 31, 1998 was
48.1%.
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. At December
31, 1998, the Company's assets consist of its investment in the Savings Bank,
its receivable from the ESOP, debt and equity investments with an aggregate
market value of $1.4 million at December 31, 1998 and deposits maintained with
the Savings Bank. Its sources of income will consist of earnings from the
investment in such debt and equity securities, interest on such deposits and
interest from the ESOP obligation. The only expenses of the Company relate to
its reporting obligations to the OTS, its reporting obligations under the
Exchange Act and related expenses to operate as a publicly traded company.
Management believes that the Company and the Savings Bank currently 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 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
is required to be adopted in years beginning after June 15, 1999. The
Corporation does not have any derivative instruments or hedging activities as of
December 31, 1998.
In October 1998, SFAS No. 134, "Accounting for Mortgage Servicing Rights,"
was issued. The Corporation does not have any mortgage servicing rights as of
December 31, 1998.
EARNINGS PER COMMON SHARE
During the fourth quarter of 1997, the Company adopted SFAS No. 128,
"Earnings Per Share." Under SFAS No. 128, earnings per share are classified as
basic earnings per share and diluted earnings per share. Basic earnings per
share includes only the weighted average common shares outstanding. Diluted
earnings per share includes the weighted average common shares outstanding and
any dilutive common stock equivalent shares in the calculation. All prior
periods have been restated to reflect this adoption. Treasury shares are treated
as retired for earnings per share purposes.
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The following table reflects the calculation of earnings per share under
SFAS No. 128.
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
-------- -------- ----------
Basic earnings per share(1):
Net income..................................... $743,087 $784,487 $ 3,070
Average shares outstanding..................... 944,240 979,772 1,019,768
Earnings per share............................. $ 0.79 $ 0.80 --
Diluted earnings per share(1):
Net income..................................... $743,087 $784,487 $ 3,070
Average shares outstanding..................... 944,240 979,772 1,019,768
Stock options.................................. 9,041 3,240 --
-------- -------- ----------
Diluted average shares outstanding............. 953,281 983,012 1,019,768
Earnings per share............................. $ 0.78 $ 0.80 --
- ---------------
(1) On April 15, 1998, the Board of Directors declared a stock dividend of 15%
to shareholders of record of June 2, 1998 payable on June 19, 1998. All per
share data have been restated to reflect the stock dividend.
BUSINESS OF THE COMPANY
GENERAL
The Company is a savings and loan holding company that holds the capital
stock of one subsidiary, the Savings Bank. As of December 31, 1998, the Company
also owns a loan receivable from the ESOP, holds debt and equity investments
with a market value totaling $1.4 million at December 31, 1998 and maintains
deposit accounts 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. However, since 1996, the Savings Bank
has begun to expand its loan products by emphasizing other types of lending in
order to meet its customer's demands. These include commercial business loans,
commercial real estate loans, construction loans, and consumer loans, including
home equity or home improvement loans, automobile loans, student loans, credit
card loans, cash collateral personal loans and unsecured personal loans.
At December 31, 1998, the Savings Bank's total loan portfolio amounted to
$125.6 million, or 70.8% of total assets at that date. The Savings Bank has
traditionally concentrated its lending activities on one-to-four family
residential mortgages in its primary market. Consistent with its lending
orientation, $81.3 million or 64.7% of the Savings Bank's total loan portfolio
consisted of one-to-four family residential loans at December 31, 1998.
Management intends that one-to-four family residential mortgage loans will
be the primary lending activity of the Savings Bank but the percentage of
one-to-four family mortgages against the total loan portfolio will not be as
high as it was at December 31, 1996 which was 84.2%. Although one-to-four family
residential mortgages advanced by the Savings Bank have increased from $65.1
million at December 31, 1996, to $72.2 million at December 31, 1997, to $81.3
million at December 31, 1998, the percentage of one-to-four family mortgages to
total loan portfolio has dropped from 84.2% at December 31, 1996, to 73.3% at
December 31, 1997 to 64.7% at December 31, 1998. This decline in percentage can
be traced to the increases in commercial business loans, construction loans, and
consumer loans booked in 1997 and 1998. Management is committed to aggressively
market the residential mortgage products of the Savings Bank, but management
does not intend to pursue a policy to return the Savings Bank's loan portfolio
to a position where one-to-four family mortgages account for 80% or more of the
total loan portfolio.
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Consumer loans, which are of shorter maturity and at higher margins above
cost of funds, have risen from $9.3 million at December 31, 1996, to $12.8
million at December 31, 1997, to $15.7 million at December 31, 1998. 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 $4.6
million at December 31, 1996, to $7.5 million at December 31, 1997 to $9.8
million at December 31, 1998. 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 went from
12.0% at December 31, 1996, to 13.0% at December 31, 1997, to 12.5% at December
31, 1998. Management is committed to increase consumer loans.
The Savings Bank is pursuing a policy to further grow its commercial
business loan and commercial real estate loan portfolio. Commercial business
loans and commercial real estate loans have risen from $2.0 million at December
31, 1996, to $11.1 million at December 31, 1997, to $27.0 million at December
31, 1998 and are expected to continue to increase in 1999. Each of the foregoing
figures shows gross loan receivables with no allocation for bad debt reserve or
other contra accounts. The percentage of commercial business loans and
commercial real estate loans against total loans receivable has changed from
2.6% at December 31, 1996, to 11.2% at December 31, 1997 to 21.0% at December
31, 1998.
By statute, the Savings Bank must limit its commercial business loans to
20% of its total assets provided that amounts in excess of 10% of total assets
may be used only for small business loans. As of December 31, 1998, the total
asset size of the Savings Bank was $177.4 million and 20% of such number is
$35.5 million and 10% of such number is $17.7 million. At December 31, 1998, the
Savings Bank had $18.7 million in commercial business loans of which $7.9
million was considered small business loans. The statutory ceiling on commercial
real estate loans is substantially higher, i.e. 400% of the Savings Bank's
capital, or at December 31, 1998, $51.9 million. At December 31, 1998 the
Savings Bank had $7.6 million in commercial real estate loans. Management
intends to continue to pursue commercial loans that carry a partial U.S.
Government guarantee of the payment of principal and interest. Included in the
Savings Bank's loan portfolio at December 31, 1998 are $5.4 million of
commercial loans that are 80% guaranteed by the United States Government.
The Savings Bank's primary market area consists of southern and
southwestern portions of Allegheny County and, to a lesser extent, Washington
and Westmoreland Counties. 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.
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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,
------------------------------------------------------------
1998 1997 1996
---------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- ------- ----- ------- -----
(DOLLARS IN THOUSANDS)
Real estate loans
One-to-four family(1)............. $ 81,284 64.71% $72,198 73.34% $65,117 84.17%
Construction...................... 2,270 1.81 2,449 2.49 925 1.20
Commercial real estate............ 7,632 6.08 1,425 1.45 1,023 1.32
-------- ----- ------- ----- ------- -----
Total.......................... $ 91,186 72.60% $76,072 77.28% $67,065 86.69%
-------- ----- ------- ----- ------- -----
Commercial business loans(1)........ $ 18,712 14.90% $ 9,565 9.72% $ 1,010 1.30%
-------- ----- ------- ----- ------- -----
Consumer loans
Home equity loans & lines......... $ 9,834 7.83% $ 7,535 7.66% $ 4,562 5.90%
Student loans..................... 2,263 1.80 2,215 2.25 2,228 2.88
Automobile loans.................. 2,405 1.92 1,967 2.00 1,515 1.96
Other consumer loans(1)........... 1,191 .95 1,076 1.09 984 1.27
-------- ----- ------- ----- ------- -----
Total.......................... $ 15,693 12.50% $12,793 13.00% $ 9,289 12.01%
-------- ----- ------- ----- ------- -----
Total loans receivable(1)........... $125,591 100% $98,430 100% $77,364 100%
======== ===== ======= ===== ======= =====
Less:
Allowance for loan losses......... $ 571 $ 403 $ 307
Loans in process.................. 1,106 1,857 515
Deferred loan (costs) fees........ (3) (11) (3)
-------- ------- -------
Loans receivable, net............... $123,917 $96,181 $76,545
======== ======= =======
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(1) Includes non-performing loans.
CONTRACTUAL MATURITIES. The following table sets forth the scheduled
contractual maturities of the Savings Bank's loan portfolio at December 31,
1998. 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, 1998
-----------------------------------------------------------------
ONE-TO-FOUR COMMERCIAL COMMERCIAL
FAMILY(1) REAL ESTATE(2) BUSINESS CONSUMER TOTAL
----------- --------------- ----------- -------- --------
(IN THOUSANDS)
1 year or less..................... $ 1,899 $1,215 $ 2,306 $ 1,431 $ 6,851
After 1 year through 5 years....... 5,840 183 6,984 4,908 17,915
More than 5 years.................. 74,601 7,448 9,422 9,354 100,825
------- ------ ------- ------- --------
Total amounts due.................. $82,340 $8,846 $18,712 $15,693 $125,591
======= ====== ======= ======= ========
Interest rate terms on amounts due
after 1 year:
Fixed............................ $61,793 $3,443 $ 7,286 $ 9,144 $ 81,666
Adjustable/Floating.............. $18,648 $4,188 $ 9,120 $ 5,118 $ 37,074
- ---------------
(1) Includes construction loans of $1.1 million for the construction of
one-to-four family homes. At the completion of the construction period
(scheduled to be less than one year), the loans will convert automatically
to a traditional mortgage with maturities in excess of five years.
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(2) Includes construction loans of $1.2 million for the construction of a
commercial real estate property. At the completion of the construction
period (scheduled to be less than one year), the loans will convert
automatically to a commercial real estate mortgage with maturities in excess
of five years.
Scheduled contractual repayment of loans does not reflect the expected term
of the Savings Bank's loan portfolio. The expected average life of loans is
substantially less than their contractual terms because of scheduled
amortization of principal, prepayments and due-on-sale clauses, which give the
Savings Bank the right to declare a conventional loan immediately due and
payable in the event, among other things, that the borrower sells the real
property subject to the mortgage and the loan is not repaid. The average life of
mortgage loans tends to increase when current mortgage loan rates are higher
than rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgage loans are lower than current mortgage loan rates (due to
refinancings of adjustable-rate and fixed-rate loans at lower rates). Under the
latter circumstance, the weighted average yield on loans decreases as
higher-yielding loans are repaid or refinanced at lower rates.
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,
---------------------------------
1998 1997 1996
--------- -------- --------
(IN THOUSANDS)
Total loans at beginning of period................ $ 98,430 $ 77,364 $ 61,737
Loan originations:
Real estate
One-to-four family........................... $ 25,685 $ 13,982 $ 17,100
Construction................................. 2,466 2,948 512
Commercial real estate....................... 5,511 475 925
--------- -------- --------
Total real estate loans originated......... $ 33,662 $ 17,405 $ 18,537
--------- -------- --------
Commercial business loans....................... $ 21,872 $ 14,174 $ 1,173
--------- -------- --------
Consumer loans
Home equity loans and lines of credit........ $ 6,987 $ 5,762 $ 3,868
Student loans................................ 397 353 482
Automobile loans............................. 1,633 1,323 1,242
Other consumer loans......................... 1,447 1,267 1,284
--------- -------- --------
Total consumer loans originated............ $ 10,464 $ 8,705 $ 6,876
--------- -------- --------
Total loans originated....................... $ 65,998 $ 40,284 $ 26,586
--------- -------- --------
Deduct:
Principal loan repayments and prepayments....... $ (38,587) $(19,218) $(10,949)
Transferred to real estate owned................ (250) (0) (10)
--------- -------- --------
Subtotal:......................................... $ (38,837) $(19,218) $(10,959)
--------- -------- --------
Net increase in loans........................... $ 27,161 $ 21,066 $ 15,627
--------- -------- --------
Total loans at end of period.................... $ 125,591 $ 98,430 $ 77,364
========= ======== ========
Applications for residential mortgage and consumer loans are taken at any
of the Savings Bank's offices, while commercial business loan, commercial real
estate loan and construction loan applications are referred to the appropriate
loan officer of the Savings Bank. Residential mortgage loan applications are
primarily developed from referrals from real estate brokers and builders,
existing customers and walk-in customers. Commercial real estate loan and
construction loan applications are obtained primarily from previous borrowers as
well as referrals. Commercial loan applications arise primarily from referrals.
The Savings Bank's lending policies allow all one-to-four residential
mortgage loans $50,000 or less to be approved with two signatures of the Chief
Executive Officer, President, and/or the Executive Vice President. One-to-four
residential mortgage loans in excess of $50,000 are presented to the Loan
Committee that consists of
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members of management and two outside directors. The Chief Executive Officer has
authority to authorize commercial loans up to and including $150,000. 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 $500,000, with
loans in excess of this amount required to be presented to the full Board for
review and approval. It has been the policy of the Savings Bank's management to
present all mortgage loans 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
$500,000. Under applicable regulations, the maximum amount of loans that the
Savings Bank may make to any one borrower, including related entities, is
limited to 15% of unimpaired capital and surplus, which legal lending limit
amounted to $1.9 million at December 31, 1998.
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 had 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 at other financial institutions that
have previously done business with the Savings Bank. At December 31, 1998, none
of the Savings Bank's total loans receivable consisted of participation
interests.
REAL ESTATE LENDING STANDARDS. Effective March 19, 1993, all financial
institutions were required to adopt and maintain comprehensive written real
estate lending policies that are consistent with safe and sound banking
practices. These lending policies must reflect consideration of the Interagency
Guidelines or Real Estate Lending Policies adopted by the Federal banking
agencies in December 1992 ("Real Estate Lending Guidelines"). The Real Estate
Lending Guidelines set forth uniform regulations prescribing standards for real
estate lending. Real estate lending is defined as the extension of credit
secured by liens on interests in real estate or made for the purpose of
financing the construction of a building or other improvements to real estate,
regardless of whether a lien has been taken on the property.
The policies must address certain lending considerations set forth in the
Real Estate Lending Guidelines, including loan-to-value ("LTV") limits, loan
administration procedures, underwriting standards, portfolio diversification
standards, and documentation, approval and reporting requirements. These
policies must also be appropriate to the size of the institution and the nature
and scope of its operations, and must be reviewed and approved by the
institution's board of directors at least annually. The LTV ratio framework,
with a LTV ratio being the total amount of credit to be extended divided by the
appraised value of the property at the time the credit is originated, must be
established for each category of real estate loans. If not a first lien, the
lender must combine all senior liens when calculating this ratio. The Real
Estate Lending Guidelines, among other things, establish the following
supervisory LTV limits: land development (75%); construction, commercial and
non-residential (80%); improved property (80%) and one-to-four family
residential (owner occupied) (no maximum ratio; however any LTV ratio in excess
of 90% should require appropriate insurance or readily marketable collateral).
Consistent with its lending philosophy, the Savings Bank's LTV limits are;
construction (80%); land development (75%); residential properties (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 a 90% LTV ratio. While the
ratios reflected above reflect the range of desired LTV ratio coverages, the
Savings Bank will evaluate each applicant and the collateral to secure the loan
on a case-by-case basis.
ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LOANS. The Savings Bank has
historically concentrated its lending activities on the origination of loans
secured primarily by first mortgage liens on existing one-to-four family
residences located within its market. At December 31, 1998, $81.3 million or
64.7% of the Savings Bank's total loan portfolio consisted of one-to-four family
residential real estate loans, substantially all of which are conventional
loans.
The Savings Bank historically has and continues to emphasize the
origination of fixed-rate mortgage loans with terms of up to 30 years and
adjustable rate mortgage loans ("ARMs") up to 30 years which provide for
periodic adjustments to the interest rate applicable to the loan. The ARMs
currently held by the Savings Bank have up to 30-year terms and an interest rate
which adjusts every one or three years in accordance with a
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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, 1998, approximately $62.6 million or 77.1% of the
one-to-four family residential loans in the Savings Bank's loan portfolio
consisted of loans that provide for fixed rates of interest. Although these
loans generally provide for repayments of principal over a fixed period of 5 to
30 years, it is the Savings Bank's experience that because of prepayments and
due-on-sale clauses, such loans generally remain outstanding for a substantially
shorter period of time.
Independent appraisers approved by the Savings Bank's Board of Directors
make property appraisals on the real estate and improvements securing the
Savings Bank's one-to-four family residential loans. Appraisals are performed in
accordance with Federal regulations and policies. The Savings Bank obtains title
insurance policies on most first mortgage real estate loans it originates. If
title insurance is not obtained or is unavailable, the Savings Bank obtains an
abstract of title and title opinion. Borrowers also must obtain hazard insurance
prior to closing and flood insurance when required by the United States
Department of Housing and Urban Development as researched by a third party
vendor. Borrowers are not required to escrow funds for real estate taxes but may
elect to escrow funds with each monthly payment of principal and interest to a
loan escrow account from which the Savings Bank makes disbursements for items
such as real estate taxes as they become due.
COMMERCIAL REAL ESTATE LOANS. The Savings Bank originates mortgage loans
for the acquisition and refinancing of commercial real estate properties
(including multi-family complexes). At December 31, 1998, $7.6 million or 6.08%
of the Savings Bank's total loan portfolio consisted of loans secured by
existing commercial real estate properties. At December 31, 1998, the Savings
Bank's commercial real estate loan portfolio consisted of nineteen loans with an
average principal balance of approximately $402,000.
The Savings Bank's commercial real estate loans are secured by apartment
complexes, developed residential lots and small retail establishments located in
Pennsylvania.
Although terms vary, commercial real estate loans generally are amortized
over a maximum period of 15 years. The Savings Bank originates these loans
either with fixed interest rates or with interest rates that adjust in
accordance with a designated index, which generally is negotiated at the time of
origination. It is also the Savings Bank's general policy to obtain personal
guarantees on its commercial real estate loans from the principals of the
borrower and, when this cannot be obtained, to impose more stringent
loan-to-value and other underwriting requirements.
COMMERCIAL BUSINESS LOANS. At December 31, 1998, $18.7 million or 14.9% of
the Savings Bank's total loan portfolio consisted of loans classified as
commercial business loans. The Savings Bank's commercial business loans can be
secured or unsecured depending upon the size of the loan and the credit analysis
by the Savings Bank of the potential borrower. Lines of credit in excess of
$25,000 are generally secured by a pledge of accounts receivable and inventory.
The Savings Bank's commercial loan portfolio consists of borrowers primarily
located in Western Pennsylvania.
Commercial business loans generally have shorter terms and higher interest
rates than residential mortgage loans but generally involve more credit risk
than residential mortgage loans because of the type and nature of the collateral
and, in certain cases, the absence of collateral. Fixed equipment may depreciate
in value quicker than 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
24
26
Bank's primary market area. At December 31, 1998, $2.3 million or 1.8% of the
Savings Bank's total loan portfolio consisted of loans classified as
construction loans.
Prior to making a commitment to fund a construction loan, the Savings
Bank's policy requires an appraisal of the property by independent appraisers
approved by the Board of Directors. The Savings Bank uses qualified appraisers
on all of its construction loans. Designated employees of the Savings Bank also
review and inspect each project at the commencement of construction. In
addition, the project is inspected by designated inspectors of the Savings Bank
prior to every disbursement of funds during the term of the construction loan.
Such inspection includes a review for compliance with the construction plan,
including materials specifications.
Construction lending is generally considered to involve a higher level of
risk as compared to one-to-four family residential lending for existing units,
due to the concentration of principal in a limited number of loans and borrowers
and the effects of general economic conditions on real estate developers and
managers. Moreover, a construction loan can involve additional risks because of
the inherent difficulty in estimating both a property's value at completion of
the project and the estimated cost (including interest) of the project. The
nature of these loans is such that they are generally more difficult to evaluate
and monitor. The Savings Bank has adopted underwriting guidelines which impose
stringent loan-to-value, debt service and other requirements for loans which are
believed to involve higher elements of credit risk, by limiting the geographic
area in which the Savings Bank will do business and by working with builders
with whom it has established relationships or which have quality reputations.
CONSUMER LOANS. The Savings Bank also offers automobile loans, home equity
loans and lines of credit, student loans, deposit account secured loans and
unsecured consumer loans. Automobile loans amounted to $2.4 million or 1.9% of
the total loans receivable at December 31, 1998. Home equity loans and lines of
credit amounted to $9.8 million or 7.8% of the total loans receivable at
December 31, 1998. The student loan balance amounted to $2.3 million or 1.8% of
the total loans receivable as of such date, deposit account secured loans had
outstanding balances of $528,000 or .4% of total loans receivable as of such
date and unsecured personal loans (including credit card balances outstanding)
stood at $663,000 or .5% of total loans receivable 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, 1998, the entire automobile
loan portfolio had fixed rate contracts. Automobile loans involve higher risk
since the collateral rapidly depreciates. Defaults during the early months of
the loan will likely result in a loss of principal due to the reduced value of
the vehicle and the costs of repossession and sale. Automobile loans may be
granted for up to 100% of the purchase price including transfer fees and taxes.
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 $469,000
or .4% of the total loans receivable at December 31, 1998.
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 1998, the Savings Bank wrote-off fifteen credit
card loan balances with aggregate outstanding balances of $19,000 that amounted
to 4.5% of the average outstanding credit balance for 1998. At December 31,
1998, $4,000 of the remaining consumer loans were classified as non-performing.
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27
ASSET QUALITY
When a borrower fails to make a required payment on a loan, the Savings
Bank attempts to cure the deficiency by contacting the borrower and seeking the
payment. Late notices are sent and/or personal contacts are made. 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, 1998, 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 that are past due.
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------------------------------------- --------------------------
90 DAYS OR 60-89
30-59 DAYS 60-89 DAYS GREATER 30-59 DAYS DAYS
----------------- ----------------- ----------------- ----------------- ------
PERCENT PERCENT PERCENT PERCENT
OF LOAN OF LOAN OF LOAN OF LOAN
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT
------ ---- ---- ----- ---- ---- ------ ---- ----
(DOLLARS IN THOUSANDS)
Real estate loans:
One-to-four family
residences......... $ 914 1.12% $123 .15% $483 .59% $2,636 3.65% $188
Construction........ 0 0 430 18.94 0 0 0 0 0
Commercial real
estate............. 859 4.59 0 0 99 1.30 0 0 0
Commercial business
loans............... 0 0 0 0 0 0 0 0 0
Consumer loans....... 95 .61 124 .79 116 .74 92 .72 8
------ ---- ---- ------ ----
Total............ $1,868 $677 $698 $2,728 $196
====== ==== ==== ====== ====
90 DAYS OR
GREATER
-----------------
PERCENT PERCENT
OF LOAN OF LOAN
CATEGORY AMOUNT CATEGORY
--- ---- ---
Real estate loans:
One-to-four family
residences......... 26% $589 .82%
Construction........ 0 0 0
Commercial real
estate............. 0 0 0
Commercial business
loans............... 0 7 .07
Consumer loans....... .06 15 .12
----
Total............ $611
====
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28
DECEMBER 31, 1996
---------------------------------------------------------
90 DAYS OR
30-59 DAYS 60-89 DAYS GREATER
----------------- ----------------- -----------------
PERCENT PERCENT PERCENT
OF LOAN OF LOAN OF LOAN
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
------ ---- --- --- ---- ---
(DOLLARS IN THOUSANDS)
Real estate loans:
One-to-four family residences........................... $1,738 2.67% $75 12% $339 .52%
Consumer loans.......................................... 6 .06 15 .16 2 .02
------ --- ----
Total................................................ $1,744 $90 $341
====== === ====
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,
--------------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
Non-accruing loans:
One-to-four family residential(1)........................... $483 $589 $339
Consumer loans(2)........................................... 116 15 2
Commercial real estate(3)................................... 99 -- --
Commercial business loans(4)................................ -- 7 --
---- ---- ----
Total nonperforming loans................................. 698 611 341
Real estate owned........................................... 205 -- 50
---- ---- ----
Total nonperforming assets................................ $903 $611 $391
==== ==== ====
Total nonperforming loans as a percentage of total loans.... .56% .63% .44%
==== ==== ====
Total nonperforming assets as a percentage of total
assets.................................................... .51% .43% .34%
==== ==== ====
- ---------------
(1) Consists of an aggregate of 7, 11 and 6 loans at December 31, 1998, 1997 and
1996, respectively.
(2) Consists of five and nine loans at December 31, 1998 and December 31, 1997,
respectively, and one loan at December 31, 1996.
(3) Consists of 1 loan at December 31, 1998.
(4) Consists of 1 loan at December 31, 1997.
The Savings Bank's total non-performing assets have increased from $611,000
or .43% of total assets at December 31, 1997 to $903,000 or .51% of total assets
at December 31, 1998. The $292,000 increase in total non-performing assets
between December 31, 1997 and 1998 principally reflects an increases in real
estate owned of $205,000.
The Savings Bank's total non-performing assets increased from $391,000 or
.34% of total assets at December 31, 1996 to $611,000 or .43% of total assets at
December 31, 1997. The $220,000 increase in total non-performing assets between
December 31, 1996 and 1997 principally reflects increases in non-performing
loans.
At December 31, 1998, 1997, and 1996 approximately $43,000, $46,000, and
$15,000 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 currently 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
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conditions, the results of the most recent regulatory examinations, and other
relevant factors. Provisions for loan losses that are charged against income
increase the allowance. 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 by bank regulators to increase its allowance for loan
losses in addition to the loan loss reserves set by management, thereby
negatively affecting the Savings Bank's financial condition and earnings at that
time.
The following table summarizes changes in the allowance for loan losses and
other selected statistics for the periods presented.
DECEMBER 31,
------------------------------------
1998 1997 1996
-------- ------- -------
(DOLLARS IN THOUSANDS)
Average total loans................................ $111,809 $89,303 $69,258
======== ======= =======
Allowance for loan losses, beginning of year....... $ 403 $ 307 $ 287
Charged-off loans(1)............................... (41) (8) (24)
Recoveries on loans previously charged off......... -- -- --
Provision for loan losses.......................... 209 104 44
-------- ------- -------
Allowance for loan losses, end of period........... $ 571 $ 403 $ 307
======== ======= =======
Net loans charged-off to average loans............. .04% .01% .04%
======== ======= =======
Allowance for loan losses to total loans........... .45% .42% .40%
======== ======= =======
Allowance for loan losses to nonperforming loans... 81.81% 65.96% 89.88%
======== ======= =======
- ---------------
(1) Consists of $22,000 of one-to-four family residential mortgage loans and
$19,000 of consumer loans in 1998; consists of $8,000 of consumer loans in
1997; and consists of $18,000 of one-to-four family residential mortgage
loans and $6,000 of consumer loans in 1996.
The Savings Bank's management is unable to determine in what loan category
future charge-offs and recoveries may occur. The following schedule sets forth
the allocation of the allowance for loan losses among
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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,
---------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
% 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............... $328 57.44% $247 61.29% $227 73.94%
Commercial Loan:
Working capital and term
loans for business uses... 173 30.30 89 22.08 5 1.63
Consumer:
Automobile, home equity,
student, share and other
consumer.................. 70 12.26 67 16.63 75 24.43
---- ------ ---- ------ ---- ------
Total..................... $571 100.00% $403 100.00% $307 100.00%
==== ====== ==== ====== ==== ======
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
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
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100% of the portion of the asset classified as a loss or charge-off such amount.
General loss allowances established to cover possible losses related to assets
classified substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses do not qualify as regulatory capital. At December 31, 1998, the Savings
Bank had $903,000 of assets classified as "substandard" (all of which are set
forth under "Non-Performing Assets" above) and no assets classified as
"doubtful" or "loss."
INVESTMENT ACTIVITIES
GENERAL. The Company's Board of Directors has given authority to the
Investment Committee of the Savings Bank to manage the investment activities of
the Company. Investment activity at the Company is minimal. The Company has
chosen to invest in several debt and equity securities. The aggregate market
value of these investments, at December 31, 1998, is $1.4 million. These
investments were selected on management's belief that the value would
appreciate. These debt and equity investments represent .8% of the total
consolidated assets of the Company and 4.0% of the total consolidated investment
securities of the Company. Excess funds at the Company level are deposited into
a money market account maintained at the Savings Bank.
The Savings Bank's investment activities are managed by the Investment
Committee designated by the Board of Directors of the Savings Bank. These
activities are conducted in accordance with a written investment policy that is
reviewed and approved by the Board of Directors at least annually. The Savings
Bank's Asset and Liability Committee has been designated to work with management
and the Board to implement and achieve 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
increased by $7.9 million from fiscal 1997 to fiscal 1998. At December 31, 1998,
cash and cash equivalents of the Savings Bank amounted to $10.2 million or 5.7%
of total assets. The largest component in this category is interest-bearing
deposits in banks, which amounted to $9.1 million at December 31, 1998. The
majority of such deposits were made with the FHLB of Pittsburgh. The $7.9
million increase in cash and cash equivalents during fiscal 1998 was primarily
due to funds received from called investments along with increased principal
payments on loans and increases in total deposits.
Cash and cash equivalents of the Savings Bank increased by $65,000 or 3.0%
from fiscal 1996 to fiscal 1997. At December 31, 1997, cash and cash equivalents
of the Savings Bank amounted to $2.2 million or 1.5% of total assets. The
largest component in this category is interest-bearing deposits in banks, which
amounted to $1.3 million at December 31, 1997. 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 that
meets the requirement of a qualified thrift lender due to the level of its
residential mortgage lending activities, the Company has broad investment
powers. Other than 100% ownership of the Savings Bank, the Company has chosen
only to maintain the loan to the ESOP, to invest in debt and equity securities
with a market value totaling $1.4 million at December 31, 1998 and to deposit
the majority of the remaining funding of the Company in a money market and
checking account maintained at the Savings Bank. Funds on deposit with the
Savings bank are used for either loans or investment securities as determined by
the Savings Bank.
The Savings Bank has authority to invest in various types of assets. The
Savings Bank's Investment Committee appointed by the Board is authorized by the
Board to: purchase or sell U.S. Government securities and securities issued by
agencies thereof; purchase, sell or trade any securities qualifying as eligible
liquidity; purchase mortgage-related securities; purchase participations in the
secondary mortgage market; 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
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32
investments; invest in various corporate securities and bonds that have at least
an "AA" rating by Standard & Poor's; and invest in various other mutual funds
and certain equity issues as authorized by the Board. The Board of the Savings
Bank does not permit investments in highly speculative securities.
The Savings Bank's investments are all classified as "held to maturity" or
"available for sale" upon acquisition based upon the Savings Bank's intent and
ability to hold such investments to maturity at the time of investment in
accordance with generally accepted accounting principles. The investment
securities and mortgage-backed securities of the Savings Bank which are
classified as "held to maturity" are carried at amortized cost, with any
discount or premium amortized to maturity. The investment securities and
mortgage-backed securities of the Savings Bank which are classified as
"available for sale" are carried at fair value and are repriced monthly. All
mutual fund investments are classified as investments available for sale.
The Savings Bank maintains a portfolio of mortgage-backed securities as a
means of investing in housing-related mortgage instruments without the costs
associated with originating mortgage loans for portfolio retention and with
limited credit risk of default which arises in holding a portfolio of loans to
maturity. Mortgage related securities (which also are known as mortgage
participation certificates or pass-through certificates) represent a
participation interest in a pool of single-family or multi-family mortgages, the
principal and interest payments on which are passed from the mortgage
originators, through intermediaries (generally U.S. Government agencies and
government sponsored enterprises) that pool and repackage the participation
interests in the form of securities, to investors such as the Savings Bank. Such
U.S. Government agencies and government sponsored enterprises, which guarantee
the payment of principal and interest to investors, primarily include the
Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal National Mortgage
Association ("FNMA") and the Government National Mortgage Association ("GNMA").
The FHLMC is a public corporation chartered by the U.S. Government and
owned by the 12 Federal Home Loan Banks and Federally insured savings
institutions. The FHLMC issues participation certificates backed principally by
conventional mortgage loans. The FHLMC guarantees the timely payment of interest
and the ultimate return of principal. The FNMA is a private corporation
chartered by the U.S. Congress with a mandate to establish a secondary market
for conventional mortgage loans. The FNMA guarantees the timely payment of
principal and interest on FNMA securities. The full faith and credit of the
United States does not back FHLMC and FNMA securities, but because the FHLMC and
FNMA are U.S. Government sponsored enterprises, these securities are considered
to be among the highest quality investments with minimal credit risks. The GNMA
is a government agency within the Department of Housing and Urban Development
that is intended to help finance government-assisted housing programs. GNMA
securities are backed by FHA-insured and VA-guaranteed loans, and the timely
payment of principal and interest on GNMA securities are guaranteed by the GNMA
and backed by the full faith and credit of the U.S. Government. Because the
FHLMC, the FNMA and the GNMA were established to provide support for low-and
middle-income housing, there are limits to the maximum size of loans that
qualify for these programs.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages, i.e., fixed rate or adjustable rate, as well as
repayment risk, are passed on to the certificate holder. The life of a
mortgage-backed pass-through security thus approximates the life of the
underlying mortgages.
Mortgage-backed securities generally yield less than the loans that
underlie such securities because of their payment guarantees or credit
enhancements that offer nominal credit risk. In addition, mortgage-backed
securities are more liquid than individual mortgage loans. Mortgage-backed
securities issued or guaranteed by FNMA or FHLMC (except interest-only
securities or the residual interests in collateralized mortgage obligations) are
weighted at no more than 20% for risk-based capital purposes, compared to a
weight of 50% to 100% for residential loans.
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33
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,
---------------------------------------------------------------------
1998 1997 1996
------------------ ------------------- ------------------
AMORTIZED % OF AMORTIZED % OF AMORTIZED % OF
COST TOTAL COST TOTAL COST TOTAL
------- ------ ---------- ------ ------- ------
(DOLLARS IN THOUSANDS)
HELD TO MATURITY
Investment securities:
U.S. Government securities..... $ 2,001 12.30% $ 2,001 10.15% $ 2,002 19.00%
Federal agency obligations..... 14,263 87.70 17,720 89.85 8,533 81.00
------- ------ ---------- ------ ------- ------
Total investment
securities................ $16,264 100.00% $ 19,721 100.00% $10,535 100.00%
======= ====== ========== ====== ======= ======
Average remaining contractual
life of investment
securities..................... 9.53 yrs. 10.38 yrs. 8.01 yrs.
======= ========== =======
Mortgage-backed securities:
GNMA........................... $ 1,951 21.17% $ 1,158 14.44% $ 1,361 13.71%
FHLMC.......................... 5,259 57.08 6,775 84.47 8,453 85.16
FNMA........................... 2,004 21.75 87 1.09 113 1.13
------- ------ ---------- ------ ------- ------
Total mortgage-backed
securities................ $ 9,214 100.00% $ 8,020 100.00% $ 9,927 100.00%
======= ====== ========== ====== ======= ======
DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
AMORTIZED % OF AMORTIZED % OF AMORTIZED % OF
COST TOTAL COST TOTAL COST TOTAL
------- ------ ------- ------ ------- ------
(DOLLARS IN THOUSANDS)
AVAILABLE FOR SALE
Investment securities:
Federal agency obligations...... $ 3,000 44.52% $ 6,602 78.75% $ 6,503 80.91%
U.S. Government securities...... 504 7.48 0 0 0 0
Corporate debentures............ 494 7.33 0 0 0 0
Marketable equity securities.... 2,740 40.67 1,781 21.25 1,535 19.09
------- ------ ------- ------ ------- ------
Total investment
securities................. $ 6,738 100.00% $ 8,383 100.00% $ 8,038 100.00%
======= ====== ======= ====== ======= ======
Average remaining contractual life
of investment securities(1)..... 8.14 yrs. 6.52 yrs. 8.31 yrs.
======= ======= =======
Mortgage-backed securities:
FHLMC........................... $ 2,215 68.36% $ 1,329 52.76% $ 2,356 63.93%
FNMA............................ 1,025 31.64 1,191 47.24 1,329 36.07
------- ------ ------- ------ ------- ------
Total mortgage-backed
securities................. $ 3,240 100.00% $ 2,520 100.00% $ 3,685 100.00%
======= ====== ======= ====== ======= ======
- ---------------
(1) Marketable equity securities have no stated maturity, therefore, are
excluded from the average remaining contractual life calculation.
32
34
The composition and maturities of the investment securities portfolio by
contractual maturity at December 31, 1998, are indicated in the following table:
DUE IN
---------------------------------------------
LESS THAN 1 TO 3 3 TO 5 OVER TOTALS
1 YEAR YEARS YEARS 5 YEARS DECEMBER 31, 1998
--------- --------- --------- --------- ------------------------------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED FAIR CARRYING
COST COST COST COST COST VALUE VALUE
---- ---- ---- ---- ---- ----- -----
(DOLLARS IN THOUSANDS)
U.S. government securities and Federal
agency obligations.................... $1,000 $3,516 $2,000 $13,252 $19,768 $19,821 $19,769
Corporate debentures.................... 0 0 0 494 494 478 478
Marketable equity securities............ 2,740 0 0 0 2,740 2,682 2,682
------ ------ ------ ------- ------- ------- -------
Total investment securities......... $3,740 $3,516 $2,000 $13,746 $23,002 $22,981 $22,929
====== ====== ====== ======= ======= ======= =======
Weighted average yield.................. 4.21% 5.78% 5.62% 6.69% 6.06% N/A N/A
====== ====== ====== ======= ======= ======= =======
The weighted yield for investment securities including held to maturity and
available for sale is based upon historical amortized cost balances.
The actual maturity of the Company's consolidated investment securities may
differ from contractual maturity since certain of the Company's consolidated
investment securities are subject to call provisions that allow the issuer to
accelerate the maturity date of the security.
The Savings Bank's investment securities portfolio at December 31, 1998 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 Company's
and the Savings Bank's mortgage-backed securities at December 31, 1998.
DUE IN
-------------------------------------------------------------------------------
LESS THAN 1 TO 3 3 TO 5 5 TO 10 10 TO 20 OVER 20
1 YEAR YEARS YEARS YEARS YEARS YEARS
--------- ------------ ------------ ------------- --------- ---------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED
COST COST COST COST COST COST
---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
GNMA..................... $ 0 $ 0 $ 0 $ 0 $ 947 $ 1004
FHLMC.................... 295 0 0 2,962 4,007 210
FNMA..................... 0 1,025 0 0 2,004 0
------ ------ ------ ------ ------ ------
Total................ $ 295 $1,025 $ 0 $2,962 $6,958 $1,214
Weighted Average Yield... 6.50% 5.06% N/A 6.00% 6.52% 6.76%
====== ====== ====== ====== ====== ======
TOTALS
DECEMBER 31, 1998
------------------------------
AMORTIZED FAIR CARRYING
COST VALUE VALUE
---- ----- -----
GNMA..................... $ 1,951 $ 1,964 $ 1,951
FHLMC.................... 7,474 7,540 7,484
FNMA..................... 3,029 3,021 3,022
------- ------- -------
Total................ $12,454 $12,525 $12,457
Weighted Average Yield... 6.30% 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.
33
35
The following table sets forth the contractual maturities of the Company's
and the Savings Bank's securities classified as held to maturity at December 31,
1998.
DUE IN
----------------------------------------------------------------------
DUE 1 YEAR 1 TO 3 3 TO 5 5 TO 10 10 TO 20 OVER 20 TOTALS
OR LESS YEARS YEARS YEARS YEARS YEARS DECEMBER 31, 1998
---------- --------- --------- --------- --------- --------- ------------------------------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED FAIR CARRYING
COST COST COST COST COST COST COST VALUE VALUE
---------- --------- --------- --------- --------- --------- --------- ------- --------
(DOLLARS IN THOUSANDS)
U.S. Gov't & Agency
Securities......... $1,000 $3,012 $ 0 $ 6,996 $ 4,982 $ 274 $16,264 $16,316 $16,264
FHLMC Certificates... 295 0 0 2,962 2,002 0 5,259 5,315 5,259
GNMA Certificates.... 0 0 0 0 947 1,004 1,951 1,964 1,951
FNMA Certificates.... 0 0 0 0 2,004 0 2,004 2,003 2,004
------ ------ --- ------- ------- ------- ------- ------- -------
Total............ $1,295 $3,012 $ 0 $ 9,958 $ 9,935 $ 1,278 $25,478 $25,598 $25,478
====== ====== === ======= ======= ======= ======= ======= =======
Weighted Average
Yield.............. 6.30% 5.78% N/A 6.45% 6.73% 6.76% 6.49% N/A N/A
====== ====== === ======= ======= ======= ======= ======= =======
The weighted yield for investment securities including held to maturity and
available for sale is based upon historical amortized cost balances.
The actual maturity of the Company's consolidated investment securities may
differ from contractual maturity since certain of the Company's consolidated
investment securities are subject to call provisions that allow the issuer to
accelerate the maturity date of the security.
The following table sets forth the contractual maturities of the Company's
and the Savings Bank's securities classified as available for sale at December
31, 1998.
DUE IN
----------------------------------------------------------------------
DUE 1 YEAR 1 TO 3 3 TO 5 5 TO 10 10 TO 20 OVER 20 TOTALS
OR LESS YEARS YEARS YEARS YEARS YEARS DECEMBER 31, 1998
---------- --------- --------- --------- --------- --------- ------------------------------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED FAIR CARRYING
COST COST COST COST COST COST COST VALUE VALUE
---------- --------- --------- --------- --------- --------- --------- ------- --------
(DOLLARS IN THOUSANDS)
Marketable Equity
Securities......... $2,740 $ 0 $ 0 $ 0 $ 0 $ 0 $ 2,740 $ 2,682 $ 2,682
U.S. Gov't & Agency
Securities......... 0 504 2,000 1,000 0 0 3,504 3,505 3,505
Corporate
debentures......... 0 0 0 0 0 494 494 478 478
FHLMC Certificates... 0 0 0 0 2,005 210 2,215 2,225 2,225
GNMA Certificates.... 0 0 0 0 0 0 0 0 0
FNMA Certificates.... 0 1,025 0 0 0 0 1,025 1,017 1,017
------ ------ ------ ------ ------ ------ ------- ------- -------
Total............ $2,740 $1,529 $2,000 $1,000 $2,005 $ 704 $ 9,978 $ 9,907 $ 9,907
====== ====== ====== ====== ====== ====== ======= ======= =======
Weighted Average
Yield.............. 3.47% 5.29% 5.62% 6.60% 6.00% 6.81% 5.24% N/A N/A
====== ====== ====== ====== ====== ====== ======= ======= =======
The weighted yield for investment securities including held to maturity and
available for sale is based upon historical amortized cost balances.
The actual maturity of the Company's consolidated investment securities may
differ from contractual maturity since certain of the Company's consolidated
investment securities are subject to call provisions that allow the issuer to
accelerate the maturity date of the security.
At December 31, 1998, the weighted average contractual maturity of all of
the Savings Bank's mortgage-backed securities was approximately 15 years and the
weighted average yield on the mortgage-backed securities portfolio was 6.30%.
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
34
36
of market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments. During periods of
falling mortgage interest rates, if the coupon rate of the underlying mortgages
exceeds the prevailing market interest rates offered for mortgage loans,
refinancing generally increases and accelerates the prepayment of the underlying
mortgages and the related security. Under such circumstances, the Savings Bank
may be subject to reinvestment risk because to the extent that the Savings
Bank's mortgage-backed securities amortize or prepay faster than anticipated,
the Savings Bank may not be able to reinvest the proceeds of such repayments and
prepayments at a comparable rate. At December 31, 1998, of the $12.5 million of
mortgage-backed securities, an aggregate of $10.1 million were secured by
fixed-rate mortgage loans and an aggregate of $2.4 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, 1998 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, interest and dividends on its debt and equity investments
(including its ownership of all of the capital stock of the Savings Bank) and
interest paid on deposits maintained at the Savings Bank. The Savings Bank's
principal source of funds for use in lending and for other general business
purposes has traditionally come from deposits obtained through the Savings
Bank's branch offices. The Savings Bank also derives funds from amortization and
prepayments of outstanding loans and mortgage-backed securities and from
maturing investment securities. The Savings Bank has also borrowed from the FHLB
of Pittsburgh. Loan 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, tiered money market deposit accounts and certificates
of deposit ranging in terms from six months to five years. The Savings Bank's
deposit products also include Individual Retirement Account ("IRA") and Keogh
certificates.
The Savings Bank's deposits are obtained primarily from residents in its
primary market area of Allegheny County and portions of Washington County and
Westmoreland County, all of which are located in Western Pennsylvania. In
February 1998, the Savings Bank opened its fifth branch located at 603 Scenery
Drive, Elizabeth Township, PA 15037. The Savings Bank to a lesser extent obtains
deposits from other locations in the greater Pittsburgh metropolitan area. The
Savings Bank attracts deposit accounts by offering a wide variety of accounts,
competitive interest rates and fee structures on transaction accounts, and
convenient branch office locations and service hours. The Savings Bank primarily
utilizes print 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, 1998. The Savings Bank presently operates five
automated teller machines ("ATMs"), one at each of the branch offices maintained
by the Savings Bank as of December 31, 1998. 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.
35
37
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,
------------------------------------------------------------
1998 1997 1996
------------------ ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Passbook and club accounts......... $ 16,372 14.93% $15,298 16.78% $15,476 18.46%
Money market....................... 19,857 18.10 16,122 17.68 13,513 16.12
Certificates of deposit............ 55,939 50.99 45,803 50.25 43,683 52.12
NOW accounts....................... 11,799 10.76 9,933 10.90 8,595 10.25
Non-interest bearing............... 5,731 5.22 4,000 4.39 2,554 3.05
-------- ------ ------- ------ ------- ------
Total deposits................ $109,698 100.00% $91,156 100.00% $83,821 100.00%
======== ====== ======= ====== ======= ======
The following table presents, by various interest rate categories, the
amount of certificates of deposit at December 31, 1998 and the amounts at
December 31, 1998 that mature during the periods indicated.
TOTAL AS OF
DECEMBER 31, AMOUNTS AT DECEMBER 31, 1998
1998 MATURING WITHIN
------------ ------------------------------------
AFTER ONE
ONE BUT WITHIN
CERTIFICATES OF DEPOSIT YEAR THREE YEARS THEREAFTER
- ----------------------- ------- ----------- ----------
(DOLLARS IN THOUSANDS)
4.01% to 6.00%............................... $51,409 $33,555 $14,367 $3,487
6.01% to 8.00%............................... 4,530 1,249 3,179 102
------- ------- ------- ------
Total certificate accounts.............. $55,939 $34,804 $17,546 $3,589
======= ======= ======= ======
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,
-----------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE PAID BALANCE RATE PAID BALANCE RATE PAID
------- --------- ------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
Passbook and club accounts...... $16,119 2.53% $15,587 2.53% $16,112 2.55%
Money market.................... 17,834 3.71 15,014 3.56 10,649 3.15
Certificates of deposit......... 50,089 5.48 45,579 5.62 45,522 5.54
NOW accounts.................... 10,455 1.56 9,272 1.74 8,009 1.73
Non-interest bearing............ 4,846 0.00 3,165 0.00 2,002 0.00
------- ---- ------- ---- ------- ----
Total deposits............. $99,343 4.00% $88,617 4.12% $82,294 4.14%
======= ==== ======= ==== ======= ====
The following table sets forth the Savings Bank's net savings flows during
the periods indicated.
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- ------- -------
(IN THOUSANDS)
Beginning balance.................................. $ 91,156 $83,821 $80,731
Increase (decrease) before interest credited....... 14,566 3,685 (317)
Interest credited.................................. 3,976 3,650 3,407
-------- ------- -------
Net savings increase............................... 18,542 7,335 3,090
-------- ------- -------
Ending balance..................................... $109,698 $91,156 $83,821
======== ======= =======
36
38
The following table sets forth maturities of the Savings Bank's
certificates of deposit of $100,000 or more at December 31, 1998 by time
remaining to maturity.
IN THOUSANDS
------------
Three months or less........................................ $ 813
Over three months through six months........................ 3,426
Over six months through 12 months........................... 2,469
Over 12 months.............................................. 2,517
------
Total.................................................. $9,225
======
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,
-----------------------------
1998 1997 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
Amount Outstanding At Year End........................ $50,977 $34,677 $14,477
======= ======= =======
Maximum Balance....................................... $50,977 $34,977 $15,077
======= ======= =======
Average Balance....................................... $49,144 $28,554 $ 5,169
======= ======= =======
Weighted Average Interest Rate:
At end of year................................... 5.55% 5.78% 5.96%
======= ======= =======
During Year...................................... 5.51% 5.57% 5.34%
======= ======= =======
The Savings Bank utilized the increased borrowings during 1998 to meet
increased loan demand. To secure the repayment of any outstanding borrowings
from the FHLB of Pittsburgh and any other credit product offered by the FHLB of
Pittsburgh, the Savings Bank has pledged to the FHLB of Pittsburgh investments
of the Savings Bank in U.S. Government and U.S. agency securities and U.S.
Government and U.S. agency mortgage-backed securities and 100% of its
unencumbered home loan mortgages.
37
39
REGULATORY CAPITAL REQUIREMENTS
Federally insured savings institutions are required to maintain minimum
levels of regulatory capital. Pursuant to Federal regulations, the OTS has
established capital standards applicable to all savings institutions. These
standards generally must be as stringent as the comparable capital requirements
imposed on national banks. The OTS also is authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
At December 31, 1998, 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, 1998
and as of December 31 of each of the preceding four years.
AS OF AS OF AS OF AS OF
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------- -------------------- -------------------- -------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
------ --------- ------ --------- ------ --------- ------ ---------
(DOLLARS IN THOUSANDS)
Tangible capital:(1)
Requirement........... $ 2,638 1.50% $ 2,139 1.50% $ 1,719 1.50% $1,378 1.50%
Actual................ 12,950 7.36 12,592 8.83 11,787 10.28 7,228 7.87
Excess................ $10,312 5.86% $10,453 7.33% $10,068 8.78% $5,850 6.37%
Core capital:(1)(2)
Requirement........... $ 5,276 3.00% $ 4,279 3.00% $ 3,438 3.00% $2,757 3.00%
Actual................ 12,950 7.36 12,592 8.83 11,787 10.28 7,228 7.87
Excess................ $ 7,674 4.36% $ 8,313 5.83% $ 8,349 7.28% $4,471 4.87%
Risk-based capital:(1)
Requirement(3)........ $ 7,286 8.00% $ 5,537 8.00% $ 4,064 8.00% $3,101 8.00%
Actual(4)............. 13,521 14.85 12,995 18.78 12,094 23.81 7,515 19.39
Excess................ $ 6,235 6.85% $ 7,458 10.78% $ 8,030 15.81% $4,414 11.39%
AS OF
DECEMBER 31, 1994
-------------------
PERCENT OF
AMOUNT ASSETS(2)
------ ---------
Tangible capital:(1)
Requirement........... $1,316 1.50%
Actual................ 7,049 8.03
Excess................ $5,733 6.53%
Core capital:(1)(2)
Requirement........... $2,632 3.00%
Actual................ 7,049 8.03
Excess................ $4,417 5.03%
Risk-based capital:(1)
Requirement(3)........ $2,985 8.00%
Actual(4)............. 7,352 19.70
Excess................ $4,367 11.70%
- ---------------
(1) Tangible capital levels are shown as a percentage of tangible assets. Core
capital levels are shown as a percentage of adjusted assets. Risk-based
capital levels are shown as a percentage of risk-weighted assets. As of
December 31, 1998, the difference between capital under generally accepted
accounting principles ("GAAP") and regulatory tangible and core capital is
attributable to $8,000 for the Savings Bank's net unrealized holding losses
on available-for-sale securities to arrive at regulatory tangible and core
capital of $12,950,000.
(2) To be "adequately capitalized" for purposes of the OTS' Prompt Corrective
Action regulations, core capital generally must be at least 4.0%.
(3) Calculated based on the OTS requirement of 8.0% of risk-weighted assets.
(4) As of December 31, 1998, 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 $571,000 for the allowance for loan loss and $8,000 for the
Savings Bank's net unrealized holding gains (losses) on available-for-sale
securities to arrive at regulatory risk-based capital of $13,521,000.
38
40
DIRECTOR AND EXECUTIVE OFFICER BIOGRAPHICAL INFORMATION
Set forth below are the directors and executive officers of the Company and
the Savings Bank together with information concerning the principal occupations
during the last five years for such directors and executive officers.
MARTIN W. DOWLING has been a director of the Company since its formation in
1996 and a director of the Savings Bank since 1992. Mr. Dowling is a director of
Jefferson Hills Real Estate, Inc. and President of Dowling Properties, Inc. He
is also President of Martin W. Dowling, Inc., a building and remodeling company,
and President of Town Hall Estates, Inc., and Meadow Green Corp., both companies
being in the business of real estate development. Mr. Dowling also serves as
director of Jefferson Hospital and other healthcare-related organizations.
JAMES M. HEIN is the Chief Financial Officer of the Savings Bank and has
performed as such since January 1996. Prior to that time Mr. Hein acted as the
Controller of the Savings Bank. In connection with the formation of the Company
and the Conversion of the Savings Bank, Mr. Hein was appointed the Controller of
the Company.
MICHAEL R. MACOSKO has been a director of the Company since its formation
in 1996 and a director of the Savings Bank since 1992. Mr. Macosko is a
pharmacist with Eckerd Drug, Inc., and has performed as such since 1995 with
Eckerd Drug, Inc. and its predecessor Thrift Drug, Inc. From 1974 until 1995 he
was pharmacist, owner and President of Woody's Drug Store, Inc.
CHARLES P. MCCULLOUGH has been a director of the Company since its
formation in 1996 and a director of the Savings Bank since 1995. Mr. McCullough
is an attorney and a shareholder with Tucker Arensberg, P.C., and has performed
as an attorney at Tucker Arensberg, P.C. since November of 1995. Prior to his
employment by Tucker Arensberg, P.C., Mr. McCullough was a solo practitioner
attorney at law.
MARK R. SCHOEN has been a director of the Company since its formation in
1996 and a director of the Savings Bank since 1994. Currently Mr. Schoen is a
senior manager of investment products and technology for SEI Investments, a
company servicing the mutual fund industry. Prior roles included Senior Manager
of Business Development at Pilgrim Baxter and Associates and Assistant Vice
President of Business Development and Product Administration for Federated
Investors.
JOHN A. STIVER has been a director of the Company since its formation in
1996 and a director of the Savings Bank since 1986. Mr. Stiver was appointed
Chief Executive Officer of the Bank and the Company effective on December 30,
1998. Mr. Stiver is a CPA licensed to practice in Pennsylvania since 1972 and
has been a self employed CPA since 1980. Mr. Stiver serves as Chairman of the
Board of Directors of the Company and the Savings Bank. He is also President and
owner of C & J Leasing Co., an equipment leasing company, President and owner of
Jackson Group, Ltd., an investment company, and President and owner of Miller's
Mini Storage, Inc., a self-storage company.
PATRICIA A. WHITE has been a director of the Company since its formation in
1996 and a director of the Savings Bank since 1989. Ms. White is the Executive
Vice President of the Savings Bank, and has performed as such since 1989. She is
also the Corporate Secretary of the Savings Bank and has performed as such since
1986. Her main duties include oversight of the marketing, compliance, security
and loan origination areas of the Savings Bank. In connection with the formation
of the Company and the Conversion, Ms. White was appointed Treasurer and
Secretary of the Company.
ROBERT S. ZYLA has been a director of the Company since its formation in
1996 and a director of the Savings Bank since 1984. Mr. Zyla was appointed
President of the Savings Bank in 1989 and Treasurer of the Savings Bank in 1995.
In connection with the formation of the Company and the Conversion, Mr. Zyla was
appointed the President of the Company.
39
41
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, 1998 and 1997,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
February 17, 1999
40
42
PRESTIGE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
1998 1997
---- ----
ASSETS
Assets:
Cash and due from banks..................................... $ 975,202 $ 927,362
Interest-bearing deposits with banks........................ 9,177,755 1,286,099
Investment securities-
Available for sale........................................ 9,907,260 11,017,858
Held to maturity (market value $25,598,337 and
$27,870,426, respectively)............................. 25,478,289 27,741,398
Loans....................................................... 125,590,998 98,429,871
Less--Deferred costs, net................................... (3,080) (10,856)
Allowance for loan losses............................ 571,183 402,964
Loans in process..................................... 1,106,061 1,856,802
------------ ------------
Net loans......................................... 123,916,834 96,180,961
------------ ------------
Federal Home Loan Bank stock, at cost....................... 2,548,900 1,748,900
Premises and equipment, net................................. 2,634,609 2,673,794
Accrued interest receivable................................. 1,116,560 1,033,261
Deferred tax asset.......................................... 90,359 --
Other assets................................................ 1,528,216 653,077
------------ ------------
Total assets................................................ $177,373,984 $143,262,710
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits-
Noninterest-bearing deposits........................... $ 5,731,447 $ 4,000,085
Interest-bearing deposits.............................. 103,966,675 87,155,740
------------ ------------
Total deposits.................................... 109,698,122 91,155,825
Federal Home Loan Bank advances........................... 50,977,000 34,677,000
Advance payments by borrowers for taxes and insurance..... 1,023,230 856,881
Income taxes payable...................................... 172,086 178,068
Deferred tax liability.................................... -- 77,927
Accrued interest payable.................................. 234,442 153,336
Other liabilities......................................... 509,199 533,862
------------ ------------
Total liabilities................................. 162,614,079 127,632,899
------------ ------------
Stockholders' Equity:
Preferred stock, $1.00 par value; 5,000,000 shares
authorized, none issued................................ -- --
Common stock, $1.00 par value; 10,000,000 shares
authorized, 1,100,090 shares issued at December 31,
1998; 963,023 shares at December 31, 1997.............. 1,100,090 963,023
Treasury stock at cost: 157,476 and 55,372 shares at
December 31, 1998 and December 31, 1997,
respectively........................................... (2,161,243) (775,881)
Additional paid in capital................................ 10,727,677 8,033,296
Unearned ESOP shares...................................... (690,380) (724,050)
Retained earnings......................................... 5,826,182 8,064,202
Accumulated other comprehensive income.................... (42,421) 69,221
------------ ------------
Total stockholders' equity........................ 14,759,905 15,629,811
------------ ------------
Total liabilities and stockholders' equity.................. $177,373,984 $143,262,710
============ ============
The accompanying notes are an integral part of these statements.
41
43
PRESTIGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
---- ---- ----
INTEREST INCOME:
Interest and fees on loans.................................. $8,689,218 $6,786,131 $5,078,301
Interest on mortgage-backed securities...................... 589,328 773,171 922,491
Interest and dividends on other investment securities....... 2,137,413 1,706,379 656,991
Interest on deposits in other financial institutions........ 255,738 105,621 90,584
---------- ---------- ----------
Total interest income................................. 11,671,697 9,371,302 6,748,367
---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits........................................ 3,976,159 3,650,221 3,406,804
Advances from Federal Home Loan Bank........................ 2,708,619 1,590,207 276,022
---------- ---------- ----------
Total interest expense................................ 6,684,778 5,240,428 3,682,826
Net interest income................................... 4,986,919 4,130,874 3,065,541
---------- ---------- ----------
PROVISION FOR LOAN LOSSES................................... 209,000 104,000 44,000
---------- ---------- ----------
Net interest income after provision for loan losses... 4,777,919 4,026,874 3,021,541
---------- ---------- ----------
OTHER INCOME:
Fees and service charges.................................... 511,954 321,727 260,685
(Loss) gain on sale of investments.......................... (6,703) 20,704 --
Gain on sale of fixed assets................................ 27,354 -- --
Loss on sale of foreclosed property......................... (18,500) -- --
Other income, net........................................... 20,327 29,932 36,327
---------- ---------- ----------
Total other income.................................... 534,432 372,363 297,012
---------- ---------- ----------
OTHER EXPENSES:
Salaries and employee benefits.............................. 2,023,378 1,567,942 1,221,432
Premises and occupancy costs................................ 529,950 332,882 326,200
Federal deposit insurance premiums.......................... 57,718 56,508 175,984
Special SAIF assessment..................................... -- -- 501,727
Data processing costs....................................... 265,707 204,757 171,485
Advertising costs........................................... 122,802 108,280 86,157
Transaction processing costs................................ 253,833 191,773 159,213
ATM transaction fees........................................ 110,408 92,515 92,174
Other expenses.............................................. 732,536 567,173 369,282
---------- ---------- ----------
Total other expenses.................................. 4,096,332 3,121,830 3,103,654
---------- ---------- ----------
Income before income tax expense............................ 1,216,019 1,277,407 214,899
INCOME TAX EXPENSE.......................................... 472,932 492,920 69,386
---------- ---------- ----------
NET INCOME.................................................. $ 743,087 $ 784,487 $ 145,513
========== ========== ==========
PER COMMON SHARE DATA(1):
Basic:
Net Income(2)........................................... $ 0.79 $ 0.80 $ --
========== ========== ==========
Average number of common shares outstanding(3).......... 944,240 979,772 1,019,768
========== ========== ==========
Diluted:
Net Income(2)........................................... $ 0.78 $ 0.80 $ --
========== ========== ==========
Average number of common shares outstanding(3).......... 953,281 983,012 1,019,768
========== ========== ==========
Cash Dividends Declared(2)................................ $ 0.20 $ 0.12 $ --
========== ========== ==========
- ---------
(1) On April 15, 1998, the Board of Directors declared a stock dividend of 15%
to shareholders of record of June 2, 1998 payable on June 19, 1998. All per
share data have been restated to reflect the stock dividend.
(2) Earnings per share and cash dividends declared information for 1996
represents the period subsequent to initial issuance of common stock on June
27, 1996.
(3) Weighted shares outstanding for 1996 represent the weighted shares
outstanding from June 27, 1996 to December 31, 1996.
The accompanying notes are an integral part of these statements
42
44
PRESTIGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
ADDITIONAL
COMPREHENSIVE COMMON STOCK TREASURY PAID-IN UNEARNED RETAINED
INCOME $1.00 PAR VALUE STOCK CAPITAL ESOP SHARES EARNINGS
------ --------------- ----- ------- ----------- --------
BALANCE, December 31, 1995... $ -- $ -- $ -- $ -- $7,245,432
Issuance and exchange of
1,107,476 shares of common
stock as a result of the
conversion................. 963,023 -- 7,995,781 -- --
88,597 shares acquired for
ESOP....................... -- -- -- (770,410) --
Allocation of 1,715 ESOP
shares..................... -- -- 4,395 14,920 --
Net income................... $ 145,513 -- -- -- -- 145,513
Net unrealized losses on
available for sale
securities, net of tax of
$67,308.................... (100,997) -- -- -- -- --
----------
Comprehensive income......... $ 44,516
========== ----------- ----------- ----------- ---------- ----------
BALANCE, December 31, 1996... 963,023 -- 8,000,176 (755,490) 7,390,945
Allocation of 3,615 ESOP
shares..................... -- -- 33,120 31,440 --
Cash dividends declared...... -- -- -- -- (111,230)
Treasury stock purchases,
55,372 shares.............. -- (775,881) -- -- --
Net income................... $ 784,487 -- -- -- -- 784,487
Net unrealized gains on
available for sale
securities, net of tax of
$158,452................... 251,340 -- -- -- -- --
Reclassification adjustment
for gains realized in net
income net of tax of
$7,039..................... (13,665) -- -- -- -- --
----------
Comprehensive income......... $1,022,162
========== ----------- ----------- ----------- ---------- ----------
BALANCE, December 31, 1997... 963,023 (775,881) 8,033,296 (724,050) 8,064,202
Allocation of 3,872 ESOP
shares..................... -- -- 44,976 33,670 --
Cash dividends declared...... -- -- -- -- (191,600)
Treasury stock purchases,
102,587 shares............. -- (1,392,128) -- -- --
Stock dividend declared:
Common stock (15% per share
on 914,873 shares)....... 137,067 -- 2,648,956 -- (2,786,023)
Cash in lieu of stock...... -- -- -- -- (3,484)
Common stock issued upon
exercise of stock
options--483 shares........ -- 6,766 449 -- --
Net income................... $ 743,087 -- -- -- -- 743,087
Net unrealized losses on
available for sale
securities, net of tax of
$74,595.................... (116,066) -- -- -- -- --
Reclassification adjustment
for losses realized in net
income net of tax of
$2,279..................... 4,424 -- -- -- -- --
----------
Comprehensive income......... $ 631,445
========== ----------- ----------- ----------- ---------- ----------
BALANCE, December 31, 1998... $ 1,100,090 $(2,161,243) $10,727,677 $ (690,380) $5,826,182
=========== =========== =========== ========== ==========
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME TOTAL
------ -----
BALANCE, December 31, 1995... $ (67,457) $ 7,177,975
Issuance and exchange of
1,107,476 shares of common
stock as a result of the
conversion................. -- 8,958,804
88,597 shares acquired for
ESOP....................... -- (770,410)
Allocation of 1,715 ESOP
shares..................... -- 19,315
Net income................... -- 145,513
Net unrealized losses on
available for sale
securities, net of tax of
$67,308.................... (100,997) (100,997)
Comprehensive income.........
----------- -----------
BALANCE, December 31, 1996... (168,454) 15,430,200
Allocation of 3,615 ESOP
shares..................... -- 64,560
Cash dividends declared...... -- (111,230)
Treasury stock purchases,
55,372 shares.............. -- (775,881)
Net income................... -- 784,487
Net unrealized gains on
available for sale
securities, net of tax of
$158,452................... 251,340 251,340
Reclassification adjustment
for gains realized in net
income net of tax of
$7,039..................... (13,665) (13,665)
Comprehensive income.........
----------- -----------
BALANCE, December 31, 1997... 69,221 15,629,811
Allocation of 3,872 ESOP
shares..................... -- 78,646
Cash dividends declared...... -- (191,600)
Treasury stock purchases,
102,587 shares............. -- (1,392,128)
Stock dividend declared:
Common stock (15% per share
on 914,873 shares)....... -- --
Cash in lieu of stock...... -- (3,484)
Common stock issued upon
exercise of stock
options--483 shares........ -- 7,215
Net income................... -- 743,087
Net unrealized losses on
available for sale
securities, net of tax of
$74,595.................... (116,066) (116,066)
Reclassification adjustment
for losses realized in net
income net of tax of
$2,279..................... 4,424 4,424
Comprehensive income.........
----------- -----------
BALANCE, December 31, 1998... $ (42,421) $14,759,905
=========== ===========
The accompanying notes are an integral part of these statements
43
45
PRESTIGE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
---- ---- ----
OPERATING ACTIVITIES:
Net income.................................................. $ 743,087 $ 784,487 $ 145,513
------------ ------------ ------------
Adjustments to reconcile net income to net cash provided
(used) by operating activities--
Depreciation of premises and equipment.................. 306,143 188,779 171,044
Amortization of premiums and discounts, net............. (28,174) (31,805) (4,354)
Non cash compensation expense related to MRP Plan....... 134,136 88,307 --
Non cash compensation expense related to ESOP benefit... 96,336 84,484 30,071
Loss on sale of mutual funds............................ 14,700 3,200 --
Loss on sale of available for sale mortgage-backed
securities............................................ -- 792 --
Gain on sale of equity securities....................... (5,834) -- --
Gain on call of held to maturity investment
securities............................................ -- (24,696) --
Gain on sale of premises and equipment.................. (38,023) -- --
Provision for loan losses............................... 209,000 104,000 44,000
(Decrease) increase in other liabilities................ (42,353) 286,828 25,524
Increase (decrease) in accrued interest payable......... 81,106 115,382 (37,978)
(Decrease) increase in income taxes payable............. (99,026) 108,912 (60,524)
Increase in accrued interest receivable................. (83,299) (222,377) (237,334)
(Increase) decrease in other assets..................... (397,700) 30,435 1,584
Other, net.............................................. -- -- 1,783
------------ ------------ ------------
Total adjustments................................... 147,012 732,241 (66,184)
------------ ------------ ------------
Net cash provided by operating activities........... 890,099 1,516,728 79,329
------------ ------------ ------------
INVESTING ACTIVITIES:
Loan originations........................................... (66,773,023) (38,985,258) (26,118,053)
Principal payments on loans................................. 38,828,150 19,245,450 10,935,360
Proceeds from calls and maturities of held to maturity
investment securities..................................... 17,000,000 8,524,696 1,700,000
Proceeds from sale of available for sale mutual funds....... 660,500 101,000 --
Proceeds from sale of available for sale mortgaged-backed
securities................................................ -- 633,274 --
Proceeds from call of available for sale investment
securities................................................ 5,600,000 1,000,000 --
Proceeds from sale of equity securities..................... 19,800 -- --
Return of capital on investment securities.................. 2,225 29,100 --
Purchases of held to maturity investment securities......... (13,727,081) (17,672,530) (8,735,000)
Purchases of available for sale investment securities....... (4,650,561) (1,479,908) (4,747,900)
Principal payments on available for sale mortgage-backed
securities................................................ 1,289,713 543,835 637,010
Principal payments on held to maturity mortgage-backed
securities................................................ 1,818,659 1,914,386 1,643,112
Principal payments on held to maturity investment
securities................................................ 193,529 -- --
Purchases of available for sale mortgage-backed
securities................................................ (2,000,000) -- --
Purchases of held to maturity mortgage-backed securities.... (3,000,000) -- --
Purchases of premises and equipment......................... (435,343) (981,654) (183,397)
Proceeds from sale of premises and equipment................ 206,408 -- --
Purchase of land............................................ -- -- (265,717)
Purchase of Federal Home Loan Bank stock.................... (800,000) (995,000) (20,200)
------------ ------------ ------------
Net cash used by investing activities............... (25,767,024) (28,122,609) (25,154,785)
------------ ------------ ------------
FINANCING ACTIVITIES:
Increase in advance payments by borrowers for taxes and
insurance................................................. 166,349 234,824 50,277
Purchases of MRP shares..................................... (611,575) (210,406) --
Proceeds from Federal Home Loan Bank advances............... 21,000,000 88,607,500 44,850,000
Payments on Federal Home Loan Bank advances................. (4,700,000) (68,407,500) (33,350,000)
Net increase in money market, NOW and passbook savings
accounts.................................................. 8,406,498 5,214,353 5,249,401
Net increase (decrease) in certificate accounts............. 10,135,799 2,120,004 (2,158,605)
Purchases of treasury stock................................. (1,392,128) (775,881) --
Common stock cash dividends paid............................ (191,600) (111,230) --
Proceeds from exercise of stock options..................... 6,562 -- --
Cash in lieu of stock dividend on fractional shares......... (3,484) -- --
Net proceeds from stock offering............................ -- -- 8,188,394
------------ ------------ ------------
Net cash provided by financing activities........... 32,816,421 26,671,664 22,829,467
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents....................................... 7,939,496 65,783 (2,245,989)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 2,213,461 2,147,678 4,393,667
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 10,152,957 $ 2,213,461 $ 2,147,678
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes.................. $ 570,000 $ 381,000 $ 132,000
============ ============ ============
Cash paid during the year for interest on deposits and
borrowings................................................ $ 6,603,672 $ 5,125,044 $ 3,682,828
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITY:
Loans transferred to real estate owned...................... $ 250,000 $ -- $ 10,000
============ ============ ============
The accompanying notes are an integral part of these statements
44
46
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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., (the Corporation), a Pennsylvania 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 of all of the
Bank's stock for approximately 50% of the net offering proceeds. The remaining
portion of the net proceeds were retained by the Corporation net of $770,410
which was loaned to the ESOP for its purchase. The conversion and public
offering was completed on June 27, 1996 with net proceeds from the offering, net
of the ESOP loan, totaling $8,188,394, after offering expenses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS
Prestige Bancorp, Inc. through its wholly-owned subsidiary, the Bank, is
primarily engaged in the business of attracting deposits in the form of savings
accounts and investing such funds in the origination or purchase of commercial
loans, residential mortgage loans and consumer loans, including credit card
services, and in mortgage-backed and other securities. The Bank conducts its
business through five offices located in the greater Pittsburgh metropolitan
area.
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 primarily with
banks. Interest-bearing deposits are on deposit with domestic banks and are due
within three months. The Corporation had no deposits in foreign banks or in
foreign branches of United States banks. In addition, cash and due from banks at
December 31, 1998 and 1997 included $292,000 and $164,000, respectively, of
reserves required to be maintained under Federal Reserve Bank regulations.
INVESTMENT SECURITIES
The Bank follows 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
accretion of discount using the interest method.
45
47
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--CONTINUED
Alternatively, investments are classified as available for sale if it is
management's intent at the time of purchase to hold the securities for an
indefinite period of time and/or to use the investments as part of the
Corporation's asset/liability management strategy. Investments classified as
available for sale include securities that may be sold to effectively manage
interest rate risk exposure, prepayment risk and other factors (such as
liquidity requirements). These available for sale securities are reported at
fair value with unrealized aggregate appreciation (depreciation) excluded from
income and credited (charged) to a separate component of equity on a net of tax
basis. The Corporation presently is not authorized by its Board of Directors 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 that have been placed on a nonaccrual
basis, previously accrued but unpaid interest is reversed and subsequently
recognized only to the extent payment is received and recovery of principal is
assured.
ALLOWANCE FOR LOAN LOSSES 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.
The Bank follows SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," which was subsequently amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan--Income Recognition and Disclosures." SFAS No. 114
addresses the treatment and disclosure of certain loans where it is probable
that the creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. This standard defines the term
"impaired loan" and indicates the method used to measure the impairment. The
measurement of impairment may be based upon (a) the present value of expected
future cash flows discounted at the loan's effective interest rate; (b) the
observable market price of the impaired loan; or (c) the fair value of the
collateral of a collateral dependent loan. Additionally, these statements
require disclosure of how the creditor recognizes the interest income related to
these impaired loans.
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 multiple pools of small-dollar-value homogeneous loans that 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.
46
48
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 that 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 defined benefit pension plan covering
substantially all employees of the Bank. Pension cost is charged to expense.
Additionally, the Bank maintains a 401(k) plan for employees. The Bank does not
match any employee contributions.
Effective June 27, 1996, the Corporation established the ESOP plan, which
acquired 77,041 shares, or 88,597 shares adjusted for the 15% stock dividend in
the second quarter of 1998, in connection with the Plan of Conversion. As of
December 31, 1998 and 1997, 79,393 and 83,265 shares, respectively, remain
unearned.
On April 23, 1997, the Board of Directors and shareholders formally
approved the Corporation's Stock Option Plan (the Option Plan) and Management
Recognition and Retention Plan and Trust (the MRP Plan).
See notes 12, 13 and 14 for additional information.
INCOME TAXES
Deferred tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases of assets and liabilities
using the enacted marginal tax rate. Deferred income tax expenses or credits are
based on the changes in the asset or liability from period to period.
EARNINGS PER COMMON SHARE
During the fourth quarter of 1997, the Company adopted SFAS No. 128,
"Earnings Per Share". Under SFAS No. 128, earnings per share are classified as
basic earnings per share and diluted earnings per share. Basic earnings per
share includes only the weighted average common shares outstanding. Diluted
earnings per share includes the weighted average common shares outstanding and
any dilutive common stock equivalent shares in the calculation. All prior
periods have been restated to reflect this adoption. Treasury shares are treated
as retired for earnings per share purposes.
47
49
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--CONTINUED
The following table reflects the calculation of earnings per share under
SFAS No. 128.
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
-------- -------- --------
Basic earnings per share (1):
Net income................................................ $743,087 $784,487 $ 3,070
Average shares outstanding................................ 944,240 979,772 1,019,768
Earnings per share........................................ $ .79 $ .80 --
Diluted earnings per share (1):
Net income................................................ $743,087 $784,487 $ 3,070
Average shares outstanding................................ 944,240 979,772 1,019,768
Stock options............................................. 9,041 3,240 --
-------- -------- --------
Diluted average shares outstanding........................ 953,281 983,012 1,019,768
Earnings per share........................................ $ .78 $ .80 --
- ---------
(1) On April 15, 1998, the Board of Directors declared a stock dividend of 15%
to shareholders of record of June 2, 1998 payable on June 19, 1998. All per
share data have been restated to reflect the stock dividend.
COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," in the
quarter ended March 31, 1998. This accounting standard requires the reporting of
all changes in the equity of an enterprise that result from recognized
transactions and other economic events of the period other than transactions
with owners in their capacity as owners. Prior to the issuance of this standard,
some of those changes in equity were displayed in the income statement, while
others were included directly in balances within a separate component of equity
in a statement of financial position.
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.
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 borrowing
capacity to manage liquidity risk.
48
50
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--CONTINUED
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.
ACCOUNTING PRONOUNCEMENTS
During 1998, the Company adopted SFAS No. 131 and No. 132. SFAS No. 131,
"Disclosures about Segments of a Business Enterprise and Related Information"
requires certain information to be reported about operating segments on a basis
consistent with the Company's internal organizational structure. The Company is
operated as a single segment; thus, there are no additional disclosure
requirements. SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," revises the disclosures for pensions and other
postretirement benefits and standardizes them into a combined format. Required
disclosures have been made and prior years' information has been reclassified
for the impact of SFAS No. 132.
FUTURE ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
is required to be adopted in years beginning after June 15, 1999. The
Corporation does not have any derivative instruments or hedging activities as of
December 31, 1998.
In October 1998, SFAS No. 134, "Accounting for Mortgage Servicing Rights,"
was issued. The Corporation does not have any mortgage servicing rights as of
December 31, 1998.
49
51
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
3. INVESTMENT SECURITIES:
The cost and market values of investment securities are summarized as
follows:
Investment securities held to maturity:
DECEMBER 31, 1998
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- -------- -------- -----------
U.S. government and government agency
obligations:
Due within one year............. $ 999,863 $ 11,387 $ -- $ 1,011,250
Due after one and within five
years......................... 3,012,412 22,515 -- 3,034,927
Due within ten years............ 6,995,520 48,788 7,142 7,037,166
Due after ten years............. 5,255,906 13,261 35,995 5,233,172
Federal Home Loan Mortgage
Corporation (FHLMC) certificates:
Due within one year............. 295,332 2,610 -- 297,942
Due after five and within ten
years......................... 2,962,464 64,388 -- 3,026,852
Due after ten years............. 2,002,073 12,158 23,769 1,990,462
Government National Mortgage
Association (GNMA) certificates due
after 10 years..................... 1,950,655 14,120 1,013 1,963,762
Federal National Mortgage Association
(FNMA) certificates due after 10
years.............................. 2,004,064 -- 1,260 2,002,804
----------- -------- -------- -----------
$25,478,289 $189,227 $ 69,179 $25,598,337
=========== ======== ======== ===========
The maturities within the table above are based upon contractual maturity.
Investment securities available for sale:
DECEMBER 31, 1998
---------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- -------- -------- -----------
U.S. government and government agency
obligations:
Due after one and within five
years......................... $ 2,503,539 $ 6,151 $ 5,350 $ 2,504,340
Due after five and within ten
years......................... 1,000,140 490 -- 1,000,630
Corporate Debentures:
Due after ten years............. 493,626 -- 16,011 477,615
Federal Home Loan Mortgage
Corporation (FHLMC) certificates:
Due after ten years............. 2,214,721 10,064 -- 2,224,785
Federal National Mortgage Association
(FNMA) certificates due after one
and within five years.............. 1,025,523 -- 7,840 1,017,683
Mutual fund investment............... 1,273,441 -- 10,713 1,262,728
Common stock portfolio............... 1,467,070 -- 47,591 1,419,479
----------- -------- -------- -----------
$ 9,978,060 $ 16,705 $ 87,505 $ 9,907,260
=========== ======== ======== ===========
The maturities within the table above are based upon contractual maturity.
50
52
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
3. INVESTMENT SECURITIES:--CONTINUED
Investment securities held to maturity:
DECEMBER 31, 1997
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- -------- -------- -----------
U.S. government and government agency
obligations:
Due after one and within five
years......................... $ 2,001,480 $ 15,763 $ 10,518 $ 2,006,725
Due within ten years............ 11,514,303 36,587 3,280 11,547,610
Due after ten years............. 6,205,592 -- 11,500 6,194,092
Federal Home Loan Mortgage
Corporation (FHLMC) certificates:
Due after one and within five
years......................... 556,615 7,494 -- 564,109
Due after ten years............. 6,217,776 62,247 -- 6,280,023
Government National Mortgage
Association (GNMA) certificates due
after 10 years..................... 1,158,357 30,793 -- 1,189,150
Federal National Mortgage Association
(FNMA) certificates due within
one year........................... 87,275 1,442 -- 88,717
----------- -------- -------- -----------
$27,741,398 $154,326 $ 25,298 $27,870,426
=========== ======== ======== ===========
The maturities within the table above are based upon contractual maturity.
Investment securities available for sale:
DECEMBER 31, 1997
---------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- -------- -------- -----------
U.S. government and government agency
obligations:
Due within one year............. $ 2,000,000 $ -- $ 13,740 $ 1,986,260
Due after one and within five
years......................... 1,100,344 -- 539 1,099,805
Due within ten years............ 1,501,819 -- 13,694 1,488,125
Due after ten years............. 2,000,000 -- 14,680 1,985,320
Federal Home Loan Mortgage
Corporation (FHLMC) certificates:
Due within one year............. 1,042,500 880 3,116 1,040,264
Due after ten years............. 286,050 13,719 -- 299,769
Federal National Mortgage Association
(FNMA) certificates due after one
and within five years.............. 1,190,371 -- 19,059 1,171,312
Mutual fund investment............... 1,325,890 -- 36,609 1,289,281
Common stock portfolio............... 455,427 202,295 -- 657,722
----------- -------- -------- -----------
$10,902,401 $216,894 $101,437 $11,017,858
=========== ======== ======== ===========
The maturities within the table above are based upon contractual maturity.
Mortgage-backed securities include net unamortized discounts of $5,060 and
$29,321 at December 31, 1998 and 1997, respectively.
51
53
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
4. LOANS RECEIVABLE:
Loans receivable at December 31, 1998 and 1997, are summarized as follows:
1998 1997
---- ----
Commercial Loans:
Commercial real estate................................ $ 7,631,666 $ 1,424,872
Commercial business loans............................. 18,712,911 9,565,000
Construction.......................................... 1,214,800 1,455,000
Less--Undisbursed loan proceeds....................... 543,011 1,315,560
Deferred loan fees............................. 53,431 --
------------ -----------
26,962,935 11,129,312
Real estate loans:
1-4 family............................................ 81,283,846 72,197,618
Construction.......................................... 1,054,807 993,981
------------ -----------
82,338,653 73,191,599
Deferred loan costs................................... 36,889 10,856
Less--Undisbursed loan proceeds....................... 563,050 541,242
------------ -----------
81,812,492 72,661,213
------------ -----------
Consumer loans:
Home equity........................................... 9,834,471 7,535,275
Student............................................... 2,262,780 2,214,946
Automobile............................................ 2,404,824 1,967,348
Collateral............................................ 528,442 517,215
Credit cards.......................................... 468,894 419,142
Personal unsecured/other.............................. 193,557 139,474
Deferred loan costs................................... 19,622 --
------------ -----------
15,712,590 12,793,400
------------ -----------
124,488,017 96,583,925
Less--Allowance for loan losses....................... 571,183 402,964
------------ -----------
$123,916,834 $96,180,961
============ ===========
The credit cards and student loans are currently being serviced by a third
party.
At December 31, 1998 and 1997, the majority of the loan portfolio was
secured by properties located in Western Pennsylvania. As of December 31, 1998,
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, 1998 and 1997, the Bank had
approximately $698,000 and $611,000 of non-accrual loans. The Bank does not have
any other significant off-balance sheet risk except for the commitments
referenced in Note 17.
5. ALLOWANCE FOR LOAN LOSSES:
Activity with respect to the allowance for loan losses is summarized as
follows:
1998 1997 1996
---- ---- ----
Balance at beginning of year....................... $402,964 $306,926 $287,060
Provision for loan losses.......................... 209,000 104,000 44,000
Charge-offs........................................ (40,841) (8,446) (24,294)
Recoveries......................................... 60 484 160
-------- -------- --------
Balance at end of year............................. $571,183 $402,964 $306,926
======== ======== ========
52
54
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
5. ALLOWANCE FOR LOAN LOSSES:--CONTINUED
At December 31, 1998 and 1997, the Bank had loans totaling $698,000 and
$611,000, 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 1998 and 1997 were
$622,000, and $467,000, 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 at December 31, 1998 of $205,000 and had no real
estate owned assets at December 31, 1997.
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, 1998 and 1997, are summarized
by major classification as follows:
1998 1997
---- ----
Land....................................................... $ 224,817 $ 224,817
Building and improvements.................................. 2,134,324 2,359,684
Furniture, fixtures and equipment.......................... 1,629,413 1,275,127
---------- ----------
Total, at cost........................................ 3,988,554 3,859,628
Less--Accumulated depreciation............................. 1,353,945 1,185,834
---------- ----------
Premises and equipment, net................................ $2,634,609 $2,673,794
========== ==========
Depreciation and amortization expense was $306,143, $188,779 and $171,044
for the fiscal years ended December 31, 1998, 1997 and 1996, respectively.
The Corporation has entered into various operating leases expiring at
various dates through October 31, 2000 for office space for three of its branch
operations. During the years ended December 31, 1998 and 1997, rental expense
included in the statement of operations was $42,000 and $1,800, respectively.
There was no rental expense in 1996.
Future minimum lease commitments for all leases as of December 31, 1998,
are as follows:
YEAR ENDING DECEMBER 31,
------------------------
1999................................................. $ 50,400
2000................................................. 50,600
2001................................................. 51,600
2002................................................. 51,600
2003................................................. 20,900
Thereafter........................................... 96,500
--------
Total Payments.................................. $321,600
========
53
55
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
8. DEPOSITS:
The aggregate amount of short-term jumbo certificates of deposit, each with
a minimum denomination of $100,000, was approximately $9,225,000 and $5,372,000
at December 31, 1998, and 1997, respectively. At December 31, 1998 the scheduled
maturities of the certificate accounts are as follows:
1999................................................. $34,803,930
2000................................................. 12,184,006
2001................................................. 5,361,650
2002................................................. 1,511,786
2003 and thereafter.................................. 2,077,626
-----------
$55,938,998
===========
Interest expense associated with deposits for each of the years ended is as
follows:
1998 1997 1996
---- ---- ----
Interest on certificates of deposit........... $2,754,876 $2,572,048 $2,530,750
Interest on savings accounts.................. 407,967 394,893 410,460
Money market demand accounts.................. 661,498 534,917 334,873
Interest on NOW accounts...................... 163,504 160,531 138,772
Early withdrawal penalties.................... (11,686) (12,168) (8,051)
---------- ---------- ----------
$3,976,159 $3,650,221 $3,406,804
========== ========== ==========
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, 1998
- ------------------------------------
WEIGHTED
MATURITY AVERAGE RATE BALANCE
- -------- ------------ -------
1999 5.64% $ 5,000,000
2000 5.65 2,977,000
2002 5.62 25,000,000
2003 5.68 1,500,000
2005 5.55 1,000,000
2008 5.21 15,500,000
-----------
$50,977,000
===========
DECEMBER 31, 1997
- ------------------------------------
WEIGHTED
MATURITY AVERAGE RATE BALANCE
- -------- ------------ -------
1998 6.07% $ 1,700,000
1999 6.32 5,000,000
2000 5.92 2,977,000
2002 5.64 25,000,000
-----------
$34,677,000
===========
54
56
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
9. FEDERAL HOME LOAN BANK ADVANCES:--CONTINUED
The Bank in 1998 has chosen not to renew its line of credit with the
Federal Home Loan Bank of Pittsburgh. Instead it will rely on other cash
management advances offered by the Federal Home Loan Bank of Pittsburgh. At
December 31, 1998 the Bank's maximum borrowing capacity was $93.1 million of
which $51.0 million had been borrowed. As of December 31, 1997, the Bank had an
available balance under its line of credit of approximately $8,185,000 in
connection with the Federal Home Loan Bank of Pittsburgh's Cash Management
Advance Program. There were no borrowings against the line of credit as of
December 31, 1997.
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.
Of the outstanding FHLB advances, $7,000,000 was adjustable rate notes with
a weighted average rate 5.58%. At December 31, 1998, there are $41.5 million of
advances that are convertible to quarterly adjustable rate advances at varying
convertible dates five years or less. The $41.5 million convertible advances
have final maturity dates of $25.0 million in 2002, $1.0 million in 2005, and
$15.5 million in 2008.
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 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.
55
57
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
10. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:--CONTINUED
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 for borrowings of similar maturities.
The estimated fair values and recorded book balances at December 31, 1998
and 1997 are as follows:
1998 1997
--------------------------- -------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BALANCE FAIR VALUE BALANCE
------------ ------------ ----------- -----------
Cash and short term
deposits.................... $ 10,152,957 $ 10,152,957 $ 2,213,461 $ 2,213,461
Investment securities......... 35,505,596 35,385,549 38,888,284 38,759,256
Net loans..................... 125,763,000 123,916,834 97,688,000 96,180,961
Accrued interest receivable... 1,116,560 1,116,560 1,033,261 1,033,261
Deposits with no stated
maturities.................. 53,759,124 53,759,124 45,352,626 45,352,626
Deposits with stated
maturities.................. 56,299,000 55,938,998 45,704,000 45,803,199
Federal Home Loan Bank
advances.................... 52,515,000 50,977,000 34,815,000 34,677,000
Commitments to originate
loans....................... 13,105,000 13,105,000 6,716,000 6,716,000
11. INCOME TAXES:
The provision (benefit) for income taxes for each of the years ended is as
follows:
1998 1997 1996
---- ---- ----
Federal:
Current........................................... $481,170 $449,181 $67,249
Deferred.......................................... (93,696) (44,797) (13,735)
-------- -------- -------
387,474 404,384 53,514
State:
Current........................................... 85,458 88,536 15,872
-------- -------- -------
Total income tax expense....................... $472,932 $492,920 $69,386
======== ======== =======
56
58
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:
1998 1997 1996
---- ---- ----
Deferred tax expense (benefit):
Deferred loan costs/fees......................... $(10,259) $ 10,259 $ 1,845
Prepaid pension.................................. (4,272) (6,603) (796)
Vacation accrual................................. (6,127) (1,417) (700)
MRP accrual...................................... -- (30,024) --
Provision for loan losses........................ (71,060) (35,360) (14,960)
Tax depreciation in excess of book
depreciation.................................. 10,200 17,000 5,950
Other, net....................................... (12,178) 1,348 (5,074)
-------- -------- --------
$(93,696) $(44,797) $(13,735)
======== ======== ========
The special tax benefit afforded to thrift institutions that allowed a bad
debt deduction based upon 8% of taxable income was repealed in 1996. A small
thrift with assets of less than $500 million may maintain a bad debt reserve
equal to the greater of the allowable base year reserve (i.e. the thrift bad
debt reserve at December 31, 1987) or the experience method reserve (six year
moving average ratio of charge-offs to loans applied to year end loan balances).
The portion of the bad debt reserve under the former (percentage of taxable
income) method which exceeds the bad debt reserve under the present (base year
or experience) method must be recaptured by recognizing such excess in taxable
income ratably over a six year period. The six-year recapture period generally
started in 1996, but may have been delayed until 1997 or 1998 if certain
residential loan origination tests were met in 1997 and 1998. The Bank had
maintained the applicable residential loan requirement and the recapture
commenced with the taxable year beginning January 1, 1998. As of December 31,
1998, the Savings Bank had an applicable excess reserve balance remaining of
approximately $107,000. Approximately $21,300 will be recaptured on an annual
basis over the next five fiscal years.
The base year (i.e. December 31, 1987) bad debt reserve under the former
method is permanently suspended, and therefore not subject to recapture, unless
a base year loan contraction occurs in a subsequent year. A base year loan
contraction occurs when the total loans at the end of the year are less than the
total loans at December 31, 1987. In such cases, a proportionate reduction to
the base year bad debt reserve at December 31, 1987 is required and the
reduction to the reserve is recaptured. Furthermore, the base year bad debt
reserve constitutes a restriction for tax purposes of the Bank's use of retained
earnings for distributions or redemptions.
In accordance with FASB statement No. 109, the Bank has recorded deferred
income tax associated with the temporary differences related to the portion of
the bad debt reserve arising in tax years after December 31, 1987. For the
period before December 31, 1987, there is an unrecognized deferred tax liability
of approximately $565,000 at December 31, 1998. 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.
57
59
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:
1998 1997 1996
---- ---- ----
Statutory federal tax rate................................. 34.0% 34.0% 34.0%
State income taxes, net of Federal income tax benefit...... 7.0 6.9 7.4
Effect of graduated federal tax rates...................... (1.3) (1.5) (5.6)
Other...................................................... (.8) (.8) (3.5)
---- ---- ----
38.9% 38.6% 32.3%
==== ==== ====
Net deferred tax (assets) liabilities as of December 31, 1998 and 1997 are
as follows:
1998 1997
---- ----
Prepaid pension............................................. $ 16,214 $20,486
Vacation accrual............................................ (22,107) (15,980)
Allowance for loan losses................................... (91,585) (20,525)
Valuation allowance for investments......................... (28,422) 46,173
Tax depreciation in excess of book depreciation............. 79,619 69,419
Deferred loan costs/fees.................................... 1,845 12,104
MRP accrual................................................. (30,024) (30,024)
Other, net.................................................. (15,899) (3,726)
-------- -------
Net deferred tax (asset) liability.......................... $(90,359) $77,927
======== =======
12. PENSION PLAN:
The Bank maintains a noncontributory defined benefit pension plan covering
all eligible employees. The following table sets forth the plan's fund status
and amounts recognized in the Corporation's balance sheets at December 31, 1998
and 1997, respectively.
1998 1997
---- ----
Change in benefit obligation:
Benefit obligation at beginning of year................... $ 921,563 $ 746,125
Service cost.............................................. 84,055 66,227
Interest cost............................................. 66,813 54,094
Actuarial loss............................................ 103,056 57,316
Benefits paid............................................. (4,618) (2,199)
---------- ---------
Benefit obligation at end of year......................... 1,170,869 921,563
---------- ---------
Change in plan assets Fair value of plan assets at beginning
of year................................................... 806,833 619,396
Actual return on plan assets.............................. 179,024 124,939
Employer contribution..................................... 81,505 64,697
Benefits paid............................................. (4,618) (2,199)
---------- ---------
Fair value of plan assets at end of year.................. 1,062,744 806,833
---------- ---------
Funded status............................................. (108,125) (114,730)
Unrecognized net obligation at transition................. 49,656 54,428
Unrecognized net loss..................................... 106,156 120,554
---------- ---------
Prepaid benefit cost...................................... $ 47,687 $ 60,252
========== =========
58
60
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
12. PENSION PLAN:--CONTINUED
Approximately 98% of the plan's assets are primarily invested either
directly or through mutual funds in common stocks, bonds, U.S. government and
agency, and foreign securities. The remaining plan assets are on deposit with
the Bank or in a cash management account. The Bank's funding policy is to
contribute annually the maximum amount that can be deducted for federal income
tax purposes. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future.
The components of pension expense are as follows for each of the years
ended:
1998 1997 1996
---- ---- ----
Service cost...................................... $ 84,055 $ 66,227 $ 51,209
Interest cost..................................... 66,813 54,094 45,200
Actual return on plan assets...................... (179,024) (124,939) (76,604)
Amortization of transition asset.................. 122,226 88,735 44,656
--------- --------- --------
Net periodic pension cost......................... $ 94,070 $ 84,117 $ 64,461
========= ========= ========
For all reported periods, the rate of increase in future compensation
levels was assumed to be 4.75%. The weighted average discount rate used in
determining the actuarial present value of the projected benefit obligation was
7.25% for each of the years ended December 31, 1998, 1997 and 1996. The expected
long-term rate of return on assets was 7.25% for each of the years ended
December 31, 1998, 1997 and 1996.
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 that was used to purchase 77,041 shares, or 88,597
shares adjusted for the 15% stock dividend in the second quarter of 1998, 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 $690,380 and $724,050 at December 31, 1998
and 1997, respectively, as reflected in shareholders' equity, will be amortized
to compensation over the remaining period of the ESOP loan. In addition, any
difference between the market price of the Corporation's common stock and the
$10 per share (the purchase price paid by the ESOP) 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 2,953
shares. Total compensation expense incurred in 1998 and 1997 for allocated ESOP
shares was $96,336 and $84,484, respectively.
14. CAPITAL STOCK PLANS:
On April 23, 1997, at the annual stockholders meeting, the Board of
Directors and shareholders formally approved the Corporation's Stock Option Plan
(the Option Plan) and the Management Recognition and Retention Plan and Trust
(the MRP Plan; the Option Plan and MRP Plan herein are referred to as the
Plans).
59
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PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
14. CAPITAL STOCK PLANS:--CONTINUED
On April 15, 1998, the Board of Directors declared a stock dividend of 15%
to shareholders of record of June 2, 1998 payable June 19, 1998. All share data
have been restated to reflect the stock dividend.
The aforementioned approval of the MRP Plan made 38,521 shares, or 44,295
shares adjusted for the 15% stock dividend in the second quarter of 1998, of
common stock available for awards to officers, key employees of the Corporation
and Bank and non-employee directors thereof. As of December 31, 1998, the
Corporation had granted 41,084 shares. However, such shares are vested over a
five year period and as of December 31, 1998, 33,152 shares remain unvested.
In connection with the MRP Plan's approval, the Bank established a trust
whose purpose is to purchase shares on the open market. During the year ended
December 31, 1998, the Corporation incurred compensation expense of $134,136,
based on the cost incurred to purchase the currently vesting or previously
vested shares in the open market. During the year ended December 31, 1998, the
Bank funded $611,575 to the trust toward the purchase of shares. As of December
31, 1998, the trust had purchased 44,108 shares.
The aforementioned approval of the Option Plan made 96,302 options, or
110,747 options adjusted for the 15% stock dividend in the second quarter of
1998, available for grant to employees and others who perform substantial
services to the Corporation. As of December 31, 1998, the corporation has
granted 101,885 options.
As permitted by Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," the Corporation accounts for the
Option Plan under APB Opinion No. 25, "Accounting for Stock Issued to Employees"
whereby no compensation cost has been recorded in accordance with certain
valuation models, such as the Black-Scholes model. Under the provisions of SFAS
No. 123, the per share compensation expense in connection with the MRP Plan is
fixed on the date of grant. Had such valuation models been used in connection
with the Option Plan and had compensation per share for the MRP Plan been set on
the date of grant, the Corporation's net income and earnings per share would
have had a net reduction to the following pro forma amounts:
DECEMBER 31, 1998
-----------------
Net income:
As reported............................................... $743,087
Pro forma................................................. 712,072
Basic earnings per share:
As reported............................................... $ .79
Pro forma................................................. .75
Diluted earnings per share:
As reported............................................... $ .78
Pro forma................................................. .75
60
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PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
14. CAPITAL STOCK PLANS:--CONTINUED
A summary of the status of the Corporation's Stock Option Plan at December
31, 1998, and changes during the year ended is presented in the table and
narrative following:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------- --------
Outstanding at beginning of period.......................... 88,252 $14.43
Granted................................................... 13,633 13.81
Exercised................................................. 483 13.59
Forfeited................................................. 1,092 15.00
Outstanding at end of period................................ 100,310 14.34
Exercisable at end of period................................ 16,075
Weighted average fair value of options granted during the
year...................................................... $ 5.06
The options are exercisable beginning one year from the grant date in equal
annual installments over a period of five years. The maximum term of any option
granted under the Plan cannot exceed 10 years.
The 100,310 options outstanding at December 31, 1998 had a weighted average
exercise price of $14.34 and a weighted average remaining contractual life of
9.9 years. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions used
for grants in 1998: weighted average risk-free interest rate of 4.68%, weighted
average expected dividend yield of 1.41%, expected life of 7.0 years and
expected volatility of 29.00%.
A summary of the status of the Corporation's Stock Option Plan at December
31, 1997, and changes during the year ended is presented in the table and
narrative following:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------- --------
Outstanding at beginning of period.......................... -- $ --
Granted................................................... 88,252 14.43
Exercised................................................. -- --
Forfeited................................................. -- --
Outstanding at end of period................................ 88,252 14.43
Exercisable at end of period................................ --
Weighted average fair value of options granted during the
year...................................................... $ 4.79
The options are exercisable beginning one year from the grant date in equal
annual installments over a period of five years. The maximum term of any option
granted under the Plan cannot exceed 10 years.
The 88,252 options outstanding at December 31, 1997 had a weighted average
exercise price of $14.43 and a weighted average remaining contractual life of
9.6 years. None of these options were exercisable. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions used for grants in 1997: weighted average
risk-free interest rate of 6.41%, weighted average expected dividend yield of
1.21%, expected life of 7.0 years and expected volatility of 19.00%.
Additionally, on August 27, 1998 and October 16, 1998, the Corporation
initiated plans to repurchase, at market value, up to 5% of its outstanding
shares of common stock through the use of its existing cash and cash
equivalents. The first repurchase program of 52,597 shares was completed on
September 18, 1998 and the second repurchase program of 49,990 shares was
completed on October 26, 1998.
61
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PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
15. RETAINED EARNINGS AND REGULATORY CAPITAL:
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the Corporation's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined) and of Tier I capital (as defined) to average assets (as
defined). Management believes, as of December 31, 1998, that the Corporation and
the Bank meet all capital adequacy requirements to which it is subject. As of
December 31, 1998, 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 below. There are no conditions or
events since that notification that management believes have changed the Bank'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, 1998.......... $13,521 14.85% $$7,286 $8.0% $$9,108 $10.0%
As of December 31, 1997.......... $12,995 18.78% $$5,537 $8.0% $$6,921 $10.0%
Tier 1 Capital (to Risk Weighted Assets):
As of December 31, 1998.......... $12,950 14.22% $$3,643 $4.0% $$5,465 $6.0%
As of December 31, 1997.......... $12,592 18.19% $$2,768 $4.0% $$4,153 $6.0%
Tier 1 Capital (to Average
Assets):
As of December 31, 1998.......... $12,950 7.86% $$6,588 $4.0% $$8,235 $5.0%
As of December 31, 1997.......... $12,592 9.43% $$5,340 $4.0% $$6,676 $5.0%
16. RELATED PARTY TRANSACTIONS:
Certain directors and executive officers of the Corporation, including
their immediate families and companies in that they are principal owners, are
loan customers of the Bank. In management's opinion, such loans are made in the
normal course of business and were granted on substantially the same terms and
conditions as loans to other individuals and businesses of comparable
creditworthiness at the time. Total loans to these persons at December 31, 1998
and 1997, amounted to $301,801 and $182,175 respectively.
62
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PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
16. RELATED PARTY TRANSACTIONS:--CONTINUED
An analysis of these related party loans is as follows:
1998 1997
---- ----
Balance at January 1........................................ $ 182,175 $ 419,236
New loans................................................... 201,500 13,000
Payments.................................................... (81,874) (250,061)
--------- ---------
Balance at December 31...................................... $ 301,801 $ 182,175
========= =========
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 1998,
1997 and 1996, such activity was as follows:
- A member of the Board of Directors leases office space from the
Corporation. The rental income was $11,100 for each of the three years
ended December 31, 1998. This director also provides professional
services to the Bank and his fees were $5,700, $5,500, $4,950 for the
years ended December 31, 1998, 1997 and 1996, respectively.
- A member of the Board of Directors is employed by a law firm retained by
the Corporation. Fees paid in fiscal 1998, 1997 and 1996 relative to
various bank and corporate matters totaled $57,133, $82,088 and $38,300,
respectively. During fiscal 1996, additional fees of approximately
$156,000 were paid relative to the stock conversion. The firm's real
estate closing service rendered gross proceeds of approximately $341,787,
$232,800 and $109,700, respectively, during fiscal 1998, 1997 and 1996 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 1998, 1997 and 1996 were $30,249, $21,070 and $21,950,
respectively.
- The Chairman of the Board of Directors, John A. Stiver, is paid a fee of
$10,000 per month for a total of $120,000 paid in 1998 for providing
advice and assistance to the officers of the Bank with respect to the
operations and management of the Bank. In addition, Mr. Stiver has
expanded the commercial loan portfolio that is in excess of $26.9 million
as of December 31, 1998.
The Chairman of the Board of Directors was paid a fee of $8,000 per
month, for a total fee of $96,000 paid in 1997 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. In addition, Mr. Stiver
expanded the commercial loan portfolio that was in excess of $11 million
as of December 31, 1997.
The Chairman of the Board of Directors was 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.
17. COMMITMENTS AND CONTINGENT LIABILITIES:
The Corporation incurs off-balance sheet risks in the normal course of
business in order to meet the financing needs of its customers. These risks
derive from commitments to extend credit. Such commitments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
financial statements.
Commitments to extend credit are obligations to lend to a customer as long
as there is no violation of any condition established in the loan agreement.
Commitments generally have fixed expiration dates or other termination clauses.
A portion of the commitments is not expected to be drawn upon; thus, the total
commitment
63
65
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
17. COMMITMENTS AND CONTINGENT LIABILITIES:--CONTINUED
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 $13,105,000 and $6,716,000 as of
December 31, 1998 and 1997, respectively. As of December 31, 1998 and 1997,
these commitments had fixed and variable rates which ranged from 6.6% to 12.9%
and 6.9% to 12.9%, respectively. In the opinion of management, the funding of
the credit commitments will not have a material adverse effect on the Bank's
financial position or results of operations. Additionally, the Bank is also
subject to asserted and unasserted potential claims encountered in the normal
course of business. In the opinion of management and legal counsel, the
resolution of these claims will not have a material adverse effect on the Bank's
financial position or results of operations.
18. PARENT COMPANY FINANCIAL INFORMATION:
Prestige Bancorp, Inc. (the Parent Company) began operations on June 27,
1996 and functions primarily as a holding company for its sole subsidiary, the
Bank. The Parent Company's balance sheets as of December 31, 1998 and 1997 and
related statements of income and cash flows are as follows:
BALANCE SHEETS
December 31, 1998 and 1997
1998 1997
---- ----
ASSETS
Cash and cash equivalents................................ $ 314,912 $ 2,480,815
Investments securities available for sale................ 1,419,479 657,721
Investment in Prestige Bank, F.S.B....................... 13,024,359 12,561,900
Other assets............................................. 32,643 2,783
----------- -----------
Total Assets............................................. $14,791,393 $15,703,219
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Total Liabilities........................................ $ 31,488 $ 73,408
Total Stockholders' Equity, net of ESOP loan of $690,380
at December 31, 1998; $724,050 at December 31, 1997.... 14,759,905 15,629,811
----------- -----------
Total Liabilities and Stockholders' Equity............... $14,791,393 $15,703,219
=========== ===========
64
66
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
18. PARENT COMPANY FINANCIAL INFORMATION:--CONTINUED
STATEMENTS OF INCOME
For The Year Ended December 31, 1998 and December 31, 1997
1998 1997
---- ----
Interest income........................................... $ 142,579 $ 194,541
Other income.............................................. 7,834 --
----------- -----------
Total income.............................................. 150,413 194,541
----------- -----------
Expenses:
Legal fees.............................................. 61,851 80,435
Other................................................... 90,799 105,795
----------- -----------
Total expenses............................................ 152,650 186,230
----------- -----------
(Loss) income before income taxes and equity in earnings
of subsidiary........................................... (2,237) 8,311
Income tax (benefit) expense.............................. (3,546) 1,338
Equity in earnings of subsidiary.......................... 741,778 777,514
----------- -----------
Net income................................................ $ 743,087 $ 784,487
=========== ===========
65
67
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
18. PARENT COMPANY FINANCIAL INFORMATION:--CONTINUED
STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1998 and December 31, 1997
1998 1997
---- ----
Operating Activities:
Net income.............................................. $ 743,087 $ 784,487
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in earnings of subsidiary..................... (741,778) (777,514)
Gain on sale of equity securities.................... (7,834) --
Change in other assets and liabilities............... (8,591) (18,164)
----------- -----------
Net cash used by operating activities.............. (15,116) (11,191)
Investing Activities:
Return of capital on investment securities.............. 2,226 --
Proceeds from sale of equity securities................. 71,800 --
Purchase of available for sale investment securities.... (1,077,833) (283,927)
----------- -----------
Net cash used by investing activities................ (1,003,807) (283,927)
Financing Activities:
Common stock dividends paid............................. (191,600) (111,230)
Dividends paid from subsidiary.......................... 400,000 --
Proceeds from exercise of stock options................. 6,562 --
Cash in lieu of stock dividend on fractional shares..... (3,484) --
Purchase of treasury stock.............................. (1,392,128) (775,881)
Repayment received from ESOP............................ 33,670 31,433
----------- -----------
Net cash used by financing activities................... (1,146,980) (855,678)
----------- -----------
Net decrease in cash and cash equivalents................. (2,165,903) (1,150,796)
Cash and Cash Equivalents, Beginning...................... 2,480,815 3,631,611
----------- -----------
Cash and Cash Equivalents, Ending......................... $ 314,912 $ 2,480,815
=========== ===========
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 that 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.
66
68
PRESTIGE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
18. PARENT COMPANY FINANCIAL INFORMATION:--CONTINUED
The Bank may not declare or pay a cash dividend on, or repurchase any of
its common shares if the effect thereof would cause the Bank's equity to be
reduced below either the amount required for the liquidation account or the
regulatory capital requirements for insured institutions.
19. SUBSEQUENT EVENT:
On February 17, 1999, the Board of Directors declared a stock dividend of
5% to shareholders of record of March 2, 1999 payable on March 19, 1999.
67
69
CORPORATE INFORMATION
CORPORATE OFFICERS
JOHN A. STIVER
Chief Executive Officer
ROBERT S. ZYLA
President
PATRICIA A. WHITE
Treasurer and Secretary
JAMES M. HEIN
Controller
BOARD OF DIRECTORS
JOHN A. STIVER
Chairman of the Board, CEO
Certified Public Accountant
John A. Stiver, C.P.A.
ROBERT S. ZYLA
President
Prestige Bancorp, Inc.
President
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
Director and Owner
Jefferson Hills Real Estate, Inc.
MICHAEL R. MACOSKO
Pharmacist
Eckerd Drug, Inc.
CHARLES P. MCCULLOUGH
Attorney at Law
Tucker Arensberg, P.C.
MARK R. SCHOEN
Senior Manager of Products and Technology
SEI Investments
CORPORATE OFFICE
710 Old Clairton Road
Pittsburgh, Pennsylvania 15236
412-655-1190
Fax 412-655-2114
www.prestigebank.com
BRANCH OFFICES
Pleasant Hills
710 Old Clairton Road
Pittsburgh, PA 15236
412-655-2110
Bethel Park
6257 Library Road
Bethel Park, PA 15102
412-831-8440
Elizabeth Township
603 Scenery Drive
Elizabeth, PA 15037
412-754-2661
Mt. Oliver
543 Brownsville Road
Pittsburgh, PA 15210
412-431-3374
Washington
Located in Shop'n Save
125 West Beau Street
Washington, PA 15301
724-228-1314
MARKET MAKERS
Friedman Billings Ramsey & Co.
Tucker, Anthony Inc.
Herzog, Heine, Geduld, Inc.
Sandler O'Neill & Partners
Ryan Beck & Co. Inc.
Legg Mason Wood Walker Inc.
Parker/Hunter Inc.
TRANSFER AGENT
Registar & Transfer Company
Cranford, NJ
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, 1998, 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
70
PRBC
PRESTIGE BANCORP, INC.
710 Old Clairton Road, Pittsburgh, PA 15236-4300
412-655-1190 o (Fax) 412-655-1772
www.prestigebank.com