1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 1997
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-24358
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ML BANCORP, INC.
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(Exact Name of registrant as specified in its charter)
PENNSYLVANIA 23-2752439
- ------------ -----------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or organization)
TWO ALDWYN CENTER
VILLANOVA, PENNSYLVANIA 19085
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 526-6460
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. (X)
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the closing prices of the registrant's common stock as
quoted on the National Association of Securities Dealers Automated Quotation
System as of June 20, 1997 was $195.7 million. For purposes of this
calculation only, affiliates are deemed to be directors, executive officers and
certain beneficial owners.
As of June 20, 1997, there were 14,547,600 shares issued and 11,276,054 shares
outstanding of the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Where Incorporated
- ----------------------------------------- ----------------------------------------
1) 1997 Annual Report Part II - Items 5, 6, 7 and 8;
Part IV - Item 14
2) Proxy Statement for 1997 Annual Meeting of Stockholders Part III - Items 10, 11, 12 and 13
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ML BANCORP, INC.
TABLE OF CONTENTS
PART I
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Item 1 Business.............................................................................1
Item 2 Properties..........................................................................36
Item 3 Legal Proceedings...................................................................38
Item 4 Submission of Matters To A Vote of Security Holders.................................38
PART II
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Item 5 Market for Registrant's Common
Equity and Related Stockholder Matters..............................................38
Item 6 Selected Financial Data.............................................................38
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................................39
Item 8 Financial Statements & Supplementary Data...........................................39
Item 9 Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure..............................................................39
PART III
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Item 10 Directors and Executive Officers of the Registrant..................................39
Item 11 Executive Compensation..............................................................39
Item 12 Security Ownership of Certain Beneficial Owners and Management......................39
Item 13 Certain Relationships and Related Transactions......................................39
PART IV
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Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.....................40
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ITEM 1: BUSINESS
ML BANCORP, INC.
ML Bancorp, Inc. (the "Company" or "Bancorp") is a Pennsylvania corporation
organized in March 1994 by Main Line Bank (the "Bank") for the purpose of
acquiring all of the capital stock of the Bank issued in the Bank's mutual to
stock conversion which occurred on August 11, 1994. At March 31, 1997, the
only significant asset of the Company is the capital stock of the Bank. At
March 31, 1997, Bancorp had $2.0 billion of total assets, $873.4 million of
total customer accounts and $135.7 million of equity.
MAIN LINE BANK
The Bank is a federally-chartered stock savings bank conducting business from
its executive offices located in Villanova, Pennsylvania, 24 full service
offices located in Bucks, Chester, Delaware and Montgomery counties,
Pennsylvania and ten mortgage loan production offices which are located in
Delaware, Florida, New Jersey and Pennsylvania. The Bank's market area, which
includes the affluent western suburbs of Philadelphia, has experienced
reasonable growth in total population and employment in recent years. The
Bank's customer accounts are insured by the Savings Association Insurance Fund
("SAIF"), which is administered by the Federal Deposit Insurance Corporation
("FDIC"), to the maximum extent permitted by law. The Bank is endeavoring to
become a full service community bank, and offers a wide variety of savings
products, real estate loans secured by 1-4 family residential properties,
residential construction loans and consumer and small business commercial
loans.
On April 1, 1996, the Company completed its acquisition of Philadelphia
Mortgage Corporation ("PMC"), a privately-held mortgage banking company.
On February 4, 1997, the Company entered into a definitive agreement to acquire
Penncore Financial Services Corporation ("Penncore") the holding company for
Commonwealth State Bank ("Commonwealth"). Commonwealth is a $138.0 million,
state-chartered bank with two branches in Newtown and Yardley, Bucks County,
Pennsylvania. The transaction, which has a total value of $14.1 million, will
be accounted for as a purchase and is subject to regulatory and Penncore
shareholder approvals.
LENDING ACTIVITIES
GENERAL. The Company's lending operations are organized into four areas:
mortgage banking, real estate financing, consumer lending and commercial
business lending.
The Company's mortgage banking operation originates single-family residential
loans primarily for sale into the secondary market and to a limited degree, for
portfolio retention. The bulk of such loans are packaged and sold to either
the Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal National
Mortgage Association ("FNMA"). A portion of such loans are sold pursuant to
commitments
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to purchase obtained from private investors concurrent with the origination of
the loans. During the fiscal years ended March 31, 1997 and 1996, the Company
originated $471.1 million and $161.6 million and sold $412.1 million and $134.7
million, respectively, of first mortgage loans. In addition, as of March 31,
1997, the Company services $4.4 billion of loans for others, including $3.6
billion of loans as to which it has purchased mortgage servicing rights
("PMSRs"). See "- Mortgage Banking Activities."
Real estate financing consists of construction lending on residential and
commercial properties and commercial and multi-family real estate lending. As
of March 31, 1997, commercial/multi-family real estate and total construction
loans amounted to $272.0 million or 33.6% of the total loan portfolio, an
increase of 10.6% from March 31, 1996.
The Company's involvement in consumer lending has continued to increase as a
result of the Company's emphasis on expanding the retail franchise (number of
business centers). Consumer loans, which consist primarily of home equity
loans, home equity lines of credit and lines of credit amounted to $142.7
million or 17.6% of the total loan portfolio at March 31, 1997, an 29.4%
increase from March 31, 1996. The Company has also selectively entered the
non-conforming as well as B & C credit consumer markets which only represents
an insignificant portion of the total consumer loan portfolio. The development
and expansion of a small business lending program was instituted in fiscal 1996
and this line of business has received greater strategic emphasis on fiscal
1997. Small businesses will continue to be an important part of the Bank's
growth strategy for the foreseeable future.
In conjunction with the determination to diversify its loan portfolio and
develop banking relationships with small and medium-sized businesses in the
greater Philadelphia metropolitan area, the Company offers commercial business
loans, including lines and letters of credit, equipment loans and term loans.
Such loans comprised $84.0 million or 10.4% of the total loan portfolio at
March 31, 1997, more than double that of the March 31, 1995 portfolio. The
Company expects to continue significant expansion and diversification of this
loan portfolio in fiscal 1998 and future years. The commercial business
strategy is to provide credit and non-credit services to entities primarily
within the Delaware Valley areas (PMSA). In fiscal 1997 the Credit Policy
department was expanded to manage the loan risk analysis activities and to
provide ongoing credit policy risk management strategies to all the Bank's
credit lines of business. The asset workout function of the Company continues
under the management of the Company's Chief Credit Policy Officer.
The maximum amount of any loan(s) to one borrower cannot exceed the lesser of
$19.6 million or 100% of the Company's regulatory imposed loans-to-one borrower
limitation as of March 31, 1997. As of March 31, 1997, the largest
loan-to-one-borrower totaled $10.2 million and consisted of one commercial
construction loan. These loans are current as to payments of principal and
interest and are performing according to the terms of the loan documents as of
March 31, 1997.
The Company's primary market area consists of the greater Delaware Valley area
(PMSA) for its retail and commercial business product lines. However, consumer
home equity loans/lines can be granted outside the Company's primary market
area consistent with the 1-4 family first mortgage line of business. The
Company's mortgage banking and commercial real estate lines of business lend to
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borrowers located outside of this area, but generally within approximately 150
miles of the Company's headquarters. As a strategic initiative the Company has
also extended its mortgage banking activities to Southwestern Florida by
establishing an office in Naples.
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LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition of
the Company's loan portfolio by type of loan at the dates indicated.
March 31,
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1997 1996 1995
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Amount % Amount % Amount %
------ - ------ - ------ -
(Dollars in Thousands)
Real estate loans:
Single-family $310,456 38.37 % $344,713 44.74 % $326,029 53.59 %
Multi-family 12,411 1.53 11,348 1.47 10,812 1.78
Commercial 130,017 16.07 109,135 14.17 69,779 11.47
Construction and land:
Residential 90,618 11.20 110,693 14.37 59,112 9.72
Commercial 38,913 4.81 14,625 1.90 15,891 2.61
--------- ------- ---------- ------- --------- --------
Total real estate loans 582,415 71.98 590,514 76.65 481,623 79.17
--------- ------- ---------- ------- --------- --------
Other Loans:
Consumer:
Home equity loans and lines of credit 131,699 16.28 92,139 11.96 76,393 12.56
Other 10,990 1.36 18,115 2.35 16,971 2.79
Commercial loans 84,034 10.38 69,647 9.04 33,328 5.48
--------- ------- ---------- ------- --------- --------
Total other loans 226,723 28.02 179,901 23.35 126,692 20.83
--------- ------- ---------- ------- --------- --------
Total loans receivable $809,138 100.00 % $770,415 100.00 % $608,315 100.00 %
--------- ======= ---------- ======= --------- ========
Less:
Loans in process (construction and land) 59,916 61,389 61,389
Deferred loan origination fees and discounts 3,954 4,111 3,578
Allowance for loan losses 14,733 13,124 9,111
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78,603 78,624 74,078
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Total loans receivable, net $730,535 $691,791 $534,237
========= ========== =========
March 31,
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1994 1993
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Amount % Amount %
------ - ------ -
(Dollars in Thousands)
Real estate loans:
Single-family $106,350 36.53 % $136,630 44.36 %
Multi-family 10,297 3.54 14,871 4.83
Commercial 47,671 16.37 35,381 11.49
Construction and land:
Residential 33,794 11.61 27,605 8.96
Commercial 2,018 0.69 1,540 0.50
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Total real estate loans 200,130 68.74 216,027 70.14
--------- ------- --------- --------
Other Loans:
Consumer:
Home equity loans and lines of credit 64,417 22.12 66,489 21.59
Other 18,375 6.31 18,383 5.96
Commercial loans 8,238 2.83 7,114 2.31
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Total other loans 91,030 31.26 91,986 29.86
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Total loans receivable $291,160 100.00 % $308,013 100.00 %
--------- ======= --------- ========
Less:
Loans in process (construction and land) 45,613 11,229
Deferred loan origination fees and discounts 3,578 2,473
Allowance for loan losses 9,111 7,488
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58,302 21,190
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Total loans receivable, net $232,858 $286,823
========= =========
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CONTRACTUAL MATURITIES. The following table sets forth the scheduled
contractual maturities of the Company's construction and commercial loans at
March 31, 1997. Demand loans, loans having no stated schedule of repayments
and no stated maturity 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 Company's loan portfolio held to maturity.
Real Estate Loans
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Single- Multi-
family family Commercial Construction Total
------ ------ ---------- ------------ -----
(In Thousands)
Amounts due in:
One year or less $82 $12 $965 $89,503 $90,562
After one year through five years 991 733 3,609 40,028 $45,361
After five years 309,383 11,666 125,443 - 446,492
-------- ------- -------- --------- --------
Total(1) $310,456 $12,411 $130,017 $129,531 $582,415
======== ======= ======== ========= ========
Interest rate terms on amounts due after one year:
Fixed 109,113
Adjustable 382,752
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$491,865
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Consumer Commercial
Loans Loans Total
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(In Thousands)
Amounts due in:
One year or less $53,275 $25,878 $169,715
After one year through five years 24,546 19,258 89,165
After five years 64,868 38,898 550,258
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Total(1) $142,689 $84,034 $809,138
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Interest rate terms on amounts due after one year:
Fixed 89,414 36,978 235,505
Adjustable - 21,178 403,930
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$ 89,414 $58,156 $639,435
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(1) Does not include adjustments relating to loans in process, allowance for
loan losses and deferred fee income.
Scheduled contractual repayment of loans does not reflect the expected term of
the Company's loan portfolio. The expected average life of loans is
substantially less than their contractual terms because of prepayments and
due-on-sale clauses. The average life of mortgage loans tends to increase when
current mortgage loan rates are higher than rates on existing mortgage loans
and, conversely, decrease when rates on existing mortgage loans are lower than
current mortgage loan rates (due to refinancings of adjustable-rate and
fixed-rate loans at lower rates). Under the latter circumstance, the weighted
average yield on loans decreases as higher-yielding loans are repaid or
refinanced at lower rates.
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The Company also occasionally purchases whole loans and participation interests
therein. During the past few years, the purchases involved the acquisition of
residential whole loans. In addition, the Bank is willing to entertain
participation from financial institutions within a general market area and
where the credit calling is satisfactory to the bank's loan and credit
management.
MORTGAGE BANKING ACTIVITIES. Mortgage loan originations are generated through
a variety of distribution channels including retail bank business centers, real
estate brokers, builders, and a small correspondent network of mortgage brokers
and mortgage bankers. The mix of business is 85% retail and 15% wholesale.
The Company originates conventional, FHA-insured and VA -guaranteed government
loan production. The vast majority of the product originated by the mortgage
banking division qualify as conforming loans which are eligible for sale into
the secondary market via agency or private investor relationships. For
conventional residential loans, the Company offers a variety of first-time
homebuyer loans offering agency and portfolio products for as little as a 3%
down payment (FNMA 97) in addition to the Company's own Homeward Bound
portfolio product. The conventional financing products combined with the
FHA-insured and VA guaranteed product enable the Company to extend home
ownership opportunities to a wide range of first time homebuyers. The Mortgage
Banking Division also offers alternative financing options through its
non-conforming (B through D Paper) loan unit.
The ability of the Mortgage Banking operation to originate loans is dependent
in part on prevailing interest rate levels, demographic trends, and the climate
of the local economic landscape. For fiscal 1998, the outlook is for low to
steady interest rates which are expected to generate adequate homebuying
opportunities and ample debt consolidation (refinance) opportunities for most
consumers. Other factors affecting origination capabilities include
competitive pricing pressures, various strategically aligned controlled
business arrangements between realtors and mortgage bankers, and the
implementation and utilization of technology.
The Company sells loans originated by it to private investors in the secondary
market or to FNMA or FHLMC with servicing rights retained. The Company's
mortgage loans sold to others generally are sold in groups through
mortgage-related securities issued by FNMA or FHLMC or on a loan-by-loan basis
to these agencies or other private investors. All FHA-insured or VA guaranteed
mortgages are sold with the servicing rights released to the investor. During
the fiscal years ended March 31, 1997, 1996 and 1995, gain on sale of loans
resulting from the Mortgage Banking division's origination and sale activities
amounted to $7.3 million, $2.1 million, and $87,000, respectively.
The Company currently employs forward commitments, described below, as a
hedging technique to protect the value of its mortgage production from
"pipeline risk" (the risk created by offering loan applicants agreed upon
interest rates for a future closing). The Company will also consider other
hedging techniques. Mortgages with established interest rates generally will
decrease in value during periods of increasing interest rates and increase in
value during periods of decreasing interest rates. Accordingly, fluctuations in
prevailing interest rates may result in a gain or loss to the Company as a
result of adjustments to the carrying value of loans held for sale or otherwise
on sale of loans to the extent that the Company has not obtained prior
commitments by investors to purchase such loans or otherwise hedged the value
of the loans against changes in interest rates. Pursuant to Company policy,
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the Mortgage Banking division cannot have more than $20.0 million of loans
which are not covered by purchase commitments.
OTHER MORTGAGE BANKING ACTIVITIES. The Company also purchases from approved
mortgage originators single-family residential loans which already have
commitments for sale within 90 days in the secondary mortgage market to FNMA,
FHLMC, Government National Mortgage Association ("GNMA") or other private
investors. The Company generally creates a minimum spread between the cost of
funds and the yield on the participation purchased. Company personnel visit the
originator under this program to review, among other things, its business
organization, management, quality control, funding sources, risk management,
loan volume and historical delinquency rate, financial condition, contingent
obligations and regulatory compliance. Upon conclusion of such review, the
Company establishes a maximum dollar amount of loans which it will be willing
to purchase from the mortgage loan originator at any given time. At March 31,
1997, the Company had extended commitments totaling $87.5 million to 10
mortgage loan originators, and had loan participation purchases outstanding of
which $30.9 million are included in assets available for sale.
LOAN SERVICING. The Company services residential real estate loans owned by
the Company and by others, including FNMA, FHLMC and other private mortgage
investors. Loan servicing includes collecting and remitting loan payments,
accounting for principal and interest, making advances to cover delinquent tax
payments, inspecting mortgaged premises, supervising foreclosures and property
dispositions and generally administering the loans. Funds that have been
escrowed by borrowers for the payment of mortgage-related expenses, such as
property taxes and hazard and mortgage insurance premiums, are maintained in
mostly non-interest-bearing deposit accounts at the Company. At March 31,
1997, the Company had $39.2 million deposited in such escrow accounts.
The following table presents information regarding the loans serviced by the
Company for others at the dates indicated.
March 31,
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1997 1996 1995
---- ---- ----
(In Thousands)
Loans originated by the Company and
serviced for:
FNMA $86,187 $69,308 $77,942
FHLMC 646,770 594,106 582,000
Others 63,744 69,639 74,562
---------- ---------- ----------
796,701 733,053 734,504
---------- ---------- ----------
Purchased mortgage loan servicing
rights serviced for:
FNMA 1,236,819 723,535 399,155
FHLMC 1,673,200 952,932 546,481
Others 654,888 2,165 2,949
---------- ---------- ----------
3,564,907 1,678,632 948,585
---------- ---------- ----------
Total loans serviced for others $4,361,608 $2,411,685 $1,683,089
========== ========== ==========
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The Company receives fees for servicing mortgage loans. Other sources of loan
servicing revenues include late charges and other ancillary fees. For fiscal
years ended March 31, 1997, 1996 and 1995, the Company earned gross fees from
loan servicing of $12.9 million, $6.0 million, and $3.7 million, respectively,
which does not take into consideration the amortization of mortgage servicing
rights ("MSRs") as shown in the table below. The Company's gross servicing fee
income as a percent of interest income and other income was 8.5%, 4.7% and 4.0%
for the same respective periods. Servicing fees are collected by the Company
out of the monthly mortgage payments made by borrowers.
In recent years, the Company has sought to expand its mortgage servicing
portfolio through the acquisition of MSRs. During the fiscal years ended March
31, 1997, 1996 and 1995, the Company paid $32.8 million, $12.0 million and
$12.3 million to acquire the servicing rights related to $2.2 billion, $858.4
million and $801.9 million of loans, respectively
The amounts paid to acquire MSRs are capitalized and amortized over the
estimated servicing life of the related loans, using a level yield method over
the estimated life of the loan. Amortization of MSRs amounted to $8.0 million,
$3.7 million and $1.5 million in fiscal years ended March 31, 1997, 1996 and
1995, respectively.
The following table sets forth an analysis of the Company's MSRs during the
periods indicated.
Carrying Value of MSRs
------------------------------------
Year ended March 31,
------------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Amortized cost, beginning of period $21,865 $12,823 $2,042
Purchases 32,780 11,985 12,316
Originated servicing rights 3,061 760 0
Amortization (7,985) (3,703) (1,535)
------- -------- --------
Amortized cost, end of period $49,721 $21,865 $12,823
======= ======== ========
As part of a servicer's responsibilities to investors of certain
mortgage-related securities, the Company is required to remit to the investors
the scheduled monthly principal and scheduled interest payments on most loans,
including those for which no principal and interest payments have been received
due to delinquency. At March 31, 1997, the principal amount of loans serviced
by the Company for others subject to this condition aggregated $2.3 billion, of
which $11.5 million or 0.50% were more than 30 days delinquent. At March 31,
1997, the Company had advanced principal and interest payments of $470,000 with
respect to such loans. Substantially all of these loans were sold without
recourse and are guaranteed by the FNMA or the FHLMC.
CONSUMER LENDING ACTIVITIES. A wide variety of consumer loan products and
services are offered to accommodate customer needs within the Company's
delineated community. At March 31, 1997, $142.7
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million or 17.6% of the Company's total loan portfolio was comprised of
consumer loans. Consumer loans are originated through the Company's business
centers, customer service department, indirect sources and the mortgage banking
division.
The largest component of the consumer loan portfolio is the home equity product
which is secured by the underlying equity in the borrower's home or second
residence. The home equity product consists of fixed rate amortizing home
equity loans and equity lines of credit with variable interest rates floating
with changes in the prime rate. The total home equity portfolio amounted to
$131.7 million or 16.3% of the Company's total loan portfolio, unused
commitments for the equity lines of credit totaled $55.5 million. The Company
has introduced alternative financing programs: 80%-100% home equity products
and real estate secured B & C Credits. The combined balances of these
alternative financing programs totaled $4.7 million at March 31, 1997.
Indirect second mortgages are originated by approved originators and aggregate
$26.5 million at March 31, 1997.
The consumer portfolio also contains small business loans. Small business
loans are subject to a maximum commitment amount of $300,000. These are
classified as other consumer loans on the balance sheet and totaled $15.8
million or 10.2% of the Company's total consumer loan portfolio at March 31,
1997.
The consumer loan department originates education loans which are sold at the
commencement of the repayment period to the Student Loan Marketing Association
and are underwritten to conform to the standards of the Pennsylvania Higher
Education Assistance Agency. At March 31, 1997, the Company had $11.6 million
of such loans classified as loans available for sale.
At March 31, 1997, the Company's remaining consumer loan portfolio was
comprised of automobile loans, personal loans and other consumer products. The
total outstanding for these products was $11.0 million at March 31, 1997.
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. These risks are not as prevalent in the case of the
Company's consumer loan portfolio, however, because a high percentage of the
portfolio is comprised of home equity loans and home equity lines of credit
which are secured by real estate and underwritten in a manner such that they
result in a lending risk which is substantially similar to single-family
residential loans.
MULTI-FAMILY/COMMERCIAL REAL ESTATE LENDING ACTIVITIES. The Company has
maintained an active role in commercial and multi-family lending for many years
with the majority of its portfolio secured by properties consisting primarily
of owner-occupied, multi-use commercial buildings, apartment buildings and
retail operations. The loans are originated for no more than 80% of the
appraised market value of the property, generally with a term of between five
to ten years, amortization periods of 15 to 25 years and have floating rates of
interest set at the Company's prime rate or the Constant Maturing Treasury Rate
plus a margin or have fixed interest. With respect to fixed-rate loans, the
interest rates on such
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loans generally are fixed for three to five years at which time they reprice.
At March 31, 1997, commercial and multi-family real estate loans totaled $142.4
million or 17.6% of the total loan portfolio, a $21.9 million or 18.2% increase
over the prior year. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Changes in Financial Condition,"
incorporated by reference in Item 7 hereof. The Company expects to continue
its involvement in such lending.
The Company evaluates all aspects of commercial and multi-family residential
real estate loan transactions in order to understand and mitigate risk to the
extent possible. In underwriting these loans, consideration is given to the
stability of the property's cash flow history, future operating projections,
current and projected occupancy, position in the local and regional market, as
well as location and physical condition. The Company also generally imposes a
debt coverage ratio (the ratio of net cash from operations before payment of
debt service to debt service) of not less than 115%. The underwriting analysis
also includes credit checks and a review of the financial condition of the
borrower and guarantor, if applicable. A appraisal report is prepared by
either a state-certified or a Member of Appraisal Institute ("MAI") appraiser
commissioned or pre-approved by the Company to substantiate property values for
every commercial real estate loan transaction. The Company also obtains
recourse from the borrower or principals of the borrowers whenever possible.
Multi-family and commercial lending entails different and significant risks
when compared to single-family residential lending because such loans typically
involve large loan balances to single borrowers and because the payment
experience on such loans is typically dependent on the successful operation of
the project or the borrower's business. These risks can also be significantly
affected by supply and demand conditions in the local market for apartments,
offices, warehouses or other commercial space. The Company attempts to minimize
its risk exposure by limiting such lending to proven developers/owners, only
considering properties with existing operating performance which can be
analyzed, requiring conservative debt coverage ratios, and continually
monitoring the operation and physical condition of the collateral.
CONSTRUCTION LENDING ACTIVITIES. Substantially all of the construction loans
originated by the Company are for the construction of owner-occupied,
single-family dwellings in the Company's primary market area. Such loans
generally have terms not exceeding 18 months, with the ability of the Company
to extend the term up to 12 additional months, have loan-to-value ratios of
80% or less of the appraised market value upon completion and generally do not
require the amortization of the principal during the term. The loans are made
with floating rates of interest based on the Company's prime rate plus a
margin. The Company also receives fees upon issuance of the commitment, which
generally range from 1.0% to 1.5% of the commitment. The majority of such
loans consist of loans to selected local developers with whom the Company is
familiar to build single-family dwellings on both a pre-sold or limited
speculative basis. However, the Company generally will not allow a developer
to have more than one speculative property and one model home at any given
time. The developer may qualify for additional speculative units with the
contribution of additional equity. The borrower is required to fund at least
25% of the unit cost. All other units must be pre-sold before construction
financing on those units commences. Loan proceeds are disbursed in stages or
on a line item basis after inspections of the project indicate that such
disbursements are for costs already incurred and added to the value of the
project. Only interest payments are due during the construction phase and
often the loans include a reserve for paying the stated interest due thereon.
The Company also will originate construction loans
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which convert upon the completion of construction to permanent commercial real
estate mortgage loans. At March 31, 1997, residential construction loans
totaled $90.6 million or 11.2% of the total loan portfolio, a decrease of $20.1
million or 18.1% from March 31, 1996 primarily due to a decrease in lending to
local developers. Commercial construction loans totaled $38.9 million or 4.8%
of the total loan portfolio, an increase of $24.3 million from March 31, 1996.
Prior to making a commitment to fund a construction loan, the Company requires
an appraisal of the property by independent appraisers approved by the Board of
Directors. The Company uses MAI qualified appraisers on all of its
construction loans. Loan officers of the Company also review and inspect each
project at the commencement of construction. In addition, the project is
inspected by a salaried inspection officer of the Company 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 financing is generally considered to involve a higher degree of
risk of loss than long-term financing on improved, owner-occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction.
During the construction phase, a number of factors could result in delays and
cost overruns. If the estimate of value proves to be inaccurate, the
property's value may be insufficient to assure full repayment. The Company
believes that these risks are mitigated by its experienced senior lending
personnel and its underwriting standards and procedures which focus on the
credit quality and cash flow of the sponsors and guarantors.
COMMERCIAL BUSINESS LENDING ACTIVITIES. The Company offers commercial business
loans, including working capital lines of credit and term loans to facilitate
the financing of inventory, accounts receivable, equipment and real property.
Depending on the collateral pledged to secure the extension of credit, maximum
loan to value ratios range from 50% (if used equipment is pledged) to 100% (if
customer accounts at the Company are pledged). Loan terms vary from one year
for lines of credit to 10 years for equipment, real property and business
acquisition loans. The interest rates on such loans can be fixed or variable.
The Company also generally obtains personal guarantees from the principals of
the borrowers. At March 31, 1997, commercial business loans amounted to $84.0
million or 10.4% of the total portfolio, as compared to $69.6 million or 9.0%
at March 31, 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Changes in Financial Condition,"
incorporated by reference in Item 7 hereof.
ASSET QUALITY
When a borrower fails to make a required payment on a loan, the Company
attempts to cure the deficiency by contacting the borrower and seeking the
payment. When a mortgage loan becomes 90 days delinquent, the Company
institutes foreclosure 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
11
14
Company does not accrue interest on loans past due 90 days or more. Payments
received on nonaccrual and impaired loans are applied to the outstanding
principal balance.
Real estate acquired by the Company as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as other real estate owned until it
is sold. When a property is acquired, it is recorded at the lower of cost or
fair value, less estimated selling costs. Fair value is generally determined
through the use of independent appraisals. In certain cases, internal cash
flow analyses are used as the basis for fair value if such amounts are lower
than appraised values. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Recent Accounting Pronouncements,"
incorporated by reference in Item 7 hereof.
The Company's Asset Workout Group manages the disposition of all real estate
owned projects, and other impaired assets that are transferred to that
department for resolution. The transfer of a loan to the Asset Workout Group
for resolution is made when the normal payment of a loan becomes doubtful and
usual methods of collection have been exhausted and/or a loan has to be
restructured in a manner that would significantly alter the original terms of
the loan beyond what the Company would be willing to accept in a normal
situation.
NON-PERFORMING ASSETS. The following table sets forth the amounts and
categories of the Company's non-performing assets and troubled debt
restructurings at the dates indicated.
March 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
------ ---- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
Single-family residential $4,451 $4,039 $1,670 $1,521 $2,738
Construction 255 3,275 2,130 2,018 7,311
Commercial real estate - 526 2,733 1,385 2,689
Commercial 3,408 - - - -
Consumer 1,278 562 224 392 795
------- ------- ------ ------- -------
Total non-accruing loans 9,392 8,402 6,757 5,316 13,533
------- ------- ------ ------- -------
Accruing loans greater than 90 days delinquent - - 5 23 43
------- ------- ------ ------- -------
Total non-performing loans 9,392 8,402 6,762 5,339 13,576
------- ------- ------ ------- -------
Other real estate owned ("OREO") 1,332 2,043 1,010 3,075 3,404
Real estate held for development or resale - - 1,159 3,949 7,678
------- ------- ------ ------- -------
Total non-performing assets $10,724 $10,445 $8,931 $12,363 $24,658
======= ======= ====== ======= =======
Total non-performing loans as a percentage
of gross loans receivable (1) 1.10% 1.05% 1.23% 1.77% 4.25%
======= ======= ====== ======= =======
Total non-performing assets
as a percentage of total assets 0.55% 0.59% 0.57% 1.23% 3.72%
======= ======= ====== ======= =======
- ----------------
(1) Includes loans receivable and loans available for sale, less construction
and land loans in process and deferred loan origination fees and discounts.
12
15
The Company's total non-performing assets have declined from $24.7 million or
3.72% of total assets at March 31, 1993 to $10.7 million or 0.55% of total
assets at March 31, 1997. During the fiscal year ended March 31, 1997, total
non-performing assets increased by $279,000 or 2.7%.
The $4.5 million of non-performing single-family residential loans at March 31,
1997 consisted of 53 loans, the largest of which had a balance of $372,000.
The $3.4 million of the Company's non-performing commercial loans at March 31,
1997 consisted of 4 loans. The largest of these loans had a balance of $1.8
million, and is unsecured.
During fiscal 1997, 1996 and 1995 approximately $583,000, $1.1 million and
$642,000 in interest income, respectively, would have been recorded on loans
accounted for on a non-accrual basis if such loans had been current in such
periods according to their original terms and had been outstanding throughout
the period or since origination if held for part of the period. These amounts
were not included in the Company's interest income for the respective periods.
The amount of interest income on loans accounted for on a non-accrual basis and
loans greater than 90 days past due and still accruing that was included in
income during the same respective periods amounted to approximately $132,000,
$96,000 and $227,000.
OTHER CLASSIFIED ASSETS. In addition to the non-performing assets discussed
above, at March 31, 1997, the Company had classified for regulatory and
internal purposes an additional $13.6 million of assets as "substandard."
Under applicable regulations, substandard assets have one or more defined
weaknesses and are characterized by the distinct possibility that an
institution will sustain some loss if the deficiencies are not corrected. See
generally " - Allowance for Loan Losses." Of the $13.6 million of substandard
assets at March 31, 1997 which were not included under non-performing assets,
an aggregate of $1.9 million were commercial real estate loans and $6.6 million
were commercial business loans.
The $1.9 million of classified commercial real estate loans not included in
non-performing assets at March 31, 1997 consisted of seven loans, the largest
of which had a balance of $794,000.
The $6.6 million of the Company's classified commercial business loans not
included in non-performing assets at March 31, 1997 consisted of twelve loans,
of which the largest had a balance of $1.8 million.
ALLOWANCE FOR POSSIBLE LOAN LOSSES. An allowance for possible loan losses is
maintained at a level that management considers adequate to provide for
potential losses based upon an evaluation of known and inherent risks in the
loan portfolio. Management's periodic evaluation is based upon examination of
the portfolio, past loss experience, current economic conditions, the results
of the most recent regulatory examinations, and other relevant factors. 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.
13
16
The following table summarizes changes in the allowance for loan losses and
other selected statistics for the periods presented.
March 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
Allowance for loan losses, beginning of year $13,124 $9,111 $7,337 $7,488 $6,996
Charged-off loans:
Single-family residential - - - - (7)
Construction (250) - (1,350) (184) (1,346)
Commercial real estate - (485) (162) (584) (1,241)
Commercial business (3,000) (422) - - -
Consumer and other (541) (281) (249) (550) (157)
-------- -------- ------- ------- -------
Total charged-off loans (3,791) (1,188) (1,761) (1,318) (2,751)
-------- -------- ------- ------- -------
Recoveries on loans previously charged-off:
Commercial real estate - 125 - - -
Consumer and other 90 56 135 54 74
Total recoveries 90 181 135 54 74
Net loans charged-off (3,701) (1,007) (1,626) (1,264) (2,677)
Provisions for loan losses 5,310 4,000 3,400 1,113 3,169
Allowance acquired from Suburban - 1,020 - - -
-------- -------- ------- ------- -------
Allowance for loan losses, end of year $14,733 $13,124 $9,111 $7,337 $7,488
======== ======== ======= ======= =======
Net loans charged-off to average
interest-earning loans (1) 0.46% 0.15% 0.39% 0.41% 0.75%
======== ======== ======= ======= =======
Allowance for loan losses to gross
loans receivable (1) 1.73% 1.64% 1.56% 2.43% 2.34%
======== ======== ======= ======= =======
Allowance for loan losses to non-performing loans 156.86% 156.20% 134.74% 137.50% 55.16%
======== ======== ======= ======= =======
Net loans charged-off to allowance for loan losses 25.12% 7.67% 17.85% 17.23% 35.75%
======== ======== ======= ======= =======
Recoveries to charge-offs 2.37% 15.24% 7.67% 4.10% 2.69%
======== ======== ======= ======= =======
- ----------------
(1) Gross loans receivable and average interest-earning loans receivable
include loans receivable and loans available for sale, less construction and
land loans in process and deferred loan origination fees and discounts.
14
17
The following table presents the allocation of the allowance for loan losses to
the total amount of loans in each category listed at the dates indicated.
March 31,
--------------------------------------------------------------------------
1997 1996 1995
------------------------- ----------------------- ----------------------
% of Loans % of Loans % of Loans
in Each in Each in Each
Catagory to Catagory to Catagory to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
Single-family residential $1,669 38.37 % $1,564 44.74 % $595 53.59 %
Multi-family residential 124 1.53 113 1.47 108 1.78
Construction 2,214 16.01 3,083 16.27 1,738 12.33
Commercial real estate 2,870 16.07 2,635 14.17 2,484 11.47
Consumer 937 17.64 737 14.31 370 15.35
Commercial business 2,885 10.38 2,011 9.04 763 5.48
Unallocated 4,034 - 2,981 - 3,053 -
------- ------- ------- ------- ------ -------
Total allowance for loan losses $14,733 100.00 % $13,124 100.00 % $9,111 100.00 %
======= ======= ======= ======= ====== =======
March 31,
--------------------------------------------
1994 1993
---------------------- --------------------
% of Loans % of Loans
in Each in Each
Catagory to Catagory to
Amount Total Loans Amount Total Loans
------ ----------- ------ ------------
Single-family residential $322 36.53 % $328 44.36 %
Multi-family residential 26 3.54 37 4.83
Construction 1,906 12.30 866 9.46
Commercial real estate 1,342 16.37 1,295 11.49
Consumer 384 28.43 398 27.55
Commercial business 223 2.83 758 2.31
Unallocated 3,134 - 3,806 -
------ ------- ------ -------
Total allowance for loan losses $7,337 100.00 % $7,488 100.00 %
====== ======= ====== =======
15
18
MORTGAGE-RELATED SECURITIES AND INVESTMENTS
Mortgage-Related Securities. The Company's mortgage-related securities and
investment portfolio is managed by investment officers in accordance with a
comprehensive written investment policy which addresses strategies, types and
levels of allowable investments and which is reviewed and approved by the Board
of Directors on an annual basis. As set forth in the current Board-approved
policy statement, investments in the aggregate cannot exceed 65% of total
assets of the Company.
The Company maintains a significant portfolio of mortgage-related 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 Company. Such
U.S. Government agencies and government sponsored enterprises, which guarantee
the payment of principal and interest to investors, primarily include FHLMC,
FNMA and GNMA. The Company also invests in certain privately issued, credit
enhanced mortgage-related securities rated "AA" or better by national
securities rating agencies.
Mortgage-related 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 certain range and have varying maturities.
The underlying pool of mortgages, i.e., fixed rate or adjustable rate, as well
as prepayment risk, are passed on to the certificate holder. The life of a
mortgage-related pass-through security thus approximates the life of the
underlying mortgages.
The Company's mortgage-related securities include collateralized mortgage
obligations ("CMOs"). A CMO can be collateralized by loans or securities which
are insured or guaranteed by FNMA, FHLMC or GNMA. In contrast to pass-through
mortgage-related securities, in which cash flow is received pro rata by all
security holders, the cash flow from the mortgages underlying a CMO is
segmented and paid in accordance with a predetermined priority to investors
holding various CMO classes. By allocating the principal and interest cash
flows from the underlying collateral among the separate CMO classes, different
classes of bonds are created, each with its own stated maturity, estimated
average life, coupon rate and prepayment characteristics.
Mortgage-related securities generally yield less than the loans which underlie
such securities because of their payment guarantees or credit enhancements. In
addition, mortgage-related securities are more liquid than individual mortgage
loans and may be used to collateralize certain obligations of the Company. At
March 31, 1997, $574.9 million or 62.4% of the Company's mortgage-related
securities were pledged to secure various obligations of the Company.
Mortgage-related securities issued or guaranteed by FNMA or FHLMC (except
interest-only securities or the residual interests in CMOs) are weighted at no
more than 20.0% for risk-based capital purposes, compared to a weight of 50.0%
for residential loans. See "Regulation - The Company - Capital Requirements."
16
19
The Company's mortgage-related securities are classified as either "held to
maturity" or "available for sale" based upon the Company's intent and ability
to hold such securities to maturity at the time of purchase, in accordance with
generally accepted accounting principles. The Company's mortgage-backed
securities which are classified as available for sale include shorter duration
instruments which are used to assist the Company in its management of liquidity
and interest rate risk. These securities generally have less price volatility
than securities with longer durations. Examples of these securities include
adjustable-rate instruments, instruments with balloon payment requirements and
instruments with generally higher than current market fixed interest rates. As
of March 31, 1997, the Company held an aggregate of $921.2 million or 47.0% of
total assets invested in mortgage-related securities, net, of which $385.3
million was held to maturity and $535.9 million was available for sale. The
tables below present the Company's mortgage-related securities on the basis of
these classifications.
The following table sets forth the composition of the Company's
mortgage-related securities that were available for sale at the dates
indicated.
Fair Value at March 31,
------------------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Mortgage-related securities available
for sale:
FHLMC $303,705 $234,800 $203,387
FNMA 80,454 115,518 140,374
GNMA 130,597 40,879 8,801
Privately issued 21,185 39,358 21,871
--------- --------- ---------
Total $535,941 (1) $430,555 (1) $374,433 (1)
========= ========= =========
- --------------
(1) Includes unrealized losses of $1.3 million and $3.7 million at March 31,
1997 and 1995, respectively, and unrealized gains of $778,000 at March 31,
1996.
The following table sets forth the composition of the Company's
mortgage-related securities portfolio held to maturity at the dates indicated.
17
20
Carrying Value at March 31
-----------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Mortgage-related securities:
FHLMC $125,205 $149,990 $194,970
FNMA 124,433 150,286 190,085
GNMA 7,130 8,397 27,014
Privately issued 19,740 1,785 2,043
--------- --------- ---------
Total mortgage-related securities 276,508 310,458 414,112
--------- --------- ---------
Collateralized mortgage obligations 108,785 93,692 55,108
--------- --------- ---------
Total mortgage-related securities, net $385,293 $404,150 $469,220
========= ========= =========
Total market value (1) $380,046 $401,231 $453,455
========= ========= =========
- ------------
(1) See Note 4 of the Notes to Consolidated Financial Statements incorporated
by reference in Item 8 hereof.
At March 31, 1997, the contractual maturity of substantially all of the
Company's mortgage-related securities was in excess of ten years. The actual
maturity of a mortgage-related security is expected to be 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. In accordance with GAAP, premiums and discounts are amortized over
the estimated lives of the loans, which decrease and increase interest income,
respectively. The prepayment assumptions used to determine the amortization
period for premiums and discounts can significantly affect the yield of the
mortgage-related security, and these assumptions are reviewed periodically to
reflect actual prepayments. Although prepayments of underlying mortgages depend
on many factors, including the type of mortgages, the coupon rate, the age of
mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates, the
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates generally is the most significant
determinant of the rate of prepayments. During periods of falling mortgage
interest rates, if the coupon rate of the underlying mortgages exceeds the
prevailing market interest rates offered for mortgage loans, refinancing
generally increases and accelerates the prepayment of the underlying mortgages
and the related security. Under such circumstances, the Company may be subject
to reinvestment risk because to the extent that the Company's mortgage-related
securities amortize or prepay faster than anticipated, the Company may not be
able to reinvest the proceeds of such repayments and prepayments at a
comparable rate. The declining yields earned during recent periods is a direct
response to falling interest rates and accelerated prepayments. At March 31,
1997, of the $385.3 million of mortgage-related securities held to maturity, an
aggregate of $342.0 million were secured by fixed-rate mortgage loans and an
aggregate of $43.3 million were secured by adjustable-rate mortgage loans. As
of such date, of the $535.9 million of mortgage-related securities available
for sale, an aggregate of $355.9 million were secured by fixed-rate mortgage
loans and an aggregate of $180.0 million were secured by adjustable-rate
mortgage loans.
18
21
OTHER INVESTMENTS. The following table sets forth certain information relating
to the Company's investment portfolio held to maturity at the dates indicated.
March 31,
----------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- -----------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
(In Thousands)
Federal Home Loan Bank stock $21,878 $21,878 $18,802 $18,802 $15,997 $15,997
U.S. Government and agency
obligations and securities 9,935 9,594 6,000 6,004 30,000 29,157
Other securities 258 258 140 140 166 166
-------- -------- -------- -------- -------- --------
Total $32,071 $31,730 $24,942 $24,946 $46,163 $45,320
======== ======== ======== ======== ======== ========
The following table sets forth certain information relating to the Company's
equity and other securities portfolio available for sale at the dates
indicated.
Fair Value at March 31,
---------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Equity securities $20,010 $6,823 $4,650
U. S. Government agency notes 23,530 17,762 20,286
Asset Management Funds for
Financial Institutions, Inc. 12,370 11,826 10,951
Trust preferred 5,974 - -
Other - 2,355 745
------- ------- -------
Total $61,884 $38,766 $36,632
======= ======= =======
- --------------
At March 31, 1997, investments in the debt and/or equity securities of any one
issuer (other than securities of the U.S. Government and U.S. Government
agencies and corporations) did not exceed more than 10.0% of the Company's
equity.
SOURCES OF FUNDS
General. The Company's principal source of funds for use in lending and for
other general business purposes has traditionally come from customer accounts
obtained through the Company's business centers. The Company also derives funds
from amortization and prepayments of outstanding loans and investments
19
22
and sales from advances from the FHLB of Pittsburgh. Loan repayments are a
relatively stable source of funds, while deposits inflows and outflows as well
as sales of investments, are significantly influenced by general interest rates
and money market conditions. Borrowings may be used on a short-term basis to
compensate for reductions in the availability of funds from other sources.
Customer Accounts. The Company's current customer account products include
non-interest bearing checking accounts, interest bearing checking accounts,
passbook accounts, money market deposit accounts and certificates of deposit
ranging in terms from 14 days to 5 years. The Company's customer accounts
products also include Individual Retirement Account certificates ("IRA
certificates").
The Company's customer accounts are obtained primarily from residents in its
primary market area. The Company participates in the regional ATM network
known as MAC(R) and the national ATM network known as PLUS(R).
The Company also acquires customer accounts through an intermediary (without
cost). At March 31, 1997, the Company's customer accounts originated through
an intermediary were $12.5 million with a weighted average cost of 5.12% and an
average life of 36 months.
The Company has been competitive in the types of accounts and interest rates it
has offered on its deposit products but does not necessarily seek to match the
highest rates paid by competing institutions.
The following table shows the distribution of the Company's customer accounts
by type of account as of the dates indicated.
March 31,
-------------------------------------------------------------------------
1997 1996 1995
--------------------- ---------------------- ---------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------- -------
(Dollars in Thousands)
Passbook and statement savings accounts $88,574 10.14 % $88,011 10.22 % $94,649 13.64 %
Money market accounts 93,807 10.74 100,530 11.68 82,055 11.82
Certificates of deposit 469,073 53.71 506,104 58.78 417,465 60.15
Repurchase agreements with customers 40,549 4.64 30,019 3.49 5,310 0.77
NOW accounts 62,518 7.16 54,585 6.34 40,673 5.86
Non-interest-bearing deposits:
Demand deposits 79,651 9.12 49,038 5.70 33,187 4.78
Other 39,185 4.49 32,729 3.79 20,649 2.98
-------- ------- -------- ------- -------- -------
Total customer accounts at end of period $873,357 100.00 % $861,016 100.00 % $693,988 100.00 %
======== ======= ======== ======= ======== =======
The following table presents, by various interest rate categories, the amount
of certificates of deposit at March 31, 1997 and 1996, and the amounts at March
31, 1997 which mature during the periods indicated.
20
23
Certificates of Deposit March 31, Amounts at March 31, 1997 Matur
- ------------------------ ---------------------- -------------------------------------------------------
1997 1996 One Year Two Years Three Years Thereafter
---- ---- -------- --------- ------------ ----------
(In Thousands)
4.0% or less $2,799 $10,570 $2,799 - - -
4.01% to 6.0% 384,595 352,168 300,738 43,787 $19,027 $21,043
6.01% to 8.0% 80,077 136,519 32,327 9,429 23,691 14,630
8.01% to 10.0% 1,602 6,847 1,217 237 60 88
-------- -------- -------- ------- ------- -------
Total certificate accounts $469,073 $506,104 $337,081 $53,453 $42,778 $35,761
======== ======== ======== ======= ======= =======
The following table presents the average balance of each customer account type
and the average rate paid on each deposit type for the periods indicated.
March 31,
-----------------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- -------------------------
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
------- ---------- ------- --------- ------- ---------
(Dollars in Thousands)
Passbook and Statement
Savings Accounts $86,828 2.16 % $85,578 2.26 % $115,840 2.38 %
Money Market Accounts 97,323 3.02 89,229 3.04 87,243 2.69
Certificates of Deposits 481,154 5.47 456,727 5.76 396,133 4.97
Repurchase agreements
with customers 32,890 4.75 13,925 5.54 2,136 4.49
NOW Accounts 56,614 1.63 48,382 1.73 46,003 1.78
Non-Interest Bearing Deposits 111,417 - 65,494 - 46,448 -
-------- ----- -------- ----- -------- -----
Total Customer Accounts $866,226 3.88 % $759,335 4.29 % $693,803 3.72 %
======== ===== ======== ===== ======== =====
The following table sets forth the net savings flows of the Company during the
periods indicated.
Year Ended March 31,
---------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Increase (decrease) before interest credit ($21,204) $134,795 ($10,917)
Interest credited 33,545 32,233 25,218
--------- --------- ---------
Net savings increase $12,341 $167,028 $14,301
========= ========= =========
The following table sets forth maturities of the Company's certificates of
deposit of $100,000 or more at March 31, 1997 by time remaining to maturity.
21
24
(Dollars in Thousands)
Three months or less $41,964
Over three months through six months 11,274
Over six months through 12 months 8,580
Over 12 months 5,198
-------
$67,016
=======
Borrowings. The Company may obtain advances from the FHLB of Pittsburgh upon
the security of the common stock it owns in that bank and certain of its
residential mortgage loans and securities held to maturity, provided certain
standards related to creditworthiness have been met. Such advances are made
pursuant to several credit programs, each of which has its own interest rate
and range of maturities. Such advances are generally available to meet
seasonal and other withdrawals of deposit accounts and to permit increased
lending. In recent years, such advances were primarily used to fund the
Company's investment and loan activities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation - Results of
Operations incorporated by reference in Item 7 hereof." At March 31, 1997, the
Company had $437.4 million of advances from the FHLB of Pittsburgh. See Note 8
of the Notes to Consolidated Financial Statements incorporated by reference in
Item 8 hereof.
In recent years, the Company entered into agreements to sell securities under
terms which require it to repurchase the same securities by a specified date.
Repurchase agreements are considered borrowings which are secured by the sold
securities and generally are short-term (90 days or less) in nature. At March
31, 1997, the Company had $456.3 million of repurchase agreements outstanding.
See Note 9 of the Notes to Consolidated Financial Statements incorporated by
reference in Item 8 hereof.
22
25
The following table sets forth certain information regarding borrowed funds at
or for the dates indicated:
At or for the Year Ended March 31,
--------------------------------------------
1997 1996 1995
---- ---- -----
(Dollars In Thousands)
FHLB of Pittsburgh advances:
Average balance outstanding $405,921 $361,128 $320,572
Maximum amount outstanding at any
month-end during the period 537,992 461,946 409,607
Balance outstanding at end of period 437,418 376,013 319,928
Weighted average interest rate
during the period 6.00 % 6.31 % 5.64 %
Weighted average interest rate at
end of period 6.08 6.21 6.36
Repurchase agreements:
Average balance outstanding $444,785 $343,139 $177,735
Maximum amount outstanding at any
month-end during the period 516,646 400,354 394,503
Balance outstanding at end of period 456,285 372,193 385,303
Weighted average interest rate
during the period 5.65 % 6.22 % 5.37 %
Weighted average interest rate at
end of period 5.60 5.65 6.18
Total borrowings
Average balance outstanding $850,706 $704,267 $498,307
Maximum amount outstanding at any
month-end during the period 925,238 755,290 710,541
Balance outstanding at end of period 893,703 748,206 705,231
Weighted average interest rate
during the period 5.82 % 6.27 % 5.54 %
Weighted average interest rate at
end of period 5.83 5.93 6.26
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SUBSIDIARIES
The Company maintains subsidiary service corporations in order to conduct the
orderly disposition of repossessed assets or conduct operations which
complement the Company's business. The Company is not currently involved in
any real estate development activities, and does not presently intend to enter
into any development projects in the future. At March 31, 1997, the Company's
net investment in and advances to its subsidiaries was not significant. A brief
description of the activities of the Company's subsidiaries is set forth below.
Main Line Abstract Company. Main Line Abstract Company ("Abstract"), a
Pennsylvania corporation and first tier subsidiary of the Company, is a title
insurance agency and abstract company, which provides title services primarily
to the Company and its customers.
Greene Townes Financial Corporation. Greene Townes Financial Corporation
("Greene Townes"), a first tier subsidiary of the Bank, is a Pennsylvania
corporation which holds the stock of Revest II Corporation and Main Line of New
Jersey.
Main Line Financial Corporation. Main Line Financial Corporation ("Main Line
Financial"), is a Pennsylvania corporation, which, through an unaffiliated
intermediary, sells mutual funds.
First ML Corporation. First ML Corporation ("First ML"), a Pennsylvania
corporation and a first-tier subsidiary of the Bank, holds the stock of Main
Line of Delaware, Inc., a Delaware holding company. At March 31, 1997, the
Bank's investment and net advances in First ML amounted to $(40,000).
During the year ended March 31, 1997, Revest I was liquidated due to cessation
of the company's operations.
REGULATION
Set forth below is a brief description of certain laws and regulations which
relate to the regulation of the Company and the Bank. The description of these
laws and regulations, as well as descriptions of laws and regulations contained
elsewhere herein, does not purport to be complete and is qualified in its
entirety by reference to applicable laws and regulations.
THE COMPANY. The Company is a registered savings and loan holding company and
is subject to OTS regulations, examinations, supervision and reporting
requirements. As a subsidiary of a savings and loan holding company, the Bank
is subject to certain restrictions in its dealings with the Company and
affiliates thereof.
Federal Activities Restrictions. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one
subsidiary savings association. However, if the Director of the
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OTS determines that there is reasonable cause to believe that the continuation
by a savings and loan holding company of an activity constitutes a serious risk
to the financial safety, soundness or stability of its subsidiary savings
institution, the Director may impose such restrictions as deemed necessary to
address such risk, including limiting (i) payment of dividends by the savings
institution; (ii) transactions between the savings institution and its
affiliates; and (iii) any activities of the savings institution that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution. Notwithstanding the
above rules as to permissible business activities of unitary savings and loan
holding companies, if the savings institution subsidiary of such a holding
company fails to meet a Qualified Thrift Lender ("QTL") test, then such unitary
holding company also shall become subject to the activities restrictions
applicable to multiple savings and loan holding companies and, unless the
savings institution requalifies as a QTL within one year thereafter, shall
register as, and become subject to the restrictions applicable to, a bank
holding company. See "- The Bank - Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution, other
than through merger or other business combination with the Bank, the Company
would thereupon become a multiple savings and loan holding company. Except
where such acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings institution meets the QTL test,
as set forth below, the activities of the Company and any of its subsidiaries
(other than the Bank or other subsidiary savings institutions) would thereafter
be subject to further restrictions. Among other things, no multiple savings
and loan holding company or subsidiary thereof which is not a savings
institution shall commence or continue for a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof any
business activity, upon prior notice to, and no objection by the OTS, other
than: (i) furnishing or performing management services for a subsidiary savings
institution; (ii) conducting an insurance agency or escrow business; (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings institution; (iv) holding or managing properties used or occupied by a
subsidiary savings institution; (v) acting as trustee under deeds of trust;
(vi) those activities authorized by regulation as of March 5, 1987 to be
engaged in by multiple savings and loan holding companies; or (vii) unless the
Director of the OTS by regulation prohibits or limits such activities for
savings and loan holding companies, those activities authorized by the Federal
Reserve Board as permissible for bank holding companies. The activities
described in (i) through (vi) above may only be engaged in after giving the OTS
prior notice and being informed that the OTS does not object to such
activities. In addition, the activities described in (vii) above also must be
approved by the Director of the OTS prior to being engaged in by a multiple
savings and loan holding company.
Limitations on Transactions with Affiliates. Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act ("FRA"). An affiliate of a savings institution is any
company or entity which controls, is controlled by or is under common control
with the savings institution. In a holding company context, the parent holding
company of a savings institution (such as the Company) and any companies which
are controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the
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institution or subsidiary as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets,
issuance of a guarantee and similar transactions. In addition to the
restrictions imposed by Sections 23A and 23B, no savings institution may (i)
loan or otherwise extend credit to an affiliate, except for any affiliate which
engages only in activities which are permissible for bank holding companies, or
(ii) purchase or invest in any stocks, bonds, debentures, notes or similar
obligations of any affiliate, except for affiliates which are subsidiaries of
the savings institution.
In addition, Sections 22(h) and (g) of the FRA place restrictions on loans to
executive officers, directors and principal stockholders. Under Section 22(h),
loans to a director, an executive officer and to a greater than 10% stockholder
of a savings institution (a "principal stockholder"), and certain affiliated
interests of either, may not exceed, together with all other outstanding loans
to such person and affiliated interests, the savings institution's loans to one
borrower limit (generally equal to 15% of the institution's unimpaired capital
and surplus). Section 22(h) also requires that loans to directors, executive
officers and principal stockholders be made on terms substantially the same as
offered in comparable transactions to other persons and also requires prior
board approval for certain loans. In addition, the aggregate amount of
extensions of credit by a savings institution to all insiders cannot exceed the
institution's unimpaired capital and surplus. Furthermore, Section 22(g)
places additional restrictions on loans to executive officers. At March 31,
1997, the Bank was in compliance with the above restrictions.
Restrictions on Acquisitions. Except under limited circumstances, savings and
loan holding companies are prohibited from acquiring, without prior approval of
the Director of the OTS, (i) control of any other savings institution or
savings and loan holding company or substantially all the assets thereof or
(ii) more than 5% of the voting shares of a savings institution or holding
company thereof which is not a subsidiary. Except with the prior approval of
the Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may acquire control of any savings institution, other
than a subsidiary savings institution, or of any other savings and loan holding
company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home
or branch office located in the state of the institution to be acquired as of
March 5, 1987; (ii) the acquiror is authorized to acquire control of the
savings institution pursuant to the emergency acquisition provisions of the
Federal Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in
which the institution to be acquired is located specifically permit
institutions to be acquired by the state-chartered institutions or savings and
loan holding companies located in the state where the acquiring entity is
located (or by a holding company that controls such state-chartered savings
institutions).
Under applicable law, the Federal Reserve Board is authorized to approve an
application by a bank holding company to acquire control of a savings
institution. In addition, a bank holding company that controls a savings
institution may merge or consolidate the assets and liabilities of the savings
institution with, or transfer assets and liabilities to, any subsidiary bank
which is a member of the Bank Insurance Fund ("BIF") with the approval of the
appropriate federal banking agency and the Federal Reserve
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Board. There have been a number of acquisitions of savings institutions by
bank holding companies in recent years.
THE BANK. The OTS has extensive regulatory authority over the operations of
savings institutions. As part of this authority, savings institutions are
required to file periodic reports with the OTS and are subject to periodic
examinations by the OTS. The investment and lending authority of savings
institutions are prescribed by federal laws and regulations and they are
prohibited from engaging in any activities not permitted by such laws and
regulations. Those laws and regulations generally are applicable to all
federally-chartered savings institutions and may also apply to state-chartered
savings institutions. Such regulation and supervision is primarily intended
for the protection of depositors.
The OTS' enforcement authority over all savings institutions and their holding
companies includes, among other things, the ability to assess civil money
penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS. The OTS is required, except
under certain circumstances, to make public disclosure of final enforcement
actions.
Insurance of Accounts. The customer accounts of the Bank are insured up to
$100,000 per insured member (as defined by law and regulation) by the SAIF
administered by the FDIC and are backed by the full faith and credit of the
United States Government. As insurer, the FDIC is authorized to conduct
examinations of, and to require reporting by, FDIC-insured institutions. It
also may prohibit any FDIC-insured institution from engaging in any activity
the FDIC determines by regulation or order to pose a serious threat to the
FDIC. The FDIC also has the authority to initiate enforcement actions against
savings institutions, after giving the OTS an opportunity to take such action.
Pursuant to legislation enacted in September 1996, a one-time fee was paid by
all SAIF-insured institutions at the rate of $0.657 per $100 of customer
accounts held by such institutions at March 31, 1995. The money collected
recapitalized the SAIF reserve to the level of 1.25% of insured customer
accounts as required by law. In September 1996, the Bank recorded a pre-tax
accrual of $4.8 million for this assessment, which was subsequently paid in
November 1996.
The new legislation also provides for the merger, subject to certain
conditions, of the SAIF into the Bank Insurance Fund ("BIF") administered by
the FDIC by 1999 and also requires BIF-insured institutions to share in the
payment of interest on the bonds issued by a specially created government
entity ("FICO"), the proceeds of which were applied toward resolution of the
thrift industry crisis in the 1980s. Beginning on January 1, 1997, in addition
to the insurance premiums that will be paid by SAIF-insured institutions to
maintain the SAIF reserve at its required level pursuant to the current risk
classification system, SAIF-insured institutions will pay deposit insurance
premiums at the annual rate of 6.4 basis points of their insured customer
accounts and BIF-insured institutions will pay deposit insurance premiums at
the annual rate of 1.3 basis points of their insured customer accounts towards
the payment of interest on the FICO bonds. Under the current risk
classification system, institutions are assigned on one of three capital groups
which are based solely on the level of an institutions capital--"well
capitalized," "adequately capitalized" and "undercapitalized"-- which are
defined in the same manner as the regulations
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establishing the prompt corrective action system under section 38 of the FDIA,
as discussed below. These three groups are then divided into three subgroups
which are based on supervisory evaluations by the institution's primary federal
regulator, resulting in nine assessment classifications. Assessment rates
currently range from 0 basis points for well capitalized, healthy institutions
to 27 basis points for undercapitalized institutions with substantial
supervisory concerns.
The recapitalization of the SAIF is expected to result in lower deposit
insurance premiums in the future for most SAIF-insured financial institutions,
including the Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation , order or any condition imposed by an agreement
with the FDIC. It also may suspend deposit insurance temporarily during the
hearing process for the permanent termination of insurance, if the institution
has no tangible capital. If insurance of accounts is terminated, the accounts
at the institution at the time of the termination, less subsequent withdrawals,
shall continue to be insured for a period of six months to two years, as
determined by the FDIC. Management is aware of no existing circumstances which
would result in termination of the Bank's deposit insurance.
Capital Requirements. Federally insured savings institutions are required to
maintain minimum levels of regulatory capital. Pursuant to the Financial
Institutions Reform Recovery and Enforcement Act of 1989 ("FIRREA"), 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 institutions on a
case-by-case basis.
Current OTS capital standards require savings institutions to satisfy three
different capital requirements. Under these standards, savings institutions
must maintain "tangible" capital equal to 1.5% of adjusted total assets, "core"
capital equal to 3% of adjusted total assets and "total" capital (a combination
of core and "supplementary" capital) equal to 8.0% of "risk-weighted" assets.
For purposes of the regulation, core capital generally consists of common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, minority interests in the equity accounts
of fully consolidated subsidiaries, certain non-withdrawable accounts and
pledged customer accounts and "qualifying supervisory goodwill." Tangible
capital is given the same definition as core capital but does not include
qualifying supervisory goodwill and is reduced by the amount of all the savings
institution's intangible assets, with only a limited exception for purchased
mortgage servicing rights. Both core and tangible capital are further reduced
by an amount equal to a savings institution's debt and equity investments in
subsidiaries engaged in activities not permissible to national banks (other
than subsidiaries engaged in activities undertaken as agent for customers or in
mortgage banking activities and subsidiary depository institutions or their
holding companies). At March 31, 1997, the Bank had no subsidiaries which were
engaged in impermissible activities, and therefore did not have a deduction
from its capital calculation.
A savings institution is allowed to include both core capital and supplementary
capital in the calculation of its total capital for purposes of the risk-based
capital requirements, provided that the amount of
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supplementary capital does not exceed the savings institution's core capital.
Supplementary capital generally consists of hybrid capital instruments;
perpetual preferred stock which is not eligible to be included as core capital;
subordinated debt and intermediate-term preferred stock; and, subject to
limitations, general allowances for loan losses. Assets are adjusted under the
risk-based guidelines to take into account different risk characteristics, with
the categories ranging from 0% (requiring no additional capital) for assets
such as cash to 100% for repossessed assets or loans more than 90 days past
due. Single-family residential real estate loans which are not more than 90
days past-due or non-performing and which have been made in accordance with
prudent underwriting standards are assigned a 50% level in the risk-weighing
system, as are certain privately-issued mortgage-backed securities representing
indirect ownership of such loans. Off-balance sheet items also are adjusted to
take into account certain risk characteristics.
OTS policy imposes a limitation on the amount of net deferred tax assets under
SFAS No. 109 that may be included in regulatory capital. (Net deferred tax
assets represent deferred tax assets, reduced by any valuation allowances, in
excess of deferred tax liabilities.) Application of the limit depends on the
possible sources of taxable income available to an institution to realize
deferred tax assets. Deferred tax assets that can be realized from the
following generally are not limited: taxes paid in prior carryback years and
future reversals of existing taxable temporary differences. To the extent that
the realization of deferred tax assets depends on an institution's future
taxable income (exclusive of reversing temporary differences and carry
forwards), or its tax-planning strategies, such deferred tax assets are limited
for regulatory capital purposes to the lesser of the amount that can be
realized within one year of the quarter-end report date or 10% of core capital.
The foregoing considerations did not affect the calculation of the Bank's
regulatory capital at March 31, 1997.
In August 1993, the OTS adopted a final rule incorporating an interest-rate
risk component into the risk-based capital regulation. Under the rule, an
institution with a greater than "normal" level of interest rate risk will be
subject to a deduction of its interest rate risk component from total capital
for purposes of calculating the risk-based capital requirement. As a result,
such an institution will be required to maintain additional capital in order to
comply with the risk-based capital requirement. Although the final rule was
originally scheduled to be effective as of January 1994, the OTS has not yet
established an effective date for the capital deduction. Management of the
Company does not believe that the OTS' adoption of an interest rate risk
component to the risk-based capital requirement will adversely affect the Bank
if it becomes effective in its current form.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Capital Resources" incorporated by reference in Item 7 hereof
setting forth the Bank's compliance with its capital requirements.
Prompt Corrective Action. Under the FDIA, each federal banking agency is
required to implement a system of prompt corrective action for institutions
which it regulates. The federal banking agencies, including the OTS, have
adopted substantially similar regulations, which became effective December 19,
1992. Under the regulations, an institution shall be deemed to be (i) "well
capitalized" if it has total risk-based capital of 10.0% or more, has a Tier I
risk-based capital ratio of 6.0% or more, has a Tier I
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leverage capital ratio of 5.0% or more and is not subject to any order or final
capital directive to meet and maintain a specific capital level for any capital
measure, (ii) "adequately capitalized" if it has a total risk-based capital
ratio of 8.0% or more, a Tier I risk-based capital ratio of 4.0% or more and a
Tier I leverage capital ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized," (iii)
"undercapitalized" if it has a total risk-based capital ratio that is less than
8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a Tier I
leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a Tier I leverage capital ratio that is less
than 3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. The FDIA and the
regulations promulgated thereunder also specify circumstances under which a
federal banking agency may reclassify a well capitalized institution as
adequately capitalized and may require an adequately capitalized institution or
an undercapitalized institution to comply with supervisory actions as if it
were in the next lower category (except that the FDIC may not reclassify a
significantly undercapitalized institution as critically undercapitalized). At
March 31, 1999, the Bank was in the "well capitalized" category.
Liquidity Requirements. All savings institutions are required to maintain an
average daily balance of liquid assets equal to a certain percentage of the sum
of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary
from time to time (between 4% and 10%) depending upon economic conditions and
savings flows of all savings institutions. At the present time, the required
minimum liquid asset ratio is 5%. The Bank has consistently exceeded such
regulatory liquidity requirement and, at March 31, 1997, had a liquidity ratio
of 6.6%.
QUALIFIED THRIFT LENDER TEST. Under Section 2303 of the Economic Growth and
Regulatory Paperwork Reduction Act of 1996, a savings association can comply
with the QTL test by either meeting the QTL test set forth in the HOLA and
implementing regulations or qualifying as a domestic building and loan
association as defined in Section 7701(a)(19) of the Code. A savings bank
subsidiary of a savings and loan holding company that does not comply with the
QTL test must comply with the following restrictions on it s operations:(i) the
institution may not engage in any new activity or make any new investment,
directly or indirectly, unless such activity or investment is permissible for a
national bank; (ii) the branching powers of the institution shall be restricted
to those of a national bank; (iii) the institution shall not be eligible to
obtain any advances from its FHLB; and (iv) payment for dividends by the
institution shall be subject to the pules regarding payment of dividends by a
national bank. Upon the expiration of three years from the date the savings
institution ceases to meet the QTL test, it must cease any activity and not
retain any investment not permissible for a national bank and immediately repay
any outstanding FHLB advances (subject to safety and soundness considerations).
The QTL test set forth in the HOLA requires that qualified thrift investments
("QTIs") represent 65% of portfolio assets of the savings institution and its
consolidated subsidiaries. Portfolio assets are defined as total assets less
intangibles, property used by a savings association in its business and
liquidity investments in an amount not exceeding 20% of assets. Generally,
QTIs are residential housing related assets. The 1996 amendments allow small
business loans, credit card loans, student loans and loans for personal, family
and household purposes to be included without limitation as qualified
investments. At
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March 31, 1997, approximately 82.1% of the Bank's assets were invested in QTIs,
which was in excess of the percentage required to qualify the Bank under the
QTL test.
Restrictions on Capital Distributions. OTS regulations govern capital
distributions by savings institutions, which include cash dividends, stock
redemptions or repurchases, cash-out mergers, interest payments on certain
convertible debt and other transactions charged to the capital account of a
savings institution to make capital distributions. Generally, the regulation
creates a safe harbor for specified levels of capital distributions from
institutions meeting at least their minimum capital requirements, so long as
such institutions notify the OTS and receive no objection to the distribution
from the OTS. Savings institutions and distributions that do not qualify for
the safe harbor are required to obtain prior OTS approval before making any
capital distributions.
Generally, savings institutions that before and after the proposed distribution
meet or exceed their fully phased-in capital requirements, or Tier 1
institutions, may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar year-to-date plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75%
of net income over the most recent four-quarter period. The "surplus capital
ratio" is defined to mean the percentage by which the institution's ratio of
total capital to assets exceeds the ratio of its fully phased-in capital
requirement to assets. "Fully phased-in capital requirement" is defined to
mean an institution's capital requirement under the applicable statutory and
regulatory standards on December 31, 1994, as modified to reflect any
applicable individual minimum capital requirement imposed upon the institution.
Failure to meet fully phased-in or minimum capital requirements will result in
further restrictions on capital distributions including possible prohibition
without explicit OTS approval.
In order to make distributions under these safe harbors, Tier 1 and Tier 2
institutions must submit written notice to the OTS 30 days prior to making the
distribution. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. In addition, a Tier 1 institution
deemed to be in need of more than normal supervision by the OTS may be
downgraded to a Tier 2 or Tier 3 institution as a result of such a
determination. The Bank currently is a Tier 1 institution for purposes of the
regulation dealing with capital distributions.
OTS regulations also prohibit the Bank from declaring or paying any dividends
or from repurchasing any of its stock if, as a result, the regulatory (or
total) capital of the Bank would be reduced below the amount required to be
maintained for the liquidation account established by it for certain depositors
in connection with its conversion from mutual to stock form.
On December 5, 1994, the OTS published a notice of proposed rule making to
amend its capital distribution regulation. Under the proposal, institutions
would only be permitted to make capital distributions that would not result in
their capital being reduced below the level required to remain "adequately
capitalized," as defined under "- Prompt Corrective Action" above. Because the
Bank is a subsidiary of a holding company, the proposal would require the Bank
to provide notice to the OTS of its intent to make a capital distribution. The
Bank does not believe that the proposal will adversely affect its ability to
make capital distributions if it is adopted substantially as proposed.
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Community Reinvestment. Under the Community Reinvestment Act of 1977, as
amended ("CRA"), as implemented by OTS regulations, a savings institution has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the OTS, in connection with its examination of a savings
institution, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such institution. FIRREA amended the CRA to require public
disclosure of an institution's CRA rating and require the OTS to provide a
written evaluation of an institution's CRA performance utilizing a rating
system which identifies four levels of performance that may describe an
institution's record of meeting community needs: outstanding, satisfactory,
needs to improve and substantial noncompliance. The CRA also requires all
institutions to make public disclosure of their CRA ratings.
Policy Statement on Nationwide Branching. The OTS policy statement on
branching by federally-chartered savings institutions permits nationwide
branching to the extent allowed by federal statute. Current OTS policy
generally permits a federally-chartered savings institution to establish branch
offices outside of its home state if the institution meets the domestic
building and loan test under the Internal Revenue Code or an asset composition
test set forth in the Code, and if, with respect to each state outside of its
home state where the institution has established branches, the branches, taken
alone, also satisfy one of the two tax tests. An institution seeking to take
advantage of this authority would have to have a branching application approved
by the OTS, which would consider the regulatory capital of the institution and
its record under the CRA, as amended, among other things.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Pittsburgh,
which is one of 12 regional FHLBs that administers the home financing credit
function of savings institutions. Each FHLB serves as a reserve or central
bank for its members within its assigned region. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB System.
It makes loans to members (i.e., advances) in accordance with policies and
procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the FHLB of
Pittsburgh in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year or 5% of its advances from the FHLB of Pittsburgh,
whichever is greater. At March 31, 1997, the Bank had $21.9 million in FHLB
stock, which was in compliance with this requirement.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain reserves against their transaction accounts and
non-personal time customer accounts. At March 31, 1997, the Bank was in
compliance with applicable requirements. However, because required reserves
must be maintained in the form of vault cash or a non-interest-bearing account
at a Federal Reserve Bank, the effect of this reserve requirement is to reduce
an institution's earning assets.
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FEDERAL AND STATE TAXATION
General. The Company and the Bank are subject to the corporate tax provisions
of the Internal Revenue Code of 1986 (the "Code"), as well as certain
additional provisions of the Code which apply to thrift and other types of
financial institutions. The following discussion of tax matters is intended
only as a summary and does not purport to be a comprehensive description of the
tax rules applicable to the Company and the Bank. The Company and its
subsidiaries file a consolidated federal income tax return.
Bad Debt Reserves. The Company had previously established a deferred tax
liability representing the estimated income taxes payable in the event that the
Bank were to convert its charter to that of a commercial bank. Prior to the
passage of the Small Business Job Protection Act of 1996 ("the Act") in August
of 1996, the Company would have been required to recapture and pay taxes on
approximately $17.8 million in bad debt deductions it had previously taken for
tax purposes if it were to convert its charter to that of a commercial bank.
Legislation enacted under the Act provided for the Bank to recapture into
income only the portion of its tax bad debt reserves as of March 31, 1996 that
exceed its base year reserves (i.e.: tax reserves for years beginning before
1988). Under the Act, the amount of the excess base year reserves subject to
recapture would be suspended for each of two successive tax years beginning
April 1, 1996 in which the Bank originates a minimum amount of certain
residential loans based upon the average of the principal amounts of such loans
the Bank made during its six preceding tax years.
The Company had previously established a deferred tax liability to recapture
both the base year reserves and the excess base year reserves, in anticipation
of changing the Bank's charter to that of a commercial bank. As a result of the
signing of the Act, the Company recognized approximately $3.8 million of income
due to the reversal of the previously established base year tax bad reserve
liability.
The base year tax reserves, which may be subject to recapture if the Bank
ceases to qualify as a bank for federal income tax purposes, are restricted to
certain distributions. Under the provisions of the Act, the Bank is considered
a "large bank" (i.e., a bank that has total assets in excess of $500 million)
and may only claim actual charge-offs of loans as tax bad debt deductions for
tax years beginning after December 31, 1995.
Minimum Tax. The Code imposes an alternative minimum tax at a rate of 20% on a
base of regular taxable income plus certain tax preferences ("alternative
minimum taxable income" or "AMTI"). The alternative minimum tax is payable to
the extent such AMTI is in excess of an exemption amount. The Code provides
that an item of tax preference is the excess of bad debt deduction allowable
for a taxable year pursuant to the percentage of taxable income method over the
amount allowable under the experience method. The other items of tax
preference that constitute AMTI include (a) tax exempt interest on newly-issued
(generally, issued on or after August 8, 1986) privately activity bonds other
than certain qualified bonds and (b) for taxable years beginning after 1989,
75% of the excess (if any) of (I) adjusted current earnings as defined in the
Code, over (ii) AMTI (determined without regard to this preference and prior to
reduction by net operating losses). Net operating losses can offset no more
than 90% of AMTI. Certain payments of alternative minimum tax may be used as
credits against regular tax
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liabilities in future years. In addition, for taxable years after 1986 and
beginning before January 1, 1996, the Company is also subject to an
environmental tax equal to 0.12% of the excess of AMTI for the taxable year
over $2.0 million.
Audit by IRS. The Company's consolidated federal income tax returns for taxable
years through December 31, 1992 have been closed for the purpose of examination
by the IRS.
State Taxation. The Company and its non-thrift Pennsylvania subsidiaries are
subject to the Pennsylvania Corporate Net Income Tax and Capital Stock and
Franchise Tax. The Corporate Net Income Tax rate for 1997 is 9.99% and is
imposed on the Company's and its non-thrift subsidiaries unconsolidated taxable
income for federal purposes with certain adjustments. In general, the Capital
Stock Tax is a property tax imposed at the rate of 1.275% of a corporation's
capital stock value, which is determined in accordance with a fixed formula.
The Bank is taxed under the Pennsylvania Mutual Thrift Institutions Tax Act
(the "MTIT"), as amended to include thrift institutions having capital stock.
Pursuant to the MTIT, the Company's tax rate is 11.5%. The MTIT exempts the
Company from all other taxes imposed by the Commonwealth of Pennsylvania for
state income tax purposes and from all local taxation imposed by political
subdivisions, except taxes on real estate and real estate transfers. The MTIT
is a tax upon net earnings, determined in accordance with generally accept
accounting principals ("GAAP") with certain adjustments. The MTIT, in
computing GAAP income, allows for the deduction of interest earned on state and
federal securities, while disallowing a percentage of a thrift's interest
expense deduction in the proportion of interest income on those securities to
the overall interest income of the Company. Net operating losses, if any,
thereafter can be carried forward three years for MTIT purposes. As of March
31, 1997, the Company has net operating loss carryforwards of approximately
300,000 for MTIT tax purposes which will expire March 31, 1998 if not utilized.
Upon conversion to a commercial bank charter, the Bank will no longer be
subject to the MTIT, but will become subject to the Pennsylvania Company Shares
Tax, which is a tax on an average of the most recent six years net worth of the
Bank on January 1 of each year, after exclusion of a portion of certain
government securities. The current rate applicable to the Pennsylvania Bank
Shares Tax is 1.25%. See Note 11 of the Notes to Consolidated Financial
Statements, incorporated herein by reference, for further information regarding
taxation.
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ITEM 2. PROPERTIES
At March 31, 1997, the Company conducted business from its executive offices
located in Villanova, Pennsylvania and 24 full service offices located in
Chester, Delaware and Montgomery Counties, Pennsylvania. See generally Note 14
of the Notes to Consolidated Financial Statements incorporated by reference in
Item 8 hereof.
The following table sets forth certain information with respect to the
Company's offices at March 31, 1997.
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Net Book Amount of
Value of Customer
Description/Address Leased/Owned Property Accounts
--------------------- -------------- ---------- ----------
Executive Offices:
- ------------------
Two Aldwyn Center Owned $4,573 -
Lancaster Avenue and Rt. 320
Villanova, PA 19085
Branch Offices:
1415 Old York Road Leased(12) 8 $7,627
Abington, PA 19001
Two Aldwyn Center Owned 44,899
Lancaster Avenue and Rt. 320
Villanova, PA 19085
44 E. Lancaster Ave. Owned 361 99,912
Ardmore, PA 19003
1770 W. Dekalb Pike Leased(1) 54 24,606
Blue Bell, PA 19422
3001 West Chester Pike Owned 419 80,812
Broomall, PA 19008
44 N. Bryn Mawr Ave. Owned 262 55,203
Bryn Mawr, PA 19010
407 Second Ave. (Rt. 29) Leased(9) 488 3,188
Collegeville, PA, 19426
MacDade Blvd. & Chester Pike Owned 322 37,764
Collingdale, PA 19023
612 Fayette Street Leased(14) 32 6,108
Conshohocken, PA 19428
133 Lancaster Ave. Owned 573 53,889
Devon, PA 19333
Dreshertown Rd. & Limekiln Pike Leased(13) 40 6,894
Dresher, PA 19025
5116 State Road Leased(3) 20 7,588
Drexel Hill, PA 19026
(Continued)
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Net Book
Value of Amount of
Description/Address Leased/Owned Property Deposits
------------------- ------------ -------- --------
Marchwood Shopping Center Leased(4) $20 $24,185
Exton, PA 19341
1140 West Chester Pike Owned 501 26,297
Goshen, PA 19382
Manoa Shopping Center Leased(5) 127 57,768
Havertown, PA 19083
Rt. 309 & Orvilla Rd. (1513 Hilltown Leased(11) 636 5,540
Crossings Shopping)
Hilltown, PA 19440
677 DeKalb Pike Leased(6) 700 30,726
King of Prussia, PA 19406
1758 Allentown Rd. Leased(10) 499 6,502
Lansdale, PA 19446
Front and Orange Streets Owned 253 72,291
Media, PA 19063
3557 W. Chester Pike Leased(7) 31 10,174
Newtown Square, PA 19073
49 E. Lancaster Ave. Owned 1,221 24,573
Paoli, PA 19301
1141 Baltimore Pike Leased(8) 50 17,520
Springfield, PA 19064
123 W. Lancaster Ave. Owned 224 62,568
Wayne, PA 19087
33 W. Gay Street Owned 332 8,876
West Chester, PA 19380
Other Administrative Offices:
One Aldwyn Center Owned 929 32,491 (9)
Lancaster Ave. & Rt. 320
Villanova, PA 19085
- -----------
(1) Lease expiration date is 06/30/2010; the Company has three
five-year renewal options.
(3) Lease expiration date is August 31, 2001; the Company has three
three-year renewal options.
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(2) Lease expiration date is September 30, 2001; the Company has two
five-year renewal options.
(4) Lease expiration date is August 31, 2001.
(5) Lease expiration date is November 30, 1999; the Company has two
five-year renewal options.
(6) Lease expiration date is March 31, 2002; the Company has one
five-year renewal option.
(7) Lease expiration date is September 30, 1998; the Company has
three five-year renewal options.
(8) Lease expiration date is July 31, 2004; the Company has three
five-year renewal options.
(9) Comprised of custodial accounts associated with the Company's loan
servicing for others. See "Loan Lending Activities - Loan
Servicing.
(10) Lease expiration date is August 30, 2011; the Company has three
five-year renewal options.
(11) Lease expiration date is September 30, 2016; the Company has one
ten-year renewal option.
(12) Lease expiration date is August 31, 2011; the Company has one
five-year renewal option.
(13) Lease expiration date is September 30, 2001; the Company has two
five-year renewal options.
(14) Lease expiration date is October 31, 2011; the Company has a
fifteen-year and five-year renewal option.
ITEM 3. LEGAL PROCEEDINGS.
The Company and the Bank are involved in routine legal proceedings occurring in
the ordinary course of business which, in the aggregate, are believed by
management to be immaterial to the financial condition and results of
operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required herein is incorporated by reference from page 9 of the
Registrant's 1997 Annual Report to Stockholders ("Annual Report").
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from page 9 of the
Registrant's 1997 Annual Report.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required herein is incorporated by reference from pages 10 to
18 of the Registrant's 1997 Annual Report.
ITEM 8. FINANCIAL STATEMENTS.
The information required herein is incorporated by reference from pages 19 to
40 of the Registrant's 1997 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information required herein is incorporated by reference from pages 5 to 7
of the Registrant's Proxy Statement dated June 13, 1997 ("Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from pages 7 to 10
of the Registrant's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required herein is incorporated by reference from pages 3 and 4
of the Registrant's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from pages 14 and
15 of the Registrant's Proxy Statement.
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PART IV
ITEM 14. EXHIBITS. LIST AND REPORTS ON FORM 8-K
(a)(1) The Following exhibits are filed as part of this Form 10-K, and
this list includes the Exhibit Index.
No. Description
3.1 Articles of Incorporation of ML Bancorp, Inc. (1)
3.2 Bylaws of ML Bancorp, Inc. (1)
4.1 Specimen Stock Certificate of ML Bancorp, Inc. (1)
4.2 Amended and Restated Declaration of Trust relating to ML
Capital Trust I, dated as of March 10, 1997, between ML
Bancorp, Inc. and the trustees named therein.
4.3 Form of Common Securities and form of Capital Securities of ML
Capital Trust I (included as exhibits to the Amended and
Restated Declaration included as Exhibit 4.2).
4.4 Indenture, dated as of March 10, 1997, between the Company and
The Bank of New York, as trustee, relating to Junior
Subordinated Deferrable Interest Debentures due 2027 of ML
Bancorp, Inc.
4.5 Form of Junior Subordinated Deferrable Interest Debentures due
2027 of ML Bancorp, Inc. (included as Exhibit A to the
Indenture included as Exhibit 4.4).
4.6 Series A Capital Securities Guarantee Agreement, dated as of
March 10, 1997, relating to the Series A capital Securities of
ML Capital Trust I
4.7 Common Securities Guarantee Agreement, dated as of March 10,
1997, relating to the Common Securities of ML Capital Trust I.
10.1 Employee Stock Ownership Plan and Trust of ML Bancorp, Inc. (1)
10.2 Employment Agreements between ML Bancorp, Inc. and Main Line
Bank and Dennis S. Marlo (3)
10.3 Form of Employment Agreement between ML Bancorp, Inc. and
Robert M. Campbell, Jr., Joseph M. Blaston and Brian M.
Hartline (1)*
10.4 1994 Stock Option Plan (2)*
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10.5 1994 Recognition and Retention Plan and Trust Agreement (2)*
*Management contract or compensatory plan or arrangement.
10.6 1997 Stock Option Plan (4)
13 1997 Annual Report to Stockholders specified portion of the
Registrant's Annual Report to Stockholders for the year ended
March 31, 1997.
21 Subsidiaries of the Registrant - Reference is made to Item 1.
"Business" for the required information
23 Consent of Accountants
27 Financial Data Schedule
- ---------
(1)Incorporated by reference from the Registration Statement on Form
S-1 (Registration No. 33-76666) filed by the Registrant with the
Securities and Exchange Commission on March 18, 1994, as amended.
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44
(2)Incorporated by reference from the Annual Report on Form 10-K for
the year ended March 31, 1995 filed by the Registrant with the
Securities and Exchange Commission on June 29, 1995.
(3)Incorporated by reference from the Annual Report on Form 10-K for
the year ended March 31, 1996 filed by the Registrant with the
Securities and Exchange Commission on July 1, 1996.
(4)Incorporated by reference from the Proxy Statement for the Annual
Meeting of Stockholders held on July 25, 1997 filed by the Registrant
with the Securities and Exchange Commission on June 17, 1997.
(a)(2) The following documents are filed as part of this Form 10-K
and are incorporated herein by reference from the Registrant's 1997
Annual Report.
Independent Auditors' Report.
Consolidated Statements of Operations for each of the years in the
three year period ended March 31, 1997
Consolidated Statements of Financial Condition as of March 31, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity for each of
the years in the three year period ended March 31, 1997
Consolidated Statements of Cash Flows for each of the years in the
three year period ended March 31, 1997
Notes to the Consolidated Financial Statements
(a)(3) All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
omitted because they are not applicable or the required information is
included in the Consolidated Financial Statements or notes thereto.
(b) Reports filed on Form 8-K.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
MLF BANCORP, INC.
By: /s/ Dennis S. Marlo
--------------------------------------
Dennis S. Marlo
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
/s/ Dennis S. Marlo June 26, 1997
- -----------------------------------------
Dennis S. Marlo
President, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ Brian M. Hartline June 26, 1997
- -----------------------------------------
Brian M. Hartline
Secretary, Treasurer and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
/s/ John R. Eppinger June 26, 1997
- -----------------------------------------
John R. Eppinger
Chairman of the Board
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/s/ David B. Hastings June 26, 1997
- -----------------------------------------
David B. Hastings
Director
/s/ John J. Leahy June 26, 1997
- -----------------------------------------
John J. Leahy
Director
/s/ Henry M. Luedecke June 26, 1997
- -----------------------------------------
Henry M. Luedecke
Director
/s/ Allan Woolford June 26, 1997
- -----------------------------------------
Allan Woolford
Director